<PAGE> 1
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 SEPTEMBER 30, 2000
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 0-21496
WESTPOINT STEVENS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3498354
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
507 WEST TENTH STREET
WEST POINT, GEORGIA 31833
(Address of principal executive offices, including Zip Code)
(706) 645-4000
(Registrant's telephone number, including area code)
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
-------- --------
Common shares outstanding at November 8, 2000: 49,464,567 shares of Common
Stock, $.01 par value.
1
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets:
September 30, 2000 (Unaudited)
and December 31, 1999 3
Condensed Consolidated Statements of
Operations (Unaudited); Three and
Nine Months Ended September 30,
2000 and September 30, 1999 4
Condensed Consolidated Statements of Cash
Flows (Unaudited); Nine Months
Ended September 30, 2000 and
September 30, 1999 5
Condensed Consolidated Statements of
Stockholders' Equity (Deficit) (Unaudited);
Nine Months Ended September 30, 2000 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
2
<PAGE> 3
WESTPOINT STEVENS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents .................... $ 391 $ 162
Accounts receivable .......................... 122,970 85,419
Inventories .................................. 432,011 448,887
Prepaid expenses and other current assets .... 6,787 13,842
----------- -----------
Total current assets .............................. 562,159 548,310
Property, Plant and Equipment, net ................ 765,559 840,712
Other Assets
Deferred financing fees ...................... 17,368 19,362
Prepaid pension and other assets ............. 72,587 62,857
Goodwill ..................................... 46,473 69,433
----------- -----------
$ 1,464,146 $ 1,540,674
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Senior Credit Facility ....................... $ 147,269 $ 89,803
Accrued interest payable ..................... 24,250 4,336
Trade accounts payable ....................... 70,456 94,036
Other accounts payable and accrued liabilities 137,479 127,059
----------- -----------
Total current liabilities ......................... 379,454 315,234
Long-Term Debt .................................... 1,475,000 1,375,000
Noncurrent Liabilities
Deferred income taxes ........................ 251,685 284,003
Other liabilities ............................ 60,162 64,457
----------- -----------
Total noncurrent liabilities ...................... 311,847 348,460
Stockholders' Equity (Deficit) .................... (702,155) (498,020)
----------- -----------
$ 1,464,146 $ 1,540,674
=========== ===========
</TABLE>
See accompanying notes
3
<PAGE> 4
WESTPOINT STEVENS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------
2000 1999 2000 1999
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ................................ $ 487,811 $ 503,065 $ 1,397,665 $1,398,102
Cost of goods sold ....................... 357,475 359,303 1,097,601 1,022,579
-------- -------- ----------- ----------
Gross earnings ...................... 130,336 143,762 300,064 375,523
Selling, general and
administrative expenses .............. 60,128 57,192 184,298 183,284
Restructuring and impairment charge ...... 6,132 -- 102,008 --
-------- -------- ----------- ----------
Operating earnings .................. 64,076 86,570 13,758 192,239
Interest expense ......................... 32,243 26,268 91,506 75,662
Other expense, net ....................... 784 659 7,112 1,834
-------- -------- ----------- ----------
Income (loss) before income tax
expense (benefit) ............. 31,049 59,643 (84,860) 114,743
Income tax expense (benefit) ............. 11,200 21,500 (30,475) 41,400
-------- -------- ----------- ----------
Net income (loss) ................... $ 19,849 $ 38,143 $ (54,385) $ 73,343
======== ======== =========== ==========
Basic net income (loss) per
common share ........................ $ .40 $ .69 $ (1.10) $ 1.32
======== ======== =========== ==========
Diluted net income (loss) per
common share ........................ $ .40 $ .67 $ (1.10) $ 1.28
======== ======== =========== ==========
Basic average common shares outstanding .. 49,739 55,134 49,655 55,569
Dilutive effect of stock options
and stock bonus plan .......... 116 1,460 -- 1,689
-------- -------- ----------- ----------
Diluted average common shares outstanding 49,855 56,594 49,655 57,258
======== ======== =========== ==========
</TABLE>
See accompanying notes
4
<PAGE> 5
WESTPOINT STEVENS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ (54,385) $ 73,343
