Stewart & Stevenson Reports 4th Quarter & Fiscal Yr Results

Stewart & Stevenson Services, Inc. (NYSE: SVC), a leading manufacturer, service provider, and distributor of industrial and energy related equipment, medium tactical vehicles for the U.S. Army and aviation ground support equipment, announced results for the fiscal fourth quarter and year ended January 31, 2004.

Sales for the fiscal fourth quarter of 2003 totaled $282.9 million compared to sales of $294.3 million recorded in the same period a year ago. Net loss from continuing operations in the fourth quarter of fiscal 2003 was $41.7 million, or $1.46 per diluted share. The company noted these results were in the range previously announced on a preliminary basis on March 2, 2004. These results were significantly impacted by approximately $52.0 million of pretax charges resulting primarily from management actions taken during the quarter aimed at improving operations and restoring profitability. Net loss from continuing operations in the fourth quarter of fiscal 2002 was $3.7 million, or $0.13 per diluted share.

Sales for fiscal 2003 totaled $1.2 billion compared to $1.2 billion in the prior year. Net loss from continuing operations for the recent fiscal year was $52.3 million, or $1.83 per diluted share, compared with net earnings from continuing operations of $10.8 million, or $0.38 per diluted share in fiscal 2002. Net loss from continuing operations for fiscal 2003 was significantly impacted by management actions taken in the second half of the year. Net loss for fiscal 2003 was $53.2 million, or $1.86 per diluted share, compared to net loss for fiscal 2002 of $7.2 million, or $0.25 per diluted share, after the effect of discontinued operations and the cumulative effect of a change in accounting in fiscal 2002.

Management Update
Max L. Lukens, the company's recently elected President and Chief Executive Officer, stated, "As a result of our dissatisfaction with our financial results, the company is continuing to identify and implement necessary actions in each of its business segments to improve overall productivity, to return the company to acceptable levels of profitability and to enhance value for our shareholders. We have taken several strategic initiatives in each of our segments to improve performance and position ourselves for sustainable profitable growth. Fiscal 2003 was a period of rapid change and challenge for our company and our dedicated employees, but we believe we are making progress toward our goals, and we are confident in our ability to deliver on our commitments. Our goal is to further drive out costs while maintaining the quality and reliability our customers demand and have come to expect from us. We are encouraged that our sales are relatively stable, our customers continue to be loyal and supportive, and our employees are committed to providing superior service. We remain steadfast in our commitment to improve operations and restore this company to profitability."

As previously announced, after Mr. Lukens became interim CEO in September 2003, the company's Board and management team began a strategic review of all of the company's primary businesses in an effort to improve operations and profitability. As part of this review, the company refocused its primary operating metrics and management incentive measurements to emphasize the need to improve return on invested capital. Using the company's total weighted average cost of capital as the threshold for acceptable returns, the company began a review of each business's performance and potential for achieving this threshold in an acceptable timeframe.

As a result of this review, during the second half of fiscal 2003 the company announced the exit of the turnkey engineering, procurement and construction activities of the Distributed Energy Solutions segment. The company also took several actions in the Power Products segment aimed at improving profitability, including the reorganization of fourteen customer service regions to four domestic regions; the exit of the Thermo King product offering; the closure of four underperforming branch locations; reduction of approximately 200 employees, principally in administrative positions; implementation of programs to liquidate slow moving inventory; and the transfer of the hybrid bus refurbishment operation to the Engineered Products segment. In addition, subsequent to year-end, the company disposed of its wheelchair lift manufacturing business and the Mercruiser product offering, both of which were part of the Power Products segment.

Segment Data
The Tactical Vehicle Systems segment, which manufactures tactical vehicles for the U.S. Army and others, recorded sales of $116.3 million in the fourth quarter of fiscal 2003 compared to $116.3 million in the prior year's fourth quarter. Operating profit for the current quarter totaled $16.1 million compared to $20.4 million in the fourth quarter of fiscal 2002. Sales for fiscal 2003 were $445.7 million compared to $450.8 million a year ago and operating profit for fiscal 2003 was $67.9 million compared to last year's operating profit of $69.3 million. The company's current multi-year contract with the U.S. Army to produce the Family of Medium Tactical Vehicles (FMTV) is expected to conclude during the fourth quarter of fiscal 2004 at which time a new five-year contract with the U.S. Army begins production. The company expects the fourth quarter of fiscal 2004 to be one of transition with lower sales as the company commences production under the new five-year contract. The company believes that building upon this contract with the U.S. Army and leveraging the success of its industry-leading FMTV vehicles will enable it to pursue opportunities in other markets with similar products.

The Power Products segment, which is responsible for sales and aftermarket support of a wide range of industrial and transportation equipment, recorded sales of $127.4 million in the fourth quarter compared to sales of $130.3 million a year ago. The fourth quarter operating loss totaled $35.9 million compared to a $9.3 million loss in the comparable period of last year. Sales for the year were $510.0 million compared to last year's sales of $547.4 million. Operating loss for fiscal 2003 was $51.2 million compared to a $10.2 million loss last year.

