10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

OR

[_]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission file number 1-7007

BANDAG, INCORPORATED

(Exact name of registrant as specified in its charter)

Iowa	42-0802143
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
2905 North Highway 61, Muscatine, Iowa	52761-5886
(Address of principal executive offices)	(Zip Code)

(563) 262-1400

(Registrant’s telephone number, including area code)

Not Applicable

(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 [_]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [_]    Accelerated filer [X]    Non-accelerated filer [_]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $1 par value, 9,129,656 shares as of April 28, 2006.
Class A Common Stock, $1 par value, 9,447,704 shares as of April 28, 2006.
Class B Common Stock, $1 par value; 917,263 shares as of April 28, 2006.

BANDAG, INCORPORATED AND SUBSIDIARIES

INDEX

Part I: FINANCIAL INFORMATION				Page No.
	Item	1.	Financial Statements (Unaudited)
			Condensed consolidated balance sheets -
			March 31, 2006 and December 31, 2005	3
			Condensed consolidated statements of operations
			Three months ended March 31, 2006 and 2005	4
			Condensed consolidated statements of cash flows
			Three months March 31, 2006 and 2005	5
			Notes to condensed consolidated financial statements
			March 31, 2006	6
	Item	2.	Management's Discussion and Analysis of Financial
			Condition and Results of Operations	13
	Item	3.	Quantitative and Qualitative Disclosures about Market Risk	18
	Item	4.	Controls and Procedures	18
PART II: OTHER INFORMATION
	Item	2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
	Item	6.	Exhibits	19
SIGNATURES				20

2

PART I. FINANCIAL INFORMATION

BANDAG, INCORPORATED AND SUBSIDIARIES

Item 1. Financial Statements
Condensed Consolidated Balance Sheets

	(Unaudited)
In thousands, except share data	March 31, 2006			December 31, 2005
Assets
Current assets
Cash and cash equivalents	$	75,239		$	97,071
Investments		64,900			60,150
Accounts receivable, net		149,015			174,017
Inventories
Finished products		67,852			67,973
Material and work in process		17,663			16,695
		85,515			84,668
Other current assets		58,161			59,960
Total current assets		432,830			475,866
Property, plant, and equipment		598,930			584,104
Less accumulated depreciation and amortization		(373,787	)		(374,464	)
		225,143			209,640
Intangible assets, net		40,743			32,949
Other assets		35,240			36,582
Total assets	$	733,956		$	755,037
Liabilities and shareholders' equity
Current liabilities
Accounts payable	$	39,812		$	45,794
Accrued employee compensation and benefits		31,278			33,695
Accrued marketing expenses		22,607			24,914
Other accrued expenses		37,198			42,038
Income taxes payable		1,789			2,477
Short-term notes payable and current portion of other obligations		12,820			15,351
Total current liabilities		145,504			164,269
Long-term debt and other obligations		23,512			24,061
Deferred income tax liabilities		5,853			4,771
Minority interest		1,672			2,779
Shareholders' equity
Common stock; $1.00 par value; authorized - 21,500,000 shares;
issued and outstanding - 9,130,441 shares in 2006, 9,129,060 shares in 2005		9,130			9,129
Class A common stock; $1.00 par value; authorized - 50,000,000 shares;
issued and outstanding - 9,425,320 shares in 2006, 9,388,786 shares in 2005		9,425			9,389
Class B common stock; $1.00 par value; authorized - 8,500,000 shares;
issued and outstanding - 917,263 shares in 2006, 917,563 shares in 2005		917			918
Additional paid-in capital		39,928			37,191
Retained earnings		509,419			529,372
Accumulated other comprehensive loss		(11,404	)		(26,842	)
Total shareholders' equity		557,415			559,157
Total liabilities and shareholders' equity	$	733,956		$	755,037

See notes to condensed consolidated financial statements.

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BANDAG, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Earnings

In thousands, except per share data	Three Months Ended March 31,
	2006			2005
Income
Net sales	$	212,355		$	189,756
Other		4,556			2,061
		216,911			191,817
Costs and expenses
Cost of products sold		147,761			125,746
Engineering, selling, administrative, and other expenses		65,179			57,396
		212,940			183,142
Income from operations		3,971			8,675
Interest income		2,454			1,813
Interest expense		(314	)		(456	)
Earnings before income taxes, minority interest
and discontinued operations		6,111			10,032
Income taxes		2,513			4,193
Minority interest		(180	)		(123	)
Earnings from continuing operations		3,778			5,962
Net loss on discontinued operations		(16,356	)		--
Net earnings (loss)	$	(12,578	)	$	5,962
Basic earnings (loss) per share
Earnings from continuing operations	$	0.20		$	0.31
Net loss on discontinued operations		(0.85	)		--
Net earnings (loss)	$	(0.65	)	$	0.31
Diluted earnings (loss) per share
Earnings from continuing operations	$	0.19		$	0.30
Net loss on discontinued operations		(0.83	)		--
Net earnings (loss)	$	(0.64	)	$	0.30
Comprehensive net earnings	$	2,860		$	6,874
Cash dividends declared per share	$	0.335		$	0.330
Depreciation included in expense	$	6,653		$	6,482
Weighted average shares outstanding:
Basic		19,324			19,392
Diluted		19,571			19,707

See notes to condensed consolidated financial statements.

