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Table of Contents

 

United States Securities and Exchange Commission

Washington, D.C.  20549

 

FORM 10-Q

 

R

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended May 5, 2012

 

or

 

o

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 001-33836

 

Stewart & Stevenson LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

20-3974034

(State or other jurisdiction of incorporation or

 

(I.R.S. Employer Identification Number)

organization)

 

 

 

 

 

1000 Louisiana St., Suite 5900, Houston, TX

 

77002

(Address of Principal Executive Offices)

 

(Zip Code)

 

(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    
R  *      No    o

 

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      o    No     R

 

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 o                    Accelerated filer o                    Non-accelerated filer R                    Smaller reporting company o

(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     
o   No    R

 

There is no market for the registrant’s equity.  As of May 5, 2012, there were 56,179,272 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.

 



Table of Contents

 

STEWART & STEVENSON LLC AND SUBSIDIARIES

TABLE OF CONTENTS

 

Part I.  Financial Information

Page

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets – As of May 5, 2012 and January 31, 2012

3

 

 

Condensed Consolidated Statements of Operations – Three months ended May 5, 2012 and April 30, 2011

4

 

 

Condensed Consolidated Statements of Comprehensive Income – Three months ended May 5, 2012 and April 30, 2012

5

 

 

Condensed Consolidated Statements of Cash Flows – Three months ended May 5, 2012 and April 30, 2011

6

 

 

Notes to Condensed Consolidated Financial Statements

7

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

 

Item 4.

Controls and Procedures

30

 

 

 

Part II.  Other Information

 

 

 

 

 

Item 1.

Legal Proceedings

30

 

Item 1A.

Risk Factors

31

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

Item 3.

Defaults Upon Senior Securities

31

 

Item 4.

Mine Safety Disclosures

31

 

Item 5.

Other Information

31

 

Item 6.

Exhibits

31

 

2



Table of Contents

 

PART I.  Financial Information

 

Item 1.  Financial Statements

 

Stewart & Stevenson LLC and Subsidiaries

Condensed Consolidated Balance Sheets

 

 

 

As of

 

 

 

May 5, 2012

 

January 31, 2012

 

(Dollars in thousands)

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

10,765

 

$

4,211

 

Restricted cash

 

5,000

 

5,000

 

Accounts receivable, net

 

131,224

 

116,144

 

Recoverable costs and accrued profits not yet billed

 

47,214

 

75,966

 

Inventories

 

465,986

 

438,550

 

Other current assets

 

5,829

 

5,714

 

Total current assets

 

666,018

 

645,585

 

 

 

 

 

 

 

Property, plant and equipment, net

 

109,512

 

94,624

 

Goodwill and intangibles, net

 

22,313

 

22,864

 

Deferred financing costs and other assets

 

5,052

 

4,928

 

Total assets

 

$

802,895

 

$

768,001

 

 

 

 

 

 

 

Liabilities and shareholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Bank notes payable

 

$

11,499

 

$

6,948

 

Accounts payable

 

116,353

 

143,493

 

Accrued payrolls and incentives

 

17,584

 

30,723

 

Billings in excess of incurred costs

 

329

 

1,734

 

Customer deposits

 

93,473

 

85,579

 

Other current liabilities

 

47,811

 

41,752

 

Total current liabilities

 

287,049

 

310,229

 

 

 

 

 

 

 

Long-term debt, net of current portion

 

280,390

 

236,772

 

Long-term debt to affiliate

 

12,510

 

-

 

Other long-term liabilities

 

-

 

8

 

Total liabilities

 

579,949

 

547,009

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common units, 56,179,272 issued and outstanding

 

76,271

 

76,101

 

Accumulated other comprehensive income

 

5,500

 

5,236

 

Retained earnings

 

141,175

 

139,655

 

Total shareholders’ equity

 

222,946

 

220,992

 

Total liabilities and shareholders’ equity

 

$

802,895

 

$

768,001

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

3



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

 

Condensed Consolidated Statements of Operations

 

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

April 30, 2011

 

(Dollars and units in thousands)

 

 

 

 

 

Sales

 

$  

374,414

 

271,367

 

Cost of sales

 

301,380

 

220,829

 

Gross profit

 

73,034

 

50,538

 

 

 

 

 

 

 

Selling and administrative expenses

 

38,560

 

31,327

 

Other expense, net

 

100

 

400

 

Operating profit

 

34,374

 

18,811

 

 

 

 

 

 

 

Interest expense, net

 

5,630

 

4,854

 

Earnings before income taxes

 

28,744

 

13,957

 

 

 

 

 

 

 

Income tax expense

 

1,008

 

110

 

Net earnings

 

$  

27,736

 

13,847

 

 

 

 

 

 

 

Weighted average units outstanding:

 

 

 

 

 

Basic

 

56,179

 

56,025

 

Diluted

 

56,179

 

56,025

 

 

 

 

 

 

 

Net earnings per common unit:

 

 

 

 

 

Basic

 

$  

0.49

 

0.25

 

Diluted

 

$  

0.49

 

0.25

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

4



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income

 

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

April 30, 2011

 

(Dollars in thousands)

 

 

 

 

 

Net earnings

 

  $

27,736

 

  $

13,847

 

Currency translation adjustments

 

264

 

1,424

 

Comprehensive income

 

  $

28,000

 

  $

15,271

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

5



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

 

Condensed Consolidated Statements of Cash Flows

 

(Unaudited)

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

 

April 30, 2011

 

(Dollars in thousands)

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

Net earnings

 

 $

27,736

 

 

 $

13,847

 

Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:

 

 

 

 

 

 

Amortization of deferred financing costs

 

306

 

 

409

 

Depreciation and amortization

 

4,715

 

 

4,121

 

Share-based compensation expense

 

170

 

 

-

 

Non-cash foreign exchange gains

 

(45

)

 

(5

)

Change in operating assets and liabilities net of the effect of acquisitions:

 

 

 

 

 

 

Accounts receivable, net

 

(14,932

)

 

(16,753

)

Recoverable costs and accrued profits not yet billed

 

28,781

 

 

41,215

 

Inventories

 

(27,003

)

 

(29,108

)

Accounts payable

 

(27,357

)

 

7,370

 

Accrued payrolls and incentives

 

(13,174

)

 

248

 

Billings in excess of incurred costs

 

(1,411

)

 

2,580

 

Customer deposits

 

7,825

 

 

18,024

 

Other current assets and liabilities

 

6,308

 

 

2,334

 

Other, net

 

(386

)

 

1,401

 

Net cash (used in) provided by operating activities

 

(8,467

)

 

45,683

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Capital expenditures

 

(1,583

)

 

(1,308

)

Additions to rental equipment

 

(1,291

)

 

(3,058

)

Acquisitions of properties

 

(16,153

)

 

-

 

Acquisitions, net of cash acquired

 

-

 

 

(23,402

)

Net cash used in investing activities

 

(19,027

)

 

(27,768

)

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Change in short-term notes payable

 

4,434

 

 

(1,824

)

Deferred financing costs

 

(429

)

 

-

 

Long-term debt to affiliate

 

12,510

 

 

-

 

Change in long-term revolving loans

 

43,618

 

 

(10,116

)

Distributions to unitholders

 

(18,000

)

 

-

 

Distributions to unitholders for tax obligations

 

(8,216

)

 

(1,063

)

Net cash provided by (used in) financing activities

 

33,917

 

 

(13,003

)

 

 

 

 

 

 

 

Effect of exchange rate on cash

 

131

 

 

86

 

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

6,554

 

 

4,998

 

Cash and cash equivalents, beginning of fiscal period

 

4,211

 

 

9,168

 

Cash and cash equivalents, end of fiscal period

 

 $

10,765

 

 

 $

14,166

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

Interest

 

 $

1,100

 

 

 $

578

 

Income taxes

 

 $

632

 

 

 $

275

 

 

See accompanying Notes to Condensed Consolidated Financial Statements

 

6



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1. Company Overview

 

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.

 

On February 26, 2007, we acquired substantially all of the operating assets and assumed certain liabilities of Crown Energy Technologies, Inc. and certain of its affiliates (collectively, “Crown”), which we refer to as the “Crown Acquisition.” Crown, which was headquartered in Calgary, Alberta, had multiple U.S. operations. Crown manufactured drilling, well servicing and workover rigs, stimulation equipment and provided related parts and services.

 

On March 23, 2011, we acquired 100% of the stock of EMDSI-Hunt Power, L.L.C. (“EMDSI”) in an all cash transaction from ITOCHU Corporation of Japan (“ITOCHU”), which we refer to as the “EMDSI Acquisition.” EMDSI, which is based in Harvey, Louisiana, specializes in the marketing and distribution of medium speed diesel engines for marine propulsion, drilling and power generation applications and is a provider of aftermarket parts and services.

