Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). 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; 9,099,775 shares as of October 31, 2003. Class A
Common Stock, $1 par value, 9,233,683 shares as of October 31, 2003. Class B
Common Stock, $1 par value; 919,288 shares as of October 31, 2003.
BANDAG, INCORPORATED AND SUBSIDIARIES
INDEX
Part I: FINANCIAL INFORMATION Page No.
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -
September 30, 2003 and December 31, 2002 3
Condensed consolidated statements of operations
Three months ended September 30, 2003 and 2002;
Nine months ended September 30, 2003 and 2002 4
Condensed consolidated statements of cash flows
Nine months ended September 30, 2003 and 2002 5
Notes to condensed consolidated financial
statements September 30, 2003 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 20
Item 4. Controls and Procedures 20
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBITS:
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 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 32.2 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 2003 2002
------------- -------------
Assets
Current assets
Cash and cash equivalents $ 179,339 $ 129,412
Investments 9,416 14,261
Accounts receivable, net 156,375 154,484
Inventories
Finished products 49,292 46,512
Material and work in process 15,063 12,935
--------- ---------
64,355 59,447
Other current assets 56,122 76,453
--------- ---------
Total current assets 465,607 434,057
Property, plant, and equipment 460,693 463,056
Less accumulated depreciation and amortization (351,147) (346,358)
--------- ---------
109,546 116,698
Intangible assets, net 3,171 3,891
Other assets 66,399 63,181
--------- ---------
Total assets $ 644,723 $ 617,827
========= =========
Liabilities and shareholders' equity
Current liabilities
Accounts payable $ 24,507 $ 26,813
Accrued employee compensation and benefits 32,397 31,834
Accrued marketing expenses 28,289 29,045
Other accrued expenses 32,444 32,580
Income taxes payable 24,831 19,883
Short-term notes payable and current portion
of other obligations 7,434 7,706
--------- ---------
Total current liabilities 149,902 147,861
Long-term debt and other obligations 45,335 45,373
Shareholders' equity
Common stock; $1.00 par value; authorized -
21,500,000 shares; issued and outstanding -
9,099,375 shares in 2003; 9,078,798 shares
in 2002 9,099 9,079
Class A common stock; $1.00 par value;
authorized - 50,000,000 shares; issued and
outstanding - 9,231,743 shares in 2003;
9,150,967 shares in 2002 9,232 9,151
Class B common stock; $1.00 par value;
authorized - 8,500,000 shares; issued and
outstanding - 919,688 shares in 2003;
921,985 shares in 2002 920 922
Additional paid-in capital 16,859 13,034
Retained earnings 454,692 442,251
Foreign currency translation adjustment (41,316) (49,844)
--------- ---------
Total shareholders' equity 449,486 424,593
--------- ---------
Total liabilities and shareholders'
equity $ 644,723 $ 617,827
========= =========
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,
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales $ 211,390 $ 245,902 $ 590,746 $ 669,542
Other income 2,922 2,547 8,665 8,499
--------- --------- --------- ---------
214,312 248,449 599,411 678,041
Cost of products sold 129,791 153,547 374,657 419,714
Engineering, selling, administrative, and other expenses 52,993 61,917 174,829 201,372
Interest expense 527 1,829 1,737 5,341
--------- --------- --------- ---------
183,311 217,293 551,223 626,427
--------- --------- --------- ---------
Earnings before income taxes and cumulative
effect of accounting change 31,001 31,156 48,188 51,614
Income taxes 11,006 11,528 17,107 19,097
--------- --------- --------- ---------
Earnings before cumulative effect of accounting change 19,995 19,628 31,081 32,517
Cumulative effect of accounting change
(net of income tax benefit of $3,704) -- -- -- (47,260)
--------- --------- --------- ---------
Net earnings (loss) $ 19,995 $ 19,628 $ 31,081 $ (14,743)
========= ========= ========= =========
Basic earnings (loss) per share
Earnings before cumulative effect of accounting change $ 1.04 $ 1.03 $ 1.62 $ 1.63
Cumulative effect of accounting change -- -- (2.37)
--------- --------- --------- ---------
Net earnings (loss) $ 1.04 $ 1.03 $ 1.62 $ (0.74)
========= ========= ========= =========
Diluted earnings (loss) per share
Earnings before cumulative effect of accounting change $ 1.03 $ 1.02 $ 1.61 $ 1.62
Cumulative effect of accounting change -- -- (2.35)
--------- --------- --------- ---------
