1
Reportable Segment Information(1)
Springs Industries, Inc.
(In millions) 1998 1997 (2) 1996
Trade sales:
Home furnishings $1,866.1 $1,896.2 $1,808.5
Specialty fabrics 314.4 329.9 412.5
- ----------------------------------------------------------------------------------------------
Total $2,180.5 $2,226.1 $2,221.0
==============================================================================================
Profit from operations before unusual items:(3)
Home furnishings $ 84.4 $ 123.2 $ 85.3
Specialty fabrics 20.1 5.8 28.5
- ----------------------------------------------------------------------------------------------
Total 104.5 129.0 113.8
- ----------------------------------------------------------------------------------------------
Unusual items(4) 31.8 13.9 33.9
Interest expense 25.0 18.6 22.1
Other (income), net (11.1) (6.4) (46.7)
- ----------------------------------------------------------------------------------------------
Income before income taxes and
extraordinary item $ 58.8 $ 102.9 $ 104.5
==============================================================================================
Total assets at year end:
Home furnishings $1,258.3 $1,248.6 $1,204.8
Specialty fabrics 128.9 160.3 163.0
Cash and cash equivalents 48.1 0.4 30.7
- ----------------------------------------------------------------------------------------------
Total $1,435.3 $1,409.3 $1,398.5
==============================================================================================
Capital expenditures:
Home furnishings $ 115.5 $ 92.1 $ 66.3
Specialty fabrics 5.0 7.2 8.8
- ----------------------------------------------------------------------------------------------
Total $ 120.5 $ 99.3 $ 75.1
==============================================================================================
Depreciation and amortization:
Home furnishings $ 80.0 $ 75.5 $ 76.9
Specialty fabrics 7.0 9.1 12.5
- ----------------------------------------------------------------------------------------------
Total $ 87.0 $ 84.6 $ 89.4
==============================================================================================
(1) This schedule provides consolidated financial information for the Company's
two reportable segments, but not financial information for the segments as
separate entities. See the notes to the consolidated financial statements
for further comments.
(2) Fiscal year 1997 included 53 weeks, whereas fiscal years 1998 and 1996
included 52 weeks.
(3) Profit from operations before unusual items represents sales less cost of
goods sold, selling, general and administrative expenses, and provision for
uncollectible receivables.
(4) Unusual items in 1998 include restructuring and realignment expenses, Year
2000 expenses and an impairment charge, of which $14.7 million was charged
to the home furnishings segment and $17.1 million to the specialty fabrics
segment. In 1997, unusual items represent realignment expenses and Year 2000
expenses, of which $12.6 million was charged to the home furnishings segment
and $1.3 million to the specialty fabrics segment. Unusual items in 1996
consist of restructuring and realignment expenses, of which $33.3 million
was charged to the home furnishings segment and $0.6 million to the
specialty fabrics segment.
13
2
Consolidated Statement Of Operations
Springs Industries, Inc.
(In thousands except per share data)
For the Fiscal Years Ended January 2, 1999, January 3, 1998 (53 weeks), and
December 28, 1996
1998 1997 1996
OPERATIONS
Net sales $2,180,497 $2,226,075 $2,220,976
Cost and expenses:
Cost of goods sold 1,795,757 1,820,131 1,830,249
Selling, general and administrative expenses 263,806 266,194 264,974
Provision for uncollectible receivables 16,401 10,747 12,001
Restructuring and realignment expenses 19,948 11,137 33,926
Impairment charge 4,783 -- --
Year 2000 expenses 7,067 2,751 --
Interest expense 25,069 18,583 22,064
Other income (16,588) (9,814) (58,128)
Other expense 5,475 3,409 11,371
- ------------------------------------------------------------------------------------------------------
Total 2,121,718 2,123,138 2,116,457
- ------------------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 58,779 102,937 104,519
Income tax provision 21,450 33,972 16,086
- ------------------------------------------------------------------------------------------------------
Income before extraordinary item 37,329 68,965 88,433
Extraordinary item:
Loss on extinguishment of debt, net
of income tax benefit of $2,176 -- -- 3,552
- ------------------------------------------------------------------------------------------------------
Net income $ 37,329 $ 68,965 $ 84,881
======================================================================================================
Basic earnings per common share:
Income before extraordinary item $ 2.01 $ 3.43 $ 4.39
Extraordinary loss -- -- (0.18)
- ------------------------------------------------------------------------------------------------------
Net income $ 2.01 $ 3.43 $ 4.21
======================================================================================================
Diluted earnings per common share:
Income before extraordinary item $ 1.97 $ 3.34 $ 4.29
Extraordinary loss -- -- (0.17)
- ------------------------------------------------------------------------------------------------------
Net income $ 1.97 $ 3.34 $ 4.12
======================================================================================================
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 18,549 20,122 20,146
Dilutive effect of stock-based compensation awards 389 546 458
- ------------------------------------------------------------------------------------------------------
Diluted weighted-average common shares outstanding 18,938 20,668 20,604
======================================================================================================
See Notes to Consolidated Financial Statements.
14
3
Consolidated Balance Sheet
Springs Industries, Inc.
(In thousands except share data)
January 2, 1999 and January 3, 1998
ASSETS 1998 1997
Current assets:
Cash and cash equivalents $ 48,127 $ 373
Accounts receivable, net 275,144 317,702
Inventories, net 385,609 420,295
Other 78,296 48,167
- ------------------------------------------------------------------------------------------------------------
Total current assets 787,176 786,537
- ------------------------------------------------------------------------------------------------------------
Property(at cost):
Land and improvements 19,187 18,881
Buildings 245,616 245,241
Machinery and equipment 1,085,420 1,076,885
- ------------------------------------------------------------------------------------------------------------
Total 1,350,223 1,341,007
Accumulated depreciation (794,827) (799,765)
- ------------------------------------------------------------------------------------------------------------
Property, net 555,396 541,242
- ------------------------------------------------------------------------------------------------------------
Other assets 92,760 81,481
- ------------------------------------------------------------------------------------------------------------
Total $1,435,332 $1,409,260
============================================================================================================
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities:
Short-term borrowings $ -- $ 7,450
Current maturities of long-term debt 21,313 14,452
Accounts payable 98,504 92,135
Accrued wages and salaries 13,560 8,610
Accrued incentive pay and benefit plans 26,723 30,510
Other accrued liabilities 72,167 86,936
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 232,267 240,093
- ------------------------------------------------------------------------------------------------------------
Noncurrent liabilities:
Long-term debt 267,991 164,287
Accrued benefits and deferred compensation 179,885 174,198
Other 31,073 26,084
- ------------------------------------------------------------------------------------------------------------
Total noncurrent liabilities 478,949 364,569
- ------------------------------------------------------------------------------------------------------------
Shareowners' equity:
Class A common stock- $.25 par value (10,728,594 and 12,601,757 shares
issued in 1998 and 1997, respectively) 2,682 3,150
Class B common stock- $.25 par value (7,196,864 and 7,270,921 shares
issued and outstanding in 1998 and 1997, respectively) 1,799 1,818
Additional paid-in capital 100,446 108,684
Retained earnings 631,943 701,354
Cost of Class A shares in treasury (98,313 and 101,091 shares
in 1998 and 1997, respectively) (2,230) (2,276)
Accumulated other comprehensive income (10,524) (8,132)
- ------------------------------------------------------------------------------------------------------------
Total shareowners' equity 724,116 804,598
- ------------------------------------------------------------------------------------------------------------
Total $1,435,332 $1,409,260
============================================================================================================
See Notes to Consolidated Financial Statements.
15
4
Consolidated Statement of Shareowners' Equity
Springs Industries, Inc.
Accumulated Class A Class B
Total Other Common Common Additional Class A
Shareowners' Retained Comprehensive Stock Stock Paid-In Stock Held
(In thousands) Equity Earnings Income (Loss) Issued Issued Capital in Treasury
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 $734,522 $616,347 $ 5,722 $3,161 $1,901 $109,840 $(2,449)
Comprehensive Income:
Net Income 84,881 84,881 -- -- -- -- --
Other comprehensive income, before tax:
Foreign currency translation adjustment,
net of reclassification adjustment (13,248) -- (13,248) -- -- -- --
Minimum pension liability adjustment (137) -- (137) -- -- -- --
Unrealized losses on securities (267) -- (267) -- -- -- --
Income tax benefit related to items
of other comprehensive income 138 -- 138 -- -- -- --
--------
Total comprehensive income, net of tax 71,367
--------
Exchange of Class B common stock
for Class A common stock -- -- -- 24 (24) -- --
Shares awarded under various employee plans 585 -- -- 2 -- 512 71
Dividends declared (25,695) (25,695) -- -- -- -- --
====================================================================================================================================
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)
====================================================================================================================================
See Notes to Consolidated Financial Statements.