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BANDAG, INCORPORATED AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

In thousands	Three Months Ended March 31,
	2006			2005
Operating Activities
Net earnings (loss)	$	(12,578	)	$	5,962
Provision for depreciation		6,653			6,482
Decrease in operating assets and liabilities, net		12,507			5,157
Net cash provided by operating activities		6,582			17,601
Investing Activities
Additions to property, plant, and equipment		(22,677	)		(8,893	)
Purchases of investments		(184,950	)		(358,305	)
Maturities of investments		180,200			351,155
Divestitures of businesses		460			2,251
Acquisitions of businesses		(7,997	)		--
Non-cash translation adjustment due to sale of South Africa		14,212			--
Net cash used in investing activities		(20,752	)		(13,792	)
Financing Activities
Principal payments on short-term notes payable and long-term obligations		(1,468	)		(1,886	)
Cash dividends		(6,515	)		(6,418	)
Purchases of Common Stock and Class A Common Stock		(946	)		(481	)
Stock options exercised		1,181			699
Excess tax benefits from share-based compensation expense		90			--
Net cash used in financing activities		(7,658	)		(8,086	)
Effect of exchange rate changes on cash and cash equivalents		(4	)		262
Decrease in cash and cash equivalents		(21,832	)		(4,015	)
Cash and cash equivalents at beginning of period		97,071			66,646
Cash and cash equivalents at end of period	$	75,239		$	62,631

See notes to condensed consolidated financial statements.

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BANDAG, INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements – Unaudited

Note 1. Basis of Presentation

The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Note 2. Comprehensive Net Earnings

Comprehensive net earnings for the three month period ended March 31 were as follows (in thousands):

	Three Months Ended March 31,
	2006			2005
Net earnings (loss)	$	(12,578	)	$	5,962
Other comprehensive income:
Foreign currency translation		15,522			912
Minimum pension liability		(84	)		--
Comprehensive net earnings	$	2,860		$	6,874

For the three month period ended March 31, 2006, other comprehensive income includes $14,212,000 of cumulative translation adjustment that was written off as part of the sale of the South African operations.

Note 3. Sale of South Africa Operations

During the first quarter of 2006 the Company recorded the previously announced deferred loss on the sale of its business in South Africa. Bandag recorded a net loss on discontinued operations of $16,356,000, or $0.83 per diluted share. The loss was primarily due to the cumulative translation adjustment of $14,212,000 that was recorded in the Consolidated Balance Sheet related to the South African operation.

6

BANDAG, INCORPORATED AND SUBSIDIARIES

Note 4. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended March 31,
	2006			2005
Numerator:
Earnings from continuing operations	$	3,778		$	5,962
Net loss on discontinued operation		(16,356	)		--
Net earnings (loss)	$	(12,578	)	$	5,962
Denominator:
Weighted-average shares - Basic		19,324			19,392
Effect of dilutive:
Restricted stock		2			5
Stock options		245			310
		247			315
Weighted-average shares - Diluted		19,571			19,707
Basic earnings (loss) per share
Earnings from continuing operations	$	0.20		$	0.31
Net loss on discontinued operations		(0.85	)
Net earnings (loss)	$	(0.65	)	$	0.31
Diluted earnings (loss) per share
Earnings from continuing operations	$	0.19		$	0.30
Net loss on discontinued operations		(0.83	)		--
Net earnings (loss)	$	(0.64	)	$	0.30

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BANDAG, INCORPORATED AND SUBSIDIARIES

Note 5. Retirement Benefit Plans

Net periodic (benefit) cost for the three month periods ended March 31 is composed of the following (in thousands):

	Three Months Ended March 31,
	2006			2005
Pension Benefits
Service cost	$	1,317		$	1,201
Interest cost		1,985			1,828
Expected return on plan assets		(2,164	)		(1,962	)
Amortization of prior service cost		32			32
Amortization of transitional assets		16			(56	)
Recognized actuarial loss		358			288
Net periodic cost	$	1,544		$	1,331
Postretirement Benefits
Service cost	$	52		$	57
Interest cost		80			98
Amortization of prior service cost		1			1
Recognized actuarial gain		(32	)		(13	)
Net periodic cost	$	101		$	143

Note 6. Share-based Compensation

Effective January 1, 2002, the Company adopted the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosures” (the Statement). Under the modified prospective method of adoption selected by the Company under the provisions of the Statement, compensation cost is the same as that which would have been recognized had the recognition provisions of the Statement been applied from its original effective date in 1994. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) (SFAS 123(R)), “Share-Based Payment” using the modified prospective method.

The Company has historically expensed stock-based compensation over the explicit service period up to the date of retirement. Upon adoption of SFAS 123(R) the Company will recognize compensation cost over the period through the date that the employee is eligible to retire.

