Ten-Year Financial Review
(Dollars in 000s except share data)
1997 1996 1995 1994 1993
===================================================================================
Net Sales .................................... $ 3,575,774 $ 3,201,554 $ 2,869,828 $ 2,788,527 $ 2,476,282
Cost of Sales ................................ 2,680,472 2,485,068 2,319,894 2,187,439 1,963,206
Selling, General and Administrative
Expenses ................................... 722,590 541,338 393,868 366,189 301,790
Pre-opening Expenses, Retail Operations ...... 3,953 13,595 -- -- --
Charge to Record Store Closing Costs ......... 36,787 -- -- -- --
Nonrecurring Charges ......................... -- 29,139 6,967 -- --
Write-down of U.K. Assets .................... 47,952 -- -- -- --
Restructuring Costs .......................... -- 19,963 -- -- --
Interest, Net ................................ 60,769 42,442 41,901 30,022 24,107
Other Expense (Income), Net .................. (7,032) (3,609) 443 (4,922) (2,530)
Income Before Income Taxes, Equity in
Income of Joint Venture, Extraordinary Item
and Accounting Change ..................... 30,283 73,618 106,755 209,799 189,709
As a Percentage of Net Sales ............ 0.8% 2.3% 3.7% 7.5% 7.7%
Effective Tax Rate ........................... 18.4% 59.0% 40.8% 37.9% 38.0%
Income Before Equity in Income of Joint
Venture, Extraordinary Item and Accounting
Change .................................... 24,697 30,155 63,152 130,389 117,636
Equity in Income of Joint Venture ............ 4,262 3,868 1,229 -- --
Extraordinary Item ........................... -- -- -- (3,363) --
Accounting Change ............................ -- -- (12,077) -- --
Net Income ................................... 28,959 34,023 52,304 127,026 117,636
As a Percentage of Net Sales ............... 0.8% 1.1% 1.8% 4.6% 4.8%
As a Percentage of Average Total Assets .... 1.5% 1.9% 3.1% 8.1% 8.8%
As a Percentage of Average Invested Capital 1.9% 2.4% 3.9% 10.7% 12.1%
As a Percentage of Average
Shareholders' Investment ................ 4.4% 4.9% 7.4% 17.7% 17.5%
Earnings Per Share:
Basic ..................................... 0.22 0.25 0.38 0.90 0.82
Diluted ................................... 0.22 0.25 0.38 0.89 0.81
Cash Dividends Per Share ..................... 0.30 0.30 0.30 0.22 0.18
Property Additions (including acquisitions) .. 106,728 177,062 93,805 187,045 174,635
Depreciation and Amortization ................ 94,954 90,906 91,083 84,898 82,416
Weighted Average Shares Outstanding:
Basic ..................................... 133,523,380 135,731,360 135,872,432 141,431,607 142,946,223
Diluted ................................... 133,714,496 135,915,308 136,378,159 142,483,067 144,922,741
At Year-End:
Working Capital ........................... 740,959 670,344 641,445 617,338 437,445
Current Ratio ............................. 3.3 2.6 3.5 3.0 2.2
Property, Plant and Equipment, Net ........ 624,379 655,141 631,990 656,178 551,873
Total Assets .............................. 1,967,614 1,984,398 1,662,783 1,697,378 1,454,266
Total Long-Term Debt ...................... 930,424 825,280 627,130 612,061 317,914
Shareholders' Investment .................. 637,534 671,711 710,189 713,025 723,830
Total Invested Capital* ................... 1,567,958 1,496,991 1,337,319 1,325,086 1,041,744
Shareholders' Investment Per Share ........ $ 4.86 $ 5.06 $ 5.22 $ 5.20 $ 5.04
1992 1991 1990 1989 1988
===================================================================================
Net Sales .................................... $ 2,035,962 $ 1,618,923 $ 1,658,771 $ 1,266,142 $ 1,120,163
Cost of Sales ................................ 1,641,404 1,341,312 1,348,808 1,017,084 905,305
Selling, General and Administrative
Expenses ................................... 240,192 188,363 179,381 138,708 126,500
Pre-opening Expenses, Retail Operations ...... -- -- -- -- --
Charge to Record Store Closing Costs ......... -- -- -- -- --
Nonrecurring Charges ......................... -- -- -- -- --
Write-down of U.K. Assets .................... -- -- -- -- --
Restructuring Costs .......................... -- -- -- -- --
Interest, Net ................................ 26,083 30,973 35,026 20,828 23,776
Other Expense (Income), Net .................. 324 (74) (483) (640) (145)
Income Before Income Taxes, Equity in
Income of Joint Venture, Extraordinary Item
and Accounting Change ..................... 127,959 58,349 96,039 90,162 64,727
As a Percentage of Net Sales ............ 6.3% 3.6% 5.8% 7.1% 5.8%
Effective Tax Rate ........................... 38.5% 38.3% 38.0% 38.4% 37.8%
Income Before Equity in Income of Joint
Venture, Extraordinary Item and Accounting
Change .................................... 78,695 35,985 59,515 55,567 40,285
Equity in Income of Joint Venture ............ -- -- -- -- --
Extraordinary Item ........................... -- -- -- -- --
Accounting Change ............................ -- -- -- -- --
Net Income ................................... 78,695 35,985 59,515 55,567 40,285
As a Percentage of Net Sales ............... 3.9% 2.2% 3.6% 4.4% 3.6%
As a Percentage of Average Total Assets .... 7.7% 4.5% 8.0% 9.4% 8.1%
As a Percentage of Average Invested Capital 10.5% 6.2% 11.1% 12.7% 10.7%
As a Percentage of Average
Shareholders' Investment ................ 16.1% 12.8% 29.1% 29.4% 25.4%
Earnings Per Share:
Basic ..................................... 0.61 0.32 0.51 0.46 0.33
Diluted ................................... 0.59 0.31 0.49 0.45 0.32
Cash Dividends Per Share ..................... 0.15 0.125 0.125 0.10 0.083
Property Additions (including acquisitions) .. 191,830 48,230 116,739 144,308 30,362
Depreciation and Amortization ................ 67,414 62,075 60,734 38,600 41,866
Weighted Average Shares Outstanding:
Basic ..................................... 129,742,222 111,850,981 117,330,116 120,084,604 123,377,560
Diluted ................................... 132,422,292 115,260,162 120,616,219 122,533,553 123,983,538
At Year-End:
Working Capital ........................... 448,089 290,305 260,644 224,443 199,458
Current Ratio ............................. 2.6 2.5 2.4 2.3 3.0
Property, Plant and Equipment, Net ........ 453,276 344,182 341,266 293,030 192,194
Total Assets .............................. 1,223,439 816,874 790,935 690,202 496,374
Total Long-Term Debt ...................... 281,742 235,424 376,499 292,763 205,775
Shareholders' Investment .................. 619,977 358,643 201,667 207,434 170,309
Total Invested Capital* ................... 901,719 594,067 578,166 500,197 376,084
Shareholders' Investment Per Share ........ $ 4.38 $ 2.89 $ 1.87 $ 1.73 $ 1.39
*The sum of shareholders' investment and long-term debt.
NOTE:All share data have been adjusted for two-for-one stock splits effected in
the form of stock dividends in December 1993, March 1992 and May 1989.
EXHIBIT 13, PAGE 1
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The Company's business, as well as the U.S. carpet industry in general, is
cyclical in nature and is significantly affected by general economic conditions.
The level of domestic carpet sales tends to reflect fluctuations in consumer
spending for durable goods and, to a lesser extent, fluctuations in interest
rates and new housing starts. The Company's international operations are also
impacted by the economic climates in the markets in which they operate
(primarily the United Kingdom, Australia and Mexico).
During 1997, the Company acquired additional residential retailers and
commercial contractors including The Carpet Exchange, Baker Brothers, Carpet
Factory Outlet, Vulcan Floors, Inc., Morton Floors, Inc. and others for cash and
common stock totaling $53.9 million and resulting in goodwill of $38.8 million
which is being amortized over 20 years.
