ITEM 1. BUSINESS
All references herein to the "Company" or "Bandag" refer to Bandag, Incorporated and its subsidiaries unless the context indicates otherwise.
Bandag is engaged in the production and sale of precured tread rubber and equipment used by its franchisees for the retreading of tires for trucks, buses, light commercial trucks, industrial equipment, off-the-road equipment and passenger cars. Bandag specializes in a patented cold-bonding retreading process which it introduced to the United States in 1957. The Bandag Method, as it is called, separates the process of vulcanizing the tread rubber from the process of bonding the tread rubber to the tire casing, allowing for optimization of temperature and pressure levels at each stage of the retreading process. Although a Bandag retread is typically sold at a higher unit price than the alternative "hot-capped" process, as well as retreads sold using competitive precured systems, the Bandag product is considered to be superior, resulting in a longer lasting retread and lower user cost per mile.
The Company and its licensees have 1,383 franchisees worldwide, with 36% located in the United States and 64% internationally. The majority of Bandag's franchisees are independent operators of full service tire distributorships. Bandag's revenues primarily come from the sale of retread material and equipment to its franchisees. Bandag's products compete with new tire sales, as well as retreads produced using other retread processes. The Company concentrates its marketing effort on existing franchisees and on expanding their respective market penetration. Due to its strong distribution system, marketing efforts, and leading technology, Bandag, through its independent franchisee network, has been able to maintain the largest market presence in the retreading industry.
The Company as a tread rubber supplier to its independent network of franchisees competes in the light and heavy truck tire replacement market. Both new tire manufacturers and tread rubber suppliers compete in this market. While the Company has independent franchisees in over 120 countries, and competes in all of these geographic markets, its largest market is the United States. Truck tires retreaded by the Company's franchisees make up approximately 15% of the U.S. light and heavy truck tire replacement market. The Company's primary competitors are new tire manufacturers such as The Goodyear Tire & Rubber Company, Bridgestone Corporation and Groupe Michelin. The Goodyear Tire & Rubber Company also competes in the U.S. market as a tread rubber supplier to a combination of company owned and independent retreaders.
As a result of a recapitalization of the Company approved by the Company's shareholders on December 30, 1986, and substantially completed in February 1987, the Carver Family (as hereinafter defined) obtained absolute voting control of the Company. As of March 21, 1997 the Carver Family beneficially owned shares of Common Stock and Class B Common Stock constituting 75% of the votes entitled to be cast in the election of directors and other corporate matters. The "Carver Family" is composed of (i) Lucille A. Carver, a director and widow of Roy J. Carver, (ii) the lineal descendants of Roy J. Carver and their spouses, and (iii) certain trusts and other entities for the benefit of the Carver Family members.
Description of Business
The Company's business consists of the franchising of a patented process for the retreading of tires primarily for trucks, buses, light commercial trucks, and the production and sale of precured tread rubber and related products used in connection with this process.
The Company's business can be divided into two main areas: (i) manufacturing the tread rubber and (ii) bonding the tread to a tire casing. Bandag manufactures over 500 separate tread designs and sizes, treads specifically designed for various applications, allowing fleet managers to fine-tune their tire programs. Bandag tread rubber is vulcanized prior to shipment to its independent franchisees. The Bandag franchisee performs the retreading process of bonding the cured tread to a prepared tire casing. This two-step process allows utilization of the optimum temperature and pressure levels at each step. Lower temperature levels during the bonding process result in a more consistent, higher quality finished retread with less damage to the casing. Bandag has developed a totally integrated retreading system with the materials, bonding process and manufacturing equipment specifically designed to work together as a whole.
The Company also franchises the use of another cold process precured retreading system, the Vakuum Vulk Method, for which the Company owns worldwide rights. In connection with the Vakuum Vulk Method, the Company currently sells tread rubber, equipment, and supplies to franchisees located in certain European countries.
Markets and Distribution
The principal market categories for tire retreading are truck and bus, with more than 90% of the tread rubber sold by the Company used in the retreading of these tires. Additionally, the Company markets tread rubber for the retreading of off-the-road equipment, industrial and light commercial vehicle and passenger car tires; however, historically, sales of tread rubber for these applications have not contributed materially to the Company's results of operations.
Trucks and Buses Tread rubber, equipment, and supplies for retreading and repairing truck and bus tires are sold primarily to independent franchisees by the Company to use the Bandag Method for that purpose. Bandag has 1,333 franchisees throughout North America, Central America, South America, Europe, Africa, Far East, Australia and New Zealand. These franchisees are owned and operated by independent franchisees, some with multiple franchises and/or locations. Of these franchisees 496 are located in the United States. Additionally, the Company has approximately 50 franchisees in Europe who retread tires using the Vakuum Vulk Method. One hundred forty of Bandag's foreign franchisees are franchised by licensees of the Company in Australia, and joint ventures in India and Sri Lanka. A limited number of franchisees are trucking companies which operate retread shops essentially for their own needs. A few franchisees also offer "hot-cap" retreading and most sell one or more lines of new tires.
The current franchise agreement offered by the Company grants the franchisee the non-exclusive retread manufacturing rights to use the Bandag Method for one or more applications and the Bandag trademarks in connection therewith within a specified territory, but the franchisee is free to market Bandag retreads outside the territory. No initial franchise fee is paid by a franchisee for its franchise.
Other Applications The Company continues to manufacture and supply to its franchisees a limited amount of tread for Off-the-Road (OTR) tires, industrial tires, including solid and pneumatic, passenger car tires and light commercial tires for light trucks and recreational vehicles.
Regulations
Various federal and state authorities have adopted safety and other regulations with respect to motor vehicles and components, including tires, and various states and the Federal Trade Commission enforce statutes or regulations imposing obligations on franchisors, primarily a duty to disclose material facts concerning a franchise to prospective franchisees. Management is unaware of any present or proposed regulations or statutes which would have a material adverse effect upon the Company's business, but cannot predict what other regulations or statutes might be adopted or what their effect on the Company's business might be.
Competition
The Company faces strong competition in the market for replacement truck and bus tires, the principal retreading market which it serves. The competition comes not only from the major manufacturers of new tires, but also from manufacturers of retreading materials. Competitors include producers of "camelback," "strip stock," and "slab stock" for "hot-cap" retreading, as well as a number of producers of precured tread rubber. Various methods for bonding precured tread rubber to tire casings are used by competitors.
Bandag retreads are often sold at a higher price than tires retreaded by the "hot-cap" process as well as retreads sold using competitive precured systems. The Company believes that the superior quality and greater mileage of Bandag retreads and expanded service programs to franchisees and end-users outweigh any price differential.
Bandag franchisees compete with many new-tire dealers and retreading operators of varying sizes, which include shops operated by the major new-tire manufacturers, large independent retread companies, retreading operations of large trucking companies, and smaller commercial tire dealers.
Sources of Supply
The Company manufactures the precured tread rubber, cushion gum, and related supplies in Company-owned manufacturing plants in the United States, Canada, Brazil, Belgium, South Africa, Indonesia, Mexico, Malaysia and New Zealand. The Company has entered into joint venture agreements in India and Sri Lanka. The Company also manufactures pressure chambers, tire casing analyzers, buffers, tire builders, tire handling systems, and other items of equipment used in the Bandag and Vakuum Vulk retreading methods. Curing rims, chucks, spreaders, rollers, certain miscellaneous equipment, and various retreading supplies, such as repair patches sold by the Company, are purchased from others.
