Item 1. Business
Stewart &
Stevenson Services, Inc. (together with its wholly-owned subsidiaries, the
“Company” or “Stewart & Stevenson”) was founded in Houston, Texas in 1902
and was incorporated under the laws of the State of Texas in 1947. Since its beginning, the Company has been
primarily engaged in the custom fabrication of engine-driven products. Stewart & Stevenson consists of five
major business segments: the Tactical
Vehicle Systems segment, the Power Products segment, the Distributed Energy
Solutions segment, the Petroleum Equipment segment, and the Airline Products
segment.
The Company’s
fiscal year begins on February 1 of the year stated and ends on January 31 of
the following year. For example,
“Fiscal 2002” commenced on February 1, 2002 and ended on January 31, 2003. Identifiable assets at the close of Fiscal
2002, 2001, and 2000, net sales and operating profit for such fiscal years for
the Company’s business segments, export sales, and sales to customers
representing 10% or more of consolidated sales are presented in the Notes to
Consolidated Financial Statements contained herein.
TACTICAL
VEHICLE SYSTEMS
The Tactical
Vehicle Systems segment assembles the Family of Medium Tactical Vehicles
(“FMTV”) under contracts with the U.S. Army, and provides sustaining design
engineering, service and support. The
initial FMTV contract was awarded in 1991 and called for the production of
approximately 11,200 2-1/2-ton and 5-ton trucks in several configurations,
including troop carriers, wreckers, cargo trucks, vans and dump trucks. Production pursuant to the original FMTV
contract was completed as of January 31, 1999.
During October
1998, the Company received a second multi-year contract from the U.S. Army that
provides for continued production of the FMTV through September 2004 including
currently exercised option years. The
second FMTV contract incorporates an environmentally improved engine, an improved
diagnostics system, anti-lock brakes and other improvements. Production under the second contract,
including all available option years would be approximately 10,829 trucks and
2,092 trailers and have a total contract value of $1.92 billion.
The Tactical
Vehicle Systems segment is competing against Oshkosh Truck Corporation for the
third multi-year FMTV contract. The
U.S. Army is expected to make its decision as to the final award for the new
production contract by the end of April 2003 and the Company believes its
proposal is competitive. Production by
the successful bidder for the new multi-year contract is anticipated to begin
in October 2004.
The U.S.
government is the primary customer of the Tactical Vehicle Systems segment,
accounting for practically all of the sales of this segment. The FMTV contracts are subject to termination
at the election of the customer and provide for termination charges that would
reimburse the Company for allowable costs, but not necessarily all costs. The loss of this customer would have a
material adverse effect on the Company’s future financial condition and results
of operations.
The Company also
sells the FMTV to other government contractors as a platform for installation
of other equipment which is then resold to the U.S. Armed Forces. The Company also has sold vehicles to other
branches of the U.S. Armed Forces and believes there will be opportunities to
sell additional vehicles to the U.S. Army, other branches of the U.S. Armed
Forces and the armed forces of foreign countries. The FMTV contracts allow for such sales, and the Company’s
facility in Sealy, Texas has the capacity to produce vehicles for additional
sales.
The FMTV
incorporates engines, transmissions, axles, and a number of other components
specified by the U.S. Army and available only from the source or sources
selected by the U.S. Army. Interruption
of the supply of any of these components could have a material adverse effect
on the results of operations of the Tactical Vehicles Systems segment. The Company believes that any delays arising
from the unavailability of source-specified components would be compensated
under the FMTV contracts.
Both domestic and
international suppliers compete for the sale of vehicles to foreign
governments. In addition to Oshkosh,
the Company’s primary competitors for international contracts include
DaimlerChrysler AG, Tatra and other companies that may have greater
international recognition as vehicle manufacturers than the Company.
In January 2003,
the Tactical Vehicle Systems segment submitted an amended bid to the United
Kingdom’s Ministry of Defence (“UK MoD”), pursuant to a request for proposals
for their multi-year production contract for over 8,000 trucks. The Company is responding to this
opportunity with a U.K.-based consortium of entities that all have experience
meeting the requirements of the UK MoD.
The Company cannot reliably predict when the UK MoD will make its
decision as to the final award of the production contract or whether the
Company will receive the award.
Operations of the
Tactical Vehicle Systems segment accounted for a substantial portion of the
Company’s operating income and approximately 38%, 32% and 27% of consolidated
sales in Fiscal 2002, 2001 and 2000, respectively.
POWER PRODUCTS
The Power Products
segment sells and rents various industrial equipment; sells components,
replacement parts, accessories and other materials supplied by independent
manufacturers; and provides in-shop and on-site repair services for industrial,
transportation, marine, construction, power generation and material handling
equipment.
Most of the
equipment sold or rented by the Power Products segment is acquired by the
Company from independent manufacturers pursuant to distribution agreements. The following table contains the name of
certain manufacturers with whom the Company presently maintains a significant
distribution contract, the year in which the first distribution agreement was
signed, a description of the products and territories covered, and the
expiration date of the contract, if applicable:
* No expiration date. Agreements
may be terminated by written notice of termination by either party under
certain conditions.
** Applicable to both the Power Products
segment and the Distributed Energy Solutions segment.
Distribution
agreements generally require the Company to purchase and inventory products for
resale to end users, original equipment manufacturers, and/or independent
dealers within the franchised area of distribution. Such agreements may contain provisions restricting sales of
products outside of the franchised territory and prohibiting the sale of
competitive products within the franchised territory. The Company’s major distribution agreements also require the
Company to inventory repair parts, components, and accessories for resale to
end users, either directly by the Company or through a dealer network; and to
provide aftermarket service support for distributed products within the
franchised territory. The Company also
offers in-shop and on-site repair services for related equipment manufactured
by businesses with whom the Company does not have a distribution agreement. In December 2002, the Company expanded its
franchised territory for Hyster equipment by acquiring the right to distribute
Hyster equipment into additional areas of Texas and New Mexico.
The Power Products
segment also sells and rents generator sets, pump packages, marine propulsion
systems and other engine-driven equipment.
The Power Products segment fabricates and markets generator sets ranging
in size from 25 kw to 1,000 kw, and also markets generator sets fabricated by
the Distributed Energy Solutions segment ranging in size from 1,000 kw to 5,700
kw. Pump packages, marine propulsion
systems and other engine-driven packaged equipment fabricated by the Company
range in size from 35 hp to 7,000 hp.
Most generator sets and other engine-driven packaged equipment are based
upon diesel, dual fuel or natural gas fueled engines supplied by independent
manufacturers with whom the Company has a distribution or packaging
agreement. Such agreements do not
usually restrict the sale of packaged equipment to a franchised territory, and
the products fabricated by the Company are sold on a world-wide basis.
Power Products
segment operations are conducted at customer service centers located within the
Company’s franchised areas of operations.
New products manufactured by suppliers, as well as repair parts,
components and accessories are marketed under the trademarks and trade names of
the original manufacturer. Products
fabricated by the Company and aftermarket services are marketed under the
“Stewart & Stevenson” name and other trademarks, trade names and service
marks owned by the Company.
The Company’s
principal distribution agreements are subject to early termination by the
suppliers for a variety of causes, including a change in control or a change in
the principal management of the Company.
Although no assurance can be given that such distribution agreements
will be renewed beyond their expiration dates, they have been renewed regularly
in the past. Any interruption in the
supply of materials from the original manufacturers, or a termination of a
distributor agreement, could have a material effect on the results of
operations of the Power Products segment.
During Fiscal
2000, Detroit Diesel Corporation was acquired by DaimlerChrysler AG. Consequently, the possibility exists that
Detroit Diesel could seek to change the terms and conditions of the
distribution agreement when the Fiscal 2003 renewal takes place.
The Power Products
segment competes with other manufacturers and their distributors in the sale of
original equipment, with the manufacturers and distributors of non-original
equipment parts for the sale of spare parts, and with independent repair shops
for in-shop and on-site repair services.
No single competitor competes against the Company’s Power Products
segment in all of its businesses, but certain competitors may have a leading
position in different product areas.
Major competitors in the sale of packaged diesel and gas-fired
reciprocating engine equipment include Caterpillar, Inc. and its distributors,
and Cummins, Inc. and its distributors.
Operations of the Power Products segment accounted for approximately
46%, 44% and 51% of consolidated sales during Fiscal 2002, 2001 and 2000,
respectively.
DISTRIBUTED
ENERGY SOLUTIONS
The Distributed Energy Solutions segment packages reciprocating diesel
and natural gas engine generator sets, installs and services power plant
operations on a turnkey basis, and markets power generation solutions in
domestic and certain international markets.
Some of the equipment
sold by the Distributed Energy Solutions segment is acquired by the Company
from independent manufacturers pursuant to distribution agreements as indicated
in the table included in the Power Products segment above. In addition, the Distributed Energy
Solutions segment has a distribution agreement with Wärtsilä Corporation for
natural gas industrial engines for the United States and China, and Power
Energy Partner agreements with Waukesha Engine and Deutz AG that allow this
segment to sell as an original equipment manufacturer (“OEM”). These agreements are terminable upon certain
notifications.
The Distributed
Energy Solutions segment fabricates and sells custom generator sets that range
in size from 280 kw to 5,700 kw. Most
generator sets and other engine-driven packaged equipment are based upon
diesel, dual fuel, landfill or natural gas fueled engines supplied by
independent manufacturers with whom the Company has distribution or OEM
packaging agreements. Such agreements
do not usually restrict the sale of packaged equipment to a franchised
territory, and the products fabricated by the Company are sold on a world-wide
basis. Other services offered by the
Distributed Energy Solutions segment include turnkey installation services,
operation and maintenance contracts, professional services agreements, green
field development, building modifications, equipment upgrades and retrofits,
emission control systems testing and environmental compliance testing.
The Distributed
Energy Solutions segment operations are conducted at fabricating facilities
located in Houston, Texas and Sacramento, California. New products manufactured by suppliers, as well as repair parts,
components and accessories are marketed under the trademarks and trade names of
the original manufacturer. Products
fabricated by the Company and aftermarket service are marketed under the
“Stewart & Stevenson” name and other trademarks, trade names and service
marks owned by the Company. The
Distributed Energy Solutions segment also utilizes the Power Products segment
branch facilities and personnel to perform aftermarket service and support for
product offerings.
The Company’s
principal OEM agreements are subject to early termination by the suppliers for
a variety of causes, including a change in control or a change in the principal
management of the Company. Although no
assurance can be given that such OEM agreements will
be renewed beyond
their expiration dates, they have been renewed regularly in the past. Any interruption in the supply of materials
from the original manufacturers, or a termination of an OEM agreement, could
have a material effect on the results of operations of the Distributed Energy
Solutions segment.
The Distributed Energy Solutions segment competes with other
manufacturers and their distributors in the custom packaging of generator sets,
with manufacturers and distributors of non-original equipment parts for the
sale of spare parts, and with independent repair shops for in-shop and on-site
repair services. No single competitor
competes against the Company’s Distributed Energy Solutions segment in all of
its businesses, but certain competitors may have a leading position in different
product areas. Major competitors in the
custom packaging of generator sets, turnkey power plant installation and power
generation solutions include Caterpillar, Inc. and Cummins Inc., among others.
Operations of the Distributed Energy Solutions segment accounted for
approximately 5%, 9% and 4% of consolidated sales during Fiscal 2002, 2001 and
2000, respectively.
PETROLEUM EQUIPMENT
The Petroleum
Equipment segment manufactures equipment primarily for the well stimulation
segment of the oil service industry.
Its products include coil tubing systems and acidizing and fracturing
systems. Many of its products are
manufactured according to proprietary designs and are covered by appropriate
process and apparatus patents. Other
products may be manufactured according to the designs or specifications of its
customers.
At the
end of Fiscal 2001, the Company announced its intention to sell this segment’s
blowout preventer and controls, valve and drilling riser business and, as a
result, these activities were reclassified for reporting purposes as
discontinued operations. In the third
quarter of Fiscal 2002, the Company completed this sale and continues to
classify any activities associated with completing retained contracts of this
business as discontinued operations.
The Petroleum
Equipment segment purchases many of the components incorporated into its
products from independent suppliers.
Some of these components are manufactured according to designs and
specifications owned by the Company and protected from disclosure by
confidentiality arrangements. Other
components are standard commercial or oilfield products and may be acquired
under the distribution or packaging agreements as discussed under “Power
Products” above. The Petroleum
Equipment segment is not dependent on a single supplier for any critical
component.
The Petroleum
Equipment segment competes primarily with other manufacturers of similar
equipment. Products are differentiated
by proprietary technology, and no manufacturer has a leading position in any
product line. Major competitors include
Caterpillar, Inc. and Halliburton Company in fracturing and acidizing equipment
and Varco International, Inc. in coil tubing systems.
The Petroleum Equipment segment’s products are sold world-wide under
the “Stewart & Stevenson” trade name.
Demand for oilfield equipment is substantially dependent on the price
trends for oil and gas.
Operations of the Petroleum Equipment segment represented 5%, 7% and 5%
of consolidated sales during Fiscal 2002, 2001 and 2000, respectively.
In January 2003,
the Company decided to consolidate its fabrication facilities located in
Houston, Texas. The Company will
combine the primary Distributed Energy Solutions segment fabrication facility
and the railcar mover and snow blower fabrication facility of the Airline
Products segment into the Petroleum Equipment segment manufacturing
facility. These combined operations
will be operating as the Engineered Products Division in Fiscal 2003.
AIRLINE PRODUCTS
The Airline
Products segment manufactures internal combustion and electric propulsion
airline ground support equipment that includes aircraft tow tractors, gate
pushback tractors, baggage tow tractors, beltloaders, air start units and air
conditioning units. This segment also
manufactures mobile railcar movers, sold under the Rail Kingâ
trademark and snow blowers, sold under the Snow Kingä
trademark. As discussed above, the
railcar mover and snow blower businesses will be reported in the Engineered
Products Division in Fiscal 2003. Some
of this segment’s products are manufactured according to proprietary designs
that are covered by appropriate process and apparatus patents. Other products may be manufactured according
to the designs or specifications of its customers. During the second half of Fiscal 2001, the Airline Products
segment consolidated its ground support business into operations located in
Marietta, Georgia, and its mobile railcar mover and snow blower businesses into
one operation located in Houston, Texas.
In December 2002,
the Company acquired the assets of DAVCO Industries, a manufacturer of aircraft
ground support equipment specifically designed for the regional airline
market. This acquisition expands the
Airline Products segment’s offerings to include ground power, rectifiers, small
air conditioning and air starts, towbars and other support equipment.
The Airline
Products segment purchases many of the components incorporated into its
products from independent suppliers.
This segment is not dependent on a single supplier for any critical
component and sells the majority of its products to the airline industry, which
has a global customer base. Airline
products are sold under the “S&S Tug” and “Stewart & Stevenson Tug”
trade names and demand for its products is generally dependent on the
profitability of the airline industry.
See further discussion in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” elsewhere herein. The Airline Products segment markets its
products domestically and internationally in the commercial, military, and
industrial segments of the airline industry.
The Airline
Products segment competes primarily with other manufacturers of similar
equipment. Major domestic competitors
include FMC Technologies, Inc. in pushback tow tractors, Trilectron Industries
Inc. in air conditioners and air starts, NMC-Wollard in belt loaders and cargo
tractors, and Tiger Tractor Corporation, Toyota and Harlan Corporation in
baggage tractors. International
competitors include Schopf-Douglas in aircraft tow tractors and Charlott in
electric baggage tractor/belt loaders.
Operations of the
Airline Products segment represented 5%, 6% and 10% of consolidated sales
during Fiscal 2002, 2001 and 2000, respectively.
OTHER BUSINESS ACTIVITIES
The Company’s
other business activities included the gas compression equipment fabrication
business, which the Company exited in Fiscal 2002. Operations of the other business activities segment represented
1%, 2% and 2% of consolidated sales during Fiscal 2002, 2001 and 2000,
respectively.
COMPETITION
The Company
encounters strong competition in all segments of its business. Competition involves pricing, quality,
availability, range of products and services, technology, environmental issues
and other factors. Some of the
Company’s competitors have greater financial resources than the Company and
manufacture some of the major components that the Company must buy from
independent suppliers. The Company
believes that its reputation for quality engineering and after-sales service,
with single-source responsibility, along with its network of customer service
center locations, are important to the Company’s market position.
INTERNATIONAL OPERATIONS
International
operations are subject to the risks of international political and economic
changes, such as changes in foreign governmental decrees, currency exchange
rate volatility and inflation. The
Company maintains operations in various foreign jurisdictions that may be considered
unstable, including Colombia and Venezuela.
We are monitoring the emerging political and economic developments in
those countries. As of January 31,
2003, our total investment in inventory and fixed assets in Colombia and
Venezuela was less than $6 million.
In many cases, the
Company accepts payments denominated in U.S. dollars and sells to customers
outside the United States against letters of credit drawn on established
international banks, thus limiting the Company’s exposure to the effects of exchange
rate fluctuations and customer credit risks.
UNFILLED
ORDERS
The Company’s
unfilled orders consist of written purchase orders and signed contracts. These unfilled orders are generally subject to
cancellation or modification due to customer relationships or other
conditions. Purchase options are not
included in unfilled orders until exercised.
Unfilled orders relating to continuing operations at the close of Fiscal
2002 and Fiscal 2001 were as follows:
Unfilled orders of
the Tactical Vehicle Systems segment at January 31, 2003 and 2002, consisted
principally of options exercised under the contract awarded in October 1998 by
the United States Army Tank - Automotive and Armament Command (“TACOM”) to
manufacture medium tactical vehicles and trailers. Production related to the sixth program year to the current contract begins in October 2003
and is expected to be completed by September 2004.
EMPLOYEES
At January 31,
2003, the Company employed approximately 3,600 people. The Company considers its employee relations
to be satisfactory.
AVAILABLE
INFORMATION
The Company will
make available its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports, filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934, free of charge through our internet website at www.ssss.com as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
The information
contained on the Company's web site is not incorporated by reference into this
Form 10-K and should not be considered to be a part of this Form 10-K.
Item 2.
Item 2. Properties.
The Company
maintains its corporate executive and administrative offices at 2707 North Loop
West, Houston, Texas, which occupy about 47,000 square feet of leased
space. The Company also leases an
additional 66,600 square feet of office, warehouse and shop space in Houston,
Texas primarily to support its marketing department, corporate records,
transportation department and training operations.
The Tactical
Vehicle Systems segment is located in a 535,000 square foot Company-owned
facility in Sealy, Texas. The Tactical
Vehicle Systems segment also leases 98,000 square feet within 11 facilities
located in Virginia, North Carolina, Georgia, Tennessee, Texas and Michigan.
