Attached files
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EX-31.1 - CERTIFICATION - Stewart & Stevenson LLC | exh31-1.htm |
EX-31.1 - CERTIFICATION - Stewart & Stevenson LLC | exh32-1.htm |
EX-10.1 - SUPPLEMENTAL INDENTURE - Stewart & Stevenson LLC | exh10-1.htm |
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
þ
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended May 1, 2010
or
¨
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from ______________ to _________________
Commission File Number 001-33836
Stewart & Stevenson LLC
(Exact name of registrant as specified in its charter)
Delaware
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20-3974034
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification Number)
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1000 Louisiana St., Suite 5900, Houston, TX
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77002
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(Address of Principal Executive Offices)
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(Zip Code)
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(713) 751-2700
(Registrant’s telephone number including area code)
None
(Former name, former address, and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or if 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 þ * No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or if such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):
Large accelerated ¨ Accelerated filer ¨ Non-accelerated filer þ Smaller reporting company filer ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2)Yes ¨ No þ
There is no market for the registrant’s equity. As of June 10, 2010, there were 100,005,000 common units outstanding.
* The registrant is currently not required to file reports, including this report, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 but is voluntarily filing this report with the Securities and Exchange Commission.
1
STEWART & STEVENSON LLC AND SUBSIDIARIES
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Part I.
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Financial Information
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Page
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Item 1.
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Financial Statements
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3
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4
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5
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6
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Item 2.
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17
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Item 3.
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22
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Item 4.
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22
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Part II.
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Other Information
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Item 1.
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23
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Item 1A.
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23
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Item 2.
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23
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Item 3.
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23
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Item 4.
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24
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Item 5.
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24
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Item 6.
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24
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PART I. Financial Information
Item 1. Financial Statements
Stewart & Stevenson LLC and Subsidiaries
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Condensed Consolidated Balance Sheets
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May 1, 2010
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January 31, 2010
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(In thousands, except units)
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(Unaudited)
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Current assets:
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Cash and cash equivalents
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$ | 4,619 | $ | 3,321 | |||
Restricted cash
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3,000 | 3,000 | |||||
Accounts receivable, net
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74,071 | 81,626 | |||||
Recoverable costs and accrued profits not yet billed
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36,525 | 38,042 | |||||
Inventories, net
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277,951 | 248,313 | |||||
Other current assets
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8,896 | 7,626 | |||||
Total current assets
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405,062 | 381,928 | |||||
Property, plant and equipment, net
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79,488 | 79,206 | |||||
Goodwill and intangibles, net
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47,943 | 46,616 | |||||
Deferred financing costs and other assets
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6,429 | 6,775 | |||||
Total assets
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$ | 538,922 | $ | 514,525 | |||
Liabilities and shareholders' equity
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Current liabilities:
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Bank notes payable
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$ | 8,088 | $ | 7,122 | |||
Current portion of long-term debt
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39 | 65 | |||||
Accounts payable
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64,287 | 52,994 | |||||
Accrued payrolls and incentives
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7,859 | 8,714 | |||||
Billings in excess of incurred costs
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495 | 115 | |||||
Customer deposits
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42,826 | 26,307 | |||||
Other current liabilities
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39,408 | 41,126 | |||||
Total current liabilities
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163,002 | 136,443 | |||||
Long-term debt, net of current portion
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221,138 | 220,926 | |||||
Other long-term liabilities
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1,661 | 1,534 | |||||
Total liabilities
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385,801 | 358,903 | |||||
Commitments and contingencies
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Shareholders' equity:
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Common units, 100,005,000 units issued and outstanding
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74,113 | 74,113 | |||||
Accumulated other comprehensive income
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3,822 | 1,383 | |||||
Retained earnings
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75,186 | 80,126 | |||||
Total shareholders' equity
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153,121 | 155,622 | |||||
Total liabilities and shareholders' equity
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$ | 538,922 | $ | 514,525 | |||
See accompanying Notes to Condensed Consolidated Financial Statements
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Stewart & Stevenson LLC and Subsidiaries
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Condensed Consolidated Statements of Operations
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(Unaudited)
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For the Three Months Ended
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May 1, 2010
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May 2, 2009
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(In thousands, except per unit data)
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$ | 161,936 | $ | 190,128 | |||||
Cost of sales
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136,257 | 151,232 | ||||||
Gross profit
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25,679 | 38,896 | ||||||
Selling and administrative expenses
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24,875 | 31,054 | ||||||
Other expense (income), net
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46 | (1,163 | ) | |||||
Operating profit
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758 | 9,005 | ||||||
Interest expense, net
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4,973 | 5,205 | ||||||
(Loss) earnings before income taxes
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(4,215 | ) | 3,800 | |||||
Income tax expense
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484 | 90 | ||||||
Net (loss) earnings available for common unit holders
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$ | (4,699 | ) | $ | 3,710 | |||
Weighted average units outstanding:
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Basic
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100,005 | 100,005 | ||||||
Diluted
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100,005 | 100,005 | ||||||
Net (loss) earnings available for common unit holders per common unit
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Basic
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$ | (0.05 | ) | $ | 0.04 | |||
Diluted
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$ | (0.05 | ) | $ | 0.04 | |||
See accompanying Notes to Condensed Consolidated Financial Statements
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Condensed Consolidated Statements of Cash Flows
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(Unaudited)
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For the Three Months Ended
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May 1, 2010
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May 2, 2009
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(In thousands)
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Net (loss) earnings
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$ | (4,699 | ) | $ | 3,710 | |||
Adjustments to reconcile net (loss) earnings to net cash
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provided by (used in) operating activities:
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Amortization of deferred financing costs
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441 | 503 | ||||||
Depreciation and amortization
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4,179 | 4,510 | ||||||
Change in operating assets and liabilities:
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Accounts receivable, net
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9,647 | 27,931 | ||||||
Recoverable costs and accrued profits not yet billed
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1,524 | (8,058 | ) | |||||
Inventories, net
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(28,563 | ) | (11,999 | ) | ||||
Accounts payable
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11,159 | (24,429 | ) | |||||
Accrued payrolls and incentives
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(782 | ) | (1,867 | ) | ||||
Billings in excess of incurred costs
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380 | 342 | ||||||
Customer deposits
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14,656 | (6,264 | ) | |||||
Other current assets and liabilities
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(3,164 | ) | 3,554 | |||||
Other, net
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(349 | ) | 915 | |||||
Net cash provided by (used in) operating activities
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4,429 | (11,152 | ) | |||||
Investing activities
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Capital expenditures
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(407 | ) | (1,326 | ) | ||||
Additions to rental equipment
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(3,585 | ) | (930 | ) | ||||
Disposal of property, plant and equipment, net
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18 | - | ||||||
Net cash used in investing activities
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(3,974 | ) | (2,256 | ) | ||||
Financing activities
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Change in short-term notes payable
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885 | 161 | ||||||
Deferred financing costs
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- | (375 | ) | |||||
Change in long-term revolving loans
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180 | 17,563 | ||||||
Distributions to shareholders for tax obligations
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(241 | ) | (3,473 | ) | ||||
Net cash provided by financing activities
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824 | 13,876 | ||||||
Effect of exchange rate on cash
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19 | (818 | ) | |||||
Increase (decrease) in cash and cash equivalents
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1,298 | (350 | ) | |||||
Cash and cash equivalents, beginning of fiscal period
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3,321 | 2,006 | ||||||
Cash and cash equivalents, end of fiscal period
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$ | 4,619 | $ | 1,656 | ||||
Cash paid for:
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Interest
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$ | 826 | $ | 1,135 | ||||
Income taxes
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$ | 162 | $ | (9 | ) | |||
See accompanying Notes to Condensed Consolidated Financial Statements
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Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Stewart & Stevenson LLC, headquartered in Houston, Texas, was formed for the purpose of acquiring from Stewart & Stevenson Services, Inc. and its affiliates on January 23, 2006 substantially all of their equipment, aftermarket parts and service and rental businesses that primarily served the oil and gas industry. Unless otherwise indicated or the context otherwise requires, the terms “Stewart & Stevenson,” the “Company,” “we,” “our” and “us” refer to Stewart & Stevenson LLC and its subsidiaries.
