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 SEPTEMBER 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
-----------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-----------------------------------------------------------------
(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; 9,078,707 shares as of October 31, 2002. Class A
Common Stock, $1 par value, 9,145,270 shares as of October 31, 2002. Class B
Common Stock, $1 par value; 922,285 shares as of October 31, 2002.
BANDAG, INCORPORATED AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -
September 30, 2002 and December 31, 2001 3
Condensed consolidated statements of operations
Three months ended September 30, 2002 and 2001;
Nine months ended September 30, 2002 and 2001 4
Condensed consolidated statements of cash flows
Nine months ended September 30, 2002 and 2001 5
Notes to condensed consolidated financial statements
September 30, 2002 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
Item 4. Controls and Procedures 17
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
EXHIBITS:
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 I. FINANCIAL INFORMATION
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
In thousands, except share data 2002 2001
--------------- ---------------
Assets
Current assets
Cash and cash equivalents $ 167,831 $ 145,625
Investments 13,051 9,394
Accounts receivable, net 149,047 164,708
Inventories
Finished products 68,493 74,667
Material and work in process 13,577 15,128
--------- ---------
82,070 89,795
Other current assets 39,355 40,652
--------- ---------
Total current assets 451,354 450,174
Property, plant, and equipment 495,905 501,609
Less accumulated depreciation and amortization (352,040) (343,601)
--------- ---------
143,865 158,008
Goodwill, net -- 50,964
Intangible assets, net 4,294 315
Other assets 59,632 59,361
--------- ---------
Total assets $ 659,145 $ 718,822
========= =========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 29,637 $ 22,153
Accrued employee compensation and benefits 23,744 25,311
Accrued marketing expenses 24,881 26,396
Other accrued expenses 30,830 30,279
Income taxes payable 20,040 14,947
Short-term notes payable and current portion of other obligations 67,845 67,239
--------- ---------
Total current liabilities 196,977 186,325
Long-term debt and other obligations 43,905 40,921
Deferred income tax liabilities 4,621 2,580
Shareholders' equity
Common stock; $1.00 par value; authorized - 21,500,000 shares; issued and
outstanding - 9,078,694 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 - 9,143,930 shares in 2002;
9,525,514 shares in 2001 9,142 9,525
Class B common stock; $1.00 par value; authorized - 8,500,000 shares;
issued and outstanding - 922,298 shares in 2002;
2,037,370 shares in 2001 922 2,037
Additional paid-in capital 11,740 11,399
Retained earnings 430,864 502,517
Foreign currency translation adjustment (48,105) (45,561)
--------- ---------
Total shareholders' equity 413,642 488,996
--------- ---------
Total liabilities and shareholders' equity $ 659,145 $ 718,822
========= =========
See notes to condensed consolidated financial statements.
3
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended Nine Months Ended
In thousands, except per share data September 30, September 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 245,902 $ 257,559 $ 669,542 $ 703,046
Other income 2,547 5,095 8,499 13,854
--------- --------- --------- ---------
248,449 262,654 678,041 716,900
Cost of products sold 153,547 167,466 419,714 460,677
Engineering, selling, administrative,
and other expenses 61,917 68,181 201,372 204,996
Interest expense 1,829 1,809 5,341 5,616
--------- --------- --------- ---------
217,293 237,456 626,427 671,289
--------- --------- --------- ---------
Earnings before income taxes and cumulative
effect of accounting change 31,156 25,198 51,614 45,611
Income taxes 11,528 10,584 19,097 19,157
--------- --------- --------- ---------
Earnings before cumulative effect of
accounting change 19,628 14,614 32,517 26,454
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- -- (47,260) --
--------- --------- --------- ---------
Net earnings (loss) $ 19,628 $ 14,614 $ (14,743) $ 26,454
========= ========= ========= =========
Basic earnings (loss) per share
Earnings before cumulative effect of
accounting change $ 1.03 $ 0.71 $ 1.63 $ 1.29
Cumulative effect of accounting change -- -- (2.37) --
--------- --------- --------- ---------
Net earnings (loss) $ 1.03 $ 0.71 $ (0.74) $ 1.29
========= ========= ========= =========
Diluted earnings (loss) per share
Earnings before cumulative effect of
accounting change $ 1.02 $ 0.71 $ 1.62 $ 1.28
Cumulative effect of accounting change -- -- (2.35) --
--------- --------- --------- ---------
Net earnings (loss) $ 1.02 $ 0.71 $ (0.73) $ 1.28
========= ========= ========= =========
Comprehensive net earnings (loss) $ 15,292 $ 13,904 $ (17,287) $ 21,180
Cash dividends per share $ 0.315 $ 0.305 $ 0.945 $ 0.915
Depreciation included in expense $ 7,174 $ 8,455 $ 23,034 $ 25,149
Weighted average shares outstanding:
Basic 19,091 20,578 19,972 20,570
Diluted 19,237 20,681 20,141 20,679
See notes to condensed consolidated financial statements.
