UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-7007
BANDAG, INCORPORATED
--------------------
(Exact name of registrant as specified in its charter)
Iowa 42-0802143
- ------------------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2905 North Highway 61, Muscatine, Iowa 52761-5886
--------------------------------------------- ---------------------------
(Address of principal executive offices) (Zip Code)
(563) 262-1400
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate 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; 9,078,676 shares as of July 31, 2002. Class A Common
Stock, $1 par value;9,138,220 shares as of July 31, 2002. Class B Common Stock,
$1 par value; 922,316 shares as of July 31, 2002.
BANDAG, INCORPORATED AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -
June 30, 2002 and December 31, 2001 3
Condensed consolidated statements of operations
Three months ended June 30, 2002 and 2001;
Six months ended June 30, 2002 and 2001 4
Condensed consolidated statements of cash flows
Six months ended June 30, 2002 and 2001 5
Notes to condensed consolidated financial statements
June 30, 2002 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
EXHIBITS:
Exhibit 3(i) Articles of Amendment to Restated Articles of Incorporation,
dated May 14, 2002
Exhibit 10 Stock Purchase Agreement dated June 18, 2002, between
Bandag, Incorporated and Lucille A. Carver
Exhibit 99.1 Written Statement of the Chairman of the Board, Chief
Executive Officer and President of Bandag, Incorporated
Pursuant to 18 U.S.C.ss.1350
Exhibit 99.2 Written Statement of the Vice President, Chief Financial
Officer and Secretary of Bandag, Incorporated Pursuant to
18 U.S.C.ss.1350
2
PART 1. FINANCIAL INFORMATION
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
In thousands, except share data 2002 2001
----------- ------------
Assets
Current assets
Cash and cash equivalents $ 143,023 $ 145,625
Investments 8,676 9,394
Accounts receivable, net 139,764 164,708
Inventories
Finished products 75,381 74,667
Material and work in process 15,031 15,128
--------- ---------
90,412 89,795
Other current assets 41,305 40,652
--------- ---------
Total current assets 423,180 450,174
Property, plant, and equipment 500,724 501,609
Less accumulated depreciation and amortization (349,422) (343,601)
--------- ---------
151,302 158,008
Goodwill, net -- 50,964
Intangible assets, net 4,543 315
Other assets 58,584 59,361
--------- ---------
Total assets $ 637,609 $ 718,822
========= =========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 30,051 $ 22,153
Accrued employee compensation and benefits 22,086 25,311
Accrued marketing expenses 19,718 26,396
Other accrued expenses 32,391 30,279
Income taxes payable 15,122 14,947
Short-term notes payable and current portion of other obligations 67,931 67,239
--------- ---------
Total current liabilities 187,299 186,325
Long-term debt and other obligations 43,665 40,921
Deferred income tax liabilities 2,551 2,580
Shareholders' equity
Common stock; $1.00 par value; authorized - 21,500,000 shares; issued and
outstanding - 9,078,874 shares in 2002;
9,079,093 shares in 2001 9,079 9,079
Class A common stock; $1.00 par value; authorized - 50,000,000 shares;
issued and outstanding - 9,138,455 shares in 2002;
9,525,514 shares in 2001 9,138 9,525
Class B common stock; $1.00 par value; authorized - 8,500,000 shares;
issued and outstanding - 922,328 shares in 2002;
2,037,370 shares in 2001 922 2,037
Additional paid-in capital 11,446 11,399
Retained earnings 417,278 502,517
Foreign currency translation adjustment (43,769) (45,561)
--------- ---------
Total shareholders' equity 404,094 488,996
--------- ---------
Total liabilities and shareholders' equity $ 637,609 $ 718,822
========= =========
See notes to condensed consolidated financial statements.