In addition, the Company opened 28 residential retail stores in 1997 and
incurred pre-opening expenses of $3,953,000. In the fourth quarter of 1997, the
Company announced a plan to close approximately 100 residential retail store
locations which had combined net sales of $90 million but contributed negatively
to the Company's profitability. Net sales for the Company's retail and
commercial contract business totaled $949.1 million in 1997 compared to $499.2
million in 1996. At January 3, 1998, the Company had approximately 450 retail
and commercial contract locations throughout the United States, including the
residential retail stores scheduled to close.
The Company believes that by combining the resources of the manufacturer
and retailer and developing a commercial contract distribution network, it can
provide a full range of products and services to more effectively meet the needs
of the end user of both residential and commercial carpet products at
significantly improved margins. As part of this strategy, the Company continues
its efforts to develop an alignment program with dealers of both residential and
commercial carpet products to provide a collection of services, benefits and
programs that will encourage dealers to increase their purchases from the
Company. At January 3, 1998, the Company had approximately 1,500 aligned
dealers.
Liquidity and Capital Resources
At January 3, 1998, the Company had working capital of $741.0 million, an
increase of $70.7 million over working capital of $670.3 million at December 28,
1996. Cash and cash equivalents decreased $6.0 million to $43.6 million at
January 3, 1998 from $49.6 million at December 28, 1996. The Company's
operations generated cash flow of $139.3 million in 1997, principally from net
income of $29.0 million adjusted for depreciation and amortization of $95.0
million, a charge to record store closing costs of $36.8 million, a write-down
of U.K. assets of $48.0 million and decreases in accounts receivable and
inventories of $74.3 million, offset in part by decreases in accounts payable
and accrued liabilities of $95.7 million. The Company's operations provided cash
flow in 1996 of $166.3 million, principally from net income of $34.0 million
adjusted for depreciation and amortization of $90.9 million and nonrecurring
charges of $29.1 million and restructuring costs of $20.0 million. In 1997, the
Company invested cash in additions to property, plant and equipment of $78.0
million, net of retirements of $31.9 million and acquisitions of business assets
of $28.7 million compared to additions of $106.8 million, net of retirements of
$2.6 million, and acquisitions of $70.2 million in 1996. The Company expended
cash in financing activities during 1997 for payments on notes payable of $39.4
million, cash dividends of $40.0 million and repurchases of 3,820,000 shares of
common stock for $46.1 million, funded in part by an increase in long-term debt
of $330.0 million, offset by payments of debt of $243.6 million. In 1996,
financing activities provided cash flow through an increase in long-term debt of
$231.6 million, offset by payments on debt of $75.0 million, cash dividends of
$40.8 million and repurchases of 7,676,800 shares of common stock for $87.8
million.
The Company has continued to maintain a strong working capital position.
Effective use of capital and the Company's ability to generate cash flow from
operations have enabled it to invest in technologies which reduce production
costs, generate operating margins that have historically exceeded industry
averages, implement its retail strategy and fund repurchases of common stock.
Capital expenditures for property, plant and equipment necessary to upgrade
and maintain the Company's facilities in a modern state-of-the-art condition
were $109.9 million. Management anticipates total capital expenditures and
capitalized lease obligations of approximately $50 million in 1998 to expand and
upgrade its manufacturing and distribution equipment to meet anticipated
increases in sales volume, to improve efficiency and to upgrade its current
retail operations.
In January 1998, the Company announced no further cash dividends would be
paid in fiscal 1998 subsequent to the quarterly dividend on February 27, 1998 to
shareholders of record on February 16, 1998.
On February 9, 1998, the Company commenced a "dutch auction" tender offer
to acquire up to approximately 10,600,000 shares of its common stock,
representing approximately 8.1 percent of its currently outstanding shares.
Under the terms of the offer, the Company's shareholders may tender their shares
at a price within a range of $11.00 to $14.00 per share for a period of 20
business days.
The Company's primary source of financing is an unsecured revolving credit
facility with a banking syndicate, which provides for borrowings of up to $950.0
million and expires in March 2002. Interest on borrowings under this facility is
currently based on LIBOR and was 6.41 percent at January 3, 1998. At January 3,
1998, borrowings outstanding under this credit facility were $774.0 million.
During 1997, the Company amended its interest rate swap agreements with notional
amounts totaling $300.0 million whereby the Company agreed to pay interest at a
fixed rate of 5.95 percent. As a result, the interest on approximately one-third
of the Company's unsecured revolving credit facility has been fixed. The
interest rate swap agreements expire in 2000. The Company does not use interest
rate swap agreements or any other derivatives for speculative trading purposes.
In February 1998, the Company received commitments from a group of
financial institutions for a new $1.0 billion unsecured revolving credit
facility which will replace the facility outstanding at January 3, 1998 and
provide for borrowings to fund stock repurchases under the "dutch auction"
tender offer. The terms and interest rates of the new facility are expected to
be comparable to the current facility.
The Company has a multicurrency credit facility in the United Kingdom with
a banking syndicate which provides for borrowings up to $131.3 million and
expires in 2001. Interest on borrowings under this facility is based on LIBOR
and approximated 8.28 percent at January 3, 1998. Borrowings outstanding under
this credit facility were $80.0 million at January 3, 1998. The Company expects
to terminate this facility upon consummation of the disposal of the U.K.
operations discussed below. In addition, the Company maintains a revolving
credit facility in Australia of $57.9 million with $46.2 million outstanding and
$11.7 million available at January 3, 1998.
The Company believes that available borrowings under its existing and
committed credit 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.
EXHIBIT 13, PAGE 2
Inflation
The Company's manufacturing costs and operating expenses are affected by
price changes. The costs of fiber and other raw materials decreased
approximately 3 percent in 1997 after having increased slightly in 1996 and
1995. The Company has historically mitigated inflationary effects by passing
price changes along to its customers and by continually developing and
implementing more cost effective manufacturing and other operational procedures.
The Company's ongoing ability to mitigate the effect of price changes will
depend on market factors.
Year 2000 Compliance
The Company has assessed the impact of the year 2000 on its reporting
systems and operations. The Company believes its plans, which are expected to be
fully implemented by the end of 1998, will adequately resolve year 2000
compliance issues and will result in an immaterial impact on the Company's
results of operations.
Results of Operations
1997 Compared to 1996
Net sales increased $374.2 million, or 11.7 percent, to $3,575.8 million in
1997. The increase was primarily attributable to incremental net sales of $449.9
million related to the residential retail and commercial contract business,
offset by slight declines in net sales prices and volumes for the Company's
wholesale manufacturing operations in both the domestic and international
markets. Gross margin as a percent of net sales increased 2.6 percent to 25.0
percent for 1997, compared to 22.4 percent for 1996, primarily due to the
incremental impact of the Company's residential retail and commercial contract
business and higher margins for the wholesale manufacturing operations in both
the domestic and international markets. Domestic and international wholesale
manufacturing margins improved .8 percent and 11.1 percent, respectively, in
1997 compared to 1996 primarily due to improved sales product mix and lower raw
material costs.
Selling, general and administrative expenses for 1997 were $722.6 million,
or 20.2 percent of net sales, compared to $541.3 million, or 16.9 percent of net
sales, in 1996. The increase of $181.3 million, or 3.3 percent of net sales, was
primarily due to increased advertising and other selling and administrative
expenses associated with the Company's continued expansion into the residential
retail and commercial contract business. Pre-opening expenses related to the
retail operations totaled $4.0 million in 1997 compared to $13.6 million in
1996. Interest expense, net, increased to $60.8 million in 1997 from $42.4
million in 1996 as a result of higher borrowings and an overall increase in
interest rates.
Results for 1997 include a charge to record residential retail store
closing costs of $36.8 million ($23.3 million, net of tax benefit, or $.17 per
share) and a reduction in the carrying value of the assets of Carpets
International, Plc (U.K.) of $48.0 million ($20.3 million, net of tax benefit,
or $.15 per share). Net income before these charges was $72.1 million, or $.54
per share, compared to 1996 net income of $84.7 million, or $.62 per share,
before nonrecurring charges of $29.1 million ($26.5 million, net of tax benefit,
or $.19 per share) and restructuring costs of $36.1 million ($24.2 million, net
of tax benefit, or $.18 per share). Net income after the charge to record store
closing costs and reduction in the carrying value of the assets in the U.K. was
$29.0 million, or $.22 per share, in 1997 compared to net income of $34.0
million, or $.25 per share, after nonrecurring charges and restructuring costs
in 1996.
