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 March 31, 1996
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 No. 1-5137
FIELDCREST CANNON, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-0586036
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Lake Circle Drive
Kannapolis, N.C. 28081
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code 704 939-2000
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days. Yes x . No .
Number of shares outstanding April 30, 1996
Common Stock 8,991,987
Total pages 22
Exhibit Index Page 9
PART 1. FINANCIAL INFORMATION
FIELDCREST CANNON, INC.
Consolidated statement of financial position
March 31, December 31,
Dollars in thousands 1996 1995
Assets
Cash $ 4,320 $ 9,124
Accounts receivable 164,408 168,112
Inventories (note 3) 270,195 228,167
Other prepaid expenses and current assets 2,284 3,446
Total current assets 441,207 408,849
Plant and equipment, net 336,654 342,285
Deferred charges and other assets 61,639 61,812
Total assets $839,500 $812,946
Liabilities and shareowners' equity
Accounts and drafts payable $ 53,910 $ 54,274
Deferred income taxes 15,578 17,593
Accrued liabilities 72,705 67,725
Current portion of long-term debt 6,930 780
Total current liabilities 149,123 140,372
Senior long-term debt 175,987 155,262
Subordinated long-term debt 203,750 210,000
Total long-term debt 379,737 365,262
Deferred income taxes 40,853 40,475
Other non-current liabilities 55,185 51,406
Total liabilities 624,898 597,515
Shareowners' equity:
Preferred Stock, $.01 par value,
10,000,000 authorized, 1,500,000 issued
and outstanding March 31, 1996 and
December 31, 1995 (aggregate liquidation
preference of $75,000) 15 15
Common Stock, $1 par value,
25,000,000 authorized, 12,598,387 issued
March 31, 1996 and 12,560,826
December 31, 1995 12,598 12,561
Additional paid in capital 221,961 221,025
Retained earnings 97,253 99,055
Excess purchase price for Common Stock
acquired and held in treasury -
3,606,400 shares (117,225) (117,225)
Total shareowners' equity 214,602 215,431
Total liabilities and shareowners' equity $839,500 $812,946
See accompanying notes
(2)
FIELDCREST CANNON, INC.
Consolidated statement of operations and retained earnings
Three Months
ended March 31
Dollars in thousands, except per share data 1996 1995
Net sales $249,971 $257,009
Cost of sales 215,112 214,025
Selling, general and administrative 25,117 26,702
Restructuring charges 3,630 3,924
Total operating costs and expenses 243,859 244,651
Operating income 6,112 12,358
Other deductions (income):
Interest expense 7,055 6,802
Other, net 140 (144)
Total other deductions 7,195 6,658
Income (loss) before income taxes (1,083) 5,700
Federal and state income taxes (benefit) (406) 2,137
Net income (loss) (677) 3,563
Preferred dividends (1,125) (1,125)
Earnings (loss) on Common (1,802) 2,438
Amount added to (subtracted from) retained earnings (1,802) 2,438
Retained earnings, beginning of period 99,055 119,280
Retained earnings, end of period $ 97,253 $121,718
Net income (loss) per Common share $ (.20) $ .28
Fully diluted income (loss) per Common share $ (.20) $ .28
Average primary shares outstanding 8,962,219 8,806,975
Average fully diluted shares outstanding 8,964,457 8,807,863
See accompanying notes
(3)
FIELDCREST CANNON, INC.
