1
EXHIBIT 13
12
Management's Report on Financial Statements
The management of the Company is responsible for the preparation of the
consolidated financial statements and related financial information included in
this annual report. The statements, which include amounts based on management's
estimates, have been prepared in conformity with accounting principles
generally accepted in the United States of America.
In fulfilling the Company's responsibilities for maintaining the integrity of
financial information and for safeguarding assets, Springs relies upon internal
control systems designed to provide reasonable assurance that the Company's
records properly reflect business transactions and that these transactions are
in accordance with management's authorization. There are limitations inherent
in all systems of internal accounting controls based on the recognition that
the cost of such systems should not exceed the benefits to be derived. Springs
believes its systems provide this appropriate balance. The Company's internal
audit staff tests, evaluates, and reports on the adequacy and effectiveness of
internal control systems and procedures.
Management also recognizes its responsibility for conducting the Company's
affairs in an ethical and socially responsible manner. Springs has communicated
to its associates its intentions to maintain high standards of ethical business
conduct in all of its activities. Ongoing review programs are carried out to
monitor compliance with this policy.
The Board of Directors pursues its oversight responsibility with respect to the
Company's systems of internal control and its financial statements, in part,
through an Audit Committee, which is composed solely of outside directors. The
Audit Committee meets regularly with Springs' management, internal auditors,
and independent auditors. Both the independent auditors and internal auditors
have access to and meet privately with this Committee without the presence of
management.
The Company's independent auditors, Deloitte & Touche LLP, rely on the
Company's internal control structure to the extent they deem appropriate and
perform tests and other procedures they deem necessary to express an opinion on
the fairness of the presentation of the financial statements, which management
believes provides an objective assessment of the degree to which management
meets its responsibility for fairness of financial reporting.
/s/ Jeffrey A. Atkins
Jeffrey A. Atkins
Executive Vice President --
Chief Financial Officer
Independent Auditors' Report
To the Board of Directors of Springs Industries, Inc.
We have audited the accompanying consolidated balance sheet of Springs
Industries, Inc. (the Company) as of January 1, 2000 and January 2, 1999, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three fiscal years in the period ended January 1, 2000.
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 auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 1, 2000 and
January 2, 1999, and the results of its operations and its cash flows for each
of the three fiscal years in the period ended January 1, 2000, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
January 31, 2000
2
13
CONSOLIDATED STATEMENT OF OPERATIONS
Springs Industries, Inc.
(In thousands except per share data)
For the Fiscal Years Ended January 1, 2000, January 2, 1999, and January 3, 1998
(53 weeks)
OPERATIONS 1999 1998 1997
NET SALES ............................................. $ 2,220,403 $ 2,180,497 $ 2,226,075
Cost and expenses:
Cost of goods sold ................................ 1,800,903 1,795,757 1,820,131
Selling, general and administrative expenses ...... 278,174 263,806 266,194
Provision for uncollectible receivables ........... 7,297 16,401 10,747
Restructuring and realignment expenses ............ -- 19,948 11,137
Year 2000 expenses ................................ 1,012 7,067 2,751
Interest expense .................................. 26,520 25,069 18,583
Other income ...................................... (8,497) (16,588) (9,814)
Other expense ..................................... 3,766 10,258 3,409
Total ........................................ 2,109,175 2,121,718 2,123,138
Income before income taxes ............................ 111,228 58,779 102,937
Income tax provision .................................. 42,267 21,450 33,972
NET INCOME .................................. $ 68,961 $ 37,329 $ 68,965
============================================================================================================
BASIC EARNINGS PER COMMON SHARE ....................... $ 3.86 $ 2.01 $ 3.43
============================================================================================================
DILUTED EARNINGS PER COMMON SHARE ..................... $ 3.80 $ 1.97 $ 3.34
============================================================================================================
CASH DIVIDENDS DECLARED PER COMMON SHARE:
Class A common shares ............................. $ 1.32 $ 1.32 $ 1.32
Class B common shares ............................. $ 1.20 $ 1.20 $ 1.20
============================================================================================================
BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING ...... 17,869 18,549 20,122
Dilutive effect of stock-based compensation awards .... 299 389 546
DILUTED WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING .... 18,168 18,938 20,668
============================================================================================================
See Notes to Consolidated Financial Statements.
3
14
CONSOLIDATED BALANCE SHEET
Springs Industries, Inc.
(In thousands except share data)
January 1, 2000 and January 2, 1999
1999 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 4,210 $ 48,127
Accounts receivable, net ....................................... 302,210 265,263
Inventories, net ............................................... 479,328 387,988
Other .......................................................... 37,669 76,834
- -------------------------------------------------------------------------------------------------------
Total current assets ...................................... 823,417 778,212
- -------------------------------------------------------------------------------------------------------
PROPERTY (AT COST):
Land and improvements .......................................... 19,046 19,187
Buildings ...................................................... 239,968 245,616
Machinery and equipment ........................................ 1,193,863 1,079,149
- -------------------------------------------------------------------------------------------------------
Total ..................................................... 1,452,877 1,343,952
Accumulated depreciation ....................................... (827,234) (794,298)
- -------------------------------------------------------------------------------------------------------
Property, net ............................................. 625,643 549,654
- -------------------------------------------------------------------------------------------------------
GOODWILL AND OTHER ASSETS .......................................... 125,938 97,585
- -------------------------------------------------------------------------------------------------------
TOTAL .................................................... $ 1,574,998 $ 1,425,451
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings .......................................... $ 35,450 $ --
Current maturities of long-term debt ........................... 21,203 21,313
Accounts payable ............................................... 106,569 104,796
Accrued wages and salaries ..................................... 11,190 13,560
Accrued incentive pay and benefit plans ........................ 42,702 26,723
Income taxes payable ........................................... 18,101 5,523
Other accrued liabilities ...................................... 65,206 50,471
- -------------------------------------------------------------------------------------------------------
Total current liabilities ................................. 300,421 222,386
- -------------------------------------------------------------------------------------------------------
NONCURRENT LIABILITIES:
Long-term debt ................................................. 283,534 267,991
Accrued benefit and deferred compensation ...................... 179,472 179,885
Other .......................................................... 36,700 31,073
- -------------------------------------------------------------------------------------------------------
Total noncurrent liabilities .............................. 499,706 478,949
- -------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Class A common stock - $.25 par value (10,844,536 and 10,728,594
shares issued in 1999 and 1998, respectively) ................ 2,712 2,682
Class B common stock - $.25 par value (7,156,663 and 7,196,864
shares issued and outstanding in 1999 and 1998, respectively) 1,789 1,799
Additional paid-in capital ..................................... 103,584 100,446
Retained earnings .............................................. 678,170 631,943
Cost of Class A stock in treasury (95,850 and 98,313 shares
in 1999 and 1998, respectively) .............................. (2,181) (2,230)
Accumulated other comprehensive loss ........................... (9,203) (10,524)
- -------------------------------------------------------------------------------------------------------
Total shareholders' equity ................................ 774,871 724,116
- -------------------------------------------------------------------------------------------------------
TOTAL .................................................... $ 1,574,998 $ 1,425,451
=======================================================================================================
See Notes to Consolidated Financial Statements.
4
15
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Springs Industries, Inc.
(In thousands)
Accumulated
For the Fiscal Years Ended Total Other Additional Class A
January 1, 2000, January 2, 1999, Shareholders' Retained Comprehensive Class A Class B Paid-In Stock Held
and January 3, 1998 (53 weeks) Equity Earnings Income (Loss) Common Stock Common Stock Capital in Treasury
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 28, 1996 ....... $ 780,779 $ 675,533 $ (7,792) $3,187 $ 1,877 $ 110,352 $(2,378)
Comprehensive Income:
Net income ...................... 68,965 68,965 -- -- -- -- --
Other comprehensive income,
before tax:
Foreign currency translation
adjustment ................... (1,078) -- (1,078) -- -- -- --
Minimum pension liability
adjustment ................... 94 -- 94 -- -- -- --
Unrealized gains on securities,
net of reclassification
adjustment ................... 1,099 -- 1,099 -- -- -- --
Income tax expense related
to items of other
comprehensive income ......... (455) -- (455) -- -- -- --
---------
Total comprehensive income,
net of tax ................... 68,625
---------
Exchange of Class B common stock
for Class A common stock ........ -- -- -- 59 (59) -- --
Shares awarded under various
employee plans .................. 569 -- -- 2 -- 465 102
Shares reacquired by the Company ... (19,716) (17,485) -- (98) -- (2,133) --
Dividends declared ................. (25,659) (25,659) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 3, 1998 ......... $ 804,598 $ 701,354 $ (8,132) $ 3,150 $ 1,818 $ 108,684 $(2,276)
Comprehensive Income:
Net income ......................... 37,329 37,329 -- -- -- -- --
Other comprehensive income,
before tax:
Foreign currency translation
adjustment .................. (2,362) -- (2,362) -- -- -- --
Minimum pension liability
adjustment .................. 465 -- 465 -- -- -- --
Income tax expense related to
items of other comprehensive
income ........................ (495) -- (495) -- -- -- --
---------
Total comprehensive income,
net of tax ..................... 34,937
---------
Exchange of Class B common stock
for Class A common stock ........ -- -- -- 19 (19) -- --
Shares awarded under various
employee plans .................. 593 -- -- 3 -- 544 46
Exercise of stock options .......... 2,441 -- -- 15 -- 2,426 --
Shares reacquired by
the Company ...................... (94,816) (83,103) -- (505) -- (11,208) --
Dividends declared ................. (23,637) (23,637) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 2, 1999 ......... $ 724,116 $ 631,943 $(10,524) $ 2,682 $ 1,799 $ 100,446 $(2,230)
Comprehensive Income:
Net income ...................... 68,961 68,961 -- -- -- -- --
Other comprehensive income,
before tax:
Foreign currency translation
adjustment .................. 910 -- 910 -- -- -- --
Minimum pension liability
adjustment .................. 689 -- 689 -- -- -- --
Income tax expense related
to items of other
comprehensive income ........ (278) -- (278) -- -- -- --
---------
Total comprehensive income,
net of tax .................. 70,282
---------
Exchange of Class B common stock
for Class A common stock ........ -- -- -- 10 (10) -- --
Shares awarded under various
employee plans .................. 933 -- -- 6 -- 878 49
Exercise of stock options .......... 2,274 -- -- 14 -- 2,260 --
Dividends declared ................. (22,734) (22,734) -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2000 ......... $ 774,871 $ 678,170 $ (9,203) $ 2,712 $ 1,789 $ 103,584 $(2,181)
===================================================================================================================================
See Notes to Consolidated Financial Statements.
5
16
CONSOLIDATED STATEMENT OF CASH FLOWS
Springs Industries, Inc.