The effective income tax rate for 1997 was 18.4 percent, compared to 59.0
percent in 1996, as a result of lower taxable income created by the tax benefit
related to the reduction in the carrying value of the U.K. assets.
1996 Compared to 1995
Net sales increased $331.8 million, or 11.5 percent, to $3,201.6 million in
1996. The increase was primarily attributable to incremental net sales of $498.6
million related to the residential retail and commercial contract business,
offset by declines in net sales prices and volumes for the Company's wholesale
manufacturing operations in both the domestic and international markets. Gross
margin as a percent of net sales increased 3.2 percent to 22.4 percent for 1996,
compared to 19.2 percent for 1995, primarily due to higher margins for retail
sales, offset in part by slightly higher raw material costs. Domestic and
international wholesale manufacturing margins improved 1.5 percent and 1.9
percent, respectively, in 1996 compared to 1995 primarily due to improved sales
product mix and increases in the efficiency relationships of volume and fixed
costs which outweighed slightly higher raw material costs.
Selling, general and administrative expenses for 1996 were $541.3 million,
or 16.9 percent of net sales, compared to $393.9 million, or 13.7 percent of net
sales, in 1995. The increase of $147.4 million, or 3.2 percent of net sales, was
primarily due to increased advertising and other selling and administrative
expenses associated with the Company's entrance into the residential retail and
commercial contract business. Pre-opening expenses related to the retail
operations totaled $13.6 million in 1996. Interest expense, net, increased to
$42.4 million in 1996 from $41.9 million in 1995 as a result of higher
borrowings, offset in part by an overall reduction in interest rates.
Results for 1996 included nonrecurring charges of $29.1 million ($26.5
million net of tax benefit, or $.19 per share) for the reduction in the carrying
value of certain goodwill, property, plant and equipment at its international
operations and a provision for the disposal of certain other assets, and
restructuring costs of $36.1 million ($24.2 million net of tax benefit, or $.18
per share) related to woolen and Axminster production in the United Kingdom, of
which $16.1 million was charged to cost of sales. Net income before nonrecurring
charges and restructuring costs was $84.7 million, or $.62 per share, compared
to $68.7 million, or $.50 per share, in 1995. Net income after nonrecurring
charges and restructuring costs was $34.0 million, or $.25 per share, in 1996
compared to net income of $52.3 million, or $.38 per share, in 1995, after
recording a change in accounting for samples and plant shutdown costs of $16.4
million, or $.12 per share in 1995.
The effective income tax rate for 1996 was 59.0 percent, compared to 40.8
percent in 1995, as a result of lower taxable income and increases in permanent
tax differences primarily as a result of nondeductible goodwill included in the
nonrecurring charges.
EXHIBIT 13, PAGE 3
Charge to Record Store Closing Costs and Write-Down of U.K. Assets
In December 1997, the Company announced a plan to close approximately 100
residential retail stores which resulted in a charge of $36.4 million ($22.8
million, net of tax benefit, or $.17 per share) consisting primarily of
reductions in the carrying value of long-lived assets of approximately
$13,430,000 and reserves for exit costs and employee termination benefits of
approximately $17,440,000 and $5,530,000, respectively. Prior to this charge,
the Company recorded store closing costs of $.4 million ($.3 million, net of tax
benefit) in 1997 which had no effect on earnings per share.
In December 1997, the Company entered into an agreement in principle to
dispose of Carpets International, Plc (the Company's wholly owned U.K.
subsidiary) and as a result of this agreement, recorded a reduction in the
carrying value of certain U.K. assets of $48.0 million ($20.3 million, net of
tax benefit, or $.15 per share) in 1997.
Foreign Operations
The Company's primary foreign operations are conducted through its United
Kingdom and Australian subsidiaries, where the functional currencies are British
pounds and Australian dollars, respectively. Fluctuations in the value of
foreign currencies create exposures which can impact the Company's operating
results. The Company may employ foreign currency forward exchange contracts
when, in the normal course of business, they are determined to effectively
manage and reduce such exposure. The Company does not enter into foreign
currency forward exchange contracts for speculative trading purposes.
EXHIBIT 13, PAGE 4
Consolidated Statements of Income
For Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
---------------- ---------------- ----------------
Net Sales ................................................ $3,575,774,000 $ 3,201,554,000 $ 2,869,828,000
Costs and Expenses:
Cost of sales ........................................ 2,680,472,000 2,485,068,000 2,319,894,000
Selling, general and administrative .................. 722,590,000 541,338,000 393,868,000
Pre-opening expenses ................................. 3,953,000 13,595,000 --
Charge to record store closing costs ................. 36,787,000 -- --
Restructuring costs .................................. -- 19,963,000 --
Write-down of U.K. assets ............................ 47,952,000 -- --
Nonrecurring charges ................................. -- 29,139,000 6,967,000
Interest, net ........................................ 60,769,000 42,442,000 41,901,000
Other (income) expense, net .......................... (7,032,000) (3,609,000) 443,000
---------------- ---------------- ----------------
Income Before Income Taxes ............................... 30,283,000 73,618,000 106,755,000
Provision for Income Taxes ............................... 5,586,000 43,463,000 43,603,000
---------------- ---------------- ----------------
Income Before Equity in Income of Joint Venture,
and Accounting Change ................................... 24,697,000 30,155,000 63,152,000
Equity in Income of Joint Venture ........................ 4,262,000 3,868,000 1,229,000
---------------- ---------------- ----------------
Income Before Accounting Change .......................... 28,959,000 34,023,000 64,381,000
Cumulative Effect of Accounting Change, net of tax benefit -- -- (12,077,000)
---------------- ---------------- ----------------
Net Income ............................................... $ 28,959,000 $ 34,023,000 $ 52,304,000
================ ================ ================
Earnings Per Common Share (Basic and Diluted):
Before Accounting Change ............................ $ 0.22 $ 0.25 $ 0.47
Cumulative Effect of Accounting Change .............. -- -- (0.09)
---------------- ---------------- ----------------
Net Income .......................................... $ 0.22 $ 0.25 $ 0.38
================ ================ ================
Weighted Average Shares Outstanding:
Basic ............................................... 133,523,380 135,731,360 135,872,432
Diluted ............................................. 133,714,496 135,915,308 136,378,159
The accompanying notes are an integral part of these consolidated financial
statements.
EXHIBIT 13, PAGE 5
Consolidated Balance Sheets
January 3, 1998 and December 28, 1996
1997 1996
--------------- ---------------
Assets
Current Assets:
Cash and cash equivalents .................................. $ 43,571,000 $ 49,581,000
--------------- ---------------
Accounts receivable, less allowance for doubtful accounts
and discounts of $16,283,000 in 1997 and ................
