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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 31, 2002 ("Fiscal 2001") or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _______
Commission file number 0-8493
STEWART & STEVENSON SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 74-1051605
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2707 North Loop West, Houston, Texas 77008
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 868-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
AGGREGATE MARKET VALUE OF VOTING SECURITIES HELD
BY NONAFFILIATES AS OF MARCH 31, 2002:
$550,544,381
Number of shares outstanding of each of the issuer's classes of common stock, as
of March 31, 2002:
COMMON STOCK, WITHOUT PAR VALUE 28,451,906 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT PART OF FORM 10-K
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Proxy Statement for the 2002 Part III
Annual Meeting of Shareholders
ITEM 1. BUSINESS
Stewart & Stevenson Services, Inc. (together with its wholly-owned subsidiaries,
the "Company" or "Stewart & Stevenson") was founded in Houston, Texas in 1902
and was incorporated under the laws of the State of Texas in 1947. Since its
beginning, the Company has been primarily engaged in the custom fabrication of
engine driven products. Stewart & Stevenson consists of five major business
segments: the Power Products segment, the Distributed Energy Solutions segment,
the Tactical Vehicle Systems segment, the Petroleum Equipment segment, and the
Airline Products segment.
The Company's fiscal year begins on February 1 of the year stated and ends on
January 31 of the following year. For example, "Fiscal 2001" commenced on
February 1, 2001 and ended on January 31, 2002. Identifiable assets at the close
of Fiscal 2001, 2000, and 1999, net sales and operating profit for such fiscal
years for the Company's business segments, export sales, and sales to customers
representing 10% or more of consolidated sales are presented in the Notes to
Consolidated Financial Statements contained herein.
POWER PRODUCTS SEGMENT
Effective with the fourth quarter of Fiscal 2001, the Power Products segment was
modified to exclude custom generator set packaging, turnkey power plant
installation, and sales of power generation solutions in domestic and certain
international markets. These activities will be reported as a new segment called
Distributed Energy Solutions - see below. The Power Products segment sells and
rents various industrial equipment; sells components, replacement parts,
accessories, and other materials supplied by independent manufacturers; and
provides in-shop and on-site repair services for industrial transportation
equipment.
Some of the equipment sold or rented by the Power Products segment is acquired
by the Company from independent manufacturers pursuant to distribution
agreements. The following table contains the name of certain manufacturers with
whom the Company presently maintains a significant distribution contract, a
description of the products and territories covered, and the expiration date
thereof.
EXPIRATION
MANUFACTURER PRODUCTS TERRITORIES DATE
--------------- ----------- ------------ ----------
Detroit Diesel Corporation, a Heavy Duty High Speed Texas, Colorado, Northern California, 2003
Daimler Chrysler Company** Diesel Engines New Mexico, Wyoming, Nebraska, Louisiana,
Mississippi, Alabama, Venezuela, and Colombia
Electro-Motive Division of General Heavy Duty Medium Speed Texas, Colorado, New Mexico, Oklahoma, 2004
Motors Corporation** Diesel Engines Arkansas, Louisiana, Tennessee, Mississippi,
Alabama, Mexico, Central America, and
parts of South America
Allison Transmission Division of On- and Off-Highway Automatic Texas, Colorado, Northern California, 2004
General Motors Corporation Transmissions, Power Shift New Mexico, Wyoming, Nebraska, Louisiana,
Transmissions and Torque Converters Mississippi, Alabama, Venezuela, and Colombia
Hyster Company Material Handling Equipment Texas *
Thermo King Corporation Transport Refrigeration Equipment Southeast and South Texas, Southern 2002
Louisiana, and Northern California
Waukesha Engine Division of Natural Gas Industrial Engines Colorado, Wyoming, New Mexico, Utah, Oregon, 2003
Dresser Industries, Inc.** Hawaii, Kansas, Arizona, California,
Washington, Nevada, Colombia, and Alaska
Kohler Company Spectrum Generator Sets Colorado, Southern Louisiana, New Mexico, *
Texas, Wyoming, and Northern California
Deutz AG** Diesel Engines Colorado, Wyoming, Arizona, New Mexico, *
Washington, Alaska, Texas, Oklahoma, Kansas,
Arkansas, Louisiana, Mississippi, and
Western Tennessee
Mercury Marine and MerCruiser, Diesel and Gas Engines Texas, Louisiana, Mississippi, Arkansas, 2003
Divisions of Brunswick Corporation Missouri, Oklahoma, Kansas, New Mexico, Iowa,
Florida, Georgia, Tennessee, Alabama, Kentucky,
North Carolina, South Carolina, Alaska,
Washington, Oregon, Idaho, Montana, Wyoming,
North Dakota, South Dakota, and Nebraska
* No expiration date. Agreements may be terminated by
written notice of termination by either party under
certain conditions.
** Applicable to both the Power Products segment and
the Distributed Energy Solutions segment.
2
Distribution agreements generally require the Company to purchase and stock
products for resale to end users, original equipment manufacturers, and/or
independent dealers within the franchised area of distribution. Such agreements
may contain provisions restricting sales of products outside of the franchised
territory and prohibiting the sale of competitive products within the franchised
territory. The Company's major distribution agreements also require the Company
to stock repair parts, components, and accessories for resale to end users,
either directly by the Company or through a dealer network; and to provide
aftermarket service support for distributed products within the franchised
territory. The Company also offers in-shop and on-site repair services for
related equipment manufactured by companies with whom it does not have a
distribution agreement.
The Power Products segment also sells generator sets, pump packages, marine
propulsion systems, and other engine driven equipment. Generator sets fabricated
by the Company range in size from 25 kw to 1,000 kw. In addition, the Power
Products segment markets generator sets ranging in size from 1,000 kw to 5,700
kw. Pump packages, marine propulsion systems, and other engine-driven packaged
equipment fabricated by the Company range in size from 35 hp to 7,000 hp. Most
generator sets and other engine-driven packaged equipment are based upon diesel,
dual fuel, or natural gas fueled engines supplied by independent manufacturers
with whom the Company has a distribution or packaging agreement. Such agreements
do not usually restrict the sale of packaged equipment to a franchised
territory, and the products fabricated by the Company are sold on a world-wide
basis.
Power Products segment operations are conducted at branch facilities located
within the Company's franchised areas of operations. New products manufactured
by suppliers and repair parts, components, and accessories are marketed under
the trademarks and trade names of the original manufacturer. Products fabricated
by the Company and aftermarket service are marketed under the "Stewart &
Stevenson" name and other trademarks, trade names, and service marks owned by
the Company.
The Company's principal distribution agreements are subject to early termination
by the suppliers for a variety of causes, including a change in control or a
change in the principal management of the Company. Although no assurance can be
given that such distribution agreements will be renewed beyond their expiration
dates, they have been renewed regularly in the past. Any interruption in the
supply of materials from the original manufacturers, or a termination of a
distributor agreement, could have a material effect on the results of operations
of the Power Products segment.
The Power Products segment competes with other manufacturers and their
distributors in the sale of original equipment, with the manufacturers and
distributors of non-original equipment parts for the sale of spare parts, and
with independent repair shops for in-shop and on-site repair services. No single
competitor competes against the Company's Power Products segment in all of its
businesses, but certain competitors may have a leading position in different
product areas. Major competitors in the sale of packaged diesel and gas-fired
reciprocating engine equipment include Caterpillar, Inc. and its distributors,
and Cummins, Inc. and its distributors.
Operations of the Power Products segment accounted for approximately 44%, 51%,
and 63% of consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
DISTRIBUTED ENERGY SOLUTIONS SEGMENT
The Distributed Energy Solutions Segment was reported separately effective with
the fourth quarter of Fiscal 2001 and includes the Company's activities
associated with the reciprocating diesel and natural gas engine generator set
packaging, turnkey power plant installation operations and maintenance services,
and sales of power generation solutions in domestic and certain international
markets. This segment was created to provide a clearer view of the Company's
power generation activities and to allow improved focus on market opportunities.
Some of the equipment sold by the Distributed Energy Solutions segment is
acquired by the Company from independent manufacturers pursuant to the
distribution agreements referenced in the Power Products segment. Some of the
listed agreements are common to both the Distributed Energy Solutions and Power
Products segments, and the table included in the Power Products segment above
details those agreements that are common to both segments. The Distributed
Energy Solutions segment also has two agreements that are unique to that
segment; an agreement with Mitsubishi Heavy Corp. for natural gas industrial
engines for the United States and the Dominican Republic, and a Power Energy
Partner agreement with Waukesha Engine that allows this segment to sell as an
original equipment manufacturer. These agreements are terminable upon certain
notifications.
The Distributed Energy Solutions segment sells custom generator sets fabricated
by the Company that range in size from 550 kw to 5,700 kw. Most generator sets
and other engine-driven packaged equipment are based upon diesel, dual fuel, or
natural gas fueled engines supplied by independent manufacturers with whom the
Company has a distribution or OEM packaging agreement. Such agreements do not
usually restrict the sale of packaged equipment to a franchised territory, and
the products fabricated by the Company are sold on a world-wide basis. Other
services offered by the Distributed Energy Solutions segment include turnkey
installation services, operation and maintenance contracts, professional
services agreements, green field development, building modifications, equipment
upgrades and retrofits, and emission control systems and environmental
compliance testing.
3
The Distributed Energy Solutions segment operations are conducted at fabricating
facilities located in Houston, Texas and Sacramento, California. New products
manufactured by suppliers and repair parts, components, and accessories are
marketed under the trademarks and trade names of the original manufacturer.
Products fabricated by the Company and aftermarket service are marketed under
the "Stewart & Stevenson" name and other trademarks, trade names, and service
marks owned by the Company. The Distributed Energy Solutions segment also
utilizes the Power Products segment branch facilities and personnel to perform
aftermarket service and support for product offerings.