During the fourth quarter, the company took numerous actions in the Power Products segment designed to enhance the segment's operations, operating results and profitability. These initiatives included, among others, the exit of certain non-core product offerings, closure of underperforming locations, a workforce reduction and reorganization of the management structure. Primarily as a result of these initiatives, the company incurred charges of approximately $22 million during the fourth quarter related to goodwill impairment, inventory write-downs, employee separation, warranty issues and accounts receivable realization. The remaining losses in the quarter of approximately $14 million were the result of a combination of factors including low margin sales in the quarter plus the ongoing low level of profitability that gave rise to the management actions taken in the quarter. The company believes actions to date, including personnel reductions, employee benefit reductions and other actions to reduce cost will result in annualized savings of approximately $20 million to $25 million. The company continues to evaluate this segment's progress and will take those further actions it believes are necessary to restore adequate returns.

The Distributed Energy Solutions segment, which is responsible for activities associated with the higher horsepower reciprocating power generation equipment business, recorded fourth quarter sales of $4.8 million compared to sales of $9.1 million in the same period of fiscal 2002. Fourth quarter operating loss totaled $28.6 million compared to a $4.8 million loss in the comparable period of last year. Sales for the year were $44.9 million compared to last year's sales of $57.0 million. Operating loss for fiscal 2003 was $56.0 million compared to a loss of $8.5 million last year.

Primarily as a result of the company's decision during the third quarter to exit the turnkey engineering, procurement and construction activities of this business, the company incurred charges of approximately $22.0 million during the fourth quarter. Such charges are attributable to estimated cost overruns associated with the fixed price turnkey contracts entered into prior to the decision to exit this portion of the business. The charges are also attributable to inventory adjustments from the writedown of the carrying value of existing engine inventory to realizable values, asset impairment charges and other customer issues. The additional losses in the quarter of $7 million resulted primarily from lower volume of sales. The company continues to evaluate how to best structure the remaining business activities within this segment.

The Engineered Products segment, which manufactures equipment for the well servicing industry, as well as mobile railcar movers, off-road seismic vehicles, and snow blowers, recorded sales of $17.7 million for the fourth quarter compared to $27.5 million last year. The operating loss for the fourth quarter totaled $9.7 million compared to an operating profit of $1.0 million in the previous year. Sales of $111.3 million and $66.4 million were recorded for fiscal 2003 and 2002, respectively. The segment reported an operating loss of $11.0 million in 2003 and a $2.9 million operating loss in 2002. Backlog in this segment decreased from $65.3 million as of last year end to $20.1 million as of the end of fiscal year 2003 as a significant volume of international orders were completed during the year.

Included in the fourth quarter loss were charges of approximately $6 million related to asset impairment and inventory write-downs. The additional losses in the quarter of approximately $4 million were the result of a combination of factors including the lower volume of sales and lower margins achieved on those sales. Efforts are ongoing to generate the higher margin contracts this segment needs to achieve acceptable returns, and the company will continue to evaluate the potential for this business to achieve such results.

The Airline Products segment, which manufactures aviation ground support products, recorded sales of $16.8 million in the fourth quarter of fiscal 2003, compared to $11.2 million in the same quarter last year. Operating losses for the fourth quarter of 2003 and 2002 were $3.8 million and $11.8 million, respectively, and the decreased operating loss year over year was primarily attributable to the $7.7 million asset impairment charge recorded in the fourth quarter of fiscal 2002. Sales for fiscal 2003 were $63.7 million compared to $54.0 million the previous year. The segment reported an operating loss of $13.2 million in 2003 compared to a loss of $17.0 million in 2002.

Included in the fourth quarter loss were charges of approximately $2.0 million related to inventory adjustments resulting from physical inventory counts and valuation assessments. Although recently announced contract awards by the U. S. Navy with a potential value of over $70.0 million in future years will not have a significant impact on results for fiscal 2004, the company believes they should serve to broaden the segment's customer base and stabilize its future revenue stream.

Liquidity
Net cash from continuing operating activities totaled $19.7 million for the fourth quarter of fiscal 2003 of which $9.5 million was used for capital expenditures and $2.5 million was used for financing activities primarily consisting of payment of the regularly scheduled dividend. At year-end, the company had total cash and short-term investments of $61.7 million and total debt of $28.4 million.

Since the company believes it has sufficient liquidity and adequate resources to meet its short-term needs, its unused revolving credit facility was allowed to expire on January 31, 2004. Total cash and short-term investments have increased since year-end to between approximately $90 million and $100 million. Given its adequate resources, the company does not believe it is necessary to establish a new revolving credit facility at this time. However, the company does intend to do so during 2004 in order to provide additional financial flexibility.

The company also noted that it expects cash to be required in fiscal 2004 for, among other identified needs, the commencement of production under the company's new five-year contract with the U.S. Army in the Tactical Vehicle Systems segment and additional expected orders in the Engineered Products segment. The company believes these activities could consume between $40 million and $50 million of cash during the second half of fiscal 2004.
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