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 November 3, 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
organization)
|
|
(I.R.S. Employer Identification Number)
|
|
|
|
1000 Louisiana St., Suite 5900, Houston, TX
|
|
77002
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
(713) 751-2700
(Registrants telephone number including area code)
None
(Former name, former address, and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or if such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
þ
* No
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
þ
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
þ
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
þ
There is no market for the registrants equity. As of November 3, 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
PART I. Financial Information
Item 1. Financial Statements
Stewart & Stevenson LLC and Subsidiaries
Condensed Consolidated Balance Sheets
|
|
As of
|
|
|
|
November 3, 2012
|
|
January 31, 2012
|
|
(Dollars in thousands)
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,300
|
|
$
|
4,211
|
|
Restricted cash
|
|
-
|
|
5,000
|
|
Accounts receivable, net
|
|
135,860
|
|
116,144
|
|
Recoverable costs and accrued profits not yet billed
|
|
45,490
|
|
75,966
|
|
Inventories
|
|
450,714
|
|
438,550
|
|
Other current assets
|
|
4,869
|
|
5,714
|
|
Total current assets
|
|
641,233
|
|
645,585
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
115,148
|
|
94,624
|
|
Goodwill and intangibles, net
|
|
21,315
|
|
22,864
|
|
Deferred financing costs and other assets
|
|
4,587
|
|
4,928
|
|
Total assets
|
|
$
|
782,283
|
|
$
|
768,001
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Bank notes payable
|
|
$
|
6,412
|
|
$
|
6,948
|
|
Accounts payable
|
|
84,274
|
|
143,493
|
|
Accrued payrolls and incentives
|
|
14,113
|
|
30,723
|
|
Billings in excess of incurred costs
|
|
6,597
|
|
1,734
|
|
Customer deposits
|
|
69,475
|
|
85,579
|
|
Other current liabilities
|
|
50,328
|
|
41,752
|
|
Total current liabilities
|
|
231,199
|
|
310,229
|
|
|
|
|
|
|
|
Long-term debt
|
|
290,700
|
|
236,772
|
|
Long-term debt to affiliate
|
|
12,510
|
|
-
|
|
Other long-term liabilities
|
|
-
|
|
8
|
|
Total liabilities
|
|
534,409
|
|
547,009
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
Common units, 56,179,272 issued and outstanding
|
|
76,247
|
|
76,101
|
|
Accumulated other comprehensive income
|
|
8,350
|
|
5,236
|
|
Retained earnings
|
|
163,277
|
|
139,655
|
|
Total shareholders equity
|
|
247,874
|
|
220,992
|
|
Total liabilities and shareholders equity
|
|
$
|
782,283
|
|
$
|
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
|
|
For the Nine Months Ended
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
November 3, 2012
|
|
October 29, 2011
|
|
(Dollars and units in thousands)
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
281,
843
|
|
$
|
351,
333
|
|
$
|
957,864
|
|
$
|
936,145
|
|
Cost of sales
|
|
228,107
|
|
279,568
|
|
773,278
|
|
753,997
|
|
Gross profit
|
|
53,736
|
|
71,765
|
|
184,586
|
|
182,148
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
31,584
|
|
33,990
|
|
105,130
|
|
101,773
|
|
Other expense, net
|
|
3,283
|
|
154
|
|
3,641
|
|
431
|
|
Operating profit
|
|
18,869
|
|
37,621
|
|
75,815
|
|
79,944
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
5,585
|
|
4,994
|
|
16,896
|
|
14,694
|
|
Earnings before income taxes
|
|
13,
284
|
|
32,627
|
|
58,919
|
|
65,250
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
416
|
|
945
|
|
1,554
|
|
1,763
|
|
Net earnings
|
|
$
|
12,
868
|
|
$
|
31,
682
|
|
$
|
57,365
|
|
$
|
63,487
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
56,
179
|
|
56,179
|
|
56,179
|
|
56,112
|
|
Diluted
|
|
56,
179
|
|
56,179
|
|
56,179
|
|
56,112
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common unit:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.23
|
|
$
|
0.56
|
|
$
|
1.02
|
|
$
|
1.13
|
|
Diluted
|
|
$
|
0.23
|
|
$
|
0.56
|
|
$
|
1.02
|
|
$
|
1.13
|
|
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
|
|
For the Nine Months Ended
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
November 3, 2012
|
|
October 29, 2011
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
12,868
|
|
$
|
31,682
|
|
$
|
57,365
|
|
$
|
63,487
|
|
Currency translation adjustments
|
|
3,034
|
|
(1,182)
|
|
3,114
|
|
85
|
|
Comprehensive income
|
|
$
|
15,902
|
|
$
|
30,500
|
|
$
|
60,479
|
|
$
|
63,572
|
|
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 Nine Months Ended
|
|
|
|
November 3, 2012
|
|
|
October 29, 2011
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
Net earnings
|
|
$
|
57,365
|
|
|
$
|
63,487
|
|
Adjustments to reconcile net earnings to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
Amortization of deferred financing costs
|
|
1,144
|
|
|
1,228
|
|
Depreciation and amortization
|
|
14,412
|
|
|
13,779
|
|
Share-based compensation expense
|
|
147
|
|
|
1,980
|
|
Non-cash foreign exchange losses (gains)
|
|
3,098
|
|
|
(291
|
)
|
Change in operating assets and liabilities net of the effect of acquisitions:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
(19,664
|
)
|
|
(31,275
|
)
|
Recoverable costs and accrued profits not yet billed
|
|
30,495
|
|
|
30,499
|
|
Inventories
|
|
(12,094
|
)
|
|
(98,385
|
)
|
Accounts payable
|
|
(59,262
|
)
|
|
41,898
|
|
Accrued payrolls and incentives
|
|
(16,611
|
)
|
|
4,643
|
|
Billings in excess of incurred costs
|
|
4,843
|
|
|
(1,598
|
)
|
Customer deposits
|
|
(16,116
|
)
|
|
16,860
|
|
Other current assets and liabilities
|
|
8,960
|
|
|
(1,520
|
)
|
Other, net
|
|
546
|
|
|
1,230
|
|
Net cash (used in) provided by operating activities
|
|
(2,737
|
)
|
|
42,535
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
Capital expenditures
|
|
(5,566
|
)
|
|
(6,271
|
)
|
Additions to rental equipment
|
|
(11,618
|
)
|
|
(23,987
|
)
|
Acquisitions of properties
|
|
(16,153
|
)
|
|
-
|
|
Acquisitions, net of cash acquired
|
|
-
|
|
|
(23,500
|
)
|
Proceeds from the sale of property, plant and equipment, net
|
|
5
|
|
|
-
|
|
Net cash used in investing activities
|
|
(33,332
|
)
|
|
(53,758
|
)
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
Change in short-term notes payable
|
|
(516
|
)
|
|
1,208
|
|
Deferred financing costs
|
|
(1,137
|
)
|
|
-
|
|
Decrease in restricted cash
|
|
5,000
|
|
|
-
|
|
Long-term debt to affiliate
|
|
12,510
|
|
|
-
|
|
Change in long-term revolving loans
|
|
53,928
|
|
|
21,566
|
|
Distributions to unitholders
|
|
(18,000
|
)
|
|
-
|
|
Distributions to unitholders for tax obligations
|
|
(15,743
|
)
|
|
(10,428
|
)
|
Net cash provided by financing activities
|
|
36,042
|
|
|
12,346
|
|
|
|
|
|
|
|
|
Effect of exchange rate on cash
|
|
116
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
89
|
|
|
1,022
|
|
Cash and cash equivalents, beginning of fiscal period
|
|
4,211
|
|
|
9,168
|
|
Cash and cash equivalents, end of fiscal period
|
|
$
|
4,300
|
|
|
$
|
10,190
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
Interest
|
|
$
|
11,378
|
|
|
$
|
9,310
|
|
Income taxes
|
|
$
|
3,329
|
|
|
$
|
2,175
|
|
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 and nine months ended November 3, 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 third quarter of Fiscal 2012 began on August 5, 2012 and ended on November 3, 2012. We refer to this period as the three months ended or the nine months ended November 3, 2012.
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.