Activities of the
Power Products segment are coordinated from Houston, Texas, where the Company
owns 320,000 square feet of space at three locations devoted to equipment and
parts sales and service. To service its
distribution territory (See “Power Products” above), Stewart & Stevenson
maintains Company-operated customer service centers occupying 592,000 square
feet of owned space and 503,000 square feet of leased space in 35 cities in
Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah, Kansas, Washington,
California, Arizona, Arkansas, Virginia and Florida. The Company leases 56,000 square feet in three locations in
Venezuela, approximately 58,000 square feet in four locations in Colombia, and
3,200 square feet in Argentina.
The Distributed
Energy Solutions segment is located in a portion of a 388,000 square foot
Company-owned facility located in Houston, Texas. The Airline Products segment also assembles railcar movers and
snow blowing equipment in this facility.
As a result of the Company’s manufacturing consolidation effort and the
creation of the Engineered Products Division discussed in Item 1 above, this
facility is currently being marketed for sale.
The Petroleum
Equipment segment is headquartered in Houston, Texas, where the Company owns
approximately 185,000 square feet devoted to manufacturing, warehousing and
administration. As a result of the
Company’s manufacturing consolidation effort and the creation of the Engineered
Products Division discussed above, this facility is currently being expanded,
with approximately 47,000 square feet being added to accommodate the
Distributed Energy Solutions business and the railcar mover and snow blower
businesses.
The Airline
Products segment is headquartered in Marietta, Georgia, where the Company
leases a 149,000 square foot facility.
Airline products are also manufactured and assembled in a Company-owned
87,000 square foot facility in Kennesaw, Georgia. The Company also leased a 19,000 square foot warehouse in
Kennesaw, Georgia during Fiscal 2002, but vacated such space during Fiscal
2003.
In addition to the
Distributed Energy Solutions facility mentioned above, the Company owns five
locations containing approximately 180,000 square feet in the aggregate, which
are currently being leased to a third party or being marketed for sale.
The Company
considers all property owned or leased by it to be well maintained, adequately
insured and suitable for its purposes.
Item
3.
Item
3. Legal Proceedings.
During Fiscal
1998, the U.S. Customs Service detained a medium tactical vehicle that was
being shipped by the Company for display in a European trade show. The Company has been advised that the U.S.
Customs Service and the Department of Justice are investigating potential
violations by the Company of laws relating to the export of controlled military
vehicles, weapons mounting systems, and firearms. Such investigation could result in the filing of criminal, civil,
or administrative sanctions against the Company and/or individual employees,
and could result in a suspension or debarment of the Company from receiving new
contracts or subcontracts with agencies of the U.S. Government or the benefit
of federal assistance payments.
The Company is a
defendant in a suit brought under the qui
tam provision of the False Claims Act, United States of America, ex rel.
Werner Stebner v. Stewart & Stevenson Services, Inc. and McLaughlin
Body Co., Civil Action No. H-96-3363, in the United States District
Court for the Southern District of Texas, Houston Division. The plaintiff’s complaint 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 in January
2004. 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.
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 Fiscal 2002, 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 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 consolidated 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, are
expected to have a material effect on the manner in which the Company conducts
its business or on its consolidated financial position or liquidity. The Company maintains certain insurance
policies that provide coverage for product liability and personal injury
cases. The Company has established
reserves that it believes to be adequate based on current evaluations. Nevertheless, an unexpected outcome in such
cases could have a material adverse impact on the results of operations in the
period it occurs. Moreover, future
adverse developments in such cases could require material changes in the
recorded reserve amounts.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
Item 5. Market for the Registrant’s Common Equity and Related Stockholder
Matters.
Since October 18,
2002, the Company’s common stock has been traded on the New York Stock Exchange
under the symbol “SVC”. Prior to that
date, the Company’s common stock was traded on the NASDAQ Stock Market under
the symbol “SSSS”. There were 583 shareholders
of record as of February 28, 2003. The
following table sets forth the high and low sales prices relating to the
Company’s common stock and the dividends declared by the Company in each
quarterly period within the last two fiscal years.
On December 10,
2002, the Board of Directors approved a dividend of $0.085 per share for
shareholders of record on January 31, 2003, which dividends were paid on
February 14, 2003. Declaration and
payment of dividends in the future is dependent upon the Company’s earnings and
liquidity position, among other factors.
Reference is made
to the Company's definitive proxy statement incorported herein by reference for
disclosure related to the Company's stock compensation plans.
Item 6.
Item 6. Selected Financial Data.
The Selected
Financial Data set forth below have been derived from the audited consolidated
financial statements of the Company and should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and the consolidated financial statements of the Company and notes
thereto, included elsewhere herein.
Item 7.
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
The following
discussion and analysis, as well as the accompanying consolidated financial
statements and related footnotes, will aid in understanding our results of
operations as well as our financial position, cash flows, indebtedness and
other key financial information. The
following discussion may contain forward-looking statements. In connection therewith, please see the
Cautionary Statements contained herein, which identify important factors that
could cause actual results to differ materially from those predicted or implied
in the forward-looking statements.
Business
Segment Highlights
(In thousands except percentages)
RESULTS
OF OPERATIONS
Overview
During Fiscal
2002, the Company achieved a number of significant milestones.
Corporate
• On
October 18, 2002, we moved our stock listing to the New York Stock Exchange
using the symbol SVC. We believe this
change has provided our shareholders with greater market efficiency and our
Company greater visibility.
Tactical Vehicle Systems
• The United States Congress funded
another one-year extension to our existing contract to produce the Family of
Medium Tactical Vehicles (“FMTV”), extending production through September 2004.
• Late in the year, we submitted our
proposal to continue manufacture of the FMTV beyond the current contract. The new contract, if awarded, would extend
production for an additional four to five years beyond September 2004.
• We also submitted a proposal to the
United Kingdom’s Ministry of Defence to supply over 8,000 cargo and support
vehicles and provide products support for the next 30 years.
Power Products
• We expanded our market reach in the
Power Products segment by acquiring the right to distribute Hyster equipment
into additional areas of Texas and New Mexico.
Formation of Engineered Products Division
• We announced the consolidation of
three manufacturing facilities into one location, creating the Engineered
Products Division. In the first half of
Fiscal 2003, we will consolidate the fabrication facilities associated with the
Petroleum Equipment segment, Distributed Energy Solutions segment, and the railcar
mover and snowblower activities that are currently included in the Airline
Products segment. This consolidation
effort is being taken in an effort to reduce operating costs, increase
responsiveness to market opportunities and improve customer service. The Company anticipates that it will incur
restructuring costs of approximately $2 million and capital expenditures of
$7-8 million to achieve this consolidation.
Once the consolidation is complete, the Company anticipates annual cost
savings of approximately $6 million, of which the Company expects to realize
approximately $2 million in Fiscal 2003.
Petroleum Equipment - Discontinued Operations
• We completed the sale of the
Petroleum Equipment segment’s blowout preventer, valve and drilling riser
business that we discontinued at the end of Fiscal 2001.
Fiscal
2002 vs. Fiscal 2001
Fiscal 2002 sales
totaled $1,175.6 million, representing a 12% decrease compared to Fiscal 2001
sales of $1,329.5 million. Net earnings
from continuing operations for Fiscal 2002 were $10.8 million, or $0.38 per
diluted share, compared with $20.2 million, or $0.70 per diluted share for
Fiscal 2001, excluding a one time gain of $25.1 million after tax associated
with settlements with the U.S. Army related to our Tactical Vehicle Systems
segment. Including this one time gain,
Fiscal 2001 earnings were $45.3 million, or $1.57 per diluted share. After the effect of discontinued operations
and the cumulative effect of a change in accounting, the net loss for Fiscal
2002 was $7.2 million, or $0.25 per diluted share, compared to net earnings for
Fiscal 2001 of $42.2 million, or $1.46 diluted share.
Tactical
Vehicle Systems
The Tactical
Vehicle Systems segment assembles the Family of Medium Tactical Vehicles under
contracts with the U.S. Army, and provides sustaining design engineering,
service and support. The Tactical
Vehicle Systems segment sales in Fiscal 2002 increased 4% to $450.8 million,
compared to $432.3 million in Fiscal 2001.
Total operating profit for Fiscal 2002 was $69.3 million compared to
Fiscal 2001 operating profit of $103.5
million, which included $39.0 million pre-tax settlement of claims, net of
expenses, with the U.S. Army, as further described below.
The increase in
sales in Fiscal 2002 was primarily due to an increase in the volume of trucks
delivered during the year. In Fiscal
2002, 2,366 trucks were shipped compared to 2,229 trucks during Fiscal 2001. Operating profit for Fiscal 2002 was $69.3 million,
or 15.4% of sales, compared to $64.5 million, or 14.9% of sales, in Fiscal
2001, excluding the impact of the one-time settlements of claims with the U.S.
Army. This increase in sales, operating
profit and operating profit percentage was largely due to the increased volume
of truck shipments and improved operating efficiency.
The U.S. Army
exercised an option to award a sixth program year to the current contract,
which added $396 million to the backlog for this segment during the fourth
quarter of Fiscal 2002. Deliveries
under this additional year are expected to begin in October 2003 and to be
completed by September 2004. Shipments for Fiscal 2003 are anticipated to be
approximately 2,389 trucks and 506 trailers.
In Fiscal 1998, we
filed a claim with the U.S. government seeking recovery of costs incurred
resulting from a delay of over eight months from the original production plan
in the first multi-year FMTV contract.
The parties reached resolution in April 2001 through the alternative
dispute resolution process managed by the Armed Services Board of Contract
Appeals and we received payment of $20.8 million, net of related expenses, in
July 2001. In addition, in Fiscal 2000,
we filed a claim with the U.S. government seeking recovery of costs incurred
from retrofitting all vehicles produced under the first FMTV contract for
changes in drive train components. All
costs associated with the retrofitting had been expensed in prior years. The parties reached resolution through an
alternate dispute resolution proceeding and the U.S. Army paid $18.2 million to
us, net of expenses, in December 2001.
The U.S.
government is the primary customer of the Tactical Vehicle Systems segment,
accounting for practically all of the sales of the segment. The FMTV contracts are subject to
termination at the election of the customer and provide for termination charges
that would reimburse us for allowable costs, but not necessarily all
costs. The loss of this customer would
have a material adverse effect on our future financial condition and results of
operations.
The FMTV
incorporates engines, transmissions, axles and a number of other components
specified by the U.S. Army and available only from the source or sources
selected by the U.S. Army. Interruption
of the supply of any of these components could have a material adverse effect
on the results of operations of the Tactical Vehicles Systems segment. We believe that any delays arising from the
unavailability of source-specified components would be compensated under the
FMTV contracts.
In November 2002,
we submitted our bid to the U.S. Army as part of the competitive bid process
for the next multi-year FMTV contract.
The U.S. Army is expected to make its decision as to the final award of
the new production contract by the end of April 2003. This contract award is valued at approximately $1.5 - $2 billion,
depending upon options, with production of over 10,000 trucks and trailers over
a four- or five-year period. Production
by the successful bidder is expected to begin in October 2004. If we do receive the award, we believe that
our profit margins will 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 projected to be lower relating to this contract, unless the U.S.
Army exercises options for additional production. We believe that if we are awarded the next multi-year FMTV
contract, the award would increase our likelihood of being awarded additional
U.S. government contracts in the future.
In January 2003,
we submitted an amended bid to the United Kingdom’s Ministry of Defence (“UK
MoD”), for their multi-year production contract for over 8,000 trucks. We cannot reliably predict when the UK MoD
will make its decision as to the final award of the production contract or
whether we will receive the award.
This segment is
highly dependent on securing additional contracts, after completion of the
current contract for production of the FMTV, at acceptable operating margins.
Power
Products
The Power Products
segment sells and rents various industrial equipment; sells components,
replacement parts, accessories and other materials supplied by independent
manufacturers; and provides in-shop and on-site repair services for industrial,
transportation, marine, construction, power generation and material handling
equipment. Sales for the Power Products
segment in Fiscal 2002 decreased 8% to $540.7 million, compared to $587.0
million in Fiscal 2001. Throughout
Fiscal 2002, we continued to operate in a challenging marketplace characterized
by a relatively weak economy. Both
equipment and parts sales were lower in the current year versus the prior year,
partially offset by an increase in service sales.
The lower
equipment and parts sales are largely attributable to the overall weakness in
the markets we serve. Specifically, our
oil and gas customers have delayed spending, consequently reducing the overall
demand for our products in this market.
Our over-the-highway customers are faced with increased costs associated
with insurance, fuel and environmental regulation compliance, resulting in
downward pricing pressure for our parts and equipment. Finally, the power generation market we
serve is also characterized by low demand, resulting from a build-up of
capacity in recent years.
As a result of
these lower sales levels and an unfavorable mix between equipment sales,
rentals, parts and service, we did not cover our fixed costs in the current
year, resulting in the Fiscal 2002 operating loss of $9.0 million, compared to
the Fiscal 2001 operating profit of $10.3 million. Fiscal 2002 results included
a credit of $1.0 million to cost of sales due to a lower LIFO inventory
reserve, compared to a $6.3 million credit in Fiscal 2001.
At current
activity levels, our plan to improve our performance in the Power Products
segment includes reducing costs compared to Fiscal 2002. This plan includes the impact of workforce
reductions and management information systems implementation and training costs
incurred in Fiscal 2002, and the creation of a shared administrative service
center. In addition, we expect
continued productivity improvements from our backroom consolidation effort,
increased service department productivity and efficiencies resulting from the
management information system to yield further margin improvement. However, until the sales volume returns to a
higher level than currently being realized, operating margin rates will
continue to be lower than those achieved historically.
We maintain
operating locations in Colombia and Venezuela and are monitoring the emerging
political and economic developments in those countries. As of January 31, 2003, our total investment
in inventory and fixed assets in these countries was less than $6 million.
Distributed
Energy Solutions
The Distributed
Energy Solutions segment packages reciprocating diesel and natural gas engine
generator sets, installs and services power plant operations on a turnkey
basis, and markets power generation solutions in domestic and certain
international markets. Sales for the Distributed Energy Solutions segment
decreased 51% to $57.0 million in Fiscal 2002 compared to $115.7 million in
Fiscal 2001. During Fiscal 2001, we
experienced higher than normal demand for our large-scale power generation
products as a result of power shortages in California. Despite the lower sales volume, this
segment’s operating loss in Fiscal 2002 was reduced to $8.5 million compared to
a $12.4 million loss in Fiscal 2001. Fiscal 2002 results included a credit of
$0.6 million to cost of sales due to a lower LIFO inventory reserve, compared
to a charge of $2.8 million in Fiscal 2001. Fiscal 2002 results also included
the substantial completion of a large, profitable project to provide the U.S.
Navy with standby power units for its next new nuclear-powered aircraft
carrier.
We had in our
backlog over $40 million of orders as of the end of Fiscal 2002. This segment’s ability to operate above a
breakeven point during Fiscal 2003 is largely dependent upon converting the
orders in backlog to sales and securing additional large-dollar projects that
are currently in the sales pipeline.
Because the contracts in this segment tend to be large in volume and
unpredictable as to timing, large quarterly swings in the financial results for
this segment could occur.
As previously
announced, in the first half of Fiscal 2003, we will be consolidating the
Houston, Texas operations of the Distributed Energy Solutions business with
those of the Petroleum Equipment segment, also in Houston.
Demand
for the products and services offered by this segment is lower than it has been
in recent years. In addition, inventory
levels in the market are relatively high.
The combination of these two factors has led to intense price
competition in the industry, which we expect to continue in the near future.
As of the end
of Fiscal 2002, inventory levels in this segment remain at higher than optimal
levels, leaving opportunities for cash generation through the reduction of
working capital in Fiscal 2003.
Petroleum
Equipment
The Petroleum
Equipment segment manufactures equipment primarily for the well stimulation
segment of the oil service industry.
Its products include coil tubing systems and acidizing and fracturing
systems. At the end of Fiscal 2001, we
announced our intention to sell this segment’s blowout preventer and controls,
valve, and drilling riser business, and as a result, these activities were
reclassified for reporting purposes as discontinued operations and are not
included in the results of this segment.
In the third quarter of Fiscal 2002, we completed this sale and continue
to classify any activities associated with completing retained contracts as
discontinued operations. See
“Discontinued Operations and Cumulative Effect of Change in Accounting
Principle” for further discussion.
Sales for the
Petroleum Equipment segment totaled $59.2 million for Fiscal 2002 compared to
$90.5 million in Fiscal 2001. The
segment reported a $0.1 million operating loss in Fiscal 2002 compared to a
$1.6 million operating profit for Fiscal 2001.
During the first half of Fiscal 2002, the continuing operations of this
segment were disrupted by the sale of the blowout preventer and controls, valve
and drilling riser business discussed above.
During the second half of Fiscal 2002, however, a comparatively large
number of profitable international orders were filled.
As
mentioned above, during the first half of Fiscal 2003, we expect to consolidate
certain operating locations of both the Distributed Energy Solutions and the
Petroleum Equipment segments at one location in Houston, Texas.
The worldwide rig
count at the end of February 2003, as reported by Baker Hughes Incorporated,
increased approximately 12% compared to February 2002, and the drilling rig
count and workover rig count in North America increased approximately 16% and
17%, respectively, for the same period.
These indicators of increased activity in the petroleum industry were
also reflected in the increase in the backlog in the Petroleum Equipment
segment to $64.6 million at January 31, 2003, up from $17.8 million at January
31, 2002. At the current level of activity and order rate, this segment is
expected to continue to generate positive operating profit and profit margins
more in line with historical rates for Fiscal 2003.
Airline
Products
The Airline
Products segment manufactures internal combustion and electric propulsion
airline ground support equipment that includes aircraft tow tractors, gate
pushback tractors, baggage tow tractors, beltloaders, air start units and air
conditioning units. This segment also
manufactures mobile railcar movers and snow blowers. Sales in the Airline Products segment for Fiscal 2002 were $61.2
million, compared to $80.6 million in Fiscal 2001. The operating loss for Fiscal 2002 was $19.8 million, which
included an asset impairment charge of $7.8 million, compared to an operating
loss of $18.4 million in Fiscal 2001.
Excluding the asset impairment charge described below, the operating
loss decreased to $12.1 million in Fiscal 2002 despite the lower sales volume,
reflecting a reduction of fixed expenses, largely attributable to the
consolidation of manufacturing facilities in Georgia in the second half of
Fiscal 2001.
