FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ________ to ________
Commission file number 1-7007
BANDAG, INCORPORATED
(Exact name of registrant as specified in its charter)
Iowa 42-0802143
(State of incorporation) (I.R.S Employer Identification No.)
2905 N HWY 61, Muscatine, Iowa 52761-5886
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: 319/262-1400
Not Applicable
(Former name, address, or fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $1 par value; 9,070,159 shares as of October 31, 1998. Class A
Common Stock, $1 par value; 10,811,179 shares as of October 31, 1998. Class B
Common Stock, $1 par value; 2,046,777 shares as of October 31, 1998.
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BANDAG, INCORPORATED AND SUBSIDIARIES
INDEX
Part I : FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II : OTHER INFORMATION
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
EXHIBITS :
Exhibit 27 - Financial Data Schedule (EDGAR filing only) 21
Exhibit 27.1 - Restated September 1997 Financial Data Schedule
(EDGAR filing only) 22
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BANDAG, INCORPORATED AND SUBSIDIARIES
PART I
FINANCIAL INFORMATION
Item l - Financial Statements:
Unaudited Condensed Consolidated Statements of Earnings
(In thousands except per share data)
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
Net sales $282,636 $201,242 $784,694 $566,508
Other income 7,119 3,733 14,914 9,311
-------- -------- -------- --------
289,755 204,975 799,608 575,819
Cost of products sold 173,499 116,012 477,304 331,863
Engineering, selling,
administrative and other expenses 81,922 49,871 240,654 153,139
Interest expense 3,163 221 8,839 1,178
-------- -------- -------- --------
258,584 166,104 726,797 486,180
-------- -------- -------- --------
Earnings before income taxes 31,171 38,871 72,811 89,639
Income taxes 13,715 15,077 32,037 34,545
-------- -------- -------- --------
Net earnings $ 17,456 $ 23,794 $ 40,774 $ 55,094
======== ======== ======== ========
Net earnings per share - Basic $ 0.78 $ 1.04 $ 1.81 $ 2.41
Net earnings per share - Diluted $ 0.77 $ 1.04 $ 1.79 $ 2.41
Comprehensive net earnings $ 14,870 $ 35,525 $ 40,218 $ 84,560
Cash dividends per share $ 0.2750 $ 0.2500 $ 0.8250 $ 0.7500
Depreciation included in expense $ 10,778 $ 7,965 $ 30,148 $ 24,749
Goodwill amortization included
in expense $ 2,035 $ 249 $ 6,475 $ 748
Weighted average shares
outstanding:
Basic 22,279 22,748 22,583 22,796
Diluted 22,536 22,884 22,749 22,934
See notes to condensed consolidated financial statements.
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BANDAG, INCORPORATED AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
September 30, December 31,
1998 1997
------------ ----------
ASSETS:
Cash and cash equivalents $ 50,926 $196,400
Investments 14,234 1,575
Accounts receivable - net 233,050 231,648
Inventories:
Finished products 92,554 90,228
Materials & work-in-process 19,391 17,295
-------- ---------
111,945 107,523
Other current assets 53,777 61,848
-------- ---------
Total current assets 463,932 598,994
Property, plant, and equipment 480,917 459,446
Less accumulated depreciation & amortization (279,725) (261,846)
-------- ---------
201,192 197,600
Other assets 93,051 103,310
-------- --------
Total assets $758,175 $899,904
======== =========
LIABILITIES & STOCKHOLDERS' EQUITY:
Accounts payable $ 45,181 $ 52,100
Income taxes payable 10,474 20,039
Accrued employee compensation and benefits 24,525 28,874
Accrued marketing expenses 30,203 32,608
Other accrued expenses 65,855 73,195
Short-term notes payable and other liabilities 5,780 99,726
-------- ---------
Total current liabilities 182,018 306,542
Deferred income taxes and other liabilities 119,160 129,948
Stockholders' equity:
Common stock; $1 par value;
authorized - 21,500,000 shares;
Issued and outstanding - 9,070,449 shares
in 1998; 9,751,063 in 1997 9,070 9,751
Class A Common stock; $1 par value;
authorized - 50,000,000 shares;
Issued and outstanding - 10,811,469 shares
in 1998; 11,013,561 in 1997 10,811 11,014
Class B Common stock; $1 par value;
authorized - 8,500,000 shares;
Issued and outstanding - 2,046,777 shares
in 1998; 2,048,785 in 1997 2,047 2,049
Additional paid-in capital 5,843 6,052
Retained earnings 441,121 445,887
Equity adjustment from foreign currency
translation (11,895) (11,339)
--------- ---------
Total equity 456,997 463,414
-------- ---------
Total liabilities & stockholders' equity $758,175 $899,904
======== ========
See notes to condensed consolidated financial statements.