3
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended Six Months Ended
In thousands, except per share data June 30, June 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 231,147 $ 240,375 $ 423,640 $ 445,487
Other income 2,891 4,479 5,952 8,759
--------- --------- --------- ---------
234,038 244,854 429,592 454,246
Cost of products sold 143,168 156,785 266,167 293,211
Engineering, selling
administrative, and other expenses 70,603 69,712 139,455 136,815
Interest expense 1,745 1,923 3,512 3,807
--------- --------- --------- ---------
215,516 228,420 409,134 433,833
--------- --------- --------- ---------
Earnings before income taxes and cumulative
effect of accounting change 18,522 16,434 20,458 20,413
Income taxes 6,853 6,922 7,569 8,573
--------- --------- --------- ---------
Earnings before cumulative effect of
accounting change 11,669 9,512 12,889 11,840
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- -- (47,260) --
--------- --------- --------- ---------
Net earnings (loss) $ 11,669 $ 9,512 $ (34,371) $ 11,840
========= ========= ========= =========
Basic earnings (loss) per share
Earnings before cumulative effect of
accounting change $ 0.58 $ 0.46 $ 0.63 $ 0.58
Cumulative effect of accounting change -- -- (2.32) --
--------- --------- --------- ---------
Net earnings (loss) $ 0.58 $ 0.46 $ (1.68) $ 0.58
========= ========= ========= =========
Diluted earnings (loss) per share
Earnings before cumulative effect of
accounting change $ 0.57 $ 0.46 $ 0.63 $ 0.57
Cumulative effect of accounting change -- -- (2.29) --
--------- --------- --------- ---------
Net earnings (loss) $ 0.57 $ 0.46 $ (1.67) $ 0.57
========= ========= ========= =========
Comprehensive net earnings (loss) $ 12,145 $ 5,217 $ (32,579) $ 7,276
Cash dividends per share $ 0.315 $ 0.305 $ 0.630 $ 0.610
Depreciation included in expense $ 8,219 $ 7,929 $ 15,860 $ 16,694
Weighted average shares outstanding:
Basic 20,235 20,578 20,413 20,566
Diluted 20,405 20,667 20,593 20,689
See notes to condensed consolidated financial statements.
4
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
Six Months Ended
In thousands June 30,
2002 2001
----------- -----------
Operating Activities
Net earnings (loss) $ (34,371) $ 11,840
Cumulative effect of accounting change 50,964 --
Provision for depreciation and amortization 16,303 21,736
Decrease (increase) in operating assets and liabilities, net 26,111 (4,523)
--------- ---------
Net cash provided by operating activities 59,007 29,053
Investing Activities
Additions to property, plant, and equipment (8,938) (9,517)
Purchases of investments (5,612) (4,300)
Maturities of investments 7,330 4,701
Acquisitions of businesses (2,000) --
--------- ---------
Net cash used in investing activities (9,220) (9,116)
Financing Activities
Principal payments on short-term notes payable and long-term obligations (77) (375)
Cash dividends (13,008) (12,567)
Purchases of Common Stock, Class A Common Stock and Class B Common Stock (40,309) (24)
--------- ---------
Net cash used in financing activities (53,394) (12,966)
Effect of exchange rate changes on cash and cash equivalents 1,005 213
--------- ---------
Increase (decrease) in cash and cash equivalents (2,602) 7,184
Cash and cash equivalents at beginning of period 145,625 86,008
--------- ---------
Cash and cash equivalents at end of period $ 143,023 $ 93,192
========= =========
See notes to condensed consolidated financial statements.
5
BANDAG, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Unaudited
Note A. Basis of Presentation
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and six month periods ended June 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. 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, 2001.
