-----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, Ad5ObqkUYZtvO4eGaS4J2XblloBAGzovADFu9MTVsg0vWVKuYGKzz6TZwb5LP+Vp SPl8MnEUL3t/uQAm3sBuDg== 0000089498-98-000044.txt : 19980819 0000089498-98-000044.hdr.sgml : 19980819 ACCESSION NUMBER: 0000089498-98-000044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980818 SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHAW INDUSTRIES INC CENTRAL INDEX KEY: 0000089498 STANDARD INDUSTRIAL CLASSIFICATION: CARPETS AND RUGS [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: 98693353 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 2ND QTR 1998 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 4, 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 1-6853 SHAW INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) GEORGIA 58-1032521 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) 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: August 7, 1998 - 122,577,554 shares SHAW INDUSTRIES, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION PAGE NUMBERS --------------------- ------------ Item 1. Financial Statements Condensed Consolidated Balance Sheets - July 4, 1998 and January 3, 1998 3-4 Condensed Consolidated Statements of Income and Retained Earnings - For the Three Months Ended July 4, 1998 and June 28, 1997 5 Condensed Consolidated Statements of Income and Retained Earnings - For the Six Months Ended July 4, 1998 and June 28, 1997 6 Condensed Consolidated Statements of Cash Flow - For the Six Months Ended July 4, 1998 and June 28, 1997 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 PART II - OTHER INFORMATION Item 1. Legal Proceedings 12 Item 2. Changes in Securities 12 Item 3. Default Upon Senior Securities 12 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 2 PART 1 - ITEM ONE - FINANCIAL INFORMATION SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS July 4, January 3, 1998 1998 ----------- ----------- (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents ................... $ 8,557 $ 43,571 ----------- ----------- Accounts receivable, less allowance for doubtful accounts and discounts of $18,522 and $16,283 .......... 397,870 374,516 ----------- ----------- Inventories - Raw materials ............................. 259,104 235,820 Work-in-process ........................... 25,689 23,584 Finished goods ............................ 270,941 270,655 ----------- ----------- 555,734 530,059 ----------- ----------- Other current assets ........................ 120,675 118,267 ----------- ----------- TOTAL CURRENT ASSETS .......... 1,082,836 1,066,413 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, At cost: Land and land improvements .................. 25,885 27,827 Buildings and leasehold improvements ........ 282,834 299,090 Machinery and equipment ..................... 964,900 987,561 Construction in progress .................... 78,664 69,345 ----------- ----------- 1,352,283 1,383,823 Less - Accumulated depreciation and amortization ......................... (761,755) (759,444) ----------- ----------- 590,528 624,379 ----------- ----------- GOODWILL, net ................................ 128,833 236,209 ----------- ----------- INVESTMENT IN JOINT VENTURE .................. 20,703 21,269 ----------- ----------- OTHER ASSETS ................................. 20,011 19,344 ----------- ----------- TOTAL ASSETS .................. $ 1,842,911 $ 1,967,614 =========== =========== 3 LIABILITIES AND SHAREHOLDERS' INVESTMENT July 4, January 3, 1998 1998 ----------- ----------- (UNAUDITED) CURRENT LIABILITIES: Notes payable ............................... $ 8 $ 10 Current maturities of long-term debt ........ 296 2,752 Accounts payable ............................ 161,758 161,964 Accrued liabilities ......................... 209,586 160,728 ----------- ----------- TOTAL CURRENT LIABILITIES .............. 371,648 325,454 ----------- ----------- LONG-TERM DEBT, less current maturities ...... 932,974 930,424 ----------- ----------- DEFERRED INCOME TAXES ........................ 66,759 61,689 ----------- ----------- OTHER LIABILITIES ............................ 12,261 12,513 ----------- ----------- SHAREHOLDERS' INVESTMENT: Common stock, no par, $1.11 stated value, authorized 500,000,000 shares; issued and outstanding: 132,455,515 shares at July 4, 1998 and 131,118,065 shares at January 3, 1998 ......................... 147,027 145,542 Paid-in capital ............................. 68,104 54,745 Cumulative translation adjustment ........... (4,319) (620) Retained earnings ........................... 382,317 437,867 ----------- ----------- 593,129 637,534 Less - Treasury stock, at cost (10,622,361 shares at July 4, 1998) .............. 133,860 -- ----------- ----------- TOTAL SHAREHOLDERS' INVESTMENT ......... 459,269 637,534 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT ........................... $ 1,842,911 $ 1,967,614 =========== =========== The accompanying notes are an integral part of these condensed 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 July 4, June 28, 1998 1997 ----------- ----------- NET SALES .................................... $ 873,149 $ 915,232 COSTS AND EXPENSES: Cost of sales .............................. 