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Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
9/30/98 9/30/97
-------- ---------
Operating Activities
Net earnings $ 40,774 $ 55,094
Depreciation and amortization 36,623 25,497
Decrease in operating assets and
liabilities-net (21,615) (19,625)
--------- ---------
Net cash provided by operating activities 55,782 60,966
Investing Activities
Additions to property, plant and equipment (32,177) (25,220)
Purchases of investments (20,941) (2,570)
Maturities of investments 8,282 3,533
Payments for acquisitions of businesses (5,105) -
--------- ---------
Net cash used in investing activities (49,941) (24,257)
Financing Activities
Proceeds from short-term notes payable 37,363 35,307
Principal payments on short-term notes payable
and other liabilities (140,587) (30,989)
Cash dividends (18,551) (17,121)
Purchases of Common Stock (28,234) (7,340)
--------- ---------
Net cash used in financing activities (150,009) (20,143)
Effect of exchange rate changes on cash and
cash equivalents (1,306) (1,221)
--------- ---------
Increase (decrease) in cash and cash equivalents (145,474) 15,345
Cash and cash equivalents at beginning of year 196,400 31,453
-------- ---------
Cash and cash equivalents at end of period $ 50,926 $ 46,798
======== ========
See notes to condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
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 months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997.
Comprehensive Net Earnings
Comprehensive net earnings for the three-month periods ended September 30, 1998
and 1997 and the nine-month periods ended September 30, 1998 and 1997 were as
follows (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
9/30/98 9/30/97 9/30/98 9/30/97
Net earnings $17,456 $23,794 $40,774 $55,094
Other comprehensive income items:
Foreign currency translation (2,586) (2,247) (556) (7,701)
Unrealized appreciation on
marketable securities - 13,978 - 37,167
------- ------- ------- -------
Comprehensive net earnings $14,870 $35,525 $40,218 $84,560
======= ======= ======= =======
Tire Distribution System, Inc. Acquisitions
The third quarter and year-to-date 1998 consolidated results include Tire
Distribution Systems, Inc. (TDS), the Company's subsidiary, which originally
acquired five tire dealerships effective November 1, 1997 and subsequently
acquired several smaller tire dealerships in 1998. TDS results include net sales
of $105,500,000 and $281,800,000 and pretax income of $2,000,000 and $2,700,000,
including $2,000,000 and $5,900,000 of goodwill amortization for the third
quarter and year-to-date, respectively. Intercompany sales from Bandag to TDS,
which have been eliminated in consolidation, totaled $15,400,000 and $40,700,000
for the third quarter and year-to-date, respectively.
Results in 1997 on a pro forma basis for third quarter and nine months to-date
include net sales of $114,900,000 and $296,900,000 and pretax income of
$5,900,000 and $11,300,000, including $1,900,000 and $5,900,000 of goodwill
amortization, respectively. Intercompany sales on a pro forma
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basis from Bandag to TDS, which would have been eliminated in consolidation,
totaled $13,100,000 and $37,000,000 for the third quarter and year-to-date,
respectively.
Earnings Per Share
Per share and weighted average share outstanding amounts for the three months
and nine months ended September 30, 1997 have been restated to conform with the
requirements of Statement of Financial Accounting Standards No. 128, "Earnings
per Share", issued in February 1997.