Note B. Comprehensive Net Earnings (Loss)
Comprehensive net earnings (loss) for the three and six month periods ended June
30, 2002 and 2001 were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- -----------
Net earnings before cumulative effect of
accounting change $ 11,669 $ 9,512 $ 12,889 $ 11,840
Other comprehensive income:
Foreign currency translation 476 (4,295) 1,792 (4,564)
-------- -------- -------- --------
Comprehensive net earnings before cumulative
effect of accounting change 12,145 5,217 14,681 7,276
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- -- (47,260) --
-------- -------- -------- --------
Comprehensive net earnings (loss) $ 12,145 $ 5,217 $(32,579) $ 7,276
======== ======== ======== ========
6
BANDAG, INCORPORATED AND SUBSIDIARIES
Note C. Earnings (Loss) Per Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Net earnings (loss) $ 11,669 $ 9,512 $(34,371) $ 11,840
======== ======== ======== ========
Denominator:
Denominator for basic earnings (loss)
per share - weighted-average shares 20,235 20,578 20,413 20,566
Effect of dilutive securities:
Non-vested restricted stock 51 61 53 49
Stock options 119 28 127 74
-------- -------- -------- --------
Dilutive potential common shares 170 89 180 123
Denominator for diluted earnings (loss) per
share - weighted-average shares and
dilutive potential common shares 20,405 20,667 20,593 20,689
======== ======== ======== ========
Net earnings (loss) per share:
Basic $ 0.58 $ 0.46 $ (1.68) $ 0.58
======== ======== ======== ========
Diluted $ 0.57 $ 0.46 $ (1.67) $ 0.57
======== ======== ======== ========
Note D. Non-Recurring Charges
During the fourth quarter of 2001, the Company recorded net non-recurring
charges totaling $3,400,000 ($2,040,000 net of tax benefits). The net
non-recurring charges included $4,300,000 ($2,580,000 net of tax benefits)
related to the closure of a North American tread rubber manufacturing facility
and certain retirement benefits. Costs included $2,659,000 ($1,595,000 net of
tax benefits) for termination benefits for the reduction of 46 employees,
$1,521,000 ($913,000 net of tax benefits) for early retirement benefits of 19
employees, and other miscellaneous closure costs. In 2001, the Company paid
$1,542,000 related to the termination of 37 employees. In the year-to-date
period ended June 30, 2002, the Company paid $1,466,000 relating to the
termination of an additional 28 employees. As of June 30, 2002, $1,234,000 of
the charges related to the closure of the North American tread rubber
manufacturing facility remain accrued, which reflects a $58,000 reduction in the
original provision due to costs being lower than original estimates. Also,
included in the net non-recurring charge was $1,800,000 ($1,080,000 net of tax
benefits) for post-retirement health care costs associated with 64 terminated
employees. These two charges were offset by a benefit of $2,700,000 ($1,620,000
net of tax benefits) for the reduction of other accrued expenses due to the
resolution of a tax audit settlement and prior year tax accrual changes.
7
BANDAG, INCORPORATED AND SUBSIDIARIES
Note E. New Accounting Standard
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, which resulted in a non-cash transition
charge in that quarter of $47.3 million (net of tax benefit of $3.7 million), or
$2.29 per diluted share, to recognize impairment of goodwill, substantially all
of which related to Tire Distribution Systems, Inc. (TDS), the Company's tire
distribution subsidiary. The fair value of the reporting units was estimated
using the expected present value of future cash flows. Pursuant to SFAS No. 142
the $47.3 million charge is treated as a change in accounting principle
The changes in the carrying amount of goodwill for the six months ended June 30,
2002, are as follows (in thousands):
Traditional
Business TDS
Segment Segment Total
--------------- --------------- ----------------
Balance as of January 1, 2002 $ 3,388 $ 47,576 $ 50,964
Impairment losses (3,388) (47,576) (50,964)
--------------- --------------- ----------------
Balance as of June 30, 2002 $ - $ - $ -
=============== =============== ================
Proforma information assuming SFAS No. 142 was adopted on January 1, 2001, (in
thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------- --------------- ---------------- ----------------
Reported net earnings before cumulative
effect of accounting change $ 11,669 $ 9,512 $ 12,889 $ 11,840
Add goodwill amortization - 1,988 - 3,976
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 11,669 $ 11,500 $ 12,889 $ 15,816
=============== ================ ================ ================
Basic earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 0.58 $ 0.46 $ 0.63 $ 0.58
Add goodwill amortization - 0.10 - 0.19
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 0.58 $ 0.56 $ 0.63 $ 0.77
=============== =============== ================ ================
Diluted earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 0.57 $ 0.46 $ 0.63 $ 0.57
Add goodwill amortization - 0.10 - 0.19
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 0.57 $ 0.56 $ 0.63 $ 0.76
=============== =============== ================ ================
8
BANDAG, INCORPORATED AND SUBSIDIARIES
Note F. Reclassifications
The Company adopted Emerging Issues Task Force (EITF) No. 00-25, "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products," in the first quarter of 2002. Under this Issue, the EITF concluded
that all consideration paid by a vendor to a reseller should be classified as a
reduction of sales and as a reduction of selling and general administrative and
other expenses. As reclassifications, these changes do not affect the Company's
financial position or earnings. In accordance with EITF 00-25 the Company
recorded $6,589,000 and $12,658,000 as a reduction of sales and as a reduction
of selling and general administrative and other expenses for the quarter and
year-to-date periods ended June 30, 2001. These amounts relate to fleet
subsidies and certain marketing programs.
