-----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, F+UvQj617XmoyuYOVdVY2zz5l7A+tjccn+7OuthZxV77UmmtacGFepoFwq3r4uy9 5z0FaRo3CaHC2RrTnPAd6g== /in/edgar/work/20001102/0000089498-00-000024/0000089498-00-000024.txt : 20001106 0000089498-00-000024.hdr.sgml : 20001106 ACCESSION NUMBER: 0000089498-00-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001102 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: 751352 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 0001.txt 3RD QTR 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 September 30, 2000 ------------------------------------------------- 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 (I.R.S. Employer incorporation or organization) Identification No.) 616 E. WALNUT AVENUE, DALTON, GEORGIA 30720 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (706) 278-3812 - -------------- Registrant's telephone number, including area code 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 24, 2000 - 124,111,208 shares ------------------------------------- SHAW INDUSTRIES, INC. FORM 10-Q INDEX PART I - FINANCIAL INFORMATION PAGE NUMBERS --------------------- ------------ Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2000 and January 1, 2000 3-4 Condensed Consolidated Statements of Income and Retained Earnings - For the Three Months Ended September 30, 2000 and October 2, 1999 5 Condensed Consolidated Statements of Income and Retained Earnings - For the Nine Months Ended September 30, 2000 and October 2, 1999 6 Condensed Consolidated Statements of Cash Flow - For the Nine Months Ended September 30, 2000 and October 2, 1999 7 Notes to Condensed Consolidated Financial Statements 8-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II - OTHER INFORMATION ----------------- Item 1. Legal Proceedings 15 Item 2. Changes in Securities and Use of Proceeds 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 16 SIGNATURES 16 2 PART 1 - ITEM ONE- FINANCIAL INFORMATION SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) September 30, January 1, 2000 2000 ------------- ---------- (UNAUDITED) ASSETS CURRENT ASSETS: Cash and cash equivalents ....................... $ 12,141 $ 34,021 ---------- ---------- Accounts receivable, less allowance for doubtful accounts and discounts of $20,431 and $18,931 ............ 227,960 234,267 ---------- ---------- Inventories - Raw materials ............................... 294,100 255,083 Work-in-process ............................. 110,520 92,605 Finished goods .............................. 365,527 319,046 ---------- ---------- 770,147 666,734 ---------- ---------- Other current assets ............................ 160,196 140,902 ---------- ---------- TOTAL CURRENT ASSETS ....... 1,170,444 1,075,924 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, at cost: Land and land improvements ...................... 29,005 31,974 Buildings and leasehold improvements ............ 338,409 331,010 Machinery and equipment ......................... 1,146,804 1,064,074 Construction in progress ........................ 116,789 148,380 ---------- ---------- 1,631,007 1,575,438 Less - Accumulated depreciation and amortization 854,492 821,633 ---------- ---------- 776,515 753,805 ---------- ---------- GOODWILL, net of amortization ........................ 394,760 418,923 ---------- ---------- OTHER ASSETS ......................................... 42,453 43,067 ---------- ---------- TOTAL ASSETS ............... $2,384,172 $2,291,719 ========== ========== 3 September 30, January 1, 2000 2000 ----------- ----------- (UNAUDITED) LIABILITIES AND SHAREHOLDERS' INVESTMENT CURRENT LIABILITIES: Current maturities of long-term debt ........... $ 3,961 $ 4,294 Accounts payable ............................... 244,776 217,332 Accrued liabilities ............................ 334,027 272,341 ----------- ----------- TOTAL CURRENT LIABILITIES ........... 582,764 493,967 ----------- ----------- LONG-TERM DEBT, less current maturities ............. 891,395 823,821 ----------- ----------- DEFERRED INCOME TAXES ............................... 73,483 77,994 ----------- ----------- OTHER LIABILITIES ................................... 34,242 27,352 ----------- ----------- SHAREHOLDERS' INVESTMENT: Common stock, no par, $1.11 stated value, authorized: 500,000,000 shares; issued and outstanding: 123,934,384 shares at September 30, 2000 and 132,663,599 shares at January 1, 2000 ......................... 137,568 147,258 Paid-in capital ................................ 5,050 60,612 Cumulative translation adjustment .............. -- (2,252) Retained earnings .............................. 659,670 662,967 ----------- ----------- TOTAL SHAREHOLDERS' INVESTMENT ...... 802,288 868,585 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT ..................... $ 2,384,172 $ 2,291,719 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 4 SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) THREE MONTHS THREE MONTHS ENDED ENDED September 30, October 2, 2000 1999 ----------- ----------- NET SALES ......................................... $ 1,035,925 $ 1,082,923 COST AND EXPENSES: Cost of sales ................................ 795,501 790,273 Selling, general and administrative .......... 152,948 156,807 Charge to record additional loss on sale of residential retail operations ............ 35,449 -- Charge to record pending settlement of class action antitrust litigation .............. 27,500 -- Interest, net ................................ 20,451 15,275 Other, net ................................... 1,369 1,012 ----------- ----------- INCOME BEFORE INCOME TAXES ........................ 