The Company purchases rubber and other materials for the production of tread rubber and other rubber products from a number of suppliers. The rubber for tread is primarily synthetic and obtained principally from sources which most conveniently serve the respective areas in which the Company's plants are located. Although synthetic rubber and other petrochemical products have periodically been in short supply and significant cost fluctuations have been experienced in previous years, the Company to date has not experienced any significant difficulty in obtaining an adequate supply of such materials. However, the effect on operations of future shortages will depend upon their duration and severity and cannot presently be forecast.
The principal source of natural rubber, used for the Company's cushion gum, is the Far East. The supply of natural rubber has historically been adequate for the Company's purposes. Natural rubber is a commodity subject to wide price fluctuations as a result of the forces of supply and demand. Synthetic prices historically have been related to the cost of petrochemical feedstocks which were relatively stable prior to 1995. A relationship between natural rubber and synthetic rubber prices exists, but it is by no means exact.
Patents
The Company owns or has licenses for the use of a number of United States and foreign patents covering various elements of the Bandag and Vakuum Vulk Methods. The Company has patents covering improved features, some of which started expiring in 1995 and others that will continue to expire through the year 2011, and the Company has applications pending for additional patents.
The Company's patent counsel has advised the Company that the United States patents are by law presumed valid and that the Company does not infringe upon the patent rights of others. While the outcome of litigation can never be predicted with certainty, such counsel has advised the Company that, in his opinion, in the event of litigation placing the validity of such patents at issue, the Company's United States patent position should remain adequate.
The protection afforded the Bandag Method by foreign patents owned by the Company, as well as those under which it is licensed, varies among different countries depending mainly upon the extent to which the elements of the Bandag Method are covered, the strength of the patent laws and the degree to which patent rights are upheld by the courts. Patent counsel for the Company is of the opinion that its patent position in the foreign countries in which its principal sales are made is adequate and does not infringe upon the rights of others. The Company has, however, extended its foreign market penetration to some countries where little or no patent protection exists.
The Company does not consider that patent protection is the primary factor in its successful retreading operation, but rather, that its proprietary technical "know-how," product quality, franchisee support programs and effective marketing programs are more important to its success.
The Company has secured registrations for its trademark and service mark BANDAG, as well as other trademarks and service marks, in the United States and most of the other important commercial countries.
Other Information
The Company conducts research and development of new products, primarily in the tire retreading field, and the improvement of materials, equipment, and retreading processes. The cost of this research and development program was approximately $12,056,000 in 1994, $12,556,000 in 1995 and $16,157,000 in 1996.
The Company's business has seasonal characteristics which are tied not only to the overall performance of the economy, but more specifically to the level of activity in the trucking industry. Tire demand does, however, lag the seasonality of the trucking industry. The Company's third and fourth quarters have historically been the strongest in terms of sales volume and earnings.
As stated in the Company's 13D filed pursuant to the acquisition of the HON Industries common stock, "The shares of Common Stock purchased by Bandag have been acquired for investment purposes. Bandag believes that the Common Stock represents an attractive investment opportunity at this time." The Company continues to believe that HON Industries' common stock is a good, long-term investment consistent with the Company's overall corporate strategy to maximize long term shareholder value. The Company purchased the stock in 1987 and 1988 at a cost of $25.3 million and the market value of the shares currently held at the end of 1996 was $79 million.
The Company has sought to comply with all statutory and administrative requirements concerning environmental quality. The Company has made and will continue to make necessary capital expenditures for environmental protection. It is not anticipated that such expenditures will materially affect the Company's earnings or competitive position.
As of December 31, 1996, the Company had 2,591 employees.
Financial Information about Industry Segments
As stated above, the Company's continuing operations are conducted in one principal business and, accordingly, the Company's financial statements contain information concerning a single industry segment.
Revenues of Principal Product Groups
The following table sets forth (in millions of dollars), for each of the last three fiscal years, revenues attributable to the Company's principal product groups:
1996 1995 1994 Revenues:
Tread rubber, cushion gum, and retreading supplies $700.7 $688.8 $613.1 Other products (1) 61.0 58.4 45.9
Corporate (2) 7.3 8.1 6.7 ----- ----- ----- Total $769.0 $755.3 $665.7
(1) Includes retreading equipment and the sale of new and retreaded tires and related services.
(2) Consists of interest and dividend income.
Financial Information about Foreign and Domestic Operations
Financial Statement "Operations in Different Geographic Areas and Sales by Principal Products" follows on page 10.
BANDAG, INCORPORATED AND SUBSIDIARIES Operations in Different Geographic Areas and Sales by Principal Products
The Company's operations are conducted in one principal business, which includes the manufacture of precured tread rubber, equipment and supplies for retreading tires. While the Company does business throughout the world, its principal markets are in the United States and Europe
Information concerning the Company's operations by geographic area and sales by principal product for the years ended December 31, 1996, 1995 and 1994 is shown below.
Information concerning operations in different geographic areas:
Executive Officers of the Company
The following table sets forth the names and ages of all executive officers of the Company as of March 21, 1997, the period of service of each with the Company, positions and offices with the Company presently held by each, and the period during which each officer has served in his present office:
Mr. Martin G. Carver was elected Chairman of the Board effective June 23, 1981, Chief Executive Officer effective May 18, 1982, and President effective May 25, 1983. Prior to his present position, Mr. Carver was also Vice Chairman of the Board from January 5, 1981 to June 23, 1981.
Mrs. Carver has served as a Director and Treasurer of the Company for more than five years.
Mr. Carlson joined Bandag in 1974. In 1985 he was appointed to Vice President, Personnel Administration and in 1989 was appointed Vice President, Planning and Development. In November 1993, he was elected to his current office of Sr. Vice President and General Manager EHRD.
Mr. Derby joined Bandag in 1971. He has served as Vice President, Engineering since 1985 and was elected to that office in August 1996.
Mr. Dvorchak joined Bandag in 1971. In 1978 he was elected to the office of Sr. Vice President, Chief Financial Officer. Mr. Dvorchak announced his decision to retire in 1997 and to step down as Chief Financial Officer effective January 1, 1997. Mr. Dvorchak will continue to serve as Senior Vice President of the Corporation until his retirement.
Mr. Ferrise joined Bandag in 1981. In 1995 he was elected to the office of Vice President, Marketing and held that position until January 1997 when he was elected to his current office of Vice President, Sales & Marketing.
Mr. Green joined Bandag in 1991 and was elected Senior Vice President, Manufacturing. From 1981 to that date, he was employed by Nissan Motor Manufacturing Corporation in various management positions in manufacturing, the latest of which was Director, Manufacturing Vehicle Assembly, Component Assembly and Paint Plants, Manufacturing Division.
Mr. Heidbreder joined Bandag in 1982. In 1986 he was elected to the office of Vice President, Legal and Tax Administration, and Corporate Secretary. In November 1996, he was elected to his current office of Vice President, Chief Financial Officer, and Corporate Secretary effective as of January 1, 1997.
