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 July 1, 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 1-6853
------
SHAW INDUSTRIES, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1032521
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
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: August 5, 2000 - 126,628,526 shares
-----------------------------------
<PAGE>
SHAW INDUSTRIES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBERS
--------------------- ------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - July 1, 2000
and January 1, 2000 3-4
Condensed Consolidated Statements of Income and
Retained Earnings - For the Three Months Ended
July 1, 2000 and July 3, 1999 5
Condensed Consolidated Statements of Income and
Retained Earnings - For the Six Months Ended
July 1, 2000 and July 3, 1999 6
Condensed Consolidated Statements of Cash Flow -
For the Six Months Ended July 1, 2000
and July 3, 1999 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
PART II - OTHER INFORMATION
-----------------
Item 1. Legal Proceedings 14
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 14-15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
PART 1 - ITEM ONE- FINANCIAL INFORMATION
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
July 1, January 1,
2000 2000
---------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 10,475 $ 34,021
---------- ----------
Accounts receivable, less
allowance for doubtful accounts and
discounts of $22,544 and $18,931 ............ 235,656 234,267
---------- ----------
Inventories -
Raw materials ............................... 271,732 255,083
Work-in-process ............................. 108,677 92,605
Finished goods .............................. 360,385 319,046
---------- ----------
740,794 666,734
---------- ----------
Other current assets ............................ 150,567 140,902
---------- ----------
TOTAL CURRENT ASSETS ....... 1,137,492 1,075,924
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and land improvements ...................... 27,724 31,974
Buildings and leasehold improvements ............ 335,537 331,010
Machinery and equipment ......................... 1,114,410 1,064,074
Construction in progress ........................ 121,780 148,380
---------- ----------
1,599,451 1,575,438
Less - Accumulated depreciation and amortization 834,578 821,633
---------- ----------
764,873 753,805
---------- ----------
GOODWILL, net of amortization ........................ 397,752 418,923
---------- ----------
OTHER ASSETS ......................................... 42,614 43,067
---------- ----------
TOTAL ASSETS ............... $2,342,731 $2,291,719
========== ==========
3
<PAGE>
July 1, January 1,
2000 2000
----------- -----------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt ........... $ 4,052 $ 4,294
Accounts payable ............................... 262,224 217,332
Accrued liabilities ............................ 269,075 272,341
----------- -----------
TOTAL CURRENT LIABILITIES ........... 535,351 493,967
----------- -----------
LONG-TERM DEBT, less current maturities ............. 895,880 823,821
----------- -----------
DEFERRED INCOME TAXES ............................... 76,513 77,994
----------- -----------
OTHER LIABILITIES ................................... 31,746 27,352
----------- -----------
SHAREHOLDERS' INVESTMENT:
Common stock, no par, $1.11 stated value,
authorized: 500,000,000 shares; issued and
outstanding: 123,428,152 shares at
July 1, 2000 and 132,663,599 shares
at January 1, 2000 ......................... 137,006 147,258
Paid-in capital ................................ -- 60,612
Cumulative translation adjustment .............. -- (2,252)
Retained earnings .............................. 666,235 662,967
----------- -----------
TOTAL SHAREHOLDERS' INVESTMENT ...... 803,241 868,585
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT ..................... $ 2,342,731 $ 2,291,719
=========== ===========
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
July 1, 2000 July 3, 1999
------------ ------------
NET SALES ......................................... $ 1,069,356 $ 1,065,126
COST AND EXPENSES:
Cost of sales ................................ 788,538 777,553
Selling, general and administrative .......... 174,751 157,799
Charge to record additional loss on sale of
residential retail operations ............ 11,125 --
Restructuring charge ......................... 6,600 --
Interest, net ................................ 18,240 15,097
Other, net ................................... 612 1,364
----------- -----------
INCOME BEFORE INCOME TAXES ........................ 69,490 113,313
PROVISION FOR INCOME TAXES ........................ 28,928 46,289
----------- -----------
INCOME BEFORE EQUITY IN INCOME OF
JOINT VENTURES ............................... 40,562 67,024
EQUITY IN INCOME OF JOINT VENTURES ................ 96 1,033
----------- -----------
NET INCOME ........................................ $ 40,658 $ 68,057
=========== ===========
DIVIDENDS PAID PER COMMON SHARE ................... $ 0.05 $ 0.00
=========== ===========
EARNINGS PER COMMON SHARE:
Basic ........................................ $ 0.32 $ 0.48
=========== ===========
Diluted ...................................... $ 0.32 $ 0.48
=========== ===========
RETAINED EARNINGS:
Beginning of period .......................... $ 698,529 $ 489,031
Add - net income ............................. 40,658 68,057
(Deduct) - dividends paid .................... (6,438) --
Stock repurchases in excess of paid-in capital (60,865) --
Translation adjustment ....................... (5,649) --
----------- -----------
End of period ................................ $ 666,235 $ 557,088
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
July 1, 2000 July 3, 1999
------------ ------------
NET SALES ......................................... $ 2,055,852 $ 2,020,929
COST AND EXPENSES:
Cost of sales ................................ 1,526,853 1,494,182
Selling, general and administrative .......... 331,972 312,628
Charge to record additional loss on sale of
residential retail operations ............ 11,125 --
Restructuring charge ......................... 6,600 --
Interest, net ................................ 35,456 31,302
Other, net ................................... 2,274 1,881
----------- -----------
INCOME BEFORE INCOME TAXES ........................ 141,572 180,936
PROVISION FOR INCOME TAXES ........................ 59,051 74,502
----------- -----------
INCOME BEFORE EQUITY IN INCOME OF
JOINT VENTURES ............................... 82,521 106,434
EQUITY IN INCOME OF JOINT VENTURES ................ 333 1,989
----------- -----------
NET INCOME ........................................ $ 82,854 $ 108,423
=========== ===========
DIVIDENDS PAID PER COMMON SHARE ................... $ 0.10 $ 0.00
=========== ===========
EARNINGS PER COMMON SHARE:
Basic ........................................ $ 0.64 $ 0.77
=========== ===========
Diluted ...................................... $ 0.63 $ 0.76
=========== ===========
RETAINED EARNINGS:
Beginning of period .......................... $ 662,967 $ 448,665
Add - net income ............................. 82,854 108,423
(Deduct) - dividends paid .................... (13,072) --
Stock repurchases in excess of paid-in capital (60,865) --
Translation adjustment ....................... (5,649) --
----------- -----------
End of period ................................ $ 666,235 $ 557,088
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOW
(IN THOUSANDS AND UNAUDITED)
SIX MONTHS SIX MONTHS
ENDED ENDED
July 1, 2000 July 3, 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................ $ 82,854 $ 108,423
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 44,944 46,366
Provision for doubtful accounts ..................... 20,473 2,587
Deferred income taxes ............................... (7,991) 2,719
Charge to record additional loss on sale of
residential retail operations .................... 11,125 --
Restructuring charge ................................ 6,600 --
Changes in operating assets and liabilities:
Accounts receivable .......................... (54,207) (17,383)
Inventories .................................. (99,525) (35,073)
Other current assets ......................... (9,891) (9,054)
Accounts payable ............................. 57,776 87,282
Accrued liabilities .......................... (4,783) 52,106
Other, net ................................... 15,555 (4,415)
--------- ---------
Total adjustments ......................... (19,924) 125,135
--------- ---------
Net cash provided by operating activities ........... 62,930 233,558
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ................ (79,061) (64,386)
Retirements of property, plant and
equipment, net ........................................ 25 727
Sale of Australian subsidiary ............................. 47,832 --
--------- ---------
Net cash used in investing activities ............... (31,204) (63,659)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in long-term debt, net ................ 89,529 (121,086)
Dividends paid ............................................ (13,072) --
Purchases of common stock ................................. (134,735) (57,816)
Proceeds from exercise of stock options ................... 3,006 7,280
--------- ---------
Net cash used in financing activities ................. (55,272) (171,622)
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ............................................... (23,546) (1,723)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ................................................. 34,021 12,555
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................... $ 10,475 $ 10,832
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 1, 2000
(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 1999 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
The company has entered into agreements pursuant to which it sells 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 current agreements
expire August 30, 2000, but may be extended for additional one-year terms. As of
July 1, 2000, the company had approximately $297,294,000 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 inventories. If LIFO inventories were valued at current
costs, the inventories would have been $11,294,000 and $46,915,000 lower at July
1, 2000 and January 1, 2000, respectively. Certain of the company's finished
goods inventories, representing approximately 8 percent of total inventories,
are valued at the lower of first-in, first-out (FIFO) cost or market.