The following table sets forth the computation of basic and diluted earnings per
share:
(In thousands except per share data)
For The Three For The Nine
Months Ended Months Ended
Sept. 30, Sept. 30,
-------------- --------------
1998 1997 1998 1997
Numerator:
Net Earnings $17,456 $23,794 $40,774 $55,094
Denominator:
Denominator for basic earnings
per share-weighted-average shares 22,279 22,748 22,583 22,796
Effect of dilutive securities:
Non-vested restricted stock 174 31 88 32
Stock options 83 105 78 106
------- ------- ------- -------
Dilutive potential common shares 257 136 166 138
------- ------- ------- -------
Denominator for diluted earnings
per share-weighted-average
shares and dilutive potential
common shares 22,536 22,884 22,749 22,934
======= ======= ======= =======
Net Earnings Per Share:
Basic $ 0.78 $ 1.04 $ 1.81 $ 2.41
====== ====== ====== ======
Diluted $ 0.77 $ 1.04 $ 1.79 $ 2.41
====== ====== ====== ======
Derivative Instruments and Hedging Activities
In June 1998, the Financial Standards Board issued Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, which is required to be
adopted in years beginning after June 15, 1999. The Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. It is not
yet known when the Company will adopt the new Statement. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is
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BANDAG, INCORPORATED AND SUBSIDIARIES
a hedge, depending on the nature of the hedge, changes in the fair value of the
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
The Company has not yet determined what the effect of Statement 133 will be on
the earnings and the financial position of the Company.
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BANDAG, INCORPORATED AND SUBSIDIARIES
Item 2 -Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
- -------
Consolidated net sales for the third quarter ended September 30, 1998, were 40%
higher than the same period last year. The increase was a result of the
Company's fourth quarter 1997 acquisition of the five Bandag dealerships, now
comprising the Company's TDS subsidiary. The acquired dealerships added
$105,500,000 and $281,800,000 in sales before elimination of $15,400,000 and
$40,700,000 of intercompany sales from Bandag, Inc. to TDS in consolidation for
the third quarter and nine months to-date, respectively. Excluding TDS sales,
sales for Bandag's traditional business for both third quarter and nine months
to-date decreased 3% on a unit volume decrease of 1% for the third quarter and a
unit volume increase of 1% for the nine months to-date. The spread between unit
volume and traditional business sales was due to the unfavorable impact of the
strong U.S. dollar on the translated value of foreign-currency-denominated
sales, and lower equipment sales.
Consolidated gross margins for the third quarter and nine months to-date were
four percentage points and two percentage points lower, respectively, than the
same periods last year. The consolidated gross margins for the third quarter and
nine months to-date were impacted by TDS subsidiaries' lower margins. Excluding
TDS, Bandag's traditional business gross margin for the third quarter and nine
months to-date were both two percentage points higher than the same periods last
year due to decreases in raw material costs and better manufacturing absorption
from higher production levels.
Consolidated operating expenses (engineering, selling, and administrative) for
the third quarter and nine months ended September 30, 1998 were substantially
higher than the same period last year because of the addition of TDS. Excluding
the effect of TDS, operating expenses for the third quarter and nine months
to-date would have been 22% and 13% higher, respectively, compared to the same
periods last year. The increased expenses reflect the Company's continuing
efforts to build people and process capabilities in the Company's domestic
operations to meet the Company's goals to bring value-added tire management
services to large fleet customers. Consolidated other expenses were
substantially higher than last year due to the impact of unfavorable changes to
foreign exchange rates, primarily on results for the Company's Asian operations,
and the goodwill amortization related to the TDS acquisitions.
Consolidated net earnings for the third quarter and nine months to-date were 27%
and 26% lower, respectively, compared to the same periods last year. Diluted EPS
for the third quarter and nine months to-date were 26% and 25% lower,
respectively, compared to the same periods last year. The lower net earnings and
lower diluted EPS were due to higher operating expenses and other expenses,
combined with a five-and-a-half percentage
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point increase in the Company's effective tax rate resulting from the impact of
non-deductible foreign losses and non-deductible TDS goodwill amortization.
As anticipated, continued unfavorable currency exchange rates, higher operating
costs, and tighter inventory management at the dealer level, pared the
performance of our traditional business to well below 1997 levels. We continue
to believe that these factors will reduce the Company's earnings per diluted
share to a range of $2.40 to $2.60 for the year. That range compares to 3.32 per
diluted share in 1997, exclusive of 1997's one-time gain from the sale of
securities and the effect of non-recurring charges. Earnings performance was
affected by continued heavy investments in the development of the company's
proprietary tire management systems, which integrates tire acquisition,
maintenance and recycling services to deliver lower cost per mile to end-user
customers.