Mr. Li joined Bandag in July 1996 as Vice President, Asian Operations and was elected to that office in August 1996. Before joining Bandag, Mr. Li was employed for more than 25 years by the Eastman Kodak Company.
Mr. Andrade-Marin served as General Manager, South America from 1989 until January 1995 when he was promoted to the position of Vice President, Latin America. He was elected to that office in August 1996.
Mr. Robbins served as General Manager, New Zealand from 1991 until June 1996 when he was promoted to the position of Vice President, Southern Region. He was elected to that office in August 1996.
All of the above-named executive officers have been elected by the Board of Directors and serve at the pleasure of the Board of Directors.
ITEM 2.
ITEM 2. PROPERTIES
The general offices of the Company are located in a Company-owned 56,000 square foot office building in Muscatine, Iowa.
The tread rubber manufacturing plants of the Company are located to service principal markets. The Company operates fifteen of such plants, six of which are located in the United States, and the remainder in Canada, Belgium, South Africa, Brazil, New Zealand, Mexico, Malaysia, Indonesia and Venezuela. The plants vary in size from 9,600 square feet to 194,000 square feet with the first plant being placed into production during 1959. All of the plants are owned in fee except for the plants located in New Zealand, Indonesia, Malaysia and Venezuela, which are under standard lease contracts.
Retreading equipment is manufactured at Company-owned plants located in Muscatine, Iowa and Campinas, S.P., Brazil, of approximately 60,000 square feet and 10,000 square feet, respectively. In addition, the Company owns a research and development center in Muscatine of approximately 58,400 square feet and a 26,000 square foot facility used primarily for training franchisees and franchisee personnel. Similar training facilities are located in Brazil, Mexico, South Africa and Europe. The Company also owns a 26,000 square foot office and warehouse facility in Muscatine.
In addition, the Company mixes rubber and produces cushion gum at a Company-owned 168,000 square foot plant in California. The Company owns its European headquarters office in Belgium and a 129,000 square foot warehouse in the Netherlands.
In September 1995, Bandag do Brasil acquired 53,820 square feet of manufacturing facility located on 4.9 acres of land. The facility is located in Sorocaba in the State of Sao Paulo, Brazil. Bandag do Brasil is in the process of building a 77,580 square foot manufacturing and warehouse facility on a 23 acre site in Mafra, State of Santa Catarina, Brazil.
In the opinion of the Company, its properties are maintained in good operating condition and the production capacity of its plants is adequate for the near future. Because of the nature of the activities conducted, necessary additions can be made within a reasonable period of time.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Treadco, Inc. v. Bandag, Inc., et. al. On October 27, 1995, Treadco, Inc. ("Treadco"), Bandag's largest franchisee, filed a complaint in the Sebastian County Chancery Court, Fort Smith, Arkansas, against Bandag (Treadco, Inc. v. Bandag, Inc., et al., Case No. 95-1224). Treadco alleges in that action various Arkansas statutory and common law claims relating to allegations that Bandag wrongfully induced several Treadco employees to terminate their employment with Treadco and begin working for Bandag, that Bandag wrongfully induced Treadco customers to switch their business to other Bandag franchises, and that Bandag wrongfully refused to renew certain franchise agreements. Treadco seeks an unspecified amount of money damages and injunctive relief. On November 8, 1995, Bandag filed an action in the United States District Court for the Western District of Arkansas to compel the arbitration of Treadco's claims (Bandag, Inc. v. Treadco, Inc., Case No. 95-2204). The Arkansas Chancery Court stayed all proceedings pending the federal court's decision on Bandag's petition. Treadco conceded that three of its claims against Bandag were subject to a binding arbitration agreement. The federal court has ruled that all claims should be settled at the arbitration hearing.
Treadco has brought a counterclaim in the arbitration matter in which Treadco alleges that Bandag has engaged in conduct intended to restrain trade and destroy competition in violation of antitrust law. Treadco and Bandag have both stated that reports from their experts will be ready during July, 1997 and they will be ready for the arbitration hearing by October, 1997. No date has been set for the arbitration hearing by the arbitrator.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Information concerning cash dividends declared and market prices of the Company's Common Stock and Class A Common Stock for the last three fiscal years is as follows:
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (Cont.)
The approximate number of record holders of the Company's Common Stock as of March 21, 1997, was 2,623, the number of holders of Class A Common Stock was 1,448, and the number of holders of Class B Common Stock was 296. The Common Stock and Class A Common Stock are traded on the New York Stock Exchange and the Chicago Stock Exchange. There is no established trading market for the Class B Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain Selected Consolidated Financial Data for the periods and as of the dates indicated:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1996-1995
Consolidated net sales in 1996 increased 2% from 1995 matching the unit volume growth for retread materials. The translated value of the Company's foreign-currency-denominated sales decreased 1% from 1995 but that difference was offset by slightly higher equipment sales. The Company's seasonal sales pattern, which is tied to the trucking industry activity, is similar to previous years with the third and fourth quarters being the strongest for both sales and earnings.
The Company's consolidated gross profit margin increased by 1.4 percentage points from 1995 to 41.6% in 1996 as a result of raw material cost decreases and manufacturing efficiencies resulting from past investments in process improvements. However, this gain was more than offset by higher operating expenses. The increased operating expenses related principally to increased spending for sales & marketing staffing and programs, employee training, distribution replacement, and higher R&D, resulting in a net earnings decline in 1996 of 16% from 1995. The Company believes that in order to achieve its strategic initiatives for future growth it will require heavy investments in people and processes. This will keep the Company's operating expenses at higher than historical levels for the near future. Therefore, growth in earnings will be dependent on the Company's ability to achieve revenue growth. The Company's effective income tax rate of 37.6% was comparable to the previous year's rate of 37.4%.
Earnings per share in 1996 of $3.44 were $.38 lower, a 10% decrease from 1995. During 1996, the Company acquired 1,298,000 shares of its outstanding Common Stock and Class A Common Stock for $61,691,000, at prevailing market prices. This, in addition to the previous year's purchases, resulted in fewer average shares outstanding in 1996, which had a favorable impact of $.07 on earnings per share.
Domestic net sales in 1996 were 3% higher than a year ago, as was the tread volume. Average raw material costs for the year were approximately 4% lower than the previous year's average. As a result, gross margin increased by 2 percentage points compared to a margin decrease experienced in the previous year. Domestic 1996 earnings before income taxes declined 10 percentage points from the previous year due to the same increases in operating expenses as discussed in the consolidated comments above.
The Company's foreign operations comprised 37% and 20% of 1996's net sales and earnings before income taxes, respectively. This compares to 38% and 24%, respectively, of last year's net sales and earnings before income taxes.
Net sales in Europe declined 5% from 1995. The decline was the result of a 7% decrease in unit volume and a 3% decrease because of the unfavorable impact on the translated value of the Company's foreign-currency- denominated sales, which was partially offset with price increases of approximately 4%. Gross profit margin in 1996 increased approximately 1 percentage point compared to 1995 due to lower per unit manufacturing costs. Earnings before income taxes declined by 33% over the previous year.