Note G. Accounting for Stock-Based Compensation
During the second quarter 2002, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" effective for employee stock options granted after
December 31, 2001. In accordance with SFAS No. 123 the Company values stock
options issued based upon the Black-Scholes option pricing model and recognizes
this value as an expense over the period in which the options vest. Previously,
the Company accounted for employee stock options in accordance with APB 125. The
Company recognized approximately $0.2 million in after-tax compensation expense
(net of tax benefit of $0.1 million) in the second quarter as a result of this
change in accounting.
Proforma information assuming the Company had accounted for employee stock
options granted since SFAS No. 123 was adopted in 1995 follows, (in thousands,
except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
--------------- --------------- ---------------- ----------------
Reported net earnings before cumulative
effect of accounting change $ 11,669 $ 9,512 $ 12,889 $ 11,840
Less stock option expense 184 193 368 368
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 11,485 $ 9,319 $ 12,521 $ 11,472
=============== =============== ================ ================
Basic earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 0.58 $ 0.46 $ 0.63 $ 0.58
Less stock option expense 0.01 0.01 0.02 0.02
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 0.57 $ 0.45 $ 0.61 $ 0.56
=============== =============== ================ ================
Diluted earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 0.57 $ 0.46 $ 0.63 $ 0.57
Less stock option expense 0.01 0.01 0.02 0.02
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 0.56 $ 0.45 $ 0.61 $ 0.55
=============== =============== ================ ================
9
BANDAG, INCORPORATED AND SUBSIDIARIES
Note H. Treasury Stock Purchase
On June 18, 2002, the Company executed an agreement to purchase 1,114,746 shares
of Bandag's Class B Common Stock and 418,371 shares of Bandag's Class A Common
Stock from Lucille A. Carver, widow of the founder of Bandag and a director from
1957 until May 14, 2002. Mrs. Carver is the mother of Martin G. Carver, Chairman
of the Board, President, Chief Executive Officer and a director of Bandag, and
Roy J. Carver, Jr., a director of Bandag. The shares were purchased on June 19,
2002 at a per share price of $27.04 and $24.00, for the Class B Common Stock and
Class A Common Stock, respectively, which was equal to the composite closing
prices of Bandag's Common Stock (in the case of the Class B Common Stock) and
Class A Common Stock on the New York Stock Exchange at the close of business on
June 18, 2002, less a discount of 3.5% per share in the case of the Class B
common Stock and 4.0% per share for the Class A Common Stock. The total purchase
price was approximately $40.2 million. As a result of these repurchases the
average shares outstanding have been reduced by approximately 4%.
Note I. Legal Proceedings
Bandag, Incorporated vs. Michelin Retread Technologies, Incorporated et al.,
United States District Court for the Southern District of Iowa, 3-99-CV-80165.
- --------------------------------------------------------------------------------
On May 21, 2002, Bandag, Inc. announced a settlement in this litigation. As a
result of the settlement agreement all parties have been dismissed from the
litigation. Michelin and Bandag agreed to dismiss all financial claims against
all parties. The agreement brought to a close the trial in the United States
District Court in Des Moines, Iowa which began May 13, 2002.
10
BANDAG, INCORPORATED AND SUBSIDIARIES
Note J. Operating Segment Information
The Company has two reportable operating segments: the Traditional Business and
TDS. The Traditional Business manufactures precured tread rubber, equipment and
supplies for retreading tires and operates on a worldwide basis. The operations
of the Traditional Business segment are evaluated by worldwide geographic
region. The Company's operations located in the United States and Canada,
together with Tire Management Solutions, Inc. (TMS), and Quality Design Systems,
Inc. (QDS), are integrated and managed as one unit, which is referred to
internally as North America. The Company's operations located in Europe
principally service those European countries, but also export to certain other
countries in the Middle East and Northern and Central Africa. This collection of
countries is under one management group and is referred to internally as Europe.
The Company's exports from North America to markets in the Caribbean, Central
America, South America and Asia, along with operations in Brazil, Mexico,
Venezuela, South Africa, New Zealand, Indonesia and Malaysia and a licensee in
Australia, are combined under one management group referred to internally as
International.
