UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
- ---------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2905 North Highway 61, Muscatine, Iowa 52761-5886
- ---------------------------------------- ----------------------------
(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; 9,230,473 shares as of July 31, 2003. Class A Common
Stock, $1 par value, 9,230,169 shares as of July 31, 2003. Class B Common Stock,
$1 par value; 919,688 shares as of July 31, 2003.
BANDAG, INCORPORATED AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -
June 30, 2003 and December 31, 2002 3
Condensed consolidated statements of operations
Three months ended June 30, 2003 and 2002;
Six months ended June 30, 2003 and 2002 4
Condensed consolidated statements of cash flows
Six months ended June 30, 2003 and 2002 5
Notes to condensed consolidated financial statements
June 30, 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 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 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 32.2 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)
June 30, December 31,
In thousands, except share data 2003 2002
----------- -------------
Assets
Current assets
Cash and cash equivalents $ 141,954 $ 129,412
Investments 16,394 14,261
Accounts receivable, net 144,251 154,484
Inventories
Finished products 47,872 46,512
Material and work in process 15,523 12,935
--------- ---------
63,395 59,447
Other current assets 66,349 76,453
--------- ---------
Total current assets 432,343 434,057
Property, plant, and equipment 467,197 463,056
Less accumulated depreciation and amortization (353,948) (346,358)
--------- ---------
113,249 116,698
Intangible assets, net 3,410 3,891
Other assets 64,808 63,181
--------- ---------
Total assets $ 613,810 $ 617,827
========= =========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 23,472 $ 26,813
Accrued employee compensation and benefits 30,833 31,834
Accrued marketing expenses 25,851 29,045
Other accrued expenses 28,636 32,580
Income taxes payable 14,403 19,883
Short-term notes payable and current portion of
other obligations 7,441 7,706
--------- ---------
Total current liabilities 130,636 147,861
Long-term debt and other obligations 45,323 45,373
Shareholders' equity
Common stock; $1.00 par value; authorized -
21,500,000 shares; issued and outstanding -
9,100,205 shares in 2003; 9,078,798 shares in 2002 9,100 9,079
Class A common stock; $1.00 par value; authorized -
50,000,000 shares; issued and outstanding -
9,221,309 shares in 2003; 9,150,967 shares in 2002 9,221 9,151
Class B common stock; $1.00 par value; authorized -
8,500,000 shares; issued and outstanding - 919,888
shares in 2003; 921,985 shares in 2002 920 922
Additional paid-in capital 15,979 13,034
Retained earnings 440,928 442,251
Foreign currency translation adjustment (38,297) (49,844)
--------- ---------
Total shareholders' equity 437,851 424,593
--------- ---------
Total liabilities and shareholders' equity $ 613,810 $ 617,827
========= =========
See notes to condensed consolidated financial statements.
3
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended Six Months Ended
In thousands, except per share data June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net sales $ 204,077 $ 231,147 $ 379,356 $ 423,640
Other income 2,743 2,891 5,743 5,952
--------- --------- --------- ---------
206,820 234,038 385,099 429,592
Cost of products sold 129,535 143,168 244,866 266,167
Engineering, selling, administrative,
and other expenses 63,228 70,603 121,836 139,455
Interest expense 551 1,745 1,210 3,512
--------- --------- --------- ---------
193,314 215,516 367,912 409,134
--------- --------- --------- ---------
Earnings before income taxes and
cumulative effect of accounting change 13,506 18,522 17,187 20,458
Income taxes 4,813 6,853 6,101 7,569
--------- --------- --------- ---------
Earnings before cumulative effect of
accounting change 8,693 11,669 11,086 12,889
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- -- -- (47,260)
--------- --------- --------- ---------
Net earnings (loss) $ 8,693 $ 11,669 $ 11,086 $ (34,371)
========= ========= ========= =========
Basic earnings (loss) per share
Earnings before cumulative effect of
accounting change $ 0.45 $ 0.58 $ 0.58 $ 0.63
Cumulative effect of accounting change -- -- (2.32)
--------- --------- --------- ---------
Net earnings (loss) $ 0.45 $ 0.58 $ 0.58 $ (1.68)
========= ========= ========= =========
Diluted earnings (loss) per share
Earnings before cumulative effect of
accounting change $ 0.45 $ 0.57 $ 0.57 $ 0.63
Cumulative effect of accounting change -- -- (2.29)
--------- --------- --------- ---------
Net earnings (loss) $ 0.45 $ 0.57 $ 0.57 $ (1.67)
========= ========= ========= =========
Comprehensive net earnings (loss) $ 17,520 $ 12,145 $ 22,633 $ (32,579)
Cash dividends per share $ 0.320 $ 0.315 $ 0.640 $ 0.630
Depreciation included in expense $ 6,571 $ 8,219 $ 13,532 $ 15,860
Weighted average shares outstanding:
Basic 19,156 20,235 19,137 20,413
Diluted 19,371 20,405 19,324 20,593
See notes to condensed consolidated financial statements.
