<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended April 29, 1999
/ / 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 1-8978
LONGS DRUG STORES CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Maryland 68-0048627
----------------------------------------- ------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
141 North Civic Drive
Walnut Creek, California 94596
----------------------------------------- -----------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (925) 937-1170
- --------------------------------------------------------------------------------
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
------- -------
There were 39,267,285 shares of common stock outstanding as of June 10, 1999.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CONDENSED CONSOLIDATED INCOME (UNAUDITED) FOR THE QUARTERS ENDED
April 29, April 30,
1999 1998
----------- -----------
--(Thousands Except Per Share)--
<S> <C> <C>
SALES $ 869,430 $ 752,799
COSTS AND EXPENSES:
Cost of merchandise sold 640,915 550,835
Operating and administrative 201,363 178,638
Interest expense 853 279
Interest income (351) (243)
---------- ----------
INCOME BEFORE TAXES ON INCOME 26,650 23,290
TAXES ON INCOME 10,300 9,100
---------- ----------
NET INCOME $ 16,350 $ 14,190
---------- ----------
---------- ----------
NET INCOME PER COMMON SHARE:
BASIC $ .42 $ .37
DILUTED $ .42 $ .37
DIVIDENDS $ .14 $ .14
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
BASIC 38,797 38,469
DILUTED 38,926 38,619
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 29, April 30, January 28,
1999 1998 1999
---------- ---------- -----------
-----(Thousands Except Share Information)-----
<S> <C> <C> <C>
ASSETS
-------(Unaudited)---------
CURRENT ASSETS:
Cash and equivalents $ 58,127 $ 34,325 $ 14,976
Pharmacy and other receivables 75,901 64,808 68,072
Merchandise inventories 371,298 333,124 382,248
Deferred income taxes 23,167 24,003 25,388
Other 2,134 1,195 1,844
---------- ---------- -----------
Total current assets 530,627 457,455 492,528
---------- ---------- -----------
PROPERTY:
Land 95,893 92,530 95,359
Buildings and leasehold improvements 397,263 368,875 392,967
Equipment and fixtures 328,661 294,682 321,998
Beverage licenses 7,576 7,520 7,569
---------- ---------- -----------
Total property-at cost 829,393 763,607 817,893
Less accumulated depreciation 353,077 320,336 345,995
---------- ---------- -----------
Property-net 476,316 443,271 471,898
GOODWILL AND OTHER ASSETS 60,885 29,572 60,704
---------- ---------- -----------
TOTAL $1,067,828 $ 930,298 $ 1,025,130
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 183,384 $ 164,191 $ 184,989
Short-term borrowings - - 10,000
Employee compensation and benefits 71,561 66,951 72,353
Taxes payable 40,607 31,416 43,700
Current portion of long-term debt and guarantee
of Profit Sharing Plan debt 3,910 4,111 1,758
Other 28,473 25,948 26,183
---------- ---------- -----------
Total current liabilities 327,935 292,617 338,983
---------- ---------- -----------
GUARANTEE OF PROFIT SHARING PLAN DEBT - 911 -
LONG-TERM DEBT 56,921 13,968 14,253
DEFERRED INCOME TAXES AND OTHER
LONG-TERM LIABILITIES 31,752 32,537 33,055
---------- ---------- -----------
STOCKHOLDERS' EQUITY:
Common stock (39,265,000, 38,907,000,
and 38,946,000 shares outstanding) 19,633 19,453 19,473
Additional capital 131,152 117,542 119,961
Common stock contribution to Profit Sharing Plan - - 9,834
Guarantee of Profit Sharing Plan debt (911) (4,371) (911)
Retained earnings 501,346 457,641 490,482
---------- ---------- -----------
Total stockholders' equity 651,220 590,265 638,839
---------- ---------- -----------
TOTAL $1,067,828 $ 930,298 $ 1,025,130
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
For the Quarters Ended
April 29, April 30,
1999 1998
---------------------------
--------(Thousands)--------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 16,350 $ 14,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,238 11,826
Deferred income taxes and other 918 (1,577)
Restricted stock awards 683 576
Common stock contribution to benefit plan and
tax benefits credited to stockholders' equity 4 210
Changes in assets and liabilities:
Pharmacy and other receivables (7,829) (1,701)
Merchandise inventories 10,950 11,958
Other current assets (290) 142
Current liabilities (2,367) (21,025)
---------- ----------
Net cash provided by operating activities $ 31,657 $ 14,599