On April 1, 1998 the Company announced that it had signed an agreement with Tire
Centers, Inc. (TCI) to end their franchise relationship through an orderly
transition process to be completed by mid-1999. TCI, with 16 franchise
locations, represented approximately 3% of the Company's consolidated net sales
in 1997. The Company expects minimal disruption to fleet customers because it
believes alternative Bandag dealer capability already exists in most markets
covered by the agreement.
Domestic Traditional Business Operations
- ----------------------------------------
Sales for the Company's domestic operations for the third quarter, which include
export shipments to various Latin and South American countries and some Asian
areas, were 3% lower than the same period last year on a 3% decrease in unit
volume. For the nine months, sales were 4% lower than the same period last year
on a 2% decrease in unit volume. The spread between unit volume and sales for
the nine months ended September 30, 1998 was mainly due to product mix and
country mix in the export markets.
Gross margin for the Company's domestic traditional business for the third
quarter and nine months were both approximately two percentage points higher
than the same periods last year. The increase in gross margin percentage for the
third quarter and nine months to-date was primarily due to an approximate 4% and
2%, respectively, decrease in raw material costs, with favorable manufacturing
absorption basically accounting for the rest of the increase.
Operating expenses for the third quarter were 17% higher than the same period
last year and 18% higher for the nine months. The increase in spending for both
the quarter and nine months was primarily due to increased sales and marketing
staffing and other costs related to expanding dealer and customer capabilities.
Other expenses for the third quarter and nine months were 16% and 39%,
respectively, lower than the same periods last year primarily due to lower
spending on research and development projects.
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BANDAG, INCORPORATED AND SUBSIDIARIES
Earnings before income taxes for the third quarter and nine months were 4% and
5% lower, respectively, than the same periods last year. The lower earnings were
primarily due to the increased operating expenses.
Tire Distribution Systems
- -------------------------
Third quarter and nine months to-date 1998 results include net sales of
$105,500,000 and $281,800,000 and pretax income of $2,000,000 and $2,700,000
including $2,000,000 and $5,900,000 of goodwill amortization, respectively, for
the Company's TDS operations. Since TDS commenced operations during the fourth
quarter of 1997, there is no prior year comparison.
Results in 1997 on a pro forma basis for third quarter and nine months to-date
include net sales of $114,900,000 and $296,900,000 and pretax income of
$5,900,000 and $11,300,000 including $1,900,000 and $5,900,000 of goodwill
amortization, respectively. Sales for the third quarter and nine months to-date
were 8% and 5% lower than pro forma results over the same periods last year,
respectively. Same-store sales were down 6% for the third quarter and down 2%
for nine months to-date from what the acquired dealerships recorded during the
prior year period under separate ownership. The decrease in same-store sales for
the third quarter was primarily due to weaker results in September of 1998 when
compared to September results recorded during the prior year under separate
ownership. Shipments increased in September 1997 due to the anticipated Bandag
acquisitions of the five tire dealerships that are currently part of TDS and the
anticipated cancellation of the Michelin supply contract for those dealerships.
European Operations
- -------------------
Sales for the Company's European operations for the third quarter were 5% lower
than the same period last year on a 4% increase in unit volume. Unit volume for
the nine months to-date was 3% higher than the volume for the same period last
year, although sales decreased by 9%. When stated in local currency, sales for
the third quarter and nine months to-date were 5% and 4% lower, respectively,
than the same periods last year. Sales of retread material in local currency for
both third quarter and nine months to-date were 2% higher than the same periods
last year. The relatively strong performance of the U.S. dollar is reflected in
the negative effect of exchange rates used to translate local currency
denominated results into U.S. dollars. Sales in US dollars for the third quarter
and nine months to-date were also negatively affected by the 54% and 50% drop in
equipment sales, respectively.
Gross margin for the Company's European operations for the third quarter was
approximately two percentage points higher than the same period last year. The
higher gross margin was due to lower raw material costs and higher production in
the quarter. Gross margin for nine months to-date was
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BANDAG, INCORPORATED AND SUBSIDIARIES
three percentage points higher than the same period last year for the same
reasons stated above.