Adjustment to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Depreciation and other amortization ........... 61,079 64,421
Deferred income taxes ......................... (31,908) 38,386
Changes in working capital .................... (26,190) (108,594)
Other - net ................................... (8,868) (6,410)
Restructuring and impairment charge ........... 102,008 --
----------- ---------
Net cash provided by operating activities ................ 41,736 61,146
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................ (48,088) (78,264)
Net proceeds from sale of assets .................... 458 497
----------- ---------
Net cash used for investing activities ................. (47,630) (77,767)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Senior Credit Facility:
Borrowings .................................... 1,045,735 698,621
Repayments .................................... (888,269) (604,840)
Net proceeds from Trade Receivables Program ......... 6,000 10,000
Purchase of common stock for treasury ............... (63,990) (90,630)
Proceeds from issuance of stock ..................... 8,891 5,368
Cash dividends paid ................................. (102,244) (2,264)
----------- ---------
Net cash provided by financing activities ................ 6,123 16,255
----------- ---------
Net increase (decrease) in cash and cash equivalents ..... 229 (366)
Cash and cash equivalents at beginning of period ......... 162 527
----------- ---------
Cash and cash equivalents at end of period ............... $ 391 $ 161
=========== =========
</TABLE>
See accompanying notes
5
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WESTPOINT STEVENS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON
STOCK AND
CAPITAL IN
EXCESS TREASURY STOCK
COMMON OF PAR -------------------- ACCUMULATED
SHARES VALUE SHARES AMOUNT DEFICIT
------------------------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 ............... 71,100 $361,504 (18,859) $(363,972) $(484,378)
Comprehensive income:
Net income (loss) .............. -- -- -- -- (54,385)
Foreign currency
translation adjustment .....
Comprehensive income (loss) .......
Exercise of management stock
options including tax benefit ... -- 4,148 754 5,251 --
Issuance of stock pursuant
to Stock Bonus Plan
including tax expense.......... -- 1,858 248 2,602 --
Issuance of restricted stock ...... -- 5 1 7 --
Amortization of
compensation ................... -- -- -- -- --
Purchase of treasury shares ....... -- -- (3,779) (63,990) --
Cash dividends .................... -- -- -- -- (102,244)
Stock dividends pursuant
to Stock Bonus Plan ............ -- -- -- -- (2)
------ -------- ------- --------- ---------
Balance, September 30, 2000 ............ 71,100 $367,515 (21,635) $(420,102) $(641,009)
====== ======== ======= ========= =========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE UNEARNED
INCOME (LOSS) COMPENSATION TOTAL
------------- ------------ ---------
<S> <C> <C> <C>
Balance, January 1, 2000 ............... $ (2,112) $ (9,062) $(498,020)
Comprehensive income:
Net income (loss) .............. -- -- (54,385)
Foreign currency
translation adjustment ..... 1,218 1,218
---------
Comprehensive income (loss) ....... (53,167)
---------
Exercise of management
stock options including
tax benefit .................... -- -- 9,399
Issuance of stock pursuant
to Stock Bonus Plan
including tax expense.......... -- -- 4,460
Issuance of restricted stock ...... -- (12) --
Amortization of
compensation ................... -- 1,409 1,409
Purchase of treasury shares ....... -- -- (63,990)
Cash dividends .................... -- -- (102,244)
Stock dividends pursuant
to Stock Bonus Plan ............ -- -- (2)
---------- -------- ---------
Balance, September 30, 2000 ............ $ (894) $(7,665) $(702,155)
========== ======== =========
</TABLE>
See accompanying notes
6
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WESTPOINT STEVENS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
annual report on Form 10-K for WestPoint Stevens Inc. (the "Company") for the
year ended December 31, 1999.
2. 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.
3. INVENTORIES
The Company uses the last-in, first-out ("LIFO") method of accounting for
substantially all inventories for financial reporting purposes. Interim
determinations of LIFO inventories are necessarily based on management's
estimates of year-end inventory levels and costs. Subsequent changes in these
estimates, including the final year-end LIFO determination, and the effect of
such changes on earnings are recorded in the interim periods in which they
occur.