Consolidated statement of cash flows
Three Months
ended March 31
Dollars in thousands 1996 1995
Increase (decrease) in cash
Cash flows from operating activities:
Net income $ (677) $ 3,563
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,959 7,753
Deferred income taxes 378 612
Other 6,956 1,277
Change in current assets and liabilities,
excluding effects of acquisition of Sure Fit:
Accounts receivable 3,704 8,563
Inventories (42,028) (32,319)
Other prepaid expenses and current assets 1,162 501
Accounts payable and accrued liabilities 4,616 7,361
Federal and state income taxes - 1,750
Deferred income taxes (2,015) (2,337)
Net cash (used in) operating activities (18,945) (3,276)
Cash flows from investing activities:
Additions to plant and equipment (7,059) (14,712)
Proceeds from disposal of plant and equipment 1,700 460
Proceeds from net assets held for sale - 20,184
Purchase of Sure Fit, net of cash acquired - (27,300)
Net cash (used in) investing activities (5,359) (21,368)
Cash flows from financing activities:
Increase in revolving debt 21,040 24,947
Payments on long-term debt (415) (751)
Dividends paid on preferred stock (1,125) (1,125)
Net cash provided by financing activities 19,500 23,071
(Decrease) in cash (4,804) (1,573)
Cash at beginning of year 9,124 5,885
Cash at end of period $4,320 $ 4,312
See accompanying notes
(4)
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
1. Basis of Presentation
The consolidated financial statements are unaudited. In the
opinion of management all adjustments, consisting only of
normal recurring items, have been made which are necessary to
show a fair presentation of the financial position of the
Company at March 31, 1996 and the related results of
operations for the three months ended March 31, 1996 and
1995. The unaudited consolidated financial statements should
be read in conjunction with the Company's Form 10-K for the
year ended December 31, 1995.
2. Income Per Common Share
Reference is made to Exhibit 11 to this Form 10-Q for a
computation of primary and fully-diluted net income per
Common share.
3. Inventories
Inventories are classified as follows:
March 31, December 31,
(In thousands) 1996 1995
Finished goods $137,941 $117,776
Work in process 84,722 72,315
Raw materials and supplies 47,532 38,076
$270,195 $228,167
At March 31, 1996 approximately 74% of the inventories were
valued on the last-in, first-out method (LIFO).
(5)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in Financial Condition
The Company's debt (including the current portion of long-term
debt) increased $20.6 million during the first quarter of 1996.
Debt increased primarily because inventories increased $42.0
million due to normal seasonal inventory build-up during the
quarter. Capital expenditures totaled $7.1 million for the
quarter compared to $14.7 million for the first quarter of 1995.
Included in the 1996 and 1995 capital expenditures are $2.8
million and $9.1 million, respectively, for the new weaving plant
at the Company's Columbus, GA/Phoenix City, Ala. towel mill.
Capital expenditures for 1996 are expected to be approximately
$38 million. At March 31, 1996, approximately $19.7 million of
the Company's $195 million revolving credit facility was
available and unused. It is anticipated that financing of future
capital expenditures will be provided by cash flows from
operations, borrowings under the Company's revolving credit
facility, and, possibly, the sale of long-term debt or equity
securities.
Changes in Results of Operations
Quarter Ended March 31, 1996 vs. Quarter Ended March 31, 1995
Net sales for the first quarter of 1996 were $250.0 million
compared to $257.0 million in the first quarter of 1995, a
decrease of 2.7%. The decrease in revenues was due primarily to
volume decreases.
Gross profit margins decreased from 16.7% to 13.9% in the first
quarter 1996. The decrease was due to higher raw material prices
and lower mill activity. Gross margins are expected to be
adversely affected by approximately $3 million of equipment
relocation, training and other related transition costs during
the second and third quarter of 1996 in connection with the towel
consolidation described below.
Selling, general and administrative expenses decreased as a
percentage of sales from 10.4% to 10.0% in the first quarter of
1996 compared to the same quarter of 1995. The decrease was due
primarily to lower payroll and selling expenses.
The Company announced plans in March 1996 to close a towel
weaving plant and a yarn manufacturing plant as a part of the
Company's ongoing consolidation effort to utilize assets more
effectively. The Company accrued a pre-tax charge of $3.6
million, or $.25 per share, for the write-down of equipment and
employee termination benefits in the first quarter of 1996. In
addition, operating costs for the remainder of 1996 will be
adversely affected by approximately $3 million of equipment
relocation, training and other related transition costs. The
move is expected to be completed in the fourth quarter of 1996
and produce annual cost
(6)
savings of $8 to $9 million. In the first quarter of 1995, pre-
tax restructuring charges of $3.9 million, or $.28 per share, for
severance and termination benefits related to the reorganization
of the Company's New York operations in 1995 were accrued.