Net earnings (loss) $ 1.03 $ 1.02 $ 1.61 $ (0.73)
========= ========= ========= =========
Comprehensive net earnings (loss) $ 16,976 $ 15,292 $ 39,609 $ (17,287)
Cash dividends per share $ 0.320 $ 0.315 $ 0.960 $ 0.945
Depreciation included in expense $ 6,049 $ 7,174 $ 19,581 $ 23,034
Weighted average shares outstanding:
Basic 19,175 19,091 19,150 19,972
Diluted 19,378 19,237 19,342 20,141
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,
2003 2002
--------- ---------
Operating Activities
Net earnings (loss) $ 31,081 $ (14,743)
Cumulative effect of accounting change -- 50,964
Provision for depreciation and amortization 20,295 23,756
Decrease in operating assets and liabilities, net 858 36,050
--------- ---------
Net cash provided by operating activities 52,234 96,027
Investing Activities
Additions to property, plant, and equipment (11,319) (12,618)
Purchases of investments (14,200) (11,030)
Maturities of investments 19,045 8,673
Divestitures of businesses 21,449 3,379
Acquisitions of businesses -- (1,951)
--------- ---------
Net cash provided by (used in) investing
activities 14,975 (13,547)
Financing Activities
Principal payments on short-term notes payable and
long-term obligations (36) (169)
Cash dividends (18,435) (19,520)
Purchases of Common Stock, Class A Common Stock
and Class B Common Stock (184) (40,313)
--------- ---------
Net cash used in financing activities (18,655) (60,002)
Effect of exchange rate changes on cash and cash
equivalents 1,373 (272)
--------- ---------
Increase in cash and cash equivalents 49,927 22,206
Cash and cash equivalents at beginning of period 129,412 145,625
--------- ---------
Cash and cash equivalents at end of period $ 179,339 $ 167,831
========= =========
See notes to condensed consolidated financial statements.
5
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 nine month period ended September 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. 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, 2002.
Note B. Comprehensive Net Earnings (Loss)
Comprehensive net earnings (loss) for the three and nine month periods ended
September 30, 2003 and 2002 were as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Earnings before cumulative effect
of accounting change $ 19,995 $ 19,628 $ 31,081 $ 32,517
Other comprehensive income:
Foreign currency translation (3,019) (4,336) 8,528 (2,544)
-------- -------- -------- --------
Comprehensive earnings before
cumulative effect of accounting
change 16,976 15,292 39,609 29,973
Cumulative effect of accounting
change (net of income tax
benefit of $3,704) -- -- -- (47,260)
-------- -------- -------- --------
Comprehensive net earnings (loss) $ 16,976 $ 15,292 $ 39,609 $(17,287)
======== ======== ======== ========
6
Note C. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Numerator:
Earnings before cumulative effect
of accounting change $ 19,995 $ 19,628 $ 31,081 $ 32,517
======== ======== ======== ========
Denominator:
Weighted-average shares - Basic 19,175 19,091 19,150 19,972
Effect of dilutive:
Restricted stock 73 51 66 53
Stock options 130 95 126 116
-------- -------- -------- --------
203 146 192 169
Weighted-average shares - Diluted 19,378 19,237 19,342 20,141
======== ======== ======== ========
Earnings per share before cumulative
effect of accounting change
Basic $ 1.04 $ 1.03 $ 1.62 $ 1.63
======== ======== ======== ========
Diluted $ 1.03 $ 1.02 $ 1.61 $ 1.62
======== ======== ======== ========
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. The Company paid $1,321,000 and $1,542,000 in 2002
and 2001, respectively, related to the termination of employees. In the
year-to-date period ended September 30, 2003, the Company paid $81,000 relating
to the termination of employees. As of September 30, 2003, $1,356,000 of the
charges related to the closure of the North American tread rubber manufacturing
facility remained accrued. The Company estimates that substantially all of the
remaining payments will be made by the end of 2004.
Note E. Restructuring Charges
In 2002, the Company recorded restructuring charges totaling $3,500,000
($2,450,000 net of tax benefits) for termination benefits covering 39 employees.
In 2002, the Company paid approximately $650,000 for benefit payments. In the
year-to-date period ended September 30, 2003, the Company paid $1,648,000
relating to the termination of employees. As of September 30, 2003, $1,479,000
of the charges related to the restructuring remained accrued, which reflects a
$277,000 increase in the original provision due to exchange rate changes.
