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 September 30, 1999
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; 9,084,651 shares as of October 31, 1999.
Class A Common Stock, $1 par value; 10,781,112 shares as of October 31, 1999.
Class B Common Stock, $1 par value; 2,045,661 shares as of October 31, 1999.
Page 1 of 19
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 9
PART II : OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 15
Signatures 16
EXHIBITS :
Exhibit 27 - Financial Data Schedule (EDGAR filing only) 18
Exhibit 27.1 - Revised September 1998 Financial Data Schedule
(with EDGAR filing only) 19
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BANDAG, INCORPORATED AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
Item l - Financial Statements:
Unaudited Condensed Consolidated Statements of Earnings
Three Months Ended Nine Months Ended
September 30, September 30,
In thousands, except per share data 1999 1998 1999 1998
-------- -------- -------- ----------
Net sales $273,240 $282,636 $749,498 $784,694
Other income 2,983 7,119 8,413 14,914
-------- -------- -------- --------
276,223 289,755 757,911 799,608
Cost of products sold 170,122 173,499 458,648 482,239
Engineering, selling,
administrative and other expenses 72,068 81,922 215,123 235,719
Interest expense 2,239 3,163 7,238 8,839
-------- -------- -------- --------
244,429 258,584 681,009 726,797
-------- -------- -------- --------
Earnings before income taxes 31,794 31,171 76,902 72,811
Income taxes 13,738 13,715 32,683 32,037
-------- -------- -------- --------
Net earnings $ 18,056 $ 17,456 $ 44,219 $ 40,774
======== ======== ======== ========
Net earnings per share - Basic $ 0.83 $ 0.78 $ 2.02 $ 1.81
Net earnings per share - Diluted $ 0.82 $ 0.77 $ 2.01 $ 1.79
Comprehensive net earnings $ 16,687 $ 14,870 $ 29,052 $ 40,218
Cash dividends per share $ 0.2850 $ 0.2750 $ 0.8550 $ 0.8250
Depreciation included in expense $ 9,677 $ 10,778 $ 29,823 $ 30,148
Goodwill amortization included
in expense $ 2,493 $ 2,035 $ 7,398 $ 6,475
Weighted average shares
outstanding:
Basic 21,873 22,279 21,885 22,583
Diluted 21,940 22,536 21,957 22,749
See notes to condensed consolidated financial statements.
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BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
In thousands September 30, December 31,
1999 1998
-------- --------
ASSETS:
Cash and cash equivalents $ 56,868 $ 37,912
Investments 12,634 9,721
Accounts receivable - net 199,821 217,299
Inventories:
Finished products 101,246 96,889
Materials and work-in-process 17,275 14,845
-------- ---------
118,521 111,734
Other current assets 59,967 62,458
-------- ---------
Total current assets 447,811 439,124
Property, plant, and equipment 499,071 503,745
Less accumulated depreciation & amortization (296,184) (290,699)
-------- ---------
202,887 213,046
Intangible assets 69,148 75,539
Other assets 29,546 28,020
-------- --------
Total assets $749,392 $755,729
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 22,405 $ 38,286
Income taxes payable 28,816 13,704
Accrued employee compensation and benefits 26,150 27,498
Accrued marketing expenses 30,230 37,044
Other accrued expenses 46,600 46,880
Short-term notes payable and other liabilities 4,868 11,497
-------- ---------
Total current liabilities 159,069 174,909
Long-term debt and other obligations 109,097 109,757
Deferred income tax liabilities 4,744 3,766
Stockholders' equity:
Common stock; $1 par value;
authorized - 21,500,000 shares;
issued and outstanding - 9,085,595 shares
in 1999; 9,083,797 in 1998 9,086 9,084
Class A Common stock; $1 par value;
authorized - 50,000,000 shares;
issued and outstanding - 10,781,892 shares
in 1999; 10,824,974 in 1998 10,782 10,825
Class B Common stock; $1 par value;
authorized - 8,500,000 shares;
issued and outstanding - 2,045,697 shares
in 1999; 2,046,577 in 1998 2,046 2,047
Additional paid-in capital 7,353 7,287
Retained earnings 476,602 452,274
Equity adjustment from foreign currency
translation (29,387) (14,220)
-------- --------
Total equity 476,482 467,297
-------- ---------
Total liabilities and stockholders' equity $749,392 $755,729
======== ========
See notes to condensed consolidated financial statements.
