UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 3, 1999
--------------------------------------------------
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 1-6853
SHAW INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1032521
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
616 E. WALNUT AVENUE, DALTON, GEORGIA 30720
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(706) 278-3812
- ------------------------------
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 |X|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 ______.
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: May 10, 1999 - 140,992,830 shares
<PAGE>
SHAW INDUSTRIES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBERS
--------------------- ------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - April 3, 1999
and January 2, 1999 3-4
Condensed Consolidated Statements of Income and Retained
Earnings - For the Three Months Ended
April 3, 1999 and April 4, 1998 5
Condensed Consolidated Statements of Cash Flow-
For the Three Months Ended April 3, 1999
and April 4, 1998 6
Notes to Condensed Consolidated Financial Statements 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
<PAGE>
PART 1 - ITEM ONE - FINANCIAL INFORMATION
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS April 3, January 2,
1999 1999
----------- -----------
CURRENT ASSETS: (UNAUDITED)
Cash and cash equivalents ................... $ 22,244 $ 12,555
----------- -----------
Accounts receivable, less
allowance for doubtful accounts and
discounts of $25,157 and $21,512 .......... 320,068 276,002
----------- -----------
Inventories -
Raw materials ............................. 291,735 293,868
Work-in-process ........................... 84,763 75,060
Finished goods ............................ 310,114 290,152
----------- -----------
686,612 659,080
----------- -----------
Other current assets ........................ 139,959 134,733
----------- -----------
TOTAL CURRENT ASSETS .......... 1,168,883 1,082,370
----------- -----------
PROPERTY, PLANT AND EQUIPMENT,
at cost:
Land and land improvements .................. 31,394 31,425
Buildings and leasehold improvements ........ 327,051 320,991
Machinery and equipment ..................... 1,086,808 1,105,505
Construction in progress .................... 52,989 41,827
----------- -----------
1,498,242 1,499,748
Less - Accumulated depreciation and
amortization ......................... (771,332) (783,320)
----------- -----------
726,910 716,428
----------- -----------
GOODWILL, net ................................ 414,305 416,028
----------- -----------
INVESTMENT IN JOINT VENTURE .................. 23,252 22,245
----------- -----------
OTHER ASSETS ................................. 23,506 24,376
----------- -----------
TOTAL ASSETS .................. $ 2,356,856 $ 2,261,447
=========== ===========
3
<PAGE>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
(IN THOUSANDS, EXCEPT SHARE
DATA)
April 3, January 2,
1999 1999
----------- -----------
CURRENT LIABILITIES: (UNAUDITED)
Current maturities of long-term debt ........ $ 61 $ 8
Accounts payable ............................ 242,911 194,352
Accrued liabilities ......................... 298,773 260,450
----------- -----------
TOTAL CURRENT LIABILITIES .............. 541,745 454,810
----------- -----------
LONG-TERM DEBT, less current maturities ...... 892,598 927,434
----------- -----------
DEFERRED INCOME TAXES ........................ 67,635 65,768
----------- -----------
OTHER LIABILITIES ............................ 12,220 16,067
----------- -----------
SHAREHOLDERS' INVESTMENT:
Common stock, no par, $1.11 stated value,
authorized 500,000,000 shares; issued and
outstanding: 141,348,480 shares at
April 3, 1999 and 140,906,175 shares
at January 2, 1999 ......................... 156,898 156,407
Paid-in capital ............................. 200,082 195,452
Cumulative translation adjustment ........... (3,353) (3,156)
Retained earnings ........................... 489,031 448,665
----------- -----------
TOTAL SHAREHOLDERS' INVESTMENT ......... 842,658 797,368
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT ........................... $ 2,356,856 $ 2,261,447
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
April 3, April 4,
1999 1998
--------- ---------
NET SALES ......................................... $ 955,803 $ 864,985
COSTS AND EXPENSES:
Cost of sales ................................... 716,629 646,114
Selling, general and administrative ............. 154,829 168,148
Pre-opening expenses, retail operations ......... -- 209
Interest expense, net ........................... 16,205 15,227
Other expense, net .............................. 517 2,633
--------- ---------
INCOME BEFORE INCOME TAXES ........................ 67,623 32,654
PROVISION FOR INCOME TAXES ........................ 28,213 13,368
--------- ---------
INCOME BEFORE EQUITY IN INCOME OF
JOINT VENTURE ................................... 39,410 19,286
EQUITY IN INCOME OF JOINT VENTURE ................. 956 219
--------- ---------