The Company's principal distribution agreements are subject to early termination
by the suppliers for a variety of causes, including a change in control or a
change in the principal management of the Company. Although no assurance can be
given that such distribution agreements will be renewed beyond their expiration
dates, they have been renewed regularly in the past. Any interruption in the
supply of materials from the original manufacturers, or a termination of a
distributor agreement, could have a material effect on the results of operations
of the Distributed Energy Solutions segment.
The Distributed Energy Solutions segment competes with other manufacturers and
their distributors in the custom packaging of generator sets, with manufacturers
and distributors of non-original equipment parts for the sale of spare parts,
and with independent repair shops for in-shop and on-site repair services. No
single competitor competes against the Company's Distributed Energy Solutions
segment in all of its businesses, but certain competitors may have a leading
position in different product areas. Major competitors in the custom packaging
of generator sets, turnkey power plant installation, and power generation
solutions include Caterpillar, Inc. and Wartsila NSD.
Operations of the Distributed Energy Solutions segment accounted for
approximately 9%, 4%, and 0% of consolidated sales during Fiscal 2001, 2000, and
1999, respectively.
TACTICAL VEHICLE SYSTEMS SEGMENT
The Tactical Vehicle Systems segment assembles and provides sustaining design
engineering and service and support for the Family of Medium Tactical Vehicles
("FMTV") under contracts with the U.S. Army. The initial FMTV contract was
awarded in 1991 and called for the production of approximately 11,200 2-1/2-ton
and 5-ton trucks in several configurations, including troop carriers, wreckers,
cargo trucks, vans, and dump trucks. Production pursuant to the original FMTV
contract was completed as of January 31, 1999.
During October 1998, the Company received a second multi-year contract from the
U.S. Army that now provides for continued production of the FMTV through
September 2003 including currently exercised option years. The U.S. Army has an
option for one additional year that could extend the contracts through September
2004. The second FMTV contract incorporates an environmentally improved engine,
an improved diagnostics system, anti-lock brakes, and other improvements.
Production under the second contract, including all available option years would
be approximately 10,200 trucks and 2,100 trailers and have a total contract
value of $1.74 billion. On occasion, the Company may be required to fund certain
expenditures related to the FMTV contracts in advance of government funding.
The Company also sells the FMTV to other government contractors as a platform
for installation of other equipment which is then resold to the Armed Forces.
The Company also has sold vehicles to other branches of the U.S. Armed Forces
and believes there will be opportunities to sell additional vehicles to the U.S.
Army, other branches of the U.S. Armed Forces, and the armed forces of foreign
countries. The FMTV contracts allow for such sales, and the Company's facility
has the capacity to produce vehicles for additional sales.
The United States Government is the primary customer of the Tactical Vehicle
Systems segment, accounting for practically all of the sales of this segment.
The FMTV contracts are subject to termination at the election of this customer
and provide for termination charges that would reimburse the Company for
allowable costs, but not necessarily all costs. The loss of this customer could
have a material adverse effect on the Company's future financial condition and
results of operations.
The FMTV incorporates engines, transmissions, axles, and a number of other
components specified by the U.S. Army and available only from the source
selected by them. Interruption of the supply of any of these components could
have a material adverse affect on the results of operations of the Tactical
Vehicles Systems segment. The Company believes that any delays arising from the
unavailability of source-specified components would be fully compensated under
the FMTV contracts.
The Tactical Vehicle Systems segment is competing against Oshkosh Truck
Corporation for the third multi-year contract for the FMTV. The Company cannot
reliably predict when the U.S. Army will make its decision as to the final award
for the new production contract or whether the Company will receive the award,
but the decision is scheduled to be made during the Company's first quarter of
Fiscal 2003 and the Company believes its proposal will be competitive. Both
domestic and foreign suppliers compete for the sale of vehicles to foreign
governments. The Company's foreign competitors include DaimlerChrysler, Tatra,
and other companies that may have greater international recognition as vehicle
manufacturers than the Company.
4
Operations of the Tactical Vehicle Systems segment accounted for approximately
32%, 27%, and 18% of consolidated sales in Fiscal 2001, 2000, and 1999,
respectively.
PETROLEUM EQUIPMENT SEGMENT
The Company recently announced its intention to sell the Petroleum Equipment
segment's blowout preventer and controls, valve, and drilling riser businesses,
and as a result these activities are being reclassified for reporting purposes
as discontinued operations. See Discontinued Operations in Part II for further
discussion. The ongoing Petroleum Equipment segment, as now configured,
manufactures equipment primarily for the well stimulation industries. Its
products include coil tubing systems and acidizing and fracturing systems. Many
of its products are manufactured according to proprietary designs and are
covered by appropriate process and apparatus patents. Other products may be
manufactured according to the designs or specifications of its customers.
The Petroleum Equipment segment purchases many of the components incorporated
into its products from independent suppliers. Some of these components are
manufactured according to designs and specifications owned by the Company and
protected from disclosure by confidentiality arrangements. Other components are
standard commercial or oilfield products and may be acquired under the
distribution or packaging agreements as discussed under "Power Products Segment"
above. The Petroleum Equipment segment is not dependent on a single supplier for
any critical component.
The Petroleum Equipment segment competes primarily with other manufacturers of
similar equipment. Products are differentiated by protected technology, and no
manufacturer has a leading position in any product line. Major competitors
include Caterpillar, Inc. and Halliburton Corporation in fracturing and
acidizing equipment and Varco International, Inc. in coil tubing systems.
The Petroleum Equipment segment's products are sold world-wide under the
"Stewart & Stevenson" trade name. Demand for oilfield equipment is substantially
dependent on the price trends for oil and gas.
Operations of the Petroleum Equipment segment represented 7%, 5%, and 3% of
consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
AIRLINE PRODUCTS SEGMENT
The Airline Products segment manufactures internal combustion and electric
airline ground support equipment that includes aircraft tow tractors, gate
pushback tractors, baggage tow tractors, beltloaders, air start units, and air
conditioning units. This segment also manufactures mobile railcar movers, sold
under the Rail King(R) trademark and snow blowers, sold under the Snow King(TM)
trademark. Some of its products are manufactured according to proprietary
designs that are covered by appropriate process and apparatus patents. Other
products may be manufactured according to the designs or specifications of its
customers.
During the second half of Fiscal 2001, the Airline Products segment consolidated
its ground support business into operations located in Marietta, Georgia, and
its mobile railcar mover and snow blower businesses into one operation located
in Houston, Texas. The Company believes the consolidation of these operations
and facilities, coupled with more than a 35% reduction in employment levels
during Fiscal 2001 should allow this segment to be profitable at a lower level
of sales.
The Airline Products segment purchases many of the components incorporated into
its products from independent suppliers. The Company believes this segment is
not dependent on a single supplier for any critical component and it sells the
majority of its products to the airline industry, which has a global customer
base. Airline products are sold under the "S&S Tug" and "Stewart & Stevenson
Tug" trade names and demand for its products is dependent on the profitability
of the airline industry. The events of September 11 have impacted the airline
industry as a whole, and recovery of the market is not expected until late
Fiscal 2002 at the earliest. See further discussion at Item 7. Management
Discussion and Analysis of Financial Condition and Results of Operations. The
Airline Products segment markets domestically and internationally in the
commercial, military, and industrial segments.
The Airline Products segment competes primarily with other manufacturers of
similar equipment. Major domestic competitors include FMC Technologies, Inc. in
pushback tow tractors, Trilectron Industries Inc. in air conditioners and air
starts, NMC-Wollard in belt loaders and cargo tractors, and Tiger Tractor
Corporation, Toyota, and Harlan Corporation in baggage tractors. International
competitors include Schopf-Douglas in aircraft tow tractors and Charlott in
electric baggage tractor/belt loaders.
Operations of the Airline Products segment represented 6%, 10%, and 12% of
consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
5
OTHER BUSINESS ACTIVITIES
The Company is engaged in other business activities that are not included in any
of its five business segments. Other businesses include fabrication of gas
compression equipment and wheelchair lifts for buses.
Operations of the Other Business Activities segment represented 2%, 2%, and 4%
of consolidated sales during Fiscal 2001, 2000, and 1999, respectively.
COMPETITION
The Company encounters strong competition in all segments of its business.
Competition involves pricing, quality, availability, range of products and
services, and other factors. Some of the Company's competitors have greater
financial resources than Stewart & Stevenson and manufacture some of the major
components that the Company must buy from independent suppliers. The Company
believes that its reputation for quality engineering and after-sales service,
with single-source responsibility, are important to its market position.
INTERNATIONAL OPERATIONS
International operations are subject to the risks of international political and
economic changes, such as changes in foreign governmental policies, currency
exchange rates, and inflation. The Company maintains operations in foreign
jurisdictions, including Colombia and Venezuela, some of which may be considered
politically or economically volatile. Where appropriate, on a transaction by
transaction basis, the Company purchases insurance policies to mitigate
political risks.
International sales are also subject to changes in exchange rates, government
policies, and inflation. Generally, the Company accepts payments denominated in
United States Dollars and makes sales to customers outside the United States
against letters of credit drawn on established international banks, thereby
limiting the Company's exposure to the effects of exchange rate fluctuations and
customer credit risks.
UNFILLED ORDERS
The Company's unfilled orders consist of written purchase orders and letters of
intent. These unfilled orders are generally subject to cancellation or
modification due to customer relationships or other conditions. Purchase options
are not included in unfilled orders until exercised.
Unfilled orders relating to continuing operations at the close of Fiscal 2001
and Fiscal 2000 were as follows:
Estimated percentage to
be recognized Unfilled orders at January 31,
Fiscal 2002 (In millions)
-------------------------------
2002 2001
-------- -------
Power Products 89% $ 51.4 $ 59.4
Distributed Energy Solutions 100% 40.3 78.4
Tactical Vehicle Systems 64% 686.0 658.2
Petroleum Equipment 100% 31.8 55.3
Airline Products 100% 6.9 16.2
All Other 100% 4.3 11.3
-------- -------
$ 820.7 $ 878.8
======== =======
Unfilled orders of the Tactical Vehicle Systems segment at January 31, 2002 and
2001, consisted principally of contracts awarded in October 1998 by the United
States Army Tank - Automotive and Armament Command (TACOM) to manufacture medium
tactical vehicles and trailers.