SFAS 123(R) also requires that the benefits of tax deductions in excess of compensation amounts recognized for book purposes, to be reported as a financing cash flow rather than an operating cash flow as required previously. This change in presentation in the accompanying unaudited Condensed Consolidated Statement of Cash Flows has reduced net operating cash flows and increased net financing cash flows by $90,000 for the three-month period ended March 31, 2006.

8

BANDAG, INCORPORATED AND SUBSIDIARIES

The Company’s Board of Directors adopted the Bandag, Incorporated Stock Award Plan in 1999 (the Plan) and the Bandag, Incorporated 2004 Stock Grant and Awards Plan in 2004 (the 2004 Plan). No additional grants may be made under plans other than the 2004 Plan. Under the terms of the 2004 Plan, the Company may award to certain eligible employees and directors stock options, stock appreciation rights, performance shares, performance units, restricted stock, restricted stock units, dividend equivalent units and incentive awards, whether granted alone or in addition to, in tandem with, or in substitution for any other award. Up to 2,000,000 shares of Class A Common Stock is authorized for issuance under the 2004 Plan and as of March 31, 2006, 1,776,660 shares were available for issuance under the 2004 Plan.

During the quarter ended March 31, 2006 and 2005, the Company recognized $1,212,000 and $1,113,000, respectively, of compensation expense related to its stock-based compensation plans.

A summary of the status of the Company’s option activity under the Bandag, Incorporated Stock Award Plan and the Bandag, Incorporated Stock Grant and Awards Plan is presented below (aggregate intrinsic value in thousands):

	Class A Common Shares			Weighted- Average Exercise Price		Aggregate Intrinsic Value
Outstanding, January 1, 2006		1,437,125			$29.80
Granted		60,460			$35.80
Exercised		(46,899	)		$25.18
Forfeited		(437	)		$31.96
Outstanding, March 31, 2006		1,450,249			$30.20		$8,033
Exercisable, March 31, 2006		1,155,381			$28.57		$8,292

The following summarizes information about stock options outstanding under the Bandag, Incorporated Stock Award Plan and Bandag, Incorporated Stock Grant and Awards Plan at March 31, 2006:

	Options Outstanding			Options Exercisable
Range of   Exercise Prices	Class A Common Shares	Average Remaining Contractual Life	Weighted- Average Exercise Price	Class A Common Shares	Weighted- Average Exercise Price
$18.99 - $23.74	222,868	3.9 years	$21.09	222,868	$21.09
$23.74 - $28.48	600,284	6.1 years	$26.24	510,516	$25.99
$28.48 - $33.23	265,777	5.7 years	$32.53	265,777	$32.53
$33.23 - $37.98	107,620	6.8 years	$34.97	46,100	$33.88
$37.98 - $42.72	106,740	8.8 years	$41.02	27,810	$41.02
$42.72 - $47.47	146,960	7.6 years	$44.71	82,310	$44.86
$18.99 - $47.47	1,450,249	6.1 years	$30.21	1,155,381	$28.57

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BANDAG, INCORPORATED AND SUBSIDIARIES

The fair value of each option granted is estimated on the grant date using the Black-Scholes model. The following weighted-average assumptions were made in estimating the fair value:

	Three months ended March 31, 2006	Three months ended March 31, 2005
Dividend yield	3.6%	3.7%
Expected volatility	36.5%	29.4%
Risk-free interest rate	4.3%	4.2%
Expected lives	7.7 years	7.7 years

The weighted-average fair value of options granted during the quarter March 31, 2006 and 2005 was $10.99 and $10.29 per option, respectively.

During the quarter ended March 31, 2006, the Company granted 8,290 restricted shares of Class A Common Stock under the Plan. Bandag accounts for restricted stock at historical cost which equals its fair market value at the date of grant.

A summary of the status of the Company’s restricted stock activity under the Bandag, Incorporated Stock Award Plan and the Bandag, Incorporated Stock Grant and Awards Plan is presented below:

	Class A Common Shares
Non-vested, January 1, 2006		124,277
Granted		8,290
Vested		(18,125	)
Non-vested, March 31, 2006		114,442

Restricted stock awards for an aggregate 114,442 shares of Class A Common Stock were outstanding at March 31, 2006, and vest as follows: 43,238 in 2007, 62,914 in 2008 and 8,290 in 2009. The weighted-average fair value of restricted stock granted during the quarter ended March 31, 2006 and 2005 was $35.69 and $40.99 per share, respectively. The total fair value of restricted stock awards that vested during the quarter ended March 31, 2006 and 2005 was $502,000 and $58,000, respectively.

Note 7. Subsequent Event

Subsequent to the end of the first quarter, North America announced the closing of the tread production plant in Shawinigan, Quebec and expects to record related charges of approximately $3,800,000 in the second quarter of 2006.

