-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VgzB26VIaFSjtCyY2U59zeSnLpEgG3/lbWou5F6o6oDw30wzNVUBvdteVCkhN5ck 4Il2djXxDP0VShhsE8nzQQ== 0000089498-97-000062.txt : 19971121 0000089498-97-000062.hdr.sgml : 19971121 ACCESSION NUMBER: 0000089498-97-000062 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971110 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHAW INDUSTRIES INC CENTRAL INDEX KEY: 0000089498 STANDARD INDUSTRIAL CLASSIFICATION: 2273 IRS NUMBER: 581032521 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06853 FILM NUMBER: 97710986 BUSINESS ADDRESS: STREET 1: 616 E WALNUT AVE STREET 2: P O DRAWER 2128 CITY: DALTON STATE: GA ZIP: 30722 BUSINESS PHONE: 7062783812 MAIL ADDRESS: STREET 1: 616 E WALNUT AVE STREET 2: P O DRAWER 2128 CITY: DALTON STATE: GA ZIP: 30720 10-Q 1 3RD QTR 10-Q FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 27, 1997 ---------------------------------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________________to________________________ Commission file number 1-6853 SHAW INDUSTRIES, INC. (Exact name of registrant as specified in its charter) GEORGIA 58-1032521 (State or other jurisdiction of incorporation or organization) (I.R.S.Employer Identification No.) 616 E. WALNUT AVENUE, DALTON, GEORGIA 30720 - - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (706) 278-3812 NOT APPLICABLE Former name, former address and former fiscal year, if changed since last report. Indicate by check |X|whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| . No ______. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: October 31, 1997 - 134,938,065 shares SHAW INDUSTRIES, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION PAGE NUMBERS --------------------- ------------ Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 27, 1997 and December 28, 1996 .................................... 3-4 Condensed Consolidated Statements of Income and Retained Earnings - For the Three Months Ended September 27, 1997 and September 28, 1996 ...... 5 Condensed Consolidated Statements of Income and Retained Earnings - For the Nine Months Ended September 27, 1997 and September 28, 1996 ............... 6 Condensed Consolidated Statements of Cash Flows - For the Nine Months Ended September 27, 1997 and September 28, 1996 .......................... 7 Notes to Condensed Consolidated Financial Statements ..... 8-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ......... 10-12 Item 3. Quantitative and Qualitative Disclosure about Market Risks 12 PART II - OTHER INFORMATION 12-13 SIGNATURES 14 2 PART 1 - ITEM ONE - FINANCIAL INFORMATION SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS September 27, December 28, 1997 1996 ----------- ------------ (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents ................... $ 28,810 $ 49,581 ----------- ----------- Accounts receivable, less allowance for doubtful accounts and discounts of $18,968 and $16,667 .......... 439,454 393,983 ----------- ----------- Inventories - Raw materials ............................. 270,485 251,262 Work-in-process ........................... 29,957 26,070 Finished goods ............................ 301,481 279,453 ----------- ----------- 601,923 556,785 ----------- ----------- Other current assets ........................ 88,673 81,056 ----------- ----------- TOTAL CURRENT ASSETS .......... 1,158,860 1,081,405 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land and land improvements .................. 31,522 29,584 Buildings and leasehold improvements ........ 315,844 293,072 Machinery and equipment ..................... 998,246 969,601 Construction in progress .................... 52,872 45,289 ----------- ----------- 1,398,484 1,337,546 Less - Accumulated depreciation and amortization ......................... (738,507) (682,405) ----------- ----------- 659,977 655,141 ----------- ----------- GOODWILL, net ................................ 263,401 212,398 ----------- ----------- INVESTMENT IN JOINT VENTURE .................. 19,812 18,302 ----------- ----------- OTHER ASSETS ................................. 18,109 17,152 ----------- ----------- TOTAL ASSETS .................. $ 2,120,159 $ 1,984,398 =========== =========== 3 LIABILITIES AND SHAREHOLDERS' INVESTMENT September 27, December 28, 1997 1996 ----------- ------------ (UNAUDITED) CURRENT LIABILITIES: Notes payable ............................... $ 12 $ 35,084 Current maturities of long-term debt ........ 16,590 17,431 Accounts payable ............................ 192,183 195,347 Accrued liabilities ......................... 171,319 163,199 ----------- ----------- TOTAL CURRENT LIABILITIES .............. 380,104 411,061 ----------- ----------- LONG-TERM DEBT, less current maturities ...... 940,771 825,280 ----------- ----------- DEFERRED INCOME TAXES ........................ 