Substantially all of the remaining payments, which are primarily severance pay,
will be made by the end of 2006.
7
Note F. Accounting for Stock-Based Compensation
During the second quarter of 2002, the Company adopted the fair value
recognition and measurement provision of SFAS No. 123, "Accounting for
Stock-Based Compensation," as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosures," effective as of the
beginning of 2002. Under the modified prospective method of adoption selected by
the Company, compensation cost recognized in 2002 and 2003 is the same as that
which would have been recognized had the recognition provisions of Statement 123
been applied from its original effective date in 1994.
Note G. Divestitures
During 2003, the Company's Tire Distribution Systems, Inc. (TDS) segment sold 41
locations with a net carrying value of $30,963,000 for cash of $21,449,000 and
assumed liabilities of $8,730,000. The assets of these locations consisted
primarily of inventory and property, plant and equipment. The divestitures
resulted in a loss before income taxes and cumulative effect of accounting
change of $784,000 for the year-to-date period ended September 30, 2003,
including a $700,000 impairment charge recorded in the second quarter, resulting
from a valuation from an independent appraiser, in operating and other expenses
for real estate that was sold in the third quarter of 2003. In the quarter ended
September 30, 2003, the Company recorded a gain before income taxes and
cumulative effect of accounting change of $521,000 as a result of the
divestitures. During 2003, TDS also closed three locations.
In conjunction with the divestiture of certain TDS locations in the second and
third quarters of 2003, Bandag guaranteed a portion of third-party loans to a
dealer. Bandag's exposure under these guarantees is $2,965,000. The guarantees
are secured by assets of the dealer. The term of the guarantees is three years.
The fair value of the guarantees, which was estimated at $600,000, is included
in long-term debt and other obligations in the Company's Condensed Consolidated
Balance Sheet at September 30, 2003 with an offsetting charge included in
earnings before income taxes and cumulative effect of accounting change of
$200,000 recorded in the second quarter of 2003 and $400,000 recorded in the
third quarter of 2003.
The divested and closed locations had net sales and earnings (loss) before
income taxes and cumulative effect of accounting change as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 1,714 $ 36,767 $40,981 $ 98,961
Earnings (loss) before income
taxes and cumulative effect
of accounting change $ (142) $ 861 $(3,802) $ 843
8
Note H. Assets Held for Sale
TDS has three locations in Tennessee held for sale. These locations had net
sales and earnings (loss) before income taxes and cumulative effect of
accounting change as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 1,978 $ 2,282 $ 5,332 $ 6,889
Earnings (loss) before income
taxes and cumulative effect
of accounting change $ 60 $ (190) $ (133) $ (585)
The assets of these locations, consisting primarily of inventory and property,
plant and equipment, had net carrying values of approximately $5,179,000 as of
September 30, 2003 and are classified with other current assets in the Company's
Condensed Consolidated Balance Sheets. As of December 31, 2002 the Company had
approximately $28,245,000 of assets classified as held for sale.
Note I. Recent Accounting Developments
In January 2003, the FASB issued Interpretation Number (FIN) No. 46,
"Consolidation of Variable Interest Entities." FIN No. 46 addresses accounting
for variable interest entities (VIE), defined as a separate legal structure that
either 1) has equity investors who lack the essential characteristics of
controlling financial interest, or 2) has equity investors that do not provide
sufficient financial resources for the entity to support its own activities. FIN
No. 46 requires that a VIE be consolidated by a company if that company is
entitled to a majority of the VIE's residual returns or subject to a majority of
its expected losses, and also requires disclosures concerning VIEs that a
company is not required to consolidate but in which it has a significant
variable interest. The Company is in the process of analyzing FIN No. 46 to
determine its applicability, if any, to certain dealer loans and to the
Company's franchise agreements. The Company had recorded approximately
$6,200,000 of dealer loans as of September 30, 2003.
Note J. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
9
Note K. Operating Segment Information
The Company has two reportable operating segments: Traditional Business and TDS.
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, and
royalties from 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 primarily in the western region of 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. Intrasegment sales between
Traditional Business and TDS are recorded at a value consistent with that to
unaffiliated customers.