NET INCOME ........................................ $ 40,366 $ 19,505
========= =========
DIVIDENDS PAID PER COMMON SHARE ................... $ -- $ 0.075
========= =========
EARNINGS PER COMMON SHARE:
Basic ........................................... $ 0.29 $ 0.15
========= =========
Diluted ......................................... $ 0.28 $ 0.15
========= =========
RETAINED EARNINGS:
Beginning of period ............................. $ 448,665 $ 437,867
Add - net income ................................ 40,366 19,505
(Deduct) - dividends paid ....................... -- (9,834)
(Deduct) - purchase of common stock ............. -- (65,277)
--------- ---------
End of period ................................... $ 489,031 $ 382,261
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOW THREE MONTHS THREE MONTHS
(UNAUDITED AND IN THOUSANDS) ENDED ENDED
April 3, April 4,
1999 1998
--------- ---------
OPERATING ACTIVITIES:
Net income ...................................... $ 40,366 $ 19,505
--------- ---------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ................. 23,027 20,960
Provision for doubtful accounts ............... 1,830 2,207
Deferred income taxes ......................... 1,867 3,060
Changes in operating assets and
liabilities, net of disposition:
Accounts receivable ...................... (45,896) (40,435)
Inventories .............................. (27,532) (51,110)
Other current assets ..................... (5,226) 40,125
Accounts payable ......................... 48,559 25,513
Accrued liabilities ...................... 38,323 9,713
Other, net ............................... (5,235) (4,499)
--------- ---------
Total adjustments ...................... 29,717 5,534
--------- ---------
Net cash provided by operating
activities ................................... 70,083 25,039
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ...... (32,844) (20,093)
Retirements of property, plant and
equipment, net ................................. 2,112 265
Disposal of U.K. assets ......................... -- (16,566)
--------- ---------
Net cash used in investing activities ......... (30,732) (36,394)
--------- ---------
FINANCING ACTIVITIES:
Decrease in notes payable ....................... -- (1)
(Decrease)increase in long-term debt, net ....... (34,783) 132,611
Dividends paid .................................. -- (9,834)
Purchase of common stock ........................ -- (133,630)
Proceeds from exercise of stock options ......... 5,121 2,001
--------- ---------
Net cash used in financing activities ......... (29,662) (8,853)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .................................... 9,689 (20,208)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ...................................... 12,555 43,571
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....... $ 22,244 $ 23,363
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
APRIL 3, 1999
(UNAUDITED)
---------------------------------------------------------------
1. Basis of Presentation
The financial statements included herein have been prepared by the
company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the company believes that the disclosures are adequate to
make the information not misleading. These financial statements should be read
in conjunction with the financial statements and related notes contained in the
company's 1998 Annual Report on Form 10-K. In the opinion of management, the
accompanying unaudited financial statements contain all adjustments necessary to
present fairly the company's financial position, results of operations and cash
flow at the dates and for the periods presented. Interim results of operations
are not necessarily indicative of the results to be expected for a full year.
2. Accounts Receivable
In September 1998, the company entered into agreements pursuant to which
it sold a percentage ownership interest in a defined pool of the company's trade
receivables to a securitization conduit. As collections reduce accounts
receivable included in the pool, the company sells participating interests in
new receivables to the conduit to bring the amount in the pool up to the maximum
permitted by the agreements. The receivables are sold to the conduit at a
discount which reflects, among other things, the conduit's financing cost of
issuing its own commercial paper backed by these accounts receivable and
accounts receivable sold by other participating entities. The agreement expires
September 1, 1999, but may be extended for additional one-year terms. On
September 4, 1998, the company received $198,971,000 of proceeds from the
initial sale of such receivables, which proceeds were used to reduce outstanding
borrowings under its domestic revolving credit facility and were reflected as a
reduction of receivables in the condensed consolidated balance sheet and as an
operating activity in the condensed consolidated statement of cash flow. As of
April 3, 1999, the company had approximately $198,265,000 of accounts receivable
sold and outstanding under this program.