4
BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
Nine Months Ended
In thousands September 30,
2002 2001
------------ -----------
Operating Activities
Net earnings (loss) $ (14,743) $ 26,454
Cumulative effect of accounting change 50,964 --
Provision for depreciation and amortization 23,756 32,717
Decrease in operating assets and liabilities, net 36,050 8,585
--------- ---------
Net cash provided by operating activities 96,027 67,756
Investing Activities
Additions to property, plant, and equipment (12,618) (15,246)
Purchases of investments (11,030) (9,089)
Maturities of investments 8,673 9,304
Divestitures of businesses 3,379 --
Acquisitions of businesses (1,951) --
--------- ---------
Net cash used in investing activities (13,547) (15,031)
Financing Activities
Principal payments on short-term notes payable and long-term obligations (169) (375)
Cash dividends (19,520) (18,862)
Purchases of Common Stock, Class A Common Stock and Class B Common Stock (40,313) (24)
--------- ---------
Net cash used in financing activities (60,002) (19,261)
Effect of exchange rate changes on cash and cash equivalents (272) 864
--------- ---------
Increase in cash and cash equivalents 22,206 34,328
Cash and cash equivalents at beginning of period 145,625 86,008
--------- ---------
Cash and cash equivalents at end of period $ 167,831 $ 120,336
========= =========
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 nine month periods ended September 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 nine month periods ended
September 30, 2002 and 2001 were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ---------- ----------- -----------
Net earnings before cumulative effect of
accounting change $ 19,628 $ 14,614 $ 32,517 $ 26,454
Other comprehensive income:
Foreign currency translation (4,336) (710) (2,544) (5,274)
-------- -------- -------- --------
Comprehensive net earnings before cumulative
effect of accounting change 15,292 13,904 29,973 21,180
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- -- (47,260) --
-------- -------- -------- --------
Comprehensive net earnings (loss) $ 15,292 $ 13,904 $(17,287) $ 21,180
======== ======== ======== ========
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator:
Net earnings (loss) $ 19,628 $ 14,614 $(14,743) $ 26,454
======== ======== ======== ========
Denominator:
Denominator for basic earnings (loss)
per share - weighted-average shares 19,091 20,578 19,972 20,570
Effect of dilutive securities:
Non-vested restricted stock 51 62 53 44
Stock options 95 41 116 65
-------- -------- -------- --------
Dilutive potential common shares 146 103 169 109
Denominator for diluted earnings (loss) per
share - weighted-average shares and
dilutive potential common shares 19,237 20,681 20,141 20,679
======== ======== ======== ========
Net earnings (loss) per share:
Basic $ 1.03 $ 0.71 $ (0.74) $ 1.29
======== ======== ======== ========
Diluted $ 1.02 $ 0.71 $ (0.73) $ 1.28
======== ======== ======== ========
Note D. Non-Recurring Charges
During the fourth quarter of 2001, the Company recorded a non-recurring charge
totaling $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 September 30,
2002, the Company paid $1,492,000 relating to the termination of an additional
28 employees. As of September 30, 2002, $1,208,000 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.
Note E. Other Income
Other income includes lease income, royalties and other miscellaneous items.
7
BANDAG, INCORPORATED AND SUBSIDIARIES
Note F. 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
$2.35 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 nine months ended
September 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 September 30, 2002 $ - $ - $ -
=============== =============== ================
Proforma information assuming SFAS No. 142 was adopted on January 1, 2001, (in
thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------- ------------- --------------- --------------
Reported net earnings before cumulative
effect of accounting change $ 19,628 $ 14,614 $ 32,517 $ 26,454
Add goodwill amortization - 1,988 - 5,964
------------- ------------- -------------- --------------
Proforma net earnings before cumulative
effect of accounting change $ 19,628 $ 16,602 $ 32,517 $ 32,418
============= ============= ============== ==============
Basic earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 1.03 $ 0.71 $ 1.63 $ 1.29
Add goodwill amortization - 0.10 - 0.29
------------- ------------- -------------- --------------
Proforma net earnings before cumulative
effect of accounting change $ 1.03 $ 0.81 $ 1.63 $ 1.58
============= ============= ============== ==============
Diluted earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 1.02 $ 0.71 $ 1.62 $ 1.28
Add goodwill amortization - 0.09 - 0.29
------------- ------------- -------------- --------------
Proforma net earnings before cumulative
Effect of accounting change $ 1.02 $ 0.80 $ 1.62 $ 1.57
============= ============= ============== ==============
8
BANDAG, INCORPORATED AND SUBSIDIARIES
Note G. 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 $6,538,000 for the quarter ended September 30, 2001 and $19,196,000 for
the year-to-date period ended September 30, 2001, as a reduction of sales and as
a reduction of selling and general administrative and other expenses. These
amounts relate to fleet subsidies and certain marketing programs.