10
BANDAG, INCORPORATED AND SUBSIDIARIES
For the three months ended September 30 (in thousands):
Traditional Business
-------------------------------------------------------------------------
North America Europe International
2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
Sales by Product
Retread products $ 97,160 $ 89,487 $ 17,132 $ 15,472 $ 23,274 $ 21,615
New tires -- -- -- -- -- --
Retread tires -- -- -- -- -- --
Equipment 4,537 5,005 713 1,411 180 385
Other 8,289 8,561 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 109,986 $ 103,053 $ 17,845 $ 16,883 $ 23,454 $ 22,000
========= ========= ========= ========= ========= =========
Sales between segments $ 12,446 $ 16,665 $ 70 $ 283 $ 2,659 $ 1,846
Operating earnings (loss) $ 27,000 $ 30,082 $ (147) $ 360 $ 3,714 $ 3,514
Interest income -- -- -- -- -- --
Interest expense -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ 27,000 $ 30,082 $ (147) $ 360 $ 3,714 $ 3,514
========= ========= ========= ========= ========= =========
TDS Other Consolidated
-------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
Sales by Product
Retread products $ -- $ -- $ -- $ -- $ 137,566 $ 126,574
New tires 32,313 57,405 -- -- 32,313 57,405
Retread tires 13,956 24,306 -- -- 13,956 24,306
Equipment -- -- -- -- 5,430 6,801
Other 13,836 22,255 -- -- 22,125 30,816
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 60,105 $ 103,966 $ -- $ -- $ 211,390 $ 245,902
========= ========= ========= ========= ========= =========
Sales between segments $ 347 $ 814 $ -- $ -- $ 15,522 $ 19,608
Operating earnings (loss) $ 1,867 $ (959) $ (2,204) $ (978) $ 30,230 $ 32,019
Interest income -- -- 1,298 966 1,298 966
Interest expense -- -- (527) (1,829) (527) (1,829)
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ 1,867 $ (959) $ (1,433) $ (1,841) $ 31,001 $ 31,156
========= ========= ========= ========= ========= =========
11
BANDAG, INCORPORATED AND SUBSIDIARIES
For the nine months ended September 30 (in thousands):
Traditional Business
--------------------------------------------------------------------------
North America Europe International
2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
Sales by Product
Retread products $ 237,346 $ 234,199 $ 51,439 $ 41,268 $ 66,166 $ 67,353
New tires -- -- -- -- -- --
Retread tires -- -- -- -- -- --
Equipment 15,078 15,532 3,222 2,983 914 1,320
Other 26,135 23,200 -- -- -- --
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 278,559 $ 272,931 $ 54,661 $ 44,251 $ 67,080 $ 68,673
========= ========= ========= ========= ========= =========
Sales between segments $ 34,374 $ 46,423 $ 446 $ 509 $ 6,209 $ 3,828
Operating earnings (loss) $ 47,295 $ 66,016 $ 564 $ 549 $ 9,814 $ 9,676
Interest income -- -- -- -- -- --
Interest expense -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ 47,295 $ 66,016 $ 564 $ 549 $ 9,814 $ 9,676
========= ========= ========= ========= ========= =========
TDS Other Consolidated
--------------------------------------------------------------------------
2003 2002 2003 2002 2003 2002
--------- --------- --------- --------- --------- ---------
Sales by Product
Retread products $ -- $ -- $ -- $ -- $ 354,951 $ 342,820
New tires 102,079 156,738 -- -- 102,079 156,738
Retread tires 45,954 67,444 -- -- 45,954 67,444
Equipment -- -- -- -- 19,214 19,835
Other 42,413 59,505 -- -- 68,548 82,705
--------- --------- --------- --------- --------- ---------
Net sales to unaffiliated customers $ 190,446 $ 283,687 $ -- $ -- $ 590,746 $ 669,542
========= ========= ========= ========= ========= =========
Sales between segments $ 1,537 $ 1,911 $ -- $ -- $ 42,566 $ 52,671
Operating earnings (loss) $ (4,615) $ (8,369) $ (6,639) $ (14,600) $ 46,419 $ 53,272
Interest income -- -- 3,506 3,683 3,506 3,683
Interest expense -- -- (1,737) (5,341) (1,737) (5,341)
--------- --------- --------- --------- --------- ---------
Earnings (loss) before income taxes &
cumulative effect of accounting change $ (4,615) $ (8,369) $ (4,870) $ (16,258) $ 48,188 $ 51,614
========= ========= ========= ========= ========= =========
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).
On July 8, 2003, Yellow Corporation and Roadway Corporation, two major national
trucking fleets, announced they have entered into an agreement under which
Yellow Corporation will acquire Roadway Corporation. The Company currently has
an outsourcing agreement with Roadway Corporation that expires in March 2004 and
is currently in negotiations with Roadway Corporation to extend the contract.