2,707 119,556 PROVISION FOR INCOME TAXES ........................ 2,559 48,843 ----------- ----------- INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURES ............................... 148 70,713 EQUITY IN INCOME OF JOINT VENTURES ................ 524 970 ----------- ----------- NET INCOME ........................................ $ 672 $ 71,683 =========== =========== DIVIDENDS PAID PER COMMON SHARE ................... $ 0.05 $ 0.05 =========== =========== EARNINGS PER COMMON SHARE: Basic ........................................ $ 0.01 $ 0.52 =========== =========== Diluted ...................................... $ 0.01 $ 0.51 =========== =========== RETAINED EARNINGS: Beginning of period .......................... $ 666,235 $ 557,088 Add - net income ............................. 672 71,683 (Deduct) - dividends paid .................... (6,202) (6,878) Stock repurchases in excess of paid-in capital (1,035) -- ----------- ----------- End of period ................................ $ 659,670 $ 621,893 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 5 SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) NINE MONTHS NINE MONTHS ENDED ENDED September 30, October 2, 2000 1999 ----------- ----------- NET SALES ......................................... $ 3,091,777 $ 3,103,852 COST AND EXPENSES: Cost of sales ................................ 2,322,354 2,284,455 Selling, general and administrative .......... 484,920 469,435 Charge to record additional loss on sale of residential retail operations ............ 46,574 -- Charge to record pending settlement of class action antitrust litigation .............. 27,500 -- Restructuring charge ......................... 6,600 -- Interest, net ................................ 55,907 46,572 Other, net ................................... 3,643 2,898 ----------- ----------- INCOME BEFORE INCOME TAXES ........................ 144,279 300,492 PROVISION FOR INCOME TAXES ........................ 61,610 123,345 ----------- ----------- INCOME BEFORE EQUITY IN INCOME OF JOINT VENTURES ............................... 82,669 177,147 EQUITY IN INCOME OF JOINT VENTURES ................ 857 2,959 ----------- ----------- NET INCOME ........................................ $ 83,526 $ 180,106 =========== =========== DIVIDENDS PAID PER COMMON SHARE ................... $ 0.15 $ 0.05 =========== =========== EARNINGS PER COMMON SHARE: Basic ........................................ $ 0.65 $ 1.29 =========== =========== Diluted ...................................... $ 0.65 $ 1.27 =========== =========== RETAINED EARNINGS: Beginning of period .......................... $ 662,967 $ 448,665 Add - net income ............................. 83,526 180,106 (Deduct) - dividends paid .................... (19,274) (6,878) Stock repurchases in excess of paid-in capital (61,900) -- Translation adjustment ....................... (5,649) -- ----------- ----------- End of period ................................ $ 659,670 $ 621,893 =========== =========== The accompanying notes are an integral part of these condensed consolidated financial statements. 6
SHAW INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (IN THOUSANDS AND UNAUDITED) NINE MONTHS NINE MONTHS ENDED ENDED September 30, October 2, 2000 1999 ------------- --------- OPERATING ACTIVITIES: Net income ................................................ $ 83,526 $ 180,106 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................... 68,623 70,075 Provision for doubtful accounts ..................... 21,851 5,075 Deferred income taxes ............................... (11,021) 6,519 Charge to record additional loss on sale of residential retail operations .................... 46,574 -- Charge to record pending settlement of class action antitrust litigation ...................... 27,500 -- Restructuring charge ................................ 6,600 -- Changes in operating assets and liabilities: Accounts receivable .......................... (47,889) (2,397) Inventories .................................. (128,878) (40,533) Other current assets ......................... (19,520) (11,226) Accounts payable ............................. 40,328 62,714 Accrued liabilities .......................... (2,780) 71,075 Other, net ................................... 18,348 (9,460) --------- --------- Total adjustments ......................... 19,736 151,842 --------- --------- Net cash provided by operating activities ........... 103,262 331,948 --------- --------- INVESTING ACTIVITIES: Additions to property, plant and equipment ................ (111,413) (86,702) Retirements of property, plant and equipment, net ........................................ 47 727 Net proceeds from sale of Australian subsidiary ........... 47,832 -- --------- --------- Net cash used in investing activities ............... (63,534) (85,975) --------- --------- FINANCING ACTIVITIES: Increase (decrease) in long-term debt, net ................ 84,953 (158,234) Dividends paid ............................................ (19,274) (6,878) Purchases of common stock ................................. (135,770) (79,515) Proceeds from exercise of stock options ................... 8,483 12,011 --------- --------- Net cash used in financing activities ................. (61,608) (232,616) --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ............................................... (21,880) 13,357 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................................. 34,021 12,555 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................... $ 12,141 $ 25,912 ========= =========
