1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Quarter Ended September 30, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5325
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Huffy Corporation
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(Exact name of registrant as specified in its charter)
Ohio 31-0326270
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Byers Road, Miamisburg, Ohio 45342-076 1
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(Address of principal executive offices) (Zip Code)
(937) 866-6251
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(Registrant's telephone number, including area code)
No Change
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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
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding Shares: 11,775,152 as of November 12, 1998
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"Index of Exhibits" is page 11 herein Page 1 of 11
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED). COMPANY FOR WHICH REPORT IS FILED:
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HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar Amounts in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ----------------- ---------------- -----------------
Net sales $ 140,111 $ 149,996 $ 542,726 $ 535,024
Cost of sales 117,031 126,531 442,658 446,680
------------ ------------ ------------ ------------
Gross profit 23,080 23,465 100,068 88,344
Selling, general and
administrative expenses 19,300 22,002 72,873 68,422
Plant closure and manufacturing
reconfiguration 2,332 -- 14,971 --
------------ ------------ ------------ ------------
Operating income 1,448 1,463 12,224 19,922
Other expense
Interest expense 2,427 1,251 6,825 4,367
Interest income -- (97) (59) (173)
Other 188 (55) 632 1,337
------------ ------------ ------------ ------------
Earnings (loss) before income
taxes (1,167) 364 4,826 14,391
Income tax expense (benefit) (448) (633) 1,785 4,220
------------ ------------ ------------ ------------
Earnings (loss) from continuing
operations (719) 997 3,041 10,171
Discontinued operations:
Loss from discontinued
operations, net of income tax
benefit of $(458) -- -- -- (813)
Gain on disposal of
discontinued operations, net of
income tax expense of $4,490 -- 18 -- 559
------------ ------------ ------------ ------------
Net earnings (loss) $ (719) $ 1,015 $ 3,041 $ 9,917
============ ============ ============ ============
Earnings per common share:
BASIC:
Weighted average
number of common shares 11,919,777 12,751,423 12,236,377 12,943,828
============ ============ ============ ============
Earnings (loss) from
continuing operations ($0.06) $0.08 $0.25 $0.79
Loss from discontinued
operations -- -- -- ($0.02)
------------ ------------ ------------ ------------
Net earnings (loss) per
common share ($0.06) $0.08 $0.25 $0.77
============ ============ ============ ============
DILUTED:
Weighted average
number of common shares 12,137,231 12,959,870 12,453,831 13,158,390
============ ============ ============ ============
Earnings (loss) from
continuing operations ($0.06) $0.08 $0.24 $0.78
Loss from discontinued
operations -- -- -- ($0.02)
------------ ------------ ------------ ------------
Net earnings (loss) per
common share ($0.06) $0.08 $0.24 $0.76
============ ============ ============ ============
See accompanying notes to interim consolidated financial statements.
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HUFFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
September 30, December 31,
1998 1997
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ASSETS
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Current assets:
Cash and cash equivalents $ 17,644 $ 2,142
Accounts and notes receivable, net 88,660 109,957
Inventories 100,140 81,692
Prepaid expenses and federal income taxes 18,928 19,065
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Total current assets 225,372 212,856
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Property, plant and equipment, at cost 234,962 206,724
Less: accumulated depreciation and amortization 138,454 127,258
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Net property, plant and equipment 96,508 79,466
Excess of cost over net assets acquired, net 33,571 21,355
Deferred federal income taxes 4,805 4,773
Other assets 4,980 5,043
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$365,236 $323,493
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Notes payable 102,500 43,000
Current installments of long-term obligations 7,783 7,786
Accounts payable 46,172 40,280
Accrued expenses and other current liabilities 48,106 49,424
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Total current liabilities 204,561 140,490
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Long-term obligations, less current installments 31,708 36,184
Other long-term liabilities 32,235 33,980
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Total liabilities 268,504 210,654
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Shareholders' equity:
Preferred stock -- --
Common stock 16,605 16,475
Additional paid-in capital 65,498 63,885
Retained earnings 82,289 82,302
Less: cost of treasury shares 67,660 49,823
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Total shareholders' equity 96,732 112,839
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$365,236 $323,493
======== ========
See accompanying notes to interim consolidated financial statements.