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BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
In thousands Nine Months Ended
September 30,
1999 1998
---- ----
Operating Activities
Net earnings $ 44,219 $ 40,774
Provision for depreciation and amortization 37,221 36,623
Increase (decrease) in operating assets and
liabilities-net 3,302 (21,615)
-------- --------
Net cash provided by operating activities 84,742 55,782
Investing Activities
Additions to property, plant and equipment (28,147) (32,177)
Purchases of investments (11,628) (20,941)
Maturities of investments 8,715 8,282
Payments for acquisitions of businesses (4,357) (5,105)
-------- --------
Net cash used in investing activities (35,417) (49,941)
Financing Activities
Proceeds from short-term notes payable - 37,363
Principal payments on short-term notes payable
and other liabilities (7,125) (140,587)
Cash dividends (18,744) (18,551)
Purchases of Common Stock and
Class A Common Stock (1,212) (28,234)
-------- --------
Net cash used in financing activities (27,081) (150,009)
Effect of exchange rate changes on cash and
cash equivalents (3,288) (1,306)
-------- --------
Increase (decrease) in cash and cash equivalents 18,956 (145,474)
Cash and cash equivalents at beginning of year 37,912 196,400
-------- ----------
Cash and cash equivalents at end of period $ 56,868 $ 50,926
======== ========
See notes to condensed consolidated financial statements.
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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 nine months ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. 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, 1998.
Comprehensive Net Earnings
Comprehensive net earnings for the three month periods ended September 30, 1999
and 1998 and the nine month periods ended September 30, 1999 and 1998 were as
follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Net earnings $ 18,056 $ 17,456 $ 44,219 $ 40,774
Other comprehensive income item:
Foreign currency translation (1,369) (2,586) (15,167) (556)
-------- -------- -------- --------
Comprehensive net earnings $ 16,687 $ 14,870 $ 29,052 $ 40,218
======== ======== ======== ========
Tire Distribution Systems, Inc.(TDS) Business Combinations and Operating Results
For the year-to-date period, Tire Distribution Systems, Inc. (TDS), a wholly
owned subsidiary of Bandag, Incorporated, acquired 4 tire dealerships for a
total of $4,357,000 in cash and the forgiveness of certain liabilities. The
accounts and transactions of the acquired businesses have been included in
consolidated financial statements from the respective dates of acquisition.
TDS results for the three month periods ended September 30, 1999 and 1998 and
the nine month periods ended September 30, 1999 and 1998 were as follows (in
thousands):
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BANDAG, INCORPORATED AND SUBSIDIARIES
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales $112,649 $105,510 $294,862 $281,790
Goodwill amortization 2,449 2,035 7,267 5,943
Earnings before interest and
income taxes 1,716 2,150 662 3,152
Intercompany sales from Traditional
Business to TDS which have been
eliminated in consolidation $ 14,636 $ 15,364 $ 41,192 $ 40,657
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
Numerator:
Net Earnings $18,056 $17,456 $44,219 $40,774
Denominator:
Denominator for basic earnings
per share-weighted-average shares 21,873 22,279 21,885 22,583
Effect of dilutive securities:
Non-vested restricted stock 40 174 41 88
Stock options 27 83 31 78
------- ------- ------- ------
Dilutive potential common shares 67 257 72 166
------- ------- ------- ------
Denominator for diluted earnings
per share-weighted-average
shares and dilutive potential
common shares 21,940 22,536 21,957 22,749
======= ======= ======= =======
Net Earnings Per Share:
Basic $ 0.83 $ 0.78 $ 2.02 $ 1.81
======= ======= ======= =======
Diluted $ 0.82 $ 0.77 $ 2.01 $ 1.79
======= ======= ======= =======
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BANDAG, INCORPORATED AND SUBSIDIARIES
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. 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 includes results
of operations for the Tire Management Solutions Inc. (TMS) pilot program and
other corporate items.
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.