Note H. Accounting for Stock-Based Compensation
During the second quarter of 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 which is a
maximum of five years. Previously, the Company accounted for employee stock
options in accordance with APB 25 in which compensation expense for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
Proforma information assuming the Company had accounted for employee stock
options granted as if SFAS No. 123 was adopted in 1995 follows, (in thousands,
except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- --------------- ---------------- ----------------
Reported net earnings before cumulative
effect of accounting change $ 19,628 $ 14,614 $ 32,517 $ 26,454
Less stock option expense 459 193 827 562
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 19,169 $ 14,421 $ 31,690 $ 25,892
=============== =============== ================ ================
Basic earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 1.03 $ 0.71 $ 1.63 $ 1.29
Less stock option expense 0.02 0.01 0.04 0.03
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 1.01 $ 0.70 $ 1.59 $ 1.26
=============== =============== ================ ================
Diluted earnings per share:
Reported net earnings before cumulative
effect of accounting change $ 1.02 $ 0.71 $ 1.62 $ 1.28
Less stock option expense 0.02 0.01 0.04 0.03
--------------- --------------- ---------------- ----------------
Proforma net earnings before cumulative
effect of accounting change $ 1.00 $ 0.70 $ 1.58 $ 1.25
=============== =============== ================ ================
9
BANDAG, INCORPORATED AND SUBSIDIARIES
Note I. 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 7% and 3% for the
quarter and year-to-date periods ended September 30, 2002, respectively.
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, 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 consists of corporate administrative expenses including corporate legal
expenses.
The Company evaluates performance and allocates resources based primarily on
profit or loss before interest and income taxes. Intersegment sales and
transfers between the Traditional Business and TDS are recorded at a value
consistent with that to unaffiliated customers.
For the three months ended September 30 (in thousands):
Traditional Business TDS
------------------------------------------------------------------- -------
North America Europe International
------------- ------ -------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Sales by Product
Retread products $ 89,311 $ 86,853 $ 15,469 $ 15,528 $ 21,615 $ 24,623 $ - $ -
New tires 57,404 66,124
Retread tires 24,306 25,326
Equipment 5,181 7,030 1,414 1,254 385 771
Other 8,561 6,548 22,256 23,502
----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Net sales to unaffiliated
customers $ 103,053 $ 100,431 $ 16,883 $ 16,782 $ 22,000 $ 25,394 $103,966 $114,952
Transfers between segments 16,665 18,718 283 106 1,846 973 814 692
Operating earnings (loss) 30,082 28,352 360 (40) 3,514 2,588 (959) 785
Interest income - - - - - - - -
Interest expense - - - - - - - -
----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Earnings (loss) before
income taxes &
cumulative effect
of accounting change $ 30,082 $ 28,352 $ 360 $ (40) $ 3,514 $ 2,588 $ (959) $ 785
=========== ========== ========== =========== ========== =========== ========== ==========
Other Consolidated
-------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Sales by Product
Retread products $ - $ - $126,395 $127,004
New tires 57,404 66,124
Retread tires 24,306 25,326
Equipment 6,980 9,055
Other 30,817 30,050
----------- ---------- ----------- ----------
Net sales to unaffiliated
customers $ - $ - $245,902 $257,559
Transfers between segments - - 19,608 20,489
Operating earnings (loss) (978) (6,398) 32,019 25,287
Interest income 966 1,720 966 1,720
Interest expense (1,829) (1,809) (1,829) (1,809)
----------- ---------- ----------- ----------
Earnings (loss) before
income taxes &
cumulative effect
of accounting change $ (1,841) $ (6,487) $ 31,156 $ 25,198
=========== ========== =========== ==========
11
BANDAG, INCORPORATED AND SUBSIDIARIES
Note J. Operating Segment Information (continued)
For the nine months ended September 30 (in thousands):
Traditional Business TDS
------------------------------------------------------------------- -------
North America Europe International
------------- ------ -------------
