1998 - Morningstar, Inc

1998

ANNUAL REPORT

Brought to you by Global Reports

Shaw Industries is a growth oriented energy services company

specializing in technology-based products and services for explo-

ration and production, pipeline and petrochemical and indus-

trial markets worldwide. The company operates through seven

business units and its 50% interest in Bre d e ro – Shaw with

manufacturing and service facilities located around the world.

These businesses operate within the following market segments.

Exploration and Pro d u c t i o n

• Mark Pro d u c t s . . . . . . . . . . . . . . . .geophysical sensors, cables and c o n n e c t o r s

• OMSCO Industries . . . . . . . . . . . .drill pipe and drill string components

• G u a rdian Oilfield Serv i c e s . . . . . .drill pipe and tubular inspection andre f u r b i s h m e n t

P i p e l i n e

• B re d e ro – Shaw . . . . . . . . . . . . . .pipeline corrosion coatings, insulationand weight coatings

• Shaw Pipeline Serv i c e s . . . . . . . . .ultrasonic and radiographic pipeline girt hweld inspection

• Canusa – CPS . . . . . . . . . . . . . . . .heat shrinkable pipeline joint protection systems and corrosion protection materials

P e t rochemical and Industrial

• Canusa – EMI . . . . . . . . . . . . . . . .heat shrinkable tubing, sleeves and kits

• S h a w fle x . . . . . . . . . . . . . . . . . . . . .specialty wire and cable

Financial Highlights and Operating Highlights 1R e p o rt to Share h o l d e r s 2Shaw Industries at a Glance 4Exploration and Pro d u c t i o n 6P i p e l i n e 8P e t rochemical and Industrial 1 2Management Discussion and Analysis 1 3M a n a g e m e n t ’s Responsibility for Financial Statements 1 9Auditors’ Report 1 9Financial Statements 2 0Six Year Review 2 8Q u a rterly Inform a t i o n 2 8D i rectors and Off i c e r s 2 9P r i m a ry Operating Locations 2 9


Financial Highlights

(In thousands except per share amounts) 1 9 9 8 1 9 9 7

Operating Results

Revenue $ 769,018 $ 590,701

Net income for the year $ 69,624 $ 58,662

Net income per share (Class A and Class B)

Basic $ 1.15 $ 0.98

Fully diluted $ 1.13 $ 0.95

Cash Flow

Cash from operating activities $ 102,412 $ 75,172

Additions to capital assets $ 57,952 $ 32,971

Financial Position

Working capital $ 116,910 $ 116,517

Total assets $ 556,897 $ 432,269

Shareholders’ equity per share

(Class A and Class B) $ 5.26 $ 4.12

Operating Highlights

R e c o rd year for revenue and earn i n g s

•

T h re e - f o r-one stock split in June

•

Completion of coating on the Sable Island Pipeline pro j e c t•

Commencement of coating on the Alliance Pipeline pro j e c t

•

Commencement of inspection work on the Solitaire

lay barge under long-term agreement with Allseas Gro u p•

Completion of major capacity expansion program

at OMSCO Industries•

Canusa – EMI acquires DSG Group of companies

in December

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Report to Shareholders1998 RESULTSShaw Industries achieved another excellent year in 1998, due primarily to strong momen-tum in the Pipeline segment as worldwide project activity continued at the high levelsexperienced in the prior year. During the second half of 1998, the impact of declining oilprices began to severely restrict the cash flows of North American energy producers. Byy e a r-end, the industry had substantially curtailed capital expenditures for explorationand production in response to this rapid reduction in cash flow and the inability to raisenew capital from either debt or equity markets in comparison to the prior year. Intern a-tional energy markets fared somewhat better as the large state owned or multinationale n e rgy producers typically have the re s o u rces to take a more pragmatic view of flu c t u a-tions in the energy cycle.

Despite the decline in exploration and production activity during the second half of 1998,Shaw Industries’ broad geographic and product diversification strategies allowed thecompany to generate re c o rd levels of revenue and net income during the year. Duringfiscal 1998, Shaw Industries generated consolidated revenue of $769.0 million, whichexceeded the comparable result achieved during the prior year of $590.7 million by30.2%. Net income reached $69.6 million or $1.13 per share, fully diluted, surpassingthe prior year level of $58.7 million or $0.95 per share by 18.7%

A number of major capital spending programs, which had been initiated during the priory e a r, were completed in 1998. While the current level of market activity will not allow fullutilization of the new capacity provided by these investments, each of the business unitswhich undertook these programs will benefit from reduced operating costs as a result ofthe increased efficiencies which were a major component of these initiatives. As theseverity of the industry downturn became more evident, new capital programs re c e i v e di n c reased scrutiny and current spending programs have been limited to those which willi m p rove cost competitiveness at today’s reduced activity levels. Business units that havebeen impacted by declining customer order levels have also implemented stringent costreduction programs and other operating expenditures have been adjusted to re flect thereality of current industry activity levels.

As part of the company’s strategy of being a major global player in each of its businesssegments, Shaw Industries took another significant step effective December 31, 1998,with the acquisition of the DSG Group of companies. The DSG Group manufactures heatshrinkable tubing products and serves customers in the European automotive, OEM andindustrial markets from facilities located in Germany and Poland. DSG will become a unitwithin the company’s Canusa – EMI heat shrinkable products business, providing addedglobal breadth as well as additional development capabilities and a range of new pro d-ucts that will be manufactured and marketed in other geographic areas served byCanusa – EMI.

OPERATIONSDuring the year, continuing vigor in the Pipeline segment offset a flat year in theExploration and Production businesses while activity levels in the Petrochemical andIndustrial segment mirro red the strength exhibited by the North American economy.