 

We are a leading designer, manufacturer and provider of specialized equipment and aftermarket parts and service for the oil and gas and other industries. Our wide range of products covers hydraulic fracturing, well stimulation, workover, intervention and drilling operations. These products include well stimulation equipment,  pumping, acidizing, coiled tubing, cementing and nitrogen units, drilling rigs, workover rigs, power generation systems and electrical support and distribution systems, as well as engines, transmissions, prime movers and material handling equipment. We have a substantial installed base of products, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues from customers in the oil and gas, power generation and various other industries. In addition, we provide rental equipment to our customers, including generator sets, air compressors, rail car movers and material handling equipment.

 

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 5, 2012 are not necessarily indicative of the results that will be realized for the fiscal year ending January 31, 2013. 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, 2012.

 

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 revenues and expenses during the reporting period.  We evaluate our estimates on an ongoing basis, based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

 

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 2012” began on February 1, 2012 and will end on January 31, 2013.  We report results on the fiscal quarter method with each quarter comprising approximately 13 weeks. The first quarter of Fiscal 2012 began on February 1, 2012 and ended on May 5, 2012.

 

7



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

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.

 

New Accounting Pronouncements:  On February 1, 2012, we adopted Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles-Goodwill and Other.”  This accounting update provides companies with the option to make a qualitative evaluation about the likelihood of goodwill impairment.  A company will be required to perform the two-step impairment test only if it concludes that the fair value of a reporting unit is more likely than not (i.e., more than 50% likelihood) less than its carrying value.  This accounting update is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011.  We will apply this update in conjunction with our Fiscal 2012 annual impairment evaluation performed in the fourth quarter.

 

Also on February 1, 2012, we adopted ASU No. 2011-05, “Presentation of Comprehensive Income” which requires that all non-owner changes in equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Our adoption of the new guidance did not impact our consolidated financial position, results of operations or cash flows.

 

Also on February 1, 2012, we adopted ASU 2011-04, “Fair Value Measurement.” This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. Our adoption of the new guidance did not impact our consolidated financial position, results of operations or cash flows, although it did require additional fair value disclosures.

 

Note 3. Segment Data

 

Our reportable segments are as follows:

 

Manufacturing

 

We design, manufacture and market equipment for U.S. and international oilfield service providers and drilling and workover contractors, as well as national oil companies that require integrated and customized product solutions. We manufacture equipment specifically for hydraulic fracturing, well stimulation, well workover, intervention and drilling operations. Our manufactured products include integrated solutions, which incorporate a variety of components into a single system, for a wide range of oilfield services and support applications. In addition, we provide parts and service to customers primarily in the oil and gas industry.

 

Distribution

 

We provide stand-alone products and aftermarket parts and service for products manufactured by us, our six key original equipment manufacturers (“OEM”) and other manufacturers. In addition, we provide rental equipment including generator sets, air compressors, rail car movers and material handling equipment to our customers. Our aftermarket parts and service operations, which provide us with a recurring, higher-margin source of revenue, serve customers engaged in the oil and gas, power generation, marine, mining, construction, commercial vehicle and material handling industries, as well as other industries.

 

Corporate and shared services

 

Our corporate and shared services segment includes administrative overhead normally not associated with specific activities within the operating segments. These expenses include legal, finance and accounting, internal audit, human resources, information technology, marketing, supply chain and similar corporate office costs.

 

8



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

Intra-segment revenues and costs are eliminated, and operating profit (loss) represents earnings (loss) before interest and income taxes. Operating results by segment were as follows:

 

 

 

For the Three Months Ended

 

 

May 5, 2012

 

 

April 30, 2011

(Dollars in thousands)

 

 

 

 

 

 

 

Sales

 

 

 

 

 

 

 

Manufacturing segment

 

 

 

 

 

 

 

Equipment

 

  $

154,006

 

 

  $

106,008

 

 

Parts and service

 

5,893

 

 

6,487

 

 

Total manufacturing sales

 

  $

159,899

 

 

  $

112,495

 

 

 

 

 

 

 

 

 

 

Distribution segment

 

 

 

 

 

 

 

Equipment

 

  $

108,010

 

 

  $

71,939

 

 

Parts and service

 

96,673

 

 

80,739

 

 

Rentals

 

9,832

 

 

6,194

 

 

Total distribution sales

 

  $

214,515

 

 

  $

158,872

 

 

 

 

 

 

 

 

 

 

Total sales

 

  $

374,414

 

 

  $

271,367

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

 

 

 

 

 

 

Manufacturing

 

  $

31,087

 

 

  $

19,756

 

 

Distribution

 

17,033

 

 

10,259

 

 

Corporate and shared services

 

(13,746

)

 

(11,204

)

 

Total operating profit

 

  $

34,374

 

 

  $

18,811

 

 

 

 

 

 

 

 

 

 

Operating profit percentage

 

 

 

 

 

 

 

Manufacturing

 

19.4

%

 

17.6

%

 

Distribution

 

7.9

%

 

6.5

%

 

Consolidated

 

9.2

%

 

6.9

%

 

 

 

Note 4. Long-Term Debt

 

 

 

As of

 

 

 

May 5, 2012

 

January 31, 2012

 

(Dollars in thousands)

 

 

 

 

 

Other debt

 

 $

11,499

 

 $

6,948

 

Long-term debt to affiliate

 

12,510

 

-

 

Revolving credit facility

 

130,390

 

86,772

 

Unsecured senior notes

 

150,000

 

150,000

 

Total

 

304,399

 

243,720

 

Less: current portion of debt

 

(11,499)

 

(6,948)

 

Long-term debt, net of current portion

 

 $

292,900

 

 $

236,772

 

 

Other debt: Other debt includes certain short-term secured loans relating to our South American operations, a floor plan financing agreement and certain equipment loans.  The restricted cash on our balance sheet relates to collateral securing a portion of this debt.

 

9



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

Long-term debt to affiliate:  Our long-term debt to affiliate relates to the financing of our March 2012 acquisition of the U.S. properties of Crown, which we had previously leased. This debt matures in ten years, bears interest at 5.0% per annum, requires quarterly interest payments beginning in June 2012 and quarterly principal payments of $0.4 million beginning in June 2017, with the principal balance of $5.4 million, along with accrued interest thereon, due in March 2022.

 

Revolving Credit Facility: On December 23, 2011, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”) for our revolving credit facility.  The Credit Agreement provides for a $250 million asset-based revolving credit facility, which is expandable by a $125 million accordion, is secured by substantially all accounts receivable, inventory and property, plant and equipment of the Company and expires on December 23, 2016.  Borrowings bear interest based on a pricing grid that is determined by the available borrowing capacity under the revolving credit facility and the interest rate selected:  LIBOR plus a margin ranging from 1.75% to 2.25% per annum or Prime Rate plus a margin ranging from 0.75% to 1.25%.  These ranges may be further reduced by 0.25% (25 basis points) based on our leverage ratios, as specified in the Credit Agreement. Borrowings under the revolving credit facility bear interest at a weighted average interest rate of 2.39% as of May 5, 2012. Commitment fees are charged for the undrawn portion of the revolving credit facility based on the usage of the revolving credit facility with 0.50% per annum being charged for usage less than or equal to 35% ($87.5 million) and 0.375% per annum being charged for usage greater than 35%. Interest payments are due monthly, or as LIBOR contracts expire. The revolving credit facility also has a $50.0 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 5, 2012, there were $20.2 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 $73.6 million at May 5, 2012. As required by the terms of the revolving credit facility, our available borrowing capacity is required to be reduced by the principal amount of our senior notes outstanding plus $25 million in the event the senior notes are not repaid by the date which is 60 days prior to their stated maturity of July 2014 or the maturity of the senior notes is not otherwise extended to at least 90 days beyond the maturity of the revolving credit facility.

 

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 5, 2012. 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 $25.0 million or less.  The financial covenant for the senior notes requires that, were we to incur additional indebtedness, pay dividends or make certain other restricted payments (in each case, 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.

 

During the fourth quarter of Fiscal 2011, we incurred $1.8 million of capitalized legal and financing costs associated with the revolving credit facility. As of May 5, 2012, $4.2 million of capitalized legal and financing costs were recorded in deferred financing costs and other in our consolidated balance sheet.

 

Our notes payable and revolving credit facility have interest rates which are tied to current market rates, and thus, their fair value approximates their recorded amounts. The estimated fair value of our senior notes was determined from information obtained from third party pricing sources, including broker quotes (Level 2 inputs). At May 5, 2012, our senior notes with a carrying value of $150.0 million had a fair value of $149.7 million.

