UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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 September 30, 2000
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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
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SHAW INDUSTRIES, INC.
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(Exact name of registrant as specified in its charter)
GEORGIA 58-1032521
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
616 E. WALNUT AVENUE, DALTON, GEORGIA 30720
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(Address of principal executive offices) (Zip Code)
(706) 278-3812
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Registrant's telephone number,
including area code
NOT APPLICABLE
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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: October 24, 2000 - 124,111,208 shares
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<PAGE>
SHAW INDUSTRIES, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE NUMBERS
--------------------- ------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September
30, 2000 and January 1, 2000 3-4
Condensed Consolidated Statements of Income and
Retained Earnings - For the Three Months Ended
September 30, 2000 and October 2, 1999 5
Condensed Consolidated Statements of Income and
Retained Earnings - For the Nine Months Ended
September 30, 2000 and October 2, 1999 6
Condensed Consolidated Statements of Cash Flow -
For the Nine Months Ended September 30, 2000
and October 2, 1999 7
Notes to Condensed Consolidated Financial Statements 8-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-14
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 14
PART II - OTHER INFORMATION
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Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
<PAGE>
PART 1 - ITEM ONE- FINANCIAL INFORMATION
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
September 30, January 1,
2000 2000
------------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 12,141 $ 34,021
---------- ----------
Accounts receivable, less
allowance for doubtful accounts and
discounts of $20,431 and $18,931 ............ 227,960 234,267
---------- ----------
Inventories -
Raw materials ............................... 294,100 255,083
Work-in-process ............................. 110,520 92,605
Finished goods .............................. 365,527 319,046
---------- ----------
770,147 666,734
---------- ----------
Other current assets ............................ 160,196 140,902
---------- ----------
TOTAL CURRENT ASSETS ....... 1,170,444 1,075,924
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land and land improvements ...................... 29,005 31,974
Buildings and leasehold improvements ............ 338,409 331,010
Machinery and equipment ......................... 1,146,804 1,064,074
Construction in progress ........................ 116,789 148,380
---------- ----------
1,631,007 1,575,438
Less - Accumulated depreciation and amortization 854,492 821,633
---------- ----------
776,515 753,805
---------- ----------
GOODWILL, net of amortization ........................ 394,760 418,923
---------- ----------
OTHER ASSETS ......................................... 42,453 43,067
---------- ----------
TOTAL ASSETS ............... $2,384,172 $2,291,719
========== ==========
3
<PAGE>
September 30, January 1,
2000 2000
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(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Current maturities of long-term debt ........... $ 3,961 $ 4,294
Accounts payable ............................... 244,776 217,332
Accrued liabilities ............................ 334,027 272,341
----------- -----------
TOTAL CURRENT LIABILITIES ........... 582,764 493,967
----------- -----------
LONG-TERM DEBT, less current maturities ............. 891,395 823,821
----------- -----------
DEFERRED INCOME TAXES ............................... 73,483 77,994
----------- -----------
OTHER LIABILITIES ................................... 34,242 27,352
----------- -----------
SHAREHOLDERS' INVESTMENT:
Common stock, no par, $1.11 stated value,
authorized: 500,000,000 shares; issued and
outstanding: 123,934,384 shares at
September 30, 2000 and 132,663,599 shares
at January 1, 2000 ......................... 137,568 147,258
Paid-in capital ................................ 5,050 60,612
Cumulative translation adjustment .............. -- (2,252)
Retained earnings .............................. 659,670 662,967
----------- -----------
TOTAL SHAREHOLDERS' INVESTMENT ...... 802,288 868,585
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT ..................... $ 2,384,172 $ 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
September 30, October 2,
2000 1999
----------- -----------
NET SALES ......................................... $ 1,035,925 $ 1,082,923
COST AND EXPENSES:
Cost of sales ................................ 795,501 790,273
Selling, general and administrative .......... 152,948 156,807
Charge to record additional loss on sale of
residential retail operations ............ 35,449 --
Charge to record pending settlement of class