In the Exploration and Production segment, low oil prices and continued uncertainty withrespect to the re c o v e ry in demand necessary to alleviate the current world oversupply situ-ation forced energy producers to severely curtail capital spending programs beginning inthe second half of the year. The impact of low oil prices was particularly evident in westernCanada and U.S. onshore markets where most drilling activity, as determined by the activerig count, fell rapidly. With the reduction in drilling, the demand for new drill pipe was par-ticularly hard hit, impacting order input and shipments at OMSCO Industries’ facilities inHouston, Texas and Cumbernauld, Scotland. Inspection and refurbishment of oilfield tubu-lars by Guardian Oilfield Services also declined in western Canada but the severity of thedecline was partially offset by gas drilling activity as gas prices rose in anticipation of newe x p o rt capacity becoming available. At Mark Products, growth in sales of geophysical

G e o ff rey F. Hyland

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cables, including ocean bottom cables, partially offset lower than planned sales of con-ventional sensor products as purchases of equipment to outfit new or upgrade existingseismic crews were deferred due to the reduction in exploration activity.

In the Pipeline segment, Bre d e ro – Shaw completed a re c o rd setting year with signific a n ti n c reases in both revenue and net income. While a number of pipeline projects wered e f e rred for economic reasons, the gro u p ’s preeminent position in all major energy mar-kets provided the operating flexibility to meet rapidly changing customer needs andresulted in the completion of several significant projects which were not anticipated ear-lier in the year. Shaw Pipeline Services also achieved re c o rd results as the rapidly incre a s-ing acceptance of this division’s ultrasonic girth weld inspection technology resulted infull capacity utilization for most of the year even though several new inspection units forboth land and off s h o re projects were added to the fleet. Canusa – CPS also benefited fro mthe continuing high level of pipeline construction activity as the division’s joint pro t e c t i o nsystems were specified and used successfully on several major international pro j e c t s .

The Petrochemical and Industrial segment, at times, offsets the cyclicality of the com-p a n y ’s upstream activities in the energy industry. While most worldwide industrial sec-tors have felt the impact of the rapid decline in economic activity that began late in 1997in the Far East and subsequently spread to Russia and Latin America, Canada and theUnited States have demonstrated substantial strength in comparison to most of thew o r l d ’s economies. For Shawflex, the year was also particularly cyclical with an excellents t a rt followed by a soft mid-term leading to gradual re c o v e ry based on positive economicindicators during the fourth quart e r. At Canusa – EMI, reduced activity in intern a t i o n a lmarkets including Latin America and the Far East was more than offset by growth inN o rth American markets and revenue generated by new products introduced during theperiod. The acquisition of the DSG Group of companies, in combination with intern a lg rowth programs will accelerate both the availability of new products for intern a t i o n a lmarkets and a stro n g e r, more effective European presence in 1999.

OUTLOOKAs 1998 drew to a close, it became increasingly evident that the current downturn in thee n e rgy industry would continue well into 1999. Historically, every downturn in the energ ycycle caused by a supply/demand imbalance has ended when a price driven reduction insupply growth approaches equilibrium with demand. Ty p i c a l l y, the reduction in supplyresults from declining exploration activity and the temporary or permanent shut-in ofm a rginal production capacity. This process often accelerates when demand gro w t hi n c reases due to a re s u rgence in economic activity. By late last year, a decline in the gro w t hof non-OPEC production was already evident. Conversely, world demand for oil is curre n t l yf o recast by the International Energy Agency to increase by 1.4% in 1999 which compare st oi n c reases of 0.4% and 2.5% in 1998 and 1997 re s p e c t i v e l y.

C l e a r l y, it is difficult to accurately predict when these two opposing trends will eliminatethe current oversupply of oil on world markets but most industry experts believe that suchconditions will begin to occur later this year. In the interim, Shaw Industries’ focus willremain firmly on both cost control and opportunities for growth which exist during thislow point in the energy cycle. Also, the company’s concentration on the gas side of thee n e rgy industry will help offset the worst effects of the slump in oil prices and, when thet u rn a round begins, we will be ready to continue the process of delivering incre a s i n gs h a reholder value through long-term, pro fitable gro w t h .

G e o ff rey F. Hyland Leslie E. ShawP resident and Chief Executive Off i c e r C h a i rman of the Board

Leslie E. Shaw

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Shaw Industries places great importance on maintaining amutually beneficial relationship with the communities inwhich it operates. The company contributes regularly to avariety of charitable institutions, universities and collegesand encourages its employees to do likewise.

The company regularly seeks out and employs universitystudents who are enrolled in cooperative education pro-grams in order to provide them with meaningful work termexperience. Their curiosity and enthusiasm are invigorating

and they re p resent a talented pool of capable and highlymotivated future employment pro s p e c t s .

Recognizing the interconnected nature of business,g o v e rnment, and community, various divisions andemployees belong to and take part in a wide range ofi n d u s t ry associations, boards, and institutes. The companyhas no doubt that such participation benefits both ShawIndustries, the other members of these import a n to rganizations and the community at larg e .

69%9%

22%PIPELINE

AT A GLANCEShaw Industries will continue to focus on the development of technologically advanced products and services for the energy industry.

PIPELINE

AT A GLANCE

• B re d e ro – Shaw• Shaw Pipeline Serv i c e s• Canusa – CPS

• B re d e ro – Shaw • Shaw Pipeline Serv i c e s• Canusa – CPS

Community Interaction


P rotection of employees and pre s e rvation of the enviro n-ment are key principles at Shaw Industries. The company’sE n v i ronmental, Health and Safety Management System,which was established several years ago, upholds theseprinciples. This system guides employees and managementin identifying and managing risk in order to ensure safe,e n v i ronmentally sound operations.

With continued strong support from the Board of Dire c t o r sand senior management, each division is responsible forthe implementation of the system within its operations.E n v i ronmental, Health and Safety staff regularly audit eachd i v i s i o n ’s status and compliance with system re q u i re m e n t s .The company’s primary goal is to complete each day withoutan environmental, health or safety related incident.