Operating expenses for the third quarter increased 18% over the same period last
year and were 8% lower for the nine months to-date. These expenses, when stated
in local currency, were 18% higher and 2% lower, respectively, than the same
periods last year. The increase in operating expenses for the third quarter is
principally due to a non-recurring pretax charge of $2,200,000 for
restructuring. The decrease in operating expenses for nine months to-date is due
to lower spending related to marketing and promotional programs. The percentage
differences between the U.S. dollar and local currency reflect the impact of
changes in exchange rates on the translation of local currencies into US
dollars.
Earnings before income taxes for the third quarter decreased 264% over the same
period last year and were 37% lower for the nine months to-date due to higher
operating expenses in the third quarter and lower sales.
Other Foreign Operations
- ------------------------
Combined sales for the Company's other foreign operations for the third quarter
and nine months to-date decreased 8% and 2%, respectively, on a unit volume
increase of 3% for the third quarter and a unit volume increase of 11% for the
nine months to-date. The decrease in sales was partially due to unit volume
decreases in Canada and South Africa. The 11% point difference in the third
quarter and 13% point difference in the nine months to-date between unit volume
and combined sales for foreign operations was a result of the lower translated
value of foreign-currency-denominated sales. Lower equipment sales were a
contributing factor to the sales decrease for the third quarter and nine months
to-date.
Unit volume for the Company's Asian operations decreased 37% and 24% for the
third quarter and nine months to-date, respectively, over the same periods last
year. Asian operations include Malaysia and Indonesia, whose results are
included in Other Foreign Operations, and US Exports to Asia, whose results are
included in Domestic operations.
Combined gross margin for the Company's other foreign operations was
approximately two percentage points higher than last year for the third quarter
and approximately three percentage points higher than last year for the nine
months to-date. This was due to higher equipment sales in the prior year, which
carry lower gross margins than retread rubber products, higher export sales out
of Malaysia that yield higher margins, and better manufacturing absorption in
Canada.
Combined operating expenses for the third quarter and nine months for the
Company's other foreign operations were 16% and 12% higher, respectively, than
the same periods last year. The higher operating expenses for both the third
quarter and nine months resulted from higher spending on sales and marketing
promotional programs, and higher payroll-related costs. Other
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expenses were significantly higher than last year with the majority of the
increase due to unfavorable foreign exchange adjustments, primarily in the
Company's Asian operations. These unfavorable foreign exchange adjustments were
partially offset on a consolidated basis through gains on related hedges entered
into by the Company's domestic operation.
Earnings before income taxes for the third quarter and nine months were 38% and
53% lower than the same periods last year due to economic conditions in Asia,
which produced the unfavorable foreign exchange adjustment included in expenses.
During the third quarter the Company began making preparations to close the
manufacturing facilities in New Zealand. Costs related to the closing of the New
Zealand manufacturing facility amounted to a pretax charge of $1,500,000 in the
third quarter. The Company will continue to supply New Zealand dealers through
shipments from other manufacturing locations.
Impact of Year 2000
- -------------------
The Company operates with a combination of purchased and internally-developed
software systems. Many of the older computer systems were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognizes a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations. The Company will be required
to modify or replace software that is not Year 2000 compliant so that its
computer systems will function properly with respect to dates in the Year 2000
and thereafter.
Purchased software systems account for a significant portion of the Company's
software environment, especially for date-sensitive applications such as Payroll
and Accounts Receivable. The Company has performed assessments in recent years
to identify clearly non-compliant software systems and to initiate replacement
activities. Most of those activities are completed or well underway. The
assessment process in North America has been completed and the company now
anticipates finishing its Year 2000 remediation process for mission critical
mainframe applications by fourth quarter 1999, although work to address cosmetic
changes for non-failure date usage could extend into first quarter 2000. Plans
call for client-server technology to be compliant by third quarter 1999,
communication and network-technology compliance to be compliant by third quarter
1999 and desktop technology to be compliant by year-end 1999. Required changes
outside of the Information Systems area will not be significant.
The installed base for the Company's software outside of North America consists
primarily of purchased commercial software, or applications written after 1990
which were written Year 2000 compliant. The assessment
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BANDAG, INCORPORATED AND SUBSIDIARIES
process has been completed for non-software items and plans call for compliance
issues in this area to be addressed mid-year 1999.