16
5
Consolidated Statement Of Cash Flows
Springs Industries, Inc.
(In thousands)
For the Fiscal Years Ended January 2, 1999, January 3, 1998 (53 weeks), and
December 28, 1996
1998 1997 1996
OPERATING ACTIVITIES:
Net income $ 37,329 $ 68,965 $ 84,881
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 86,951 84,565 89,422
Gains on sales of businesses and other assets (12,122) (6,047) (43,948)
Deferred income taxes 3,542 7,596 (13,738)
Provision for restructuring 13,388 1,800 30,375
Provision for uncollectible receivables 16,401 10,747 12,001
Impairment charge 4,783 -- --
Extraordinary loss on extinguishment of debt -- -- 5,728
Changes in operating assets and liabilities, net of effects
of business acquisition and sales of businesses:
Accounts receivable (189) 19,555 (42,368)
Inventories 1,081 (49,399) (17,840)
Accounts payable and other accrued liabilities 913 (21,184) 20,966
Accrued restructuring costs (7,305) (7,115) (4,137)
Other, net (7,800) 1,057 (4,967)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 136,972 110,540 116,375
- ------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (120,451) (99,331) (75,131)
Business acquisitions -- (6,429) (1,900)
Notes receivable (40) (14,000) --
Principal collected on notes receivable 7,119 3,447 20
Proceeds from sales of businesses and other assets 39,686 17,857 195,371
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (73,686) (98,456) 118,360
- ------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term borrowings, net (7,450) 7,450 (21,900)
Proceeds from long-term borrowings 125,000 1,587 2,834
Repayments of long-term debt (14,435) (7,409) (161,861)
Repurchase of Class A common shares (96,206) (18,325) --
Proceeds from exercise of stock options 1,876 -- --
Cash dividends paid (24,317) (25,733) (25,695)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used by financing activities (15,532) (42,430) (206,622)
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 47,754 (30,346) 28,113
Cash and cash equivalents at beginning of year 373 30,719 2,606
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 48,127 $ 373 $ 30,719
==============================================================================================================================
See Notes to Consolidated Financial Statements.
17
6
Notes To Consolidated Financial Statements
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
ownership of the goods transfers to the customer.
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 $11.7 million at January 2,
1999, and $14.0 million at January 3, 1998. During 1998, net write-offs of
approximately $15.8 million for previously reserved accounts more than offset
the current year's provision for doubtful accounts, which totaled $13.5 million.
Inventories: Inventories are summarized as follows:
(in thousands)
1998 1997
Standard cost (which approximates
average cost) or average cost:
Finished goods ............... $265,707 $280,316
In process ................... 170,836 199,600
Raw materials and supplies ... 54,624 59,381
- ---------------------------------------------------------------
491,167 539,297
Less LIFO reserve ............... (105,558) (119,002)
- ---------------------------------------------------------------
Total .................... $385,609 $420,295
===============================================================
Inventories are valued at the lower of cost or market. Cost is determined using
the last-in, first-out method (LIFO) for approximately 83 percent of inventories
and the average cost method for all other inventories. Average cost approximates
current cost.
During the fourth quarter of fiscal year 1997, the Company merged the LIFO
inventory pool associated with a wholly-owned subsidiary, acquired in 1995, into
the corporate pool at the same time as the subsidiary was merged into the
Company. This transaction increased net income by $1.5 million, or $0.07 per
diluted share. The merger of the two LIFO pools resulted from the acquired
operations being integrated with the Company's operations.
Goodwill and Other Intangible Assets: The cost of intangible assets is amortized
on a straight-line basis over the estimated periods benefited (not exceeding 40
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. Unamortized goodwill represented less than 2 percent of the
Company's total assets at the end of 1998.
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 through 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.
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 extant futures contracts, which
were not material at January 2, 1999 and January 3, 1998, 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 recovered. The estimated future undiscounted cash flows
associated with such assets are compared to the assets' carrying values to
determine if write-downs are required. In 1998, the Company recorded a pre-tax
impairment charge of approximately $4.8 million in connection with the
consolidation and modernization of terry manufacturing 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 year amounts have been reclassified to con-
form with the 1998 presentation.
Accounting Changes: In 1998, the Company adopted several pronouncements issued
by the Financial Accounting Standards Board (FASB). FASB Statement No. 130,
"Reporting Comprehensive Income," requires the components of comprehensive
income to be disclosed in the financial statements. FASB Statement No 131,
"Disclosures about Segments of an Enterprise and Related Information," requires
certain information to be reported about operating segments on a basis
consistent with the Company's internal organizational structure. FASB Statement
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," revises the disclosures for pensions and other postretirement
benefits and standardizes them into a combined format. Required disclosures have
been made, and applicable prior years' information has been reclassified for the
impact of adopting these statements. The adoption of these statements had no
impact on the Company's reported financial position, results of operations, or
cash flows.
18
7
Notes To Consolidated Financial Statements
Springs Industries, Inc.
Recently Issued Accounting Standards: In March 1998, the Accounting Standards
Executive Committee issued Statement of Position No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
standard, which will be adopted in 1999, revised the accounting for software
development costs and will require the capitalization of certain costs which the
Company has historically expensed. This statement is not expected to have a
material impact on the Company's financial position, results of operations, or
cash flows.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. This Statement will require the Company to
recognize all derivatives on the balance sheet at fair value and may impact the
Company's earnings depending on the instruments held at the time of adoption.
The Company has not yet determined the impact FASB Statement No. 133 will have
on its financial position, results of operations, or cash flows.
Note 2. Reportable Segment Information:
Springs operates in two reportable segments: home furnishings and specialty
fabrics. The Company's principal markets and operations are in North America.
The home furnishings segment manufactures, purchases for resale and markets home
furnishing products, including sheets, pillowcases, bedspreads, comforters,
infant and toddler bedding, draperies, shower curtains, accent and bath rugs,
towels, other bath fashion accessories, drapery hardware and decorative window
furnishings to all major channels of retail distribution and to institutional
customers. The specialty fabrics segment manufactures, finishes, purchases for
resale and markets woven and non-woven fabrics, including apparel fabrics,
home-sewing fabrics, industrial fabrics, specialty and high-performance fabrics,
and protective and fire retardant fabrics to manufacturers for use in a variety
of end products. See Note 3 for a discussion of businesses sold during the last
three years affecting the specialty fabrics segment. Summarized segment
information appears on page 13 and is an integral part of the consolidated
financial statements.
The Company's reportable segments are strategic business units that offer
different products. The reportable segments are managed separately, because they
provide different products through different operating processes to different
end markets.
The accounting policies of each segment are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profit or loss from operations before income taxes, unusual items,
interest expense, and other (income), net. Sales between these reportable
segments are not material and have been eliminated in consolidation.
Sales for 1998, 1997, and 1996 include sales of $320.8 million, $314.3 million,
and $306.2 million, respectively, to one customer. The home furnishings segment
had sales of $265.2 million, $258.3 million, and $248.4 million for 1998, 1997,
and 1996, respectively, to this customer. Sales to this customer of $55.6
million, $56.0 million, and $57.8 million for 1998, 1997, and 1996,
respectively, were generated in the specialty fabrics segment. Accounts
receivable at January 2, 1999, and January 3, 1998, included receivables from
this customer totaling $37.7 million and $40.1 million, respectively.
Sales by geographic area, as defined by customer location, are as follows:
(in millions)
1998 1997 1996
United States $2,029.6 $2,078.0 $2,077.9
Canada ...... 112.4 108.3 105.5
Other ....... 38.5 39.8 37.6
- -------------------------------------------------------
Total ....... $2,180.5 $2,226.1 $2,221.0
=======================================================
Company assets located outside the United States are not material for any of the
three years presented.
Note 3. Divestitures:
During the three years ended 1998, the Company sold four specialty fabrics
businesses.