7
Table of Contents
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements continued
(Unaudited)
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 may 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 No. 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.
In July 2012, the Financial Accounting Standards Board (FASB) issued ASU No. 2012-02, Intangibles Goodwill and Other (Topic 350) (ASU No. 2012-02). This accounting update allows companies the option to make a qualitative evaluation of long-lived intangible assets for possible impairment, similar to that allowed by ASU No. 2011-08 for goodwill. The quantitative assessment will only be required when it is more likely than not that a long-lived intangible asset is impaired. The amendment is effective for interim and annual impairment testing performed for fiscal years beginning after September 15, 2012, however early adoption is permitted. We may apply this update in conjunction with our Fiscal 2012 annual impairment evaluation performed in the fourth quarter.
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
|
|
For the Nine Months Ended
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
November 3, 2012
|
|
October 29, 2011
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
103,561
|
|
|
$
|
150,490
|
|
|
$
|
373,005
|
|
|
$
|
388,970
|
|
|
Parts and service
|
|
6,571
|
|
|
6,560
|
|
|
17,766
|
|
|
17,308
|
|
|
Total manufacturing sales
|
|
$
|
110,132
|
|
|
$
|
157,050
|
|
|
$
|
390,771
|
|
|
$
|
406,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution segment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
67,009
|
|
|
$
|
95,817
|
|
|
$
|
253,752
|
|
|
$
|
248,013
|
|
|
Parts and service
|
|
90,563
|
|
|
88,483
|
|
|
278,714
|
|
|
257,216
|
|
|
Rentals
|
|
14,139
|
|
|
9,983
|
|
|
34,627
|
|
|
24,638
|
|
|
Total distribution sales
|
|
$
|
171,711
|
|
|
$
|
194,283
|
|
|
$
|
567,093
|
|
|
$
|
529,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
281,843
|
|
|
$
|
351,333
|
|
|
$
|
957,864
|
|
|
$
|
936,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
21,163
|
|
|
$
|
31,592
|
|
|
$
|
75,282
|
|
|
$
|
76,663
|
|
|
Distribution
|
|
7,503
|
|
|
18,179
|
|
|
35,952
|
|
|
41,978
|
|
|
Corporate and shared services
|
|
(9,797
|
)
|
|
(12,150
|
)
|
|
(35,419
|
)
|
|
(38,697
|
)
|
|
Total operating profit
|
|
$
|
18,869
|
|
|
$
|
37,621
|
|
|
$
|
75,815
|
|
|
$
|
79,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
19.2
|
%
|
|
20.1
|
%
|
|
19.3
|
%
|
|
18.9
|
%
|
|
Distribution
|
|
4.4
|
%
|
|
9.4
|
%
|
|
6.3
|
%
|
|
7.9
|
%
|
|
Consolidated
|
|
6.7
|
%
|
|
10.7
|
%
|
|
7.9
|
%
|
|
8.5
|
%
|
|
Note 4. Long-Term Debt
|
|
As of
|
|
|
|
November 3, 2012
|
|
January 31, 2012
|
|
(Dollars in thousands)
|
|
|
|
|
|
Bank notes payable
|
|
$
|
6,412
|
|
$
|
6,948
|
|
Long-term debt to affiliate
|
|
12,510
|
|
-
|
|
Revolving credit facility
|
|
140,700
|
|
86,772
|
|
Unsecured senior notes
|
|
150,000
|
|
150,000
|
|
Total
|
|
309,622
|
|
243,720
|
|
Less: current portion of debt
|
|
(6,412)
|
|
(6,948)
|
|
Long-term debt
|
|
$
|
303,210
|
|
$
|
236,772
|
|
9
Table of Contents
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements continued
(Unaudited)
Bank Notes Payable:
Bank notes payable includes certain short-term secured loans relating to our South American operations, a floor plan financing agreement and certain equipment loans. During the second quarter of Fiscal 2012, we entered into a new floor plan agreement with a new lender to finance the operations of one of our subsidiaries. The new agreement currently provides for a $6.0 million wholesale floor plan facility, bears interest at Prime Rate less a margin of 0.5%, is secured by the inventory and equipment the facility finances and their related proceeds and may be canceled by the lender or us at any time. The restricted cash on our balance sheet at January 31, 2012 represented collateral securing the old floor plan financing agreement that was not required by the terms of the new agreement.
Long-term Debt to Affiliate:
Our long-term debt to affiliate relates to 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 and requires quarterly interest payments which began 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 July 11, 2012, we exercised $75 million of the $125 million accordion feature in the Third Amended and Restated Credit Agreement (the Credit Agreement). As a result, the Credit Agreement as expanded provides for a $325 million asset-based revolving credit facility, which is expandable by an additional $50 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 2.0% as of November 3, 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% ($113.8 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 November 3, 2012, there were $11.1 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 $148.4 million at November 3, 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 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 November 3, 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 $36.0 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 nine months ended November 3, 2012, we incurred $1.0 million of capitalized legal and financing costs associated with the revolving credit facility. As of November 3, 2012, $4.1 million of capitalized legal and financing costs, net are recorded in deferred financing costs and other in our consolidated balance sheet.
Our bank notes payable and revolving credit facility have interest rates which are tied to current market rates, and thus, their fair values approximate 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 November 3, 2012, our senior notes with a carrying value of $150.0 million had a fair value of $150.4 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 $325.0 million revolving credit facility.
The following condensed consolidated financial statements present separately the financial position, results of operations and cash flows of Stewart & Stevenson LLC, which is the parent entity, Stewart & Stevenson Funding Corp. and the guarantors (collectively, Guarantor Entities) and all non-guarantor subsidiaries of the Company (Non-Guarantor Entities) based on the equity method of accounting. Stewart & Stevenson LLC and Stewart & Stevenson Funding Corp. have no operations, nor any material assets, and have been combined with the guarantor subsidiaries for this presentation.