The Company is unable to predict what effect the proposed acquisition, if
consummated, will have on its contract with Roadway Corporation. If, after
acquiring Roadway Corporation, Yellow Corporation were to allow the contract to
expire, the effect on the Company could be materially adverse to net sales and
net income. The Company currently has tire and wheel assets of approximately
$30,200,000 recorded in connection with this contract. Upon termination of the
agreement, the tire and wheel assets will either be repurchased by Roadway
Corporation or a third party at a contractually agreed upon price, which the
Company believes will approximate their carrying value, or will remain the
property of the Company.
Sale of TDS Locations
---------------------
During 2003, TDS sold 41 locations with a net carrying value of $30,963,000 for
cash of $21,449,000 and assumed liabilities of $8,730,000. The assets of these
locations consisted primarily of inventory and property, plant and equipment.
The divestitures resulted in a loss before income taxes and cumulative effect of
accounting change of $784,000 for the year-to-date period ended September 30,
2003, including a $700,000 impairment charge, resulting from a valuation from an
independent appraiser, in operating and other expenses for real estate that was
sold in the third quarter of 2003. In the quarter ended September 30, 2003, the
Company recorded a gain before income taxes and cumulative effect of accounting
change of $521,000 as a result of the divestitures. During 2003, TDS also closed
three locations.
In conjunction with the divestiture of certain TDS locations in the second and
third quarters of 2003, Bandag guaranteed a portion of third-party loans to a
dealer. Bandag's exposure under these guarantees is $2,965,000. The guarantees
are secured by assets of the dealer. The term of the guarantees is three years.
The fair value of the guarantees, which was estimated at $600,000, is included
in long-term debt and other obligations in the Company's Condensed Consolidated
Balance Sheet at September 30, 2003 with an offsetting charge included in
earnings before income taxes and cumulative effect of accounting change of
$200,000 recorded in the second quarter of 2003 and $400,000 recorded in the
third quarter of 2003.
13
BANDAG, INCORPORATED AND SUBSIDIARIES
The divested and closed locations had net sales and earnings (loss) before
income taxes and cumulative effect of accounting change as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 1,714 $36,767 $40,981 $98,961
Earnings (loss) before income
taxes and cumulative effect of
accounting change $ (142) $ 861 $(3,802) $ 843
Assets Held for Sale
--------------------
TDS has three locations in Tennessee held for sale. These locations had net
sales and earnings (loss) before income taxes and cumulative effect of
accounting change as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
-------- -------- -------- --------
Net sales $ 1,978 $ 2,282 $ 5,332 $ 6,889
Earnings (loss) before income
taxes and cumulative effect of
accounting change $ 60 $ (190) $ (133) $ (585)
The assets of these locations, consisting primarily of inventory and property,
plant and equipment, had net carrying values of approximately $5,179,000 as of
September 30, 2003 and are classified with other current assets in the Company's
Condensed Balance Sheets. As of December 31, 2002 the Company had approximately
$28,245,000 of assets classified as held for sale.
Net Sales
---------
Consolidated net sales for the quarter and year-to-date periods ended September
30, 2003 decreased $34,512,000 and $78,796,000, or 14% and 12%, from the prior
year periods, respectively. The decrease in consolidated net sales is
substantially due to a $43,861,000 and $93,241,000, or 42% and 33%, decrease in
TDS net sales for the quarter and year-to-date periods ended September 30, 2003,
respectively, primarily as a result of the divestitures and closures of 71
locations in 2002 and 2003. Net sales were positively impacted by $4,785,000 and
$4,964,000 for the quarter and year-to-date periods ended September 30, 2003,
due to the effect of translating foreign currency denominated results to U.S.
dollars. The Company's seasonal sales pattern is tied to the overall performance
of the economy and to the level of trucking activity.
Gross Profit Margins
--------------------
Consolidated gross profit margin for the quarter ended September 30, 2003,
increased 1.0 percentage points from the prior year period. Traditional Business
gross profit margin for the
14
BANDAG, INCORPORATED AND SUBSIDIARIES
quarter ended September 30, 2003, decreased by 1.6 percentage points from the
prior year period. Consolidated and Traditional Business gross profit margins
for the year-to-date period ended September 30, 2003 decreased 0.7 and 3.8
percentage points from the prior year period, respectively. The decrease in
Traditional Business gross profit margin is primarily the result of margin
erosion in North America. The increase in consolidated gross profit margin for
the quarter is primarily due to lower TDS sales which carry lower gross margins
than Traditional Business. Gross profit margin for TDS increased 1.5 and 1.7
percentage points for the quarter and year-to-date periods ended September 30,
2003, respectively, as compared to the prior year periods. The improvement in
TDS gross profit margin was positively impacted by increased sales of higher
margin product coupled with a decrease in cost of sales as a result of inventory
adjustments recorded in the prior year.