4
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended
In thousands June 30,
2003 2002
---------- ----------
Operating Activities
Net earnings (loss) $ 11,086 $ (34,371)
Cumulative effect of accounting change -- 50,964
Provision for depreciation and amortization 14,010 16,303
(Increase) decrease in operating assets and
liabilities, net (4,375) 26,111
--------- ---------
Net cash provided by operating activities 20,721 59,007
Investing Activities
Additions to property, plant, and equipment (8,647) (8,938)
Purchases of investments (9,188) (5,612)
Maturities of investments 7,055 7,330
Divestitures of businesses 11,115 --
Acquisitions of businesses -- (2,000)
--------- ---------
Net cash provided by (used in) investing
activities 335 (9,220)
Financing Activities
Principal payments on short-term notes payable
and long-term obligations (31) (77)
Cash dividends (12,279) (13,008)
Purchases of Common Stock, Class A Common Stock
and Class B Common Stock (110) (40,309)
--------- ---------
Net cash used in financing activities (12,420) (53,394)
Effect of exchange rate changes on cash and cash
equivalents 3,906 1,005
--------- ---------
Increase (decrease) in cash and cash equivalents 12,542 (2,602)
Cash and cash equivalents at beginning of period 129,412 145,625
--------- ---------
Cash and cash equivalents at end of period $ 141,954 $ 143,023
========= =========
See notes to condensed consolidated financial statements.
5
BANDAG, INCORPORATED AND SUBSIDIARIES
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 six month period ended June 30, 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 and six month periods ended June
30, 2003 and 2002 were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Earnings before cumulative effect
of accounting change $ 8,693 $ 11,669 $ 11,086 $ 12,889
Other comprehensive income:
Foreign currency translation 8,827 476 11,547 1,792
-------- -------- -------- --------
Comprehensive earnings before
cumulative effect of accounting
change 17,520 12,145 22,633 14,681
Cumulative effect of accounting
change (net of income tax benefit
of $3,704) -- -- -- (47,260)
-------- -------- -------- --------
Comprehensive net earnings (loss) $ 17,520 $ 12,145 $ 22,633 $(32,579)
======== ======== ======== ========
6
BANDAG, INCORPORATED AND SUBSIDIARIES
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 Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
Earnings before cumulative
effect of accounting change $ 8,693 $ 11,669 $ 11,086 $ 12,889
======== ======== ======== ========
Denominator:
Weighted-average shares - Basic 19,156 20,235 19,137 20,413
Effect of dilutive:
Restricted stock 73 51 63 53
Stock options 142 119 124 127
-------- -------- -------- --------
215 170 187 180
Weighted-average shares - Diluted 19,371 20,405 19,324 20,593
======== ======== ======== ========
Earnings per share before
cumulative effect of accounting
change
Basic $ 0.45 $ 0.58 $ 0.58 $ 0.63
======== ======== ======== ========
Diluted $ 0.45 $ 0.57 $ 0.57 $ 0.63
======== ======== ======== ========
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 June 30, 2003, the Company paid $42,000 relating to
the termination of employees. As of June 30, 2003, $1,400,000 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
BANDAG, INCORPORATED AND SUBSIDIARIES
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 June 30, 2003, the Company paid $1,489,000 relating to
the termination of employees. As of June 30, 2003, $1,750,000 of the charges
related to the restructuring remained accrued, which reflects a $389,000
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 and second quarters of 2003, the Company's Tire Distribution
Systems, Inc. (TDS) segment sold 34 locations with a net carrying value of
$18,371,000 for cash of $11,115,000 and assumed liabilities of $6,851,000. The
divestitures resulted in a gain before income taxes and cumulative effect of
accounting change of $199,000 in the first quarter of 2003 and a loss before
income taxes and cumulative effect of accounting change of $804,000 in the
second quarter of 2003. The assets of these locations consisted primarily of
inventory and property, plant and equipment.