---------- ----------
---------- ----------
INVESTING ACTIVITIES:
Payments for property additions and other assets (20,045) (20,120)
Receipts from property dispositions 2,209 419
---------- ----------
Net cash used in investing activities (17,836) (19,701)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from (repayments of) borrowings, net 34,820 (271)
Repurchase of common stock - (3,418)
Dividend payments (5,490) (5,436)
---------- ----------
Net cash provided by (used in) financing activities 29,330 (9,125)
---------- ----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 43,151 (14,227)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 14,976 48,552
---------- ----------
CASH AND EQUIVALENTS AT END OF PERIOD $ 58,127 $ 34,325
---------- ----------
---------- ----------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
STATEMENTS OF CONDENSED CONSOLIDATED STOCKHOLDERS' EQUITY
For the Year Ended January 28, 1999 and Quarter Ended April 29, 1999
<TABLE>
<CAPTION>
Guarantee
Common Stock Profit Sharing of Profit Total
---------------- Additional Plan Sharing Retained Stockholders'
(Thousands) Shares Amount Capital Contributions Plan Debt Earnings Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 29, 1998 38,629 $19,315 $110,466 $ 9,856 ($4,371) $448,877 $584,143
- ------------------------------------------------------------------------------------------------------------------------------
Net income 63,358 63,358
Dividends ($.56 per share) (21,783) (21,783)
Profit Sharing Plan:
Issuance of stock for FY98
contribution 309 154 9,902 (9,856) 200
Stock portion of FY99 contribution 9,834 9,834
Purchase of stock from plan (105) (52) (3,365) (3,417)
Reduction of plan debt 3,460 3,460
Restricted stock awards, net 113 56 2,597 2,653
Tax benefits related to stock awards 361 361
Tax benefits related to employee
stock plans 30 30
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 28, 1999 38,946 19,473 119,961 9,834 (911) 490,482 638,839
- ------------------------------------------------------------------------------------------------------------------------------
UNAUDITED:
Net income 16,350 16,350
Dividends ($.14 per share) (5,490) (5,490)
Profit Sharing Plan:
Issuance of stock for FY99
contribution 268 135 9,699 (9,834) 0
Restricted stock awards, net 51 25 658 683
Tax benefits related to stock awards 834 834
Tax benefits related to employee
stock plans 4 4
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT APRIL 29, 1999 39,265 $19,633 $131,152 $ 0 ($ 911) $ 501,346 $651,220
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The Condensed Consolidated Financial Statements include Longs Drug
Stores Corporation (Company) and its wholly-owned subsidiary, Longs
Drug Stores California, Inc. All inter-company accounts and
transactions have been eliminated. The statements have been prepared
on a basis consistent with the accounting policies described in the
Annual Report of the Company previously filed with the Commission on
Form 10-K for the year ended January 28, 1999, and reflect all
adjustments and eliminations which are, in management's opinion,
necessary for a fair statement of the results for the periods. The
Condensed Consolidated Financial Statements for the periods ended
April 29, 1999, and April 30, 1998, are unaudited. The Condensed
Consolidated Balance Sheet at January 28, 1999, and Condensed
Consolidated Statement of Stockholders' Equity for the year then
ended, presented herein, have been derived from the audited
consolidated financial statements of the Company included in the Form
10-K for the year ended January 28, 1999.
2. Certain reclassifications have been made to prior year financial
statements in order to conform to current financial statement
presentation.
3. The financial statements have been prepared using the Last In First
Out (LIFO) method of accounting for inventories. The excess of
specific cost inventory over LIFO valuation was $147.0 million at
April 29, 1999, $143.7 million at April 30, 1998, and $146.6 million
at January 28, 1999. A final valuation of inventory under the LIFO
method can be made only after year-end based on ending inventory
levels and inflation rates for the year. Interim LIFO calculations
are based on management's estimates of year-end inventory levels and
inflation rates for the year.
4. The Company has an unsecured revolving line of credit of $65.0
million at a LIBOR based rate, which expires on August 31, 2002.
