BULOVA CORP
10-Q, 1999-11-15
WATCHES, CLOCKS, CLOCKWORK OPERATED DEVICES/PARTS
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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, 1999

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 1-457

BULOVA CORPORATION

(Exact name of registrant as specified in its charter)

          New York   11-1719409  
(State or other jurisdiction of   (I.R.S. employer  
incorporation or organization)   identification No.)  

One Bulova Avenue, Woodside, New York 11377-7874
(Address of principal executive offices) (Zip Code)

(718) 204-3300
(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                                                     

Class   Outstanding at November 8, 1999    
 
 
   Common Stock, $5 par value
 
4,599,249 shares      
 

Page 1

 

INDEX

Part I. Financial Information Page No.
  Item 1. Financial Statements  
 
  Consolidated Condensed Balance Sheet--
 September 30, 1999 and December 31, 1998 		     
3
            
  Consolidated Condensed Statements of Income--
 Three and Nine months ended September 30, 1999 and 1998 		     
4
 
  Consolidated Condensed Statements of Cash Flows--
 Nine months ended September 30, 1999 and 1998 		     
5
     
  Notes to Consolidated Condensed Financial Statements      
6
     
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations  
9
 
Part II. Other Information
     
  Item 6. Exhibits and Reports on Form 8-K  
11
 
          Exhibits 27-Financial Data Schedule for the nine months ended September 30, 1999

Page 2

 

 

PART I. FINANCIAL INFORMATION

Item 1.      Financial Statements

Bulova Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands)

 

 
Assets
 
September 30,   December 31,  
1999   1998  
 
Current assets:      
           
  Cash and cash equivalents   $           17,186   $             5,720  
   Investments   16,965   19,964  
   Accounts and notes receivable-net   56,267   56,213  
   Inventories, principally watches and clocks   38,577   38,937  
   Prepaid expenses   1,325   1,502  
   Prepaid federal income tax       1,057  
   Deferred income taxes   9,480   9,416  
 
           
       Total current assets   139,800   132,809  
 
           
Property, plant and equipment-net   15,365   15,207  
 
           
Other assets:          
           
   Deferred income taxes   15,371   16,220  
   Other   199   216  
 
           
       Total other assets   15,570   16,436  
 
           
       Total assets   $         170,735   $         164,452  
 
           
Liabilities and Shareholders' Equity          
           
Current liabilities:          
           
   Accounts payable   $             3,378   $             3,579  
   Accrued expenses   21,844   21,529  
   Accrued federal and foreign income taxes   1,142      
 
           
       Total current liabilities   26,364   25,108  
 
           
Other liabilities and credits:          
           
   Postretirement benefits payable   37,223   39,495  
   Pension benefits payable   2,987   3,590  
   Other   4,581   4,428  
 
           
       Total other liabilities and credits   44,791   47,513  
 
           
Shareholders' equity   99,580   91,831  
 
           
       Total liabilities and shareholders' equity   $         170,735   $         164,452  
 

See accompanying Notes to Consolidated Condensed Financial Statements

Page 3

.

Bulova Corporation and Subsidiaries
Consolidated Condensed Statements of Income
(Amounts in thousands, except per share data)

Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
Net sales   $         37,609   $         33,920   $         95,890   $       91,661  
Cost of sales   18,024   16,853   48,077   48,829  
                   
Gross profit   19,585   17,067   47,813   42,832  
Selling, general and administrative expenses   14,521   12,934   37,298   33,745  
                   
Operating income   5,064   4,133   10,515   9,087  
                   
Royalty income   934   899   2,825   2,692  
Interest income   392   452   1,272   1,579  
Interest expense       (16 ) (3 ) (71 )
Other   (274 ) 118   (361 ) 280  
                   
Income before income tax expense   6,116   5,586   14,248   13,567  
 
Income tax expense   2,656   2,345   6,148   6,050  
                   
Net income   $           3,460   $           3,241   $           8,100   $         7,517  
                   
Net income per share   $             0.75   $             0.70   $             1.76   $           1.63  
                   
Weighted average number of shares outstanding   4,599   4,599   4,599   4,599  

See accompanying Notes to Consolidated Condensed Financial Statements.

Page 4

.