In conjunction with the divestiture of certain TDS locations in the second
quarter of 2003, Bandag guaranteed third-party loans to a dealer of $1,045,000.
The guarantee is secured by assets of the dealer. The term of the guarantee is
three years. The fair value of the guarantee, which was estimated at $200,000,
is included in long-term debt and other obligations in the Company's Condensed
Consolidated Balance Sheet at June 30, 2003 with an offsetting charge included
in earnings before income taxes and cumulative effect of accounting change
recorded in the second quarter of 2003.
The divested locations had net sales and earnings (loss) before income taxes and
cumulative effect of accounting change as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 7,889 $ 26,488 $ 24,738 $ 47,569
Earnings (loss) before income
taxes and cumulative effect
of accounting change $(1,219) $ 568 $ (3,133) $ 130
8
BANDAG, INCORPORATED AND SUBSIDIARIES
Note H. Assets Held for Sale
During the second quarter of 2003, the Company's TDS operating segment entered
into an agreement to sell ten locations in Louisiana. TDS also has three
locations in Tennessee and one in Texas held for sale. These locations had net
sales and earnings (loss) before income taxes and cumulative effect of
accounting change as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
Agreement to Sell
Net sales $ 7,786 $ 7,946 $14,528 $14,625
Earnings (loss) before income
taxes and cumulative effect
of accounting change $ (907) $ 56 $(1,140) $ (133)
Held for sale
Net sales $ 2,457 $ 2,683 $ 4,400 $ 5,711
Earnings (loss) before income
taxes and cumulative effect
of accounting change $ (222) $ (387) $ (457) $ (529)
The assets of these locations, consisting primarily of inventory and property,
plant and equipment, had net carrying values of approximately $17,365,000 and
$28,245,000 as of June 30, 2003 and December 31, 2002, respectively, and are
classified with other current assets in the Company's Condensed Consolidated
Balance Sheets.
During the second quarter of 2003, TDS recorded a $700,000 impairment charge,
resulting from a valuation from an independent appraiser, in operating and other
expenses for real estate that is classified as held for sale.
Note I. Recent Accounting Developments
In January 2003, the FASB issued Interpretation Number (FIN) No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 addresses accounting
for variable interest entities (VIE), defined as a separate legal structure that
either 1) has equity investors who lack the essential characteristics of
controlling financial interest, or 2) has equity investors that do not provide
sufficient financial resources for the entity to support its own activities. FIN
No. 46 requires that a VIE be consolidated by a company if that company is
entitled to a majority of the VIE's residual returns or subject to a majority of
its expected losses, and also requires disclosures concerning VIEs that a
company is not required to consolidate but in which it has a significant
variable interest. The Company is in the process of analyzing FIN No. 46 to
determine its applicability, if any, to certain dealer loans. The Company had
recorded approximately $7,200,000 of dealer loans as of June 30, 2003.
Note J. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
9
BANDAG, INCORPORATED AND SUBSIDIARIES
Note K. 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 June 30 (in thousands):
Traditional Business
--------------------------------------------------------------------------------
North America Europe International
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- ---------- ---------- ----------
Sales by Product
Retread products $ 81,777 $ 80,088 $ 17,058 $ 13,648 $ 22,783 $ 23,395
New tires -- -- -- -- -- --
Retread tires -- -- -- -- -- --
Equipment 5,230 5,139 777 1,160 371 528
Other 9,354 8,360 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 96,361 $ 93,587 $ 17,835 $ 14,808 $ 23,154 $ 23,923
Transfers between segments 10,382 15,705 57 70 1,444 1,036
Operating earnings (loss) $ 16,379 $ 23,271 $ (679) $ 361 $ 2,429 $ 4,255
Interest income -- -- -- -- -- --
Interest expense -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ 16,379 $ 23,271 $ (679) $ 361 $ 2,429 $ 4,255
========= ========= ========= ========= ========= =========
TDS Other Consolidated
--------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- ---------- ---------- ----------
Sales by Product
Retread products $ -- $ -- $ -- $ -- $ 121,618 $ 117,131
New tires 36,296 55,212 -- -- 36,296 55,212
Retread tires 15,856 22,545 -- -- 15,856 22,545
Equipment -- -- -- -- 6,378 6,827
Other 14,575 21,072 -- -- 23,929 29,432
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 66,727 $ 98,829 $ -- $ -- $ 204,077 $ 231,147
Transfers between segments 562 661 -- -- 12,445 17,472