Interest expense increased $.3 million in the first quarter of
1996 as compared to the first quarter of 1995 due primarily to an
increase in average debt outstanding.
The effective income tax rate was 37.5% for the first quarter of
1996 compared to 37.5% for the first quarter of 1995.
A net loss, including the effect of the restructuring charges, of
$.7 million, or $.20 per share after preferred dividends, was
incurred in the first quarter of 1996 compared to net income of
$3.6 million, or $.28 per share in the first quarter of 1995.
PART II. OTHER INFORMATION
FIELDCREST CANNON, INC.
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
10. Yarn Purchase Agreement between Parkdale Mills,
Incorporated and the Registrant (CONFIDENTIAL
TREATMENT).
11. Computation of Primary and Fully Diluted Net
Income Per Share.
(b). Reports on Form 8-K
The Registrant did not file any reports to the
Commission on Form 8-K for the quarter ended March 31,
1996.
(7)
S I G N A T U R E S
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.
FIELDCREST CANNON, INC.
(Registrant)
BY: (signed) T. R. Staab
T. R. Staab
Vice President and
Chief Financial Officer
Date: May 10, 1996
(8)
EXHIBIT INDEX TO
QUARTERLY REPORT ON FORM 10-Q FOR
FIELDCREST CANNON, INC.
FOR THE QUARTER ENDED MARCH 31, 1996
Exhibit Page
Number Description Number
(10) Yarn Purchase Agreement between
Parkdale Mills, Incorporated and
the Registrant (CONFIDENTIAL
TREATMENT). 10-21
(11) Computation of Primary and Fully
Diluted Net Income Per Share 22
/TABLE
(9)
Exhibit 10
YARN PURCHASE AGREEMENT
This Yarn Purchase Agreement is entered into January 1,
1996 between Parkdale Mills, Incorporated and Fieldcrest
Cannon, Inc.
Parkdale agrees to sell and Fieldcrest Cannon agrees to
purchase yarns meeting the specifications spelled out in
attached Schedules A, C and D (B was voided) beginning with
the first order from Fieldcrest Cannon in 1996 and
continuing through December 31, 2000.
IT IS AGREED:
1. Quantities - Fieldcrest Cannon s projected weekly
requirements for each of the three yarn counts are
stated in Schedule E. Parkdale agrees to supply up to
these quantities plus any additional requirements
compounded at an annual growth factor of 15 percent.
Fieldcrest Cannon agrees to purchase from Parkdale all
requirements for these yarns in excess of internal
production. Fieldcrest Cannon is not required to order
any minimum amount of yarn while this agreement remains
in effect.
Should Fieldcrest Cannon s requirements increase
significantly over projections as stated in Schedule E,
Parkdale will have the right of first refusal for the
additional pounds.
Fieldcrest Cannon will provide Parkdale with a rolling
three months projection of yarn requirements covered by
this agreement. The parties agree that such
projections are good faith estimates only and actual
requirements may vary significantly from the
projections.
2. Prices -Yarn prices per pound shall be determined as
follows:
Cost of cotton content is based upon cotton price
as fixed by Fieldcrest Cannon plus * basis points
times waste factor as stated in Schedule F, PLUS --
Cost of polyester content (if required) at a
transfer price per pound to be provided by the
polyester supplier, PLUS --
*Information has been omitted as confidential and filed
separately with the Commission.
Page 1
(10)
Conversion costs as listed in Schedule G.
These prices are subject to adjustments as provided in
paragraphs 3 and 5.
3. Cotton Price Fixations - Parkdale is responsible for
purchasing the cotton. Fieldcrest Cannon is
responsible for fixing the cotton price following the
arrangement
outlined in Schedule H.