Unit volume for the Company's other combined foreign operations improved by 5% over 1995, and net sales increased by 6%. Gross profit margin remained the same, but operating and other expenses, as a percent of sales, increased by approximately 6 percentage points from the previous year due principally to a provision related to a tax dispute in Brazil and the Company's commitment to building a global organizational structure. Earnings before income taxes declined by 28% due to the increased operating expenses.
1995-1994
Consolidated net sales increased 14% from 1994. Retread unit volume increased 3% while the translated value of the Company's foreign-currency- denominated sales increased 2%. The remaining 9% increase was from the cumulative increases in selling prices in 1994 and 1995 in response to higher raw material costs. The Company's seasonal sales pattern, which is tied to the trucking industry activity, is similar to previous years with the third and fourth quarters being the strongest for both sales and earnings.
The Company's consolidated gross profit margin declined by 1.8 percentage points from 1994, because of raw material cost increases which were not passed on to dealers. This, combined with increased operating expenses related principally to increased spending for marketing programs, resulted in net earnings improving only 3% above 1994. The Company's effective income tax rate of 37.4% was comparable to the previous year's rate.
1995 earnings per share of $3.82 were $.31 higher, a 9% increase from 1994. During the year, the Company acquired 1,946,000 shares of its outstanding Common Stock and Class A Common Stock for $107,964,000, at prevailing market prices. This, in addition to the previous year's purchases, resulted in fewer average shares outstanding in 1995. This had a favorable impact of $.17 on earnings per share.
Domestic net sales in 1995 were 11% higher than in 1994 due to increased selling prices in 1994 and 1995, and higher equipment sales. Tread volume increased only 1%. Average raw material costs for the year were approximately 27% higher than the previous year's average. Selling prices were increased only in the first quarter, as the Company chose to absorb further increases during the year. This resulted in a gross margin decline of 3 percentage points. Domestic 1995 earnings before income taxes declined 4 percentage points over the prior year due to flat sales volume and higher raw material costs, as well as increased spending for marketing programs.
The Company's foreign operations comprised 38% and 24% of 1995's net sales and earnings before income taxes, respectively. This represents a 2 percentage-point increase, as a percent of total revenues, and a 7 percentage-point increase, as a percent of total earnings before income taxes, in comparison with the prior year.
Unit volume in Europe increased 6% over 1994. Net sales improved by 22%, with 8 percentage points due to the favorable impact on the translated value of the Company's foreign-currency-denominated sales. Gross profit margin in 1995 increased 2 percentage points compared to 1994 due to higher production levels and lower manufacturing spending. Earnings before income taxes improved by 100% over the prior year.
Unit volume for the Company's other combined foreign operations improved by 6% over 1994, with net sales increasing by 16%. The sales increase exceeded the volume increase due to the favorable impact of the higher translated value of foreign-currency-denominated sales coupled with selling price increases initiated during the year in response to higher raw material costs. Gross profit margin decreased 1 percentage point, but operating expenses, as a percent of sales, decreased by approximately 1 percentage point from 1994. Earnings before income taxes increased by 21% due to the increased sales combined with a 5% increase in other income.
1994-1993
Consolidated 1994 net sales increased 10% from 1993, of which six percentage points were due to unit volume increases and four percentage points were due to increases in selling prices in response to higher costs for the Company's major raw materials. The Company's seasonal sales pattern, which is tied to trucking industry activity, was similar to previous years. As is normally the case, the third and fourth quarters were the strongest in terms of both sales volume and earnings.
The Company's consolidated 1994 net earnings increased 19% from 1993 due to the combined impact of higher unit volume and improved manufacturing efficiencies. The Company's consolidated gross profit margin improved by 1.7 percentage points due to relatively flat manufacturing expenses but higher unit volume. This, while an improvement, still leaves the Company's consolidated gross margin below its 1992 level, which was itself below historic levels. The higher gross profit was partially offset by increased operating expenses related principally to increased spending for marketing programs. The Company's effective income tax rate of 37% was equal to the previous year's rate.
The Company's earnings per share for 1994 of $3.51, were $.63 higher, a 22% increase from 1993. During the year, the Company acquired 1,043,000 shares of its outstanding Common Stock and Class A Common Stock for $53,580,000, at prevailing market prices. This, in combination with prior year purchases, resulted in fewer shares outstanding in 1994 which had a favorable impact of $.06 on earnings per share.
Domestic net sales in 1994 were 11% higher than a year ago due to increased unit volume (up 5%), increased selling prices and higher equipment sales. Average raw material costs for the year were approximately 4% higher than the previous year and selling prices were increased a proportional amount to maintain gross margin. Domestic 1994 earnings before income taxes increased 15% over the prior year due to higher sales volume and relatively flat manufacturing costs, the benefit of which was partially offset by an increase in spending for marketing programs.
The Company's foreign operations comprised 36% and 17% of 1994's net sales and earnings before income taxes, respectively. This represents a one percentage-point decline as a percent of total revenues and a three percentage-point increase as a percent of total earnings before income taxes in comparison to the previous year.
Unit volume in Europe increased 6% over 1993, while net sales improved by 8%. Gross profit margin increased 2.7 percentage points in 1994 compared to 1993 due to higher production volume but relatively flat manufacturing costs. Selling price increases during 1994 were not as significant as in the Company's domestic markets because the strong Belgian franc offset most of Europe's raw material cost increases, which are based on world prices. Overall, earnings before income taxes improved by 250% over the previous year.
Unit volume for the Company's other combined foreign operations improved by 11% in 1994 over 1993, with net sales increasing by a lesser 9%. The sales increase was lower than the volume increase due to the unfavorable impact of the lower translated value of foreign-currency-denominated sales. The lower translated values more than offset selling price increases initiated during the year in response to higher raw material costs. Gross profit margins remained flat, but operating expenses, as a percent of sales, decreased by approximately one percentage point from the prior year. Earnings before income taxes increased by 23% from the previous year due to the unit volume and sales increases combined with flat operating expenses.
Impact of Inflation and Changing Prices
It has generally been the Company's practice to adjust its selling prices to recover increased production and raw material costs in order to maintain its gross profit margin. Since the Company's raw material costs declined in 1996, the Company used the increased margin to partially offset the increase in operating expenses.
Replacement of fixed assets requires a greater investment than the original asset cost due to the impact of the general price level increases over the useful lives of plant and equipment. This increased capital investment would result in higher depreciation charges affecting both inventories and cost of products sold.
However, the replacement cost depreciation for new assets, calculated on a straight-line basis, is not significantly greater than historical depreciation using accelerated methods which result in higher depreciation charges in the early years of an asset's life.
Capital Resources and Liquidity
At the end of 1996, current assets exceeded current liabilities by $202,486,000. Cash and cash equivalents totaled $31,453,000 at year-end, increasing by $436,000 during the year. The Company invests excess funds over various terms, but only instruments with an original maturity date of over 90 days are classified as investments. These investments decreased by $7,684,000 from the prior year.
The only changes in working capital requirements are for normal business growth. The Company funds its capital expenditures from the cash flow it generates from operations. During 1996, the Company spent $34,388,000 for capital expenditures. The Company expects that 1997 capital expenditures will be at a higher level than 1996.