Operating and Other Expenses
----------------------------
Consolidated operating and other expenses decreased $8,924,000 and $26,543,000,
or 14% and 13%, for the quarter and year-to-date periods ended September 30,
2003 from the prior year periods, respectively. The decrease in consolidated
operating and other expenses for the year-to-date period ended September 30,
2003 primarily resulted from the TDS divestitures and closures coupled with
approximately $10,700,000 of litigation expenses and $2,200,000 of expenses
related to converting SystemBandag users to the Roadware(TM) software system, in
the year-to-date period ended September 30, 2002, which did not occur during the
similar period of 2003. Consolidated operating and other expenses for the
year-to-date period ended September 30, 2003, were negatively impacted by
$84,000 of net losses on TDS divestitures and a $700,000 impairment charge for
real estate held for sale.
Net Earnings
------------
Consolidated earnings before income taxes and cumulative effect of accounting
change decreased $155,000 and $3,426,000 for the quarter and year-to-date
periods ended September 30, 2003 as compared to the prior year periods,
respectively. Consolidated net earnings were $19,995,000 and $31,081,000, or
$1.03 and $1.61 per diluted share, for the quarter and year-to-date periods
ended September 30, 2003, respectively, compared to consolidated net earnings of
$19,628,000 and a loss of $14,743,000, or $1.02 and a loss of $0.73 per diluted
share, for the quarter and year-to-date periods ended September 30, 2002,
respectively. A cumulative effect of accounting change of $47,260,000 net of
income tax, or $2.35 per diluted share, was recorded in the first quarter of
2002 in accordance with SFAS 142, "Goodwill and Other Intangible Assets."
Due to the settlement of several tax audits, the Company is reviewing its
deferred tax accounts and will make any necessary adjustments in the fourth
quarter of 2003. The Company believes this will not have a negative impact on
earnings.
TRADITIONAL BUSINESS
- --------------------
North America
-------------
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. North America sells to independent dealers as well
as to TDS and other subsidiaries. Sales to TDS and other
15
BANDAG, INCORPORATED AND SUBSIDIARIES
subsidiaries are eliminated in consolidation. Accordingly, as TDS locations are
divested and become unaffiliated Bandag customers, sales to independent dealers
will benefit. The table below depicts the breakout of North America's retread
product sales between TDS and independent dealers.
Three Months Ended Nine Months Ended
(in thousands) September 30, September 30,
Increase Increase
Retread Product Sales 2003 2002 (Decrease) 2003 2002 (Decrease)
-------- -------- ---------- -------- -------- ----------
Sales to Independent Dealers $ 97,160 $ 89,487 8.6% $237,346 $234,199 1.3%
Sales to TDS 6,802 13,882 -51.0% 24,955 38,649 -35.4%
-------- -------- -------- --------
Total Retread Product Sales $109,064 $105,001 0.6% $262,301 $272,848 -3.9%
======== ======== ======== ========
The increase in retread product sales to independent dealers is due to several
factors including (a) increased sales to independent dealers that purchased TDS
locations, (b) the effect of translating Canadian dollar foreign currency
denominated sales to U.S. dollars of $1,390,000 and $2,747,000 for the quarter
and year-to-date periods ended September 30, 2003, respectively, and (c) the
impact of a January 1, 2003 price increase. These factors were offset by an
overall decrease in volume. The decrease in retread product sales to TDS is
primarily due to the divestitures and closures of TDS locations.
Primarily as a result of increased sales of RoadWare(TM) software, North America
other net sales for the year-to-date period ended September 30, 2003 increased
$2,935,000 compared to the prior year period.
An increase in fleet subsidy, coupled with higher manufacturing expenses, higher
raw material costs and lower volume primarily resulted in a five and seven
percentage point decrease in North America's gross margin for the quarter and
year-to-date periods ended September 30, 2003 from the prior year periods,
respectively.
