FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ________ to ________
Commission file number 1-7007
BANDAG, INCORPORATED
(Exact name of registrant as specified in its charter)
Iowa 42-0802143
(State of incorporation) (I.R.S Employer Identification No.)
2905 N HWY 61, Muscatine, Iowa 52761-5886
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: 319/262-1400
Not Applicable
(Former name, address, or 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 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; 9,754,430 shares as of April 30, 1998.
Class A Common Stock, $1 par value; 11,016,199 shares as of April 30,
1998. Class B Common Stock, $1 par value; 2,048,056 shares as of April 30,
1998.
BANDAG, INCORPORATED AND SUBSIDIARIES
INDEX
Part I : FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II : OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
EXHIBITS :
Exhibit 27 - Financial Data Schedule (EDGAR filing only) 15
Exhibit 27.1 Revised March 1997 Financial Data Schedule
(with EDGAR filing only) 16
BANDAG, INCORPORATED AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Condensed Consolidated Statements of Earnings
(In thousands except per share data)
Three Months Ended
3/31/98 3/31/97
Net sales $235,931 $169,518
Interest income 2,442 1,593
Other income 1,399 1,414
-------- --------
239,772 172,525
Cost of products sold 140,249 100,549
Engineering, selling, and
administrative expenses 71,148 44,794
Other expenses 10,380 4,485
Interest expense 2,381 407
-------- --------
224,158 150,235
-------- --------
Earnings before income taxes 15,614 22,290
Income taxes 6,464 8,550
-------- --------
Net earnings $ 9,150 $ 13,740
======== ========
Net earnings per share - Basic $ 0.40 $ 0.60
Net earnings per share Diluted $ 0.40 $ 0.60
Comprehensive net earnings $ 10,645 $ 14,984
Cash dividends per share $ 0.275 $ 0.250
Depreciation included in expense $ 10,900 $ 8,194
Goodwill amortization included in expense $ 2,240 $ 249
Weighted average shares outstanding:
Basic 22,784 22,868
Diluted 22,908 23,004
See notes to condensed consolidated financial statements.
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
March 31, December 31,
1998 1997
ASSETS:
Cash and cash equivalents $ 95,055 $196,400
Investments 16,267 1,575
Accounts receivable - net 203,647 231,648
Inventories:
Finished products 102,810 90,228
Materials & work-in-process 18,814 17,295
-------- --------
121,624 107,523
Other current assets 58,169 61,848
-------- --------
Total current assets 494,762 598,994
Property, plant, and equipment 471,028 459,446
Less accumulated depreciation
& amortization (268,629) (261,846)
-------- --------
202,399 197,600
Goodwill, less accumulated amortization 75,223 75,627
Other assets 23,148 27,683
-------- --------
Total assets $795,532 $899,904
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY:
Accounts payable $ 48,418 $ 52,100
Income taxes payable 24,193 20,039
Accrued employee compensation and benefits 23,552 28,874
Accrued marketing expenses 30,134 32,608
Other accrued expenses 71,671 73,195
Short-term notes payable and other liabilities 6,219 99,726
-------- --------
Total current liabilities 204,187 306,542
Deferred income tax and other liabilities 123,260 129,948
Stockholders' equity:
Common Stock; $1 par value;
authorized - 21,500,000 shares;
Issued and outstanding 9,754,576 shares
in 1998; 9,751,063 in 1997 9,755 9,751
Class A Common Stock; $1 par value;
authorized - 50,000,000 shares;
Issued and outstanding - 11,016,395 shares
in 1998; 11,013,561 in 1997 11,016 11,014
Class B Common Stock; $1 par value;
authorized - 8,500,000 shares;
Issued and outstanding - 2,048,106 shares
in 1998; 2,048,785 in 1997 2,048 2,049
Additional paid-in capital 6,348 6,052
Retained earnings 448,762 445,887
Equity adjustment from foreign currency
translation (9,844) (11,339)
-------- --------
Total stockholders equity 468,085 463,414
-------- --------
Total liabilities & stockholders' equity $795,532 $899,904
======== ========
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
3/31/98 3/31/97
Operating Activities
Net earnings $ 9,150 $ 13,740
Depreciation and amortization 13,140 8,443
Increase in operating assets and liabilities-net 13,790 10,281
-------- --------
Net cash provided by operating activities 36,080 32,464
Investing Activities
Additions to property, plant and equipment (15,699) (8,018)
Purchases of investments (15,195) (604)
Maturities of investments 503 514
-------- --------
Net cash used in investing activities (30,391) (8,108)
Financing Activities
Proceeds from short-term notes payable - 1,118
Principal payments on short-term notes
payable and other liabilities (100,320) (162)
Cash dividends (6,275) (5,732)
Purchases of Common Stock - (5,114)
-------- --------
Net cash used in financing activities (106,595) (9,890)
Effect of exchange rate changes on cash and
cash equivalents (439) (637)
-------- --------
Increase (decrease) in cash and cash
equivalents (101,345) 13,829
Cash and cash equivalents at beginning of period 196,400 31,453
-------- --------
Cash and cash equivalents at end of period $ 95,055 $ 45,282
======== ========
BANDAG, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
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 months ended March 31, 1998, are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998. 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, 1997.