Operating earnings (loss) $ (2,430) $ (1,445) $ (2,694) $ (7,483) $ 13,005 $ 18,959
Interest income -- -- 1,052 1,308 1,052 1,308
Interest expense -- -- (551) (1,745) (551) (1,745)
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ (2,430) $ (1,445) $ (2,193) $ (7,920) $ 13,506 $ 18,522
========= ========= ========= ========= ========= =========
11
BANDAG, INCORPORATED AND SUBSIDIARIES
For the six months ended June 30 (in thousands):
Traditional Business
--------------------------------------------------------------------------------
North America Europe International
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- ---------- ---------- ----------
Sales by Product
Retread products $ 140,186 $ 144,712 $ 34,307 $ 25,796 $ 42,892 $ 45,738
New tires -- -- -- -- -- --
Retread tires -- -- -- -- -- --
Equipment 10,541 10,527 2,509 1,572 734 935
Other 17,846 14,639 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 168,573 $ 169,878 $ 36,816 $ 27,368 $ 43,626 $ 46,673
Transfers between segments 21,928 29,758 376 226 3,550 1,982
Operating earnings (loss) $ 20,295 $ 35,934 $ 711 $ 189 $ 6,100 $ 6,162
Interest income -- -- -- -- -- --
Interest expense -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ 20,295 $ 35,934 $ 711 $ 189 $ 6,100 $ 6,162
========= ========= ========= ========= ========= =========
TDS Other Consolidated
--------------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
---------- ---------- ---------- ---------- ---------- ----------
Sales by Product
Retread products $ -- $ -- $ -- $ -- $ 217,385 $ 216,246
New tires 69,766 99,333 -- -- 69,766 99,333
Retread tires 31,998 43,138 -- -- 31,998 43,138
Equipment -- -- -- -- 13,784 13,034
Other 28,577 37,250 -- -- 46,423 51,889
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 130,341 $ 179,721 $ -- $ -- $ 379,356 $ 423,640
Transfers between segments 1,190 1,097 -- -- 27,044 33,063
Operating earnings (loss) $ (6,482) $ (7,410) $ (4,435) $ (13,622) $ 16,189 $ 21,253
Interest income -- -- 2,208 2,717 2,208 2,717
Interest expense -- -- (1,210) (3,512) (1,210) (3,512)
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ (6,482) $ (7,410) $ (3,437) $ (14,417) $ 17,187 $ 20,458
========= ========= ========= ========= ========= =========
12
BANDAG, INCORPORATED AND SUBSIDIARIES
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).
On July 8, 2003, Yellow Corporation and Roadway Corporation, two major national
trucking fleets, announced they have entered into an agreement under which
Yellow Corporation will acquire Roadway Corporation. The Company currently has
an outsourcing agreement with Roadway Corporation that expires in March 2004 and
is currently in negotiations with Roadway Corporation to extend the contract.
The Company is unable to predict what effect the proposed acquisition, if
consummated, will have on its contract with Roadway Corporation. If, after
acquiring Roadway Corporation, Yellow Corporation were to allow the contract to
expire, the effect on the Company could be materially adverse to net sales and
net income. The Company currently has tire and wheel assets of approximately
$30,000,000 recorded in connection with this contract. Upon termination of the
agreement, the tire and wheel assets will either be repurchased by Roadway
Corporation or a third party at a contractually agreed upon price, which the
Company believes will approximate their carrying value, or will remain the
property of the Company.
Sale of TDS Locations
---------------------
During the first and second quarters of 2003, the Company's TDS segment sold 34
locations with a net carrying value of $18,371,000 for cash of $11,115,000 and
assumed liabilities of $6,815,000. The divestitures resulted in a gain before
income taxes and cumulative effect of accounting change of $199,000 in the first
quarter of 2003 and a loss before income taxes and cumulative effect of
accounting change of $804,000 in the second quarter of 2003. In conjunction with
the divestiture of certain TDS locations in the second quarter of 2003, Bandag
guaranteed third-party loans to a dealer of $1,045,000. The guarantee is secured
by assets of the dealer. The term of the guarantee is three years. The fair
value of the guarantee, which was estimated at $200,000, is included in
long-term debt and other obligations in the Company's Condensed Consolidated
Balance Sheet at June 30, 2003 with an offsetting charge included in earnings
before income taxes and cumulative effect of accounting change recorded in the
second quarter of 2003. The assets of these locations consisted primarily of
inventory and property, plant and equipment. These locations contributed
$7,889,000 and $24,738,000 to net sales for the quarter and year-to-date periods
ended June 30, 2003, respectively, and $26,488,000 and $47,569,000 to net sales
for the quarter and year-to-date periods ended June 30, 2002, respectively.