3.A. All fixation orders and executions of orders
must be confirmed in writing. Fieldcrest Cannon
will provide fixation orders by contract months
that are currently being traded and in multiples of
100 bales.
3.B. In the event that the cotton content of the
yarn deliveries are less than the number of bales
fixed for the quarter, the average of the excess
cotton fixation will be rolled forward to the next
quarter having an open cotton position. If the
cotton content of the yarn deliveries is greater
than the bales fixed for the quarter, cotton
fixation will be rolled back from the upcoming
quarter.
3.C. Should Fieldcrest Cannon fail to exercise its
right to fix the price prior to the dates as agreed
upon in Schedule H, Parkdale has the right to fix
the cotton price for the coming quarters yarn
requirements.
3.D. The individuals responsible for price
fixation orders and executions are also listed in
Schedule H.
3.E. Parkdale agrees to provide a Status report
each week of yarn deliveries against cotton price
fixations.
4. Polyester - Fieldcrest Cannon reserves the right to
select the supplier and negotiate the price of
polyester required to produce these yarns. Parkdale
will be responsible for ordering polyester against
Fieldcrest Cannon s account with the designated
supplier. The polyester supplier will invoice Parkdale
a transfer price. Parkdale will use this transfer
price in calculating the yarn price to Fieldcrest
Cannon. The polyester supplier will settle with
Fieldcrest Cannon any differences that might occur
between the transfer price and the actual negotiated
price for polyester.
5. Annual Price Adjustments for Changes in the Variable
Cost Portion of Parkdale's Conversion Costs.
Page 2
(11)
5.A. All shipments after December 31, 1996 shall
be subject to any reduction that may occur in the
variable costs in cents per pound from Parkdale's
current variable costs per pound as set forth
below:
M.J.S. O.E
Labor $ * $ *
Maintenance & Repair * *
Utilities * *
Benefits * *
Taxes * *
5.B. The variable costs for M.J.S. and O.E.
represent approximately 50% of the conversion
costs. These costs for ring spun represent
approximately 67% of the conversion costs. No
adjustment shall be made for any change in selling
and general administrative expenses or in
depreciation and amortization. The changes in
variable cost will be computed using a weighted
average of the costs of the Parkdale plants that
produce Fieldcrest Cannon yarn.
5.C. All shipments after December 31, 1997 shall
be subject to any increases in variable costs that
may occur from Parkdale s 1997 year ending variable
costs over the base cost stated above. However,
should an increase occur, the annual amount of the
increase shall not exceed as follows:
M.J.S. and Open End -- up to *% of variable
costs
Ring Spun -- up to *% of variable costs
6. Review of Price Changes - Fieldcrest Cannon shall have
the right to reasonably review all price changes under
this agreement prior to their becoming effective.
7. Term - This Agreement shall remain in effect until
December 31, 2000, and shall continue for successive
renewal terms of one calendar year each thereafter,
unless at least one year in advance of the commencement
of the renewal term any party gives notice to all other
parties of its election to terminate the Agreement.
*Information has been omitted as confidential and filed
separately with the Commission.
Page 3
(12)
8. Assignment - None of the rights or obligations under
this Agreement shall be assigned or delegated without
the express written consent of each party, which
consent shall not be unreasonably withheld.
9. Specifications - Any changes in specifications of the
three yarn counts covered in Schedules A, C and D that
result in an increase or decrease in Parkdale's
manufacturing costs must be mutually agreed upon before
commencement of manufacture. These changes will also
be reflected in the yarn prices.
10. Payment - All invoices are payable net cash thirty days
in U.S. dollars. Terms are F.O.B. Parkdale Mills.
11. Cover Option - Should Parkdale for any reason be unable
to fulfill the conditions of this contract, Parkdale
will be responsible for purchasing yarn from a reliable
supplier and delivering such yarn to Fieldcrest Cannon
under the terms and conditions of this contract.
Parkdale shall notify Fieldcrest Cannon in advance
should this become necessary.