The airline
industry encountered multiple challenges during Fiscal 2002, including economic
recession, terrorist activities, the threat of war with Iraq, overall decreased
consumer demand and high fuel prices.
During the fourth quarter of Fiscal 2002, the likelihood of war became
more imminent, there was a heightened risk of terrorist activities and the
airlines’ overall sentiment regarding their current and future operations
continued to decline. In light of these
continuing challenges and the history of operating losses for this segment, we
tested the segment’s long-lived assets and goodwill for impairment as of
January 31, 2003 in accordance with SFAS No. 144 and SFAS No. 142. We calculated the fair value of these
long-lived assets based on the present value of estimated future cash flows
from the Airline Products segment. As a
result of this analysis, we fully impaired the net carrying value of property,
plant and equipment ($6.5 million) and goodwill and other intangibles ($1.3
million) related to the Airline Products segment as of January 31, 2003.
Since September
2001, we have taken aggressive measures to reduce costs, including personnel
reductions, optimizing facility locations and increasing downtime. In addition, we have taken action to expand
and diversify our product line and to increase our sales in the military and
industrial sectors. In December 2002,
we acquired the assets of DAVCO Industries, a manufacturer of aircraft ground
support equipment specifically designed for the regional airline markets, for
cash of $2.2 million. We do not expect
a return to breakeven performance in Fiscal 2003, but we do expect a reduced
level of operating losses than we incurred in Fiscal 2002.
Other
Business Activities
Other business
activities not identified in a specific segment do not represent a significant
portion of our business operations going forward. This segment primarily included sales of gas compression
equipment, a business we exited in Fiscal 2002, and corporate interest income
of $1.8 million, $3.4 million and $7.9 million in Fiscal 2002, 2001 and 2000,
respectively.
Fiscal
2001 vs. Fiscal 2000
Fiscal 2001 sales totaled
$1,330 million compared to $1,111 million in Fiscal 2000. Net earnings from continuing operations for
the year grew 29% to $45 million, or $1.57 per diluted share, compared with $35
million, or $1.24 per diluted share, in the prior year. Including discontinued operations, total
year net earnings for Fiscal 2001 and 2000 were $42 million, or $1.46 per
diluted share, and $35 million, or $1.25 per diluted share, respectively.
Tactical
Vehicle Systems
The Tactical
Vehicle Systems segment recorded sales for Fiscal 2001 of $432.3 million versus
$304.1 million in Fiscal 2000. Total
operating profit for Fiscal 2001 was $103.5 million, which compared favorably
with $54.3 million in Fiscal 2000.
Included in the Fiscal 2001 operating profit is $39.0 million in
settlement of claims, net of expenses of $1.5 million, with the U.S. Army, as
discussed previously.
The increase in
sales in Fiscal 2001 was due to an increase in the volume of products shipped
during the year. In Fiscal 2001, 2,229
trucks and 692 trailers were shipped compared to 1,534 trucks and no trailers
for the comparable period of Fiscal 2000.
Power
Products
Sales for the
Power Products segment in Fiscal 2001 were $587.0 million, 4% higher than
Fiscal 2000 sales of $566.1 million, largely due to higher service sales. We increased the number of service
technicians in this segment and focused on the service aspect of this
business. While equipment sales
increased modestly year-over-year, the trend was downward during the fourth
quarter, reflecting weakness in selected markets such as oil and gas, material
handling, and small power generation equipment. This market softness was
reflected in the
equipment order backlog, which decreased $8 million during the year. Parts sales remained steady but were
impacted by the retirement of the two-cycle engine in the marine market.
Operating profit
for Fiscal 2001 was $10.3 million compared with $16.4 million for Fiscal
2000. A $3.1 million improvement from
higher volume was more than offset by $5.1 million higher expense related to
information systems improvements, $2.0 million of expense related to
collectibility of certain accounts receivable, $0.7 million in inventory
valuation adjustments (net of a lower LIFO reserve which decreased cost of
sales by $6.3 million), and $1.4 million higher costs due to inflation and
other factors. Overall, margin rates on
equipment were down while margin rates on parts and service sales remained
consistent with prior periods.
Distributed
Energy Solutions
Sales for the
Distributed Energy Solutions segment in Fiscal 2001 were $115.7 million
compared to $46.4 million in the prior year.
The increase in sales was primarily due to two large turnkey power
generation projects in California that were completed in the first half of
Fiscal 2001. An operating loss of $12.4
million was recorded in Fiscal 2001 compared to a $3.8 million operating loss
in Fiscal 2000. The $6.7 million impact
of higher gross margins due to increased volume was more than offset by cost
structure increases in Houston ($6.9 million) and Sacramento ($3.3 million),
$2.8 million LIFO provisions associated with an inventory increase, $1.4
million in warranty expenses, and $0.9 million for restructuring and other
costs.
Petroleum
Equipment
At the end of
Fiscal 2001, we announced our intention to sell the Petroleum Equipment
segment’s blowout preventer and controls, valve, and drilling riser business,
and as a result, these activities were reclassified for reporting purposes as
discontinued operations and not included in the results of this segment. See “Discontinued Operations and Cumulative
Effect of Change in Accounting Principle” below for further discussion. The currently reported Petroleum Equipment
segment manufactures equipment primarily for the well stimulation sector of the
oil service industry.
Sales for the
Petroleum Equipment segment totaled $90.5 million for Fiscal 2001 compared to
$58.1 million in Fiscal 2000. The
segment reported a $1.6 million operating profit in Fiscal 2001 compared to a
$4.1 million operating profit for Fiscal 2000.
The $3.0 million benefit from increased volume was more than offset by
$2.9 million increased operating expense to support the increased volume, $1.0
million in higher information systems expense, a $1.0 million increase in
product warranty costs and $0.5 million restructuring costs.
Airline
Products
Sales for the
Airline Products segment for Fiscal 2001 were $80.6 million versus $110.3
million in Fiscal 2000. The operating
loss for Fiscal 2001 was $18.4 million compared to an operating loss of $6.6
million for Fiscal 2000. The increase
in operating loss was attributable to lower volume ($4.5 million),
restructuring costs ($4.7 million) associated with facility and organization
consolidations, higher operating costs ($4.5 million) associated with facility
costs, ramp up of the snow blower business transferred to Houston, Texas,
higher insurance and bad debt expense, and other costs. These costs were partially offset by lower
LIFO reserves, which decreased cost of sales by $2.0 million.
Other
Business Activities
Other business
activities not identified in a specific segment primarily included sales of gas
compression equipment, a business we exited in Fiscal 2002. Fiscal 2001 sales were $23.3 million versus
$26.1 million in Fiscal 2000. Operating
profit for Fiscal 2001 totaled $1.2 million versus $3.5 million in Fiscal 2000,
which included a $5.6 million gain on the sale of the gas compression equipment
leasing business.
Period
Expenses
Net
Period Expenses
Period expenses
for Fiscal 2002 totaled $138.8 million, or 11.8% of sales compared with $147.3
million, or 11.1% of sales in Fiscal 2001 and $115.8 million, or 10.4% of sales
in Fiscal 2000.
Selling and
administrative expenses for Fiscal 2002, 2001 and 2000 totaled $136.9 million,
$148.8 million and $120.5 million, respectively. The $11.8 million decrease during Fiscal 2002 resulted from lower
spending at the business unit level of $4.5 million, primarily reflecting costs
related to restructurings in Fiscal 2001 that did not recur in Fiscal 2002, and
a reduction in corporate spending, primarily related to management information
systems. The $28.3 million increase
during Fiscal 2001 included an $8.0 million increase in management information
systems expenses, $6.1 million in restructuring expenses and higher costs due
to increased business activity.
Interest expense
declined during Fiscal 2002 by $1.1 million, as $20 million of long-term debt
was repaid in the second quarter of Fiscal 2001, resulting in lower average
debt balances outstanding year over year.
Interest expense declined $2.7 million in Fiscal 2001 compared to Fiscal
2000 due to debt reductions and capitalization of $0.6 million of interest on
major capital projects.
Other income, net
for Fiscal 2002 included $1.8 million of interest income, which is $1.7 million
lower than Fiscal 2001, as the average investment balance and the average rate
earned on such investments were lower in Fiscal 2002 compared to Fiscal
2001. In Fiscal 2001, Other income, net
also included a $1.7 million insurance recovery of damages from insurance
carriers related to prior year claims.
Other income, net, for Fiscal 2000 included a $5.6 million gain on sale
of the gas compression leasing business.
Discontinued
Operations and Cumulative Effect of Change in Accounting Principle
During the fourth
quarter of Fiscal 2001, we determined that the Petroleum Equipment segment’s
blowout preventer and controls, valve and drilling riser business was not
strategically aligned with our core competencies. At the end of Fiscal 2001, we announced our intention to sell
this business and, consequently, these activities were reclassified for
reporting purposes for all periods shown as discontinued operations. Included in the net loss from discontinued
operations for Fiscal 2002 were higher costs associated with certain contracts,
including operational inefficiencies due to the closure of the business. Also included in the loss from discontinued
operations in Fiscal 2002 is a $1.1 million reserve ($0.7 million net of tax)
related to a $6.1 million obligation to a financial institution in connection
with a guarantee of a customer’s base obligation for certain gas turbine
equipment in Argentina. We are pursuing
our rights under an export insurance credit policy procured in connection with
the underlying transaction and our rights with the Argentine end user of the equipment.
In the third
quarter of Fiscal 2002, we completed the sale of the blowout preventer and
controls, valve and drilling riser business mentioned above. At that time, we recognized an after-tax
loss of $5.5 million on the sale. We
anticipate that losses from these discontinued operations will continue until
all unresolved matters are finalized.
We recorded an after-tax gain of $0.6 million in Fiscal 2000 related to
the prior year disposal of an investment and certain obligations relating to a
power generation facility in Argentina associated with the previously
discontinued gas turbine operations.
Accordingly, the gain was reflected as a gain on disposal of
discontinued operations.
Effective February 1,
2002, we adopted 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. Among other things, SFAS No. 142 requires
that the carrying value of goodwill and intangibles with indefinite lives no
longer be amortized to expense, but instead be tested at least annually for
impairment. Upon adoption of SFAS No.
142 in the first quarter of Fiscal 2002, we recognized, as a cumulative effect
of a change in accounting principle, a pre-tax impairment charge of $5.5
million to goodwill ($3.7 million after tax) primarily related to the Airline
Products segment and ceased amortization of the remaining unamortized
goodwill. Our goodwill amortization for
Fiscal 2001 was $0.7 million.
Financial Condition
Working
Capital
During Fiscal 2002, current assets decreased by $2.3 million. Cash and cash equivalents increased $26.6
million due to $56.7 million in cash from operations generated during Fiscal
2002 offset by $19.2 million used in investing activities and $11.0 million
used in financing activities. See
“Liquidity and Capital Resources” below for further discussion. Accounts and notes receivable decreased
$14.3 million due to the timing of receipts from the U.S. government, retention
on certain turnkey projects and other timing of collections. Recoverable costs and accrued profits not
yet billed increased as large contracts in the Petroleum Equipment segment and
the Distributed Energy Solutions segment, which are accounted for on the
percentage of completion method, were in process and not yet invoiced. Inventories increased $13.5 million,
principally in the Airline Products segment, as sales order activity slowed in
the second half of Fiscal 2002. Income
taxes receivable decreased by $12.5 million, as we received a refund from the
Internal Revenue Service early in Fiscal 2002.
Assets of discontinued operations decreased substantially as such
businesses were sold in Fiscal 2002.
Current liabilities
increased by $40.5 million during Fiscal 2002 principally due to a $30.0
million increase in the current portion of long-term debt. This traunch of our private placement is due
to be repaid in May 2003. In addition,
accounts payable, accruals and other current liabilities decreased by $6.5
million primarily due to the timing of payments. Billings in excess of costs, which almost entirely related to our
Tactical Vehicle Systems segment, increased by $22.7 million due to timing of receipts
from the U.S government versus the timing of expenditures associated with the
FMTV contract.
Non-Current Assets
Non-current assets
increased by $5.9 million during Fiscal 2002, primarily as a result of
increased deferred tax assets, reflecting the impact of losses recorded for
book purposes that are not yet deductible for tax. With respect to property, plant and equipment, the
impact of the
final completion of both a new facility in Dallas, Texas in the Power Products
segment and a new fabrication facility in the Tactical Vehicle Systems segment
was largely offset by the impairment of long-lived assets and goodwill in the
Airline Products segment.
Long-Term Liabilities and Equity
Total long-term
liabilities and shareholders’ equity decreased by $36.9 million during Fiscal
2002, principally due to
the reclassification of $30.0 million of debt due May 2003 to current
liabilities. Other long-term
liabilities increased by $22.4 million, almost all of which related to an
increase in our accrued pension benefit obligation. Of this amount, $17.1 million was due to an increase in
additional minimum pension liability.
Shareholders’ equity decreased by $29.2 million as a result of: $13.0
million of other comprehensive loss, principally related to an increase in the
tax-affected additional minimum pension liability; $9.7 million of dividend
payments; and $7.2 million of net loss.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of
cash liquidity include cash and cash equivalents, cash from operations, amounts
available under credit facilities and other external sources of funds. We believe that these sources are sufficient
to fund the current requirements of working capital, capital expenditures,
dividends and other financial commitments.
We have a $150
million unsecured revolving credit facility, which matures on January 31,
2004. No borrowings were outstanding
under the facility at any time during Fiscal 2002 or Fiscal 2001. The revolving credit facility has a $25
million sub facility, which may be used for letters of credit. Approximately $8.1 million in letters of
credit under the revolving credit facility were outstanding at January 31,
2003. Pursuant to covenant limitations
of the revolving credit facility, approximately $53 million was available for
borrowing at January 31, 2003. A
commitment fee ranging from 20 to 50 basis points is paid on the daily average
unused balance based on our leverage ratio.
Borrowings outstanding would bear interest at several options, including
LIBOR plus 75 to 175 basis points based on our leverage ratio, the prime rate,
or a competitive bid among the banks.
Based on the first option (LIBOR plus 75 to 175 basis points based on
our leverage ratio), the borrowing rate would have been approximately 2.34% as
of January 31, 2003. We intend to
negotiate an extension of the revolving credit facility on similar terms and
conditions prior to its expiration in January 2004. There can be no assurance that we will be able to successfully
negotiate such an extension or, if we do, that such extension will include
similar terms and conditions, rates of interest and covenants. Although no borrowings are currently
outstanding under the revolving credit facility, failure to negotiate a new
facility on terms acceptable to us could restrict our future ability to make
acquisitions and fund working capital, capital expenditures, common stock
dividends or other financial obligations.
In addition, we
have $55 million in senior notes outstanding.
The senior notes are unsecured and were issued pursuant to an agreement
containing a covenant, which imposes a debt to total capitalization
requirement. Of this $55 million
amount, $30 million is due and payable in May 2003 and is classified on our
Consolidated Statement of Financial Position as current portion of long-term
debt. We currently intend to repay this
obligation with available cash on hand.
Other available sources of cash, including capacity under the revolving
credit facility, are available to fund this obligation. The remaining $25 million is due and payable
in May 2006. For additional information,
see Note 9 to the Consolidated Financial Statements.
In
Fiscal 2002, we entered into an interest rate swap agreement, which expires in
Fiscal 2004, with a notional amount of $15 million related to $15 million of
the senior notes due in 2006. This transaction, which is designated as a fair
value hedge, effectively converts $15 million of fixed rate debt with an
interest rate of 7.38% into floating rate debt with an interest rate of LIBOR
plus 436 basis points. The applicable
floating interest rate as of January 31, 2003 was approximately 5.70%. The net interest received or paid as a
result of the interest rate swap is included in interest expense on the
Consolidated Statements of Earnings. The recorded value of the swap and the
related debt are carried on the Consolidated Statements of Financial Position
at fair value.
The revolving
credit facility and the senior notes mentioned above were issued pursuant to
agreements containing covenants that restrict indebtedness, guarantees, sales
of assets, rentals and other items.
Additional covenants in the revolving credit facility require us to
maintain a minimum tangible net worth and interest coverage. Since these requirements are calculated from
earnings and cash
flow, our ability
to declare and pay dividends could be restricted indirectly. Based on our financial condition as of
January 31, 2003, the restrictions imposed by our debt instruments do not
currently restrict our ability to declare and pay dividends at historical
levels.
In addition, our
international subsidiaries had foreign currency bank notes payable totaling
$1.5 million and $3.1 million at January 31, 2003 and 2002, respectively. Such notes payable consist of renewable, secured
loans for the purpose of financing our South American operations. These loans are denominated in local
currency (Colombian Pesos and Venezuelan Bolivars) and are secured by letters
of credit issued by us and principally bear market-based variable rates of
interest, which were approximately 15.6% and 13.4% as of January 31, 2003 and
2002, respectively. We use foreign
denominated debt to offset the impact of foreign currency exchange rate
fluctuations on our South American operations.
We have additional
banking relationships, which provide uncommitted borrowing arrangements. In the event that any acquisition of
additional operations, growth in existing operations, settlements of lawsuits
or disputes, changes in inventory levels, accounts receivable, tax payments or
other working capital items create a permanent need for working capital or
capital expenditures in excess of the existing cash and cash equivalents and
committed lines of credit, we may seek to borrow under other long-term
financing instruments or seek additional equity capital.
The following
table summarizes the Company’s cash flows from operating, investing and
financing activities as reflected in the Consolidated Statements of Cash Flows.
Summarized
Consolidated Statements of Cash Flows
Net Cash Provided By (Used In) Operating
Activities
Net cash provided
by continuing operations in Fiscal 2002 was $63.1 million. Net earnings from continuing operations and
non-cash charges provided cash of $42.6 million. Other non-cash items in Fiscal
2002 primarily represent the non-cash impairment charge of $7.8 million related
to Airline Products segment long-lived assets and goodwill. We reduced overall working capital by $20.5
million in Fiscal 2002, including an increase in billings in excess of costs of
$22.7 million primarily associated with the Tactical Vehicles Systems segment
and $14.8 million in accounts and notes receivable due to the timing of
collections, partially offset by $12.6 million for inventories and $11.7
million in recoverable costs and accrued profits not yet billed associated with
our Petroleum Equipment and Distributed Energy Solutions segments.
Net cash provided
by continuing operations in Fiscal 2001 was $37.5 million. Net earnings from continuing operations and
non-cash charges provided cash of $63.0 million. The $25.6 million usage from the change in operating assets and
liabilities, net, was largely due to a $25.2 million increase in inventories
primarily in the Distributed Energy Solutions segment.
