FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For Quarter Ended March 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 1-5325
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Huffy Corporation
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(Exact name of registrant as specified in its charter)
Ohio 31-0326270
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Byers Road, Miamisburg, Ohio 45342
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(Address of principal executive offices) (Zip Code)
(937) 866-6251
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(Registrant's telephone number, including area code)
No Change
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding Shares: 10,398,172 as of April 25, 2002
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Page 1 of 13
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS COMPANY FOR WHICH REPORT IS FILED:
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HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar Amounts in Thousands, Except Per Share Data)
(unaudited)
Three Months Ended
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March 30, 2002 March 31, 2001
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Net sales $ 70,385 $ 81,243
Cost of sales 58,384 69,608
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Gross profit 12,001 11,635
Selling, general and administrative expenses 10,528 10,043
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Operating income 1,473 1,592
Other expense (income)
Interest expense 349 568
Interest income (47) (162)
Other 204) (417)
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Earnings before income taxes 967 1,603
Income tax expense 343 609
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Net earnings $ 624 $ 994
============ ============
Earnings per common share:
Basic:
Weighted average number of common shares 10,389,422 10,231,558
============ ============
Net earnings per common share $ 0.06 $ 0.10
============ ============
Diluted:
Weighted average number of common shares 10,617,935 10,368,848
============ ============
Net earnings per common share $ 0.06 $ 0.10
============ ============
See accompanying notes to consolidated financial statements.
Page 2 of 13
HUFFY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar Amounts In Thousands)
March 30, December 31,
2002 2001
(Unaudited)
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ASSETS
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Current assets:
Cash and cash equivalents $ 13,907 $ 26,541
Accounts and notes receivable, net 55,834 48,934
Inventories 16,394 12,483
Prepaid expenses and federal income taxes 20,132 17,803
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Total current assets 106,267 105,761
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Property, plant and equipment, at cost 39,998 39,320
Less: Accumulated depreciation and amortization 30,903 30,053
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Net property, plant and equipment 9,095 9,267
Excess of cost over net assets acquired, net 13,127 8,038
Other assets 21,782 22,419
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$ 150,271 $ 145,485
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Notes payable $ -- $ --
Current portion of long-term obligations -- --
Accounts payable 34,512 31,161
Accrued expenses and other current liabilities 30,657 30,224
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Total current liabilities 65,169 61,385
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Long-term obligations less current portion -- --
Other long-term liabilities 18,687 18,498
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Total liabilities 83,856 79,883
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Shareholders' equity:
Common stock 16,936 16,931
Additional paid-in capital 67,256 67,226
Retained earnings 75,770 75,147
Accumulative comprehensive income (3,266) (3,421)
Less: cost of treasury shares 90,281 90,281
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Total shareholders' equity 66,415 65,602
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$ 150,271 $ 145,485
========= =========
See accompanying notes to consolidated financial statements.
Page 3 of 13
HUFFY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts in Thousands)
(Unaudited)
Three Months Ended
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March 30, 2002 March 31, 2001
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings from continuing operations $ 624 $ 994
Adjustments to reconcile net earnings to net cash used in operating activities:
Depreciation and amortization 878 1,306
Deferred federal income tax benefit (104) --
Changes in assets and liabilities:
Accounts and notes receivable, net (5,824) 26,095
Inventories (3,911) 2,046
Prepaid expenses and federal income taxes (2,329) (780)
Other assets 745 (81)
Accounts payable 3,231 9,843
Accrued expenses and other current liabilities (796) (5,333)
Other long-term liabilities 343 (752)
Other -- --
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Net cash provided by (used in) operating activities (7,143) 33,338
====================================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (626) (353)
Acquisition of businesses, net of cash acquired (4,900) --
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Net cash used in investing activities (5,526) (353)
====================================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in short-term borrowings -- (17,656)
Issuance of long-term debt -- --
Issuance of common shares 35 16
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Net cash provided by (used in) financing activities 35 (17,640)
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Net change in cash and cash equivalents (12,634) 15,345
Cash and cash equivalents:
Beginning of the period 26,541 4,334
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End of the period $ 13,907 $ 19,679
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See accompanying notes to consolidated financial statements
Page 4 of 13
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts in Thousands)
Note 1: Footnote disclosure, which would substantially duplicate the
disclosure contained in the Annual Report to Shareholders for the
year ended December 31, 2001, has not been included. The unaudited
interim consolidated financial statements reflect all adjustments,
which, in the opinion of management, are necessary to a fair
statement of the results for the periods presented and to present
fairly the consolidated financial position of Huffy Corporation as of
March 30, 2002. All such adjustments are of a normal recurring
nature.