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 SEPTEMBER 30, 2000 (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 1999 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the company's financial position, results of operations and cash flow at the dates and for the periods presented. Interim results of operations are not necessarily indicative of the results to be expected for a full year. 2. Accounts Receivable The company has entered into agreements pursuant to which it sells a percentage ownership interest in a defined pool of the company's trade receivables to a securitization conduit. As collections reduce accounts receivable included in the pool, the company sells participating interests in new receivables to the conduit to bring the amount in the pool up to the maximum permitted by the agreements. The receivables are sold to the conduit at a discount which reflects, among other things, the conduit's financing cost of issuing its own commercial paper backed by these accounts receivable and accounts receivable sold by other participating entities. The current agreements expire August 29, 2001, but may be extended for additional one-year terms. As of September 30, 2000, the company had approximately $296,710,000 of accounts receivable sold and outstanding under this program. 3. Inventories The company uses the last-in, first-out (LIFO) method of valuing substantially all of its inventories. If LIFO inventories were valued at current costs, the inventories would have been $8,668,000 and $46,915,000 lower at September 30, 2000 and January 1, 2000, respectively. Certain of the company's finished goods inventories, representing approximately 8% of total inventories, are valued at the lower of first-in, first-out (FIFO) cost or market. 4. Long-Term Debt The company maintains a domestic revolving credit facility which provides for borrowings of up to $1.0 billion and expires in March 2003. The LIBOR-based rate at September 30, 2000 was approximately 7.1%, and borrowings outstanding under this facility totaled $859,000,000. The variable interest rate on a total of $542,813,000 of amounts outstanding under the company's revolving credit facilities has been fixed through various dates through January 2007 by interest rate swap agreements. To provide further financing capacity, the company maintains a 364-day $200 million senior unsecured revolving credit facility which has not been utilized. 5. Earnings Per Share Earnings per share for the three and nine month periods ended September 30, 2000 and October 2, 1999 have been computed based upon the weighted average shares and dilutive potential common shares outstanding. The net income amounts presented in the accompanying condensed consolidated statements of income represent amounts available or related to shareholders. 8 The following table reconciles the denominator of the basic and diluted earnings per share computations:
Three Months Ended September 30, 2000 October 2, 1999 - ---------------------------------------------------- ------------------ --------------- Weighted average common shares ..................... 123,522,891 137,722,390 Dilutive incremental shares from assumed conversions of options under stock option plans. 741,106 2,119,429 - ---------------------------------------------------- ----------- ----------- Weighted average common shares and dilutive potential common shares ............... 124,263,997 139,841,819 - ---------------------------------------------------- ----------- -----------
Nine Months Ended September 30, 2000 October 2, 1999 - ---------------------------------------------------- ------------------ --------------- Weighted average common shares ..................... 128,073,069 139,820,506 Dilutive incremental shares from assumed conversions of options under stock option plans. 600,137 2,355,566 - ---------------------------------------------------- ----------- ----------- Weighted average common shares and dilutive potential common shares ............... 128,673,206 142,176,072 - ---------------------------------------------------- ----------- -----------
6. Commitments and Contingencies The company has guaranteed certain leases of retail stores sold to Flooring America, Inc. (formerly, The Maxim Group, Inc.) in 1998. During the second quarter 2000, Flooring America filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As a result of Flooring America's reorganization, the company expects to be liable for lease payments under certain of the guarantees. See Note 11 for the nonrecurring charge recorded in the third quarter of 2000 related to the company's estimated liability under the guarantees. 7. Derivative Financial Instruments The company uses interest rate swap agreements to fix interest rates on current and anticipated borrowings to reduce exposure to interest rate fluctuations. Under existing accounting literature, these interest rate swap agreements are accounted for as hedging activities. The net cash paid or received on interest rate hedges is included in interest expense. The company may also employ foreign currency exchange contracts when, in the normal course of business, they are determined to effectively manage and reduce foreign currency exchange fluctuation risk. The company does not enter into financial derivatives for speculative or trading purposes. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 as amended by SFAS No. 137 is effective, and the company expects to adopt this new standard in the company's first quarter of fiscal 2001. The company's management has not determined the impact this new statement will have on the financial statements. 