<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One) FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 1-11756
PILLOWTEX CORPORATION
(Exact name of registrant as specified in its charter)
TEXAS 75-2147728
(State of incorporation) (IRS Employer Identification No.)
4111 Mint Way
Dallas, Texas 75237
(Address of principal executive offices) (Zip Code)
(214) 333-3225
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS Outstanding at May 7, 1999
Common Stock, $0.01 par value 14,186,408
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<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
INDEX
Part I - Financial Information Page No.
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Balance Sheets as of
January 2, 1999 and April 3, 1999 3
Consolidated Statements of Earnings for the three months
ended April 4, 1998 and April 3, 1999 4
Consolidated Statements of Cash Flows for the three months
ended April 4, 1998 and April 3, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and April 3, 1999
(Dollars in thousands, except for par value)
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
ASSETS ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . .$ 5,561 $ 13,773
Receivables:
Trade, less allowances of $21,117 and $21,208 in
1998 and 1999, respectively. . . . . . . . . . . . . 246,348 256,570
Other. . . . . . . . . . . . . . . . . . . . . . . . . 13,124 10,992
Inventories. . . . . . . . . . . . . . . . . . . . . . 434,281 481,444
Assets held for sale . . . . . . . . . . . . . . . . . 4,058 4,620
Prepaid expenses . . . . . . . . . . . . . . . . . . . 3,785 8,782
----------- -----------
Total current assets. . . . . . . . . . . . . . . . 707,157 776,181
Property, plant and equipment, less accum. depreciation
of $98,737 and $110,197 in 1998 and 1999, respectively 629,205 630,956
Intangible assets, at cost less accumulated
amortization of $11,866 and $13,790 in 1998
and 1999, respectively . . . . . . . . . . . . . . . . 289,829 295,852
Other assets . . . . . . . . . . . . . . . . . . . . . . 27,963 26,136
----------- -----------
$1,654,154 $1,729,125
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . .$ 127,575 $ 137,873
Accrued expenses . . . . . . . . . . . . . . . . . . . 96,250 93,877
Deferred income taxes. . . . . . . . . . . . . . . . . 22,978 22,980
Current portion of long-term debt. . . . . . . . . . . 12,421 14,496
Income taxes payable . . . . . . . . . . . . . . . . . - 814
----------- -----------
Total current liabilities . . . . . . . . . . . . . 259,224 270,040
Long-term debt, net of current portion . . . . . . . . . 944,493 1,011,838
Deferred income taxes. . . . . . . . . . . . . . . . . . 96,013 90,302
Noncurrent liabilities . . . . . . . . . . . . . . . . . 53,434 51,348
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . 1,353,164 1,423,528
Series A redeemable convertible preferred stock, $.01
par value; 65,000 shares issued and outstanding. . . . 63,057 63,111
Shareholders' equity:
Preferred stock, $0.01 par value; authorized
20,000,000 shares; only Series A issued. . . . . . . - -
Common stock, $0.01 par value; authorized 30,000,000
shares; 14,126,595 and 14,183,852 shares issued
and outstanding in 1998 and 1999, respectively . . . 141 142
Additional paid-in capital . . . . . . . . . . . . . . 155,811 157,025
Retained earnings. . . . . . . . . . . . . . . . . . . 83,650 87,517
Currency translation adjustment. . . . . . . . . . . . (1,669) (1,105)
Deferred compensation. . . . . . . . . . . . . . . . . - (1,093)
----------- -----------
Total shareholders' equity . . . . . . . . . . . . 237,933 242,486
----------- -----------
$1,654,154 $1,729,125
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Three Months Ended April 4, 1998 and April 3, 1999
(Amounts in thousands, except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . $ 366,293 $ 368,508
Cost of goods sold . . . . . . . . . . . . . . . . . . . 304,751 312,294
---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . 61,542 56,214
Selling, general and administrative expenses . . . . . . 33,731 28,136
Restructuring charge . . . . . . . . . . . . . . . . . . 1,539 -
---------- ----------
Earnings from operations. . . . . . . . . . . . . . 26,272 28,078
Interest expense . . . . . . . . . . . . . . . . . . . . 16,795 19,466
---------- ----------
Earnings before income taxes. . . . . . . . . . . . 9,477 8,612
Income taxes . . . . . . . . . . . . . . . . . . . . . . 3,839 3,359
---------- ----------
Net earnings. . . . . . . . . . . . . . . . . . . . 5,638 5,253
Preferred dividends and accretion. . . . . . . . . . . . 486 535