As of December 31, 1996, the Company had available uncommitted lines of credit totaling $91,000,000 in the United States for working capital purposes. Also, the Company's foreign subsidiaries have approximately $28,000,000 in credit and overdraft facilities available to them. From time to time during 1996, the Company borrowed funds to supplement operational cash flow needs or to settle intercompany transactions. The Company's long-term liabilities totaled $10,125,000 at year end, which are approximately 2% of long-term liabilities and stockholders' equity combined. The Company has no plans at this time to undertake additional liabilities of any substantial amount.
During the year, the Company purchased 1,298,000 shares of its outstanding Common Stock and Class A Common Stock for $61,691,000 at prevailing market prices and paid cash dividends amounting to $21,785,000. The Company generally funds its dividends and stock repurchases from the cash flow generated from its operations. Historically the Company has utilized excess funds to purchase its own shares, believing the acquisition of the Company's stock to be a good investment.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements
Page
Report of Independent Auditors 23 Consolidated Balance Sheets as of December 31, 1996, 1995 and 1994 24 - 25
Consolidated Statements of Earnings for the Years Ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 27
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29 - 38
Report of Independent Auditors
Stockholders and Board of Directors Bandag, Incorporated
We have audited the accompanying consolidated balance sheets of Bandag, Incorporated and subsidiaries as of December 31, 1996, 1995, and 1994, and the related consolidated statements of earnings, cash flows, and changes in stockholders' equity for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bandag, Incorporated and subsidiaries at December 31, 1996, 1995, and 1994, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois January 31, 1997
BANDAG, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets December 31 Assets 1996 1995 1994 Current Assets (In thousands) Cash and cash equivalents $ 31,453 $ 31,017 $ 46,519 Investments - Note B 2,089 9,773 36,864 Accounts receivable, less allowance (1996 - $13,320; 1995 - $12,327; 1994 - $11,883) 206,732 200,300 178,057 Inventories: Finished products 44,704 40,252 37,022 Material and work in process 14,228 12,811 14,132 -------- ------- ------- 58,932 53,063 51,154
Deferred income tax assets 29,138 22,451 21,230 Prepaid expenses and other current assets 13,356 11,854 11,055 -------- ------- ------- Total Current Assets 341,700 328,458 344,879
Property, Plant, and Equipment, on the Basis of Cost: Land 3,671 3,731 3,587 Buildings and improvements 85,445 84,426 79,981 Machinery and equipment 292,956 287,771 267,986 Construction and equipment installation in progress 12,520 6,327 8,177 -------- ------- ------- 394,592 382,255 359,731 Less allowances for depreciation and amortization (249,457) (237,405) (207,973) -------- ------- ------- 145,135 144,850 151,758
Marketable Equity Securities - Note B 79,035 55,684 64,066 Other Assets 22,472 25,167 21,443 -------- ------- ------- Total Assets $588,342 $554,159 $582,146 ======== ======= =======
Liabilities and Stockholders' Equity Current Liabilities Accounts payable $ 28,744 $ 24,268 $ 20,014 Accrued employee compensation and benefits 23,532 21,604 17,695 Accrued marketing expenses 32,872 32,485 28,609 Other accrued expenses 34,076 25,098 23,433 Dividends payable 5,731 5,440 5,270 Income taxes payable 12,254 10,124 9,999 Short-term notes payable and other liabilities 2,005 3,015 8,280 ------- ------- ------- Total Current Liabilities 139,214 122,034 113,300
Other Liabilities 10,125 11,857 12,252 Deferred Income Tax Liabilities 28,136 20,289 22,545 Stockholders' Equity - Note E Common Stock; $1.00 par value, authorized - 21,500,000 shares; issued and outstanding - 9,842,861 shares in 1996; 10,112,164 shares in 1995; 10,788,985 shares in 1994 9,843 10,112 10,789 Class A Common Stock; $1.00 par value; authorized - 50,000,000 shares; issued and outstanding -11,027,759 shares in 1996; 11,711,344 shares in 1995; 12,976,211 shares in 1994 11,028 11,711 12,976 Class B Common Stock; $1.00 par value; authorized - 8,500,000 shares; issued and outstanding - 2,051,984 shares in 1996; 2,355,352 shares in 1995; 2,357,976 shares in 1994 2,052 2,355 2,358 Additional paid-in capital 4,069 2,493 3,192 Retained earnings 355,663 355,814 384,607 Unrealized gain on securities available-for-sale, net of related tax effect (1996 - $20,765; 1995 - $11,700; 1994 - $15,159) 33,854 19,568 24,491 Equity adjustment from foreign currency translation (5,642) (2,074) (4,364) -------- -------- -------- Total Stockholders' Equity 410,867 399,979 434,049 -------- -------- -------- Total Liabilities and Stockholders' Equity $588,342 554,159 582,146 ======== ======== ========
See notes to consolidated financial statements.
BANDAG, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Earnings
Year Ended December 31 1996 1995 1994 (In thousands, except per share data) Income: Net Sales $756,925 $740,363 $650,567 Other income 12,074 14,911 15,125 ------- ------- ------- 768,999 755,274 665,692 Costs and expenses: Cost of products sold 442,149 442,837 377,385 Engineering, selling, administrative and other expenses 194,834 155,362 136,346 Interest 1,236 1,959 2,126 ------- ------- ------- 638,219 600,158 515,857 ------- ------- ------- Earnings Before Income Taxes 130,780 155,116 149,835 Income Taxes - Note D 49,176 58,089 55,841 ------- ------- ------- Net Earnings $ 81,604 $ 97,027 $ 93,994 ======= ======= ======= Net Earnings Per Share - Note E $ 3.44 $ 3.82 $ 3.51 ======= ======= =======
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows Year Ended December 31 1996 1995 1994 (In thousands) Operating Activities Net earnings $ 81,604 $ 97,027 $ 93,994 Adjustments to reconcile net earnings to net cash provided by operating activities: Provisions for depreciation and amortization 34,595 34,595 35,328 Change in deferred income taxes 1,367 (3,462) (2,590) Change in operating assets and liabilities: Accounts receivable (9,959) (19,674) (14,211) Inventories (7,401) (1,148) (6,872) Prepaid expenses and other current assets (1,921) 94 (2,019) Accounts payable and other accrued expenses 19,063 11,164 13,219 Income taxes payable 2,582 158 (1,357) Other assets (5,883) 443 1,131 ------- ------- ------- Net Cash Provided by Operating Activities 114,047 119,197 116,623
Investing Activities Additions to property, plant and equipment (34,388) (28,411) (40,799) Net dispositions of property, plant and equipment 506 724 1,151 Purchases of investments (18,205) (27,379) (61,775) Maturities of investments 25,889 54,470 49,954 Sale of marketable equity securities -- -- 2,447 ------- ------- ------- Net Cash Used in Investing Activities (26,198) (596) (49,022)
Financing Activities Proceeds from short-term notes payable 42,902 41,230 80,425 Principal payments on short-term notes payable and other liabilities (45,246) (46,887) (86,442) Cash dividends (21,785) (20,651) (19,310) Purchases of Common Stock and Class A Common Stock (61,691) (107,964) (53,580) ------- ------- ------- Net Cash Used in Financing Activities (85,820) (134,272) (78,907)
Effect of exchange rate changes on cash and cash equivalents (1,593) 169 (179) ------- ------- ------- Increase (Decrease) in Cash and Cash Equivalents 436 (15,502) (11,485) Cash and cash equivalents at beginning of year 31,017 46,519 58,004 ------- ------- ------- Cash and Cash Equivalents at End of Year $ 31,453 $ 31,017 $ 46,519 ======= ======= =======
See notes to consolidated financial statements.
