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 March 31, 1999
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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
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Byers Road, Miamisburg, Ohio 45342
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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
----- -----
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 X 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: 10,640,521 as of May 13, 1999
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Page 1 of 12
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED). COMPANY FOR WHICH REPORT IS FILED:
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar Amounts in Thousands, Except Per Share Data)
Three Months Ended
March 31,
-----------------------------
1999 1998
----------- -----------
Net sales $ 149,333 $ 143,923
Cost of sales 127,347 118,963
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Gross profit 21,986 24,960
Selling, general and
administrative expenses 19,047 19,357
Plant closure and manufacturing reconfiguration 2,087 --
----------- -----------
Operating income 852 5,603
Other expense (income)
Interest expense 1,682 1,346
Interest income (67) (51)
Other 135 208
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Earnings (loss) before income taxes (898) 4,100
Income tax expense (benefit) (333) 1,569
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Earnings (loss) from continuing operations (565) 2,531
----------- -----------
Discontinued operations:
Income (loss) from discontinued operations, net
of income tax expense (benefit) of $(208) and $764 (312) 1,255
Gain on disposal of discontinued operations, net of
income tax expense of $2,338 3,028 --
----------- -----------
Net earnings $ 2,151 $ 3,786
=========== ===========
Earnings per common share:
Basic:
Weighted average number of common shares 11,759,942 12,531,939
=========== ===========
Earnings (loss) from continuing operations $ (0.05) $ 0.20
Discontinued operations 0.23 .10
----------- -----------
Net earnings per common share $ 0.18 $ 0.30
=========== ===========
Diluted:
Weighted average number of common shares 11,898,056 12,714,461
=========== ===========
Earnings (loss) from continuing operations $ (0.05) $ 0.20
Discontinued operations 0.23 .10
----------- -----------
Net earnings per common share $ 0.18 $ 0.30
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HUFFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
March 31, December 31,
1999 1998
-------- ------------
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 12,137 $ 17,834
Accounts and notes receivable, net 104,669 70,149
Inventories 52,016 46,442
Prepaid expenses and federal income taxes 26,700 20,425
Net assets of discontinued operations -- 70,338
-------- --------
Total current assets 195,522 225,188
-------- --------
Property, plant and equipment, at cost 165,147 177,992
Less: accumulated depreciation and amortization 102,150 114,260
-------- --------
Net property, plant and equipment 62,997 63,732
Excess of cost over net assets acquired, net 31,540 31,985
Deferred federal income taxes 3,721 3,565
Other assets 4,083 4,388
-------- --------
$297,863 $328,858
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable $ 34,900 $ 99,240
Current installments of long-term obligations 6,395 6,411
Accounts payable 56,440 33,604
Accrued expenses and other current liabilities 48,664 36,641
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Total current liabilities 146,399 175,896
-------- --------
Long-term obligations, less current installments 29,772 29,784
Other long-term liabilities 29,737 31,028
-------- --------
Total liabilities 205,908 236,708
-------- --------
Shareholders' equity:
Preferred stock -- --
Common stock 16,652 16,633
Additional paid-in capital 66,066 65,892
Retained earnings 80,078 78,967
Less: cost of treasury shares 70,841 68,341
-------- --------
Total shareholders' equity 91,955 93,151
-------- --------
$297,863 $328,858
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HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) from continuing operations $ (565) $ 2,531
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 3,527 3,905
Loss on sale of property, plant and equipment 509 --
Changes in assets and liabilities:
Accounts and notes receivable, net (34,520) (14,584)
Inventories (5,574) (11,390)
Prepaid expenses and federal income taxes (6,430) 1,260
Other assets 201 420
Accounts payable 23,837 954
Accrued expenses and other current liabilities 12,162 (2,581)
Other long-term liabilities (1,474) 453
Other -- (108)
-------- --------
Net cash used in continuing operating
activities (8,327) (19,140)
Discontinued operations:
Gain on disposal of discontinued operations 3,028 --
Income (loss) from discontinued operations (312) 1,255
Items not affecting cash, net 877 1,277
Cash provided by (used in) discontinued operations 69,461 (19,712)
-------- --------
Net cash provided by (used in)
discontinued operating activities 73,054 (17,180)
Net cash provided by (used in)
operating activities 64,727 (36,320)
=====================================================================================
- -------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,097) (3,556)
Proceeds from sale of property, plant and equipment 1,345 15
-------- --------
Net cash used in investing activities (2,752) (3,541)
=====================================================================================
- -------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in short-term borrowings (64,340) 45,003
Reduction of long-term debt (28) (23)
Issuance of common shares 193 228
Purchase of treasury shares (2,500) (6,258)
Dividends paid (997) (1,089)
-------- --------
Net cash provided by (used in) financing
activities (67,672) 37,861
=====================================================================================
- -------------------------------------------------------------------------------------
Net change in cash and cash equivalents
Cash and cash equivalents: (5,697) (2,000)
Beginning of the year 17,834 2,110
-------- --------
End of the three month period $ 12,137 $ 110
- -------------------------------------------------------------------------------------
=====================================================================================
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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, 1998 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 March 31,
1999. 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 1999, these
charges included severance and related benefits ($359); facility
shutdown and asset write-downs ($678); and new facility startup and
equipment, personnel, and inventory relocation ($1,050).