632,967 678,240 Selling, general and administrative ........ 168,259 184,093 Charge to record loss on sale of residential retail operations, store closing costs and writedown of certain ... 141,526 -- assets Pre-opening expenses, retail operations .... 23 1,183 Interest expense, net ...................... 15,581 15,342 Other expense(income), net ................. 833 (5,619) ----------- ----------- (LOSS)INCOME BEFORE INCOME TAXES ............. (86,040) 41,993 (BENEFIT) PROVISION FOR INCOME TAXES ......... (20,776) 17,398 ----------- ----------- (LOSS)INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURE .............................. (65,264) 24,595 EQUITY IN INCOME OF JOINT VENTURE ............ 43 636 ----------- ----------- NET (LOSS) INCOME ............................ $ (65,221) $ 25,231 =========== =========== DIVIDENDS PAID PER COMMON SHARE .............. $ 0.0 $ 0.075 =========== =========== (LOSS)EARNINGS PER COMMON SHARE: Basic ...................................... $ (0.54) $ 0.19 =========== =========== Diluted .................................... $ (0.54) $ 0.19 =========== =========== RETAINED EARNINGS: Beginning of period ........................ $ 447,768 $ 449,704 Add - net (loss) income .................... (65,221) 25,231 (Deduct) - dividends paid .................. -- (10,038) (Deduct) - purchase of common stock ........ (230) -- ----------- ----------- End of period .............................. $ 382,317 $ 464,897 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 5 SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) SIX MONTHS SIX MONTHS ENDED ENDED July 4, June 28, 1998 1997 ----------- ----------- NET SALES .................................... $ 1,738,134 $ 1,723,885 COSTS AND EXPENSES: Cost of sales .............................. 1,279,081 1,286,803 Selling, general and administrative ........ 336,407 351,490 Charge to record loss on sale of residential retail operations, store closing costs and writedown of certain ... 141,526 -- assets Pre-opening expenses, retail operations .... 232 2,943 Interest expense, net ...................... 30,808 29,070 Other expense(income), net ................. 3,466 (6,103) ----------- ----------- (LOSS)INCOME BEFORE INCOME TAXES ............. (53,386) 59,682 (BENEFIT) PROVISION FOR INCOME TAXES ......... (7,408) 25,022 ----------- ----------- (LOSS)INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURE .............................. (45,978) 34,660 EQUITY IN INCOME OF JOINT VENTURE ............ 262 1,319 ----------- ----------- NET (LOSS) INCOME ............................ $ (45,716) $ 35,979 =========== =========== DIVIDENDS PAID PER COMMON SHARE .............. $ 0.075 $ 0.15 =========== =========== (LOSS)EARNINGS PER COMMON SHARE: Basic ...................................... $ (0.37) $ 0.27 =========== =========== Diluted .................................... $ (0.37) $ 0.27 =========== =========== RETAINED EARNINGS: Beginning of period ........................ $ 437,867 $ 448,939 Add - net (loss) income .................... (45,716) 35,979 (Deduct) - dividends paid .................. (9,834) (20,021) ----------- ----------- End of period .............................. $ 382,317 $ 464,897 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 6 SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW SIX MONTHS SIX MONTHS (UNAUDITED AND IN THOUSANDS) ENDED ENDED July 4, June 28, 1998 1997 ----------- ----------- OPERATING ACTIVITIES: Net income .................................. $ (45,716) $ 35,979 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............. 40,597 46,213 Provision for doubtful accounts ........... 5,056 4,435 Deferred income taxes ..................... 6,010 2,065 Charge to record loss on sale of residential retail operations, store closing costs and writedown of certain .. (98,203) -- assets Other, net ................................ (5,692) (27,145) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable .................. (64,538) (34,671) Inventories .......................... (69,548) (52,234) Other current assets ................. 36,633 3,591 Accounts payable ..................... 18,298 17,695 Accrued liabilities .................. 37,801 7,723 ----------- ----------- Total adjustments .................. 102,823 (32,328) ----------- ----------- Net cash provided (used) by operating Activities ............................... 57,107 (3,651) ----------- ----------- INVESTING ACTIVITIES: Additions to property, plant and equipment .. (34,412) (39,416) Disposal of U.K. assets ..................... (16,566) -- Acquisitions of business assets ............. -- (27,709) ----------- ----------- Net cash used in investing activities ..... (50,978) (67,125) ----------- ----------- FINANCING ACTIVITIES: Decrease in notes payable ................... (2) (38,996) Increase in long-term debt, net of payments . 87,710 87,230 Dividends paid .............................. (9,834) (20,021) Purchase of common stock held in treasury ... (133,860) -- Proceeds from exercise of stock options ..... 