TDS operates franchised retreading locations and commercial, retail, and
wholesale outlets throughout the United States for the sale and maintenance of
new and retread tires to principally commercial and industrial customers. Other
includes 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 June 30 (in thousands):
Traditional Business TDS
-------------------------------------------------------------------- -----
North America Europe International
2002 2001 2002 2001 2002 2001 2002
Net sales to unaffiliated
customers $ 93,587 $ 93,136 $ 14,808 $ 16,155 $ 23,923 $ 26,845 $ 98,829
Transfers between segments 15,705 16,561 70 77 1,036 1,101 661
Operating earnings (loss) 23,271 20,247 361 1,360 4,255 2,634 (1,445)
Interest income -- -- -- -- -- -- --
Interest expense -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before
income taxes $ 23,271 $ 20,247 $ 361 $ 1,360 $ 4,255 $ 2,634 $ (1,445)
========= ========= ========= ========= ========= ========= =========
Other Consolidated
----- ------------
2001 2002 2001 2002 2001
Net sales to unaffiliated
customers $ 104,239 $ -- $ -- $ 231,147 $ 240,375
Transfers between segments 587 -- -- 17,472 18,326
Operating earnings (loss) (902) (7,483) (6,801) 18,959 16,538
Interest income -- 1,308 1,819 1,308 1,819
Interest expense -- (1,745) (1,923) (1,745) (1,923)
--------- --------- --------- --------- ---------
Earnings (loss) before
income taxes $ (902) $ (7,920) $ (6,905) $ 18,522 $ 16,434
========= ========= ========= ========= =========
11
For the six months ended June 30 (in thousands):
Traditional Business TDS
-------------------------------------------------------------------- ------
North America Europe International
2002 2001 2002 2001 2002 2001 2002
Net sales to unaffiliated
customers $ 169,878 $ 172,609 $ 27,368 $ 33,438 $ 46,673 $ 52,329 $ 179,721
Transfers between segments 29,758 33,611 226 269 1,982 2,224 1,097
Operating earnings (loss) 35,934 33,579 189 1,292 6,162 5,581 (7,410)
Interest income -- -- -- -- -- -- --
Interest expense -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Earnings (loss) before
income taxes $ 35,934 $ 33,579 $ 189 $ 1,292 $ 6,162 $ 5,581 $ (7,410)
========= ========= ========= ========= ========= ========= =========
Other Consolidated
----- ------------
2001 2002 2001 2002 2001
Net sales to unaffiliated
customers $ 187,111 $ -- $ -- $ 423,640 $ 445,487
Transfers between segments 1,115 -- -- 33,063 37,219
Operating earnings (loss) (6,171) (13,622) (13,724) 21,253 20,557
Interest income -- 2,717 3,663 2,717 3,663
Interest expense -- (3,512) (3,807) (3,512) (3,807)
--------- --------- --------- --------- ---------
Earnings (loss) before
income taxes $ (6,171) $ (14,417) $ (13,868) $ 20,458 $ 20,413
========= ========= ========= ========= =========
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 2 -Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
Results include the Company's two reportable operating segments - its
Traditional Business and Tire Distribution Systems, Inc. (TDS).
During the first quarter of 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, which resulted in a non-cash transition
charge in the quarter of $47,260,000 (net of tax benefit of $3,704,000), or
$2.29 per diluted share, to recognize impairment of goodwill, substantially all
of which related to TDS. Pursuant to SFAS No. 142 the $47,300,000 charge is
treated as a change in accounting principle.
During the first quarter of 2002, the Company acquired the assets of Open Road
Technologies, Inc., the supplier of RoadWare(TM) retread shop management
software, with annual sales of approximately $5,000,000.
During the second quarter of 2002, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation" for employee stock options granted after December
31, 2001. Refer to Note G of the condensed consolidated financial statements for
further details.