Inventories consisted of the following at September 30, 2000 and December 31,
1999 (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Finished goods ........... $188,922 $ 203,364
Work in progress ......... 184,491 188,778
Raw materials and supplies 58,598 60,164
LIFO reserve ............. -- (3,419)
-------- ---------
$432,011 $ 448,887
======== =========
</TABLE>
7
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WESTPOINT STEVENS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. INDEBTEDNESS AND FINANCIAL ARRANGEMENTS
Indebtedness is as follows (in thousands of dollars):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
<S> <C> <C>
Short-term indebtedness:
Senior Credit Facility............. $ 147,269 $ 89,803
=========== ===========
Long-term indebtedness:
Senior Credit Facility............ $ 475,000 $ 375,000
7 7/8% Senior Notes due 2005...... 525,000 525,000
7 7/8% Senior Notes due 2008...... 475,000 475,000
----------- -----------
$ 1,475,000 $ 1,375,000
=========== ===========
</TABLE>
The Company has included $475 million of Revolver in long-term debt at September
30, 2000 because the Company intends that at least that amount would remain
outstanding during the next twelve months.
During 2000 the Company amended the Senior Credit Facility to decrease the
revolving loan commitment from $800 million to $725 million on July 1, 2001 and
further decrease the revolving loan commitment to $650 million on July 1, 2002.
On September 30, 2000 and December 31, 1999, $160.0 million and $154.0 million,
respectively, of accounts receivable had been sold pursuant to a trade
receivables program (the "Trade Receivables Program") and the sale is reflected
as a reduction of accounts receivable in the accompanying Condensed Consolidated
Balance Sheets.
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES
On June 28, 2000 the Company announced that its Board of Directors had approved
the new Eight Point Program, which was created to be the guiding discipline for
the Company in a global economy. The Board also approved a $195 million pre-tax
restructuring, impairment and other charge ($125 million net of taxes) to cover
the cost of implementing the program in the second, third and fourth quarters of
2000. The Eight Point Program addresses the following points: 1) rationalize
manufacturing; 2) reduce overhead; 3) increase global sourcing; 4) improve
inventory utilization; 5) enhance supply chain and logistics; 6) expand brands;
7) explore new licensing opportunities; and 8) improve capital structure.
8
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WESTPOINT STEVENS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. RESTRUCTURING, IMPAIRMENT AND OTHER CHARGES (CONTINUED)
During the second quarter of 2000 the Company conducted an intense evaluation of
its manufacturing process flow and capacity and how they relate to market
demand. The Company adopted a plan to close certain manufacturing plants and
consolidate manufacturing operations in an arrangement that will reduce costs
and enable more efficient production. The Company also evaluated its internal
support and administrative functions and adopted a plan to consolidate as well
as outsource certain internal support and administrative functions.
The cost of the manufacturing rationalization and certain overhead reduction
costs were reflected in a restructuring and impairment charge of $95.9 million,
before taxes, in the second quarter of 2000 and $6.1 million, before taxes, in
the third quarter of 2000. The components of the restructuring and impairment
charge in the second quarter of 2000 included $64.2 million for the impairment
of fixed assets, $23.7 million for the impairment of goodwill and other assets
and $8 million in reserves to cover cash expenses related to severance benefits
of $4.6 million and other exit costs including lease terminations of $3.4
million, and in the third quarter of 2000 included $6.1 million in reserves to
cover cash expenses related to severance benefits of $5.8 million and other exit
costs of $0.3 million.
The following is a summary of activity in the related reserves (in millions):
<TABLE>
<CAPTION>
OTHER EXIT
SEVERANCE COSTS AND LEASE
BENEFITS TERMINATIONS
--------- ----------------
<S> <C> <C>
Second Quarter Restructuring and Impairment Charge $4.6 $3.4
Third Quarter Restructuring and Impairment Charge 5.8 0.3
Payments ......................................... (3.5) --
---- ----
Balance at September 30, 2000 .................... $6.9 $3.7
==== ====
</TABLE>
During the second quarter of 2000 other expenses related to the Eight Point
Program of $72.3 million, before taxes, were recognized including inventory
writedowns of $62.2 million and claims of $5 million both reflected in cost of
goods sold and other costs of $5.1 million reflected in other expense, net, and
during the third quarter of 2000 other expenses of $6.3 million, before taxes,
were recognized including inventory writedowns of $5 million and other expenses
of $1.3 million both reflected in cost of goods sold.
The Company expects to incur additional charges aggregating $14.4 million,
before taxes, during the fourth quarter of 2000 related to severance benefits,
relocation of machinery, training and other costs in connection with the Eight
Point Program.