The U.S. Army exercised an option to award a fifth program year to the current
contract, which begins in October 2002 and is expected to be completed by
September 2003. The U.S. Army holds an additional option to award a sixth
program year that, if exercised by the U.S. Army, could extend production of the
FMTV through September 2004. The sixth program year is not included in unfilled
orders, as the U.S. Government has not yet exercised such option.
6
EMPLOYEES
At January 31, 2002, the Company employed approximately 4,100 persons. The
Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES.
The Company maintains its corporate executive and administrative offices at 2707
North Loop West, Houston, Texas, which occupy about 65,000 square feet of leased
space.
Activities of the Power Products segment are coordinated from Houston, Texas,
where the Company owns 320,000 square feet of space at three locations and
leases 31,200 square feet in one location devoted to equipment and parts sales
and service. To service its distribution territory (See "Power Products Segment"
in Item 1 above), Stewart & Stevenson maintains Company operated facilities
occupying 668,000 square feet of owned space and 698,000 square feet of leased
space in 35 cities in Texas, Louisiana, Colorado, New Mexico, Wyoming, Utah,
Kansas, Washington, Georgia, California, Mississippi, Arizona, Arkansas, and
Florida. The Company leases 56,000 square feet in three locations in Venezuela,
approximately 58,000 square feet in four locations in Colombia, and 3,200 square
feet in Argentina.
The Distributed Energy Solutions segment is located in a portion of a 388,000
square foot company owned facility located in Houston, Texas. The Airline
Products segment also assembles railcar movers and snow blowing equipment in
this facility.
The Tactical Vehicle Systems segment is located in a 535,000 square foot Company
owned facility near Houston, Texas. The Tactical Vehicle Systems segment also
leases 105,000 square feet of warehousing facilities in Houston, Texas, 19,000
square feet in Sealy, Texas, and 35,400 square feet in Fayetteville, North
Carolina, and approximately 7,600 square feet within three facilities located in
Alexandria, Virginia, Fayetteville, North Carolina, and Troy, Michigan.
The Petroleum Equipment segment is headquartered in Houston, Texas, where the
Company owns approximately 323,000 square feet devoted to manufacturing,
warehousing, and administration. The Company also leases facilities in Scotland
(18,000 square feet) and Abu Dhabi, U.A.E. (12,000 square feet).
The Airline Products segment is headquartered in Marietta, Georgia, where the
company leases a 149,000 square foot facility. Airline products are also
manufactured and assembled in a 87,000 square foot facility in Kennesaw,
Georgia. The Company also leases a 19,000 square foot warehouse in Kennesaw,
Georgia.
The Company also leases an additional 66,600 square feet of office, warehouse,
and shop space to support its marketing department, corporate records, and
transportation department.
The Company owns five locations containing approximately 237,500 square feet
which are currently being leased to a third party or being marketed for sale.
The Company considers all property owned or leased by it to be well maintained,
adequately insured, and suitable for its purposes.
ITEM 3. LEGAL PROCEEDINGS.
During Fiscal 1998, the U.S. Customs Service detained a medium tactical vehicle
that was being shipped by the Company for display in a European trade show. The
Company has been advised that the U.S. Customs Service and the Department of
Justice are investigating potential violations by the Company of laws relating
to the export of controlled military vehicles, weapons mounting systems, and
firearms. Such investigation could result in the filing of criminal, civil, or
administrative sanctions against the Company and/or individual employees, and
could result in a suspension or debarment of the Company from receiving new
contracts or subcontracts with agencies of the U.S. Government or the benefit of
federal assistance payments.
The Company is a defendant in a suit brought under the QUI TAM provision of the
False Claims Act, United States of America, ex rel. Werner Stebner v. Stewart &
Stevenson Services, Inc. and McLaughlin Body Co., Civil Action No. H-96-3363, in
the United States District Court for the Southern District of Texas, Houston
Division. The suit seeks penalties and damages in an unspecified amount. The
suit alleges that the Company made false statements and certifications in
connection with claims for payment for Family of Medium Tactical Vehicles
delivered to the U.S. Army starting in 1995, and the suit alleges that the
vehicles were substandard because of corrosion problems. The suit was filed
under seal in 1996, and following an investigation by the Justice Department,
the United States declined to intervene in the suit, which was unsealed on
August 29, 2000. The case is set for trial December 1, 2003. The Company
believes the claims in the suit are without merit and is vigorously defending
the suit.
7
The Company is also a defendant in a number of lawsuits relating to contractual,
product liability, personal injury, and warranty matters normally incident to
the Company's business. No individual case, or group of cases presenting
substantially similar issues of law or fact, is expected to have a material
effect on the manner in which the Company conducts its business. Although
management has established reserves that it believes to be adequate in each
case, an unforeseen outcome in such cases could have a material adverse impact
on the results of operations in the period it occurs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is traded on the NASDAQ Stock Market under the
symbol: SSSS. There were 608 shareholders of record as of February 28, 2002. The
following table sets forth the high and low sales prices relating to the
Company's common stock and the dividends declared by the Company in each
quarterly period within the last two fiscal years.
Fiscal 2001 Fiscal 2000
------------------------------------------ ------------------------------------------
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
--------- --------- ---------- --------- --------- ----------
First Quarter $ 27.13 $ 19.56 $ 0.085 $ 12.31 $ 8.75 $ 0.085
Second Quarter 35.55 22.20 0.085 15.44 11.56 0.085
Third Quarter 32.30 14.78 0.085 22.50 14.92 0.085
Fourth Quarter 19.94 14.35 0.085 27.19 19.50 0.085
On December 11, 2001, the Board of Directors approved a dividend of $0.085 per
share for shareholders of record on January 31, 2002, payable on February 15,
2002. The Board of Directors of the Company intends to consider the payment of
dividends on a quarterly basis, commensurate with the Company's earnings and
financial needs.
9
ITEM 6. SELECTED FINANCIAL DATA.
The Selected Financial Data set forth below should be read in conjunction with
the accompanying consolidated financial statements and notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
STEWART & STEVENSON SERVICES, INC.
CONSOLIDATED FINANCIAL REVIEW
- ---------------------------------------------------------------------------------------------------------------------------------
Fiscal Fiscal Fiscal Fiscal Fiscal
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA:
Sales $ 1,329,510 $ 1,111,050 $ 861,264 $ 1,150,939 $ 1,082,427
Cost of sales 1,150,792 939,592 738,498 1,136,097 1,007,794
----------- ----------- ----------- ----------- -----------
Gross profit 178,718 171,458 122,766 14,842 74,633
Recovery of costs incurred, net (39,000) -- -- -- --
Period expenses 147,270 115,842 102,425 84,209 101,688
----------- ----------- ----------- ----------- -----------
Earnings (loss) from continuing operations
before income taxes 70,448 55,616 20,341 (69,367) (27,055)
Gain on sale of investment, net of tax -- -- 2,746 -- --
Net earnings (loss) from continuing
operations 45,344 35,157 15,942 (43,955) (17,718)
Net earnings (loss) from discontinued operations,
net of tax (2,493) (368) 1,509 4,950 8,637
Gain (loss) on disposal of discontinued
operations, net of tax (628) 565 6,879 (33,979) 61,344
Net earnings (loss) 42,223 35,354 24,330 (72,984) 52,263
Total assets 649,055 638,862 646,012 705,777 1,252,647
Short-term debt (including current portion
of long-term debt) 3,364 33,048 34,006 86,824 261,000
Long-term debt 56,600 66,327 77,881 82,864 147,166
PER SHARE DATA:
Earnings (loss) per share:
Basic
Continuing operations $ 1.60 $ 1.25 $ 0.57 $ (1.52) $ (0.52)
Discontinued operations (0.09) (0.01) 0.05 0.17 0.25
Gain (loss) on disposal of discontinued
operations (0.02) 0.02 0.25 (1.17) 1.85
----------- ----------- ----------- ----------- -----------
$ 1.49 $ 1.26 $ 0.87 $ (2.51) $ 1.57
=========== =========== =========== =========== ===========
Diluted
Continuing operations $ 1.57 $ 1.24 $ 0.57 $ (1.52) $ (0.52)
Discontinued operations (0.09) (0.01) 0.05 0.17 0.25
Gain (loss) on disposal of discontinued
operations (0.02) 0.02 0.25 (1.17) 1.84
----------- ----------- ----------- ----------- -----------
$ 1.46 $ 1.25 $ 0.87 $ (2.51) $ 1.57
=========== =========== =========== =========== ===========
Weighted average shares outstanding:
Basic 28,325 28,026 27,989 29,006 33,184
Diluted 28,865 28,373 28,042 29,006 33,250
Cash dividends declared per share $ 0.34 $ 0.34 $ 0.34 $ 0.34 $ 0.34
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis, as well as the accompanying consolidated
financial statements and related footnotes, will aid in understanding the
Company's results of operations as well as its financial position, cash flows,
indebtedness, and other key financial information. The following discussion may
contain forward-looking statements. In connection therewith, please see the
Cautionary Statements contained herein, which identify important factors that
could cause actual results to differ materially from those predicted or implied
in the forward-looking statements.
