FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
SHELBY WILLIAMS INDUSTRIES, INC.
December 31 and year then ended
(In thousands except for per share amounts)
1998 1997 1996 1995 1994
OPERATING RESULTS
Net sales $ 165,937 $ 157,779 $ 149,481 $ 144,525 $ 135,011
Cost of goods sold 126,388 120,849 114,998 112,412 107,635
Restructuring charge -- -- -- -- 5,575
Selling, general and administrative expenses 22,994 22,268 22,100 22,301 21,683
Interest expense 391 622 969 1,257 1,207
Interest income (539) (614) (18) (9) --
Miscellaneous expense (income) (102) (89) (44) 37 106
Income (loss) from continuing operations
before income taxes 16,805 14,743 11,476 8,527 (1,195)
Income taxes 6,191 5,066 3,720 2,330 (575)
Income (loss) from continuing operations 10,614 9,677 7,756 6,197 (620)
PER SHARE DATA
Net sales per share $ 18.28 $ 17.15 $ 16.98 $ 16.14 $ 14.92
Income (loss) per share from continuing
operations-basic and diluted 1.17 1.05 0.88 0.69 (0.07)
Cash dividends per share 0.36 0.32 0.30 0.28 0.28
Equity per share 7.31 7.68 6.38 5.81 5.41
Weighted average number of
common shares outstanding 9,078 9,198 8,805 8,955 9,049
Weighted average number of
common shares outstanding-assuming dilution 9,108 9,250 8,838 8,981 9,070
CHANGES IN FINANCIAL POSITION
Cash provided by operating activities $ 12,136 $ 10,088 $ 8,069 $ 9,199 $ 4,953
Capital expenditures 3,919 3,557 1,189 2,250 2,183
Depreciation and amortization 2,478 2,298 2,457 2,629 2,511
Cash dividends 3,293 2,944 2,643 2,511 2,533
FINANCIAL POSITION
Stockholders' equity $ 64,695 $ 71,772 $ 55,970 $ 51,724 $ 48,658
Long-term debt (including current portion) 3,000 7,000 8,000 8,895 8,944
Total assets 89,633 97,238 83,213 87,613 86,306
Working capital 39,164 48,494 37,606 32,016 28,092
Current assets 62,111 68,929 55,712 56,962 54,865
Net investment in plant and equipment 25,985 24,611 23,476 26,547 26,989
FINANCIAL RATIOS
Continuing operations:
Gross margin as percent of sales 23.8% 23.4% 23.1% 22.2% 20.3%
Pre-tax return on net sales 10.1% 9.3% 7.7% 5.9% --
Effective income tax rate 36.8% 34.4% 32.4% 27.3% --
After-tax return on net sales 6.4% 6.1% 5.2% 4.3% --
Dividend payout ratio 31% 30% 34% 41% --
Current ratio 2.7 3.4 3.1 2.3 2.1
Debt as percent of total invested capital 4% 9% 13% 15% 16%
Current assets as percent of total assets 69% 71% 67% 65% 64%
PRODUCTIVITY STATISTICS
Average inventory turnover 6.3X 6.4X 5.6X 5.3X 5.0X
Average receivable turnover 6.1X 6.4X 6.5X 6.5X 6.2X
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996
NET SALES $ 165,937,000 $ 157,779,000 $ 149,481,000
Cost of goods sold 126,388,000 120,849,000 114,998,000
Selling, general and administrative expenses 22,994,000 22,268,000 22,100,000
16,555,000 14,662,000 12,383,000
OTHER DEDUCTIONS (INCOME):
Interest expense 391,000 622,000 969,000
Interest income (539,000) (614,000) (18,000)
Miscellaneous income (102,000) (89,000) (44,000)
(250,000) (81,000) 907,000
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 16,805,000 14,743,000 11,476,000
INCOME TAXES:
Current 7,626,000 4,926,000 3,247,000
Deferred (1,435,000) 140,000 473,000
6,191,000 5,066,000 3,720,000
Income from continuing operations 10,614,000 9,677,000 7,756,000
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations,
net of taxes (48,000) 915,000 661,000
Loss on disposal of discontinued operations,
net of taxes (7,081,000)
NET INCOME $ 3,485,000 $ 10,592,000 $ 8,417,000
INCOME PER SHARE:
Continuing operations $ 1.17 $ 1.05 $ 0.88
Income (loss) from discontinued operations,
net of taxes (0.01) 0.10 0.08
Loss on disposal of discontinued operations,
net of taxes (0.78) -- --
Net income $ 0.38 $ 1.15 $ 0.96
INCOME PER SHARE-ASSUMING DILUTION:
Continuing operations $ 1.17 $ 1.05 $ 0.88
Income (loss) from discontinued operations,
net of taxes (0.01) 0.10 0.07
Loss on disposal of discontinued operations,
net of taxes (0.78) -- --
Net income $ 0.38 $ 1.15 $ 0.95
Weighted average number of
common shares outstanding 9,078,000 9,198,000 8,805,000
Weighted average number of
common shares outstanding-assuming dilution 9,108,000 9,250,000 8,838,000
See accompanying notes.
CONSOLIDATED BALANCE SHEETS
SHELBY WILLIAMS INDUSTRIES, INC.