There was $65.0 million available for use and $1.2 million restricted
for letters of credit at April 29, 1999. The line of credit contains
quarterly and annual financial covenants which require minimum
tangible net worth and various financial ratios. The Company has
complied with restrictions and limitations included in the provisions
of the line of credit.
5. There were no repurchases of common stock during the first quarter of
fiscal year 2000.
6. During the first quarter of fiscal 2000, the Company completed a
private placement financing in which $45 million in senior notes were
issued. The debt consisted of $15 million of 5.85% notes due in 2006
and $30 million of 6.19% notes due in 2014. A portion of the proceeds
from these notes was used to repay short-term borrowings and the
remainder will be used for general corporate purposes. The note
agreements include various financial and non-financial covenants
including limitations on debt level.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES
First quarter sales increased 15.5% to $869.4 million compared to $752.8
million in the first quarter prior year. Incremental sales from the Pacific
Northwest (PNW) acquisition contributed 5.0% of total sales growth. Total
same store sales posted a strong 9.1% growth for the first quarter.
Pharmacy sales for the first quarter increased 23.4% led by a 14.8% increase
in script volume and a 7.5% increase in average script price. Pharmacy
represented 40.0% of total sales in first quarter, up from 37.4% in the prior
year. Same store sales for Pharmacy grew 17.8% for the quarter. Third party
as a percentage of pharmacy sales declined from 84.3% to 83.2% of sales. The
inclusion of our PNW stores and the increase in sales of new drugs not
covered by insurance contributed to this shift.
Front-end sales growth of 10.6% was partly fueled by the PNW acquisition,
contributing about half of front-end sales growth. Strong increases in core
categories, specifically cosmetics and over-the-counter medications, led to
same store front-end sales growth of 3.8%.
GROSS MARGINS
Gross profit dollars for the first quarter increased 13.1% to $228.5 million
but gross margin as a percent of sales (including LIFO) decreased to 26.3%
from 26.8% in the prior year. The decrease is primarily due to the continued
decline in pharmacy percentage margins and lower percentage margins from the
Pacific Northwest stores relative to chain averages. Due to relatively lower
margins in pharmacy, growth in pharmacy sales to 40.0% of total sales
negatively impacts total gross margin as a percent of sales.
The Company uses the Last-In First-Out (LIFO) method of inventory valuation.
The LIFO provision was $400 thousand for the first quarter compared to $4.6
million in the prior year. The Company benefited from lower than expected
pharmacy inflation, a portion of which is a benefit of the sole-sourcing
arrangement with Bergen Brunswig completed this quarter.
OPERATING AND ADMINISTRATIVE EXPENSES
Operating and administrative expenses as a percent of sales dropped 56 basis
points, from 23.2% to 23.1% for the first quarter, benefiting from good
leverage on sales increases and cost reduction efforts.
Included in operating and administrative expenses are costs for the year 2000
(Y2K) remediation effort, including $1.4 million expensed during the quarter
compared to $1.3 million in the first quarter of the prior year. Y2K expenses
planned for the remainder of this fiscal year will be approximately $1.5
million, the majority of which ($1.1 million) will be incurred in the second
quarter. Including first quarter, total Y2K expenditures for fiscal year 2000
will total $2.9 million, bringing total Y2K expenses to $9.7 million. The
Company believes that systems will be fully remediated and tested by the end
of the third quarter of fiscal 2000, including end-to-end testing with all
our vendor partners with whom we exchange information electronically.
INCOME BEFORE TAXES/NET INCOME
Strong sales and reduced operating expenses as a percent of sales resulted in
solid growth in income before taxes of 14.4% for the first quarter. Income
before taxes as a percent of sales for the first quarter remained consistent
with prior year at 3.1%.
The Company's effective tax rate for the quarter was 38.6%, down slightly
from the prior year, benefiting from a new California law which retroactively
reinstated the deductibility of dividends paid on shares held
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<PAGE>
by the Profit Sharing Plan. The Company's effective tax rate has also
benefited from increased business in Washington and Nevada, which have no
state income tax.
Net income grew 15.2% to $16.4 million for the first quarter and is in line
with the 15.5% increase in sales.