EXPLORATION AND PRODUCTION

PETROCHEMICAL AND INDUSTRIALPETROCHEMICAL AND INDUSTRIAL

EXPLORATION AND PRODUCTION• Mark Pro d u c t s• OMSCO Industries• G u a rdian Oilfield Serv i c e s

• Mark Pro d u c t s• OMSCO Industries• G u a rdian Oilfield Serv i c e s

• Canusa – EMI• S h a w fle x• Canusa – EMI• S h a w fle x

Environmental, Health and Safety


Exploration and Pro d u c t i o nDuring the second half of 1997 and continuing throughout 1998, declining oil pricesbegan to exert a major impact on the energy industry. The rapid change in energy indus-t ry market dynamics was caused by a growing imbalance in crude oil supply anddemand due to the accumulation of re c o rd high inventories worldwide. This imbalanceresulted from rising overproduction and a global decline in demand growth spawned bythe financial crisis, which began in the Far East. The inability of OPEC to agree to ande ffectively monitor production cuts together with the decrease in world economic activitye x e rted additional downward pre s s u re on oil prices through the end of 1998 and into1999. Realizing weaker than anticipated cash flows, energy producers cut back capitalspending and implemented other cost-cutting strategies that had a significant negativeimpact on drilling activity, particularly in North America.

MARK PRODUCTS

Mark Products is an industry leading designer and manufacturer of land and marinegeophysical survey equipment including geophones, hydrophones, cables, connectorsand accessories. The division also manufactures specialized cables for ocean bottoms u rveys (OBC cables) and for use in downhole re s e rvoir monitoring applications.T h e division is a primary supplier of ocean bottom cables and land geophone stringsused in conjunction with several of the industry ’s foremost data re c o rding systems.

In 1998, despite tough market conditions, Mark Products generated increased re v e n u et h rough the continued execution of sound business strategies. The geophone re n t a lbusiness was strengthened and a new repair service center was established in Houstonto rehabilitate rental strings and provide customers with rapid turn a round for geophoneand cable repair needs.

Mark Products continued to stay in the fore f ront of rapidly evolving geophysicaltechnologies. This past year the division developed and introduced to market thre e -component land and four-component marine sensors. The movement of the industry tomulti-component sensors, consisting of vertically and horizontally mounted geophonesto measure shear waves, is a trend that Mark Products is well positioned to serv e .

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OMSCO INDUSTRIES

OMSCO Industries is one of the world’s largest manufacturers of standard and heavyweight drill pipe, drill collars, kellys, kelly valves and other accessories for both oil andgas drilling. Following a year of re c o rd shipments and extended delivery schedules in1997, capital programs were implemented at both the Houston and Cumbernauld facili-ties in 1998 to expand capacity, reduce production costs and provide customers with ab roader range of products including larger sizes and extended length drill pipe. TheHouston facility is currently implementing a fully integrated management inform a t i o nsystem to further improve material planning and cost contro l s .

While most of the division’s capital programs were completed or well underway by thetime depressed oil prices and declining rig utilization rates impacted drill pipe ord e r s ,the cost reduction aspects of these programs will cushion the margin impact of re d u c e ddemand during the competitive bottom of the drilling cycle. Additional cost-cuttingstrategies implemented in response to the decline in drill pipe volumes included as i g n i ficant reduction of the workforce and the implementation of several programs toi m p rove operational efficiencies. Completion of these programs has placed OMSCOIndustries in a position to achieve planned capacity levels with a lower cost stru c t u re assoon as rising oil prices lead to increased rig utilization and improved drill pipe demand.

GUARDIAN OILFIELD SERVICES

G u a rdian Oilfield Services is a leading provider of complete tubular managementp rograms for oil and gas companies, drilling contractors and tool rental companies.These programs utilize a pro p r i e t a ry, computerized inventory tracking system and areo ff e red at several locations in western Canada. The division also operates a modern ,mobile inspection fleet although the primary focus is on the provision of in-plants e rvices and yard management programs. During 1998, Guardian opened a new fulls e rvice facility in Lloydminster to provide improved services, including computerizedpipe tracking, for customers in southeastern Alberta and southwestern Saskatchewan.The division continued to capitalize on the consolidation occurring in the contractdrilling industry by establishing and maintaining key alliances with growing customersand handling their complete tubular management needs. Based upon these long-termrelationships and a significant shift to the drilling of deeper gas wells, Guard i a n ’ss e rvice volumes in the western Canadian sedimentary basin did not decline asdramatically as the 40% reduction in wells drilled would imply. In Mexico, Guard i a nexpanded operations to a new location in the nort h e rn part of the country at Dos Bocosto offset reduced volumes on PEMEX contracts in Vi l l a h e rmosa and Del Carm e n .

During 1998, Guardian extended the development and implementation of its state-of-t h e - a rt, computer driven inspection software, which provides detailed inspection dataand a choice of re p o rting formats unmatched in the industry. Currently four fix e dlocations and several mobile units offer this sophisticated service with the re m a i n d e ro f the division’s inspection systems to be converted in 1999. The division alsoimplemented a new management information system that will provide Guardian withthe capability to utilize more sophisticated perf o rmance measurements and contro l s .

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PipelineNotwithstanding the slowdown in worldwide economic activity outside North America,g rowth in consumption of natural gas for the electrical generation, heating andindustrial applications continued through 1998. Although growth in overall energ yconsumption declined to the lowest levels in the past decade, gas usage continued toi n c rease as this economic and environmentally friendly fuel captured market share fro mboth oil and coal in developed and developing countries alike. Shaw Industries’businesses are leveraged toward the natural gas industry and, with more products ands e rvices aimed at gas markets, the company will continue to benefit from this shift ine n e rgy consumption. While several major international pipeline projects neared com-pletion in the North Sea during 1998, the geographic focus is now shifting to the MiddleEast and Central Asia where a number of major pipeline projects are either underway orplanned for 1999.

BREDERO – SHAW

B re d e ro – Shaw is a long-term, 50/50 alliance incorporating Shaw Pipe Pro t e c t i o n ,t h e pipecoating operations of Shaw Industries and Bre d e ro – Price, the pipecoatingoperations of the Halliburton Company based in Dallas, Texas. Halliburton completedthe acquisition of Dresser Industries in the fall of 1998 to form one of the larg e s tintegrated oil service companies in the world. This merger provides Shaw Industrieswith an even stronger global part n e r, increasing the potential benefits from the jointv e n t u re in the future .