December 31, 1998 and 1997 1998 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,355,000 $11,124,000
Accounts receivable, less allowance for doubtful
accounts of $375,000 in 1998 and $325,000 in 1997 28,025,000 26,165,000
Inventories:
Raw materials 11,818,000 8,147,000
Work in process 5,492,000 4,978,000
Finished goods 5,234,000 4,643,000
22,544,000 17,768,000
Prepaid expenses 5,187,000 5,015,000
Net assets of discontinued operations -- 8,857,000
TOTAL CURRENT ASSETS 62,111, 000 68,929,000
NET ASSETS OF DISCONTINUED OPERATIONS -- 2,335,000
EXCESS OF COST OVER NET ASSETS OF ACQUIRED COMPANIES 151,000 160,000
PROPERTY, PLANT AND EQUIPMENT, AT COST:
Land and land improvements 2,560,000 2,392,000
Buildings and leasehold improvements 20,974,000 20,176,000
Machinery and equipment 26,746,000 22,720,000
Construction in progress -- 1,690,000
50,280,000 46,978,000
Less accumulated depreciation and amortization 24,295,000 22,367,000
25,985,000 24,611,000
OTHER ASSETS 1,386,000 1,203,000
$89,633,000 $97,238,000
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 7,063,000 $ 4,730,000
Customer deposits on orders in process 5,717,000 4,225,000
Accrued liabilities 6,278,000 5,629,000
Income taxes 889,000 1,851,000
Current portion of long-term debt 3,000,000 4,000,000
TOTAL CURRENT LIABILITIES 22,947,000 20,435,000
LONG-TERM DEBT -- 3,000,000
DEFERRED INCOME TAXES 1,991,000 2,031,000
COMMITMENTS (SEE NOTES)
STOCKHOLDERS' EQUITY:
Common stock, $.05 par value; authorized 30,000,000 shares;
issued 11,876,000 shares (1997-11,848,000) 593,000 592,000
Capital in excess of par value 10,128,000 9,837,000
Retained earnings 77,012,000 76,820,000
87,733,000 87,249,000
Less common stock held in
treasury; 3,025,000 shares at cost (1997-2,500,000) 23,038,000 15,477,000
TOTAL STOCKHOLDERS' EQUITY 64,695,000 71,772,000
$89,633,000 $97,238,000
See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,485,000 $ 10,592,000 $ 8,417,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 2,478,000 2,298,000 2,457,000
Provision for losses on accounts receivable 207,000 110,000 136,000
Change in net assets of discontinued operations 9,692,000 (468,000) (314,000)
Changes in assets and liabilities net of effects
from sale of facility:
Accounts receivable (2,067,000) (2,953,000) (540,000)
Inventories (4,776,000) 2,380,000 (640,000)
Prepaid expenses (172,000) (2,051,000) (267,000)
Accounts payable and accrued liabilities 4,474,000 (818,000) (2,706,000)
Income taxes payable (962,000) 147,000 921,000
Increase (decrease) in deferred taxes (40,000) (106,000) 34,000
Pension liability adjustment -- 789,000 119,000
Other (183,000) 168,000 452,000
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,136,000 10,088,000 8,069,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of business and facility 1,500,000 -- 2,000,000
Proceeds from disposal of property,
plant and equipment 76,000 133,000 5,000
Capital expenditures (3,919,000) (3,557,000) (1,189,000)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (2,343,000) (3,424,000) 816,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of treasury stock at public offering -- 7,953,000 --
Repayment of short-term borrowings -- -- (5,900,000)
Principal payments of long-term debt (4,000,000) (1,000,000) (32,000)
Sale of common stock under stock option plan 292,000 296,000 290,000
Purchase of common stock for the treasury (7,561,000) (884,000) (1,937,000)
Dividends declared and paid (3,293,000) (2,944,000) (2,643,000)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (14,562,000) 3,421,000 (10,222,000)
Net increase (decrease) in cash
and cash equivalents (4,769,000) 10,085,000 (1,337,000)
Cash and Cash Equivalents at Beginning of Year 11,124,000 1,039,000 2,376,000
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,355,000 $ 11,124,000 $ 1,039,000
Supplemental cash flow information:
Cash paid during the year for:
Interest $ 447,000 $ 632,000 $ 969,000
Income taxes 4,557,000 6,104,000 3,277,000
$ 5,004,000 $ 6,736,000 $ 4,246,000
See accompanying notes.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SHELBY WILLIAMS INDUSTRIES, INC.