Bulova Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Amounts in thousands)

Nine Months Ended
September 30,
1999 1998
       
Operating Activities:      
           
Net income   $         8,100   $         7,517  
Adjustments to reconcile net income to net cash provided by operating activities   3,170   1,945  
Changes in assets and liabilities-net:          
   Receivables   (2,336 ) (955 )
   Inventories   360   (2,519 )
   Other assets   194   740  
   Accounts payable and accrued expenses   114   (1,999 )
   Accrued federal and foreign income taxes          
   Other liabilities and credits   (3,073 ) (3,790 )
           
    8,728   1,784  
           
Investing Activities:          
           
Purchases of short-term investments   (19,551 ) (218,332 )
Proceeds from sales of short-term investments   23,000   214,952  
Purchases of property, plant and equipment   (711 ) (363 )
Proceeds from disposal of property, plant and equipment       6  
           
    2,738   (3,737 )
           
Net change in cash and cash equivalents   11,466   (1,953 )
Cash and cash equivalents, beginning of period   5,720   9,127  
Cash and cash equivalents, end of period   $      17,186   $         7,174  

See accompanying Notes to Consolidated Condensed Financial Statements.

Page 5

 

Bulova Corporation and Subisidiaries

Notes to Consolidated Condensed Financial statements

Note 1. See Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 1998 filed with the Securities and Exchange Commission on March 30, 1999.

There have been no changes in significant accounting policies since December 31, 1998. In addition, certain amounts applicable to prior periods have been reclassified to conform to classifications followed in 1999.

Note 2. In 1991, the Company and a third party commenced an arbitration proceeding before the Netherlands Arbitration Institute contesting the attempt of Benetton International N.V. ("Benetton") to prematurely terminate the license agreement for "Benetton by Bulova" timepieces and seeking damages in relation thereto. (The license agreement subsequently terminated in 1994). The arbitral panel determined that Benetton was not entitled to terminate the license agreement prior to the expiration of its term and awarded damages to the Company in relation thereto. Benetton has commenced proceedings in the Dutch courts seeking to overturn the arbitral award on a number of grounds and, pending the outcome of those proceedings, to suspend enforcement of the damage award. The Dutch courts have refused to suspend enforcement of the damage award and on February 12, 1996, the Company received approximately $3,857,000, which represented damages, costs and interest. The funds received are subject to return, with interest, if the Dutch courts ultimately uphold Benetton's petition to overturn the arbitral award. As a result, the Company has deferred recognition of the award and recorded a deferred credit. In addition, Benetton has commenced a second arbitration proceeding, asserting claims against the Company and the Company has asserted counter claims against Benetton in relation to the license agreement.

Note 3. Under the tax allocation agreement between the Company and its parent, Loews Corporation ( "Loews"), the Company has paid Loews approximately $2,053,000, $688,000, $4,445,000 and $3,282,000 for the three and nine months ended September 30, 1999 and 1998, respectively.

See Note 3 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 1998.

Note 4. Loews provides administrative and managerial services for which the Company was charged $665,000, $519,000, $1,994,000 and $1,557,000 for the three and nine months ended September 30, 1999 and 1998, respectively. This expense is included in selling, general and administrative expenses. The cost allocated to the Company is estimated to be the incremental cost incurred by Loews in providing these services to the Company.

Note 5. For the three and nine months ended September 30, 1999 and 1998, comprehensive income totaled $3,490,000, $2,817,000, $7,749,000 and $7,119,000, respectively. Comprehensive income includes all changes to shareholders' equity, except those resulting from investments by shareholders and distributions to shareholders. Comprehensive income includes net income, foreign currency translation gains or losses, and pension liability adjustments.

Note 6. The Company is responsible for the clean-up of certain environmental conditions at its Woodside, N.Y. facility as well as certain former manufacturing facilities. The environmental liability recognized in the Company's financial statements of $140,000 represents the minimum of the Company's estimated range of equally likely outcomes, the upper limit of that range is approximately $500,000.

See Note 8 of the Notes to Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 1998.

Page 6

Note 7.      Shareholders' equity:


September 30,   December 31,  
1999   1998  
             (In thousands)
Common stock   $           22,999   $          22,999  
Additional paid-in capital   23,197   23,197  
Retained earnings   56,814   48,714  
Accumulated other comprehensive loss   (3,425 ) (3,074 )
           
    Total   99,585   91,836  
Less treasury stock, at cost   5   5  
           
    Total shareholders' equity   $           99,580   $          91,831  

Note 8.      Geographic Information:

     The Company operates predominately in a single industry segment, that being the distribution and sales of watches and clocks under the brand names of Bulova, Caravelle and Accutron. Substantially all of the Company's sales are in the United States and Canada. The Company evaluates performance based on operating earnings of the respective geographic area and the geographic distribution of the Company's operating results are summarized in the following tables:

Three Months Ended September 30, 1999 United States Canada Total
 (In thousands)
               
Sales   $           34,796   $              3,302   $        38,098  
Intercompany sales   (489 )     (489 )
               
Total net sales   $           34,307   $              3,302   $        37,609  
               
Operating income   $             4,790   $                 274   $          5,064  
Royalties   934       934  
Interest-net   379   13   392  
Other   (273 ) (1 ) (274 )
               