9
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WESTPOINT STEVENS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," as amended in June 2000 by Statement of Financial Accounting
Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," which requires companies to recognize all
derivatives as either assets or liabilities in the balance sheet and measure
such instruments at fair value. Adoption of SFAS 133, as amended by SFAS 138,
is not expected to have a material impact on the Company's consolidated
financial statements when adopted on January 1, 2001.
10
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WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS: THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
The tables below present the Company's proforma operating results before
restructuring and actual results for the three and nine months ended September
30, 2000 and September 30, 1999 (in thousands of dollars).
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
2000 1999
-------------------------------------- --------
PROFORMA RESTRUCTURING
BEFORE AND OTHER
RESTRUCTURING ITEMS ACTUAL ACTUAL
------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................... $487,811 $ -- $487,811 $503,065
Cost of goods sold ...................... 351,250 6,225 357,475 359,303
-------- -------- -------- --------
Gross earnings (loss) ............. 136,561 (6,225) 130,336 143,762
Selling, general and administrative
expenses ............................. 60,128 -- 60,128 57,192
Restructuring and impairment charge ..... -- 6,132 6,132 --
-------- -------- -------- --------
Operating earnings (loss) ......... 76,433 (12,357) 64,076 86,570
Interest expense ........................ 32,243 -- 32,243 26,268
Other expense, net ...................... 784 -- 784 659
-------- -------- -------- --------
Income (loss) before income
tax expense (benefit) ......... 43,406 (12,357) 31,049 59,643
Income tax expense (benefit) ............ 15,650 (4,450) 11,200 21,500
-------- -------- -------- --------
Net income (loss) ................. $ 27,756 $ (7,907) $ 19,849 $ 38,143
======== ======== ======== ========
Basic net income (loss) per common share $ .56 $ .40 $ .69
======== ======== ========
Diluted net income (loss) per common
share ............................... $ .56 $ .40 $ .67
======== ======== ========
Basic average common shares outstanding.. 49,739 49,739 55,134
Dilutive effect of stock options
and stock bonus plan .......... 116 116 1,460
-------- -------- --------
Diluted average common shares
outstanding ......................... 49,855 49,855 56,594
======== ======== =========
</TABLE>
See accompanying notes.
11
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WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS:THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------------
2000 1999
---------------------------------------- ----------
PROFORMA RESTRUCTURING
BEFORE AND OTHER
RESTRUCTURING ITEMS ACTUAL ACTUAL
------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales .............................. $1,397,665 $ -- $ 1,397,665 $1,398,102
Cost of goods sold ..................... 1,024,173 73,428 1,097,601 1,022,579
---------- --------- ----------- ----------
Gross earnings (loss) ............ 373,492 (73,428) 300,064 375,523
Selling, general and administrative
expenses ............................ 184,298 -- 184,298 183,284
Restructuring and impairment charge .... -- 102,008 102,008 --
---------- --------- ----------- ----------
Operating earnings (loss) ........ 189,194 (175,436) 13,758 192,239
Interest expense ....................... 91,506 -- 91,506 75,662
Other expense, net ..................... 1,992 5,120 7,112 1,834
---------- --------- ----------- ----------
Income (loss) before income
tax expense (benefit) ........ 95,696 (180,556) (84,860) 114,743
Income tax expense (benefit) ........... 34,525 (65,000) (30,475) 41,400
---------- --------- ----------- ----------
Net income (loss) ................ $ 61,171 $(115,556) $ (54,385) $ 73,343
========== ========= =========== ==========
Basic net income (loss) per common share $ 1.23 $ (1.10) $ 1.32
========= =========== ==========
Diluted net income (loss) per common
share ............................... $ 1.23 $ (1.10) $ 1.28
========= =========== ==========
Basic average common shares outstanding 49,655 49,655 55,569
Dilutive effect of stock options
and stock bonus plan ......... 265 -- 1,689
--------- ----------- ----------
Diluted average common shares
outstanding ......................... 49,920 49,655 57,258
========= =========== ==========
</TABLE>
See accompanying notes.
12
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WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 2000
IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES. As a result of a strategic review
of the Company's businesses, manufacturing and other facilities, and products in
the second quarter of 2000 the Company's Board of Directors approved a $195
million pre-tax charge ($125 million net of tax) to cover the cost of
implementing an Eight Point Program that is designed to streamline operations
and improve profitability, $168.2 million pretax, of which was recorded in the
second quarter of 2000. Of the remaining $26.8 million pretax charge, $12.4
million was recorded in the third quarter of 2000; $6.3 million reflected in
cost of goods sold, the majority of which reflected inventory write-offs and
$6.1 million reflected in increased current liabilities for severance benefits
and other exit costs. The Company estimates the implementation of the Eight
Point Program will generate annual savings of $29 million pre-tax starting in
2002. (See Note 5 in Notes to Condensed Consolidated Financial Statements.)