Note 4: In March 1999, Huffy Corporation reached an agreement with U.S.
Industries, Inc. to sell the assets of its Harrisburg, Pennsylvania
based lawn and garden tools and wheelbarrows business, True Temper
Hardware Company, for $100 million. The results for True Temper
Hardware Company have been classified as discontinued operations in
the Consolidated Statement of Earnings. The assets and liabilities of
discontinued operations have been classified in the Consolidated
Balance Sheet as "Net assets of discontinued operations."
Summarized balance sheet data for discontinued operations is as
follows:
December 31, 1998
-----------------
Current assets $61,313
Property, plant & equipment, net 20,639
Other assets 2,271
-------
Total assets 84,223
Current liabilities 13,885
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Net assets $70,338
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Note 4. The Company has classified its operations into the following
business segments:
Sporting Goods - bicycles, backboards and related products.
Services for Retail - in-store assembly, repair, and display
services and inventory counting services
Earnings (loss)
Before Income
Sales Taxes
-------- ---------------
MARCH 31, 1999
Sporting Goods $ 91,427 $ 1,264
Services for Retail 58,084 448
Eliminations (178)
Interest, net (1,615)
General Corporate (995)
-------- -------
$149,333 $ (898)
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MARCH 31, 1998
Sporting Goods $ 98,087 $ 6,648
Services for Retail 45,990 1,534
Eliminations (154)
Interest, net (1,295)
General Corporate (2,787)
-------- -------
$143,923 $ 4,100
======== =======
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 AND
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RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 31, 1999
COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 1998
(Dollar Amounts in Thousands, Except Per Share Data)
NET EARNINGS (LOSS)
- -------------------
Huffy Corporation ("Huffy" or "Company") had a net loss from continuing
operations of $(565), or $(0.05) per common share for the quarter ended March
31, 1999 compared to $2,531, or $0.20 per common share for the same period last
year. Earnings for the first quarter of 1999 included a pretax charge of $2,087
($1,294 after tax), or $0.11 per common share for the final phase of the plant
closure and manufacturing reconfiguration at the Huffy Bicycle Company. Net
earnings from continuing operations, excluding the Huffy Bicycle Company plant
closure and reconfiguration charges were $729 or $0.06 per common share for the
first quarter of 1999. Net earnings before the above mentioned charges were
negatively impacted by $3,298 in the Sporting Goods segment primarily due to
bicycle price deflation and by $1,086 in the Services for Retail segment
primarily due to short labor supply. The net earnings from continuing operations
excludes results and gain from the Company's lawn and garden and wheelbarrow
business which was sold to U.S. Industries, Inc. on March 16, 1999. The lawn and
garden and wheelbarrow business had net sales of $24,480 and a net loss of
$(312), or $(0.03) per common share, compared to net sales of $38,382 and net
earnings of $1,255,or $0.10 per common share for the first quarter of 1998. The
gain on the sale of the lawn and garden and wheelbarrow business was $3,028, or
$0.26 per common share.
NET SALES
- ---------
Net sales from continuing operations for the quarter ended March 31, 1999 were
$149,333, an increase from sales of $143,923 for the same quarter in 1998. For
the three months ended March 31, 1999, net sales in the Sporting Goods segment
decreased $6,660 from the same period in the prior year, primarily at Huffy
Bicycle Company where price deflation and close-out pricing to reduce inventory
built during the Celina facility phase-out decreased total sales dollars on flat
unit volume for the quarter. In the Services for Retail segment, net sales
increased $12,070 primarily due to strong demand for assembly services and the
impact of the June 1998 Inventory Auditors acquisition.
GROSS PROFIT
- ------------
Gross profit for the quarter ended March 31, 1999 was $21,986, down from the
$24,960 achieved in the first quarter of 1998. As a percent of net sales, gross
profit for the first quarter of 1999 was 14.7% compared to 17.3% for the first
quarter of 1998. Gross profit as a percent of net sales for the Sporting Goods
segment decreased 2.2%, primarily due to a lower margin product mix and
unfavorable pricing pressures. In the Services for Retail segment gross margins
as a percent of net sales declined 2.9% primarily due to capacity constraints
experienced by Washington Inventory Service caused by a significant volume
increase in inventory services and a tight labor market across the nation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
Selling, general and administrative expenses were $19,047 for the first quarter
of 1999, compared to $19,357 for the same period in 1998. As a percent of net
sales, selling, general and administrative expenses for the quarter ended March
31, 1999 were 12.8% compared to 13.4% for the first quarter of 1998. The
decrease in selling, general and administrative expenses as a percent of net
sales for the quarter ended March 31, 1999 is primarily due to the continued
emphasis on Continuous Rapid Improvement.