3. Inventories
The company uses the last-in, first-out (LIFO) method of valuing
substantially all of its domestic inventories. If LIFO inventories were valued
at current costs, the inventories would have been $44,995,000 and $23,556,000
lower at April 3, 1999 and January 2, 1999, respectively. Certain of the
company's finished goods inventories, representing approximately 11 percent of
total inventories, are valued at the lower of first-in, first-out (FIFO) cost or
market.
4. Long-Term Debt
In March 1998, the company completed a domestic revolving credit facility
which provides for borrowings of up to $1.0 billion and expires in March 2003.
The LIBOR-based rate at April 3, 1999 was approximately 5.5 percent, and
borrowings outstanding under this new facility totaled $811,000,000. The
variable interest rates on a total of $441,031,000 of amounts outstanding under
the company's revolving credit facilities have been fixed through various dates
through March 2003 by interest rate swap agreements. To provide further
financing capacity, in October 1998, the company entered into a 364-day $150
million senior unsecured revolving credit facility.
5. Earnings Per Share
Earnings per share for the three-month periods ended April 3, 1999 and
April 4, 1998 have been computed based upon the weighted average shares and
dilutive potential common shares outstanding. The net income amounts presented
in the accompanying condensed consolidated statements of income represent
amounts available or related to shareholders.
7
<PAGE>
The following table reconciles the denominator of the basic and diluted
earnings per share computations:
<TABLE>
<CAPTION>
Three Months Ended
April 3, 1999 April 4, 1998
- ------------------------------------------------------ ----------- -----------
<S> <C> <C>
Weighted average common shares ....................... 141,099,637 128,902,035
Dilutive incremental shares from assumed
conversions of options under stock option plans .. 2,805,197 394,059
- ------------------------------------------------------ ----------- -----------
Weighted average common shares and
dilutive potential common shares ................. 143,904,834 129,296,094
- ------------------------------------------------------ ----------- -----------
</TABLE>
6. Derivative Financial Instruments
The company uses interest rate swap agreements to fix interest rates on
current and anticipated borrowings to reduce exposure to interest rate
fluctuations. Under existing accounting literature, these interest rate swaps
are accounted for as hedging activities. The net cash paid or received on
interest rate hedges is included in interest expense. The company may also
employ foreign currency exchange contracts when, in the normal course of
business, they are determined to effectively manage and reduce foreign currency
exchange fluctuation risk. The company does not enter into financial derivatives
for speculative or trading purposes. In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
for hedging activities. SFAS No. 133 is effective, and the company expects to
adopt this new standard, in the company's first quarter of fiscal 2000. The
company's management has not determined the impact this new statement will have
on the financial statements.
7. Comprehensive Income
The company has other comprehensive income in the form of cumulative
translation adjustments which resulted in total comprehensive income of
$40,169,000 and $17,709,000 for the three months ended April 3, 1999 and April
4, 1998, respectively.
8. Acquisition and Sale
On August 9, 1998, the company sold substantially all of its remaining
residential retail operations to The Maxim Group, Inc. ("Maxim") in exchange for
3,150,000 shares of Maxim stock, $25,000,000 cash and a one-year note in the
principal amount of approximately $18,000,000, subject to adjustment. Stores not
sold were closed.