Net cash provided
by continuing operations in Fiscal 2000 totaled $108.1 million. Net earnings from continuing operations and
non-cash charges provided cash of $47.1 million. Decreases in accounts and notes receivable net of changes in
recoverable costs not yet billed of $75.6 million provided the primary
additional source of cash from operations.
Net Cash Provided by (Used In) Investing Activities
During Fiscal
2002, we reduced our level of capital expenditures significantly compared to
the previous years. Included in the
$27.0 million are final expenditures associated with the completion of our new
facility in Dallas and the fabrication facility in Sealy, Texas, both mentioned
below. The Company currently
anticipates the capital spending in Fiscal 2003 will be $30 to $35 million,
including $7 to $8 million related to consolidation of the Engineered Products
Division fabrication facilities.
Included in the
$4.9 million of Acquisition of businesses in Fiscal 2002 are two acquisitions
completed in the fourth quarter. We
acquired the assets of DAVCO Industries, Inc., a supplier of regional and
governmental airline ground support equipment, for $2.2 million. These products have been integrated into the
Airline Products segment operations in Georgia. Anticipated annual sales volume from this product line is
approximately $4 million. We also acquired
the franchise for the Hyster forklift truck territory that includes five Texas
counties in the El Paso, Texas area as well as the entire state of New Mexico
for $2.7 million. We currently hold the
Hyster franchise for most of the state of Texas and now New Mexico. This acquisition is expected to add
approximately $5 million of annual revenue to the Power Products segment.
Net investing
activities of discontinued operations in Fiscal 2002 primarily included
proceeds of $14.8 million from the sale of our blowout preventer and controls,
valve and drilling riser business, partially offset by an expenditure of $6.1
million to satisfy a gas turbine guarantee obligation in Argentina.
During Fiscal 2001
and 2000, we invested significant amounts of cash in property, plant and
equipment to expand our existing business.
Included in Fiscal 2001 are expenditures for a new fabrication facility
in the Tactical Vehicle Systems segment, equipment and leasehold improvements
related to a new facility in Georgia for the Airline Products segment, and
expenditures related to a new facility in Dallas for the Power Products
segment. Also included in Fiscal 2001
and 2000 were $2.1 million and $5.2 million, respectively, of expenditures
related to our new enterprise resource planning software and capitalizable
implementation costs.
During Fiscal 2001,
we received $5.7 million in cash associated with the sale of our John Deere
franchise and the final payment related to the sale of our gas compression
business sold in the prior year, both in the Power Products segment. During Fiscal 2000, we received $55.2
million in cash associated with the divestiture of our gas compression
equipment leasing business.
In Fiscal 2001,
our Tactical Vehicle Systems segment acquired Extended Reach Logistics, Inc.,
an e-commerce business for $1.2 million in cash plus additional potential
performance payments.
Net Cash
Provided By (Used In) Financing Activities
During Fiscal
2002, we paid common stock dividends of $9.7 million, or $0.34 per share. There have been no changes in the dividend
rate per share during the years presented.
We generally use funds from operations to pay such dividends. Declaration and payment of dividends in the
future is dependent upon our earnings and liquidity position, among other
factors. Proceeds from exercise of
stock options during Fiscal 2002 decreased compared to 2001 due to generally as
a result of lower stock prices which resulted in a lower level of stock option
exercises.
During Fiscal
2001, we paid down $21.0 million of long-term borrowings of which $20.0 million
related to senior notes from a private placement in prior fiscal periods. In Fiscal 2001, $9.5 million of short-term
debt was also paid, substantially all of which was related to a financing
arrangement for equipment inventory.
Proceeds from exercise of stock options at Fiscal 2001 increased due to
generally higher stock prices, which resulted in a greater level of stock
option exercises.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
We occasionally enter into
certain financing arrangements in the ordinary course of business, including
non-cancelable operating leases, letters of credit and debt guarantees.
We enter into operating leases
for some of our facility and equipment needs.
Such lease arrangements enable us to conserve cash by paying monthly
lease rental fees for the applicable assets rather than purchasing them. At the end of the lease period, we have no
further obligation to the lessor. If we
decide to cancel or terminate a lease prior to the end of its term, we are
typically obligated to pay the remaining lease payments over the term of the
lease, and in certain cases may be allowed to sublet the asset to another
party.
We are occasionally required to
issue performance indemnities or to post letters of credit, generally issued by
a bank, to collateralize certain insurance programs, to secure credit
facilities or to ensure performance under contracts. A letter of credit commits the issuer to remit specified amounts
to the holder, if the holder demonstrates that we have failed to meet our obligations
under the letter of credit. If this
were to occur, we would be obligated to reimburse the issuer for any payments
the issuer was required to remit to the holder of the letter of credit. Generally, a letter of credit is released
when we have satisfied the obligations that the letter of credit is securing.
We occasionally provide certain
guarantees in support of our customers’ financing of purchases from us in the
form of debt guarantees. Pursuant to
such guarantees, once the customer has satisfied its debt obligation to the
lender, our guarantee is released.
Should a customer fail to meet its obligation to the lender, the lender
could require us to satisfy such obligation, in which case we would have some
legal recourse against the customer.
Our contractual obligations at January 31, 2003 are
summarized as follows (in thousands):
In addition, our other commercial commitments expire as
follows (in thousands):
EMPLOYEE DEFINED BENEFIT PLANS
We have a noncontributory
defined benefit pension plan covering substantially all of our full-time
employees. The pension benefits are
based on years of service, limited to 45 years, and the employee’s highest
consecutive five-year average compensation out of the last 10 years of
employment. We fund pension costs in
conformity with the funding requirements of applicable government regulations.
The assets of our pension plan,
like numerous other companies’ plans, are, to a substantial degree, invested in
the capital markets and managed by a third party under the review of our
pension plan committee. Given the
performance of the stock market during recent history, we were required to
reflect an additional minimum pension liability of $17.1 million in our Fiscal
2002 financial statements as
a result of a decline in the
value of the assets held by our pension plan.
Minimum pension liability adjustments are non-cash adjustments that are
reflected as an increase in pension liability with an offsetting charge to
shareholders’ equity (net of income tax) through comprehensive income (rather
than net income). We also anticipate
that the decline in the value of the pension plan assets will result in higher
future pension costs. However, absent a
decision by us to increase our contributions to the pension plan as a result of
the Fiscal 2002 asset performance, such asset performance is not expected to
have a material impact on our near-term liquidity as pension funding
requirements generally allow for such impacts to be spread over multiple years. Increases in post-Fiscal 2002 pension
funding requirements could occur, however, if capital market performance in
future periods does not more closely approximate the long-term rate of return
assumed by us, and the amount of such increases could be material.
The calculation of
expense associated with our pension plan is dependent on key assumptions,
including the long-term discount rate, the expected rate of return on plan
assets, and the assumed rate of compensation increases. During Fiscal 2002, we changed the assumed
discount rate used for this calculation from 7.00% in Fiscal 2001 to
6.75%. This decision was based on the
trending in the monthly average Moody’s/Mergent’s Corporate Aa yields and the
monthly average 30-year Treasury rates.
In addition, we reduced the assumed rate of compensation increase for
our employee population by 1% point, from 5.1% to 4.1% based on more recent
actual data and the expectation that long-term rates of compensation increase
should approximate growth in overall gross domestic product. Consistent with prior years, we used 9.0% in
Fiscal 2002 as our expected long-term rate of return on plan assets. This is based on an actuarial estimate of
returns over a 20-year time horizon based on our pension plan’s long-term asset
allocation strategy using geometric averaging.
While we believe that these assumptions are reasonable for Fiscal 2002,
we will continue to evaluate the reasonableness of our actuarial assumptions
for their applicability in the Fiscal 2003 actuarial analysis.
If we decrease the
expected long-term rate of return on plan assets assumption by 50 basis points,
the pension expense we would recognize would increase by $0.4 million. If we were to decrease the discount rate by
100 basis points, the pension expense we would recognize would increase by
approximately $3.0 million.
During Fiscal
2002, 2001 and 2000 we recognized $6.0 million, $4.6 million and $3.8 million,
respectively, of expense associated with our defined benefit pension plan. During those same three years, we
contributed $1.7 million, $5.7 million and $0.4 million of funding,
respectively. Based on the best
available information we have at this time, we expect that in Fiscal 2003 we
will contribute approximately $6 million to our defined benefit pension plan
and recognize $8 million of pension expense.
These pro-forma estimates include a discount rate of 6.75%, an expected
long-term rate of return on plan assets of 8.5% and a 4.1% rate of compensation
increase.
In addition to our
defined benefit pension plan, we have a defined benefit postretirement medical
plan, which covers most of our employees and provides for the payment of
medical costs of eligible employees and dependents upon retirement. The plan is currently not funded. We expect to continue paying postretirement
medical costs as covered claims are incurred.
Like the pension
plans discussed above, the defined benefit postretirement medical plan is
dependent on key assumptions. For this
actuarial calculation, we have also used a discount rate of 6.75%. Another key assumption in this actuarial
calculation is the assumed future health care cost trend rates. We have assumed an annual rate of increase
of approximately 5.5% in the per capita cost of covered health care benefits
for Fiscal 2003. The rate is assumed to
moderate to 5% through 2004 and remain at that level thereafter. This estimate of future medical cost growth
was based on the assumption that the rate of medical cost increases would
eventually level off and that growth in these costs would eventually
approximate the overall growth in gross domestic product. Given more recent data, however, we are
re-evaluating this assumption. When we
initiate our actuarial calculation of the Fiscal 2003 expense, we expect to
assume a Fiscal 2004 growth rate of over 8%, eventually and gradually
decreasing to 5% by 2008 and remaining at that level thereafter.
If we had
increased our medical growth assumptions by 100 basis points in Fiscal 2002,
the effect on total service and interest cost components would have been
approximately $0.3 million. While we
currently believe the existing discount rate of 6.75% is appropriate for the
Fiscal 2003 estimate, if we were to decrease the discount rate by 100 basis points,
the effect on total service and interest cost components we would recognize
would increase by $0.2 million.
CRITICAL
ACCOUNTING POLICIES
Preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and related
disclosures during the period. We
evaluate our estimates on an on-going basis, based on historical experience and
various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these
estimates. If actual market conditions
are less favorable than those projected by us, additional adjustments to
reserve items might be required. We
consider the following policies to be the most critical and pervasive
accounting policies we use, and the areas most sensitive to material change
from external factors.
Revenue Recognition: Generally, revenue is recognized when
contract terms are met, collectibility is reasonably assured and a product is
shipped or risk of ownership has been transferred to and accepted by the
customer. With respect to long-term
construction
contracts, revenue is recognized using the percentage-of-completion
method in accordance with the American Institute of Certified Public
Accountants Statement of Position 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.” Measurement of progress toward completion is
based on units-of-production for the FMTV contracts in the Tactical Vehicle
Systems segment, and typically based on direct labor hours for other
percentage-of-completion contracts.
Changes in estimates for revenues, costs to complete and profit margins
are recognized in the period in which they are reasonably determinable. Any anticipated losses on uncompleted
contracts are recognized whenever evidence indicates that the estimated total
cost of a contract exceeds its estimated total revenue.
Warranty: Based on historical experience and contract
terms, we provide for the estimated cost of product and service warranties at
the time of sale or, in some cases, when specific warranty problems are
identified. Accrued warranty costs are
adjusted periodically to reflect actual experience. Certain warranty and other
related claims involve matters of dispute that ultimately are resolved by
negotiation, arbitration or litigation.
Occasionally, a material warranty issue can arise that is beyond our
historical experience. We provide for
any such warranty issues as they become known and estimable. Should actual product failure rates or
repair costs differ from our current estimates, revisions to the estimated
warranty liability would be required.
Allowance for Doubtful Accounts: We extend credit and credit enhancements to
customers and other parties in the normal course of business and maintain an
allowance for doubtful accounts for estimated losses resulting from the
inability of customers to make required payments. We base such estimates on our historical experience and any
specific customer collection issues we have identified. While such credit losses have historically
been within our expectations and the provisions established, we might not
continue to experience the same credit loss rates we have in the past. Circumstances in some of the industries in
which our customers operate may affect their operating performance and cash
flows, which in turn might affect our ability to collect our accounts receivable. As circumstances develop, the financial
condition of specific customers changes or additional information becomes
available, adjustments to the allowance for doubtful accounts may be required.
Inventory: Inventories are stated at the lower of cost
or market, with cost generally determined on a last-in, first-out (“LIFO”)
basis, and market determined on the basis of estimated realizable values, less
related customer deposits. Work in
process costs include material, labor and overhead. When circumstances dictate, we write inventory down to its
estimated realizable value based upon assumptions about future demand,
technological innovations, market conditions and the physical condition of
products. If circumstances change,
causing us to reduce our estimate of realizable value for specific inventory
items or categories, additional provisions to cost of sales may be required.
Asset Impairment: We assess the valuation of components of our
property, plant and equipment and other long-lived assets whenever events or
circumstances dictate that the carrying value might not be recoverable. We base our evaluation on indicators such as
the nature of the assets, the future economic benefit of the assets, any
historical or future profitability measurements and other external market
conditions or factors that may be present.
If such factors indicate that the carrying amount of an asset or asset
group may not be recoverable, we determine whether impairment has occurred by
analyzing an estimate of undiscounted future cash flows at the lowest level for
which identifiable cash flows exist. If
our estimate of undiscounted future cash flows during the estimated useful life
of the asset is less than the carrying value of the asset, we recognize a loss
for the difference between the carrying value of the asset and its estimated
fair value, generally measured by the present value of estimated future cash
flows.
Deferred Income Tax Assets: We record deferred tax assets and
liabilities for differences between the book basis and tax basis of our net
assets. We record a valuation
allowance, when appropriate, to adjust deferred tax asset balances to the
amount we expect to realize. We
consider the amount of taxable income available in carryback years, future
taxable income and potential tax planning strategies in assessing the potential
need for a valuation allowance. Should
we determine that we will not likely realize all or part of our net deferred
income tax assets in the future, an adjustment to the deferred tax asset
balance would be charged to the income tax provision in the period such
determination is made.
Insurance: We maintain a variety of insurance for our
operations that we believe to be customary and reasonable. Although we believe we currently maintain
insurance coverage that is adequate for the risks involved, there is always a
risk that our insurance may not be sufficient to cover any particular loss or
that our insurance may not cover all losses.
For example, it is possible that an adverse product liability claim
could arise in excess of our coverage.
In addition, insurance rates and availability are subject to wide
fluctuation, and changes in our coverage and the insurance industry could
result in increases in our insurance cost and higher deductibles and
retentions.
We are self-insured up to certain levels in the form of deductibles and
retentions for general liability, vehicle liability, group medical and workers
compensation claims. In addition, we do
not maintain insurance for some business risks and potential exposures for
which insurance is not available or not financially cost-effective. We accrue
for estimated self-insurance costs and uninsured exposures based on estimated
development of claims filed and an estimate of claims incurred but not
reported. We regularly review estimates
of reported and unreported claims and provide for losses accordingly. Although we believe that adequate reserves
have been provided for expected liabilities arising from our self-insured
obligations, uninsured claims and exposures, our estimates of these liabilities
may change as claims develop, and adjustments to reserves may be required.
Pensions and Other Postretirement Benefits: We account for our defined benefit pension
plan and our defined benefit postretirement medical plan in accordance with
SFAS No. 87, “Employers’ Accounting for Pensions” and SFAS No. 106, “Employers'
Accounting for Postretirement Benefits Other Than Pensions,” respectively.
These standards require that amounts recognized in the financial statements be
determined on an actuarial basis.
Significant elements in determining our pension and other postretirement
benefit expense include the expected return on plan assets, expected medical
cost and compensation increases, and the discount rate for calculating future
liability. See “Employee Defined
Benefit Plans” for further discussion.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 142, “Goodwill and Other Intangible Assets,” which addresses financial
accounting and reporting for acquired goodwill and other intangible
assets. Among other things, SFAS No.
142 requires that the carrying value of goodwill and intangibles with indefinite
lives no longer be amortized to expense, but instead be tested at least
annually for impairment. Upon adoption
of SFAS No. 142 in the first quarter of Fiscal 2002, we recognized, as a
cumulative effect of a change in accounting principle, a pre-tax impairment
charge of $5.5 million to goodwill ($3.7 million after tax), primarily related
to the Airline Products segment and ceased amortization on the remaining
unamortized goodwill. See Note 13 in
the consolidated financial statements elsewhere herein for further discussion.
In August
2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement
Obligations,” which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
can be reasonably estimated. Such asset
retirement costs are to be capitalized as part of the carrying value of the
related long-lived asset and depreciated over the asset’s estimated useful
life. We have adopted SFAS No. 143 as
of February 1, 2003. We do not believe
adoption of the new standard will have a material effect on our consolidated
financial statements.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets,” which supersedes both SFAS No.
121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of” and the accounting and reporting provisions of APB
Opinion No. 30, for the disposal of a business. SFAS No. 144 provides a single accounting model for long-lived
assets to be sold and addresses significant implementation issues of SFAS No.
121. The new rules also broaden the
criteria regarding classification of a discontinued operation. We adopted SFAS No. 144 in Fiscal 2001 and
as a result classified certain operations to be sold as discontinued
operations. In Fiscal 2002, in
accordance with SFAS No. 144, we recorded a charge of $6.5 million to impair
the long-lived assets of the Airline Products segment. See Notes 2 and 3 in the consolidated
financial statements elsewhere herein for further discussion.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs
Associated with Exit or Disposal Activities,” which requires companies to
recognize costs associated with plant closings or other exit or disposal
activities when incurred. Previous
guidance required recognition of such costs as a liability as of the date an
entity commits to an exit plan. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. Adoption of the new
standard will impact the timing of liability recognition related to future exit
or disposal activities, but will not have a material effect on our ultimate
costs associated with such activities.
In November 2002, the FASB issued Interpretation (“FIN”) No. 45,
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others,” which requires a guarantor to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligations undertaken in issuing the guarantee. FIN No. 45 also expands the disclosures required to be made by a
guarantor about its obligation under certain guarantees that it has
issued. The recognition provisions of
FIN No. 45 do not apply to product warranties.