action antitrust litigation .............. 27,500 --
Interest, net ................................ 20,451 15,275
Other, net ................................... 1,369 1,012
----------- -----------
INCOME BEFORE INCOME TAXES ........................ 2,707 119,556
PROVISION FOR INCOME TAXES ........................ 2,559 48,843
----------- -----------
INCOME BEFORE EQUITY IN INCOME OF
JOINT VENTURES ............................... 148 70,713
EQUITY IN INCOME OF JOINT VENTURES ................ 524 970
----------- -----------
NET INCOME ........................................ $ 672 $ 71,683
=========== ===========
DIVIDENDS PAID PER COMMON SHARE ................... $ 0.05 $ 0.05
=========== ===========
EARNINGS PER COMMON SHARE:
Basic ........................................ $ 0.01 $ 0.52
=========== ===========
Diluted ...................................... $ 0.01 $ 0.51
=========== ===========
RETAINED EARNINGS:
Beginning of period .......................... $ 666,235 $ 557,088
Add - net income ............................. 672 71,683
(Deduct) - dividends paid .................... (6,202) (6,878)
Stock repurchases in excess of paid-in capital (1,035) --
----------- -----------
End of period ................................ $ 659,670 $ 621,893
=========== ===========
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)
NINE MONTHS NINE MONTHS
ENDED ENDED
September 30, October 2,
2000 1999
----------- -----------
NET SALES ......................................... $ 3,091,777 $ 3,103,852
COST AND EXPENSES:
Cost of sales ................................ 2,322,354 2,284,455
Selling, general and administrative .......... 484,920 469,435
Charge to record additional loss on sale of
residential retail operations ............ 46,574 --
Charge to record pending settlement of class
action antitrust litigation .............. 27,500 --
Restructuring charge ......................... 6,600 --
Interest, net ................................ 55,907 46,572
Other, net ................................... 3,643 2,898
----------- -----------
INCOME BEFORE INCOME TAXES ........................ 144,279 300,492
PROVISION FOR INCOME TAXES ........................ 61,610 123,345
----------- -----------
INCOME BEFORE EQUITY IN INCOME OF
JOINT VENTURES ............................... 82,669 177,147
EQUITY IN INCOME OF JOINT VENTURES ................ 857 2,959
----------- -----------
NET INCOME ........................................ $ 83,526 $ 180,106
=========== ===========
DIVIDENDS PAID PER COMMON SHARE ................... $ 0.15 $ 0.05
=========== ===========
EARNINGS PER COMMON SHARE:
Basic ........................................ $ 0.65 $ 1.29
=========== ===========
Diluted ...................................... $ 0.65 $ 1.27
=========== ===========
RETAINED EARNINGS:
Beginning of period .......................... $ 662,967 $ 448,665
Add - net income ............................. 83,526 180,106
(Deduct) - dividends paid .................... (19,274) (6,878)
Stock repurchases in excess of paid-in capital (61,900) --
Translation adjustment ....................... (5,649) --
----------- -----------
End of period ................................ $ 659,670 $ 621,893
=========== ===========
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)
NINE MONTHS NINE MONTHS
ENDED ENDED
September 30, October 2,
2000 1999
------------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................ $ 83,526 $ 180,106
--------- ---------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ....................... 68,623 70,075
Provision for doubtful accounts ..................... 21,851 5,075
Deferred income taxes ............................... (11,021) 6,519
Charge to record additional loss on sale of
residential retail operations .................... 46,574 --
Charge to record pending settlement of class
action antitrust litigation ...................... 27,500 --
Restructuring charge ................................ 6,600 --
Changes in operating assets and liabilities:
Accounts receivable .......................... (47,889) (2,397)
Inventories .................................. (128,878) (40,533)
Other current assets ......................... (19,520) (11,226)
Accounts payable ............................. 40,328 62,714
Accrued liabilities .......................... (2,780) 71,075
Other, net ................................... 18,348 (9,460)
--------- ---------
Total adjustments ......................... 19,736 151,842
--------- ---------
Net cash provided by operating activities ........... 103,262 331,948
--------- ---------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ................ (111,413) (86,702)
Retirements of property, plant and
equipment, net ........................................ 47 727
Net proceeds from sale of Australian subsidiary ........... 47,832 --
--------- ---------
Net cash used in investing activities ............... (63,534) (85,975)
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in long-term debt, net ................ 84,953 (158,234)
Dividends paid ............................................ (19,274) (6,878)
Purchases of common stock ................................. (135,770) (79,515)
Proceeds from exercise of stock options ................... 8,483 12,011