Income before tax   $             5,830   $                 286   $          6,116  
               
Three Months Ended September 30, 1998              
               
Sales   $           31,316   $              3,152   $        34,468  
Intercompany sales   (548 )     (548 )
               
Total net sales   $           30,768   $              3,152   $        33,920  
               
Operating income   $             3,597   $                 536   $          4,133  
Royalties   899       899  
Interest-net   432   4   436  
Other   93   25   118  
Income before tax   $             5,021   $                 565   $          5,586  

Page 7

 

Nine Months Ended September 30, 1999 United States Canada Total
         (In thousands)
Sales   $          88,075   $            9,306   $              97,381  
Intercompany sales   (1,491 )     (1,491 )
               
Total net sales   $          86,584   $            9,306   $              95,890  
               
Operating income   $            9,459   $            1,056   $              10,515  
Royalties   2,825       2,825  
Interest-net   1,223   46   1,269  
Other   (365 ) 4   (361 )
               
Income before tax   $         13,142   $            1,106   $              14,248  
               
Nine Months Ended September 30, 1998              
               
Sales   $          84,528   $            8,823   $              93,351  
Intercompany sales   (1,690 )     (1,690 )
               
Total net sales   $          82,838   $            8,823   $              91,661  
               
Operating income   $            7,926   $            1,161   $                9,087  
Royalties   2,692       2,692  
Interest-net   1,476   32   1,508  
Other   234   46   280  
Income before tax   $          12,328   $            1,239   $              13,567  

Note 9.      In the opinion of Management, the accompanying consolidated condensed financial statements reflect all adjustments December 31, 1998 and the results of operations for the three and nine months ended September 30, 1999 and 1998 and changes in cash flows for the nine months ended September 30, 1999 and 1998, respectively.

     Results of operations for the third quarter and first nine months of each of the years is not necessarily indicative of results of operations for that entire year.

Page 8

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations:

Net sales increased $3,689,000 and $4,229,000, or 10.9% and 4.6%, for the three and nine months ended September 30, 1999, respectively, as compared to the corresponding periods of the prior year. Income before taxes increased by approximately $530,000 and $681,000, or 9.5% and 5.0%, for the three and nine months ended September 30, 1999, respectively, as compared to the prior year. The increase in net sales is primarily attributable to a unit volume increase of 7.7% and 7.3%, for the three and nine months ended September 30, 1999, respectively, and an increase in the average unit selling prices of 2.9% for the three months ended September 30, 1999, partially offset by a decrease in average unit selling prices of 2.5% for the nine months ended September 30, 1999, as compared to the corresponding periods of the prior year. The unit volume increase is due primarily to the increase in the Caravelle product line. The unit selling price change is primarily associated with a change in the Company's core product mix.

The Company recorded a credit of $304,000 and $227,000 in cost of sales related to an actuarial revaluation of its post retirement benefit net periodic expense, for the three months ended September 30, 1999 and 1998, respectively. Exclusive of this transaction, gross profit as a percentage of net sales increased to 51.3% and 49.5% for the three and nine months ended September 30, 1999, respectively, as compared to 49.6% and 46.5% for the prior year. This increase is attributable to the Company's efforts to maintain efficient operational and procurement practices.

In the three months ended September 30, 1999 and 1998, the Company recorded a credit of $564,000 and $423,000, respectively, in administrative expense related to an actuarial revaluation of its post retirement benefit net periodic expense. Exclusive of this transaction, selling, general and administrative expenses as a percentage of net sales for the three and nine months ended September 30, 1999 was 40.1% and 39.5%, respectively, as compared to 39.4% and 37.3%, respectively, for the prior year. This increase is the result of an increased level of brand support, an increase in commission expense related to an increase in net sales as discussed above, as well as an increase in parent company charges of $146,000 and $437,000 for the three and nine months ended September 30, 1999, respectively, as compared to the corresponding periods of the prior year.

Royalty income has increased by approximately $35,000 and $133,000, or 3.9% and 4.9%, for the three and nine months ended September 30, 1999, respectively, as compared to the corresponding periods of the prior year. Royalty income represents payments by a distributor and licensees principally in Europe, the Far East and South America. The income represents an annual increase in association with the South American distributor agreement. The Europe and Far East license agreements expire on December 31, 2001 and the South American distributor agreement expires on December 31, 2000. The negative economic conditions in the Far East and South America may result in a decrease in royalty income. A reduction in royalty income would negatively impact revenues, gross profit, results of operations and cash flows.

Interest income decreased $60,000 and $307,000 for the three and nine months ended September 30, 1999, respectively, as compared to the prior year. This decrease is the result of a lower level of invested assets compared to the corresponding period of the prior year.