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HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Nine Months Ended
September 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings from continuing operations $ 3,041 $ 10,171
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 13,604 13,716
Loss on sale of property, plant and equipment 19 270
Deferred federal income tax benefit (630) (4,038)
Changes in assets and liabilities:
Accounts and notes receivable, net 23,435 (13,371)
Inventories (17,661) (19,896)
Prepaid expenses and federal income taxes 872 (852)
Other assets (347) (156)
Accounts payable 4,255 36,165
Accrued expenses and other current liabilities (1,644) 9,726
Other long-term liabilities (1,745) 999
Other 151 (451)
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Net cash provided by continuing operating activities 23,350 32,283
Discontinued operations:
Gain on disposal of discontinued operations 0 559
Loss from discontinued operations 0 (813)
Items not affecting cash, net 0 1,516
Cash provided by discontinued operations 0 49,260
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Net cash provided by discontinued operating 0 50,522
activities
Net cash provided by operating activities 23,350 82,805
=======================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (27,578) (12,409)
Proceeds from sale of property, plant and equipment 11 69
Acquisition of businesses (15,928) 0
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Net cash used in investing activities (43,495) (12,340)
=======================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings 59,500 (38,910)
Reduction of long-term debt (4,479) (4,311)
Issuance of common shares 1,743 1,096
Purchase of treasury shares (17,837) (9,580)
Dividends paid (3,280) (3,352)
-------- --------
Net cash provided by (used in) financing activities 35,647 (55,057)
=======================================================================================
Net change in cash and cash equivalents
Cash and cash equivalents 15,502 15,408
Beginning of the year 2,142 2,048
-------- --------
End of the nine month period $ 17,644 $ 17,456
=======================================================================================
See accompanying notes to interim consolidated financial statements.
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
Note 1: Footnote disclosure which would substantially duplicate the
disclosure contained in the Annual Report to Shareholders for the year
ended December 31, 1997 has not been included. The unaudited interim
consolidated financial statements reflect all adjustments which, in the
opinion of management, are necessary to a fair statement of the results
for the periods presented and to present fairly the consolidated
financial position of Huffy Corporation as of September 30, 1998. All
such adjustments are of a normal recurring nature.
Note 2: Inventories of Huffy Bicycle Company and Huffy Sports Company are
valued using the dollar value LIFO method and, as a result, it is
impractical to separate inventory values between raw materials,
work-in-process and finished products on an interim basis.
Note 3: During the second quarter of 1998, the Company implemented a plan to
maximize operational efficiency by eliminating excess production
capacity and reducing annual operating expenses at the Huffy Bicycle
Company. The plan includes the closure of the Celina, Ohio manufacturing
facility to reduce capacity; the leasing of a parts fabrication facility
to support other plants; and the continuation of its import program for
opening price point bikes. In 1998 the Company estimates plant closure
and manufacturing reconfiguration charges of $20 million ($12,000 after
tax or $0.97 per share). Operating income for the nine months ended
September 30, 1998 included charges of $14,971 ($9,434 after tax, or
$0.74 per share). These charges included severance and related benefits
($7,159); facility shutdown and asset write-downs ($5,628); and new
facility startup and equipment, personnel, and inventory relocation
($2,184).
Note 4: In March 1997, Huffy Corporation reached an agreement with Evenflo
Company, Inc. to sell the assets of its Denver-based juvenile products
business, Gerry Baby Products Company, for $73 million. The results for
Gerry Baby Products Company have been classified as discontinued
operations for all periods presented in the Consolidated Statements of
Earnings and Consolidated Statements of Cash Flow.