For the three months ended September 30 (in thousands):
Traditional Business
--------------------------------------------------------------------------------------------
North America Europe Latin America Asia
-------------------- -------------------- --------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
Net sales to
unaffiliated
customers $ 101,106 $ 115,065 $ 22,902 $ 25,912 $ 24,576 $ 29,151 $ 6,190 $ 6,998
Transfers between
segments 19,638 18,708 183 327 -- -- -- --
Operating earnings
(loss) 33,318 33,916 1,981 (68) 2,188 2,070 1,321 (1,003)
Interest income -- -- -- -- -- -- -- --
Interest expense -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss)
before income
taxes $ 33,318 $ 33,916 $ 1,981 $ (68) $ 2,188 $ 2,070 $ 1,321 $ (1,003)
========= ========= ========= ========= ========= ========= ========= =========
TDS Other Consolidated
---------------------- --------------------- ----------------------
1999 1998 1999 1998 1999 1998
Net sales to
unaffiliated
customers $ 112,649 $ 105,510 $ 5,817 -- $ 273,240 $ 282,636
Transfers between
segments -- -- -- -- 19,821 19,035
Operating earnings
(loss) 1,716 2,150 (7,785) (4,972) 32,739 32,093
Interest income -- -- 1,294 2,241 1,294 2,241
Interest expense -- -- (2,239) (3,163) (2,239) (3,163)
--------- --------- --------- --------- --------- ---------
Earnings (loss)
before income
taxes $ 1,716 $ 2,150 $ (8,730) $ (5,894) $ 31,794 $ 31,171
========= ========= ========= ========= ========= =========
For the nine months ended September 30 (in thousands):
Traditional Business
--------------------------------------------------------------------------------------------
North America Europe Latin America Asia
-------------------- -------------------- --------------------- --------------------
1999 1998 1999 1998 1999 1998 1999 1998
Net sales to
unaffiliated
customers $ 280,202 $ 315,060 $ 70,419 $ 74,550 $ 73,853 $ 92,470 $ 18,803 $ 20,824
Transfers between
segments 52,871 50,643 652 838 -- 2 -- --
Operating earnings
(loss) 73,883 75,497 8,988 3,100 10,694 11,596 3,042 (5,653)
Interest income -- -- -- -- -- -- -- --
Interest expense -- -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Earnings (loss)
before income
taxes $ 73,883 $ 75,497 $ 8,988 $ 3,100 $ 10,694 $ 11,596 $ 3,042 $ (5,653)
========= ========= ========= ========= ========= ========= ========= =========
TDS Other Consolidated
--------------------- ------------------- --------------------
1999 1998 1999 1998 1999 1998
Net sales to
unaffiliated
customers $ 294,862 $ 281,790 $ 11,359 -- $ 749,498 $ 784,694
Transfers between
segments -- -- -- -- 53,523 51,483
Operating earnings
(loss) 662 3,152 (17,692) (13,196) 79,577 74,496
Interest income -- -- 4,563 7,154 4,563 7,154
Interest expense -- -- (7,238) (8,839) (7,238) (8,839)
--------- --------- --------- --------- --------- ---------
Earnings (loss)
before income
taxes $ 662 $ 3,152 $ (20,367) $ (14,881) $ 76,902 $ 72,811
========= ========= ========= ========= ========= =========
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BANDAG, INCORPORATED AND SUBSIDIARIES
Item 2 -Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
- -------
Consolidated net sales for the quarter and year-to-date periods ended September
30, 1999, were 3% and 4% lower than the prior year periods, respectively.
Traditional Business net sales were 11% below both the prior year quarter and
year-to-date periods. Of these decreases, approximately 4 percentage points were
a result of the lower translated value of the Company's
foreign-currency-denominated sales. The remaining decreases resulted from lower
equipment sales and an 8% and 7% decline in retread material unit volume from
the prior year quarter and year-to-date periods, respectively. The Traditional
Business sales decline was primarily due to intense competitive pressures and
industry consolidation in the United States, which is expected to continue
through 1999 and beyond. In addition, the Company has recently experienced some
dealer separations in the United States which has also negatively impacted sales
volume. The Company anticipates that sales volume may be negatively impacted in
future periods due to additional dealer separations, although the Company has
not received any additional notices of separations. The decline in Traditional
Business sales was slightly offset by a 7% and 5% increase in Tire Distribution
Systems, Inc. (TDS) sales over the prior year quarter and year-to-date periods,
respectively, and sales for Tire Management Solutions, Inc. (TMS) pilot
operation. The increase in TDS net sales is attributable to dealership
acquisitions during the year. The Company's seasonal sales pattern, which is
tied to trucking activity, was similar to third quarters in previous years in
that it is seasonally the strongest quarter for both sales and earnings. Both
the Traditional Business and TDS were similarly affected.