---------- ----------
Earnings available for common shareholders. . . . . $ 5,152 $ 4,718
========== ==========
Basic earnings per common share. . . . . . . . . . . . . $ .37 $ .33
========== ==========
Weighted average common shares outstanding - basic . . . 13,999 14,148
========== ==========
Diluted earnings per common share. . . . . . . . . . . . $ .33 $ .31
========== ==========
Weighted average common shares outstanding - diluted . . 16,974 16,937
========== ==========
Dividends declared per common share. . . . . . . . . . . $ .06 $ .06
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended April 4, 1998 and April 3, 1999
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . .$ 5,638 $ 5,253
Adjustments to reconcile net earnings to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . . . . 13,970 13,627
Deferred income taxes . . . . . . . . . . . . . . . . 8,193 (195)
Accretion on debt instruments . . . . . . . . . . . . 438 317
Provision for doubtful accounts . . . . . . . . . . . 414 140
Amortization of deferred compensation . . . . . . . . - 99
Gain on disposal of property, plant and equipment . . (12) -
Changes in operating assets and liabilities:
Trade receivables. . . . . . . . . . . . . . . . . (15,324) (10,499)
Inventories. . . . . . . . . . . . . . . . . . . . (25,290) (46,901)
Accounts payable . . . . . . . . . . . . . . . . . 248 40,424
Accrued expenses . . . . . . . . . . . . . . . . . 8,383 (2,229)
Other assets and liabilities . . . . . . . . . . . (6,716) (330)
---------- ----------
Net cash used in operating activities . . . . . (10,058) (294)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment. . . 11,715 77
Purchases of property, plant and equipment . . . . . . . (22,591) (27,996)
Proceeds from disposal of assets held for sale . . . . . 24,627 -
Payments for businesses purchased. . . . . . . . . . . . (19,747) (59)
---------- ----------
Net cash used in investing activities . . . . . (5,996) (27,978)
---------- ----------
Cash flows from financing activities:
Decrease in checks not yet presented for payment . . . . (14,749) (30,167)
Borrowings on revolving credit loans . . . . . . . . . . 125,600 142,800
Repayments of revolving credit loans . . . . . . . . . . (95,000) (70,600)
Retirement of long-term debt . . . . . . . . . . . . . . (1,985) (4,189)
Payments of debt issuance costs. . . . . . . . . . . . . - (38)
Dividends paid . . . . . . . . . . . . . . . . . . . . . (910) (1,332)
Proceeds from exercise of stock options. . . . . . . . . 1,026 10
Other. . . . . . . . . . . . . . . . . . . . . . . . . . (133) -
---------- ----------
Net cash provided by financing activities . . . 13,849 36,484
---------- ----------
Net change in cash and cash equivalents. . . . . . . . . . (2,205) 8,212
Cash and cash equivalents at beginning of period . . . . . 4,604 5,561
---------- ----------
Cash and cash equivalents at end of period . . . . . . . .$ 2,399 $ 13,773
========== ==========
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . .$ 10,765 $ 13,540
========== ==========
Income taxes . . . . . . . . . . . . . . . . . . . . .$ (7,245) $ (2,160)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(Unaudited)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of Pillowtex
Corporation, which is referred to in this report as "Parent," and its
subsidiaries, which are collectively with Parent, referred to in this
report as the "Company," include all adjustments, consisting only of
normal, recurring adjustments and accruals, which are, in the opinion of
management, necessary for fair presentation of the results of operations
and financial position. Results of operations for interim periods may not
be indicative of future results. The unaudited consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements included in the Company's annual report on Form 10-K,
as filed with the Securities and Exchange Commission on March 30, 1999 for
the fiscal year ended January 2, 1999.
The three month period ended April 3, 1999 includes the results of The
Leshner Corporation ("Leshner") which was acquired on July 28, 1998.
Certain reclassifications have been made to conform prior year financial
statements to the current period classifications.
The Company is organized by functional responsibilities and operates as a
single segment.
(2) Comprehensive Income
Comprehensive income consists of net earnings and foreign currency
translation adjustments and aggregates $5.6 million and $5.8 million for
the three month periods ended April 4, 1998 and April 3, 1999,
respectively.
