Stewart & Stevenson Services Reports Third Quarter 2005 Results

Third Quarter Net Earnings Were $0.11 Per Diluted Share; Third Quarter Net Earnings From Continuing Operations Were $0.02 Per Diluted Share 


HOUSTON, Nov. 30  /PRNewswire-FirstCall/ -- Stewart & Stevenson Services, Inc. (NYSE:SVC) announced results for the third quarter of fiscal 2005, which ended on October 29, 2005.

As previously announced, the company entered into two separate definitive agreements during the third quarter to sell the Engineered Products and Power Products businesses.  Operating results have been restated to reflect the two businesses as discontinued operations and restated fiscal 2005 and fiscal 2004 quarterly statements of operations for continuing operations are attached. The company's continuing operations consist of the Tactical Vehicle Systems ("TVS") business and certain corporate overhead expenses.

Sales for the third quarter of fiscal 2005 totaled $161.8 million compared to sales of $133.4 million in the same period a year ago.  Net earnings in the third quarter of fiscal 2005 were $3.4 million, or $0.11 per diluted share, compared to $2.1 million, or $0.07 per diluted share, in the third quarter of fiscal 2004.  Net earnings from continuing operations in the third quarter of fiscal 2005 were $0.6 million, or $0.02 per diluted share, compared to $8.5 million, or $0.29 per diluted share, in the third quarter of fiscal 2004.

Max L. Lukens, Stewart & Stevenson's President and Chief Executive Officer, stated, "Upon completion of the sales of the Power Products and Engineered Products businesses, Stewart & Stevenson will be primarily engaged in the design, manufacture and service of tactical military vehicles and related products.  We are confident that our expertise in this area, combined with our strong production backlog and financial condition, uniquely positions us to take advantage of potential opportunities aimed at enhancing shareholder value."

Continuing Operations

Sales in the third quarter of fiscal 2005 were $161.8 million, representing a 21% increase from $133.4 million of sales in the prior year's third quarter.  Gross profit for the third quarter of fiscal 2005 decreased to $6.4 million or 4.0% of sales compared to $18.5 million or 13.8% of sales in the third quarter of fiscal 2004.  Gross profit margins were expected to be lower in fiscal 2005 as a result of the lower unit prices and mix of option vehicles in the current multi-year contract with the U.S. Army to produce the Family of Medium Tactical Vehicles ("FMTV") which began production in November 2004.  The lower margins on this contract were partially offset by sales under other U.S. Army contracts to produce Low Signature Armored Cabs ("LSAC") for use on the FMTV. Third quarter 2005 results included the sale of 230 LSAC units.

Selling and administrative expenses during the third quarter of fiscal 2005 were $4.7 million or 2.9% of sales compared to $6.2 million or 4.6% of sales in the third quarter of fiscal 2004.  The decline in selling and administrative expenses is attributable to lower LSAC product development costs combined with lower spending in the company's corporate office. Corporate office expenses declined from $4.0 million in the third quarter of fiscal 2004 to $3.4 million in the third quarter of fiscal 2005.

As previously announced, during the second quarter of fiscal 2005, the TVS business received additional orders from the U.S. Army for FMTV trucks and trailers valued at approximately $483 million.  These contract modifications, which are funded by the 2005 U.S. Congress Supplemental Spending Bill, provide for 3,016 additional vehicles to the third program year of the current production contract with deliveries scheduled from June 2006 through September 2008. At the end of the third quarter, total backlog from continuing operations was approximately $1.1 billion.

The company is evaluating the requirements under the contract modifications and is increasing its production capacity for 2006 in order to meet the required delivery schedule.  This will require capital expenditures of approximately $25 million for additional equipment and buildings through the first half of fiscal 2006, of which approximately $7 million was expended during the third quarter of fiscal 2005.  The contract modification is not expected to have a significant impact on the company's fourth quarter fiscal 2005 operating results.

Discontinued Operations

Net earnings from discontinued operations were $2.7 million or $0.09 per diluted share in the third quarter of fiscal 2005.  These earnings include after-tax earnings of $5.2 million from the Power Products and Engineered Products businesses, an after-tax loss on disposal of $1.9 million resulting from the settlement of a dispute arising from the sale of the Airline Products business during fiscal 2004, and after-tax losses of $0.5 million from the continued wind-down of activities in the Distributed Energy Solutions business.