(In thousands)
For the Fiscal Years Ended January 1, 2000, January 2, 1999, and
January 3, 1998 (53 weeks)
OPERATING ACTIVITIES: 1999 1998 1997
Net income ............................................. $ 68,961 $ 37,329 $ 68,965
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................... 101,292 86,951 84,565
Gains on sales of businesses,
property and other assets ....................... (2,989) (7,339) (6,047)
Deferred income taxes ............................. (4,364) 3,542 7,596
Provision for restructuring ....................... -- 13,388 1,800
Provision for uncollectible receivables ........... 7,297 16,401 10,747
Changes in operating assets and liabilities,
net of effects of business acquisitions
and sales of businesses:
Accounts receivable ........................... (39,329) 11,316 19,555
Inventories ................................... (72,293) 1,081 (49,399)
Accounts payable and other accrued liabilities 23,881 (10,592) (21,184)
Accrued restructuring costs ................... -- (7,305) (7,115)
Other, net .................................... (8,956) (13,218) 1,057
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ......... 73,500 131,554 110,540
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property .................................. (166,817) (115,033) (99,331)
Business acquisitions, net of cash acquired ............ (52,513) -- (6,429)
Notes receivable ....................................... (610) (40) (14,000)
Principal collected on notes receivable ................ 7,979 7,119 3,447
Net proceeds from sales of businesses, property
and other assets ................................... 67,860 39,686 17,857
- --------------------------------------------------------------------------------------------------------
Net cash used for investing activities ............ (144,101) (68,268) (98,456)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term
borrowings, net .................................... 34,229 (7,450) 7,450
Proceeds from long-term debt ........................... 80,000 125,000 1,587
Repayments of long-term debt ........................... (66,911) (14,435) (7,409)
Repurchase of Class A common shares .................... -- (96,206) (18,325)
Proceeds from exercise of stock options ................ 2,073 1,876 --
Payment of cash dividends .............................. (22,707) (24,317) (25,733)
- --------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities ...................................... 26,684 (15,532) (42,430)
- --------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................................... (43,917) 47,754 (30,346)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR ....................................... 48,127 373 30,719
- --------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ......... $ 4,210 $ 48,127 $ 373
========================================================================================================
CASH PAID DURING THE YEAR FOR:
Interest ............................................... $ 21,433 $ 19,279 $ 17,808
- --------------------------------------------------------------------------------------------------------
Income taxes ........................................... $ 36,024 $ 22,119 $ 27,009
- --------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17
Springs Industries, Inc.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of Springs Industries, Inc. and its subsidiaries (Springs
or the Company). Intercompany balances and transactions are eliminated in
consolidation. Investments in businesses in which the Company has voting
interests ranging from 20 to 50 percent are accounted for using the equity
method of accounting.
USE OF ESTIMATES: Preparation of the Company's consolidated 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, disclosures relating to contingent assets and liabilities, and the
reported amounts of revenues and expenses. Actual results could differ from
those estimates.
REVENUE RECOGNITION: Revenue from product sales is recognized at the time
goods are delivered to the customer.
CASH AND CASH EQUIVALENTS: Cash equivalents consist of liquid investments with
original maturities of three months or less when purchased.
ACCOUNTS RECEIVABLE: The Company performs ongoing credit evaluations of its
customers' financial condition and, typically, requires no collateral from its
customers. The reserve for doubtful accounts was $9.7 million at January 1,
2000, and $11.7 million at January 2, 1999. During 1999, net write-offs of
approximately $9.3 million for previously-reserved accounts more than offset the
current year's provision for doubtful accounts, which totaled $7.3 million.
INVENTORIES: Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out method (LIFO) for approximately 69
percent and 83 percent of inventories at January 1, 2000 and January 2, 1999,
respectively. The decrease in inventories valued using LIFO is due primarily to
1999 acquisitions. See Note 3, Acquisitions and Divestitures. The first-in,
first-out method (FIFO) is used for all other inventories.
GOODWILL AND OTHER ASSETS: The cost of goodwill and other intangible assets is
amortized on a straight-line basis over the estimated periods benefited,
typically 20 years. Goodwill and other intangible assets are periodically
reviewed to assess recoverability. The Company's policy is to compare the
carrying value of goodwill with the expected undiscounted cash flows from
operations of the acquired business. Other intangible assets consist of trade
names, patents and copyrights.
PROPERTY: Depreciation is computed for financial reporting purposes on a
straight-line basis over the estimated useful lives of the related assets,
ranging from 10 to 20 years for land improvements, 20 to 40 years for buildings,
and 3 to 11 years for machinery and equipment. Certain of the Company's fixed
assets are leased through industrial revenue bond financings and other
arrangements with county and local authorities.
STOCK-BASED COMPENSATION: The Company measures stock-based compensation using
the intrinsic value method in accordance with Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees."
PURCHASE COMMITMENTS: Periodically the Company enters into forward delivery
contracts and futures contracts for the purchase of certain raw materials,
consistent with the size of its business, to reduce the Company's exposure to
price volatility. Unrealized gains and losses on outstanding futures contracts,
which were not material at January 1, 2000 and January 2, 1999, are deferred and
subsequently recognized in income as cost of goods sold in the same period as
the hedged item. The Company does not hold or issue derivative instruments for
trading purposes.
IMPAIRMENT OF LONG-LIVED ASSETS: Long-lived assets are reviewed for impairment
when events or changes in business conditions indicate that their full carrying
value may not be recoverable. The estimated future undiscounted cash flows
associated with such assets are compared to the assets' carrying values to
determine if write-downs are required. Pretax impairment charges of
approximately $3.0 million and $6.0 million in 1999 and 1998, respectively, were
recorded in the Other Expense line item in the Consolidated Statement of
Operations.
INCOME TAXES: The provision for income taxes includes federal, state, and
foreign taxes currently payable and deferred taxes. Deferred taxes were
determined using the liability method, which considers future tax consequences
associated with differences between financial accounting and tax bases of assets
and liabilities and gives immediate effect to changes in income tax laws upon
enactment.
RECLASSIFICATION: Certain prior years' amounts have been reclassified to conform
with the 1999 presentation.
ACCOUNTING CHANGES: In 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use." This
standard revised the accounting for software development costs and requires the
capitalization of certain costs which the Company has historically expensed as
incurred. The adoption of this statement resulted in an increase to 1999 net
income of $1.2 million, or $0.07 per diluted share, from the capitalization of
costs that would have been expensed in previous years. In accordance with this
standard, costs incurred prior to the initial adoption have not been
retroactively adjusted.
RECENTLY ISSUED ACCOUNTING STANDARDS: In June 1998, the FASB issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. This statement will require the Company to
recognize all derivatives on the Consolidated Balance Sheet at fair value, and
may impact the Company's earnings depending on the instruments held at the time
of adoption. The Company will be required to adopt this standard beginning in
its 2001 fiscal year, and is in the process of determining the impact of this
standard on its financial position, results of operations and cash flows.
NOTE 2. REPORTABLE SEGMENT INFORMATION:
Prior to the first quarter of 1999, Springs had two reportable segments: home
furnishings and specialty fabrics. The home furnishings segment manufactures,
purchases for resale, and markets home furnishings products. The specialty
fabrics segment manufactured, finished, purchased for resale, and marketed woven
and non-woven fabrics. During 1998 and the first quarter of 1999, the Company
sold four of its specialty fabrics businesses. See Note 3, Acquisitions and
Divestitures, for additional discussion of businesses sold. Following these
divestitures, Springs realigned its internal organizational structure during the
first quarter of 1999 to reflect the Company's strategic focus on
the home furnishings market, resulting in one reportable segment, the home
furnishings segment. The segment's operating results have been restated to
include the Company's Retail and Specialty Fabrics unit's operating results,
which were previously included in the specialty fabrics segment.
The Company offers a variety of related products including sheets, pillows,
pillowcases, bedspreads, comforters, mattress pads, baby bedding and infant
apparel, shower curtains, accent and bath rugs, towels, other bath fashion
accessories, home-sewing fabrics, draperies, drapery hardware, and decorative
window furnishings. The operating results of the divested specialty fabrics
businesses are included in the specialty fabrics category for the prior years.
7
18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Springs Industries, Inc.
The Company's accounting policies are described in Note 1, Summary of
Significant Accounting Policies. The Company evaluates its performance based on
profit or loss from operations before income taxes, unusual items, interest
expense, and other income, net. Its principal markets and operations are in the
United States.
Based on the current organizational structure, sales and profit from operations
before unusual items for the reportable segments are as follows:
(in millions)
1999 1998 1997(1)
TRADE SALES:
Home furnishings ................ $2,220.4 $2,014.7 $2,043.2
Specialty fabrics ............... -- 165.8 182.9
- -------------------------------------------------------------------------
TOTAL ........................ $2,220.4 $2,180.5 $2,226.1
=========================================================================
PROFIT FROM OPERATIONS
BEFORE UNUSUAL ITEMS: (2)
Home furnishings ................ $ 134.0 $ 88.9 $ 117.8
Specialty fabrics ............... -- 15.6 11.2
- -------------------------------------------------------------------------
Total ........................ 134.0 104.5 129.0
=========================================================================
Restructuring and
realignment expenses (3) ....... -- 19.9 11.1
Year 2000 expenses(3) ........... 1.0 7.1 2.8
Interest expense ................ 26.5 25.0 18.6
Other income, net (4) ........... (4.7) (6.3) (6.4)
- -------------------------------------------------------------------------
INCOME BEFORE
INCOME TAXES ................. $ 111.2 $ 58.8 $ 102.9
=========================================================================
TOTAL ASSETS AT YEAR END:
Home furnishings ................ $1,575.0 $1,326.6 $1,321.5
Specialty fabrics ............... -- 50.8 87.4
Cash and cash
equivalents(5) .................. -- 48.1 0.4
- -------------------------------------------------------------------------
TOTAL ........................ $1,575.0 $1,425.5 $1,409.3
=========================================================================
CAPITAL EXPENDITURES:
Home furnishings ................ $ 166.8 $ 112.7 $ 94.0
Specialty fabrics ............... -- 2.3 5.3
- -------------------------------------------------------------------------
TOTAL ........................ $ 166.8 $ 115.0 $ 99.3
=========================================================================
DEPRECIATION AND AMORTIZATION:
Home furnishings ................ $ 101.3 $ 82.4 $ 77.2
Specialty fabrics ............... -- 4.6 7.4
- -------------------------------------------------------------------------
TOTAL ........................ $ 101.3 $ 87.0 $ 84.6
=========================================================================
(1) Fiscal year 1997 was 53 weeks, whereas fiscal years 1999 and 1998 were
52 weeks.
(2) Profit from operations before unusual items represents sales less cost
of goods sold, selling, general and administrative expenses, and
provision for uncollectible receivables.