BANDAG, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include the accounts and transactions of all subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. The carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximates its fair value.
Accounts Receivable and Concentrations of Credit Risk: Concentrations of credit risk with respect to accounts receivable are limited due to the number of dealers the Company has and their geographic dispersion. The Company maintains close working relationships with these customers and performs ongoing credit evaluations of their financial condition. No one customer is large enough to pose a significant financial risk to the Company. The Company maintains an allowance for losses based upon the expected collectibility of accounts receivable. Credit losses have been within management's expectations.
Inventories: Inventories are valued at the lower of cost, determined by the last in, first out (LlFO) method, or market.
The excess of current cost over the amount stated for inventories valued by the LIFO method amounted to approximately $23,111,000, $24,479,000, and $19,143,000 at December 31, 1996, 1995, and 1994, respectively.
Property, Plant, and Equipment: Provisions for depreciation and amortization of plant and equipment are principally computed using declining-balance methods, based upon the estimated useful lives of the various classes of depreciable assets.
Foreign Currency Translation: Assets and liabilities of foreign subsidiaries are translated at the current exchange rate and items of income and expense are translated at the average exchange rate for the year. Exchange gains and losses arising from translations denominated in a currency other than the functional currency of the foreign subsidiary and translation adjustments in countries with highly inflationary economies or in which operations are directly and integrally linked to the Company's U.S. operations are included in income.
Research and Development: Expenditures for research and development are expensed as incurred.
Revenue Recognition: Sales and associated costs are recognized when products are shipped to dealers.
B. INVESTMENTS
Debt securities are classified as held-to-maturity based upon the positive intent and ability of the Company to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in investment income. Interest on securities classified as held-to-maturity is included in investment income.
Marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with the unrealized gains, net of tax, reported as a separate component of stockholders' equity. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in investment income. The cost of securities sold is based on the specific identification method. Dividends on securities classified as available-for-sale are included in investment income.
The following is a summary of securities held-to-maturity and available- for-sale (in thousands):
At December 31, 1996, 1995 and 1994, securities held-to-maturity are due in one year or less and include $14,955,000, $20,805,000 and $38,815,000, respectively, reported as cash equivalents.
C. SHORT-TERM NOTES PAYABLE AND LINES OF CREDIT
The carrying amount reported in the consolidated balance sheet of the Company's short-term notes payable approximates its fair value.
Total available funds under unused lines of credit at December 31, 1996 amounted to $119,000,000.
The weighted average interest rate on short-term borrowings outstanding for the full years of 1996, 1995, and 1994, were 5.8%, 7.9%, and 5.3%, respectively.
Interest paid on short-term notes payable and other obligations amounted to $1,764,000, $2,231,000, and $1,747,000 in 1996, 1995, and 1994, respectively.
D. INCOME TAXES
Significant components of the Company's deferred tax assets (liabilities) reflecting the net tax effects of temporary differences are summarized as follows: December 31 1996 1995 1994 (In thousands) Obligation to provide postretirement benefits $2,243 $2,039 $2,093 Marketing programs 14,012 11,148 10,152 Accounts receivable valuation allowances 2,696 2,834 3,005 Unremitted earnings of foreign subsidiaries (3,488) (1,999) (3,119) Excess pension funding (3,953) (3,252) (2,890) Purchased tax benefits (1,025) (1,531) (1,975) Unrealized holding gain on marketable equity securities (20,765) (11,700) (15,159) Other, net 11,282 4,623 6,578 ------ ------ ------- Net deferred tax assets (liabilities) $1,002 $2,162 ($1,315) ====== ====== =======
The components of earnings before income taxes are summarized as follows:
Year Ended December 31 1996 1995 1994 (In thousands)
Domestic $102,099 $116,373 $123,715 Foreign 28,681 38,743 26,120 ------- ------- ------- $130,780 $155,116 $149,835 ======= ======= =======
Significant components of the provision for income tax expense (credit) are summarized as follows:
Year Ended December 31 1996 1995 1994 (In thousands) Current: Federal $39,570 $39,513 $42,965 State 4,900 4,900 4,712 Foreign 11,353 14,010 10,118 Deferred: Federal (4,354) (1,555) (3,842) State (486) (107) (163) Foreign (1,301) 1,768 2,434 Equivalent credit relating to purchased income tax benefits (506) (440) (383) ------- ------- ------- $49,176 $58,089 $55,841 ======= ======= =======
No item, other than state income taxes in 1996, 1995, and 1994 affects the Company's effective income tax rate by an amount which exceeds 5% of the income tax expense computed at the statutory rate.
Undistributed earnings of subsidiaries on which deferred income taxes have not been provided are not significant.
Income taxes paid amounted to $52,992,000, $58,238,000, and $61,706,000 in 1996, 1995, and 1994, respectively.
E. STOCKHOLDERS' EQUITY
Class A Common Stock and Class B Common Stock have the same rights regarding dividends and distributions upon liquidation as Common Stock. However, Class A Common Stockholders are not entitled to vote, Class B Common Stockholders are entitled to ten votes for each share held and Common Stockholders are entitled to one vote for each share held. Transfer of shares of Class B Common Stock is substantially restricted and must be converted to Common Stock prior to sale. In certain instances, outstanding shares of Class B Common Stock will be automatically converted to shares of Common Stock. Unless extended for an additional period of five years by the Board of Directors, all then-outstanding shares of Class B Common Stock will be converted to shares of Common Stock on January 16, 2002.
Under the terms of the Bandag, Incorporated Restricted Stock Grant Plan, the Company is authorized to grant up to an aggregate of 100,000 shares of Common Stock and 100,000 shares of Class A Common Stock to certain key employees. The shares granted under the Plan will entitle the grantee to all dividends and voting rights; however, such shares will not vest until seven years after the date of grant. If a grantee's employment is terminated prior to the end of the seven-year period for any reason other than death, disability or termination of employment after age 60, the shares will be forfeited and made available for future grants. A grantee who has attained age 60 and whose employment is then terminated prior to the end of the seven-year vesting period does not forfeit the nonvested shares. During the years ended December 31, 1996, 1995, and 1994, 7,610 shares, 4,430 shares and 4,030 shares of Common Stock, respectively, were granted under the Plan. During the years ended December 31, 1996, 1995 and 1994, 7,610 shares, 4,430 shares and 4,030 shares of Class A Common Stock, respectively, were also granted under the Plan. The resulting charge to earnings amounted to $1,245,000, $770,000, and $779,000, in 1996, 1995, and 1994, respectively. During the year ended December 31, 1996, 110 shares of Common Stock and 110 shares of Class A Common Stock were forfeited. The credit to 1996 earnings related to the forfeited shares was approximately $12,000. At December 31, 1996, 42,155 shares of Common Stock and 51,925 shares of Class A Common Stock are available for grant under the Plan.