BUSINESS SEGMENT HIGHLIGHTS
- --------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PERCENTAGES)
- --------------------------------------------------------------------------------
Sales
----------------------------------------
Fiscal Fiscal Fiscal
2001 2000 1999
----------------------------------------
Power Products $ 587,034 $ 566,078 $ 540,740
Distributed Energy Solutions 115,728 46,385 --
Tactical Vehicle Systems 432,288 304,143 150,884
Petroleum Equipment 90,547 58,092 26,864
Airline Products 80,649 110,250 104,915
Other Business Activities 23,264 26,102 37,861
---------- ---------- ----------
Total Segment Sales $1,329,510 $1,111,050 $ 861,264
========== ========== ==========
Operating Profit (Loss)
----------------------------------------
Fiscal Fiscal Fiscal
2001 2000 1999
----------------------------------------
Power Products $ 10,278 $ 16,395 $ 15,164
Distributed Energy Solutions (12,449) (3,839) --
Tactical Vehicle Systems 103,493 54,258 30,195
Petroleum Equipment 1,648 4,062 (1,588)
Airline Products (18,395) (6,643) (3,712)
Other Business Activities 1,180 3,478 (1,712)
--------- --------- ---------
Total Operating Profit (Loss) 85,755 67,711 38,347
Corporate expenses, net (13,322) (11,980) (10,047)
Non-operating interest income 3,415 7,993 1,083
Interest expense (5,400) (8,108) (9,042)
--------- --------- ---------
Earnings (loss) from continuing
operations before taxes $ 70,448 $ 55,616 $ 20,341
========= ========= =========
Operating Profit (Loss) as a Percentage of Sales
----------------------------------------
Fiscal Fiscal Fiscal
2001 2000 1999
----------------------------------------
Power Products 1.8% 2.8% 2.8 %
Distributed Energy Solutions (10.8) (8.3) --
Tactical Vehicle Systems 23.9 17.8 20.0
Petroleum Equipment 1.8 7.0 (5.9)
Airline Products (22.8) (6.0) (3.5)
Other Business Activities 5.1 13.3 (4.5)
Consolidated 6.5 6.1 4.5
11
RESULTS OF OPERATIONS
GENERAL
During Fiscal 2001, the Company continued to focus on five key management
initiatives aimed at improving the balance sheet, increasing profit margins, and
growing the business.
With respect to the leadership initiative, many new team members joined the
Company during Fiscal 2001, including the Senior Vice President and General
Counsel, Senior Vice President Power Products, President Tactical Vehicle
Systems, Vice President Petroleum Equipment, President S&S Tug, and over thirty
mid and upper level managers.
Working capital improvement initiatives contributed to the generation of $50.3
million in cash provided by operating activities during Fiscal 2001. In
addition, cash and equivalents less total debt at January 31, 2002 totaled a
positive $21.5 million, an improvement of $10.7 million from the $10.8 million
at January 31, 2001.
In the supply chain initiative, the principal focus has been shifted from a
corporate driven activity to an effort led by each of the business segments. A
corporate-wide purchasing database has been established for the purposes of
sharing information across the Company. Additionally, a corporate-wide
engineering council was created to help improve product structuring and
configuration management.
The information management systems project is under new leadership and the scope
has been expanded to include substantial improvements in basic business
processes, including project management, configuration control, bill of
materials management, and inventory and production control. An effort is also
under way to improve inquiry-to-order and order-to-remittance processes as well
as the final integration of the JD Edwards software into the manufacturing and
service business.
Progress was made on growth initiatives despite a tough market environment. The
Distributed Energy Solutions segment reported a $69 million (150%) revenue
increase during Fiscal 2001. The Power Products segment reported a 19% increase
in service sales, relocated into a new facility in Dallas, Texas, and opened up
new branches in El Paso, Texas, Stockton, California, and Valencia, Venezuela.
Tactical Vehicle Systems acquired Extended Reach Logistics, Inc., an e-commerce
business that provides military units and commercial companies with a web-based
portal for ordering repair parts or component repair services. The Airline
Products segment is preparing to introduce an expanded line of electric-powered
products as well as new products currently being offered for the regional jet
market. The Petroleum Equipment segment recently introduced coil tubing
equipment to the underground construction industry for laying fiber optic cable
and other utility services.
FISCAL 2001 VS. FISCAL 2000
Fiscal 2001 sales totaled $1,330 million compared to $1,111 million in Fiscal
2000. Net earnings from continuing operations for the year grew 29% to $45
million, or $1.57 per diluted share, compared with $35 million, or $1.24 per
diluted share, in the prior year. Including discontinued operations, total
year net earnings for Fiscal 2001 and 2000 were $42 million, or $1.46 per
diluted share, and $35 million, or $1.25 per diluted share, respectively.
POWER PRODUCTS
Effective with the fourth quarter of Fiscal 2001, the Power Products segment was
modified to exclude certain activities pertaining to power generation, which are
being reported in a new segment called Distributed Energy Solutions. The
currently reported Power Products segment sells and rents various industrial
equipment; sells components, replacement parts, accessories, and other materials
supplied by independent manufacturers; and provides in-shop and on-site repair
services for industrial equipment.
Sales for the Power Products segment in Fiscal 2001 were $587 million, 4% higher
than Fiscal 2000 sales of $566 million, largely due to higher service sales. The
Company has increased the number of service technicians in this segment and
continues to focus on the service aspect of this business. While equipment sales
increased modestly year-over-year, the trend was downward during the fourth
quarter, reflecting weakness in selected markets such as oil and gas, material
handling, and small power generation equipment. This market softness was
reflected in the equipment order backlog, which decreased $8 million during the
year. Parts sales remained steady but were impacted by the continuing retirement
of the two cycle engine in the marine market. In particular, the continuing
retirement of the two cycle engine in the marine market has caused the Company's
supply partners to lose share to competitors as the newer four cycle engines are
introduced to the market, which could negatively impact sales in future periods.
Operating profit for Fiscal 2001 was $10 million compared with $16 million for
the comparable period of Fiscal 2000. A $3.1 million improvement from higher
volume was more than offset by $5.1 million higher expense related to
information systems improvements, $2.0 million of expense related to
collectibility of certain accounts receivable, $0.7 million in inventory
valuation adjustments (net of a lower LIFO reserve which decreased cost of sales
by $6.3 million), and $1.4 million higher costs due to inflation and other
factors.
12
Overall, margin rates on equipment were down while margin rates on parts and
service sales remained consistent with prior periods. The Company is continuing
the installation of information technology tools to help reduce transaction
costs and improve margin rates.
It is expected that the overall market for this segment will be flat to slightly
down in Fiscal 2002. Actions being taken to improve profitability in this
segment include redesign of business processes to improve accountability and
reduce costs, the introduction of new leaders to the business, and improved
management information systems. Management continues to monitor the Class 8
truck after-market activity, the domestic oil and gas markets, and the overall
condition of the economy, all of which influence the activity level for this
segment.
DISTRIBUTED ENERGY SOLUTIONS
As noted above, the Distributed Energy Solutions segment was reported separately
effective with the fourth quarter of Fiscal 2001 to provide a clearer view of
the Company's power generation activities and to allow more focus on market
opportunities.
Sales for the Distributed Energy Solutions segment in Fiscal 2001 were $116
million compared to $46 million in the prior year. The increase in sales was
primarily due to two large turnkey power generation projects in California that
were completed in the first half of Fiscal 2001. An operating loss of $12
million was recorded in Fiscal 2001 compared to a $4 million operating loss in
the comparable period of Fiscal 2000. The $6.7 million impact of higher gross
margins due to increased volume was more than offset by cost structure increases
in Houston ($6.9 million) and Sacramento ($3.3 million), $2.8 million LIFO
provisions associated with an inventory ramp up, $1.4 million in warranty
expenses, and $0.9 million for restructuring and other costs.
The Company anticipates a weaker market in Fiscal 2002 compared with Fiscal 2001
as a result of decreased customer demand and excess power generation capacity
and equipment in selected markets. The Company plans to increase focus on
natural gas co-generation.
Actions being taken to improve profitability in this segment include an
organization realignment to better focus on market opportunities as well as
monitor costs, the introduction of new leaders to the business, and the
implementation of new business processes and cost tracking systems. This segment
has a low market share in the markets it serves which should allow for
opportunity to grow even in a weakened economy. However, the contracts that are
won in this segment tend to be large in volume and unpredictable as to timing
which may cause large quarterly swings in the financial results for this segment
going forward.
TACTICAL VEHICLE SYSTEMS
The Tactical Vehicle Systems segment, which manufactures tactical vehicles for
the U. S. Army and others, recorded sales for Fiscal 2001 of $432 million versus
$304 million a year ago. Total operating profit for Fiscal 2001 was $103
million, which compared favorably with $54 million a year ago. Included in the
current year's operating profit is $39 million in settlement of claims, net of
expenses of $1.5 million, with the U.S. Army, as further described below.
In Fiscal 1998, the Company filed a certified claim with the U.S. government
seeking recovery of costs incurred by the Company resulting from a delay of over
eight months from the original production plan in the first multi-year FMTV
contract. The U.S. Army and the Company reached resolution in April 2001 through
the alternative dispute resolution process managed by the Armed Services Board
of Contract Appeals, and the Company received payment of $22 million in July
2001.
The U.S. Army directed the Company to make certain changes in drive train
components of all vehicles produced under the first FMTV contract. The Company
commenced the installation of the directed changes during Fiscal 1999 and
completed the changes during Fiscal 2000. The financial responsibility for the
cost of the drive train change has been resolved through an alternate dispute
resolution proceeding and the U.S. Army paid $18.5 million to the Company in
December 2001.
The FMTV incorporates engines, transmissions, axles, and a number of other
components specified by the U.S. Army and available only from the source
selected by them. Interruption of the supply of any of these components could
have a material adverse affect on the results of operations of the Tactical
Vehicles Systems segment. The Company believes that any delays arising from the
unavailability of source-specified components would be fully compensated under
the FMTV contracts.
The increase in sales in Fiscal 2001 was due to an increase in the volume of
products sold during the year. In Fiscal 2001, 2,229 trucks and 692 trailers
were shipped compared to 1,534 trucks and no trailers for the comparable period
of Fiscal 2000.