(3) In 1998, restructuring and realignment expenses totaling $19.9 million
were charged to the home furnishings segment, and Year 2000 expenses
totaling $6.8 million and $0.3 million were charged to the home
furnishings segment and the specialty fabrics segment, respectively. In
1997, realignment expenses totaling $10.2 million and $0.9 million and
Year 2000 expenses totaling $2.6 million and $0.2 million were charged
to the home furnishings segment and the specialty fabrics segment,
respectively.
(4) In 1998, an impairment charge of $4.8 million was charged to the home
furnishings segment. In 1997, home furnishings earnings included a $4.1
million gain on the sale of an investment.
(5) In 1999, all of the Company's assets, including cash and cash
equivalents, are reported in the home furnishings segment. In 1998 and
1997, cash and cash equivalents were not allocated to the reportable
segments.
Sales for 1999, 1998, and 1997 include sales of $450.4 million, $320.8 million,
and $314.3 million, respectively, to one customer and are included in the home
furnishings segment. Accounts receivable at January 1, 2000, and January 2,
1999, included receivables from this customer totaling $47.2 million and $37.7
million, respectively. Sales by geographic area, as defined by customer
location, are as follows:
(in millions)
1999 1998 1997
United States ................. $2,072.0 $2,031.5 $2,078.0
Canada ........................ 117.7 113.3 108.3
Other ......................... 30.7 35.7 39.8
- --------------------------------------------------------------------
TOTAL ...................... $2,220.4 $2,180.5 $2,226.1
====================================================================
Company assets located outside the United States are not material for any of the
three years presented.
Note 3. Acquisitions and Divestitures:
During 1999 and 1998, the Company acquired two home furnishings businesses and
sold four specialty fabrics businesses. On January 23, 1999, the Company
acquired Regal Rugs, Inc. ("Regal"). Regal imports and manufactures bath and
accent rugs for sale to department and specialty stores, national chain stores,
and catalog retailers. The purchase price was approximately $35 million. The
acquisition was accounted for as a purchase in accordance with APB Opinion No.
16, "Business Combinations" ("APB 16"), and Regal's operating results have been
included in the Company's consolidated financial statements since the January
23, 1999, acquisition date. The purchase price was allocated to the assets
acquired and to the liabilities assumed based on their estimated fair value at
the date of acquisition.
On January 5, 1999, the Company acquired the remaining 50 percent interest in
American Fiber Industries, LLC ("AFI"), a manufacturer and distributor of bed
pillows, mattress pads, down comforters and comforter accessories. Springs
acquired its original 50 percent interest in AFI in February 1997 and had been
accounting for the original investment under the equity method. The purchase
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19
Springs Industries, Inc.
price for the remaining interest totaled approximately $15 million. The Company
has accounted for the remaining interest as a step-acquisition in accordance
with APB 16, whereby the purchase price was allocated to the assets acquired and
to the liabilities assumed based on 50 percent of their estimated fair value on
the date of acquisition. In addition, AFI's operating results have been included
in the Company's consolidated financial statements since the January 5, 1999,
acquisition date.
The excess of the purchase price for both transactions over the fair value of
net assets acquired, which totaled $34.3 million, has been recorded as goodwill
and is being amortized on a straight-line basis over 20 years.
Because Regal and AFI were acquired in January, 1999, substantially all of their
1999 operating results have been included in Springs' 1999 Consolidated
Statement of Operations. The following unaudited pro forma financial information
presents the combined results of operations for Springs, Regal and AFI as if the
acquisitions had been effective as of the beginning of 1998, after giving effect
to certain adjustments, including amortization of goodwill, additional
depreciation expense and related income tax effects. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had Springs, Regal and AFI constituted a single entity during
1998. Such pro forma results would present net sales of $2.277 billion, net
income of $39.7 million and diluted earnings per share of $2.09 for 1998.
During 1999 and 1998, the Company sold four specialty fabrics businesses.
Effective March 31, 1999, the Company sold its UltraFabrics business and there
was no material gain on the sale. The first quarter 1999 sales and earnings
before interest and taxes of the UltraFabrics business were not material.
Effective January 2, 1999, the Company disposed of the net assets of the
Company's Springfield business in exchange for a $10 million preferred equity
interest in the divested business and cash of $33 million. A receivable for the
cash proceeds received on January 4, 1999, was included in other current assets
on the Company's Balance Sheet as of the end of 1998. The Company has committed
to provide the divested business with certain commission finishing services and
a limited amount of yarn for a period of 10 years. Springs does not believe that
the terms of this commitment will have a material impact on future earnings.
Effective December 19, 1998, the Company disposed of its Industrial Products
business in exchange for principally $18.5 million in cash and other
consideration in the form of notes receivable and a preferred equity interest in
the divested business. Effective August 7, 1998, the Company sold its UltraSuede
business and certain related assets of the UltraFabrics business in exchange for
approximately $15 million in cash. The combined effect of the 1998 transactions
was a pretax gain of $8.4 million, which is included in other income. The
combined sales of the four specialty fabrics businesses included in the
Company's 1998 results were $165.8 million, and after-tax earnings totaled
approximately $9.5 million.
NOTE 4. RESTRUCTURING AND REALIGNMENT COSTS:
1998 RESTRUCTURING
In the first quarter of 1998, the Company adopted a plan to close the Rock Hill
(SC) Printing and Finishing Plant. At that time, the Company recorded a pretax
charge of $23.0 million, which included an $11.3 million write-off of property,
a $4.0 million accrual for anticipated severance costs arising from the
elimination of approximately 480 positions, and a $7.7 million accrual primarily
for idle plant and demolition costs.
The following represents changes in the restructuring accruals since the
adoption of the plan:
Accrual
(in millions) Severance for Other
Accrual Expenses
- ------------------------------------------------------------------------
Original accrual on
February 17, 1998 .......................... $ 4.0 $ 7.7
Cash Payments .............................. (3.0) (1.2)
Adjustments ................................ (1.0) (6.5)
- ------------------------------------------------------------------------
ACCRUAL BALANCE ON
JANUARY 2, 1999 ........................ $ 0.0 $ 0.0
========================================================================
The restructuring plan was completed during the fourth quarter of 1998. In 1998,
the severance accrual was reduced due to lower-than-expected costs per associate
and the accrual for other expenses was reduced, primarily due to the sale on
September 25, 1998, of the Rock Hill facility. As a result of the sale, which
management considered as an unlikely possibility at the time the plant was
closed, the Company reversed accruals relating to idle plant and demolition
costs by approximately $4.3 million.
In 1998, the Company incurred expenses of $1.3 million for equipment relocation
and other realignment expenses related to the 1998 plan which do not qualify as
"exit costs" as defined by Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."
1996 RESTRUCTURING
During 1996, the Company adopted a restructuring plan to consolidate and realign
its fabric manufacturing operations. During 1998, the severance accrual
associated with the plan was reduced by approximately $1.5 million due to
lower-than-expected severance costs and the accrual for other expenses was
reduced by $0.9 million, primarily due to lower-than-expected idle plant costs.
The restructuring plan was completed during the fourth quarter of 1998. The
Company incurred realignment expenses of $5.3 million in 1998 for equipment
relocation and other expenses related to the 1996 plan that do not qualify as
"exit costs" as defined by Emerging Issues Task Force Issue No. 94-3.
NOTE 5. INVENTORIES:
Inventories are summarized as follows:
(in thousands)
STANDARD COST (WHICH APPROXIMATES CURRENT COST): 1999 1998
Finished goods .................................... $ 328,383 $ 268,086
In process ........................................ 181,323 170,836
Raw materials and supplies ........................ 64,293 54,624
- ---------------------------------------------------------------------------------------
573,999 493,546
Less LIFO reserve ................................. (94,671) (105,558)
- ---------------------------------------------------------------------------------------
TOTAL .......................................... $ 479,328 $ 387,988
=======================================================================================
9
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Springs Industries, Inc.
NOTE 6. GOODWILL:
The Company had net goodwill of $60.2 million and $26.7 million at January 1,
2000, and January 2, 1999, respectively. These amounts are net of accumulated
amortization of $13.6 million at January 1, 2000, and $10.9 million at January
2, 1999. See Note 3, Acquisitions and Divestitures, for a description of the
good-will from 1999 acquisitions.
NOTE 7. ACCRUED BENEFITS AND DEFERRED COMPENSATION:
The long-term portion of accrued benefits and deferred compensation was
comprised of the following:
(in thousands) 1999 1998
Postretirement medical benefit obligation $ 62,097 $ 65,060
Deferred compensation ................... 68,132 66,640
Other employee benefit obligations ...... 49,243 48,185
- -----------------------------------------------------------------------------
TOTAL ................................ $179,472 $179,885
=============================================================================
The liabilities are long-term in nature and will be paid over time in accordance
with the terms of the plans.
NOTE 8. FINANCING ARRANGEMENTS:
The Company has access to short-term financing for operations through various
uncommitted credit facilities. As of January 1, 2000, the Company had short-term
borrowings of $35.5 million outstanding through these uncommitted credit
facilities at a weighted-average interest rate of 6.3 percent.
Long-term debt consists of:
(in thousands) 1999 1998
Revolving credit agreement, due December 2002, interest payable at LIBOR-based
variable rates (6.4% at 1/1/2000) ........................................... $ 35,000 $ --
Note payable in quarterly installments of $4,464 from September 2001 through
June 2008, interest payable at LIBOR-based variable rates (6.5% at 1/1/2000) 125,000 125,000
Senior notes payable in annual installments of $5,000 through July 2006,
interest rate at 9.6% ....................................................... 35,000 40,000
Notes payable in quarterly installments of $2,857 through May 2005, interest
payable at LIBOR-based variable rates (6.4% at 1/1/2000) .................... 62,857 74,286
Notes payable in quarterly installments of $714 through September 2005, interest
payable at LIBOR-based variable rates (6.4% at 1/1/2000) .................... 16,429 19,285
Industrial Revenue Bond Obligations, payable in varying annual
amounts through 2019, interest at rates ranging from 3.0% to 8.3% ........... 28,603 29,857
Other .......................................................................... 1,848 876
- -------------------------------------------------------------------------------------------------------------
Total ....................................................................... 304,737 289,304
Current maturities ............................................................. (21,203) (21,313)
- -------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT .............................................................. $283,534 $267,991
=============================================================================================================
The Company has the ability to obtain financing through the issuance of
commercial paper. The Company's access to the commercial paper market is
facilitated by a committed $225 million long-term revolving credit agreement
provided by several banks. This revolving credit agreement will expire on
December 16, 2002. The Company pays a 0.1 percent annual facility fee related to
this agreement. As of January 1, 2000, $35.0 million in borrowings were
outstanding under this agreement. The LIBOR-based weighted-average interest rate
on the revolving credit agreement was 6.4 percent as of January 1, 2000.
During 1998, the Company borrowed $125 million under a long-term credit facility
at a variable rate based on LIBOR, which was 6.5 percent as of January 1, 2000.
