Bandag Inc. reported decreases in consolidated net earnings and net sales, and suffered a net loss of $46 million in the first quarter of 2002.
Consolidated net earnings were impacted by a required accounting change. Prior to the change, earnings totaled $1.2 million.
But during the quarter, Bandag adopted Statement of Financial Accounting Standards 142 (SFAS 142), which resulted in a non-cash transition charge in the quarter of $47.3 million to recognize impairment of goodwill, substantially all of which is related to Tire Distribution Systems Inc. (TDS), Bandag’s tire distribution subsidiary.
Pursuant to SFAS 142, the $47.3 million charge is treated as a change in accounting method. Bandag’s net loss after the cumulative effect of accounting change totaled $46 million, down more than 2000% compared to the same period a year ago (Bandag posted net income of $2.3 million in the first quarter of 2001).
Bandag stopped amortizing goodwill as of January 1, 2002, in accordance with the adoption of SFAS 142.
"Worldwide, commercial retread truck tire markets remained soft, reflecting the continued effects of sluggish business conditions in the truck tire segment of the industry, resulting in a 6% reduction in our global traditional business tread volume," said Martin Carver, Bandag's chairman and CEO. "Difficult market conditions were also evident in the results of TDS, where sales were off 2% from the year-earlier period.
"We are pleased to see that in light of these challenging market conditions, we generated $40.7 million of cash from operations, as a result of our prudent management of working capital.”
In North America, traditional business sales decreased 4%. Improved pricing and lower raw material costs partially offset a 15% increase in operating and other expenses, which included lower pension income, higher marketing costs and approximately $2 million in expense related to converting SystemBandag users to the RoadWare software system.
Bandag acquired the assets of Open Road Technologies Inc. during the first quarter. Open Road, the supplier of RoadWare retread shop management software, has annual sales of some $5 million.
Results from the European and International segments reflected lower volume "due to weak market conditions, particularly in Europe." Results from Mexico and South Africa were stronger.
"Current rising energy prices and uncertainty in the Middle East continue to complicate the near term economic outlook worldwide," said Carver. "Energy prices impact not only the operating cost structure of our fleet customers, but also the costs of our oil-derived raw materials and tread production."
TDS sales for the quarter were $80.9 million, down 2% from the period period last year. TDS’ first quarter 2002 operating loss of $6 million was an increase of $0.7 million over the previous year’s reported loss of $5.3 million.
However, proforma first quarter 2001 results would have been a loss of $3.2 million before goodwill amortization of $2.1 million, so TDS’ loss increased by $2.8 million on a comparable basis.
Corporate expenses included legal fees of approximately $4 million related to Bandag's current litigation against Michelin North America Inc. Carver said he looks forward "to the favorable resolution of Bandag’s litigation with Michelin this summer."
Carver is optimistic about the company's future. "We are confident that the intiatives we have in place will enable us to capitalize on both the eventual industry recovery and the new opportunities that emerge as the trucking industry moves forward.”