These locations incurred $1,219,000 and $3,133,000 of losses before income taxes
and cumulative effect of accounting change for the quarter and year-to-date
periods ended June 30, 2003, respectively, and $568,000 and $130,000 of earnings
before income taxes and cumulative effect of accounting change for the quarter
and year-to-date periods ended June 30, 2002, respectively.
13
BANDAG, INCORPORATED AND SUBSIDIARIES
Assets Held for Sale
--------------------
Also during the second quarter of 2003, the Company's TDS segment entered into
an agreement to sell ten locations in Louisiana. TDS also has three locations in
Tennessee and one in Texas held for sale. These locations contributed
$10,243,000 and $18,928,000 to net sales for the quarter and year-to-date
periods ended June 30, 2003, respectively, and $10,629,000 and $20,336,000 to
net sales for the quarter and year-to-date periods ended June 30, 2002,
respectively. These locations contributed $1,129,000 and $1,597,000 of losses
before income taxes and cumulative effect of accounting change for the quarter
and year-to-date periods ended June 30, 2003, respectively, and $331,000 and
$662,000 of losses before income taxes and cumulative effect of accounting
change for the quarter and year-to-date periods ended June 30, 2002,
respectively. The assets of these locations, consisting primarily of inventory
and property, plant and equipment, had net carrying values of approximately
$17,365,000 and $28,245,000 as of June 30, 2003 and December 31, 2002,
respectively, and are classified with other current assets in the Company's
Condensed Consolidated Balance Sheets. During the second quarter of 2003, TDS
recorded a $700,000 impairment charge, resulting from a valuation from an
independent appraiser, in consolidated operating and other expenses for real
estate that is classified as held for sale.
Net Sales
---------
Consolidated net sales for the quarter and year-to-date periods ended June 30,
2003 decreased $27,070,000 and $44,284,000, or 12% and 11%, from the prior year
periods, respectively. The decrease in consolidated net sales is substantially
due to a $32,102,000 and $49,380,000, or 32% and 27%, decrease in TDS net sales
for the quarter and year-to-date periods ended June 30, 2003, respectively,
primarily as a result of the divestitures and closures of 61 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.
Gross Profit Margins
--------------------
Consolidated and Traditional Business gross profit margins for the quarter ended
June 30, 2003, decreased by 1.5 and 4.8 percentage points from the prior year
period, respectively. Consolidated and Traditional Business gross profit margins
for the year-to-date period ended June 30, 2003 decreased 1.7 and 5.1 percentage
points from the prior year period, respectively. The decrease in consolidated
and Traditional Business gross profit margins is primarily the result of margin
erosion in North America, partially offset, in the case of consolidated gross
profit margin, by lower TDS sales which carry lower gross margins than the
Traditional Business. Gross profit margin for TDS increased 1.2 and 1.8
percentage points for the quarter and year-to-date periods ended June 30, 2003,
respectively, as compared to the prior year periods. The improvement in TDS
gross profit margin was positively impacted by increased sales of higher margin
product coupled with a decrease in cost of sales as a result of inventory
adjustments recorded in the prior year.
Operating and Other Expenses
----------------------------
Consolidated operating and other expenses decreased $7,375,000 and $17,619,000,
or 10% and 13%, for the quarter and year-to-date periods ended June 30, 2003
from the prior year periods, respectively. The decrease in consolidated
operating and other expenses primarily resulted from approximately $9,700,000 of
litigation expenses and $2,200,000 of expenses related to
14
BANDAG, INCORPORATED AND SUBSIDIARIES
converting SystemBandag users to the Roadware(TM) software system, in the
year-to-date period ended June 30, 2002, which did not occur during the similar
period of 2003. Consolidated operating and other expenses were also positively
impacted by the TDS divestitures and closures. Consolidated operating and other
expenses were negatively impacted by $2,239,000 and $2,362,000 of net foreign
exchange losses in the quarter and year-to-date periods ended June 30, 2003,
respectively, primarily resulting from revaluing funds held in US Dollars
outside the United States into local currencies, which had strengthened relative
to the US Dollar. Consolidated operating and other expenses were also negatively
impacted by $804,000 of net losses on TDS divestitures and a $700,000 impairment
charge for real estate held for sale.
