EX-13.1 3 june30form10ka13.txt PAGES 25 AND 30-31 OF 2000 ANNUAL REPORT Exhibit 13.1 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION Springs Industries, Inc. A five-year summary of Selected Financial Data appears on pages 30 and 31. RESULTS OF OPERATIONS GENERAL Springs Industries, Inc. ("Springs" or "the Company") is engaged in manufacturing, marketing, selling and distributing home furnishings products. The Company's product line includes sheets, pillows, pillowcases, bedspreads, comforters, mattress pads, baby bedding and infant apparel, towels, shower curtains, bath and accent rugs, other bath fashion accessories, over-the-counter home-sewing fabrics, drapery hardware, and hard and soft decorative window fashions. The Company's emphasis on the home furnishings market has developed into the following strategic initiatives: focus on key accounts; brand investment and expansion; manufacturing and purchasing efficiencies; supply chain management and global sourcing. Springs' strategic initiatives have helped the Company to achieve improvements in both sales and income before unusual items for 2000, when compared to 1999. The focus on key accounts and brand investment and expansion has allowed Springs to increase market share and volume, despite the economic slowdown in the last half of the year and aggressive inventory management by most retailers. Springs continued to identify and recognize savings from manufacturing and purchasing efficiencies during the year. In order to improve manufacturing productivity and reduce manufacturing costs, the Company announced two separate restructuring plans in 2000. In December, Springs announced that it would eliminate certain production at its Katherine and Elliott bedding plants in South Carolina. The plan eliminates some narrow loom weaving, which is not compatible with newer fabrication equipment, at its Katherine plant and outdated yarn spinning at the Katherine and Elliott plants. In June, the Company announced a plan to phase out production and close plants in Georgia which manufactured certain baby apparel products. The Company further announced that terry yarn production would be phased out at its Griffin, Georgia plant No. 2 and transferred to its newer, more cost effective facilities in Griffin and Hartwell, Georgia. See the RESTRUCTURING AND REALIGNMENT section of Management's Discussion and Analysis of Operations and Financial Condition for additional discussion. 2000 Compared with 1999 SALES Net sales for 2000 were $2.275 billion, 2.5 percent higher than the prior year's $2.220 billion. This increase was principally driven by sales to the Company's key mass merchant, specialty store and home improvement accounts. Sales to the Company's top ten customers were $1.449 billion in 2000, an increase of 11 percent compared to 1999. Increases in sales to key accounts during 2000 were partially offset by lower overall sales to department stores, smaller specialty stores and institutional customers, compared to the prior year. Bedding sales were $1.286 billion and bath product sales were $499.6 million, an increase of 4.3 and 3.0 percent, respectively, over the prior year. Sales of window fashions products were $371.9 million, an increase of 3.9 percent when compared to last year. All other sales totaled $117.3 million, a decrease of 18.7 percent from the prior year. Growth in bedding and bath product sales benefited from the introduction of the Springmaid(R) brand to the mass merchant channel in the first quarter of 2000. Bedding sales also benefited from continued growth of Springs' pillow business. The increases in bedding sales were partially offset by lower sales of licensed juvenile products. EARNINGS Net income was $67.1 million, or $3.70 per diluted share, for 2000, compared to $69.0 million, or $3.80 per diluted share, for 1999. Before the effects of the $1.8 million and $1.5 million after-tax restructuring charges taken in the second and fourth quarters of 2000, respectively, full-year net income would have been $70.4 million, or $3.88 per diluted share. The only unusual item in 1999 was $0.6 million of after-tax expense related to the Year 2000 Computer Issue. Excluding this item, full-year net income in 1999 would have been $69.6 million, or $3.83 per diluted share. Operating earnings for 2000 increased over the prior year primarily due to the increase in sales volume. The gross margin percentage decreased from 18.9 percent in 1999 to 18.7 percent in 2000. Several factors contributed to the lower gross margin percentage in 2000. Sales in the last half of 2000 included a higher level of off-quality and closeout goods, at higher losses, than 1999. The fourth quarter of 1999 benefited from a decision to reduce the amount of off-quality and closeout sales that would normally have been made in the quarter, in anticipation of improving market conditions which did not materialize in 2000. The Company also experienced increased customer claims in 2000 compared to the prior year. During the last half of