8. Comprehensive Income The company has other comprehensive income in the form of cumulative translation adjustments which resulted in total comprehensive income of $672,000 and $71,010,000 for the three months ended September 30, 2000 and October 2, 1999, respectively, and $85,778,000 and $180,923,000 for the nine months ended September 30, 2000 and October 2, 1999, respectively. 9. Stock Repurchases During the second quarter ended July 1, 2000, the company purchased and retired 9,364,647 shares of its common stock at a total cost of $134,735,000 under its ongoing share repurchase plan, including 3,991,047 shares purchased at a price of $15.50 per share through a "Dutch Auction" tender offer completed April 26, 2000. No shares were purchased in the third quarter of 2000. The company has approximately 5.6 million shares currently authorized for purchase. 9 10. Sale of Australian Subsidiary On May 9, 2000, the company completed the sale of Shaw Industries Australia Pty. Ltd. (the company's wholly-owned Australian subsidiary) to Feltex Carpets Limited of New Zealand. The transaction's value was $72,054,000 consisting of cash proceeds of $54,342,000 and the assumption of debt of $17,712,000 and resulted in an immaterial after-tax gain. 11. Nonrecurring Charges During the second quarter, the company restructured its residential sales force to optimize the marketing of the company's Shaw and Queen residential products. In connection with this restructuring, the company recorded a nonrecurring charge of $6,600,000 ($3,967,000, net of tax benefit, or $.03 per share) for severance and other employee termination benefits. In June 2000, the company recorded a nonrecurring charge totaling $26,458,000 ($15,901,000, net of tax benefit, or $.12 per share) to reflect the impact of the Flooring America bankruptcy filing. The nonrecurring charge consists of approximately $15,333,000 of accounts receivable owed by Flooring America and charged against selling, general and administrative expense in the accompanying condensed consolidated statement of income and approximately $11,125,000 of notes and related interest receivable related to the sale of the company's retail operations in 1998. On August 11, 2000, the company reached an agreement in principle to recommend the court approve a settlement of the two class action antitrust suits pending against the company and other carpet manufacturers in the United States District Court in Rome, Georgia. Under the terms of the agreement in principle entered into with the counsel for the plaintiffs, all claims against the company and its affiliates will be dismissed with prejudice, and the company will pay to the plaintiff classes an aggregate settlement amount of $27,500,000, including attorneys fees and costs. In September 2000, the company recorded a charge of $27,500,000 ($16,528,000, net of tax benefit, or $.13 per share) for this settlement which is subject to, among other things, court approval and the execution of a definitive settlement agreement. In September 2000, the company recorded a nonrecurring charge totaling $35,449,000 ($21,305,000, net of tax benefit, or $.17 per share) to reflect the estimated liability resulting from certain lease guarantees and commitments as a result of Flooring America Inc.'s filing for protection under Chapter 11 of the U.S. Bankruptcy Code. The estimated liability reflects the company's expected recovery from sub-leasing and other negotiated settlements. 12. Subsequent Event-Merger Agreement with Berkshire Hathaway Inc. On September 6, 2000, the company announced that Berkshire Hathaway, Inc. had offered to purchase between 80.1% and 86.0% of its outstanding shares for $19 per share in cash, subject to the approval of the company's board of directors. The offer was not subject to any financing contingencies. The offer was contingent upon Robert E. Shaw, the chairman of the board and chief executive officer, and Julian D. Saul, the president, together with members of their immediate families, each retaining a minimum of 5% ownership interest. Other shares not purchased by Berkshire Hathaway would be owned by other members of management or members of the Shaw and Saul families not included in the 5% ownership requirement. On October 19, 2000, the company's board of directors approved the proposed acquisition of Shaw Industries, Inc. by an investor group led by Berkshire Hathaway, Inc. and including Robert E. Shaw, Chairman and Chief Executive Officer, Julian D. Saul, a director and President of the company, through certain family related entities, William C. Lusk, Jr. and W. Norris Little, directors of the company, and eight other members of the company's management. Following approval by its board of directors, the company entered into a merger agreement with Berkshire Hathaway and a newly-formed corporation which will be owned by the investor group pursuant to which, subject to shareholder and certain regulatory approvals, the company will be acquired by the investor group at $19 per share in cash. 10 SHAW INDUSTRIES, INC. AND SUBSIDIARIES ITEM TWO-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- GENERAL The company manufactures, markets and distributes a broad range of soft floor covering products primarily consisting of broadloom tufted carpet. The company also distributes hard floor covering products through its highly developed sales and distribution channels. The company operates in a business environment comprised of numerous small customers and several large retailers and buying