UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] 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 1-7007
BANDAG, INCORPORATED
(Exact name of registrant as specified in its charter)
Iowa 42-0802143
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2905 North Highway 61, Muscatine, Iowa 52761-5886
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(Address of principal executive offices) (Zip Code)
(563) 262-1400
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(Registrant's telephone number, including area code)
Not Applicable
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(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 for 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 |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1 par value; 9,100,781 shares as of April 30, 2003.
Class A Common Stock, $1 par value, 9,201,397 shares as of April 30, 2003.
Class B Common Stock, $1 par value; 919,935 shares as of April 30, 2003.
BANDAG, INCORPORATED AND SUBSIDIARIES
INDEX
Page
Part I: FINANCIAL INFORMATION No.
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - March 31, 2003
and December 31, 2002 3
Condensed consolidated statements of operations
Three months ended March 31, 2003 and 2002 4
Condensed consolidated statements of cash flows
Three months ended March 31, 2003 and 2002 5
Notes to condensed consolidated financial statements
March 31, 2003 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure about Market Risk 16
Item 4. Controls and Procedures 16
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
EXHIBITS:
Exhibit 99.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18 U.S.C.
Section 1350
Exhibit 99.2 Written Statement of the Vice President, Chief Financial Officer
and Secretary of Bandag, Incorporated Pursuant to 18 U.S.C.
Section 1350
2
PART I. FINANCIAL INFORMATION
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
In thousands, except share data 2003 2002
----------- ------------
Assets
Current assets
Cash and cash equivalents $ 146,839 $ 129,412
Investments 11,218 14,261
Accounts receivable, net 125,353 154,484
Inventories
Finished products 46,626 46,512
Material and work in process 15,273 12,935
--------- ---------
61,899 59,447
Other current assets 75,238 76,453
--------- ---------
Total current assets 420,547 434,057
Property, plant, and equipment 461,934 463,056
Less accumulated depreciation and amortization (349,326) (346,358)
--------- ---------
112,608 116,698
Intangible assets, net 3,649 3,891
Other assets 64,290 63,181
--------- ---------
Total assets $ 601,094 $ 617,827
========= =========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 21,751 $ 26,813
Accrued employee compensation and benefits 29,649 31,834
Accrued marketing expenses 24,719 29,045
Other accrued expenses 31,715 32,580
Income taxes payable 15,534 19,883
Short-term notes payable and current
portion of other obligations 7,451 7,706
--------- ---------
Total current liabilities 130,819 147,861
Long-term debt and other obligations 44,899 45,373
Shareholders' equity
Common stock; $1.00 par value; authorized -
21,500,000 shares; issued and outstanding
- 9,101,212 shares in 2003; 9,078,798 shares in 2002 9,101 9,079
Class A common stock; $1.00 par value; authorized -
50,000,000 shares; issued and outstanding - 9,197,413
shares in 2003; 9,150,967 shares in 2002 9,197 9,151
Class B common stock; $1.00 par value; authorized -
8,500,000 shares; issued and outstanding - 919,935
shares in 2003; 921,985 shares in 2002 920 922
Additional paid-in capital 14,821 13,034
Retained earnings 438,461 442,251
Foreign currency translation adjustment (47,124) (49,844)
--------- ---------
Total shareholders' equity 425,376 424,593
--------- ---------
Total liabilities and shareholders' equity $ 601,094 $ 617,827
========= =========
See notes to condensed consolidated financial statements.