$16,667,000 in 1996 ..................................... 374,516,000 393,983,000
--------------- ---------------
Inventories-
Raw materials ............................................ 235,820,000 251,262,000
Work-in-process .......................................... 23,584,000 26,070,000
Finished goods ........................................... 270,655,000 279,453,000
--------------- ---------------
530,059,000 556,785,000
--------------- ---------------
Other current assets ....................................... 118,267,000 81,056,000
--------------- ---------------
Total current assets ..................................... 1,066,413,000 1,081,405,000
--------------- ---------------
Property, Plant and Equipment, at cost:
Land and land improvements ................................. 27,827,000 29,584,000
Buildings and leasehold improvements ....................... 299,090,000 293,072,000
Machinery and equipment .................................... 987,561,000 969,601,000
Construction in progress ................................... 69,345,000 45,289,000
--------------- ---------------
1,383,823,000 1,337,546,000
Less-Accumulated depreciation and amortization ............. 759,444,000 682,405,000
--------------- ---------------
624,379,000 655,141,000
--------------- ---------------
Goodwill, net of amortization .................................. 236,209,000 212,398,000
--------------- ---------------
Investment in Joint Venture .................................... 21,269,000 18,302,000
--------------- ---------------
Other Assets ................................................... 19,344,000 17,152,000
--------------- ---------------
Total Assets ............................................. $1,967,614,000 $1,984,398,000
=============== ===============
EXHIBIT 13, PAGE 6
1997 1996
--------------- ---------------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable .............................................. $ 10,000 $ 35,084,000
Current maturities of long-term debt ....................... 2,752,000 17,431,000
Accounts payable ........................................... 161,964,000 195,347,000
Accrued liabilities ........................................ 160,728,000 163,199,000
--------------- ---------------
Total current liabilities ................................ 325,454,000 411,061,000
--------------- ---------------
Long-Term Debt, less current maturities ........................ 930,424,000 825,280,000
--------------- ---------------
Deferred Income Taxes .......................................... 61,689,000 63,453,000
--------------- ---------------
Other Liabilities .............................................. 12,513,000 12,893,000
--------------- ---------------
Commitments and Contingencies
Shareholders' Investment:
Preferred stock, 250,000 shares authorized, no shares issued -- --
Common stock, no par, $1.11 stated value, authorized
500,000,000 shares; issued and outstanding: 131,118,065
shares at January 3, 1998 and 132,772,548 shares at
December 28, 1996 145,542,000 147,379,000
Paid-in capital ............................................ 54,745,000 72,335,000
Cumulative translation adjustment .......................... (620,000) 3,058,000
Retained earnings .......................................... 437,867,000 448,939,000
--------------- ---------------
Total shareholders' investment ........................... 637,534,000 671,711,000
--------------- ---------------
Total Liabilities and Shareholders' Investment ........... $1,967,614,000 $1,984,398,000
=============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
EXHIBIT 13, PAGE 7
Consolidated Statements of Shareholders' Investment
For Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
Cumulative
Common Stock Paid-In Translation Retained
Shares Amount Capital Adjustment Earnings
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 ... 137,017,402 $ 152,090,000 $ 118,635,000 $(1,815,000) $ 444,115,000
Net income ............... -- -- -- -- 52,304,000
Purchase and retirement
of common stock ............ (1,384,200) (1,537,000) (19,053,000) -- --
Exercise of stock options 323,400 360,000 2,136,000 -- --
Cumulative translation
adjustment ................. -- -- -- 3,710,000 --
Cash dividends paid
($.30 per share) ........... -- -- -- -- (40,756,000)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 30, 1995 ... 135,956,602 150,913,000 101,718,000 1,895,000 455,663,000
Net income ............... -- -- -- -- 34,023,000
Issuance of stock in
acquisitions ............... 4,379,646 4,862,000 49,207,000 --
Purchase and retirement
of common stock ............ (7,676,800) (8,521,000) (79,275,000) -- --
Exercise of stock options 113,100 125,000 685,000 -- --
Cumulative translation
adjustment ................. -- -- -- 1,163,000 --
Cash dividends paid
($.30 per share) ........... -- -- -- -- (40,747,000)
- ----------------------------------------------------------------------------------------------------------------
Balance, December 28, 1996 ... 132,772,548 147,379,000 72,335,000 3,058,000 448,939,000
Net income ............... -- -- -- -- 28,959,000
Issuance of stock in
acquisitions ............... 2,112,517 2,344,000 23,336,000 -- --
Issuance of stock to
directors .................. 7,000 8,000 83,000 -- --
Purchase and retirement
of common stock ............ (3,820,000) (4,240,000) (41,822,000) -- --
Exercise of stock options 46,000 51,000 504,000 -- --
Tax benefit on disposition
of stock options ........... -- -- 309,000 -- --
Cumulative translation
adjustment .................. -- -- -- (3,678,000) --
Cash dividends paid
($.30 per share) ........... -- -- -- -- (40,031,000)
- ----------------------------------------------------------------------------------------------------------------
Balance, January 3, 1998 ..... 131,118,065 $ 145,542,000 $ 54,745,000 $ (620,000) $ 437,867,000
================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
EXHIBIT 13, PAGE 8
Consolidated Statements of Cash Flow
For Years Ended January 3, 1998, December 28, 1996 and December 30, 1995
1997 1996 1995
-------------- -------------- --------------
Operating Activities:
Net Income ........................................................ $ 28,959,000 $ 34,023,000 $ 52,304,000
-------------- -------------- --------------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Depreciation and amortization ................................... 94,954,000 90,906,000 91,083,000
Provision for doubtful accounts ................................. 9,318,000 10,777,000 8,629,000
Deferred income taxes ........................................... (1,841,000) 12,120,000 5,028,000
Charge to record store closing costs ............................ 36,787,000 -- --
Nonrecurring charges ............................................ -- 29,139,000 --
Write-down of U.K. assets ....................................... 47,952,000 -- --
Restructuring costs ............................................. -- 19,963,000 --
Cumulative effect of accounting change .......................... -- -- 12,077,000
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable ......................................... 35,166,000 1,937,000 (21,137,000)
Inventories ................................................. 39,111,000 2,250,000 2,456,000
Accounts payable ............................................ (60,360,000) 22,427,000 (32,899,000)
Accrued liabilities ......................................... (35,371,000) (16,703,000) 28,277,000
Other, net .................................................. (55,397,000) (40,560,000) 15,429,000
-------------- -------------- --------------
Total Adjustments ......................................... 110,319,000 132,256,000 108,943,000
-------------- -------------- --------------
Net Cash Provided by Operating Activities ................... 139,278,000 166,279,000 161,247,000
-------------- -------------- --------------
Investing Activities:
Additions to property, plant and equipment ........................ (109,883,000) (109,454,000) (73,851,000)
Retirements from property, plant and equipment, net ............... 31,882,000 2,606,000 6,594,000
Acquisitions of business assets ................................... (28,727,000) (70,214,000) (29,503,000)
Investment in joint venture ....................................... -- -- (3,500,000)
Deconsolidation of joint venture .................................. -- -- (3,828,000)
-------------- -------------- --------------
Net Cash Used in Investing Activities ....................... (106,728,000) (177,062,000) (104,088,000)
-------------- -------------- --------------
Financing Activities:
Borrowings under revolving credit agreements ...................... 330,000,000 155,000,000 30,000,000
Repayment of revolving credit agreements .......................... (220,702,000) (75,000,000) (35,000,000)
Borrowings on other long-term debt ................................ -- 76,644,000 3,779,000
Repayment of long-term debt ....................................... (22,937,000) -- --
Net payments on short-term debt ................................... (39,383,000) -- --
Purchase and retirement of common stock ........................... (46,062,000) (87,796,000) (20,590,000)
Payment of cash dividends ......................................... (40,031,000) (40,747,000) (40,756,000)
Proceeds from exercise of stock options ........................... 555,000 810,000 2,496,000
-------------- -------------- --------------
Net Cash (Used in) Provided by Financing Activities ................... (38,560,000) 28,911,000 (60,071,000)
-------------- -------------- --------------
Cash and Cash Equivalents:
Net change ........................................................ (6,010,000) 18,128,000 (2,912,000)
Beginning of period ............................................... 49,581,000 31,453,000 34,365,000
-------------- -------------- --------------
End of period ..................................................... $ 43,571,000 $ 49,581,000 $ 31,453,000
============== ============== ==============
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for-
Interest ........................................................ $ 66,223,000 $ 39,997,000 $ 41,751,000
Income taxes .................................................... $ 51,619,000 $ 63,696,000 $ 36,874,000
Noncash capital lease obligations ................................. $ -- $ 1,540,000 $ 3,450,000
Acquisition of business assets by assuming liabilities ............ $ 40,328,000 $ 121,670,000 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
EXHIBIT 13, PAGE 9
Notes to Consolidated Financial Statements
January 3, 1998, December 28, 1996 and December 30, 1995
Note 1 Summary of Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Shaw
Industries, Inc. and subsidiaries (the "Company"). All significant intercompany
balances and transactions are eliminated in consolidation.
Nature of Business
The Company manufactures and distributes carpet in a broad range of prices,
patterns, colors and textures for residential and commercial use. The Company
markets its products through wholesale distribution channels to floor covering
retailers, distributors and contractors throughout the United States, Canada,
Australia, Mexico and the United Kingdom and through residential retail and
commercial contract distribution channels to various residential and commercial
end users in the United States. The Company also distributes hard surface floor
covering products through its retail distribution channels.
Fiscal Period
The Company's fiscal year-end is the Saturday closest to December 31.
Fiscal 1997 consisted of 53 weeks while fiscal years 1996 and 1995 consisted of
52 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues are recognized when goods are shipped for wholesale sales and
generally as installed for residential retail and commercial contract sales.