Initial recognition and measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued after December 31,
2002. The disclosure requirements are
effective immediately. See Note 7 in
the consolidated financial statements elsewhere herein. We do not expect the recognition provisions
of FIN No. 45 will have a material effect on our consolidated financial
statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting for
Stock-Based Compensation-Transition and Disclosure,” which amends SFAS No. 123,
“Accounting for Stock-Based Compensation,” by providing alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock options and other stock-based employee compensation. In addition, SFAS No. 148 requires prominent
disclosures in both annual and interim financial statements about the method of
accounting used for stock-based compensation and its effect on reported
results. SFAS No. 148 is effective in
Fiscal 2003, and has no impact on our financial position, results of operations
or cash flows.
In January 2003, the FASB issued FIN No. 46, “Consolidation of Variable
Interest Entities,” which requires that a company that controls another entity
through interests other than voting interests should consolidate such
controlled entity. FIN No. 46 applies
to variable interest entities created after January 31, 2003, and is effective
for interim periods beginning after June 15, 2003 for existing variable
interest entities. As we have no
material exposures to special purpose entities or other off-balance sheet
arrangements, we anticipate that the effects of adopting FIN No. 46 will not be
material to our consolidated financial statements.
FACTORS
THAT MAY AFFECT FUTURE RESULTS
Cautionary
Statements
Certain of the statements
contained in this document, including those made under the captions “Business,”
“Legal Proceedings,” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” are “forward-looking” statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Other
than statements of historical fact included herein, all statements herein,
including in particular, but not limited to, statements regarding potential
future products and markets, our future financial position or results of
operations, business strategy, other plans, and objectives for future
operations, relating to trends, expressing our belief, referring to
expectations, referring to backlogs as to future product deliveries, relating
to long-term contracts in progress or using the words “should,” “could,” “may,”
and words of similar import and prospective focus, are forward-looking
statements. We can give no assurance
that any forward-looking statement of ours will prove to have been correct and
such statements are not guarantees of future performance. They involve certain risks, uncertainties,
and assumptions that are difficult to predict, and actual outcomes and results
may differ materially from what is expressed or forecasted or implied in such
forward-looking statements. The Company
undertakes no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. Specific important factors that could cause
actual results, performance, or achievements to differ materially from our
forward-looking statements, and that otherwise may affect our operations, are
identified below. All written and oral
forward-looking statements attributable to us or to persons acting on our
behalf are expressly qualified in their entirety by such factors.
• Risk
of Competition. Our foreign
and domestic competitors may use their resources and product and service
offerings to increase competition, both in prices and products and services
offered, and thereby reduce our market shares and/or sales and
profitability. Some of our existing and
potential competitors have substantially greater marketing, financial, and technical
resources than we have, and these resources may be used in effective
competition with us. We have assumed in
our forward-looking statements that we will continue to be a reasonably
effective competitor in our markets.
• Risks
Relating to Technology. Our
business will suffer if we are unable to keep up with rapid technological
change and product development. Our
success will depend on our ability to anticipate changes in technology and
industry requirements and to respond to technological developments on a timely
basis, either internally or through strategic alliances. We will likely be constantly threatened by
current competitors or new market entrants who may develop new technologies or
products or establish new standards that could render our products less
marketable or obsolete. Thus, we can
offer no assurances that we will be successful in developing and marketing, on
a timely and cost effective basis, products or product enhancements that
respond to our competition, to technological developments, to changing industry
standards, and to market place acceptability.
We have assumed in our forward-looking statements that we can reasonably
keep pace with our competitors in technology changes and product development.
• 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 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 and world-wide economic uncertainty exists,
particularly in light of the war in Iraq and related factors. If the United States or world economies decline
or fail to recover, the demand for, and price of, our products and services
could be adversely affected, thus adversely affecting our revenues, results of
operations and cash flow. 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 Oil and Gas Industry Economic Conditions. Our Petroleum Equipment segment, as well as
certain aspects of our Power Products and Distributed Energy Solutions
segments, are closely tied to the oil and gas industry in general and, in
particular, to capital expenditures by oil and gas companies and companies
providing services and manufactured products to the oil and gas industry. Capital expenditures by oil and gas
companies have tended in the past to follow trends in the price of oil and
natural gas, which have fluctuated widely in recent years and which were
somewhat depressed (particularly for natural gas) in Fiscal 2002. A sustained period of substantially reduced
capital expenditures by oil and gas companies and oil and gas service and
manufacturing companies, as we have experienced in the most recent year and also
in some other recent years, will likely lead to a drop in demand for products
and services in our Petroleum Equipment segment as well as in our Distributed
Energy Solutions and Power Products segments, which also provide products and
services used in connection with the exploration for and production of oil and
gas. Any such drop will have an adverse
effect on our revenues, results of operations and cash flow during the affected
period, as it did during Fiscal 2002.
There are some recent modest signs of recovery in the oil and gas
industry, and we have assumed in our forward-looking statements that economic
conditions in such industry will stabilize at least at present levels or
improve and that capital expenditures in the industry will not continue to be
unduly restrained in future periods.
• Risks of Airline Industry Economic Conditions. Our Airline Products segment is highly
dependent upon the economic well-being of the airline industry and was adversely
affected in Fiscal 2002 by serious difficulties in that industry, including
difficulties arising following the terrorist attacks on the U.S. in September
2001. Capital and other general
expenditures by airline companies are the principal source for demand for the
products of our Airline Products segment.
Should there be a sustained period of substantially reduced capital
expenditures by airline companies and other companies that cater to the airline
industry, the demand for our products in our Airline Products segment will drop
and there will likely be an adverse effect on our results of operations and
cash flow during the affected period, as there was in Fiscal 2001 and Fiscal
2002. In our forward-looking statements
we continue to be cautious as to the recovery of economic conditions in the
airline and related industries and do not anticipate quick and/or complete
recovery. Further, we are unable to
predict the effect of a current viral epidemic (SARS) on air travel and the
resultant effect on the airline business, although it appears to be adversely
affecting air travel at present.
• Risks as to Terrorist Attacks on the U.S. and Their
Impact on the U.S. Economy.
While we are not yet able to evaluate fully the ongoing impacts of the
terrorist attacks on the U.S. (which appear to have coincided with or
contributed to a general downturn in the U.S. economy), or the threat of
further such incidents, such circumstances may continue to adversely affect our
business in ways that we cannot yet identify.
However, both the past attacks and threats of future ones may adversely
affect the demand for our products and services generally in addition to their
specific impact on our segments that serve the oil and gas and airline
industries. Our forward-looking statements
at present assume no further material impacts of such circumstances on the U.S.
or further deterioration on our affected business.
• Risks
Relating to Personnel. Labor
shortages and our inability to recruit and retain key employees and workers could
limit our operations and increase our labor costs and, in turn, adversely
affect our results of operations. Our
manufacturing and service operations are substantially dependent upon our
ability to recruit and retain key managers and qualified machinists, mechanics,
factory workers, and other laborers. A
strong labor market can adversely impact us by limiting our manufacturing
capacity or resulting in significantly increased wages and other benefits to
attract additional key employees and workers.
We have assumed in our forward-looking statements that we will continue
to be able to recruit and retain necessary personnel at overall costs that are
comparable with our ability to produce revenues.
• 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 five of our second multi-year contract with the
U.S. Army for production of the FMTV that provides for continued production of
the FMTV through September 2004 including currently exercised option
years. 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. Army and may be terminated at any time for
the convenience of the government. As
of January 31, 2003, funding in the amount of approximately $1.92 billion
for the FMTV contract had been authorized and appropriated by the U.S. Congress,
$631.1 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 by the end of April 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 the other
competitor for the award 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. The U.S. Army is
the predominant customer of our Tactical Vehicle Systems segment, accounting
for practically all of the sales of this segment. The loss of this customer would have a material adverse effect on
our consolidated financial condition and results of operations. In our forward-looking statements, we have
assumed that we will continue to have satisfactory benefits from our government
contracting business.
• Inherent
Risks of Government Contracts.
Government contracts present us with numerous special risks that are
inherent in their nature and that could adversely affect our operations. Government contracts are often relatively
large in our business. Major contracts
for military systems are performed over extended periods of time and are
subject to changes in scope of work
and delivery
schedules. Pricing negotiations on
changes and settlement of claims often extend over prolonged periods of
time. Whether we are able to obtain
ultimate profitability on military contracts that we may receive often depends
on the eventual outcome of an equitable settlement of contractual issues with
the U.S. government, and, due to uncertainties inherent in the estimation and
claim negotiation process, no assurances can be given that any estimates as to
satisfactory profitability will be accurate.
Moreover, estimates as to percentage-of-completion accounting on large
government contracts can prove to have been incorrect. Variances between actual results and such
estimates could be material. Furthermore,
there are inherent risks in projecting actual costs on multi-year government
contracts because of unforeseen factors, including price and wage inflation and
supply shortages. Our government
contracting operations are subject to U.S. government investigations of
business practices and cost classifications and legal and administrative
proceedings can flow from our practices.
Under certain circumstances a contractor can be fined as well as
suspended or debarred from government contracting. Suspension or debarment could prevent us from selling equipment
or services to customers that depend on loans or financial commitments from
other U.S. government agencies such as the Export Import Bank and the Overseas
Private Investment Corporation. In such
events we might otherwise not be able to receive the benefits of federal
assistance payments during a suspension or debarment. In our forward-looking statements, we have assumed our reasonable
management of risks inherent in our government contracting business.
• Risks
of Claims and Litigation.
Unexpected outcomes of pending litigation and governmental proceedings
and future unexpected litigation and legal disputes could have a material
adverse impact on our operations. If we
experience materially adverse and unexpected outcomes or other unexpected
results in our existing litigation and government proceedings, which in turn
have a material adverse effect on our results of operations, the accuracy of
our forward-looking statements would be affected. Similarly, if we experience in the future new, unexpected
litigation or adverse results from new, unexpected litigation, there could also
be a material adverse effect on our results, again affecting the accuracy of
our forward-looking statements. Our
forward-looking statements assume that there will be no materially adverse
unexpected outcomes or results that we have not already adequately provided
for.
• Risks of Product Defects. Our customers often require demanding
specifications for product performance and reliability. Because many of our products are complex and
often use state-of-the-art components, processes, and techniques, undetected
errors and design flaws may occur.
Product defects result in higher product service and warranty and
replacement costs and may cause damage to our customer relationships and
industry reputation, all of which may negatively impact our results of
operations. We have assumed in our
forward-looking statements that we will not in the future incur material
difficulties with respect to product defects and warranty claims.
• Risks
as to Foreign Sales and Global Trade
Matters. Foreign
sales are subject to special risks inherent in doing business outside of the
U.S., including the risk of war, terrorist activities, civil disturbances,
embargoes, and government activities, all of which may disrupt markets. Foreign sales are also generally subject to
the risk of compliance with additional laws, including tariff regulations and
import and export restrictions. Sales
in certain foreign countries require prior U.S. government approval in the form
of an export license. We cannot assure
you that we will not experience difficulties in connection with future foreign
sales. Moreover, changes in global
trade policies in our markets could impact our operations in these
markets. Recent events concerning the
adoption by the U.S. of certain tariffs on foreign imported steel and other
products could cause other countries to retaliate and other disruptions in
global trade policies. We have assumed
in connection with our forward-looking statements that there will be no material
changes in global trading policies, such as embargoes, new and large tariffs,
or other tax assessments and the like or other new and material restrictions on
trade, that apply in particular to our businesses.
• Risks
as to Cost Controls. As a
manufacturing and service company operating within “tight” margins and with
substantial facilities and inventories and a large workforce, our operations
have been, and can be, adversely affected by our inability to control costs and
to accurately estimate and plan our costs on an exacting basis. As a manufacturing and service company it is
particularly important for us to estimate and control our costs and expenses,
and we continuously endeavor to implement cost identification, estimation, and
savings measures in our operations. Our
forward-looking statements assume that we will be able to contain our costs and
expense increases at reasonable levels consistent with expected revenues.
• Risks as to Information Technology. We have recently added, at substantial costs,
new information processing systems designed to assist us in cost controls,
reporting, and other operations areas.
We anticipate the need to make additional expenditures to increase the
efficiency and usefulness of such systems and have not yet enjoyed the full
benefits of implementation of such systems.
Accordingly, we are at risk as to further costs and implementation
problems on our relatively new information technology systems that could
adversely affect our results of operations.
We have assumed in our forward-looking statements that we will control
the costs of such systems in line with our expectations for such systems and
that we will implement them satisfactorily.
• Risks
as to Acquisitions. Our
success is dependent upon the integration of newly acquired businesses with our
existing businesses. Our
forward-looking statements assume the successful integration of acquired
businesses and their future contribution to our operations even though
integration of acquisitions requires constant effort, including attention to
personnel and cost issues, and there can be no assurance as to the ultimate
success of our integration efforts.
• Risks
as to Currency Fluctuations.
A material change in currency exchange rates in our markets could affect
our future results as well as affect the carrying values of certain of our
assets. World currencies have been
subject to much volatility in
recent years. The U.S. dollar has weakened somewhat
against other key currencies (the Euro and, in recent periods, the Japanese
Yen). Our forward-looking statements
assume no material impact from future changes in currency exchange rates.
• Risks
as to Environmental and Safety Matters. Our operations and products, and the use thereof, are regulated
under a number of federal, state, local, and foreign environmental laws and
regulations, which govern, among other things, the discharge of hazardous
materials into the air and water as well as the handling, storage, and disposal
of hazardous materials. Compliance with
these environmental laws is a major consideration in the manufacturing of our
products and in their servicing and distribution, as we use and generate
hazardous substances and wastes in our manufacturing operations and as we may
be subject to material financial liability for any investigation and clean-up
of such hazardous materials. In
addition, many of our current and former properties are or have been used for
industrial purposes. Accordingly, we
also may be subject to financial liabilities relating to the investigation and
remediation of hazardous materials resulting from the action of previous owners
or operators of industrial facilities on those sites. Liability in many instances may be imposed on us regardless of
the legality of the original actions relating to hazardous or toxic substances
or whether or not we knew of, or were responsible for, the presence of those
substances. We are also subject to
various federal, state, local, and foreign laws and regulations relating to
safety and health conditions in our manufacturing facilities and with respect
to our products and the use thereof and our service operations. Those laws and regulations may also subject
us to material financial penalties or liabilities for any noncompliance, as
well as potential business disruption if any of our facilities or a portion of
any facility is required to be temporarily closed as a result of any violation
of those laws and regulations. Any
financial liability or business disruption from environmental or health and
safety issues could have a material adverse effect on our financial condition
and results of operations. Our
forward-looking statements assume no material adverse impact from environmental
and safety issues.
• Risks
as to Distributorships. Our
Power Products and Distributed Energy Solutions segments are, in particular,
dependent upon a number of distribution agreements with third-party
manufacturers. All of our distribution
agreements either have expiration dates or are terminable upon certain
notifications. Even those with
expiration dates are also terminable based on other factors, including changes
in our control or in our principal management.
While our principal distribution agreements have been renewed on a
regular basis in the past, there can be no assurance that any particular
distribution agreement will be renewed in the future or that, on the whole, our
principal distribution agreements will continue to be renewed. The termination of, or a failure to renew,
key distribution agreements could have a material adverse impact on our
operations. We have assumed in our
forward-looking statements that our principal distribution agreements will not
be terminated and/or will be renewed as they come up for renewal.
• 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. We are currently in discussions with the
Motor Vehicle Division of the Texas Department of Transportation as to issues
that have been raised concerning licenses necessary for the sale, distribution,
installation and warranty repair of certain large engines and
transmissions. No enforcement action is
pending against us in such situation, but our licenses have not been renewed at
present pending the resolution of issues that have been raised. 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 and that we will resolve satisfactorily the
Texas licensing matters.
• Credit Risks. We believe that our allowance for bad debts at January 31, 2003,
is adequate in light of known circumstances.
However, we cannot give assurance that additional amounts of
uncollectible receivables and bad debt write-offs will not have a material
adverse effect on our future results of operations. Many of our customers have suffered from lower revenues and
experienced liquidity challenges resulting from the economic difficulties
throughout our industry and the industries we have served in recent
periods. We have in the past incurred
write-offs in our accounts receivable due to customer credit problems. We have also found it necessary to extend
trade credit and credit enhancements to long-term customers and others from
time to time where some risks of nonpayment or late payment exist. Substantial unanticipated credit issues can
adversely affect our results of operations.
We have assumed in our forward-looking statements that our current
reserves and allowances will be sufficient to avoid future material impacts on
our results of operations.
Item 7a.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Stewart &
Stevenson’s market risk results from volatility in interest rates and foreign
currency exchange rates. This risk is
monitored and managed.
Stewart &
Stevenson’s exposure to interest rate risk relates primarily to its debt
portfolio. During Fiscal 2002, the
Company entered into an interest rate swap agreement in the aggregate notional
amount of $15.0 million converting a portion of its fixed rate debt to a floating
rate of interest. See “Liquidity and
Capital Resources” in Item 7 above.
The table below
provides information about the Company’s market sensitive financial instruments
and constitutes a forward-looking statement.
Principal Amount by Expected Maturity
(In thousands, except interest rate data)
Fiscal
Years Ending January 31,
(a) represents weighted average rate at January 31,
2003.
(b) Fair value represents a liability (asset) on the
consolidated balance sheet.
The Company’s earnings and cash flows are
subject to fluctuations due to changes in foreign currency exchange rates. Generally, the Company’s contracts provide
for payment in U.S. dollars and the Company does not maintain significant
foreign currency cash balances.
International subsidiaries in Venezuela and Colombia have in-country
working capital loans, which limit the exposure to foreign currency exchange
rate fluctuations. Certain suppliers
bill in foreign currencies, particularly the Euro. The Company occasionally enters into foreign exchange forward
contracts with maturities of up to 12 months to hedge these specific purchase
commitments and anticipated transactions but not for speculative or trading
purposes. At January 31, 2003, the
Company had approximately $3.1 million of Euro forward contracts outstanding at
a net unrealized gain of $0.3 million recorded on the consolidated balance
sheet. Based on our average net foreign
currency positions during Fiscal 2002, a 10% adverse change in average annual
foreign currency exchange rates would not have had a material impact on our
consolidated financial statements.
Item
8.
Item
8. Financial Statements and
Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
and Shareholders
Stewart &
Stevenson Services, Inc.
We have audited
the accompanying consolidated statements of financial position of Stewart &
Stevenson Services, Inc. and subsidiaries as of January 31, 2003 and the
related consolidated statements of earnings, shareholders’ equity,
comprehensive income, and cash flows for the year then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit. The consolidated financial statements of
Stewart & Stevenson Services, Inc. and subsidiaries as of and for each of
the two years in the period ended January 31, 2002 were audited by other
auditors who have ceased operations and whose report dated March 27, 2002,
expressed an unqualified opinion on these statements.