Comprehensive Net Earnings
Comprehensive net earnings for the three-month period ended March 31, 1998
and 1997, were as follows:
(In thousands)
3/31/98 3/31/97
Net earnings $ 9,150 $13,740
Other comprehensive income items:
Foreign currency translation 1,495 (4,800)
Unrealized appreciation on
marketable securities - 6,044
------- -------
Comprehensive net earnings $10,645 $14,984
======= =======
Tire Distributions Systems, Inc. Acquisitions
The first quarter 1998 consolidated results include Tire Distribution
Systems, Inc. (TDS), the Company's newly formed subsidiary, which acquired
five tire dealerships effective November 1, 1997. TDS results include net
sales of $79,700,000 and a pretax loss of $1,200,000, including $2,000,000
of goodwill amortization. Intercompany sales from Bandag to TDS, which
have been eliminated in consolidation, totaled $12,400,000 during the
quarter.
Earnings Per Share
Per share and weighted average share outstanding amounts for the three
months ended March 31, 1997 have been restated to conform with the
requirements of Statement of Financial Accounting Standards No. 128,
"Earnings per Share", issued in February 1997.
The following table sets forth the computation of basic and diluted
earnings per share:
For The Three
Months Ended
March 31 ,
1998 1997
(In thousands except
per share data)
Numerator:
Net Earnings $9,150 $13,740
Denominator:
Denominator for basic earnings
per share-weighted-average shares 22,784 22,868
Effect of dilutive securities:
Non-vested restricted stock 32 33
Stock options 92 103
--------- --------
Dilutive potential common shares 124 136
--------- --------
Denominator for diluted earnings per
share-weighted-average shares and
dilutive potential common shares 22,908 23,004
========= ========
Net Earnings Per Share:
Basic $ 0.40 $ 0.60
========= ========
Diluted $ 0.40 $ 0.60
========= ========
BANDAG, INCORPORATED AND SUBSIDARIES
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
Consolidated net sales for the first quarter ended March 31, 1998 were 39%
higher than the same period last year. The majority of this increase was
a result of the Company's fourth quarter 1997 acquisition of the five
Bandag dealerships, now comprising the Company's TDS subsidiary. The
acquired dealerships added $79,700,000 in sales for the quarter before
elimination of $12,400,000 of intercompany sales from Bandag, Inc. to TDS
in consolidation. Excluding TDS sales, sales for Bandag's traditional
business would have increased 1% on a unit volume increase of 6%. The
increase in net sales was less than the volume increase due to the
unfavorable impact of the strong U.S. dollar on the translated value of
foreign currency denominated sales, primarily in Europe, and slightly
lower equipment sales.
Consolidated gross margin for the first quarter ended March 31, 1998 was
basically even with the same period last year despite the impact of the
TDS subsidiaries' lower margins. Excluding TDS, Bandag's traditional
business gross margin was approximately three percentage points higher
than last year due to a two percent decrease in raw material costs and
better manufacturing absorption from higher production levels.