Years Ended December 31, 1998, 1997 and 1996
Common Stock Capital in Accumulated other
Shares excess of Retained comprehensive
issued Amount par value earnings income
BALANCE AT DECEMBER 31, 1995 11,779,000 $ 589,000 $ 7,855,000 $ 63,398,000 $ (908,000)
Net income 8,417,000
Other comprehensive income:
Pension liability adjustment 198,000
Tax expense (79,000)
Comprehensive income 8,417,000 119,000
Sale of common stock under
stock option plan 35,000 2,000 288,000
Common stock purchased for
treasury (168,000 shares)
Cash dividends-$.30 per share (2,643,000)
BALANCE AT DECEMBER 31, 1996 11,814,000 591,000 8,143,000 69,172,000 (789,000)
Net income 10,592,000
Other comprehensive income:
Pension liability adjustment 1,315,000
Tax expense (526,000)
Comprehensive income 10,592,000 789,000
Sale of treasury stock at public offering
(619,000 shares) 1,399,000
Sale of common stock under
stock option plan 34,000 1,000 295,000
Common stock purchased for
treasury (72,000 shares)
Cash dividends-$.32 per share (2,944,000)
BALANCE AT DECEMBER 31, 1997 11,848,000 592,000 9,837,000 76,820,000 0
Net income and comprehensive income 3,485,000
Sale of common stock under
stock option plan 28,000 1,000 291,000
Common stock purchased for
treasury (525,000 shares)
Cash dividends-$.36 per share (3,293,000)
BALANCE AT DECEMBER 31, 1998 11,876,000 $ 593,000 $ 10,128,000 $ 77,012,000 $ 0
Treasury
other
stock,
at cost Total
BALANCE AT DECEMBER 31, 1995 $(19,210,000) $ 51,724,000
Net income 8,417,000
Other comprehensive income:
Pension liability adjustment 198,000
Tax expense (79,000)
Comprehensive income 8,536,000
Sale of common stock under
stock option plan 290,000
Common stock purchased for
treasury (168,000 shares) (1,937,000) (1,937,000)
Cash dividends-$.30 per share (2,643,000)
BALANCE AT DECEMBER 31, 1996 (21,147,000) 55,970,000
Net income 10,592,000
Other comprehensive income:
Pension liability adjustment 1,315,000
Tax expense (526,000)
Comprehensive income 11,381,000
Sale of treasury stock at public offering
(619,000 shares) 6,554,000 7,953,000
Sale of common stock under
stock option plan 296,000
Common stock purchased for
treasury (72,000 shares) (884,000) (884,000)
Cash dividends-$.32 per share (2,944,000)
BALANCE AT DECEMBER 31, 1997 (15,477,000) 71,772,000
Net income and comprehensive income 3,485,000
Sale of common stock under
stock option plan 292,000
Common stock purchased for
treasury (525,000 shares) (7,561,000) (7,561,000)
Cash dividends-$.36 per share (3,293,000)
Balance at December 31, 1998 $(23,038,000) $ 64,695,000
See accompanying notes.
December 31, 1998, 1997 and 1996
Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS
Shelby Williams designs, manufactures and distributes products for the
contract furniture market. The Company has a significant position in the
hospitality and food service markets through its "Shelby Williams" seating
line, "King Arthur" line of function room furniture and "Sterno" accessories.
It serves the health care, university, and other institutional markets
through its "Thonet" division with health care and university furniture,
including chairs, tables, and other institutional products. The Company also
processes and distributes vinyl wallcoverings for residential, hotel and
office use under the name "Sellers & Josephson."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
items and transactions are denominated in U.S. dollars and have been eliminated
in consolidation.
REVENUE RECOGNITION
Sales are recognized when the products are shipped.
INCOME TAXES
Income tax expense includes Federal and state income taxes currently
payable and deferred taxes arising from temporary differences between the tax
bases of assets or liabilities and their reported amounts in the financial
statements.
CASH AND CASH EQUIVALENTS
Cash equivalents include highly liquid investments, with original
maturities of three months or less, that are readily convertible to known
amounts of cash.
INVENTORIES
Inventories are carried at the lower of cost or market, determined by the
last-in, first-out (LIFO) method. The current replacement cost of inventories
exceeded carrying value by approximately $ 10,828,000 at December 31, 1998 and
$9,997,000 at December 31, 1997.
As a result of the difference between the method of allocating the cost of
acquisitions in 1976, 1987 and 1988 for financial reporting purposes, and the
method used for income tax purposes, the Company's tax basis in the inventories
is approximately $ 20,204,000 at December 31, 1998 and $ 22,278,000 at December
31, 1997. Related 1998 disposition cost of $ 616,000 was not a deduction for
tax.
PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization of property, plant and equipment is provided
using the straight-line method over the estimated useful lives of the
respective assets.
POSTEMPLOYMENT BENEFITS
The Company provides certain postemployment benefits. Payments of these
benefits in the past have been infrequent and are not estimable, thus the
Company records these benefits on an event basis.
OTHER SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. As a result of significant deductibles in its insurance coverage for
liability and worker's compensation claims, the Company provides amounts
which management believes are sufficient to cover the associated liabilities.
COMMITMENTS
LEASES
The Company leases certain manufacturing facilities under operating leases which
expire over the next seven years. The Company also leases showroom space under
operating leases expiring over the next five years.
Future minimum rental payments required under operating leases that have initial
or remaining non-cancelable lease terms in excess of one year as of December 31,
1998 are:
Year ending December 31,
1999 $ 1,058,000
2000 968,000
2001 573,000
2002 532,000
2003 469,000
Subsequent to 2003 62,000 Total minimum lease payments $ 3,662,000 Total rental
expense for all operating leases aggregated $ 1,899,000 in 1998, $ 1,955,000 in
1997, and $ 1,912,000 in 1996.