 

10



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

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.

 

Condensed Consolidating Balance Sheets

 

 

 

As of May 5, 2012

 

 

 

(Unaudited)

 

 

 

Guarantor
Entities

 

Non-Guarantor
Entities

 

Eliminations

 

Consolidated
Totals

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Current assets

 

 $

594,865

 

 $

71,153

 

 $

-

 

 $

666,018

 

Property, plant and equipment, net

 

107,050

 

2,462

 

-

 

109,512

 

Other assets

 

9,818

 

3,816

 

13,731

 

27,365

 

Total assets

 

 $

711,733

 

 $

77,431

 

 $

13,731

 

 $

802,895

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 $

246,878

 

 $

40,171

 

 $

-

 

 $

287,049

 

Intercompany (receivables) payables

 

(50,991)

 

50,991

 

-

 

-

 

Long-term liabilities

 

292,900

 

-

 

-

 

292,900

 

Shareholders’ equity (deficit)

 

222,946

 

(13,731)

 

13,731

 

222,946

 

Total liabilities and shareholders’ equity

 

 $

711,733

 

 $

77,431

 

 $

13,731

 

 $

802,895

 

 

 

 

 

As of January 31, 2012

 

 

 

Guarantor
Entities

 

Non-Guarantor
Entities

 

Eliminations

 

Consolidated
Totals

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Current assets

 

 $

577,929

 

 $

67,656

 

 $

-

 

 $

645,585

 

Property, plant and equipment, net

 

92,193

 

2,431

 

-

 

94,624

 

Other assets

 

16,229

 

3,946

 

7,617

 

27,792

 

Total assets

 

 $

686,351

 

 $

74,033

 

 $

7,617

 

 $

768,001

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 $

273,111

 

 $

37,118

 

 $

-

 

 $

310,229

 

Intercompany (receivables) payables

 

(44,523)

 

44,523

 

-

 

-

 

Long-term liabilities

 

236,771

 

9

 

-

 

236,780

 

Shareholders’ equity (deficit)

 

220,992

 

(7,617)

 

7,617

 

220,992

 

Total liabilities and shareholders’ equity

 

 $

686,351

 

 $

74,033

 

 $

7,617

 

 $

768,001

 

 

11



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

 

Condensed Consolidating Statements of Operations

(Unaudited)

 

 

 

For the Three Months Ended May 5, 2012

 

 

 

Guarantor
Entities

 

Non-Guarantor
Entities

 

Eliminations

 

Consolidated
Totals

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Sales

 

  $

340,228

 

  $

34,186

 

  $

-

 

  $

374,414

 

Cost of sales

 

272,805

 

28,575

 

-

 

301,380

 

Gross profit

 

67,423

 

5,611

 

-

 

73,034

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

34,475

 

4,085

 

-

 

38,560

 

Equity in earnings of subsidiaries

 

(169)

 

-

 

169

 

-

 

Other (income) expense, net

 

(30)

 

130

 

-

 

100

 

Operating profit

 

33,147

 

1,396

 

(169)

 

34,374

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

4,731

 

899

 

-

 

5,630

 

Earnings before income taxes

 

28,416

 

497

 

(169)

 

28,744

 

Income tax expense

 

680

 

328

 

-

 

1,008

 

Net earnings

 

  $

27,736

 

  $

169

 

  $

(169)

 

  $

27,736

 

Currency translation adjustments

 

 

5,196

 

 

(4,932)

 

 

-

 

 

264

 

Comprehensive income (loss)

 

  $

32,932

 

  $

(4,763)

 

  $

(169)

 

  $

28,000

 

 

 

 

 

For the Three Months Ended April 30, 2011

 

 

 

Guarantor
Entities

 

Non-Guarantor
Entities

 

Eliminations

 

Consolidated
Totals

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Sales

 

  $

240,171

 

  $

31,196

 

  $

-

 

  $

271,367

 

Cost of sales

 

195,428

 

25,401

 

-

 

220,829

 

Gross profit

 

44,743

 

5,795

 

-

 

50,538

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

27,279

 

4,048

 

-

 

31,327

 

Equity in earnings of subsidiaries

 

(808)

 

-

 

808

 

-

 

Other (income) expense, net

 

(52)

 

452

 

-

 

400

 

Operating profit

 

18,324

 

1,295

 

(808)

 

18,811

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

4,115

 

739

 

-

 

4,854

 

Earnings before income taxes

 

14,209

 

556

 

(808)

 

13,957

 

Income tax expense (benefit)

 

362

 

(252)

 

-

 

110

 

Net earnings

 

  $

13,847

 

  $

808

 

  $

(808)

 

  $

13,847

 

Currency translation adjustments

 

 

-

 

 

1,424

 

 

-

 

 

1,424

 

Comprehensive income

 

  $

13,847

 

  $

2,232

 

  $

(808)

 

  $

15,271

 

 

12



Table of Contents

 

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 5, 2012

 

 

 

Guarantor
Entities

 

Non-Guarantor
Entities

 

Eliminations

 

Consolidated
Totals

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net earnings

 

  $

27,736

 

  $

169

 

  $

(169)

 

  $

27,736

 

Equity in earnings of subsidiaries

 

(169)

 

-

 

169

 

-

 

Other adjustments

 

(42,976)

 

6,773

 

-

 

(36,203)

 

Operating activities

 

(15,409)

 

6,942

 

-

 

(8,467)

 

Investing activities

 

(18,743)

 

(284)

 

-

 

(19,027)

 

Financing activities

 

28,178

 

5,739

 

-

 

33,917

 

Effect of exchange rate on cash

 

5,215

 

(5,084)

 

-

 

131

 

Net (decrease) increase in cash

 

(759)

 

7,313

 

-

 

6,554

 

Cash at the beginning of the period

 

1,066

 

3,145

 

-

 

4,211

 

Cash at the end of the period

 

  $

307

 

  $

10,458

 

  $

-

 

  $

10,765

 

 

 

 

 

For the Three Months Ended April 30, 2011

 

 

 

Guarantor
Entities

 

Non-Guarantor
Entities

 

Eliminations

 

Consolidated
Totals

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

 

 

Net earnings

 

  $

13,847

 

  $

808

 

  $

(808)

 

  $

13,847

 

Equity in earnings of subsidiaries

 

(808)

 

-

 

808

 

-

 

Other adjustments

 

32,189

 

(353)

 

-

 

31,836

 

Operating activities

 

45,228

 

455

 

-

 

45,683

 

Investing activities

 

(27,740)

 

(28)

 

-

 

(27,768)

 

Financing activities

 

(11,243)

 

(1,760)

 

-

 

(13,003)

 

Effect of exchange rate on cash

 

-

 

86

 

-

 

86

 

Net increase (decrease) in cash

 

6,245

 

(1,247)

 

-

 

4,998

 

Cash at the beginning of the period

 

2,273

 

6,895

 

-

 

9,168

 

Cash at the end of the period

 

  $

8,518

 

  $

5,648

 

  $

-

 

  $

14,166

 

 

Note 5. Significant Balance Sheet Accounts

 

Allowance for Doubtful Accounts:  Activity in the allowance for doubtful accounts was as follows:

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

April 30, 2011

 

(Dollars in thousands)

 

 

 

 

 

Allowance for doubtful accounts at beginning of period

 

  $

2,616

 

  $

2,707

 

Additions to reserves

 

461

 

220

 

Writeoffs against allowance for doubtful accounts

 

(10)

 

(393)

 

Collections of previously reserved items

 

51

 

10

 

Allowance for doubtful accounts at end of period

 

  $

3,118

 

  $

2,544

 

 

13



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

Inventories:  Summarized below are the components of inventories:

 

 

 

As of

 

 

 

May 5, 2012

 

January 31, 2012

 

(Dollars in thousands)

 

 

 

 

 

Inventory purchased under distributor agreements

 

  $

165,705

 

  $

174,131

 

Raw materials and spare parts

 

146,787

 

127,345

 

Work in process

 

151,485

 

135,555

 

Finished goods

 

2,009

 

1,519

 

Total inventories

 

  $

465,986

 

  $

438,550

 

 

Raw materials and spare parts include OEM equipment and components used in the manufacturing segment. Included in work in process are seven drilling rigs that are substantially complete and ready for customer orders. Finished goods include manufactured equipment that is essentially complete. The inventory balances above are net of inventory valuation allowances totaling $40.2 million and $40.6 million as of May 5, 2012 and January 31, 2012, respectively.