During the third quarter of 1998, the Company entered into an interest rate swap
agreement for a notional amount of $60 million to effectively fix the interest
rate at 6.1 percent on $60 million of the $125 million note payable in June
2008.
In 1995, the Company entered into other interest rate swap agreements to reduce
the potential impact of increases in interest rates on floating-rate, long-term
debt. The interest rate swap agreements were designed to fix the interest rate
at 6.7 percent on $100 million of notes payable in May 2005 and September 2005.
The Company is exposed to credit losses in the event of nonperformance by the
counterparties to the swap agreements; however, the Company believes
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21
Springs Industries, Inc.
such counterparties will perform. At January 1, 2000, and January 2, 1999, the
notional amount of these swap agreements totaled $139.3 million and $153.6
million, respectively.
Certain long-term debt agreements contain requirements concerning, among other
things: the maintenance of working capital and tangible net worth; limitations
on the incurrence of indebtedness; and restrictions on the payment of dividends,
sales of assets and/or redemption of stock. The Company is in compliance with
the requirements of these agreements as of January 1, 2000. Under the most
restrictive requirements on the payment of dividends, retained earnings of
approximately $154 million were free of restrictions at January 1, 2000.
Scheduled annual maturities of long-term debt are $21.2 million in 2000, $29.6
million in 2001, $73.6 million in 2002, $38.3 million in 2003, $38.0 million in
2004, and varying amounts thereafter through 2019.
NOTE 9. LEASES:
The Company leases certain office space, facilities, and equipment under
operating leases. During 1999, the Company sold its New York City office
building for $29.5 million and leased back a portion of the building for a
ten-year term. The result of the sale-leaseback was a pretax gain of $1.5
million recorded in other income and the deferral of an additional $17.8 million
pretax gain, which will be amortized over the operating lease term.
Future scheduled minimum lease payments under noncancelable operating leases are
as follows:
(in thousands)
FISCAL YEAR AMOUNT
2000 ............................. $13,832
2001 ............................. 11,158
2002 ............................. 8,545
2003 ............................. 6,488
2004 ............................. 4,696
Thereafter ....................... 17,589
----------------------------------------------
TOTAL ............................ $62,308
==============================================
Total rent expense was $21.3 million in 1999, $19.0 million in 1998 and $18.3
million in 1997.
NOTE 10. SHAREHOLDERS' EQUITY:
As of January 1, 2000, Springs had authorized 1,000,000 shares of $1.00 par
value, voting preferred stock, none of which was outstanding. Authorized common
stock consisted of 40,000,000 shares of $.25 par value Class A stock and
20,000,000 shares of $.25 par value Class B stock. Subject to certain
exceptions, owners of Class B stock are entitled to four votes per share on
matters brought before shareholders of the Company, while owners of Class A
stock are entitled to one vote per share. Cash dividends per share declared on
Class A stock must equal at least 110 percent of cash dividends declared per
share on Class B stock. See Note 15, Other Matters, for a description of related
parties.
The Company's Board of Directors authorized the Company to purchase, from
time to time, up to 4 million shares of Class A common stock in the open market
and in private transactions. As of January 2, 1999, the Company had repurchased
2,408,400 shares pursuant to this authorization. No shares were repurchased
during 1999.
Accumulated other comprehensive income or loss shown in the Consolidated
Statement of Shareholders' Equity consisted of foreign currency translation
adjustments of $8.5 million and a minimum pension liability of $0.7 million
in 1999; foreign currency translation adjustments of $9.5 million and a minimum
pension liability of $1.0 million in 1998; and foreign currency translation
adjustments of $7.1 million and a minimum pension liability of $1.0 million in
1997.
The change in unrealized gains on securities during 1997 included a
reclassification adjustment of $0.7 million, net of a $0.4 million tax benefit,
for losses realized in net income as a part of the gain on the sale of an
investment.
NOTE 11. STOCK-BASED COMPENSATION:
The Company has a stock-based incentive plan ("the Plan") which is designed to
achieve the objectives of the long-term component of the Company's executive
compensation program. The Plan provides for various stock-based Class A common
stock awards, including stock options, deferred stock, restricted stock,
performance units, and stock appreciation rights.
Under the Plan, stock options have been granted with exercise prices equal to
the Company's stock price on the grant date. Generally, the options granted
cannot be exercised until at least three years after the grant date, and
generally expire ten years after the grant date. The deferred stock awards
typically vest over a five-year period. The restrictions on the stock typically
lapse over a two or three year period.
Performance units which have been granted are subject to a three-year
performance cycle and are accounted for as a variable plan. The number of units
ultimately earned are determined at the end of the three-year cycle based on the
Company's total shareholder return over the three-year cycle as compared to the
companies in the S&P 500 index.
11
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Springs Industries, Inc.
A summary of the Company's stock options as of January 1, 2000, January 2, 1999,
and January 3, 1998, and changes during the years ended on those dates is
presented below:
1999 1998 1997
-------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at the beginning of the year 1,680,141 $38.11 1,127,500 $39.53 882,500 $38.26
Granted ................................ 473,000 37.84 632,800 34.95 250,000 44.00
Forfeited .............................. (97,799) 39.01 (20,002) 38.32 (5,000) 39.13
Exercised .............................. (55,334) 35.37 (60,157) 31.18 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR .......... 2,000,008 $38.08 1,680,141 $38.11 1,127,500 $39.53
====================================================================================================================================
OPTIONS EXERCISABLE AT YEAR END ..... 822,904 $40.16 810,167 $40.05 225,809 $32.09
====================================================================================================================================
The following table summarizes information about the stock options outstanding
at January 1, 2000:
Options Exercisable
--------------------------
Weighted- Weighted- Weighted-
Range of Options Average Average Average
Exercise Outstanding Remaining Exercise Exercise
Prices at 1/1/00 Contractual Life Price at 1/1/00 Price
- ------------------------------------------------------------------------------------------------------------
$ 29.00 141,000 1.9 years $ 29.00 141,000 $ 29.00
30.44 to 34.33 622,168 8.6 years 33.17 60,068 33.71
36.63 to 38.44 409,500 9.9 years 38.26 -- --
39.13 80,340 5.1 years 39.13 56,836 39.13
39.75 to 44.00 659,000 6.4 years 42.56 477,000 42.20
46.38 to 47.25 38,000 4.5 years 46.72 38,000 46.72
56.19 50,000 8.1 years 56.19 50,000 56.19
- ------------------------------------------------------------------------------------------------------------
TOTAL 2,000,008 822,904
============================================================================================================
The options granted during 1999, 1998, and 1997 had a weighted-average fair
value of $12.67, $10.00 and $14.22, respectively. The fair value of each option
was estimated on the date of grant using the Black-Scholes option-pricing model
and the following weighted-average assumptions:
1999 1998 1997
Expected option lives .................. 10 years 10 years 8 years
Weighted average risk-free interest rate 6.2% 5.3% 6.4%
Expected volatility .................... 32.5% 28.6% 28.8%
Expected dividend rate ................. $ 1.32 $ 1.32 $ 1.32
The Company awarded deferred stock awards, restricted stock and performance unit
awards during 1999, 1998, and 1997. Such awards totaled 21,380 deferred and
restricted shares, and 53,893 performance units in 1999, 6,210 deferred and
restricted shares, and 35,677 performance units in 1998, and 20,230 deferred and
restricted shares, and 51,551 performance units in 1997, at weighted-average
grant-date fair values of $39.46, $52.19 and $44.57, respectively. Compensation
expense (income) for deferred stock, restricted stock and performance unit
awards totaled approximately $1,587,000, $(80,000) and $2,718,000 for the years
ended January 1, 2000, January 2, 1999 and January 3, 1998, respectively. The
amounts of the Company's deferred compensation shown on the Company's Balance
Sheet associated with these benefits, including interest and dividend credits,
were $6.3 million and $5.1 million as of January 1, 2000, and January 2, 1999,
respectively.
The Company measures stock-based compensation using the intrinsic value method
in accordance with APB Opinion No. 25 and FASB Interpretation No. 28. Had
compensation cost for the Company's stock-based compensation awards been
determined at the grant dates based on the fair value method described in FASB
Statement No. 123, "Accounting for Stock-Based Compensation", the Company's pro
forma net income would have been $67.1 million, or $3.69 per diluted share, for
1999, $34.7 million, or $1.83 per diluted share, for 1998, and $66.9 million, or
$3.24 per diluted share, for 1997.
12
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Springs Industries, Inc.
NOTE 12. INCOME TAXES:
The following tables present the components of the provision for income taxes
and reconciliation of the statutory United States income tax rate to the
effective income tax rate during 1999, 1998, and 1997.
INCOME TAX PROVISION:
(in thousands) 1999 1998 1997
Current .................. $ 46,631 $17,908 $26,376
Deferred ................. (4,364) 3,542 7,596
- ---------------------------------------------------------------------
TOTAL .................. $ 42,267 $21,450 $33,972
=====================================================================
RECONCILIATION TO EFFECTIVE TAX RATES:
1999 1998 1997
Provision at statutory
U.S. tax rate ........... 35.0% 35.0% 35.0%
Effective state income
tax rate (excluding
sale of subsidiary) ..... 2.9 2.5 2.1
Effect of sale of
subsidiary (including
state tax) .............. -- -- (1.2)
Other .................... 0.1 (1.0) (2.9)
- ---------------------------------------------------------------------
TOTAL .................. 38.0% 36.5% 33.0%
=====================================================================
Income before income taxes includes foreign income of $1.7 million, $1.4
million, and $2.6 million in 1999, 1998, and 1997, respectively. The provision
for income taxes includes state income taxes of $5.0 million, $2.3 million, and
$3.3 million in 1999, 1998, and 1997, respectively. Temporary differences which
give rise to deferred income taxes and the resulting assets and liabilities are
as follows:
(in thousands) 1999 1998
Employee benefit accruals .............. $ 36,242 $ 37,141
Deferred compensation .................. 34,784 33,398
Receivables reserves ................... 11,443 10,557
Environmental accruals ................. 3,964 3,856
Deferred income ........................ 6,703 --
Other items ............................ 13,756 15,674
- ----------------------------------------------------------------------------
Total deferred tax assets ............ 106,892 100,626
- ----------------------------------------------------------------------------
Property ............................... (85,378) (83,515)
Inventories ............................ (8,129) (8,648)
Intangibles ............................ (815) (911)
- ----------------------------------------------------------------------------
Other items ............................ (1,368) (714)
- ----------------------------------------------------------------------------
Total deferred tax liabilities ....... (95,690) (93,788)
- ----------------------------------------------------------------------------
NET DEFERRED TAX ASSET .............. $ 11,202 $ 6,838
============================================================================
NOTE 13. EMPLOYEE BENEFIT PLANS:
Substantially all associates of Springs are covered by defined contribution or
defined benefit retirement plans. The Company makes contributions to defined
contribution plans, and these contributions are computed as a percentage of
each participant's eligible compensation. In addition, in the event that
eligible participants contribute a percentage of their compensation to certain
defined contribution plans, the Company matches a portion of their
contributions. Company contributions to defined benefit plans are made in
accordance with the Employee Retirement Income Security Act, and benefits are
generally based upon the participant's years of service and compensation level.
