SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
F O R M 10-Q/A
Amendment No. 1
For the Quarter Ended March 31, 2001 Commission File Number 1-5315
----------------------------
SPRINGS INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0252730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
205 North White Street
Fort Mill, South Carolina 29715
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(803) 547-1500
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
----- -----
As of May 7, 2001, there were 10,795,010 shares of Class A Common Stock and
7,151,563 shares of Class B Common Stock of Springs Industries, Inc.
outstanding.
EXPLANATORY NOTE:
The Company is filing this Amendment No. 1 on Form 10-Q/A in
response to comments received from the Securities and Exchange Commission (the
"SEC") regarding the Company's Form 10-Q for the quarter ended March 31, 2001
that was originally filed on May 15, 2001 (the "Original Filing"). As requested
by the SEC, the Company is providing additional disclosure in its MD&A. This
report continues to speak as of the date of the Original Filing, and the Company
has not updated the disclosure in this report to speak to any later date. While
this report primarily relates to the historical period covered, events may have
taken place since the date of the Original Filing that might have been reflected
in this report if they had taken place prior to the Original Filing. All
information contained in this amendment and the Original Filing is subject to
updating and supplementing as provided in the Company's periodic reports filed
with the SEC.
Part I, Item 2 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) of the Original Filing is hereby amended by
deleting Item 2 in its entirety and replacing it with the corresponding Item 2
attached hereto and filed herewith. Item 2 has been revised to make certain
changes to the paragraph entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operation-Results of Operations-Earnings."
Any items in the Original Filing not expressly changed hereby shall
be as set forth in the Original Filing.
-2-
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Springs Industries, Inc. ("Springs" or "the Company") is engaged in
manufacturing, marketing, selling and distributing home furnishings products.
The Company's product line includes sheets, pillows, pillowcases, bedspreads,
comforters, mattress pads, baby bedding and infant apparel, towels, shower
curtains, bath and accent rugs, other bath fashion accessories, over-the-counter
home-sewing fabrics, drapery hardware, and hard and soft decorative window
fashions. The Company's emphasis on the home furnishings market has developed
into the following strategic initiatives: focus on key accounts; brand
investment and expansion; manufacturing and purchasing efficiencies; supply
chain management and global sourcing.
The Company continues to see the benefits of these strategic initiatives. The
focus on key accounts has resulted in increases in our top ten customer sales,
despite the slowdown in the retail economy and inventory adjustments by many
retailers. Springs' manufacturing and purchasing initiatives have helped to
mitigate the impact of higher raw material and energy costs and the effects of
production curtailments to adjust inventory levels.
On February 20, 2001, the Company was presented with a proposal from the Close
family, which owns approximately 41 percent of Springs' common stock, and
Heartland Industrial Partners, L.P. ("Heartland"), a private equity firm, to
take the Company private in a recapitalization transaction (the
"recapitalization transaction"). The Company's Board of Directors formed a
special committee of independent directors on February 22, 2001, to evaluate the
recapitalization transaction on behalf of the Company's shareholders. The
special committee recommended, and on April 24, 2001, the Board of Directors
approved, the recapitalization transaction. See the SUBSEQUENT EVENT section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional discussion.
RESULTS OF OPERATIONS
Sales
Net sales for the first quarter of 2001 were $570.4 million, down 3.9 percent
from the first quarter of 2000. Sales to the Company's key mass merchant,
specialty store and home improvement accounts increased, with top ten customer
sales increasing approximately 3.7 percent over the first quarter of 2000. The
increase in sales to key customers was offset by lower volumes of sales to
department stores, smaller specialty stores and institutional customers, and
lower sales of hard window fashions products to distributors and fabricators,
resulting in the overall decrease in net sales. Net sales for the first quarter
of 2000 also included sales under the Disney license, which was not renewed
later in the year. Compared to the first quarter of 2000, sales of bedding
products were lower, while sales of bath products were higher, in the first
quarter of 2001.
Earnings
Net income for the first quarter of 2001 was $13.1 million, or $0.72 per diluted
share, compared to $20.1 million, or $1.10 per diluted share in the first
quarter of 2000. Net income for the first quarter of 2001 included a pretax
charge of $2.3 million for financial advisory and legal services
-3-
associated with the evaluation by the Special Committee of the Board of
Directors of the recapitalization transaction. Excluding the impact of this
unusual item, net income would have been $14.5 million, or $0.80 per diluted
share for the first quarter of 2001.