Condensed Consolidating Balance Sheets
|
|
As of November 3, 2012
|
|
|
|
(Unaudited)
|
|
|
|
Guarantor
Entities
|
|
Non-Guarantor
Entities
|
|
Eliminations
|
|
Consolidated
Totals
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
585,015
|
|
$
|
56,218
|
|
$
|
-
|
|
$
|
641,233
|
|
Property, plant and equipment, net
|
|
112,281
|
|
2,867
|
|
-
|
|
115,148
|
|
Other assets
|
|
7,292
|
|
3,560
|
|
15,050
|
|
25,902
|
|
Total assets
|
|
$
|
704,588
|
|
$
|
62,645
|
|
$
|
15,050
|
|
$
|
782,283
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
199,514
|
|
$
|
31,685
|
|
$
|
-
|
|
$
|
231,199
|
|
Intercompany (receivables) payables
|
|
(46,010)
|
|
46,010
|
|
-
|
|
-
|
|
Long-term liabilities
|
|
303,210
|
|
-
|
|
-
|
|
303,210
|
|
Shareholders equity (deficit)
|
|
247,874
|
|
(15,050)
|
|
15,050
|
|
247,874
|
|
Total liabilities and shareholders equity
|
|
$
|
704,588
|
|
$
|
62,645
|
|
$
|
15,050
|
|
$
|
782,283
|
|
|
|
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 November 3, 2012
|
|
|
|
Guarantor
Entities
|
|
Non-Guarantor
Entities
|
|
Eliminations
|
|
Consolidated
Totals
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
245,872
|
|
$
|
35,971
|
|
$
|
-
|
|
$
|
281,843
|
|
Cost of sales
|
|
196,278
|
|
31,829
|
|
-
|
|
228,107
|
|
Gross profit
|
|
49,594
|
|
4,142
|
|
-
|
|
53,736
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
27,854
|
|
3,730
|
|
-
|
|
31,584
|
|
Equity in loss of subsidiaries
|
|
3,575
|
|
-
|
|
(3,575)
|
|
-
|
|
Other (income) expense, net
|
|
(168)
|
|
3,451
|
|
-
|
|
3,283
|
|
Operating profit (loss)
|
|
18,333
|
|
(3,039)
|
|
3,575
|
|
18,869
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
4,961
|
|
624
|
|
-
|
|
5,585
|
|
Earnings (loss) before income taxes
|
|
13,372
|
|
(3,663)
|
|
3,575
|
|
13,284
|
|
Income tax expense (benefit)
|
|
504
|
|
(88)
|
|
-
|
|
416
|
|
Net earnings (loss)
|
|
$
|
12,868
|
|
$
|
(3,575)
|
|
$
|
3,575
|
|
$
|
12,868
|
|
Currency translation adjustments
|
|
-
|
|
3,034
|
|
-
|
|
3,034
|
|
Comprehensive income (loss)
|
|
$
|
12,868
|
|
$
|
(541)
|
|
$
|
3,575
|
|
$
|
15,902
|
|
|
|
For the Three Months Ended October 29, 2011
|
|
|
|
Guarantor
Entities
|
|
Non-Guarantor
Entities
|
|
Eliminations
|
|
Consolidated
Totals
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
312,995
|
|
$
|
38,338
|
|
$
|
-
|
|
$
|
351,333
|
|
Cost of sales
|
|
249,756
|
|
29,812
|
|
-
|
|
279,568
|
|
Gross profit
|
|
63,239
|
|
8,526
|
|
-
|
|
71,765
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
29,920
|
|
4,070
|
|
-
|
|
33,990
|
|
Equity in earnings of subsidiaries
|
|
(3,293)
|
|
-
|
|
3,293
|
|
-
|
|
Other expense, net
|
|
146
|
|
8
|
|
-
|
|
154
|
|
Operating profit
|
|
36,466
|
|
4,448
|
|
(3,293)
|
|
37,621
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
4,183
|
|
811
|
|
-
|
|
4,994
|
|
Earnings before income taxes
|
|
32,283
|
|
3,637
|
|
(3,293)
|
|
32,627
|
|
Income tax expense
|
|
601
|
|
344
|
|
-
|
|
945
|
|
Net earnings
|
|
$
|
31,682
|
|
$
|
3,293
|
|
$
|
(3,293)
|
|
$
|
31,682
|
|
Currency translation adjustments
|
|
-
|
|
(1,182)
|
|
-
|
|
(1,182)
|
|
Comprehensive income
|
|
$
|
31,682
|
|
$
|
2,111
|
|
$
|
(3,293)
|
|
$
|
30,500
|
|
12
Table of Contents
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements continued
(Unaudited)
Condensed Consolidating Statements of Operations, continued
(Unaudited)
|
|
For the Nine Months Ended November 3, 2012
|
|
|
|
Guarantor
Entities
|
|
Non-Guarantor
Entities
|
|
Eliminations
|
|
Consolidated
Totals
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
859,206
|
|
$
|
98,658
|
|
$
|
-
|
|
$
|
957,864
|
|
Cost of sales
|
|
688,250
|
|
85,028
|
|
-
|
|
773,278
|
|
Gross profit
|
|
170,956
|
|
13,630
|
|
-
|
|
184,586
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
93,116
|
|
12,014
|
|
-
|
|
105,130
|
|
Equity in loss of subsidiaries
|
|
4,214
|
|
-
|
|
(4,214)
|
|
-
|
|
Other (income) expense, net
|
|
(94)
|
|
3,735
|
|
-
|
|
3,641
|
|
Operating profit (loss)
|
|
73,720
|
|
(2,119)
|
|
4,214
|
|
75,815
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
14,609
|
|
2,287
|
|
-
|
|
16,896
|
|
Earnings (loss) before income taxes
|
|
59,111
|
|
(4,406)
|
|
4,214
|
|
58,919
|
|
Income tax expense (benefit)
|
|
1,746
|
|
(192)
|
|
-
|
|
1,554
|
|
Net earnings (loss)
|
|
$
|
57,365
|
|
$
|
(4,214)
|
|
$
|
4,214
|
|
$
|
57,365
|
|
Currency translation adjustments
|
|
4,981
|
|
(1,867)
|
|
-
|
|
3,114
|
|
Comprehensive income (loss)
|
|
$
|
62,346
|
|
$
|
(6,081)
|
|
$
|
4,214
|
|
$
|
60,479
|
|
|
|
For the Nine Months Ended October 29, 2011
|
|
|
|
Guarantor
Entities
|
|
Non-Guarantor
Entities
|
|
Eliminations
|
|
Consolidated
Totals
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
837,227
|
|
$
|
98,918
|
|
$
|
-
|
|
$
|
936,145
|
|
Cost of sales
|
|
677,705
|
|
76,292
|
|
-
|
|
753,997
|
|
Gross profit
|
|
159,522
|
|
22,626
|
|
-
|
|
182,148
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses
|
|
90,152
|
|
11,621
|
|
-
|
|
101,773
|
|
Equity in earnings of subsidiaries
|
|
(7,899)
|
|
-
|
|
7,899
|
|
-
|
|
Other (income) expense, net
|
|
(79)
|
|
510
|
|
-
|
|
431
|
|
Operating profit
|
|
77,348
|
|
10,495
|
|
(7,899)
|
|
79,944
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
12,335
|
|
2,359
|
|
-
|
|
14,694
|
|
Earnings before income taxes
|
|
65,013
|
|
8,136
|
|
(7,899)
|
|
65,250
|
|
Income tax expense
|
|
1,526
|
|
237
|
|
-
|
|
1,763
|
|
Net earnings
|
|
$
|
63,487
|
|
$
|
7,899
|
|
$
|
(7,899)
|
|
$
|
63,487
|
|
Currency translation adjustments
|
|
-
|
|
85
|
|
-
|
|
85
|
|
Comprehensive income
|
|
$
|
63,487
|
|
$
|
7,984
|
|
$
|
(7,899)
|
|
$
|
63,572
|
|
13
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 Nine Months Ended November 3, 2012
|
|
|
|
Guarantor
Entities
|
|
Non-Guarantor
Entities
|
|
Eliminations
|
|
Consolidated
Totals
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
57,365
|
|
$
|
(4,214)
|
|
$
|
4,214
|
|
$
|
57,365
|
|
Equity in loss of subsidiaries
|
|
4,214
|
|
-
|
|
(4,214)
|
|
-
|
|
Other adjustments
|
|
(72,120)
|
|
12,018
|
|
-
|
|
(60,102)
|
|
Operating activities
|
|
(10,541)
|
|
7,804
|
|
-
|
|
(2,737)
|
|
Investing activities
|
|
(32,141)
|
|
(1,191)
|
|
-
|
|
(33,332)
|
|
Financing activities
|
|
37,840
|
|
(1,798)
|
|
-
|
|
36,042
|
|
Effect of exchange rate on cash
|
|
5,216
|
|
(5,100)
|
|
-
|
|
116
|
|
Net increase (decrease) in cash
|
|
374
|
|
(285)
|
|
-
|
|
89
|
|
Cash at the beginning of the period
|
|
1,066
|
|
3,145
|
|
-
|
|
4,211
|
|
Cash at the end of the period
|
|
$
|
1,440
|
|
$
|
2,860
|
|
$
|
-
|
|
$
|
4,300
|
|
|
|
For the Nine Months Ended October 29, 2011
|
|
|
|
Guarantor
Entities
|
|
Non-Guarantor
Entities
|
|
Eliminations
|
|
Consolidated
Totals
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
63,487
|
|
$
|
7,899
|
|
$
|
(7,899)
|
|
$
|
63,487
|
|
Equity in earnings of subsidiaries
|
|
(7,899)
|
|
-
|
|
7,899
|
|
-
|
|
Other adjustments
|
|
(24,369)
|
|
3,417
|
|
-
|
|
(20,952)
|
|
Operating activities
|
|
31,219
|
|
11,316
|
|
-
|
|
42,535
|
|
Investing activities
|
|
(53,318)
|
|
(440)
|
|
-
|
|
(53,758)
|
|
Financing activities
|
|
20,463
|
|
(8,117)
|
|
-
|
|
12,346
|
|
Effect of exchange rate on cash
|
|
-
|
|
(101)
|
|
-
|
|
(101)
|
|
Net (decrease) increase in cash
|
|
(1,636)
|
|
2,658
|
|
-
|
|
1,022
|
|
Cash at the beginning of the period
|
|
2,273
|
|
6,895
|
|
-
|
|
9,168
|
|
Cash at the end of the period
|
|
$
|
637
|
|
$
|
9,553
|
|
$
|
-
|
|
$
|
10,190
|
|
In the nine months ended November 3, 2012, the financial statements of the Guarantor Entities include $4.9 million of other comprehensive income and the financial statements of the Non-Guarantor entities contain $4.9 million of other comprehensive loss related to currency translation adjustments recorded in the current year to properly account for an intercompany transaction not correctly translated in prior periods.