NET SALES. Net sales for the three months ended September 30, 2000, decreased
3.0% or $15.3 million to $487.8 million compared with $503.1 million a year ago.
With the exception of the Company's Vellux blanket and retail operations, which
saw modest revenue growth in the quarter, sales declined in every other product
category due to disappointing retail demand for home fashion products in the
quarter.
GROSS EARNINGS/MARGINS. Excluding charges associated with the Eight Point
Program, gross earnings for the three months ended September 30, 2000 decreased
$7.2 million, or 5%, to $136.6 million compared with $143.8 million for the same
period of 1999 and reflect gross margins of 28.0% for the 2000 period and 28.6%
for the 1999 period. Gross earnings decreased as a result of under absorption of
fixed overhead due to selected production downtime, and increases in other
manufacturing costs that were only partially offset by lower raw material costs.
Included in the cost of goods sold in the third quarter of 2000 are charges
associated with the Eight Point Program of $6.3 million, the majority of which
reflected inventory write-offs. Including the charges, gross earnings for the
three months ended September 30, 2000 decreased $13.4 million, or 5%, to $130.3
million compared with $143.8 million for the same period of 1999.
OPERATING EARNINGS/MARGINS. Selling, general and administrative expenses
increased $2.9 million, or 5%, in the third quarter of 2000 compared with the
same period of last year, and as a percentage of net sales represent 12.3% in
the 2000 period and 11.4% in the 1999 period. The increase in selling, general
and administrative expenses in the third quarter of 2000 was primarily due to
increased costs associated with the Company's trade receivable securitization
program as well as increased warehousing and shipping costs associated with the
rollout of a major program for one of the Company's leading customers.
13
<PAGE> 14
WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
Before charges associated with the Eight Point Program, operating earnings for
the third quarter of 2000 decreased 11.7% to $76.4 million, or 15.7% of sales,
compared with operating earnings of $86.6 million, or 17.2% of sales, for the
same period in 1999. The decrease in operating earnings resulted from the
decrease in gross earnings and the increase in selling, general and
administrative expenses discussed above. Operating earnings for the three months
ended September 30, 2000, with the charges, were $64.1 million, compared to
$86.6 million in the same period of 1999. A separate line item reflected $6.1
million in severance benefits and other exit costs.
INTEREST EXPENSE. Interest expense for the three months ended September 30, 2000
of $32.2 million increased $6.0 million compared with interest expense of $26.3
million for the three months ended September 30, 1999. The increase was due
primarily to higher interest rates on the Company's variable rate bank debt and
higher average debt levels in the third quarter of 2000 compared with
corresponding 1999 average debt levels.
OTHER EXPENSE, NET. Other expense, net in the third quarter of 2000 consisted
primarily of the amortization of deferred financing fees of $0.8 million
compared with $0.7 million in the 1999 period, less certain miscellaneous income
items in both years.
INCOME TAX EXPENSE. The Company's effective tax rate differed from the federal
statutory rate primarily due to state income taxes and nondeductible items.
NET INCOME. Net income, before charges associated with the Eight Point Program,
decreased $10.4 million, or 27.2%, to $27.8 million, or $0.56 per share diluted,
from $38.1 million, or $0.67 per share diluted, in the same period of last year.
After the charges, net income for the third quarter of 2000 was $19.8 million,
or $0.40 per share diluted, compared with net income of $38.1 million, or $0.56
per share diluted, for the same period of last year.
Diluted per share amounts are based on 49.9 million and 56.6 million average
shares outstanding for the 2000 and 1999 periods, respectively. The decrease in
average shares outstanding was primarily the result of the purchase by the
Company of shares under its various stock repurchase programs.