We are a leading designer, manufacturer and marketer of specialized equipment and provide aftermarket parts and service to the oil and gas and other industries. Our diversified product lines include equipment for well stimulation, well servicing and workover rigs, drilling rigs, coiled tubing, cementing, nitrogen pumping, power generation and electrical systems as well as engines, transmissions and material handling equipment. We have a substantial installed base of equipment, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues and also provide rental equipment to our customers.
Note 2. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X for interim financial statements and do not include all information and footnotes required by United States (“U.S.”) generally accepted accounting principles (“GAAP”) for complete financial statements. However, the information furnished herein reflects all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the three months ended May 1, 2010 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2011. These condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K and the notes thereto for the year ended January 31, 2010.
Use of Estimates and Assumptions: The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from these estimates.
Fiscal Year: Our fiscal year begins on February 1 of the year stated and ends on January 31 of the following year. For example, our “Fiscal 2010” commenced on February 1, 2010 and will end on January 31, 2011. We report results on the fiscal quarter method with each quarter comprising approximately 13 weeks. The first quarter of Fiscal 2010 commenced on February 1, 2010 and ended on May 1, 2010.
Consolidation: The consolidated financial statements include the accounts of Stewart & Stevenson LLC and all enterprises in which we have a controlling interest. All intercompany accounts and transactions have been eliminated. We do not have any variable-interest entities.
6
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Note 3. Comprehensive Income
Total comprehensive income was as follows:
For the Three Months Ended
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May 1, 2010
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May 2, 2009
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(In thousands)
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Net (loss) earnings
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$ | (4,699 | ) | $ | 3,710 | ||
Currency translation gain
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2,439 | 1,645 | |||||
Comprehensive (loss) income
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$ | (2,260 | ) | $ | 5,355 |
Translation adjustments resulting from changes in exchange rates are reported in other comprehensive income. As of May 1, 2010, and May 2, 2009, the entire accumulated other comprehensive gain (loss) balance consisted of currency translation adjustments. Foreign currency transaction exchange gains (losses) are recorded in other expense (income), net in the consolidated statements of operations and were a loss of $0.1 million during the period ended May 1, 2010 and a $0.5 million gain during the period ended May 2, 2009.
On January 10, 2010, the Venezuelan Government devalued its currency from 2.15 Bolivars per U.S. dollar to 4.30 Bolivars per U.S. dollar (“the official rate”) and the Venezuelan economy has since been designated as hyperinflationary. The Company has historically utilized the official rate for its Venezuelan operations and will continue to monitor future developments as they may relate to the impact from hyperinflationary currency fluctuations. As such, the Company used the official rate to translate its Venezuelan subsidiary’s financial statements in prior years.
Beginning February 1, 2010, the Company utilizes the U.S. dollar as the functional currency for its Venezuelan subsidiary and remeasures its financial statements into U.S. dollars at the official rate. Accordingly, using “hyperinflationary accounting,” it recognizes the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations. During the three months ended May 1, 2010, the official rate for Venezuela did not fluctuate significantly. As a result, the effect of remeasuring our Venezuelan subsidiary was insignificant.
Note 4. Segment Data
Our reportable operating segments are based on the types of products and services offered and are aligned with our internal management structure. Intra-segment revenues and costs are eliminated, and the operating profit (loss) represents the earnings (loss) before interest and income taxes.
Our reportable segments include:
Equipment – This segment designs, manufactures, constructs and markets equipment for well stimulation, coiled tubing, cementing, nitrogen pumping, power generation and electrical systems as well as workover rigs, drilling rigs, service rigs and related equipment, serving the oil and gas industry. This segment also sells engines, transmissions and material handling equipment for well servicing, workover, drilling, pumping and other applications for a wide range of other industries.
Aftermarket Parts and Service – This segment provides aftermarket parts and service for products manufactured by us, and others, to customers in the oil and gas industry as well as customers in the power generation, marine, mining, construction, commercial vehicle and material handling industries.
Rental – This segment provides equipment on a short-term rental basis, including generators, material handling equipment and air compressors, to a wide range of end-markets.
7
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Corporate – This segment includes administrative overhead normally not associated with the specific activities within the operating segments. Such expenses include legal, finance and accounting, internal audit, human resources, information technology and other similar corporate office costs.
Certain general and administrative costs which are incurred to support all operating segments are allocated to the segment operating results presented. Operating results by segment are as follows:
For the Three Months Ended
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May 1, 2010
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May 2, 2009
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(In thousands)
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Sales
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Equipment
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$ | 89,621 | $ | 106,247 | ||||
Aftermarket parts and service
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67,781 | 78,415 | ||||||
Rental
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4,534 | 5,466 | ||||||
Total sales
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$ | 161,936 | $ | 190,128 | ||||
Operating profit (loss)
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Equipment
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$ | 5,048 | $ | 6,784 | ||||
Aftermarket parts and service
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2,878 | 9,118 | ||||||
Rental
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(236 | ) | 628 | |||||
Corporate
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(6,932 | ) | (7,525 | ) | ||||
Total operating profit
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$ | 758 | $ | 9,005 | ||||
Operating profit percentage
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Equipment
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5.6 | % | 6.4 | % | ||||
Aftermarket parts and service
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4.2 | 11.6 | ||||||
Rental
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(5.2 | ) | 11.5 | |||||
Consolidated
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0.5 | % | 4.7 | % |
Note 5. Long-Term Debt
As of
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May 1, 2010
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January 31, 2010
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(In thousands)
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Other debt
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$ | 8,186 | $ | 7,243 | ||||
Revolving credit facility
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71,079 | 70,870 | ||||||
Unsecured senior notes
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150,000 | 150,000 | ||||||
Total
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229,265 | 228,113 | ||||||
Less: current portion of other debt
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(8,127 | ) | (7,187 | ) | ||||
Long-term debt, net of current portion
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$ | 221,138 | $ | 220,926 |
Other debt: Other debt includes certain secured loans within our South American operations, a floor plan financing agreement and other equipment loans. The restricted cash on our balance sheet relates to collateral securing certain of this debt.