(3) Inventories
Inventories consisted of the following at January 2, 1999 and
April 3, 1999:
<TABLE>
<CAPTION> 1998 1999
-------- --------
<S> <C> <C>
Finished goods $218,439 $226,724
Work-in-process 134,428 151,522
Raw materials 58,306 71,009
Supplies 23,108 32,189
-------- --------
$434,281 $481,444
======== ========
</TABLE>
-6-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands)
(Unaudited)
(4) Earnings Per Share
The following table reconciles the numerators and denominators of basic
and diluted earnings per share for the three month periods ended
April 4, 1998 and April 3, 1999. Options to purchase 697,000 shares of
common stock at prices ranging from $22.00 to $44.38 per share were
outstanding during the three month period ended April 3, 1999, but were
not included in the computation of diluted earnings per share because
inclusion would have been antidilutive for the period. Additionally,
683,000 and 633,000 potentially dilutive shares relating to the
6% convertible debentures as of April 4, 1998 and April 3, 1999,
respectively, were also not included because inclusion would have been
antidilutive for each period.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
April 4, 1998 April 3, 1999
------------------ ------------------
Earnings Shares Earnings Shares
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Basic - earnings available for common shareholders $ 5,152 13,999 $ 4,718 14,148
Effect of dilutive securities:
Stock options - 246 - 81
Convertible preferred stock 486 2,729 535 2,708
-------- ------ -------- ------
Diluted - earnings available for common shareholders $ 5,638 16,974 $ 5,253 16,937
======== ====== ======== ======
</TABLE>
-7-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Supplemental Condensed Consolidating Financial Information
The following table presents condensed consolidating financial information
for the Company, segregating the Parent and guarantor subsidiaries from
non-guarantor subsidiaries. The guarantor subsidiaries are wholly owned
subsidiaries of the Parent and the guarantees are full, unconditional and
joint and several. Separate financial statements of the guarantor
subsidiaries are not presented because management believes that these
financial statements would not provide relevant material additional
information.
<TABLE>
<CAPTION>
January 2, 1999
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
- -------
Trade receivables $ - $ 240,909 $ 5,439 $ - $ 246,348
Receivable from affiliates 746,839 - - (746,839) -
Inventories - 424,563 9,718 - 434,281
Other current assets - 25,946 582 - 26,528
------------ ------------ ------------ ------------ ------------
Total current assets 746,839 691,418 15,739 (746,839) 707,157
Property, plant and equipment, net 565 627,114 1,526 - 629,205
Intangibles, net 19,102 268,478 2,249 - 289,829
Other assets 382,558 17,898 - (372,493) 27,963
------------ ------------ ------------ ------------ ------------
Total assets $ 1,149,064 $ 1,604,908 $ 19,514 $(1,119,332) $ 1,654,154
============ ============ ============ ============ ============
Liabilities and Shareholders' Equity:
- -------------------------------------
Accounts payable and accrued liabilities $ 6,425 $ 212,823 $ 4,577 $ - $ 223,825
Payables to affiliates - 744,000 2,839 (746,839) -
Other current liabilities 8,318 27,002 79 - 35,399
------------ ------------ ------------ ------------ ------------
Total current liabilities 14,743 983,825 7,495 (746,839) 259,224
Noncurrent liabilities 833,331 260,082 527 - 1,093,940
------------ ------------ ------------ ------------ ------------
Total liabilities 848,074 1,243,907 8,022 (746,839) 1,353,164
Redeemable convertible preferred stock 63,057 - - - 63,057
Shareholders' equity 237,933 361,001 11,492 (372,493) 237,933
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 1,149,064 $ 1,604,908 $ 19,514 $(1,119,332) $ 1,654,154
============ ============ ============ ============ ============
</TABLE>
-8-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
April 3, 1999
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Financial Position Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Assets:
- -------
Trade receivables $ - $ 252,255 $ 4,315 $ - $ 256,570
Receivable from affiliates 750,612 - - (750,612) -
Inventories - 466,845 14,599 - 481,444
Other current assets - 36,738 1,429 - 38,167
------------ ------------ ------------ ------------ ------------
Total current assets 750,612 755,838 20,343 (750,612) 776,181
Property, plant and equipment, net 548 628,925 1,483 - 630,956
Intangibles, net 18,394 275,174 2,284 - 295,852
Other assets 462,261 16,311 - (452,436) 26,136
------------ ------------ ------------ ------------ ------------
Total assets $ 1,231,815 $ 1,676,248 $ 24,110 $(1,203,048) $ 1,729,125
============ ============ ============ ============ ============
Liabilities and Shareholders' Equity:
- -------------------------------------
Accounts payable and accrued liabilities $ 14,155 $ 213,282 $ 4,313 $ - $ 231,750