Operating earnings for the first quarter of 2001 were lower than the first
quarter of 2000 due to the decrease in sales volume and a decrease in the
Company's gross margin for the first quarter, from 19.4 percent in 2000 to 17.6
percent in 2001. The gross margin percentage is calculated by dividing net sales
less costs of goods sold, by net sales. Several factors contributed to the lower
gross margin in 2001. The mix of sales in the first quarter of 2001 reflected a
higher level of bath products, which have comparatively lower margins. The sales
in the first quarter of 2001 also included higher levels of off-quality and
closeout product sales compared to the prior year. Raw material costs, due
primarily to lower cotton rebates in the current quarter, and energy costs,
principally for natural gas, were higher in the first quarter of 2001 than in
the prior year. Lower manufacturing volumes, due to efforts to reduce inventory
levels, resulted in greater levels of under-absorbed overhead when compared to
the first quarter of 2000.
Selling, general and administrative expenses were lower in the first quarter of
2001 primarily due to lower spending on advertising and the settlement of a
state sales and use tax assessment. Advertising expenses in the first quarter of
2000 were higher than 2001 due to the promotion of the Springmaid(R) brand
rollout to the mass merchant channel. During the second quarter of 2000, the
Company received a $3.0 million sales and use tax assessment from the state of
Wisconsin. Management performed an initial analysis of the several tax issues
raised in the assessment, evaluated the basis for the claimed underpayment of
tax, estimated the potential for settlement, and accrued approximately $2.2
million. During the third and fourth quarters of 2000, the Company engaged
consultants to assist in the evaluation of the assessment and negotiation with
the state of Wisconsin. Springs was able to challenge several of the positions
taken by the state and provided additional documentation that significantly
reduced the Company's tax exposure. During the first quarter of 2001, the
Company reached a settlement with the state of Wisconsin for approximately $0.5
million. As a result of this settlement, the Company was able to reverse
approximately $1.7 million during the first quarter of 2001. Fees for consulting
services performed through the settlement were approximately $0.5 million. The
net effect on first quarter 2001 earnings was an increase of approximately $1.3
million. The increase in the provision for uncollectible receivables in the
first quarter of 2001 reflects the adverse effects on certain retail customers
from the general slowdown in the retail economy.
Income Taxes
The Company's provision for income taxes for fiscal 2001 is based on an
estimated 37 percent effective tax rate. This estimated effective tax rate does
not take into consideration the proposed recapitalization transaction, which is
subject to shareholder and regulatory approval. If the recapitalization
transaction is completed, the effective tax rate for the year will be higher
than currently estimated due to the treatment of certain merger-related
expenses. The effective tax rate for 2000 was also 37 percent.
-4-
OUTLOOK
The recent softness in the economy led retailers to adjust inventories during
the last half of 2000 and first quarter of 2001. Management presently believes
that projected improvements in the retail economy during the last half of the
year will result in a slight improvement in overall sales volume for the year,
compared to 2000. Management also expects that the Company's progress toward
purchasing and manufacturing efficiency initiatives, as well as overall cost
containment, will be somewhat offset by the effects of the previously mentioned
increases in raw material and energy costs, and should result in gross margins
that are consistent, or slightly better than, full-year 2000 gross margins.
Selling, general and administrative expense levels are expected to be consistent
with prior year levels, as a percentage of sales.
RESTRUCTURING AND REALIGNMENT EXPENSES
In December 2000, the Company announced a restructuring plan to eliminate
certain production at its Katherine and Elliott bedding plants in South
Carolina, beginning in February 2001. The plan eliminates some narrow loom
weaving, which is not compatible with newer fabrication equipment, at the
Katherine plant and outdated yarn spinning at the Katherine and Elliott plants.
The Company recorded a charge of $2.4 million in fiscal 2000, which included a
$1.1 million accrual for severance costs arising from the elimination of an
estimated 326 manufacturing positions and a $1.3 million impairment charge for
disposal of machinery and equipment. Impairment was determined by comparing the
net book value against estimated sales value less costs to sell.
As a result of the plan, the Company expects that its annual operating costs
will be improved by approximately $3.5 million. Including one-time transition
costs and a partial-year benefit, operating costs in 2001 are expected to be
improved by approximately $1.7 million. The restructuring plan is expected to be
completed by mid-2001.
Changes in the restructuring accruals since the adoption of the plan are as
follows: (in millions)
Severance Asset
Accrual Impairment
--------- ----------
Original accrual as of
December 6, 2000 $1.1 $ 1.3
Cash payments (0.2) -
Charged against assets - (1.3)
---- -----
Accrual balance as of
March 31, 2001 $0.9 $ 0.0
==== =====
In the second quarter of 2000, the Company adopted a plan to phase out
production and close plants in Griffin and Jackson, Georgia, which manufactured
certain baby apparel products, and to phase out yarn production for terry towels
at its No. 2 plant in Griffin, Georgia beginning in August 2000. The Company has
replaced the baby products production by outsourcing from low-cost providers.