SHORT-TERM BORROWINGS
The Company has unsecured lines of credit amounting to $20,000,000 at
interest rates of prime or less. At December 31, 1998, all of these lines
were unused.
LONG-TERM DEBT
Long-term debt at December 31, 1998, and 1997 consisted of the following:
1998 1997
7.8% senior notes due in quarterly
installments through July 1999 $3,000,000 $7,000,000
Less amounts due within one year 3,000,000 4,000,000
$ -- $3,000,000
The terms of the senior note agreement contain certain restrictions. At December
31, 1998, the Company was in compliance with all such restrictions. The final
$863,000 of a capitalized lease obligation was discharged by assignment with
sale of the related facility in August 1996.
COMMON STOCK INFORMATION (UNAUDITED)
The following table sets forth the high and low
sales prices of the Company's common stock as
reported by the New York Stock Exchange.
Sales Prices High Low
1998 1st Quarter 17 1/8 14 5/8
2nd Quarter 16 1/8 14 5/8
3rd Quarter 15 3/4 11 7/8
4th Quarter 13 1/8 11 7/8
1997 1st Quarter 17 7/8 11 7/8
2nd Quarter 14 3/8 11 3/8
3rd Quarter 19 7/8 13 3/4
4th Quarter 20 5/8 14 3/4
At December 31, 1998, there were approximately 3,000 holders of record of the
Company's common stock, including individual participants in security position
listings.
The Company declared and paid cash dividends on its common stock during the last
two fiscal years as follows:
Period Cash Dividend per Common Share
1998 1997
1st Quarter $ 0.09 $ 0.08
2nd Quarter 0.09 0.08
3rd Quarter 0.09 0.08
4th Quarter 0.09 0.08
$ 0.36 $ 0.32
QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly results for the two years ended December 31, 1998 follows
(dollars in thousands, except for per share amounts):
1998 1997
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
Net sales $ 44,237 $ 42,387 $ 40,829 $ 38,484 $ 41,966 $ 39,608 $ 39,749 $ 36,456
Gross profit 10,962 10,095 9,937 8,555 10,256 9,435 9,182 8,057
Income from continuing operations 3,120 2,727 2,689 2,078 2,862 2,532 2,450 1,833
Net income (loss) 3,120 2,727 (4,476) 2,114 2,985 2,734 2,707 2,166
Income (loss) per share (basic and diluted):
Continuing operations 0.35 0.30 0.29 0.22 0.31 0.27 0.26 0.21
Net income (loss) 0.35 0.30 (0.49) 0.23 0.32 0.29 0.29 0.25
STOCK OPTION PLANS
Under the Company's incentive stock option plan and directors' stock option
plan, options are granted to key employees and directors to purchase the
Company's common stock at not less than fair market value at date of grant. At
December 31, 1998 and 1997, there were 276,000 and 308,000 shares, respectively,
reserved for issuance under the plans. Of options granted, 20,000 in 1997 and
16,000 in 1996 have five year terms and vest and become fully exercisable at the
end of six months service. The remaining options granted in 1997 and 1996 and
all of the options granted in 1998 have five year terms and vest and
become exercisable in 1/3 increments after 15 months, 30 months, and 45 months,
respectively, of continued employment.
The intrinsic value method is used in accounting for stock-based awards under
the Company's stock option plans. Because the exercise price of the Company's
stock options at least equals the market price of the under-lying stock on the
date of grant, no compensation expense is recognized.
A summary of the Company's stock option activity, and related information for
years ended December 31 follows:
1998 1997 1996
Options Weighted-Average Options Weighted-Average Options Weighted-Average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
Outstanding-beginning of year 217 $ 12.17 147 $ 9.97 119 $ 8.30
Granted 43 16.69 107 13.96 63 12.25
Exercised (28) 10.37 (34) 8.61 (35) 8.38
Forfeited (4) 14.00 (3) 8.38 -- --
Outstanding-end of year 228 $ 13.21 217 $ 12.17 147 $ 9.97
Exercisable at end of year 111 $ 11.62 88 $ 10.89 79 $ 9.14
Weighted-average fair
value of options granted
during the year $ 5.17 $ 4.05 $ 3.68
Exercise prices for options outstanding as of December 31, 1998 ranged from
$7.94 to $8.73 for 33,000 options and $12.12 to $18.15 for 195,000 options, with
weighted-average exercise prices of $8.03 and $14.10, respectively. The
weighted-average remaining contractual life of those options is 1 year and 3
years, respectively, or 2.7 years as a whole. Exercise prices for options
exercisable at December 31, 1998 ranged from $7.94 to $8.73 for 33,000 shares
and $12.12 to $15.25 for 78,000 shares, with weight-average exercise prices of
$8.03 and $13.15, respectively.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996, 1997 and 1998, respectively: risk-free interest rates of
6.5%, 6.2% and 5.3%; dividend yields of 2.7%, 2.6% and 2.2%; volatility factors
of the expected market price of the Company's common stock of .32, .31 and .35;
and a weighted-average expected life of the option of five years.
The effect of applying the fair value method to the Company's stock-based awards
results in net income and earnings per share that are not materially different
from amounts reported. The assumed dilutive effect of stock options, which were
the only dilutive securities outstanding in 1998, 1997 and 1996, was 30,000,
52,000 and 33,000 shares, respectively.