North America's operating and other expenses for the quarter and year-to-date
periods ended September 30, 2003 increased 7% and 3% from the prior year
periods, respectively. Operating and other expenses were negatively impacted by
$1,200,000 and $3,600,000 of increased pension expense for the quarter and
year-to-date periods ended September 30, 2003, respectively. Operating and other
expenses for the year-to-date period ended September 30, 2003 was positively
impacted by the absence of approximately $2,200,000 of expense incurred during
the quarter ended March 31, 2002 related to converting SystemBandag users to the
RoadWare(TM) software system.
Lower gross profit margin and increased operating and other expenses primarily
resulted in a decrease for North America of $3,082,000 and $18,721,000 in
earnings before income taxes and cumulative effect of accounting change for the
quarter and year-to-date periods ended September 30, 2003, respectively, as
compared to the prior year periods.
16
BANDAG, INCORPORATED AND SUBSIDIARIES
Europe
------
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 $962,000 and $10,410,000, or 6% and 24%, for the quarter and
year-to-date periods ended September 30, 2003 from the prior year periods,
respectively. Retread material volume decreased 2% for the quarter ended
September 30, 2003 and increased 4% for the year-to-date period ended September
30, 2003, from the prior year periods. Net sales in Europe in the quarter and
year-to-date periods ended September 30, 2003 were positively impacted by
$2,435,000 and $9,013,000, respectively, due to the effect of translating
foreign currency denominated results to U.S. dollars. Gross margin decreased 2.8
percentage points and remained even for the quarter and year-to-date periods
ended September 30, 2003 compared to the prior year periods, respectively. The
decrease in gross margin for the quarter ended September 30, 2003 is primarily
due to higher manufacturing costs.
Operating and other expenses increased $152,000 and $3,326,000, or 3% and 22%,
for the quarter and year-to-date periods ended September 30, 2003 as compared to
the prior year periods, respectively. Operating expenses for the quarter ended
September 30, 2003 were positively impacted by $857,000 of net foreign exchange
gains primarily resulting from revaluing funds held in U.S. Dollars outside the
United States into local currencies which was offset by higher expenses related
to securing new fleet contracts. Operating expenses for the year-to-date period
ended September 30, 2003 were negatively impacted by $978,000 of net foreign
exchange losses coupled with higher expenses related to securing new fleet
contracts.
Principally as a result of higher operating and other expenses, Europe incurred
a loss before income taxes and cumulative effect of accounting change of
$147,000 for the quarter ended September 30, 2003, as compared to earnings
before income taxes and cumulative effect of accounting change of $360,000 for
the prior year period. Principally as a result of higher sales, partially offset
by higher operating and other expenses, Europe's earnings before income taxes
and cumulative effect of accounting change was $564,000 for the year-to-date
period ended September 30, 2003, as compared to $549,000 for the prior year
period.
International
-------------
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, and royalties from a licensee in Australia, are
combined under one management group referred to internally as International. Net
sales in International for the quarter ended September 30, 2003 increased
$1,454,000, or 7% from the prior year period. Net sales for the year-to-date
period ended September 30, 2003 decreased $1,593,000, or 2% from the prior year
period. Retread material unit volume decreased 14% and 11% for the quarter and
year-to-date periods ended September 30, 2003 from the prior year periods,
respectively. The increase in net sales for the quarter ended September 30, 2003
is primarily due to the effect of translating foreign currency denominated
results to U.S. dollars of $960,000, partially offset by lower retread material
unit volume. The decrease in net sales for the year-to-date period ended
September 30, 2003 is primarily a result of the decrease in retread material
unit volume and a reduction in sales of
17
BANDAG, INCORPORATED AND SUBSIDIARIES
$6,796,000 due to the effect of translating foreign currency denominated results
to U.S. dollars, partially offset by price increases.
The gross margin for the quarter and year-to-date periods ended September 30,
2003 decreased 2.4 and 3.7 percentage points from the prior year periods,
respectively, due mainly to higher raw material costs, partially offset by price
increases in Brazil and South Africa. Operating and other expenses for the
year-to-date period ended September 30, 2003 decreased $2,847,000 from the prior
year period, primarily due to management instituting new operating expense
restrictions. Earnings before income taxes and cumulative effect of accounting
change for the quarter and year-to-date periods ended September 30, 2003
increased $200,000 and $138,000 from the prior year period, primarily due to
lower operating and other expenses.
TIRE DISTRIBUTION SYSTEMS, INC.