 

Property, Plant and Equipment, net:  Components of property, plant and equipment, net, were as follows:

 

 

 

As of

 

 

 

May 5, 2012

 

January 31, 2012

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Machinery and equipment

 

  $

35,179

 

  $

34,590

 

Buildings and leasehold improvements

 

43,436

 

32,655

 

Rental equipment

 

88,445

 

87,502

 

Computer hardware and software

 

5,666

 

5,570

 

Accumulated depreciation

 

(78,850)

 

(74,947)

 

Net depreciable assets

 

  $

93,876

 

  $

85,370

 

Construction in progress

 

5,080

 

1,085

 

Land

 

10,556

 

8,169

 

Property, plant and equipment, net

 

  $

109,512

 

  $

94,624

 

 

During the first quarter of Fiscal 2012, we acquired the U.S. properties of Crown that we had previously leased for approximately $12.6 million and an additional facility for $3.5 million.

 

Depreciation expense was $4.1 million and $3.6 million during the three months ended May 5, 2012 and April 30, 2011, respectively.

 

14



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

Intangible Assets and Goodwill: Amounts allocated to intangible assets are amortized in a manner over which the expected benefits of those assets are realized pursuant to their estimated useful lives.  Intangible asset values include the following:

 

 

 

 

 

As of May 5, 2012

 

 

 

Estimated
Useful Life

 

Gross
Carrying
Value

 

Accumulated
Amortization

 

Currency
Translation

 

Net

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Non-current amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

Engineering drawings

 

2.5-10 Years

 

  $

6,346

 

  $

(5,540)

 

  $

189

 

  $

995

 

Distribution contracts

 

27 Years

 

5,997

 

(1,412)

 

-

 

4,585

 

Customer relationships

 

6-11 Years

 

9,489

 

(4,664)

 

652

 

5,477

 

Non-compete covenant

 

5 Years

 

1,420

 

(1,526)

 

106

 

-

 

Total

 

 

 

  $

23,252

 

  $

(13,142)

 

  $

947

 

  $

11,057

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradename

 

-

 

7,077

 

-

 

378

 

7,455

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

  $

30,329

 

  $

(13,142)

 

  $

1,325

 

  $

18,512

 

 

 

 

 

 

 

As of January 31, 2012

 

 

 

Estimated
Useful Life

 

Gross
Carrying
Value

 

EMDSI
Acquisition

 

Accumulated
Amortization

 

Currency
Translation

 

Net

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-current amortizable intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Engineering drawings

 

2.5-10 Years

 

  $

6,346

 

  $

-

 

  $

(5,474)

 

  $

189

 

  $

1,061

 

Distribution contracts

 

27 Years

 

3,384

 

2,613

 

(1,240)

 

-

 

4,757

 

Customer relationships

 

6-11 Years

 

7,409

 

2,080

 

(4,360)

 

638

 

5,767

 

Non-compete covenant

 

5 Years

 

1,420

 

-

 

(1,500)

 

106

 

26

 

Total

 

 

 

  $

18,559

 

  $

4,693

 

  $

(12,574)

 

  $

933

 

  $

11,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-lived intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and tradename

 

-

 

6,316

 

762

 

-

 

374

 

7,452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

  $

24,875

 

  $

5,455

 

  $

(12,574)

 

  $

1,307

 

  $

19,063

 

 

Amortization expense was $0.6 million and $0.5 million during the three months ended May 5, 2012 and April 30, 2011, respectively.

 

The following table presents goodwill (relating entirely to the distribution segment) as of the dates indicated, as well as changes in the account during the period shown:

 

 

 

Amount

 

(Dollars in thousands)

 

 

 

Carrying amount as of January 31, 2012

 

  $

3,801

 

Goodwill acquired during the year

 

-

 

Carrying amount as of May 5, 2012

 

  $

3,801

 

 

15



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

Warranty Costs: Generally, the only warranty provided to our customers for products we sell that were originally manufactured by others, including our key OEMs, is the warranty provided by those original manufacturers. We warrant products manufactured, and services provided, by us for periods of three to 18 months. Based on historical experience and contract terms, we accrue the estimated cost of our product and service warranties at the time of sale or, in some cases, when specific warranty exposures are identified and quantifiable. Accrued warranty costs are adjusted periodically to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. Occasionally, a material warranty issue can arise that is beyond our historical experience. We accrue 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 for the periods ended May 5, 2012 and April 30, 2011, was as follows:

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

April 30, 2011

 

(Dollars in thousands)

 

 

 

 

 

Accrued warranty costs at beginning of period

 

  $

10,686

 

  $

9,110

 

Payments for warranty obligations

 

(1,848)

 

(1,317)

 

Warranty accrual

 

2,798

 

1,063

 

Accrued warranty costs at end of period

 

  $

11,636

 

  $

8,856

 

 

Other current liabilities:  Included in other current liabilities were $5.6 million and $10.9 million of accrued job costs as of May 5, 2012 and April 30, 2011, respectively.  No other item comprises more than 5% of total current liabilities.

 

Note 6. Equity and Share-Based Compensation

 

The Company has 56,179,272 common units issued and outstanding, which consist of both Common Units and Common B Units.  Additionally, we have 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. The number of Common Units and Common B Units issued and outstanding was 27,747,927 and 28,431,345, respectively, as of May 5, 2012 and January 31, 2012.

 

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.

 

16



Table of Contents

 

Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

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 units to our non-executive directors and certain members of our senior executive management. The grants to our four non-executive directors totaled 134,454 restricted units vesting in five (5) 26,891 unit tranches, with each such tranche vesting upon board service for a complete fiscal year. In addition, approximately 62,745 of the restricted units granted to three former directors were earned as part of their service to us with the balance of their grants being forfeited. The executive grants total 33,613 restricted units vesting in five (5) 6,723 unit tranches, with each tranche vesting upon employment for a complete fiscal year.  In addition, approximately 11,204 of the restricted units 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. This performance condition was met for Fiscal 2011, 2010 and 2007 and 6,723 units vested in each fiscal year; however, this performance condition was not met for Fiscal 2009 or Fiscal 2008 and 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 5, 2012, diluted earnings per common unit excluded the approximately 228,571 contingent unvested restricted units related to these September 2007 grants.

 

On May 31, 2011, upon the recommendation of our chairman, approval of our compensation committee and pursuant to the Amended and Restated 2007 Incentive Compensation Plan, we made two grants of equity awards to our Chief Executive Officer. The first was a grant of 154,062 fully vested common units made on May 31, 2011. The second was options to purchase 112,045 common units, which grant was made on May 31, 2011.  These options vest on the first anniversary of the date of the grant, subject to the achievement of a Board-approved Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) target for Fiscal 2011 of $122.0 million (our actual EBITDA was $138.8 million) and have an exercise price of $11.00.

 

As there is no active market for our common units, the fair value for the common units was determined through an independent, third-party valuation of the Company.  This valuation resulted in a fair value of $11.00 per common unit. As such, the 154,062 common units, which vested immediately, were recognized as compensation expense at a fair value of $11.00 per common unit and resulted in approximately $1.7 million of compensation expense recorded in selling and administrative expenses during the second quarter of Fiscal 2011.

 

In order to determine the fair value for the 112,045 options granted on May 31, 2011, we used the Black-Scholes option pricing model.  The options have an exercise price of $11.00 per option and a ten-year contractual life.  The following valuation assumptions were used: expected volatility (40.03%), risk-free interest rate (1.70%), expected term (4.55 years) and no expected dividends.

 

As there is no active market for our common units, we utilized comparisons to a peer group of companies for certain of our key valuation assumptions, including the expected volatility and expected term.  The risk-free interest rate assumption is based upon observed interest rates reasonably appropriate for the term of the options.  The dividend yield assumption is based on our history and expectation of dividend payouts.  Utilizing these valuation assumptions, the fair value of these options was $3.92 per common unit, or $0.4 million of total fair value  As the service measure exceeds the performance measure, which was anticipated to and has been met for Fiscal 2011, the fair value of $0.4 million is being recognized as compensation expense ratably over the one year service requirement and approximately $0.3 million was recognized as compensation expense, recorded in selling and administrative expenses, in Fiscal 2011.  Compensation expense of approximately $0.1 million was recognized during the first quarter of Fiscal 2012.  While the performance condition for these options has been met for Fiscal 2011, these options are not yet exercisable as the service condition has not been reached.

 

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

There were no grants of restricted units or options to purchase common units during the first quarter of Fiscal 2012. There were no option exercises or vesting of restricted units during the first quarter of Fiscal 2012.

 

On April 16, 2012, an $18.0 million distribution was paid to the common unitholders of Stewart & Stevenson LLC. This represented the first distribution other than tax distributions made to unitholders.

 

Note 7. 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 three months ended May 5, 2012 and April 30, 2011, we recognized tax expense of $0.7 million and $0.4 million, respectively, of Texas Margins tax. During the three months ended May 5, 2012 and April 30, 2011, we recognized tax expense of $0.3 million and tax benefit of $0.3 million, respectively, associated with foreign jurisdictions.