Effective January 2, 1999, the Company disposed of the net assets of the
Company's Springfield division in exchange for a $10 million preferred equity
interest in the buyer 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. Effective December 19, 1998,
the Company disposed of its Industrial Products division 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 buyer. Effective August 7,
1998, the Company sold its UltraSuede business and certain related assets of the
UltraFabrics division. The Company has retained the UltraLeather portion of the
UltraFabrics division, which is part of the Company's specialty fabrics segment.
The combined effect of these transactions was a pretax gain of $8.4 million
which is included in other (income) expense. The combined sales of these
businesses included in the Company's 1998 results were $156.6 million and
earnings before interest and taxes totaled approximately $14.3 million.
On April 17, 1996, the Company sold Clark-Schwebel, Inc., for $193 million in
cash. A gain of $50.1 million was included in other income for 1996. This
business included foreign operations with respect to which a foreign currency
translation adjustment of $10.9 million had accumulated at the time of the sale.
This translation adjustment was included in the determination of the gain on
disposition. Through the date of the divestiture, Clark-Schwebel, Inc., had 1996
sales of $68.9 million and earnings before interest and taxes of $11.3 million.
19
8
Notes To Consolidated Financial Statements
Springs Industries, Inc.
Note 4. Restructuring and Realignment Costs:
1996 Restructuring
During the second quarter of 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
Company recorded a pretax charge of $30.4 million during the second quarter of
1996, which included a $16.3 million write-off of plant and equipment, a $6.6
million accrual for anticipated employment severance expenses arising from the
elimination of approximately 850 positions, and a $7.5 million accrual primarily
for idle plant costs and demolition costs.
The following represents changes in the restructuring accruals since the
adoption of the plan: (in millions)
Accrual
Severance for Other
Accrual Expenses
- -------------------------------------------------------------
Original accrual on June 28, 1996 .. $ 6.6 $ 7.5
Cash payments ...................... (1.1) (3.0)
- -------------------------------------------------------------
Accrual balance on December 28,
1996.............................. 5.5 4.5
Cash payments ...................... (3.0) (2.2)
Adjustments ........................ 1.8 --
(2.0) --
- -------------------------------------------------------------
Accrual balance on January 3, 1998 . 2.3 2.3
Cash payments ...................... (0.8) (1.4)
Adjustments ........................ (1.5) (0.9)
- -------------------------------------------------------------
Accrual balance on January 2, 1999 . $ 0.0 $ 0.0
=============================================================
During 1997, Springs reduced the accrual for severance by $2.0 million due to
lower-than-expected average severance cost per associate. The Company was able
to place a greater percentage of the terminated employees in other positions
within the Company than had been expected. At the same time, the Company also
increased the severance accrual by $1.8 million for severance costs associated
with 320 additional positions that were to be eliminated at other manufacturing
facilities.
During 1998, Springs again reduced the severance accrual by approximately $1.5
million due to continued favorable experience relative to the Company's earlier
expectation as to the number of associates to whom severance would have to be
paid.
The restructuring plan was completed during the fourth quarter of 1998. The
accrual for other expenses was reduced by $0.9 million, primarily due to lower-
than-expected idle plant costs.
The Company has incurred realignment expenses of $20.2 million, including $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.
1998 Restructuring
In the first quarter of 1998, the Company adopted a plan to close one of its
specialty fabrics facilities, the Rock Hill 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 plant and equipment, 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 costs, demolition
costs, and costs associated with a defined benefit plan.
The following represents changes in the restructuring accruals since the
adoption of the plan: (in millions)
Accrual
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. Springs
reduced the severance accrual in 1998 due to lower-than-expected cost per
associate. The accrual for other expenses was reduced in 1998, primarily as a
result of lower-than-anticipated costs associated with a defined benefit plan
and its unexpected sale on September 25, 1998, of the Rock Hill facility. As a
result of the sale, the Company reversed accruals relating to idle plant costs
and demolition costs of approximately $4.3 million.
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.
Note 5. Accrued Benefits and Deferred Compensation:
The long-term portion of accrued benefits and deferred compensation were
comprised of the following: (in thousands)
1998 1999
Postretirement medical benefit obligation $ 65,060 $ 68,805
Deferred compensation ................... 66,640 48,652
Other employee benefit obligations ...... 48,185 56,741
- ---------------------------------------------------------------------
Total ................................ $179,885 $174,198
=====================================================================
The liabilities are long-term in nature and will be paid over time in accordance
with the terms of the plans.
20
9
Notes To Consolidated Financial Statements
Springs Industries, Inc.
Note 6. Long-Term Debt:
Long-term debt consists of: (in thousands) 1998 1997
Note payable in quarterly installments of $4,464 from September 2001
through March 2008, interest payable at variable rates (5.6% at 1/2/99) $125,000 $ --
Senior notes payable in annual installments of $5,000
through 2006, interest rate at 9.6% ................................... 40,000 45,000
Notes payable in quarterly installments of $2,857 through
May 2005, interest payable at variable rates (5.6% at 1/2/99) ......... 74,286 80,000
Notes payable in quarterly installments of $714 through September 2005,
interest payable at variable rates (5.6% at 1/2/99) ................... 19,285 20,000
Industrial Revenue Bond Obligations, payable in varying annual
amounts to 2019, interest at rates ranging from 3.0% to 8.3% .......... 29,857 31,115
Other .................................................................... 876 2,624
- --------------------------------------------------------------------------------------------------------
Total ................................................................. 289,304 178,739
Current maturities ....................................................... (21,313) (14,452)
- --------------------------------------------------------------------------------------------------------
Long-term debt ........................................................ $267,991 $164,287
========================================================================================================
Periodically, the Company finances its operations 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 an annual commitment fee on the unused
portion of this agreement. As of January 2, 1999, no borrowings were outstanding
under this agreement.
During 1998, the Company borrowed $125 million under a long-term credit facility
at a variable rate, which is currently 5.6 percent per annum. 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 on $60
million of the $125 million long-term loan at 6.1 percent. 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 on $100
million of variable rate debt at 6.7 percent. The Company is exposed to credit
loss in the event of nonperformance by the counterparties to the interest rate
swap agreements; however, the Company believes such counterparties will perform.
At January 2, 1999, and January 3, 1998, the notional amount of swap agreements
totaled $153.6 million and $100.0 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. Under the most restrictive
requirements on the payment of dividends, retained earnings of approximately
$160 million were free of restrictions at January 2, 1999.
Scheduled annual maturities of long-term debt are: 1999 - $21.3 million; 2000 -
$20.6 million; 2001 - $29.1 million, 2002 - $38.1 million, 2003 - $38.1 million
and varying amounts thereafter through 2019. Total interest payments in 1998,
1997 and 1996 were $19.3 million, $17.8 million, and $24.0 million,
respectively.
Note 7. Shareowners' Equity:
As of January 2, 1999, Springs had authorized 1 million shares of $1.00 par
value, voting preferred stock, none of which was outstanding. Authorized common
stock consisted of 40 million shares of $.25 par value Class A stock and 20
million 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 shareowners of the Company, while owners of Class A stock are entitled to
one vote per share. See Note 12 for description of related parties. 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.
In October 1997, the Company's Board of Directors authorized management to
purchase, from time to time, up to 2 million shares of Class A common stock in
the open market and in private transactions. In August 1998, the Board granted
similar authority for management to purchase up to an additional 2 million
shares of Class A common stock. As of January 2, 1999, the Company had
repurchased 2,408,400 shares pursuant to these authorizations.
Accumulated other comprehensive income or loss shown in the consolidated
statement of shareowners' equity consisted of foreign currency translation
adjustments of $9.5 million and a minimum pension liability of $1.0 million in
1998; foreign currency translation adjustments of $7.1 million and a minimum
pension liability of $1.0 million in 1997; and foreign currency translation
adjustments of $6.0 million, a minimum pension liability of $1.1 million and an
unrealized loss on securities of $0.7 million in 1996.
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. The change in foreign currency translation adjustments in 1996
included a reclassification adjustment of $10.9 million for currency translation
gains realized in net income as a part of the gain on the sale of
Clark-Schwebel, Inc.
21
10
Notes To Consolidated Financial Statements
Springs Industries, Inc.