Note 5: The components of comprehensive income are immaterial for disclosure.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE
THREE MONTHS ENDED SEPTEMBER 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
NET EARNINGS (LOSS)
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Huffy Corporation ("Huffy" or "Company") had a net loss from continuing
operations of $(719), or $(.06) per common share for the quarter ended September
30, 1998, compared to net income of $1,015, or $.08 per common share for the
same period last year. Earnings for the third quarter of 1998 included a pretax
charge of $2,332 ($1,446 after tax), or $0.12 per common share for plant closure
and manufacturing reconfiguration at the Huffy Bicycle Company. The plan
includes actions such as the closure of the Celina, Ohio manufacturing facility;
leasing of a new parts fabrication facility; and expansion of its import program
for bicycles. Net income from continuing operations, excluding the Huffy Bicycle
Company plant closure and reconfiguration charges, was $727 million, or $.06 per
common share for the third quarter of 1998. Net earnings before the above
mentioned one time charges were impacted by reduced sales volume, which was
partially offset by the favorable impact of strategic initiatives, such as
management's focus on brand and channel management, continuous cost reduction
efforts, and bolt-on acquisitions.
Net earnings from continuing operations for the nine months ended September 30,
1998 were $3,041 million, or $.24 per common share compared to $10,071 million,
or $.78 per common share for the same period last year. Excluding the Huffy
Bicycle Company plant closure and reconfiguration charges, $14,971 before tax
($9,282 after tax) net earnings were $12,232 versus $9,917 for the same period
last year. This improvement in year over year earnings is the result of
innovative new products and services, brand development and channel expansion, a
company-wide focus on cost reduction, and bolt-on acquisitions. The prior year
net earnings from continuing operations excludes both operating results and gain
on the sale of the juvenile products business sold in 1997.
NET SALES
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Net sales from continuing operations for the quarter ended September 30, 1998
were $140,111, a decrease from the sales level of $149,996 for the same quarter
in 1997. Net sales for the nine months ended September 30, 1998 were $542,726, a
1.4% increase from net sales of $535,024 for the same period last year. For the
three and nine months ended September 30, 1998, net sales in the Services for
Retail segment increased primarily due to strong demand for inventory services.
In the Consumer Products segment, sales decreased due to cautious retail orders
and store level inventory reductions, primarily in the sporting goods category.
GROSS PROFIT
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Gross profit for the quarter ended September 30, 1998 was $23,080, down from the
$23,465 achieved in the third quarter of 1997. Expressed as a percentage of net
sales, gross profit for the third quarter of 1998 was 16.5% compared to 15.6%
for the third quarter of 1997. Gross profit dollars for the Consumer Products
segment decreased primarily due to lower sales volume but gross profit as a
percentage of sales improved due to lower volume rebate levels and the positive
impact of the Continuous Rapid Improvement (CRI) program. In the Services for
Retail segment gross margins decreased due to the increased labor cost driven
primarily by the low national unemployment levels.
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Gross profit for the nine months ended September 30, 1998 was $100,068, or 18.4%
of net sales, versus $88,344, or 16.5% of net sales for the same period in 1997.
Both the Consumer Products and Services for Retail segments contributed to the
increase in gross profit for the first nine months of 1998. This increase in
gross profit dollars was primarily volume driven in the Services for Retail
segment, while improved margin was the major factor in the Consumer Products
segment. Gross profit expressed as a percent of net sales increased primarily
due to improvements achieved through CRI initiatives.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses were $19,300 for the third quarter
of 1998, compared to $22,002 for the same period in 1997. Expressed as a
percentage of net sales, selling, general and administrative expenses for the
quarter ended September 30, 1998 were 13.8% compared to 14.7% for the third
quarter of 1997. The decrease in selling, general and administrative expenses
for the quarter ended September 30, 1998 is primarily due to reduced incentive
compensation accruals in both the Consumer Products and Services for Retail
segments.
For the nine months ended September 30, 1998, selling, general and
administrative expenses were $72,873 versus $68,422 for the same period in 1997.
Expressed as a percentage of net sales, selling, general and administrative
expenses for the nine months ended September 30, 1998 were 13.4% compared to
12.8% for the same period in 1997. Selling, general and administrative expenses
for the nine months ended September 30, 1998 increased due to volume related
increases in commissions, customer service costs and distribution costs in both
segments. Selling, general and administrative costs for 1997 were favorably
impacted by an insurance recovery.
