CHARLOTTE, N.C. (April 26, 2000)—While Heafner Tire Group Inc. reported healthy increases in net sales and operating earnings for 1999, the company declared a net loss for the second consecutive year.
Also, the investment rating organization Standard & Poors has placed the company on its CreditWatch list with what it called "negative implications."
Heafner reported a 49.6-percent increase in operating earnings (EBITDA) for the year to $36.2 million, before interest, taxes, depreciation and amortization were deducted.
However, Heafner reported a net loss of $6.58 million for 1999—a 40-percent increase over the $4.7 million loss reported in 1998.
Sales for the year grew 41.9 percent to $1.02 billion.
Despite the higher operating results, they were weaker than expected, said S&P, expressing concern the Charlotte-based company will continue a lower-than-expected financial performance "in the near to intermediate term."
Heafner´s debt has grown by $50 million since 1998, S&P noted, partly due to acquisitions. In February 1999, Heafner purchased California Tire after making several major acquisitions in 1998.
S&P also noted that management´s attention to consolidating several major acquisitions is partially responsible for Heafner´s slow sales growth the past few years.
However, Donald C. Roof, Heafner president and CEO, expressed satisfaction with the rate of growth. "Once again we achieved sales increases in excess of the overall industry growth rate," he said in a press release.
The transaction in which Heafner sold a majority of its stock to Charlesbank Capital Partners in May 1999, and the doubling this past March of Heafner´s revolving credit line to $200 million will give the company "the financial flexibility and muscle to continue growing in 2000, both through logical acquisitions, as well as expansions of our base business," he said.
David H. Taylor, Heafner´s chief financial officer, responded to the S&P advisory saying it only means the organization "will review the ratings on the bonds that the Heafner Group has issued."
He acknowledged S&P´s concern with slow sales and high debt, but added S&P´s action will not affect interest rates on Heafner´s current debt. Those rates are for a fixed amount for 10 years, Mr. Roof said.
Included in the 1999 loss, Mr. Taylor said, was a $3.5 million non-recurring charge Heafner took in the third quarter to settle a class action lawsuit by former Winston Tire managers over wage and hours issues.
In Securities and Exchange Commission documents, Heafner said it has filed an indemnification claim against the former shareholders of Winston Tire and is holding $4.6 million of the purchase price in escrow pending settlement of the claim.
The recent two-fold increase in the firm´s credit line by its bankers, Mr. Taylor said, is another positive indicator. "We don´t see this announcement (by S&P) to be a deterrence."
S&P wanted to hear that Heafner would curtail acquisitions and pay down debt this year, he added, but the company plans to use its recently increased credit to continue expansion.
"We intend to continue to consolidate," Mr. Taylor said, "and continue to grow."
Noting Heafner´s 500,000-sq.-ft. expansion of its distribution facilities last year, Mr. Roof said the company "will continue to expand our existing facilities and also explore new markets in the future in order to provide superior service to the independent tire dealer."
"Would the bond rating agency like us to never borrow another penny, and use all our excess cash to pay down debt? Sure it would," Mr. Roof told Tire Business.
"Are we going to do that? No, not until we get the (distribution) coverage we need to have."
Senior Reporter Sigmund J. Mikolajczyk contributed to this story.