14
Table of Contents
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements continued
(Unaudited)
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
|
|
For the Nine Months Ended
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
November 3, 2012
|
|
October 29, 2011
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts at beginning of period
|
|
$
|
2,725
|
|
$
|
2,740
|
|
$
|
2,616
|
|
$
|
2,707
|
|
Additions (reductions) to reserves
|
|
173
|
|
(14)
|
|
592
|
|
504
|
|
Writeoffs against allowance for doubtful accounts
|
|
(129)
|
|
(80)
|
|
(519)
|
|
(599)
|
|
Collections of previously reserved items
|
|
22
|
|
19
|
|
102
|
|
53
|
|
Allowance for doubtful accounts at end of period
|
|
$
|
2,791
|
|
$
|
2,665
|
|
$
|
2,791
|
|
$
|
2,665
|
|
Inventories
: Summarized below are the components of inventories:
|
|
As of
|
|
|
|
November 3, 2012
|
|
January 31, 2012
|
|
(Dollars in thousands)
|
|
|
|
|
|
Inventory purchased under distributor agreements
|
|
$
|
162,800
|
|
$
|
174,131
|
|
Raw materials and spare parts
|
|
152,177
|
|
127,345
|
|
Work in process
|
|
128,985
|
|
135,555
|
|
Finished goods
|
|
6,752
|
|
1,519
|
|
Total inventories
|
|
$
|
450,714
|
|
$
|
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 $41.6 million and $40.6 million as of November 3, 2012 and January 31, 2012, respectively.
Property, Plant and Equipment, net:
Components of property, plant and equipment, net, were as follows:
|
|
As of
|
|
|
|
November 3, 2012
|
|
January 31, 2012
|
|
(Dollars in thousands)
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
35,457
|
|
$
|
34,590
|
|
Buildings and leasehold improvements
|
|
47,458
|
|
32,655
|
|
Rental equipment
|
|
97,480
|
|
87,502
|
|
Computer hardware and software
|
|
5,841
|
|
5,570
|
|
Accumulated depreciation
|
|
(86,666)
|
|
(74,947)
|
|
Net depreciable assets
|
|
$
|
99,570
|
|
$
|
85,370
|
|
Construction in progress
|
|
4,662
|
|
1,085
|
|
Land
|
|
10,916
|
|
8,169
|
|
Property, plant and equipment, net
|
|
$
|
115,148
|
|
$
|
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 $4.4 million and $12.8 million during the three and nine months ended November 3, 2012, respectively and $4.3 million and $12.0 million during the three and nine months ended October 29, 2011, respectively.
15
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 November 3, 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
|
|
$
|
(5,672)
|
|
$
|
189
|
|
$
|
863
|
|
Distribution contracts
|
|
27 Years
|
|
5,997
|
|
(1,723)
|
|
-
|
|
4,274
|
|
Customer relationships
|
|
6-11 Years
|
|
9,489
|
|
(5,220)
|
|
652
|
|
4,921
|
|
Non-compete covenant
|
|
5 Years
|
|
1,420
|
|
(1,526)
|
|
106
|
|
-
|
|
Total
|
|
|
|
$
|
23,252
|
|
$
|
(14,141)
|
|
$
|
947
|
|
$
|
10,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and tradename
|
|
-
|
|
7,078
|
|
-
|
|
378
|
|
7,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
30,330
|
|
$
|
(14,141)
|
|
$
|
1,325
|
|
$
|
17,514
|
|
|
|
|
|
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 $0.5 million and $1.6 million during the three and nine months ended November 3, 2012, respectively and $0.6 million and $1.8 million during the three and nine months ended October 29, 2011, respectively.
Our goodwill balance of $3.8 million as of November 3, 2012 (relating entirely to the distribution segment) remains unchanged since January 31, 2012.
16
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. 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 November 3, 2012 and October 29, 2011, was as follows:
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
November 3, 2012
|
|
October 29, 2011
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Accrued warranty costs at beginning of period
|
|
$
|
12,070
|
|
$
|
9,518
|
|
$
|
10,686
|
|
$
|
9,110
|
|
Payments for warranty obligations
|
|
(2,523)
|
|
(1,010)
|
|
(6,013)
|
|
(3,338
|
)
|
Warranty accrual
|
|
2,392
|
|
1,862
|
|
7,266
|
|
4,598
|
|
Accrued warranty costs at end of period
|
|
$
|
11,939
|
|
$
|
10,370
|
|
$
|
11,939
|
|
$
|
10,370
|
|
Other Current Liabilities:
Included in other current liabilities were $4.2 million and $5.8 million of accrued job costs as of November 3, 2012 and January 31, 2012, respectively. No other items comprise more than 5% of total current liabilities.
Accumulated Other Comprehensive Income:
During the third quarter of Fiscal 2012, we completed the wind down of our operations in Venezuela. This decision resulted from the continued difficult economic and political environment experienced in this country. Our Venezuelan subsidiarys revenues represented 0.15%, 0.34% and 2.29% of our consolidated revenues for Fiscal Years 2011, 2010 and 2009, respectively. It is expected that we will be able to continue to service and sell to Venezuela through our Colombian subsidiary. While we are not legally dissolving or selling this entity, nor its assets or liabilities, for accounting purposes there has been a substantial liquidation of its assets and liabilities. As a result, we recognized the cumulative currency translation adjustment loss of $3.3 million, which was previously recorded as a component of accumulated other comprehensive income in our balance sheets, during the third quarter of Fiscal 2012 as a non-cash foreign currency exchange loss, a component of other expense (income), net in our statements of operations.
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 each of November 3, 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.
17
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 executives 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 November 3, 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 vested 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 options to purchase 112,045 common units granted on May 31, 2011, we used the Black-Scholes option pricing model. The options have an exercise price of $11.00 per common unit 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 exceeded the performance measure, which was anticipated to be, and has been, met for Fiscal 2011, the fair value of $0.4 million was 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 nine months of Fiscal 2012. Both the service and performance conditions for these options have been met and they are vested and exercisable in full.
There have been no grants of restricted units or options to purchase common units during Fiscal 2012. There have been no option exercises or vesting of restricted units during 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.
18
Table of Contents
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements continued
(Unaudited)
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 and nine months ended November 3, 2012, we recognized tax expense of $0.5 million and $1.7 million, respectively, of Texas Margins tax. During the three and nine months ended October 29, 2011, we recognized tax expense of $0.6 million and $1.5 million, respectively, of Texas Margins tax. During the three and nine months ended November 3, 2012, we recognized tax benefit of $0.1 million and $0.2 million, respectively, associated with foreign jurisdictions. During the three and nine months ended October 29, 2011, we recognized tax expense of $0.3 million and $0.2 million, respectively, associated with foreign jurisdictions.
Generally, we make quarterly distributions to our unit holders to fund their tax obligations. During the nine months ended November 3, 2012 and October 29, 2011, we made tax distributions of $15.7 million and $10.4 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 November 3, 2012 and January 31, 2012, we held the remaining portion of the equipment in inventories in the amount $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 year and requires quarterly interest payments which began 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, which will be approximately $0.5 million, 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 year, 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, are being recognized ratably over the fiscal year and are recorded in cost of sales and selling and administrative expenses in our statements of operations.
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.