14,843 229 ----------- ----------- Net cash (used)provided by financing Activities .............................. (41,143) 28,442 ----------- ----------- NET (DECREASE)IN CASH AND CASH EQUIVALENTS ................................ (35,014) (35,032) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................. 43,571 49,581 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ... $ 8,557 $ 14,549 =========== =========== The accompanying notes are an integral part of these condensed 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 1997 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the Company's financial position, results of operations and cash flow at the dates and for the periods presented. Interim results of operations are not necessarily indicative of the results to be expected for a full year. 2. 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 $13,734,000 and $11,707,000 lower at July 4, 1998 and January 3, 1998, respectively. Certain of the Company's finished goods inventories, representing 24 percent of total inventories, are valued at the lower of first-in, first-out (FIFO) cost or market. 3. Long-term Debt In March 1998, the Company completed a new domestic revolving credit facility which provides for borrowings of up to $1.0 billion and expires in March 2003. The borrowings bear interest at variable rates equal to the London Interbank Offered Rate (LIBOR) plus margins ranging from 0.220 percent to 0.750 percent, depending on the Company's consolidated funded debt to earnings ratio, as defined. Fees associated with the domestic revolving credit agreement include a facility fee on the committed amount ranging from 0.10 percent to 0.25 percent. The LIBOR-based rate at July 4, 1998 was 6.24 percent and borrowings outstanding under this new facility totaled $878,000,000. 4. Sale of Residential Retail Operations, Store Closing Costs and Writedown of Certain Assets On June 23, 1998, the Company agreed to sell substantially all of its residential retail operations to The Maxim Group, Inc. for consideration valued at approximately $115,000,000, including 3.15 million shares of Maxim stock, $25 million in cash and a one-year note in the principal amount of approximately $18 million. For the quarter ended July 4, 1998, the Company incurred a charge to record the loss on sale of the residential retail operations, store closing costs and writedown of certain assets of $141,526,000 ($98,203,000, net of tax benefit, or $.81 per share on a basic and diluted basis) related to the exiting of its residential retail business. The sale was completed effective August 9, 1998. 5. Earnings Per Share The Company adopted SFAS No. 128, "Earnings Per Share," effective January 3, 1998. Earnings per share for the quarter and six month periods ended July 4, 1998 and June 28, 1997 have been computed based upon the weighted average shares and dilutive potential common shares outstanding. The net income amounts presented in the accompanying condensed consolidated statements of income represent amounts available or related to shareholders. 8 The following table reconciles the denominator of the basic and diluted earnings per share computations: Three Months Ended July 4, 1998 June 28, 1997 - ---------------------------------------------- ----------- ----------- Weighted average common shares ............... 121,034,349 133,766,596 Dilutive incremental shares from assumed conversions of options under 1987 and 1992 incentive stock option plans ........ -- 14,533 - ---------------------------------------------- ----------- ----------- Weighted average common shares and dilutive potential common shares ......... 121,034,349 133,581,129 - ---------------------------------------------- ----------- ----------- Six Months Ended July 4, 1998 June 28, 1997 - ---------------------------------------------- ----------- ----------- Weighted average common shares ............... 124,968,192 133,404,107 Dilutive incremental shares from assumed conversions of options under 1987 and 1992 incentive stock option plans ........ -- 210,502 - ---------------------------------------------- ----------- ----------- Weighted average common shares and dilutive potential common shares ......... 124,968,192 133,614,609 - ---------------------------------------------- ----------- ----------- 6. Derivative Financial Instruments 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 net cash paid or received on interest rate hedges is included in interest expense. The Company may also employ foreign currency exchange contracts when, in the normal course of business, they are determined to effectively manage and reduce foreign currency exchange fluctuation risk. At July 4, 1998, the Company had no foreign currency exchange contracts outstanding. The Company does not enter into financial derivatives for speculative or trading purposes. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 is effective, and the Company expects to adopt this new standard, in the Company's first quarter of fiscal 2000. The Company's management has not determined the impact this new statement will have on the financial statements. 