Liquidity

Total cash and short-term investments were $60.9 million at the end of the third quarter, as compared to $71.5 million at the end of the second quarter. Cash used in operating activities of the discontinued Engineered Products and Power Products businesses, partially offset by $9.4 million of cash provided by the third quarter sale of four Power Products California locations, accounted for most of the decrease in the cash balance.  The sales of the Engineered Products and Power Products businesses are expected to provide cash proceeds of approximately $240 million in the fourth quarter, subject to adjustment.

Conference Call

Stewart & Stevenson Services has scheduled a conference call for Wednesday, November 30, 2005 at 10:00 a.m. Eastern Time to review third quarter results.  To listen to the call, dial 800-299-6183 or 617-801-9713 and use pass code 28695450 at least ten minutes before the conference call begins. A telephonic replay of the conference call will be available until December 7, 2005 and may be accessed by dialing 888-286-8010 or 617-801-6888 and using pass code 21556853.

Investors, analysts, and the general public will also have the opportunity to listen to the conference call free over the Internet by visiting the company's web site at http://www.ssss.com/ .  To listen to the live call on the web, please visit the Stewart & Stevenson web site at least fifteen minutes early to register, download, and install any necessary audio software.  For those who cannot listen to the live web cast, an audio archive will be available shortly after the call ends.

This press release contains forward-looking statements that are based on management's current expectations, estimates, and projections.  These statements are not guarantees of future performance and involve a number of risks, uncertainties and assumptions and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.  Many factors, including those discussed more fully elsewhere in this release and in the Company's filings with the Securities and Exchange Commission, particularly its latest annual report on Form 10-K, as well as others, could cause results to differ materially from those stated.  These factors include, but are not limited to, risks of dependence on government and failure to obtain new government contracts, inherent risks of government contracts, risks of supply interruptions to Tactical Vehicle Systems segment, risks associated with Distributed Energy Solutions segment, risks of fixed-price contracts, risks as to rising steel prices, risks as to cost controls, risks of general economic conditions, risks of oil and gas industry economic conditions, risks as to distributorships, risks as to licenses, risk of competition, risks relating to technology, risks as to terrorist attacks on the U.S. and their impact on the U.S. economy, risks relating to personnel, risks of claims and litigation, risks of product defects, risks as to foreign sales and global trade matters, risks as to acquisitions and restructuring activities, risks as to currency fluctuations, risks as to environmental and safety matters, and credit risks  all as more specifically outlined in the Company's latest annual report on Form 10-K. In addition, such forward-looking statements could be affected by general industry and market conditions and growth rates, general domestic and international conditions including interest rates, inflation and currency exchange rates and other future factors.  Actual outcomes and results may differ materially from what is expressed or forecasted in such forward- looking statements.

           STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                  (In thousands, except per share data)

                                     Three Months Ended   Nine Months Ended
                                      Oct. 29,  Oct. 30,  Oct. 29,  Oct. 30,
                                        2005      2004      2005      2004
                                         (Unaudited)         (Unaudited)
  Sales                              $161,821  $133,431  $531,513  $412,951
  Cost of sales                       155,421   114,961   489,349   351,752

  Gross profit                          6,400    18,470    42,164    61,199

  Selling and administrative
   expenses                             4,720     6,199    14,869    19,281
  Other expense (income), net              85        29      (138)       29

  Operating profit                      1,595    12,242    27,433    41,889

  Interest expense                        563       534     1,636     1,487
  Interest income                        (525)     (411)   (2,082)     (997)

  Earnings from continuing
   operations before income taxes       1,557    12,119    27,879    41,399
  Income tax expense                      918     3,630    10,411    14,038
  Net earnings from continuing
   operations                             639     8,489    17,468    27,361
  Earnings (loss) from discontinued
   operations, net of tax expense
   (benefit) of $2,574, ($5,557),
   $4,656 and ($9,454)                  4,660    (6,406)    9,656   (13,959)
  Loss from disposal of discontinued
   operations, net of tax of
   ($1,077) and ($3,269)               (1,949)      ---    (6,780)      ---
  Net earnings                         $3,350    $2,083   $20,344   $13,402

  Weighted average shares outstanding:
     Basic                             29,194    28,768    29,060    28,729
     Diluted                           29,674    29,186    29,555    29,100