On October 6, 1998, the company completed its merger with Queen Carpet
Corporation ("Queen") for approximately $579,135,000 consisting of approximately
19,440,000 shares of common stock of the company, 3,150,000 shares of Maxim
stock, cash of $35,981,000 and assumed debt of approximately $216,000,000. The
acquisition has been accounted for as a purchase transaction, and accordingly,
the results of operations of Queen have been included in the accompanying
condensed consolidated financial statements since October 7, 1998. The purchase
price has been allocated to assets and liabilities based on their estimated fair
values at the date of acquisition. The excess of the consideration paid over the
estimated fair value at the date of acquisition, currently estimated at
$318,600,000, has been recorded as goodwill and is being amortized on a
straight-line basis over 40 years. The following table summarizes on an
unaudited pro forma basis, the consolidated results of operations as though
Queen had been acquired on January 4, 1998 (000s except per share data):
Three months ended
April 4, 1998
(Unaudited)
- --------------------------------------------------------------- ----------
Net Sales ..................................................... $1,045,103
Net Income .................................................... 24,941
Earnings per common share-
Basic and Diluted 0.17
- --------------------------------------------------------------- ----------
8
<PAGE>
9. Segment Information
The table below presents information about reported segments for the
three months ended April 3, 1999 and April 4, 1998 (000s omitted):
<TABLE>
<CAPTION>
Wholesale Residential
Manufacturing Retail Intercompany Consolidated
Operations Operations Eliminations Operations
- ------------------ ----------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net Sales
1999 $955,803 $ - $ - $955,803
1998 794,936 137,623 (67,574) 864,985
Gross Margin
1999 $239,174 $ - $ - $239,174
1998 167,527 51,965 (621) 218,871
Selling Expense
1999 $110,299 $ - $ - $110,299
1998 71,793 56,900 - 128,693
- ------------------ ----------------- ---------------- ---------------- ---------------
</TABLE>
9
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
ITEM TWO-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The company's business, as well as the U.S. carpet industry in general,
is affected by general economic conditions. The level of domestic carpet sales
tends to reflect fluctuations in consumer spending for durable goods and, to a
lesser extent, fluctuations in interest rates and new housing starts. The
company's international operations are also impacted by the economic climates in
the markets in which they operate (primarily Australia and Mexico). During the
first three months of 1999, demand for the company's domestic wholesale
manufacturing business improved substantially over that of the first three
months of 1998, sales prices increased and margins improved. The Australian
market declined slightly in the first three months of 1999, and sales prices and
margins decreased slightly compared to the first three months of 1998.
In August 1998, the company sold substantially all of its residential
retail operations to The Maxim Group, Inc. ("Maxim") and closed stores not sold.
On October 6, 1998, the company completed its merger with Queen Carpet
Corporation ("Queen") for $579.1 million, including 19.4 million shares of the
company's common stock, 3.15 million shares of Maxim stock acquired in the sale
of the company's residential retail operations, approximately $36 million of
cash and approximately $216 million of assumed debt. Based on estimates of the
fair values of assets and liabilities acquired, goodwill for $318.6 million has
been recorded and is being amortized over 40 years.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Statement establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement and requires
that a company formally assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for the company's fiscal year 2000.
The company has not yet quantified the impacts of adopting SFAS No. 133 on its
financial statements and has not determined the method of adoption of SFAS No.
133. However, the Statement could increase volatility in earnings and other
comprehensive income.
LIQUIDITY AND CAPITAL RESOURCES
At April 3, 1999, the company had working capital of $627.1 million, a
decrease of $.5 million from the working capital of $627.6 million at January 2,
1999.
Cash and cash equivalents increased $9.6 million to $22.2 million at
April 3, 1999 from $12.6 million at January 2, 1999. The company's operations
generated cash flow of $70.1 million in the first three months of 1999,
principally from net income of $40.4 million adjusted for depreciation and
amortization of $23 million, an increase in accounts payable and accrued
liabilities of $86.9 million, offset in part by an increase in accounts
receivable and inventories of $73.4 million. In the first three months of 1998,
cash generated from operating activities was $25 million primarily as a result
of net income of $19.5 million adjusted for depreciation and amortization of $21
million, and an increase in accounts payable and accrued liabilities of $35.2
million, offset in part by an increase in accounts receivable and inventories of
$91.5 million.
In the first three months of 1999, the company's investing activities
primarily included additions to property, plant and equipment, net of
retirements, of $30.7 million compared to additions to property, plant and
equipment, net of retirements, of $19.8 million and the disposal of U.K. assets
of $16.6 million in the first three months of 1998. Cash used in financing
activities for the first three months of 1999 of $29.7 million included net
payments on long-term borrowings of $34.8 million offset in part by proceeds
from the exercise of stock options of $5.1 million. Cash flow used in financing
activities for the first three months of 1998 of $8.9 million principally
included the purchase and retirement of common stock of $133.6 million and the
payment of cash dividends of $9.8 million, offset in part by a net increase in
long-term borrowings of $132.6 million and proceeds from the exercise of stock
options of $2 million.
During 1998, the company implemented EVA(R), a financial measurement
concept which emphasizes profitability, proper asset allocation, the cost of
capital and the creation of shareholder wealth. Effective use of capital and the
company's ability to generate cash flow from operations has enabled it to invest
in technologies which reduce production costs, generate operating margins that
have historically exceeded industry averages and pursue its strategy for
increasing shareholder value. Capital expenditures for property, plant and
equipment, net of retirements, necessary to maintain the company's facilities in
10
<PAGE>
modern state-of-the-art condition, expand production capacity and increase
efficiency were $30.7 million for the three months ended April 3, 1999.