 

Generally, we make quarterly distributions to our unit holders to fund their tax obligations. During the three months ended May 5, 2012 and April 30, 2011, we made tax distributions of $8.2 million and $1.1 million, respectively, to our unit holders.

 

Note 8. Related Party Transactions

 

In Fiscal 2009, we received a $37.5 million equipment order from an affiliate that was negotiated at arms-length on terms that were consistent with market pricing for such equipment. Full payment for the order has been received but revenue recognition is deferred until the equipment is sold to a third party. In the second quarter of Fiscal 2011, we purchased a portion of this equipment from the affiliate for $7.4 million and subsequently sold it to a third party for $7.8 million. As a result of this sale to a third party, we recognized revenue and cost of sales, including acquisition cost paid to the affiliate of $0.4 million. As of May 5, 2012 and January 31, 2012, we held the remaining portion of the equipment in inventories in the amount of $24.2 million for resale on behalf of our affiliate, and maintained $30.5 million of the payments received from the affiliate as customer deposits.

 

In March 2012, we acquired the U.S. properties of Crown for approximately $12.6 million.  This acquisition was financed with the proceeds of a $12.5 million loan from an affiliate and is recorded on our balance sheet as long-term debt to affiliate. The loan matures in ten years, bears interest at 5.0% per annum, requires quarterly interest payments beginning in June 2012 and quarterly principal payments of $0.4 million beginning in June 2017, with the principal balance of $5.4 million, along with accrued interest thereon, due in March 2022.  The annual interest expense for Fiscal 2012 will be approximately $0.5 million and is being recognized ratably over the fiscal year and is recorded in interest expense, net in our statements of operations.

 

Also in March 2012, an affiliate acquired the Canada property of Crown from its owner. As a consequence of that acquisition, our lease from the prior owner was replaced by a lease from this affiliate. The lease terms and conditions remain unchanged, including annual rent payments of Canadian $0.8 million per annum, except that the lease term is 10 years ending in March 2022 and rent escalates in accordance with changes in the U.S. consumer price index. The new lease provides us (i) an option to extend the term for two consecutive periods of five years each and (ii) a right of first refusal to purchase the property in the event the affiliate receives a third party bona fide offer to purchase the property.  The annual rent payments for Fiscal 2012 will be approximately Canadian $0.7 million and are being recognized ratably over the fiscal year and are recorded in selling and administrative expenses in our statements of operations.

 

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Stewart & Stevenson LLC and Subsidiaries

Notes to Condensed Consolidated Financial Statements – continued

(Unaudited)

 

Note 9. Litigation and Contingencies

 

In August 2011, a $10.8 million judgment against the Company was entered in the 80th Judicial District Court of Harris County, Texas in the matter of Brady Foret v. Stewart & Stevenson, et al. Our insurer has defended, and is continuing to defend, the Company in this case and has indicated that the judgment will be appealed.  Our self-insurance retention for this matter is $1.0 million, which amount has been accrued in a prior year.  Any costs associated with the appeal and any payment required by an eventual final judgment will be covered by our insurance policies.   This matter is not expected to have a material adverse effect to our consolidated balance sheets, results of operations or cash flows.

 

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. These insurance policies are subject to a self-insured retention for which we are responsible, which is generally $500,000 for newer cases and $1.0 million for cases initiated before Fiscal 2009. 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.

 

Note 10. EMDSI Acquisition

 

On March 23, 2011, we acquired 100% of the stock of EMDSI-Hunt Power, L.L.C. (“EMDSI”) in an all cash transaction from ITOCHU (the “EMDSI Acquisition”) for total consideration of approximately $25.8 million. EMDSI, which is based in Harvey, Louisiana, specializes in the marketing and distribution of medium speed diesel engines for marine propulsion, drilling and power generation applications and is a provider of aftermarket parts and service.

 

The unaudited pro forma condensed combined statement of operations for the three months ended April 30, 2011 gives effect to the March 23, 2011 consummation of the EMDSI Acquisition as if the transaction occurred on February 1, 2011. The unaudited pro forma information is presented for illustration purposes only and is not necessarily indicative of results of operations which would have been reported had the transaction actually occurred on February 1, 2011.

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

April 30, 2011

 

 

 

(unaudited)

 

(unaudited)

 

(Dollars and units in thousands)

 

 

 

 

 

Sales

 

  $

374,414

 

  $

278,374

 

Net earnings

 

  $

27,736

 

  $

13,471

 

 

 

 

 

 

 

Weighted average units outstanding:

 

 

 

 

 

Basic

 

56,179

 

56,025

 

Diluted

 

56,179

 

56,025

 

 

 

 

 

 

 

Net earnings per common unit:

 

 

 

 

 

Basic

 

  $

0.49

 

  $

0.24

 

Diluted

 

  $

0.49

 

  $

0.24

 

 

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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 that we serve;

·                  factors affecting our international sales and operations;

·                  the potential loss of a key OEM supplier;

·                  our failure to accurately estimate costs associated with products produced under fixed-price contracts;

·                  our ability to translate backlog into revenue and profit;

·                  the effect of regulation of hydraulic fracturing on the demand for our products;

·                  the impact of governmental laws and regulations, including environmental laws and regulations;

·                  the hazards to which our employees and customers are exposed during the conduct of our business;

·                  the occurrence of events not covered by insurance;

·                  our susceptibility to adverse weather conditions affecting the Gulf Coast;

·                  unforeseen difficulties relating to acquisitions;

·                  our ability to attract and retain qualified employees;

·                  our failure to maintain key licenses;

·                  our ability to protect our intellectual property;

·                  our level of indebtedness and restrictions on our activities imposed by our debt instruments;

·                  our principal stockholder could exercise control of our affairs through his beneficial ownership of a majority of our common equity; and

·                  the other factors described under “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2012, 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.

 

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Overview

 

We are a leading designer, manufacturer and provider of specialized equipment and aftermarket parts and service for the oil and gas industry and other industries that we have served for over 100 years.

 

Our wide range of products covers hydraulic fracturing, well stimulation, workover, intervention and drilling operations. These products include pumping, acidizing, coiled tubing, cementing and nitrogen units; drilling rigs, workover rigs; power generation systems; and electrical support and distribution systems, as well as engines, transmissions and material handling equipment. We have a substantial installed base of products, which provides us with significant opportunities for recurring, higher-margin aftermarket parts and service revenues from customers in the oil and gas, power generation and various other industries. In addition, we provide rental equipment to our customers, including generator sets, air compressors, rail car movers and material handling equipment.

 

Business drivers and measures

 

Revenue factors

 

Oil and gas industry capital expenditures. Sales of our equipment are significantly driven by the capital spending programs of our customers. Growing worldwide demand for energy has resulted in significantly increased capital expenditures by oil and gas producers in recent years. We believe that we are well positioned for the rapid growth in the development of unconventional oil and gas resources, particularly in North America, which require utilization of technologically advanced well stimulation equipment of the nature that we provide. Although commodity price fluctuations may impact the level of oil and gas exploration activity in the long term, we believe the capital spending programs of our customers at this time continue to be strong; however, the recent short-term decrease in gas prices has caused some lessening and/or delay in demand for our products as evidenced by our equipment order backlog.  While we do not anticipate this development to significantly affect us in the first half of the year, this could result in decreased activity in the second half of Fiscal 2012. A decrease in the capital spending programs of our customers would adversely impact our equipment sales and, to a lesser extent, our aftermarket parts and service and rental sales. Approximately 68.0% and 77.8% of our revenues in the three months ended May 5, 2012 and April 30, 2011, respectively, came from customers in the oil and gas industry.

 

Non-oil and gas industries. We believe that many of the non-oil and gas industries we serve, particularly the commercial vehicle and material handling industries, provide us with opportunities to continue to grow our business.

 

Aftermarket parts and service demand. We provide aftermarket parts and service and rental equipment to customers in the oil and gas, power generation, marine, mining, construction, commercial vehicle and material handling industries. These sales generated approximately 27.2% and 32.2% of our revenues during the three months ended May 5, 2011 and April 30, 2011, respectively. We provide aftermarket parts and service for equipment manufactured by approximately 100 manufacturers, including products manufactured by us and our six key OEMs, and our aftermarket business provides us with a recurring revenue stream. Our rental revenue includes generators, compressors and material handling equipment.