Operating from its global headquarters in Slough, England, Bre d e ro – Shaw pro v i d e sadvanced corrosion protection, insulation and concrete weight coating products forpipeline applications from 32 plants around the world. Bre d e ro – Shaw’s OperationalS u p p o rt Group provides the engineering expertise necessary for the modification andmaintenance of existing plants, the installation of new process technologies and theestablishment of permanent or pro j e c t - s p e c i fic plants wherever they are re q u i re dt h roughout the world.

During 1998, Bre d e ro – Shaw completed several major projects and was successful inwinning a significant number of new ones. Buoyant pipeline construction activity in most

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markets boosted revenues to re c o rd levels despite the fact several projects in southeastAsia were deferred. The strongest activity occurred in the North Sea where coatingvolumes increased under a long-term contract with Norw a y ’s Statoil and were sup-plemented by an increase in other off s h o re projects. Major contracts were carried outi n Malaysia and Australia and several smaller jobs for multinational clients werecompleted at the plant in Indonesia despite the impact of the currency crisis on manyo f the Asian economies.

Declining oil prices throughout most of 1998 coupled with large pipe inventories held bydistributors and producers led to reduced small diameter coating volumes for westernCanadian oil and gas gathering systems. Higher activity levels at Canadian larg ediameter plants offset this reduction as work commenced on several projects for majortransmission sector clients. During the third quart e r, coating commenced at at e m p o r a ry project plant located in Sheet Harbour, Nova Scotia for the Sable Islando ff s h o re pipeline while coating also began in Welland and Regina for the AlliancePipeline. The Sable Island work was completed by the end of the year while theconnecting onshore portion, known as the Maritimes and Northeast Pipeline Pro j e c t ,w i l l continue at Welland until May 1999. The Alliance Project will commence in Camro s eat mid-year 1999 and will continue at Regina until early in the year 2000.

Declining activity in the Gulf of Mexico led to the deferral of several off s h o re projects andhad a negative impact on revenue in the United States. Projects in Brazil and Mexicoa n di n c reased activity in Nigeria offset the lower activity levels in the United States.

Late in the year, the joint venture secured a major contract to establish a coating plantat the Volzhsky Pipe Mill in Volgograd, Russia for the Caspian Pipeline Consort i u m ’s4 0-inch diameter pipeline. This is the first of several potential projects in the re g i o nwhich may lead to a longer- t e rm presence in this important market.

B re d e ro – Shaw successfully completed the acquisition of a supplier of concrete coatingp roducts in August and will continue to seek strategic acquisition opportunities toexpand its technological base and gain entry into new markets. A concerted focus on thedevelopment of new, pro p r i e t a ry coating technologies expanded in 1998 with the evalua-tion of several high perf o rmance materials including high density foams for deep-waterinsulated flow lines and new joint protection systems.

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B re d e ro – Shaw is recognized by the energy industry as the leading intern a t i o n a lspecialist for pipeline protection in the world. While the global decrease in pipelineactivity from the re c o rd levels experienced in 1998 will have an impact on thep ro fitability of the joint venture in 1999, the long-term fundamentals for the pipelinei n d u s t ry will remain favourable based upon the continuing focus on natural gas as thefuel of choice and as oil prices begin to recover due to renewed growth in consumptionin the developing regions of the world.

SHAW PIPELINE SERVICES

Shaw Pipeline Services is a major international provider of ultrasonic (UT) and radio-graphic (RT) girth weld inspection services for land and marine pipelines around theworld. In 1998, the division continued to develop and expand its state-of-the-art UTinspection technology through the introduction of more advanced, pro p r i e t a ry softwareand process improvements which provide improved defect detection and re p o rt i n gf e a t u res for clients. Due to its greater accuracy and speed, UT inspection continued togain acceptance over RT inspection at an accelerating pace for both land-based andl a yb a rge applications.

During 1998, the division was awarded a number of major pipeline contracts for UT girt hweld inspection services in the United States, the Gulf of Mexico, Brazil and the MiddleEast. In part i c u l a r, the division was pleased to be awarded the inspection contract forthe entire U.S. portion of the Alliance Pipeline, which will be the first major land pipelineto utilize UT inspection in the United States. Shaw Pipeline Services was also award e dl o n g - t e rm contracts to supply inspection services by several lay barge operators whohave found that the speed and accuracy of the UT system greatly improves pro d u c t i v i t yand reduces operating costs which are critical factors to the success of off s h o rep i p e l i n ep rojects.

Steady growth in the use of UT inspection services has placed increased demand onShaw Pipeline Services’ equipment capacities and human re s o u rces. During 1998 andcontinuing throughout 1999, the division is undergoing significant infrastru c t u reb u i l d-up and the addition and training of new crews in order to meet this rapid incre a s ein customer re q u i re m e n t s .

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CANUSA – CPS

Canusa – CPS is a leading manufacturer of specialized materials including heat shrink-able sleeves, adhesives, sealants and liquid coatings for pipeline corrosion and abrasionresistance applications. With re p resentation in every important energy region around theworld, Canusa – CPS is one of the leading suppliers in its field. In 1998, the divisioncontinued its global expansion program with the opening of key sales offices in AbuDhabi, Brazil and Singapore. During the year, the division continued to grow by securingseveral transmission projects in Latin America, Central and Eastern Europe and Russia.

New product introductions which contributed to revenue growth in 1998 includedabrasion resistant coatings systems for thrust boring applications utilized under ro a d sand for river crossings as well as coating and sleeve products for high temperaturepipeline applications. Ongoing development programs continued in response to industryneeds, especially in the areas of joint protection systems, onshore and off s h o re hight e m p e r a t u re applications, compatible mainline coatings and district heating systems.

To further support the division, several manufacturing productivity and effic i e n c yp rograms were completed which will continue to enhance pro fitability in the future .Several other initiatives were also completed which will increase output and facilitatethe production of new pro d u c t s .