The Company has shifted new software development efforts to the client-server
platform, and has so far been able to obtain sufficient resources in this area,
but mainframe development resources remain in short supply and this will affect
development on this platform into the year 2000. This delay has not, to this
point, significantly affected the Company's business initiatives.
The costs related to the Year 2000 issue are expected to total approximately
$12,700,000, which represent an increase of $3,900,000 from our previous
published estimate. To date, $7,600,000 of this amount has been spent or
committed. We expect approximately 62% of total costs will be recorded as
current expense.
The Company presently believes that with a combination of actions, including
modification of existing software, conversions to newer versions of purchased
software and replacement with new systems, the Year 2000 issue will not pose
significant operational problems for its computer systems. On the other hand, if
such modifications and conversions are not made or not completed on a timely
basis, the Year 2000 issue could have a material impact on the operations of the
Company. In addition to remediation actions, the Company's contingency plans
will be reviewed and updated to address Year 2000 risks.
During the year, the Company will continue to have formal communications with
its significant suppliers and large customers to determine the extent to which
the Company's activities would be impacted by those third parties' failure to
remediate their own Year 2000 issues. However, there can be no guarantee that
the systems of other companies on which the Company relies will be corrected on
a timely basis and therefore have no adverse effect on the Company.
The Company has assessed its own products to determine if it has exposure to
contingencies related to the Year 2000 issue and it believes that any such
exposure will not be material.
Financial Condition:
- -------------------
Operating Activities.
Net cash provided by operating activities for the nine months ended September
30, 1998, was $5,184,000 less than the amount for the same period last year
primarily due to a decrease in net earnings.
Investing Activities.
The Company spent $32,177,000 on capital expenditures for the nine months ended
September 30, 1998, compared to $25,220,000 spent for the same period
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last year. The Company typically funds its capital expenditures from operating
cash flow. The Company has spent $5,105,000 on tire dealership acquisitions as
of September 30, 1998. These acquisitions have been consolidated into TDS.
The Company's excess funds are invested in financial instruments with various
maturities, but only instruments with an original maturity date of over 90 days
are classified as investments for balance sheet purposes. The Company's
purchases of investments exceeded maturities by $12,659,000 during the nine
months, leaving total investments at approximately $14,234,000 as of September
30, 1998.
Financing Activities.
Cash dividends totaled $6,003,000 and $18,551,000 for the third quarter and nine
months to-date, respectively, compared to totals of $5,694,000 and $17,121,000
for the same periods last year. The Company purchased 887,350 shares of its
outstanding Common and Class A Common stock, at prevailing market prices, for
$28,234,000 during the nine months ended September 30, 1998. Cash dividends and
stock purchases were funded from operational cash flows. During the first
quarter, the Company paid off $87,224,000 in short-term notes that it had issued
in conjunction with the November 1997 TDS acquisitions, and approximately
$12,700,000 in various other TDS notes payable assumed in the acquisitions.
The Company continues to have $111,000,000 in funds available under unused lines
of credit.
On October 7, 1998, the Company announced that the Board had authorized an
additional 2.0 million shares under the Company's share repurchase program. This
most recent authorization is in addition to the 82,216 shares as of September
30, 1998, remaining from previous authorizations.
Forward-Looking Information - Safe Harbor Statement.
- ---------------------------------------------------
In addition to historical information, this quarterly report on Form 10-Q
contains forward-looking statements regarding events and trends which may affect
the Company's future operating results and financial position. Such statements
are identified by the use of such words as "we continue to believe," "the
Company expects," "it believes," "are expected," "we expect," "the Company
presently believes," or other words of similar import. Future operations are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements. Such
uncertainties and risks include, but are not limited to, changes in economic
conditions in the market areas served by the Company's operations, increased
competitive activity, fluctuations in the price paid for raw materials, monetary
policy changes in the various countries where the Company has significant
operations, continued spending in sales, training, development of information
systems and expenses related to developing capabilities to
Page 15
<PAGE>
BANDAG, INCORPORATED AND SUBSIDIARIES
provide tire management services for fleet customers, and the risk that dealer
capabilities in the markets affected by the TCI agreement may not prove
sufficient for adequate fleet coverage.