Payables to affiliates - 744,000 6,612 (750,612) -
Other current liabilities 11,171 27,038 81 - 38,290
------------ ------------ ------------ ------------ ------------
Total current liabilities 25,326 984,320 11,006 (750,612) 270,040
Noncurrent liabilities 900,892 252,071 525 - 1,153,488
------------ ------------ ------------ ------------ ------------
Total liabilities 926,218 1,236,391 11,531 (750,612) 1,423,528
Redeemable convertible preferred stock 63,111 - - - 63,111
Shareholders' equity 242,486 439,857 12,579 (452,436) 242,486
------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' equity $ 1,231,815 $ 1,676,248 $ 24,110 $(1,203,048) $ 1,729,125
============ ============ ============ ============ ============
</TABLE>
-9-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Three Months Ended April 4, 1998
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 360,760 $ 6,184 $ (651) $ 366,293
Cost of goods sold - 299,820 5,582 (651) 304,751
------------ ------------ ------------ ------------ ------------
Gross profit - 60,940 602 - 61,542
Selling, general and administrative (201) 33,542 390 - 33,731
Restructuring charges - 1,539 - - 1,539
------------ ------------ ------------ ------------ ------------
Earnings from operations 201 25,859 212 - 26,272
Equity in earnings of subsidiaries 4,772 - - (4,772) -
Interest expense (income) (1,132) 17,928 (1) - 16,795
------------ ------------ ------------ ------------ ------------
Earnings before income taxes 6,105 7,931 213 (4,772) 9,477
Income taxes 467 3,357 15 - 3,839
------------ ------------ ------------ ------------ ------------
Net earnings 5,638 4,574 198 (4,772) 5,638
Preferred dividends 486 - - - 486
------------ ------------ ------------ ------------ ------------
Earnings available for common
shareholders $ 5,152 $ 4,574 $ 198 $ (4,772) $ 5,152
============ ============ ============ ============ ============
<CAPTION> Three Months Ended April 3, 1999
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Results of Operations Parent Subsidiaries Subsidiaries Eliminations Consolidated
- --------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 362,664 $ 6,825 $ (981) $ 368,508
Cost of goods sold - 307,228 6,047 (981) 312,294
------------ ------------ ------------ ------------ ------------
Gross profit - 55,436 778 - 56,214
Selling, general and administrative (1,042) 28,980 198 - 28,136
------------ ------------ ------------ ------------ ------------
Earnings from operations 1,042 26,456 580 - 28,078
Equity in earnings of subsidiaries 4,039 - - (4,039) -
Interest expense (income) (826) 20,303 (11) - 19,466
------------ ------------ ------------ ------------ ------------
Earnings before income taxes 5,907 6,153 591 (4,039) 8,612
Income taxes 654 2,637 68 - 3,359
------------ ------------ ------------ ------------ ------------
Net earnings 5,253 3,516 523 (4,039) 5,253
Preferred dividends 535 - - - 535
------------ ------------ ------------ ------------ ------------
Earnings available for common
shareholders $ 4,718 $ 3,516 $ 523 $ (4,039) $ 4,718
============ ============ ============ ============ ============
</TABLE>
-10-
<PAGE>
PILLOWTEX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Supplemental Condensed Consolidating Financial Information (Continued)
<TABLE>
<CAPTION>
Three Months Ended April 4, 1998
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities $ 20,455 $ (31,235) $ 722 $ - $ (10,058)
Cash provided by (used in) investing activities (19,747) 13,785 (34) - (5,996)
Cash provided by (used in) financing activities (708) 15,245 (688) - 13,849
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents - (2,205) - - (2,205)
Cash and cash equivalents at beginning of period - 4,590 14 - 4,604
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ - $ 2,385 $ 14 $ - $ 2,399
============ ============ ============ ============ ============
<CAPTION>
Three Months Ended April 3, 1999
------------------------------------------------------------------------
Non-
Guarantor Guarantor
Cash Flows Parent Subsidiaries Subsidiaries Eliminations Consolidated
- ---------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash provided by (used in) operating activities $ 16,304 $ (13,573) $ (3,025) $ - $ (294)
Cash provided by (used in) investing activities 18 (27,967) (29) - (27,978)
Cash provided by (used in) financing activities (16,322) 48,871 3,935 - 36,484
------------ ------------ ------------ ------------ ------------
Net change in cash and cash equivalents - 7,331 881 - 8,212
Cash and cash equivalents at beginning of period - 5,554 7 - 5,561
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period $ - $ 12,885 $ 888 $ - $ 13,773
============ ============ ============ ============ ============
-11-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the attached
unaudited consolidated financial statements and notes thereto, and with the
Company's audited consolidated financial statements and notes thereto for the
fiscal year ended January 2, 1999.