Assets in defined benefit plans are invested in diversified equity securities,
fixed income securities (including United States government obligations), real
estate and money market securities. The Company provides eligible executives
retirement benefits under nonqualified supplemental executive retirement plans
(SERP's). The Company also sponsors an unfunded, postretirement medical plan
for eligible retirees. The Company and the retirees contribute to the plan,
with contributions adjusted periodically.
Defined contribution plan expenses for 1999, 1998, and 1997 were $21.7 million,
$19.0 million, and $21.6 million, respectively. The net assets available for
benefits under defined contribution plans had a market value of $786.7 million
as of December 31, 1999.
In 1999, the Company amended one of its SERP plans to cease future benefit
accruals and recognized a curtailment gain of $1.9 million. Regal, which the
Company acquired in 1999, has two defined benefit plans and a SERP plan. These
plans have a combined projected benefit obligation, accumulated benefit
obligation and fair value of plan assets of $6.8 million, $6.1 million and $5.7
million as of January 1, 2000, respectively.
Effective December 31, 1998, the Company merged two of its defined benefit
pension plans together, eliminating approximately $1.9 million of unfunded
liability on a combined plan basis. Prior to the merger, the Company
distributed lump-sum payments of approximately $1.9 million to plan
participants. A settlement gain of approximately $0.4 million was recognized in
1998.
In 1998, the Company amended one of its defined benefit pension plans to cease
future benefit accruals. A curtailment loss of $0.5 million was recognized in
1998. During 1999, settlement payments of approximately $45.1 million were
distributed to participants in the plan.
The Company amended its postretirement medical plan effective January 1, 1999,
to extend to retirees the managed care medical options that were previously
available only to active associates and to limit the Company's maximum per
capita cost for postretirement medical coverage to two times the Company's 1998
per capita cost. These amendments decreased the postretirement benefit
obligation by approximately $10 million. In addition, the Company amended the
plan to decrease the eligibility requirement from age 62 and at least 25 years
of service, to age 60 and at least 10 years of service, resulting in an increase
in the postretirement benefit obligation of $4.1 million.
13
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Springs Industries, Inc.
The following tables include summarized information on the Company's pension
and postretirement plans for the years ended January 1, 2000, and January 2,
1999:
(in thousands) Defined Post retirement
Pension Benefits Medical Benefits
------------------------------------------------
CHANGE IN BENEFIT OBLIGATION: 1999 1998 1999 1998
--------- --------- --------- ---------
Benefit obligation at beginning of year ......................... $ 80,585 $ 69,152 $ 46,617 $ 66,847
Service cost ................................................... 701 2,021 1,538 1,474
Interest cost .................................................. 4,798 4,621 3,132 3,214
Participants' contributions .................................... -- -- 2,602 2,381
Actuarial (gains) losses ....................................... (7,138) 3,196 (3,763) (11,689)
Acquisition .................................................... 7,493 -- -- --
Plan amendments, divestitures, curtailments and settlements .... (43,239) 7,489 -- (7,549)
Special termination benefits .................................... 478 -- -- --
Benefit payments ................................................ (2,796) (5,894) (8,746) (8,061)
- -------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT END OF YEAR ........................... $ 40,882 $ 80,585 $ 41,380 $ 46,617
===================================================================================================================
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year .............. $ 57,733 $ 54,286
Actual return on plan assets ................................ 596 9,173
Acquisition ................................................. 5,612 --
Employer contributions ...................................... 1,888 426
benefit payments ............................................. (2,796) (4,302)
Settlements ................................................. (45,120) (1,850)
- -----------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT END OF YEAR ................ $ 17,913 $ 57,733
=========================================================================================
FUNDED STATUS:
Funded status at end of year ................................ $(22,969) $(22,852) $(41,380) $(46,617)
Unrecognized actuarial (gains) losses ....................... (2,093) 2,640 (20,085) (16,129)
Unrecognized prior service cost ............................. 3,035 (236) (6,607) (7,768)
Unrecognized transition obligation .......................... (86) (125) -- --
- -------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED ................................... $(22,113) $(20,573) $(68,072) $(70,514)
===================================================================================================================
AMOUNTS RECOGNIZED IN THE COMPANY'S BALANCE SHEET:
Prepaid benefit cost ......................................... $ -- $ 146 $ -- $ --
Accrued benefit cost ......................................... (24,757) (23,041) (68,072) (70,514)
Intangible asset ............................................ 1,558 546 -- --
Accumulated other comprehensive loss ........................ 1,086 1,776 -- --
- -------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED ................................... $(22,113) $(20,573) $(68,072) $(70,514)
===================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate ............................................... 7.75% 6.50% 7.75% 6.50%
Expected return on plan assets .............................. 8.50% 8.50% -- --
Rate of compensation increase ............................... 4.50% 4.50% -- --
Initial health care cost trend rate (1) (2) ................. -- -- 8.00% 8.50%
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost ................................................ $ 701 $ 2,021 $ 1,538 $ 1,474
Interest cost ............................................... 4,798 4,621 3,132 3,214
Actual return on assets ..................................... (3,226) (4,358) -- --
Amortization of prior service cost .......................... 521 -- -- --
Amortization of transition obligation ....................... (39) -- -- --
Net amortization and deferral ............................... 78 (962) (968) (1,080)
Special termination Benefit cost ............................. 478 396 -- --
Effect of curtailment/settlement ............................ (1,911) 101 -- 2,066
- -------------------------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST ................................ $ 1,400 $ 1,819 $ 3,702 $ 5,674
===================================================================================================================
(1) Assumed to decrease gradually to 5.0 percent in 2005 and remain at
that level thereafter.
(2) 6.0 percent and 6.1 percent for HMO plans for 1999 and 1998,
respectively.
14
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Springs Industries, Inc.
The Company had unfunded defined benefit plans with a total projected benefit
obligation and accumulated benefit obligation of $24.3 million and $23.6
million, respectively, as of January 1, 2000. The Company had under-funded
defined benefit plans with a projected benefit obligation, accumulated benefit
obligation and fair value of plan assets of $32.9 million, $31.7 million, and
$10.0 million, respectively as of January 2, 1999.
A one-percentage point change in assumed health care cost trend rates would
have the following effects:
(in thousands) One Percent One Percent
Increase Decrease
--------- ---------
Effect on total of service
and interest cost components ........... $ 78 $ (113)
========= =========
Effect on postretirement
benefit obligation ...................... $ 973 $ (1,336)
========= =========
NOTE 14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company has estimated the fair values of financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment, however, is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company would
realize in a current market exchange.
The carrying amounts of cash and cash equivalents, accounts receivable, certain
other assets, accounts payable, and short-term borrowings are reasonable
estimates of their fair value at January 1, 2000, and January 2, 1999. The
carrying value of notes receivable is $3.7 million at January 1, 2000, compared
to an estimated fair value of $3.4 million, using interest rates based on the
credit worthiness of the customers. The carrying value of notes receivable was
$12.4 million at January 2, 1999, compared to an estimated fair value of $11.4
million.
The carrying value of long-term debt at January 1, 2000, was $304.7 million,
compared to an estimated fair value of $309.6 million. The carrying value of
long-term debt at January 2, 1999, was $289.3 million, compared to an estimated
fair value of $297.4 million. Fair value was estimated using interest rates that
were available to the Company at those dates for issuance of debt with similar
terms and remaining maturities. At January 1, 2000, and January 2, 1999, the
Company had interest rate swaps with notional amounts totaling $139.3 million
and $153.6 million, respectively. The estimated fair value of these agreements
was an unrealized gain of $3.4 million at January 1, 2000, and an unrealized
loss of $5.2 million at January 2, 1999, based on market prices for similar
instruments. The fair value of exchange-traded futures contracts held at
year-end 1999 and 1998 was not material.
NOTE 15. OTHER MATTERS:
TRANSACTIONS WITH RELATED PARTIES: The Company conducts business with other
companies or individuals which are considered related parties. Two members of
the Board of Directors, including the Chairman and Chief Executive Officer,
their family and related entities own approximately 99.9 percent of Springs'
Class B common stock and 1.0 percent of Class A common stock. Springs transacts
business with certain companies that are controlled by these persons and
related entities. In the opinion of Springs' management, the cost of services
provided by and to these companies is not material and the services have been
obtained or supplied at competitive prices or rates. Management annually
reviews its conclusions concerning related party transactions with the Audit
Committee of the Board of Directors.
COMMITMENTS: The Company has entered into a ten-year operating agreement to
provide certain commission finishing services and supply limited amounts of yarn
to one of the divested specialty fabrics businesses. This agreement specifies
that Springs provide the services and yarn to the divested specialty fabrics
business at Springs' cost, with a small premium over cost after the third year
of the agreement. The Company does not believe that this agreement will have
a material impact on its results of operations.
CONTINGENCIES: Springs is involved in certain administrative proceedings
governed by environmental laws and regulations, including proceedings under the
Comprehensive Environmental Response, Compensation, and Liability Act. The
potential costs to the Company related to all of these environmental matters
are uncertain due to such factors as: the unknown magnitude of possible
pollution and cleanup costs; the complexity and evolving nature of governmental
laws and regulations and their interpretations; the timing, varying costs and
effectiveness of alternative cleanup technologies; the determination of the
Company's liability in proportion to other potentially responsible parties; and
the extent, if any, to which such costs are recoverable from insurers or other
parties.
In connection with these proceedings, the Company estimates the range
of possible losses for such matters to be between $7 million and $15 million,
and has accrued an undiscounted liability of approximately $11 million, which
represents management's best estimate of Springs' probable liability concerning
all known environmental matters.
Management believes the $11 million will be paid out over the next 15 years.
This accrual has not been reduced by any potential insurance recovery to which
the Company may be entitled regarding environmental matters. Environmental
matters include a site listed on the United States Environmental Protection
Agency's ("EPA") National Priority List where Springs is the sole responsible
party. Springs, the EPA and the United States Department of Justice have
executed a consent decree related to this site. Soil cleanup was completed in
1993, subject to final approval by the EPA, and the approved EPA groundwater
remedy began in 1996. There are no other known sites which the Company
presently believes may involve material amounts.
Springs is also involved in various other legal proceedings and claims
incidental to its business. Springs is protecting its interests in all such
proceedings.
In the opinion of management, based on the advice of counsel, the likelihood
that the resolution of the above matters would have a material adverse impact
on either the financial condition or the future results of operations of Springs
is remote.
15
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
Springs Industries, Inc.