Note 8. Stock-Based Compensation:
The Company has an incentive stock plan ("the Plan") which was approved by the
shareowners in 1991. Prior to that time, the Company maintained a deferred unit
stock plan which expired in 1991 except for the shares and grants outstanding
thereunder. Primary stock equivalents and incremental stock equivalents, which
are similar to deferred stock and stock appreciation rights, respectively, were
issued under the deferred unit stock plan. The primary stock equivalents are
still outstanding; however, the holder of the incremental stock equivalents
surrendered the rights to the Company during 1998 pursuant to an agreement by
the Company to convert the value thereof to a deferred compensation account. The
shareowners in 1991 also approved a restricted stock plan for outside directors
under which an annual grant of restricted stock is made to outside directors.
The Plan 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, restricted
stock, performance units, and stock appreciation rights. Under the Plan,
non-qualified stock options, deferred stock, and performance unit awards have
been granted.
Performance units are earned over a three-year cycle and are accounted for as a
variable plan. The number of units ultimately earned cannot be determined until
the end of the three-year cycle and is based on the Company's total shareowner
return over the three-year cycle as compared to the companies in the S&P 500
index.
The exercise prices of all options granted to date represent the fair market
values of the shares on the dates of the grants. Options which have been granted
generally become exercisable on the third anniversary of the grant date or
ratably over a two-to-four year period thereafter. No portion of the grants may
be exercised beyond ten years from the dates of the grants.
A summary of the Company's stock options as of January 2, 1999, January 3, 1998,
and December 28, 1996, and changes during the years ended on those dates is
presented below:
1998 1997 1996
-----------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
(Shares in thousands) Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at the beginning of the year 1,127,500 $39.53 882,500 $38.26 926,000 $37.99
Granted ................................ 632,800 34.95 250,000 44.00 15,000 47.25
Forfeited .............................. (20,002) 38.32 (5,000) 39.13 (58,500) 36.41
Exercised .............................. (60,157) 31.18 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year ............. 1,680,141 $38.11 1,127,500 $39.53 882,500 $38.26
==================================================================================================================================
Options exercisable at year end ........ 810,167 $40.05 225,809 $32.09 141,333 $30.52
==================================================================================================================================
The following table summarizes information about the stock options outstanding
at January 2, 1999:
Shares Exercisable
---------------------------
Weighted- Weighted- Weighted-
Range of Options Average Average Average
Exercise Outstanding Remaining Exercise Exercise
Prices at 1/2/99 Contractual Life Price at 1/2/99 Price
- -------------------------------------------------------------------------------------------------------------------------
$29.00 166,000 2.9 years $29.00 166,000 $29.00
33.13 to 34.33 618,968 9.5 years 33.20 26,001 34.33
39.13 to 41.88 547,673 6.6 years 41.36 485,666 41.65
44.00 250,000 8.1 years 44.00 50,000 44.00
46.38 to 47.25 47,500 5.2 years 46.65 32,500 46.38
56.19 50,000 9.1 years 56.19 50,000 56.19
- -------------------------------------------------------------------------------------------------------------------------
1,680,141 810,167
=========================================================================================================================
22
11
Notes To Consolidated Financial Statements
Springs Industries, Inc.
The options granted during 1998, 1997, and 1996 had a weighted-average fair
value of $10.00, $14.22, and $17.79, 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:
1998 1997 1996
Expected option lives . 10 years 8 years 10 years
Risk-free interest rate 5.3% 6.4% 6.9%
Expected volatility ... 28.6% 28.8% 30.0%
Expected dividend rate $1.32 $1.32 $1.32
The Company has awarded deferred stock awards and performance unit awards during
1998, 1997, and 1996. The performance units are earned over a three-year period,
and the deferred stock awards typically vest over a five-year period. Such
awards totaled 41,887 units in 1998, 71,781 units in 1997, and 117,483 units in
1996 at weighted-average grant-date fair values of $52.19, $44.57 and 44.71,
respectively. Compensation expense (income) for deferred stock awards totaled
approximately $(833,000), $2,718,000 and $1,107,000 for the years ended January
2, 1999, January 3, 1998, and December 28, 1996, 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
$5.1 million and $7.1 million as of January 2, 1999, and January 3, 1998,
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 $34.7 million, or $1.83 per diluted share, for
1998, $66.9 million, or $3.24 per diluted share, for 1997, and $83.5 million, or
$4.05 per diluted share, for 1996.
Note 9. Income Taxes:
The following tables present the components of the provision for income taxes
and reconciliation of the statutory U.S. income tax rate to the effective income
tax rate during 1998, 1997, and 1996.
Income Tax Provision:
(in thousands)
1998 1997 1996
Current ............. $17,908 $26,376 $ 29,824
Deferred ............ 3,542 7,596 (13,738)
- -------------------------------------------------------------
Total tax provision
on income before
extraordinary
item ............. $21,450 $33,972 $ 16,086
=============================================================
Reconciliation to Effective Tax Rates:
1998 1997 1996
Provision at statutory
U.S. tax rate ........ 35.0% 35.0% 35.0%
Effective state income
tax rate (excluding
sale of subsidiary) .. 2.5 2.1 2.6
Effect of sale of
subsidiary (including
state tax) ............ -- (1.2) (18.2)
Changes in valuation
allowance ............ -- -- (1.4)
Other ................. (1.0) (2.9) (2.6)
- ---------------------------------------------------------------
Total effective tax
rate on income before
extraordinary item .. 36.5% 33.0% 15.4%
===============================================================
Income before income taxes includes foreign income of $1.4 million, $2.6
million, and $4.9 million in 1998, 1997, and 1996, respectively. The provision
for income taxes includes state income taxes of $2.3 million in 1998, $3.3
million in 1997, and $1.5 million in 1996. Springs made income tax payments of
approximately $22.1 million, $27.0 million, and $32.2 million in 1998, 1997, and
1996, respectively.
Temporary differences which give rise to deferred income taxes and the resulting
assets and liabilities are as follows:
(in thousands) ................. 1998 1997
Employee benefit accruals ...... $ 37,141 $ 38,704
Deferred compensation .......... 33,398 31,637
Restructuring reserves ......... -- 2,650
Receivables reserves ........... 10,557 8,242
Environmental accruals ......... 3,856 3,938
Other items .................... 15,674 13,840
- -------------------------------------------------------------
Total deferred tax assets .... 100,626 99,011
- -------------------------------------------------------------
Property ....................... (83,515) (80,317)
Inventories .................... (8,648) (6,167)
Intangibles .................... (911) (910)
Other items .................... (714) (1,237)
- -------------------------------------------------------------
Total deferred tax liabilities (93,788) (88,631)
- -------------------------------------------------------------
Net deferred tax asset ......... $ 6,838 $ 10,380
=============================================================
23
12
Notes To Consolidated Financial Statements
Springs Industries, Inc.
Note 10. 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
ERISA, and benefits are generally based upon years of service. 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.
Defined contribution plan expenses for 1998, 1997, and 1996 were $19.0 million,
$ 21.6 million, and $22.4 million, respectively. The net assets available for
benefits under defined contribution plans had a market value of approximately
$750 million as of December 31, 1998.
Effective December 31, 1998, the Company merged two of its defined benefit
pension plans, 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. 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. The fair value of assets in this plan approximates the projected benefit
obligation.
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.
In 1998, the Company amended its postretirement medical plan 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 current amount. These
amendments decreased the postretirement benefit obligation by approximately $10
million. In addition, the Company decreased its eligibility requirement from age
65 and 25 years of service to age 60 and 10 years of service, increasing the
postretirement benefit obligation by approximately $4.1 million.
The following tables include summarized information on the Company's pension and
postretirement medical plans for the years ended January 2, 1999, and January 3,
1998: (in thousands)
Defined Postretirement
Pension Benefits Medical Benefits
- -------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year ................... $69,152 $68,767 $ 66,847 $64,436
Service Cost .............................................. 2,021 2,058 1,474 1,769
Interest cost ............................................. 4,621 5,044 3,214 4,401
Participants' contributions ............................... -- -- 2,381 1,875
Actuarial (gains) losses .................................. 3,196 (553) (11,689) 4,525
Plan amendments, divestitures, curtailments and settlements 7,489 (2,090) (7,549) (2,910)
Benefit payments .......................................... (5,894) (4,074) (8,061) (7,249)
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year ...................... $80,585 $69,152 $ 46,617 $66,847
=========================================================================================================================
Change in Plan Assets:
Fair value of plan assets at beginning of year ............ $54,286 $47,584
Actual return on plan assets .............................. 9,173 8,676
Employer contributions .................................... 426 651
Benefit payments .......................................... (4,302) (2,625)
Settlements ............................................... (1,850) --
- -------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year ............... $57,733 $54,286
=========================================================================================================================
Continued next page
24
13
Notes To Consolidated Financial Statements
Springs Industries, Inc.