We conducted our
audit in accordance with auditing standards generally accepted in the United
States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion,
the financial statements referred to above present fairly, in all material
respects, the financial position of Stewart & Stevenson Services, Inc. and
subsidiaries as of January 31, 2003 and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
As discussed in
Note 13 to the consolidated financial statements, effective February 1, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets” (“SFAS No. 142”).
As discussed
above, the consolidated financial statements of Stewart & Stevenson
Services, Inc. and subsidiaries as of and for each of the two years in the
period ended January 31, 2002 were audited by other auditors who have ceased
operations. The prior year amounts in
Notes 4 and 5 have been revised to conform to the current year presentation. We
audited the adjustments that were applied to revise the Fiscal 2001 and Fiscal
2000 consolidated financial statements relating to these changes. We also
applied procedures with respect to the disclosures in Note 13 pertaining to financial
statement revisions to include the transitional disclosures required by SFAS
No. 142. In our opinion, the changes to
Notes 4 and 5 and the SFAS No. 142 disclosures in Note 13 for Fiscal 2001 and
Fiscal 2000 are appropriate. However,
we were not engaged to audit, review or apply any procedures to the Fiscal 2001
and Fiscal 2000 consolidated financial statements of the Company other than
with respect to such disclosures and accordingly, we do not express an opinion
or any other form of assurance on the Fiscal 2001 and Fiscal 2000 consolidated
financial statements as a whole.
REPORT
OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors and
Shareholders
Stewart & Stevenson
Services, Inc.
We have audited the
accompanying consolidated statements of financial position of Stewart &
Stevenson Services, Inc. and subsidiaries as of January 31, 2002 and 2001, and
the related consolidated statements of earnings, shareholders’ equity,
comprehensive income, and cash flows for each of the three years in the period
ended January 31, 2002. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits
in accordance with auditing standards generally accepted in the United
States. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material
respects, the financial position of Stewart & Stevenson Services, Inc. and
subsidiaries as of January 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 2002, in conformity with accounting principles generally accepted
in the United States.
NOTE: The consolidated financial statements for the year
ended January 31, 2002 and 2001 included in this Form 10-K were audited by
Arthur Andersen LLP. The report of
Arthur Andersen LLP included in this Form 10-K is a copy of the previously
issued report of Arthur Andersen LLP, and it has not been reissued by Arthur
Andersen LLP. The report was filed with
the Company’s fiscal 2001 Form 10-K.
After reasonable efforts, the Company has been unable to obtain a
reissued report of Arthur Andersen LLP or a currently dated consent to the
inclusion of this previously issued report of Arthur Andersen LLP into this
Form 10-K. In addition, the Company
will not be able to obtain the written consent of Arthur Andersen LLP for any
registration statement it may file as required by Section 7 of the Securities
Act. Accordingly, investors will not be
able to sue Arthur Andersen LLP pursuant to Section 11(a)(4) of the Securities
Act relating to those registration statements and therefore may have their
recovery limited as a result of the lack of Arthur Andersen LLP’s consent. The ability of investors to recover from
Arthur Andersen LLP also may be limited as a result of their financial
condition or other matters relating to the various civil and criminal lawsuits
relating to them.
STEWART
& STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
See accompanying
notes to the consolidated financial statements.
STEWART
& STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
See
accompanying notes to the consolidated financial statements.
STEWART & STEVENSON
SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
STEWART
& STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
See
accompanying notes to the consolidated financial statements.
STEWART
& STEVENSON SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to the consolidated financial statements.
STEWART
& STEVENSON SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Note
1: Summary of Principal Accounting Policies
Fiscal Year: The Company’s fiscal year begins on February 1 of the year stated
and ends on January 31 of the following year.
For example, “Fiscal 2002” commenced on February 1, 2002 and ended on
January 31, 2003. The Company reports
results on the fiscal quarter method with each quarter comprising approximately
13 weeks.
Use of Estimates and Assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual
results may differ from these estimates.
Consolidation: The consolidated financial statements include the accounts of
Stewart & Stevenson Services, Inc. and all enterprises in which the Company
has a controlling interest. All
intercompany accounts and transactions have been eliminated.
Cash Equivalents: Interest-bearing deposits and other
investments with original maturities of three months or less are considered
cash equivalents.
Allowance for Doubtful Accounts: The Company extends credit and credit
enhancements to customers and other parties in the normal course of business
and maintains an allowance for doubtful accounts for estimated losses resulting
from the inability of customers to make required payments. The Company bases
such estimates on its historical experience and any specific customer
collection issues the Company has identified.
Inventories: Inventories are stated at the lower of cost or market, with cost
generally determined on a last-in, first-out (“LIFO”) basis, and market
determined on the basis of estimated realizable values, less related customer
deposits. The value of inventories
carried on a LIFO basis represented approximately 74% of total inventories at
January 31, 2003 and 2002. Work in
process costs include material, labor and overhead. The carrying values of these inventories are not in excess of
their fair values. When circumstances
dictate, the Company writes inventory down to its estimated realizable value
based upon assumptions about future demand, technological innovation, market
conditions and the physical condition of products. Shipping and handling costs are expensed as incurred in cost of
sales. Shipping and handling costs
billed to customers are recorded as sales.
Revenue Recognition: Generally, revenue is recognized when
contract terms are met, collectibility is reasonbly assured and a product is
shipped or risk of ownership has been transferred to and accepted by the
customer. With respect to long-term construction contracts, revenue is
recognized using the percentage-of-completion method in accordance with the
American Institute of Certified Public Accountants Statement of Position 81-1,
“Accounting for Performance of Construction-Type and Certain Production-Type
Contracts.” Measurement of progress
toward completion is based on units-of-production for the FMTV contracts in the
Tactical Vehicle Systems segment, and typically based on direct labor hours for
other percentage-of-completion contracts. Changes in estimates for revenues,
costs to complete and profit margins are recognized in the period in which they
are reasonably determinable. Any anticipated losses on uncompleted contracts
are recognized whenever evidence indicates that the estimated total cost of a
contract exceeds its estimated total revenue.
Property, Plant and Equipment: Property, plant and equipment is stated at
historical cost. Depreciation is
computed over the estimated useful lives of the assets, historically using both
accelerated and straight-line methods.
In Fiscal 2002, the Company adopted the straight-line method of
depreciation for all property, plant, and equipment placed into service after
January 31, 2002. Management believes
that the straight-line method results in a better matching of revenues and
costs, and is the more prevalent method in the industries in which the Company
operates. This conforming change to
straight-line depreciation did not have a material impact on the Company’s
financial position, results of operations or cash flows.
When items are retired or
otherwise disposed of, income is charged or credited for the difference between
net book value and proceeds realized thereon.
Ordinary maintenance and repairs are charged to expense as incurred, and
replacements and betterments are capitalized.
The range of estimated service lives used to calculate financial
reporting depreciation for principal items of property, plant and equipment are
as follows:
The Company assesses the
valuation of components of its property, plant and equipment and other
long-lived assets whenever events or circumstances dictate that the carrying
value might not be recoverable. The Company bases its evaluation on indicators
such as the nature of the assets, the future economic benefit of the assets,
any historical or future profitability measurements and other external market
conditions or factors that may be present. If such factors indicate that the
carrying amount of an asset or asset group may not be recoverable, the Company
determines whether impairment has occurred by analyzing an estimate of
undiscounted future cash flows at the lowest level for which identifiable cash
flows exist. If the estimate of undiscounted future cash flows during the
estimated useful life of the asset is less than the carrying value of the
asset, the Company recognizes a loss for the difference between the carrying
value of the asset and its estimated fair value, generally measured by the
present value of estimated future cash flows.
Goodwill and Other Intangible Assets: Goodwill
represents the excess of the aggregate purchase price over the fair value of
net identifiable assets of businesses acquired. Effective February 1, 2002, the Company adopted SFAS No. 142,
“Goodwill and Other Intangible Assets,” which requires that the carrying amount
of goodwill and intangibles with indefinite lives no longer be amortized
into expense, but instead be
tested at least annually for impairment.
Prior to the adoption of SFAS No. 142, the Company amortized goodwill
and other intangible assets on a straight-line basis over fifteen years. As discussed in Note 13, in connection with
the adoption of SFAS No. 142, the Company recognized, as a cumulative effect of
a change in accounting principle in Fiscal 2002, a charge of $3.7 million, net
of tax benefit of $1.8 million. As discussed in Note 3, at the end of Fiscal
2002, the Company recorded a $1.3 million impairment charge to goodwill and
other intangibles related to the Airline Products segment.
Deferred Income Tax Assets: The Company records deferred tax assets and
liabilities for differences between the book basis and tax basis of net
assets. The Company records a valuation
allowance, when appropriate, to adjust deferred tax asset balances to the
amount the Company expects to realize.
The Company considers the amount of taxable income available in
carryback years, future taxable income and potential tax planning strategies in
assessing the potential need for a valuation allowance.
Insurance: The Company maintains a variety of insurance for its operations
that it believes to be customary and reasonable. The Company is self-insured up
to certain levels in the form of deductibles and retentions for general
liability, vehicle liability, group medical and workers compensation
claims. In addition, the Company does
not maintain insurance for some business risks and potential exposures for
which insurance is not available or not financially cost effective. The Company
accrues for estimated self-insurance costs and uninsured exposures based on
estimated development of claims filed and an estimate of claims incurred but
not reported. The Company regularly reviews estimates of reported and
unreported claims and provides for losses accordingly.
Internal-use
Software Costs:
Internal and external costs incurred to develop internal-use computer
software are capitalized. The cost of
business process reengineering activities and training are expensed as
incurred.
Capitalized
Interest: In
accordance with SFAS No. 34, the Company capitalizes interest costs related to
the Company’s construction of long-lived assets. The amount of interest capitalized is calculated based on the
Company’s average cost of borrowed funds.
Amounts capitalized during Fiscal 2002 and 2001 were $0.3 million and
$0.6 million, respectively. These
amounts are deducted from interest expense on the Company’s consolidated
statement of earnings and are included in the cost of the related asset on the
consolidated balance sheet.
Foreign Exchange Contracts and Interest Rate Swaps: The Company occasionally enters into foreign
currency forward contracts and interest rate swaps only as a hedge against
certain economic exposures and not for speculative or trading purposes. While these contracts affect the Company’s
results of operations, they do so only in connection with the underlying
transactions. All derivative
instruments are recognized as assets or liabilities in the balance sheet and
are measured at fair value at the end of each period.
With respect to foreign
currency forward contracts, changes in the market value of open positions
represent unrealized gains or losses and are recorded to other comprehensive
income. To the extent that changes in market
values are initially recorded in other comprehensive income, such changes
reverse out and are recorded in net income when the underlying transaction
occurs. At the close of Fiscal 2002,
the Company had approximately $3.1 million in forward contracts to purchase
foreign currencies, the fair value of which was an asset of approximately $0.3
million. These contracts settle
periodically through September 2003.
The counterparties to these contracts are major financial institutions;
therefore, the Company believes the risk of default is minimal.
The Company's interest
rate swap is designated as a fair value hedge. As such, changes in the market
value of the swap represent unrealized gains and losses. Conversely, changes in
the market value of the underlying debt that the swap hedges represent
unrealized losses and gains, which substantially offset the unrealized gains
and losses from the swap. See Note 9
for further discussion.
Translation
of Foreign Currency:
The local currency is the functional currency for the Company’s South
American subsidiaries and, as such, assets and liabilities are translated into
U.S. dollars at year-end exchange rates.
Income and expense items are translated at average exchange rates during
the year. Translation adjustments
resulting from changes in exchange rates are reported in other comprehensive
income. Net foreign currency exchange
losses (gains) included in Other (income) expense, net in the consolidated
statements of earnings were $(0.1) million, $(0.9) million, and $0.3 million
during Fiscal 2002, 2001, and 2000 respectively.
Fair Value of Financial Instruments: The Company’s financial instruments consist
primarily of cash equivalents, trade receivables, trade payables, debt
instruments and interest rate swaps.
The recorded values of cash equivalents, trade receivables, and trade
payables are considered to be representative of their respective fair
values. Generally, the Company’s notes
payable have interest rates which are tied to current market rates. The senior notes had a carrying value of $55
million at January 31, 2003 and 2002, and a fair value of $58 million and $57
million, respectively. The fair value
of the Company’s interest rate swap at January 31, 2003, was an asset of $0.2
million. The fair values of these
financial instruments were estimated based on market quotes obtained from
brokers. The Company estimates that the
recorded value of all other of its financial instruments approximates their
fair values.
Warranty Costs: Based on historical experience and contract terms, the Company
provides for the estimated cost of product and service warranties at the time
of sale or, in some cases, when specific warranty problems are identified.
Accrued warranty costs are adjusted periodically to reflect actual experience.
Certain warranty and other related claims involve matters of dispute that
ultimately are resolved by negotiation, arbitration or litigation.
Occasionally, a material warranty issue can arise that is beyond the Company's
historical experience. The Company provides for any such warranty issues as
they become known and estimable.
Accrued warranty costs included in Other current liabilities at January
31, 2003 and 2002 were $7.5 million and $9.4 million, respectively. The reduction in the accrual balance is
primarily attributable to cash expended to satisfy warranty obligations.
Historically, the
Company's primary product liability risk has been in its Tactical Vehicle
Systems segment. A summary of warranty activity for Fiscal 2002 in the Tactical
Vehicle Systems segment follows:
Pensions
and Other Postretirement Benefits: The Company accounts for its defined benefit pension plan and its
defined benefit postretirement medical plan in accordance with SFAS No. 87,
“Employers’ Accounting for Pensions” and SFAS No. 106, “Employers' Accounting
for Postretirement Benefits Other Than Pensions,” respectively. These standards
require that amounts recognized in the financial statements be determined on an
actuarial basis. Significant assumptions
involved in determining the Company’s pension and other postretirement benefit
expense include the expected return on plan assets and the discount rate for
calculating future liability. The
assumed long-term rate of return on assets, expected medical cost and
compensation increases is applied to a calculated value of plan assets which
results in an estimated return on plan assets that is included in current year
pension income or expense. Adjustments
to the minimum pension liability are recorded in other comprehensive income and
amortized over the remaining average service life of the Company’s workforce.
Stock-Based Compensation: In December 2002, the Financial Accounting
Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)
No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,”
which amends SFAS No. 123, “Accounting for Stock-Based Compensation,” by
providing alternative methods of transition for a voluntary change to the fair
value method of accounting for stock options and other stock-based employee
compensation. As permitted under SFAS
No. 123, the Company continues to use the intrinsic value method of accounting
prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for
Stock Issued to Employees,” to account for its stock-based compensation
programs. Accordingly, no compensation
expense is recognized when the exercise price of an employee stock option is
equal to or greater than the market price of the Company’s common stock on the
grant date.
The following pro forma
data are calculated as if compensation expense for the Company’s stock option
plans was determined based on the fair value at the grant date for awards under
these plans, amortized on a pro rata basis over the option vesting period, in
accordance with the methodology prescribed by SFAS No. 123, “Accounting for
Stock-Based Compensation:”
For purposes of the pro
forma disclosures, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in Fiscal 2002, 2001 and 2000:
Based on the above assumptions,
the weighted average fair value of stock options granted in Fiscal 2002, 2001
and 2000 was $8.59, $10.57 and $4.22, respectively.
The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock price
volatility. Because the Company’s
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management’s opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
Earnings Per Share: Basic earnings per share have been
calculated by dividing net earnings (loss) by the weighted average number of
common shares outstanding during the year.
Diluted earnings per share are computed considering the potential
dilution that would occur if all securities or other contracts to issue common
stock were exercised or converted into common stock. See Note 11.
Reclassifications: The accompanying consolidated financial
statements for prior fiscal years contain certain reclassifications to conform
with the presentation used in Fiscal 2002.
Recent Accounting Pronouncements: In August 2001, the FASB issued SFAS No.
143, “Accounting for Asset Retirement Obligations,” which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred and can be reasonably estimated. Such asset retirement costs are to be capitalized as part of the
carrying value of the related long-lived asset and depreciated over the asset’s
estimated useful life. The Company has
adopted SFAS No. 143 as of February 1, 2003.
The Company does not believe adoption of the new standard will have a
material effect on its consolidated financial statements.
In August 2001, the FASB
issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” which supersedes both SFAS No. 121, “Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of” and the
accounting and reporting provisions of APB Opinion No. 30, for the disposal of
a business. SFAS No. 144 provides a
single accounting model for long-lived assets to be sold and addresses
significant implementation issues of SFAS No. 121. The new rules
also broaden the criteria
regarding classification of a discontinued operation. The Company adopted SFAS No. 144 in Fiscal 2001 and as a result
classified certain operations to be sold as discontinued operations. See Note 2.
In Fiscal 2002, in accordance with SFAS No. 144, the Company recorded a
charge of $6.5 million to impair the long-lived assets of the Airline Products
segment. See Note 3.
In June 2002, the FASB issued SFAS No. 146,
“Accounting for Costs Associated with Exit or Disposal Activities,” which
requires companies to recognize costs associated with plant closings or other
exit or disposal activities when incurred.
Previous guidance required recognition of such costs as a liability as
of the date an entity commits to an exit plan.
SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002.
Adoption of the new standard will impact the timing of liability
recognition related to future exit or disposal activities, but will not have a
material effect on the ultimate costs associated with such activities.
In November 2002, the FASB
issued Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,” which requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligations undertaken in
issuing the guarantee. FIN No. 45 also
expands the disclosures required to be made by a guarantor about its obligation
under certain guarantees that it has issued.
The recognition provisions of FIN No. 45 do not apply to product
warranties. Initial recognition and
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued after December 31, 2002.
The disclosure requirements are effective immediately, and are reflected
in Note 7. The Company does not expect
the recognition provisions of FIN No. 45 will have a material effect on its
consolidated financial statements.
In January 2003, the FASB
issued FIN No. 46, “Consolidation of Variable Interest Entities,” which
requires that a company that controls another entity through interests other
than voting interests should consolidate such controlled entity. FIN No. 46 applies to variable interest
entities created after January 31, 2003, and is effective for interim periods
beginning after June 15, 2003 for existing variable interest entities. As the Company has no material exposures to
special purpose entities or other off-balance sheet arrangements, the Company
anticipates that the effects of adopting FIN No. 46 will not be material to its
consolidated financial statements.