8
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Revolving Credit Facility: The revolving credit facility is a $250.0 million asset-based facility, which matures in February 2012, and is secured by substantially all accounts receivable, inventory and property, plant and equipment and provides for borrowings at LIBOR plus a margin ranging from 1.25% to 2.00% per annum, based on our leverage ratios, as specified in the credit agreement. The revolving credit facility has a $25.0 million sub-facility to be used by our Canadian subsidiary. As of May 1, 2010, borrowings under the facility bear interest at LIBOR plus 1.5%, or 2.46%. A commitment fee of 0.30% to 0.375% per annum is payable on all unused portions of the revolving credit facility based on our leverage ratios. Interest payments are due monthly, or as LIBOR contracts expire. The revolving credit facility also has a $30.0 million sub-facility which may be used for letters of credit. The credit agreement limits available borrowings to certain percentages of our assets. As of May 1, 2010, there were $24.0 million of letters of credit outstanding. Based on the outstanding borrowings, letters of credit issued and the terms of the asset-based revolving credit facility, our available borrowing capacity was approximately $67.2 million at May 1, 2010.
Unsecured Senior Notes: The $150.0 million of unsecured senior notes bear interest at 10% per annum and mature in July 2014.
The revolving credit facility and the senior notes contain financial and operating covenants with which we must comply during the terms of the agreements. These covenants include the maintenance of certain financial ratios, restrictions related to the incurrence of certain indebtedness and investments, and prohibition of the creation of certain liens. We were in compliance with all covenants as of May 1, 2010. The financial covenant for the revolving credit facility requires that we maintain a fixed charge coverage ratio, as defined in the agreement, of at least 1.1 to 1.0; however, this covenant does not take effect until our available borrowing capacity is $30.0 million or less. The financial covenant for the senior notes indenture requires that, were we to incur additional indebtedness (subject to various exceptions set forth in the indenture), after giving effect to the incurrence of such additional indebtedness, we have a consolidated coverage ratio, as defined in the indenture, of at least 2.5 to 1.0.
We incurred and capitalized legal and financing costs associated with establishing the revolving credit facility and unsecured senior notes. These deferred financing costs are being amortized over the terms of the credit facility and senior notes of five years and eight years, respectively, as a component of interest expense, net in the consolidated statements of operations. As of May 1, 2010, $5.1 million of unamortized deferred financing costs are included in the balance sheet.
The estimated fair value of our senior notes is based on unadjusted quoted market prices from an active market (Level 1 inputs). At May 1, 2010, our senior notes with a carrying value of $150.0 million had a fair value of $144.0 million.
Guarantor entities: The senior notes were co-issued by Stewart & Stevenson LLC and Stewart & Stevenson Funding Corp. and are guaranteed by all of our subsidiaries except one domestic subsidiary, one subsidiary in Canada and two subsidiaries in South America. Stewart & Stevenson LLC and all of its subsidiaries except one domestic subsidiary, one subsidiary in Canada and two subsidiaries in South America are co-borrowers on the $250.0 million revolving credit facility.
The following condensed consolidated financial statements present separately the financial position, results of operations and cash flows of the co-issuers/guarantors (“Guarantor Entities”), and all non-guarantor subsidiaries of the Company (“Non-Guarantor Entities”) based on the equity method of accounting.
9
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
As of May 1, 2010
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(Unaudited)
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Guarantor Entities
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Non-Guarantor Entities
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Eliminations
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Consolidated Totals
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(In thousands) | |||||||||||||||
Current assets
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$ | 350,977 | $ | 54,085 | $ | - | $ | 405,062 | |||||||
Property, plant and equipment
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75,431 | 4,057 | - | 79,488 | |||||||||||
Other assets
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34,867 | 34,981 | (15,476 | ) | 54,372 | ||||||||||
Total assets
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$ | 461,275 | $ | 93,123 | $ | (15,476 | ) | $ | 538,922 | ||||||
Current liabilities
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$ | 136,043 | $ | 26,959 | $ | - | $ | 163,002 | |||||||
Intercompany payables (receivables)
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(49,367 | ) | 49,367 | - | - | ||||||||||
Long-term liabilities
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221,478 | 1,321 | - | 222,799 | |||||||||||
Shareholders' equity
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153,121 | 15,476 | (15,476 | ) | 153,121 | ||||||||||
Total liabilities and shareholders' equity
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$ | 461,275 | $ | 93,123 | $ | (15,476 | ) | $ | 538,922 | ||||||
As of January 31, 2010
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Guarantor Entities
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Non-Guarantor Entities
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Eliminations
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Consolidated Totals
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Current assets
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$ | 333,191 | $ | 48,737 | $ | - | $ | 381,928 | |||||||
Property, plant and equipment
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75,072 | 4,134 | - | 79,206 | |||||||||||
Other assets
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35,150 | 33,376 | (15,135 | ) | 53,391 | ||||||||||
Total assets
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$ | 443,413 | $ | 86,247 | $ | (15,135 | ) | $ | 514,525 | ||||||
Current liabilities
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$ | 113,997 | $ | 22,446 | $ | - | $ | 136,443 | |||||||
Intercompany payables (receivables)
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(47,474 | ) | 47,474 | - | - | ||||||||||
Long-term liabilities
|