Under the terms of the Bandag, Incorporated Nonqualified Stock Option Plan, the Company is authorized through November 13, 1997 to grant options to purchase up to 500,000 shares of Common Stock and 500,000 shares of Class A Common Stock to certain key employees. The option price is equal to the market value of the shares on the date of grant. No options were granted under the Plan in 1996, 1995 or 1994. At December 31, 1996, options to purchase 100,000 shares of Common Stock and 100,000 shares of Class A Common Stock are outstanding and exercisable at $23.458 per share for Common Stock options and $22.792 per share for Class A Common Stock options. Options to purchase 20,000 shares of Common Stock and 20,000 shares of Class A Common Stock expire on November 13, 1997, and each of the four anniversaries thereafter. At December 31, 1996, no options granted under this Plan have been exercised and options to purchase 400,000 shares of Common Stock and 400,000 shares of Class A Common Stock are available for grant.
The Company has a stock award program covering substantially all U.S. and Canadian employees, which was established to promote employee commitment and ownership in the Company. In 1996, 1995 and 1994, $250,000, $284,000 and $319,000, respectively, were charged to earnings for the estimated cost of awards to be made under the stock award program.
Earnings per share amounts are based upon the weighted average number of shares of Common Stock, Class A Common Stock, Class B Common Stock, and common stock equivalents (dilutive stock options) outstanding during each year.
F. EMPLOYEE PENSION PLANS
The Company sponsors defined-benefit pension plans covering substantially all of its full-time employees in North America and certain employees in the Company's European operations. Benefits are based on years of service and, for salaried employees, the employee's average annual compensation for the last five years of employment. The Company's funding policy is to contribute annually the maximum amount that can be deducted for income tax purposes. Contributions are intended to provide for benefits attributed to service to date and those expected to be earned in the future.
Aggregate accumulated benefit obligations, projected benefit obligations, as estimated by consulting actuaries, plan net assets and funded status are as follows: December 31 1996 1995 1994 (In thousands) Actuarial present value of accumulated benefit obligations: Vested $40,944 $33,787 $30,535 Nonvested 3,145 5,810 2,310 ------- ------- ------- $44,089 $39,597 $32,845 ======= ======= ======= Plan net assets at fair value $90,775 $79,291 $63,594 Projected benefit obligations 58,357 54,496 46,367 ------- ------- ------- Plan net assets in excess of projected benefit obligations 32,418 24,795 17,227 Unrecognized prior service cost 1,187 1,278 1,214 Unamortized actuarial net loss (gain) (19,557) (12,988) (5,728) Unamortized net transition gain (5,591) (6,332) (7,080) ------- ------- ------- Prepaid pension cost included in the consolidated balance sheet $8,457 $6,753 $5,633 ====== ====== ======
Assumptions used in the determination of the actuarial present value of the projected benefit obligations and net pension cost are as follows:
Weighted average discount rate 7.00% 7.00% 7.50% Rate of increase in future compensation 4.50% 4.75% 5.00% Expected long-term rate of return on assets 8.00% 8.00% 8.00%
Assets of the plans are principally invested in guaranteed interest contracts, common stock, and stock mutual funds.
Pension expense (credit) is composed of the following:
Year Ended December 31 1996 1995 1994 (In thousands) Service cost for benefits earned during the year $2,193 $1,929 $3,183 Interest cost on projected benefit obligations 3,153 2,899 3,343 Investment return on plan assets (12,025) (14,510) (1,454) Net amortization and deferral 5,045 8,964 (4,161) ------- ------- ------- Net periodic pension expense (credit) ($1,634) ($718) $911 ======= ======= =======
The Company also sponsors defined-contribution plans, covering substantially all salaried employees in the United States. Annual contributions are made in such amounts as determined by the Company's Board of Directors. Although employees may contribute up to 12% of their annual compensation from the Company, they are generally not required to make contributions in order to participate in the plans. The Company recorded expense for contributions in the amount of $2,796,000, $3,578,000, and $2,892,000 in 1996, 1995, and 1994, respectively.
Employees in most foreign countries are covered by various retirement benefit arrangements generally sponsored by the foreign governments. The Company's contributions to foreign plans were not significant in 1996, 1995, and 1994.
G. OTHER POSTRETIREMENT EMPLOYEE BENEFITS
The Company provides medical benefits under its self-insured health benefit plan to certain individuals who retired from employment before January 1, 1993. Employees who retire after December 31, 1992 and are at least age 62 with 5 years of service are eligible for temporary medical benefits that cease at age 65. The program is contributory, with retiree contributions adjusted periodically. The program also contains co- insurance provisions, which result in shared costs between the Company and the retiree. The Company's postretirement medical obligations are unfunded.
The following table sets forth amounts recognized in the Company's consolidated balance sheet:
December 31 1996 1995 1994 (In thousands) Accumulated postretirement benefit obligation: Retirees $2,146 $2,109 $1,847 Fully eligible active plan participants 104 111 92 Other active plan participants 3,177 2,754 1,801 ------- ------- ------- Accumulated postretirement benefit obligation 5,427 4,974 3,740 Unrecognized net gain and prior service cost 429 351 1,105 ------- ------- ------- Accrued postretirement benefit cost $5,856 $5,325 $4,845 ======= ======= =======
Net periodic postretirement benefit cost includes the following components:
Service cost $231 $200 $167 Interest cost on accumulated postretirement benefit obligation 344 321 261 Net amortization and deferral 3 33 (2) ------ ------ ------ Net periodic postretirement benefit cost $578 $554 $426 ====== ====== ======
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits is 10% for 1997 and is assumed to decrease gradually to 6% for 2001 and remain at that level thereafter. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1996, by $770,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1996 by $95,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% for 1996 and 1995, and 7.5% for 1994.
Substantially all United States employees with the Company on and after January 1, 1993 are covered by the Bandag Security Program, which provides fully vested benefits after 5 years of service. Benefits under this program are available upon retirement or separation for any other reason and may be used in connection with medical expense, insurance premiums, or for any other purpose. The periodic cost and benefit obligation information for the Bandag Security Program is reflected in Note F.
H. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into agreements (derivative financial instruments) to manage the risks associated with certain aspects of its business. The Company does not actively trade such instruments nor enter into such agreements for speculative purposes. The Company principally utilizes foreign currency forward exchange contracts and foreign currency option contracts.
At December 31, 1996, 1995 and 1994, the Company had approximately $23,862,000, $18,156,000 and $10,513,000, respectively, in foreign currency forward exchange contracts and foreign currency option contracts designated and effective as hedges which become due in various amounts and at various dates throughout the following year. Such contracts were principally for the purpose of hedging commitments arising from forecasted material purchases and intercompany export sales, respectively. Unrealized gains and losses on the forward exchange contracts and the currency option contracts are deferred and will be recognized in income in the same period as the hedged transaction. The difference between the contract amounts and their fair value, in the aggregate, was insignificant at December 31, 1996, 1995 and 1994.