Consolidated operating expenses (engineering, selling, and administrative)
for the first quarter ended March 31, 1998 were substantially higher than
the same period last year because of the addition of TDS. Excluding the
effect of TDS, operating expenses would have been 11% higher for the
quarter. The increased expenses reflect the Company's continuing efforts
to build people and process capabilities in the Company's domestic
operations to meet the Company's goals to bring value-added tire
management services to large fleet customers. Consolidated other expenses
were substantially higher than last year due to the impact of unfavorable
changes to foreign exchage rates, primarily on results for the Company's
Asian operations, and the goodwill amortization related to the TDS
acquisitions.
Consolidated net earnings and diluted net earnings per share both
decreased 33% from the same period last year due to the increase in
operating expenses, combined with a three-percentage-point increase in the
Company's effective income tax rate.
At this point, the Company believes that it will be difficult to achieve
1997's $3.32 diluted earnings per share before non-recurring items. Sales
revenue has not kept pace with the growth in operating expenses as the
Company continues to increase expenditures to improve sales capabilities,
invest in training of employees and dealers, develop information systems
and build capability with its dealers to provide tire management services
for fleet customers. The Company's business is volume sensitive. In
addition, as experienced in the first quarter where approximately 39% of
the Company's traditional business sales were denominated in foreign
currencies, the Company is exposed to changes in the value of such foreign
currency sales relative to the U.S. dollar.
On April 1, 1998 the Company issued a news release announcing that it had
signed an agreement with Tire Center, Inc. (TCI) to end their franchise
relationship through an orderly transition process to be completed by mid-
1999. TCI, with 16 franschise locations, represented approximately 3.26%
of the Company's consolidated net sales in 1997. The Company expects
minimal disruption to fleet customers because it believes alternative
Bandag dealer capability already exists in most markets covered by the
agreement.
Forward-Looking Information Safe Harbor Statement.
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements in the preceding two paragraphs
regarding events and trends which may affect the Company's future
operating results and financial position. Such statements are identified
by the use of such words as "believes" and "expects". Future operations
are subject to certain risks and uncertainties that could cause actual
results to differ materially from those reflected in the forward-looking
statements. Such uncertainties and risks include, but are not limited to,
changes in economic conditions in the market areas served by the Company's
operations, increased competitive activity, fluctuations in the price paid
for raw materials, monetary policy changes in the various countries where
the Company has significant operations, continued spending in sales,
training, development of information systems and expenses related to
developing capabilities to provide tire management services for fleet
customers, and the risk that dealer capabilities in the markets affected
by the TCI agreement may not prove sufficient for adequate fleet
converage.
Domestic Traditional Business Operations.
Net sales for the Company's domestic traditional business operations for
the quarter ended March 31, 1998, which includes export shipments to
various Latin and South American countries and some Asian areas, were
approximately 1% higher than the same period last year on a unit volume
increase of 3%. The sales increase was lower than the unit volume
increase due to decreased equipment sales.
First quarter gross margin for the Company's domestic traditional business
operations increased approximately three percentage points over the same
period last year due to a 2.5% decrease in raw material cost and favorable
manufacturing absorption from higher production levels.
Operating expenses for the first quarter increased 21% over the same
period last year. The majority of the increased operating expenses was
related to spending in support of marketing programs and continuing
efforts to build capabilities. Other expenses were 41% lower than the
same period last year due to foreign exchange hedging gains related to,
and partially offseting, unfavorable exchange adjustments recorded by the
Company's Asian operations.
Earnings before income taxes for the first quarter increased approximately
3% over the same period last year primarily due to the increased gross
margin with some offset from increased operating expenses.
Tire Distribution Systems.
First quarter 1998 results include net sales of $79,700,000 for the
Company's TDS operations. Since TDS commenced operations during the
fourth quarter of 1997, there is no prior year comparison. However, sales
were only slightly below what the acquired dealerships recorded during the
prior year period under separate ownership despite disruptions caused by
changing major new tire suppliers. The tire business is seasonal, and the
first quarter is historically the slowest quarter of the year, with
approximately 20% of the year's sales volume. As a result, TDS recorded a
$1,200,000 pretax loss for the quarter, after deducting $2,000,000 of
goodwill amortization.
European Operations.