The cost of the Year 2000 issue and the date on which the Company believes it
will complete Year 2000 modifications are based on management's best estimates
which are based on numerous assumptions of future events, including the
continued availability of certain resources, third party plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to purchase
Year 2000 systems, the ability to locate and correct all relevant computer
codes, the complexity of the Year 2000 Issue due to dispersed operating units
and geographic locations and similar uncertainties.
Page 16
<PAGE>
BANDAG, INCORPORATED AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 5 - Other Information
The deadline for submission of shareholder proposals pursuant to Rule
14a-8 under the Securities Exchange Act of 1934, as amended, for inclusion in
the Company's proxy statement for its 1999 Annual Meeting of Shareholders is
December 7, 1998. Additionally, if the Company receives notice of a shareholder
proposal after February 20, 1999, the persons named in proxies solicited by the
Board of Directors of the Company for its 1999 Annual Meeting of Shareholders
may exercise discretionary voting power with respect to such proposal.
Page 17
<PAGE>
BANDAG, INCORPORATED AND SUBSIDIARIES
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only)
27.1 Restated September 1997 Financial Data Schedule (EDGAR filing
only)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter ended
September 30, 1998.
Page 18
<PAGE>
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 12, 1998 \S\ Martin G. Carver
--------------------------------
Martin G. Carver
Chairman and Chief Executive Officer
Date: November 12, 1998 \S\ Warren W. Heidbreder
---------------------------------
Warren W. Heidbreder
Vice President, Chief Financial Officer
Page 19
<PAGE>
BANDAG, INCORPORATED AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Exhibit Page
------- ------- ----
27 Financial Data Schedule (EDGAR filing only) 21
27.1 Restated September 1997 Financial Data Schedule
(EDGAR filing only) 22
Page 20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND THE UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS OF THE REGISTRANT AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1998, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE IN THOUSANDS OF DOLLARS
EXCEPT PER SHARE DATA.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> $50,926
<SECURITIES> 14,234
<RECEIVABLES> 248,123
<ALLOWANCES> 15,073
<INVENTORY> 111,945
<CURRENT-ASSETS> 463,932
<PP&E> 480,917
<DEPRECIATION> 279,725
<TOTAL-ASSETS> 758,175
<CURRENT-LIABILITIES> 182,018
<BONDS> 112,960
0
0
<COMMON> 21,928
<OTHER-SE> 435,069
<TOTAL-LIABILITY-AND-EQUITY> 758,175
<SALES> 784,694
<TOTAL-REVENUES> 799,608
<CGS> 477,304
<TOTAL-COSTS> 477,304
<OTHER-EXPENSES> 240,654
<LOSS-PROVISION> 3,307
<INTEREST-EXPENSE> 8,839
<INCOME-PRETAX> 72,811
<INCOME-TAX> 32,037
<INCOME-CONTINUING> 40,774
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 40,774
<EPS-PRIMARY> 1.81
<EPS-DILUTED> 1.79
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS AND THE UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS OF THE REGISTRANT AS OF AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1997, RESPECTIVELY, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS. AMOUNTS ARE IN THOUSAND OF DOLLARS
EXCEPT PER SHARE DATA.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> $46,798
<SECURITIES> 1,126
<RECEIVABLES> 232,177
<ALLOWANCES> 12,392
<INVENTORY> 57,217
<CURRENT-ASSETS> 370,884
<PP&E> 400,555
<DEPRECIATION> 254,949
<TOTAL-ASSETS> 672,315
<CURRENT-LIABILITIES> 136,919
<BONDS> 12,929
0
0
<COMMON> 22,778
<OTHER-SE> 448,276
<TOTAL-LIABILITY-AND-EQUITY> 672,315
<SALES> 566,508
<TOTAL-REVENUES> 575,819
<CGS> 331,863
<TOTAL-COSTS> 331,863
<OTHER-EXPENSES> 153,139
<LOSS-PROVISION> 1,218
<INTEREST-EXPENSE> 1,178
<INCOME-PRETAX> 89,639
<INCOME-TAX> 34,545
<INCOME-CONTINUING> 55,094
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,094
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.41
</TABLE>