4. Long-Term Debt
The company maintains 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 July 1, 2000 was approximately 7.0 percent, and borrowings outstanding
under this new facility totaled $862,000,000. The variable interest rate on a
total of $445,606,000 of amounts outstanding under the company's revolving
credit facilities has been fixed through various dates through January 2007 by
interest rate swap agreements. To provide further financing capacity, the
company maintains a 364-day $200 million senior unsecured revolving credit
facility which has not been utilized.
5. Earnings Per Share
Earnings per share for the three and six month periods ended July 1, 2000
and July 3, 1999 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.
8
<PAGE>
The following table reconciles the denominator of the basic and diluted earnings
per share computations:
<TABLE>
<CAPTION>
Three Months Ended
July 1, 2000 July 3, 1999
--------------------------------------------------------- ------------ ------------
<S> <C> <C>
Weighted average common shares .......................... 128,026,239 140,639,491
Dilutive incremental shares from assumed
conversions of options under stock option plans ..... 860,599 2,040,693
--------------------------------------------------------- ----------- -----------
Weighted average common shares and
dilutive potential common shares .................... 128,886,838 142,680,184
--------------------------------------------------------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
July 1, 2000 July 3, 1999
--------------------------------------------------------- ------------ ------------
<S> <C> <C>
Weighted average common shares .......................... 130,348,158 140,869,564
Dilutive incremental shares from assumed
conversions of options under stock option plans ..... 641,614 2,438,650
--------------------------------------------------------- ----------- -----------
Weighted average common shares and
dilutive potential common shares .................... 130,989,772 143,308,214
--------------------------------------------------------- ----------- -----------
</TABLE>
6. Commitments and Contingencies
The company has guaranteed certain leases of retail stores sold to Flooring
America, Inc. (formerly, The Maxim Group, Inc.). The related stores are
currently leased by Flooring America. During the second quarter Flooring America
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. No estimate
can be made of the potential impact of the guarantees on the company pending the
outcome of Flooring America's reorganization. In the event the company becomes
liable for lease payments under the guarantees, the company would pursue
subleasing and other arrangements to satisfy its guarantee.
7. 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 swap
agreements 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 2001. The
company's management has not determined the impact this new statement will have
on the financial statements.
8. Comprehensive Income
The company has other comprehensive income in the form of cumulative
translation adjustments which resulted in total comprehensive income of
$45,688,000 and $69,744,000 for the three months ended July 1, 2000 and July 3,
1999, respectively, and $85,106,000 and $109,913,000 for the six months ended
July 1, 2000 and July 3, 1999, respectively.
9. Stock Repurchases
During the second quarter ended July 1, 2000, the company purchased and
retired 9,364,647 shares of its common stock at a total cost of $134,735,000
under its ongoing share repurchase plan, including 3,991,047 shares purchased at
a price of $15.50 per share through a "Dutch Auction" tender offer completed
April 26, 2000. The company has approximately 5.6 million shares currently
authorized for purchase.
10. Sale of Australian Subsidiary
On May 9, 2000, the company completed the sale of Shaw Industries Australia
Pty. Ltd. (the company's wholly-owned Australian subsidiary) to Feltex Carpets
Limited of New Zealand. The transaction's value was $72,054,000 consisting of
cash proceeds of $54,342,000 and the assumption of debt of $17,712,000 and
resulted in an immaterial after-tax gain.
9
<PAGE>
11. Nonrecurring Charges
During the second quarter, the company restructured its residential sales
force to optimize the marketing of the company's Shaw and Queen residential
products. In connection with this restructuring, the company recorded a
nonrecurring charge of $6,600,000 ($3,967,000, net of tax benefit, or $.03 per
share) for severance and other employee termination benefits.
In June 2000, the company recorded a nonrecurring charge totaling
$26,458,000 ($15,901,000, net of tax benefit, or $.12 per share) to reflect the
impact of the Flooring America bankruptcy filing. The nonrecurring charge
consists of approximately $15,333,000 of accounts receivable owed by Flooring
America and charged against selling, general and administrative expense in the
accompanying condensed consolidated statement of income and approximately
$11,125,000 of notes and related interest receivable related to the sale of the
company's retail operations in 1998. The company has deemed both amounts
uncollectible.