Cash and Cash Equivalents
The Company considers all investments with an original maturity of three
months or less to be cash equivalents.
Accounts Receivable
The Company accounts for receivables sold to a financial institution under
its private label credit card financing program in accordance with Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." Approximately
$43,296,000 of accounts receivable sold under this program was outstanding at
January 3, 1998. The Company has recorded approximately $3,816,000 of liability
for recourse provisions under the financing program.
Inventory Valuation
Inventories are stated at the lower of cost or market. Cost includes
materials, direct and indirect labor and factory overhead. Market with respect
to raw materials is replacement cost and for work-in-process and finished goods
is net realizable value. The Company uses the last-in, first-out (LIFO) method
of valuing certain of its domestic inventories to more properly match current
costs against current revenues, thereby reducing the effects of price changes on
earnings. If LIFO inventories were valued at current costs, the inventory
amounts would have been $11,707,000 and $1,643,000 lower than those reported at
January 3, 1998 and December 28, 1996, respectively. Although current
replacement cost for inventories was less than LIFO carrying value at January 3,
1998, the Company's management believes that the carrying value will be
recovered through profit margins on future sales. The Company's foreign and
certain of its finished goods inventories, representing approximately 28 percent
of total inventories, are valued at the lower of first-in, first-out (FIFO) cost
or market for 1997 and 1996.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Renewals and betterments
are capitalized; maintenance and repairs are charged to expense as incurred. The
cost and accumulated depreciation of property retired or otherwise disposed of
are removed from the accounts, and any gains or losses thereon are included in
income. For financial reporting purposes, depreciation is computed using the
straight-line method over the estimated useful lives of the assets, 15 to 39
years for buildings and 5 to 14 years for machinery and equipment. Leasehold
improvements are amortized over the terms of the related leases.
EXHIBIT 13, PAGE 10
Goodwill
Costs in excess of the fair value of net assets of businesses acquired are
recorded as goodwill and are amortized using the straight-line method over a
period not to exceed 40 years for acquisitions of domestic and foreign
manufacturing operations and 20 years for acquisitions of residential retail and
commercial contract operations. The recoverability of goodwill is periodically
reviewed by management based on current and anticipated conditions. The amount
of goodwill considered realizable, however, could be reduced in the near term if
changes occur in anticipated conditions. Accumulated amortization was
$17,858,000, $11,485,000 and $6,210,000 at January 3, 1998, December 28, 1996
and December 30, 1995, respectively.
Accrued Liabilities
Accrued liabilities include $33,597,000 and $30,599,000 for workers'
compensation claims and $25,446,000 and $32,918,000 for returns and allowances
at January 3, 1998 and December 28, 1996, respectively.
Employee Benefits
The Company's Retirement Savings Plan provides, among other things, for
voluntary contributions by domestic employees not to exceed 15 percent of their
gross salaries and wages. The Company provides matching contributions of 25 to
50 percent based on the employee's contribution percentage. At January 3, 1998,
$5,241,000, or 2.0% of the Plan's assets consisted of shares of the Company's
common stock as elected by plan participants. During 1997, 1996 and 1995, the
Company contributed $11,987,000, $9,960,000 and $9,356,000, respectively, under
the plan.
The Company has a Deferred Compensation Plan for key personnel. The plan
provides, among other things, for certain deferred compensation to become
payable on the employee's death, retirement or total disability as set forth in
the plan. During 1997, 1996 and 1995, the Company provided $1,546,000,
$2,008,000 and $1,425,000, respectively, under the plan. The actuarial present
value of obligations of the plan has been recorded as other liabilities in the
accompanying balance sheets.
The Company has a defined benefit plan covering certain employees of its
United Kingdom operations which provides for the payment of specific periodic
payments upon retirement based on years of service. The projected benefit
obligation was $80,400,000 and $64,800,000 as of January 3, 1998 and December
28, 1996, respectively, and the fair value of plan assets was $73,500,000 and
$65,900,000 as of January 3, 1998 and December 28, 1996, respectively. Net
pension cost recognized by the Company during 1997, 1996 and 1995 was
$3,518,000, $3,800,000 and $3,595,000, respectively.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share," effective January
3, 1998. Earnings per share have been computed based upon the weighted average
shares and dilutive potential common shares outstanding during the year. All
prior period earnings per share amounts have been restated to comply with SFAS
No. 128.
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into United States currency in accordance with SFAS No. 52, "Foreign
Currency Translation." Assets and liabilities are translated into United States
dollars at period-end exchange rates. Income and expense items are translated at
average rates of exchange prevailing during the period. Translation adjustments
are accumulated as a separate component of shareholders' investment. Gains and
losses which result from foreign currency transactions are included in the
accompanying statements of income.
Derivative Financial Instruments
The Company uses interest rate swaps to fix interest rates on current and
anticipated borrowings to reduce exposure to interest rate fluctuations. Under
existing accounting literature, these interest rate swaps are accounted for as
hedging activities. The net cash paid or received on interest rate hedges is
included in interest expense. The Company may also employ foreign currency
exchange contracts when, in the normal course of business, they are determined
to effectively manage and reduce foreign currency exchange fluctuation risk. At
January 3, 1998, the Company had no foreign currency exchange contracts
outstanding. The Company does not enter into financial derivatives for
speculative or trading purposes.
Accounting Change
Effective January 1, 1995, the Company changed its method of accounting for
sample costs from expensing sample costs that exceed estimated net realizable
value when shipped to expensing that portion of sample costs as they are
produced. This change was made in recognition of an increasing number of samples
placed with customers that do not result in future sales. The cumulative effect
of the change was to decrease net income for the year ended December 30, 1995 by
$12,077,000, or $.09 per share, net of tax benefit of $7,885,000.
Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
presentation.
EXHIBIT 13, PAGE 11
Note 2 Long-Term Debt
Long-term debt presented in the accompanying consolidated balance sheets at
January 3, 1998 and December 28, 1996 consisted of the following (000s omitted):
1997 1996
- --------------------------------------------------------------------------------- ---------- ----------
Revolving credit facility, United States, at LIBOR-based rate, due in fiscal 2002 $ 774,000 $ 599,000
Revolving multi-currency credit facility,
United Kingdom, at LIBOR-based rate, due in fiscal 2001 ....................... 80,033 128,294
Revolving loan facility, Australia, at LIBOR-based rate, due in fiscal 1999 ..... 46,207 63,648
Other ........................................................................... 25,281 40,029
Capitalized leases .............................................................. 7,655 11,740
- --------------------------------------------------------------------------------- ---------- ----------
933,176 842,711
Less: current maturities ........................................................ (2,752) (17,431)
- --------------------------------------------------------------------------------- ---------- ----------
$ 930,424 $ 825,280
================================================================================= ========== ==========
The domestic revolving credit facility which was amended in March 1997
provides for borrowings of up to $950,000,000. Borrowings bear interest at
variable rates equal to the London Interbank Offered Rate (LIBOR) plus margins
ranging from 0.150 percent to 0.475 percent, depending on the Company's
consolidated funded debt to earnings ratio, as defined. The LIBOR-based rate at
January 3, 1998 was 6.41 percent. Fees associated with the domestic revolving
credit agreement include a facility fee on the committed amount ranging from
0.10 percent to 0.15 percent. The LIBOR-based variable interest rate on a total
of $300,000,000 of the domestic revolving credit facility has been fixed through
December 29, 2000 at 5.95 percent using interest rate swap agreements. The
counterparty to these interest rate swap agreements has the right but not the
obligation to terminate the agreements on December 31, 1999. The Company also
has revolving loan facilities through which its foreign subsidiaries obtain
funds necessary for operations including a multicurrency revolving credit
facility in the United Kingdom which provides for borrowings up to $131.3
million. The borrowings bear interest at a LIBOR-based rate which was 8.28
percent at January 3, 1998. The repayment of these revolving loan facilities for
its foreign subsidiaries is guaranteed by the Company.