RESULTS OF OPERATIONS
NET SALES. Net sales were $368.5 million for the three months ended April 3,
1999, representing an increase of $2.2 million, as compared to $366.3 million
for the three months ended April 4, 1998. Net sales of blankets and sheets for
the first quarter of 1999 were negatively affected by inefficiencies
experienced in connection with the installation of new production and
warehousing computer systems at some of the Company's sheet and blanket plants
during the quarter. As a result of these inefficiencies, the Company
experienced reduced sales through unshipped orders. The declines in net sales
resulting from these inefficiencies were offset by the addition of Leshner's
net sales. Leshner was acquired in July 1998 and accordingly, its net sales
were not included in the first quarter of 1998.
GROSS PROFIT. Gross profit margins decreased to 15.3% for the three months
ended April 3, 1999 from 16.8% for the three months ended April 4, 1998. The
decline in gross profit margin is primarily due to higher costs and unabsorbed
overhead expenses associated with the system installations and new product
rollouts during the quarter, and the closure of our facility in
Opelika, Alabama completed in March 1999.
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A"). SG&A expenses decreased $5.6
million to $28.1 million for the three months ended April 3, 1999, compared to
$33.7 million for the three months ended April 4, 1998. As a percentage of net
sales, SG&A expenses declined to 7.6% for the three months ended April 3, 1999
from 9.2% for the three months ended April 4, 1998. The decline in SG&A
expenses, both in dollars and as a percent of net sales, is primarily
attributable to lower costs of operating the legacy systems and lower
professional fees in 1999 as compared to 1998, which was negatively impacted
due to the settlement of a lawsuit.
RESTRUCTURING CHARGE. The $1.5 million restructuring charge for the three
month period ended April 4, 1998 was related to severance and other employee-
related costs associated with the consolidation of blanket production into
facilities in Swannanoa, North Carolina and Westminster, South Carolina.
INTEREST EXPENSE. Interest expense increased $2.7 million to $19.5 million for
the three months ended April 3, 1999, compared to $16.8 million for the three
months ended April 4, 1998. The increase is primarily due to the additional
debt incurred as a result of the Leshner acquisition and higher working capital
requirements. Average interest rates for the three month period ended
April 3, 1999 declined to 8.0% from 8.5% for the period ended April 4, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that its principal sources of liquidity will be funds
from its operations and funds available under its revolving credit facilities.
As of April 3, 1999, the outstanding principal balance under the Company's
$350.0 million secured revolving credit facility was $255.0 million, with $41.6
million committed to outstanding letters of credit and $31.8 million committed
for future potential payments on the 6% convertible debentures (which amount is
equal to 50% of the cash that would have been payable if all of those
debentures were converted on that date). As of April 3, 1999, the Company had
$21.6 million of availability under its revolving credit facility. The debt
outstanding under the revolving credit facility as of April 3, 1999 was $72.2
million higher than at January 2, 1999. This increase was due primarily to
short term buildups in inventory to assure product supply during the production
and warehousing system implementations at several plants, to ensure adequate
stock for new product rollouts scheduled for the second quarter, and to
accelerate certain capital projects. The Company expects to reduce borrowings
for working capital for the rest of 1999 primarily by reducing inventory;
however, the Company can give no assurance that it will be able to reduce
inventory as planned. The Company expects a reduction in the manufacturing
inefficiencies and shipping problems experienced with the system installations;
however, no assurance can be given that the Company will not experience
additional difficulties in connection with the installation of these computer
systems.
-12-
<PAGE>
As permitted under the terms of the Company's secured revolving credit
facility, in May 1999, the Company entered into a $20.0 million senior
unsecured revolving credit facility in order to assure adequate working capital
availability and continue the current capital expenditure initiatives. The
unsecured facility is guaranteed on a senior basis by the Company's domestic
subsidiaries. The Company is required to pay interest on any amounts borrowed
under the senior unsecured facility at a rate which is based upon the London
Interbank Offered Rate plus 4.0% or the prime rate plus 2.5% at the Company's
option. The senior unsecured facility matures upon termination by the Company
at any time or otherwise generally at the earliest to occur of: a) any
increase in the commitment under the secured facility or the Company's existing
term loans, the issuance of any capital stock by the Company or its domestic
subsidiaries, or other specified events; or b) August 2, 1999.