Note 2: Discontinued Operations
During
the fourth quarter of Fiscal 2001, the Company determined that the Petroleum
Equipment segment’s blowout preventer and controls, valve and drilling riser
business was not strategically aligned with the Company’s core
competencies. The Company announced its
intention to sell this business and, consequently, these activities were
reclassified for reporting purposes for all periods shown as discontinued
operations. These discontinued
operations generated revenues of $18.5 million, $45.6 million and $42.2 million
in Fiscal 2002, 2001 and 2000, respectively. The operating loss from these
activities during Fiscal 2002, 2001 and 2000 was $12.2 million ($8.0 million,
net of income taxes), $3.7 million ($2.5 million, net of income taxes) and $0.5
million ($0.4 million, net of income taxes), respectively. The Fiscal 2002 operating loss resulted from
this business operating at below breakeven levels before the sale was
consummated, and from costs primarily to complete certain retained contracts
after the sale was consummated. The
operating losses in Fiscal 2001 and 2000 resulted from operating at below
breakeven levels. In addition, the
Company recognized a loss from disposal of discontinued operations of $8.3
million ($5.6 million, net of income taxes) in Fiscal 2002, resulting from the
sale of these operations to Cooper Cameron Corporation for cash proceeds of
$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,
including retained warranties and contracts.
In addition, at the end of Fiscal 2001, the Company had included the
facility where these operations were located in assets from discontinued
operations. The Company ultimately retained such facility and reclassified it
to continuing operations in Fiscal 2002.
Also included in the loss from discontinued operations in Fiscal 2002
was a provision for a financial guaranty of $1.1 million ($0.7 million, net of
income taxes). The pre-tax charge of
$1.1 million related to a $6.1 million payment the Company made to a financial
institution in connection with an obligation under the financial guaranty for
certain gas turbine equipment in Argentina.
The equipment, which provides power to the town of Rio Grande,
Argentina, 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 $6.1 million payment
was recorded as a note receivable within Total assets of discontinued
operations on the consolidated statements of financial position. The Company is pursuing 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. During the fourth quarter of Fiscal 2002,
the Company received payments totaling $0.5 million from the export insurance
credit policy, subject to a reservation of rights, and the Company is pursuing
the restructure of the financing arrangement with the customer and the
insurance company.
Significant categories of
assets and liabilities from discontinued operations are included in the table
below:
During
the first quarter of Fiscal 2001, the Company recognized an adjustment to a
reserve for certain taxes associated with previously discontinued businesses,
resulting in an after-tax loss of $0.6 million included in loss on disposal of
discontinued operations. In Fiscal
2000, a $0.6 million gain, net of tax, was recognized upon the disposal of an
investment and certain obligations relating to a power generation facility in
Argentina associated with the previously discontinued gas turbine operations.
Note
3: Unusual Charges
Impairment of Assets: The airline industry encountered multiple
challenges during Fiscal 2002, including economic recession, terrorist
activities, the threat of war with Iraq, overall decreased consumer demand and
high fuel prices. During the fourth
quarter of Fiscal 2002, the likelihood of war became more imminent, there was a
heightened risk of terrorist activities and the airlines’ overall sentiment
regarding their current and future operations continued to decline. In light of these continuing challenges and
the history of operating losses for the Airline Products segment, the Company
tested its long-lived assets and goodwill for impairment at the end of Fiscal
2002 in accordance with SFAS No. 144 and SFAS No. 142. The Company calculated the fair value of
such long-lived assets based on the present value of estimated future cash
flows from the Airline Products segment.
As a result of this analysis, the Company fully impaired the net
carrying value of property, plant and equipment ($6.5 million) and goodwill and
other intangibles ($1.3 million) related to the Airline Products segment as of
January 31, 2003.
Recovery of Costs Incurred, net: In Fiscal 1998, the Company filed a claim with the
U.S. government seeking recovery of costs incurred resulting from a delay of
over eight months from the original production plan in the first multi-year
FMTV contract. The parties reached
resolution in April 2001 through the alternative dispute resolution process
managed by the Armed Services Board of Contract Appeals and the Company
received payment of $20.8 million, net of related expenses, in July 2001. In addition, in Fiscal 2000, the Company
filed a claim with the U.S. government seeking recovery of costs incurred from
retrofitting all vehicles produced under the first FMTV contract for changes in
drive train components. All costs
associated with the retrofitting had been expensed by the Company in prior
years. The parties reached resolution
through an alternative dispute resolution proceeding and the U.S. Army paid the
Company $18.2 million, net of expenses, in December 2001.
Note
4: Segment Data
During Fiscal 2002, the
Company operated in five business segments.
The Tactical Vehicle Systems segment assembles the Family of Medium
Tactical Vehicles under contracts with the U.S. Army, and provides sustaining
design engineering, service and support.
The Power Products segment sells and rents various industrial equipment;
sells components, replacement parts, accessories and other materials supplied
by independent manufacturers; and provides in-shop and on-site repair services
for industrial equipment. The
Distributed Energy Solutions segment packages reciprocating diesel and natural
gas engine generator sets, installs and services power plant operations on a
turnkey basis, and markets power generation solutions in domestic and certain
international markets. The Petroleum
Equipment segment manufactures equipment primarily for the well stimulation
segment of the oil service industry.
Its products include coil tubing systems and acidizing and fracturing
systems. The Airline Products segment
manufactures internal combustion and electric propulsion airline ground support
equipment that includes aircraft tow tractors, gate pushback tractors, baggage
tow tractors, beltloaders, air start units and air conditioning units. This segment also manufactures mobile
railcar movers, sold under the Rail King®
trademark, and snow blowers,
sold under the Snow King™ trademark. Other business
activities principally include the gas compression equipment business, which
the Company exited in Fiscal 2002, and corporate interest income of $1.8
million, $3.4 million and $7.9 million in Fiscal 2002, 2001 and 2000,
respectively.
The high degree of
integration of the Company’s operations necessitates the use of a substantial
number of allocations and apportionments in the determination of business
segment information. Sales are shown
net of intercompany, intersegment and intrasegment eliminations.
The Company markets its
products and services throughout the world and is not dependent upon any single
geographic region outside the United States.
The U.S. government has accounted for $468.9 million, $425.3 million and
$303.7 million of sales in Fiscal 2002, 2001 and 2000, respectively. No other single group or customer represents
more than 10% of consolidated sales in any of the last three fiscal years. Sales from continuing operations attributed
to countries outside the United States, including sales to U.S. customers for
export, for Fiscal 2002, 2001 and 2000 were $189.4 million, $181.0 million, and
$96.2 million, respectively. Included
in such amounts are FMTV sales to the U.S. Army in South Korea totaling $89.4
million and $91.0 million in Fiscal 2002 and 2001, respectively.
During Fiscal 2001, the
Company expensed certain items related to restructuring. Specifically, the Company consolidated its
Airline Products manufacturing facilities in Marietta, Georgia, combining
operations from both Kennesaw, Georgia and Houston, Texas. Also, the Company relocated the manufacture
of snow blowers from Colorado to Houston, Texas. In conjunction with these restructurings, the Company recognized
expense of $1.1 million in Distributed Energy Solutions, $4.7 million in
Airline Products, and $0.5 million in Petroleum Equipment during Fiscal
2001. The Company expended cash
totaling $5.9 million during Fiscal 2001 and $0.3 million during Fiscal 2002
related to these restructurings, which included employee severance, asset
relocation costs and facility optimization costs. The Company eliminated approximately 100 positions as a result.
Financial information
relating to industry segments is as follows excluding those operations that
have been discontinued. See Note 2.
As discussed in Note 3, operating profit in Fiscal 2002 includes an
asset impairment charge of $7.8 million in the Airline Products segment, and
operating profit in Fiscal 2001 includes $39.0 million in the Tactical Vehicle
Systems segment from settlements of claims with the U.S. government, net of
related expenses.
A reconciliation of operating profit to
earnings from continuing operations before income taxes is as follows:
Note 5:
Contracts in Process
Amounts included in the financial statements
which relate to recoverable costs and accrued profits not yet billed on
contracts in process are classified as current assets. Billings on uncompleted contracts in excess
of incurred costs and accrued profits are classified as current
liabilities. Progress billings on
contracts are made in accordance with the terms and conditions of the
contracts, which often differ from the revenue recognition process. A summary of the status of uncompleted
contracts is as follows:
Billings in excess of incurred costs and
accrued profits primarily relate to the Tactical Vehicles Systems segment. Billings in excess of costs related to the
Tactical Vehicle Systems segment include direct costs of manufacturing and
engineering and allocable overhead costs, but not accrued profit. Generally, overhead costs include selling
and administrative expenses in accordance with generally accepted accounting
principles and are charged to cost of sales at the time that revenue is
recognized. The U.S. government has a
security interest in unbilled amounts associated with contracts that provide
for performance-based payments.
Note
6: Inventories
Summarized below are the components of
inventories by segment excluding discontinued operations, net of customer
deposits:
The Company’s inventory classifications
correspond to its reportable segments.
The Power Products segment’s inventory consists primarily of industrial
equipment, equipment under modification, used equipment available for sale or
rent and parts held in the Company’s distribution network for resale. As a custom packager of power systems and
other equipment to customer specifications, the Distributed Energy Solutions,
Petroleum Equipment, Airline Products, Tactical Vehicle Systems and Other
Business Activities segments’ inventory consists of both work-in-process, which
includes purchased and manufactured components in various stages of assembly,
and on-hand parts and equipment to support service and future sales.
LIFO income (expense), classified as cost of
sales on the consolidated statements of earnings, was allocated by segment as
follows:
Note
7: Commitments and Contingencies
As a custom packager of
power systems, the Company issues bid and performance guarantees in the form of
performance bonds or standby letters of credit. Performance type letters of credit totaled approximately $5.7
million and $3.1 million at the end of Fiscal 2002 and Fiscal 2001, respectively. In addition, the Company had contingent
performance indemnities of approximately $6.7 million at the end of Fiscal 2002
and Fiscal 2001.
The Company has provided
certain guarantees in support of its customers’ financing of purchases from the
Company in the form of debt guarantees.
Pursuant to such guarantees, once the customer has satisfied its debt
obligation to the lender, the Company’s guarantee is released. Should a customer fail to meet its
obligation to the lender, the lender could require the Company to satisfy such
obligation, in which case the Company would have some legal recourse against
the customer. The amount of such
guarantees is approximately $0.9 million and $4.4 million as of January 31,
2003 and 2002, respectively.
The Company leases
certain facilities and equipment from third parties under operating lease
arrangements of varying terms whose annual rentals are less than 1% of
consolidated sales.
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 plaintiff’s complaint 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 in January
2004. 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 has made
reserves that it believes are adequate for certain estimated legal fees
associated with such matters 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 Fiscal 2002, 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 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, are expected
to have a material effect on the manner in which the Company conducts its
business or on its consolidated financial position or liquidity. The Company maintains certain insurance
policies that provide coverage for product liability and personal injury
cases. The Company has established
reserves that it believes to be adequate based on current evaluations. Nevertheless, an unexpected outcome in such
cases could have a material adverse impact on the results of operations in the
period it occurs. Moreover, future
adverse developments in such cases could require material changes in the
recorded reserve amounts.
Note
8: Government Contracts
The U.S. government is
one of the Company’s key customers. As such, decreased government spending or
termination of significant government programs could adversely affect 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 substantial percentages
of the Company’s annual revenues and operating income. The Company is currently in the fifth
production year of its second multi-year contract with the U.S. Army for
production of the FMTV. In the fourth
quarter of Fiscal 2002, the U.S. Army exercised an option to award a sixth
program year to the current contract, which begins in October 2003 and is
expected to be completed by 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. Army and may be terminated at any time for the convenience of the
government. 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 incurred.
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. In
November 2002, the Company submitted its bid to the U.S. Army as part of the
competitive bid process for the next multi-year FMTV contract. The U.S. Army is expected to make its
decision as to the final award of the new production contract by the end of
April 2003. If the Company does receive
the award, it believes that profit margins will 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 projected to be lower relating to this
contract, unless the U.S. Army exercises options for additional
production. There can be no assurance
that the Company will be successful in winning the award. Moreover, there can be no assurance that the
Company will be successful in other future bids and awards for tactical
vehicles.
Continued success in the
Tactical Vehicle Systems segment is highly dependent on securing additional
contracts, such as the next multi-year contract award for the FMTV, after
completion of the current contract, at 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
9: Debt Arrangements
Outstanding debt, which is generally
unsecured, consists of the following:
The Company’s international subsidiaries have
foreign currency bank notes payable consisting of renewable, secured loans for
the purpose of financing the Company’s South American operations. These loans are denominated in local
currency (Colombian Pesos and Venezuelan Bolivars) and are secured by $4
million of letters of credit issued by the Company and principally bear
market-based variable rates of interest which were approximately 15.6% and
13.4% as of January 31, 2003 and 2002, respectively. The Company uses foreign-denominated debt to offset the impact of
foreign currency exchange rate fluctuations on its operations.
The Company has a $150
million revolving credit facility which matures on January 31, 2004. No borrowings were outstanding under the
facility at January 31, 2003 or 2002 nor at any point during Fiscal 2002 or
Fiscal 2001. The revolving credit
facility has a $25 million sub facility, which may be used for letters of
credit. Approximately $8.1 million in
letters of credit under the revolving credit facility were outstanding at
January 31, 2003. Pursuant to covenant
limitations of the revolving credit facility, approximately $53 million was
available for borrowing at January 31, 2003.
A commitment fee ranging from 20 to 50 basis points is paid on the daily
average unused balance based on the Company’s leverage ratio. Borrowings outstanding would bear interest
at several options, including LIBOR plus 75 to 175 basis points based on the
Company’s leverage ratio, the prime rate, or a competitive bid among the banks. Based on the first option (LIBOR plus 75 to
175 basis points based on the Company’s leverage ratio), the borrowing rate
would have been approximately 2.34% as of January 31, 2003. The Company intends to negotiate an
extension of the revolving credit facility on similar terms and conditions
prior to its expiration in January 2004.
There can be no assurance that the Company will be able to successfully
negotiate such an extension or, if it does, that such extension will include
similar terms and conditions, rates of interest and covenants. Although no borrowings are currently
outstanding under the revolving credit facility, failure to negotiate a new
facility on terms acceptable to the Company could restrict the Company’s
ability to make acquisitions and fund working capital, capital expenditures,
common stock dividends or other financial obligations.
The revolving credit
facility and senior notes were issued pursuant to agreements containing covenants
that restrict indebtedness, guarantees, sales of assets, rentals, and other
items. Additional covenants in the
revolving credit facility require the Company to maintain a minimum tangible
net worth and interest coverage. Since
these requirements are calculated from earnings and cash flow, the Company's
ability to declare and pay dividends could be restricted indirectly. Based on the Company's financial condition
as of January 31, 2003, the restrictions imposed by the Company's debt
instruments do not currently restrict the Company's ability to declare and pay
dividends at historical levels.
In Fiscal 2002, the
Company entered into an interest rate swap agreement, which expires in Fiscal
2004, with a notional amount of $15 million related to $15 million of the
senior notes due in 2006. This transaction, which is designated as a fair value
hedge, effectively converts $15 million of fixed rate debt with an interest
rate of 7.38% into floating rate debt with an interest rate of LIBOR plus 436
basis points. The applicable floating
interest rate as of January 31, 2003 was approximately 5.70%. The net interest received or paid as a
result of the interest rate swap is included in interest expense on the
consolidated statements of earnings.
The recorded value of the swap, which was an asset of $0.2 million at
January 31, 2003, and the related debt are carried on the consolidated
statements of financial position at fair value.
The amounts of long-term debt which will
become due during the next five years are as follows (in thousands):
Note
10: Employee Pension and Other Benefit
Plans
The Company has a
noncontributory defined benefit pension plan covering substantially all of its
full-time employees. The pension
benefits are based on years of service, limited to 45 years, and the employee’s
highest consecutive five-year average compensation out of the last 10 years of
employment. The Company funds pension
costs in conformity with the funding requirements of applicable government
regulations.
The Company also has a
defined benefit postretirement medical plan, which covers most of its employees
and provides for the payment of certain medical costs of eligible employees and
dependents upon retirement. The plan is
currently not funded. The Company
expects to continue paying postretirement medical costs as covered claims are
incurred.
The following table includes pension benefits
information for the noncontributory defined benefit pension plan and the
postretirement medical plan discussed above, as well as an unfunded
supplemental retirement plan and an unfunded defined benefit retirement plan
for non-employee directors.
Defined
Benefit Pension Plans
Assets of the pension plan are allocated to
investment categories based on a written policy. The guidelines of this policy generally call for the allocation
of approximately 70% of pension plan assets to domestic equity securities, with
the remainder to be allocated to fixed income investments.
The
assets of the pension plan, like numerous other companies’ plans, are, to a
substantial degree, invested in the capital markets and managed by a third
party under the review of our pension plan committee. Given the performance of the stock market during recent history,
the Company was required to reflect an additional minimum pension liability of
$17.1 million in its Fiscal 2002 financial statements as a result of a decline
in the value of the assets held by its pension plan. Minimum pension liability adjustments are non-cash adjustments
that are reflected as an increase in pension liability with an offsetting
charge to shareholders’ equity (net of income tax) through comprehensive income
(rather than net income). The Company
also anticipates that the decline in the value of the pension plan assets will
result in higher future pension costs.
However, absent a decision by the Company to increase its contributions
to the pension plan as a result of the Fiscal 2002 asset performance, such
asset performance is not expected to have a material impact on the Company’s
near-term liquidity as pension funding requirements generally allow for such
impacts to be spread over multiple years.
Increases in post-Fiscal 2002 pension funding requirements could occur,
however, if capital market performance in future periods does not more closely
approximate the long-term rate of return assumed by the Company, and the amount
of such increases could be material.
The
calculation of expense associated with the Company’s pension plan is dependent
on key assumptions, including the long-term discount rate, the expected rate of
return on plan assets and the assumed rate of compensation increases. During Fiscal 2002, the Company changed the
assumed discount rate used for this calculation from 7.00% in Fiscal 2001 to
6.75%. This decision was based on the
trending in the monthly average Moody’s/Mergent’s Corporate Aa yields and the
monthly average 30-year Treasury rates.
In addition, the Company reduced the assumed rate of compensation
increase for its employee population by 1% point, from 5.1% to 4.1% based on
more recent actual data and the expectation that long-term rates of
compensation increase should approximate growth in overall gross domestic
product. Consistent with prior years,
the Company used 9.0% in Fiscal 2002 as its expected long-term rate of return on
plan assets. This is based on an
actuarial estimate of returns over a 20-year time horizon based on the pension
plan’s long-term asset allocation strategy using geometric averaging. While the Company believes that these
assumptions are reasonable for Fiscal 2002, it will continue to evaluate the
reasonableness of its actuarial assumptions for their applicability in the
Fiscal 2003 actuarial analysis.