The terry yarn production at the Griffin No. 2 plant has been transferred to the
Company's Griffin No. 5 and Hartwell, Georgia plants, where recent investment in
new manufacturing technology allows terry yarn to be produced more
competitively.
-5-
In connection with this plan, the Company recorded a charge of $2.9 million,
which included a $2.4 million accrual for severance costs arising from the
elimination of an estimated 426 manufacturing positions, a $0.3 million
impairment charge for machinery and equipment to be sold, and a $0.2 million
accrual for estimated idle plant costs. These charges relate primarily to the
baby products facilities since costs related to the terry yarn facility were not
significant. The restructuring plan was completed during the first quarter of
2001.
The expected benefits of this plan include lower product costs and better
utilization of existing capacity in other facilities. As a result, the Company
realized savings from lower product costs of approximately $2.1 million during
the second half of 2000, and expects to realize approximately $3.8 million of
savings in fiscal 2001.
Changes in the restructuring accruals since the adoption of the plan are as
follows: (in millions)
Idle
Severance Asset Plant
Accrual Impairment Costs
--------- ---------- -------
Original accrual as of
June 2, 2000 $ 2.4 $ 0.3 $ 0.2
Cash payments (2.4) - (0.2)
Charged against assets - (0.3) -
----- ----- ------
Accrual balance as of
March 31, 2001 $ 0.0 $ 0.0 $ 0.0
===== ===== =====
CAPITAL RESOURCES AND LIQUIDITY
For the thirteen weeks ended March 31, 2001, the Company borrowed an additional
$55 million reflecting increased borrowing under its revolving credit agreement,
net of scheduled long-term debt payments and repayments of uncommitted credit
facilities. The increased borrowings under the existing long-term revolving
credit agreement were $65 million. The Company expects $35 million of the
additional borrowings to be repaid within one year and has classified these
amounts as short-term borrowings. The remaining $30 million of additional
borrowings are classified as long-term debt. The LIBOR-based weighted-average
interest rate on this agreement was 5.7 percent as of March 31, 2001. This
increase in borrowings in the first quarter reflects a typical seasonal use of
cash. The Company expects capital expenditures for 2001 to approximate $110
million.
Springs expects that positive operating cash flows for the remaining quarters of
the year will be more than sufficient to provide for capital expenditures and
allow the Company to pay down the first quarter's increased borrowings under the
revolving credit agreement and make the scheduled repayments of long-term debt,
resulting in positive cash flows for the year.
The majority of the Company's existing financing arrangements will be refinanced
if the proposed recapitalization transaction, which is subject to shareholder
and regulatory approval, is completed. Refer to the SUBSEQUENT EVENT section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations for additional discussion.
-6-
ACQUISITIONS
Effective January 2, 2001, the Company acquired certain assets of Maybank
Textile Corp. ("Maybank"), a manufacturer of rug yarn. Prior to the acquisition,
Maybank was a supplier to Springs, its largest customer. The acquisition
included all of the assets used by Maybank to supply yarn to Springs. The
purchase price was approximately $12.4 million. The acquisition was accounted
for as a purchase in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations" ("APB 16"), and the operating results for the acquired
business have been included in the Company's consolidated financial statements
since the January 2, 2001, acquisition date. The purchase price was allocated to
the assets acquired based on their estimated fair value at the date of
acquisition. The excess of the purchase price over the fair value of the assets
acquired, which totaled $2.0 million, has been recorded as goodwill and is being
amortized on a straight-line basis over 20 years. Due to the supplier-customer
relationship between Maybank and Springs prior to the acquisition, pro-forma
operating results are not materially different than previously reported results.
On August 7, 2000, the Company acquired certain assets and operations of a
Mexican maquiladora (a business enterprise which provides preferential import
and tax treatment for goods transferred between Mexico and the United States),
which fabricates window blinds, and a related U.S. distribution operation. The
purchase price was approximately $5.7 million. The acquisition was accounted for
as a purchase in accordance with APB 16, and the operating results of the
acquired business have been included in the Company's consolidated financial
statements since the August 7, 2000, acquisition date. The purchase price was
allocated to the assets acquired based on their estimated fair value at the date
of acquisition.
The excess of the purchase price over the fair value of the assets acquired,
which totaled $3.9 million, has been recorded as goodwill and is being amortized
on a straight-line basis over 20 years. The pro-forma impact on sales and
operating profits for 2000 was not material.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Refer to the ACCOUNTING CHANGES section of Management's Discussion and Analysis
of Financial Condition and Results of Operations for a discussion of the impact
of Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") on market risk
sensitive instruments and positions.
Interest Rate Risk: Springs is exposed to interest rate volatility with regard
to existing issuances of variable rate debt. The Company uses interest rate
swaps to reduce interest rate volatility and funding costs associated with
certain debt issues, and to achieve a desired proportion of variable versus
fixed-rate debt, based on current and projected market conditions. The fair
value of the Company's interest rate swap contracts as of March 31, 2001, was a
loss of $5.3 million, which increased during the year, due to lower interest
rates.