A five-year summary of Selected Financial Data appears on pages 30 and 31.
RESULTS OF OPERATIONS
GENERAL
In connection with Springs Industries, Inc.'s (Springs or the Company)
divestiture of four of its specialty fabrics businesses, including its
UltraFabrics business in March 1999, Springs realigned its internal
organizational structure during the first quarter of 1999 to reflect the
Company's strategic focus on the home furnishings market, resulting in one
reportable segment. The home furnishings segment's operating results for 1998
and 1997 have been restated to include the Company's Retail and Specialty
Fabrics unit's operating results, which were previously included in its former
specialty fabrics segment. Please refer to Note 2, Reportable Segment
Information, and the Divestitures section of Management's Discussion and
Analysis of Operations and Financial Condition, for additional discussion.
During the first quarter of 1999, and in conjunction with the Company's
increasing focus on the home furnishings market, Springs acquired the remaining
50 percent interest in American Fiber Industries, LLC ("AFI"), a manufacturer
and distributor of bed pillows, mattress pads, down comforters and comforter
accessories, and Regal Rugs, Inc. ("Regal"), an importer and manufacturer of
bath and accent rugs. Please refer to the Acquisitions section of Management's
Discussion and Analysis of Operations and Financial Condition for additional
discussion.
1999 COMPARED WITH 1998
SALES
Consolidated sales for 1999 were $2.220 billion, two percent higher than the
previous year's $2.180 billion. Consolidated sales for 1998 included $165.8
million of sales from the divested specialty fabrics businesses. Excluding the
divested businesses, sales for 1999 represent an increase of 10 percent over
1998 sales of $2.015 billion. The improvement in sales reflects the
contribution of $112.6 million in sales from the Company's acquisitions of
Regal and AFI, as well as stronger sales to mass merchants and specialty
stores, and sales to one of the Company's divested specialty fabrics
businesses. These increases were partially offset by lower sales of licensed
juvenile and institutional products.
EARNINGS
Consolidated net income was $69.0 million, or $3.80 per diluted share, for
1999, compared to $37.3 million, or $1.97 per diluted share, for 1998. The only
unusual item impacting 1999 was $0.6 million of after-tax Year 2000 expense,
whereas unusual items impacting earnings in 1998, net of taxes, included
realignment expenses of $12.3 million associated with the Company's
restructuring of its fabric manufacturing operations and the closing of its
Rock Hill (SC) Printing and Finishing facility, an aggregate gain of $8.6
million on the sales of the Company's UltraSuede business and its Rock Hill
facility, Year 2000 costs of $4.4 million, an impairment charge of $3.0 million
recorded in connection with the consolidation and modernization of terry
manufacturing operations, and aggregate losses of $1.7 million on the
divestitures of the Industrial Products and Springfield businesses. Excluding
unusual items, net income for 1999 would have been $69.6 million, or $3.83 per
diluted share, compared to $50.1 million, or $2.64 per diluted share, in 1998.
Consolidated net income for 1998 included $9.5 million of after-tax operating
earnings from the divested specialty fabrics businesses.
Excluding the results of the divested specialty fabrics businesses and unusual
items, after-tax earnings were $69.6 million, or $3.83 per diluted share, in
1999, compared to $40.6 million, or $2.14 per diluted share, in 1998. The
improvement in 1999 earnings reflects the benefits of improved sales volume
noted above, ongoing cost-reduction initiatives, and improved product mix due
primarily to lower sales of off-quality and closeout goods during the fourth
quarter of 1999. The Company expects that these off-quality and closeout goods
will be sold in the first half of 2000. The earnings increase in 1999 occurred
primarily in bedding products, where volumes and margins improved compared to
1998's disappointing results.
Cost of goods sold for 1999 included the benefit of after-tax insurance proceeds
of $2.0 million received during the fourth quarter from the settlement of a
business interruption claim related to a warehouse ore which occurred in the
first quarter of 1999. Net income for 1998 included the impact of a
third-quarter after-tax provision for employee severance expenses of $3.3
million and a second-quarter after-tax charge for uncollectible window fashions
receivables of $4.7 million.
OTHER INCOME AND EXPENSE
During the third quarter of 1999, the Company sold its New York City office
building for $29.5 million and leased back a portion of the building for a
ten-year term. The result of the sale-leaseback was a pretax gain of $1.5
million recorded in other income, and the deferral of an additional $17.8
million pretax gain, which will be amortized over the operating lease term.
Other income for 1999 also included pretax income of $4.3 million from the sale
of previously-closed manufacturing facilities. Other income for 1998 included
the previously-mentioned gains on the sales of the Company's UltraSuede
business and Rock Hill facility.
Other expense included pretax impairment charges totaling approximately $3.0
million and $1.2 million in 1999 and 1998, respectively, in connection with
various types of property that management identified for sale or other disposal.
In 1998, the Company recognized a $4.8 million pretax impairment charge in
connection with the consolidation and modernization of terry manufacturing
operations. The terry manufacturing consolidation and modernization was
originally projected to be completed by mid-1999, but as a result of unexpected
delays, the project is now expected to be completed in mid-2000. The Company
also recognized pretax losses in 1998 totaling $2.7 million on the divestitures
of the Industrial Products and Springfield businesses.
1998 COMPARED WITH 1997
SALES
Net sales for 1998 were $2.180 billion, down two percent from the previous
year's sales of $2.226 billion. Sales for the home furnishings segment in 1998
(52 weeks) totaled $2.015 billion, down less than two percent from the prior
year due primarily to the 53-week year in 1997 and weaker demand for products
in the fourth quarter of 1998. Sales growth in both window fashions products,
due primarily to increased volume in the home improvement retail business, and
bath fashions, resulting from stronger rug demand, partially offset declines in
sales of bed fashions and baby products. Bedding sales were lower in 1998,
principally in the department store trade and in certain licensed bedding
products.
Specialty fabrics sales of $165.8 million were nine percent lower than 1997 due
to the 53-week year and the divestitures of the UltraSuede and Industrial
Products businesses in August and December 1998, respectively.
EARNINGS
Net income for 1998 was $37.3 million, or $1.97 per diluted share, compared to
$69.0 million, or $3.34 per diluted share, in 1997. Excluding the impact of
1998 unusual items discussed previously, full-year 1998 earnings would have
been $50.1 million, or $2.64 per diluted share, compared to $73.5 million, or
$3.56 per diluted share in 1997, a decrease of approximately 32 percent.
Unusual items which impacted 1997 earnings, net of taxes, included Year 2000
expenses of $1.7 million, realignment expenses of $6.9 million related to the
restructuring of fabric manufacturing operations, and a gain of $4.1 million on
the sale of an investment.
16
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
Springs Industries, Inc.
In the home furnishings segment, after-tax operating earnings in 1998 of $35.6
million declined by $33.6 million from the prior year, including unusual items
which impacted this segment's earnings. Excluding the effect of unusual items
from both years, the segment's 1998 operating earnings were $17.9 million lower
than the previous year. The decline in profits was due principally to lower
sales volume in the department store trade, a decline in demand for certain
licensed bedding products in the latter part of the year, closeout sales, and
production curtailments associated in part with the Company's efforts to reduce
inventories. Additionally, 1998 profits were negatively affected by the
previously-discussed severance costs and by the provision for window fashions
uncollectible receivables.
The specialty fabrics segment's after-tax operating profits in 1998 were $3.2
million higher than their 1997 level, including the impact of unusual items.
Before unusual items, 1998 full-year after-tax operating earnings for the
segment increased by $2.7 million. Improvements came from a change to a more
profitable mix of products and a decrease in selling, general and administrative
expenses in the Springfield apparel fabric business.
OTHER INCOME AND EXPENSE
Other income for 1998 included the previously-discussed gain on the sales of
the Company's UltraSuede business and the Rock Hill facility. Included in other
income for 1997 was a pretax gain on the sale of an investment of $6.6 million.
Other expense in 1998 increased due to the previously-mentioned impairment
charges.
INFLATION AND CHANGING PRICES
The replacement cost of property is generally greater than the historical cost
shown on the Consolidated Balance Sheet due to inflation that has occurred since
the property was placed in service.
Springs uses the last-in, first-out method (LIFO) of accounting for
approximately 69 percent of its inventories. This percentage has decreased from
83 percent in the prior year due primarily to the acquisitions of Regal and AFI.
Under this method, the cost of goods sold reported in the Consolidated Statement
of Operations generally reflects current costs.
CAPITAL RESOURCES AND LIQUIDITY
The Company's overall cash needs for 1999 were provided from operations, asset
sales, business divestitures and available credit facilities. Total debt, net
of cash and cash equivalents, as a percent of total capital was 30.2 percent at
January 1, 2000, compared to 25.0 percent at January 2, 1999. In 1999, the
Company utilized various credit facilities consisting of a revolving credit
agreement and uncommitted credit facilities. At January 1, 2000, $35 million
was outstanding under the revolving credit agreement at a LIBOR-based
weighted-average rate of 6.4 percent and $35.5 million was outstanding under
the uncommitted credit facilities at a weighted-average rate of 6.3 percent. In
1998, the Company borrowed $125 million under a long-term credit facility at a
variable rate based on LIBOR, which was 6.5 percent as of January 1, 2000.
During the third quarter of 1998, the Company entered into an interest rate
swap agreement for a notional amount of $60 million to effectively ox the
interest rate on $60 million of the $125 million long-term loan at 6.1 percent.
The Company invested $166.8 million in new property during 1999, primarily in
the areas of manufacturing, distribution and information technology. The
Company expects capital expenditures for 2000 to be approximately $150 million.
Management expects that cash generated by operations and borrowings from bank
lines will adequately provide for the Company's cash needs during 2000.
The Company's Board of Directors authorized the Company to purchase, from time
to time, up to 4 million shares of Class A common stock in the open market and
in private transactions. As of January 2, 1999, the Company had repurchased
2,408,400 shares pursuant to this authorization. No shares were repurchased
during 1999.
ACQUISITIONS
On January 23, 1999, the Company acquired Regal at a purchase price of
approximately $35 million. The acquisition was accounted for as a purchase in
accordance with APB Opinion No. 16, "Business Combinations" ("APB 16"), and
Regal's operating results have been included in the Company's consolidated
financial statements since the January 23, 1999, acquisition date. The purchase
price was allocated to the assets acquired and to the liabilities assumed based
on their estimated fair value at the date of acquisition.
On January 5, 1999, the Company acquired the remaining 50 percent interest in
AFI. Springs acquired its original 50 percent interest in AFI in February 1997
and had been accounting for the original investment under the equity method.
The purchase price for the remaining interest totaled approximately $15
million. The Company has accounted for the remaining interest as a step-
acquisition in accordance with APB 16, whereby the purchase price was allocated
to the assets acquired and to the liabilities assumed based on 50 percent of
their estimated fair value on the date of acquisition. In addition, AFI's
operating results have been included in the Company's consolidated financial
statements since the January 5, 1999, acquisition date.