Management anticipates total capital expenditures and capitalized lease
obligations of approximately $70 million for the remainder of 1999 to expand and
upgrade its manufacturing and distribution equipment to meet anticipated
increases in sales volume and to improve efficiency.
The company's primary source of financing is an unsecured revolving
credit facility with a banking syndicate. The facility provides for borrowings
of up to $1 billion and expires in March 2003. The interest rate on borrowings
under this facility is currently based on LIBOR and was approximately 5.5
percent, including applicable margins, at April 3, 1999. Borrowings outstanding
under this credit facility at April 3, 1999 were $811 million. To provide
further financing capacity, in October 1998, the company entered into a 364-day
$150 million senior unsecured revolving credit facility which remained
unutilized and available at April 3, 1999.
The company maintains a receivables securitization program established
September 3, 1998 under which the company sells a percentage ownership interest
in a defined pool of the company's trade receivables to a securitization
conduit. The company used the initial proceeds from the receivables
securitization to reduce outstanding borrowings under its domestic revolving
credit facility. The receivables securitization program expires September 1,
1999, but may be extended for additional one-year terms. As of April 3, 1999,
the company had approximately $198.3 million of accounts receivable sold and
outstanding under this program.
The company believes that available borrowings under its existing credit
and securitization agreements, available cash and internally generated funds
will be sufficient to support its working capital, capital expenditures, stock
repurchases and debt service requirements for the foreseeable future. In
addition, the company believes it could further expand its revolving credit and
long-term bank facilities, if necessary.
YEAR 2000 READINESS DISCLOSURE
The company has completed its internal assessment of the year 2000
compliance of the systems and technologies supporting all operations of the
business. The company's assessment of external compliance readiness is ongoing.
The company has developed and is implementing plans to correct identified
compliance problems that would adversely affect the company's operations.
Compliance remediation efforts are proceeding on schedule. The majority of the
efforts have been completed, and compliance testing is underway.
The company has initiated inquiries of third parties with whom it has
significant business relationships, such as customers and vendors, to assess
their state of addressing Year 2000 issues that could materially and adversely
impact the company. The company has requested those third parties respond in
writing that they will be Year 2000 compliant by the end of 1999. The company
has incurred approximately $2 million to perform compliance remediation and
expects to incur less than $3 million in connection with the Year 2000
compliance process. These costs are expensed as incurred.
The company believes the most reasonably likely worst case Year 2000
scenario would be a failure by a non-core, peripheral system or a third-party
system impacting the availability of certain management information or the
exchange of data with certain customers or vendors.
The company has focused its remediation efforts on those problems which
it can reasonably be expected to influence and is currently developing a
contingency plan to address the most likely worst case scenario described above.
As a result, the company anticipates no significant disruption of business. If
the company cannot successfully and timely resolve its Year 2000 issues,
however, its business, results of operations and financial condition could be
materially and adversely affected.
RESULTS OF OPERATIONS
The company's primary business consists of its wholesale manufacturing
operations which sell carpet and related products manufactured primarily in the
company's manufacturing facilities, located primarily in the southeastern U.S.,
to wholesalers and retailers located primarily in the U.S., Canada, Australia
and Mexico. Beginning in 1996 and continuing through mid-1998, the company built
and acquired existing companies which were engaged in residential retail
operations which sold floor covering and related products acquired from the
company's wholesale manufacturing operations and other floor covering
manufacturers directly to residential consumers. The company evaluates the
performance of its segments and allocates resources to them on the basis of
sales, gross margin and "net divisional contribution" which consists of gross
margin less selling expenses.