Note 3: Inventories of Huffy Bicycle Company and Huffy Sports Company are
at cost (not in excess of market) determined by the FIFO method. The
components of inventories are as follows:
March 30, December 31,
2002 2001
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Finished Goods $14,493 $10,768
Work-in-Progress 105 105
Raw Materials & Supplies 1,796 1,610
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$16,394 $12,483
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Note 4: On March 27, 2002, Huffy Service First acquired the stock of McCalla
Company and its subsidiaries Creative Retail Services and Creative
Retail Services Canada ("McCalla") for $5,400, less $500 net cash
received, subject to certain post closing adjustments. Of the total
purchase price, $5,089 was recorded as intangible goodwill and
covenant not to compete as of March 30, 2002. The McCalla companies
provide merchandising services, including cycle and periodic resets,
stocking and sales training services for a number of well-known
manufacturers serving the Home Center channel, including, among
others Philips Lighting, Duracell, and The Stanley Works. The
estimated opening balance sheet of McCalla is included in the March
30, 2002 consolidated balance sheet.
Note 5: The Company classifies its operations into a single integrated
business segment.
Note 6: The Company adopted the provisions of Statement of Financial
Accounting Standards No. 141, Business Combinations, and Statement
No. 142, Goodwill and Other Intangible Assets, as of January 1,
2002. Statement 141 addresses financial accounting and reporting for
business combinations requiring the use of the purchase method of
accounting and reporting for goodwill and other intangible assets
requiring that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at
least annually in accordance with the provisions of Statement 142.
Statement 142 also requires intangible assets with estimate useful
lives be amortized over their respective useful life to their
estimated residual values, and reviewed for impairment.
As of March 30, 2002, the Company had $13,127 of goodwill and other
intangibles, including $5,089 from the acquisition of McCalla on
March 27, 2002. The McCalla acquisition-related intangibles include
non-compete agreement and goodwill. The non-compete agreement is the
only intangible subject to amortization under Statement 142.
Page 5 of 13
In the first quarter of 2001, $181 ($112 after-tax), or $0.01 per
common share, of goodwill amortization was included in selling,
general and administrative expenses. First quarter 2001 net earnings
without goodwill amortization were $1,106, or $0.11 per common
share. The Company charged selling, general and administrative
expense for $726 ($477 after tax), or $0.05 per common share, for
the amortization of goodwill for the year ended December 31, 2001.
The full year 2001 net loss without goodwill amortization was
$7,933, or $0.77 per common share. No goodwill amortization was
incurred during the first quarter of 2002. The Company tested each
reporting unit's unamortized goodwill for impairment and found the
assets unimpaired as of the date of adoption. In accordance with
Statement No. 142, the Company will test each reporting unit's
goodwill as of end of the calendar year.
Note 7: The components of comprehensive income are immaterial and are
therefore not disclosed.
Page 6 of 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
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THREE MONTHS ENDED MARCH 30, 2002
COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2001
(Dollar Amounts in Thousands, Except Per Share Data)
For the first quarter of 2002, Huffy Corporation ("Huffy" or "Company") had net
earnings of $624, or $.06 per common share compared to net earnings of $994, or
$0.10 per common share, for the same period last year.
Consolidated net sales for the quarter ended March 30, 2002 were $70,385, a
decrease of 13.4% over sales of $81,243 for the same quarter in 2001. This sales
decrease was primarily the result of Kmart's first quarter Chapter 11 filing,
which interrupted shipments of product, and unfavorably impacted consumer sales.
In addition, during the first quarter the Company experienced a mix shift to
more opening price point bicycles. Sales of basketball backboards and lighted
balls rose 36% over 2001 levels, continuing the strong trend begun in the second
half of 2001. Sales of retail services were up 5% over the prior year, despite
weakness in merchandising revenue directly attributable to slower Kmart sales.
Gross profit for the quarter ended March 30, 2002 was $12,001, or 17.1% of net
sales compared to $11,635, or 14.3% of net sales for the quarter ended March 31,
2001. Aggressive foreign sourcing programs, cost containment programs throughout
all Huffy companies and improved manufacturing volumes in the basketball product
line were offset by unfavorable product mix shifts toward lower margin opening
price point bicycles and higher field labor costs in the assembly service
business.
Selling, general and administrative expenses were $10,528 for the first quarter
of 2002, compared to $10,043 for the same period last year. As a percent of net
sales, selling, general and administrative expenses (SG&A) for the quarter ended
March 30, 2002 were 15.0% versus 12.4% in 2001, as a result of lower sales
volume. Pension expenses are up in 2002 as a result of low interest rates and
weak stock market performance during 2001. In addition, the Company has invested
more aggressively in advertising in 2002.
Other income and expense in 2001 included favorable adjustments related to the
final payoff of the revolver and adjustments related to the settlement of
liabilities assumed in the sales of Washington Inventory Service and True Temper
Hardware.