The amended domestic revolving credit agreement contains covenants which,
among other provisions, (i) limit the Company's ability to incur indebtedness or
assume liens, (ii) limit the payment of cash dividends and repurchases of common
stock, (iii) limit new indebtedness and lease obligations and (iv) require the
Company to satisfy certain ratios related to net worth, debt-to-equity and
interest coverage. The foreign revolving loan facilities have covenants that are
no more restrictive than those of the domestic revolving credit agreement. At
January 3, 1998, the Company was out of compliance with certain of the financial
ratios of these agreements for which it has obtained appropriate waivers.
The aggregate annual maturities of long-term debt, including capitalized
lease obligations, as of January 3, 1998 are as follows: 1998 - $2,752,000; 1999
- - $73,213,000; 2000 - $1,796,000; 2001 - $80,691,000; 2002 - $774,139,000;
thereafter - $585,000.
The following is presented with respect to the revolving credit facilities
for 1997 and 1996 (000s omitted):
1997 1996
Revolving Credit:
- ---------------------------------------- ----------- -----------
Available at year-end .................. $1,132,850 $ 819,102
Unused at year-end ..................... 232,610 28,160
EXHIBIT 13, PAGE 12
Note 3 Shareholders' Investment
Under the Company's 1987 and 1992 Incentive Stock Option Plans, 8 million
and 6 million shares of common stock, respectively, are reserved for issuance at
a price no less than the market value on the date granted. These options are
exercisable over five to ten years.
The following is a summary of stock option information for the 1987 and
1992 Incentive Stock Option Plans:
1997 1996
- ---------------------------------------------- ---------- ----------
Options outstanding, beginning of year ....... 5,465,200 4,300,100
Options granted .............................. 2,930,300 1,510,800
Options exercised ............................ (46,000) (113,100)
Options canceled ............................. (296,000) (232,600)
Options outstanding, end of year ............. 8,053,500 5,465,200
Option price per share range ................. $10.625-$17.02 $11.975-$17.02
Options exercisable, end of year ............. 4,543,900 2,456,800
Options available for grant .................. 508,700 3,143,000
- ---------------------------------------------- ---------- ----------
The Company accounts for its stock-based compensation plans in accordance
with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," under which no compensation was recognized in 1997, 1996
and 1995 for its incentive stock option plans. The Company applies SFAS No. 123,
"Accounting for Stock-Based Compensation," as required for disclosure purposes.
For SFAS No. 123 purposes, the fair value of each incentive stock option grant
for 1997, 1996 and 1995 has been estimated as of the date of the grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of
6.04 percent, 6.64 percent and 6.21 percent; dividend yields of 2.70 percent,
2.29 percent and 1.80 percent; expected volatilities of 34 percent, 35 percent
and 35 percent; and expected life of five years for all years. Using these
assumptions, the fair value of the stock option grants for 1997, 1996 and 1995
was $9.3 million, or $3.63 per option granted, $8.9 million, or $4.82 per option
granted, and $13.7 million, or $7.07 per option granted, respectively. Had
compensation cost been determined under SFAS No. 123 utilizing the assumptions
detailed above, the Company's net income and net income per common share would
have been reduced to the following pro forma amounts:
1997 1996 1995
- --------------------------------------------------------------------------------
Net income (in thousands):
As reported ................................ $ 28,959 $ 34,023 $ 52,304
Pro forma .................................. 23,382 30,080 51,694
Net income per common share (basic and diluted):
As reported ................................ $ .22 $ .25 $ .38
Pro forma .................................. .18 .22 .38
- --------------------------------------------------------------------------------
During March 1989, the Company adopted a Shareholder Rights Plan and
pursuant thereto declared a dividend of one Right for each outstanding share of
common stock. When exercisable, each Right will entitle its holder to buy one
one-hundredth of a share of Series A Participating Preferred Stock at a price of
$12.50 per share (the "Purchase Price"). If a person or group acquires or makes
a tender or exchange offer to acquire 20% or more of the Company's common stock
without the consent of the Company (an "Acquiring Shareholder"), the Rights will
become exercisable and each Right will entitle the holder, other than the
Acquiring Shareholder, to receive, upon payment of the Purchase Price, in lieu
of preferred stock, a number of shares of common stock of the Company having a
market value equal to twice the Purchase Price. The Rights may be redeemed by
the Company under certain circumstances at a price of $.01 per Right. The Rights
have no voting power and, until exercised, no dilutive effect on net income per
common share. If not previously redeemed, the Rights will expire in April 1999.
The Company has designated 200,000 shares, of the 250,000 shares of preferred
stock authorized, as Series A Participating Preferred Stock for issuance upon
exercise of the Rights.
The Company's board of directors approved a stock repurchase plan in 1996
whereby the Company's management is authorized to repurchase additional shares
of the Company's common stock. For the year ended January 3, 1998, a total of
3,820,000 shares of the Company's common stock had been purchased and retired at
a cost of $46,062,000. During the year ended December 28, 1996, a total of
7,676,800 shares were repurchased and retired at a cost of $87,796,000. At
January 3, 1998, the Company has authority to repurchase up to 3,916,000 shares
of the Company's common stock under the stock repurchase plan.
In 1995, the Company's board of directors approved a dividend reinvestment
plan whereby all holders of record of the Company's common stock are eligible to
participate. The plan provides a method of investing cash dividends and optional
cash payments in shares of the Company's common stock. All costs associated with
administering the plan are paid by the Company.
EXHIBIT 13, PAGE 13
Note 4 Income Taxes
The provision for income taxes consisted of the following (000s omitted):
1997 1996 1995
- --------------------------------------------------------------------------------
Current:
Federal ............................ $ (8,568) $ 51,429 $ 45,579
State ............................... (1,918) 7,824 6,907
- --------------------------------------------------------------------------------
(10,486) 59,253 52,486
Foreign operating loss carryforwards .... 17,860 (8,268) (10,688)
Deferred ................................ (1,788) (7,522) 1,805
- --------------------------------------------------------------------------------
$ 5,586 $ 43,463 $ 43,603
================================================================================
The differences between the federal statutory income tax rate and the
Company's effective tax rate were as follows:
1997 1996 1995
- ---------------------------------------------------------------------------------------
Federal statutory rate .................................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit ............ 4.9 4.6 4.4
Abandonment of stock of U.K. subsidiary ................... (28.1) -- --
Nondeductible goodwill .................................... 7.2 13.2 .8
Difference in foreign tax rates versus U.S. statutory rates 1.0 5.2 1.6
Other, net ................................................ (1.6) 1.0 (1.0)
- ---------------------------------------------------------------------------------------
18.4% 59.0% 40.8%
=======================================================================================
Components of the net deferred income tax liability at January 3, 1998 and
December 28, 1996 are shown below (000s omitted):
1997 1996
- ---------------------------------------------------------------------------------------
Deferred income tax assets:
Accrued advertising expenses not currently deductible .... $ 2,705 $ 2,253
Reserve for cash discounts and bad debts ................. 5,793 5,179
Employee benefit accruals not currently deductible ....... 21,455 19,672
Reserve for returns and allowances ....................... 9,976 12,082
Foreign net operating loss carryforwards ................. 4,938 24,491
Reorganization provision ................................. 7,180 10,950
Other .................................................... 2,885 2,586
- ---------------------------------------------------------------------------------------
54,932 77,213
- ---------------------------------------------------------------------------------------
Deferred income tax liabilities:
Book basis of inventory over tax basis ................... (13,896) (10,708)
Sample costs ............................................. (1,884) --
Book basis of property, plant and equipment over tax basis (58,619) (69,307)
Other .................................................... (2,214) (1,114)
- ---------------------------------------------------------------------------------------
(76,613) (81,129)
- ---------------------------------------------------------------------------------------
$(21,681) $ (3,916)
=======================================================================================
Income tax carryforwards of $17,860,000 were reversed at January 3, 1998
related to the abandonment of the stock of Carpets International, Plc in the
United Kingdom and $1,693,000 was utilized in 1997. Realization of the remaining
deferred tax benefit of $4,938,000 at January 3, 1998 is dependent on generating
sufficient future taxable income at the related foreign operations. Although
realization is not assured, management believes it is more likely than not that
all of the remaining deferred tax asset is realizable; however, it could be
reduced in the near term if estimates of future taxable income decreased.