Defined Postretirement
Pension Benefits Medical Benefits
1998 1997 1998 1997
Funded Status:
Funded status at end of year ................................... $(22,852) $(14,866) $(46,617) $(66,847)
Unrecognized actuarial (gains) losses .......................... 2,640 1,986 (16,129) (5,200)
Unrecognized prior service cost ................................ (236) (7,317) (7,768) (2,586)
Unrecognized transition obligation ............................. (125) (286) -- --
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized ...................................... $(20,573) $(20,483) $(70,514) $(74,633)
========================================================================================================================
Amounts Recognized in the Company's Balance Sheet:
Prepaid benefit cost ........................................... $ 146 $ 1,158 $ -- $ --
Accrued benefit cost ........................................... (23,041) (24,728) (70,514) (74,633)
Intangible asset ............................................... 546 847 -- --
Accumulated other comprehensive income ......................... 1,776 2,240 -- --
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized ...................................... $(20,573) $(20,483) $(70,514) $(74,633)
========================================================================================================================
Weighted Average Assumptions:
Discount rate .................................................. 6.50% 6.75% 6.50% 6.75%
Expected return on plan assets ................................. 8.50% 8.50% -- --
Rate of compensation increase .................................. 4.50% 4.50% -- --
Initial health care cost trend rate (1) ........................ -- -- 8.50%(2) 9.00%(2)
(1) Assumed to decrease gradually to 5.0 percent in 2005
and remain at that level thereafter.
(2) 6.1 percent and 6.2 percent for HMO plans for 1998
and 1997, respectively.
Components of Net Periodic Benefit Cost:
Service cost ...................................................... $ 2,021 $ 2,058 $ 1,474 $ 1,769
Interest cost ..................................................... 4,621 5,044 3,214 4,401
Actual return on assets ........................................... (4,358) (4,598) -- --
Net amortization and deferral ..................................... (962) 1,273 (1,080) (342)
Termination benefit ............................................... 396
Effect of curtailment/settlement .................................. 101 -- 2,066 --
- ------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost .................................. $ 1,819 $ 3,777 $ 5,674 $ 5,828
========================================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $32.9 million, $31.7 million,
and $10.0 million, respectively, as of January 2, 1999, and $29.3 million,
$27.9 million, and $4.8 million, respectively as of January 3, 1998.
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 $ 89 $ (129)
Effect on postretirement
benefit obligation 1,108 (1,521)
- ------------------------------------------------------------------------
25
14
Notes To Consolidated Financial Statements
Springs Industries, Inc.
Note 11. 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 2, 1999 and January 3, 1998. The
carrying value of notes receivable is $12.4 million at January 2, 1999, compared
to an estimated fair value of $11.4 million, using interest rates based on the
credit worthiness of the customers. The carrying value of notes receivable was
$17.6 million at January 3, 1998, compared to an estimated fair value of $15.4
million.
The estimated fair value of long-term debt at January 2, 1999, was $297.4
million, compared to a carrying value of $289.3 million. The estimated fair
value of long-term debt at January 3, 1998, was $185.3 million, compared to its
carrying value of $178.7 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 2, 1999, and January 3, 1998,
the Company had interest rate swaps with notional amounts totaling $153.6
million and $100 million, respectively. The estimated fair value of these
agreements was an unrealized loss of $5.2 million at January 2, 1999, and an
unrealized loss of $1.6 million at January 3, 1998, based on market prices for
similar instruments.
Note 12. 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 percent of Springs' Class
B common stock and approximately 1 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 these companies is not material and the services have been
obtained at competitive prices or rates.
Management annually reviews its conclusions concerning related party
transactions with the Audit Committee of the Board of Directors.
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 $8 million and $13 million, and
has accrued an undiscounted liability of approximately $12 million, which
represents management's best estimate of Springs' probable liability concerning
all known environmental matters.
Management believes the $12 million will be paid out over the next 10 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 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.
Subsequent Events (Unaudited): In January 1999, the Company acquired two
separate businesses. On January 5, the Company acquired an additional 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. The
cost of the remaining interest totaled approximately $15 million, subject to
possible adjustments in accordance with the agreement.
Effective January 23, 1999, the Company acquired Regal Rugs, Inc. (Regal) a
subsidiary of Readicut International PLC. Regal manufactures bath and accent
rugs for sale to department and specialty stores, national chain stores, and
catalogs. The purchase price for Regal was approximately $30 million, subject to
possible adjustments for asset valuation and incremental tax liabilities of the
seller.
26
15
Independent Auditors' Report
Springs Industries, Inc.
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 2, 1999 and January 3, 1998, and
the related consolidated statements of operations, shareowners' equity and cash
flows for each of the three fiscal years in the period ended January 2, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at January 2, 1999 and
January 3, 1998, and the results of its operations and its cash flows for each
of the three fiscal years in the period ended January 2, 1999 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche, LLP
Deloitte & Touche, LLP
Charlotte, North Carolina
February 1, 1999
27
16
Management's Report On Financial Statements
Springs Industries, Inc.
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 generally accepted accounting
principles.
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/ James F. Zahrn
James F. Zahrn
Executive Vice President--
Chief Financial Officer
28
17
Management's Discussion And Analysis Of Operations And Financial Condition
Springs Industries, Inc.
A five-year summary of Selected Financial Data appears on pages 34 and 35. A
three-year analysis of reportable segment information appears on page 13.
RESULTS OF OPERATIONS
1998 Compared with 1997
Sales
Net sales for the full year 1998 (52 weeks) were $2.180 billion, down two
percent from the previous year's 53-week sales of $2.226 billion. The decline
resulted from the shorter 1998 accounting period along with lower sales in the
fourth quarter for both operating segments.
Sales for the home furnishings segment totaled $1.866 billion, down less than
two percent from the 53-week 1997 fiscal year. Sales growth in both window
fashions (due primarily to increased volume in the home improvement retail
business) and bath fashions (due to stronger rug demand) partially offset
declines in sales of bed fashions and baby products. Bedding sales were lower,
principally in the core solid color business with the department store trade and
in certain licensed bedding products.
Specialty fabrics sales of $314.4 million were almost five percent lower than
the 1997 level due to last year's 53-week year and the divestitures of the
UltraSuede and Industrial Products businesses in August and December 1998,
respectively.
Earnings
Net income for the year 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
unusual items, 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 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 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 divisions. 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.
In the home furnishings segment, pretax operating earnings of $69.7 million
declined by $40.9 million, after considering unusual items which impacted this
segment's earnings. Excluding the effect of unusual items from both years, the
segment's operating earnings were $38.8 million lower than the previous year.
The decline in profits is due principally to lower sales volume in the core
solid color bedding business to the department store trade, a decline in demand
for certain licensed bedding products in the latter part of the year, close out
sales, and production curtailments associated in part with the Company's efforts
to reduce inventories. Additionally, profits were negatively affected by
severance costs related to several of the Company's cost-cutting initiatives,
and a pretax charge of $7.5 million for uncollectible receivables in the
Company's window fashions business.
The specialty fabrics segment's pretax operating profits were $1.5 million lower
than their 1997 level, after considering the impact of unusual items. Before
unusual items, which included a pretax restructuring charge of $14.9 million for
the closing of the Rock Hill Printing and Finishing facility, full-year
operating earnings for the specialty fabrics segment increased by $14.3 million.
Improvements came in both the retail fabric and Springfield apparel fabric
businesses and were attributable to a change in product mix, reduced fixed costs
as a result of closing the Rock Hill facility and a decrease in selling, general
and administrative expenses.
Included in other income were an $11.1 million pretax gain on the sale of the
Company's UltraSuede business, previously part of the Company's specialty
fabrics segment, and a $2.8 million pretax gain on the sale of the Rock Hill
facility. Included in other income for 1997 was a pretax gain on the sale of an
investment of $6.6 million.