Net Earnings
------------
Consolidated earnings before income taxes and cumulative effect of accounting
change decreased $5,016,000 and $3,271,000 for the quarter and year-to-date
periods ended June 30, 2003 as compared to the prior year periods, respectively.
Consolidated net earnings were $8,693,000 and $11,086,000, or $0.45 and $0.57
per diluted share, for the quarter and year-to-date periods ended June 30, 2003,
respectively, compared to consolidated net earnings of $11,669,000 and a loss of
$34,371,000, or $0.57 and a loss of $1.67 per diluted share, for the quarter and
year-to-date periods ended June 30, 2002, respectively. A cumulative effect of
accounting change of $47,260,000 net of income tax, or $2.29 per diluted share,
was recorded in the first quarter of 2002 in accordance with SFAS 142.
TRADITIONAL BUSINESS
- --------------------
North America
-------------
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 $8,636,000 and $18,153,000 of retread
products to TDS accounted for 9% and 11% of North America's total retread
products sold for the quarter and year-to-date periods ended June 30, 2003,
respectively, compared to $13,170,000 and $24,767,000, or 14%, in each of the
prior year periods. Total retread products sold in North America for the quarter
and year-to-date periods ended June 30, 2003 decreased $3,235,000 and
$11,863,000, or 3% and 7%, from the prior year periods, respectively. Retread
product sales to TDS for the quarter and year-to-date periods ended June 30,
2003, declined 34% and 27%, respectively, as compared to the prior year periods.
Despite the fact that retread product sales to independent dealers for the
quarter ended June 30, 2003, increased 2%, retread product sales to independent
dealers for the year-to-date period ended June 30, 2003 decreased 3%. The
decrease in retread product sales to TDS is primarily due to the divestitures
and closures of TDS locations. The year-to-date decrease in retread products
sales to independent dealers is primarily due to a 7% decline in retread
material volume, resulting primarily from dealer buying during the fourth
quarter of 2002 as they stocked inventories ahead of a January price increase,
flat freight traffic experienced by many major North American fleets, and
pressure from new replacement truck tires in the traditional retread market.
Sales to independent dealers should benefit as former TDS locations are sold.
Primarily as a result of the acquisition of Open Road Technologies in the first
15
BANDAG, INCORPORATED AND SUBSIDIARIES
quarter of 2002, North America other net sales for the year-to-date period ended
June 30, 2003 increased $3,207,000 compared to the prior year period.
A reduction in sales as a result of an increase in sales incentive programs,
coupled with higher manufacturing expenses, higher raw material costs and lower
volume primarily resulted in an eight and nine percentage point decrease in
North America's gross margin for the quarter and year-to-date periods ended June
30, 2003 from the prior year periods, respectively. North America's operating
and other expenses for the quarter ended June 30, 2003 increased 2% from the
prior year period. North America's operating and other expenses for the
year-to-date period ended June 30, 2003 increased 1% from the prior year period.
Operating and other expenses in the current quarter and year-to-date period were
negatively impacted by $1,000,000 and $2,400,000 of increased pension expense,
respectively. Operating and other expenses for the year-to-date period ended
June 30, 2003 was positively impacted by the absence of approximately $2,200,000
of 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
$6,892,000 and $15,639,000 in earnings before income taxes and cumulative effect
of accounting change for the quarter and year-to-date periods ended June 30,
2003 as compared to the prior year periods.
Europe
------
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 $3,027,000 and $9,448,000, or 20% and 35%, for the quarter and
year-to-date periods ended June 30, 2003 from the prior year periods,
respectively. Retread material volume decreased 1% for the quarter ended June
30, 2003 and increased 8% for the year-to-date period ended June 30, 2003, from
the prior year periods. Net sales in Europe in the quarter and year-to-date
periods ended June 30, 2003 were positively impacted by the strengthening of the
euro. Gross margin remained even and increased 1.1 percentage points for the
quarter and year-to-date periods ended June 30, 2003 compared to the prior year
periods, respectively. Operating and other expenses increased $1,785,000 and
$3,174,000, or 33% and 32%, for the quarter and year-to-date periods ended June
30, 2003 as compared to the prior year periods, respectively, primarily due to
an increase of $818,000 and $1,835,000 of net foreign exchange losses,
respectively. The net foreign exchange losses primarily resulted from revaluing
funds held in US Dollars outside the United States into local currencies, which
have strengthened relative to the US Dollar. Principally as a result of higher
operating and other expenses, Europe incurred a loss before income taxes and
cumulative effect of accounting change of $679,000 for the quarter ended June
30, 2003, as compared to earnings before income taxes and cumulative effect of
accounting change of $361,000 for the prior year period. Principally as a result
of higher sales, partially offset by higher operating and other expenses,
Europe's earnings before income taxes and cumulative effect of accounting change
was $711,000 for the year-to-date period ended June 30, 2003, as compared to
$189,000 for the prior year period.