3
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended
In thousands, except per share data March 31,
2003 2002
--------- ---------
Net sales $ 175,279 $ 192,493
Other income 3,000 3,061
--------- ---------
178,279 195,554
Cost of products sold 115,331 122,999
Engineering, selling, administrative, and other expenses 58,608 68,852
Interest expense 659 1,767
--------- ---------
174,598 193,618
--------- ---------
Earnings before income taxes and cumulative
effect of accounting change 3,681 1,936
Income taxes 1,288 716
--------- ---------
Earnings before cumulative effect of accounting change 2,393 1,220
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- (47,260)
--------- ---------
Net earnings (loss) $ 2,393 $ (46,040)
========= =========
Basic earnings (loss) per share
Earnings before cumulative effect of accounting change $ 0.13 $ 0.06
Cumulative effect of accounting change -- (2.30)
--------- ---------
Net earnings (loss) $ 0.13 $ (2.24)
========= =========
Diluted earnings (loss) per share
Earnings before cumulative effect of accounting change $ 0.12 $ 0.06
Cumulative effect of accounting change -- (2.27)
--------- ---------
Net earnings (loss) $ 0.12 $ (2.21)
========= =========
Comprehensive net earnings (loss) $ 5,113 $ (44,724)
Cash dividends per share $ 0.320 $ 0.315
Depreciation included in expense $ 6,961 $ 7,641
Weighted average shares outstanding:
Basic 19,118 20,591
Diluted 19,277 20,781
See notes to condensed consolidated financial statements.
4
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended
In thousands March 31,
2003 2002
--------- ---------
Operating Activities
Net earnings (loss) $ 2,393 $ (46,040)
Cumulative effect of accounting change -- 50,964
Provision for depreciation and amortization 7,200 7,687
Decrease in operating assets and liabilities, net 10,482 27,792
--------- ---------
Net cash provided by operating activities 20,075 40,403
Investing Activities
Additions to property, plant, and equipment (4,520) (3,162)
Purchases of investments (3,000) (5,000)
Maturities of investments 6,043 3,543
Divestitures of businesses 3,867 --
Acquisitions of businesses -- (2,000)
--------- ---------
Net cash provided by (used in) investing
activities 2,390 (6,619)
Financing Activities
Principal payments on short-term notes payable and
long-term obligations (21) (77)
Cash dividends (6,128) (6,502)
Purchases of Common Stock, Class A Common Stock and
Class B Common Stock (33) (41)
--------- ---------
Net cash used in financing activities (6,182) (6,620)
Effect of exchange rate changes on cash and cash
equivalents 1,144 1,042
--------- ---------
Increase in cash and cash equivalents 17,427 28,206
Cash and cash equivalents at beginning of period 129,412 145,625
--------- ---------
Cash and cash equivalents at end of period $ 146,839 $ 173,831
========= =========
See notes to condensed consolidated financial statements.
5
Notes to Condensed Consolidated Financial Statements - Unaudited
Note A. Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002.
Note B. Comprehensive Net Earnings (Loss)
Comprehensive net earnings (loss) for the three month periods ended March 31,
2003 and 2002 were as follows (in thousands):
Three Months Ended
March 31,
2003 2002
--------- ---------
Earnings before cumulative effect
of accounting change $ 2,393 $ 1,220
Other comprehensive income:
Foreign currency translation 2,720 1,316
--------- ---------
Comprehensive earnings before cumulative
effect of accounting change 5,113 2,536
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- (47,260)
--------- ---------
Comprehensive net earnings (loss) $ 5,113 $ (44,724)
========= =========
6
Note C. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended
March 31,
2003 2002
--------- ---------
Numerator:
Earnings before cumulative effect
of accounting change $ 2,393 $ 1,220
========= =========
Denominator:
Weighted-average shares - Basic 19,118 20,591
Effect of dilutive:
Restricted stock 57 55
Stock options 102 135
--------- ---------
159 190
Weighted-average shares - Diluted 19,277 20,781
========= =========
Earnings per share before cumulative effect
of accounting change
Basic $ 0.13 $ 0.06
========= =========
Diluted $ 0.12 $ 0.06
========= =========
Note D. Non-Recurring Charges
During the fourth quarter of 2001, the Company recorded a non-recurring charge
totaling $4,300,000 ($2,580,000 net of tax benefits) related to the closure of a
North American tread rubber manufacturing facility and certain retirement
benefits. Costs included $2,659,000 ($1,595,000 net of tax benefits) for
termination benefits for the reduction of 46 employees, $1,521,000 ($913,000 net
of tax benefits) for early retirement benefits of 19 employees, and other
miscellaneous closure costs. The Company paid $1,321,000 and $1,542,000 in 2002
and 2001, respectively, related to the termination of employees. In the
year-to-date period ended March 31, 2003, the Company paid $15,000 relating to
the termination of employees. As of March 31, 2003, $1,427,000 of the charges
related to the closure of the North American tread rubber manufacturing facility
remained accrued. The Company estimates that substantially all of the remaining
payments will be made by the end of 2004.