1997 Compared with 1996
Sales
For 1997, a 53-week fiscal period, sales of $2.226 billion increased less than
one percent from the previous year's sales of $2.221 billion. After adjusting
for the 1996 divestiture of the Company's former subsidiary Clark-Schwebel,
Inc., sales for 1997 rose more than three percent.
Sales for the home furnishings segment reached a record $1.896 billion, up
almost five percent from 1996. Sales for each of the principal business units
within this segment exceeded the prior year amounts.
Specialty fabrics sales were $329.9 million, down 20 percent from 1996.
Excluding the effect of Clark-Schwebel, Inc., full year specialty fabrics sales
for 1997 were lower by about four percent.
Earnings
Net income for 1997 was $69.0 million, or $3.34 per diluted share, compared to
$84.9 million, or $4.12 per diluted share, in 1996. Excluding realignment
expenses, a gain on the sale of an investment, and Year 2000 expenses, 1997
earnings amounted to $73.5 million, or $3.56 per diluted share, a 14 percent
increase over 1996 earnings before unusual items of $64.6 million, or $3.13 per
diluted share.
Operating profits of $115.1 million in 1997 exceeded the prior year's operating
profits of $79.8 million by 44 percent. Excluding restructuring and realignment
expenses and Year 2000 expenses, operating profits for 1997 would have been
$129.0 million, compared to $113.8 million in 1996. The home furnishings segment
reported operating profits of $110.6 million, which more than doubled the
previous year's earnings. Excluding restructuring and realignment expenses and
Year 2000 expenses from both years, the home furnishings segment's operating
earnings would have been $123.2 million, compared to $85.3 million in 1996.
For 1997, the specialty fabrics segment's operating earnings fell by more than
80 percent. Excluding the earnings of Clark-Schwebel from 1996, the segment's
operating earnings fell by more than 70 percent. Operating profits from sales of
retail fabrics and certain woven apparel fabrics declined sharply from the prior
year. Profits were impacted by lower sales of home sewing fabrics, an adverse
change in product mix, and price pressures resulting from a weak
29
18
Management's Discussion And Analysis Of Operations And Financial Condition
Springs Industries, Inc.
retail market for apparel. Additionally, the segment experienced manufacturing
inefficiencies which were acted upon by management subsequent to year end, as
discussed in Note 4 to the financial statements.
The increase in the effective income tax rate to 33.0 percent in 1997, compared
to 15.4 percent in 1996, was primarily the result of the absence in 1996 of any
federal income tax on the book gain arising from the sale of Clark-Schwebel,
Inc.
INFLATION AND CHANGING PRICES
The replacement cost of property, plant and equipment 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 LIFO method of accounting for approximately 83 percent of its
inventories. 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 1998 were provided from operations, asset
sales, business divestitures and long-term borrowings. Debt, net of cash and
cash equivalents, as a percent of total capital was 30.6 percent at January 2,
1999, compared to 23.6 percent at January 3, 1998. In 1998, the Company borrowed
$125 million under a long-term credit facility at a variable rate, which is
currently 5.6 percent per annum. 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 on $60 million of the $125 million
long-term loan at 6.1 percent.
In October 1997, the Company's Board of Directors authorized management to
purchase, from time to time, up to 2 million shares of Class A common stock in
the open market and in private transactions. In August 1998, the Board granted
similar authority for management to purchase up to an additional 2 million
shares of Class A common stock. As of January 2, 1999, the Company had
repurchased 2,408,400 shares pursuant to these authorizations.
The Company invested $120.5 million in new property, plant and equipment during
1998, primarily for manufacturing, distribution and information technology. The
Company expects capital expenditures for 1999 to approximate $170 million.
Management expects that cash generated by operations, cash received from the
sale of the Springfield division, cash on hand at the end of 1998, and
borrowings from committed bank lines and commercial paper will adequately
provide for the Company's cash needs during 1999.
DIVESTITURES
During the three years ended 1998, the Company sold four specialty fabrics
businesses.
Effective January 2, 1999, the Company disposed of the net assets of the
Company's Springfield division in exchange for a $10 million preferred equity
interest in the buyer 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. Effective December 19, 1998,
the Company disposed of its Industrial Products division 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 buyer. Effective August 7,
1998, the Company sold its UltraSuede business and certain related assets of the
UltraFabrics division. The Company has retained the UltraLeather portion of the
UltraFabrics division, which is part of the Company's specialty fabrics segment.
The combined effect of these transactions was a pretax gain of $8.4 million
which is included in other (income) expense. The combined sales of these
businesses included in the Company's 1998 results were $156.6 million, and
earnings before interest and taxes totaled approximately $14.3 million.
On April 17, 1996, the Company sold Clark-Schwebel, Inc., for $193 million in
cash. A gain of $50.1 million was included in other income for 1996. This
business included foreign operations with respect to which a foreign currency
translation adjustment of $10.9 million had accumulated at the time of the sale.
This translation adjustment was included in the determination of the gain on
disposition. Through the date of the divestiture, Clark-Schwebel, Inc., had 1996
sales of $68.9 million and earnings before interest and taxes of $11.3 million.
RESTRUCTURING AND REALIGNMENT
1996 Restructuring
During the second quarter of 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
Company recorded a pretax charge of $30.4 million during the second quarter of
1996, which included a $16.3 million write-off of plant and equipment, a $6.6
million accrual for anticipated employment severance expenses arising from the
elimination of approximately 850 positions, and a $7.5 million accrual primarily
for idle plant costs and demolition costs.
The following represents changes in the restructuring accruals since the
adoption of the plan: (in millions)
Severance Accrual for
Accrual Other Expenses
- -------------------------------------------------------------
Original accrual on
June 28, 1996 ..... $ 6.6 $ 7.5
Cash payments ..... (1.1) (3.0)
- -------------------------------------------------------------
Accrual balance on
December 28, 1996 . 5.5 4.5
Cash payments ..... (3.0) (2.2)
Adjustments ....... 1.8 --
(2.0) --
- -------------------------------------------------------------
Accrual balance on
January 3, 1998 ... 2.3 2.3
Cash payments ..... (0.8) (1.4)
Adjustments ....... (1.5) (0.9)
- -------------------------------------------------------------
Accrual balance on
January 2, 1999 ... $ 0.0 $ 0.0
=============================================================
30
19
Management's Discussion And Analysis Of Operations And Financial Condition
Springs Industries, Inc.
The plan benefited operating results by reducing the volume of linear yards and
second-quality units produced, reducing the complexity of the finishing process,
and increasing manufacturing flexibility with respect to the use of finished
roll stock.
During 1997, Springs reduced the accrual for severance by $2.0 million due to
lower-than-expected average severance cost per associate. The Company was able
to place a greater percentage of the terminated employees in other positions
within the Company than had been expected. At the same time, the Company also
increased the severance accrual by $1.8 million for severance costs associated
with 320 additional positions that were to be eliminated at other manufacturing
facilities.
During 1998, Springs again reduced the severance accrual by approximately $1.5
million due to continued favorable experience relative to the Company's earlier
expectations as to the number of associates to whom severance would have to be
paid.
The restructuring plan was completed during the fourth quarter of 1998. The
accrual for other expenses was reduced by $0.9 million primarily due to lower-
than-expected idle plant costs.
The Company has incurred realignment expenses of $20.2 million, including $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.
1998 Restructuring
In the first quarter of 1998, the Company adopted a plan to close one of its
specialty fabrics facilities, the Rock Hill 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 plant and equipment, 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 costs, demolition
costs, and costs associated with a defined benefit plan. The expected benefits
of this action included lower production costs and better utilization of
existing capacity in other facilities. During 1998, the Company began to realize
a reduction in product costs as a result of closing the facility.
The following represents changes in the restructuring accruals since the
adoption of the plan: (in millions)
Severance Accrual for
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. Springs
reduced the severance accrual in 1998 due to lower-than-expected cost per
associate. The accrual for other expenses was reduced in 1998, primarily as a
result of lower-than-anticipated costs associated with a defined benefit plan
and the unexpected sale on September 25, 1998, of the Rock Hill facility. As a
result of the sale, the Company reversed accruals relating to idle plant costs
and demolition costs of approximately $4.3 million.
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.