Consolidated net sales for the quarter and year-to-date periods ended June 30,
2002 were 4% and 5% lower than the prior year periods, respectively on a 3% and
6% decline in Traditional Business net sales, respectively. The decrease in
consolidated and Traditional Business net sales primarily resulted from a 3% and
5% decline in retread material unit volume and a 16% and 27% decline in
equipment sales for the quarter and year-to-date periods ended June 30, 2002,
respectively. Net sales were also unfavorably affected by the lower translated
value of the Company's foreign-currency-denominated sales, particularly sales
denominated in the Brazilian real and South African rand. TDS net sales
decreased 5% and 4% for the quarter and year-to-date periods ended June 30, 2002
from the prior year periods, respectively, due to the difficult market
conditions. The Company's seasonal sales pattern, which is tied to trucking
activity, was similar to previous years in that the second quarter is seasonally
stronger than the first quarter for both sales and earnings. Both segments were
similarly affected.
The consolidated and Traditional Business gross profit margins for the quarter
ended June 30, 2002 increased 3.3 and 4.8 percentage points from the prior year
periods, respectively. The consolidated and Traditional Business gross profit
margins for the year-to-date period ended June 30, 2002 increased 3.0 and 5.1
percentage points from the prior year periods, respectively. The increase in
gross profit margins for the quarter and year-to-date periods primarily reflects
lower raw material costs across all geographic areas within the Traditional
Business. However, market trends indicate raw material costs may increase
through the remainder of the year.
12
BANDAG, INCORPORATED AND SUBSIDIARIES
Excluding the effects of goodwill amortization in 2001, consolidated operating
and other expenses for the quarter and year-to-date periods ended June 30, 2002
increased 5% from the prior year periods. Traditional Business operating and
other expenses for the quarter and year-to-date periods ended June 30, 2002
increased 4% and 5% from the prior year periods, respectively. The increase in
year-to-date operating and other expenses primarily resulted from higher costs
of doing business at TDS, increased cost of litigation with Michelin North
America, Inc. and Michelin Retread Technologies, Inc. and approximately
$2,200,000 in expense related to converting SystemBandag users to the
RoadWare(TM) software system. As previously announced, the settlement of
Bandag's ongoing litigation with Michelin included dismissal of all financial
claims against all parties. Therefore, no further expense related to this
litigation is anticipated. Expenses for the Michelin litigation for the quarter
and year-to-date periods ended June 30, 2002 were approximately $5,700,000 and
$9,700,000, respectively, as compared to $4,700,000 and $8,700,000 for the prior
year periods. This expense is included in Other in the operating segment
information in Note J of the condensed consolidated financial statements.
Second quarter 2001 net income included $1,988,000 of goodwill amortization, or
$0.10 per diluted share. On a comparable basis, the Company's earnings per
diluted share for the second quarter of 2002 increased $0.01 per diluted share
compared to the same period in 2001. Consolidated net loss for the year-to-date
period ended June 30, 2002 was $34,371,000, or $1.67 per diluted share. This
loss includes the write-off of $47,260,000 net of income tax to give effect to
the adoption of SFAS No. 142 as of January 1, 2002. For the year-to-date period
ended June 30, 2002, the Company reported consolidated net income of
$12,889,000, or $0.63 per diluted share, before the write-off of $47,260,000.
This was a 9% increase from the prior year reported net income of $11,840,000,
or $0.57 per diluted share. However, net income for the year-to-date period
ended June 30, 2001 would have been $15,816,000, or $0.76 per diluted share
before goodwill amortization of $3,976,000, or $0.19 per diluted share.
Therefore, on a comparable basis the Company's earnings per diluted share
decreased 17% for the year-to-date period ended June 30, 2002.
TRADITIONAL BUSINESS
The Company's Traditional Business operations located in the United States and
Canada, together with Tire Management Solutions, Inc. and Quality Design
Systems, Inc., are integrated and managed as one unit, which is referred to
internally as North America. Net sales in North America for the quarter ended
June 30, 2002 were 1% above the prior year period primarily due to the
acquisition of Open Road Technologies in the first quarter of 2002. Net sales in
North America for the year-to-date period ended June 30, 2002 were 2% below the
prior year period primarily due to a 3% lower retread material unit volume and a
decrease in equipment sales. A decrease in average raw material costs in the
United States and Canada primarily resulted in a 5.5 and 6.3 percentage-point
increase in North America's gross margin for the quarter and year-to-date
periods ended June 30, 2002 from the prior year periods,
13
BANDAG, INCORPORATED AND SUBSIDIARIES
respectively. North American operating and other expenses for the quarter and
year-to-date periods ended June 30, 2002 were 7% and 10% higher than the prior
year periods, respectively. Year-to-date operating expenses were higher
primarily due to lower pension income and approximately $2,200,000 in expense
related to converting SystemBandag users to the RoadWare(TM) software system.