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BANDAG, INCORPORATED AND SUBSIDIARIES

Note 8. Operating Segment Information

The Company has three reportable operating segments: Traditional Business, TDS and Speedco. The Traditional Business manufactures precured tread rubber, equipment and supplies for retreading tires and operates on a worldwide basis. The operations of the Traditional Business segment are evaluated by worldwide geographic region. The Company’s operations located in the United States and Canada, together with Open Road Technologies, are integrated and managed as one unit, which is referred to internally as North America. The Company’s operations located in Europe principally service European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally as EMEA. The Company’s exports from North America to markets in the Caribbean, Central America, South America and Asia, along with operations in Brazil, Mexico, Venezuela, and royalties from licensees in Australia and South Africa, are combined under one management group referred to internally as International.

TDS operates franchised retreading locations and commercial, retail, and wholesale outlets in the western region of the United States for the sale and maintenance of new and retread tires to principally commercial and industrial customers.

Speedco provides quick-service truck lubrication and routine tire services through company-owned on-highway locations in the United States.

Other consists of corporate administrative expenses, net unrealized foreign exchange gains and losses on U.S. denominated investments, interest income and interest expense.

The Company evaluates performance and allocates resources based primarily on profit or loss before interest and income taxes. Intersegment and intrasegment sales and transfers are recorded at fair market value less a discount between geographic areas within the Traditional Business. Transactions between the Traditional Business and TDS and between the Traditional Business and Speedco are recorded at a value consistent with that to unaffiliated customers.

11

BANDAG, INCORPORATED AND SUBSIDIARIES

For the three months ended March 31 (in thousands):

	Traditional Business
	North America				EMEA				International
	2006		2005		2006		2005		2006		2005
Sales by Product
Retread products	$	87,797	$	79,814	$	18,967	$	18,540	$	26,246	$	28,277
New tires		--		--		--		--		--		--
Retread tires		--		--		--		--		--		--
Equipment		6,354		3,940		555		849		433		592
Other		5,949		7,516		--		--		--		--
Net sales to unaffiliated customers	$	100,100	$	91,270	$	19,522	$	19,389	$	26,679	$	28,869
Transfers	$	7,066	$	6,618	$	41	$	223	$	2,175	$	1,216
Operating earnings	$	4,207	$	8,605	$	801	$	921	$	3,248	$	3,439
Interest income		--		--		--		--		--		--
Interest expense		--		--		--		--		--		--
Earnings before income taxes, minority
interest and discontinued operations	$	4,207	$	8,605	$	801	$	921	$	3,248	$	3,439

	TDS						Speedco					Other
	2006			2005			2006			2005		2006			2005
Sales by Product
Retread products	$	--		$	--		$	--		$	--	$	--		$	--
New tires		24,126			17,426			847			229		--			--
Retread tires		7,473			6,251			160			28		--			--
Equipment		--			--			--			--		--			--
Other		10,876			9,000			22,572			17,294		--			--
Net sales to unaffiliated customers	$	42,475		$	32,677		$	23,579		$	17,551	$	--		$	--
Transfers	$	--		$	136		$	--		$	--	$	--		$	--
Operating earnings (loss)	$	(26	)	$	(1,097	)	$	(996	)	$	799	$	(3,263	)	$	(3,992	)
Interest income		--			--			--			--		2,454			1,813
Interest expense		--			--			--			--		(314	)		(456	)
Earnings (loss) before income taxes, minority
interest and discontinued operations	$	(26	)	$	(1,097	)	$	(996	)	$	799	$	(1,123	)	$	(2,635	)

	Consolidated
	2006			2005
Sales by Product
Retread products	$	133,010		$	126,631
New tires		24,973			17,655
Retread tires		7,633			6,279
Equipment		7,342			5,381
Other		39,397			33,810
Net sales to unaffiliated customers	$	212,355		$	189,756
Transfers	$	9,282		$	8,193
Operating earnings	$	3,971		$	8,675
Interest income		2,454			1,813
Interest expense		(314	)		(456	)
Earnings before income taxes, minority
interest and discontinued operations	$	6,111		$	10,032

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BANDAG, INCORPORATED AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

Results include the Company’s three reportable operating segments – its Traditional Business, TDS and Speedco.

   Sale of South Africa Operations

During the first quarter of 2006 the Company recorded the previously announced deferred loss on the sale of its business in South Africa. Bandag recorded a net loss on discontinued operations of $16,356,000, or $0.83 per diluted share. The loss was primarily due to the cumulative translation adjustment of $14,212,000 that was recorded in the Consolidated Balance Sheet related to the South African operation.

   Net Sales

Consolidated net sales for the quarter ended March 31, 2006 increased $22,599,000, or 12%, from the prior year period. Retread unit volume in the Traditional Business decreased 3% for the quarter ended March 31, 2006 from the prior year period. Net sales were positively impacted by an increase in TDS and Speedco net sales of $9,798,000 and $6,028,000, respectively, for the quarter ended March 31, 2006. The Company’s seasonal sales pattern is tied to the overall performance of the economy and to the level of trucking activity.

   Gross Margin

Consolidated gross margin for the quarter ended March 31, 2006 declined 3.3 percentage points from the prior year period. Traditional Business gross margin decreased 3.7 percentage points for the quarter ended March 31, 2006, from the prior year period. The decrease in Traditional Business gross margin is primarily due to higher raw material costs.