The U.S. Army exercised an option to award a fifth program year to the current
contract, which added $374 million to the backlog for this segment. Deliveries
under this award should begin in October 2002 and are expected to be completed
by September 2003. Shipments for Fiscal 2002 are anticipated to be approximately
2,351 trucks and 518 trailers, a portion of which are included in option year
production at somewhat lower pricing levels. The lower pricing in the option
year along with bid costs associated with the competitive rebuy should be offset
by cost reduction efforts.
13
As the current contract with the U.S. Army for production of the FMTV is nearing
completion, the Company continues its preparation for the next multi-year
contract award. The Company has been awarded a contract under the first phase of
the competitive bid process and is currently competing for the final award. The
Company cannot reliably predict when the U.S. Army will make its decision as to
the final award for the new production contract or whether the Company will
receive the award, but the decision is scheduled to be made during the Company's
first quarter of Fiscal 2003 and the Company believes its proposal will be
competitive. Even if the Company receives the award, there can be no assurance
that operating margins will be at the same level as the existing FMTV contract.
Continued success in this segment is dependent on securing additional contracts
after completion of the current contract for production of the FMTV at
acceptable operating margins.
PETROLEUM EQUIPMENT
The Company recently announced its intention to sell the Petroleum Equipment
segment's blowout preventer and controls, valve, and drilling riser business,
and as a result, these activities were reclassified for reporting purposes as
discontinued operations and are not included in the results of this segment. See
Discontinued Operations for further discussion. The currently reported Petroleum
Equipment segment manufactures equipment primarily for the well stimulation
industries.
Sales for the Petroleum Equipment segment totaled $91 million for Fiscal 2001
compared to $58 million last year. The segment reported a $1.6 million operating
profit in Fiscal 2001 compared to a $4.1 million operating profit for Fiscal
2000. The $3.0 million benefit from increased volume was more than offset by
$2.9 million increased operating expense to support the increased volume, $1.0
million in higher information systems expense, a $1.0 million increase in
product warranty costs, and $0.5 million restructuring costs.
During the last half of Fiscal 2001, oil and gas prices dropped significantly
resulting in reduced capital spending in the oil and gas markets which has
impacted the general business level for this segment. The downward pressure in
this market has resulted in a 53% decrease in backlog at the end of Fiscal 2001
as compared to the end of Fiscal 2000. Management will continue to monitor the
changes in the oil and gas market and respond to opportunities as they arise. A
new business leadership team was installed during the fourth quarter of Fiscal
2001 and efforts are underway to improve basic business processes, reduce costs,
and improve margins.
AIRLINE PRODUCTS
The Airline Products segment manufactures airline ground support products,
mobile railcar movers, and snow blowers. Sales for Fiscal 2001 were $81 million
versus $110 million in Fiscal 2000. The operating loss for Fiscal 2001 was $18
million compared to an operating loss of $7 million for the same period in
Fiscal 2000. The increase in operating loss was attributable to lower volume
($4.5 million), restructuring costs ($4.7 million) associated with facility and
organization consolidations, higher operating costs ($4.5 million) associated
with facility costs, ramp up of the snow blower business transferred to Houston,
Texas, higher insurance and bad debt expense, and other costs. These costs were
partially offset by lower LIFO reserves which decreased cost of sales by $2.0
million.
Sales volume in this segment was impacted by fallout from the September 11
terrorist attack, which resulted in domestic flight schedule reduction
approximating 20% and significant cash flow pressures for the airline industry.
As a result, the order backlog decreased by $9.3 million (57%) during the fiscal
year. This segment's customers in the passenger airline industry are still
cautious as they assess their equipment requirements in the coming year. While
airlines have begun to restore flight schedules, it is unlikely that normal
levels of airline ground support equipment purchases will be restored until
Fiscal 2003.
Consolidation of production facilities, coupled with significant staff
reductions associated with organization realignments should reduce the breakeven
point for this segment. In addition, a new leadership team was installed in
January 2002.
OTHER BUSINESS
Other business activities not identified in a specific segment include
predominantly sales of gas compression equipment and wheel chair lifts. Fiscal
2001 sales were $23 million versus $26 million in Fiscal 2000. Operating profit
for the year totaled $1 million versus $3 million last year which included a $6
million gain on sale of the gas compression equipment leasing business.
FISCAL 2000 VS. FISCAL 1999
Sales for Fiscal 2000 totaled $1,111 million compared to $861 million in Fiscal
1999. Net earnings from continuing operations for the year totaled $35 million,
or $1.24 per diluted share, compared with $16 million, or $0.57 per share, in
the prior year. Including discontinued operations, total year net earnings for
Fiscal 2000 and 1999 were $35 million, or $1.25 per diluted share, and $24
million, or $0.87 per share, respectively.
During Fiscal 2000, the Company made significant progress in five important
management initiatives. The result of this progress has been to improve its
balance sheet, to increase its profit margins, and to grow organically (or
internally) its businesses. With regards to
14
the improvement of the balance sheet, during Fiscal 2000 the Company increased
its cash and cash equivalents by $98 million, reduced its total debt by $13
million, and improved its current ratio to 2.74%. While the Company has made
significant progress in reducing its inventory and accounts receivable levels,
it continues to focus on further reductions. Increased profit margins are
ultimately reflected in net earnings from continuing operations, which, as
mentioned above, were significantly improved versus Fiscal 1999. Sales for the
year increased 29% versus Fiscal 1999.
The Power Products segment, which is responsible for marketing and aftermarket
support of a wide range of industrial equipment, recorded Fiscal 2000 sales of
$566 million, 5% higher than Fiscal 1999 sales of $541 million. Operating profit
for Fiscal 2000 was $16 million compared with $15 million last year. Operations
in Fiscal 2000 were adversely impacted by special charges of $9 million,
principally in connection with an uncollectible account and note receivable, and
inventory reserves. Order backlog for this segment decreased $18 million during
the year. The Power Products segment relies on a number of markets for top line
growth. The Power Products segment also participates in the oil and gas market
through the sale of equipment, parts, and service for the propulsion and power
of marine support vessels, and through the application of off-highway internal
combustion engines, along with service and parts support for land-based
applications. While these markets strengthened during the year, the Power
Products segment continues to monitor the land-based Class 8 on-highway
transportation markets for signs of weakness which could occur as a result of a
softening of the overall economy. Latin American sales were strong in Fiscal
2000. However, there remains an element of volatility as these markets continue
to mature and grow.
The Power Products segment realized increasing sales in each successive quarter
of Fiscal 2000. While the segment was able to enjoy modest price increases on
some of its products and services, the increased sales in Fiscal 2000 were
primarily attributable to increased volumes. Parts, equipment, and service sales
and profitability all showed a positive trend throughout the year. During Fiscal
2000, the Company added approximately 200 service technicians to promote organic
growth. Power Products segment management continues to focus on business process
improvement and reducing administrative expenses in an effort to improve its
operating profit, and to further reduce its working capital.
The Distributed Energy Solutions segment reported sales of $46 million and an
operating loss of $4 million in Fiscal 2000. This segment was not in existence
in Fiscal 1999 and the results of any activities of a similar nature are
included in the results of the Power Products segment. The operating loss in
Fiscal 2000 was due to higher operating costs associated with startup of this
segment compared to sales at a volume below that required to achieve break even
in this segment.
The Tactical Vehicle Systems segment, which manufactures tactical vehicles for
the U.S. Army and others, recorded sales for Fiscal 2000 of $304 million versus
$151 million a year ago. Total year operating profit for Fiscal 2000 was $54
million, which compared favorably with $30 million a year ago.
The Tactical Vehicle Systems segment experienced significantly improved results
for Fiscal 2000 versus Fiscal 1999, as sales almost doubled. The increase in
sales was primarily the result of an increase in the volume of products sold.
The segment shipped approximately 1,500 trucks during Fiscal 2000.
The Petroleum Equipment segment manufactures equipment for oil and gas
exploration, production, and well stimulation industries. Sales in this segment
totaled $58 million for Fiscal 2000 compared to $27 million last year. The
segment reported a $4 million operating profit in Fiscal 2000 and a $2 million
operating loss in Fiscal 1999. The order backlog at the end of Fiscal 2000
totaled $55 million, well above the $17 million at 1999 fiscal year-end.
While the Petroleum Equipment segment was able to enjoy modest price increases
on some of its products and services, the increased operating profit in Fiscal
2000 were primarily attributable to increased volumes. During the first half of
the year, while the markets for its products were comparatively soft, the
Company was not able to fully utilize its infrastructure and absorbed its fixed
costs over a relatively low volume of sales. Later in the year, as demand
rapidly increased, the segment incurred a substantial amount of overtime
expense, as the tight labor markets did not allow the Company to increase
staffing to optimal levels.
The Airline Products segment manufactures airline ground support products,
mobile railcar movers, and snow blowers. Sales for Fiscal 2000 were $110 million
versus $105 million the previous year. Operating losses were reported for both
years: $7 million in Fiscal 2000 and $4 million in Fiscal 1999 and results for
Fiscal 2000 included $4.3 million in inventory write downs. The continuing
disappointing performance in Airline Products results principally from
production and inventory process issues, and to a lesser extent, softness in
demand from airline customers. The Company's management has made the restoration
of profitability to this segment a high priority. Furthermore, a shift in the
industry to electric propulsion products and the growth of regional airlines
that require smaller foot print products could provide the Company with an
opportunity to better serve those markets. However, the airline industry
continues to experience increased fuel expenses and reduced travel spending by
its customers due to a general softening of the U.S. economy. These factors
could result in lower industry profits, which could impact the available
business for the Company's ground support products.
15
Other business activities not identified in a specific segment include
predominantly gas compression equipment sales. Fiscal 2000 sales were $26
million versus $38 million in Fiscal 1999. Operating profit for the year totaled
$3 million and included a $6 million gain on sale of the gas compression
equipment leasing business. An operating loss of $2 million was reported in
Fiscal 1999.