7. Comprehensive Income Effective January 4, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires additional disclosure of amounts comprising comprehensive income. The Company has other comprehensive income in the form of cumulative translation adjustments which resulted in total comprehensive (loss) income of $(67,124,000) and $23,574,000 for the quarters ended July 4, 1998 and June 28, 1997, respectively, and total comprehensive (loss) income of ($49,415,000) and $34,942,000 for the six months ended July 4, 1998 and June 28, 1997, respectively. 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 Australia and Mexico). During the first six months of 1998, demand for the Company's domestic wholesale manufacturing business improved substantially over that of the first six months of 1997, while sales prices were comparable and margins substantially improved. The Australian market improved in late 1997 and the first six months of 1998, and margins improved slightly in the first six months of 1998 compared to the first six months of 1997, while sales prices substantially declined. During the six months ended July 4, 1998 net sales for the Company's residential retail and commercial contractor business totaled $464.4 million compared to $437.1 million for the six months ended June 28,1997. In June 1998, the Company agreed to sell substantially all of its residential retail operations to The Maxim Group, Inc. for consideration valued at approximately $115 million. For the quarter ended July 4, 1998, the Company recorded nonrecurring charges for the loss on sale of its residential retail operations, store closing costs, and the writedown of certain assets of $141.5 million ($98.2 million, net of tax benefit) resulting from exiting substantially all of its residential retail business. At July 4, 1998, the Company has 350 residential and commercial contractor locations throughout the United States including the residential stores scheduled to be sold or closed subsequent to the end of the quarter. LIQUIDITY AND CAPITAL RESOURCES At July 4, 1998, the Company had working capital of $711.2 million, a decrease of $29.8 million, or 4.0 percent, from the working capital of $741.0 million at January 3, 1998. Cash and cash equivalents decreased $35.0 million from $43.6 million at January 3, 1998 to $8.6 million at July 4, 1998. The Company's operations generated cash flow of $57.1 million in the first six months of 1998, principally from depreciation and amortization of $40.6 million, provision for doubtful accounts of $5.1 million, a charge to record the loss on sale of its residential retail operations, store closing costs and writedown of certain assets of $98.2 million, a decrease in other current assets of $36.6 million and an increase in accounts payable and accrued liabilities of $56.1 million, offset in part by a net loss of $45.6 million and increases in accounts receivable and inventories of $134.1 million. In the first six months of 1997, cash generated from operating activities was $3.7 million primarily as a result net income of $36.0 million adjusted for depreciation and amortization of $46.2 million, provision for doubtful accounts of $4.4 million and deferred income taxes of $2.1 million, offset in part by increases in inventories and accounts receivable of $52.2 million and $34.7 million, respectively. In the first six months of 1998, the Company's investing activities included additions to property, plant and equipment, net of retirements, of $34.4 million and the liquidation of Carpets International, Plc (U.K.) assets, net of liabilities, of $16.6 million compared to additions to property, plant and equipment, net of retirements, of $39.4 million and acquisitions of business assets of $29.9 million in the first six months of 1997. Cash used by financing activities for the first six months of 1998 of $41.1 million included the purchase of common stock of $133.9 million and the payment of cash dividends of $9.8 million, offset in part by an increase in long-term borrowings, net of payments, of $87.7 million and proceeds from the exercise of stock options of $14.8 million. Cash flow provided by financing activities for the first six months of 1997 of $28.4 million included an increase in long-term borrowings, net of payments, of $87.2 million and the exercise of stock options of $.2 million, offset in part by cash dividends of $20.0 million and payments on notes payable of $39.0 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 invest in technologies which reduce production costs, generate operating margins that have historically exceeded industry averages and implement its growth strategy. Capital expenditures for property, plant and equipment, net of retirements necessary to maintain the Company's facilities in a modern state-of-the-art condition and expand its production capacity were $34.4 million for the six months ended July 4, 1998. Management anticipates total capital expenditures and capitalized lease obligations of approximately $35 million for the remainder of 1998 to expand and upgrade its manufacturing and distribution equipment to meet anticipated increases in sales volume, to improve efficiency and to upgrade its current commercial contract distribution operations. 