Diluted earnings per share for the quarter increased 14.3% to $0.42 per share
compared to $0.37 per share in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
CASH POSITION
Cash provided by operating activities increased by $17.1 million compared to
prior year primarily due to increased income and solid control of inventory
investment.
Cash used in investing activities for the first quarter decreased $1.9
million compared to prior year due to additional receipts from property
dispositions.
Capital expenditures for the year are expected to be between $70 and $80
million, supporting the increase in new stores and continued investment in
technology.
Cash provided by financing activities increased $38.5 million due to the
proceeds of a $45 million private placement financing. The debt consists of
$15 million of 5.85% notes due in 2006 and $30 million of 6.19% notes due in
2014. The debt was used to repay short-term borrowings and will be used for
general corporate purposes.
At quarter end, the Company had no borrowings outstanding on a $65 million
unsecured revolving line of credit. Borrowings on this line incur interest at
prevailing rates.
The number of stores in operation compared to first quarter last year
increased by 29, including 20 stores located in the Pacific Northwest which
were acquired in July 1998. The Company expects to open 18 stores in fiscal
2000, six of which will replace smaller pharmacies that were purchased when
the Company committed to these new communities.
Subsequent to quarter end, the Company completed an exchange with Rite Aid
involving several stores. The Company acquired two stores as well as the
pharmacy files of six other Rite Aid stores. In return, Rite Aid received
three stores and the pharmacy files of two other Longs Drugs stores. The five
stores the Company disposed of were under-performing the Company's financial
goals. The stores and files the Company received will strengthen stores and
markets in which the Company is already strong.
The Company closed one store during the first quarter and anticipates ending
fiscal 2000 with 387 stores.
Expenditures for capital projects, dividends and stock repurchases are
expected to continue to be funded from operations, cash reserves and
borrowings as deemed necessary.
YEAR 2000 COMPLIANCE
Historically, computer systems have maintained two-digit year information in
date fields; "98," for example, has meant "1998." With the year 2000
approaching, some systems will be unable to process dates correctly.
Processes may abort or produce erroneous data. Systems that require the use
of dates beyond 1999 will run into this problem before 2000.
The problem can be found almost anywhere, in both hardware and software.
Mainframe systems, mid-range systems, and personal computers can all be a
source of trouble. So can elevators, point-of-sale systems, PBX's, and other
devices operating with embedded microcomputer chips that many people don't
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<PAGE>
think of as being "computers." If a company's systems cannot interpret the
year 2000 dates beyond 1999, some modification or replacement of the systems
is necessary to avoid system failures and the temporary inability to process
transactions or engage in the normal business activities.
In 1996 the Company established a Year 2000 Project Team, headed by the
Company's Chief Information Officer, to coordinate the Company's year 2000
efforts. The project team is staffed by the Company's Management Information
Services (MIS) personnel and outside consultants on an as-needed basis. The
Chief Information Officer reports regularly on the status of year 2000 to the
Company's senior officers and to the Company's board of directors.
An assessment of the Company's MIS and non-MIS systems was completed to
determine which mission-critical systems are at risk, and a plan was
developed for replacing and remediating both operating systems and business
applications to achieve year 2000 compliance. The implementation of the plan
is underway and the applications and operating systems are being modified or
replaced based on the level of priority. Management estimates all of the
activities with respect to assessment, clean up, remediation, testing and
implementation are about 70% complete for MIS and about 60% complete for
non-MIS systems. The Company estimates that all critical and non-critical
systems and applications will be year 2000 compliant by July 31, 1999.
Vendor Certification is in progress. First priority testing is given to key
vendors with direct connection switches into Point of Sale and Pharmacy, as
well as all financial settlement vendors. All vendor certification testing is
expected to be completed by August 1999. Although the Company is assessing
the year 2000 status of outside parties, there is no assurance that outside
parties will attain year 2000 compliance on a timely basis; if they do not,
year 2000 problems may have a material impact on the Company's operations.
Management believes that, should the Company or any third party with whom the
Company has a business relationship experience a year 2000 related systems
failure, the most likely worst-case scenario would be a possible failure of
third party systems over which the company has no control, such as (but not
limited to) power and telecommunications, supply chain interruption, or
electronic commerce. Such an event could result in a substantial interruption
of business and may have a material impact on the Company's results of
operations.