groups. Customers of the company in turn market floor covering and other products to retail and other wholesale residential and commercial end-users. Demand for the company's products is primarily a result of multi and single family residential and commercial floor covering replacement, new commercial and multi family residential construction, and, to a lesser extent, new single family residential construction. This demand is driven by such end-user factors as consumer spending on durable goods and general consumer confidence. The company's profitability is dependent upon its ability to efficiently manage changing raw material costs and its integrated manufacturing process to produce products meeting the style, color and quality demanded by its customers and to deliver those products in a timely manner. During the quarter ended September 30, 2000, the company had revenues of $1,035.9 million and net income of $.7 million after nonrecurring charges. Margins during the third quarter of 2000 were impacted by increases in raw material and energy costs, primarily related to petrochemical products along with labor costs increases. The company continues to manage the impact of escalating costs through price increases and internal cost reduction efforts. Nonrecurring charges recorded in the third quarter ended September 30, 2000 In September 2000, the company recorded a nonrecurring charge totaling $35.4 million ($21.3 million, net of tax benefit, or $.17 per share) to reflect the estimated liability resulting from certain lease guarantees and commitments as a result of Flooring America Inc.'s filing for protection under Chapter 11 of the U.S. Bankruptcy Code. The estimated liability reflects the company's expected recovery from sub-leasing and other negotiated settlements. In September 2000, the company also recorded a nonrecurring charge of $27.5 million ($16.5 million, net of tax benefit, or $.13 per share) to reflect an agreement in principle to recommend the court approve a settlement of two class action antitrust lawsuits. Under the terms of the agreement in principle entered into with counsel for the plaintiffs, all claims against the company and its affiliates will be dismissed with prejudice and the company will pay to the plaintiff classes an aggregate settlement amount of $27.5 million, including attorneys fees and costs. The settlement is subject to, among other things, court approval and the execution of a definitive settlement agreement. Nonrecurring charges recorded in the second quarter ended July 1, 2000 During the second quarter, the company restructured its residential sales force to optimize the marketing of the company's various Shaw and Queen brands of residential products. In connection with this restructuring, the company recorded a nonrecurring charge of $6.6 million ($4.0 million, net of tax benefit, or $.03 per share) for severance and other employee termination benefits. The company expects to save approximately $8.0 million in annual selling expense as a direct result of this restructuring. In June 2000, the company recorded a nonrecurring charge totaling $26.5 million ($15.9 million, net of tax benefit, or $.12 per share) to reflect the impact of Flooring America, Inc.'s filing for protection under Chapter 11 of the U.S. Bankruptcy Code. The nonrecurring charge consists of approximately $15.3 million of accounts receivable owed by Flooring America and charged against selling, general and administrative expense in the second quarter 2000 consolidated income statement and approximately $11.1 million of notes and related interest receivable related to the sale of the company's retail operations in 1998. Flooring America's company-owned stores represented the company's single largest customer with annualized sales of approximately $80 million. The company expects some portion of those sales to continue and is working aggressively to replace sales in the affected markets. Sale of Shaw Industries Australia On May 9, 2000, the company completed the sale of Shaw Industries Australia Pty. Ltd. (the company's wholly-owned Australian subsidiary) to Feltex Carpets Limited of New Zealand. The transaction's value was $72.1 million consisting of cash proceeds of $54.3 million and the assumption of debt of $17.7 million and resulted in an immaterial after-tax gain. 11 Subsequent Event-Merger Agreement with Berkshire Hathaway Inc. On September 6, 2000, the company announced that Berkshire Hathaway, Inc. had offered to purchase between 80.1% and 86.0% of its outstanding shares for $19 per share in cash, subject to the approval of the company's board of directors. The offer was not subject to any financing contingencies. The offer was contingent upon Robert E. Shaw, the chairman of the board and chief executive officer, and Julian D. Saul, the president, together with members of their immediate families, each retaining a minimum of 5% ownership interest. Other shares not purchased by Berkshire Hathaway would be owned by other members of management or members of the Shaw and Saul families not included in the 5% ownership requirement. On October 19, 2000, the company's board of directors approved the proposed acquisition of Shaw Industries, Inc. by an investor group led by Berkshire Hathaway, Inc. and including Robert E. Shaw, Chairman and Chief Executive Officer, Julian D. Saul, a director and President of the company, through certain family related entities, William C. Lusk, Jr. and W. Norris Little, directors of the company, and eight other members of the company's management. Following approval by its board of directors, the company