10 The Company's primary source of financing is an unsecured revolving credit facility with a banking syndicate which provides for borrowings of up to $1.0 billion and expires in March 2003. Interest on borrowings under this facility is currently based on LIBOR, and was 6.24 percent at July 4, 1998. At July 4, 1998, borrowings outstanding under this credit facility were $878.0 million. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 is effective, and the Company expects to adopt this new standard, in the Company's first quarter of fiscal 2000. The Company's management has not determined the impact this new statement will have on the financial statements. RESULTS OF OPERATIONS Three Months Ended July 4, 1998 Compared to Three Months Ended June 28, 1997 Net sales decreased $42.1 million, or 4.6 percent, to $873.1 million in the second quarter of 1998. The decrease was primarily attributable to $49.1 million in the second quarter of 1997 related to the Company's U.K. operations which were sold at the close of the first quarter of 1998 and $23.4 million associated with the closure of approximately 100 residential retail stores in the first quarter of 1998. Gross margin as a percentage of net sales increased 1.6 percent to 27.5 percent in the second quarter of 1998 compared to the second quarter for 1997, primarily due to improved sales product mix and increases in the efficiency relationships of volume and fixed costs for the domestic and Australian wholesale manufacturing business. Selling, general and administrative expenses for the second quarter of 1998 were $168.3 million, or 19.3 percent of net sales, compared to $184.1 million, or 19.8 percent of net sales, in the comparable period of 1997. Interest expense, was $15.6 million for the second quarter of 1998 compared to $15.3 million for the second quarter of 1997 as a result of slightly higher borrowings. For the second quarter ended July 4, 1998, the Company recorded nonrecurring charges of $141.5 million ($98.2 million, net of tax benefit, or $.81 per share on a basic and diluted basis) related to recording the loss on sale of its residential retail operations, store closing costs and writedown of certain assets which was completed in August 1998 as discussed in note 4 of notes to condensed consolidated financial statements. Net income before nonrecurring charges was $33.0 million, or $.27 per share. Net loss after nonrecurring charges was $65.2 million, or $.54 per share, on a basic and diluted basis. Net income was $25.1 million, or $.19 per share, for the second quarter of 1997. The effective income tax rate for the second quarter of 1998 before the nonrecurring charges decreased to 40.6 percent compared to 41.4 percent for the second quarter of 1997 due to more profitable Australian operations in 1998 which are taxed at a lower effective income tax rate. Six Months Ended July 4, 1998 Compared to Six Months Ended June 28, 1997 Net sales increased $14.2 million, or .8 percent to $1,738.1 million in the first six months of 1998. The increase was primarily attributable to incremental net sales of $34.1 million related to the wholesale manufacturing operations in both the domestic and Australian markets and incremental net sales of $27.3 million related to the residential retail and commercial contract business, offset by a decline of $47.2 million in net sales primarily related to sale of the U.K. operations during the first quarter of 1998 and $42.8 million associated with the closure of approximately 100 residential retail stores in the first quarter of 1998. Gross margin as a percentage of net sales increased 1.0 percent to 26.4 percent in the first six months of 1998 compared to the first six months of 1997, primarily due to improved product sales mix and increases in the efficiency relationships of volume and fixed costs for the domestic and international wholesale manufacturing business. Selling general and administrative expenses for the first six months of 1998 were $336.4 million, or 19.4 percent of net sales, compared to $351.5 million, or 20.4 percent of net sales, in the comparable period of 1997. Pre-opening expenses related to the retail operations totaled $.2 million for the first six months of 1998 compared to $2.9 million for the first six months of 1997. Interest expense, net increased to $1.1 million for the first six months of 1998 from $29.1 million for the first six months of 1997 as a result of higher borrowings. Results for the first six months of 1998 included nonrecurring charges of $141.5 million ($98.2 million net of tax benefit, or $.79 per share on a basic and diluted basis) as discussed in note 4 of notes to condensed consolidated financial statements. Net income before nonrecurring charges was $52.5 million, or $.42 per share. Net loss was $45.7 million, or $.37 per share on basic and diluted basis. Net income was $36.0 million, or $.27 per share, for the first six months of 1997. The effective income tax rate for the first six months of 1998 before the nonrecurring charges decreased to 40.7 percent compared to 41.9 percent for the first six months of 1997 due to more profitable foreign operations in 1998 which are taxed at a lower effective income tax rate. 11 FOREIGN OPERATIONS The Company's primary foreign operations are conducted through its Australian subsidiaries, where the functional currency is Australian dollars. 