- -------------------------------
TDS net sales for the quarter and year-to-date periods ended September 30, 2003
decreased $43,861,000 and $93,241,000, or 42% and 33%, from the prior year
periods, respectively, primarily due to the divestitures and closures of 71 TDS
locations throughout 2002 and 2003. These divested and closed locations had
sales of approximately $48,796,000 and $130,627,000 for the quarter and
year-to-date periods ended September 30, 2002, respectively. The locations that
were divested or closed in 2003 contributed $1,714,000 and $40,981,000 to net
sales for the quarter and year-to-date periods ended September 30, 2003,
respectively.
Gross margin for the quarter and year-to-date periods ended September 30, 2003
increased 1.5 and 1.7 percentage points from the prior year periods,
respectively. TDS gross profit margin was positively impacted by increased sales
of higher margin product coupled with a decrease in cost of sales due to
inventory adjustments. Operating and other expenses decreased $12,138,000 and
$21,631,000, or 48% and 30%, for the quarter and year-to-date periods ended
September 30, 2003, respectively, primarily due to the divestitures and
closures, with the reduction for the year-to-date period ended September 30,
2003 being partially offset by the loss on divestitures of $84,000 and the
$700,000 impairment charge on real estate. Operating and other expenses for the
quarter ended September 30, 2003 were positively impacted by $521,000 of gain on
sale of divestitures.
TDS recorded earnings before income taxes and cumulative effect of accounting
change of $1,867,000 for the quarter ended September 30, 2003 and a loss on the
same basis of $4,615,000 for the year-to-date period ended September 30, 2003,
as compared to a loss before income taxes and cumulative effect of accounting
change of $959,000 and $8,369,000 in the prior year periods, respectively.
See "GENERAL - Sale of TDS Locations" hereunder for a discussion of the sale of
TDS locations in 2003.
18
BANDAG, INCORPORATED AND SUBSIDIARIES
Financial Condition:
- --------------------
Liquidity
At September 30, 2003, the Company had cash and cash equivalents of
$179,339,000, as compared to $129,412,000 at December 31, 2002. The Company's
ratio of total current assets to total current liabilities was 3.1 to 1 at
September 30, 2003 with current assets exceeding current liabilities by
$315,705,000. At September 30, 2003, the Company had approximately $5,179,000 of
assets held for sale, consisting primarily of inventory and property, plant and
equipment classified as other current assets. At September 30, 2003, the Company
had approximately $87,274,000 in borrowing capacity available under unused lines
of credit. The Company believes it has an adequate cash balance for future cash
flow needs.
Operating Activities
Net cash provided by operating activities for the nine months ended September
30, 2003 was $52,234,000, primarily due to net earnings and depreciation.
Investing Activities
The Company spent $11,319,000 on capital expenditures through September 30,
2003, compared to $12,618,000 spent for the same period last year. The Company
typically funds its capital expenditures from operating cash flows. During the
nine months ended September 30, 2003, the Company sold 44 TDS locations for cash
proceeds of $21,449,000.
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
maturities of investments exceeded purchases by $4,845,000 during the nine
months ended September 30, 2003, resulting in total investments of $9,416,000 as
of September 30, 2003.
Financing Activities
Cash dividends totaled $18,435,000 for the nine months ended September 30, 2003,
compared to $19,520,000 for the same period last year. During the quarter ended
June 30, 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, for approximately $40,184,000.
19
BANDAG, INCORPORATED AND SUBSIDIARIES
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
Based on an evaluation performed by the Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2003.
Based on an evaluation performed by the Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, there were no changes in the Company's internal control over financial
reporting identified in such evaluation that occurred during the quarter ended
September 30, 2003 that has materially affected, or is likely to materially
affect, the Company's internal control over financial reporting.
20
PART II. OTHER INFORMATION
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
32.2 Written Statement of the Vice President, Chief Financial
Officer and Secretary of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated July 18, 2003,
reporting in Item 9 (the information required under Item 12), the issuance of a
press release reporting financial results for the second quarter ended June 30,
2003.
21
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 4, 2003 /s/ Martin G. Carver
---------------------------------------
Martin G. Carver
Chairman and Chief Executive Officer
Date: November 4, 2003 /s/ Warren W. Heidbreder
---------------------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
22
Exhibit Index
Exhibit
Number Exhibit
- ------- -------
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the Chairman of the Board, Chief Executive
Officer and President of Bandag, Incorporated Pursuant to 18
U.S.C. Section 1350
32.2 Written Statement of the Vice President, Chief Financial Officer
and Secretary of Bandag, Incorporated Pursuant to 18 U.S.C.
Section 1350
23