EXHIBIT 13, PAGE 14
Note 5 Commitments and Contingencies
The Company is a party to several lawsuits incidental to its various
activities and incurred in the ordinary course of business. The Company believes
that it has meritorious claims and defenses in each case. After consultation
with counsel, it is the opinion of management that, although there can be no
assurance given, none of the associated claims, when resolved, will have a
material adverse effect upon the Company.
From time to time, the Company is subject to claims and suits arising in
the course of its business. The Company is a defendant in certain litigation
alleging personal injury resulting from personal exposure to volatile organic
compounds found in carpet produced by the Company. The complaints seek
injunctive relief and unspecified money damages on all claims. The Company has
denied any liability. The Company believes that it has meritorious defenses and
that the litigation will not have a material adverse effect on the Company's
financial condition or results of operations.
In June 1994, the Company and several other carpet manufacturers received a
grand jury subpoena from the Antitrust Division of the United States Department
of Justice relating to an investigation of the industry. In October, 1997, the
Company received formal notification from the Department of Justice that the
investigation has been closed. In December 1995, the Company learned that it was
one of six carpet companies named as additional defendants in a pending
antitrust suit filed in the United States District Court 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 plantiffs' allegations and sets forth several defenses. In September
1997, the Court issued an order certifying a nationwide plaintiff class of
persons and entities who purchase "mass production" polypropylene carpet
directly from any of the defendants from June 1, 1991 through June 30, 1995,
excluding, among others, any persons or entities whose only purchases were from
any of the Company's retail establishments. Discovery began in November 1997.
The Company is also a party to two consolidated lawsuits pending in the Superior
Court of the State of California, City and County of San Francisco, both of
INDUSTRIES, INC. #to Consolidated Financial Statements (continued) 5 Commitments
and Contingencies (continued) which were brought on behalf of a purported class
of indirect purchasers of carpet in the State of California and which seek
damages for alleged violations of California antitrust and fair competition
laws. The Company believes that it has meritorious defenses to plaintiffs'
claims in the lawsuits described in this paragraph and intends to defend these
actions vigorously. After consultation with counsel, it is the opinion of
management that, although there can be no assurance given, none of the claims
described in this paragraph, when resolved, will have a material adverse effect
upon the Company.
In February 1996, a jury in Greensboro, North Carolina, returned a
verdict against the Company in litigation brought by four former employees of
Salem Carpet Mills, acquired by the Company in 1992, alleging age discrimination
and sex discrimination in employment decisions made with regard to such
employees. The judgment is being appealed by both parties. The Company believes
that the litigation will not have a material adverse effect on the Company's
financial condition or results of operations.
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.
The Company has entered into several capitalized leases for machinery and
equipment, including computer equipment, at a cost of $55,734,000 at January 3,
1998 and $61,746,000 at December 28, 1996. These assets are amortized on a
straight-line basis over the lease terms and amortization is included in
depreciation expense. Accumulated amortization of capital lease cost was
$49,760,000 and $52,389,000 at January 3, 1998 and December 28, 1996,
respectively. The related obligations are included in long-term debt (Note 2).
The Company also leases warehouses and showroom space, customer service centers
and certain equipment under operating leases.
At January 3, 1998, future minimum lease payments for all capital and
operating leases exceeding one year were as follows (000s omitted):
Capital Operating Total Future
Leases Leases Payments
- --------------------------------------------------------------------------------------
1998 ............................................. $ 3,124 $ 65,391 $ 68,515
1999 ............................................. 2,704 57,762 60,466
2000 ............................................. 1,863 51,689 53,552
2001 ............................................. 639 42,691 43,330
2002 ............................................. 73 23,170 23,243
2003 and thereafter .............................. 160 54,449 54,609
- --------------------------------------------------------------------------------------
Total Payments ................................... 8,563 $295,152 $303,715
Less: amount representing interest ............... 908 =====================
- ---------------------------------------------------
Present value of capitalized lease payments with a
weighted average interest rate of 11.9% ..... $ 7,655
=============================================================
Rental payments under noncancelable operating leases were $74,718,000,
$44,667,000 and $32,187,000 in 1997, 1996 and 1995, respectively.
At January 3, 1998, the Company had commitments to purchase certain capital
assets of approximately $30,400,000.
EXHIBIT 13, PAGE 15
Note 6 Earnings Per Share
Income before accounting change, cumulative effect of accounting change and
net income amounts presented in the accompanying consolidated statements of
income represent amounts available or related to shareholders.
The following table reconciles the denominator of the basic and diluted
earnings per share computations:
1997 1996 1995
- ------------------------------------------------------------------------------------
Weighted average common shares .......... 133,523,380 135,731,360 135,872,432
Incremental shares from assumed
conversions of options under 1987 and
1992 incentive stock option plans ... 191,116 183,948 505,727
- ------------------------------------------------------------------------------------
Weighted average common shares and
dilutive potential common shares .... 133,714,496 135,915,308 136,378,159
- ------------------------------------------------------------------------------------
EXHIBIT 13, PAGE 16
Note 7 Derivative Financial Instruments and Fair Value of Financial Instruments
The Company has entered into two interest rate swap agreements with a total
notional amount of $300,000,000 to fix the interest rate paid on a portion of
the domestic revolving credit facility. The fixed interest rate paid on the two
interest rate swap agreements was 5.99 percent while the floating rate received
in 1997 averaged 5.62 percent.
The carrying amount and fair value of the Company's financial instruments
are as follows (000s omitted):
January 3, 1998 December 28, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Debt:
Revolving credit facilities . $900,240 $900,240 $790,942 $790,942
Other obligations ........... 32,936 32,936 51,769 51,769
Interest rate swap agreements -- 2,207 -- 814
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Revolving Credit Facilities
The carrying values of the revolving credit facilities approximate their
fair values due to the floating market interest rates charged on those
facilities. Other Obligations The carrying values of other obligations
approximate their fair values due to the interest rates charged on those
agreements: either floating market rates or fixed rates which approximated
market rates available at January 3, 1998 and December 28, 1996.
Interest Rate Swap Agreements
The fair values of the interest rate swap agreements were estimated by
obtaining quotes from brokers.
EXHIBIT 13, PAGE 17
Note 8 - Acquisitions and Agreement in Principle to Dispose of Carpets
International, Plc
Acquisitions
In January 1995, the Company increased its operations in the United Kingdom
by acquiring substantially all of the operating assets of the Carpets Division
of Coats Viyella Plc for approximately $29,503,000. During 1996, the Company
acquired certain residential retail and commercial contractors in order to
develop and expand its presence in the retail distribution channel. To complete
the acquisitions, the Company paid $70,214,000 in cash and issued 4,379,646
shares of common stock at an aggregate value of $54,069,000, notes payable of
$35,000,000 due January 15, 1997, and notes payable of $24,000,000 due June 1999
convertible to 1,500,000 shares of the Company's common stock at the option of
the note holders. As a result of these acquisitions, the Company recorded
goodwill of $132,756,000.
During 1997, the Company further expanded its retail distribution channel
by acquiring certain residential retail and commercial contractors. To complete
the acquisitions, the Company paid $28,727,000 in cash, net of cash acquired,
and issued 2,112,517 shares of common stock at an aggregate value of
$25,680,000. As a result of these acquisitions, the Company recorded goodwill of
$38,773,000.
Agreement in Principle to Dispose of Carpets International, Plc
In December 1997, the Company entered into an agreement in principle to
dispose of Carpets International, Plc (the Company's wholly owned U.K.
subsidiary) and as a result of this agreement, recorded a reduction in the
carrying value of certain U.K. assets of $47,952,000 ($20,300,000, net of tax
benefit, or $.15 per share) in 1997.
EXHIBIT 13, PAGE 18
Note 9 - Nonrecurring Charges, Restructuring Costs and Charge to Record Store
Closing Costs
Nonrecurring Plant Shutdown Costs
During 1995, the Company closed two of its domestic yarn spinning mills and
one yarn spinning mill in Australia. As a result, the Company recorded a charge
of $4,360,000 related to the domestic plant closings and $2,607,000 related to
the foreign plant closing. These charges related primarily to termination
benefits and to recording affected property, plant and equipment at net
realizable value.
Long-Lived Asset and Goodwill Impairment
In March 1996, the Company recorded nonrecurring charges of $29,139,000
($26,519,000, net of tax benefit, or $.19 per share) for the reduction of the
carrying value of certain goodwill and property, plant and equipment at its
international operations as required under SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and a provision for the disposal of other assets.