12. Inspection and Rejection - Fieldcrest Cannon will
notify Parkdale as soon as possible if yarn deliveries
vary from the specifications contained herein. All
non-conforming yarns will be returned to Parkdale.
13. Inventory Availability - Parkdale agrees to maintain an
inventory of each of the yarns covered by this contract
equal to three days requirements.
14. Packaging - Yarn shall be delivered in trays. All
packaging materials will be returned to Parkdale. Yarn
performance data will accompany each shipment.
15. Additions or Deletions of Yarn Counts - Fieldcrest
Cannon may elect to discontinue a given yarn count or
to add a yarn count to this contract. However,
negotiations on waste factors and conversion costs must
be mutually agreed upon prior to adding a yarn count.
All such changes will be reflected in the appropriate
schedules attached to this contract.
Page 4
(13)
Each of the parties hereto has caused this Agreement to
be executed by its appropriate officer as of the day and
year first above written.
PARKDALE MILLS, INCORPORATED FIELDCREST CANNON, INC.
BY: W. Duke Kimbrell BY: J. M. Fitzgibbons
TITLE: Chairman and C.E.O. TITLE: Chairman and C.E.O.
Page 5
(14)
Schedule A
26/1 50/50 KP MJS FILLING YARN SPECIFICATIONS
TYPE TEST SPECIFICATION
Yarn Count 26
% VB 1.7
Skein Strength
Pounds 95 min.
Break Factor 2470 min.
Single-End Strength
Grams Break 350 min.
% VO 10.0 max.
% VB 4.25 max.
% VW 9.0 max.
Single-End Elongation
Percent 8.6 min.
% VB 4.5 max.
Uster Eveness
Uster CV% 15.5-16.5
%VB 2.3 max.
Imperfection Count
Thin Places 30 max.
Thick Places 175 max.
Nep 100 max.
Classimat
Minors 655 max.
Majors 2.5 max.
Long Thick Places 2.0 max.
Long Thin Places 12.5 max.
Polyester High Tenacity
Package Size 6#
MUST HAVE TAILS
Disposable Paper Cone 3 degree 51 minute taper
Color Coded
Bottom diameter cannot exceed 9-1/4 inches
Cone length cannot exceed 6 5/8 inches
Angle of wind to equal a 2-1/2 turn drum on
winder
Page 6
(15)
Schedule C
34.5/1 50/50 KP OE WARP YARN SPECIFICATIONS
TYPE TEST SPECIFICATION
Yarn Count 34.5/1
%VO 0.75
Skein Strength
Pounds 60 min.
Breakfactor 2200 min.
Single-End Strength
Grams Break 240 min.
% VO 9.0 max.
% VB 1.5 max.
% VW 10.00 max.
Single-End Elongation
Percent 8.0 min.
% VO 10 max.
Uster Eveness
Uster CV% 16-17
%VO 1.0 max.
Imperfection Count
Thin Places 150 max.
Thick Places 350 max.
Neps 600 max.
Classimat
Minors 200 max.
Majors 1 max.
Long Thick Places 1 max.
Long Thin Places 10 max.
Polyester High Tenacity
Package Size Metered
Plt. 4 - 143,000
Yds.
Plt. 16 - 206,000
Yds.
/TABLE
Page 7
(16)
Schedule D
SPECIFICATION FOR 37/1, 50/50 P/L MJS Yarn
PROPERTY SPECIFICATION
Yarn Count 37
% VB 1.4 max.
Skein Strength
Pounds 63 min.
Break Factor 2365 min.
Single-end Strength
Grams Break 235 min.
% Vo 11.5
Single-End Elongation
Percent 8.5 min.
%VO 11.0
Uster CV% 17.0 max.
%Vb 2.2 max.
Thins 140 max.
Thicks 300 max.
Neps 300 max.
Classimat
Minors 850 max.
Majors/Long Thicks 5 max.
Long Thins 300 max.
