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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File 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, NC 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 September 30, 1997
Common Stock 9,243,602
Total pages 12
Exhibit Index Page 11
PART 1. FINANCIAL INFORMATION
FIELDCREST CANNON, INC.
Consolidated statement of financial position
September 30 December 31,
Dollars in thousands 1997 1996
Assets
Cash $ 5,475 $ 4,647
Accounts receivable 170,071 154,511
Inventories (note 3) 202,064 216,165
Other prepaid expenses and current assets 2,218 2,489
Total current assets 379,828 377,812
Plant and equipment, net 342,392 323,838
Deferred charges and other assets 67,259 66,843
Total assets $789,479 $768,493
Liabilities and shareowners' equity
Accounts and drafts payable $ 63,893 $ 63,910
Deferred income taxes 20,593 18,212
Accrued liabilities 69,435 61,172
Current portion of long-term debt 4,697 5,508
Total current liabilities 158,618 148,802
Senior long-term debt 111,320 107,746
Subordinated long-term debt 197,500 203,750
Total long-term debt 308,820 311,496
Deferred income taxes 39,758 38,291
Other non-current liabilities 52,962 54,149
Total liabilities 560,158 552,738
Shareowners' equity:
Preferred Stock, $.01 par value,
10,000,000 authorized, 1,500,000 issued
and outstanding September 30, 1997 and
December 31, 1996 (aggregate liquidation
preference of $75,000) 15 15
Common Stock, $1 par value,
25,000,000 authorized, 12,850,002 issued
September 30, 1997 and 12,738,894
December 31, 1996 12,850 12,739
Additional paid in capital 226,758 224,611
Retained earnings 106,923 95,615
Excess purchase price for Common Stock
acquired and held in treasury -
3,606,400 shares (117,225) (117,225)
Total shareowners' equity 229,321 215,755
Total liabilities and shareowners' equity $789,479 $768,493
/TABLE
See accompanying notes
(2)
FIELDCREST CANNON, INC.
Consolidated statement of operation and retained earnings
For the three months For the nine months
Dollars in thousands, ended September 30 ended September 30
except per share data 1997 1996 1997 1996
Net sales $286,966 $285,221 $820,635 $812,995
Cost of sales 243,060 249,568 695,615 706,482
Selling, general and administrative 29,395 28,253 85,563 78,406
Restructuring charges - 4,500 - 8,130
Total operating costs and expenses 272,455 282,321 781,178 793,018
Operating income 14,511 2,900 39,457 19,977
Other deductions (income):
Interest expense 6,150 7,160 18,708 21,496
Other, net (347) 97 (2,021) 519
Total other deductions 5,803 7,257 16,687 22,015
Income (loss) before income taxes 8,708 (4,357) 22,770 (2,038)
Federal and state income
taxes (benefit) 2,884 (1,634) 8,087 (764)
Net income (loss) 5,824 (2,723) 14,683 (1,274)
Preferred dividends (1,125) (1,125) (3,375) (3,375)
Earnings (loss) on common 4,699 (3,848) 11,308 (4,649)
Amount added to (subtracted from)
retained earnings 4,699 (3,848) 11,308 (4,649)
Retained earnings,
beginning of period 102,224 98,254 95,615 99,055
Retained earnings, end of period $106,923 $ 94,406 $106,923 $ 94,406
Net income (loss) per common share $ .51 $ (.43) $ 1.23 $ (.52)
Fully diluted income (loss)
per common share $ .47 $ (.43) $ 1.23 $ (.52)
Average primary shares outstanding 9,275,112 9,044,250 9,204,171 9,002,815
Average fully diluted shares outstanding 14,595,551 9,044,250 9,247,477 9,003,562
/TABLE
See accompanying notes
(3)
FIELDCREST CANNON, INC.
Consolidated statement of cash flows
Nine Months
ended September 30
Dollars in thousands 1997 1996
Increase (decrease) in cash
Cash flows from operating activities:
Net income (loss) $ 14,683 $ (1,274)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 26,241 26,979
Deferred income taxes 1,467 (2,732)
Other (2,319) 8,625
Change in current assets and liabilities:
Accounts receivable (15,560) 4,156
Inventories 14,101 (36,219)
Other prepaid expenses and current assets 271 2,369
Accounts payable and accrued liabilities 8,246 7,210
Deferred income taxes 2,381 (616)
Net cash provided by operating activities 49,511 8,498
Cash flows from investing activities:
Additions to plant and equipment (46,214) (21,035)
Proceeds from disposal of plant and equipment 3,277 3,911
Net cash (used in) investing activities (42,937) (17,124)
Cash flows from financing activities:
Increase in revolving debt 4,294 11,826
Proceeds from issuance of long-term debt - 3,610
Payments on long-term debt (6,665) (800)
Proceeds from sale of common stock - 41
Dividends paid on preferred stock (3,375) (3,375)
Net cash provided by (used in)
financing activities (5,746) 11,302
Increase in cash 828 2,676
Cash at beginning of year 4,647 9,124
Cash at end of period $ 5,475 $ 11,800
See accompanying notes
(4)
FIELDCREST CANNON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
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 September 30, 1997 and the related results of
operations for the three and nine months ended September 30,
1997 and 1996. The unaudited consolidated financial
statements should be read in conjunction with the Company's
Form 10-K for the year ended December 31, 1996.