The excess of the purchase price for both acquisitions over the fair value of
net assets acquired, which totaled $34.3 million, has been recorded as
good-will and is being amortized on a straight-line basis over 20 years.
Because Regal and AFI were acquired in January, 1999, substantially all of
their 1999 operating results have been included in Springs' 1999 Consolidated
Statement of Operations. The following unaudited pro forma financial information
presents the combined results of operations for Springs, Regal and AFI as if
the acquisitions had been effective as of the beginning of 1998, after giving
effect to certain adjustments, including amortization of goodwill, additional
depreciation expense and related income tax effects. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had Springs, Regal and AFI constituted a single entity during
1998. Such pro forma results would present net sales of $2.277 billion, net
income of $39.7 million and diluted earnings per share of $2.09 for 1998.
DIVESTITURES
During 1999 and 1998, the Company sold four specialty fabrics businesses.
Effective March 31, 1999, the Company sold its UltraFabrics business and there
was no material gain on the sale. The first quarter 1999 sales and earnings
before interest and taxes of the UltraFabrics business were not material.
Effective January 2, 1999, the Company disposed of the net assets of the
Company's Springfield business in exchange for a $10 million preferred equity
interest in the divested business and cash of $33 million. A receivable for the
cash proceeds received on January 4, 1999, was included in other current assets
on the Company's Balance Sheet as of the end of 1998. The Company has committed
to provide the divested business with certain commission finishing services and
limited amounts of yarn for a period of 10 years. Springs does not believe that
the terms of this commitment will have a material impact on future earnings.
Effective December 19, 1998, the Company disposed of its Industrial Products
business in exchange for principally $18.5 million in cash and other
consideration in the form of notes receivable and a preferred equity interest
in the divested business. Effective August 7, 1998, the Company sold its
UltraSuede business and certain related assets of the UltraFabrics business in
exchange for approximately $15 million in cash. The combined effect of the 1998
transactions was a pretax gain of $8.4 million which is included in other
income. The combined sales of the four specialty fabrics businesses included in
the Company's 1998 results were $165.8 million, and after-tax earnings totaled
approximately $9.5 million.
17
28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
Springs Industries, Inc.
RESTRUCTURING AND REALIGNMENT
1998 RESTRUCTURING
In the first quarter of 1998, the Company adopted a plan to close the Rock Hill
(SC) Printing and Finishing Plant. At that time, the Company recorded a pretax
charge of $23.0 million, which included an $11.3 million write-off of property,
a $4.0 million accrual for anticipated severance costs arising from the
elimination of approximately 480 positions, and a $7.7 million accrual
primarily for idle plant and demolition costs. The expected benefits of this
action included lower production costs and better utilization of existing
capacity in other facilities. The Company realized a reduction in product costs
in 1998 and 1999 as a result of closing the facility.
The following represents changes in the restructuring accruals since the
adoption of the plan:
Severance Accrual for
(in millions) Accrual Other Expenses
- -----------------------------------------------------------------------------------
Original accrual on February 17, 1998 ............ $ 4.0 $ 7.7
Cash payments .................................... (3.0) (1.2)
Adjustments ...................................... (1.0) (6.5)
- -----------------------------------------------------------------------------
ACCRUAL BALANCE ON JANUARY 2, 1999 ............ $ 0.0 $ 0.0
=============================================================================
The restructuring plan was completed during the fourth quarter of 1998. In
1998, the severance accrual was reduced by $1.0 million due to a
lower-than-expected cost per associate and the accrual for other expenses was
reduced primarily due to the sale on September 25, 1998, of the Rock Hill
facility. As a result of the sale, which management considered as an unlikely
possibility at the time the plant was closed, the Company reversed accruals
relating to idle plant and demolition costs by approximately $4.3 million.
In 1998 the Company incurred expenses of $1.3 million for equipment relocation
and other realignment expenses related to the 1998 plan which do not qualify as
"exit costs" as defined by Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)."
1996 RESTRUCTURING
During 1996, the Company adopted a restructuring plan to consolidate and
realign its fabric manufacturing operations. In connection with this plan, the
Company closed three fabric manufacturing plants, added production in other
plants, and increased outside purchases of grey fabric. The plan benefited
operating results by reducing the volume of linear yards and second-quality
units produced, by reducing the complexity of the finishing process, and by
increasing manufacturing flexibility with respect to the use of finished roll
stock.
During 1998, the severance accrual associated with the plan was reduced by
approximately $1.5 million due to lower-than-expected severance costs and the
accrual for other expenses was reduced by $0.9 million primarily due to
lower-than-expected idle plant costs. The restructuring plan was completed
during the fourth quarter of 1998. The Company incurred realignment expenses of
$5.3 million in 1998 for equipment relocation and other expenses related to the
1996 plan that do not qualify as "exit costs" as defined by Emerging Issues Task
Force Issue No. 94-3.
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 table
below provides information for the Company's derivative financial instruments
and other financial instruments that are sensitive to changes in interest
rates, including interest rate swaps and debt obligations as of January 1, 2000
and January 2, 1999. For debt obligations, the table presents principal cash
flows and related weighted-average interest rates by expected maturity dates.
The weighted-average variable interest rates, at the respective expected
maturity dates, are presented assuming that the projected weighted-average
variable interest rates will be the same as the weighted-average variable
interest rates as of January 1, 2000 and January 2, 1999, respectively. For
interest rate swaps, the table presents notional amounts and weighted-average
rates by expected maturity dates.
January 1, 2000 Expected Maturity Date Fair Value
---------------------- ----------
January 1,
(in millions) 2000 2001 2002 2003 2004 Thereafter Total 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Long-term debt:
Fixed rate instruments ...... $ 5.7 $ 5.5 $ 5.6 $ 5.3 $ 5.0 $ 24.4 $ 51.5 $ 56.4
Average interest rate .... 9.5% 9.4% 9.4% 9.4% 9.3% 8.3%
Variable rate instruments ... $ 15.5 $ 24.1 $ 68.0 $ 33.0 $ 33.0 $ 79.6 $ 253.2 $ 253.2
Average interest rate .... 6.4% 6.4% 6.4% 6.4% 6.4% 6.4%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ................ $ 304.7 $ 309.6
==================================================================================================================================
Interest rate swaps:
Pay fixed/receive variable
1995 notional amounts ....... $ 14.3 $ 14.3 $ 14.3 $ 14.3 $ 14.3 $ 7.8 $ 79.3 $ 0.8
Average pay rate ......... 6.7% 6.7% 6.7% 6.7% 6.7% 6.7%
1998 notional amounts ....... $ 0.0 $ 2.1 $ 8.6 $ 8.6 $ 8.6 $ 32.1 $ 60.0 $ 2.6
Average pay rate ......... 6.1% 6.1% 6.1% 6.1% 6.1% 6.1%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ................ $ 139.3 $ 3.4
==================================================================================================================================
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION 29
Springs Industries, Inc.
January 2, 1999 Expected Maturity Date Fair Value
(in millions) ---------------------- ----------
January 2,
1999 2000 2001 2002 2003 Thereafter Total 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Long-term debt:
Fixed rate instruments ...... $ 5.8 $ 5.1 $ 5.1 $ 5.1 $ 5.1 $ 29.4 $ 55.6 $ 63.7
Average interest rate .... 9.4% 9.4% 9.4% 9.4% 9.3% 8.5%
Variable rate instruments ... $ 15.5 $ 15.5 $ 24.0 $ 33.0 $ 33.0 $ 112.7 $ 233.7 $ 233.7
Average interest rate .... 5.5% 5.5% 5.5% 5.5% 5.5% 5.5%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ................ $ 289.3 $ 297.4
===================================================================================================================================
Interest rate swaps:
Pay fixed/receive variable
1995 notional amounts ....... $ 14.3 $ 14.3 $ 14.3 $ 14.3 $ 14.3 $ 22.1 $ 93.6 $ (3.4)
Average pay rate ......... 6.7% 6.7% 6.7% 6.7% 6.7% 6.7%
1998 notional amounts ....... $ 0.0 $ 0.0 $ 2.1 $ 8.6 $ 8.6 $ 40.7 $ 60.0 $ (1.8)
Average pay rate ......... 6.1% 6.1% 6.1% 6.1% 6.1% 6.1%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ................ $ 153.6 $ (5.2)
===================================================================================================================================
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. Management assesses these contracts on a
continuous basis to determine if contract prices will be recovered through
subsequent sales. The fair value of exchange-traded futures contracts held at
year-end 1999 and 1998 was not material. Near-term changes in the price of
cotton fiber are not expected to have a material impact on the Company's future
earnings or cash flows.
Foreign Exchange Risk - The Company is exposed to foreign exchange risk 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
effect on future earnings, financial position or cash flows of the Company.
YEAR 2000 COMPUTER ISSUE
The Company completed its Year 2000 Project and has not experienced any
significant disruptions in operations as a result of the Year 2000 Computer
Issue. None of the Company's vendors or customers have indicated that they have
experienced any significant Year 2000 related business interruptions. Although
the Company has not experienced and does not anticipate any significant Year
2000 disruptions, because of the uncertainties inherent with the Year 2000
Computer Issue, the Company cannot ensure that it will not experience a Year
2000 related issue in the future.
Approximately $1.0 million, $7.1 million and $2.8 million of pretax expense was
incurred in 1999, 1998 and 1997, respectively, related to Springs' Year 2000
Project. If any costs are incurred in 2000 related to this issue, they are not
expected to be material.
ACCOUNTING CHANGES
In 1999, the Company adopted the American Institute of Certified Public
Accountants' Statement of Position No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This standard
revised the accounting for software development costs and requires the
capitalization of certain costs which the Company has historically expensed as
incurred. The adoption of this statement resulted in an increase to 1999 net
income of $1.2 million, or $0.07 per diluted share, from the capitalization of
costs that would have been expensed in previous years. In accordance with this
standard, costs incurred prior to the initial adoption have not been
retroactively adjusted.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and hedging activities. This
statement will require the Company to recognize all derivatives on the
Consolidated Balance Sheet at fair value, and may impact the Company's earnings
depending on the instruments held at the time of adoption. The Company will be
required to adopt this standard beginning in its 2001 fiscal year, and is in
the process of determining the impact of this standard on its financial
position, results of operations and cash flows.
FORWARD-LOOKING INFORMATION
This Annual 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 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 forecasted 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 cost-reduction goals;
unanticipated natural disasters; legal proceedings; Year 2000-related computer
issues; labor matters; and the availability and price of raw materials which
could be affected by weather, disease, energy costs, or other factors.
19
30 Selected Financial Data
Springs Industries, Inc.