19
Table of Contents
Stewart & Stevenson LLC and Subsidiaries
Notes to Condensed Consolidated Financial Statements continued
(Unaudited)
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 $0.5 million 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 Corporation of Japan (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 statements of operations for the nine months ended October 29, 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 Nine Months Ended
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
|
|
|
|
(Pro Forma)
|
|
|
|
(Unaudited)
|
|
(Dollars and units in thousands)
|
|
|
|
|
|
Sales
|
|
$
|
957,864
|
|
$
|
943,152
|
|
Net earnings
|
|
$
|
57,365
|
|
$
|
63,425
|
|
Weighted average units outstanding:
|
|
|
|
|
|
Basic
|
|
56,179
|
|
56,112
|
|
Diluted
|
|
56,179
|
|
56,112
|
|
Net earnings per common unit:
|
|
|
|
|
|
Basic
|
|
$
|
1.02
|
|
$
|
1.13
|
|
Diluted
|
|
$
|
1.02
|
|
$
|
1.13
|
|
20
Table of Contents
Item 2. Managements 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 Quarterly 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 Commissions 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.
21
Table of Contents
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.
We are experiencing a slow-down in demand for our well stimulation equipment resulting primarily from lower prices for gas and other commodities, which, in turn, have brought about lower capital expenditures by our customers. While this slow-down could continue through 2013, it provides increased opportunities for our company for the service and refurbishment of such equipment, which are more in demand during these slower periods. These developments have resulted in a progressive decrease in equipment sales in our manufacturing segment over the first nine months of Fiscal 2012 as compared to the same period of Fiscal 2011. In our distribution segment, equipment sales have decreased since the first quarter of Fiscal 2012 through the end of the third quarter of Fiscal 2012 as a result of lower demand from the oil and gas sector, as is impacting our manufacturing segment, and remain slightly up when comparing the nine month periods of Fiscal 2012 and 2011. During periods where our customers are lowering their capital expenditures, our parts and service business typically increases in our distribution segment, as it has through the Fiscal 2012 period when compared to the Fiscal 2011 period. In addition, we continue to have strong demand for our rental business. While there can be no assurances, based on the totality of the current environment, we anticipate manufacturing segment sales to continue to decrease over the short-term; however, over this period our distribution segment sales are anticipated to grow modestly and profitability is expected to improve. Approximately 68.9% and 67.7% of our revenues in the three and nine months ended November 3, 2012, respectively, and 81.6% and 80.5% of our revenues in the three and nine months ended October 29, 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. Aftermarket parts and service sales generated approximately 34.8% and 31.2% of our revenues during the three and nine months ended November 3, 2012, respectively, and 29.8% and 31.9% of our revenues during the three and nine months ended October 29, 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 products include 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 November 3, 2012, our equipment order backlog was $231.0 million, compared to $452.6 million as of October 29, 2011. Our equipment order backlog continued to grow through the third quarter of Fiscal 2011. Since then, backlog began to fluctuate through the first quarter of Fiscal 2012 and steadily decline thereafter as underlying orders have been delivered and new equipment orders have decreased. The price of gas and other commodities has fluctuated during this time and our customers have slowed, and in some circumstances delayed, orders pending their evaluation of both the oil and gas markets and economic climate, as well as their own customers needs. We estimate that we will recognize approximately 55% of our November 3, 2012, equipment order backlog as revenue during the remainder of Fiscal 2012.
22
Table of Contents
Backlog of $231.0 million as of November 3, 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, though the recent softness experienced in the oil and gas sector has lessened this 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. 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 critical to our success. In periods of strong demand and rapid growth, this can place a significant challenge to our organization, though the recent softness in the market, particularly in the oil and gas sector, has lessened this concern. Regardless, 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 third quarter of Fiscal 2012 began on August 5, 2012 and ended on November 3, 2012. We refer to this period as the three months ended or the nine months ended November 3, 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 may 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 No. 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.
23
Table of Contents
In July 2012, the Financial Accounting Standards Board (FASB) issued ASU No. 2012-02, Intangibles Goodwill and Other (Topic 350) (ASU No. 2012-02). This accounting update allows companies the option to make a qualitative evaluation of long-lived intangible assets for possible impairment, similar to that allowed by ASU No. 2011-08 for goodwill. The quantitative assessment will only be required when it is more likely than not that a long-lived intangible asset is impaired. The amendment is effective for interim and annual impairment testing performed for fiscal years beginning after September 15, 2012, however early adoption is permitted. We may apply this update in conjunction with our Fiscal 2012 annual impairment evaluation performed in the fourth quarter.
Current Quarterly TrendsThree Months Ended November 3, 2012 and August 4, 2012
The following table presents our sales and operating profit by segment on a trailing quarter basis as follows:
|
|
For the Three Months Ended
|
|
|
Change
|
|
|
|
November 3, 2012
|
|
August 4, 2012
|
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment sales
|
|
$
|
110,132
|
|
$
|
120,740
|
|
|
$
|
(10,608)
|
|
-8.8%
|
|
Distribution segment sales
|
|
171,711
|
|
180,867
|
|
|
(9,156)
|
|
-5.1%
|
|
Total sales
|
|
$
|
281,843
|
|
$
|
301,607
|
|
|
$
|
(19,764)
|
|
-6.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
21,163
|
|
$
|
23,032
|
|
|
(1,869)
|
|
-8.1%
|
|
Distribution
|
|
7,503
|
|
11,416
|
|
|
(3,913)
|
|
-34.3%
|
|
Corporate and shared services
|
|
(9,797)
|
|
(11,876)
|
|
|
2,079
|
|
17.5%
|
|
Total operating profit
|
|
$
|
18,869
|
|
$
|
22,572
|
|
|
$
|
(3,703)
|
|
-16.4%
|
|
Our sales for the three months ended November 3, 2012 decreased $19.8 million, or 6.6%, as compared to the three months ended August 4, 2012. Manufacturing segment sales decreased $10.6 million and distribution segment sales decreased $9.2 million. All product lines for our manufacturing segment, except seismic products, experienced decreases during this period, with well stimulation equipment sales representing the largest decrease. We attribute the decreased well stimulation equipment sales to the current oil and gas and economic environment and the uncertainty this creates for our customers capital spending programs, as reflected by the decrease in our equipment order backlog. Distribution segment equipment sales decreased in power generation, prime movers and transmissions, but were partially offset by equipment sales increases in engines, material handling and rail car movers. Many of our distribution segment customers are experiencing similar circumstances to those that are currently impacting our manufacturing segment.
Overall operating profit margin decreased to 6.7% for the three months ended November 3, 2012 from 7.5% for the three months ended August 4, 2012. Included in our operating profit for the three months ended November 3, 2012 is a $3.3 million non-cash foreign currency exchange loss, recorded in our distribution segment, related to the wind down of our operations in Venezuela, discussed elsewhere herein, and which represented the cumulative currency translation adjustment loss that was recorded as a component of accumulated comprehensive income in our balance sheets. Operating profit margin for our Fiscal 2012 third quarter on an adjusted basis without this foreign currency exchange loss would have been approximately 7.9%. The decrease in recognized operating profit margin is reflective of overall decreases in sales volume and lower distribution segment operating profit margins. The manufacturing segment operating profit margin was consistent with the trailing quarter, while the distribution segment operating profit margin decreased due to the foreign currency exchange loss. The distribution segment operating profit margin would have been flat on an adjusted basis without this foreign currency exchange loss. Selling and administrative expenses in our corporate and shared services segment decreased essentially as a result of lower legal and professional fees and salaries and wages. Our equipment order backlog decreased by $87.7 million, from $318.7 million as of August 4, 2012, to $231.0 million as of November 3, 2012, with well stimulation representing over 80% of this decrease.
24
Table of Contents
Comparison of Results of OperationsThree Months Ended November 3, 2012 and October 29, 2011
Sales -
For the three months ended November 3, 2012, our sales were $281.8 million, a decrease of $69.5 million, or 19.8%, compared to the same period of Fiscal 2011 sales of $351.3 million. The decrease in sales impacted both operating segments and was primarily attributable to an overall decrease in equipment sales to customers in the oil and gas industry, with decreased equipment sales for our well stimulation products representing substantially all of the decreased sales in our manufacturing segment. Decreased sales of power generation, transmissions and prime movers were partially offset by increased sales of engines and material handling equipment in our distribution segment. Parts and service sales and rental sales increased in the distribution segment.