12. Subsequent Event
On August 11, 2000, the company announced that it had reached an agreement
in principle to recommend that the Court approve a settlement of the two class
action antitrust suits pending against the company and other carpet
manufacturers in the United States District Court in Rome, Georgia. Under the
terms of the agreement in principle entered into with the counsel for the
plaintiffs, all claims against the company and its affiliates will be dismissed
with prejudice, and the company will pay to the plaintiff classes an aggregate
settlement amount of $27.5 million, including attorneys fees and costs. The
settlement is subject to, among other things, court approval and the execution
of a definitive settlement agreement.
10
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
ITEM TWO-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
GENERAL
The company manufactures, markets and distributes a broad range of soft
floor covering products primarily consisting of broadloom tufted carpet. The
company also distributes hard floor covering products through its highly
developed sales and distribution channels. The company operates in a business
environment comprised of numerous small customers and several large retailers
and buying groups. The company's customers in turn market floor covering and
other products to retail and other wholesale residential and commercial
end-users. The company experiences demand for its products primarily as a result
of multi and single family residential and commercial floor covering
replacement, new commercial and multi family residential construction, and, to a
lesser extent, new single family residential construction. This demand is driven
by such end-user factors as consumer spending on durable goods and general
consumer confidence. The company's profitability is dependent upon its ability
to efficiently manage changing raw material costs and its integrated
manufacturing process to produce products meeting the style, color and quality
demanded by its customers and to deliver those products in a timely manner.
During the quarter ended July 1, 2000, the company had revenues of $1,069.4
million and net income of $40.7 million after nonrecurring charges. Margins
during the second quarter of 2000 were impacted by increases in raw material and
other energy costs, primarily related to petrochemical products. The company
continues to manage the impact of escalating costs through price increases and
internal cost reduction efforts. However, additional raw material and other
energy and labor-related cost increases are expected to put continued pressure
on gross margins going forward.
During the quarter, the company restructured its residential sales force to
optimize the marketing of the company's various Shaw and Queen brands of
residential products. In connection with this restructuring, the company
recorded a nonrecurring charge of $6.6 million ($4.0 million, net of tax
benefit, or $.03 per share) for severance and other employee termination
benefits. The company expects to save approximately $8.0 million in annual
selling expense as a direct result of this restructuring.
In June 2000, the company recorded a nonrecurring charge totaling $26.5
million ($15.9 million, net of tax benefit, or $.12 per share) to reflect the
impact of Flooring America, Inc.'s filing for protection under Chapter 11 of the
U.S. Bankruptcy Code. The nonrecurring charge consists of approximately $15.3
million of accounts receivable owed by Flooring America and charged against
selling, general and administrative expense in the second quarter 2000
consolidated income statement and approximately $11.1 million of notes and
related interest receivable related to the sale of the company's retail
operations in 1998. The company has deemed both amounts uncollectible. Flooring
America's company-owned stores represent the company's single largest customer
with annualized sales of approximately $80 million. The company expects some
portion of those sales to continue and is working aggressively to replace sales
in the affected markets. The company has guaranteed certain of the leases of
retail stores previously sold to Flooring America. While the related stores are
currently leased by Flooring America, no estimate can currently be made of the
potential impact of the guarantees on the company pending the outcome of
Flooring America's reorganization. In the event the company becomes liable for
lease payments under the guarantees, the company would pursue subleasing and
other arrangements to satisfy its guarantee.
On May 9, 2000, the company completed the sale of Shaw Industries Australia
Pty. Ltd. (the company's wholly-owned Australian subsidiary) to Feltex Carpets
Limited of New Zealand. The transaction's value was $72.1 million consisting of
cash proceeds of $54.3 million and the assumption of debt of $17.7 million and
resulted in an immaterial after-tax gain.