221,268 | 1,192 | - | 222,460 | |||||||||||
Shareholders' equity
|
155,622 | 15,135 | (15,135 | ) | 155,622 | ||||||||||
Total liabilities and shareholders' equity
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$ | 443,413 | $ | 86,247 | $ | (15,135 | ) | $ | 514,525 |
10
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Condensed Consolidating Statements of Operations
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(Unaudited)
|
||||||||||||||||
For the Three Months Ended May 1, 2010
|
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Guarantor Entities
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Non-Guarantor Entities
|
Eliminations
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Consolidated Totals
|
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(In thousands) | ||||||||||||||||
Sales
|
$ | 144,061 | $ | 17,875 | $ | - | $ | 161,936 | ||||||||
Cost of sales
|
120,684 | 15,573 | - | 136,257 | ||||||||||||
Gross profit
|
23,377 | 2,302 | - | 25,679 | ||||||||||||
Selling and administrative expenses
|
21,809 | 3,066 | - | 24,875 | ||||||||||||
Equity in loss of subsidiaries
|
2,097 | - | (2,097 | ) | - | |||||||||||
Other expense (income), net
|
(381 | ) | 427 | - | 46 | |||||||||||
Operating (loss) profit
|
(148 | ) | (1,191 | ) | 2,097 | 758 | ||||||||||
Interest expense, net
|
4,254 | 719 | - | 4,973 | ||||||||||||
Loss before income taxes
|
(4,402 | ) | (1,910 | ) | 2,097 | (4,215 | ) | |||||||||
Income tax expense
|
297 | 187 | - | 484 | ||||||||||||
Net loss
|
$ | (4,699 | ) | $ | (2,097 | ) | $ | 2,097 | $ | (4,699 | ) | |||||
For the Three Months Ended May 2, 2009
|
||||||||||||||||
Guarantor Entities
|
Non-Guarantor Entities
|
Eliminations
|
Consolidated Totals
|
|||||||||||||
Sales
|
$ | 169,044 | $ | 21,084 | $ | - | $ | 190,128 | ||||||||
Cost of sales
|
134,170 | 17,062 | - | 151,232 | ||||||||||||
Gross profit
|
34,874 | 4,022 | - | 38,896 | ||||||||||||
Selling and administrative expenses
|
27,505 | 3,549 | - | 31,054 | ||||||||||||
Equity in loss of subsidiaries
|
664 | - | (664 | ) | - | |||||||||||
Other expense (income), net
|
(1,482 | ) | 319 | - | (1,163 | ) | ||||||||||
Operating profit
|
8,187 | 154 | 664 | 9,005 | ||||||||||||
Interest expense, net
|
4,576 | 629 | - | 5,205 | ||||||||||||
Earnings (loss) before income taxes
|
3,611 | (475 | ) | 664 | 3,800 | |||||||||||
Income tax expense (benefit)
|
(99 | ) | 189 | - | 90 | |||||||||||
Net earnings (loss)
|
$ | 3,710 | $ | (664 | ) | $ | 664 | $ | 3,710 |
11
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Condensed Consolidating Statements of Cash Flows
|
||||||||||||||||
(Unaudited)
|
||||||||||||||||
For the Three Months Ended May 1, 2010
|
||||||||||||||||
|
Guarantor Entities
|
Non-Guarantor Entities
|
Eliminations
|
Consolidated Totals
|
||||||||||||
(In thousands) | ||||||||||||||||
Net cash provided by (used in):
|
||||||||||||||||
Operating activities
|
||||||||||||||||
Net loss
|
$ | (4,699 | ) | $ | (2,097 | ) | $ | 2,097 | $ | (4,699 | ) | |||||
Equity in loss of subsidiaries
|
2,097 | - | (2,097 | ) | - | |||||||||||
Other adjustments
|
8,461 | 667 | - | 9,128 | ||||||||||||
Operating activities
|
5,859 | (1,430 | ) | - | 4,429 | |||||||||||
Investing activities
|
(3,946 | ) | (28 | ) | - | (3,974 | ) | |||||||||
Financing activities
|
(2,049 | ) | 2,873 | - | 824 | |||||||||||
Effect of exchange rate on cash
|
- | 19 | - | 19 | ||||||||||||
Net increase (decrease) in cash
|
(136 | ) | 1,434 | - | 1,298 | |||||||||||
Cash at the beginning of the period
|
248 | 3,073 | - | 3,321 | ||||||||||||
Cash at the end of the period
|
$ | 112 | $ | 4,507 | $ | - | $ | 4,619 | ||||||||
For the Three Months Ended May 2, 2009
|
||||||||||||||||
|
Guarantor Entities
|
Non-Guarantor Entities
|
Eliminations
|
Consolidated Totals
|
||||||||||||
Net cash provided by (used in):
|
||||||||||||||||
Operating activities
|
||||||||||||||||
Net earnings (loss)
|
$ | 3,710 | $ | (664 | ) | $ | 664 | $ | 3,710 | |||||||
Equity in loss of subsidiaries
|
664 | - | (664 | ) | - | |||||||||||
Other adjustments
|
(14,095 | ) | (767 | ) | - | (14,862 | ) | |||||||||
Operating activities
|
(9,721 | ) | (1,431 | ) | - | (11,152 | ) | |||||||||
Investing activities
|
(420 | ) | (1,836 | ) | - | (2,256 | ) | |||||||||
Financing activities
|
10,342 | 3,534 | - | 13,876 | ||||||||||||
Effect of exchange rate on cash
|
- | (818 | ) | - | (818 | ) | ||||||||||
Net increase (decrease) in cash
|
201 | (551 | ) | - | (350 | ) | ||||||||||
Cash at the beginning of the period
|
26 | 1,980 | - | 2,006 | ||||||||||||
Cash at the end of the period
|
$ | 227 | $ | 1,429 | $ | - | $ | 1,656 |
Note 6. Significant Balance Sheet Accounts
Allowance for Doubtful Accounts: Activity in the allowance for doubtful accounts was as follows:
For the Three Months Ended
|
||||||||
|
May 1, 2010
|
May 2, 2009
|
||||||
(In thousands) | ||||||||
Allowance for doubtful accounts at beginning of period
|
$ | 4,919 | $ | 3,599 | ||||
Accruals to bad debt expense
|
553 | 572 | ||||||
Writeoffs against allowance for doubtful accounts
|
(317 | ) | (367 | ) | ||||
Collections of previously reserved items
|
35 | 26 | ||||||
Allowance for doubtful accounts at end of period
|
$ | 5,190 | $ | 3,830 |
12
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Inventories, net: Summarized below are the components of inventories:
As of
|
|||||||
|
May 1, 2010
|
January 31, 2010
|
|||||
(In thousands) | |||||||
Inventory purchased under distributor agreements
|
$ | 108,925 | $ | 104,542 | |||
Raw materials and spare parts
|
95,434 | 93,017 | |||||
Work in process
|
67,438 | 34,481 | |||||
Finished goods
|
6,154 | 16,273 | |||||
Total inventories, net
|
$ | 277,951 | $ | 248,313 |
Raw materials and spare parts include OEM equipment and components used in the equipment segment. Finished goods include manufactured equipment that is essentially complete. The inventory balances above are net of inventory valuation allowances totaling $19.6 million and $20.4 million as of May 1, 2010 and January 31, 2010, respectively.
Property, Plant and Equipment, net: Components of property, plant and equipment, net, were as follows:
As of
|
||||||||
May 1, 2010
|
January 31, 2010
|
|||||||
(In thousands) | ||||||||
Machinery and equipment
|
$ | 28,043 | $ | 27,892 | ||||
Buildings and leasehold improvements
|
27,359 | 27,299 | ||||||
Rental equipment
|
62,313 | 60,655 | ||||||
Computer hardware and software
|
4,584 | 4,459 | ||||||
Accumulated depreciation
|
(52,068 | ) | (48,546 | ) | ||||
Net depreciable assets
|
$ | 70,231 | $ | 71,759 | ||||
Construction in progress
|
2,207 | 384 | ||||||
Land
|
7,050 | 7,063 | ||||||
Property, plant and equipment, net
|
$ | 79,488 | $ | 79,206 |
Depreciation expense was $3.8 million in the periods ending May 1, 2010 and May 2, 2009.