Liquidity and Capital Resources:

The Company generated net cash flow from operations of $8,728,000 and $1,784,000 for the nine months ended September 30, 1999 and 1998, respectively. The increase in net cash flow compared to the corresponding period of the prior year is primarily the result of an increase in inventory purchases in the prior year period to meet the Company's increasing sales . An increase in accounts payable and accrued expenses, resulting from timing differences of payments, compared to the corresponding period of the prior year, also increased the net cash flow. The increase in cash flow was partially offset by an increase in accounts receivable in the current year period, resulting from an increase in sales.

The Company's investments consist primarily of U.S Treasury notes and commercial paper. Cash and cash equivalents, and investments amounted to approximately $34,151,000 at September 30, 1999, as compared to approximately $25,684,000 at December 31, 1998.

The Company has invested in property, plant and equipment in an effort to improve warehouse operational efficiency. Capital expenditures related to this project are estimated to be approximately $2,000,000, of which approximately $31,000 was incurred during the third quarter of 1999, and approximately $1,263,000 has been incurred since the inception of the project, which commenced in the first quarter of 1997. This project will be funded through the Company's working capital. Additionally, during the fourth quarter of 1998, the Company purchased a building for its clock warehousing and distribution requirements to replace a leased facility. The cost of the building was approximately $4,000,000 and was funded through the Company's available working capital. Renovation costs incurred during the nine months of 1999 were approximately $520,000. These costs were funded through the Company's working capital.

Page 9

Year 2000 Issue

The widespread use of computer programs, both in the United States and internationally, that rely on two digit date fields to perform computations and decision making functions may cause computer systems to malfunction when processing information involving dates beginning in 1999. Such malfunctions could lead to business delays and disruptions. The Company renovated or replaced many of its legacy systems and upgraded its systems to accommodate business for the Year 2000 and beyond. In addition, the Company is checking embedded systems in computer hardware and other infrastructure such as heating and ventilating systems, and security systems.

The Company's total cost to replace and upgrade its systems to accommodate Year 2000 processing amounted to approximately $350,000. However, prior to 1997, the Company did not specifically separate technology charges for the Year 2000 from other information technology charges.

In addition, while some hardware charges are included in the budget figures, the Company's hardware costs are typically included as part of ongoing technology updates and not specifically as part of the Year 2000 project. All funds spent and to be spent will be financed from current operating funds.

As of September 30, 1999, the Company has certified internally all of its internal applications and systems as being ready for the year 2000. However, due to the interdependent nature of computer systems, there may be an adverse impact on the Company if vendors, customers, and other business partners fail to successfully address the Year 2000 issue. The Company's contingency plans have been structured to address both remediation of systems and their components and overall business operating risk. These plans are intended to mitigate both internal risks as well as potential risk with the Company's vendors, customers, and other business partners.

Foreign Currency

The Company imports most of its watch and clock products. During the first nine months of 1999 approximately 11% of the Company's purchases were denominated in Japanese yen. The remaining purchases were primarily denominated in U.S. dollars and acquired from vendors located in Europe, Hong Kong and other Asian countries. The Hong Kong dollar is pegged to the U.S. dollar and has not been subject to the fluctuations that have affected other Asian currencies. In the event that the peg between the two currencies is removed, currency fluctuations could have a material impact on the cost of those imported products which ultimately could have a negative impact on the Company's gross profit, operating income and cash flow. Foreign currency fluctuations have not had a material impact on the results of operations for the three and nine months ended September 30, 1999 and 1998. Future foreign currency fluctuations, however, could impact gross profit, income, and cash flow.

Forward-Looking Statements

When included in this Report, the words "believes," "expects," "intends," "anticipates," "estimates" and analogous expressions are intended to identify forward-looking statements. Such statements inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, among others, general economic and business conditions, changes in financial markets, significant changes in consumer spending patterns, competition in the Company's product areas, effects of the Asian economic crisis, changes in foreign currency valuations in relation to the U.S. dollar, changes in foreign, political, social and economic conditions, and various other matters, many of which are beyond the Company's control. These forward-looking statements speak only as of the date of this report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

Page 10

PART II. OTHER INFORMATION

Item 6. Exhibit and Reports on Form 8-K

 (a) Exhibits --

 (b) Current reports on Form 8-K-There were no reports on Form 8-K filed for the three months ended September 30, 1999.

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.

  BULOVA CORPORATION
 
  (Registrant)

 

 

  
Dated: November 15, 1999 By: /s/ Paul S. Sayegh
 
  PAUL S. SAYEGH
Chief Operating Officer (Duly
authorized officer and principal
financial officer)
   
   

Page 11

 

 

 

 

 



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