International
-------------
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
16
BANDAG, INCORPORATED AND SUBSIDIARIES
royalties from a licensee in Australia, are combined under one management group
referred to internally as International. Net sales in International for the
quarter and year-to-date periods ended June 30, 2003 decreased $769,000 and
$3,047,000, or 3% and 7%, from the prior year periods, respectively. The
decrease in net sales is primarily a result of a 13% and 9% 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 and year-to-date periods
ended June 30, 2003 decreased 5.3 and 4.4 percentage points from the prior year
periods, respectively, due mainly to higher raw material costs, partially offset
by price increases in Brazil and South Africa. Operating and other expenses for
the quarter ended June 30, 2003 increased $496,000 from the prior year period,
primarily due to an increase of $1,782,000 of net foreign exchange losses and
the lower translated value of the Brazilian Real and Mexican peso. The net
foreign exchange losses primarily resulted from revaluing funds held in US
Dollars outside the United States into local currencies, which have strengthened
relative to the US Dollar. Operating and other expenses for the year-to-date
period ended June 30, 2003, decreased $2,810,000 from the prior year period,
primarily due to management instituting new operating expense restrictions.
Earnings before income taxes and cumulative effect of accounting change for the
quarter and year-to-date periods ended June 30, 2003 decreased $1,826,000 and
$62,000 from the prior year period, primarily due to lower gross margins and an
increase in foreign exchange losses.
TIRE DISTRIBUTION SYSTEMS, INC.
- -------------------------------
During the first and second quarters of 2003, the Company's TDS segment sold 34
locations with a net carrying value of $18,371,000 for cash of $11,115,000 and
assumed liabilities of $6,815,000. The divestitures resulted in a gain before
income taxes and cumulative effect of accounting change of $199,000 in the first
quarter of 2003 and a loss before income taxes and cumulative effect of
accounting change of $804,000 in the second quarter of 2003. In conjunction with
the divestiture of certain TDS locations in the second quarter of 2003, Bandag
guaranteed third-party loans to a dealer of $1,045,000. The guarantee is secured
by assets of the dealer. The term of the guarantee is three years. The fair
value of the guarantee, which was estimated at $200,000, is included in
long-term debt and other obligations in the Company's Condensed Consolidated
Balance Sheet at June 30, 2003 with an offsetting charge included in earnings
before income taxes and cumulative effect of accounting change recorded in the
second quarter of 2003. The assets of these locations consisted primarily of
inventory and property, plant and equipment. These locations contributed
$7,889,000 and $24,738,000 to net sales for the quarter and year-to-date periods
ended June 30, 2003, respectively, and $26,488,000 and $47,569,000 to net sales
for the quarter and year-to-date periods ended June 30, 2002, respectively.
These locations incurred $1,219,000 and $3,133,000 of losses before income taxes
and cumulative effect of accounting change for the quarter and year-to-date
periods ended June 30, 2003, respectively and $568,000 and $130,000 of earnings
before income taxes and cumulative effect of accounting change for the quarter
and year-to-date periods ended June 30, 2002, respectively.
TDS net sales for the quarter and year-to-date periods ended June 30, 2003
decreased $32,102,000 and $49,380,000, or 32% and 27%, from the prior year
periods, respectively, primarily due to the divestitures and closures of 61 TDS
locations throughout 2002 and 2003.
17
BANDAG, INCORPORATED AND SUBSIDIARIES
The divested and closed locations had sales of approximately $36,343,000 and
$67,206,000 for the quarter and year-to-date periods ended June 30, 2002,
respectively. The locations that were divested or closed in 2003 contributed
$7,889,000 and $24,738,000 to net sales for the quarter and year-to-date periods
ended June 30, 2003, respectively. Gross margin for the quarter and year-to-date
periods ended June 30, 2003 increased 1.2 and 1.8 percentage points from the
prior year periods, respectively. 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 $5,540,000 and $9,493,000, or 23% and 20%, for the quarter and
year-to-date periods ended June 30, 2003, respectively, primarily due to the
divestitures and closures, with the reduction for the quarter ended June 30,
2003 being partially offset by the loss on divestitures of $804,000 and the
$700,000 impairment charge on real estate that were both recorded during the
quarter ended June 30, 2003. TDS incurred a loss before income taxes and
cumulative effect of accounting change of $2,430,000 and $6,482,000 for the
quarter and year-to-date periods ended June 30, 2003, respectively, as compared
to a loss on the same basis of $1,445,000 and $7,410,000 in the prior year
periods.