Package 6#
Disposable Paper Cone 3 degree 51 minute taper
Color Coded
Bottom diameter cannot exceed 9-1/4 inches
Cone length cannot exceed 6-5/8 inches
Angle of wind to equal a 2-1/2 turn drum on
winder
Specs. subject to minor changes.
Page 8
(17)
Schedule E
SHEETING DIVISION
WEEKLY REQUIREMENTS FOR PURCHASED YARN
(In Thousand Pounds)
Yarn Type Plant 04 Plant 07 Plant 16 Total
26/1 50/50 MJS-Filling 39.6 14.0 6.4 60.0
34.5/1 50/50 O.E.-Warp 185.0 42.0 107.0 334.0
37/1 50/50 MJS-Filling 159.0 27.3 76.0 262.3
Total 383.6 83.3 189.4 656.3
/TABLE
Page 9
(18)
Schedule F
Cotton Requirements Per Pound of Yarn
Waste Cotton Cotton Required
Yarn Type Factor Content Per Pound of
Yarn
26/1 50/50 M.J.S. - Filling * .5 pounds *
34.5/1 50/50 O.E. - Warp * .5 pounds *
37/1 50/50 M.J.S. - Filling * .5 pounds *
At the end of 1996, Parkdale agrees to allow Fieldcrest Cannon
personnel to review the waste recover process.
*Information has been omitted as confidential and filed separately
with the Commission.
Page 10
(19)
Schedule G
Parkdale's Cost of Conversion
Conversion Costs
Yarn Type Per Pound
26/1 50/50 M.J.S. - Filling $*
34.5/1 50/50 O.E. - Warp $*
37/1 50/50 M.J.S. - Filling $* for 1996
$* for 1997, 1998
*Information has been omitted as confidential and filed
separately with the Commission.
Page 11
(20)
Schedule H
Schedule for Cotton Price Fixations
Cotton Requirement for
Projected Yarn Deliveries
Prices Should be Fixed N.Y. Futures
Quarter Bales Prior To Cover Month
First 9500 November 30 March
Second 9500 February 28 May
Third 9500 May 31 July
Fourth 9500 August 30 December
Persons responsible for price fixation orders at Fieldcrest
Cannon: Frank Garnier, and in his absence, Carol Kasten
Persons responsible for price fixation executions at Parkdale:
Duke Kimbrell, and in his absence, Andy Warlick
Page 12
(21)
Exhibit 11
Computation of Primary and Fully Diluted Net Income Per Share
For the three months
ended March 31
1996 1995
Average shares outstanding 8,954,830 8,794,159
Add shares assuming exercise of
options reduced by the number
of shares which could have been
purchased with the proceeds from
exercise of such options 7,389 12,816
Average shares and equivalents
outstanding, primary 8,962,219 8,806,975
Average shares outstanding 8,954,830 8,794,159
Add shares giving effect to the
conversion of the convertible
subordinated debentures (1) (1)
Add shares giving effect to the
conversion of the convertible
preferred stock (1) (1)
Add shares assuming exercise of
options reduced by the number
of shares which could have been
purchased with the proceeds from
exercise of such options 9,627 13,704
Average shares and equivalents
outstanding, assuming full
dilution 8,964,457 8,807,863
Primary Earnings
Net income (loss) $ (677,000) $ 3,563,000
Preferred dividends (1,125,000) (1,125,000)
Earnings (loss) on Common $(1,802,000) $ 2,438,000
Primary earnings (loss) per share $ (.20) $ .28
Fully Diluted Earnings
Earnings (loss) on Common $(1,802,000) $ 2,438,000
Add convertible subordinated
debenture interest, net of taxes (1) (1)
Add convertible preferred dividends (1) (1)
Net income (loss) $(1,802,000) $ 2,438,000
Fully diluted earnings (loss) per share $ (.20) $ .28
(1)The assumed conversion of the Registrant's Convertible Subordinated
Debentures and Convertible Preferred Stock for the three month periods
ended March 31, 1996 and 1995 would have an anti-dilutive effect for
the computation of earnings per share; therefore, conversion has not
been assumed for these periods.
(22)