Contingency planning is in process to provide for viable alternatives to
ensure that the Company's core business operations are able to continue in
the event of a year 2000 related systems failure. Management expects to have
a comprehensive contingency plan developed by June 30, 1999 and implemented
by October 31, 1999.
At the request of the board of directors, an external consulting group
conducts independent reviews of the Company's year 2000 efforts. A review was
conducted in September 1998 and the recommendations were implemented. A
second assessment was conducted at the beginning of March 1999. The results
are under review and recommendations will be addressed.
The Company expensed $1.4 million for year 2000 efforts in the first quarter
and estimates it will incur an additional $1.5 million for fiscal 2000. This
brings the total year 2000 project cost of $9.7 million, which includes the
estimated costs of all modifications, testing and consulting fees.
The foregoing discussion of year 2000 compliance contains forward-looking
statements about the Company's plans, expectations, costs, and consequences
regarding year 2000 matters. There can be no assurance that the Company's
expectations can be met and that the Company will not be adversely affected
in a way unidentified in the preceding discussion. Factors that could cause
the Company's results to differ from expectations include (but not limited
to) unforeseen problems, greater than anticipated costs, and unexpected
difficulties with outside parties.
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<PAGE>
FORWARD-LOOKING INFORMATION
Certain information in this form 10-Q, as well as in other public filings,
press releases and oral statements made by our representatives, is
forward-looking information based on current expectations and plans that
involve risks and uncertainties. Forward-looking information includes
statements concerning pharmacy sales trends, prescriptions margins, number of
store openings, the level of capital expenditures and the company's success
in addressing Year 2000 issues; as well as those that include or are preceded
by the words "expects," "estimates," "believes" or similar language. For such
statements, we claim the protection of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The following factors, in
addition to those discussed elsewhere in this Form 10-Q and in our Annual
Reports, could cause results to differ materially from management
expectations as projected in such forward-looking statements: changes in
economic conditions generally or in the markets served by the company;
consumer preferences and spending patterns; competition from other drugstore
chains, supermarkets, other retailers and mail order companies; changes in
state or federal legislation or regulations; the efforts of third party
payors to reduce prescription drug costs; the availability and cost of real
estate and construction; accounting policies and practices; the company's
ability to hire and retain pharmacists and other store and management
personnel; the company's relationships with its suppliers; the ability of the
company, its vendors and others to manage Year 2000 issues; the company's
ability to successfully implement new computer systems and technology; and
adverse determinations with respect to litigation or other claims. The
company assumes no obligation to update its forward-looking statements to
reflect subsequent events or circumstances.
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<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Reports on Form 8-K
There have been no reports on Form 8-K filed during the
quarter ended April 30, 1999.
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<PAGE>
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.
LONGS DRUG STORES CORPORATION
---------------------------------------
(REGISTRANT)
Date June 14, 1999 /s/ G. L. White
-------------------------------- ---------------------------------------
G. L. White
Vice President, Controller
(PRINCIPAL ACCOUNTING OFFICER)
/s/ R. A. Plomgren
--------------------------------------
R. A. Plomgren
Senior Vice President -- Development
(CHIEF FINANCIAL OFFICER)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-27-2000
<PERIOD-START> JAN-29-1999
<PERIOD-END> APR-29-1999
<CASH> 58,127
<SECURITIES> 0
<RECEIVABLES> 75,901
<ALLOWANCES> 0
<INVENTORY> 371,298
<CURRENT-ASSETS> 530,627
<PP&E> 829,393
<DEPRECIATION> 353,077
<TOTAL-ASSETS> 1,067,828
<CURRENT-LIABILITIES> 327,935
<BONDS> 0
0
0
<COMMON> 19,633
<OTHER-SE> 631,587
<TOTAL-LIABILITY-AND-EQUITY> 1,067,828
<SALES> 869,430
<TOTAL-REVENUES> 0
<CGS> 640,915
<TOTAL-COSTS> 842,780
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 853
<INCOME-PRETAX> 26,650
<INCOME-TAX> 10,300
<INCOME-CONTINUING> 16,350
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,350
<EPS-BASIC> .42
<EPS-DILUTED> .42
</TABLE>