7
Note E. Restructuring Charges
In 2002, the Company recorded restructuring charges totaling $3,500,000
($2,450,000 net of tax benefits) for termination benefits covering 39 employees.
In 2002, the Company paid approximately $650,000 for benefit payments. In the
year-to-date period ended March 31, 2003, the Company paid $550,000 relating to
the termination of employees. As of March 31, 2003, $2,465,000 of the charges
related to the restructuring remained accrued, which reflects a $165,000
increase in the original provision due to exchange rate changes. The Company
estimates that substantially all of the remaining payments will be made by the
end of 2006.
Note F. Accounting for Stock-Based Compensation
During the second quarter of 2002, the Company adopted the fair value
recognition and measurement provision of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosures," effective as of the
beginning of 2002. Under the modified prospective method of adoption selected by
the Company, compensation cost recognized in 2002 and 2003 is the same as that
which would have been recognized had the recognition provisions of Statement 123
been applied from its original effective date in 1994.
Note G. Divestitures
During the first quarter of 2003, the Company's Tire Distribution Systems, Inc.
(TDS) segment sold seventeen locations with a net carrying value of $7,317,000
for cash of $3,867,000 and assumed liabilities of $3,649,000, resulting in a
gain before income taxes and cumulative effect of accounting change of $199,000.
The net assets of these locations consisted primarily of inventory and property,
plant and equipment. These locations contributed $7,056,000 and $10,706,000 to
net sales for the quarters ended March 31, 2003 and 2002, respectively. These
locations incurred $1,374,000 and $284,000 of losses to earnings before income
taxes and cumulative effect of accounting change for the quarters ended March
31, 2003 and 2002, respectively.
8
Note H. Assets Held for Sale
In the first quarter of 2003, the Company's TDS operating segment entered into
letters of intent to sell twenty locations in Louisiana and Mississippi. TDS
also has six locations in Okalahoma and three in Tennessee held for sale. These
locations had net sales and loss before income taxes and cumulative effect of
accounting change as follows (in thousands):
Letters Assets Held
of Intent for Sale
Three months ended March 31, 2003
Net sales $ 12,725 $ 4,559
Loss before income taxes and cumulative
effect of accounting change $ (457) $ (359)
Three months ended March 31, 2002
Net sales $ 12,634 $ 6,195
Loss before income taxes and cumulative
effect of accounting change $ (202) $ (143)
The net assets of these locations, consisting primarily of inventory and
property, plant and equipment, were approximately $28,648,000 and $28,245,000 as
of March 31, 2003 and December 31, 2002, respectively, and are classified as
other current assets on the Company's Condensed Consolidated Balance Sheets.
Subsequent to March 31, 2003, TDS entered into agreements to sell the twenty
locations in Louisiana and Mississippi and the six locations in Oklahoma
referenced above. The Company has not yet calculated the gain or loss on these
transactions.
Note I. Reclassification
Certain prior year amounts have been reclassified to conform with the current
year presentation.
9
Note J. Operating Segment Information
The Company has two reportable operating segments: the Traditional Business and
TDS. The Traditional Business manufactures precured tread rubber, equipment and
supplies for retreading tires and operates on a worldwide basis. The operations
of the Traditional Business segment are evaluated by worldwide geographic
region. The Company's operations located in the United States and Canada,
together with Tire Management Solutions, Inc. (TMS), and Quality Design Systems,
Inc. (QDS), are integrated and managed as one unit, which is referred to
internally as North America. The Company's operations located in Europe
principally service those European countries, but also export to certain other
countries in the Middle East and Northern and Central Africa. This collection of
countries is under one management group and is referred to internally as Europe.