61,670 63,453 ----------- ----------- OTHER LIABILITIES ............................ 13,919 12,893 ----------- ----------- SHAREHOLDERS' INVESTMENT: Common stock, no par, $1.11 stated value, authorized 500,000,000 shares; issued and outstanding: 134,619,189 shares at September 27, 1997 and 132,772,548 shares at December 28, 1996 ....................... 149,428 147,379 Paid-in capital ............................. 92,484 72,335 Cumulative translation adjustment ........... 1,647 3,058 Retained earnings ........................... 480,136 448,939 ----------- ----------- TOTAL SHAREHOLDERS' INVESTMENT ......... 723,695 671,711 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT ........................... $ 2,120,159 $ 1,984,398 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 4 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 27, September 28, 1997 1996 ----------- ------------ NET SALES .................................... $ 922,997 $ 881,760 COSTS AND EXPENSES: Cost of sales .............................. 686,762 673,602 Selling, general and administrative ........ 177,445 155,097 Pre-opening expenses, retail operations .... 578 3,354 Interest expense, net ...................... 15,795 10,347 Other expense(income), net ................. 1,286 (1,003) ----------- ----------- INCOME BEFORE INCOME TAXES ................... 41,131 40,363 PROVISION FOR INCOME TAXES ................... 17,048 17,049 ----------- ----------- INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURE ..................................... 24,083 23,314 EQUITY IN INCOME OF JOINT VENTURE ............ 1,252 865 =========== =========== NET INCOME ................................... $ 25,335 $ 24,179 =========== =========== DIVIDENDS PAID PER COMMON SHARE .............. $ 0.075 $ 0.075 =========== =========== EARNINGS PER COMMON SHARE: Primary and fully diluted basis - .......... $ 0.19 $ 0.18 =========== =========== RETAINED EARNINGS: Beginning of period ........................ $ 464,897 $ 447,753 Add - net income ........................... 25,335 24,179 Deduct - dividends paid .................... (10,096) (10,273) ----------- ----------- End of period .............................. $ 480,136 $ 461,659 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 5 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 27, September 28, 1997 1996 ----------- ------------ NET SALES .................................... $ 2,646,882 $ 2,325,593 COSTS AND EXPENSES: Cost of sales .............................. 1,973,565 1,815,530 Selling, general and administrative ........ 528,935 372,689 Pre-opening expenses, retail operations .... 3,521 5,163 Nonrecurring charges ....................... -- 29,139 Interest expense, net ...................... 44,865 30,046 Other (income), net ........................ (4,817) (2,358) ----------- ----------- INCOME BEFORE INCOME TAXES ................... 100,813 75,364 PROVISION FOR INCOME TAXES ................... 42,070 41,021 ----------- ----------- INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURE ..................................... 58,743 34,343 EQUITY IN INCOME OF JOINT VENTURE ............ 2,571 2,351 =========== =========== NET INCOME ................................... $ 61,314 $ 36,694 =========== =========== DIVIDENDS PAID PER COMMON SHARE .............. $ 0.225 $ 0.225 =========== =========== EARNINGS PER COMMON SHARE: Primary and fully diluted basis ............ $ 0.46 $ 0.27 =========== =========== RETAINED EARNINGS: Beginning of period ........................ $ 448,939 $ 455,663 Add - net income ........................... 61,314 36,694 Deduct - dividends paid .................... (30,117) (30,698) ----------- ----------- End of period .............................. $ 480,136 $ 461,659 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 6 SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS NINE MONTHS (UNAUDITED AND IN THOUSANDS) ENDED ENDED September 27, September 28, 1997 1996 ------------- ------------- OPERATING ACTIVITIES: Net income .................................. $ 61,314 $ 36,694 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............. 70,152 69,454 Provision for doubtful accounts ........... 7,510 8,154 Deferred income taxes ..................... (4,060) 3,782 Nonrecurring charges ...................... -- 29,139 Other, net ................................ (27,767) (6,696) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable .................. (28,258) (27,366) Inventories .......................... (31,351) (2,187) Other current assets ................. (3,237) (24,626) Accounts payable ..................... (19,165) 35,020 Accrued liabilities .................. 1,952 14,187 ----------- ----------- Total adjustments .................. (34,714) 98,861 ----------- ----------- Net cash provided by operating activities ............................... 