Gross profit margin for the Company's Traditional Business increased by 2.4
percentage points over the prior year-to-date period due to lower raw material
costs in the U.S., South Africa, and Mexico. In the U.S., raw material costs
decreased 5% from the prior year-to-date period. The consolidated gross profit
margin increased by .3 percentage points over the prior year-to-date period, a
lower increase than seen in the Traditional Business margin due to a higher
portion of consolidated sales coming from TDS which operates at a lower gross
margin and the inclusion of the TMS pilot operation.
Consolidated operating and other expenses for the quarter and year-to-date
periods ended September 30, 1999 decreased 12% and 9% from the prior quarter and
year-to-date periods, respectively. Despite a decline in unit volume for the
quarter and year-to-date periods ended September 30, 1999, consolidated earnings
improved 3% and 8% from the prior year periods, respectively. The earnings
improvement is attributable to the decreases in operating and other expenses for
the Traditional Business, particularly in North America and Europe, partially
offset by a loss in the TMS pilot program. Earnings benefited from progress in
efforts to return operating expenses to a more traditional level and the absence
of a $2.5 million foreign exchange loss that existed in the prior year-to-date
period. The
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BANDAG, INCORPORATED AND SUBSIDIARIES
improved earnings resulted in diluted earnings per share of $.82 and $2.01 for
the quarter and year-to-date periods ended September 30, 1999, up from $.77 and
$1.79 in the prior year periods, respectively.
During the quarter, the Company announced that it expects 1999 earnings to be
below original estimates due primarily to three factors: slow sales in its
Traditional Business through the remainder of the year; higher than expected
expense levels in the TMS pilot program; and a non-recurring fourth quarter
pretax charge of approximately $15 million to cover planned restructuring of
North American operations. The restructuring will be implemented in the fourth
quarter of 1999. It includes company-wide personnel reductions through a
combination of voluntary early retirements, anticipated closing of a tread
rubber manufacturing facility, and other position eliminations. Bandag expects
annualized pretax savings from the restructuring to be approximately $14.5
million.
TRADITIONAL BUSINESS
The Company's Traditional Business operations located in the United States and
Canada are integrated and managed as one unit, which is referred to internally
as North America. Net sales in North America for the quarter ended September 30,
1999 were 10% below the prior year period due to 8% lower retread material unit
volume. The 2 percentage point spread between the net sales decrease and the
retread unit volume decrease is due to a 36% decline in equipment sales. North
American year-to-date sales experienced similar results with a 9% sales decline
over the prior year period which was principally attributable to a 7% decline in
retread material unit volume. The North American sales decline was due to
intense competitive pressures and industry consolidation in the United States,
which is expected to continue through the rest of 1999 and beyond, as well as
some dealer terminations in the United States. The decreases in raw material
costs during the year yielded a 3 percentage point improvement in North
America's gross profit margin over the prior year-to-date period. North American
operating expenses for the quarter ended September 30, 1999 were 34% lower than
the prior year period due to decreases in R&D projects, marketing programs,
promotional expenses, and personnel related costs. Earnings before income taxes
for both the quarter and year-to-date decreased 2% from the prior year periods.
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
for the quarter ended September 30, 1999 declined 12% from the prior year period
on a retread material unit volume decrease of 9% over the prior year period. The
3 percentage point spread between the net sales decrease and the retread
material unit volume decrease is due to the lower translated value of
foreign-currency-denominated sales. Europe's year-to-date retread material unit
volume decreased 5% from the prior year period,
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BANDAG, INCORPORATED AND SUBSIDIARIES
resulting in a 6% decline in net sales from the same prior year period. The
spread between Europe's year-to-date net sales decrease and retread material
unit volume decrease is due to lower sales prices. Gross profit margin for the
year-to-date period ended September 30, 1999 decreased 1 percentage point from
the prior year period due to the inclusion of lower margin service revenue.
Operating expenses for the quarter and year-to-date periods ended September 30,
1999 decreased 20% and 23% from the prior year periods, respectively, due to
lower personnel and marketing costs. Earnings before income taxes for the
quarter and year-to-date periods ended September 30, 1999 increased by 3,013%
and 190% over the prior year periods, respectively.