On August 11, 2000, the company announced that it had reached an agreement
in principle to recommend that the Court approve a settlement of the two class
action antitrust suits pending against the company and other carpet
manufacturers in the United States District Court in Rome, Georgia. Under the
terms of the agreement in principle entered into with the counsel for the
plaintiffs, all claims against the company and its affiliates will be dismissed
with prejudice, and the company will pay to the plaintiff classes an aggregate
settlement amount of $27.5 million, including attorneys fees and costs. The
settlement is subject to, among other things, court approval and the execution
of a definitive settlement agreement.
LIQUIDITY AND CAPITAL RESOURCES
The company's primary capital requirements are for working capital, capital
expenditures, stock repurchases and debt service requirements. The company's
capital needs are met through a combination of internally generated funds and
credit and securitization agreements.
At July 1, 2000, the company had working capital of $602.1 million, an
increase of $20.1 million from working capital of $582.0 million at January 1,
2000. Primary sources of cash during the six months ended July 1, 2000 were (i)
$62.9 million provided by operating activities, consisting of cash earnings of
approximately $158.0 million offset in part by working capital needs of
approximately $95.1 million, (ii) $89.5 million from additional
11
<PAGE>
long-term debt financing and (iii) $47.8 million from the sale of the Australian
operation. The primary uses of cash during the second quarter of 2000 were (i)
$79.1 million for additions to property, plant and equipment, (ii) $134.7
million for repurchases of common stock and (iii) $13.1 million for dividends
paid.
The company manages its capital using EVA(R), ("EVA" is a registered
trademark of Stern, Stewart & Company) 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
exceed 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 modern
state-of-the-art condition, expand production capacity and increase efficiency
were $79.1 million for the six months ended July 1, 2000. Management anticipates
total capital expenditures and capitalized lease obligations of approximately
$40 to $60 million for the remainder of 2000 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 7.0 percent,
including applicable margins, at July 1, 2000. Borrowings outstanding under this
credit facility at July 1, 2000 were $862 million. To provide further financing
capacity, the company maintains a 364-day $200 million senior unsecured
revolving credit facility which remained unutilized and available at July 1,
2000.
The company maintains a receivables securitization program under which the
company sells a percentage ownership interest in a defined pool of the company's
trade receivables to a securitization conduit. The receivables securitization
program expires August 30, 2000, but may be extended for additional one-year
terms. As of July 1, 2000, the company had approximately $297.3 million of
accounts receivable sold and outstanding under this program.
During the second quarter of 2000, the company repurchased approximately
9.4 million shares of its common stock at a total cost of $134.7 million under
its ongoing share repurchase program. Repurchases included the "Dutch Auction"
tender offer completed in April 2000 under which the company repurchased 4.0
million shares at a price of $15.50 per share. Share repurchases were funded
from operations and existing credit facilities as well as proceeds from the sale
of the company's Australian subsidiary. The company has approximately 5.6
million shares currently authorized for purchase under its 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.
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 swap
agreements 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 contracts to effectively manage exposure to
foreign currency exchange rate fluctuations in its Mexican operations and
capital expenditures. The company does not enter into financial derivatives for
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, as amended by SFAS No. 137, is effective, and the company expects to
adopt this new standard, in the first quarter of the company's fiscal 2001. The
company's management has not determined the impact this statement will have on
the financial statements. However, this statement could increase volatility in
earnings and other comprehensive income.
RESULTS OF OPERATIONS
Three Months Ended July 1, 2000 Compared to Three Months Ended July 3, 1999
Net sales for the quarter ended July 1, 2000 increased to $1,069.4 million
from $1,065.1 for the same period last year. Sales grew approximately 2.5% for
the quarter, excluding sales from the company's Australian subsidiary which was
sold at the beginning of May 2000, on higher sales prices but generally lower
volumes.
Gross margin decreased to 26.3 percent from 27.0 percent of net sales. The
decrease resulted from increases in raw material and other energy costs during
the quarter primarily related to petrochemical products.
Selling, general and administrative expenses for the second quarter of 2000
were $174.8 million, or 16.3 percent of net sales, compared to $157.8 million,
or 14.8 percent of net sales, in the comparable period of 1999. The second
quarter of 2000 includes the $15.3 million write-off of accounts receivable from
Flooring America.
The second quarter of 2000 includes two additional nonrecurring charges.
The company recorded a nonrecurring charge of $6.6 million for severance and
other employee termination benefits related to the previously
12
<PAGE>
discussed sales force restructuring. The company also recorded a nonrecurring
charge to write-off approximately $11.1 million of notes and related interest
receivable owed by Flooring America related to the sale of the company's retail
operations in 1998.