RESTRUCTURING CHARGE
Due to increases in lumber prices and increased competition primarily from
imported products, the Company made changes in its product and manufacturing
strategies during December 1994, designed to make the Company more
competitive in the industry. The plan was to exit certain portions of the
Company's enterprise by selling an upholstery business with a related
manufacturing facility and discontinuing a part of the product lines in the
health care, university and office markets, resulting in closure of another
plant. The Company anticipated completing the restructuring by December 31,
1995; however, the sale of the upholstery business was not completed until
August 1996.
At December 31, 1995, accrued liabilities included $439,000 related to the plan.
These costs were paid and charged against the liability in 1996, completing the
plan. In 1996, revenues and net operating income for the upholstery business
that was sold amounted to $5,858,000 and $182,000, respectively.
DISCONTINUED OPERATIONS
On July 14, 1998, the Company's Board of Directors approved management's plan to
discontinue the Company's distribution operations of textile and floor covering
products manufactured by outside suppliers. Of the two businesses comprising
these operations, one was sold and one was liquidated. The plan was completed in
December, 1998. During the second quarter 1998, the Company recorded a loss on
the disposition of these operations of $9,698,000, or $7,081,000 after taxes,
including a provision for losses prior to disposal, which is summarized below:
Reduction of inventory value $4,706,000
Reduction of property to net realizable value 2,198,000
Reduction of accounts receivable and prepaids value 629,000
Other liabilities 1,445,000
Losses through disposition 720,000
Total 9,698,000
Income tax benefit 2,617,000
$7,081,000
The operating results of the discontinued operations are summarized as follows:
Year ended December 31, 1998 1997 1996
Net sales $ 6,981,000 $21,849,000 $22,950,000
Income (loss) before
income taxes (77,000) 1,474,000 1,052,000
Income taxes (benefit) (29,000) 559,000 391,000
Net income (loss) (48,000) 915,000 661,000
Net income (loss) per share (0.01) 0.10 0.08
Net income (loss) per
share-assuming dilution (0.01) 0.10 0.07
The net assets of the discontinued operations follows:
As of December 31, 1997
Current assets $ 9,947,000
Current liabilities 1,090,000
Net assets of discontinued operations, current $ 8,857,000
Property, net $ 2,235,000
Net assets of discontinued operations, non-current $ 2,235,000
The consolidated financial statements of the Company have been restated to
reflect the results of operations and net assets of these operations as a
discontinued operation in accordance with generally accepted accounting
principles. The losses recorded on the disposition of these operations were not
materially different from those incurred on the actual amounts realized in the
sale and liquidation process.
RETIREMENT PLANS
The Company has several defined pension plans covering essentially all of its
employees in the United States. These plans held 66,000 shares of the Company's
common stock at December 31, 1998 and December 31, 1997.
Weighted-average assumptions used in the accounting were as follows:
As of December 31, 1998 1997
Discounts rates 7.0% 8.3%
Rates of compensation increase 3.5% 3.5%
Expected return on plan assets 8.5% 8.5%
Components of net periodic benefit cost are as follows:
Year ended December 31, 1998 1997 1996
Benefit cost:
Service cost $ 1,062,000 $ 964,000 $ 966,000
Interest cost 1,496,000 1,354,000 1,151,000
Expected return on
plan assets (1,654,000) (1,350,000) (1,143,000)
Amortization:
Transition asset (25,000) (25,000) (25,000)
Net actuarial loss -- 38,000 102,000
Net benefit cost $ 879,000 $ 981,000 $ 1,051,000
Changes in plan assets and benefit obligation, indicating the end of year funded
status and prepaid pension, included in prepaid expenses of the accompanying
consolidated balance sheets, were as follows:
Year ended December 31, 1998 1997
Fair value of plan assets:
Beginning of year $ 19,485,000 $ 15,142,000
Actual return on plan assets 2,318,000 3,169,000
Employer contribution 1,462,000 1,858,000
Benefits paid (809,000) (684,000)
End of year 22,456,000 19,485,000
Benefit obligation:
Beginning of year 18,484,000 15,983,000
Service cost 1,062,000 964,000
Interest cost 1,496,000 1,354,000
Actuarial loss 3,859,000 867,000
Benefits paid (809,000) (684,000)
End of year 24,092,000 18,484,000
Funded status (1,636,000) 1,001,000
Unrecognized net asset (137,000) (163,000)
Unrecognized net loss 4,184,000 989,000
Unrecognized prior service cost 60,000 61,000
Prepaid pension at end of year $ 2,471,000 $ 1,888,000
The Company has an employee stock ownership plan covering essentially all
salaried employees. The contributions were $83,000 for 1998, $69,000 for 1997,
and $63,000 for 1996. The plan held 52,000 shares of the Company's common stock
at December 31, 1998 and 44,000 shares at December 31, 1997.
Retirement plan expense was $962,000, $1,050,000, and $1,114,000 for 1998, 1997,
and 1996 respectively.