  Earnings (loss) per share:
    Basic:
       Continuing operations            $0.02     $0.30     $0.60     $0.95
       Discontinued operations           0.09     (0.23)     0.10     (0.48)



       Net earnings per share           $0.11     $0.07     $0.70     $0.47

    Diluted:
       Continuing operations            $0.02     $0.29     $0.59     $0.94
       Discontinued operations           0.09     (0.22)     0.10     (0.48)
       Net earnings per share           $0.11     $0.07     $0.69     $0.46

  Cash dividends per share             $0.085    $0.085    $0.255    $0.255



           STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUING OPERATIONS
                          (Dollars in thousands)

                                Three Months Ended (Unaudited)
                  May 1,  July 31,  Oct. 30,   Jan. 31,  April 30, July 30,
                   2004     2004      2004       2004       2005     2005

  Sales          $138,783  $140,737  $133,431  $136,852  $165,518  $204,174
  Cost of sales   117,527   119,265   114,961   124,254   150,253   183,675

  Gross profit     21,256    21,472    18,470    12,598    15,265    20,499

  Selling and
   administrative
   expenses         6,047     7,036     6,199     6,661     5,264     4,885
  Other expense
   (income), net     (101)      102        29       378      (142)      (81)

  Operating
   profit          15,310    14,334    12,242     5,559    10,143    15,695

  Interest expense    517       436       534       542       525       547
  Interest income    (254)     (332)     (411)     (391)     (760)     (797)

  Earnings from
   continuing
   operations,
   before income
   taxes          $15,047   $14,230   $12,119    $5,408   $10,378   $15,945



           STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
                       CONSOLIDATED BALANCE SHEETS
                    (In thousands, except share data)

                                              Oct. 29, 2005    Jan. 31, 2005
  ASSETS                                       (Unaudited)        (Audited)
  CURRENT ASSETS
     Cash and cash equivalents                   $50,093          $128,515
     Short-term investments                       10,790             2,480
     Accounts receivable, net                     63,221            62,136
     Inventories                                  21,460            17,803
     Deferred income taxes                         6,406             5,872
     Income tax receivable                         4,551             7,223
     Other current assets                          6,275             1,655
     Total assets of discontinued operations     344,738           321,949
        TOTAL CURRENT ASSETS                     507,534           547,633

  PROPERTY, PLANT AND EQUIPMENT, NET              40,993            34,660
  DEFERRED INCOME TAX ASSET                       23,998            26,438
  INTANGIBLES AND OTHER ASSETS, NET               45,972             4,611
        TOTAL ASSETS                            $618,497          $613,342




  LIABILITIES AND SHAREHOLDERS' EQUITY
  CURRENT LIABILITIES
     Notes payable                                $1,874              $---
     Current portion of long-term debt            25,000               ---
     Accounts payable                             53,897            43,441
     Accrued payrolls and incentives              13,308            13,178
     Billings in excess of incurred costs         18,162            59,894
     Other current liabilities                    28,676            26,154
     Total liabilities of discontinued
      operations                                 112,005            99,193
        TOTAL CURRENT LIABILITIES                252,922           241,860


  LONG-TERM DEBT, NET                                 76            25,000
  ACCRUED POSTRETIREMENT BENEFITS AND
   PENSION                                        58,684            57,621
  OTHER LONG-TERM LIABILITIES                      3,715             4,141
      TOTAL LIABILITIES                          315,397           328,622
  SHAREHOLDERS' EQUITY
    Common Stock, without par value,
     100,000,000 shares authorized;
     29,270,741 and 28,865,070 shares
     issued, respectively                         66,978            59,616
    Accumulated other comprehensive loss         (37,968)          (36,048)
    Retained earnings                            274,090           261,152
        TOTAL SHAREHOLDERS' EQUITY               303,100           284,720
        TOTAL LIABILITIES AND
         SHAREHOLDERS' EQUITY                   $618,497          $613,342



           STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                              (In thousands)