The Company's exports from North America to markets in the Caribbean, Central
America, South America and Asia, along with operations in Brazil, Mexico,
Venezuela, South Africa, and royalties from a licensee in Australia, are
combined under one management group referred to internally as International.
TDS operates franchised retreading locations and commercial, retail, and
wholesale outlets throughout the United States for the sale and maintenance of
new and retread tires to principally commercial and industrial customers.
Other consists of corporate administrative expenses including corporate legal
expenses.
The Company evaluates performance and allocates resources based primarily on
profit or loss before interest and income taxes. Intersegment sales and
transfers between the Traditional Business and TDS are recorded at a value
consistent with that to unaffiliated customers.
10
BANDAG, INCORPORATED AND SUBSIDIARIES
For the three months ended March 31 (in thousands):
Traditional Business
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North America Europe International
---------------------- ---------------------- ----------------------
2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
Sales by Product
Retread products $ 58,409 $ 64,624 $ 17,249 $ 12,148 $ 20,109 $ 22,343
New tires -- -- -- -- -- --
Retread tires -- -- -- -- -- --
Equipment 5,311 5,388 1,732 412 363 407
Other 8,492 6,279 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 72,212 $ 76,291 $ 18,981 $ 12,560 $ 20,472 $ 22,750
Transfers between segments 11,546 14,053 319 156 2,106 946
Operating earnings (loss) $ 3,916 $ 12,663 $ 1,390 $ (172) $ 3,671 $ 1,907
Interest income -- -- -- -- -- --
Interest expense -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ 3,916 $ 12,663 $ 1,390 $ (172) $ 3,671 $ 1,907
========= ========= ========= ========= ========= =========
TDS Other Consolidated
---------------------- ---------------------- ----------------------
2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
Sales by Product
Retread products $ -- $ -- $ -- $ -- $ 95,767 $ 99,115
New tires 33,470 44,121 -- -- 33,470 44,121
Retread tires 16,142 20,593 -- -- 16,142 20,593
Equipment -- -- -- -- 7,406 6,207
Other 14,002 16,178 -- -- 22,494 22,457
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 63,614 $ 80,892 $ -- $ -- $ 175,279 $ 192,493
Transfers between segments 628 436 -- -- 14,599 15,591
Operating earnings (loss) $ (4,052) $ (5,965) $ (1,741) $ (6,139) $ 3,184 $ 2,294
Interest income -- -- 1,156 1,409 1,156 1,409
Interest expense -- -- (659) 1,767) (659) (1,767)
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ (4,052) $ (5,965) $ (1,244) $ (6,497) $ 3,681 $ 1,936
========= ========= ========= ========= ========= =========
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Results include the Company's two reportable operating segments - its
Traditional Business and Tire Distribution Systems, Inc. (TDS).
During the first quarter of 2003, the Company's TDS segment sold seventeen
locations with a net carrying value of $7,317,000 for cash of $3,867,000 and
assumed liabilities of $3,649,000, resulting in a gain before income taxes and
cumulative effect of accounting change of $199,000. The net assets of these
locations consisted primarily of inventory and property, plant and equipment.
These locations contributed $7,056,000 and $10,706,000 to net sales for the
quarters ended March 31, 2003 and 2002, respectively. These locations incurred
$1,374,000 and $284,000 of losses to earnings before income taxes and cumulative
effect of accounting change for the quarters ended March 31, 2003 and 2002,
respectively.