P e t rochemical and IndustrialInvestment in the petrochemical sector declined as low prices impacted the pro fit a b i l i t yof many producers of polyethylene and other commodity resins. Aside from the energ yand petrochemical industries, the perf o rmance of the broader Canadian and UnitedStates economies was substantially better than in most other parts of the world. In par-t i c u l a r, the convergence of telecommunications and cable television and competition tobecome the single source for home communications and entertainment caused thesesectors to gain strength as the year pro g re s s e d .

CANUSA – EMICanusa – EMI is a major global manufacturer of heat shrink based systems pro v i d i n gelectrical and mechanical insulation solutions to a wide range of industries. The past yearwas a period of solid growth for Canusa – EMI. Rising demand and a broader pro d u c trange justified expansion of the division’s manufacturing operations in To ronto, Ontarioand the opening of a new finishing center in Cincinnati, Ohio. New products intro d u c e dduring 1998 included bus-bar tubing and high ratio tubing. Expanding intern a t i o n a l l y,Canusa – EMI opened a new sales office in Budapest, Hungary to take advantage ofpotential growth opportunities in Eastern Europe. The division also achieved incre a s e dp ro fitability at the facility in Plymouth, England.

At the end of 1998, Canusa – EMI acquired the DSG Group of companies, an advancedtechnology heat shrink manufacturer with a solid share of the European marketplaceand a strong focus on automotive, OEM and industrial applications. The DSG Gro u poperates re s e a rch, development and manufacturing facilities at Meckenheim andLangewiesen in Germany and at Czluchow in Poland. The synergies inherent in the inte-gration of the DSG Group and Canusa – EMI will provide broader product offerings tos e rve customers in both European and international markets. Combined, the division isnow one of the leading manufacturers of heat shrinkable products in the world and ispositioned for even stronger growth in the future .

SHAWFLEXS h a w flex is a world-class wire and cable manufacturer serving high value-added segmentsof the petrochemical and industrial marketplace. Marketing eff o rts throughout 1998focused on serving a broader and more diversified customer base. During the year, Shawfle xe n t e red the market for specialty cables used in the construction of off s h o re drilling rigs andi n c reased penetration into the marine/shipboard markets. Success in these highly special-ized segments of the wire and cable industry exemplifies Shawfle x ’s commitment to supplyunique wire and cable products manufactured to superior quality standard s .

A dedicated focus on product development in 1998 continued to pay dividends forS h a w flex as nearly one-fifth of total revenue was from products introduced during thep revious three years. The use of improved materials and technologies, in conjunctionwith increased operational efficiencies, played a major role in Shawfle x ’s ability to lowercosts in an extremely competitive wire and cable industry.12


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Management Discussion and AnalysisR E V E N U E

Consolidated revenue for 1998 of $769.0 million increased 30.2% from the level achieved

in 1997, establishing a record for the company. The company classifies its revenue from

products and services sold to three segments of the energy industry namely, exploration and

production, pipeline and petrochemical and industrial.

The exploration and production segment includes the worldwide markets served by Mark

Products, OMSCO Industries and Guardian Oilfield Services. Mark Products manufactures

geophysical sensors, cables and connectors at plants in Canada and in the United States.

OMSCO Industries manufactures drill pipe and drill string components in the United States

and Scotland. Guardian Oilfield Services provides tubular management services and carries

out inspection, testing and refurbishment of oilfield tubulars in Canada, Mexico and the

United Kingdom. In 1998, sales and rentals of seismic equipment at Mark Products were

stronger than in the prior year while drill pipe and other drill string component revenues at

OMSCO Industries were marginally below 1997 levels. At Guardian Oilfield Services facilities,

activity levels declined during the third and fourth quarters in unison with oil and gas

drilling activity, resulting in a marginally slower year. Notwithstanding the rapid decline in

upstream oil and gas expenditures, which commenced at mid-year and affected order

bookings, revenue in the exploration and production segment reached $169.8 million in

1998, equaling the prior year result.

The pipeline segment, which is the largest part of the company’s activities, includes the

global markets served by Bredero – Shaw, Canusa – CPS and Shaw Pipeline Services.

Bredero – Shaw applies external corrosion, insulation and concrete weight coatings and

internal flow efficiency coatings on steel pipe for oil, gas and water pipelines. Canusa – CPS

manufactures heat shrinkable sleeves, adhesives, sealants and liquid coatings utilized in

pipecoating processes and pipeline joint protection systems. Shaw Pipeline Services pro-

vides ultrasonic and radiographic girth weld inspection services to pipeline owners and

contractors and mill inspection services. During 1998, Bredero – Shaw generated record

revenue resulting in a 49.0% increase above the prior year. Strong demand for pipecoating

products in North Sea markets and in the Canadian large diameter transmission sector, as

well as revenue generated from a pipecoating contract awarded for the Sable Island offshore

natural gas project in Nova Scotia, account for the improvement. In the Far East, revenue

held steady with the prior year despite turmoil in political and monetary circles that nega-

tively affected economic growth in the region.

Canusa – CPS successfully launched a number of new products and expanded global sales

coverage by opening offices in Abu Dhabi, Brazil and Singapore. These initiatives, plus

success in winning tenders to supply joint protection products for several major pipeline

projects in Europe and South America, resulted in another strong year. Shaw Pipeline

Services achieved record growth through increased use of ultrasonic girth weld inspection

technology on both offshore lay barge projects and international land-based pipeline

construction contracts. Due to stronger market demand, new product introductions and


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increased market penetration, revenue in the pipeline segment (including intersegment

revenue) increased 47.5% to $529.7 million in 1998.

The petrochemical and industrial segment includes Shawflex, a manufacturer of wire and

cable for process instrumentation and control applications and Canusa – EMI, which manu-

factures heat shrinkable tubing for electrical, electronic and utility applications. A softening

in demand for Shawflex wire and cable products in the industrial sector was offset by very

strong growth in heat shrinkable tubing shipments from Canusa – EMI facilities in Europe

and North America. Underpinned by record revenues at Canusa – EMI, on a combined basis,

petrochemical and industrial segment revenue (including intersegment revenue) increased

12% in 1998 to $71.3 million. On December 31, 1998, Shaw Industries purchased the DSG

Group of companies, a German based manufacturer of heat shrinkable tubing, serving

customers in European automotive, OEM and industrial markets. To optimise operating

efficiencies and growth opportunities, the European business functions of Canusa – EMI

and DSG will be integrated commencing in 1999.