1999 1998 1997 (c) 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS: (in millions)
Net sales ................................... $ 2,220.4 $ 2,180.5 $ 2,226.1 $ 2,221.0 $ 2,223.2
Income from continuing operations ........... 69.0 37.3 69.0 88.4(i) 71.6
Net income .................................. 69.0(a) 37.3(b) 69.0(d) 84.9(e) 71.6
Class A cash dividends declared ............. 14.1 14.9 16.9 16.7 14.8
Class B cash dividends declared ............. 8.6 8.7 8.8 9.0 8.9
PER SHARE OF COMMON STOCK:
Income from continuing operations-diluted ... $ 3.80 $ 1.97 $ 3.34 $ 4.29(i) $ 3.69
Net income-diluted .......................... 3.80(a) 1.97(b) 3.34(d) 4.12(e) 3.69
Class A cash dividends declared ............. 1.32 1.32 1.32 1.32 1.26
Class B cash dividends declared ............. 1.20 1.20 1.20 1.20 1.14
Shareholders' equity ........................ 43.28 40.62 40.69 38.75 36.48
Class A stock price range:
High ..................................... 43 5/8 61 54 3/4 50 1/2 44 3/4
Low ...................................... 27 1/16 31 3/4 41 38 3/8 35 1/4
- -----------------------------------------------------------------------------------------------------------------------------------
STATISTICAL DATA:
Net income to net sales ..................... 3.1%(a) 1.7%(b) 3.1%(d) 3.8%(e) 3.2%
Net income to average shareholders' equity .. 9.2%(a) 5.0%(b) 8.6%(d) 11.1%(e) 10.8%
Operating return on assets employed(f) ...... 9.1% 5.8% 8.6% 8.8% 9.8%
Inventory turnover(g) ....................... 4.2 4.1 4.6 4.8 5.3
Accounts receivable turnover(h) ............. 6.9 6.6 6.4 6.4 6.5
Net sales divided by average assets ......... 1.5 1.5 1.6 1.5 1.5
Current ratio ............................... 2.7 3.5 3.3 3.1 2.9
Capital expenditures (in millions) .......... $ 166.8 $ 115.0 $ 99.3 $ 75.1 $ 75.2
Depreciation (in millions) .................. $ 90.5 $ 81.9 $ 78.8 $ 80.8 $ 84.6
Approximate number of shareholders .......... 2,548 2,636 2,856 3,000 3,200
Average number of associates ................ 18,300 18,000 20,100 21,700 22,600
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA: (in millions)
Net working capital ......................... $ 523.0 $ 555.8 $ 546.4 $ 537.4 $ 506.3
Net property ................................ 625.6 549.7 541.2 534.6 614.0
Total assets ................................ 1,575.0 1,425.5 1,409.3 1,398.5 1,527.5
Long-term debt .............................. 283.5 268.0 164.3 177.6 326.9
Shareholders' equity ........................ 774.9 724.1 804.6 780.8 734.5
- ---------------------------------------------------------------------------------------------------------------------------------
20
SELECTED FINANCIAL DATA 31
Springs Industries, Inc.
NOTES:
(a) Net of Year 2000 expenses of $0.6 million. Without this unusual item,
net income would have been $69.6 million, or $3.83 per diluted share,
net income to sales would have been 3.1 percent, and the return on
average shareholders' equity would have been 9.3 percent.
(b) Net of restructuring and realignment expenses of $12.3 million, Year
2000 expenses of $4.4 million, gains of $8.6 million on the Company's
sale of its UltraSuede business and the Rock Hill facility, losses of
$1.7 million on the Company's sale of its Industrial Products and
Springfield businesses, and an impairment charge of $3.0 million
recorded in connection with the Company's decision to close a terry
manufacturing facility. Without these unusual items, net income would
have been $50.1 million, or $2.64 per diluted share, net income to net
sales would have been 2.3 percent, and the return on average
shareholders' equity would have been 6.7 percent.
(c) Fiscal year 1997 includes 53 weeks, whereas all other fiscal years
include 52 weeks.
(d) Net of restructuring and realignment expenses of $6.9 million, a $4.1
million gain on the sale of an investment, and Year 2000 expenses of
$1.7 million. Without these unusual items, net income would have been
$73.5 million, or $3.56 per diluted share, net income to net sales
would have been 3.3 percent, and the return on average shareholders'
equity would have been 9.2 percent.
(e) Net of restructuring and realignment expenses of $21.0 million, a gain
of $50.1 million on the sale of Clark-Schwebel, Inc., an extraordinary
loss, net of an income tax benefit of $2.2 million, of $3.6 million,
and other write-offs. Without these unusual items, net income would
have been $64.6 million, or $3.13 per diluted share, net income to net
sales would have been 2.9 percent, and the return on average
shareholders' equity would have been 8.5 percent.
(f) Pretax income before interest expense divided by average of month-end
total assets used in operations. For 1999, pretax income was net of
Year 2000 expenses. Without this unusual item, operating return on
assets employed would have been 9.2 percent. For 1998, pretax income
was net of restructuring and realignment expenses, Year 2000 expenses,
gains on the Company's sales of its UltraSuede business and the Rock
Hill facility, losses on the Company's sales of its Industrial
Products and Springfield businesses, and an impairment charge in
connection with the Company's decision to close a terry manufacturing
facility. Without these unusual items, operating return on assets
employed would have been 7.2 percent. For 1997, pretax income was net
of realignment expenses, a gain on the sale of an investment, and Year
2000 expenses. Without these unusual items, operating return on assets
employed would have been 9.2 percent. For 1996, pretax income was net
of restructuring and realignment expenses, a gain on the sale of
Clark-Schwebel, Inc. and other write-offs. Without these unusual
items, operating return on assets employed would have been 8.3
percent.
(g) Cost of goods sold divided by average of month-end inventories.
(h) Net sales divided by average of month-end receivables.
(i) Differs from net income by an extraordinary loss of $3.6 million due
to an early extinguishment of debt, net of an income tax benefit of
$2.2 million, or $0.17 per diluted share.
NOTE: Selected Financial Data includes the following since their respective
dates of acquisition: Dundee Mills, Incorporated, May 1995; certain
assets of Dawson Home Fashions, Inc., May 1995; Nanik Window Covering
business, July 1995; American Fiber Industries, LLC, January 1999; and
Regal Rugs, Inc., January 1999. Selected Financial Data also includes
the following until their respective dates of disposition: the
Company's Intek office panel fabrics business, December 1995;
Clark-Schwebel, Inc., April 1996; the Company's UltraSuede business,
August 1998; the Company's Industrial Products business, December
1998; the Company's Springfield business, December 1998; and the
Company's UltraFabrics business, March 1999.
21
32 Quarterly Financial Data (Unaudited)
Springs Industries, Inc.
(In millions except per share data)
1999
QUARTER 1ST 2ND 3RD 4TH YEAR
- -------
Net sales ................. $ 584.0 $ 544.9 $ 562.9 $528.6 $2,220.4
Gross profit .............. $ 102.1 $ 98.4 $ 107.0 $112.0 $ 419.5
Income before
unusual items ............ $ 15.5 $ 13.5 $ 18.1 $ 22.5 $ 69.6
Year 2000 expenses ........ (0.3) (0.2) (0.1) -- (0.6)
Restructuring and
realignment ............. -- -- -- -- --
Sales of businesses and
Rock Hill facility ...... -- -- -- -- --
Impairment charge ......... -- -- -- -- --
- -----------------------------------------------------------------------------------------
NET INCOME ............. $ 15.2 $ 13.3 $ 18.0 $ 22.5 $ 69.0
=========================================================================================
EARNINGS PER COMMON
SHARE-DILUTED:
Net income before
unusual items ........... $ 0.86 $ 0.74 $ 0.99 $ 1.23 $ 3.83
Year 2000 expenses ........ (0.02) (0.01) -- -- (0.03)
Restructuring and
realignment ............. -- -- -- -- --
Sales of businesses and
Rock Hill facility ...... -- -- -- -- --
Impairment charge ......... -- -- -- -- --
- -----------------------------------------------------------------------------------------
NET INCOME ............. $ 0.84 $ 0.73 $ 0.99 $ 1.23 $ 3.80
=========================================================================================
DIVIDENDS AND PRICE RANGE OF COMMON STOCK
1999
QUARTER 1ST 2ND 3RD 4TH YEAR
- -------
(per share)
Class A dividends
declared ................ $ .33 $ .33 $ .33 $.33 $ 1.32
Class B dividends
declared ................ .30 .30 .30 .30 1.20
COMMON STOCK PRICES:
High .................... 42 1/2 43 5/8 43 5/16 43 7/16 43 5/8
Low ..................... 27 1/16 27 13/16 33 11/16 32 15/16 27 1/16
=========================================================================================
1998
QUARTER 1ST 2ND 3RD 4TH YEAR
- -------
Net sales ................. $ 556.7 $ 537.1 $ 578.3 $ 508.4 $ 2,180.5
Gross profit .............. $ 101.6 $ 93.2 $ 99.2 $ 90.7 $ 384.7
Income before
unusual items ............ $ 13.2 $ 7.7 $ 14.7 $ 14.5 $ 50.1
Year 2000 expenses ........ (0.9) (1.4) (1.3) (0.8) (4.4)
Restructuring and
realignment ............. (15.4) (0.8) 2.8 1.1 (12.3)
Sales of businesses and
Rock Hill facility ...... -- -- 8.6 (1.7) 6.9
Impairment charge ......... -- -- (3.0) -- (3.0)
- --------------------------------------------------------------------------------------------
NET INCOME ............. $ (3.1) $ 5.5 $ 21.8 $ 13.1 $ 37.3
============================================================================================
EARNINGS PER COMMON
SHARE-DILUTED:
Net income before
unusual items ........... $ 0.66 $ 0.40 $ 0.80 $ 0.80 $ 2.64
Year 2000 expenses ........ (0.04) (0.08) (0.07) (0.05) (0.23)
Restructuring and
realignment ............. (0.78) (0.04) 0.15 0.06 (0.64)
Sales of businesses and
Rock Hill facility ...... -- -- 0.47 (0.09) 0.36
Impairment charge ......... -- -- (0.16) -- (0.16)
- --------------------------------------------------------------------------------------------
NET INCOME ............. $ (0.16) $ 0.28 $ 1.19 $ 0.72 $ 1.97
============================================================================================
DIVIDENDS AND PRICE RANGE OF COMMON STOCK
1998
QUARTER 1ST 2ND 3RD 4TH YEAR
- -------
(per share)
Class A dividends
declared ................ $ .33 $ .33 $ .33 $ .33 $ 1.32
Class B dividends
declared ................ .30 .30 .30 .30 1.20
- --------------------------------------------------------------------------------------------
COMMON STOCK PRICES:
High .................... 58 1/16 61 46 1/2 42 1/4 61
Low ..................... 50 1/8 45 1/4 32 7/16 31 3/4 31 3/4
============================================================================================