Based upon current and anticipated levels of operations, the Company believes
that its cash flow from operations, together with amounts available under the
revolving credit facilities, will be adequate to meet its anticipated cash
requirements in the foreseeable future.
As of May 14, 1999, the Company's total long-term debt (including the current
portion) was $1,042.3 million. As of that date, no borrowings were outstanding
under the senior unsecured revolving credit facility.
Instruments governing the Company's debt, including its secured revolving
credit facility, require it to maintain specified financial ratios and satisfy
financial condition tests. Among other things, the senior secured credit
facilities establish a maximum leverage ratio - the ratio of total debt to
EBITDA (as defined) for four consecutive fiscal quarters - that the Company may
have as of the end of any fiscal quarter. The maximum leverage ratio under
this facility is currently 5.25-to-one and declines first to 4.75-to-one
commencing with the last fiscal quarter of the 1999 fiscal year and thereafter
to 4.25-to-one commencing with the last fiscal quarter of fiscal year 2000. At
April 3, 1999, the Company's leverage ratio was 5.12-to-one, based on total
debt of $1,026.3 million and EBITDA for the four consecutive fiscal quarters
ending April 3, 1999 of $200.4 million (which amount includes $2.4 million of
Leshner's pre-acquisition EBITDA as permitted under the secured revolving
credit facility). As of April 3, 1999, the Company was in compliance with the
specified financial ratios and financial condition tests, including the maximum
leverage ratio, imposed on it under its debt instruments; however, the Company
can make no assurance that it will be able to maintain that compliance.
The Company periodically enters into interest rate swap agreements to minimize
the risk of fluctuations in interest rates. As of January 2, 1999 and
April 3, 1999, the Company had swap agreements covering approximately $345.0
million of notional amounts exchanging floating rates for fixed rates. The
weighted average fixed and floating rates were 4.7% and 5.3%, respectively, at
January 2, 1999 and 4.7% and 5.0%, respectively, at April 3, 1999. The fair
value of the swaps at January 2, 1999 and April 3, 1999 was $2.1 million and
$2.4 million, respectively. The fair values were in favor of the Company.
On March 31, 1999, the Company paid a cash dividend of $.06 per share to its
common shareholders of record as of March 12, 1999. Additionally, the Company
paid preferred dividends in cash in the amount of $481,000 during the first
quarter of 1999.
Dividends currently accrue on the preferred stock at a rate of 3% per annum and
are currently payable in cash or in-kind at the Company's option. To date, the
Company has elected to pay such dividends in cash on a quarterly basis.
Beginning January 1, 2000, the preferred stock dividend rate may increase
depending on the Company's diluted earnings per share, calculated on a
pro forma basis as provided in the preferred stock terms, for the fiscal year
ending January 1, 2000. The following table indicates the dividend rate that
will result at January 1, 2000 based on 1999 pro forma earnings per share:
</TABLE>
<TABLE>
<CAPTION>
Applicable Dividend
Rate at
1999 Pro Forma Earnings Per Share January 1, 2000
--------------------------------- -------------------
<S> <C>
$2.70 or greater 3.0% per annum
$2.35 to$2.69 7.0% per annum
$2.34 or less 10.0% per annum
</TABLE>
-13-
<PAGE>
In addition, if the Company's 1999 pro forma earnings per share are below
$2.70, the Company will be obligated to pay a one-time cumulative dividend in
shares of the preferred stock in an amount equal to approximately 2,669 shares.
This one-time dividend increases to approximately 10,135 shares if the
Company's 1999 pro forma earnings per share are below $2.35. The Company's
diluted earnings per share were $0.31 for the first quarter of 1999. The
Company cannot assure you that the 1999 pro forma earnings per share will be
$2.70 or greater.
NEW ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The provisions of
SFAS No. 133 are effective for financial statements beginning after June 15,
1999, although early adoption is allowed. The Company has not determined the
financial impact of adopting this SFAS and has not determined if it will adopt
its provisions prior to its effective date.
YEAR 2000 CONSIDERATIONS
GENERAL
Many existing computer programs use only two digits to identify a year in the
date field. These programs, if not corrected, could fail or create incorrect
results by or at the Year 2000. This could disrupt the Company's operations
and those of its suppliers and customers. This "Year 2000" issue is believed
to affect virtually all companies and organizations, including the Company.