   Operating and Other Expenses

Consolidated operating and other expenses increased $7,783,000, or 14%, for the quarter ended March 31, 2006 from the prior year period. The increase in consolidated operating and other expenses was substantially impacted by expenses related to the Speedco operations.

   Other Income

Consolidated other income increased $2,495,000 for the quarter ended March 31, 2006 from the prior year period. Other income was positively impacted by $1,978,000 due to a legal settlement with a raw material supplier and by $845,000 due to the sale of the Company’s joint venture in India.

   Interest Income

Consolidated interest income increased $641,000 for the quarter ended March 31, 2006 from the prior year period, primarily due to an increase in interest rates.

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BANDAG, INCORPORATED AND SUBSIDIARIES

   Net Earnings

Consolidated earnings from continuing operations were $3,778,000, or $0.19 per diluted share, for the quarter ended March 31, 2006, compared to $5,962,000, or $0.30 per diluted share, for the prior year period. During the quarter ended March 31, 2006 the Company recorded a net loss on discontinued operations of $16,356,000, or $0.83 per diluted share, resulting in a net loss of $12,578,000, or $0.64 per diluted share.

TRADITIONAL BUSINESS

   North America

The Company’s Traditional Business operations located in the United States and Canada, together with Open Road Technologies are integrated and managed as one unit, which is referred to internally as North America. North America sells to independent dealers as well as to TDS and other subsidiaries. Sales to TDS and other subsidiaries are eliminated in consolidation.

The table below depicts the breakout of North America’s retread product sales to TDS and to independent dealers.

(in thousands)	Three Months Ended March 31,
Retread Product Sales	2006		2005		Increase
Sales to Independent Dealers		$87,797		$79,814		10.0%
Sales to TDS		4,355		3,336		30.5%
Total Retread Product Sales		$92,152		$83,150		10.8%

Retread product sales were positively impacted by a 1% increase in retread material unit volume for the quarter ended March 31, 2006. Retread product sales increased at a higher rate than the unit volume increased due to the impact of price increases in May 2005 and January 2006. Net sales were also positively impacted by increased equipment sales of $2,414,000 and the positive effect of translating Canadian dollar foreign currency denominated results to U.S. dollars of $633,000.

Higher raw material costs and an increase in sales incentive programs primarily resulted in a 4.1 percentage point decrease in North America’s gross margin for the quarter ended March 31, 2006 from the prior year period.

Operating and other expenses increased $4,133,000, or 17%, for the quarter ended March 31, 2006 from the prior year period. The increase in operating and other expenses is primarily due to an increase in personnel related costs and a decrease in net foreign exchange gains. Other income was positively impacted by $1,083,000 due to a legal settlement with a raw material supplier.

Lower gross profit margin and higher operating and other expenses were the primary reasons for a decrease for North America of $4,398,000 in earnings before income taxes, minority interest and discontinued operations for the quarter ended March 31, 2006. North America recorded earnings before income taxes, minority interest and discontinued operations of $4,207,000 for the quarter ended March 31, 2006 as compared to earnings on the same basis of $8,605,000 for the prior year period.

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BANDAG, INCORPORATED AND SUBSIDIARIES

Subsequent to the end of the first quarter, North America announced the closing of the tread production plant in Shawinigan, Quebec and expects to record related charges of approximately $3,800,000 in the second quarter of 2006.

   EMEA

The Company’s operations located in Europe principally service markets in European countries, but also export to certain other countries in the Middle East and Northern and Central Africa. This collection of countries is under one management group and is referred to internally as EMEA. Net sales in EMEA increased $133,000, or 1%, for the quarter ended March 31, 2006 from the prior year period on a 9% increase in retread material unit volume. Net sales in EMEA in the quarter ended March 31, 2006 were positively impacted by increased selling prices. Net sales were negatively impacted by $2,222,000 due to the effect of translating foreign currency denominated results to U.S. dollars.

Primarily as a result of higher raw material costs, gross margin decreased 3.3 percentage points for the quarter ended March 31, 2006 as compared to the prior year period. Operating and other expenses decreased $180,000, or 3%, for the quarter ended March 31, 2006 as compared to the prior year period. Other income was positively impacted by $340,000 due to a legal settlement with a raw material supplier.

Lower gross profit margin was the primary reason for a decrease for EMEA of $120,000 in earnings before income taxes, minority interest and discontinued operations for the quarter ended March 31, 2006. EMEA recorded earnings before income taxes, minority interest and discontinued operations of $801,000 for the quarter ended March 31, 2006 as compared to earnings on the same basis of $921,000 for the prior year period.