--------- ---------
Net cash used in financing activities ................. (61,608) (232,616)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................... (21,880) 13,357
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ................................................. 34,021 12,555
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................... $ 12,141 $ 25,912
========= =========
</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
SEPTEMBER 30, 2000
(UNAUDITED)
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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 29, 2001, but may be extended for additional one-year terms. As of
September 30, 2000, the company had approximately $296,710,000 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 $8,668,000 and $46,915,000 lower at
September 30, 2000 and January 1, 2000, respectively. Certain of the company's
finished goods inventories, representing approximately 8% 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 September 30, 2000 was approximately 7.1%, and borrowings outstanding
under this facility totaled $859,000,000. The variable interest rate on a total
of $542,813,000 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 nine month periods ended September 30,
2000 and October 2, 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
September 30, 2000 October 2, 1999
---------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Weighted average common shares ..................... 123,522,891 137,722,390
Dilutive incremental shares from assumed
conversions of options under stock option plans. 741,106 2,119,429
---------------------------------------------------- ----------- -----------
Weighted average common shares and
dilutive potential common shares ............... 124,263,997 139,841,819
---------------------------------------------------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 2000 October 2, 1999
---------------------------------------------------- ------------------ ---------------
<S> <C> <C>
Weighted average common shares ..................... 128,073,069 139,820,506
Dilutive incremental shares from assumed
conversions of options under stock option plans. 600,137 2,355,566
---------------------------------------------------- ----------- -----------
Weighted average common shares and
dilutive potential common shares ............... 128,673,206 142,176,072
---------------------------------------------------- ----------- -----------
</TABLE>
6. Commitments and Contingencies
The company has guaranteed certain leases of retail stores sold to Flooring
America, Inc. (formerly, The Maxim Group, Inc.) in 1998. During the second
quarter 2000, Flooring America filed for protection under Chapter 11 of the U.S.
Bankruptcy Code. As a result of Flooring America's reorganization, the company
expects to be liable for lease payments under certain of the guarantees. See
Note 11 for the nonrecurring charge recorded in the third quarter of 2000
related to the company's estimated liability under the guarantees.
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 as amended by SFAS No. 137 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 $672,000
and $71,010,000 for the three months ended September 30, 2000 and October 2,
1999, respectively, and $85,778,000 and $180,923,000 for the nine months ended
September 30, 2000 and October 2, 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. No shares were purchased in the third quarter of 2000. The
company has approximately 5.6 million shares currently authorized for purchase.
9
<PAGE>
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.
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.
On August 11, 2000, the company reached an agreement in principle to
recommend 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 $27,500,000, including
attorneys fees and costs. In September 2000, the company recorded a charge of
$27,500,000 ($16,528,000, net of tax benefit, or $.13 per share) for this
settlement which is subject to, among other things, court approval and the
execution of a definitive settlement agreement.
In September 2000, the company recorded a nonrecurring charge totaling
$35,449,000 ($21,305,000, net of tax benefit, or $.17 per share) to reflect the
estimated liability resulting from certain lease guarantees and commitments as a
result of Flooring America Inc.'s filing for protection under Chapter 11 of the
U.S. Bankruptcy Code. The estimated liability reflects the company's expected
recovery from sub-leasing and other negotiated settlements.
12. Subsequent Event-Merger Agreement with Berkshire Hathaway Inc.
On September 6, 2000, the company announced that Berkshire Hathaway, Inc.
had offered to purchase between 80.1% and 86.0% of its outstanding shares for
$19 per share in cash, subject to the approval of the company's board of
directors. The offer was not subject to any financing contingencies. The offer
was contingent upon Robert E. Shaw, the chairman of the board and chief
executive officer, and Julian D. Saul, the president, together with members of
their immediate families, each retaining a minimum of 5% ownership interest.