PLANT CLOSURE AND MANUFACTURING RECONFIGURATION
- -----------------------------------------------
During the second quarter of 1998, the Company announced a plan to maximize
operational efficiency by eliminating excess production capacity and reducing
annual operating expenses at the Huffy Bicycle Company. The plan includes the
closure of the Celina, Ohio manufacturing facility to reduce capacity; the
leasing of a parts fabrication facility to support other plants; and the
continuation of Huffy Bicycle Company's import program for opening price point
bikes. In 1998 the Company estimates it will incur plant closure and
manufacturing reconfiguration charges of $20 million ($12,000 after tax or $0.97
per share). Operating income for the third quarter of 1998 included charges of
$2,332 ($1,446 after tax, or $0.12 per share). These charges included facility
shutdown and asset write-downs($1,178); and new facility startup and equipment,
personnel, and inventory relocation($1,395); and a credit of $241 to severance
and related benefits.
Operating income for the nine months ended September 30, 1998 included charges
of $14,971 ($9,434 after tax, or $.74 per share). On a pre-tax basis, these
charges included severance and related benefits ($7,159); facility shutdown and
asset write downs ($5,628); and new facility startup, equipment, personnel, and
inventory relocation ($2,184).
ACQUISITIONS
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In June 1998, the Company completed two bolt-on acquisitions to strengthen its
market position. True Temper Hardware Company acquired Lantz Manufacturing
Corporation of Pettisville, Ohio. Lantz broadens the Company's position in lawn
and garden tools, with leaf rakes, snow shovels, lawn edging and splash blocks.
Washington Inventory Service acquired the business of Inventory Auditors, Inc.
This acquisition combines the second and third largest businesses in the
inventory taking services in the U.S., and allows expanded service coverage to
the nation's retailers.
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SALE OF JUVENILE PRODUCTS BUSINESS
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On April 21, 1997, the Company sold the assets of its juvenile products
business, Gerry Baby Products Company to Evenflo Company, Inc., for $73 million.
YEAR 2000 COMPLIANCE
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Many existing computer programs used globally use only two digits to identify a
year in the date field. These programs, if not corrected, could fail or create
erroneous results after the century date changes on January 1, 2000. This Year
2000 issue is believed to affect virtually all companies, including Huffy
Corporation.
Huffy Corporation relies on computer-based technology and uses a variety of
third-party hardware and proprietary and third-party software. In addition to
the information technology ("IT") systems, the Company's operations rely on
various non-IT equipment and systems that contain embedded computer technology.
During 1996, the Company began evaluating and assessing all its internal
date-sensitive systems and equipment for Year 2000 compliance. The assessment
phase of the Year 2000 project is substantially complete and included both
information technology equipment and non-information technology equipment. Based
on its assessment, the Company determined that it was necessary to modify or
replace a portion of its information systems. For its major IT systems, as of
September 30, 1998, the Company is approximately 85% complete in the
modification or replacement of its critical software and hardware and expects
all such modifications and replacements to be completed by the spring of 1999.
After completion of this phase, the Company plans to test and implement its IT
systems. As of September 30, 1998, the Company has completed testing of
approximately 60% of its remediated systems. Completion of the testing and
implementation of all remediated systems is expected by June 30, 1999.
The Company has also communicated with key suppliers and customers to determine
their Year 2000 compliance and the extent to which the Company is vulnerable to
any third-party Year 2000 issues. Most key suppliers and customers who have
replied to our inquiries indicated that they expect to be Year 2000 compliant on
a timely basis. There can be no assurance that there will not be an adverse
effect on the Company if third parties do not make the necessary modifications
to their systems in a timely manner. However, management believes that ongoing
communication with and assessment of these third parties will minimize these
risks.