Intangible Assets and Goodwill: Amounts allocated to intangible assets are amortized on a straight-line basis over their estimated useful lives. Intangible asset values include the following:
As of May 1, 2010
|
||||||||||||||||||||
|
Estimated Useful Life
|
Gross Carrying Value
|
Accumulated Amortization
|
Currency Translation
|
Net
|
|||||||||||||||
(In thousands) | ||||||||||||||||||||
Non-current amortizable intangible assets:
|
||||||||||||||||||||
Engineering drawings
|
2.5-10 Years
|
$ | 6,346 | $ | (5,012 | ) | $ | 189 | $ | 1,523 | ||||||||||
Distribution contracts
|
27 Years
|
3,384 | (530 | ) | - | 2,854 | ||||||||||||||
Customer relationships
|
6-11 Years
|
7,409 | (2,510 | ) | 575 | 5,474 | ||||||||||||||
Patents
|
4 Years
|
209 | (187 | ) | - | 22 | ||||||||||||||
Non-compete covenant
|
5 Years
|
1,420 | (949 | ) | 101 | 572 | ||||||||||||||
Total
|
$ | 18,768 | $ | (9,188 | ) | $ | 865 | $ | 10,445 | |||||||||||
Indefinite-lived intangible assets:
|
||||||||||||||||||||
Trademarks
|
- | 9,150 | - | 319 | 9,469 | |||||||||||||||
Total
|
$ | 27,918 | $ | (9,188 | ) | $ | 1,184 | $ | 19,914 |
13
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
As of January 31, 2010
|
||||||||||||||||||||
|
Estimated Useful Life
|
Gross Carrying Value
|
Accumulated Amortization
|
Currency Translation
|
Net
|
|||||||||||||||
(In thousands) | ||||||||||||||||||||
Non-current amortizable intangible assets:
|
||||||||||||||||||||
Engineering drawings
|
2.5-10 Years
|
$ | 6,346 | $ | (4,947 | ) | $ | 189 | $ | 1,588 | ||||||||||
Distribution contracts
|
27 Years
|
3,384 | (499 | ) | - | 2,885 | ||||||||||||||
Customer relationships
|
6-11 Years
|
7,409 | (2,318 | ) | 380 | 5,471 | ||||||||||||||
Patents
|
4 Years
|
209 | (176 | ) | - | 33 | ||||||||||||||
Non-compete covenant
|
5 Years
|
1,420 | (871 | ) | 78 | 627 | ||||||||||||||
Total
|
$ | 18,768 | $ | (8,811 | ) | $ | 647 | $ | 10,604 | |||||||||||
Indefinite-lived intangible assets:
|
||||||||||||||||||||
Trademarks
|
- | 9,150 | - | 191 | 9,341 | |||||||||||||||
Total
|
$ | 27,918 | $ | (8,811 | ) | $ | 838 | $ | 19,945 |
Amortization expense was $0.4 million and $0.7 million in the periods ending May 1, 2010 and May 2, 2009, respectively.
The following table presents goodwill (relating entirely to the equipment segment) as of the dates indicated, as well as changes in the account during the period shown:
Amount
|
||||
(In thousands)
|
||||
Carrying amount as of January 31, 2010
|
$ | 26,671 | ||
Currency translation
|
1,358 | |||
Carrying amount as of May 1, 2010
|
$ | 28,029 |
Warranty Costs: We generally provide product and service warranties for periods of six months to 18 months. Based on historical experience and contract terms, we provide for the estimated cost of product and service warranties at the time of sale or, in some cases, when specific warranty problems are identified. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately may be resolved by negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond our historical experience. We provide for any such warranty issues as they become known and estimable.
A summary of activity for accrued warranty costs, recorded in other current liabilities on the consolidated balance sheets, was as follows:
For the Three Months Ended
|
||||||||
May 1, 2010
|
May 2, 2009
|
|||||||
(In thousands)
|
||||||||
Accrued warranty costs at beginning of period
|
$ | 4,398 | $ | 4,990 | ||||
Payments for warranty obligations
|
(706 | ) | (1,213 | ) | ||||
Warranty accrual for current period sales
|
269 | 1,341 | ||||||
Accrued warranty costs at end of period
|
$ | 3,961 | $ | 5,118 |
14
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Other current liabilities: Included in other current liabilities are $9.4 million and $15.6 million of accrued job costs as of May 1, 2010 and January 31, 2010, respectively. No other item comprises more than 5% of total current
liabilities as of these dates.
Derivative financial instruments A short-term foreign currency exchange rate derivative instrument was entered in January 2009 to manage our exposure to fluctuations in foreign currency exchange rates for certain contracts of our Canadian subsidiary that are not denominated in its functional currency. We obtained a valuation for this foreign currency derivative instrument from a third-party pricing model using observable inputs (Level 2). The estimated fair values of a derivative fluctuate over time and should be viewed in relation to the underlying transaction and the overall management of our exposure to fluctuations in the underlying risks. The fair value of this derivative as of May 2, 2009 was an asset of $0.5 million and is included in other current assets within our consolidated balance sheets. Hedge accounting for our foreign currency derivative was not pursued. Changes in fair value of the derivative instrument were recorded in other (income) expense, net within our consolidated statements of operations and amounted to a $0.6 million unrealized gain for the quarter ended May 2, 2009. The derivative was settled in the second quarter of Fiscal 2009.
Note 7. Equity
The Company has 100,005,000 common units issued and outstanding, which consist of both Common Units and Common B Units. Additionally, the Company has Common A Units, none of which are issued or outstanding. These three classes of Units have the same economic rights. The voting and transfer rights of the three classes differ in that the Common Units are entitled to one vote per Common Unit and upon transfer shall remain designated as Common Units. The Common A Units are entitled to ten votes per Common A Unit and upon transfer will be designated as Common Units. The Common B Units are entitled to ten votes per Common B Unit and upon transfer may be designated by the transferor as Common B Units, Common A Units or Common Units. As of May 1, 2010 and January 31, 2010, the number of Common Units and Common B Units issued and outstanding was 48,255,000 and 51,750,000, respectively.
Stewart & Stevenson LLC is a limited liability company, therefore, U.S. federal and certain state taxes are paid by the holders of our common units. As a limited liability company, the common unit holders’ liability is limited to the capital invested in the Company.
Share-Based Compensation: On September 5, 2007, our board of directors adopted the 2007 Incentive Compensation Plan (“Incentive Plan”). The Incentive Plan received the required approval of a majority of our unit holders and became effective on September 27, 2007. In connection with the adoption and approval of the Incentive Plan, the compensation committee of the board, which has the responsibility to administer the Incentive Plan, made certain grants of restricted shares to our non-executive directors and certain members of our senior executive management. The grants to our five non-executive directors totaled 300,000 restricted shares vesting in five (5) 60,000 share tranches, with each such tranche vesting upon board service for a complete fiscal year. In addition, approximately 54,000 of the restricted shares granted to two former directors were earned as part of their service to the Company with the balance of their grants being forfeited. The executive grants total 60,000 restricted shares vesting in five (5) 12,000 share tranches, with each tranche vesting upon employment for a complete fiscal year. In addition, approximately 20,000 of the restricted shares granted to a former executive were earned before his resignation from the Company with the balance being forfeited. The executive grants are subject to the achievement of net pre-tax income growth in the relevant fiscal year that exceeds the median net pre-tax income growth of a peer group of companies consisting of Schlumberger, Ltd., National Oilwell Varco, Inc., Weatherford International Ltd. and Cameron International Corp. and are subject to acceleration in the case of an executive’s death or disability. As this performance condition was not met for Fiscal 2009 or Fiscal 2008, those tranches were forfeited. All grants are subject to (i) the completion of an initial public equity offering, and (ii) accelerated vesting upon a change-in-control of the Company. No expense has been recognized for these grants because the contingent condition has not occurred and, as of May 1, 2010, diluted earnings per share excluded the approximately 410,000 contingent unvested restricted shares.
15
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements - Continued
(Unaudited)
Note 8. Income Taxes
As a limited liability company, income is reported for federal and state income tax purposes (except for the Texas Margins tax and foreign taxes reported at the entity level) by our unit holders. During the periods ended May 1, 2010 and May 2, 2009, we recognized tax expense of $0.3 million and benefit of $0.1 million, respectively, of Texas Margins tax. Additionally, for each of the periods ended May 1, 2010 and May 2, 2009, we recognized $0.2 million of tax expense associated with foreign jurisdictions.