Other shares not purchased by Berkshire Hathaway would be owned by other members
of management or members of the Shaw and Saul families not included in the 5%
ownership requirement.
On October 19, 2000, the company's board of directors approved the proposed
acquisition of Shaw Industries, Inc. by an investor group led by Berkshire
Hathaway, Inc. and including Robert E. Shaw, Chairman and Chief Executive
Officer, Julian D. Saul, a director and President of the company, through
certain family related entities, William C. Lusk, Jr. and W. Norris Little,
directors of the company, and eight other members of the company's management.
Following approval by its board of directors, the company entered into a merger
agreement with Berkshire Hathaway and a newly-formed corporation which will be
owned by the investor group pursuant to which, subject to shareholder and
certain regulatory approvals, the company will be acquired by the investor group
at $19 per share in cash.
10
<PAGE>
SHAW INDUSTRIES, INC. AND SUBSIDIARIES
ITEM TWO-MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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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. Customers of the company in turn market floor covering and
other products to retail and other wholesale residential and commercial
end-users. Demand for the company's products is primarily 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 September 30, 2000, the company had revenues of
$1,035.9 million and net income of $.7 million after nonrecurring charges.
Margins during the third quarter of 2000 were impacted by increases in raw
material and energy costs, primarily related to petrochemical products along
with labor costs increases. The company continues to manage the impact of
escalating costs through price increases and internal cost reduction efforts.
Nonrecurring charges recorded in the third quarter ended September 30, 2000
In September 2000, the company recorded a nonrecurring charge totaling
$35.4 million ($21.3 million, net of tax benefit, or $.17 per share) to reflect
the estimated liability resulting from certain lease guarantees and commitments
as a result of Flooring America Inc.'s filing for protection under Chapter 11 of
the U.S. Bankruptcy Code. The estimated liability reflects the company's
expected recovery from sub-leasing and other negotiated settlements.
In September 2000, the company also recorded a nonrecurring charge of $27.5
million ($16.5 million, net of tax benefit, or $.13 per share) to reflect an
agreement in principle to recommend the court approve a settlement of two class
action antitrust lawsuits. Under the terms of the agreement in principle entered
into with 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.
Nonrecurring charges recorded in the second quarter ended July 1, 2000
During the second 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. Flooring America's company-owned stores represented 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.
Sale of Shaw Industries Australia
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.
11
<PAGE>
Subsequent Event-Merger Agreement with Berkshire Hathaway Inc.
On September 6, 2000, the company announced that Berkshire Hathaway, Inc.
had offered to purchase between 80.1% and 86.0% of its outstanding shares for
$19 per share in cash, subject to the approval of the company's board of
directors. The offer was not subject to any financing contingencies. The offer
was contingent upon Robert E. Shaw, the chairman of the board and chief
executive officer, and Julian D. Saul, the president, together with members of
their immediate families, each retaining a minimum of 5% ownership interest.
Other shares not purchased by Berkshire Hathaway would be owned by other members
of management or members of the Shaw and Saul families not included in the 5%
ownership requirement.
On October 19, 2000, the company's board of directors approved the proposed
acquisition of Shaw Industries, Inc. by an investor group led by Berkshire
Hathaway, Inc. and including Robert E. Shaw, Chairman and Chief Executive
Officer, Julian D. Saul, a director and President of the company, through
certain family related entities, William C. Lusk, Jr. and W. Norris Little,
directors of the company, and eight other members of the company's management.
Following approval by its board of directors, the company entered into a merger
agreement with Berkshire Hathaway and a newly-formed corporation which will be
owned by the investor group pursuant to which, subject to shareholder and
certain regulatory approvals, the company will be acquired by the investor group
at $19 per share in cash.