Also during the first quarter of 2003, the Company's TDS segment entered into
letters of intent to sell twenty locations in Louisiana and Mississippi. TDS
also has six locations in Oklahoma and three in Tennessee held for sale. These
locations contributed $17,284,000 and $18,829,000 to net sales for the quarters
ended March 31, 2003 and 2002, respectively. These locations contributed
$816,000 and $345,000 of losses to earnings before income taxes and cumulative
effect of accounting change for the quarters ended March 31, 2003 and 2002,
respectively. The net assets of these locations were approximately $28,648,000
and $28,245,000 as of March 31, 2003 and December 31, 2002, respectively, and
are classified as other current assets on the Company's Condensed Consolidated
Balance Sheets. Subsequent to March 31, 2003, TDS entered into agreements to
sell the twenty locations in Louisiana and Mississippi and the six locations in
Oklahoma. The Company has not yet calculated the gain or loss on these
transactions.
Consolidated net sales for the quarter ended March 31, 2003 decreased
$17,214,000, or 9%, from the prior year period on a 2% decline in Traditional
Business net sales and a 21% decline in TDS net sales. The decrease in
Traditional Business net sales for the quarter ended March 31, 2003, primarily
resulted from a 4% decline in retread material unit volume and an increase in
dealer marketing programs classified as a reduction of sales, partially offset
by a 19% increase in equipment sales. TDS net sales decreased $17,278,000, or
21%, for the quarter ended March 31, 2003 from the prior year period, primarily
as a result of the divestitures and closures of 44 locations in 2002 and 2003.
The Company's seasonal sales pattern is tied to the overall performance of the
economy and to the level of trucking activity.
Consolidated and Traditional Business gross profit margin for the quarter ended
March 31, 2003, decreased by 1.9 and 5.4 percentage points from the prior year
period, respectively. The decrease in consolidated and Traditional Business
gross profit margin is primarily the result of margin erosion in North America,
partially offset by lower TDS sales which carry lower gross margins than the
Traditional Business. Gross profit margin for TDS increased 2.6 percentage
points for the quarter ended March 31, 2003 as compared to the prior year
period. The
12
improvement in TDS gross profit margin was positively impacted by increased
sales of higher margin product coupled with a decrease in cost of sales due to
inventory adjustments.
Consolidated operating and other expenses decreased $10,244,000, or 15%, for the
quarter ended March 31, 2003 from the prior year period. Traditional Business
operating and other expenses for the quarter ended March 31, 2003 decreased
$1,893,000, or 5%, from the prior year period. The decrease in consolidated
operating and other expenses primarily resulted from the absence in the quarter
ended March 31, 2003 of approximately $4,000,000 of litigation expenses and
$2,200,000 of expenses related to converting SystemBandag users to the
Roadware(TM) software system, both of which were recorded in the quarter ended
March 31, 2002. Consolidated operating and other expenses were also positively
impacted by the TDS divestitures and closures.
Consolidated earnings before income taxes and cumulative effect of accounting
change increased $1,745,000 for the quarter ended March 31, 2003 as compared to
the prior year period. Consolidated net earnings were $2,393,000 or $0.12 per
diluted share for the quarter ended March 31, 2003.
TRADITIONAL BUSINESS
The Company's Traditional Business operations located in the United States and
Canada, together with Tire Management Solutions, Inc. and Quality Design
Systems, Inc., are integrated and managed as one unit, which is referred to
internally as North America. North America sells to independent dealers as well
as to TDS and other subsidiaries. Sales to TDS and other subsidiaries are
eliminated in consolidation. Sales of $9,517,000 of retread products to TDS
accounted for 14% of North America's total retread products sold for the quarter
ended March 31, 2003, compared to $11,597,000, or 15%, in the prior year period.