RECOVERY OF COSTS INCURRED, NET
- --------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
- --------------------------------------------------------------------------------
Recovery of costs incurred, net $(39,000) $ -- $ --
In Fiscal 1998, the Company filed a certified claim with the U.S. government
seeking recovery of costs incurred by the Company resulting from a delay of over
eight months from the original production plan in the first multi-year FMTV
contract. The U.S. Army and the Company reached resolution in April 2001 through
the alternative dispute resolution process managed by the Armed Services Board
of Contract Appeals, and the Company received payment of $22 million in July
2001.
The U.S. Army directed the Company to make certain changes in drive train
components of all vehicles produced under the first FMTV contract. The Company
commenced the installation of the directed changes during Fiscal 1999 and
completed the changes during Fiscal 2000. The financial responsibility for the
cost of the drive train change has been resolved through an alternate dispute
resolution proceeding and the U.S. Army paid $18 million to the Company in
December 2001.
Expenses of $1.5 million related to the recoveries were offset against the
payments received from the U.S. Army.
PERIOD EXPENSES
- --------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
- --------------------------------------------------------------------------------
Selling and administrative
expenses 148,757 120,482 100,680
Interest expense 5,400 8,108 9,042
Other income, net (6,887) (12,748) (7,297)
--------- --------- ---------
Net period expenses
$ 147,270 $ 115,842 $ 102,425
========= ========= =========
Net period expenses as a
percentage of sales 11.1% 10.4% 11.9%
16
NET PERIOD EXPENSES
Period expenses for Fiscal 2001 totaled $147 million, or 11.1% of sales compared
with $116 million, or 10.4% of sales in Fiscal 2000 and $102 million, or 11.9%
of sales in Fiscal 1999.
Selling and administrative expenses for Fiscal year 2001, 2000, and 1999 totaled
$149 million, $120 million, and $101 million, respectively. The $28 million
increase during Fiscal 2001 included an $8.0 million increase in management
information systems expenses, $6.1 million in restructuring expenses, $4.6
million in timing differences of various one-time balance sheet adjustments
($2.9 million of credits in Fiscal 2000 versus a $1.7 million expense in Fiscal
2001), and $9.6 million in higher costs due to inflation and increased business
activity. The $20 million increase for 1999 to 2000 includes a $7 million
writeoff of an uncollectible receivable as well as increased salary and benefits
expense.
Interest expense declined during Fiscal 2001 due to debt reductions and
capitalization of $0.6 million of interest on major capital projects.
Other income included interest income of $3.4 million and a $1.7 million
insurance recovery of damages from insurance carriers related to prior year
claims in the fourth quarter in Fiscal 2001. Other income, net, for Fiscal 2000
included a $5.6 million gain on sale of the gas compression business.
DISCONTINUED OPERATIONS
NET EARNINGS (LOSS)
- -------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Net earnings (loss) from discontinued operations $(2,493) $ (368) $ 1,509
Gain (loss) on disposal of discontinued operations, (628) 565 6,879
net of tax
------- ------- -------
Net earnings (loss) $(3,121) $ 197 $ 8,388
======= ======= =======
As previously noted, the Company recently announced its intention to sell the
Petroleum Equipment segment's blowout preventer and controls, valve, and
drilling riser business, and as a result, these activities were reclassified for
reporting purposes for all periods shown as discontinued operations. Net losses
for these discontinued operations for Fiscal 2001 and 2000 were $2.5 million and
$0.4 million, respectively while net earnings in Fiscal 1999 were $1.5 million.
Included in the net loss for Fiscal 2001 were higher costs associated with
certain contracts, higher operating expenses related to facility leases in the
United Kingdom, and cost associated with inventory valuation.
During the fourth quarter of Fiscal 1999, the Company disposed of an
investment and certain obligations relating to a power generation facility in
Argentina associated with the previously discontinued gas turbine operations
resulting in a $0.6 million and $7 million, net of tax gain in Fiscal 2000
and 1999, respectively. Accordingly, the gain has been reflected as a gain on
disposal of discontinued operations.
17
FINANCIAL CONDITION
WORKING CAPITAL
- ----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) January 31, 2002 January 31, 2001
- ----------------------------------------------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 81,438 $110,174
Accounts and notes receivable, net 166,123 156,787
Recoverable costs and accrued profits not yet billed -- 11,829
Inventories 188,168 162,407
Income tax receivable 13,262 5,586
Deferred income tax asset 16,488 10,428
Other current assets 3,753 1,348
Total assets of discontinued operations 40,693 57,130
-------- --------
Total Current Assets 509,925 515,689
-------- --------
Current Liabilities
Notes payable 3,114 12,611
Accounts payable 71,270 60,354
Accrued payrolls and incentives 19,402 20,024
Income tax liabilities 1,394 1,962
Current portion of long-term debt 250 20,437
Billings in excess of cost 39,874 30,638
Other current liabilities 21,577 33,870
Total liabilities of discontinued operations 8,078 8,548
-------- --------
Total Current Liabilities 164,959 188,444
-------- --------
Working Capital $344,966 $327,245
======== ========
Current Ratio 3.09 2.74
During Fiscal 2001, current assets decreased by $6 million or 1%. Cash and cash
equivalents decreased $29 million due to $50 million in cash from operations
generated during Fiscal 2001 offset by $45 million in usage on investing
activities and $34 million in usage on financing activities. See Liquidity and
Capital Resources section below for further discussion. Accounts and notes
receivable increased $9 million due to timing of receipts from the U.S.
government, retention on certain turnkey projects, and other timing of
collections. Recoverable costs and profits not yet billed decreased as
significant contracts in the Petroleum Equipment segment, accounted for on the
percentage of completion method, were completed and billed. Inventories
increased $26 million, principally in the Distributed Energy Solutions segment.
Income tax assets increased due to estimated tax payments made prior to
realization of lower than expected earnings in the Fiscal Fourth Quarter 2001.
Assets of discontinued operations decreased primarily due to lower accounts
receivable and inventory balances.
Current liabilities decreased by $24 million during Fiscal 2001 principally due
to a $30 million reduction of notes payable and the current portion of long term
debt and $12 million lower other current liabilities due to payment against
various reserves established in prior periods for warranty, royalty, and other
liabilities. These decreases were offset by $11 million higher accounts payable
and $9 million in billings in excess of cost due to timing of receipts from the
U.S. Government.
The net change in current assets and current liabilities resulted in the current
ratio improving to 3.09 as of the end of Fiscal 2001 compared to 2.74 at the end
of Fiscal 2000.
18
LONG LIVED ASSETS
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) January 31, 2002 January 31, 2001
- ----------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net (excluding revenue $100,309 $ 84,886
earning assets)
Revenue earning assets, net 19,348 18,334
Deferred income tax asset 3,237 840
Investments and other assets 16,236 19,113
-------- --------
$139,130 $123,173
======== ========
Long-lived assets increased by $16 million during Fiscal 2001, principally as a
result of expenditures for property, plant and equipment. These expenditures
included a new facility in Dallas, Texas in the Power Products segment and a new
fabrication facility in the Tactical Vehicle Systems segment.
CAPITAL STRUCTURE
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) January 31, 2002 January 31, 2001
Amount Percentage Amount Percentage
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt (excluding current portion) $ 56,600 11.7% $ 66,327 14.7%
Other long-term liabilities excluding long-term debt 36,265 7.5 23,507 5.2
Shareholders' equity 391,231 80.8 360,584 80.1
-------- ----- -------- -----
$484,096 100.0% $450,418 100.0%
======== ===== ======== =====
The Company's capital structure consists primarily of Shareholders' equity and
Long-term debt. The capital structure increased by $34 million during Fiscal
2001, primarily due to net earnings of $42 million, partially offset by
dividends of $10 million and a reduction of long-term debt. Other long-term
liabilities increased $13 million due to higher accrued postretirement benefits
and pension liability as a result of lower investment returns and certain
discount rate assumptions used in the calculation of the liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of cash liquidity included cash and cash equivalents, cash
from operations, amounts available under credit facilities, and other external
sources of funds. The Company believes that these sources are sufficient to fund
the current requirements of working capital, capital expenditures, dividends,
and other financial commitments. The Company has in place an unsecured revolving
debt facility that could provide up to approximately $144 million, net of $6
million outstanding under a $25 million letter of credit sub facility, all of
which was available for the Company's use at the end of Fiscal 2001. This
revolving facility matures during Fiscal 2004. In addition, the Company has $55
million in senior notes outstanding. The senior notes are unsecured and were
issued pursuant to an agreement containing a covenant which imposes a debt to
total capitalization requirement. For additional information, see Note 9 to the
Financial Statements, "Debt Arrangements."
The Company has additional banking relationships which provide uncommitted
borrowing arrangements. In the event that any acquisition of additional
operations, growth in existing operations, settlements of lawsuits or disputes,
changes in inventory levels, accounts receivable, tax payments, or other working
capital items create a permanent need for working capital or capital
expenditures in excess of the existing cash and cash equivalents and committed
lines of credit, the Company may seek to borrow under other long-term financing
instruments or seek additional equity capital.
19
The following table summarizes the Company's cash flows from operating,
investing, and financing activities as reflected in the Consolidated Statements
of Cash Flows.