11
<PAGE>
The following table summarizes key management information for the
company's reportable segments (000's omitted) for the three months ended April
3, 1999 and April 4, 1998:
<TABLE>
<CAPTION>
Wholesale Residential
Manufacturing Retail Intercompany Consolidated
Operations Operations Eliminations Operations
- ------------------- ----------------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net Sales
1999 $955,803 $ - $ - $955,803
1998 794,936 137,623 (67,574) 864,985
Gross Margin
1999 $239,174 $ - $ - $239,174
1998 167,527 51,965 (621) 218,871
Selling Expense
1999 $110,299 $ - $ - $110,299
1998 71,793 56,900 - 128,693
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended April 3, 1999 Compared to Three Months Ended April 4, 1998
- ------------------------------------------------------------------------------
Wholesale manufacturing sales increased $160.9 million in the three
months ended April 3, 1999 compared to the same period last year. The sales
increase was a result of the acquisition of Queen and increased overall demand,
offset in part by decreased sales as a result of the disposal of the U.K.
operations. Wholesale manufacturing margins on outside sales increased to 25
percent from 23 percent on lower material costs and improved efficiencies
resulting from higher demand and the ongoing integration of the Queen
operations. Wholesale manufacturing selling expense increased to 11.5% in the
first quarter 1999 from 9.9% in 1998 due to increased advertising and sample
distribution after the company's exit from the residential retail business. As
indicated above, substantially all residential retail operations were sold or
closed during 1998.
As a result of the above, consolidated net sales increased $90.8 million,
or 10.5 percent, to $955.8 million in the first three months of 1999. Gross
margin as a percentage of net sales decreased .3 percent to 25 percent in the
first quarter of 1999 compared to the first quarter of 1998, primarily due to
the reduction in higher margin residential retail sales, offset in part by
improved performance in wholesale manufacturing as previously described.
Selling, general and administrative expenses for the first quarter of
1999 were $154.8 million, or 16.2 percent of net sales, compared to $168.1
million, or 19.4 percent of net sales, in the comparable period of 1998. The
decrease of $13.3 million, or 3.2 percent of net sales, was primarily due to the
company's exiting the residential retail business. Interest expense was $16.2
million for the first quarter of 1999 compared to $15.2 million for the first
quarter of 1998 as a result of higher borrowings.
The effective income tax rate for the first quarter of 1999 increased to
41.7 percent compared to 40.9 percent for the first quarter of 1998 primarily
due to increased amortization of nondeductible goodwill.
FORWARD-LOOKING INFORMATION
Certain statements in this report, including those regarding anticipated
total capital expenditures and capitalized lease obligations, availability of
funding for working capital, capital expenditures, stock repurchases and debt
service requirements, Year 2000 readiness and estimated remediation costs, and
the effects of litigation on the company's future results of operations, are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1933,
as amended, and are subject to the safe harbor provisions of those Acts. When
used in this report, the words "believes," "expects," "anticipates," "estimates"
or "intends," and similar expressions, are intended to identify forward-looking
statements. The forward-looking statements herein involve a number of risks and
uncertainties that could cause actual results to differ materially from those
expressed or reflected in such statements. The important factors which may
affect the company's future results and could cause those results to differ
materially from the results expressed or reflected in the forward-looking
statements include, but are not limited to, the following: changes in economic
conditions generally; changes in consumer spending for durable goods, interest
rates and new housing starts; competition from other carpet, rug and floor
covering manufacturers; changes in raw material prices; the degree of success in
the integration of the company's recent acquisition; failure of the company's
12
<PAGE>
vendors, customers and suppliers to timely identify and adequately address Year
2000 compliance issues; and other factors identified from time to time in the
company's reports and other filings with the Securities and Exchange Commission.
ITEM THREE - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes occurred in the sources and effects of market risk
during the three months ended April 3, 1999.
PART II - OTHER INFORMATION
ITEM ONE - LEGAL PROCEEDINGS
The company is a party to several lawsuits incidental to its various
activities and incurred in the ordinary course of business. The company believes
that it has meritorious claims and defenses in each case. After consultation
with counsel, it is the opinion of management that, although there can be no
assurance given, none of the associated claims, when resolved, will have a
material adverse effect upon the company.
The company is a defendant in certain litigation alleging personal injury
resulting from personal exposure to volatile organic compounds found in carpet
produced by the company. The complaints seek injunctive relief and unspecified
money damages on all claims. The company has denied any liability. The company
believes that it has meritorious defenses and that the litigation will not have
a material adverse effect on the company's financial condition or results of
operations.
In December 1995, the company learned that it was one of six carpet
companies named as additional defendants in a pending antitrust suit filed in
the United States District Court of Rome, Georgia. The amended complaint alleges
price-fixing regarding certain types of carpet products in violation of Section
1 of the Sherman Act. The amount of damages sought is not specified. If any
damages were to be awarded, they may be trebled under the applicable statute.