the year, curtailment of certain production processes to reduce inventory levels resulted in higher period costs. These items were partially offset by lower market prices for raw materials and from progress made toward purchasing and manufacturing productivity initiatives. In addition to these factors, certain fourth-quarter items contributed to the lower margins for 2000 compared to 1999. Gross margins for the fourth quarter of 2000 were 16.2 percent, compared to 21.2 percent in the fourth quarter of 1999. In addition to the effects of higher off-quality and closeout inventory sales and the production curtailments discussed above, the lower margins in the fourth quarter of 2000 also reflect an increase in energy prices, primarily for natural gas. These items were partially offset by lower expenses related to changes in accounting for the Company's postretirement medical benefit plan and certain manufacturing supply inventories in the amount of $1.3 million and $1.5 million, respectively. See the ACCOUNTING CHANGES section of Management's Discussion and Analysis of Operations and Financial Condition for additional information. The Company also received $3.3 million in insurance proceeds during the fourth quarter of 1999 from the settlement of a business interruption insurance claim related to a warehouse fire which occurred in the first quarter of 1999. Selling, general and administrative expenses decreased in 2000 due primarily to lower incentive compensation expenses which were $7.8 million lower in the fourth quarter of 2000, and $9.4 million lower for the full year 2000, compared to the same periods in 1999, as the Company did not meet its internal performance goals. During 1999, selling, general and administrative expenses included higher fees for management advisory services related to the Company's development of its strategic initiatives. The impact of these items was partially offset by higher spending on advertising during 2000 in connection with the Company's brand investment and expansion initiative. During the second quarter of 2000, Springs received a state sales and use tax assessment in the amount of $3.0 million. The Company accrued a significant portion of that assessment in the second quarter, although Springs is challenging the assessment and actual amounts paid to the state may differ. INTEREST EXPENSE Interest expense was $32.0 million in 2000, compared to $26.5 million in 1999. This increase reflects higher average borrowings for 2000, as well as an increase in interest rates during the year. OTHER INCOME AND EXPENSE During the third quarter of 1999, the Company sold its New York City office building for $29.5 million and leased back a portion of the building for a ten-year term. The result of the sale-leaseback was a gain of $1.5 million recorded in other income, and the deferral of an additional $17.8 million gain, which is being amortized over the operating lease term. Other income for 1999 also included income of $4.3 million from the sale of previously closed manufacturing facilities. Other expense included impairment charges totaling approximately $1.6 million and $3.0 million in 2000 and 1999, respectively, in connection with various types of property that management identified for sale or other disposal. INCOME TAXES The Company's provision for income taxes for fiscal 2000 is based on a 37 percent effective tax rate, compared to 38 percent during fiscal 1999. This change is due to the Company's ongoing tax planning strategies and management of tax rates in various jurisdictions and resulted in a $1.1 million reduction in the tax provision for 2000. OUTLOOK The Company expects the softness in the retail economy experienced during the last half of 2000 to continue through the first half of 2001. Springs believes that its focus on key accounts and brands, combined with a projected improvement in market conditions in the last half of 2001, will result in a slight increase in overall sales volume for 2001. Springs will continue to focus on achieving improvements in purchasing efficiencies and manufacturing productivity, while placing additional emphasis on supply-chain management and new sourcing opportunities. These initiatives, combined with the benefits of the Company's 2000 restructuring activities and overall cost-containment efforts, are expected to contribute to a moderate increase in 2001 operating earnings, compared to 2000. 30