Interest expense for the current period was $18.2 million compared to $15.1
million in the second quarter of 1999 as a result of both higher borrowings and
higher interest rates.
The effective income tax rate for the second quarter of 2000 increased to
41.6 percent from 40.9 percent for the second quarter of 1999.
Six Months Ended July 1, 2000 Compared to Six Months Ended July 3, 1999
Net sales for the six months ended July 1, 2000 increased to $2,055.9
million from $2,020.9 million in the same period last year. Sales grew
approximately 2.7% for the six months, excluding sales from the company's
Australian subsidiary which was sold at the beginning of May 2000.
Gross margin decreased to 25.7 percent from 26.1 percent last year.
Increases in raw material and other energy costs in the second quarter of this
year offset cost improvements gained in the first quarter.
Selling, general and administrative expenses for the current six month
period were $332.0 million, or 16.1 percent of net sales, compared to $312.6
million, or 15.5 percent of net sales, in the comparable period of 1999. The six
months of 2000 include the $15.3 million write-off of accounts receivable from
Flooring America.
The six months ended July 1, 2000 includes the previously discussed
nonrecurring charges of $6.6 million related to a restructuring of the company's
residential sales force and $11.1 million of notes and related interest
receivable owed by Flooring America related to the sale of the company's retail
operations in 1998.
Interest expense for the current six month period was $35.5 million
compared to $31.3 million in the first six months of 1999 as a result of both
higher borrowings and higher interest rates.
The effective income tax rate for the first six months of 2000 increased to
41.7 percent from 41.2 percent for the first six months of 1999.
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, 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 single and multi-family
construction; competition from other carpet, rug and floor covering
manufacturers; changes in raw material prices; 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
The information required by this item is set forth under the caption
"Derivative Financial Instruments" in "ITEM TWO - MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" above.
13
<PAGE>
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.
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
that denies plaintiff's allegations and sets forth several defenses.
On August 11, 2000, the company announced that it had reached an agreement
in principle to recommend that the court approve a settlement of the two class
action antitrust suits described above. Under the terms of the agreement in
principle entered into with the counsel for the plaintiffs, all claims against
the company and its affiliates will be dismissed with prejudice, and the company
will pay to the plaintiff classes an aggregate settlement amount of $27.5
million, including attorneys fees and costs. The settlement is subject to among
other things, court approval and the execution of a definitive settlement
agreement.
The company is also a party to four consolidated lawsuits pending in the
Superior Court of the State of California, City and County of San Francisco, all
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 vigorously defend these actions. 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.
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.
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
The 2000 Annual Meeting of Shareholders of the company was held on April
27, 2000. The following matters were submitted to the shareholders for approval
at the meeting:
1. A proposal to elect four directors to Class III for a three-year term.
The results of the voting on this proposal were as follows:
14
<PAGE>
Nominee Votes For Authority Withheld
------- --------- ------------------
W. Norris Little 109,739,587 2,180,909
----------- ---------
William C. Lusk, Jr. 109,802,772 2,117,724
----------- ---------
Robert R. Harlin 109,776,912 2,143,584
----------- ---------
Roberto Garza 109,781,805 2,138,691
----------- ---------
The members of the Board of Directors whose terms of office continued after
the 2000 Annual Meeting of Shareholders are as follows: (i) J. Hicks Lanier, R.
Julian McCamy, Thomas G. Cousins and S. Tucker Grigg (Class II Directors, term
expiring 2001); and (ii) J.C. Shaw, Robert E. Shaw, Robert J. Lunn, Julian D.
Saul (Class I Directors, terms expiring 2002).
2. A proposal to approve the 2000 Stock Incentive Plan. The results of the
voting on this proposal were as follows:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
95,324,849 16,436,455 159,192 -0-
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 July 1, 2000.
15
<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: August 14, 2000 /s/ Robert E. Shaw
--------------------------- -------------------
Robert E. Shaw
Chairman of the Board and Chief
Executive Officer
DATE: August 14, 2000 /s/ Kenneth G. Jackson
--------------------------- -----------------------
Kenneth G. Jackson
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
16