Total retread products sold in North America for the quarter ended March 31,
2003 decreased $8,628,000, or 11%, from the prior year period. Retread product
sales to TDS and independent dealers for the quarter ended March 31, 2003,
declined 18% and 10%, respectively, as compared to the prior year period. The
decrease in retread product sales to TDS is primarily due to the divestitures
and closures of TDS locations. The decrease in retread products sales to
independent dealers is primarily due to an 8% decline in retread material
volume, approximately half of which the Company estimates is due to dealer
buying during the fourth quarter of 2002 in order to stock inventories ahead of
a January price increase. Retread product sales to independent dealers are
positively impacted by the TDS divestitures due to sales by North America to
independent dealers rather than to TDS. Primarily as a result of the acquisition
of Open Road Technologies in the first quarter of 2002, North America other net
sales for the quarter ended March 31, 2003 increased $2,213,000 compared to the
prior year period.
An increase of approximately $1,500,000 related to dealer marketing program
expenses, classified as a reduction of sales, coupled with higher manufacturing
expenses and lower volume primarily resulted in a 9 percentage point decrease in
North America's gross margin for the quarter ended March 31, 2003 from the prior
year period. North America's operating and other expenses for the quarter ended
March 31, 2003 remained even with the prior year period. Operating and other
expenses in the current quarter were negatively impacted by $1,400,000 of
increased pension expense, which was offset by the absence of approximately
$2,200,000 of
13
expense incurred during the quarter ended March 31, 2002 related to converting
SystemBandag users to the RoadWare(TM) software system. Lower sales and gross
profit margin primarily resulted in a decrease for North America of $8,747,000
in earnings before income taxes and cumulative effect of accounting change for
the quarter ended March 31, 2003 as compared to the prior year period.
The Company's operations located in Europe principally service markets in
European countries, but also export to certain other countries in the Middle
East and Northern and Central Africa. This collection of countries is under one
management group and is referred to internally as Europe. Net sales in Europe
increased $6,421,000, or 51%, for the quarter ended March 31, 2003 from the
prior year period, primarily due to an 18% increase in material unit volume and
strengthening of the euro. Gross margin increased 2.5 percentage points for the
quarter ended March 31, 2003 compared to the prior year period. Operating and
other expenses increased $1,389,000, or 31%, for the quarter ended March 31,
2003 as compared to the prior year period, primarily due to an increase of
$1,017,000 of net foreign exchange losses. Principally as a result of higher
sales and gross margin, partially offset by an increase in operating expenses,
Europe recorded earnings before income taxes and cumulative effect of accounting
change of $1,390,000 for the quarter ended March 31, 2003, as compared to a loss
before income taxes and cumulative effect of accounting change of $172,000 for
the prior year period.
The Company's exports from North America to markets in the Caribbean, Central
America, South America and Asia, along with operations in Brazil, Mexico,
Venezuela, South Africa, and royalties from a licensee in Australia, are
combined under one management group referred to internally as International. Net
sales in International for the quarter ended March 31, 2003 decreased
$2,278,000, or 10%, from the prior year period. The decrease in net sales is
primarily a result of a 5% decrease in retread material unit volume, coupled
with the lower translated value of the Brazilian real and Mexican peso,
partially offset by the higher translated value of the South African rand. The
gross margin for the quarter ended March 31, 2003 decreased 3.4 percentage
points from the prior year period, due mainly to higher raw material costs.
Operating and other expenses for the quarter ended March 31, 2003 decreased
$3,306,000 from the prior year period, primarily due to an increase of
$2,005,000 of net foreign exchange gains and the lower translated value of the
Brazilian Real and Mexican peso. Earnings before income taxes and cumulative
effect of accounting change for the quarter ended March 31, 2003 increased
$1,764,000 from the prior year period, primarily due to the decrease in
operating and other expenses.
TIRE DISTRIBUTION SYSTEMS, INC.
During the first quarter of 2003, TDS sold seventeen locations with a net
carrying value of $7,317,000 for cash of $3,867,000 and assumed liabilities of
$3,649,000, resulting in a gain before income taxes and cumulative effect of
accounting change of $199,000. These locations contributed $7,056,000 and
$10,706,000 to net sales for the quarters ended March 31, 2003 and 2002,
respectively. These locations incurred $1,292,000 and $192,000 of losses to
earnings before income taxes and cumulative effect of accounting change for the
quarters ended March 31, 2003 and 2002, respectively.