entered into a merger agreement with Berkshire Hathaway and a newly-formed corporation which will be owned by the investor group pursuant to which, subject to shareholder and certain regulatory approvals, the company will be acquired by the investor group at $19 per share in cash. LIQUIDITY AND CAPITAL RESOURCES The company's primary capital requirements are for working capital, capital expenditures, stock repurchases and debt service requirements. The company's capital needs are met through a combination of internally generated funds and credit and securitization agreements. At September 30, 2000, the company had working capital of $587.7 million, an increase of $5.7 million from working capital of $582.0 million at January 1, 2000. Primary sources of cash during the nine months ended September 30, 2000 were (i) $103.3 million provided by operating activities, consisting of cash earnings of approximately $243.7 million offset in part by working capital needs of approximately $140.4 million, (ii) $85.0 million from additional long-term debt financing and (iii) $47.8 million from the sale of the Australian operation. The primary uses of cash during the nine months ended September 30, 2000 were (i) $111.4 million for additions to property, plant and equipment, (ii) $135.8 million for repurchases of common stock and (iii) $19.3 million for dividends paid. The company manages its capital using EVA(R), ("EVA" is a registered trademark of Stern, Stewart & Company) a financial measurement concept which emphasizes profitability, proper asset allocation, the cost of capital and the creation of shareholder wealth. Effective use of capital and the company's ability to generate cash flow from operations has enabled it to invest in technologies which reduce production costs, generate operating margins that exceed industry averages and pursue its strategy for increasing shareholder value. Capital expenditures for property, plant and equipment, net of retirements, necessary to maintain the company's facilities in modern state-of-the-art condition, expand production capacity and increase efficiency were $111.4 million for the nine months ended September 30, 2000. Management anticipates total capital expenditures and capitalized lease obligations of approximately $30 to $40 million for the remainder of 2000 to expand and upgrade its manufacturing and distribution equipment to improve efficiency. The company's primary source of financing is an unsecured revolving credit facility with a banking syndicate. The facility provides for borrowings of up to $1 billion and expires in March 2003. The interest rate on borrowings under this facility is currently based on LIBOR and was approximately 7.1 percent, including applicable margins, at September 30, 2000. Borrowings outstanding under this credit facility at September 30, 2000 were $859 million. To provide further financing capacity, the company maintains a 364-day $200 million senior unsecured revolving credit facility which remained unutilized and available at September 30, 2000. The company maintains a receivables securitization program under which the company sells a percentage ownership interest in a defined pool of the company's trade receivables to a securitization conduit. The receivables securitization program expires August 29, 2001, but may be extended for additional one-year terms. As of September 30, 2000, the company had approximately $296.7 million of accounts receivable sold and outstanding under this program. During the second quarter of 2000, the company repurchased approximately 9.4 million shares of its common stock at a total cost of $134.7 million under its ongoing share repurchase program. Repurchases included the "Dutch Auction" tender offer completed in April 2000 under which the company repurchased approximately 4.0 million shares at a price of $15.50 per share. Share repurchases were funded from operations and existing credit 12 facilities as well as proceeds from the sale of the company's Australian subsidiary. The company has approximately 5.6 million shares currently authorized for purchase under its program. The company believes that available borrowings under its existing credit and securitization agreements, available cash and internally generated funds will be sufficient to support its working capital, capital expenditures, stock repurchases and debt service requirements for the foreseeable future. In addition, the company believes it could further expand its revolving credit and long-term bank facilities, if necessary. Derivative Financial Instruments The company uses interest rate swap agreements to fix interest rates on current and anticipated borrowings to reduce exposure to interest rate fluctuations. Under existing accounting literature, these interest rate swap agreements are accounted for as hedging activities. The net cash paid or received on interest rate hedges is included in interest expense. The company may also employ foreign currency contracts to effectively manage exposure to foreign currency exchange rate fluctuations in its Mexican operations and capital expenditures. The company does not enter into financial derivatives for trading purposes. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133, as amended by SFAS No. 137, is effective, and the company expects to adopt this new standard, in the first quarter of the company's fiscal 2001. The company's management has not determined the impact this statement will have on the financial statements. However, this statement could increase volatility in earnings and other comprehensive income. RESULTS OF OPERATIONS Three Months Ended September 30, 2000 Compared to Three Months Ended October 2, 1999 Net sales for the quarter ended September 30, 2000 decreased to $1,035.9 million from $1,082.9 for the same period last year. Sales were down approximately 1.4% for the quarter, excluding sales from the company's Australian subsidiary which was sold at the beginning of May 2000, on higher sales prices but generally lower volumes. Gross margin decreased to 23.2 percent from 27.0 percent of net sales. The decrease resulted from increases in raw material and other energy costs during the quarter primarily related to petrochemical products and labor cost increases. Selling, general and administrative expenses for the third quarter of 2000 were $152.9 million, or 14.8 percent of net sales, compared to $156.8 million, or 14.5 percent of net sales, in the comparable period of 1999. As previously discussed, the third quarter of 2000 includes two nonrecurring charges. The company recorded a nonrecurring charge of $27.5 million in preparation for the settlement of two class action antitrust lawsuits, including attorney fees and costs. The company also recorded a nonrecurring charge totaling $35.4 million to reflect additional losses resulting from lease guarantees and commitments as a result of the bankruptcy of Flooring America. Interest expense for the current period was $20.5 million compared to $15.3 million in the third quarter of 1999 as a result of both higher borrowings and higher interest rates. The effective income tax rate for the third quarter of 2000 increased to 94.5 percent from 40.9 percent for the third quarter of 1999. The higher effective income tax rate for the third quarter of 2000 is a function of lower income and the effect of non-deductible permanent tax items. Nine Months Ended September 30, 2000 Compared to Nine Months Ended October 2, 1999 Net sales for the nine months ended September 30, 2000 decreased to $3,091.8 million from $3,103.9 million in the same period last year. Excluding sales from the company's Australian subsidiary which was sold at the beginning of May 2000, sales grew approximately 1.3% for the nine months. Gross margin decreased to 24.9 percent from 26.4 percent last year. Increases in raw material and other energy costs in the second and third quarters of this year offset cost improvements gained in the first quarter. Selling, general and administrative expenses for the current nine month period were $484.9 million, or 15.7 percent of net sales, compared to $469.4 million, or 15.1 percent of net sales, in the comparable period of 1999. The nine months of 2000 include the previously discussed $15.3 million write-off of accounts receivable from Flooring America. The nine months ended September 30, 2000 also includes the previously discussed nonrecurring charges of $27.5 million related to the potential settlement of two class action antitrust lawsuits, and the $35.4 million charge for lease guarantees and commitments as a result of Flooring America's bankruptcy. The nine months also includes nonrecurring charges of $6.6 million related to a restructuring of the company's residential sales force and $11.1 13 million of notes and related interest receivable owed by Flooring America related to the sale of the company's retail operations in 1998. Interest expense for the current nine month period was $55.9 million compared to $46.6 million in the first nine months of 1999 as a result of both higher borrowings and higher interest rates. The effective income tax rate for the first nine months of 2000 increased to 42.7 percent from 41.0 percent for the first nine months of 1999. The higher effective income tax rate for the first nine months of 2000 is a function of lower income and the effect of non-deductible permanent tax items. FORWARD-LOOKING INFORMATION Certain statements in this report, including those regarding anticipated total capital expenditures and capitalized lease obligations, availability of funding for working capital, capital expenditures, stock repurchases and debt service requirements, and the effects of litigation on the company's future results of operations, are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1933, as amended, and are subject to the safe harbor provisions of those Acts. When used in this report, the words "believes," "expects," "anticipates," "estimates" or "intends," and similar expressions, are intended to identify forward-looking statements. The forward-looking statements herein involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or reflected in such statements. The important factors which may affect the company's future results and could cause those results to differ materially from the results expressed or reflected in the forward-looking statements include, but are not limited to, the following: changes in economic conditions generally; changes in consumer spending for durable goods, interest rates and new single and multi-family construction; competition from other carpet, rug and floor covering manufacturers; changes in raw material prices; and other factors identified from time to time in the company's reports and other filings with the Securities and Exchange Commission. ITEM THREE - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is set forth under the caption "Derivative Financial Instruments" in "ITEM TWO - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" above. 14 PART II - OTHER INFORMATION ITEM ONE - LEGAL PROCEEDINGS The company is a party to several lawsuits incidental to its various activities and incurred in the ordinary course of business. The company believes that it has meritorious claims and defenses in each case. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the associated claims, when resolved, will have a material adverse effect upon the company. The company is a defendant in certain litigation alleging personal injury resulting from personal exposure to volatile organic compounds found in carpet produced by the company. The complaints seek injunctive relief and unspecified money damages on all claims. The company has denied any liability. The company believes that it has meritorious defenses and that the litigation will not have a material adverse effect on the company's financial condition or results of operations. In December 1995, the company learned that it was one of six carpet companies named as additional defendants in a pending antitrust suit filed in the United States District Court of Rome, Georgia. The amended complaint alleges price-fixing regarding certain types of carpet products in violation of Section 1 of the Sherman Act. The amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. The company has filed an answer to the complaint that denies plaintiffs' allegations and sets forth several defenses. In September 1997, the Court issued an order certifying a nationwide plaintiff class of persons and entities who purchased "mass production" polypropylene carpet directly from any of the defendants from June 1, 1991 through June 30, 1995, excluding, among others, any persons or entities whose only purchases were from any of the company's retail establishments. On October 3, 1998, the company learned that it was one of five defendants in a pending antitrust suit filed in the United States District Court in Rome, Georgia. The complaint alleges price fixing regarding certain types of carpet products in violation of Section 1 of the Sherman Act. The amount of damages sought is not specified. If any damages were to be awarded, they may be trebled under the applicable statute. The company has filed an answer to the complaint that denies plaintiff's allegations and sets forth several defenses. On August 11, 2000, the company announced that it had reached an agreement in principle to recommend that the court approve a settlement of the two class action antitrust suits described above. Under the terms of the agreement in principle entered into with the counsel for the plaintiffs, all claims against the company and its affiliates will be dismissed with prejudice, and the company will pay to the plaintiff classes an aggregate settlement amount of $27.5 million, including attorneys fees and costs. The settlement is subject to among other things, court approval and the execution of a definitive settlement agreement. The company is also a party to four consolidated lawsuits pending in the Superior Court of the State of California, City and County of San Francisco, all of which were brought on behalf of a purported class of indirect purchasers of carpet in the State of California and which seek damages for alleged violations of California antitrust and fair competition laws. The company believes that it has meritorious defenses to plaintiffs' claims in the lawsuits described in this paragraph and intends to vigorously defend these actions. After consultation with counsel, it is the opinion of management that, although there can be no assurance given, none of the claims described in this paragraph, when resolved, will have a material adverse effect upon the company. The company is subject to a variety of environmental regulations relating to the use, storage, discharge and disposal of hazardous materials used in its manufacturing processes. Failure by the company to comply with present and future regulations could subject it to future liabilities. In addition, such regulations could require the company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The company is not involved in any material environmental proceedings. ITEM TWO - CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM THREE - DEFAULTS UPON SENIOR SECURITIES None ITEM FOUR - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM FIVE - OTHER INFORMATION None 15 ITEM SIX - EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits 27 - Financial Data Schedule Shareholders may obtain copies of Exhibits without charge upon written request to the Corporate Secretary, Shaw Industries, Inc., Mail drop 061-22, P.O. Drawer 2128, Dalton, Georgia 30722-2128. (B) A report on Form 8-K was filed on September 6, 2000 reporting an offer by Berkshire Hathaway, Inc. to purchase up to 86% of the outstanding shares of Shaw Industries, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHAW INDUSTRIES, INC. ------------------------------- (The Registrant) DATE: November 1, 2000 /s/ Robert E. Shaw - --------------------------- ------------------- Robert E. Shaw Chairman of the Board and Chief Executive Officer DATE: November 1, 2000 /s/ Kenneth G. Jackson - --------------------------- ----------------------- Kenneth G. Jackson Executive Vice President and Chief Financial Officer (Principal Financial Officer) 16 EX-27 2 0002.txt FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEETS OF SHAW INDUSTRIES, INC. AND SUBSIDIARIES AS OF SEPTEMBER 30, 2000 AND THE RELATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-30-2000 SEP-30-2000 12,141 0 227,960 20,431 770,147 1,170,444 1,631,007 854,492 2,384,172 582,764 0 0 0 137,568 664,720 2,384,172 3,091,777 3,091,777 2,322,354 2,322,354 547,386 21,851 55,907 144,279 61,610 83,526 0 0 0 83,526 0.65 0.65
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