IMPAIRMENT CHARGE AND SEVERANCE ACCRUAL
During 1998, the Company adopted a plan to invest $67 million to consolidate and
modernize its Griffin, Georgia and Hartwell, Georgia towel weaving and yarn
operations. Springs announced in September 1998 that under the plan it will
invest over $26 million, as part of the $67 million plan, to modernize and
expand production at its Griffin Plant No. 5. The Company began to consolidate
production from its Griffin Plant No. 1 into its Griffin Plant No. 5 and its
Hartwell, Georgia facility in January 1999, with an expected completion date of
mid-1999. The Company expects that 300 positions will be eliminated as a result
of the consolidation and, therefore, recorded a severance accrual of
approximately $1.4 million in its 1998 earnings. The Company also recorded a
pretax impairment charge of approximately $4.8 million in connection with the
consolidation and modernization of terry manufacturing operations.
YEAR 2000 COMPUTER ISSUE
Overview
The "Year 2000 Computer Issue" arises because many computer programs use only
two digits to refer to a year. If uncorrected, these computer programs may not
be able to distinguish between the years 1900 and 2000 and consequently may fail
to operate or may produce unpredictable results.
Springs has been addressing the Year 2000 Computer Issue within its information
technology and non-information technology systems through a Company-wide Year
2000 Project. Non-information technology systems typically include embedded
technology such as computer chips within manufacturing equipment and building
security systems. (Information technology and non-information technology systems
are hereinafter referred to as "information systems.") The Company's Year 2000
Project commenced in 1996 and is directed by an internal Program Management
Office. In general, Springs' Year 2000 Project is proceeding on or ahead of
schedule.
In addition, in 1993, the Company began a series of capital investment projects
to improve internal operations and customer service by consolidating and
replacing certain information systems. As part of these capital projects, the
Company has been replacing certain older, non-compliant information systems with
Year 2000 compliant information systems. These capital projects are expected to
be completed by the end of the second quarter of 1999.
Year 2000 Project
The Company organized its Year 2000 Project into six broad phases: (1)
development of a Company-wide inventory of information systems, (2) development
of Company-wide standards, processes and guidelines for remediation, testing
31
20
Management's Discussion And Analysis Of Operations And Financial Condition
Springs Industries, Inc.
and certification, (3) remediation, (4) testing, (5)certification, and (6)
development of contingency plans, as necessary. The Company will certify an
information system as Year 2000 compliant only after the information system
satisfies the Company's established test criteria. The Company completed the
inventory of its information systems in 1997. The Company divided the tasks of
remediating information systems which would not be replaced through a capital
project into two major efforts (business applications and process logic
controllers) and also undertook a project to contact certain key trading
partners.
(a) Business Applications: This project addresses all Company business
applications, such as general ledger, accounts receivable, order fulfillment and
payroll, and the technical infrastructure which supports them. As of January 2,
1999, the Company has certified approximately 90 percent of its business
applications' lines of code as Year 2000 compliant. The remaining lines of code
are in the testing phase. The Company expects to certify all business
applications and supporting technical infrastructure as Year 2000 compliant by
the end of its first quarter of 1999.
(b) Process Logic Controllers: This project addresses the hardware, software and
associated embedded chips that are used in the operation of all facilities and
manufacturing equipment used by the Company. As of January 2, 1999,
approximately 90 percent of the Company's process logic controllers are Year
2000 compliant. The Company projects that the rest will be repaired or replaced
by the end of its second quarter of 1999.
(c) Trading Partners: This project involves identifying critical vendors and
customers and communicating with them about their compliance status and plans.
The Company contacted all trading partners with which it does over $100,000 in
business annually, all electronic data interchange trading partners, any other
critical trading partner that did not otherwise meet the criteria, and all
utilities which serve the Company in order to request written information
regarding each trading partner's Year 2000 compliance status. The Company has
been receiving written responses which indicate whether its trading partners are
or plan to become Year 2000 compliant. The Company is aware that these written
responses may not accurately represent the Year 2000 compliance status of its
trading partners. The Company is continuing to follow up with its trading
partners and intends to develop contingency plans as necessary.
Costs
The total cost of the Company's Year 2000 Project is not expected to be material
to the Company's financial position. The Company presently expects to incur
approximately $18 million of pretax expense in connection with its Year 2000
Project. Approximately $2.8 million of pretax expense was incurred in fiscal
1997, the first year in which the Company incurred Year 2000 expenses. Expenses
totaling approximately $7.1 million were incurred during 1998 related to this
effort. The funds to complete the remediation efforts are expected to be
provided from cash flow from operations and short-term investments.
Acquisitions
During January 1999, the Company acquired American Fiber Industries, LLC and
Regal Rugs, Inc. The Company plans to complete a detailed inventory and
assessment of the information systems in each acquired entity by the end of its
first quarter of 1999. Due diligence completed prior to these acquisitions
indicates that any necessary remediation or replacement of information systems
should not have a material impact on the Company's estimated total Year 2000
project expenses or the Company's ability to complete its Year 2000 project
prior to the end of 1999.
Risks
Due to the numerous uncertainties inherent in the Year 2000 Computer Issue, the
Company cannot ensure, despite its ongoing communications with its trading
partners, that its most important suppliers and customers will be Year 2000
compliant on time. The failure of critical suppliers or customers to timely
correct their Year 2000 Computer problems could materially and adversely affect
the Company's operations and financial condition, even resulting in interruption
of normal business operations. The Company has implemented and certified a
contingency plan to continue transacting business with electronic data
interchange trading partners who do not implement the Year 2000 version of the
electronic data interchange software. The Company has not completed written
contingency plans for the complete business failure of its key trading partners,
which at this point appears to be unlikely. The Company is able to identify
alternative raw materials suppliers in the event a critical supplier fails to
timely correct a Year 2000 problem, disrupting its supply of products.
A failure on the part of the Company to timely complete a Year 2000 remediation
project or capital project in one or more of its divisions also could result in
an interruption in, or failure of, normal business operations and could
materially and adversely affect the Company's financial condition. At the end of
1998, however, all projects are proceeding according to plan. The Company
believes that all projects will be completed by the end of 1999. The Company
will continue to monitor all Year 2000 projects and capital projects and will
develop contingency plans for specific business divisions, if required.
The Company is preparing contingency plans to address the possibility of
information systems failures at each of its facilities. The Company expects to
complete these contingency plans during its first quarter of 1999.
At this point, the Company cannot determine whether any other contingency plans
are necessary or whether any such plan could completely alleviate the risk to
the Company of its own or a key trading partner's failure to timely become Year
2000 compliant.
Forward-looking statements contained in this Year 2000 Computer Issue section
should be read in conjunction with the Company's disclosures under the heading
"FORWARD-LOOKING INFORMATION" on page 33.
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. For debt obligations, the
table presents principal cash flows and related weighted-average interest rates
by expected maturity dates. For interest rate swaps, the table presents notional
amounts and weighted-average rates by expected maturity dates.
32
21
Management's Discussion And Analysis Of Operations And Financial Condition
Springs Industries, Inc.
Expected Maturity Date Fair Value
---------------------- ----------
January 2,
1999 2000 2001 2002 2003 Thereafter Total 1999
- ------------------------------------------------------------------------------------------------------------------------------
(in millions)
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 commodity contracts held at year-end 1998
was not material, and near-term changes in commodity prices are not expected to
have a material impact on the Company's future earnings or cash flows.
ACCOUNTING CHANGES
In 1998, the Company adopted several pronouncements issued by the Financial
Accounting Standards Board (FASB). FASB Statement No. 130, "Reporting
Comprehensive Income," requires the components of comprehensive income to be
disclosed in the financial statements. FASB Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information," requires certain
information to be reported about operating segments on a basis consistent with
the Company's internal organizational structure. FASB Statement No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits,"
revises the disclosures for pensions and other postretirement benefits and
standardizes them into a combined format. Required disclosures have been made,
and applicable prior years' information has been reclassified for the impact of
adopting these statements. The adoption of these statements had no impact on the
Company's reported financial position, results of operations, or cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee issued Statement of
Position No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." This standard, which will be adopted in 1999,
revised the accounting for software development costs and will require the
capitalization of certain costs which the Company has historically expensed.