27,090 135,555 ----------- ----------- INVESTING ACTIVITIES: Additions to property, plant and equipment .. (60,279) (61,545) Acquisitions of business assets ............. (28,926) (68,006) ----------- ----------- Net cash used in investing activities ..... (89,205) (129,551) ----------- ----------- FINANCING ACTIVITIES: Decrease in notes payable ................... (39,381) -- Increase in long-term debt .................. 110,546 66,649 Dividends paid .............................. (30,117) (30,698) Purchase and retirement of common stock ..... -- (22,759) Proceeds from exercise of stock options ..... 296 784 ----------- ----------- Net cash provided by financing activities .............................. 41,344 13,976 ----------- ----------- NET INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS ................................ (20,771) 19,980 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 49,581 31,453 =========== =========== CASH AND CASH EQUIVALENTS AT END OF PERIOD ... $ 28,810 $ 51,433 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 7 SHAW INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) --------------------------------------------------------------- 1. Basis of Presentation The financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information not misleading. These financial statements should be read in conjunction with the financial statements and related notes contained in the Company's 1996 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 flows 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. Certain prior period amounts have been reclassified to conform with the current period presentation. 2. Inventories The Company uses the last-in, first-out (LIFO) method of valuing substantially all of its domestic inventories. If LIFO inventories were valued at current costs, the inventories would have been $4,454,000 and $1,643,000 lower at September 27, 1997 and December 28, 1996, respectively. The Company's foreign inventories and certain of its finished goods inventories, representing 25.8 percent of total inventories, are valued at the lower of first-in, first-out (FIFO) cost or market. 3. Long-term Debt In March 1997, the Company completed a new domestic revolving credit facility which provides for borrowings of up to $900,000,000 and expires in March 2002. The borrowings bear interest at variable rates equal to the London Interbank Offered Rate (LIBOR) plus margins ranging from 0.150 percent to 0.475 percent, depending on the Company's consolidated funded debt to earnings ratios, as defined. Fees associated with the domestic revolving credit agreement include a facility fee on the committed amount ranging from 0.10 percent 0.15 percent. The LIBOR-based rate at September 27, 1997 was 6.16 percent and borrowings outstanding under this new facility totaled $778,000,000. 4. Acquisitions During the nine months ended September 27, 1997, the Company acquired G & S Investments, Inc. and affiliates collectively doing business as the Carpet Exchange; Walters Carpet One; Sun Control Tile, Co., doing business as Baker Bros.; Circle Floors, Inc.; Plywood Paneling, Inc.; The Carpet Group, Inc. and several other residential retailers and commercial contractors for cash and common stock totaling $53.0 million and resulting in goodwill of $39.7 million as part of its continuing retail acquisition strategy which commenced in December 1995. 5. Long-Lived Asset and Goodwill Impairment The Financial Accounting Standards Board issued SFAS NO. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which establishes, among other things, accounting standards for the impairment of long-lived assets and certain identifiable intangibles. The Company adopted the new standard effective December 31, 1995 and in connection with management's review of the Company's international operations in March 1996, management determined that certain of its international production equipment would not provide sufficient cash flows to recover the carrying value of such equipment and related goodwill. As a result, the Company recorded nonrecurring charges of $29,139,000 ($26,519,000, net of tax benefit, or $.19 per share for the first quarter and $.19 for the first nine months) in March 1996 for the reduction of the carrying value of certain goodwill and property, plant and equipment at its international operations related to the adoption and a provision for the disposal of other assets. 8 6. Transfers and Servicing of Financial Assets and Extinguishment of Liabilities In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is applied prospectively. The Company anticipates that the adoption of this statement will not have a material effect on the financial statements. 