For the quarter and year-to-date periods ended June 30, 2002, higher gross
profit was partially offset by higher operating and other expenses, resulting in
a 15% and 7% increase in earnings before income taxes from the prior year
periods, respectively.
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 and year-to-date periods ended June 30, 2002 declined 8% and 18%
from the prior year periods, respectively, primarily due to a retread material
unit volume decrease of 7% and 13% from the prior year periods, respectively.
Despite lower raw material costs, gross margin for the quarter and year-to-date
periods ended June 30, 2002 was 1.6 and 1.0 percentage points lower than the
prior year periods, respectively. Operating expenses for the quarter and
year-to-date periods ended June 30, 2002 decreased 6% and 9% from the prior year
periods, respectively. Principally as a result of lower sales and gross margin,
earnings before income taxes for the quarter and year-to-date periods ended June
30, 2002 decreased 73% and 85% from the prior year periods, respectively.
The Company's exports from North America to markets in the Caribbean, Central
America, South America and Asia, along with operations in Brazil, Mexico,
Venezuela, South Africa, New Zealand, Indonesia and Malaysia and a licensee in
Australia, are combined under one management group referred to internally as
International. Net sales in International for the quarter and year-to-date
periods ended June 30, 2002 declined 11% from the prior year periods, as a
result of an 8% and 6% decrease in retread material unit volume. The spread
between the net sales decrease and the retread material unit volume decrease is
primarily due to the lower translated value of the Brazilian real and South
African rand. The gross profit margin for the quarter and year-to-date periods
ended June 30, 2002 increased 5.2 and 4.0 percentage points from the prior year
periods, respectively, due mainly to lower raw material costs. Operating
expenses for the quarter and year-to-date periods ended June 30, 2002 decreased
15% and 17% from the prior year periods, respectively, primarily due to the
lower translated value of the Brazilian real and South African rand. Earnings
before income taxes for the quarter and year-to-date periods ended June 30, 2002
increased 62% and 10% from the prior year periods, respectively, primarily due
to the improvement in gross margin and the reduction in operating expenses
coupled with a favorable change in net foreign exchange gains and losses.
14
BANDAG, INCORPORATED AND SUBSIDIARIES
TIRE DISTRIBUTION SYSTEMS, INC.
TDS net sales for the quarter and year-to-date periods ended June 30, 2002
decreased 5% and 4% from the prior year periods, respectively. The decrease in
net sales resulted from difficult market conditions. The gross profit margin for
the quarter ended June 30, 2002 increased 1% from the prior year period, while
the gross profit margin for the year-to-date period ended June 30, 2002 remained
even with the prior year period. TDS's operating expenses as a percentage of
sales for the quarter and year-to-date periods ended June 30, 2002 were 3.0 and
2.7 percentage points higher than the prior year periods, respectively,
primarily due to higher health insurance, workers' compensation costs, vehicle
expenses and lower purchase discounts from suppliers. Primarily as a result of
the lower sales volume and higher operating expenses, TDS recorded losses before
interest and taxes of $1,445,000 and $7,410,000 for the quarter and year-to-date
periods ended June 30, 2002, respectively. This compares to income before
interest and taxes, excluding goodwill amortization, of $1,166,000 and a loss
before interest and taxes, excluding goodwill amortization, of $2,035,000 in the
prior year periods, respectively.
Financial Condition:
Liquidity
At June 30, 2002, the Company had cash and cash equivalents of $143,023,000, as
compared to $145,625,000 at December 31, 2001. The Company's ratio of total
current assets to total current liabilities was 2.3 to 1 at June 30, 2002 as
compared to 2.4 to 1 at December 31, 2001. In addition, at June 30, 2002, the
Company had approximately $94,286,000 in borrowings available under unused lines
of credit.
Operating Activities
Net cash provided by operating activities for the six months ended June 30, 2002
was $29,954,000 more than the amount for the same period last year, primarily
due to a decrease in accounts receivables.