The Company's exports from North America to markets in the Caribbean, Central
America and South America, along with operations in Brazil, Mexico, Venezuela
and South Africa are combined under one management group referred to internally
as Latin America. Net sales in Latin America for the quarter and year-to-date
periods ended September 30, 1999 declined 16% and 20% from the prior year
periods on a retread material unit volume decrease of 2% and 4% from the prior
year periods, respectively. The spread between the decrease in net sales and the
decrease in material unit volume for the quarter and year-to-date periods is
mainly due to the lower translated value of foreign-currency-denominated sales,
particularly the Brazilian real. The gross profit margin for the year-to-date
period ended September 30, 1999 increased by 1.4 percentage points over the
prior year period due to a reduction in raw material costs in South Africa and
lower production costs and higher margins on locally produced products in
Mexico. Operating expenses for both the quarter and year-to-date periods ended
September 30, 1999 declined 22% and 13% from the prior year periods,
respectively, mainly due to the real devaluation in Brazil. In local currency,
Brazil operating expenses for the quarter and year-to-date were 20% and 29%
above prior year periods, respectively, due to an increase in marketing program
costs and higher bad debt expense. Earnings before income taxes for the quarter
and year-to-date periods ended September 30, 1999 were 6% above and 8% below the
prior year periods, respectively.
The Company's exports from North America to markets in Asian countries, along
with operations in New Zealand, Indonesia and Malaysia and a licensee in
Australia are combined under one management group referred to internally as
Asia. Net sales in Asia for the quarter and year-to-date periods ended September
30, 1999 declined 12% and 10% from the prior year periods on a 6% and 3%
decrease in retread material unit volume, respectively. The spread between the
decrease in net sales and the decrease in retread material unit volume for the
quarter and year-to-date periods is due to lower exported equipment sales, and
reduced new tire sales in New Zealand. Lower raw material costs and higher
margins on export shipments in Malaysia were partially offset by the higher cost
of imported retread materials in New Zealand, resulting in an increase in the
gross profit margin for the quarter and year-to-date periods ended September 30,
1999 of 5.1 and 1.4 percentage points from the prior year periods, respectively.
Operating expenses for the quarter and year-to-date declined 65% and 53% from
the prior year periods, respectively, mainly due to the restructuring done in
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BANDAG, INCORPORATED AND SUBSIDIARIES
the prior year which reduced personnel related costs and managerial and
administrative support costs. Principally because of the absence of a $2.5
million foreign exchange loss that existed in the prior year-to-date period and
lower operating expenses, earnings before income taxes for the quarter and
year-to-date were 232% and 154% above the prior year periods, respectively.
TIRE DISTRIBUTION SYSTEMS, INC.
Excluding the effect of acquisitions, TDS sales were flat for the quarter
compared to the prior year period. From an operating perspective, TDS continued
to make progress in integrating the dealerships it has acquired since 1997. TDS
operating expenses for the quarter and year-to-date were 17% and 13% above the
prior year periods, respectively. Operating expenses have been unfavorably
impacted by the integration of new acquisitions and the consolidation of the
Central Division office into the Eastern Division headquarters. Due to higher
operating expenses, earnings before interest and taxes for the quarter and
year-to-date periods ended September 30, 1999 declined 20% and 79% from the
prior year periods, respectively.
IMPACT OF YEAR 2000
The Company operates with a combination of purchased and internally developed
software systems. Many of the older computer systems were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations. The Company will be required
to modify or replace software that is not Year 2000 compliant so that its
computer systems will function properly with respect to dates related to the
Year 2000.
Purchased software systems account for a significant portion of the Company's
global software environment, especially for date-sensitive applications such as
payroll and accounts receivable. The Company has performed inventories in recent
years to identify clearly non-compliant software systems and to initiate
replacement activities.
The Company has completed the remediation of all North American mainframe
applications and systems software. Future date testing of application software
is continuing and is scheduled to be completed by the end of November 1999.
There may be some cleanup work required after January 1, 2000; however,
management believes it will be minimal and without disruption to critical
systems.
The Company has completed the remediation of all North American networked
hardware and software. All desktop hardware is compliant and all desktop
software is expected to be compliant and future date tested by the end of
November 1999.
The Company has completed the remediation and future date testing of all North
American phone systems.
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BANDAG, INCORPORATED AND SUBSIDIARIES
Remediation of the installed base for the Company's hardware and software
outside of North America is proceeding on plan and is expected to be completed
by the end of November, 1999.