OPERATING SEGMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information". Applying the criteria from this statement, the Company has
three segments. The hotel and foodservice furniture segment manufactures and
distributes chairs, tables, and guest, banquet and function room furnishings,
along with specialty items for banquet use, for the hospitality market. The
healthcare and university furniture segment produces and markets seating
products used for healthcare, university and other institutional facilities. The
wallcoverings segment processes and distributes vinyl wallcoverings for the
hospitality and other markets.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Cash and cash equivalents are
considered corporate assets and interest expense and interest income are
unallocated. Intersegment sales are not significant. The Company evaluates
performance based on income before income taxes.
The Company's segments are strategic business units that offer different
products or serve different markets. They are managed separately because each
requires different technology and marketing strategies, which are coordinated to
the extent practical.
Segment information follows:
December 31, Hotel and Healthcare
and year foodservice and university
then ended furniture furniture Wallcoverings Totals
Net sales: 1998 $ 126,726,000 $ 23,478,000 $ 15,733,000 $ 165,937,000
1997 117,707,000 24,868,000 15,204,000 157,779,000
1996 113,436,000 22,135,000 13,910,000 149,481,000
Depreciation and amortization: 1998 1,564,000 431,000 483,000 2,478,000
1997 1,396,000 417,000 485,000 2,298,000
1996 1,501,000 419,000 537,000 2,457,000
Segment profit: 1998 13,990,000 1,022,000 1,645,000 16,657,000
1997 11,991,000 1,178,000 1,582,000 14,751,000
1996 10,626,000 504,000 1,297,000 12,427,000
Capital expenditures: 1998 2,390,000 684,000 845,000 3,919,000
1997 2,737,000 465,000 355,000 3,557,000
1996 751,000 115,000 323,000 1,189,000
Segment assets: 1998 59,685,000 15,797,000 7,796,000 83,278,000
1997 52,387,000 15,346,000 7,189,000 74,922,000
Reconciliation of segment profits to consolidated income from continuing
operations before income taxes, follows:
Year Ended December 31, 1998 1997 1996
Total profit for segments $ 16,657,000 $ 14,751,000 $ 12,427,000
Unallocated:
Interest expense (391,000) (622,000) (969,000)
Interest income 539,000 614,000 18,000
Income from continuing
operations before
income taxes $ 16,805,000 $ 14,743,000 $ 11,476,000
Reconciliation of segment assets to consolidated assets,
follows:
As of December 31, 1998 1997
Total assets for segments $83,278,000 $74,922,000
Net assets of discontinued operations -- 11,192,000
Cash and cash equivalents 6,355,000 11,124,000
Consolidated assets $89,633,000 $97,238,000
Geographic information for net sales follows:
Year ended December 31, 1998 1997 1996
Net sales:
United States $151,727,000 $140,834,000 $135,025,000
Foreign (exports) 14,210,000 16,945,000 14,456,000
Total $165,937,000 $157,779,000 $149,481,000
Geographic information for long-lived assets follows:
As of December 31, 1998 1997
Long-lived assets:
United States $23,070,000 $21,527,000
Mexico 3,066,000 3,244,000
Total $26,136,000 $24,771,000
Income Taxes
Deferred income tax liabilities (assets) for differences in tax
bases and amounts in the financial statements were as follows:
As of December 31, 1998 1997
Current:
Allocated costs of
acquisition inventories $ 796,000 $1,005,000
Prepaid pension 850,000 763,000
Other-net (1,641,000) (368,000)
Total included in current
income taxes 5,000 1,400,000
Noncurrent:
Property, plant and equipment 1,991,000 2,031,000
Net deferred tax liabilities $ 1,996,000 $3,431,000
The components of income tax expense are as follows:
Year ended December 31, 1998 1997 1996
Current:
Federal $ 6,806,000 $4,414,000 $2,790,000
State 820,000 512,000 457,000
7,626,000 4,926,000 3,247,000
Deferred:
Federal (1,435,000) 140,000 473,000
$6,191,000 $5,066,000 $3,720,000
Income tax expense differs from amounts computed by applying the Federal
statutory tax rate to income before income taxes as follows:
Year ended December 31, 1998 1997 1996
Statutory rate $ 5,714,000 $ 5,013,000 $ 3,902,000
State income taxes, net
of Federal tax benefit 541,000 337,000 302,000
Other (64,000) (284,000) (484,000)
$ 6,191,000 $ 5,066,000 $ 3,720,000
Effective rate 36.8% 34.4% 32.4%
Report of Independent Auditors
ERNST & YOUNG LLP
The Board of Directors and Stockholders
Shelby Williams Industries, Inc.
We have audited the accompanying consolidated balance sheets of Shelby Williams
Industries, Inc., as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Shelby Williams
Industries, Inc., as of December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
January 29, 1999
Atlanta, Georgia
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term cash needs are primarily for working capital to support
its accounts receivable and inventory requirements. The Company has historically
financed its short-term liquidity needs with internally generated funds and
short-term bank borrowings. At December 31, 1998, the Company had $ 39.2 million
of working capital and $ 20.0 million of unused short-term bank credit lines.
At December 31, 1998, total debt of $ 3.0 million amounted to only 4% of total
capitalization. The indebtedness consisted of a note payable to an institutional
investor bearing interest at an annual rate of 7.8%. Amortization of $ 1.0
million per quarter continues through July 1999. Pursuant to the terms of the
note, a prepayment option is available only at a substantial penalty.