Investing Activities
The Company spent $8,938,000 on capital expenditures through June 30, 2002,
compared to $9,517,000 spent for the same period last year. The Company
typically funds its capital expenditures from operating cash flows. During the
quarter ended June 30, 2002, the Company acquired the assets of Open Road
Technologies, Inc., the supplier of RoadWare(TM) retread shop management
software, for $2,000,000.
The Company's excess funds are invested in financial instruments with various
maturities, but only instruments with an original maturity date of over 90 days
are classified as investments
15
BANDAG, INCORPORATED AND SUBSIDIARIES
for balance sheet purposes. The Company's maturities of investments exceeded
purchases by $1,718,000 during the six months, resulting in total investments of
approximately $8,676,000 as of June 30, 2002.
Financing Activities
Cash dividends totaled $6,506,000 and $13,008,000 for the quarter and
year-to-date periods, respectively, compared to $6,295,000 and $12,567,000 for
the same periods last year.
The Company purchased 3,618 shares of its outstanding Common and Class A Common
stock, at prevailing market prices, for $117,000 during the six months ended
June 30, 2002. On June 19, 2002, the Company purchased 1,114,746 shares of
Bandag Class B Common Stock and 418,371 shares of Bandag Class A Common Stock
from Lucille A. Carver, widow of the Company's founder. The cost of the purchase
totaled approximately $40,192,000. Cash dividends and stock purchases were
funded from operational cash flows.
16
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 4 - Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of the shareholders of the Company was held on May 14,
2002.
(b) Three matters were voted upon at the annual meeting. First, the following
two nominees, all of whom were incumbent directors, were elected as
directors for a three-year term ending in 2005 by the following vote:
Name Votes For Votes Against Abstentions
- ---- --------- ------------- -----------
Martin G. Carver 27,170,573 1,367,922 86,802
Edgar D. Jannotta 28,480,927 88,854 55,516
A vote was held to act upon a proposal to amend the Corporation's
Restated Articles of Incorporation, as amended, to limit directors' liability.
The shareholders ratified the proposal by the following vote:
Votes For Votes Against Abstentions
- --------- ------------- -----------
28,326,810 287,937 10,550
Shareholders also voted upon a proposal to ratify the selection of
Ernst & Young LLP as independent auditors of the Company for the year ending
December 31, 2002. The shareholders ratified the selection by the following
vote:
Votes For Votes Against Abstentions
- --------- ------------- -----------
28,277,089 342,022 6,186
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
3(i) Articles of Amendment to Restated Articles of Incorporation, dated
May 14, 2002
10 Stock Purchase Agreement dated June 18, 2002 between Bandag,
Incorporated and Lucille A. Carver
99.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C.ss.1350
99.2 Written Statement of the Vice President, Chief Financial Officer
and Secretary of Bandag, Incorporated Pursuant to 18 U.S.C.ss.1350
17
(b) Reports on Form 8-K
The Company filed three Current Reports on Form 8-K during the quarter ended
June 30, 2002 as follows:
1. A Current Report on Form 8-K dated May 23, 2002, reporting under Item 5 the
settlement of litigation between the Company, on one hand, and Michelin North
America, Inc. and Michelin Retread Technologies, Inc., on the other hand.
1. A Current Report on Form 8-K dated June 14, 2002, reporting under Item 5 and
filing as an exhibit a letter by the Company to all of its U.S. franchisees.
3. A Current Report on Form 8-K dated June 19, 2002, reporting under Item 5 the
purchase of Class A Common Stock and Class B Common Stock by the Company from
Lucille A. Carver.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANDAG, INCORPORATED
(Registrant)
Date: August 13, 2002 /s/ Martin G. Carver
--------------------
Martin G. Carver
Chairman and Chief Executive Officer
Date: August 13, 2002 /s/ Warren W. Heidbreder
------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
19
Exhibit Index
Exhibit
Number Exhibit
3(i) Articles of Amendment to Restated Articles of Incorporation, dated
May 14, 2002
10 Stock Purchase Agreement dated June 18, 2002, between Bandag,
Incorporated and Lucille A. Carver
99.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C. ss.1350
99.2 Written Statement of the Vice President, Chief Financial Officer and
Secretary of Bandag, Incorporated Pursuant to 18 U.S.C. ss.1350
20