                                      Three Months Ended   Nine Months Ended
                                       Oct. 29,  Oct. 30,  Oct. 29, Oct. 30,
                                          2005     2004      2005     2004
                                            (Unaudited)        (Unaudited)
  Operating Activities
    Net earnings                          $3,350   $2,083   $20,344  $13,402
    Adjustments to reconcile net
     earnings to net cash provided by
     (used in) operating activities:
       Net (earnings) loss from
        discontinued operations           (2,711)   6,406   (2,876)  13,959
       Deferred tax (benefit) expense     (2,393)   2,634    1,378     (427)
       Depreciation and amortization       2,738    2,233    5,988    6,200
       Unrealized foreign exchange
        (gains) losses                      (198)     ---    1,216      ---
       Change in operating assets and
        liabilities net of the effect
        of discontinued operations:
           Accounts receivable, net       (7,826)  (6,627)  (8,576)  (9,716)
           Recoverable costs and accrued
            profits not yet billed         5,044      ---      ---      ---
           Inventories                     1,877   (6,527)   3,066   (7,072)
           Other current and noncurrent
            assets                        (1,699)  (7,373)    (547)   8,935
           Accounts payable              (10,440)   3,077    3,918     (663)
           Accrued payrolls and
            incentives                     4,385    4,690   (1,929)   3,308
           Billings in excess of
            incurred costs                18,179    3,635  (41,715) (33,094)



           Other current liabilities         253   (2,452)  (5,835)   2,884
           Accrued postretirement
            benefits & pension               348  (10,148)   1,063   (9,434)
           Other, net                         59      163     (304)  (1,413)
    Net Cash Provided by (Used in)
     Continuing Operations                10,966   (8,206) (24,809) (13,131)
    Net Cash Provided by (Used in)
     Discontinued Operations             (24,231)  (3,152) (16,606)  47,218
    Net Cash Provided by (Used in)
     Operating Activities                (13,265) (11,358) (41,415)  34,087

  Investing Activities
    Capital expenditures                  (7,125)  (3,021)  (8,960)  (6,567)
    Proceeds from sale of businesses       9,438      ---   24,438      ---
    Acquisition of businesses                ---      ---  (42,778)     ---
    Proceeds from disposal of property,
     plant and equipment                     147      163      147      342
    Short-term investment activity, net      250    3,505   (8,310)     315
    Net investing activities of
     discontinued operations                 ---       38       66      112
      Net Cash Provided by (Used in)
       Investing Activities                2,710      685  (35,397)  (5,798)

  Financing Activities
    Loan acquisition costs                   ---      ---      (76)     ---
    Change in short-term notes payable       (19)     ---      (19)     ---
    Dividends paid                        (2,474)  (2,465)  (7,407)  (7,341)
    Proceeds from exercise of stock
     options                               2,302       89    5,949    1,339
      Net Cash Used in Financing
       Activities                           (191)  (2,376)  (1,553)  (6,002)

  Effect of exchange rate changes on cash    348      ---      (57)     ---

  Increase (decrease) in cash and cash
   equivalents                           (10,398) (13,049) (78,422)  22,287
  Cash and cash equivalents, beginning
   of period                              60,491   87,522  128,515   52,186
  Cash and cash equivalents, end of
   period                                $50,093  $74,473  $50,093  $74,473



           STEWART & STEVENSON SERVICES, INC. AND SUBSIDIARIES
                        SELECTED OTHER INFORMATION
                          Continuing Operations

                 July 31,  Oct. 30,  Jan. 31,  April 30,  July 30,  Oct. 29,
  ($ Millions)     2004      2004      2005      2005       2005      2005

  Order Backlog     $497      $451      $457      $910     $1,205    $1,121


                                TACTICAL VEHICLE UNIT DELIVERIES
                                          Fiscal 2004
                                  1Q    2Q    3Q    4Q   Total

   Trucks                         743   751   683   627   2,804

   LSACs                          ---   ---   ---   270     270

   Trailers                       204   201   146   179     730

  Sales (millions)               $139  $141  $133  $137    $550





                                          Fiscal 2005
  Estimated Unit Deliveries       1Q    2Q    3Q    4Q*   Total*

   Trucks                         627   711   704   937   2,979

   LSACs                          621   852   230    62   1,765

   Trailers                       291   337   373   554   1,555

  Sales (millions)               $166  $204  $162  $187    $719

   * Based on current customer forecasts and other data.



See cautionary statements above for important information regarding forward-looking statements. 

DATASOURCE: Stewart & Stevenson Services, Inc.



CONTACT:  John Simmons, Sr. V.P., CFO of Stewart & Stevenson Services,

Inc., [phone]



Web site:  http://www.ssss.com/ 

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