SUMMARIZED CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in):
Operating activities $ 50,313 $ 97,025 $ 89,493
Investing activities (44,787) 22,868 (23,152)
Financing activities (34,262) (21,430) (67,415)
-------- -------- --------
$(28,736) $ 98,463 $ (1,074)
======== ======== ========
20
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Net earnings from continuing operations $ 45,344 $ 35,157 $ 15,942
Depreciation and amortization 22,275 20,790 21,834
Gain on sale of business assets (528) (5,649) (5,804)
Deferred taxes (4,058) (3,160) (34)
Change in operating assets and liabilities, net (25,567) 60,916 45,404
--------- --------- ---------
Net cash provided by continuing operations 37,466 108,054 77,342
Net cash provided by (used in) discontinued operations 12,847 (11,029) 12,151
--------- --------- ---------
Net cash provided by operating activities $ 50,313 $ 97,025 $ 89,493
========= ========= =========
Net cash provided by continuing operations in Fiscal 2001 was $37 million. Net
earnings from continuing operations provided $45 million of net cash before
adding back $22 million in depreciation. The $26 million usage from the change
in operating assets and liabilities, net, was largely due to a $25 million
increase in inventories primarily in the Distributed Energy Solutions segment.
Net cash provided by continuing operations in Fiscal 2000 totaled $108 million.
Net earnings from continuing operations provided $35 million of net cash before
adding back $21 million in depreciation. Decreases in accounts and notes
receivable net of changes in recoverable costs not yet billed of $76 million
provided the primary additional source of cash from operations.
Net cash provided by continuing operations in Fiscal 1999 totaled $77 million
and included a $45 million change in net operating assets and liabilities
resulting primarily from the completion of the original FMTV contract and the
liquidation of inventories. Net cash provided by discontinued operations in
Fiscal 1999 was primarily related to certain discontinued operations of the
Petroleum Equipment segment.
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Expenditures for property, plant and equipment $(53,207) $(35,021) $(39,379)
Acquisition of businesses (1,225) -- (5,832)
Proceeds from sale of business assets 5,737 55,221 8,303
Disposal of property, plant and equipment 3,908 2,668 13,756
-------- -------- --------
Net cash provided by (used in) investing activities $(44,787) $ 22,868 $(23,152)
======== ======== ========
During Fiscal 2001, 2000, and 1999, the Company invested significant amounts of
cash in property, plant, and equipment to expand its existing business. Included
in Fiscal 2001 are expenditures for a new fabrication facility in the Tactical
Vehicle Systems segment, equipment and leasehold improvements related to a new
facility in Georgia for the Airline Products segment, and expenditures related
to a new facility in Dallas for the Power Products segment. Also included in
Fiscal 2001, 2000, and 1999 were $2.1 million, $5.2 million, and $3.0 million,
respectively for expenditures related to the Company's new enterprise resource
planning software and capitalizable implementation cost.
During Fiscal 2001, the Company received $5.7 million in cash associated with
the sale of its John Deere franchise and the final payment related to the sale
of its gas compression business in the prior year, both in the Power Products
segment. During Fiscal 2000, the Company received $55 million in cash associated
with the divestiture of its gas compression equipment leasing business.
Proceeds from sale of business assets in Fiscal 1999 totaled $8 million and
consisted of sale of investments in (1) GFI Control Systems, Inc., a
21
gaseous fuel injection joint venture located in Ontario, Canada ($4 million);
(2) Syracuse Orange Partners, L.P., a cogeneration facility located in Syracuse,
New York ($3 million); and (3) a facility in North Dakota ($1 million).
In Fiscal 2001, the Company's Tactical Vehicle segment acquired Extended Reach
Logistics, Inc., an e-commerce business for $1.2 million in cash plus additional
potential performance payments. Acquisitions of businesses in Fiscal 1999
consisted of the purchase of Thermo King of Northern California for
approximately $6 million.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
- --------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS) Fiscal Fiscal Fiscal
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Additions to long-term borrowings $ -- $ 29,238 $ 16,500
Payments on long-term borrowings (21,005) (29,233) (82,093)
Net short-term borrowings (payments) (9,498) (12,517) 7,792
Dividends paid (9,610) (9,521) (9,517)
Proceeds from exercise of stock options 5,851 603 (97)
-------- -------- --------
Net cash used in financing activities $(34,262) $(21,430) $(67,415)
======== ======== ========
During Fiscal 2001, the Company paid down $21 million of long-term borrowings of
which $20 million related to senior notes from a private placement in prior
fiscal periods. In Fiscal 2001, $9 million of short-term debt was also paid down
all of which was related to a financing arrangement for equipment inventory.
Payment of cash dividends on common stock totaled approximately $9.6 million
during Fiscal 2001, 2000, and 1999. There have been no changes in the dividends
per share during these years. The Company uses funds from operations, along with
borrowings, as necessary, to pay dividends. Proceeds from exercise of stock
options at Fiscal 2001 increased due to generally higher stock prices which
resulted in a level of greater stock option exercise.
During Fiscal 2001, the Company sold its interest in a partnership in which
the Company was a limited partner. This partnership was no longer
consolidated as of the end of Fiscal 2001. As of January 31, 2001, the
Company's long-term debt included approximately $9 million of non-recourse
debt associated with this partner.
22
CRITICAL ACCOUNTING POLICIES
The Company believes the following accounting policies represent those which
have the most impact on the significant judgments and estimates used in the
preparation of its consolidated financial statements.
Generally, revenue is recognized when contract terms are met, collectibility is
reasonably assured and a product is shipped or accepted by the customer, except
for certain equipment contracts, where revenue is recognized using the
percentage-of-completion method as required by Generally Accepted Accounting
Principles. The revenues of the Tactical Vehicle Systems segment are generally
recognized under the units-of-production method, whereby sales and cost of the
units produced under the Family of Medium Tactical Vehicle ("FMTV") contracts
are recognized as units are accepted by the U.S. Government. Cost of sales for
units accepted are based on actual unit cost. . Changes in estimates for
revenues, costs, and profits are recognized in the period in which they are
reasonably determinable using the cumulative catch-up method of accounting
applied on an annual basis. In certain cases, the estimated revenue values
include amounts expected to be realized from contract adjustments when recovery
of such amounts is probable. Any anticipated losses on contracts are charged in
full to operations in the period in which they are reasonably determinable.
From time to time, the Company assesses the valuation of its long-lived assets
for impairment. In so doing, it utilizes operating plans, budgets, and forecasts
and recognizes impairments when expected future cash flows associated with these
assets is less than book value.
The Company extends credit and credit enhancements to customers and other
parties in the normal course of business and management regularly reviews
outstanding receivables, and provides for estimated losses through an allowance
for doubtful accounts. Management makes judgments regarding the parties' ability
to make required payments, economic events, and other factors.
Inventories are generally stated at the lower of cost (using LIFO) or market
(determined on the basis of estimated realizable values), less related customer
deposits. Work in process costs include material, labor, and overhead. The
aggregate carrying values of these inventories are not in excess of their fair
values.
The Company maintains insurance coverage for various aspects of its business and
operations and retains a portion of losses that occur through the use of
deductibles and retentions under self-insurance programs. Management regularly
reviews estimates of reported and unreported claims and makes judgments as the
level of losses to provide for through insurance reserves. As claims develop and
additional information becomes available, adjustments to loss reserves may be
required.
Deferred tax assets and liabilities are recognized for differences between the
book basis and tax basis of the net assets of the Company. In providing for
deferred taxes, management considers current tax regulations, estimates of
future taxable income, and available tax planning strategies.
As revenue is recorded, expected warranty and performance guarantee costs are
accrued, based on both historical experience and contract terms. Should actual
product failure rates or repair costs differ from the Company's current
estimates, revisions to the estimated warranty liability would be required.
The Company accounts for its defined benefit pension plans in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 87, "Employers'
Accounting for Pensions" which requires that amounts recognized in the financial
statements be determined on an actuarial basis. A significant element in
determining the Company's pension income or expense in accordance with SFAS No.
87 is the expected return on plan assets and the discount rate for calculating
future liability. The assumed long-term rate of return on assets is applied to a
calculated value of plan assets which results in an estimated return on plan
assets that is included in current year pension income or expense.
ACCOUNTING DEVELOPMENTS
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." Both statements are
effective for the Company's Fiscal 2002, which begins on February 1, 2002. Under
these new rules, goodwill and intangible assets deemed to have indefinite lives
will no longer be amortized but will be subject to annual impairment tests.
Other identifiable intangible assets will continue to be amortized over their
useful lives.
The Company expects that it will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of Fiscal 2002.
During Fiscal 2001, the Company amortized approximately $0.7 million of
goodwill. Such amortization expense will cease beginning with the first quarter
of the Company's Fiscal 2002.
The Company expects to complete its impairment testing on remaining goodwill
during the first quarter of Fiscal 2002 and expects to recognize an impairment
of approximately $4 to $5 million as a result of this testing, subject to
continuing analysis. This charge will
23
be recorded as a cumulative effect of a change in accounting principle and is
primarily related to the goodwill associated with the Airline Products segment.
In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 144 also supersedes the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations Reporting the Effects of
Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 is intended to establish one
accounting model for long-lived assets to be disposed of by sale and to address
significant implementation issues of SFAS No. 121. The Company has adopted SFAS
144. Accordingly, the Company reported discontinued operations in connection
with the announced intended sale of certain businesses associated with the
Petroleum Equipment segment.
In September 2000, the Emerging Issues Task Force ("EITF") released abstract No.
00-10, "Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10
requires that shipping and handling costs billed to customers be recorded as
sales. Accordingly, the Company has restated its quarterly and annual sales and
cost of sales for Fiscal 2001 and 2000 and annual sales and cost of sales for
1999, 1998, and 1997 versus that which was originally reported.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting For Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts and
hedging activities. Effective February 1, 2001, the Company adopted SFAS No.
133. The adoption of SFAS No. 133 did not have a material effect on the
Company's results of operations or financial position.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition." This bulletin
provides guidance on the recognition, presentation, and disclosure of revenue in
financial statements. The bulletin is not intended to change existing
authoritative literature. The Company is in compliance with all such
authoritative literature described in SAB No. 101.