   International

The Company’s exports from North America to markets in the Caribbean, Central America, South America and Asia, along with operations in Brazil, Mexico, Venezuela, and royalties from licensees in Australia and South Africa, are combined under one management group referred to internally as International. Net sales in International for the quarter ended March 31, 2006 decreased $2,190,000, or 8%, from the prior year period. Retread material unit volume decreased 17% for the quarter ended March 31, 2006 as compared to the prior year period. Net sales and retread material unit volume were negatively impacted by 17% and 13%, respectively, due to the divestiture of South Africa. Net sales in International for the quarter ended March 31, 2006 were positively impacted by price increases and by $2,903,000 due to the effect of translating foreign currency denominated results to U.S. dollars.

Gross margin for the quarter ended March 31, 2006 decreased 2.7 percentage points from the prior year period, primarily due to higher raw material prices. Operating and other expenses for the quarter ended March 31, 2006 were even with the prior year period. Other income was positively impacted by $555,000 due to a legal settlement with a raw material supplier and by $845,000 due to the sale of the Company’s joint venture in India.

15

BANDAG, INCORPORATED AND SUBSIDIARIES

Lower net sales and gross profit margin primarily resulted in a decrease for International of $191,000 in earnings before income taxes, minority interest and discontinued operations for the quarter ended March 31, 2006. International recorded earnings before income taxes, minority interest and discontinued operations of $3,248,000 for the quarter ended March 31, 2006 as compared to earnings on the same basis of $3,439,000 for the prior year period.

During the first quarter of 2006 the Company recorded the previously announced deferred loss on the sale of its business in South Africa. Bandag recorded a net loss on discontinued operations of $16,356,000. The loss was primarily due to the cumulative translation adjustment of $14,212,000 that was recorded in the Consolidated Balance Sheet related to the South African operation.

TIRE DISTRIBUTION SYSTEMS, INC.

TDS net sales for the quarter ended March 31, 2006 increased $9,798,000, or 30%, from the prior year period. TDS net sales were positively impacted by increased unit sales and higher prices.

Gross margin for the quarter ended March 31, 2006 was even with the prior year periods. Operating and other expenses increased $1,633,000, or 16%, for the quarter ended March 31, 2006, but decreased as a percentage of sales.

Higher net sales was the primary reason for an improvement for TDS of $1,071,000 in earnings before income taxes, minority interest and discontinued operations for the quarter ended March 31, 2006. TDS recorded a loss before income taxes, minority interest and discontinued operations of $26,000 for the quarter ended March 31, 2006 as compared to a loss on the same basis of $1,097,000 for the prior year period.

SPEEDCO, INC.

Speedco net sales for the quarter ended March 31, 2006 increased $6,028,000, or 34%, from the prior year period. For the quarter ended March 31, 2006, same store lube sales increased $2,771,000, or 16%, and same store tire sales increased $397,000, or 93%, as compared to the prior year period. Same store revenue is comprised of locations that have operated for twelve full months. As of March 31, 2006 same store lube sales included 33 locations and same store tire sales included 7 locations. Speedco had 39 locations, 27 with tire service capabilities, as of March 31, 2006, compared to 33 locations, 8 with tire service capabilities, for the prior year period.

Gross margin for the quarter ended March 31, 2006 decreased 4.3 percentage points as compared to the prior year period. Operating and other expenses for the quarter ended March 31, 2006 increased $2,943,000, or 55%, as compared to the prior year period. Speedco gross margin and operating and other expenses were negatively impacted by expenses associated with the start-up of new stores and the addition of tire lanes to existing stores.

16

BANDAG, INCORPORATED AND SUBSIDIARIES

Lower gross margin and higher operating and other expenses were the primary reasons for a decrease for Speedco of $1,795,000 in earnings before income taxes, minority interest and discontinued operations for the quarter ended March 31, 2006. Speedco recorded a loss before income taxes, minority interest and discontinued operations of $996,000 for the quarter ended March 31, 2006 as compared to earnings on the same basis of $799,000 for the prior year period.

OTHER

The Company’s Other segment consists of corporate expenses, interest income on invested cash balances and interest expense on long-term and short-term debt. Corporate expenses decreased $729,000 for the quarter ended March 31, 2006 as compared to the prior year period. Interest income increased $641,000 for the quarter ended March 31, 2006 from the prior year period due to an increase in interest rates.

Financial Condition:

Liquidity

At March 31, 2006, the Company had cash and cash equivalents of $75,239,000, as compared to $97,071,000 at December 31, 2005. At March 31, 2006, the Company had investments of $64,900,000, as compared to $60,150,000 at December 31, 2005. The Company’s ratio of total current assets to total current liabilities was 3.0 to 1 at March 31, 2006, with current assets exceeding current liabilities by $287,326,000. At March 31, 2006, the Company had approximately $105,230,000 in borrowing capacity available under unused lines of credit. The Company believes it has an adequate cash balance for future cash flow needs.

Operating Activities

Net cash provided by operating activities for the three months ended March 31, 2006 was $6,582,000. At March 31, 2006, the Company had a net decrease in operating assets and liabilities of $12,507,000 compared to $5,157,000 for the prior year period. The net decrease in operating assets and liabilities at March 31, 2006 is primarily due to a decrease in accounts receivables.