I. BUSINESS INFORMATION BY GEOGRAPHIC AREA
The information regarding operations in different geographic areas is presented on page 10 of this report, and is included herein by reference.
J. SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
Unaudited quarterly results of operations for the years ended December 31, 1996 and 1995 are summarized as follows:
Quarter Ended Mar. 31 Jun. 30 Sep. 30 Dec. 31 (In thousands, except per share data) 1996: Net sales $170,303 $188,875 $194,086 $203,661 Gross profit 66,295 77,403 85,762 85,316 Net earnings 15,866 20,094 23,945 21,699 Net earnings per share $0.65 $0.83 $1.02 $0.94
1995: Net sales $168,243 $182,929 $190,337 $198,854 Gross profit 65,134 73,710 77,991 80,691 Net earnings 19,579 24,910 27,050 25,488 Net earnings per share $0.75 $0.96 $1.07 $1.04
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by Item 10 (with respect to the directors of the registrant) is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1996. In accordance with General Instruction G (3) to Form 10-K, the information with respect to executive officers of the Company required by Item 10 has been included in Part I hereof.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1996.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1996.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference from the registrant's definitive Proxy Statement involving the election of directors filed or to be filed pursuant to Regulation 14A not later than 120 days after December 31, 1996.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The following consolidated financial statements are included in Part II, Item 8:
Page Consolidated Balance Sheets as of December 31, 1996, 1995 and 1994 24-25
Consolidated Statements of Earnings for the Years Ended December 31, 1996, 1995 and 1994 26
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 27
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29-38
(2) Financial Statement Schedule
Schedule II - Valuation and qualifying accounts and reserves. 41
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Item 14 (Cont.)
(3) Exhibits
Exhibit No. Description
3.1 Bylaws: As amended February 5, 1997
3.2 Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by reference to Exhibit No. 3.2 to the Company's Form 10-K for the year ended December 31, 1992.)
3.3 Articles of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6, 1992. (Incorporated by reference to Exhibit No. 3.3 to the Company's Form 10-K for the year ended December 31, 1992.)
4 Instruments defining the rights of security holders. (Incorporated by reference to Exhibit Nos. 3.2 and 3.3 to the Company's Form 10-K for the year ended December 31, 1992.)
The Company agrees to furnish copies of its long-term debt agreements to the Commission on request.
10.1 *Bandag, Incorporated Restricted Stock Grant Plan, as amended November 12,
10.2 U. S. Bandag System Franchise Agreement Truck and Bus Tires. (Incorporated by reference to Exhibit No. 10.2 to the Company's Form 10-K for the year ended December 31, 1993.)
10.2(a) U.S. Bandag System Franchise Agreement Truck and Bus Tires (revised April 1996.)
10.3 *Miscellaneous Fringe Benefits for Executives.
10.4 *Nonqualified Stock Option Plan, as amended November 12, 1996
10.5 *Nonqualified Stock Option Agreement of Martin G. Carver dated November 13, 1987, as amended by an Addendum dated June 12, 1992. (Incorporated by reference to Exhibit No. 10.7 to the Company's Form 10-K for the year ended December 31, 1992.)
10.6 *Form of Participation Agreement under the Bandag, Incorporated Restricted Stock Grant Plan. (Incorporated by reference as Exhibit 10.7 to the Company's Form 10-K for the year ended December 31, 1994.)
10.7 *Employment Agreement with Michel Petiot effective January 1, 1994, dated December 20, 1993 (Incorporated by reference to Exhibit No. 10.8 to the Company's Form 10-K for the year ended December 31, 1993.)
10.8 *Agreement with William D. Herd regarding termination of employment, dated September 12, 1995 (Incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for the year ended December 31, 1995.)
11 Computation of earnings per share.
21 Subsidiaries of Registrant.
27 Financial Data Schedule (with EDGAR filing only)
*Represents a management compensatory plan or arrangement.
(b) Reports on Form 8-K: No report on Form 8-K was filed during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ Martin G. Carver Martin G. Carver Chairman of the Board, Chief Executive Officer, President and Director (Principal Executive Officer)
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Robert T. Blanchard Robert T. Blanchard Lucille A. Carver Director Director
/s/ Roy J. Carver, Jr. /s/ Robert K. Drummond Roy J. Carver, Jr. Robert K. Drummond Director Director
/s/ James R. Everline James R. Everline Edgar D. Jannotta Director Director
/s/ Warren W. Heidbreder /s/ R. Stephen Newman Warren W. Heidbreder R. Stephen Newman Vice President, Chief Financial Officer /s/ Martin G. Carver (Chief Accounting Officer) Martin G. Carver Chairman of the Board, Chief Executive Officer, President and Director (Principal Executive Officer)
Date: March 26, 1997
EXHIBIT INDEX
Exhibit No. Description
3.1 Bylaws: As amended February 5, 1997
3.2 Restated Articles of Incorporation, effective December 30, 1986. (Incorporated by reference to Exhibit No. 3.2 to the Company's Form 10-K for the year ended December 31, 1992.)
3.3 Articles of Amendment to Bandag, Incorporated's Articles of Incorporation, effective May 6, 1992. (Incorporated by reference to Exhibit No. 3.3 to the Company's Form 10-K for the year ended December 31, 1992.)
4 Instruments defining the rights of Security Holders. (Incorporated by reference to Exhibit Nos. 3.2 and 3.3 to the Company's Form 10-K for the year ended December 31, 1992.)
The Company agrees to furnish copies of its long- term debt agreements to the Commission on request.
10.1 *Bandag, Incorporated Restricted Stock Grant Plan, as amended November 12, 1996.
10.2 U. S. Bandag System Franchise Agreement Truck and Bus Tires. (Incorporated by reference to Exhibit No. 10.2 to the Company's Form 10-K for the year ended December 31, 1993.)
10.2(a) U. S. Bandag System Franchise Agreement Truck and Bus Tires (revised April 1996).
10.3 *Miscellaneous Fringe Benefits for Executives.
10.4 *Nonqualified Stock Option Plan, as amended November 12, 1996.
10.5 *Nonqualified Stock Option Agreement of Martin G. Carver dated November 13, 1987, as amended by an Addendum dated June 12, 1992. (Incorporated by reference to Exhibit No. 10.7 to the Company's Form 10-K for the year ended December 31, 1992.)
10.6 *Form of Participation Agreement under the Bandag, Incorporated Restricted Stock Grant Plan. (Incorporated by reference to Exhibit No. 10.7 to the Company's Form 10-K for the year ended December 31, 1994.)
10.7 *Employment Agreement with Michel Petiot effective January 1, 1994, dated December 20, 1993 (Incorporated by reference to Exhibit No. 10.8 to the Company's Form 10-K for the year ended December 31, 1993.)
10.8 *Agreement with William D. Herd regarding termination of employment dated September 12, 1995 (incorporated by reference to Exhibit 10.8 to the Company's Form 10-K for the year ended December 31, 1995.)
11 Computation of earnings per share.
21 Subsidiaries of Registrant.
27 Financial Data Schedule (with EDGAR filing only)
* Represents a management compensatory plan or arrangement.