7. Earnings Per Share In February 1997, the FASB issued SFAS No. 128, " Earnings Per Share" which specifies the computation, presentation and disclosure requirements for earnings per share. The Company will be required to adopt SFAS No. 128 in the fourth quarter of 1997. All prior period earnings per share data will be restated to conform with the provision of SFAS No. 128. Based on a preliminary evaluation of this Standards' requirements, the Company does not expect the per share amounts reported under SFAS No. 128 to be materially different from those calculated and presented under Accounting Principles Board Opinion No. 15. Earnings per share of $61,314,000, or $0.46 per share, for the nine months ended September 27, 1997 include a gain on the sale of fixed assets of $3,696,000, net of income taxes, or $0.03 per share. 8. Derivative Transactions The Company uses interest rate swaps to fix interest rates on current and anticipated borrowings to reduce exposure to interest rate fluctuations. Under existing accounting literature, these interest rate swaps are accounted for as hedging activities. The 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. At September 27, 1997, the Company had no material foreign currency exchange contracts outstanding. To qualify as a hedge, the item to be hedged must expose the Company to interest rate risk and the related contract must reduce that exposure and be designated by the Company as a hedge. The net cash paid or received on interest rate hedges is included in interest expense. Gains or losses on the termination of hedges are deferred and recognized in interest over the period covered by the interest rate hedge. The Company does not enter into financial derivatives for speculative or trading purposes. 9 SHAW INDUSTRIES, INC. AND SUBSIDIARIES ITEM TWO-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - - -------------------------------------------------------------------------------- GENERAL The Company's business, as well as the U.S. carpet industry in general, is cyclical in nature and is significantly affected by general economic conditions. The level of domestic carpet sales tends to reflect fluctuations in consumer spending for durable goods and, to a lesser extent, fluctuations in interest rates and new housing starts. The Company's international operations are also impacted by the economic climates in the markets in which they operate (primarily the United Kingdom, Australia and Mexico). Sales prices and demand for the Company's domestic wholesale manufacturing business declined slightly in 1996 with the decision in December 1995 to enter the residential retail and commercial contractor business, while margins improved. During the first nine months of 1997, demand for the Company's domestic wholesale manufacturing business improved over that of the first nine months of 1996, and margins were comparable. International markets were weak in 1996 and the first nine months of 1997, but margins improved substantially in the first nine months of 1997 over the first nine months of 1996 as a result of recording restructuring costs of $36.1 million ($24.2 million, net of tax benefit) in December 1996 related to the Company's decision to exit the woolen carpet business in the United Kingdom. During the first nine months of 1997, the Company continued to implement its retail acquisition strategy by acquiring several residential retailers and commercial contractors for cash and common stock totaling $53.0 million and resulting in goodwill of $39.7 million which is being amortized over 20 years. Net sales for the Company's residential retail and commercial contractor business totaled $684.7 million for the nine months ended September 27, 1997 compared to $278.5 million for the nine months ended September 28, 1996. At September 27, 1997 the Company has 432 residential retail and commercial contractor locations throughout the United States. The Company believes that by combining the resources of the manufacturer and retailer and developing a commercial contract distribution network, it can provide a full range of products and services to more effectively meet the needs of the end-user of both residential and commercial carpet products at significantly improved margins. As part of this strategy, the Company continues its efforts to develop an alignment program with dealers of both residential and commercial carpet products to provide a collection of services, benefits and programs that will encourage dealers to purchase more from the Company. At September 27, 1997, the Company has approximately 1,440 aligned dealers. LIQUIDITY AND CAPITAL RESOURCES At September 27, 1997, the Company had working capital of $779.2 million, an increase of $108.9 million, or 16.2 percent, over working capital of $670.3 million at December 28, 1996. Cash and cash equivalents decreased $20.8 million from $49.6 million at December 28, 1996 to $28.8 million at September 27, 1997. Cash provided by operating activities was $27.1 million in the first nine months of 