Generally, we make quarterly distributions to our unit holders to fund their tax obligations. During the periods ended May 1, 2010 and May 2, 2009, we made tax distributions of $0.2 million and $3.5 million, respectively, to our unit holders.
Note 9. Related Party Transactions
During the fourth quarter of Fiscal 2009, the Company received a $37.5 million order from an affiliate of the Company’s shareholder. Revenue recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. Cash payments received and amounts invoiced pursuant to this transaction are recorded as a customer deposit in the consolidated balance sheet and amounted to $14.2 million and $9.4 million as of May 1, 2010 and January 31, 2010, respectively. Included in inventories, net are $12.8 million and $5.8 million in costs related to this transaction, respectively, as of these same dates. No amounts have been recorded in the consolidated statements of operations for this transaction to date.
Note 10. Litigation and Contingencies
In July 2009, we settled an arbitration action brought against one of our suppliers and us. Fiscal 2009 results of operations, after insurance proceeds and receipt of certain inventory, were negatively impacted by approximately $3.5 million, which was recorded in selling and administrative expenses. The settlement resolved the arbitration action and resulted in dismissal and release of all claims alleged.
The State of Texas began conducting a sales and use tax audit for the fiscal years 2006 through 2008 during Fiscal 2009. During the second quarter of Fiscal 2009, management completed a preliminary analysis and recorded a charge of $3.4 million to selling and administrative expenses and other current liabilities. This amount represents management’s best estimate of probable loss, though such loss could be higher or lower and remains subject to the audit by the State of Texas. We are in discussions with our customers and will attempt to recoup such sales tax where possible and will record such recoveries, if any, upon receipt.
We are also a defendant in a number of lawsuits relating to matters normally incident to our 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 we conduct our business or on our consolidated results of operations, financial position or liquidity. We maintain certain insurance policies that provide coverage for product liability and personal injury cases. We have established reserves that we believe to be adequate based on current evaluations and our experience in these types of claim situations. Nevertheless, an unexpected outcome or adverse development in any such case could have a material adverse impact on our consolidated results of operations in the period in which it occurs.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts and are not limited to the outlook for our future business and financial performance. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and some of which are beyond our control. We believe that these risks and uncertainties include:
|
·
|
periodic economic and industry downturns affecting the oil and gas industry;
|
|
·
|
competitive pressures in the industries we serve;
|
|
·
|
factors affecting our international sales and operations;
|
|
·
|
the potential loss of a key OEM supplier;
|
|
·
|
the occurrence of events not covered by insurance;
|
|
·
|
our ability to attract and retain qualified employees;
|
|
·
|
our failure to accurately estimate costs associated with products produced under fixed-price contracts;
|
|
·
|
our susceptibility to adverse weather conditions affecting the Gulf Coast;
|
|
·
|
unforeseen difficulties relating to acquisitions;
|
|
·
|
the impact of governmental laws and regulations, including environmental laws and regulations;
|
|
·
|
our failure to maintain key licenses;
|
|
·
|
our ability to protect our intellectual property;
|
|
·
|
our level of indebtedness; and
|
|
·
|
the other factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov.
|
These factors should not be construed as exhaustive and should be read with the other cautionary statements in this Quarterly Report.
We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and developments in the industry in which we operate, may differ materially from those made in, or suggested by, the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition, liquidity and growth, and developments in
the industry in which we operate are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements which we make in this Quarterly Report speak only as of the date of such statement, and, except as required under the federal securities laws and the rules and regulations of the SEC, we undertake no obligation to update publicly any forward-looking statements in this Quarterly Report after the date of this Quarterly Report, whether as a result of new information, future events or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
Overview and Outlook
We are a leading designer, manufacturer and marketer of specialized equipment and provide aftermarket parts and service to the oil and gas and other industries. Our diversified product lines include equipment for well stimulation, well servicing and workover rigs, drilling rigs, coiled tubing, cementing, nitrogen pumping, power generation and electrical systems as well as engines, transmissions and material handling equipment. We have a substantial installed base of equipment, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues and also provide rental equipment to our customers.
Our business continues to be impacted by the significant decline in gas and oil prices that began in the summer of 2008, as well as the difficulties experienced in the U.S. and global economies and related impacts to the credit markets. While gas and oil prices have remained at relatively stable levels over the past year, they remain below levels in comparison to those preceding the significant decline from Fiscal 2008 that has both tempered and changed customers’ spending patterns and programs, both in the oil and gas industries and others. These factors continue to impact all segments of our business.
Despite these challenges, we have seen an increase in new equipment orders beginning in the fourth quarter of Fiscal 2009 and continuing through the first quarter of Fiscal 2010. This has resulted in an increase in backlog from $130.2 million as of October 31, 2009 to $259.9 million as of May 1, 2010. It is difficult to determine whether this increase is a short-term change or the beginning of a longer-term growth and rebuilding of the industry and our business. We expect that a substantial portion of this increase in backlog will result in revenue for Fiscal 2010.
Comparison of Results of Operations—Three Months Ended May 1, 2010 and May 2, 2009
Sales - For the three months ended May 1, 2010 our sales were $161.9 million, a decrease of $28.2 million, or 14.8%, compared to the same period of Fiscal 2009 sales of $190.1 million. The decrease in sales impacted all segments and is attributable, in part, to a higher backlog entering Fiscal 2009 ($287.9 million) as compared to backlog entering Fiscal 2010 ($203.3 million), our customers’ confidence remaining low given the challenges and continuing uncertainty with the U.S. and global economies and gas and oil prices remaining significantly lower than in prior years. A breakdown of sales for the periods is as follows:
For the Three Months Ended
|
Change
|
|||||||||||||||
May 1, 2010
|
May 2, 2009
|
$
|
%
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Sales
|
||||||||||||||||
Equipment
|
$ | 89,621 | $ | 106,247 | $ | (16,626 | ) | (15.6 | ) | % | ||||||
Aftermarket parts and service
|
67,781 | 78,415 | (10,634 | ) | (13.6 | ) | % | |||||||||
Rental
|
4,534 | 5,466 | (932 | ) | (17.1 | ) | % | |||||||||
Total sales
|
$ | 161,936 | $ | 190,128 | $ | (28,192 | ) | (14.8 | ) | % | ||||||
Operating profit (loss)
|
||||||||||||||||
Equipment
|
$ | 5,048 | $ | 6,784 | (1,736 | ) | (25.6 | ) | % | |||||||
Aftermarket parts and service
|
2,878 | 9,118 | (6,240 | ) | (68.4 | ) | % | |||||||||
Rental
|
(236 | ) | 628 | (864 | ) | (137.6 | ) | % | ||||||||
Corporate
|
(6,932 | ) | (7,525 | ) | 593 | (7.9 | ) | % | ||||||||
Total operating profit
|
$ | 758 | $ | 9,005 | $ | (8,247 | ) | (91.6 | ) | % | ||||||
Operating profit percentage
|
||||||||||||||||
Equipment
|
5.6 | % | 6.4 | % | ||||||||||||
Aftermarket parts and service
|
4.2 | 11.6 | ||||||||||||||
Rental
|
(5.2 | ) | 11.5 | |||||||||||||
Consolidated
|
0.5 | % | 4.7 | % |
Sales of equipment fell by 15.6%, or $16.6 million, during the three months ended May 1, 2010 compared to the same period in Fiscal 2009. The decrease in sales was primarily attributable to lower sales volumes in all product lines except transmissions, electrical products and well stimulation, with rigs, power generation and engine sales representing the largest percentage of the decline.