If the
expected long-term rate of return on plan assets assumption is decreased by 50
basis points, the pension expense recognized would increase by $0.4
million. A 100 basis point decrease in
the discount rate would result in an increase in pension expense of
approximately $3.0 million.
Defined
Benefit Postretirement Medical Plan
Like the
pension plan discussed above, the defined benefit postretirement medical plan
is dependent on key assumptions. For
this actuarial calculation, the Company has also used a discount rate of
6.75%. Another key assumption in this
actuarial calculation is the assumed future health care cost trend rates. The Company has assumed an annual rate of
increase of approximately 5.5% in the per capita cost of covered health care
benefits for Fiscal 2003. The rate is
assumed to moderate to 5% through 2004 and remain at that level thereafter. This estimate of future medical cost growth
was based on the assumption that the rate of medical cost increases would
eventually level off and that growth in these costs would eventually
approximate the overall growth in gross domestic product. Given more recent data, however, the Company
is re-evaluating this assumption for the calculation of its Fiscal 2003
expense. The evaluation will likely
result in a higher level of expense for Fiscal 2003 as compared to Fiscal 2002.
If the Company
had changed its medical growth rate assumptions by 100 basis points in Fiscal
2002, the effect on total service and interest cost components of its expense
associated with postretirement medical would have been approximately $0.3
million and the impact on the postretirement benefit obligation associated
therewith would have changed by approximately $2.0 million.
Other Employee Benefit Plans
The Company has an
unfunded supplemental retirement plan for certain corporate officers. Retirement expense for the plan in Fiscal
2002, 2001 and 2000 was $0.9 million, $0.6 million and $0.4 million,
respectively. Prior service cost not
yet recognized in periodic pension cost was $2.4 million, $2.7 million, and
$1.1 million at January 31, 2002, 2001 and 2000, respectively.
The Company has an employee savings plan,
which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating employees may
contribute up to 20% of their pre-tax salary subject to statutory limits. The Company contributes a matching payment
equal to each dollar contributed by employees up to 1% of their eligible annual
compensation and twenty-five cents for each dollar contributed on the next 5%
of their eligible annual compensation, subject to certain limitations. The Company’s matching contribution to the
savings plan for continuing operations was $2.7 million, $2.8 million and $2.2
million in Fiscal 2002, 2001 and 2000, respectively.
Under an unfunded
nonqualified deferred compensation plan for certain employees, a portion of
eligible employees’ discretionary income can be deferred at the election of the
employee. These deferred funds accrue
interest payable to the employee at the prime rate in effect on specified dates.
In Fiscal 2001, the
Company implemented a new elective salary deferral plan and ceased accepting
contributions to the previous nonqualified deferred compensation plan described
above. The new plan is also nonqualified
and allows certain employees to defer a portion of their compensation,
resulting in potential tax benefits to the employee. These deferred funds accrete value through deemed investments in
equity or other instruments and are then distributed to the employee at time of
separation from the Company or may be distributed under an optional
pre-retirement interim distribution.
Note
11: Common Stock
Cash
Dividend: Cash dividends of $0.085 per common share
were declared and paid in each quarter of Fiscal 2002, 2001 and 2000. Declaration and payment of dividends in the
future is dependent upon the Company’s earnings and liquidity position, among
other factors.
Shareholder
Rights Plan: The Company has a shareholder rights plan
under which the Company’s shareholders have one right with respect to each
share of Company common stock held.
Currently, the rights trade with the shares of Company common
stock. Upon the announcement of
intended acquisition of, or acquisition of, 15% or more of the Company’s common
stock by a person or group, each right will generally entitle the holder to
purchase additional shares of the Company’s stock at half its market value,
subject to other action of the board of directors. The rights have some anti-takeover effects. Because a person or group acquiring the Company’s
stock in a manner that causes the rights to become exercisable is not entitled
to exercise the rights that relate to its shares, such person or group’s
ownership of Company stock would be severely diluted if the other shareholders
exercise their rights. The Company’s
board of directors may redeem the rights for $0.01 per right. The rights are subject to anti-dilution
adjustments and will expire on March 20, 2005, unless the plan is further
extended or rights are earlier redeemed.
Stock
Issuance: During Fiscal 2002 and 2001 the Company
issued under the 1996 Director Stock Plan 6,153 and 3,094 shares, respectively,
to certain directors of the Company for services rendered.
Stock
Option Plans: The Company has various stock option plans
pursuant to which stock options may be granted to officers, employees and
non-employee directors of the Company.
Options may be granted with a per share exercise price not less than the
per share market value of common stock at the date of grant. The options have terms not to exceed ten
years and vest over periods not to exceed four years. As of January 31, 2003, a
total of 4,225,925 shares were reserved for issuance pursuant to such stock
option plans.
A summary of
the status of the Company’s stock option plans during Fiscal 2002, 2001, and
2000 is presented in the tables below:
A reconciliation of basic earnings (loss) per
share to diluted earnings (loss) per share is below:
Note
12: Income Taxes
The components of the income
tax provision from continuing operations and the income tax payments are as
follows:
The components of the income
tax provision (benefit) from discontinued operations is as follows:
The components of the income tax benefit from
the cumulative effect of a change in accounting principle are a current benefit
of $0.2 million and a deferred benefit of $1.6 million.
A reconciliation between the income tax
provision from continuing operations and income taxes computed by applying the
statutory U.S. Federal income tax rate of 35% in Fiscal 2002, 2001 and 2000 is
as follows:
The deferred tax
liability from continuing operations is determined under the liability method
based on the difference between the financial statement and tax basis of assets
and liabilities as measured by the enacted statutory tax rates, and deferred
tax expense is the result of changes in the net liability for deferred taxes.
The tax effects of the significant temporary
differences which comprise the deferred tax asset at the end of Fiscal 2002 and
2001 are as follows:
The Company believes it
is more likely than not that the net deferred income tax asset as of January
31, 2003 will be realized, based primarily upon sufficient taxable income
available in carryback years as permitted by the tax law.
Note 13: Supplemental Financial Data
Accounts and notes receivable, net consist of
the following:
The U.S. government
accounted for approximately 11.4% and 8.7% of accounts receivable at January
31, 2003 and 2002, respectively. Due to
the large number of entities and diversity of the rest of the Company’s
customer base, concentration of credit risk with respect to accounts receivable
is limited. The Company recorded
approximately $3.9 million and $4.1 million in bad debt expense and charged
approximately $2.7 million and $4.3 million against its allowance for doubtful
accounts during Fiscal 2002 and 2001, respectively.
Components of Property, plant and equipment,
net are as follows:
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 opened a service facility in Dallas, Texas with
a cost of $5.1 million, while Computer hardware and software increased $8.4
million for costs related to the implementation of the Company’s ERP system
during Fiscal 2002. Construction in
progress as of January 31, 2003 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. Most of the
construction in progress at the end of Fiscal 2001 related to the fabrication
facility in Sealy, Texas, the service facility in Dallas, Texas, and the ERP
development costs, which were all placed into service during Fiscal 2002.
Components of Intangibles
and other assets, net are as follows:
A summary of goodwill activity
follows:
Goodwill, net of accumulated
amortization, at the end of Fiscal 2001 included $6.0 million associated with
the Power Products segment, $4.1 million associated with Airline Products and
$1.5 million associated with other segments.
The Company implemented SFAS No. 142 effective February 1, 2002 and,
accordingly, net goodwill balances as of such date were tested for impairment
by comparing the fair value of each reporting unit to its carrying value. Fair value was determined using discounted
estimated future cash flows and market multiples of earnings estimates. Significant estimates used in the
methodologies included estimates of future earnings, future growth rates,
weighted average cost of capital and market valuation multiples for each
reporting unit. Based upon these
impairment tests performed upon adoption of SFAS No. 142, the Company
recognized, as a cumulative effect of a change in accounting principle in
Fiscal 2002, a charge of $3.7 million, or $0.13 per diluted share, net of tax
benefit of $1.8 million. This
impairment charge primarily related to the Airline Products segment.
The following unaudited pro
forma earnings data for the periods shown are presented as if the provisions of
SFAS No. 142 had been in effect for all periods presented.
Note 14:
Consolidated Quarterly Data (Unaudited)
Quarterly earnings per share is not
necessarily additive to the annual calculation of earnings per share, as each
quarter’s calculation is based on that quarter’s weighted average shares
outstanding.
Note
15: Acquisitions and Divestitures
In the fourth quarter of
Fiscal 2002, the Company’s Airline Products segment acquired the assets of
DAVCO Industries, a manufacturer of aircraft ground support equipment
specifically designed for the regional airline market, for cash of $2.2
million. Also in the fourth quarter of
Fiscal 2002, the Company’s Power Products segment acquired the franchise for
the Hyster forklift truck territory that includes five Texas counties in the El
Paso area and the entire state of New Mexico for $2.7 million.
In Fiscal 2001, the
Company’s Tactical Vehicle Systems segment acquired Extended Reach Logistics,
Inc., an e-commerce business, for $1.2 million in cash plus additional
potential performance-based payments to be paid in future years. Also during Fiscal 2001, the Company
recognized a gain of $0.5 million associated with the sale of its John Deere
distributorship located Casper, Wyoming and received $3.4 million in cash
consideration.
Effective July 1, 2000,
the Company completed the sale of its gas compressor leasing business for $57.5
million. The Company continued to
package gas compressor equipment for sale, until it exited that business in
Fiscal 2002. The Company realized a
gain of $5.6 million on the sale of the gas compressor leasing business during
Fiscal 2000. During Fiscal 2001 and
Fiscal 2000, the Company received $2.3 million and $55.2 million, respectively,
from this sale.
See Note 2 for discussion
of the sale of the Company’s blowout preventer and controls, valve and drilling
riser business.
Note
16: Vulnerability Due To Certain Concentrations
The Company’s principal
distribution agreements are subject to termination by the suppliers for a
variety of causes. Although no
assurance can be given that they will be renewed beyond their expiration dates
on terms similar to those currently in effect, such distribution agreements
have typically been renewed regularly.
Any interruption in the supply of materials from the original
manufacturers, a termination of a distribution agreement or a material change
in the terms of a current distribution agreement could have a material adverse
effect on the results of operations of the Power Products and Distributed
Energy Solutions segments.
The U.S. government is
the predominant customer of the Tactical Vehicle Systems segment, accounting
for practically all of the sales of this segment. The loss of this customer would have a material adverse effect on
the Company’s consolidated financial condition and results of operations. Additionally, the FMTV incorporates
components specified by the U.S. Army which are produced by specified
sources. Interruption of the supply of
any of these components could have a material adverse effect on the results of
the Tactical Vehicle Systems segment.
Item
9.
Item
9. Changes in and Disagreements With
Accountants on Accounting and Financial Disclosure.
Information concerning a
change in accountants is included in the Company’s Form 8-K filed with the
Securities and Exchange Commission (the “Commission”) on April 26, 2002.
PART III
In accordance with
General Instruction G(3) to Form 10-K, Items 10 through 13 have been omitted
since the Company will file with the Commission a definitive proxy statement
complying with Regulation 14A involving the election of directors not later
than 120 days after the close of its fiscal year. Such information is incorporated herein by reference.
CROSS REFERENCE
Form 10-K
Item Number and Caption
Caption in
Definitive Proxy Statement
Item 10.
Item 10.
Directors and Executive
Election of Directors;
Executive Officers;
Officers of the Registrant
Compliance with Section
16(a) of the Exchange Act
Item 11.
Item 11.
Executive Compensation
Election of Directors;
Performance of
Stewart & Stevenson
Common Stock;
Report of the Compensation
and
Management Development
Committee;
Executive Compensation
Item 12.
Item 12.
Security Ownership of
Voting Securities and
Ownership
Certain Beneficial Owners
Thereof by Certain
Beneficial
and Management and Related
Stockholders Matters
Owners and Management
Item 13.
Item 13.
Certain Relationships
Transactions with
Management and Certain
and Related Transactions
Business Relationships
Item
14.
Item
14. Controls and Procedures.
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
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.
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.
PART IV
Item
15.
Item
15. Exhibits, Financial Statement
Schedules and Reports on Form 8-K.
(a)
1.
The
following financial statements for Stewart & Stevenson Services, Inc. are
filed as a part of this report:
Consolidated
Statements of Financial Position-January 31, 2003 and 2002.
Consolidated
Statements of Earnings-Years ended January 31, 2003, 2002 and 2001.
Consolidated
Statements of Shareholders’ Equity-Years ended January 31, 2003, 2002 and
2001.
Consolidated
Statements of Comprehensive Income - Years ended January 31, 2003, 2002 and
2001.
Consolidated
Statements of Cash Flows-Years ended January 31, 2003, 2002 and 2001.
Notes to
Consolidated Financial Statements.
2.
Schedules
are omitted because of the absence of conditions under which they are required
or because the information is included in the financial statements or notes
thereto.
3.
The
Company has several instruments which define the rights of holders of
long-term debt. Except for the
instruments listed as exhibits 4.1 and 4.2 below, the total amount of
securities authorized under any individual instrument with respect to
long-term debt does not exceed 10% of the total assets of the Company and its
subsidiaries on a consolidated basis.
The Company agrees to furnish upon request by the Securities and
Exchange Commission any instruments not filed herewith relating to its
long-term debt.
The
Company will furnish to any shareholder of record as of April 23, 2003, a
copy of any exhibit to this annual report upon receipt of a written request
addressed to Carl B. King, P. O. Box 1637, Houston, Texas 77008-1637 and the
payment of $.20 per page with a minimum charge of $5.00 for reasonable
expenses prior to furnishing such exhibits.
The
following instruments and documents are included as exhibits to this report.
All management contracts or compensation plans or arrangements set forth in
such list are marked with a .
*3.1
Third
Restated Articles of Incorporation of Stewart & Stevenson Services, Inc.,
effective as of September 13, 1995 (Exhibit 3(a) to 10/95 10-Q).
3.2
Sixth
Restated Bylaws of Stewart & Stevenson Services, Inc., effective as of
April 11, 2000, as amended.
*4.1
Credit
Agreement effective February 20, 2001, between Stewart & Stevenson Services,
Inc. and The Chase Manhattan Bank, as Administrative Agent, and the other
Banks named therein (Exhibit 4.1 to 1/31/01 10-K).
*4.2
Note Purchase Agreement
effective May 30, 1996, between Stewart & Stevenson Services, Inc. and
the Purchasers named therein (Exhibit 4 to 7/96 10-Q).
*4.3
Rights
Agreement effective March 13, 1995, between Stewart & Stevenson Services,
Inc. and The Bank of New York (Exhibit 1 to Form 8-A Registration Statement
under the Commission File No. 001-11443).
*10.1
Lease
Agreement effective April 15, 1997, between Miles McInnes and Faye Manning
Tosch, as Lessors, and the Company, as Lessee (Exhibit 10.1 to 1/97 10-Q).
*10.2
Distributor Sales and
Service Agreement effective January 1, 1996, between the Company and Detroit
Diesel Corporation (Exhibit 10.2 to 1/96 10-K).
*10.3
Stewart
& Stevenson Elective Deferral Plan dated as of June 1, 2001 (Exhibit 4.1
of Form S-8 Registration Statement under Commission File No. 333-62438).
*10.4
Stewart
& Stevenson Services, Inc. 1988 Nonstatutory Stock Option Plan (as
amended and restated effective as of June 10, 1997) (Exhibit B to 5/9/97
Proxy Statement).
*10.5
Stewart
& Stevenson Services, Inc. Supplemental Executive Retirement Plan
(Exhibit 10.11 to 1/94 10-K).
*10.6
Stewart
& Stevenson Services, Inc. Amended and Restated 1996 Director Stock Plan
(Exhibit B to 5/3/02 Proxy Statement).
*10.7
Contract
Number DAAE07-98-C-M005 dated October 14, 1998 between Stewart &
Stevenson Services, Inc. and the United States Department of Defense, U.S.
Army Tank-Automotive and Armaments Command (Exhibit 10.9 to 10/98 10-Q).
21.1
List
of Subsidiaries.
23.1
Consent
of Ernst & Young LLP, Independent Auditors
*
Incorporated by reference.
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on the 15th day of April, 2003.
STEWART
& STEVENSON SERVICES, INC.
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on the 15th day of April, 2003.
/s/ Michael L. Grimes
/s/ Khleber V. Attwell
Michael L. Grimes
Khleber V. Attwell
President
and Chief Executive Officer
Director
(Principal Executive
Officer)
/s/ John B. Simmons
/s/ C. Jim Stewart III
John B. Simmons
C. Jim Stewart III
Vice President and Chief
Director
Financial Officer
(Principal Financial
Officer)
/s/ L. Scott Biar
/s/ Darvin M. Winick
L. Scott Biar
Darvin M. Winick
Controller
and Chief Accounting Officer
Director
(Principal Accounting
Officer)
/s/ Max L. Lukens
/s/ Howard Wolf
Max L. Lukens
Howard Wolf
Director
Director
/s/ Donald E. Stevenson
/s/ Charles R. Ofner
Donald E. Stevenson
Charles R. Ofner
Director
Director
/s/ Robert S. Sullivan
/s/ Monroe M. Luther
Robert S. Sullivan
Monroe M. Luther
Director
Director
EXHIBIT
INDEX
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Michael L. Grimes,
certify that:
1. I have reviewed this
annual report on Form 10-K of Stewart & Stevenson Services, Inc.;
2. Based on my knowledge,
this annual 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 annual report;
3. Based on my knowledge,
the financial statements, and other financial information included in this
annual 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 annual 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 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
annual 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 annual report (the
“Evaluation Date”); and
c) presented in this annual
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 annual 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.
CHIEF FINANCIAL OFFICER CERTIFICATION
I, John B. Simmons, certify
that:
1. I have reviewed this
annual report on Form 10-K of Stewart & Stevenson Services, Inc.;
2. Based on my knowledge,
this annual 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 annual report;
3. Based on my knowledge,
the financial statements, and other financial information included in this
annual 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 annual 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 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
annual 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 annual report (the
“Evaluation Date”); and
c) presented in this annual
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 annual 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: April 15, 2003
/s/ John B. Simmons
John B. Simmons
Vice
President and Chief Financial Officer
(Principal Financial Officer)
Informational Addendum to Report on Form
10-K
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-K,
the undersigned hereby certify that this report on Form 10-K 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-K fairly presents, in all material respects, the
financial condition and results of operations of Stewart & Stevenson
Services, Inc.