Financial Condition:
- --------------------
Liquidity
At June 30, 2003, the Company had cash and cash equivalents of $141,954,000, as
compared to $129,412,000 at December 31, 2002. The Company's ratio of total
current assets to total current liabilities was 3.3 to 1 at June 30, 2003 with
current assets exceeding current liabilities by $301,707,000. At June 30, 2003,
the Company had approximately $17,365,000 of assets held for sale, consisting
primarily of inventory and property, plant and equipment classified as other
current assets. At June 30, 2003, the Company had approximately $87,974,000 in
borrowing capacity available under unused lines of credit. The Company believes
it has an adequate cash balance for future cash flow needs.
Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2003
was $20,721,000, primarily due to net earnings and decreases in accounts
receivables partially offset by decreases in accounts payable and other
liabilities.
Investing Activities
The Company spent $8,647,000 on capital expenditures through June 30, 2003,
compared to $8,938,000 spent for the same period last year. The Company
typically funds its capital expenditures from operating cash flows. During the
six months ended June 30, 2003, the Company sold 34 TDS locations for cash
proceeds of $11,115,000.
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
purchases of investments exceeded maturities by
18
BANDAG, INCORPORATED AND SUBSIDIARIES
$2,133,000 during the six months ended June 30, 2003, resulting in total
investments of $16,394,000 as of June 30, 2003.
Financing Activities
Cash dividends totaled $12,279,000 for the six months ended June 30, 2003,
compared to $13,008,000 for the same period last year. During the quarter ended
June 30, 2002, the Company purchased 1,114,746 shares of Bandag Class B Common
Stock and 418,371 shares of Bandag Class A Common Stock from Lucille A. Carver,
widow of the Company's founder, for approximately $40,184,000.
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
Based on an evaluation performed by the Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of June
30, 2003.
Based on an evaluation performed by the Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, there were no changes in the Company's internal control over financial
reporting identified in such evaluation that occurred during the quarter ended
June 30, 2003 that has materially affected, or is likely to materially affect,
the Company's internal control over financial reporting.
19
PART II. OTHER INFORMATION
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the shareholders was held on May 13, 2003.
(b) The following directors were elected for three-year terms expiring in
2006: Robert T. Blanchard Gary E. Dewel R. Stephen Newman
In addition to the above directors, the following directors continued
as directors for terms expiring as shown below
Name Term Expires
---- ------------
Roy J. Carver, Jr. 2004
James R. Everline 2004
Phillip J. Hanrahan 2004
Martin G. Carver 2005
Edgar D. Jannotta 2005
(c) Two matters were voted upon at the annual meeting. First, the
following three nominees, all of whom were incumbent directors, were
elected as directors for a three-year term ending in 2006 by the
following vote:
Name Votes For Votes Withheld
---- --------- --------------
Robert T. Blanchard 17,284,747 138,621
Gary E. Dewel 17,284,678 138,690
R. Stephen Newman 17,284,978 138,390
Shareholders also voted upon a proposal to ratify the selection of
Ernst & Young LLP as independent auditors of the Company for the year
ending December 31, 2003. The shareholders ratified the selection by
the following vote:
Votes For Votes Against Abstentions
--------- ------------- -----------
17,195,808 222,737 4,823
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
32.2 Written Statement of the Vice President, Chief Financial
Officer and Secretary of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
20
BANDAG, INCORPORATED AND SUBSIDIARIES
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated April 17, 2003,
reporting under Item 12, the issuance of a press release reporting
financial results for the first quarter ended March 31, 2003.
21
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: August 12, 2003 /s/ Martin G. Carver
---------------------------------------
Martin G. Carver
Chairman and Chief Executive Officer
Date: August 12, 2003 /s/ Warren W. Heidbreder
---------------------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
22
BANDAG, INCORPORATED AND SUBSIDIARIES
Exhibit Index
Exhibit
Number Exhibit
- ------- -------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
32.2 Written Statement of the Vice President, Chief Financial Officer
and Secretary of Bandag, Incorporated Pursuant to 18 U.S.C.
Section 1350
23