The company has filed an answer to the complaint that denies plaintiffs'
allegations and sets forth several defenses. In September 1997, the Court issued
an order certifying a nationwide plaintiff class of persons and entities who
purchased "mass production" polypropylene carpet directly from any of the
defendants from June 1, 1991 through June 30, 1995, excluding, among others, any
persons or entities whose only purchases were from any of the company's retail
establishments. Discovery began in November 1997 and is continuing. The company
is also a party to two consolidated lawsuits pending in the Superior Court of
the State of California, City and County of San Francisco, both of which were
brought on behalf of a purported class of indirect purchasers of carpet in the
State of California and which seek damages for alleged violations of California
antitrust and fair competition laws. The company believes that it has
meritorious defenses to plaintiffs' claims in the lawsuits described in this
paragraph and intends to defend these actions vigorously. After consultation
with counsel, it is the opinion of management that, although there can be no
assurance given, none of the claims described in this paragraph, when resolved,
will have a material adverse effect upon the company.
On October 3, 1998, the company learned that it was one of five
defendants in a pending antitrust suit filed in the United States District Court
in Rome, Georgia. The complaint alleges price fixing regarding certain types of
carpet products in violation of Section 1 of the Sherman Act. The amount of
damages sought is not specified. If any damages were to be awarded, they may be
trebled under the applicable statute. The company has filed an answer to the
complaint. The company believes it has meritorious defenses to plaintiffs'
claims in the lawsuit described in this paragraph and intends to defend itself
vigorously. After consultation with counsel, it is the opinion of management
that, although there can be no assurance given, none of the claims described in
this paragraph, when resolved, will have a material adverse effect on the
company.
The company is subject to a variety of environmental regulations relating
to the use, storage, discharge and disposal of hazardous materials used in its
manufacturing processes. Failure by the company to comply with present and
future regulations could subject it to future liabilities. In addition, such
regulations could require the company to acquire costly equipment or to incur
other significant expenses to comply with environmental regulations. The company
is not involved in any material environmental proceedings.
13
<PAGE>
ITEM TWO - CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM THREE - DEFAULTS UPON SENIOR SECURITIES
None
ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM FIVE - OTHER INFORMATION
None
ITEM SIX - EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits
27 - Financial Data Schedule
Shareholders may obtain copies of Exhibits without charge upon written
request to the Corporate Secretary, Shaw Industries, Inc., Mail drop 061-22,
P.O. Drawer 2128, Dalton, Georgia 30722-2128.
(B) No reports on Form 8-K have been filed during the fiscal quarter
ended April 3, 1999.
14
<PAGE>
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.
SHAW INDUSTRIES, INC.
--------------------------------------
(The Registrant)
DATE: May 17, 1999 /s/ Robert E. Shaw
--------------------------------------
Robert E. Shaw
Chairman of the Board, Chief Executive
Officer and President
DATE: May 17, 1999 /s/ Kenneth G. Jackson
--------------------------------------
Kenneth G. Jackson
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS OF SHAW INDUSTRIES, INC. AND SUBSIDIARIES
AS OF APRIL 3, 1999 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND CASH FLOWS FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
NOTE: EARNINGS PER SHARE (E.P.S.) HAVE BEEN CALCULATED IN ACCORDANCE WITH FASB
128.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 22,244
<SECURITIES> 0
<RECEIVABLES> 320,068
<ALLOWANCES> 25,157
<INVENTORY> 686,612
<CURRENT-ASSETS> 1,168,883
<PP&E> 1,498,242
<DEPRECIATION> 771,332
<TOTAL-ASSETS> 2,356,856
<CURRENT-LIABILITIES> 541,745
<BONDS> 0
0
0
<COMMON> 156,898
<OTHER-SE> 685,760
<TOTAL-LIABILITY-AND-EQUITY> 2,356,856
<SALES> 955,803
<TOTAL-REVENUES> 955,803
<CGS> 716,629
<TOTAL-COSTS> 716,629
<OTHER-EXPENSES> 153,516
<LOSS-PROVISION> 1,830
<INTEREST-EXPENSE> 16,205
<INCOME-PRETAX> 67,623
<INCOME-TAX> 28,213
<INCOME-CONTINUING> 39,410
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<NET-INCOME> 40,366
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