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:
September 30, December 31,
(In thousands) 1997 1996
Finished goods $ 92,655 $104,092
Work in process 65,718 68,668
Raw materials and supplies 43,691 43,405
$202,064 $216,165
At September 30, 1997 approximately 65% 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) decreased $3.5 million during the first nine months of
1997. Capital expenditures totaled $46.2 million for the first
nine months of 1997 compared to $21.0 million for the first nine
months of 1996. Capital expenditures for 1997 are expected to be
approximately $70 million. At September 30, 1997, approximately
$87.5 million of the Company's $200 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 and borrowings under the Company's
revolving credit facility.
On September 10, 1997, the Company entered into a merger
agreement with Pillowtex Corporation under which Pillowtex will
acquire the Company for a combination of cash and Pillowtex
common stock. Under the agreement each share of Company common
stock would be exchanged for $27 in cash and $7 in Pillowtex
common stock and each share of preferred stock would be exchanged
for $46.15 in cash and $11.97 in Pillowtex common stock. The
merger is conditioned upon, among other things, approval of each
company's shareholders and customary regulatory clearances, and
is expected to be completed by the end of 1997.
Changes in Results of Operations
Quarter Ended September 30, 1997 vs. Quarter Ended
September 30, 1996
Net sales for the third quarter of 1997 were $287.0 million
compared to $285.2 million in the third quarter of 1996, an
increase of 1%. Excluding the effects of the sales during 1996
of the Company's Blanket Division, sales in the third quarter of
1997 increased 8%. The increase in revenues was due primarily to
volume increases.
Gross profit margins increased from 12.5% in the third quarter of
1996 to 15.3% in the third quarter of 1997. The increase
reflects lower raw material costs, the benefits of recently
completed capital projects, and continued emphasis on cost
reduction programs. Operating income for the third quarter of
1997 was adversely affected by $2.7 million of costs relating to
lower labor productivity, lower mill activity and administrative
costs in connection with union organizing efforts at the
Kannapolis, N.C. area plants that occurred in August 1997 and
$1.3 million for expenses related to stock appreciation rights
plans. Operating income for the third quarter of 1996 was
reduced $1.7 million by equipment relocation and employee
training costs related to the consolidation and closing of two
towel facilities.
(6)
Selling, general and administrative expenses increased as a
percentage of sales from 9.9% to 10.2% in the third quarter of
1997 compared to the same quarter of 1996. The increase was due
primarily to higher information technology expenses associated
with implementation of new enterprise information systems and
higher advertising expenses.
In the third quarter of 1996 operating income was reduced by pre-
tax restructuring charges of $4.5 million for employee
termination benefits and facility disposal costs related to the
sale of certain Blanket Division assets to Pillowtex Corporation.
Interest expense decreased $1.0 million in the third quarter of
1997 as compared to the third quarter of 1996 due primarily to a
decrease in average debt outstanding. Total debt declined $67.2
million from September 30, 1996 to September 30, 1997, as a
result of the sale of the Blanket Division and lower inventory
levels. Inventories at September 30, 1997 were $37.5 million
lower than September 30, 1996, after excluding blanket
inventories.
The effective income tax rate was 33.1% for the third quarter of
1997 compared to 37.5% for the third quarter of 1996.
Net income was $5.8 million, or $.51 per share after preferred
dividends, in the third quarter of 1997, compared to a loss after
the effect of the restructuring charges of $2.7 million, or $.43
per share after preferred dividends, in the third quarter of
1996.
Nine Months Ended September 30, 1997 vs. Nine Months Ended
September 30, 1996
Net sales for the first nine months of 1997 were $820.6 million
compared to $813.0 million in the first nine months of 1996.
Excluding the effects of the sales during 1996 of the Company's
Blanket Division, sales in 1997 increased 6.5%. The increase in
revenues was due primarily to volume increases.
Gross profit margins increased from 13.1% in the first nine
months of 1996 to 15.2% in the first nine months of 1997. The
increase reflects lower raw material costs, the benefits of
recently completed capital projects, and continued emphasis on
cost reduction programs. Operating income for the nine months
ended September 30, 1996 was reduced $3.3 million by equipment
relocation and employee training costs related to the
consolidation and closing of two towel facilities.