A breakdown of sales for the periods is as follows:
|
|
For the Three Months Ended
|
|
|
Change
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
103,561
|
|
$
|
150,490
|
|
|
$
|
(46,929)
|
|
-31.2%
|
|
Parts and service
|
|
6,571
|
|
6,560
|
|
|
11
|
|
0.2%
|
|
Total manufacturing sales
|
|
$
|
110,132
|
|
$
|
157,050
|
|
|
$
|
(46,918)
|
|
-29.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution segment
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
67,009
|
|
$
|
95,817
|
|
|
$
|
(28,808)
|
|
-30.1%
|
|
Parts and service
|
|
90,563
|
|
88,483
|
|
|
2,080
|
|
2.4%
|
|
Rentals
|
|
14,139
|
|
9,983
|
|
|
4,156
|
|
41.6%
|
|
Total distribution sales
|
|
$
|
171,711
|
|
$
|
194,283
|
|
|
$
|
(22,572)
|
|
-11.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
281,843
|
|
$
|
351,333
|
|
|
$
|
(69,490)
|
|
-19.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
21,163
|
|
$
|
31,592
|
|
|
(10,429)
|
|
-33.0%
|
|
Distribution
|
|
7,503
|
|
18,179
|
|
|
(10,676)
|
|
-58.7%
|
|
Corporate and shared services
|
|
(9,797)
|
|
(12,150)
|
|
|
2,353
|
|
19.4%
|
|
Total operating profit
|
|
$
|
18,869
|
|
$
|
37,621
|
|
|
$
|
(18,752)
|
|
-49.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit percentage
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
19.2%
|
|
20.1%
|
|
|
|
|
|
|
Distribution
|
|
4.4%
|
|
9.4%
|
|
|
|
|
|
|
Consolidated
|
|
6.7%
|
|
10.7%
|
|
|
|
|
|
|
Manufacturing segment sales decreased by 29.9%, or $46.9 million, for the three months ended November 3, 2012 compared to the same period in Fiscal 2011. Equipment sales decreased by $46.9 million and parts and service sales remained flat. Equipment sales decreases in well stimulation equipment continued to generate the largest portion of the decrease. A breakdown of manufacturing segment equipment sales by product line is as follows:
|
|
For the Three Months Ended
|
|
|
Change
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Manufacturing equipment sales
|
|
|
|
|
|
|
|
|
|
|
Well stimulation
|
|
$
|
84,867
|
|
$
|
131,495
|
|
|
$
|
(46,628)
|
|
-35.5%
|
|
Rigs
|
|
9,515
|
|
10,871
|
|
|
(1,356)
|
|
-12.5%
|
|
Seismic products
|
|
6,516
|
|
5,545
|
|
|
971
|
|
17.5%
|
|
Electric products
|
|
2,430
|
|
1,361
|
|
|
1,069
|
|
78.5%
|
|
Other
|
|
233
|
|
1,218
|
|
|
(985)
|
|
-80.9%
|
|
Total equipment sales
|
|
$
|
103,561
|
|
$
|
150,490
|
|
|
$
|
(46,929)
|
|
-31.2%
|
|
25
Table of Contents
Distribution segment sales decreased by $22.6 million to $171.7 million for the three months ended November 3, 2012, compared to $194.3 million during the same period of Fiscal 2011. The decrease in distribution segment sales was due to decreased equipment sales of $28.8 million, partially offset by increased parts and service sales of $2.1 million and rental sales of $4.1 million. Equipment sales decreases in the distribution segment in power generation, transmissions and prime movers were partially offset by increases in the various other product categories as our customers are experiencing decreased demand for oil and gas industry related products. Distribution segment equipment sales reflected the following changes in our distribution segment products:
|
|
For the Three Months Ended
|
|
Change
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Distribution equipment sales
|
|
|
|
|
|
|
|
|
|
Material handling
|
|
$
|
13,778
|
|
$
|
11,316
|
|
$
|
2,462
|
|
21.8%
|
|
Engines
|
|
11,988
|
|
7,972
|
|
4,016
|
|
50.4%
|
|
Prime movers
|
|
11,469
|
|
17,748
|
|
(6,279)
|
|
-35.4%
|
|
Transmissions
|
|
9,175
|
|
20,871
|
|
(11,696)
|
|
-56.0%
|
|
Power generation
|
|
8,967
|
|
25,892
|
|
(16,925)
|
|
-65.4%
|
|
Rail car movers
|
|
3,877
|
|
3,254
|
|
623
|
|
19.1%
|
|
Other
|
|
7,755
|
|
8,764
|
|
(1,009)
|
|
-11.5%
|
|
Total equipment sales
|
|
$
|
67,009
|
|
$
|
95,817
|
|
$
|
(28,808)
|
|
-30.1%
|
|
Gross profit
Our gross profit was $53.7 million for the three months ended November 3, 2012 compared to $71.8 million for the same period in Fiscal 2011. Our gross profit margin decreased from 20.4% to 19.1%. The manufacturing segment gross profit margin increased slightly from 24.2% to 24.3% and the distribution segment gross profit margin decreased from 17.4% to 15.7%, a decrease of 1.7 points. These changes in gross profit margin were due in large part to changes in product mix.
Selling and administrative expenses
Selling and administrative expenses decreased by $2.4 million to $31.6 million for the three months ended November 3, 2012. The Fiscal 2011 period reflected the expensing of costs relating to our proposed initial public offering ($0.3 million) and share-based compensation expense ($0.2 million), which were not recurring items in the Fiscal 2012 period. In comparison without these costs, the Fiscal 2012 selling and administrative expenses decreased $1.9 million, which primarily resulted from decreased bonus expense, partially offset by increases in salaries and wages and facility expenses. As a percentage of sales, selling and administrative expenses increased from 9.7% to 11.2% for the three months ended November 3, 2012, as compared to the three months ended October 29, 2011, primarily due to decreased sales volumes.
Other expense, net
Other expense, net increased to $3.3 million for the three months ended November 3, 2012 compared to $0.2 million for the three months ended October 29, 2011. During the third quarter of Fiscal 2012, we completed the wind down of our operations in Venezuela, which decision resulted from the continued difficult economic and political environment experienced in this country. Our Venezuelan subsidiarys revenues represented 0.15%, 0.34% and 2.29% of our consolidated revenues for Fiscal Years 2011, 2010 and 2009, respectively. It is expected that we will be able to continue to service and sell to Venezuela through our Colombian subsidiary. While we are not legally dissolving or selling this entity, nor its assets or liabilities, for accounting purposes there has been a substantial liquidation of its assets and liabilities. As a result, we recognized the cumulative currency translation adjustment loss of $3.3 million in the third quarter of Fiscal 2012, which was previously recorded as a component of accumulated other comprehensive income in our balance sheets, as a non-cash foreign currency exchange loss, a component of other expense, net in our statements of operations.
Operating profit
Our operating profit decreased to $18.9 million during the three months ended November 3, 2012 from $37.6 million in the same period of Fiscal 2011. Operating profit as a percentage of sales decreased to 6.7% for the period ended November 3, 2012 compared to 10.7% for the same period in the prior year. The decrease in operating profit reflects lower sales volume and gross profit margin and the impact of the foreign currency exchange loss, partially offset by lower selling and administrative expenses.
Interest expense, net -
Interest expense, net for the three months ended November 3, 2012 increased by $0.6 million over the same period in Fiscal 2011 mainly as a result of higher borrowings in the current period.
26
Table of Contents
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 November 3, 2012 and October 29, 2011
Manufacturing
Operating profit generated by our manufacturing segment decreased to $21.2 million, or 19.2% of sales, for the three months ended November 3, 2012, from $31.6 million, or 20.1% of sales, for the same period of Fiscal 2011. The $10.4 million decrease in operating profit was attributable to a decrease of $11.3 million in sales volume, which was partially offset by a decrease in selling and administrative expenses of $0.9 million. The majority of the decrease in selling and administrative expense related to decreased bonus expense.
Our manufacturing backlog as of November 3, 2012 was $122.2 million, as compared to $316.9 million as of October 29, 2011, a decrease of 61.4%. 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. 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. A deposit in the amount of $30.5 million is recorded as a customer deposit in the consolidated balance sheet as of November 3, 2012. Included in inventories is $24.2 million of costs related to this order.