2002 2001 2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ---- ---- ----
Sales by Product
Retread products $233,141 $230,654 $ 41,265 $ 46,588 $ 67,353 $ 76,275 $ - $ -
New tires 156,737 170,098
Retread tires 67,444 68,959
Equipment 16,590 22,968 2,986 3,632 1,320 1,448
Other 23,200 19,418 59,506 63,006
----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Net sales to unaffiliated
customers $272,931 $273,040 $ 44,251 $ 50,220 $ 68,673 $ 77,723 $283,687 $302,063
Transfers between segments 46,423 52,329 509 375 3,828 3,197 1,911 1,807
Operating earnings (loss) 66,016 61,931 549 1,252 9,676 8,169 (8,369) (5,386)
Interest income - - - - - - - -
Interest expense - - - - - - - -
----------- ---------- ---------- ----------- ---------- ----------- ---------- ----------
Earnings (loss) before
income taxes &
cumulative effect
of accounting change $ 66,016 $ 61,931 $ 549 $ 1,252 $ 9,676 $ 8,169 $ (8,369) $ (5,386)
=========== ========== ========== =========== ========== =========== ========== ==========
Other Consolidated
-------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Sales by Product
Retread products $ - $ - $341,759 $353,517
New tires 156,737 170,098
Retread tires 67,444 68,959
Equipment 20,896 28,048
Other 82,706 82,424
----------- ---------- ----------- ----------
Net sales to unaffiliated
customers $ - $ - $ 669,542 $ 703,046
Transfers between segments - - 52,671 57,708
Operating earnings (loss) (14,600) (20,122) 53,272 45,844
Interest income 3,683 5,383 3,683 5,383
Interest expense (5,341) (5,616) (5,341) (5,616)
----------- ---------- ----------- ----------
Earnings (loss) before
income taxes &
cumulative effect
of accounting change $ (16,258) $ (20,355) $ 51,614 $ 45,611
=========== ========== =========== ==========
12
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
$2.35 per diluted share, to recognize impairment of goodwill, substantially all
of which related to TDS. Pursuant to SFAS No. 142 the $47,260,000 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 H of the condensed consolidated financial statements for
further details.
During the third quarter of 2002, the Company's TDS segment sold two retail and
three commercial retreading locations with no material impact on net sales or
earnings.
Consolidated net sales for the quarter and year-to-date periods ended September
30, 2002 were 5% lower than the prior year periods on a 2% and 5% decline in
Traditional Business net sales, respectively. The decrease in Traditional
Business net sales for the quarter ended September 30, 2002, primarily resulted
from a 23% decline in equipment sales and the lower translated value of the
Company's foreign sales denominated in the Brazilian real. The decrease in
Traditional Business net sales for the year-to-date period ended September 30,
2002, primarily resulted from a 3% decline in retread material unit volume, a
26% decline in equipment sales, and the lower translated value of the Company's
foreign sales denominated in the Brazilian real and South African rand. TDS net
sales decreased 10% and 6% for the quarter and year-to-date periods ended
September 30, 2002 from the prior year periods, respectively. TDS net sales for
the quarter and year-to-date periods ended September 30, 2002 were negatively
impacted by the loss of several significant customers, most notably the
bankruptcy of Consolidated Freightways, and the negative impact of the economy.
The Company's seasonal sales pattern, which is tied to trucking activity, was
similar to the third quarter in previous years in that it is seasonally the
strongest quarter for both sales and earnings. Both segments were similarly
affected.
The consolidated and Traditional Business gross profit margins for the quarter
ended September 30, 2002 increased 2.6 and 3.7 percentage points from the prior
year periods, respectively. The consolidated and Traditional Business gross
profit margins for the year-to-date period ended September 30, 2002 increased
2.8 and 4.7 percentage points from the prior year periods, respectively. The
increase in gross profit margins for the quarter and year-to-date periods
13
BANDAG, INCORPORATED AND SUBSIDIARIES
primarily reflects lower raw material costs and increased production efficiency
in the Traditional Business, particularly in North America. While such costs
have been favorable for the year-to-date period ended September 30, 2002,
supplier pricing indicates raw material costs will increase for the remainder of
the year.