Interest costs for the first quarter of 2002 dropped to $302 from $406 for the
same period last year. The Company has been debt free, with cash invested since
the first quarter of 2001. 2002 interest expense is primarily comprised of
amortization of financing costs, letter of credit, and non-usage revolver fees.
On March 27, 2002, the Huffy Service First acquired the stock of McCalla Company
and its subsidiaries
Page 7 of 13
Creative Retail Services and Creative Retail Services Canada. ("McCalla") for
approximately $5,400 less $500 net cash received, subject to certain post
closing adjustments. Of the total purchase price, $5,089 is recorded as
intangible goodwill and covenant not to compete as of March 30, 2002. The
McCalla companies provide merchandising services, including cycle and periodic
resets, stocking and sales training services for a number of well-known
manufacturers serving the Home Center channel, including, among others, Philips
Lighting, Duracell, and The Stanley Works. The estimated opening balance sheet
of McCalla is included in the March 30, 2002 consolidated balance sheet.
The Company's $75,000 revolving credit facility is secured by all assets of the
Company and its affiliates and will expire on December 31, 2002, with a 12-month
renewal option. As of March 30, 2002, the Company had $31,221 available on its
revolving credit facility and had no outstanding balance.
The first quarter of 2001 benefited from the liquidation of $26,095 of
receivables, which resulted from the strong fourth quarter 2000 Huffy Micro(TM)
scooter sales. During the first quarter of 2002, receivables increased $5,824,
principally as a result of the Kmart bankruptcy filing. As of March 30, 2002,
the Company has $7,830 of pre-bankruptcy receivables from Kmart. The Company
believes it is adequately reserved for the collectibility of its receivables.
Kmart is the Company's largest customer comprising 38% of consolidated net sales
in 2001.
The Company expects existing cash, cash flow from operations, and its revolving
credit facility will be sufficient to finance seasonal working capital needs and
capital expenditures throughout the coming year.
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Remediation costs that relate to an existing
condition caused by past operations are accrued when it is probable that these
costs will be incurred and can be reasonably estimated.
The Company, along with others, has been designated as a potentially responsible
party (PRP) by the U.S. Environmental Protection Agency (the "EPA") with respect
to claims involving the discharge of hazardous substances into the environment
in the Baldwin Park operable unit of the San Gabriel Valley Superfund site. The
Company, along with other PRPs, the Main San Gabriel Basin Watermaster
(Watermaster), the San Gabriel Water Quality Authority (WQA), and numerous local
water districts (Water Districts), have worked with the EPA on a mutually
satisfactory remedial plan, with the end result being a joint water supply/clean
up Project Agreement which settles four different lawsuits filed by the WQA and
the Water Districts. The Project Agreement was signed on March 28, 2002 and is
expected to be approved by the court and become effective in mid-May 2002. In
developing its estimate of environmental remediation costs, the Company
considers, among other things, currently available technological solutions,
alternative cleanup methods, and risk-based assessments of the contamination
and, as applicable, an estimation of its proportionate share of remediation
costs. The Company may also make use of external consultants and consider, when
available, estimates by other PRPs and governmental agencies and information
regarding the financial viability of other PRPs. Based upon information
currently available, the Company believes it is unlikely that it will incur
substantial previously unanticipated costs as a result of failure by other PRPs
to satisfy their responsibilities for remediation costs.
Page 8 of 13
The Company has recorded environmental accruals, based upon the information
available, that are adequate to satisfy known remediation requirements. The
total accrual for estimated environmental remediation costs related to the
Superfund site and other potential environmental liabilities was $6,699 at March
30, 2002. Management expects that the majority of expenditures relating to costs
currently accrued will be made over the next year. As a result of factors, such
as the continuing evolution of environmental laws and regulatory requirements,
the availability and application of technology, the identification of presently
unknown remediation sites, and the allocation of costs among potentially
responsible parties, estimated costs for future environmental compliance and
remediation are necessarily imprecise and it is not possible to fully predict
the amount or timing of future environmental remediation costs which may
subsequently be determined.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company along with numerous California water companies and other potentially
responsible parties ("PRPs") for the Baldwin Park Operable Unit of the San
Gabriel Valley Superfund (see Note 10 to the Company's annual report regarding
the Superfund in which a tentative remediation settlement has been reached) have
been named in fourteen civil lawsuits which allege claims related to the
contaminated groundwater in the Azusa, California area (collectively, the "San
Gabriel Cases").
The cases have been stayed for a variety of reasons, including a number of
demurrers and writs taken in the Appellate Division, relating primarily to the
California Public Utilities Commission ("PUC") investigation described below.