PILLOWTEX'S READINESS
SYSTEMS REPLACEMENT PROJECT. In 1995, the Company began a project to improve
its access to business information through common integrated computing and
reporting systems. In 1996, before the Company acquired Fieldcrest Cannon,
Fieldcrest Cannon had begun a similar project. Each of the Company and
Fieldcrest Cannon had decided to use systems using software applications
primarily developed by Oracle Corporation. These applications replace many of
the accounting, reporting, and manufacturing systems that are, or previously
had been, used at the Company and Fieldcrest Cannon. Also, the Company and
Fieldcrest Cannon have identified certain other payroll, manufacturing and
warehousing systems to be replaced with software applications from other
vendors. The Company believes that the software applications purchased for
these projects are Year 2000 compliant.
The Company's system replacement project is expected to be completed toward the
end of 1999. The Company previously estimated that it would complete its
project in June 1999. This date has been extended due to recent acquisitions
and software customizations which have broadened the original scope of the
project. Over 95% of the Oracle software development is complete. The
financial application was substantially completed in October 1998. The
Company's payroll conversion was completed during early 1999. The development
and implementation of the manufacturing and warehousing applications requires
unique customization to meet the specific needs of each plant and is expected
to continue into the third quarter of 1999.
YEAR 2000 PLAN. The Company has developed a specific plan to help ensure that
the Company is not negatively affected by Year 2000 problems. The plan is
divided into the following components:
(1) Information Technology Systems;
(2) Information Technology Infrastructure;
(3) Process Control and Instrumentation; and
(4) third party suppliers and customers.
-14-
<PAGE>
Each component includes the following six general phases:
(1) inventory Year 2000 items;
(2) assign priorities to identified items;
(3) assess the impact of items determined not to be Year 2000 compliant;
(4) convert or replace material items that are determined not to be Year
2000 compliant;
(5) test material items; and
(6) design and implement contingency and business continuation plans for
each location.
The Company hired a consultant in 1999 to review the Company's Year 2000
plan and suggest improvements. The Company will receive feedback during the
second quarter of 1999. The Company has identified the most important issues
as the safety of individuals, safety of property and the environment, and the
Company's ability to manufacture and ship its products.
The inventory and priority assessment phases were completed with respect to
each component of the Year 2000 plan in May 1998. The remainder of the Year
2000 plan is ongoing, the majority of which will be completed during the third
quarter of 1999. However, the Company will continue to monitor, review, and
perform testing in each phase through the end of 1999.
INFORMATION TECHNOLOGY SYSTEMS. Information Technology Systems include mostly
applications software. The Company is remediating its applications software
mostly through its systems replacement project. Other non-compliant
applications software is being converted internally through custom programming
or will be replaced by the software supplier. The conversion phase of
Information Technology Systems will be completed during the third quarter of
1999. The testing of converted software is ongoing and will continue through
the end of 1999. Vendor software replacements and upgrades are scheduled to be
completed by June 1999 for the majority of the plant conversions. However,
certain vendor software upgrades will not be complete until the third quarter
of 1999. The testing of converted software will be conducted as the software
is replaced and will continue through the end of the year. Contingency
planning with respect to Information Technology Systems is ongoing, but the
high level planning is expected to be completed during the second quarter of
1999. Detailed refinement of these plans will continue into the third and
fourth quarters, as other system conversions are completed.
INFORMATION TECHNOLOGY INFRASTRUCTURE. Information Technology Infrastructure
includes hardware and systems software other than applications software. The
Year 2000 plan for Information Technology Infrastructure is on schedule.
Approximately 90% of the changes to Information Technology infrastructure were
complete by April 3, 1999. This component is expected to be significantly
complete during the third quarter of 1999. The testing phase will continue as
the Information Technology Infrastructure is remediated, upgraded, or replaced.
Contingency planning with respect to Information Technology Infrastructure is
ongoing. Development and enhancement will continue through the end of the
year.
PROCESS CONTROL AND INSTRUMENTATION. The Process Control and Instrumentation
component involves the hardware, software, and associated embedded computer
chips that are used in the operation of the Company's facilities. The
Year 2000 plan with respect to this component is in place. Approximately 80%
of the Process Control and Instrumentation vendors have responded to
questionnaires indicating their equipment is Year 2000 compliant, and 20% have
reported non-compliance. The non-compliant systems have been or will be
remediated. However, the Company is still assessing the needs of its newly
acquired facilities and expects to complete this assessment during the third
quarter of 1999. Contingency planning with respect to this component is
ongoing and will be based on the results of tests expected to be completed by
the end of the third quarter of 1999.