Excluding the effects of goodwill amortization in 2001, consolidated operating
and other expenses decreased 6% for the quarter ended September 30, 2002, but
increased 2% for the year-to-date period ended September 30, 2002 from the prior
year period. Traditional Business operating and other expenses for the quarter
and year-to-date periods ended September 30, 2002 decreased 14% and 1% from the
prior year periods, respectively. The increase in year-to-date consolidated
operating and other expenses primarily resulted from higher costs of doing
business at TDS, lower pension income, and approximately $2,200,000 in expense
related to converting SystemBandag users to the RoadWare(TM) software system,
partially offset by a decrease in litigation expense. 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 September 30, 2002 were
approximately $300,000 and $10,000,000, respectively, as compared to $5,100,000
and $15,000,000 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.
Third quarter 2002 net income was $19,628,000, or $1.02 per diluted share. Third
quarter 2001 net income of $14,614,000, or $0.71 per diluted share, included
$1,988,000 of goodwill amortization, or $0.09 per diluted share. On a comparable
basis, the Company's earnings per diluted share for the third quarter of 2002
increased $0.22 per diluted share compared to the same period in 2001.
Consolidated net loss for the year-to-date period ended September 30, 2002 was
$14,743,000, or $0.73 per diluted share. This loss includes the write-off of
$47,260,000 net of income tax, resulting from the adoption of SFAS No. 142 as of
January 1, 2002. For the year-to-date period ended September 30, 2002, the
Company reported consolidated net income of $32,517,000, or $1.62 per diluted
share, before the write-off of $47,260,000. This was a 23% increase from the
prior year reported net income of $26,454,000, or $1.28 per diluted share.
However, net income for the year-to-date period ended September 30, 2001 would
have been $32,418,000, or $1.57 per diluted share before goodwill amortization
of $5,964,000, or $0.29 per diluted share. Therefore, on a comparable basis the
Company's earnings per diluted share increased 3% for the year-to-date period
ended September 30, 2002.
Repurchases of the Company's outstanding Class A and Class B common stock during
the second quarter of 2002 had a favorable impact on diluted earnings per share
for the quarter and year-to-date periods ended September 30, 2002 of $0.06 and
$0.04, respectively. Refer to Note I of the condensed consolidated financial
statements for further details.
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
14
BANDAG, INCORPORATED AND SUBSIDIARIES
America increased 3% for the quarter ended September 30, 2002 from the prior
year period, primarily due to a 3% increase in retread material unit volume and
the acquisition of Open Road Technologies in the first quarter of 2002,
partially offset by a 26% decrease in equipment sales. Net sales in North
America for the year-to-date-period ended September 30, 2002 remained even with
the prior year period primarily due to the acquisition of Open Road
Technologies, partially offset by a 28% decrease in equipment sales and a 1%
decrease in material unit volume. A decrease in average raw material costs and
increased production efficiency in the United States and Canada primarily
resulted in a 2.6 and 4.9 percentage point increase in North America's gross
margin for the quarter and year-to-date periods ended September 30, 2002 from
the prior year periods, respectively. North American operating and other
expenses for the quarter and year-to-date periods ended September 30, 2002 were
6% and 11% 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
September 30, 2002, higher gross profit was partially offset by higher operating
and other expenses, resulting in a 6% 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
increased 1% for the quarter ended September 30, 2002 from the prior year
period, primarily due to strengthening of the Euro, partially offset by a 10%
decrease in material unit volume. Net sales in Europe for the year-to-date
period ended September 30, 2002 declined 12% from the prior year period,
primarily due to a retread material unit volume decrease of 12%, partially
offset by the strengthening of the Euro. Gross margin increased 0.8 percentage
points for the quarter ended September 30, 2002 compared to the prior year
period. For the year-to-date period ended September 30, 2002 gross margin was
0.6 percentage points lower than the prior year period. Operating and other
expenses increased 1% for the quarter ended September 30, 2002 as compared to
the prior year period. For the year-to-date period ended September 30, 2002
operating and other expenses decreased 10% from the prior year period, primarily
due to net foreign exchange losses in 2001 that did not recur. Earnings before
income taxes increased $400,000 for the quarter ended September 30, 2002 as
compared to the prior year period. Principally as a result of lower sales and
gross margin, earnings before income taxes for the year-to-date period ended
September 30, 2002 decreased $703,000 from the prior year period.