Investing Activities

The Company spent $22,677,000 on capital expenditures through March 31, 2006, compared to $8,893,000 spent for the same period last year. The increase in capital expenditures is primarily due to expenditures made by Speedco for new facilities and installations of quick-service tire lanes at existing facilities. The Company typically funds its capital expenditures from cash, investments and operating cash flows.

The Company’s excess funds are invested in financial instruments with various maturities, but only instruments available-for-sale with an original maturity date of over 90 days and auction rate securities are classified as investments for balance sheet purposes. The Company’s purchases of investments exceeded maturities by $4,750,000 during the three months ended March 31, 2006, resulting in total investments of $64,900,000 as of March 31, 2006.

17

BANDAG, INCORPORATED AND SUBSIDIARIES

During the quarter ended March 31, 2006, the Company recorded a non-cash translation adjustment loss of $14,212,000 due to the sale of the South African operation.

Financing Activities

Cash dividends totaled $6,515,000 for the three months ended March 31, 2006, compared to $6,418,000 for the same period last year. Cash dividends declared per share were $0.335 for the three months ended March 31, 2006, compared to $0.33 per share for the same period last year.

During the three month period ended March 31, 2006, the Company purchased 26,198 shares of Common Stock and Class A Common Stock at an average price of $36.13 per share, as compared to the purchase of 11,264 shares of Common Stock and Class A Common Stock at an average price of $42.66 per share for the same period last year.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

See the Company’s most recent Annual Report filed on Form 10-K (Item 7A). There has been no material change in this information.

Item 4. Controls and Procedures

Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2006.

Based on an evaluation performed by the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, there were no changes in the Company’s internal control over financial reporting identified in such evaluation that occurred during the quarter ended March 31, 2006 that has materially affected, or is likely to materially affect, the Company’s internal control over financial reporting.

18

PART II. OTHER INFORMATION

BANDAG, INCORPORATED AND SUBSIDIARIES

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities(1)

January 1, 2006 -	Total		Average		Total Number		Maximum
March 31, 2006	Number		Price Paid		of Shares		Number of
	of Shares		per Share		Purchased as		Shares that May
	Purchased				Part of Publicly		Yet be Purchased
					Announced		Under the
					Programs		Program
Common Stock
January 1 - January 31		970		$44.96		970		715,336
February 1 - February 28		557		$42.42		557		713,725
March - March 31		1,704		$41.41		1,704		691,172
Total		3,231		$42.65		3,231		691,172	(1)(2)
Class A Common Stock
January 1 - January 31		1,064		$38.60		1,064		715,336
February 1 - February 28		1,054		$36.01		1,054		713,725
March - March 31		20,849		$35.00		20,849		691,172
Total		22,967		$35.21		22,967		691,172	(1)(2)

(1) On May 2, 2000, the Board of Directors approved a stock purchase program which authorized the purchase of up to 2,000,000 shares of outstanding Common Stock, Class A Common Stock, and/or Class B Common Stock in the open market or in private transactions. The program has no stated expiration date. No stock purchase program expired during the period covered by the above table.

(2) Represents the total number of shares of Common Stock, Class A Common Stock and/or Class B common Stock remaining to be purchased under the stock purchase program.

Item 6 – Exhibits

10.20 Form of Performance Unit Agreement under 2004 Stock Grant and Awards Plan

31.1 Certification of Chief Executive Officer

31.2 Certification of Chief Financial Officer

32.1 Written Statement of the Chairman of the Board, Chief Executive Officer and President of Bandag, Incorporated
Pursuant to 18 U.S.C.ss.1350

32.2 Written Statement of the Vice President, Chief Financial Officer and Secretary of Bandag, Incorporated
Pursuant to 18 U.S.C.ss.1350

19

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BANDAG, INCORPORATED
              (Registrant)

Date: May 9, 2006	/s/ Martin G. Carver
	Martin G. Carver
	Chairman and Chief Executive Officer
Date: May 9, 2006	/s/ Warren W. Heidbreder
	Warren W. Heidbreder
	Vice President, Chief Financial Officer

20

Exhibit Index

Exhibit
Number
Exhibit

10.20 Form of Performance Unit Agreement under 2004 Stock Grant and Awards Plan

31.1 Certification of Chief Executive Officer

31.2 Certification of Chief Financial Officer

32.1 Written Statement of the Chairman of the Board, Chief Executive Officer and President of Bandag, Incorporated
Pursuant to 18 U.S.C.ss.1350

32.2 Written Statement of the Vice President, Chief Financial Officer and Secretary of Bandag, Incorporated
Pursuant to 18 U.S.C.ss.1350

EX-10.20

Exhibit 10.20

BANDAG, INCORPORATED
PERFORMANCE UNIT AGREEMENT

        You have been selected to receive performance units (PUs) under the Bandag, Incorporated 2004 Stock Grant and Awards Plan (the “Plan”). The following sets forth the terms and conditions of the PUs:

        Participant: __________________________

        1.     Grant of PUs.  The Management Continuity and Compensation Committee of the Board of Directors of the Company (the “Committee”) has awarded to you PUs, subject to the terms and conditions of this Agreement.