Demand for the company’s products and services grew year-over-year in all major geographic

areas of the world, except in the United States, where client expenditures in the Gulf of Mexico

market sector for pipeline segment products contracted. The European market segment expe-

rienced substantial revenue growth during the year, mainly due to unprecedented pipeline

activity in the North Sea. Canadian revenue, on a combined market segment basis, increased

modestly above the prior year. Boosted by Bredero – Shaw pipeline activity, revenue in the Far

East, Pacific and Other segment was approximately one-third higher in 1998.

INCOME FROM OPERAT I O N S

Income from operations, at $115.8 million, represented an increase of 27.2% above the

prior year and established a new record for Shaw Industries. A significant contribution from

Bredero – Shaw largely accounted for the improvement.

In the exploration and production segment, the full effect of the low oil price environment

was felt beginning mid-1998. At OMSCO Industries, the rapid drop in North American active

drill rigs created excess inventories of drill pipe, which were available for use throughout the

industry. This situation resulted in order intake and shipments at OMSCO Industries falling

correspondingly, which negatively affected earnings in the second half of the year. A capac-

ity expansion program at Houston, Texas and Cumbernauld, Scotland, which commenced in

late 1997 to relieve capacity constraints, allowed the facilities to capitalize on the strong

market demand that continued until mid-year. Guardian Oilfield Services and Mark Products

experienced marginally reduced year-over-year earnings due to lower demand for inspection

and tubular management services and softness in certain seismic markets respectively,

both primarily in North America. Exploration and production income from operations at $17.8

million in 1998 declined year-over-year by 26.8%, a consequence of the downturn in energy

industry capital spending combined with increased depreciation.

In the pipeline segment, a significant gain in income was recorded in comparison to the

prior year. Bredero – Shaw contributed strongly achieving results in Canada and in the North


15

Sea geographic sector that were well above 1997 levels. Canadian large diameter pipe-

coating plants were busy throughout the year and corrosion and concrete coating on the

Sable Island project also contributed to the strong results. During the year, several signifi-

cant offshore pipecoating projects in the North Sea region were awarded to Bredero – Shaw,

which resulted in an unprecedented level of activity at coating facilities in Scotland and

Norway. In the Middle and Far East sector, earnings from joint venture operations improved

in comparison to the prior year on a similar level of revenue. Shaw Industries’ share of

Bredero – Shaw income from operations reached $87.1 million in 1998 compared with

$61.5 million in 1997. Shaw Pipeline Services and Canusa – CPS, Shaw Industries’ other

businesses in the pipeline segment, achieved steady year-over-year improvement through

increased use of ultrasonic girth weld inspection technology and successful awards for joint

protection products on international projects.

In the petrochemical and industrial segment, which includes Shawflex and Canusa – EMI,

healthy sales growth combined with improved margins to boost income from operations to

$11.0 million, well above the prior year level of $6.9 million.

Depreciation increased 40.5% to $21.4 million reflecting capital improvements and addi-

tions to plant and equipment in all business units. A year-over-year increase in depreciation

was recorded at OMSCO Industries where several major capacity expansion programs were

completed in Houston, Texas and Cumbernauld, Scotland and at Shaw Pipeline Services

where additional ultrasonic inspection units were put into service. Goodwill amortization for

1998 was $2.0 million comprising $0.3 million in respect of the 1997 acquisition of Markel

and $1.7 million as consideration for the extended joint venture term with Dresser Indus-

tries, Inc. (See note 13 to the consolidated financial statements in respect to joint venture

operations.) Research and development expenses were $7.2 million before applying invest-

ment tax credits of $0.4 million, which resulted in $6.8 million for the year, a net increase

above the prior year of 11.8%. The investigation and development of new materials and

technologies continued at the company’s Technology and Development group in order to

reduce manufacturing costs and heighten internal growth opportunities.

Interest on bank indebtedness was $2.5 million compared with $1.9 million in the prior year.

The company’s share of joint venture indebtedness accounted for $2.0 million of the total

interest expenses. Interest on long-term debt was $4.5 million (1997 – $2.0 million) in

respect of the payment commitment to Dresser Industries resulting from the amendment to

the joint venture agreement.

Income taxes in 1998 were 37.0% of income before taxes and minority interest, slightly

higher than 1997 at 36.4%. This increase was mainly due to the 1997 utilization of

unrecorded tax losses, which did not recur in 1998.

The minority interest in the profit of subsidiaries of $1.4 million compares with a prior year

loss of $0.7 million and relates to the non-wholly-owned subsidiaries of Bredero – Shaw.


16

BREDERO – SHAW

The company and Dresser Industries, Inc. entered into an amended shareholders’ agreement

on August 1, 1997 that, among other things, extended the Bredero – Shaw joint venture to

the year 2030 with a buy-sell arrangement in place after August 1, 2002 and provided both

parties equal ownership and equal entitlement to worldwide earnings. In consideration, the

company agreed to pay Dresser Industries, Inc., U.S. $41.7 million plus interest in five

installments. The company made the first and second contractual payments totaling U.S.

$8.3 million and U.S. $11.7 million on September 4, 1997 and July 31, 1998 respectively.

Three remaining annual payments are due on the 31st of July each year until 2001. Shaw

Industries is amortizing the total amount of the consideration over the term of the joint

venture agreement to the year 2030. (See note 13 to the consolidated financial statements

in respect to joint venture operations.)

In 1998, the company’s interest in Bredero – Shaw assets, liabilities, revenue, expenses and

net income was consolidated based on its 50% proportionate ownership position. On

September 29, 1998, the acquisition of Dresser Industries, Inc. by the Halliburton Company

was completed.