Sales for the quarter ended March 31, 1998 for the Company's European
operations were 10% lower in U.S. dollars than the same period last year
on an 8% increase in unit volume. Sales in U.S. dollars were adversely
affected by unfavorable changes in exchange rates resulting from the
stronger U.S. dollar during the period. The higher volume was due to unit
volume increases primarily in Turkey, Germany and Belgium. In local
currency, sales were 1% higher than last year but lower than the unit
volume increase, due to a 46% drop in equipment sales.
Gross margin for the Company's European operations for the first quarter
was basically even with last year.
Operating expenses for the first quarter decreased 25% over the same
period last year primarily due to lower spending for promotional programs
and product development and staffing, combined with the impact of
favorable changes in exchange rates on the translation of local currencies
into U.S. dollars. In local currency, operating expenses were 16% lower
than last year. Other income decreased substantially because the prior
year had high foreign exchange gains against the Belgian franc. Other
expenses were nil for both periods.
Earnings before income taxes for the first quarter were 41% higher than
the same period last year primarily due to the lower operating expenses.
Other Foreign Operations.
Sales for the Company's other combined foreign operations for the quarter
ended March 31, 1998 were approximately 2% higher than the same period
last year on a 16.5% increase in unit volume. The sales increase was
primarily due to unit volume increases in both Brazil and Mexico, 15% and
32%, respectively. The sales impact of the unit volume increase was offset
by lower effective sales prices due to changes in product and country
sales mix.
First quarter gross margin for the Company's other foreign operations, on
a combined basis, was approximately three percentage points lower than the
same period last year.
First quarter combined operating expenses for the Company's other foreign
operations decreased approximately 6% from the same period last year due
to lower spending in Brazil and New Zealand and the impact of translating
foreign currency results for the Asian operations at weaker foreign
currency exchange rates than a year ago. Other expenses were
significantly higher than last year, but a percentage comparison is not
meaningful because last year was nil. The majority of the increase was
due to unfavorable foreign exchange adjustments, primarily in the
Company's Asian operations. This unfavorable foreign exchange adjustment
was partially offset on a consolidated basis through gains on related
hedges entered into by the Company's domestic operations.
Earnings before income taxes for the other combined foreign operations
were essentially at break-even for the quarter. This was primarily due to
the economic conditions in Asia, which produced the unfavorable foreign
exchange adjustment included in expenses.
Financial Condition:
Operating Activities.
Net cash provided by operating activities for the quarter ended March 31,
1998 was $3,616,000 higher than the same period last year primarily due to
lower accounts receivable, which was partially offset by increases in
inventory.
Investing Activities.
The Company spent $15,699,000 on capital expenditures in the first quarter
compared to $8,018,000 spent for the same period last year. The Company
typically funds its capital expenditures from operating cash flow.
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 $14,692,000
during the quarter, leaving total investments at approximately $16,300,000
as of March 31, 1998.
Financing Activities.
Cash dividends totaled $6,275,000 for the first quarter compared to
$5,732,000 last year. During the first quarter, the Company paid off
$87,224,000 in short-term notes that it had issued in conjunction with the
November 1997 TDS acquisitions, and approximately $12,700,000 in various
other TDS notes payable assumed in the acquisitions.
Presently, the Company has approximately $111,000,000 in funds available
under unused lines of credit.
BANDAG, INCORPORATED AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only)
27.1 Revised March 1997 Financial Data Schedule
(EDGAR filing only)
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on February 20, 1998.
The Current Report included unaudited condensed consolidated
balance sheets for the years ended December 31, 1997 and 1996,
unaudited condensed consolidated statements of earnings for the
three and twelve month periods ended December 31, 1997 and 1996,
respectively, and unaudited condensed consolidated statements of
cash flows for the twelve months ended December 31, 1997 and
1996.
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 13, 1997 \S\ Martin G. Carver
Martin G. Carver
Chairman and Chief Executive Officer
Date May 13, 1997 \S\ Warren W. Heidbreder
Warren W. Heidbreder
Vice President, Chief Financial Officer
BANDAG, INCORPORATED AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Exhibit Page
27 Financial Data Schedule (EDGAR filing only) 13
27.1 Revised March 1997 Financial Data Schedule
(EDGAR filing only) 14