Distribution
Operating profit generated by the distribution segment decreased to $7.5 million during the three months ended November 3, 2012 from $18.2 million during the same period in Fiscal 2011, representing a decrease in operating profit percentage from 9.4% to 4.4%. The $10.7 million decrease in operating profit was attributable to decreases of $3.9 million in sales volume and $3.0 million in average gross profit margin, plus increases of $0.5 million in selling and administrative expenses and $3.3 million in other expense. The increase in selling and administrative expense was primarily due to increased salaries and wages and facility related costs, partially offset by decreased bonus expense. The $3.3 million increase in other expense is related to the foreign currency exchange loss recognized in connection with the wind down of our operations in Venezuela.
Our distribution backlog as of November 3, 2012 was $108.8 million, as compared to $135.7 million on October 29, 2011, a decrease of 19.8%.
27
Table of Contents
Corporate and shared services
Corporate and shared services expenses decreased to $9.8 million during the three months ended November 3, 2012 compared to $12.2 million during the same period of Fiscal 2011. The Fiscal 2011 period reflected the expensing of costs relating to our proposed initial public offering ($0.3 million) and share-based compensation expense ($0.2 million), which were not recurring items in the Fiscal 2012 period. In comparison without these costs, the Fiscal 2012 selling and administrative expenses decreased by $1.9 million, with the substantial portion of the decrease due to lower bonus expense, partially offset by increases in salaries and wages. Corporate and shared services expenses remained flat at 3.5% as a percentage of sales.
Comparison of Results of OperationsNine Months Ended November 3, 2012 and October 29, 2011
Sales -
For the nine months ended November 3, 2012, our sales were $957.8 million, an increase of $21.7 million, or 2.3%, compared to the same period of Fiscal 2011 sales of $936.1 million. The increase in overall sales was driven by our distribution segment, while our manufacturing segment had decreased sales. The decrease in the manufacturing segment sales is primarily reflective of the continued slowdown of the capital spending programs of our customers in the oil and gas industry, in particular for well stimulation equipment. Increased sales of material handling, power generation and prime movers were primarily responsible for the increase in equipment sales in the distribution segment and were partially offset by decreases in sales of transmissions and engines. Parts and service sales increased, primarily in the distribution segment.
A breakdown of sales for the periods is as follows:
|
|
For the Nine Months Ended
|
|
|
Change
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Manufacturing segment
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
373,005
|
|
$
|
388,970
|
|
|
$
|
(15,965)
|
|
-4.1%
|
|
Parts and service
|
|
17,766
|
|
17,308
|
|
|
458
|
|
2.6%
|
|
Total manufacturing sales
|
|
$
|
390,771
|
|
$
|
406,278
|
|
|
$
|
(15,507)
|
|
-3.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution segment
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
253,752
|
|
$
|
248,013
|
|
|
$
|
5,739
|
|
2.3%
|
|
Parts and service
|
|
278,714
|
|
257,216
|
|
|
21,498
|
|
8.4%
|
|
Rentals
|
|
34,627
|
|
24,638
|
|
|
9,989
|
|
40.5%
|
|
Total distribution sales
|
|
$
|
567,093
|
|
$
|
529,867
|
|
|
$
|
37,226
|
|
7.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales
|
|
$
|
957,864
|
|
$
|
936,145
|
|
|
$
|
21,719
|
|
2.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss)
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
75,282
|
|
$
|
76,663
|
|
|
(1,381)
|
|
-1.8%
|
|
Distribution
|
|
35,952
|
|
41,978
|
|
|
(6,026)
|
|
-14.4%
|
|
Corporate and shared services
|
|
(35,419)
|
|
(38,697)
|
|
|
3,278
|
|
8.5%
|
|
Total operating profit
|
|
$
|
75,815
|
|
$
|
79,944
|
|
|
$
|
(4,129)
|
|
-5.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit percentage
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
19.3%
|
|
18.9%
|
|
|
|
|
|
|
Distribution
|
|
6.3%
|
|
7.9%
|
|
|
|
|
|
|
Consolidated
|
|
7.9%
|
|
8.5%
|
|
|
|
|
|
|
28
Table of Contents
Manufacturing segment sales decreased by 3.8%, or $15.5 million, for the nine months ended November 3, 2012 compared to the same period in Fiscal 2011. Equipment sales decreases of $16.0 million were partially offset by an increase of $0.5 million in parts and service sales. Equipment sales decreases in well stimulation and power generation were partially offset by increases in rigs and seismic and electric product sales. A breakdown of manufacturing segment equipment sales by product line is as follows:
|
|
For the Nine Months Ended
|
|
Change
|
|
|
|
November 3, 2012
|
|
October 29, 2011
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Manufacturing equipment sales
|
|
|
|
|
|
|
|
|
|
Well stimulation
|
|
$
|
299,103
|
|
$
|
333,465
|
|
$
|
(34,362)
|
|
-10.3%
|
|
Rigs
|
|
42,376
|
|
28,472
|
|
13,904
|
|
48.8%
|
|
Seismic products
|
|
18,924
|
|
14,444
|
|
4,480
|
|
31.0%
|
|
Electric products
|
|
11,616
|
|
7,185
|
|
4,431
|
|
61.7%
|
|
Power generation
|
|
-
|
|
4,156
|
|
(4,156)
|
|
-100.0%
|
|
Other
|
|
986
|
|
1,248
|
|
(262)
|
|
-21.0%
|
|
Total equipment sales
|
|
$
|
373,005
|
|
$
|
388,970
|
|
$
|
(15,965)
|
|
-4.1%
|
|
Distribution segment sales increased by $37.2 million to $567.1 million for the nine months ended November 3, 2012, compared to $529.9 million during the same period of Fiscal 2011. The increase in distribution segment sales was due to increased equipment sales of $5.7 million, parts and service sales of $21.5 million and rental sales of $10.0 million. The increase in prime movers sales was primarily due to higher sales volumes for oilfield equipment, while the increase in power generation and material handling sales was primarily attributable to sales in other industries and was partially offset by a decrease in engine, transmission and rail car movers sales. Distribution segment equipment sales reflected the following changes in our distribution segment products:
|
|
For the Nine Months Ended
|
|
Change
|
|
|
|
August 4, 2012
|
|
July 30, 2011
|
|
$
|
|
%
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Distribution equipment sales
|
|
|
|
|
|
|
|
|
|
Power generation
|
|
$
|
56,244
|
|
$
|
53,572
|
|
$
|
2,672
|
|
5.0%
|
|
Prime movers
|
|
53,691
|
|
51,985
|
|
1,706
|
|
3.3%
|
|
Transmissions
|
|
45,602
|
|
57,338
|
|
(11,736)
|
|
-20.5%
|
|
Material handling
|
|
38,504
|
|
28,266
|
|
10,238
|
|
36.2%
|
|
Engines
|
|
28,130
|
|
31,440
|
|
(3,310)
|
|
-10.5%
|
|
Rail car movers
|
|
11,448
|
|
11,674
|
|
(226)
|
|
-1.9%
|
|
Other
|
|
20,133
|
|
13,738
|
|
6,395
|
|
46.5%
|
|
Total equipment sales
|
|
$
|
253,752
|
|
$
|
248,013
|
|
$
|
5,739
|
|
2.3%
|
|
Gross profit
Our gross profit was $184.6 million for the nine months ended November 3, 2012 compared to $182.1 million for the same period in Fiscal 2011, reflecting a decrease in gross profit margin from 19.5% to 19.3%. The manufacturing segment gross profit margin increased from 23.0% to 24.2%, an increase of 1.2 points, and the distribution segment gross profit margin decreased from 16.7% to 15.8%, a decrease of 0.9 points. The increase in manufacturing gross profit margin was due in large part to product mix. The decrease in the distribution gross profit margin was due to increased equipment sales which carry a lower gross profit margin.
Selling and administrative expenses
Selling and administrative expenses increased by $3.3 million to $105.1 million for the nine months ended November 3, 2012. The Fiscal 2011 period reflected the expensing of costs relating to our proposed initial public offering ($2.8 million) and share-based compensation expense ($2.0 million), which were not recurring items in the Fiscal 2012 period. In comparison without these costs, the Fiscal 2012 selling and administrative expenses increased $8.2 million, which primarily resulted from increases in salaries and wages, legal and professional fees and facility related costs, partially offset by decreased bonus expense. As a percentage of sales, selling and administrative expenses increased slightly to 11.0% from 10.9% for the nine months ended November 3, 2012, as compared to the same period in Fiscal 2011.