14
<PAGE> 15
WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 2000
IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES. As a result of a strategic review
of the Company's businesses, manufacturing and other facilities, and products in
the second quarter of 2000 the Company's Board of Directors approved a $195
million pretax charge ($125 million net of tax) to cover the cost of
implementing an Eight Point Program that is designed to streamline operations
and improve profitability. The total amount of the charges recorded in the first
nine months of 2000 was $180.6 million, pretax. Of this total, $73.5 million was
reflected in cost of goods sold, the majority of which reflected inventory
write-offs and $5.0 million in reserves for accounts receivable. Another $102
million reflected a reduction in goodwill and fixed assets in addition to
severance benefits and other exit costs. Lastly, a $5.1 million charge to other
expense, net reflected other related costs. The Company estimates the
implementation of the Eight Point Program will generate annual savings of $29
million pretax starting in 2002. (See Note 5 in Notes to Condensed Consolidated
Financial Statements.)
NET SALES. Net sales for the nine months ended September 30, 2000, were
essentially flat at $1.4 billion compared with net sales for the nine months
ended September 30, 1999. Declines in towel revenues due to adverse industry
conditions including pricing pressures and increased import competition
essentially offset gains in other product categories.
GROSS EARNINGS/MARGINS. Excluding charges associated with the Eight Point
Program, gross earnings for the nine months ended September 30, 2000 decreased
$2.0 million, or 0.5%, to $373.5 million compared with $375.5 million for the
same period of 1999 and reflect margins of 26.7% in the 2000 period and 26.9% in
the 1999 period. Gross earnings and margins decreased primarily as a result of
under absorbed overhead costs due to production curtailment and increased
manufacturing costs. Gross earnings for the nine months ended September 30,
2000, after the charges, decreased $75.5 million, or 20%, to $300.0 million
compared with $375.5 million for the same period of 1999.
OPERATING EARNINGS/MARGINS. Selling, general and administrative expenses
increased by $1.0 million, or 0.6%, in the first nine months of 2000 compared
with the same period of last year, and as a percentage of net sales represents
13.2% in the 2000 period and 13.1 % in the 1999 period. The increase in selling,
general and administrative expenses in the first nine months of 2000 was
primarily due to increased costs associated with the Company's trade receivable
securitization program as well as increased warehousing and shipping expenses
that were only partially offset by on-going cost reduction programs.
15
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WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 2000 (CONTINUED)
OPERATING EARNINGS/MARGINS (CONTINUED). Before charges associated with the Eight
Point Program, operating earnings for the nine months ended September 30, 2000
decreased 1.6% to $189.2 million, or 13.5% of sales, compared with operating
earnings of $192.2 million, or 13.7% of sales, for the same period in 1999. The
decrease in operating earnings resulted from the decrease in gross earnings and
the increase in selling, general and administrative expenses discussed above.
Including charges associated with the Eight Point Program, operating earnings
for the first nine months of 2000 were a loss of $54.4 million, compared to
earnings of $73.3 million in the same period of 1999. A separate line item
reflected a $102.0 million reduction in goodwill and fixed assets in addition to
severance benefits and other exit costs.
INTEREST EXPENSE. Interest expense for the nine months ended September 30, 2000
of $91.5 million increased $15.8 million compared with the interest expense of
$75.7 million for the nine months ended September 30, 1999. The increase was due
primarily to higher interest rates on the Company's variable rate bank debt and
higher average debt levels in the first nine months of 2000 compared with
corresponding 1999 average debt levels.
OTHER EXPENSE, NET. Before charges associated with the Eight Point Program,
other expense, net in the first nine months of 2000 consisted primarily of the
amortization of deferred financing fees of $2.3 million compared with $2.1
million in the 1999 period, less certain miscellaneous income items in both
years. Including charges associated with the Eight Point Program, other
expenses, net were $7.1 million for the first nine months of 2000 compared with
$1.8 million for the first nine months of 1999.
INCOME TAX EXPENSE. The Company's effective tax rate differed from the federal
statutory rate primarily due to state income taxes and nondeductible items.
NET INCOME. Before charges associated with the Eight Point Program, net income
decreased $12.2 million, or 16.6%, to $61.2 million, or $1.23 per share diluted,
from $73.3 million, or $1.28 per share diluted, in the same period of last year.
Net income for the first nine months of 2000, including the charges, was a loss
of $115.6 million, or ($1.10) per share diluted, compared with net income of
$73.3 million, or $1.28 per share diluted, for the same period of last year.
Diluted per share amounts are based on 49.7 million and 57.3 million average
shares outstanding for the 2000 and 1999 periods, respectively. The decrease in
average shares outstanding was primarily the result of the purchase by the
Company of shares under the stock repurchase programs.