1997 primarily as the result of net income of $61.3 million adjusted for depreciation and amortization of $70.2 million and provision for doubtful accounts of $7.5 million, which were offset in part by larger increases in inventories and accounts receivables of $28.3 million and $31.3 million, respectively, a decrease in accounts payable of $19.2 million and other, net of $33.1 million. Cash flow provided by operating activities for the first nine months of 1996 totaled $135.6 million, principally due to net income of $36.7 million adjusted for depreciation and amortization of $69.5 million, nonrecurring charges of $29.1 million as discussed in note 5 of notes to condensed consolidated financial statements, and substantial increases in accounts payable and accrued liabilities of $49.2 million, which were offset in part by increases in inventories, accounts receivable and other assets, net of $54.2 million. Cash used in investing activities for the first nine months of 1997 consisted of additions to property, plant and equipment of $60.3 million and acquisitions of business assets of $28.9 million compared to $61.5 million and $68.1 million, respectively, in the first nine months of 1996. Cash flow provided by financing activities during the first nine months of 1997 of $41.3 million principally included an increase in long-term debt of $110.5 million offset in part by cash dividends of $30.1 million and payments on notes payable of $39.4 million. During the first nine months of 1996, cash provided by financing activities of $14.1 million included an increase in long-term debt of $66.6 million offset in part by cash dividends of $30.7 million and common stock repurchases of $22.8 million. The Company has continued to maintain a strong working capital position. Effective use of capital and the Company's ability to generate cash flow from operations has enabled it to make investments which reduce production costs, generate operating margins that have historically exceeded industry averages and implement its retail strategy. 10 Capital expenditures for property, plant and equipment necessary to maintain the Company's facilities in a modern state-of-the-art condition and expand its production capacity were $60.3 million for the nine months ended September 27, 1997. Management anticipates total capital expenditures and capitalized lease obligations of approximately $20 million for the remainder of 1997 to expand and upgrade its manufacturing and distribution equipment to meet anticipated increases in sales volume, to improve efficiency and to open new retail stores and upgrade its current retail operations. The Company's primary source of financing is an unsecured revolving credit facility with a banking syndicate which provides for borrowings of up to $900.0 million and expires in March 2002. Interest on borrowings under this facility is currently based on LIBOR, and was 6.16 percent at June 28, 1997. At September 27, 1997, borrowings outstanding under this credit facility were $778.0 million. RESULTS OF OPERATIONS Three Months Ended September 27, 1997 Compared To Three Months Ended September 27, 1996 Net sales increased $41.2 million, or 4.7 percent, to $923.0 million in the third quarter of 1997. The increase was primarily attributable to incremental net sales of $55.4 million related to the residential retail and commercial contract business, offset by declines in the net sales volumes of $14.2 million for the Company's wholesale manufacturing operations in both the domestic and international markets. Gross margin as a percentage of net sales increased 2.0 percent to 25.6 percent in the third quarter of 1997 compared to the third quarter for 1996, primarily due to improved sales product mix and increases in the efficiency relationships of volume and fixed costs for both the domestic and international wholesale manufacturing business. Selling, general and administrative expenses for the third quarter of 1997 were $177.4 million, or 19.2 percent of net sales, compared to $155.1 million, or 17.6 percent of net sales, in the comparable period of 1996. The increase of $22.3 million, or 1.6 percent of net sales, was primarily due to increased advertising and other selling and administrative expenses associated with the Company's residential retail and commercial contract business. Pre-opening expenses related to the retail operations totaled $0.6 million for the third quarter of 1997 compared to $3.4 million for the third quarter of 1996. Interest expense, net increased to $15.8 million for the third quarter of 1997 from $10.3 million for the third quarter of 1996 as a result of higher borrowings. The effective income tax rate for the third quarter of 1997 decreased to 41.4 percent compared to 42.2 percent for the third quarter of 1996 due to more profitable foreign operations in 1997 which are taxed at a lower