The costs related to the Year 2000 issue are expected to total approximately
$12,000,000. To date, $10,950,000 of this amount has been spent, with the
remaining under contract or subject to executed purchase orders. The Company
expects approximately 60% of total costs, which are for contracted services, to
be recorded as current expense and the remaining 40%, which are to replace
hardware and software and upgrade existing hardware, to be capitalized.
The Company presently believes that with a combination of actions, including
modification of existing software, conversion to newer versions of purchased
software and replacement with new systems, the Year 2000 issue will not pose
significant operational problems for its computer systems. On the other hand, if
such modifications and conversions are not made or are not completed on a timely
basis, the Year 2000 issue could have a material impact on the operations of the
Company. The Company has completed a contingency plan to deal with any
unanticipated Year 2000 issues.
During 1999 the Company has had and will continue to have formal communications
with its significant suppliers and large customers to determine the extent to
which the Company's activities would be impacted by those third parties' failure
to remediate their own Year 2000 issues. However, there can be no guarantee that
the systems of other companies on which the Company relies will be corrected on
a timely basis and therefore have no adverse effect on the Company.
The Company has assessed its own products to determine if it has exposure to
contingencies related to the Year 2000 issue and it believes any such exposure
will not be material.
Financial Condition:
- --------------------
Operating Activities.
Net cash provided by operating activities for the year-to-date period ended
September 30, 1999, was $28,960,000 more than the amount for the same period
last year primarily due to a decrease in accounts receivable and an increase in
taxes payable offset by other working capital items.
Investing Activities.
The Company spent $28,147,000 on capital expenditures through September 30,
1999, compared to $32,177,000 spent for the same period last year. The Company
typically funds its capital expenditures from operating cash flow.
The Company has spent $4,357,000 on tire dealership acquisitions through
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BANDAG, INCORPORATED AND SUBSIDIARIES
September 30, 1999, compared to $5,105,000 spent for the same period last year.
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 $2,913,000 during the nine
months, bringing total investments to approximately $12,634,000 as of September
30, 1999.
Financing Activities.
Cash dividends totaled $6,245,000 and $18,744,000 for the quarter and
year-to-date periods, respectively, and compare to $6,003,000 and $18,551,000
for the same periods last year. The Company purchased 45,200 shares of its
outstanding Common and Class A Common stock, at prevailing market prices, for
$1,212,000 during the year-to-date period ended September 30, 1999. Cash
dividends and stock purchases were funded from operational cash flows.
As of September 30, 1999, the Company had $103,000,000 in funds available under
unused lines of credit.
Forward-Looking Information - Safe Harbor Statement.
- ----------------------------------------------------
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements 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 "anticipates," "is expected to
continue," "it expects," "Bandag expects," "management believes," "is expected
to be," "are expected," "the Company expects," "the Company presently believes,"
"it believes," or other words of similar import. 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 the likelihood of increased competitive
pressures and industry consolidation in the United States for the remainder of
1999 and beyond, the loss of additional key dealers and the timely remediation
of Year 2000 problems by the Company, its suppliers and its customers.
The cost of the Year 2000 issue and the date on which the Company believes it
will complete Year 2000 modifications are based on management's best estimates
which are based on numerous assumptions of future events, including the
continued availability of certain resources, third party plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to purchase
Year 2000 systems, the ability to locate and correct all relevant computer
codes, the complexity of the Year 2000 issue due to dispersed operating units
and geographic locations and similar uncertainties.
Page 14
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only)
27.1 Revised September 1998 Financial Data Schedule (EDGAR
filing only)
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed on October 21, 1999.
The Current Report included unaudited condensed consolidated
balance sheets for the quarter ended September 30, 1999 and
the year ended December 31, 1998, unaudited condensed
consolidated statements of earnings for the three and nine
month periods ended September 30, 1999 and 1998, respectively,
and unaudited condensed consolidated statements of cash flows
for the nine months ended September 30, 1999 and 1998.
Page 15
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: November 11, 1999 \S\ Martin G. Carver
-------------------------------
Martin G. Carver
Chairman and Chief Executive Officer
Date: November 11, 1999 \S\ Warren W. Heidbreder
-------------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
Page 16
BANDAG, INCORPORATED AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Exhibit Page
------ ----------------------- ----
27 Financial Data Schedule (EDGAR filing only) 18
27.1 Revised September 1998 Financial Data
Schedule (EDGAR filing only) 19