<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended November 27, 1998
-----------------
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 33-68412
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AVONDALE INCORPORATED
(Exact name of registrant as specified in its charter)
Georgia 58-0477150
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
506 South Broad Street 30655
Monroe, Georgia (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (770) 267-2226
Former name, former address and former fiscal year, if changed since last
report: N/A
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.
<TABLE>
<CAPTION>
Description As Of Shares Outstanding
--------------------- --------------- ------------------
<S> <C> <C>
Class A Common Stock January 4, 1999 11,698,184 Shares
Class B Common Stock January 4, 1999 978,939 Shares
</TABLE>
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<PAGE> 2
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION (Unaudited)
---------------------
Item 1: Financial Statements
Condensed Consolidated Balance Sheets at November 27, 1998 and August 28, 1998........ 1
Condensed Consolidated Statements of Income for the Thirteen Weeks Ended
November 27, 1998 and November 28, 1997............................................... 2
Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended
November 27, 1998 and November 28, 1997............................................... 3
Notes to Condensed Consolidated Financial Statements.................................. 4
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................ 6
Item 3: Quantitative and Qualitative Disclosures about Market Risk............................ 8
PART II - OTHER INFORMATION
-----------------
Item 1: Legal Proceedings .................................................................... 9
Item 2: Changes in Securities and Use of Proceeds............................................. 9
Item 3: Defaults upon Senior Securities....................................................... 9
Item 4: Submission of Matters to a Vote of Security Holders................................... 9
Item 5: Other Information..................................................................... 10
Item 6: Exhibits and Reports on Form 8-K...................................................... 10
Signature ...................................................................................... 11
</TABLE>
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
AVONDALE INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Aug. 28, Nov. 27,
1998 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash $ 9,259 $ 6,674
Accounts receivable, less allowance for doubtful accounts
of $2,533 in fiscal 1998 and $2,719 in fiscal 1999 62,497 55,842
Inventories 114,684 133,885
Prepaid expenses 742 1,041
--------- ---------
Total current assets 187,182 197,442
Property, plant and equipment
Land 8,510 8,510
Buildings 82,366 83,180
Machinery and equipment 430,629 444,574
--------- ---------
521,505 536,264
Less accumulated depreciation (267,791) (278,203)
--------- ---------
253,714 258,061
Other assets 22,686 23,249
--------- ---------
$ 463,582 $ 478,752
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 34,839 $ 37,938
Accrued compensation, benefits and related expenses 24,665 19,669
Other accrued expenses 18,970 15,704
Long-term debt due in one year 2,250 2,250
Income taxes payable 1,345 3,231
--------- ---------
Total current liabilities 82,069 78,792
Long-term debt 244,575 258,225
Deferred income taxes and other long-term liabilities 36,894 37,733
Shareholders' equity
Preferred stock
$.01 par value; 10,000 shares authorized -- --
Common stock
Class A, $.01 par value; 100,000 shares
authorized, 11,698 issued and outstanding 117 117
Class B, $.01 par value; 5,000 shares
authorized, 979 issued and outstanding 10 10
Capital in excess of par value 39,835 39,835
Retained earnings 60,082 64,040
--------- ---------
Total shareholders' equity 100,044 104,002
--------- ---------
$ 463,582 $ 478,752
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements
1
<PAGE> 4
AVONDALE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------
Nov. 28, Nov. 27,
1997 1998
----------- -----------
<S> <C> <C>
Net sales $ 268,789 $223,519
Operating costs and expenses
Cost of goods sold 225,293 186,035
Depreciation 10,003 10,534
Selling and administrative expenses 11,684 10,829
--------- --------
Operating income 21,809 16,121
Interest expense 5,670 5,654
Discount and expenses on sale of receivables 2,151 1,703
Other (income) expense, net (375) 263
--------- --------
Income before income taxes 14,363 8,501
Provision for income taxes 5,745 3,275
--------- --------
Net income $ 8,618 $ 5,226
========= ========
Per share data:
Net income-basic $ .65 $ .41