The Company's Year 2000 compliance program is directed primarily towards
ensuring that the Company will be able to continue to perform four critical
functions: (1) produce and ship goods, (2) order and receive inventory, (3) pay
its employees and vendors, and (4) schedule and perform service business. It is
difficult, or impossible, to assess with any degree of accuracy, the impact on
any of these four areas of the failure of one or more aspects of the Company's
compliance program.
Because the Company began this process in a timely fashion, and because it
regularly evaluates and upgrades its IT capabilities, the total estimated cost
of the Year 2000 project alone is not material and has been funded by operating
cash flows. The Company's remaining Year 2000 budget does not include material
amounts for hardware and software replacement.
The novelty and complexity of the Year 2000 issues, the proposed solutions, and
the Company's dependence on the technical skills of employees and independent
contractors and on the representations and preparedness of third parties are
among the factors that could cause the Company's efforts to be less than fully
effective. Moreover, Year 2000 issues present a number of risks that are beyond
the Company's
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reasonable control, such as the failure of utility companies to deliver
electricity, the failure of telecommunications companies to provide voice and
data services, the failure of financial institutions to process transactions and
transfer funds, the failure of vendors to deliver merchandise or perform
services required by the Company and the collateral effects on the Company of
the effects of Year 2000 issues on the economy in general or on the Company's
business partners and customers in particular. Although the Company believes
that its Year 2000 compliance program is designed to appropriately identify and
address those Year 2000 issues that are subject to the Company's reasonable
control, there can be no assurance that the Company's efforts in this regard
will be fully effective or that Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
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There have been no significant changes in the Company's liquidity and capital
resources as of September 30, 1998 from those discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997. The Company's balance
sheet does however reflect fluctuations in both current assets and current
liabilities attributable to seasonal changes in the operation of its businesses.
ENVIRONMENTAL
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As disclosed in the Company's Annual Report to Shareholders for the year ended
December 31, 1997, the Company, along with others, has been designated as a
potentially responsible party (PRP) by the U.S. Environmental Protection Agency
(the "EPA") with respect to claims involving the discharge of hazardous
substances into the environment in the Baldwin Park operable unit of the San
Gabriel Valley Superfund site ("Superfund"). Currently, the Company, along with
other PRPs, the San Gabriel Basin Water Quality Authority and numerous local
water districts are working with the EPA on a mutually satisfactory remedial
plan. In developing its estimate of environmental remediation costs, the Company
considers, among other things, currently available technological solutions,
alternative cleanup methods and risk-based assessments of the contamination and,
as applicable, an estimation of its proportionate share of remediation costs.
The Company may also make use of external consultants, and consider, when
available, estimates by other PRPs and governmental agencies and information
regarding the financial viability of other PRPs. The Company believes it is
unlikely that it will incur substantial previously unanticipated costs as a
result of failure by other PRPs to satisfy their responsibilities for
remediation costs. On May 15, 1997, the Company, along with other PRPs, received
special notice letters from the EPA requesting a good faith offer of remediation
for the Superfund. Such response has currently been postponed until July 2,
1999. Based upon information currently available, such future costs are not
expected to have a material adverse effect on the Company's financial condition,
liquidity, or its ongoing results of operations. However, such costs could be
material to results of operations in a future period.
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PART II -- OTHER INFORMATION
ITEM 5: OTHER INFORMATION
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a. Please see the Company's meaningful cautionary statements
regarding forward looking statements contained in the Company's
report on Form 8-K filed with the Securities and Exchange
Commission on April 1, 1998 which is hereby incorporated herein by
reference.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits - The Exhibits, as shown in the "Index of Exhibits,"
attached hereto as page 10, are filed as a part of this Report.
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.
HUFFY CORPORATION, registrant
November 13, 1998 /s/ Timothy G. Howard
- ------------------------------------- --------------------------
Date Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
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INDEX OF EXHIBITS
Exhibit
No. Item
- ------- -------------
(2) Not applicable
(3) Not applicable
(4) Not applicable
(10) Not applicable
(11) Not applicable
(15) Not applicable
(18) Not applicable
(19) Not applicable
(22) Not applicable
(23) Not applicable
(24) Not applicable
(27) Financial Data Schedule
(99) Not applicable
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