D I V I D E N D S

Dividends per share were increased in 1998 to $0.0734 and $0.0663 for Class A Subordinate

Voting Shares and Class B Multiple Voting Shares respectively. The dividend applicable to

Class A shares includes a non-cumulative premium of 10% above that applicable to Class

B shares. As stated in note 7(b) to the consolidated financial statements, shareholders of

record at the close of business on June 1, 1998 participated in a three-for-one stock split.

The Board of Directors determines dividend payments based on consideration of net earn-

ings over a period of years and the company’s overall financial standing.

LIQUIDITY AND CAPITA L I Z AT I O N

Total working capital of $116.9 million (1997 – $116.5 million) represented a slight

decrease in the current ratio from 1.81 to 1 to 1.65 to 1. Cash on hand net of bank indebt-

edness of $45.5 million is represented by $8.8 million in joint venture operations and

$36.7 million in Shaw Industries’ other divisions and compares with $47.5 million in the

prior year. Cash on hand net of bank indebtedness at December 31, 1998 decreased

year-over-year by $4.6 million in the joint venture and increased by $2.6 million in

Shaw Industries’ other divisions.

Capital expenditures during 1998 were $58.0 million (1997 – $33.0 million) of which $35.1

million related to Shaw Industries’ divisions and $22.9 million to Shaw Industries’ share of

the joint venture. Capital items included ultrasonic inspection capacity increases at Shaw

Pipeline Services and a $19.3 million capacity expansion program at OMSCO Industries in

Houston, Texas and Cumbernauld, Scotland.

On December 31, 1998, Shaw Industries acquired the German based DSG Group of com-

panies, a manufacturer of heat shrinkable tubing. This transaction was recorded on the


17

company’s balance sheet as investment in subsidiaries. Note 12 to the consolidated finan-

cial statements describes particulars of the purchase transactions.

At December 31, 1998, total goodwill of $56.2 million included $54.9 million in respect of

the amendment of the joint venture agreement with Dresser Industries. Shaw Industries is

amortizing the related goodwill over the term of the joint venture agreement to the year

2030. Total goodwill amortization in 1998 was $2.0 million compared with $1.1 million in

1997.

In 1998, funds of $4.3 million were used to pay dividends compared with $3.5 million in

1997, a 22.7% increase. During the year, the company acquired shares under a Normal

Course Issuer Bid, which permits the purchase of up to 5% of the company’s issued and

outstanding Class A Subordinate Voting Shares and Class B Multiple Voting Shares. A total

of 190,300 Class B shares were purchased for cancellation under the Normal Course Issuer

Bid at a total cost of $2.8 million. Management considers the use of available funds to

purchase shares, at acceptable prices, to be a prudent means to enhance longer-term

shareholder value.

Bank indebtedness increased to $24.8 million from $12.6 million in the prior year. Current

year bank indebtedness relating to the company’s share of the joint venture was $13.5

million (1997 – $12.6 million). Long-term debt of DEM 26.5 million was recorded at Decem-

ber 31, 1998, in respect to the acquisition of the DSG Group of companies, raising total

long-term debt to $48.0 million at year-end compared with $34.6 million in 1997. Note 6 to

the consolidated financial statements describes particulars in respect of the company’s

long-term indebtedness.

The cumulative translation account increased $7.1 million during the year. This increase

was mainly due to the translation of joint venture and wholly-owned entities in the United

States and the United Kingdom and resulted from the weakening of the Canadian dollar

against most major currencies during 1998.

Shareholders’ equity increased 28.6% to $319.5 million, reflecting the net income for the

year and the increase in the cumulative translation account, partially offset by dividends

declared and paid during the year and the excess of the purchase price paid over the stated

value of Class B shares cancelled under the Normal Course Issuer Bid.

OUTLOOK AND UNCERTA I N T I E S

The outlook for the energy services sector in 1999 is dampened by several factors including

the low oil price environment in which the industry is operating, energy markets in Asia that

have been impeded by slow or negative economic growth and warmer than average temper-

atures in North America, which have resulted in reduced energy demand. In response to the

cyclical nature of the energy industry, Shaw Industries has strategically positioned itself to

soften the impact of market downturns by: (i) establishing an extensive global presence;

(ii) producing products competitively priced in worldwide markets; (iii) developing a broad


18

product range; and (iv) focusing on natural gas markets, which are less susceptible to

global influences. Forecast business activity in 1999 in the pipeline and exploration and

production sectors shows a decline from the high level achieved during 1998. Notwithstand-

ing the current contraction in energy industry capital spending, Shaw Industries remains

strongly committed to the energy services sector and is well positioned to take advantage

of opportunities and industry consolidations as they arise.

The company responded to the implications of Year 2000 issues by forming a task force, to

review, assess and manage the risks related to the Year 2000 across all of its business

operations, including an assessment of external compliance by suppliers, service providers

and utilities. The Year 2000 task force began to address the issues by taking an inventory of

the company’s systems, testing them and developing a strategy to either replace, retire or fix

the systems within specified time frames. The company recognizes the potential impact of

the Year 2000 issue in the supply chain and within its operations and is taking the steps

believed necessary to maintain business continuity at all locations. In early 1999, an exter-

nal consultant was engaged to review the company’s Year 2000 programs and scheduled

compliance dates. This review resulted in the adoption of several industry best practices

recommendations. Year 2000 compliance programs are being carried out expeditiously with

no significant impact recorded in the company’s 1998 earnings and none foreseen in 1999.

(See note 15 to the consolidated financial statements.)

Uncertainties facing Shaw Industries include deterioration in political and/or monetary

stability in countries identified as important growth markets, including those located in

areas such as Southeast Asia, West Africa, Latin America and the Caspian region. Other

uncertainties include policy changes initiated within the OPEC framework, the level of world

oil and gas prices, foreign exchange rates and domestic and foreign government policies

and regulations.

This document contains forward-looking statements, which are subject to certain risks

and uncertainties that could cause actual results to differ materially from those reflected

in such statements.