Net cash provided by operating activities was $ 12.1 million in 1998.
Net cash used by investing activities was $ 2.3 million in 1998, which included
capital expenditures of $ 3.9 million consisting of $ 0.3 million to finish the
installation begun in 1997 of a modern powder coating system completed in March
1998 at a total cost of $ 2.0 million, approximately $ 0.8 million for
facilities expansion and improvements which increased wallcovering production
capacity by about 25%, and the balance primarily for automated machinery. The
Company plans to expend approximately $ 6 million in 1999 for additional
automated machinery and facilities expansion including a state- of-the-art
aluminum production facility and a new wood-finishing system. On July 14, 1998,
the Company's Board of Directors approved management's plan to discontinue the
Company's distribution operations of textile and floor covering products
manufactured by outside suppliers. Of the two businesses comprising these
operations, one was liquidated and one was sold. Cash proceeds from the sale
amounted to $ 1.5 million. The plan was completed in December 1998. Proceeds
from other disposals amounted to $ 0.1 million.
Net cash used by financing activities in 1998 was $ 14.6 million which
principally reflects the repayment of $ 4.0 million of total indebtedness, the
payment of $ 3.3 million in dividends and the repurchase of $ 7.6 million of
treasury stock. The Company received $ 0.3 million for common stock issued under
stock option plans.
The Company's stockholders' equity at December 31, 1998, was $ 64.7 million, or
$ 7.31 per share. The Company purchased 525,000 shares of its common stock in
1998 for $ 7.6 million at an average repurchase price of $ 14.40 per share.
These repurchases were made to be used for proper corporate purposes as
authorized and unissued shares. The Company's Board of Directors has authorized
the repurchase of an additional 420,000 shares of common stock. The Company may
purchase these shares from time to time, depending on market conditions, in the
open market or privately negotiated transactions. Inventories, excluding those
of the discontinued operations, increased during the year 1998 by 26.9% to $
22.5 million. This was mainly due to a 7.5% increase in backlog of unshipped
orders during the same period and the timing of receipt of raw material as
reflected by the $ 2.3 million increase in accounts payable.
The Company operates a frame and component manufacturing plant in Mexico. The
year-end carrying value of property, plant and equipment at this facility was $
3.1 million for 1998, $ 3.2 million for 1997, and $ 3.5 million for 1996. All
items produced at the plant are shipped to facilities of the Company in the
United States for further processing. The value of these transfers amounted to $
2.1 million in 1998, $ 2.3 million in 1997, and $ 2.1 million in 1996.
The Company believes that cash on hand, internally generated cash flows, and
available credit lines will be adequate to support currently planned business
operations both on a near-term and long-term basis.
IMPACT OF YEAR 2000
The Company does not have a significant amount of date- dependent software
programs in its centralized information systems. Other systems, such as computer
controlled machinery and even telephones may have Year 2000 problems with their
computer chips. The Company's manufacturing operations are not significantly
dependent on computer controlled machinery. The Company has inventoried all
computer controlled equipment and assessed the exposure of each system to ensure
all computer controlled equipment is Year 2000 compliant. Based upon this
review, the Company believes that all critical equipment is compliant.
The Company has completed an assessment of its centralized information system
and has modified or replaced portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The project, according to plan, has been completed. The Year 2000
project cost was approximately $ 163,000 of which approximately $ 118,000 was
capitalized and the remainder expensed.
The Company believes that with modifications to existing software which have
been completed and conversions to new software which have been made, the Year
2000 Issue will not pose significant operational problems
for its computer systems. However, actual results could differ from those
anticipated and have a material impact on the operations of the Company. In
addition, disruptions in the general economy resulting from Year 2000 issues
could also materially adversely affect the Company. The amount of potential lost
revenue and additional cost cannot be reasonably estimated at this time. The
Company has contingency plans for certain critical applications. These
contingency plans involve, among other actions, manual workarounds and adjusting
staffing strategies.
The Company's centralized information systems do not interface with third party
systems. The Company has queried its significant suppliers, all of whose
products are available from alternative sources. To date, the Company is not
aware of any supplier with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity, or capital resources. However, the
Company has no means of ensuring that its suppliers will be Year 2000 ready. The
inability of suppliers to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company, the effect of which is not
determinable.
This is a Year 2000 readiness disclosure entitled to protection as provided in
the Year 2000 Information and Readiness Disclosure Act.
1998 COMPARED TO 1997
Net sales increased 5.2% to $ 165.9 million in 1998 from $ 157.8 million for
1997. This increase was due almost entirely to volume increases. Volume growth
was primarily attributable to continued robust activity in the hospitality and
foodservice markets. The Company's products sold in these markets include
virtually all of its hotel and foodservice furniture, which amounted to $ 126.7
million in 1998, or a 7.7% increase from the prior year, and most of its
wallcoverings, which increased 3.5% to $ 15.7 million. Reflecting consolidation
within the healthcare industry in 1998, sales of healthcare and university
furniture declined 5.6% to $ 23.5 million.