effective income tax rate. Nine Months Ended September 27, 1997 Compared to Nine Months Ended September 28, 1996 Net sales increased $321.3 million, or 13.8 percent, to $2,646.9 million in the first nine months of 1997. The increase was primarily attributable to incremental net sales of $406.1 million related to the residential retail and commercial contract business, offset by declines in the net sales volumes of $84.8 million for the Company's wholesale manufacturing operations in both the domestic and international markets. Gross margin as a percentage of net sales increased 3.5 percent to 25.4 percent in the first nine months of 1997 compared to the first nine months for 1996, primarily due to improved sales product mix and increases in the efficiency relationships of volume and fixed costs for the both the domestic and international wholesale manufacturing business. Selling, general and administrative expenses for the first nine months of 1997 were $528.9 million, or 20.0 percent of net sales, compared to $372.7 million, or 16.0 percent of net sales, in the comparable period of 1996. The increase of $156.2 million, or 4.0 percent of net sales, was primarily due to increased advertising and other selling and administrative expenses associated with the Company's residential retail and commercial contract business. Pre-opening expenses related to the retail operations totaled $3.5 million for the first nine months of 1997 compared to $5.2 million for the first nine months of 1996. Interest expense, net increased to $44.9 million for the first nine months of 1997 from $30.0 million for the first nine months of 1996 as a result of higher borrowings. Results for the first nine months of 1996 included nonrecurring charges of $29.1 million ($26.5 million net of tax benefit, or $.19 per share) as discussed in note 5 of notes to condensed consolidated financial statements. Net income before nonrecurring charges was $63.2 million, or $0.46 per share. Net income after nonrecurring charges was $36.7 million, or $0.27 per share for the first nine months of 1996. The effective income tax rate for the first nine months of 1997 was 41.7 percent compared to 41.5 percent for the first nine months of 1996, before nonrecurring charges of $29.1 million. FOREIGN OPERATIONS The Company's primary foreign operations are conducted through its United Kingdom and Australian subsidiaries, where the functional currencies are British 11 pounds and Australian dollars, respectively. Fluctuations in the value of foreign currencies create exposures which can impact the Company's operating results. The Company may employ foreign currency forward exchange contracts when, in the normal course of business, they are determined to effectively manage and reduce such exposure. The Company does not enter into foreign currency forward exchange contracts for speculative trading purposes. FORWARD-LOOKING INFORMATION Certain Statements contained in this section, including but not limited to, statements regarding the effects of the Company's retail strategy and dealer alignment program, levels of future capital expenditures and the anticipated effects of pending litigation, may constitute "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 1934, as amended. Forward-looking statements involve a number of risks and uncertainties. The Company cautions that a number of important factors could, individually or in the aggregate, cause actual results to differ materially from those referred to or reflected in the forward-looking statements, including, but not limited to, the following: market conditions in the carpet industry; raw material prices; timing and level of capital expenditures; adverse results of litigation; the Company's ability to integrate acquisitions successfully; the Company's ability to introduce new products successfully; and other risks and uncertainties identified from time to time in the Company's reports filed with the Securities and Exchange Commission and in public announcements. ITEM THREE - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Not applicable 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. From time to time, the Company is subject to claims and suits arising in the course of its business. 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 June 1994, the Company and several other carpet manufacturers received a grand jury subpoena from the Antitrust Division of the United States Depart of justice relating to an investigation of the industry. In October, 1997, the Company received formal notification from the Department of Justice that the investigation has been closed. 