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. 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 Department 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 purchased "mass production" polypropylene carpet directly from any of the defendants from June 1, 1991 through June 30, 1995, excluding, among others, any persons or entities whose only purchases were from any of the Company's retail establishments. Discovery began 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 a purported class of indirect purchasers of carpet in the State of California and which seek damages for alleged violations of California antitrust and fair competition laws. The Company believes that it has meritorious defenses to plaintiffs' claims in the lawsuits described in this paragraph and intends to 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. 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. At the end of the quarter ended July 4, 1998, there were no other pending legal proceedings to which the Company was a party or to which any of its property was subject which, in the opinion of management, were likely to have a material adverse effect on the Company's business, financial condition or results of operations. ITEM TWO - CHANGES IN SECURITIES None ITEM THREE - DEFAULTS UPON SENIOR SECURITIES None 12 ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1998 Annual Meeting of Shareholders of the Company was held on April 30, 1998. The only matter submitted to a vote at the meeting was the election of Class II directors for a three-year term. J. Hicks Laner, R. Julian McCamy, Thomas G. Cousins and S. Tucker Grigg were elected as Class II Directors, term expiring 2001. a total of 96,249,739 shares were voted for the election of all nominees; 1,832,635 shares voted withheld authority for the election of one or more directors. The members of the Board of Directors whose terms of office continued after the 1998 Annual Meeting of Shareholders are as follows: (i) J.C. Shaw, Robert E. Shaw and Robert J. Lunn (Class I directors, term expiring 1999); and (ii) W. Norris Little, William C. Lusk, Jr. and Robert R. Harlin (Class III Directors, term expiring 2000). The proxy or proxies designated by the Company will have discretionary authority to vote on any matter properly presented by a shareholder for consideration at the 1999 Annual Meeting of shareholders but not submitted for inclusion in the proxy materials for such meeting unless notice of the matter is received by the Company at its principal executive office not later than February 17, 1999 and certain other conditions of the applicable rules of the Securities and Exchange Commission are satisfied. ITEM FIVE - OTHER INFORMATION None ITEM SIX - EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 27 - Financial Data Schedule 10.1 Agreement and Plan of Merger, dated June 23, 1998, among The Maxim Group, Inc., CMAX Acquisition, Inc., the Registrant and Shaw Carpet Showplace, Inc., and forms of Subordinated Promissory Note and Shareholder's Agreement attached as Exhibits B and C, respectively, [Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on June 26, 1998 (Commission File No. 1-6853).] 10.2 Share Transfer Agreement dated April 3, 1998 among the Registrant, Shaw UK Holdings Limited and Carpet Holdings Limited. [Incorporated by reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed on April 20, 1998 (Commission File No. 1-6853).] 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) 1.A report on Form 8-K was filed on April 20, 1998, reporting the disposition of Carpets International, Plc (the Company's wholly-owned U.K. subsidiary). 2.A report on Form 8-K was filed on June 26, 1998, reporting the Company and Shaw Carpet Showplace, Inc., a wholly-owned subsidiary, had entered into an agreement to dispose of substantially all of residential retail operations to The Maxim Group, Inc. 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: August 17, 1998 s/ Robert E. Shaw - ------------------------ ----------------- Robert E. Shaw Chairman of the Board, Chief Executive Officer and President DATE: August 17, 1998 /s/ Kenneth G. Jackson - ------------------------ ---------------------- Kenneth G. Jackson Vice President and Chief Financial Officer (Principal Financial Officer) 14 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS OF SHAW INDUSTRIES, INC. AND SUBSIDIARIES AS OF JULY 4, 1998 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JULY 4, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. NOTE: EARNINGS PER SHARE (E.P.S.) HAVE BEEN CALCULATED IN ACCORDANCE WITH FASB 128. 6-MOS JAN-02-1999 JUL-04-1998 8,557,000 0 397,870,000 18,522,000 555,734,000 1,082,836,000 1,352,283,000 761,755,000 1,842,911,000 371,648,000 0 0 0 147,027,000 579,962,000 1,842,911,000 1,738,134,000 1,738,134,000 1,279,081,000 1,279,081,000 476,575,000 5,056,000 30,808,000 (53,386,000) (7,408,000) (45,978,000) 0 0 0 (45,716,000) (0.37) (0.37)
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