16
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WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
OUTLOOK FOR OPERATIONS: THREE MONTHS ENDED DECEMBER 31, 2000
Sales are expected to decline approximately 3% to 5% for the three months ended
December 31, 2000 due to difficult industry conditions consisting of slower
consumer demand and retailers' reduction of inventories. In order to reduce the
Company's inventories to $400 million at the end of the period, management
intends to stand production a minimum in towels of 16 days and in sheets of 10
days in the period. Given the impact to margins of under absorbed fixed costs,
coupled with higher anticipated interest expense of $31 million, fully diluted
earnings per share are expected to approximate $0.30, down 46% versus $0.56 a
year ago.
In November, the Company announced it had signed a letter of intent to
purchase the assets and business operations of the Chatham Consumer Products
division (Chatham) of CMI Industries. Chatham is a leading manufacturer and
wholesaler of woven blankets located in Elkin, North Carolina with estimated
sales of $35 million. The transaction is expected to close before the end of
2000. No purchase price was disclosed.
EFFECTS OF INFLATION
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on its sales or profitability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are expected to be cash from its
operations and funds available under the Senior Credit Facility. At November 8,
2000, the maximum commitment under the Senior Credit Facility was $800 million
and the Company had unused borrowing availability under the Senior Credit
Facility totaling approximately $200 million. The Senior Credit Facility
contains covenants which, among other things, limit indebtedness and require the
maintenance of certain financial ratios and minimum net worth (as defined).
17
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WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company's principal uses of cash for the next several years will be
operating expenses, capital expenditures and debt service requirements related
primarily to interest payments. The Company spent approximately $148.6 million
in 1999 on capital expenditures and intends to invest approximately $75 million
in 2000. The Board of Directors approved the payment of a quarterly cash
dividend of $.02 per share which was paid on March 1, 2000, June 1, 2000 and
September 1, 2000 plus a special dividend of $2.00 per share which was paid on
June 1, 2000 totaling approximately $102.2 million, and has approved the
payment of a quarterly cash dividend of $.02 per share payable on December 1,
2000 to shareholders of record as of November 17, 2000.
During the first nine months of 2000, the Company purchased approximately 3.8
million shares under its various stock repurchase programs, at an average price
of $16.93 per share. The Board of Directors has approved the purchase of up to
twenty-seven million shares of the Company's common stock, subject to the
Company's debt limitations. At September 30, 2000, approximately 3.7 million
shares remained to be purchased under these programs.
The Company, through a "bankruptcy remote" receivables subsidiary, has a Trade
Receivables Program which provides for the sale of accounts receivable, on a
revolving basis. At September 30, 2000 and December 31, 1999, $160 million and
$154 million, respectively, had been sold under this program and the sale is
reflected as a reduction of accounts receivable in the accompanying Condensed
Consolidated Balance Sheets. The cost of the Trade Receivables Program in 2000
is estimated to total approximately $9.9 million, compared with $8.8 million in
1999, and will be charged to selling, general and administrative expenses.
Debt service requirements for interest payments in 2000 are estimated to total
approximately $123 million (excluding amounts related to the Trade Receivables
Program) compared with interest payments of $104.1 million in 1999. The
Company's long-term indebtedness has no scheduled principal payment requirement
during 2000.
Management believes that cash from the Company's operations and borrowings under
its credit agreement will provide the funding necessary to meet the Company's
anticipated requirements for capital expenditures, operating expenses and to
enable it to meet its anticipated debt service requirements.
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WESTPOINT STEVENS INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SAFE HARBOR STATEMENT
Except for historical information contained herein, certain matters set forth in
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations are "forward looking statements" within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995. Such forward looking
statements involve certain risks and uncertainties that could cause actual
results to differ materially from those in the forward looking statements. Such
risks and uncertainties may be attributable to important factors that include
but are not limited to the following: Product margins may vary from those
projected; Raw material prices may vary from those assumed; Additional reserves
may be required for bad debts, returns, allowances, governmental compliance
costs, or litigation; There may be changes in the performance of financial
markets or fluctuations in foreign currency exchange rates; Unanticipated
natural disasters could have a material impact upon results of operations; There
may be changes in the general economic conditions that affect customer practices
or consumer spending; Competition for retail and wholesale customers, pricing
and transportation of products may vary from time to time due to seasonal
variations or otherwise; Customer preferences for our products can be affected
by competition, or general market demand for domestic or imported goods or the
quantity, quality, price or delivery time of such goods; There could be an
unanticipated loss of a material customer or a material license; The
availability and price of raw materials could be affected by weather, disease,
energy costs or other factors. The Company assumes no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
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WESTPOINT STEVENS INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On February 14, 2000, seven individual suits, entitled Matthew Lubrano v.