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 in 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 purchase `mass production" polypropylene carpet directly from any of the defendants from June 1, 1991 through June 30, 1995, excluding, among others, any persons or entities whose only purchases were from any of the Company's retail establishments. Discovery will begin in November 1997. The Company is also a party to two consolidated lawsuits pending in the Superior Court of the State of California, City and County of San Francisco, both of which were brought on behalf of purported class of indirect purchasers of carpet in the State of California and which seek damages for alleged violations of California antitrust and fair competition laws. The Company believes that it has meritorious defenses to plaintiffs' claims in the lawsuits described in this paragraph and intends to defend these actions vigorously. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the claims described in this paragraph, when resolved, will have a material adverse effect upon the Company. In February 1996, a jury in Greensboro, North Carolina, returned a verdict against the Company in litigation brought by four former employees of Salem Carpet Mills, acquired by the Company in 1992, alleging age discrimination and sex discrimination in employment decisions made with regard to such employees. The judgment is being appealed by both parties. The Company believes that the litigation will not have a material adverse effect on the Company's financial condition or results of operations. 12 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 None ITEM THREE - DEFAULTS UPON SENIOR SECURITIES None ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM FIVE - OTHER INFORMATION None ITEM SIX - EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 11 - Statement re: Computation of Per Share Earnings 27 - Financial Data Schedule Shareholders may obtain copies of Exhibits without charge upon written request to the Corporate Secretary, Shaw Industries, Inc., Mail drop 061-22, P.O. Drawer 2128, Dalton, Georgia 30722-2128. (B) No reports on Form 8-K have been filed during the fiscal quarter ended September 27, 1997. 13 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 10 , 1997 s/ Robert E. Shaw - - --------------------------- ----------------- Robert E. Shaw Chairman of the Board, Chief Executive Officer and President DATE: November 10, 1997 /s/ Kenneth G. Jackson - - -------------------------- ---------------------- Kenneth G. Jackson Vice President and Chief Financial Officer (Principal Financial Officer) 14 EX-11 2 3RD QTR EARNINGS PER SHARE CALCULATION EXHIBIT 11.0
SHAW INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (1) (In Thousands, Except Per Share Data) (Unaudited) Three Months Ended Nine Months Ended ============================= ============================= September 27, September 28, September 27, September 28, 1997 1996 1997 1996 ------------ ------------ ------------- ------------- PRIMARY: Weighted average common shares outstanding ..................... 134,577 136,717 133,795 136,220 Additional shares assuming exercise of stock options ........... 119 456 146 191 -------- -------- -------- -------- Weighted average common and common equivalent shares outstanding 134,696 137,173 133,941 136,411 ======== ======== ======== ======== Income ......................................................... $ 25,335 $ 24,179 $ 61,314 $ 36,694 ======== ======== ======== ======== Earnings per common share ...................................... $ 0.19 $ 0.18 $ 0.46 $ 0.27 ======== ======== ======== ======== FULLY DILUTED: Weighted average common shares outstanding ..................... 134,577 136,717 133,795 136,220 Additional shares assuming exercise of stock options (2) ...... 602 456 380 191 -------- -------- -------- -------- Weighted average common and common equivalent shares outstanding 135,179 137,173 134,175 136,411 ======== ======== ======== ======== Income ......................................................... $ 25,335 $ 24,179 $ 61,314 $ 36,694 ======== ======== ======== ======== Earnings per common share ...................................... $ 0.19 $ 0.18 $ 0.46 $ 0.27 ======== ======== ======== ========
(1) All numbers of shares in this exhibit are weighted on the basis of the number of days the shares were outstanding or assumed to be outstanding during each period. (2) Based on the treasury stock method using the higher of the average or period-end market price. 15 EX-27 3 FDS 3RD QTR
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS OF SHAW INDUSTRIES, INC. AND SUBSIDIARIES AS OF SEPTEMBER 27, 1997 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS JAN-03-1998 SEP-27-1997 28,810,000 0 458,422,000 18,968,000 601,923,000 1,158,860,000 1,398,484,000 738,507,000 2,120,159,000 380,104,000 0 0 0 149,428,000 574,267,000 2,120,159,000 2,646,882,000 2,646,882,000 1,973,565,000 1,973,565,000 527,639,000 7,510,000 44,865,000 100,813,000 42,070,000 58,743,000 0 0 0 61,314,000 .46 .46
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