========= ========
Net income-diluted $ .64 $ .40
========= ========
Dividends declared $ .10 $ .10
========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 5
AVONDALE INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
Nov. 28, Nov. 27,
1997 1998
-------- --------
<S> <C> <C>
Operating activities
Net income $ 8,618 $ 5,226
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,101 10,704
Provision for (benefit of) deferred income taxes (318) 843
Gain on sale of equipment (95) (11)
Changes in operating assets and liabilities (12,600) (2,909)
-------- --------
Net cash provided by operating activities 5,706 13,853
Investing activities
Purchases of property, plant and equipment (19,007) (14,836)
Proceeds from sale of property, plant and equipment 95 16
-------- --------
Net cash used in investing activities (18,912) (14,820)
Financing activities
Net borrowings on revolving line of credit 7,660 13,650
Sale of accounts receivable, net 7,000 (14,000)
Dividends paid (1,327) (1,268)
-------- --------
Net cash provided by (used in) financing activities 13,333 (1,618)
Increase (decrease) in cash 127 (2,585)
Cash at beginning of period 8,517 9,259
-------- --------
Cash at end of period $ 8,644 $ 6,674
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
November 27, 1998
1. Basis of Presentation: The accompanying unaudited condensed
consolidated financial statements include the accounts of Avondale Incorporated
and its wholly owned subsidiaries, Avondale Mills, Inc. and Avondale Receivables
Company (collectively, the "Company"). These statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The August 28, 1998 balance sheet has been derived from
the audited financial statements at that date. The accounting policies and basis
of presentation followed by the Company are presented in Note 1 to the August
28, 1998 Audited Consolidated Financial Statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation. Operating results for the
thirteen weeks ended November 27, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending August 27, 1999.
During the first quarter of fiscal 1999, the Company adopted Statement
of Financial Accounting Standard No. 130 "Reporting Comprehensive Income" (FAS
130), which requires the reporting and display of net income plus other
comprehensive income items such as unrealized gains and losses on securities or
foreign currency translation adjustments. The adoption of FAS 130 did not have a
material impact on the presentation of the Company's condensed consolidated
financial statements, as the Company does not have any significant other
comprehensive income to report.
2. Inventories: Components of inventories are as follows (amounts in
thousands):
<TABLE>
<CAPTION>
Aug 28, Nov. 27,
1998 1998
-------- --------
<S> <C> <C>
Finished goods $ 28,744 $ 39,291
Work in process 49,434 58,448
Raw materials 23,279 22,913
Dyes and chemicals 6,084 6,200
-------- --------
Inventories at FIFO 107,541 126,852
Less allowance to reduce carrying value to
LIFO basis -- --
-------- --------
107,541 126,852
Supplies at average cost 7,143 7,033
-------- --------
$114,684 $133,885
======== ========
</TABLE>
4
<PAGE> 7
AVONDALE INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CON.)
(UNAUDITED)
November 27, 1998
Valuation of the Company's inventories under the last-in, first-out
(LIFO) method at November 27, 1998 and the related impact on the statement of
income for the thirteen weeks then ended has been determined using estimated
quantities and costs as of the fiscal 1999 year-end. As a result, interim
amounts are subject to the final year-end LIFO valuation.
3. Earnings Per Share: Earnings per share is calculated by dividing the
reported net income for the period by the appropriate weighted average number of
shares of common stock outstanding, as shown below (amounts in thousands):
<TABLE>
<CAPTION>
Thirteen Weeks Ended
--------------------
Nov. 28, Nov. 27,
1997 1998
------- --------
<S> <C> <C>
Weighted average shares outstanding - basic 13,269 12,677
Effect of employee stock options 180 279
------ ------
Weighted average shares outstanding - diluted 13,449 12,956
====== ======
</TABLE>
4. Contingencies: The Company is involved in certain environmental
matters and claims. The Company has provided reserves to cover management's
estimates of the cost of investigating, monitoring and remediating these and
other environmental conditions. If more costly remediation measures are
necessary than those believed to be probable based on current facts and
circumstances, actual costs may exceed the reserves provided. However, based on
the information currently available, management does not believe that the
outcome of these matters will have a material adverse effect on its future
results of operations or financial condition.