Selling, general and administrative expenses increased as a
percentage of sales from 9.6% to 10.4% in the first nine months
of 1997 compared to the first nine months of 1996. The increase
was
due primarily to higher information technology expenses
associated with implementation of new enterprise information
systems and higher advertising expenses.
(7)
Pre-tax restructuring charges of $8.1 million in the first nine
months of 1996 include $3.6 million for closing a towel weaving
plant and a yarn manufacturing plant as a part of the Company's
ongoing consolidation effort to utilize assets more effectively
and $4.5 million for employee termination benefits and disposal
costs related to sale of certain Blanket Division assets.
Interest expense decreased $2.8 million the first nine months of
1997 as compared to the first nine months of 1996 due primarily
to a decrease in average debt outstanding. The decreased debt
resulted from the sale of the Blanket Division in 1996 and lower
inventory levels.
The effective income tax rate was 35.5% for the first nine months
of 1997 compared to 37.5% for the first nine months of 1996.
Net income for the first nine months of 1997 was $14.7 million,
or $1.23 per share after preferred dividends, compared to a loss
after the effect of the restructuring charges of $1.3 million, or
a loss of $.52 per share after preferred dividends, for the first
nine months of 1996.
In February, 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share, which is required
to be adopted on December 31, 1997. At that time, the Company
will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. The impact of
Statement 128 on the calculation of earnings per share for these
quarters is not expected to be material.
(8)
Item 6. Exhibits and Reports on Form 8-K
(a). Exhibits
11 Computation of Primary and Fully Diluted Net
Income Per Share.
(b). Reports on Form 8-K
On September 15, 1997 the Registrant filed a Form 8-K
to report under Item 5 (Other Events), that on
September 10, 1997, Fieldcrest Cannon, Inc. (the
"Company"), Pillowtex Corporation ("Pillowtex") and a
wholly-owned subsidiary of Pillowtex ("Newco") entered
into an agreement (the "Merger Agreement") pursuant to
which, on the terms and subject to the condition set
forth therein, Newco will be merged with and into the
Company, and the Company will thereby become a wholly
owned subsidiary of Pillowtex.
(9)
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: /s/ T. R. Staab
T. R. Staab
Vice President and
Chief Financial Officer
Date: October 29, 1997
(10)
EXHIBIT INDEX TO
QUARTERLY REPORT ON FORM 10-Q FOR
FIELDCREST CANNON, INC.
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
Exhibit Page
Number Description Number
(11) Computation of Primary and Fully
Diluted Net Income Per Share 12
/TABLE
(11)
Exhibit 11
Computation of Primary and Fully Diluted Net Income Per Share
For the three months For the nine months
ended September ended September 30
1997 1996 1997 1996
Average shares outstanding $ 9,225,965 $8,884,750 $9,184,756 8,995,373
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 49,147 5,455 19,415 7,442
Average shares and equivalents
outstanding, primary 9,275,112 9,044,250 9,204,171 9,002,815
Average shares outstanding 9,225,965 9,038,795 9,184,756 8,995,373
Add shares giving effect to the
conversion of the convertible
subordinated debentures 2,632,248 (1) (1) (1)
Add shares giving effect to the
conversion of the convertible
preferred stock 2,564,100 (1) (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 173,238 5,455 62,721 8,189
Average shares and equivalents
outstanding, assuming full
dilution 14,595,551 9,044,250 9,247,477 9,003,562
Primary Earnings
Net income (loss) $ 5,824,000 $(2,723,000) $14,683,000 $(1,274,000)
Preferred dividends (1,125,000) (1,125,000) (3,375,000) (3,375,000)
Earnings (loss) on Common $ 4,699,000 $(3,848,000) $11,308,000 $(4,649,000)
Primary earnings (loss)
per common share $ .51 $ (.43) $ 1.23 $ (.52)
Fully Diluted Earnings
Earnings (loss) on Common $ 4,699,000 $(3,848,000) $11,308,000 $(4,649,000)
Add convertible subordinated
debenture interest, net of taxes 1,066,000 (1) (1) (1)
Add convertible preferred dividends 1,125,000 (1) (1) (1)
Net income (loss) $ 6,890,000 $(3,848,000) $11,308,000 $(4,649,000)
Fully diluted earnings (loss)
per Common share $ .47 $ (.43) $ 1.23 $ (.52)
(1) The assumed conversion of the Registrant's Convertible Subordinated Debentures and
Convertible Preferred Stock for the three months ended September 30, 1996 and nine
months ended September 30, 1997 and 1996 would have an anti-dilutive effect for the
computation of earnings per share; therefore, conversion has not been assumed for these
periods.
(12)