        2.    General Terms of Your PUs.  The number of PUs subject to this Agreement is ______________.

        The value of each PU is the Fair Market Value of one share of the Company’s Class A Common Stock (the “Shares”).

        The "Grant Date" of this Award is: _________________

        3.    Vesting of PUs.  The PUs will vest in full as of December 31, 2008, in accordance with the degree to which the performance goals determined by the Management Continuity and Compensation Committee and communicated to you (“Performance Goals”) are met, provided, however, if you terminate employment from the Company or an Affiliate as a result of death, Disability or Retirement prior to December 31, 2008, your PUs will continue until December 31, 2008, and payment will be made to you (or your estate or beneficiary in the event of your death) to the extent required under this Agreement, including any payment required by Paragraph 5 hereof.

        Except in the case of death, Disability or Retirement, if you are involuntarily terminated from the Company or an Affiliate prior to December 31, 2008, you shall, to the extent the Performance Goals are met, be entitled to a payment which shall be prorated equitably based on the number of days you were employed by the Company or the Affiliate during the performance period as compared to the number of days in the performance period, including the proration of any minimum guaranteed payment pursuant to Paragraph 5 hereof. You shall not be entitled to any payment if you voluntarily terminate employment prior to December 31, 2008.

        4.    Payment of PUs.  The value of your vested PUs will be paid within 30 days after the public release of the Company’s financial results for the fiscal year ending December 31, 2008, but in no event no later than December 31,2009.

        Payment required to be made hereunder will be made as follows: Fifty percent (50%) of the Fair Market Value of the PUs shall be made in Shares having a Fair Market Value (determined as of a date two business days after the public release of the Company’s financial results for the immediately preceding fiscal year) and fifty percent (50%) of the Fair Market Value of the PUs shall be paid in cash (valuing each PU as the Fair Market Value of a Share determined as of a date two business days after the public release of the Company’s financial results for the immediately preceding year).

        5.    Minimum Guaranteed Payment.  In the event none of the Performance Goals are met, you shall be entitled to receive a payment (fifty percent (50%) in the Fair Market Value of Shares and fifty percent (50%) in cash) equal to twenty percent (20%) of the payment you would have received if the Target Performance Goal had been attained, such payment to be equitably prorated if required by the second paragraph of Paragraph 3.

        6.    Change of Control.  Upon a Change of Control, the provisions of Section 17 of the Plan as may be subsequently amended shall apply.

        7.    Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of this Agreement shall in no way be a waiver of such provision or of any other provision hereof.

        8.    Participant Bound by Plan.  You agree to be bound by all the terms and provisions of the Plan. The terms of the Plan are expressly incorporated into this Agreement by reference and, in the event of any conflict between this Agreement and the Plan, the Plan shall govern. Any capitalized terms not defined herein will have the meanings given in the Plan. This Agreement is subject to all of the terms, conditions and provisions of the Plan, including, without limitation, the Plan’s amendment provisions, and to such rules, regulations and interpretations relating to the Plan or this Agreement as are adopted by the Committee and in effect from time to time. By signing below you agree and accept on behalf of yourself, your heirs, legatees and legal representatives that all decisions or interpretations of the Committee with respect to the Plan or this Agreement are binding, conclusive and final.

        IN WITNESS WHEREOF, the parties have executed this Performance Unit Agreement as of the ____ day of __________, 2006.

Agreement to Participate

By signing a copy of this Agreement and returning it to the Secretary of the Company, I agree to participate in the Plan, subject to all of the provisions contained therein. I further understand that a copy of the Plan will be made available to me upon request to the Secretary of the Company.

Participant’s Signature

2

EX-31.1

CERTIFICATIONS Exhibit 31.1

I, Martin G. Carver, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bandag, Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2006	By: /s/ Martin G. Carver
	Martin G. Carver
	Chairman and Chief Executive Officer

1

EX-31.2

CERTIFICATIONS Exhibit 31.2

I, Warren W. Heidbreder, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Bandag, Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2006	By: /s/ Warren W. Heidbreder
	Warren W. Heidbreder
	Vice President, Chief Financial Officer

1

EX-32.1

Exhibit 32.1

Written Statement of the Chairman of the Board, Chief Executive Officer and President of
Bandag, Incorporated
Pursuant to 18 U.S.C. §1350

        Solely for the purposes of complying with 18 U.S.C. §1350, I, the undersigned Chairman of the Board, Chief Executive Officer and President of Bandag, Incorporated (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Martin G. Carver
Martin G. Carver
May 9, 2006

1

EX-32.2

Exhibit 32.2

Written Statement of the Vice President, Chief Financial Officer and Secretary of Bandag,
Incorporated
Pursuant to 18 U.S.C. §1350

        Solely for the purposes of complying with 18 U.S.C. §1350, I, the undersigned Vice President, Chief Financial Officer and Secretary of Bandag, Incorporated (the “Company”), hereby certify, based on my knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2006 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Warren W. Heidbreder
Warren W. Heidbreder
May 9, 2006

1