For discussion of certain legal proceedings to which the Company is a
party, see Item 3 "Legal Proceedings" in the Company's Annual Report on Form
10-K for the fiscal year ended August 28, 1998 and Part II - Other Information,
Item I "Legal Proceedings" in this Quarterly Report on Form 10-Q. The Company is
also a party to other litigation incidental to its business from time to time.
The Company is not currently a party to any litigation other than as referenced
above, that management, in consultation with legal counsel, believes, if
determined adversely to the Company, would have a material adverse effect on the
Company's financial condition or results of operations.
5
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Thirteen Weeks Ended November 27, 1998 Compared to Thirteen Weeks Ended November
28, 1997
NET SALES. Net sales decreased 16.8% to $223.5 million for the thirteen
weeks ended November 27, 1998 from $268.8 million for the thirteen weeks ended
November 28, 1997.
Apparel fabric sales decreased 10.0% to $161.4 million for the thirteen
weeks ended November 27, 1998 from $179.3 million for the thirteen weeks ended
November 28, 1997. This decrease in sales reflected a 7.7% decrease in yards
sold and a 2.5% decline in average selling prices. The decline in yards sold and
average selling prices resulted from softening market conditions for certain
denim and workwear fabrics caused by excess inventories of fabrics and garments
within the industry, as well as increased production capacity of domestic and
international suppliers.
Greige and specialty fabric sales decreased 21.4% to $13.4 million for
the thirteen weeks ended November 27, 1998 from $17.1 million for the thirteen
weeks ended November 28, 1997. This decrease reflected a 16.2% decrease in units
sold and a 6.3% decrease in average selling prices for those units. The decrease
in units sold and average selling prices was primarily the result of softening
demand for greige and specialty fabrics in the apparel, tent and marine products
industries. Utilization of greige fabric capacity was maintained, however, as
greige fabrics were produced for consumption within the Company's apparel fabric
operation, reducing the amount of greige fabric purchases from outside
suppliers.
Yarn sales decreased 32.7% to $48.7 million for the thirteen weeks
ended November 27, 1998 from $72.4 million for the thirteen weeks ended November
28, 1997. This decrease reflected a 27.5% decrease in pounds sold and a 7.1%
decrease in average selling prices for those pounds. The decrease in pounds sold
was primarily the result of the Company's decision to significantly increase the
consumption of internally produced yarn within the Company's weaving facilities,
thereby reducing dependence on outside yarn sourcing. Market demand and pricing
for sales yarns also remained very competitive, reflecting continued excess
production capacity within the industry and increased imports of yarn and
knitted apparel from Asia.
COST OF GOODS SOLD. Cost of goods sold decreased 17.4% to $186.0
million for the thirteen weeks ended November 27, 1998 from $225.3 million for
the thirteen weeks ended November 28, 1997. Cost of goods sold as a percentage
of net sales decreased to 83.2% for the thirteen weeks ended November 27, 1998
from 83.8% for the thirteen weeks ended November 28, 1997, primarily due to
improved capacity utilization, unit cost reductions achieved by capital
expenditure projects and lower raw material costs.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative
expenses decreased 7.3% to $10.8 million for the thirteen weeks ended November
27, 1998 from $11.7 million for the thirteen weeks ended November 28, 1997.
Selling and administrative expenses as a percentage of net sales increased to
4.8% for the thirteen weeks ended November 27, 1998 from 4.4% for the thirteen
weeks ended November 28, 1997, reflecting the impact of lower sales.