Restructuring Costs
In December 1996, the Company recorded $36,078,000 ($24,172,000 net of tax
benefit, or $.18 per share), of restructuring costs related to woolen yarn
operations and the discontinuance of Axminster carpet production in the United
Kingdom. The restructuring costs include $16,115,000 of markdowns of inventory
to estimated realizable value which have been recorded as a charge to cost of
sales.
Charge to Record Store Closing Costs
In December 1997, the Company announced a plan to close approximately 100
residential retail stores which resulted in a charge to operations of
$36,349,000 ($22,817,000, net of tax benefit, or $.17 per share) consisting
primarily of reductions in the carrying value of long-lived assets of
approximately $13,430,000 and reserves for exit costs and employee termination
benefits of approximately $17,440,000 and $5,530,000, respectively. The stores
to be closed had combined net sales of approximately $90,000,000 in 1997, but
contributed negatively to the Company's profitability. Prior to this charge, the
Company recorded store closing costs of $438,000 ($263,000, net of tax benefit)
which had no effect on earnings per share.
EXHIBIT 13, PAGE 19
Note 10 Foreign Operations
The following information is presented regarding the Company's consolidated
foreign operations for the years ended January 3, 1998, December 28, 1996 and
December 30, 1995 (000s omitted):
1997
Adjustments
and
Domestic Foreign Eliminations Consolidated
- --------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 3,248,014 $ 327,760 $ -- $ 3,575,774
- --------------------------------------------------------------------------------------------
Operating profit (loss) ....... $ 122,986 $ (38,966) $ -- $ 84,020
- --------------------------------------------------------------------------
Interest expense, net ......... (60,769)
Miscellaneous income, net ..... 7,032
-------------
Income before income taxes $ 30,283
-------------
Identifiable assets ........... $ 1,876,788 $ 223,990 $ (133,164) $ 1,967,614
- --------------------------------------------------------------------------------------------
1996
Adjustments
and
Domestic Foreign Eliminations Consolidated
- --------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 2,865,737 $ 335,817 $ -- $ 3,201,554
- --------------------------------------------------------------------------------------------
Operating profit (loss) ....... $ 170,734 $ (58,283) $ -- $ 112,451
- --------------------------------------------------------------------------
Interest expense, net ......... (42,442)
Miscellaneous income, net ..... 3,609
-------------
Income before income taxes $ 73,618
-------------
Identifiable assets ........... $ 1,725,668 $ 310,732 $ (52,002) $ 1,984,398
- --------------------------------------------------------------------------------------------
1995
Adjustments
and
Domestic Foreign Eliminations Consolidated
- --------------------------------------------------------------------------------------------
Sales to unaffiliated customers $ 2,509,443 $ 360,385 $ -- $ 2,869,828
- --------------------------------------------------------------------------------------------
Operating profit (loss) ....... $ 168,500 $ (19,401) $ -- $ 149,099
- --------------------------------------------------------------------------
Interest expense, net ......... (41,901)
Miscellaneous expense, net .... (443)
-------------
Income before income taxes $ 106,755
-------------
Identifiable assets ........... $ 1,440,153 $ 357,453 $ (134,823) $ 1,662,783
- --------------------------------------------------------------------------------------------
Sales and transfers between geographic areas and export sales are not
material. Operating profit is total revenue less operating expenses. In
computing operating profit, none of the following items have been added or
deducted: net interest expense, net miscellaneous income, income taxes, equity
in income of joint venture or the cumulative effect of an accounting change.
Identifiable assets are those assets of the Company that are identified
with the operations in each geographic area, including goodwill.
EXHIBIT 13, PAGE 20
Note 11 Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1997, 1996 and 1995 is as follows
(000s except per share amounts):
1997 Quarters First Second Third Fourth*
- ----------------------------------------------------------------------------
Net Sales ................ $ 808,653 $ 915,232 $ 922,997 $ 928,892
Gross Profit ............. 200,090 236,992 236,235 221,985
Net Income (Loss) ........ 10,748 25,231 25,335 (32,355)
Earnings (Loss) Per Share-
Basic and Diluted .... 0.08 0.19 0.19 (0.24)
- ----------------------------------------------------------------------------
1996 Quarters First** Second Third Fourth***
- ----------------------------------------------------------------------------
Net Sales ................ $ 657,856 $ 785,957 $ 881,760 $ 875,981
Gross Profit ............. 129,920 171,965 208,158 206,443
Net Income (Loss) ........ (15,584) 28,099 24,179 (2,671)
Earnings (Loss) Per Share-
Basic and Diluted***** (0.11) 0.21 0.18 (0.02)
- ----------------------------------------------------------------------------
1995 Quarters First**** Second Third Fourth
- ----------------------------------------------------------------------------
Net Sales ................ $ 676,550 $ 738,326 $ 748,364 $ 706,588
Gross Profit ............. 117,081 144,516 142,716 145,621
Net Income (Loss) ........ (7,600) 18,673 21,905 19,326
Earnings (Loss) Per Share-
Basic and Diluted .... (0.06) 0.14 0.16 0.14
- ----------------------------------------------------------------------------
* The fourth quarter net income and per share amounts for 1997 include store
closing costs of $22,817,000, or $.17 per share, and a write-down of
certain U.K. assets of $20,300,000, or $.15 per share.
** The first quarter net income and per share amount for 1996 include
nonrecurring charges of $26,519,000, or $.19 per share, net of tax benefit,
for the reduction in the carrying value of certain goodwill and property,
plant and equipment at its international operations and a provision for the
disposal of certain other assets.
*** The fourth quarter net income and per share amounts for 1996 included
restructuring costs of $24,172,000, or $.18 per share, net of tax benefit,
related to woolen and Axminster production in the United Kingdom. ***** The
first quarter net income and per share amounts for 1995 include a charge of
$12,077,000, or $.09 per share, net of tax benefit, from the cumulative
effect of a change in the method of accounting for sample costs.
**** The sum of the 1996 quarterly earnings per share amounts is different from
the annual earnings per share amounts because of differences in the
weighted average number of common shares outstanding used in the quarterly
and annual computations.
EXHIBIT 13, PAGE 21
Note 12 Subsequent Event
On February 9, 1998, the Company commenced a "dutch auction" tender offer
to acquire up to approximately 10,600,000 shares of its common stock,
representing approximately 8.1 percent of its currently outstanding shares.
Under the terms of the offer, the Company's shareholders may tender their shares
at a price within a range of $11.00 to $14.00 per share for a period of 20
business days. In addition, the Company announced no further cash dividends
would be paid in fiscal 1998 subsequent to the quarterly dividend on February
27, 1998 to shareholders of record on February 16, 1998.
EXHIBIT 13, PAGE 22
Report of Independent Public Accountants
To The Shareholders of Shaw Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Shaw
Industries, Inc. (a Georgia corporation) and subsidiaries as of January 3, 1998
and December 28, 1996 and the related consolidated statements of income,
shareholders' investment and cash flow for each of the three years in the period
ended January 3, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shaw Industries, Inc. and
subsidiaries as of January 3, 1998 and December 28, 1996 and the results of
their operations and their cash flows for each of the three years in the period
ended January 3, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 20, 1998
EXHIBIT 13, PAGE 23
Stock Information
High and low stock prices and cash dividends paid by fiscal quarter
1997 1996 1995 Dividends Paid
High Low High Low High Low 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
1st Quarter ...... 14 1/8 11 7/8 14 7/8 10 3/4 17 1/8 12 7.50 cents 7.50 cents 7.50 cents
2nd Quarter ...... 13 10 1/2 13 3/4 11 1/8 17 3/8 12 1/4 7.50 cents 7.50 cents 7.50 cents
3rd Quarter ...... 12 7/8 10 1/2 15 3/8 11 1/2 17 1/4 14 1/4 7.50 cents 7.50 cents 7.50 cents
4th Quarter ...... 13 7/16 10 7/8 13 3/8 11 16 3/8 12 5/8 7.50 cents 7.50 cents 7.50 cents
- ----------------------------------------------------------------------------------------------------------------------
Total 30.00 cents 30.00 cents 30.00 cents
---------------------------------------------
EXHIBIT 13, PAGE 24