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, 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
September 30, 2002 declined 13% and 12% from the prior year periods,
respectively, as a result of a 3% and 5% 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 September 30, 2002 increased 3.5 and 3.9
15
BANDAG, INCORPORATED AND SUBSIDIARIES
percentage points from the prior year periods, respectively, due mainly to lower
raw material costs. Operating and other expenses for the quarter and
year-to-date periods ended September 30, 2002 decreased 24% and 12% from the
prior year periods, respectively, primarily due to net foreign exchange gains
and 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
September 30, 2002 increased 36% and 18% from the prior year periods,
respectively, primarily due to the improvement in gross margin and the reduction
in operating and other expenses.
TIRE DISTRIBUTION SYSTEMS, INC.
TDS net sales for the quarter and year-to-date periods ended September 30, 2002
decreased 10% and 6% from the prior year periods, respectively. The decrease in
net sales primarily resulted from the loss of several significant customers,
most notably the bankruptcy of Consolidated Freightways, and the negative impact
of the economy. Gross margin for the quarter and year-to-date periods ended
September 30, 2002 increased 0.9 and 0.3 percentage points from the prior year
periods, respectively. TDS's operating expenses as a percentage of sales for the
quarter and year-to-date periods ended September 30, 2002 were 3.9 and 3.2
percentage points higher than the prior year periods, respectively, primarily
due to higher health insurance, workers' compensation costs, and legal expenses.
Primarily as a result of the lower sales volume and higher operating expenses,
TDS recorded losses before interest and taxes of $959,000 and $8,369,000 for the
quarter and year-to-date periods ended September 30, 2002, respectively. This
compares to income before interest and taxes, excluding goodwill amortization,
of $2,853,000 and $818,000 in the prior year periods, respectively.
Financial Condition:
Liquidity
At September 30, 2002, the Company had cash and cash equivalents of
$167,831,000, 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
September 30, 2002 as compared to 2.4 to 1 at December 31, 2001. The Company has
approximately $67,000,000 of debt payable in December 2002. At September 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 nine months ended September
30, 2002 was $28,271,000 more than the amount for the same period last year,
primarily due to decreases in accounts receivables and inventories.
Investing Activities
The Company spent $12,618,000 on capital expenditures through September 30,
2002, compared to $15,246,000 spent for the same period last year. The Company
typically funds its capital expenditures from operating cash flows. During the
first quarter of 2002, the Company acquired
16
BANDAG, INCORPORATED AND SUBSIDIARIES
the assets of Open Road Technologies, Inc., the supplier of RoadWare(TM) retread
shop management software, for $1,951,000 net of cash acquired. During the
quarter ended September 30, 2002, the Company sold five TDS stores for
$3,379,000.
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 for balance sheet purposes. The Company's
purchases of investments exceeded maturities by $2,357,000 during the nine
months, resulting in total investments of $13,051,000 as of September 30, 2002.
Financing Activities
Cash dividends totaled $6,512,000 and $19,520,000 for the quarter and
year-to-date periods, respectively, compared to $6,295,000 and $18,862,000 for
the same periods last year.
The Company purchased 4,063 shares of its outstanding Common and Class A Common
stock, at prevailing market prices, for $129,000 during the nine months ended
September 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 $40,184,000. Cash dividends and stock purchases were
funded from operating cash flows.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
See the Company's most recent Annual Report filed on Form 10-K (Item 7A). There
has been no material change in this information.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. During the prior
ninety-day period, an evaluation was performed under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
the Company's internal controls subsequent to the date of their evaluation.
17
PART II. OTHER INFORMATION
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
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
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
quarter ended September 30, 2002.
18
BANDAG, INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANDAG, INCORPORATED
(Registrant)
Date: November 13, 2002 /s/ Martin G. Carver
----------------------------------
Martin G. Carver
Chairman and Chief Executive Officer
Date: November 13, 2002 /s/ Warren W. Heidbreder
----------------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
19
BANDAG, INCORPORATED AND SUBSIDIARIES
CERTIFICATIONS
I, Martin G. Carver, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bandag, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ Martin G. Carver
--------------------------------
Martin G. Carver
Chairman and Chief Executive
Officer
20
BANDAG, INCORPORATED AND SUBSIDIARIES
CERTIFICATIONS
I, Warren W. Heidbreder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Bandag, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002 By: /s/ Warren W. Heidbreder
-----------------------------------
Warren W. Heidbreder
Vice President, Chief Financial
Officer
21
Exhibit Index
Exhibit
Number 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
99.2 Written Statement of the Vice President, Chief Financial Officer and
Secretary of Bandag, Incorporated Pursuant to 18 U.S.C. ss.1350
22