FACTORS THAT MAY AFFECT FUTURE RESULTS
CAUTIONARY STATEMENTS
Certain of the statements contained in this document, including those made under
the captions "Business," "Legal Proceedings," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," are
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Other than
statements of historical fact included herein, all statements herein, including
in particular, but not limited to, statements regarding potential future
products and markets, our future financial position or results of operations,
business strategy, other plans, and objectives for future operations, relating
to trends, expressing our belief, referring to expectations, referring to
backlogs as to future product deliveries, relating to long-term contracts in
progress or using the verbs "should," "could," "may," and verbs of similar
import and prospective focus, are forward-looking statements. We can give no
assurance that any forward-looking statement of ours will prove to have been
correct and such statements are not guarantees of future performance. They
involve certain risks, uncertainties, and assumptions that are difficult to
predict, and actual outcomes and results may differ materially from what is
expressed or forecasted or implied in such forward-looking statements. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Specific important factors that could cause actual results, performance, or
achievements to differ materially from our forward-looking statements, and that
otherwise may affect our operations, are identified below. All written and oral
forward-looking statements attributable to us or to persons acting on our behalf
are expressly qualified in their entirety by such factors.
o RISK OF COMPETITION. Our foreign and domestic competitors may use their
resources and product and service offerings to increase competition, both
in prices and products and services offered, and thereby reduce our
market shares and/or sales and profitability. Some of our existing and
potential competitors have substantially greater marketing, financial,
and technical resources than we have, and these resources may be used in
effective competition with us. We have assumed in our forward-looking
statements that we will continue to be a reasonably effective competitor
in our markets.
o RISKS RELATING TO TECHNOLOGY. Our business will suffer if we are unable
to keep up with rapid technological change and product development. Our
success will depend on our ability to anticipate changes in technology
and industry requirements and to respond to technological developments on
a timely basis, either internally or through strategic alliances. We will
likely be constantly threatened by current competitors or new market
entrants who may develop new technologies or products or establish new
standards that could render our products less marketable or obsolete.
Thus, we can offer no assurances that we will be successful in developing
and marketing, on a timely and cost effective basis, products or product
enhancements that respond to our competition, to technological
developments, to changing industry standards, and to market place
acceptability. We have assumed in our forward-looking statements that we
can reasonably keep pace with our competitors in technology changes and
product development.
24
o RISKS OF GENERAL ECONOMIC CONDITIONS. Our commercial operations are
cyclical and dependent for success on the general economic well-being of
the United States and certain other world markets. A general economic
downturn could adversely affect demand for our products and services.
Although the economy of the United States experienced one of its longest
periods of growth in recent years, the continued strength of the United
States economy cannot be assured. Notwithstanding that period of growth,
in 2001 there was a marked period of economic slowdown. Even though some
recent data is encouraging about the U.S. economy, there are still some
signs that we are in a period of a world economic slowdown. If the United
States or world economies fail to recover or decline, the demand for, and
price of, our products and services could be adversely affected, thus
adversely affecting our revenues and income. Further, other general
market conditions such as increased inflation and higher interest rates
could also adversely impact our revenues and results of operations. In
our forward-looking statements we have assumed that a worldwide recession
or material downturn in the United States economy, to the extent they may
exist at present, will not continue or worsen and that we are not
entering a new and significant down-cycle in our markets or a period of
significantly increasing inflation and interest rates.
o RISKS OF OIL AND GAS INDUSTRY ECONOMIC CONDITIONS. Our Petroleum
Equipment segment, as well as certain aspects of our Power Products and
Distributed Energy Solutions segments, are closely tied to the oil and
gas industry in general and, in particular, to capital expenditures by
oil and gas companies and companies providing services and manufactured
products to the oil and gas industry. Capital expenditures by oil and gas
companies have tended in the past to follow trends in the price of oil
and natural gas, which have fluctuated widely in recent years and which
were somewhat depressed (particularly for natural gas) in Fiscal 2001. A
sustained period of substantially reduced capital expenditures by oil and
gas companies and oil and gas service and manufacturing companies, as we
have experienced in the most recent year and also in some other recent
years, will likely lead to a drop in demand for products and services in
our Petroleum Equipment segment as well as in our Distributed Energy
Solutions and Power Products segments, which also provide products and
services used in connection with the exploration for and production of
oil and gas. Any such drop will have an adverse effect on our results of
operations and cash flow during the affected period, as it did during
Fiscal 2001. There are some recent modest signs of recovery in the oil
and gas industry, and we have assumed in our forward-looking statements
that economic conditions in such industry will stabilize at least at
present levels or improve and that capital expenditures in the industry
will not continue to be unduly restrained in future periods.
o RISKS OF AIRLINE INDUSTRY ECONOMIC CONDITIONS. Our Airline Products
segment is highly dependent upon the economic well-being of the airline
industry and was adversely affected in 2001 by serious difficulties in
that industry, including difficulties arising following the terrorist
attacks on the U.S. in September, 2001. Capital and other general
expenditures by airline companies are the principal source for demand for
the products of our Airline Products segment. Should there be a sustained
period of substantially reduced capital expenditures by airline companies
and other companies that cater to the airline industry, the demand for
our products in our Airline Products segment will drop and there will
likely be an adverse effect on our results of operations and cash flow
during the affected period, as there was in 2001. In our forward-looking
statements we continue to be cautious as to the recovery of economic
conditions in the airline and related industries and do not anticipate
quick and/or complete recovery.
o RISKS AS TO TERRORIST ATTACKS ON THE U.S. AND THEIR IMPACT ON THE U.S.
Economy. While we are not yet able to evaluate fully the ongoing impacts
of the recent terrorist attacks on the U.S. (which appear to have
coincided with or contributed to a general downturn in the U.S. economy),
or the threat of further such incidents, such circumstances may continue
to adversely affect our business in ways that we cannot yet identify.
However, both the past attacks and threats of future ones may adversely
affect the demand for our products and services generally in addition to
their specific impact on our segments that serve the oil and gas and
airline industries. Our forward-looking statements at present assume no
further material impacts of such circumstances on the U.S. or further
deterioration on our affected business.
o RISKS RELATING TO PERSONNEL. Labor shortages and our inability to recruit
and retain key employees and workers could limit our operations and
increase our labor costs and, in turn, adversely affect our results of
operations. Our manufacturing and service operations are substantially
dependent upon our ability to recruit and retain key managers and
qualified machinists, mechanics, factory workers, and other laborers.
While there are some signs that the U.S. and world economies are
strengthening and labor markets improving, there continued to be a strong
labor market in the U.S. in general even during the slower periods of
2001. A strong labor market can adversely impact us by limiting our
manufacturing capacity or resulting in significantly increased wages and
other benefits to attract additional key employees and workers. We have
assumed in our forward-looking statements that we will continue to be
able to recruit and retain necessary personnel at overall costs that are
comparable with our ability to produce revenues.
o RISKS OF DEPENDENCE ON GOVERNMENT. Because the U.S. government is one of
our key customers, decreased government spending or termination of
significant government programs could adversely affect our business. Our
Tactical Vehicle Systems segment depends largely on U.S. Government
expenditures. In recent years, government contracts in such segment have
accounted for substantial percentages of our annual revenues and
operating income. We are currently in production year four of our second
multi-year contract with the U.S. Department of the Army ("U.S. Army")
for production of the Family of Medium Tactical Vehicles ("FMTV"). The
U.S. Army exercised an option to award a fifth program year to the
current contract, which begins in October 2002 and is expected to be
completed by September 2003. The U.S. Army holds an additional option to
award a sixth program year that, if exercised by the U.S. Army, could
extend production of the FMTV through September 2004. The funding of the
new FMTV contract is subject to the inherent uncertainties of
Congressional appropriations. As is typical of multi-year defense
contracts that may be canceled or adjusted by the government, the FMTV
25
contract must be funded annually by the U.S. Department of the Army and
may be terminated at any time for the convenience of the government. As
of January 31, 2002, funding in the amount of approximately $1.5 billion
for the FMTV contract had been authorized and appropriated by the U.S.
Congress. If the FMTV contract is terminated, other than for our default
(in which event there could be serious adverse consequences and claims
against us), the contract includes a provision under which we will be
reimbursed for certain allowable costs but not necessarily for all costs.
As our current contract with the U.S. Army for production of the FMTV is
nearing completion, it will be necessary for us to secure additional
contracts for us to have continued success in this segment. We have been
awarded a contract under the first phase of the competitive bid process
for the next multi-year contract for production of the FMTV and are
currently competing for the final award. The U.S. Army is scheduled to
make its decision as to the final award of the next multi-year contract
during our first quarter of Fiscal 2003. The U.S. Army will determine the
award by a competitive bid process, and there can be no assurance that we
will be successful in such regard or that our competitor will not be more
successful than we will be in this or coming bids and awards for tactical
vehicles. Even if we do receive the award, there can be no assurance that
operating margins will be at the same level as the existing FMTV
contract. Moreover, there can be no assurance as to whether future
governmental spending will adequately support our business in this area,
and substantial decreases in government spending, the loss of the U.S.
government as a customer or the cancellation of key significant
government programs could materially and adversely affect our operations.
Even if government spending in general continues at current levels, we
are not assured that we can compete effectively as to the receipt of
specific government orders and contract awards or as to the timing
thereof. In our forward-looking statements, we have assumed that we will
continue to have satisfactory benefits from our government contracting
business.
o INHERENT RISKS OF GOVERNMENT CONTRACTS. Government contracts present us
with numerous special risks that are inherent in their nature and that
could adversely affect our operations. Government contracts are often
relatively large in our business. Major contracts for military systems
are performed over extended periods of time and are subject to changes in
scope of work and delivery schedules. Pricing negotiations on changes and
settlement of claims often extend over prolonged periods of time. Whether
we are able to obtain ultimate profitability on military contracts that
we may receive often depends on the eventual outcome of an equitable
settlement of contractual issues with the U.S. Government, and, due to
uncertainties inherent in the estimation and claim negotiation process,
no assurances can be given that our estimate