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 September 30, 2000, the company had working capital of $587.7 million,
an increase of $5.7 million from working capital of $582.0 million at January 1,
2000. Primary sources of cash during the nine months ended September 30, 2000
were (i) $103.3 million provided by operating activities, consisting of cash
earnings of approximately $243.7 million offset in part by working capital needs
of approximately $140.4 million, (ii) $85.0 million from additional long-term
debt financing and (iii) $47.8 million from the sale of the Australian
operation. The primary uses of cash during the nine months ended September 30,
2000 were (i) $111.4 million for additions to property, plant and equipment,
(ii) $135.8 million for repurchases of common stock and (iii) $19.3 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 $111.4 million for the nine months ended September 30, 2000. Management
anticipates total capital expenditures and capitalized lease obligations of
approximately $30 to $40 million for the remainder of 2000 to expand and upgrade
its manufacturing and distribution equipment 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 7.1 percent,
including applicable margins, at September 30, 2000. Borrowings outstanding
under this credit facility at September 30, 2000 were $859 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
September 30, 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 29, 2001, but may be extended for additional one-year
terms. As of September 30, 2000, the company had approximately $296.7 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
approximately 4.0 million shares at a price of $15.50 per share. Share
repurchases were funded from operations and existing credit
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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 September 30, 2000 Compared to Three Months Ended October 2,
1999
Net sales for the quarter ended September 30, 2000 decreased to $1,035.9
million from $1,082.9 for the same period last year. Sales were down
approximately 1.4% 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 23.2 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 and labor cost
increases.
Selling, general and administrative expenses for the third quarter of 2000
were $152.9 million, or 14.8 percent of net sales, compared to $156.8 million,
or 14.5 percent of net sales, in the comparable period of 1999.
As previously discussed, the third quarter of 2000 includes two
nonrecurring charges. The company recorded a nonrecurring charge of $27.5
million in preparation for the settlement of two class action antitrust
lawsuits, including attorney fees and costs. The company also recorded a
nonrecurring charge totaling $35.4 million to reflect additional losses
resulting from lease guarantees and commitments as a result of the bankruptcy of
Flooring America.
Interest expense for the current period was $20.5 million compared to $15.3
million in the third quarter of 1999 as a result of both higher borrowings and
higher interest rates.
The effective income tax rate for the third quarter of 2000 increased to
94.5 percent from 40.9 percent for the third quarter of 1999. The higher
effective income tax rate for the third quarter of 2000 is a function of lower
income and the effect of non-deductible permanent tax items.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended October 2,
1999
Net sales for the nine months ended September 30, 2000 decreased to
$3,091.8 million from $3,103.9 million in the same period last year. Excluding
sales from the company's Australian subsidiary which was sold at the beginning
of May 2000, sales grew approximately 1.3% for the nine months.
Gross margin decreased to 24.9 percent from 26.4 percent last year.
Increases in raw material and other energy costs in the second and third
quarters of this year offset cost improvements gained in the first quarter.
Selling, general and administrative expenses for the current nine month
period were $484.9 million, or 15.7 percent of net sales, compared to $469.4
million, or 15.1 percent of net sales, in the comparable period of 1999. The
nine months of 2000 include the previously discussed $15.3 million write-off of
accounts receivable from Flooring America.
The nine months ended September 30, 2000 also includes the previously
discussed nonrecurring charges of $27.5 million related to the potential
settlement of two class action antitrust lawsuits, and the $35.4 million charge
for lease guarantees and commitments as a result of Flooring America's
bankruptcy. The nine months also includes nonrecurring charges of $6.6 million
related to a restructuring of the company's residential sales force and $11.1
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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 nine month period was $55.9 million
compared to $46.6 million in the first nine months of 1999 as a result of both
higher borrowings and higher interest rates.
The effective income tax rate for the first nine months of 2000 increased
to 42.7 percent from 41.0 percent for the first nine months of 1999. The higher
effective income tax rate for the first nine months of 2000 is a function of
lower income and the effect of non-deductible permanent tax items.
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.
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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
None
ITEM FIVE - OTHER INFORMATION
None
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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) A report on Form 8-K was filed on September 6, 2000 reporting an offer
by Berkshire Hathaway, Inc. to purchase up to 86% of the outstanding
shares of Shaw Industries, Inc.
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: November 1, 2000 /s/ Robert E. Shaw
--------------------------- -------------------
Robert E. Shaw
Chairman of the Board and
Chief Executive Officer
DATE: November 1, 2000 /s/ Kenneth G. Jackson
--------------------------- -----------------------
Kenneth G. Jackson
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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