 

Backlog. Among the metrics we track to monitor demand in our business is equipment order backlog. We define backlog as unfilled equipment orders that consist of written purchase orders or signed contracts accompanied, if required by our credit policies, by credit support (typically down payments or letters of credit). As of May 5, 2012, our equipment order backlog was $391.3 million, compared to $412.2 million as of April 30, 2011.  Our equipment order backlog grew for eight consecutive quarters, beginning with the fourth quarter of Fiscal 2009 through the third quarter of Fiscal 2011.  Since this time, backlog has begun to fluctuate as underlying orders have been delivered and new equipment orders have slowed; however, new orders continue to be booked.  The price of gas has decreased during this time and certain anticipated orders have been delayed, pending our customers’ evaluation of both the oil and gas markets and economic climate, as well as their own customer’s needs. We expect to recognize a significant portion of our equipment order backlog as revenue during the remainder of Fiscal 2012.

 

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Table of Contents

 

Backlog of $391.3 million as of May 5, 2012 included a $30.5 million equipment order received in Fiscal 2009 from an affiliate. Revenue recognition from this order is deferred until title to the equipment passes to a third party and all other revenue recognition criteria have been met. A deposit in the amount of $30.5 million is recorded as a customer deposit in our consolidated balance sheet. Included in inventories is $24.2 million in costs related to this order.

 

Seasonality. Our revenues are not significantly affected by seasonality.

 

Operational factors

 

Ensuring timely supply of components. While we believe that the opportunities to grow our business are significant, there are also challenges and uncertainties we face in executing our business plans. Our ability to procure certain components on a timely basis to meet the delivery needs of our customers is a concern. A substantial portion of the products we sell includes components provided by our six key OEMs and on occasion we need to rely upon alternative sources of supply for those components because of the current levels of high demand for the components we require. Our ability to satisfy the delivery requirements of a customer on a timely basis is critical to our success.

 

Labor market constraints. Although we have the benefit of a highly trained and experienced workforce, we believe that attracting and retaining high quality and experienced personnel is a critical success factor, particularly in oil and gas related activities and our distribution segment. Accordingly, we place particular emphasis on career development programs that seek to improve the retention of employees, including senior and middle management.

 

Presentation of historical financial information

 

Our fiscal year begins on February 1 of the stated year and ends on January 31 of the following year. For example, Fiscal 2012 began on February 1, 2012 and will end on January 31, 2013. We report results on the fiscal quarter method, with each quarter comprising approximately 13 weeks.  The first quarter of Fiscal 2012 began on February 1, 2012 and ended on May 5, 2012.

 

Operation as an LLC

 

We conduct our operations through Stewart & Stevenson LLC, a limited liability company, and, as a result, U.S. federal and certain state income taxes are paid by the holders of our common units. Therefore, no U.S. federal income tax expense is recorded in our statement of operations. The amounts shown under ‘‘income taxes’’ in our consolidated financial statements reflect income tax expense associated with foreign jurisdictions and certain state taxes.

 

New accounting pronouncements

 

On February 1, 2012, we adopted Accounting Standards Update (“ASU”) No. 2011-08, “Intangibles-Goodwill and Other.”  This accounting update provides companies with the option to make a qualitative evaluation about the likelihood of goodwill impairment.  A company will be required to perform the two-step impairment test only if it concludes that the fair value of a reporting unit is more likely than not (i.e., more than 50% likelihood) less than its carrying value.  This accounting update is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011.  We will apply this update in conjunction with our Fiscal 2012 annual impairment evaluation performed in the fourth quarter.

 

Also on February 1, 2012, we adopted ASU No. 2011-05, “Presentation of Comprehensive Income” which requires that all non-owner changes in equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  Our adoption of the new guidance did not impact our consolidated financial position, results of operations or cash flows.

 

Also on February 1, 2012, we adopted ASU 2011-04, “Fair Value Measurement.” This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. Our adoption of the new guidance did not impact our consolidated financial position, results of operations or cash flows, although it did require additional fair value disclosures.

 

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Table of Contents

 

Current Quarterly Trends—Three Months Ended May 5, 2012 and January 31, 2012

 

The following table presents our sales and operating profit by segment on a trailing quarter basis as follows:

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

January 31, 2012

 

(Dollars in thousands)

 

 

 

 

 

Sales

 

 

 

 

 

Manufacturing segment sales

 

  $

159,899

 

  $

192,947

 

Distribution segment sales

 

214,515

 

194,915

 

Total sales

 

  $

374,414

 

  $

387,862

 

 

 

 

 

 

 

Operating profit (loss)

 

 

 

 

 

Manufacturing

 

  $

31,087

 

  $

36,166

 

Distribution

 

17,033

 

15,158

 

Corporate and shared services

 

(13,746)

 

(10,667)

 

Total operating profit

 

  $

34,374

 

  $

40,657

 

 

Our sales for the three months ended May 5, 2012 decreased $13.4 million, or 3.5%, as compared to the three months ended January 31, 2012.  Manufacturing segment sales decreased $33.0 million, while distribution segment sales increased $19.6 million.  The decrease in manufacturing segment sales was largely attributable to a $43.7 million decrease in well stimulation equipment, offset by a $17.1 million increase in rig equipment sales.  Well stimulation equipment sales decreased due to a slow-down in orders received during the fourth quarter of Fiscal 2011, which was largely attributable to the decrease in gas prices and customers evaluating the current oil and gas and economic environment.  Distribution segment sales increased for equipment, parts and service and rentals, with equipment sales representing $15.3 million of the increase, largely from power generation equipment.  Overall operating profit margins decreased to 9.2% for the three months ended May 5, 2012 from 10.5% for the three months ended January 31, 2012.  This decrease in operating profit margin is reflective of increased sales from our distribution segment, which generate a lower operating profit margin, and amounted to approximately 57% of total sales for the three months ended May 31, 2012, as compared to approximately 50% of total sales for the three months ended January 31, 2012.  Increased selling and administrative expenses in our corporate and shared services segment were attributable to increased salaries and wages, advertising and travel expenses.  Our equipment backlog grew by $39.7 million to $391.3 million as of May 5, 2012, from $351.6 million as of January 31, 2012, with well stimulation representing the substantial portion of this increase.

 

Comparison of Results of Operations—Three Months Ended May 5, 2012 and April 30, 2011

 

Sales - For the three months ended May 5, 2012, our sales were $374.4 million, an increase of $103.0 million, or 38.0%, compared to the same period of Fiscal 2011 sales of $271.4 million.  The increase in sales impacted both operating segments and was primarily attributable to an overall increase in equipment sales from the oil and gas industry, with increased equipment sales for our well stimulation, seismic products and rigs in our manufacturing segment. Increased sales of power generation, transmissions, prime movers and material handling were primarily responsible for the increase in equipment sales in the distribution segment. Parts and service sales increased in the distribution segment. Sales for the first quarter of Fiscal 2011 include the impact of the EMDSI Acquisition which is reported in our distribution segment, from the date of its acquisition, March 23, 2011.

 

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Table of Contents

 

A breakdown of sales for the periods is as follows:

 

 

 

For the Three Months Ended

 

Change

 

 

 

May 5, 2012

 

April 30, 2011

 

$

 

%

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Manufacturing segment

 

 

 

 

 

 

 

 

 

Equipment

 

$

154,006

 

$

106,008

 

$

47,998

 

45.3%

 

Parts and service

 

5,893

 

6,487

 

(594)

 

-9.2%

 

Total manufacturing sales

 

$

159,899

 

$

112,495

 

$

47,404

 

42.1%

 

 

 

 

 

 

 

 

 

 

 

Distribution segment

 

 

 

 

 

 

 

 

 

Equipment

 

$

108,010

 

$

71,939

 

$

36,071

 

50.1%

 

Parts and service

 

96,673

 

80,739

 

15,934

 

19.7%

 

Rentals

 

9,832

 

6,194

 

3,638

 

58.7%

 

Total distribution sales

 

$

214,515

 

$

158,872

 

$

55,643

 

35.0%

 

 

 

 

 

 

 

 

 

 

 

Total sales

 

$

374,414

 

$

271,367

 

$

103,047

 

38.0%

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

 

 

 

 

 

 

 

 

Manufacturing

 

$

31,087

 

$

19,756

 

11,331

 

57.4%

 

Distribution

 

17,033

 

10,259

 

6,774

 

66.0%

 

Corporate and shared services

 

(13,746)

 

(11,204)

 

(2,542)

 

-22.7%

 

Total operating profit

 

$

34,374

 

$

18,811

 

$

15,563

 

82.7%

 

 

 

 

 

 

 

 

 

 

 

Operating profit percentage

 

 

 

 

 

 

 

 

 

Manufacturing

 

19.4%

 

17.6%

 

 

 

 

 

Distribution

 

7.9%

 

6.5%

 

 

 

 

 

Consolidated

 

9.2%

 

6.9%

 

 

 

 

 

 