THIRD PARTY SUPPLIERS AND CUSTOMERS. The third party component of the
Year 2000 plan involves identifying and prioritizing critical business partners
at the direct interface level and communicating with them about their plans and
progress in addressing the Year 2000 issue. Detailed evaluations of the most
important third parties have been started. The Company is developing
contingency plans based upon these evaluations. Contingency planning will
continue with the Company's business partners throughout 1999. The Company
believes the development and implementation of this component of the Year 2000
plan is on schedule as of April 3, 1999.
-15-
<PAGE>
COSTS TO ADDRESS THE BUSINESS SYSTEM REPLACEMENTS AND YEAR 2000
As of April 3, 1999, the Company had spent $65.0 million on the systems
replacement project. A portion of these costs relate to expenditures made
prior to the acquisition of Fieldcrest Cannon. The Company estimates that it
will need to spend $16.0 million in 1999 to complete the systems replacement
project. Expenses to complete remediation are not expected to significantly
impact the Company's results of operations or financial position. The Company
believes that it will have sufficient operating cash flows for any remaining
costs related to the systems replacement project and the Year 2000 plan. The
Company does not expect that these costs will affect its liquidity or financial
condition; however, the Company can make no assurance that the actual costs
will not exceed those estimated above or that it will have available liquidity
to fund any such additional costs.
RISKS ASSOCIATED WITH THE COMPANY'S YEAR 2000 ISSUES
The Company's failure to resolve Year 2000 issues on or before
December 31, 1999 could result in system failures or miscalculations causing
disruption in operations, including, among other things, a temporary inability
to process transactions, send invoices, send and/or receive e-mail and voice
mail, or engage in similar normal business activities. Additionally, failure
of third parties, upon whom the Company's business relies, to timely remediate
their Year 2000 issues could result in disruption of the Company's supply of
materials and parts, late, missed or unapplied payments, temporary disruptions
in order processing and other general problems related to the Company's daily
operations. While the Company believes the Year 2000 Plan will adequately
address the Company's internal Year 2000 issues, until the Company receives
responses from all significant business partners, the overall risks associated
with the Year 2000 issue remain difficult to accurately assess and quantify.
Therefore, the Company cannot assure you that the Year 2000 issue will not have
a material adverse effect on the Company and its operations.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This filing contains certain forward-looking statements. Such statements are
based upon the beliefs and assumptions of, and on information available to, the
Company's management. Because such forward-looking statements are subject to
various risks and uncertainties, results may differ materially from those
expressed in or implied by such statements. Many of the factors that will
determine these results are beyond the Company's ability to control or predict.
Factors which could affect the Company's future results and could cause results
to differ materially from those expressed in or implied by such forward-looking
statements are discussed under the caption "Cautionary Statement Regarding
Forward-Looking Statements" in the Company's Annual Report on Form 10-K for its
fiscal year ended January 2, 1999.
-16-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
-17-
<PAGE>
SIGNATURE
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.
(REGISTRANT) PILLOWTEX CORPORATION
BY (SIGNATURE) /s/ Ronald M. Wehtje
(NAME AND TITLE) Ronald M. Wehtje
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
(DATE) May 18, 1999
-18-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Method of Filing
- ------- -----------------------------
<S> <C> <C>
27.1 Financial Data Schedule. . . . . . . . . . Filed herewith electronically
</TABLE>
-19-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 13,773
<SECURITIES> 0
<RECEIVABLES> 277,778
<ALLOWANCES> 21,208
<INVENTORY> 481,444
<CURRENT-ASSETS> 776,181
<PP&E> 741,153
<DEPRECIATION> 110,197
<TOTAL-ASSETS> 1,729,125
<CURRENT-LIABILITIES> 270,040
<BONDS> 1,011,838
63,111
0
<COMMON> 142
<OTHER-SE> 242,344
<TOTAL-LIABILITY-AND-EQUITY> 1,729,125
<SALES> 368,508
<TOTAL-REVENUES> 368,508
<CGS> 312,294
<TOTAL-COSTS> 312,294
<OTHER-EXPENSES> 28,136
<LOSS-PROVISION> 140
<INTEREST-EXPENSE> 19,466
<INCOME-PRETAX> 8,612
<INCOME-TAX> 3,359
<INCOME-CONTINUING> 5,253
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,253
<EPS-PRIMARY> .33
<EPS-DILUTED> .31
</TABLE>