INTEREST EXPENSE, NET. Interest expense, net remained constant at $5.7
million for the thirteen weeks ended November 27, 1998 and November 28, 1997.
DISCOUNT AND EXPENSES ON SALE OF RECEIVABLES. Discount and expenses on
sale of receivables were $1.7 million for the thirteen weeks ended November 27,
1998 compared to $2.2 million for the thirteen weeks ended November 28, 1997.
This decrease was primarily attributable to the payment of bank fees relating to
the amendment of the receivables securitization facility in the prior year.
6
<PAGE> 9
RESULTS OF OPERATIONS (CONT.)
PROVISION FOR INCOME TAXES. Provision for income taxes decreased to $3.3 million
for the thirteen weeks ended November 27, 1998 from $5.7 million for the
thirteen weeks ended November 28, 1997. The Company's effective tax rate was
38.5% for the thirteen weeks ended November 27, 1998 compared to 40.0% for the
thirteen weeks ended November 28, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $13.9 million for the
thirteen weeks ended November 27, 1998. Principal working capital changes
included a $20.7 million decrease in Accounts Receivable, a $19.2 million
increase in Inventories, and a $5.2 million decrease in Accounts Payable and
Accrued Expenses. Investing activities were predominantly equipment purchases
and plant improvements of $14.8 million made in connection with the ongoing
modernization of the Company's manufacturing facilities. Financing activities
included a $13.7 million net advance under the revolving line of credit, payment
of $1.3 million in dividends on outstanding common stock, and payment of $14.0
million due to the decrease in Accounts Receivable sold under the securitization
facility.
At November 27, 1998, the Company had borrowings of $125.0 million
outstanding under its revolving line of credit and $75.0 million of borrowing
availability thereunder.
The Company's capital expenditures, aggregating $14.8 million for the
thirteen weeks ended November 27, 1998, were primarily used to fund the
expansion and modernization of a weaving facility in South Carolina and other
equipment purchases. Management estimates that capital expenditures for the
balance of fiscal 1999 will be approximately $35.0 million, and that such
amounts will be used primarily to improve fabric finishing facilities.
Management believes that cash generated from operations, together with
borrowings available under its revolving line of credit and proceeds received in
connection with sales of trade receivables, will be sufficient to meet the
Company's working capital and capital expenditure needs in the foreseeable
future.
7
<PAGE> 10
OTHER DATA
EBITDA, which is presented not as an alternative measure of operating
results or cash flow from operations (as determined in accordance with generally
accepted accounting principles) but because it is a widely accepted financial
indicator of the ability to incur and service debt, is calculated by the Company
as follows (amounts in thousands):
<TABLE>
<CAPTION>
13 Weeks Ended
-------------------------
Nov. 28, Nov. 27,
1997 1998
-------- -------
<S> <C> <C>
Net income $ 8,618 $ 5,226
Interest expense 5,670 5,654
Discount and expenses on sale of receivables 2,151 1,703
Provision for income taxes 5,745 3,275
Depreciation and amortization 10,101 10,704
Net change in allowance to reduce carrying
Value of inventory to LIFO basis (150) --
-------- -------
EBITDA $ 32,135 $26,562
======== =======
</TABLE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For discussion of certain market risks related to the Company see Part I,
Item 7a. "Quantitative and Qualitative Disclosures about Market Risk" in the
Company's Annual Report on Form 10-K for fiscal year ended August 28, 1998.
8
<PAGE> 11
AVONDALE INCORPORATED
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 3, 1993, a case was filed in the Circuit Court of
Jefferson County, Alabama by Joe and Darnell Sullivan and Tommy and
Stella Fay Gould and other parties against the Alabama Power Company,
Russell Corporation, the Company and certain other parties. The
complaint alleges that the Company and such other parties negligently
or willfully discharged industrial wastewater containing hazardous
materials, which allegedly damaged the plaintiffs' real properties and
caused mental anguish to the plaintiffs. The complaint seeks an award
of compensatory and punitive damages. After two years and eleven months
of litigation, the plaintiffs amended their complaint to include class
action claims and treatment. Although the Trial Court granted class
certification, the Supreme Court of Alabama reversed the class
certification order, and the case proceeded as to the individual claims
of the five plaintiffs.