This statement is not expected to have a material impact on the Company's
financial position, results of operations, or cash flows.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in years
beginning after June 15, 1999. This Statement will require the Company to
recognize all derivatives on the balance sheet at fair value and may impact the
Company's earnings depending on the instruments held at the time of adoption.
The Company has not yet determined what impact FASB Statement No. 133 will have
on its financial position, results of operations, or cash flows.
SUBSEQUENT EVENTS
In January 1999, the Company acquired two separate businesses. On January 5, the
Company acquired an additional 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. The cost of the remaining interest totaled
approximately $15 million, subject to possible adjustments in accordance with
the agreement.
Effective January 23, 1999, the Company acquired Regal Rugs, Inc. (Regal), a
subsidiary of Readicut International PLC. Regal manufactures bath and accent
rugs for sale to department and specialty stores, national chain stores, and
catalogs. The purchase price for Regal was approximately $30 million, subject to
possible adjustments for asset valuation and incremental tax liabilities of the
seller.
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 intended 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 ability
of the Company and its suppliers and customers to bring their information
systems to readiness for the Year 2000 (see the "Year 2000 Computer Issue" on
page 31); 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; labor
matters; and the availability and price of raw materials which could be affected
by weather, disease, energy costs, or other factors.
33
22
Selected Financial Data
Springs Industries, Inc.
1998 1997(b) 1996 1995 1994
Summary of Operations: (in millions)
Net sales ............................... $2,180.5 $2,226.1 $2,221.0 $2,223.2 $2,060.6
Income from continuing operations ....... 37.3 69.0 88.4(h) 71.6 62.2
Net income .............................. 37.3(a) 69.0(c) 84.9(d) 71.6 62.2
Class A cash dividends declared ......... 14.9 16.9 16.7 14.8 11.8
Class B cash dividends declared ......... 8.7 8.8 9.0 8.9 8.5
- --------------------------------------------------------------------------------------------------------------------------------
Per Share of Common Stock:
Income from continuing operations-diluted 1.97 3.34 4.29(h) 3.69 3.48
Net income-diluted ...................... 1.97(a) 3.34(c) 4.12(d) 3.69 3.48
Class A cash dividends declared ......... 1.32 1.32 1.32 1.26 1.20
Class B cash dividends declared ......... 1.20 1.20 1.20 1.14 1.08
Shareowners' equity ..................... 40.62 40.69 38.75 36.48 33.20
Class A stock price range:
High .................................. 61 54 3/4 50 1/2 44 3/4 41
Low ................................... 31 3/4 41 38 3/8 35 1/4 29 1/4
- --------------------------------------------------------------------------------------------------------------------------------
Statistical Data:
Net income to net sales ................. 1.7%(a) 3.1%(c) 3.8%(d) 3.2% 3.0%
Net income to average shareowners' equity 5.0%(a) 8.6%(c) 11.1%(d) 10.8% 11.2%
Operating return on assets employed(e) .. 5.8% 8.6% 8.8% 9.8% 10.4%
Inventory turnover(f) ................... 4.1 4.6 4.8 5.3 5.8
Accounts receivable turnover(g) ......... 6.6 6.4 6.4 6.5 6.4
Net sales divided by average assets ..... 1.5 1.6 1.5 1.5 1.6
Current ratio ........................... 3.4 3.3 3.1 2.9 2.5
Capital expenditures (in millions) ...... $ 120.5 $ 99.3 $ 75.1 $ 75.2 $ 92.6
Depreciation (in millions) .............. $ 82.3 $ 78.8 $ 80.8 $ 84.6 $ 79.7
Approximate number of shareowners ....... 2,636 2,856 3,000 3,200 3,200
Average number of associates ............ 18,000 20,100 21,700 22,600 20,300
- --------------------------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data: (in millions)
Net working capital ..................... $ 554.9 $ 546.4 $ 537.4 $ 506.3 $ 373.0
Net property ............................ 555.4 541.2 534.6 614.0 555.3
Total assets ............................ 1,435.3 1,409.3 1,398.5 1,527.5 1,289.0
Long-term debt .......................... 268.0 164.3 177.6 326.9 265.4
Shareowners' equity ..................... 724.1 804.6 780.8 734.5 584.1
- --------------------------------------------------------------------------------------------------------------------------------
34
23
Selected Financial Data
Springs Industries, Inc.
Notes
(a) 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 divisions, and
an impairment charge of $3.0 million recorded in connection with the
consolidation and modernization of terry manufacturing operations. 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 shareowners' equity would have been 6.7 percent.
(b) Fiscal year 1997 includes 53 weeks, whereas all other years include 52
weeks.
(c) 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 shareowners' equity would have been
9.2 percent.
(d) 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 shareowners' equity would have been
8.5 percent.
(e) Pretax income before interest expense divided by average of month-end total
assets used in operations. 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 divisions, and an
impairment charge in connection with the consolidation and modernization of
terry manufacturing operations. 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.
(f) Cost of goods sold divided by average of month-end inventories.
(g) Net sales divided by average of month-end receivables.
(h) 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; Dawson Home
Fashions, Inc., May 1995; and Nanik Window Coverings Group, July 1995.
Selected Financial Data also includes the following until their respective
dates of disposition: Clark-Schwebel Distribution Corp., June 1994; 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 division, December 1998; and the Company's
Springfield division, December 1998.
35
24
36
Quarterly Financial Data (Unaudited)
Springs Industries, Inc.
(In millions except per share data)
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)
Sale of an investment ......... - - - - -
- ---------------------------------------------------------------------------------------
Net income .................... $ (3.1) $ 5.5 $ 21.8 $ 13.1 $ 37.3
=======================================================================================
Earnings per common
share-diluted
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)
Sale of an investment ......... - - - - -
- ---------------------------------------------------------------------------------------
Net income .................... $ (0.16) $ 0.28 $ 1.19 $ 0.72 $ 1.97
=======================================================================================
1997
-----------------------------------------------------
Quarter 1st 2nd 3rd 4th(1) Year(1)
Net sales ..................... $ 543.0 $ 528.9 $ 579.3 $ 574.9 $ 2,226.1
Gross profit .................. $ 96.2 $ 98.1 $ 108.4 $ 103.2 $ 405.9
Income before
unusual items ................ $ 13.1 $ 16.8 $ 25.2 $ 18.4 $ 73.5
Year 2000 expenses ............ (0.2) (0.3) (0.4) (0.8) (1.7)
Restructuring and realignment . (1.7) (1.3) (1.5) (2.4) (6.9)
Sales of businesses and
Rock Hill facility .......... - - - - -
Impairment charge ............. - - - - -
Sale of an investment ......... - - 4.1 - 4.1
- ------------------------------------------------------------------------------------------
Net income .................... $ 11.2 $ 15.2 $ 27.4 $ 15.2 $ 69.0
==========================================================================================
Earnings per common
share-diluted
Income before
unusual items ............... $ 0.64 $ 0.81 $ 1.21 $ 0.90 $ 3.56
Year 2000 expenses ............ (0.02) (0.01) (0.02) (0.05) (0.09)
Restructuring and realignment . (0.08) (0.07) (0.07) (0.11) (0.33)
Sales of businesses and
Rock Hill facility .......... - - - - -
Impairment charge ............. - - - - -
Sale of an investment ......... - - 0.20 - 0.20
- ------------------------------------------------------------------------------------------
Net income .................... $ 0.54 $ 0.73 $ 1.32 $ 0.74 $ 3.34
==========================================================================================
(1) 14 weeks for the quarter and 53 weeks for the year.
DIVIDENDS AND PRICE RANGE OF COMMON STOCK
1998 1997
-------------------------------------------- ----------------------------------------------
Quarter 1st 2nd 3rd 4th Year 1st 2nd 3rd 4th Year
Per share:
Class A dividends
declared ......... $ .33 $ .33 $ .33 $ .33 $ 1.32 $ .33 $ .33 $ .33 $ .33 $ 1.32
Class B dividends
declared ......... .30 .30 .30 .30 1.20 .30 .30 .30 .30 1.20
========================================================================================================================
Common stock prices:
High ............. 58 1/16 61 46 1/2 42 1/4 61 47 1/2 54 3/4 54 53 1/16 54 3/4
Low .............. 50 1/8 45 1/4 32 7/16 31 3/4 31 3/4 41 42 7/8 43 11/16 43 13/16 41
========================================================================================================================