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PLANT CLOSURE AND MANUFACTURING RECONFIGURATION
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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 1999, these
charges included facility shutdown and asset write-downs $(678); new facility
startup and equipment, personnel, and inventory relocation $(1,050); and
severance and related benefits $(359).
SALE OF TRUE TEMPER HARDWARE
- ----------------------------
In March 1999, the Company sold the assets of its lawn and garden tools and
wheelbarrows business, True Temper Hardware Company to U.S. Industries, Inc. The
purchase price was $100 million cash and is subject to certain post-closing
adjustments based on closing date financial statements.
YEAR 2000 COMPLIANCE
- --------------------
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.
Huffy 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 of 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 such 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
March 31, 1999, the Company is approximately 95% 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 March 31, 1999, the Company has completed testing of
approximately 85% of its remediated systems. Completion of the testing and
implementation of all remediated systems is expected by early second half of
1999.
The Company has also communicated with material 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. Essentially all material
suppliers and customers have replied to our inquiries in writing indicating that
they expect to be Year 2000 compliant on a timely basis.
The Company is actively involved in the assessment and development of
contingency plans and anticipates by December 31, 1999 contingency plans will be
developed for mission critical systems. Based upon current information,
management believes that the most likely worst case scenario would be isolated,
short business interruptions, having minimal impact on the results of
operations.
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.
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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 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
- -------------------------------
The sale of True Temper Hardware Company has favorably impacted the Company's
liquidity and capital resources as of March 31, 1999 by generating $73 million
in cash which was primarily used to reduce short term borrowings. The Company's
balance sheet reflects fluctuations in both current assets and current
liabilities attributable to seasonal changes in the operations of its
businesses.
ENVIRONMENTAL
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As disclosed in the Company's Annual Report to Shareholders for the year ended
December 31, 1998, 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 is negotiating an agreement with local water companies to develop a
water treatment and supply project intended to result in a settlement by and
among the PRPs, the local water companies, the EPA, and the state of California.
At this time, the relative liabilities of the parties are uncertain. 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 to 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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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.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company along with numerous California water companies and other PRPs for
the Baldwin Park Operable Unit of the San Gabriel Valley Superfund have been
named in eight civil lawsuits which allege claims related to the contaminated
groundwater in the Azusa, California area. On March 12, 1998, the California
Public Utilities Commission ("PUC") issued an Order Instituting Investigation
("OII"), stating that because the toxic tort lawsuits relate to water quality,
public health and safety, and the operations and practices of the public
utilities subject to the PUC's jurisdiction, the PUC intends to pursue its
jurisdiction by investigating the operations and practices of the named
defendant public utilities, their compliance with the PUC standards and policies
regarding water quality, and whether those standards and policies regarding
water quality continue to be adequate to protect the public health and safety.
The PUC investigation and decision is expected to conclude in September, 1999.
As a result of the PUC OII, a majority of the lawsuits were stayed pending the
PUC determination. The plaintiffs appealed the decisions to stay. Following a
hearing on the matter, the Court of Appeal took the matter under submission and
a decision is pending. To date, the matters are in their initial stage. It is
impossible to currently predict the outcome of the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Annual Meeting of Shareholders of the Company was held April 22, 1999. At
such meeting, the Shareholders of the Company elected as Directors Jack D.
Michaels, James F. Robeson and Patrick W. Rooney, each for a three year term
expiring in 2002. Shares were voted as follows: FOR: Jack D. Michaels
(10,522,807), James F. Robeson (10,520,664), and Patrick W. Rooney (10,516,127);
WITHELD (including broker non-votes): Jack D. Michaels (206,432), James F.
Robeson (208,575), and Patrick W. Rooney (213,112).
In addition, the Shareholders also ratified the appointment of KPMG LLP as the
Company's independent public accountants for calendar year 1999. In accordance
with such ratification, 10,690,665 shares were voted for ratification, 19,022
shares cast against, and 19,552 shares cast to abstain (including broker
non-votes).
The Shareholders also voted on one shareholder proposal. The Shareholders voted
against the Shareholder Proposal requesting the Company to prepare a report on
the ratio of CEO compensation compared to compensation of the average Company
worker for each of the last 10 years. In connection with such proposal, there
were 751,273 shares voted for the proposal, 8,301,804 shares cast against,
194,808 shares cast to abstain and 1,481,354 broker non-votes.
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.
b. The Company filed one report on Form 8-K, dated March 16, 1999, which was
filed with the Securities and Exchange Commission on March 30, 1999
disclosing the Company closed on its sale of the True Temper Hardware
Company business to TTHA Corp, an affiliate of U.S. Industries.
Page 10 of 12
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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
May 14, 1999 /s/ Timothy G. Howard
- ---------------------- ----------------------------------
Date Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
Page 11 of 12
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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
Page 12 of 12