Aftermarket parts and service sales fell by $10.6 million to $67.8 million in the three months ended May 1, 2010 compared to $78.4 million in the comparable period of Fiscal 2009. The decrease in aftermarket parts and service sales was primarily attributable to decreased parts sales ($6.2 million) and decreased service sales ($4.4 million).
Rental sales fell by 17.1%, or $0.9 million, in the three months ended May 1, 2010 compared to the same period of Fiscal 2009.
Gross profit – Our gross profit was $25.7 million for the three months ended May 1, 2010 compared to $38.9 million for the same period in Fiscal 2009, reflecting a decrease in gross profit margin from 20.5% to 15.9%. Our gross profit margin decreased by 4.6 points due to lower sales volumes, product mix, backlog with higher margins realized in the prior period compared to current period margins, pricing pressures and unabsorbed overhead. The equipment segment gross profit margin decreased from 20.5% to 17.6%, a decrease of 2.9 points. The aftermarket parts and service segment gross profit margin decreased from 20.2% to 13.7%, a decrease of 6.5 points. The rental segment gross profit margin decreased from 24.0% to 13.0%, a decrease of 11.0 points.
Selling and administrative expenses – Selling and administrative expenses decreased by $6.2 million to $24.9 million for the three months ended May 1, 2010 primarily as a result of cost containment measures undertaken by management and lower legal and professional fees. As a result, selling and administrative expenses as a percentage of sales decreased to 15.4% from 16.3% for the three months ended May 2, 2009.
Other expense (income), net – Other income decreased by $1.2 million to expense of $46 thousand for the three months ended May 1, 2010, mainly as the result of foreign currency transaction losses associated with our foreign subsidiaries in the current period compared to foreign currency transaction gains with these subsidiaries and unrealized gains associated with a foreign currency derivative instrument in the prior period.
Operating profit – Our operating profit decreased to $0.8 million, or 0.5% of sales, during the three months ended May 1, 20109 from $9.0 million, or 4.7% of sales, in the same period of Fiscal 2009, primarily as the result of lower sales and gross profit margins.
Interest expense, net - Interest expense, net for the three months ended May 1, 2010 decreased by $0.2 million over the same period in Fiscal 2009 mainly as a result of lower borrowings outstanding and interest rates for our revolving credit facility, offset by higher interest income in the prior period.
Segment Results Comparison – Three Months Ended May 1, 2010 and May 2, 2009
Equipment – Operating profit generated by the equipment segment decreased to $5.1 million, or 5.6% of sales, for the three months ended May 1, 2010 from $6.8 million, or 6.4% of sales, for the same period in Fiscal 2009 primarily due to lower sales volumes. The $1.7 million decrease in operating profit was attributable to a decrease of $3.4 million in sales volume partially offset by an increase in margin rate of $1.7 million.
Our equipment order backlog as of May 1, 2010 was $259.9 million, as compared to $225.5 million on May 2, 2009, an increase of 15.3%. We expect to recognize a significant portion of this equipment order backlog as revenue during the remainder of Fiscal 2010.
Backlog of $259.9 million as of May 31, 2010 includes a $37.5 million related party transaction reflecting an order from an affiliate of the Company's shareholder. Revenue recognition from this transaction will be deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. Cash payments received and amounts invoiced pursuant to this transaction are recorded as customer deposits in the consolidated balance sheet and amounted to $14.2 million as of May 1, 2010. Included in inventories, net is $12.8 million in costs related to this transaction and no amounts have been recorded in the consolidated statements of operations for this transaction to date.
Aftermarket Parts and Service – Operating profit generated by the aftermarket parts and service segment decreased to $2.9 million in the three months ended May 1, 2010 from $9.1 million in the same period of Fiscal 2009, representing a decrease in operating profit percentage from 11.6% to 4.2%. The decrease in operating profit was primarily attributable to decreases in sales volume of $2.1 million and margin rate of $4.1 million.
Rental – Operating loss generated by the rental segment decreased to $0.2 million in the three months ended May 1, 2010, from operating profit of $0.6 million in the same period of Fiscal 2009. Operating loss percentage decreased to (5.2%) for the three months ended May 1, 2010 from 11.5% profit for the same period in Fiscal 2009 mainly as a result of lower sales volumes.
Corporate - Corporate and administrative expenses (i) decreased to $6.9 million in the three months ended May 1, 2010 compared to $7.5 million in the same period of 2009 due to cost containment measures undertaken by management and lower legal and professional fees, and (ii) increased as a percentage of sales from 4.0% to 4.3% as a result of lower sales volumes.
Liquidity and Capital Resources
Our principal source of liquidity is cash generated by operations. We also have a $250 million asset-based revolving credit facility which we draw upon when necessary to satisfy our working capital needs and generally pay down with available cash. Our liquidity needs are primarily driven by changes in working capital associated with execution of large manufacturing projects. While many of our contracts include advance customer deposits and progress billings, some international contracts provide for substantial portions of funding under confirmed letters of credit upon delivery of the products.
During the three months ended May 1, 2010, we generated net cash from operating activities of $4.4 million. The cash generated by operating activities consisted of $4.5 million as a result of changes in operating assets and liabilities and depreciation and amortization of $4.6 million, partially offset by $4.7 million of cash used by net losses. The change in operating assets and liabilities is the result of cash provided by accounts receivable, recoverable costs and accrued profits not yet billed, accounts payable, billings in excess of incurred costs and customer deposits, which in aggregate totaled $37.4 million and which were offset by cash used for inventory, accrued payrolls and incentives, other current assets and liabilities and other, which in aggregate totaled $32.9 million.
During the three months ended May 2, 2009, we used net cash in operating activities of $11.2 million. The cash used in operating activities during the three months ended May 2, 2009 consisted of $3.7 million of cash generated by net earnings and depreciation and amortization of $5.0 million, offset by changes in operating assets and liabilities of $19.9 million. Changes in operating assets and liabilities were the result of decreases in accounts receivable and increases in billings in excess of incurred costs and other, which in aggregate totaled $32.7 million and which were offset by increases in recoverable costs and accrued profits not yet billed and inventories and decreases in accounts payable, accrued payrolls, and customer deposits which in aggregate totaled $52.6 million.
Net cash used in investing activities was $4.0 million during the three months ended May 1, 2010, primarily for capital expenditures of $0.4 million and $3.6 million related to additions to our rental fleet. Net cash used in investing activities was $2.2 million during the three months ended May 2, 2009. This included $1.3 million of capital expenditures and $0.9 million related to additions to our rental fleet.
Net cash provided by financing activities was $0.8 million during the three months ended May 1, 2010. This included $1.0 million in net borrowings which was offset by tax distributions to holders of common units of $0.2 million. Net cash provided by financing activities was $13.9 million during the three months ended May 2, 2009. This included $17.7 million in net borrowings partially offset by tax distributions to holders of common units of $3.5 million and deferred financing costs of $0.4 million.
As of May 1, 2010, our cash and cash equivalent balance was $4.6 million, reflecting timing of cash receipts, disbursements and borrowings under our revolving credit facility.