On November 17, 1998, the court handed down a verdict of
$155,200 in compensatory damages and $52,398,000 in punitive damages
against the Alabama Power Company, Russell Corporation and the Company,
on a joint and several basis, in favor of the plaintiffs. The Company
believes that there are numerous grounds on which the verdict can be
appealed and that the verdict was not supported by the evidence. An
appeal of the verdict is planned, and the Company intends to pursue
such appeal vigorously.
Although the Company believes that it should be successful in
its appeal of the verdict, there can be no assurance regarding the
outcome of the appeal. If the Company is not successful in its appeal
of the verdict, the Company anticipates that its share of the liability
incurred in connection with the verdict could have a material adverse
effect on its results of operations for the fiscal quarter and year in
which the liability is incurred; however, it does not believe the
outcome of this matter will have a material adverse effect on its
financial condition.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Shareholders
on November 19, 1998.
(b) Eight directors were elected at the Annual Meeting to
serve until the Annual Meeting of Shareholders in
1999. The names of these Directors are as follows:
G. Stephen Felker
Jack R. Altherr, Jr.
Dale J. Boden
Robert B. Calhoun
Kenneth H. Callaway
Harry C. Howard
C. Linden Longino, Jr.
John P. Stevens
9
<PAGE> 12
(c) The Company had outstanding shares of Class A Common
Stock and Class B Common Stock having an aggregate of
31,276,964 votes entitled to be cast at the Annual
Meeting. Of such aggregate outstanding votes, 91,783
votes were not present at the Annual Meeting in
person or by proxy. The remaining outstanding
31,185,181 votes were present at the Annual Meeting
in person or by proxy and voted for the 8 directors
that were elected at the Annual Meeting. There were
no abstentions or broker non-votes and no votes were
withheld.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
1. On October 20, 1998, the Company filed a
current report on Form 8-K regarding its
press release announcing sales and earnings
for the fiscal year ended August 28, 1998.
2. On November 18, 1998, the Company filed a
current report on Form 8-K regarding its
press release announcing a legal verdict
against the Company and plans to vigorously
appeal such verdict.
10
<PAGE> 13
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.
AVONDALE INCORPORATED
By: /S/ JACK R. ALTHERR, JR.
-----------------------------------------
Jack R. Altherr, Jr.
Vice Chairman and Chief Financial Officer
Date: January 8, 1999
----------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF AVONDALE INCORPORATED FOR THE
THREE MONTH PERIOD ENDED NOVEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-27-1999
<PERIOD-END> NOV-27-1998
<CASH> 6,674
<SECURITIES> 0
<RECEIVABLES> 55,842
<ALLOWANCES> 2,719
<INVENTORY> 133,885
<CURRENT-ASSETS> 197,442
<PP&E> 536,264
<DEPRECIATION> 278,203
<TOTAL-ASSETS> 478,752
<CURRENT-LIABILITIES> 78,792
<BONDS> 258,225
0
0
<COMMON> 127
<OTHER-SE> 103,875
<TOTAL-LIABILITY-AND-EQUITY> 478,752
<SALES> 223,519
<TOTAL-REVENUES> 223,519
<CGS> 186,035
<TOTAL-COSTS> 207,398
<OTHER-EXPENSES> 1,966
<LOSS-PROVISION> 319
<INTEREST-EXPENSE> 5,654
<INCOME-PRETAX> 8,501
<INCOME-TAX> 3,275
<INCOME-CONTINUING> 5,226
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,226
<EPS-PRIMARY> .41
<EPS-DILUTED> .40
</TABLE>