Notwithstanding ongoing economic difficulties in the export markets served by
the Company, its overall business remains strong. In 1998, export sales
decreased $ 2.7 million, or 16.1%, from 1997. The Company's position as market
leader abroad leaves management confident that it will garner a significant
share of export business as the international situation normalizes, although
there can be no assurance in this regard. The Company's backlog of unshipped
orders at December 31, 1998 increased 7.5%, to a year-end record of $ 34.2
million, compared to $ 31.8 million a year earlier.
Gross profit increased 7.1% to $ 39.5 million in 1998 from $ 36.9 million in
1997. The gross profit margin increased to 23.8% in 1998, compared to 23.4% in
1997, reflecting higher factory utilization rates and improved productivity
resulting from recent investments in automated machinery.
Selling, general and administrative expenses increased 3.3% to $ 23.0 million in
1998 from $ 22.3 million in 1997. As a percentage of net sales, selling, general
and administrative expenses decreased to 13.9% in 1998 from 14.1% in 1997,
principally due to function of volume.
As a result of the factors described above, operating profit increased 12.9% to
$ 16.6 million in 1998 from $ 14.7 million in 1997. The operating margin
improved to 10.0% in 1998 compared to 9.3% in 1997.
Net interest income of $ 0.1 million in 1998, contrasted to net interest expense
of almost nil in 1997, which reflects the reduction in outstanding indebtedness
to $ 3.0 million at December 31, 1998 from $ 7.0 million at December 31, 1997.
The effective tax rate increased to 36.8% in 1998 from 34.4% in 1997 primarily
due to increased state income taxes resulting, in part, from the effect of
reduced export sales and loss of federal income tax benefits also related to
export sales.
As a result of the foregoing, income from continuing operations increased 9.7%
to $ 10.6 million in 1998, or $ 1.17 per share, compared to $ 9.7 million, or $
1.05 per share in 1997.
During the second quarter 1998, the Company recorded a loss on the disposition
of the discontinued operations, indicated under Liquidity and Capital Resources
above, of $ 9.7 million, or $ 7.1 million after taxes. These operations did not
make a contribution to profits in 1998, and management believed they offered
limited upside potential. The losses recorded on the disposition of these
operations were not materially different from those incurred on the actual
amounts realized in the sale and liquidation process. See Note to Consolidated
Financial Statements captioned "Discontinued Operations." 1997 Compared to 1996
This comparison reflects restatement for operations discontinued in 1998.
Net sales increased 5.6% to $ 157.8 million in 1997 from $ 149.5 million in
1996. The Company divested its contemporary upholstered seating product line,
Preview, and a related manufacturing facility in August 1996. See Note to
Consolidated Financial Statements captioned "Restructuring Charge." Excluding
Preview, net sales increased 9.9% to $ 157.8 million in 1997 from $ 143.6
million in 1996. Approximately 2% of this increase was due to increased pricing
and favorable product mix with the remainder attributable to volume increases.
Efforts to strengthen foreign marketing capability resulted in increased export
sales for 1997 to $ 16.9 million, compared to $ 14.5 million in 1996. The demand
for hotel rooms across the U.S. remained strong in 1997. As a result, lodging
companies continued to build new hotels and refurbish older ones in order to
remain competitive. New construction and refurbishing of hotels provide a market
for the Company's products, allowing it to benefit from this major industry
expansion. Sales of these products increased from 1996 to 1997 by 3.8%, or 9.4%
excluding Preview, to $ 117.7 million for hotel and foodservice furniture, and
9.3% to $ 15.2 million for wallcoverings. Sales of healthcare and university
furniture also increased from 1996, amounting to $ 24.9 million for 1997, or an
increase of 12.3%. At December 31, 1997, the Company's backlog of unshipped
orders was approximately $ 31.8 million, compared to $ 30.7 million at December
31, 1996.
Gross profit increased 7.1% to $ 36.9 million in 1997 from $ 34.5 million in
1996. The gross profit margin increased to 23.4% in 1997, compared to 23.1% in
1996, reflecting higher capacity utilization and favorable product mix.
Selling, general and administrative expenses were $ 22.3 million in 1997 and $
22.1 million in 1996. As a percentage of net sales, selling, general and
administrative expenses decreased to 14.1% in 1997 from 14.8% in 1996. This
decrease as a percentage of net sales was a function of volume and reflects the
high selling, general and administrative expenses of Preview.
As a result of the factors described above, operating profit increased 18.4% to
$ 14.7 million in 1997 from $ 12.4 million in 1996. The operating margin
improved to 9.3% in 1997 compared to 8.3% in 1996. Excluding Preview, operating
profits in 1997 and 1996 were $ 14.7 million and $ 12.2 million, respectively,
and as a percentage of sales, were 9.3% and 8.5%, respectively.
Net interest expense in 1996 of $ 1.0 million was reduced to almost nil in 1997
as a result of reduced debt and increased cash equivalents.
The effective tax rate increased to 34.4% in 1997 from 32.4% in 1996 due to the
absence of tax credits which were no longer available.
As a result of the foregoing, income from continuing operations for 1997 was $
9.7 million, a 24.8% increase over $ 7.8 million for 1996. Income per share from
continuing operations increased 19.3% to $ 1.05 from $ .88 on 4.5% more average
shares outstanding.