Current Resources
We have an asset-based revolving credit facility in the amount of $250.0 million with a $25.0 million sub-facility to be used by our Canadian subsidiary. The $250.0 million revolving credit facility, which matures in February 2012, is secured by substantially all accounts receivable, inventory and property, plant and equipment and provides for borrowings at LIBOR, plus a margin ranging from 1.25% to 2.00% per annum, based on our leverage ratios, as specified in the credit agreement. Based on the outstanding borrowings, letters of credit issued and the terms of the asset-based revolving credit facility, our available borrowing capacity was approximately $67.2 million at May 1, 2010.
Borrowings under our revolving credit facility and our senior notes were as follows:
As of
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May 1, 2010
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January 31, 2010
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(In thousands)
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Revolving credit facility
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$ | 71,079 | $ | 70,870 | |||
Unsecured senior notes
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150,000 | 150,000 | |||||
Total | $ | 221,079 | $ | 220,870 |
The revolving credit facility and the senior notes contain financial and operating covenants with which we must comply during the terms of the agreements. These covenants include the maintenance of certain financial ratios, restrictions related to the incurrence of certain indebtedness and investments, and prohibition of the creation of certain liens. We were in compliance with all covenants as of May 1, 2010. The financial covenant for the revolving credit facility requires that we maintain a fixed charge coverage ratio, as defined in the agreement, of at least 1.1 to 1.0; however, this covenant does not take effect until our available borrowing capacity is $30.0 million or less. The financial covenant for the senior notes indenture requires that, were we to incur additional indebtedness (subject to various exceptions set forth in the indenture), after giving effect to the incurrence of such additional indebtedness, we have a consolidated coverage ratio, as defined in the indenture, of at least 2.5 to 1.0.
We have funded, and expect to continue to fund, operations through cash flows generated by operating activities and borrowings under our revolving credit facility. We also expect that ongoing requirements for debt service and capital expenditures will be funded from these sources.
Our future liquidity requirements will be for working capital, capital expenditures, debt service and general corporate purposes. Our borrowing capacity under the revolving credit facility is impacted by, among other factors, the amount of working capital and qualifying assets therein. Based on our current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our revolving credit facility, will be adequate to meet our short-term and long-term liquidity needs. However, our ability to meet our working capital and debt service requirements is subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. If we are not able to meet such requirements, we may be required to seek additional sources of capital.
We currently believe that we will make approximately $16.0 million of capital expenditures during Fiscal 2010.
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk
Foreign Exchange Risk
Our international subsidiaries in Colombia and Venezuela transact most of their business in their respective local currencies, while our Canadian subsidiary conducts its business in both Canadian and U.S. dollars. Revenues generated by our Canadian, Colombian and Venezuelan subsidiaries comprised 5.2%, 4.0% and 0.2%, respectively of our total revenue during the three months ended May 1, 2010. Our results of operations were not significantly impacted by changes in currency exchange rates. A short-term foreign currency exchange rate derivative instrument was entered in January 2009 to manage our exposure to fluctuations in foreign currency exchange rates for certain contracts of our Canadian subsidiary that were not denominated in its functional currency. The fair value of this derivative was an asset of $0.5 million as of May 2, 2009. The derivative was settled in the second quarter of Fiscal 2009.
On January 10, 2010, the Venezuelan Government devalued its currency from 2.15 Bolivars per U.S. dollar to 4.30 Bolivars per U.S. dollar (“the official rate”) and the Venezuelan economy has since been designated as hyperinflationary. The Company has historically utilized the official rate for its Venezuelan operations and will continue to monitor future developments as they may relate to the impact from hyperinflationary currency fluctuations. As such, the Company used the official rate to translate its Venezuelan subsidiary’s financial statements in prior years.
Beginning February 1, 2010, the Company utilizes the U.S. dollar as the functional currency for its Venezuelan subsidiary and remeasures its financial statements into U.S. dollars at the official rate. Accordingly, using “hyperinflationary accounting,” it recognizes the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations. During the three months ended May 1, 2010, the official rate for Venezuela did not fluctuate significantly. As a result, the effect of remeasuring our Venezuelan subsidiary was insignificant.
Interest Rate Risk
We use variable-rate debt under our revolving credit facility to finance certain of our operations and capital expenditures. Assuming the entire $250.0 million revolving credit facility was drawn, each quarter point change in interest rates would result in a $0.6 million change in annual interest expense.
Item 4. Controls and Procedures
Effectiveness of Disclosure Controls and Procedures
We maintain a set of disclosure controls and procedures designed to ensure that information we are required to disclose in reports that we file with or submit to the SEC is recorded, processed, summarized and reported within the time periods specified by the SEC. An evaluation was carried out under the supervision and with the participation of the Company’s management, including Robert L. Hargrave, our Chief Executive Officer and Chief Financial Officer, (collectively for purposes of this Item 4, our “CEO”), of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the CEO has concluded that the Company’s disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in reports we file with the SEC is recorded, processed, summarized and reported within the time periods required by the SEC, and is accumulated and communicated to management including our CEO, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
Management, including our CEO, evaluated the changes in our internal control over financial reporting during the quarter ended May 1, 2010. We determined that there were no changes in our internal control over financial reporting during the quarter ended May 1, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In July 2009, we settled an arbitration action brought against one of our suppliers and us. Fiscal 2009 results of operations, after insurance proceeds and receipt of certain inventory, were negatively impacted by approximately $3.5 million, which was recorded in selling and administrative expenses. The settlement resolved the arbitration action and resulted in dismissal and release of all claims alleged.
The State of Texas began conducting a sales and use tax audit for the fiscal years 2006 through 2008 during Fiscal 2009. During the second quarter of Fiscal 2009, management completed a preliminary analysis and recorded a charge of $3.4 million to selling and administrative expenses and other current liabilities. This amount represents management’s best estimate of probable loss, though such loss could be higher or lower and remains subject to the audit by the State of Texas. We are in discussions with our customers and will attempt to recoup such sales tax where possible and will record such recoveries, if any, upon receipt.
We are also a defendant in a number of lawsuits relating to matters normally incident to our 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 we conduct our business or on our consolidated results of operations, financial position or liquidity. We maintain certain insurance policies that provide coverage for product liability and personal injury cases. We have established reserves that we believe to be adequate based on current evaluations and our experience in these types of claim situations. Nevertheless, an unexpected outcome or adverse development in any such case could have a material adverse impact on our consolidated results of operations in the period in which it occurs.
Item 1A. Risk Factors
For a discussion of our potential risks and uncertainties relating to our business and an investment in our senior notes, see the factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2010, which is accessible on the Securities and Exchange Commission’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in the Form 10-K.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Removed and Reserved
Item 5. Other Information
Not applicable.
Item 6. Exhibits
First Supplemental Indenture, dated as of March 10, 2010, among Stewart & Stevenson LLC, Stewart & Stevenson Manufacturing Technologies LLC and Wells Fargo Bank, National Association, to Indenture dated as of July 6, 2006.
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Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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Section 1350 certification of the Principal Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
The Company has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereto duly authorized.
STEWART & STEVENSON LLC
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By:
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/S/ ROBERT L. HARGRAVE
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Robert L. Hargrave
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Chief Executive Officer and
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Chief Financial Officer
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June 15, 2010
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