WestPoint Stevens Inc., et al., Crandon Capital Partners v. Holcombe T. Green,
et al., John McMullen v. WestPoint Stevens Inc., et al., David Frankel v. M.
Katherine Dwyer, et al., Norman Geller v. WestPoint Stevens Inc., et al., Pal
Green v. WestPoint Stevens Inc., et al., and Whitney Smith v. WestPoint Stevens
Inc., et al. were filed against the Company and certain of its directors in the
Court of Chancery of the State of Delaware in and for New Castle County,
challenging, on various legal grounds, a proposal from Holcombe T. Green, Jr.,
Chairman and Chief Executive Officer of the Company, and certain affiliates to
acquire the Company in a leveraged buyout transaction. On May 19, 2000 the
Company announced that the proposed transaction had been cancelled. The Company
believes that the allegations contained in the complaints are without merit and
intends to contest the action vigorously on behalf of itself and its directors.
The Company is subject to various federal, state and local environmental laws
and regulations governing, among other things, the discharge, storage, handling
and disposal of a variety of hazardous and non-hazardous substances and wastes
used in or resulting from its operations and potential rededication obligations
thereunder. Certain of the Company's facilities (including certain facilities no
longer owned or utilized by the Company) have been cited or are being
investigated with respect to alleged violations of such laws and regulations.
The Company believes that it has adequately provided in its financial statements
for any expenses and liabilities that may result from such matters. The Company
also is insured with respect to certain of such matters. The Company's
operations are governed by laws and regulations relating to employee safety and
health which, among other things, establish exposure limitations for cotton
dust, formaldehyde, asbestos and noise, and regulate chemical and ergonomic
hazards in the workplace. Although the Company does not expect that compliance
with any such laws and regulations will adversely affect the Company's
operations, there can be no assurance such regulatory requirements will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such requirements.
The Company and its subsidiaries are involved in various other legal
proceedings, both as plaintiff and as defendant, which are normal to its
business.
It is the opinion of management that the aforementioned actions and claims, if
determined adversely to the Company, will not have a material adverse effect on
the financial condition or operations of the Company taken as a whole.
20
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WESTPOINT STEVENS INC.
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a.) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ -----------------------------------------------------------------
<S> <C>
10.1 Employment Agreement, dated as of July 1, 2000, between WestPoint
Stevens, Inc. and Holcombe T. Green, Jr.
10.2 Employment Agreement, dated as of July 1, 2000, between WestPoint
Stevens, Inc. and David C. Meek
10.3 Employment Agreement, dated as of July 1, 2000, between WestPoint
Stevens, Inc. and Thomas J. Ward
10.4 Employment Agreement, dated as of July 1, 2000, between WestPoint
Stevens, Inc. and John T. Toolan
27 Financial Data Schedule (for SEC use only)
b.) No report on Form 8-K was filed by the Company during the quarter ended
September 30, 2000.
</TABLE>
21
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WESTPOINT STEVENS INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
WESTPOINT STEVENS INC.
-------------------------
REGISTRANT
/s/ David C. Meek
---------------------------
David C. Meek
Executive Vice President-Finance
and Chief Financial Officer
Date: November 14, 2000
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WESTPOINT STEVENS INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER NUMBER
------- ------
<S> <C> <C>
10.1 Employment Agreement, dated as of July 1, 2000, between
WestPoint Stevens, Inc. and Holcombe T. Green, Jr.
10.2 Employment Agreement, dated as of July 1, 2000, between
WestPoint Stevens, Inc. and David C. Meek
10.3 Employment Agreement, dated as of July 1, 2000, between
WestPoint Stevens, Inc. and Thomas J. Ward
10.4 Employment Agreement, dated as of July 1, 2000, between
WestPoint Stevens, Inc. and John T. Toolan
27 Financial Data Schedule (for SEC use only)
</TABLE>
23