Other expense, net
Other expense, net increased to $3.6 million for the nine months ended November 3, 2012 compared to $0.4 million for the nine months ended October 29, 2011. The increase in other expense is essentially the recognition of a $3.3 million non-cash foreign currency exchange loss related to the wind down of our operations in Venezuela and which represented the cumulative currency translation adjustment loss that was recorded as a component of accumulated comprehensive income in our balance sheets.
Operating profit
Our operating profit decreased to $75.8 million, or 7.9% of sales, during the nine months ended November 3, 2012 from $80.0 million, or 8.5% of sales, in the same period of Fiscal 2011, primarily as the result of the impact of the foreign currency exchange loss and higher selling and administrative expenses, partially offset by increased gross profit on higher sales volume.
29
Table of Contents
Interest expense, net -
Interest expense, net for the nine months ended November 3, 2012 increased by $2.2 million over the same period in Fiscal 2011 mainly as a result of higher borrowings in the current period.
Segment Results Comparison Nine Months Ended November 3, 2012 and October 29, 2011
Manufacturing
Operating profit generated by our manufacturing segment decreased to $75.3 million, or 19.3% of sales, for the nine months ended November 3, 2012, from $76.7 million, or 18.9% of sales, for the same period of Fiscal 2011. The $1.4 million decrease in operating profit was attributable to decreases of $3.6 million in sales volume and increases in selling and administrative expenses of $2.2 million and other of $0.4 million, which were partially offset by an increase of $4.8 million in average gross profit margin. Selling and administrative expenses increases were primarily related to higher salaries and wages, increased travel, facility related costs and advertising, partially offset by decreases in legal and professional fees and bonus expense.
Distribution
Operating profit generated by the distribution segment decreased to $36.0 million during the nine months ended November 3, 2012 from $42.0 million during the same period in Fiscal 2011, representing a decrease in operating profit percentage from 7.9% to 6.3%. The $6.0 million decrease in operating profit was attributable to decreases of $5.1 in average gross profit margin and increases of $4.4 million in selling and administrative expenses and $2.7 million in other expense, partially offset by an increase of $6.2 million from higher sales volume. The increase in selling and administrative expenses was due to higher salaries and wages, facility related costs and travel, partially offset by decreases in bonus expense. Other expense essentially increased due to the $3.3 million foreign currency exchange loss recognized in connection with the wind down of our operations in Venezuela.
Corporate and shared services
Corporate and shared services expenses decreased to $35.4 million during the nine months ended November 3, 2012 compared to $38.7 million during the same period of Fiscal 2011. The Fiscal 2011 period reflected the expensing of costs relating to our proposed initial public offering ($2.8 million) and share-based compensation expense ($2.0 million), which were not recurring items in the Fiscal 2012 period. In comparison without these costs, the Fiscal 2012 selling and administrative expenses increased $1.5 million, which primarily resulted from increases in salaries and wages and legal and professional fees, partially offset by decreased bonus expense. 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 an asset-based revolving credit facility, which was increased to $325 million in the second quarter of Fiscal 2012, 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.
30
Table of Contents
Cash flows
|
|
For the Nine Months Ended
|
|
|
November 3, 2012
|
|
|
October 29, 2011
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(2,737
|
)
|
|
$
|
42,535
|
|
Net cash used in investing activities
|
|
(33,332
|
)
|
|
(53,758
|
)
|
Net cash provided by financing activities
|
|
36,042
|
|
|
12,346
|
|
|
|
|
|
|
|
|
|
|
As of November 3, 2012, our cash and cash equivalent balance was $4.3 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.
For the nine months ended November 3, 2012, cash used in operating activities was $2.7 million compared to cash provided by operating activities of $42.5 million for the same period of Fiscal 2011, a decrease of $45.2 million. While net earnings decreased $6.1 million in the first nine months of Fiscal 2012 over the first nine months of Fiscal 2011, the decrease in cash flow from operating activities was largely attributable to the overall slow-down in growth we are experiencing, and which we anticipate to continue, with our business in the current period as compared to the rapid growth in the prior period. For the first nine months of Fiscal 2012, this has resulted in net uses of cash from our operating activities, primarily through decreases in accounts payable and customer deposits amounting to $75.4 million, while these items were net sources of cash of $58.8 million in the prior period. Given the substantial increase in our business experienced in Fiscal 2011, coupled with long lead times from our suppliers, inventory purchases increased significantly; however, with our current view of the business, inventory purchases have decreased in the first nine months of Fiscal 2012 over the first nine months of Fiscal 2011 and used $12.1 million of cash, as compared to $98.4 of cash, respectively. In future periods, we expect cash to be provided from our operating activities as working capital is converted to cash.
Net cash used in investing activities decreased by $20.4 million for the nine months ended November 3, 2012 compared to the same period in Fiscal 2011. The overall decrease resulted from less cash flow attributable to acquisitions in Fiscal 2012 of $7.3 million and decreased capital expenditures and additions to rental equipment in the aggregate for Fiscal 2012 of $13.1 million.
Net cash provided by financing activities increased by $23.7 million for the nine months ended November 3, 2012 compared to the same period in Fiscal 2011. Borrowings under our revolving credit facility and short-term notes payable, collectively, increased $34.5 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 with debt to an affiliate of $12.5 million. Distributions to our unitholders increased $23.3 million, with $5.3 million of this increase attributable to higher net earnings, as adjusted for tax timing differences, 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 Companys Board of Directors and will be dependent upon the Companys results of operations, financial condition, capital requirements and other factors deemed relevant by the Companys Board of Directors.
Financing Sources
On July 11, 2012, we exercised $75 million of the $125 million accordion feature in the Third Amended and Restated Credit Agreement (the Credit Agreement) to provide flexibility as we evaluate business and strategic opportunities, as well as to address our liquidity needs. As a result, the Credit Agreement as expanded provides for a $325 million asset-based revolving credit facility, which is expandable by an additional $50 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.
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 $148.4 million at November 3, 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 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.
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.
31
Table of Contents
Borrowings under our revolving credit facility and our senior notes were as follows:
|
|
As of
|
|
|
|
November 3, 2012
|
|
January 31, 2012
|
|
(Dollars in thousands)
|
|
|
|
|
|
Revolving credit facility
|
|
$
|
140,700
|
|
$
|
86,772
|
|
Unsecured senior notes
|
|
150,000
|
|
150,000
|
|
Total
|
|
$
|
290,700
|
|
$
|
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 November 3, 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 $36.0 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 $30.0 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 Colombian subsidiary transacts most of its business in its local currency, while our Canadian subsidiary conducts its business in both Canadian and U.S. dollars. Revenues generated by our Canadian and Colombian subsidiaries comprised 5.0% and 2.6%, respectively, of our total revenue during the nine months ended November 3, 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 subsidiarys assets and sales as of and for the nine months ended November 3, 2012 to decrease in U.S. dollar terms by approximately $2.7 million and $5.0 million, respectively. A 10% depreciation of the Colombian peso with respect to the U.S. dollar would have caused our Colombian subsidiarys assets and sales as of and for the nine months ended November 3, 2012 to decrease in U.S. dollar terms by approximately $1.9 million and $2.2 million, respectively.
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 $325.0 million revolving credit facility was drawn, each quarter point change in interest rates would result in a $0.8 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 Companys 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 Companys 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.
32
Table of Contents
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 November 3, 2012. We determined that there were no changes in our internal control over financial reporting during the quarter ended November 3, 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.
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 $0.5 million 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 Commissions 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.
33
Table of Contents
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 Registrants Quarterly Report on Form 10-Q for the quarter ended November 3, 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.
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
|
December 14, 2012
34
Steak N Shake (NYSE:SNS)
Historical Stock Chart
From Apr 2024 to May 2024
Steak N Shake (NYSE:SNS)
Historical Stock Chart
From May 2023 to May 2024