SELECTED FINANCIAL DATA Springs Industries, Inc. 2000 1999 1998 1997(b) 1996 ---------------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS: (in millions) Net sales........................................ $2,275.1 $2,220.4 $2,180.5 $2,226.1 $2,221.0 Income from continuing operations................ 67.1 69.0 37.3 69.0 88.4(c) Net income....................................... 67.1 69.0 37.3(a) 69.0 84.9(d) Class A cash dividends declared.................. 14.2 14.1 14.9 16.9 16.7 Class B cash dividends declared.................. 8.6 8.6 8.7 8.8 9.0 ----------------------------------------------------------------------------------------------------------------- PER SHARE OF COMMON STOCK: Income from continuing operations-diluted........ $ 3.70 $ 3.80 $ 1.97 $ 3.34 $ 4.29(c) Net income-diluted............................... 3.70 3.80 1.97(a) 3.34 4.12(d) Class A cash dividends declared.................. 1.32 1.32 1.32 1.32 1.32 Class B cash dividends declared.................. 1.20 1.20 1.20 1.20 1.20 Shareholders' equity............................. 45.72 43.28 40.62 40.69 38.75 Class A stock price range: High.......................................... 48.81 43.63 61.00 54.75 50.50 Low........................................... 22.63 27.06 31.75 41.00 38.38 ------------------------------------------------------------------------------------------------------------------ STATISTICAL DATA: Net income to net sales.......................... 3.0% 3.1% 1.7%(a) 3.1% 3.8%(d) Net income to average shareholders' equity....... 8.4% 9.2% 5.0%(a) 8.6% 11.1%(d) Operating return on assets employed(e)........... 8.6% 9.1% 5.8% 8.6% 8.8% Inventory turnover(f)............................ 3.7 4.2 4.1 4.6 4.8 Accounts receivable turnover(g).................. 7.1 6.9 6.6 6.4 6.4 Net sales divided by average assets.............. 1.4 1.5 1.5 1.6 1.5 Current ratio.................................... 3.1 2.7 3.5 3.3 3.1 Capital expenditures (in millions)............... $ 93.3 $ 166.8 $ 115.0 $ 99.3 $ 75.1 Depreciation (in millions)....................... $ 98.0 $ 90.5 $ 81.9 $ 78.8 $ 80.8 Approximate number of shareholders............... 2,459 2,548 2,636 2,856 3,000 Average number of associates..................... 18,200 18,300 18,000 20,100 21,700 ----------------------------------------------------------------------------------------------------------------- SELECTED BALANCE SHEET DATA: (in millions) Net working capital.............................. $ 565.4 $ 523.0 $ 555.8 $ 546.4 $ 537.4 Net property..................................... 617.9 625.6 549.7 541.2 534.6 Total assets..................................... 1,584.1 1,575.0 1,425.5 1,409.3 1,398.5 Long-term debt................................... 283.3 283.5 268.0 164.3 177.6 Shareholders' equity............................. 819.8 774.9 724.1 804.6 780.8 -----------------------------------------------------------------------------------------------------------------
31 SELECTED FINANCIAL DATA Springs Industries, Inc. NOTES: (a) Net income included after-tax gains of $8.6 million on the Company's sale of its UltraSuede business and its Rock Hill, South Carolina facility, losses of $1.7 million on the Company's sale of its Industrial Products and Springfield businesses, and an impairment charge of $3.0 million recorded in connection with the Company's decision to close a terry manufacturing facility. Without these unusual items, net income would have been $33.4 million, or $1.76 per diluted share, net income to net sales would have been 1.5 percent, and the return on average shareholders' equity would have been 4.5 percent. (b) Fiscal year 1997 includes 53 weeks, whereas all other years include 52 weeks. (c) Differs from net income by an extraordinary loss of $3.6 million due to an early extinguishment of debt, net of an income tax benefit of $2.2 million, or $0.17 per diluted share. (d) Net income included an after-tax gain of $50.1 million on the sale of Clark-Schwebel, Inc. and an extraordinary loss, net of an income tax benefit of $2.2 million, of $3.6 million. Without these unusual items, net income would have been $38.3 million, or $1.86 per diluted share, net income to net sales would have been 1.7 percent, and the return on average shareholders' equity would have been 5.3 percent. (e) Pretax income before interest expense divided by average of month-end total assets used in operations. For 1998, pre-tax income was net of gains on the Company's sales of its UltraSuede business and its Rock Hill, South Carolina facility, losses on the Company's sales of its Industrial Products and Springfield businesses, and an impairment charge in connection with the Company's decision to close a terry manufacturing facility. Without these unusual items, operating return on assets employed would have been 5.3 percent. For 1996, pretax income was net of a gain on the sale of Clark-Schwebel, Inc. Without this unusual item, operating return on assets employed would have been 3.2 percent. (f) Cost of goods sold divided by average of month-end inventories. (g) Net sales divided by average of month-end receivables. NOTE: Selected Financial Data includes the following since their respective dates of acquisition: American Fiber Industries, LLC, January 1999; and Regal Rugs, Inc., January 1999. Selected Financial Data also includes the following until their respective dates of disposition: Clark-Schwebel, Inc., April 1996; the Company's UltraSuede business, August 1998; the Company's Industrial Products business, December 1998; the Company's Springfield business, December 1998; and the Company's UltraFabrics business, March 1999.