Manufacturing segment sales increased by 42.1%, or $47.4 million, for the three months ended May 5, 2012 compared to the same period in Fiscal 2011. Equipment sales increased by $48.0 million and were partially offset by a decrease of $0.6 million in parts and service sales. Equipment sales increased in all product lines, except power generation, with well stimulation equipment continuing to generate the largest portion of the increase. Rigs and seismic products continued to increase significantly during the quarter. A breakdown of manufacturing segment equipment sales by product line is as follows:

 

 

 

For the Three Months Ended

 

Change

 

 

 

May 5, 2012

 

April 30, 2011

 

$

 

%

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Manufacturing equipment sales

 

 

 

 

 

 

 

 

 

Well stimulation

 

$

114,898

 

$

92,047

 

$

22,851

 

24.8%

 

Rigs

 

22,224

 

5,399

 

16,825

 

311.6%

 

Seismic products

 

10,782

 

4,188

 

6,594

 

157.4%

 

Electric products

 

5,660

 

1,947

 

3,713

 

190.7%

 

Power generation

 

-

 

2,425

 

(2,425)

 

-100.0%

 

Other

 

442

 

2

 

440

 

 

 

Total equipment sales

 

$

154,006

 

$

106,008

 

$

47,998

 

45.3%

 

 

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Distribution segment sales increased by $55.6 million to $214.5 million for the three months ended May 5, 2012, compared to $158.9 million during the same period of Fiscal 2011. The increase in distribution segment sales was due to increased equipment sales of $36.1 million, parts and service sales of $15.9 million and rentals sales of $3.6 million. The increase in transmissions and prime movers sales was primarily due to higher sales volumes for oilfield equipment. Power generation sales increased primarily due to sales in non-oil and gas industries; however, we are experiencing increased sales from our oil and gas industry customers for power generation equipment resulting from infrastructure constraints in non-conventional oil and gas plays.

 

 

 

For the Three Months Ended

 

Change

 

 

 

May 5, 2012

 

April 30, 2011

 

$

 

%

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Distribution equipment sales

 

 

 

 

 

 

 

 

 

Power generation

 

$

31,713

 

$

14,796

 

$

16,917

 

114.3%

 

Prime movers

 

24,784

 

18,295

 

6,489

 

35.5%

 

Transmissions

 

22,712

 

14,237

 

8,475

 

59.5%

 

Material handling

 

12,063

 

8,817

 

3,246

 

36.8%

 

Engines

 

8,561

 

9,630

 

(1,069)

 

-11.1%

 

Rail car movers

 

4,257

 

4,117

 

140

 

3.4%

 

Other

 

3,920

 

2,047

 

1,873

 

91.5%

 

Total equipment sales

 

$

108,010

 

$

71,939

 

$

36,071

 

50.1%

 

 

Gross profit — Our gross profit was $73.0 million for the three months ended May 5, 2012 compared to $50.5 million for the same period in Fiscal 2010, reflecting an increase in gross profit margin from 18.6% to 19.5%.  Our gross profit margin increased by 0.9 points due to higher sales volumes and product mix. The manufacturing segment gross profit margin increased from 22.3% to 23.7%, an increase of 1.4 points, and the distribution segment gross profit margin increased from 16.0% to 16.4%, an increase of 0.4 points. These increases in gross profit margin were due in large part to higher sales volumes and product mix.

 

Selling and administrative expenses — Selling and administrative expenses increased by $7.2 million to $38.6 million for the three months ended May 5, 2012, primarily as a result of increases in salaries and wages, including reductions in bonus accruals, increased headcount, share-based compensation expense, travel, depreciation and advertising expenses, all of which amounted to approximately $6.0 million.  These expenses were partially offset by reductions in legal and professional expense and new product development costs. The remaining increase is attributable to, and reflective of, the overall increase in our business activity. As a percentage of sales, selling and administrative expenses decreased to 10.3% from 11.5% for the three months ended May 5, 2012, as compared to the same period in Fiscal 2011.

 

Other expense, net — Other expense, net decreased to $0.1 million for the three months ended May 5, 2012 compared to $0.4 million for the three months ended April 30, 2011. Other expense is primarily the result of foreign currency transaction losses related to our foreign subsidiaries.

 

Operating profit — Our operating profit increased to $34.4 million, or 9.2% of sales, during the three months ended May 5, 2012 from $18.8 million, or 6.9% of sales, in the same period of Fiscal 2011, primarily as the result of higher sales volumes and overall improved gross profit margins.

 

Interest expense, net - Interest expense, net for the three months ended May 5, 2012 increased by $0.7 million over the same period in Fiscal 2011 mainly as a result of higher borrowings and interest rates for our revolving credit facility in the current period.

 

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Segment data

 

Our reportable segments are as follows:

 

Manufacturing

 

We design, manufacture and market equipment for U.S. and international oilfield service providers and drilling and workover contractors, as well as national oil companies that require integrated and customized product solutions. We manufacture equipment specifically for hydraulic fracturing, well stimulation, well workover, intervention and drilling operations. Our manufactured products include integrated solutions, which incorporate a variety of components into a single system, for a wide range of oilfield services and support applications. In addition, we provide parts and service to customers primarily in the oil and gas industry.

 

Distribution

 

We provide stand-alone products and aftermarket parts and service for products manufactured by us, our six key OEMs and other manufacturers. In addition, we provide rental equipment including generator sets, air compressors, rail car movers and material handling equipment to our customers. Our aftermarket parts and service operations, which provide us with a recurring, higher-margin source of revenue, serve customers engaged in the oil and gas, power generation, marine, mining, construction, commercial vehicle and material handling industries, as well as other industries.

 

Corporate and shared services

 

Our corporate and shared services segment includes administrative overhead normally not associated with specific activities within the operating segments. These expenses include legal, finance and accounting, internal audit, human resources, information technology, marketing, supply chain and similar corporate office costs.

 

Intra-segment revenues and costs are eliminated, and operating profit (loss) represents earnings (loss) before interest and income taxes.

 

Segment Results Comparison – Three Months Ended May 5, 2012 and April 30, 2011

 

Manufacturing

 

Operating profit generated by our manufacturing segment increased to $31.1 million, or 19.4% of sales, for the three months ended May 5, 2012, from $19.8 million, or 17.6% of sales, for the same period of Fiscal 2011. The $11.3 million increase in operating profit was attributable to increases of $12.8 million in sales volume which was partially offset by an increase in selling and administrative expenses of $1.5 million.  Selling and administrative expenses increases were primarily related to higher salaries and wages, increased headcount and travel, partially offset by decreases in new product development costs ($0.9 million). The remaining increase is attributable to, and reflective of, the overall increase in our business activity.

 

Our manufacturing backlog as of May 5, 2012 was $267.2 million, as compared to $278.6 million as of April 30, 2011, a decrease of 4.1%. Backlog as of both of these dates included an equipment order received in Fiscal 2009 from an affiliate in the amount of $30.5 million and $37.5 million, respectively. Revenue recognition from this order is deferred until title to the product passes to a third party and all other revenue recognition criteria have been met. As of May 5, 2012, a deposit in the amount of $30.5 million was recorded as a customer deposit in the consolidated balance sheet and included in inventories was $24.2 million of costs related to this order.

 

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Distribution

 

Operating profit generated by the distribution segment increased to $17.0 million during the three months ended May 5, 2012 from $10.3 million during the same period in Fiscal 2011, representing an increase in operating profit percentage from 6.5% to 7.9%. The $6.7 million increase in operating profit was attributable to increases of $9.1 million in sales volume, $0.6 million in average gross profit margins and $0.3 million in other, partially offset by an increase of $3.3 million in selling and administrative expenses. The increase in selling and administrative expenses was due to higher salaries and wages, increased headcount and travel, partially offset by decreases in bonus accruals ($2.3 million). The remaining increase is attributable to, and reflective of, the overall increase in our business activity.

 

Our distribution backlog as of May 5, 2012 was $124.1 million, as compared to $133.6 million on April 30, 2011, a decrease of 7.1%.

 

Corporate and shared services

 

Corporate and shared services expenses increased to $13.7 million during the three months ended May 5, 2012 compared to $11.2 million during the same period of Fiscal 2011, primarily as a result of higher salaries and wages, share-based compensation expense, advertising and travel expenses. These increases were partially offset by decreases in legal and professional fees and bonus accruals. Corporate and shared services expenses decreased from 4.1% to 3.7% as a percentage of sales.

 

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.

 

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.