14
TDS net sales for the quarter ended March 31, 2003 decreased $17,278,000, or
21%, from the prior year period, primarily due to the divestitures and closures
of 44 TDS locations throughout 2002 and 2003. The divested and closed locations
had sales of approximately $20,500,000 for the quarter ended March 31, 2002. The
locations that were divested in the first quarter of 2003 contributed $7,056,000
to first quarter 2003 sales. Gross margin for the quarter ended March 31, 2003
increased 2.6 percentage points from the prior year period. TDS gross profit
margin was positively impacted by increased sales of higher margin product
coupled with a decrease in cost of sales due to inventory adjustments. Operating
and other expenses decreased $3,953,000, or 17%, for the quarter ended March 31,
2003 primarily due to the divestitures and closures. Primarily as a result of
the lower operating and other expenses, partially offset by the lower sales
volume, TDS recorded a loss before income taxes and cumulative effect of
accounting change of $4,052,000 for the quarter ended March 31, 2003, as
compared to a loss on the same basis of $5,965,000 in the prior year period.
Financial Condition:
Liquidity
At March 31, 2003, the Company had cash and cash equivalents of $146,839,000, as
compared to $129,412,000 at December 31, 2002. The Company's ratio of total
current assets to total current liabilities was 3.2 to 1 at March 31, 2003 with
current assets exceeding current liabilities by $289,728,000. At March 31, 2003,
the Company had approximately $28,648,000 of assets held for sale, consisting
primarily of inventory and property, plant and equipment classified as other
current assets. At March 31, 2003, the Company had approximately $88,768,000 in
borrowings available under unused lines of credit.
Operating Activities
Net cash provided by operating activities for the three months ended March 31,
2003 was $20,075,000, primarily due to decreases in accounts receivables
partially offset by decreases in accounts payable and other liabilities.
Investing Activities
The Company spent $4,520,000 on capital expenditures through March 31, 2003,
compared to $3,162,000 spent for the same period last year. The Company
typically funds its capital expenditures from operating cash flows. During the
quarter ended March 31, 2003, the Company sold seventeen TDS locations for cash
proceeds of $3,867,000.
The Company's excess funds are invested in financial instruments with various
maturities, but only instruments with an original maturity date of over 90 days
are classified as investments for balance sheet purposes. The Company's
maturities of investments exceeded purchases by $3,043,000 during the three
months ended March 31, 2003, resulting in total investments of $11,218,000 as of
March 31, 2003.
15
Financing Activities
Cash dividends totaled $6,128,000 for the quarter ended March 31, 2003, compared
to $6,502,000 for the same period last year.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
See the Company's most recent Annual Report filed on Form 10-K (Item 7A). There
has been no material change in this information.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. During the prior
ninety-day period, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's internal controls subsequent to the date of their evaluation.
16
PART II. OTHER INFORMATION
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
99.2 Written Statement of the Vice President, Chief Financial Officer
and Secretary of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter ended March 31, 2003.
17
BANDAG, INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANDAG, INCORPORATED
(Registrant)
Date: May 9, 2003 /s/ Martin G. Carver
---------------------------------------
Martin G. Carver
Chairman and Chief Executive Officer
Date: May 9, 2003 /s/ Warren W. Heidbreder
---------------------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
18
CERTIFICATIONS
I, Martin G. Carver, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bandag, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ Martin G. Carver
-------------------------------------
Martin G. Carver
Chairman and Chief Executive Officer
19
CERTIFICATIONS
I, Warren W. Heidbreder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bandag, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003 By: /s/ Warren W. Heidbreder
---------------------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
20
Exhibit Index
Exhibit
Number Exhibit
- ------- -------
99.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C.ss.1350
99.2 Written Statement of the Vice President, Chief Financial Officer and
Secretary of Bandag, Incorporated Pursuant to 18 U.S.C.ss.1350
21