Commodity Price Risk: The Company is exposed to price fluctuations related to
anticipated purchases of certain raw materials, primarily cotton fiber. Springs
uses a combination of forward delivery contracts and exchange-traded futures
contracts, consistent with the size of its business, to reduce the Company's
exposure to price volatility. The fair value of cotton futures
-7-
contracts held as of March 31, 2001 was a loss of $5.0 million, which resulted
from an increase in the number of cotton futures contracts held and lower market
prices.
The Company is also exposed to price fluctuations related to anticipated
purchases of natural gas. The Company utilizes commodity swap contracts to fix
the price it pays for natural gas for a significant portion of its expected
utilization and thereby reduce the Company's exposure to changes in future cash
flows due to natural gas price volatility. The fair value of the Company's
natural gas swap contract at March 31, 2001 was not material.
Foreign Exchange Risk: The Company is exposed to foreign exchange risks to the
extent of adverse fluctuations in certain exchange rates, primarily the Canadian
dollar and Mexican peso. The Company does not believe that reasonably possible
near-term changes in foreign currencies will result in a material impact on
future earnings or cash flows.
ACCOUNTING CHANGES
Effective December 31, 2000 (fiscal 2001), the Company adopted SFAS 133, as
amended by Statement No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities (an amendment of SFAS 133)." This statement, as
amended, requires the Company to recognize all derivatives on the Consolidated
Balance Sheets at fair value, with changes in fair value recognized in earnings
unless specific criteria are met for derivatives in qualifying hedging
transactions. Changes in fair value of derivatives in qualifying cash flow
hedging transactions are reflected in accumulated other comprehensive loss and
reclassified into earnings at the time the corresponding hedged transaction is
recognized in earnings.
The Company's derivatives consisted of cotton futures contracts, a natural gas
commodity swap contract and interest rate swap contracts which were designated
in cash flow hedging relationships as of the SFAS 133 adoption date. As a result
of this adoption, in the first quarter of 2001 the Company recorded a natural
gas commodity swap asset of $2.1 million, interest rate swap liabilities of $1.6
million, an immaterial cotton futures liability, and the cumulative effect of a
change in accounting adjustment to other comprehensive income of $0.5 million
($0.3 million net of taxes).
SUBSEQUENT EVENT
On April 24, 2001, Springs' Board of Directors approved a definitive
recapitalization agreement with Heartland Springs Investment Company, an
affiliate of Heartland Industrial Partners, L.P., a private equity firm. Upon
completion of the recapitalization, which would be accomplished through a merger
between Springs and the Heartland affiliate, each public shareholder of Springs
would receive $46.00 per share in cash and Springs would become privately held
by the Close family, whose ownership interest in Springs' common stock would
increase from approximately 41 percent to approximately 55 percent, and
Heartland, whose ownership interest in Springs' common stock would be
approximately 45 percent.
The recapitalization agreement will require the approval of two-thirds of the
outstanding Class A and Class B shares of Springs, with each share casting one
vote per share. In addition, the recapitalization agreement will require the
approval of a majority of votes cast by shareholders whose shares are being
converted into cash (with the Class A and Class B shares voting together as a
single class with each having one vote per share). The
-8-
completion of the proposed recapitalization is subject to certain other
conditions, including regulatory approvals, the availability of funding and
other customary closing conditions.
FORWARD LOOKING INFORMATION
This Form 10-Q report contains forward-looking statements that are based on
management's expectations, estimates, projections, and assumptions. Words such
as "expects," "believes," "estimates," and variations of such words and similar
expressions are often used to identify such forward-looking statements which
include but are not limited to projections of sales, expenditures, savings,
completion dates, cash flows, and operating performance. Such forward-looking
statements are made pursuant to the safe-harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are not guaranties of
future performance; instead, they relate to situations with respect to which
certain risks and uncertainties are difficult to predict. Actual future results
and trends, therefore, may differ materially from what is predicted in
forward-looking statements due to a variety of factors, including: the health of
the retail economy in general, competitive conditions and demand for the
Company's products; progress toward the Company's manufacturing and purchasing
efficiency initiatives; unanticipated natural disasters; legal proceedings;
labor matters; and the availability and price of raw materials which could be
affected by weather, disease, energy costs, or other factors. The Company
assumes no obligation to update publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
-9-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Springs
Industries, Inc. has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SPRINGS INDUSTRIES, INC.
By: /s/ Charles M. Metzler
------------------------------
Charles M. Metzler
Vice President-Controller
(Duly Authorized Officer and
Principal Accounting officer)
DATED: July 30, 2001
-10-