 

Cash flows

 

 

 

For the Three Months Ended

 

 

 

May 5, 2012

 

April 30, 2011

 

(Dollars in thousands)

 

 

 

 

 

Net cash (used in) provided by operating activities

 

$

(8,467)

 

$

45,683

 

Net cash used in investing activities

 

(19,027)

 

(27,768)

 

Net cash provided by (used in) financing activities

 

33,917

 

(13,003)

 

 

As of May 5, 2012, our cash and cash equivalent balance was $10.8 million. The level of cash and cash equivalents is impacted by the timing of cash receipts, disbursements and borrowings and payments under our revolving credit facility.

 

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Net cash flow from operating activities for the three months ended May 5, 2012 decreased by $54.1 million compared to the same period in Fiscal 2011. While net earnings increased $13.9 million in Fiscal 2012, the decrease in cash flow from operating activities was largely attributable to decreased cash flow due to the timing of (i) completing, billing and collecting on projects for recoverable costs and accrued profits not yet billed and (ii) receipt of down payments on new contracts signed for customer deposits, which in the aggregate amounted to $22.6 million.  Further, decreases in accounts payable and accrued payroll and incentives used $48.1 million of cash flow. The decrease in accrued payroll and incentives relates to both the timing of payroll cycles and the payment of Fiscal 2011 bonuses, while the decrease in accounts payable reflects a decrease in our order rate, as well as the timing of placing orders and making payments.

 

Net cash used in investing activities decreased by $8.7 million for the three months ended May 5, 2012 compared to the same period in Fiscal 2011. The overall decrease results from less cash flow attributable to acquisitions in Fiscal 2012 of $7.2 million and decreased capital expenditures and additions to rental equipment in Fiscal 2012 of $1.5 million.

 

Net cash provided by financing activities increased by $46.9 million for three months ended May 5, 2012 compared to the same period in Fiscal 2011. Borrowings under our revolving credit facility and short-term notes payable increased $60.0 million to fund portions of our operating and investing activities, as well as distributions to our unitholders.  We financed the purchase of the U.S. properties of Crown, which we had previously leased, with debt to an affiliate of $12.5 million.  Distributions to our unitholders increased $25.2 million, with $7.2 million of this increase attributable to higher net earnings and the remaining $18.0 million representing the first distribution to our unitholders other than for taxes. The payment of future distributions to our unitholders other than for taxes is at the discretion of the Company’s Board of Directors and will be dependent upon the Company’s results of operations, financial condition, capital requirements and other factors deemed relevant by the Company’s Board of Directors.

 

Financing Sources

 

In December 2011, we renewed our $250 million asset-based revolving credit facility, which is expandable by a $125 million accordion, and it is secured by substantially all accounts receivable, inventory and property, plant and equipment of the Company and expires in December 2016. Borrowings bear interest based on a pricing grid that is determined by the available borrowing capacity under the revolving credit facility and the interest rate selected: LIBOR plus a margin ranging from 1.75% to 2.25% per annum or Prime Rate plus a margin ranging from 0.75% to 1.25%. 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 $73.6 million at May 5, 2012. As required by the terms of the revolving credit facility, our available borrowing capacity is required to be reduced by the principal amount of our senior notes outstanding plus $25 million in the event the senior notes are not repaid by the date which is 60 days prior to their stated maturity of July 2014 or the maturity of the senior notes is not otherwise extended to at least 90 days beyond the maturity of the revolving credit facility.

 

We are in the process of exercising the accordion feature under our revolving credit facility for a $75 million expansion.  The expansion of our revolving credit facility is expected to be completed during the second quarter of Fiscal 2012, although there is no assurance that we will be able to do so, and is anticipated to allow flexibility as we evaluate business and strategic opportunities, as well as address our liquidity needs.

 

In June 2006, we issued $150.0 million in principal amount of 10% Senior Notes due 2014. The senior notes are unsecured and are guaranteed on an unsecured basis by our domestic restricted subsidiaries. The senior notes mature on July 15, 2014, and interest is payable semi-annually on January 15 and July 15.

 

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Borrowings under our revolving credit facility and our senior notes were as follows:

 

 

 

As of

 

 

 

May 5, 2012

 

January 31, 2012

 

(Dollars in thousands)

 

 

 

 

 

Revolving credit facility

 

$

130,390

 

$

86,772

 

Unsecured senior notes

 

150,000

 

150,000

 

Total

 

$

280,390

 

$

236,772

 

 

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 5, 2012.  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 $25.0 million or less.  The covenants in the senior notes indenture requires that, if we were to incur additional indebtedness, pay dividends or make certain other restricted payments (in each case, subject to various exceptions set forth in the indenture), after giving effect to the incurrence of such additional indebtedness, we have a fixed charge coverage ratio, as described in the indenture, of at least 2.5 to 1.0.

 

Our estimated capital expenditures for Fiscal 2012 are not anticipated to exceed $35.0 million, with up to $12.0 million of this amount available for additions to our rental fleet.  This estimate excludes the impact of the U.S. Crown property acquisitions and future acquisitions, if any.

 

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 5.4%, 2.1% and 0.1%, respectively, of our total revenue during the three months ended May 5, 2012. Our results of operations were not significantly impacted by changes in currency exchange rates.

 

A 10% depreciation of the Canadian dollar with respect to the U.S. dollar would have caused our Canadian subsidiary’s assets and sales as of and for the three months ended May 5, 2012 to decrease in U.S. dollar terms by approximately $2.9 million and $2.1 million, respectively. A 10% depreciation of the Colombian peso with respect to the U.S. dollar would have caused our Colombian subsidiary’s assets and sales as of and for the three months ended May 5, 2012 to decrease in U.S. dollar terms by approximately $2.3 million and $0.7 million, respectively.

 

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. We have historically utilized the official rate for our Venezuelan operations. Beginning February 1, 2010, we utilized the U.S. dollar as the functional currency for our Venezuelan subsidiary and remeasured its financial statements into U.S. dollars at the official rate. Accordingly, using ‘‘hyperinflationary accounting,’’ we recognized the related losses or gains from such remeasurement of its balance sheet in the consolidated statements of its operations.

 

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At January 31, 2011, we evaluated the rate at which we remeasure our Venezuelan subsidiary and concluded that based on the continued slow-down of the Venezuelan economy and resultant constraints presently impacting the banking environment and associated limitations therein, that the SITME rate of 5.30 Bolivars per U.S. dollar was a more appropriate remeasurement rate. The result of this change in remeasurement rate did not have a material impact to our financial statements. During the three months ended May 5, 2012 and April 30, 2011, the SITME rate and official rate 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.

 

Effects of inflation

 

We do not believe that inflation has had a material adverse effect on our financial condition or results of operations in recent years. However, to the extent that the cost of components and other supplies that we purchase rise and we are unable to pass those price increases on to our customers, our financial condition and results of operations would be adversely affected. In instances in which we enter into contracts, such as for the manufacture of certain equipment that requires lead time between the placing of the order and delivery, the majority of those contracts are at a fixed price. Any increase in component and other supply costs over the term of these contracts would reduce our profit margin on those products.

 

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 the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), 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 and CFO have 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 and CFO, as appropriate, to allow timely decisions regarding disclosure.

 

Changes in Internal Control over Financial Reporting

 

Management, including our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended May 5, 2012. We determined that there were no changes in our internal control over financial reporting during the quarter ended May 5, 2012 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 August 2011, a $10.8 million judgment against the Company was entered in the 80th Judicial District Court of Harris County, Texas in the matter of Brady Foret v. Stewart & Stevenson, et al. Our insurer has defended, and is continuing to defend, the Company in this case and has indicated that the judgment will be appealed.  Our self-insurance retention for this matter is $1.0 million, which amount has been accrued in a prior year.  Any costs associated with the appeal and any payment required by an eventual final judgment will be covered by our insurance policies.   This matter is not expected to have a material adverse effect to our consolidated balance sheets, results of operations or cash flows.

 

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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. These insurance policies are subject to a self-insured retention for which we are responsible, which is generally $500,000 for newer cases and $1.0 million for cases initiated before Fiscal 2009. 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 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, 2012, 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 Fiscal 2011 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.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

Not applicable.

 

Item 6.  Exhibits

 

31.1

Rule 13a-14(a)/15d-14(a) certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

31.2

Rule 13a-14(a)/15d-14(a) certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

32.1

Section 1350 certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

Section 1350 certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

*101

The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended May 5, 2012, formatted in Extensible Business Reporting Language (XBRL), include: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Comprehensive Income, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) related notes.

 


*XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise is not subject to liability under these sections.

 

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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

 

 

 

 

By:

/S/ STEVE FULGHAM

 

 

Steve Fulgham

 

 

Chief Executive Officer

 

 

 

 

 

 

 

By:

/S/ JOHN B. SIMMONS

 

 

John B. Simmons

 

 

Chief Financial Officer

 

 

June 15, 2012

 

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