The resulting Appellate Division decisions were reviewed by the California
Supreme Court, which ruled in February 2002. The cases have been reactivated as
a result of the California Supreme Court's, decision, with the trial level
Coordination Judge holding a Status Conference on all of the cases on March 14,
2002. The Coordination Judge has asked the parties to brief the status of the
case following the California Supreme Court's ruling, and has scheduled a
hearing on those briefs for May 23, 2002. Thereafter, it is anticipated that the
Coordination Judge will set a Case Management Order, calling for the
commencement of formal discovery and providing for an opportunity for the
mediation of disputes.
The Company, along with the other PRPs for the Baldwin Park Operable Unit of the
San Gabriel Valley Superfund Site (the "BPOU"), has also been named in four
civil lawsuits filed by water purveyors. The water purveyor lawsuits allege
CERCLA, property damage, nuisance, trespass and other claims related to the
contaminated groundwater in the BPOU (collectively, the "Water Entity Cases").
The Company was named as a direct defendant by the water purveyor in two of
these cases, and was added as a third party defendant in the two others by
Aerojet General Corporation, which, in those cases, was the only PRP sued by the
water purveyors. As noted above, each of the Water Entity Cases are being
settled through the entry of the Project Agreement. Thus, it is anticipated that
the Water Entity Cases, which are in their initial stages, will be dismissed
within the next thirty to sixty days.
Page 9 of 13
On March 12, 1998, the PUC commenced an investigation in response to the
allegations in the toxic tort actions that "drinking water delivered by the
water utilities caused death and personal injury to customers." The PUC's
inquiry addressed two broad issues central to these allegations: 1) "whether
current water quality regulation adequately protects the public health;" and 2)
"whether respondent utilities are (and for the past 25 years have been)
complying with existing drinking water regulation." On November 2, 2000, the PUC
issued its Final Opinion and Order Resolving Substantive Water Quality Issues.
Significantly, the Order finds, in pertinent part, that: 1) "existing maximum
contaminant level ("MCLs") and action level ("ALs") established by the DHS are
adequate to protect the public health;" 2) "there is a significant margin of
safety when MCLs are calculated so that the detection of carcinogenic
contaminants above MCLs that were reported in this investigation are unlikely to
pose a health risk;" 3) based upon its comprehensive review of 25 years of
utility compliance records, that for all periods when MCLs and ALs for specific
chemicals were in effect, the PUC regulated water companies complied with DHS
testing requirements and advisories, and the water served by the water utilities
was not harmful or dangerous to health; and 4) with regard to the period before
the adoption by DHS of MCLs and ALs, a further limited investigation by the PUC
Water Division will be conducted.
The toxic tort cases are in their initial stages. Thus, it is impossible to
currently predict the outcome of any of the actions. Based upon information
presently available, such future costs are not expected to have a material
adverse effect on the Company's financial condition, liquidity, or its ongoing
results of operations. However, such costs could be material to results of
operations in a future period.
ITEM 4. SUBMISSON OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held April 25, 2002. At
such meeting, the Shareholders of the Company elected as a Director, James F.
Robeson, for a two-year term expiring in 2004. Shares were voted as follows:
For: 8,356,882; Withheld (including broker non-votes): 1,067,069.
The Shareholders voted to approve an amendment to the 1998 Director Stock Option
Plan to provide for restrictive stock awards in lieu of options. Shares were
voted as follows: For approval: 5,977,860; against approval: 3,404,911; and
abstain 41,180.
In addition, the Shareholders also ratified the appointment of KPMG LLP as the
Company's independent public accountants for calendar year 2002. In accordance
with such ratification, 9,220,111 shares were voted for ratification, 169,442
shares cast against, and 34,398 shares cast to abstain (including broker
non-votes).
ITEM 5: OTHER INFORMATION
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
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a. Exhibits - No Exhibits, as shown in the "Index of Exhibits", attached
hereto as page 13, are applicable to be filed as a part of this Report.
Page 10 of 13
b. The Company filed a report on Form 8-K dated April 25, 2002 with the
Securities and Exchange Commission regarding remarks delivered at the
Annual Meeting of Shareholders held on April 25, 2002.
Please see the Company's meaningful cautionary statements regarding forward
looking statements contained in the Company's report on Form 10-K filed with the
Securities and Exchange Commission on February 21, 2002 which is hereby
incorporated herein by reference.
Page 11 of 13
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.
HUFFY CORPORATION, Registrant
May 1, 2002 /s/ Timothy G.. Howard
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Date Timothy G. Howard
Vice President - Corporate Controller
(Principal Accounting Officer)
Page 12 of 13
INDEX OF EXHIBITS
Exhibit
No. Item
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(2) Not applicable
(3) Not applicable
(4) Not applicable
(10) Not applicable
(11) Not applicable
(15) Not applicable
(18) Not applicable
(19) Not applicable
(22) Not applicable
(23) Not applicable
(24) Not applicable
(99) Not applicable
Page 13 of 13