19

The accompanying consolidated financial statements of ShawIndustries Ltd. included in this Annual Report are the re s p o n s i b i l i t yof management and have been approved by the Board of Dire c t o r s .

The financial statements have been prepared by management inaccordance with generally accepted accounting principles. Whenalternative accounting methods exist, management has selectedthose it deems to be most appropriate in the circumstances. Thefinancial statements include estimates based on the experienceand judgement of management in order to ensure that the finan-cial statements are presented fairly, in all material respects.Financial information presented elsewhere in the Annual Reportis consistent with that in the financial statements.

The management of the company and its subsidiaries developedand continues to maintain systems of internal accounting con-trols and management practices designed to provide reasonableassurance that the financial information is relevant, reliable andaccurate and that the company’s assets are appropriatelyaccounted for and adequately safeguarded.

The Board of Directors exercises its responsibilities for ensuring

that management fulfils its responsibilities for financial reportingand internal control with the assistance of its Audit Committee.

The Audit Committee is appointed by the Board and all of itsmembers are Directors who are not officers or employees of ShawIndustries Ltd. or any of its subsidiaries. The Committee meetsperiodically to discuss internal controls over the financial re p o rt i n gp rocess, auditing matters and financial re p o rting issues. The Com-mittee reviews the company’s annual consolidated financial state-ments and recommends their approval to the Board of Dire c t o r s .

These financial statements have been audited by Ernst & YoungLLP, the external auditors, on behalf of the shareholders. Ernst &Young LLP has full and free access to the Audit Committee.

March 3, 1999

Geoffrey F. Hyland Brian J. Conroy President and Senior Vice-President andChief Executive Officer Chief Financial Officer

We have audited the consolidated balance sheets of Shaw Indus-tries Ltd. as at December 31, 1998 and 1997 and the consolidatedstatements of income, retained earnings and cash flow for theyears then ended. These financial statements are the responsibil-ity of the company’s management. Our responsibility is to expressan opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally acceptedauditing standards. These standards require that we plan andperform an audit to obtain reasonable assurance whether thefinancial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and

significant estimates made by management, as well as evaluat-ing the overall financial statement presentation.

In our opinion, these consolidated financial statements presentfairly, in all material respects, the financial position of thecompany as at December 31, 1998 and 1997 and the results ofits operations and the changes in its financial position for theyears then ended, in accordance with generally acceptedaccounting principles.

Toronto, Canada (Signed) Ernst & Young LLP

February 19, 1999 Chartered Accountants

Management’s Responsibility for Financial Statements

Auditors’ Report

To the Shareholders of Shaw Industries Ltd.


20

Consolidated Balance SheetsDecember 31 (In thousands) 1 9 9 8 1 9 9 7

A s s e t sCurrent assets

Cash and short-term deposits $ 70,299 $ 60,057

Accounts receivable 124,599 132,260

Inventories (note 2) 92,680 64,688

Prepaid expenses 7,893 3,848

295,471 260,853

Capital assets, net of accumulated depreciation (note 3) 149,999 103,624

Investment in subsidiaries (note 12) 50,512 —

Other assets (note 4) 60,915 67,792

$ 556,897 $ 432,269

L i a b i l i t i e sCurrent liabilities

Bank indebtedness $ 24,823 $ 12,565

Accounts payable and accrued liabilities 111,757 103,980

Taxes payable 26,093 15,798

Current portion of long-term debt (note 6) 15,888 11,993

178,561 144,336

Long-term debt (note 6) 48,027 34,570

Deferred income taxes 8,186 3,182

Minority interest (note 1(a)) 2,589 1,654

237,363 183,742

S h a reho lders ’ Equ i tyCapital stock (note 7) 7,371 5,978

Retained earnings 313,082 250,598

Cumulative translation account (note 8) (919) (8,049)

319,534 248,527

$ 556,897 $ 432,269

See accompanying notes.

On behalf of the Board

G e o ff rey F. Hyland Leslie E. ShawD i re c t o r D i re c t o r


21

Consolidated Statements of IncomeYears Ended December 31 (In thousands except per share inform a t i o n ) 1 9 9 8 1 9 9 7

Revenue $ 769,018 $ 590,701

Operating expenses 622,939 477,218

Depreciation and amortization 23,417 16,357

Research and development 6,839 6,088

653,195 499,663

Income from operations 115,823 91,038

Other income (note 10) 3,876 4,099

Interest on bank indebtedness 2,521 1,947

Interest on long-term debt 4,454 1,969

Income before income taxes and minority interest 112,724 91,221

Income taxes (note 11) 41,683 33,223

Income before minority interest 71,041 57,998

Minority interest (1,417) 664



Basic $ 1.15 $ 0.98

Fully diluted $ 1.13 $ 0.95

Consolidated Statements of Retained EarningsYears Ended December 31 (In thousands) 1 9 9 8 1 9 9 7

Balance at beginning of year $ 250,598 $ 195,623

Net income for the year 69,624 58,662

320,222 254,285

Excess of purchase price paid over stated value of shares (note 7(e)) 2,812 159

Dividends paid 4,328 3,528

Balance at end of year $ 313,082 $ 250,598



22

Consolidated Statements of Cash FlowYears Ended December 31 (In thousands) 1 9 9 8 1 9 9 7

Operat ing act iv i ties :Net income for the year $ 69,624 $ 58,662

Items not requiring an outlay of cash:

Depreciation and amortization 23,417 16,357

Deferred income taxes 2,070 2,064

Equity in earnings of associated company (note 10) (60) (648)

Minority interest 1,417 (664)

Change in non-cash working capital 5,944 (599)

Cash provided by operating activities 102,412 75,172

Invest ing act ivi ties:Additions to capital assets (57,952) (32,971)

Proceeds on disposal of capital assets 2,634 1,726

Acquisitions, net of cash acquired (note 12) (58,806) (7,040)

Purchase of additional interest in joint venture (note 13(a)) — (57,397)

Cash used in investing activities (114,124) (95,682)

Financing act ivi ties :Increase in long-term debt (notes 6 and 12) 28,012 46,563

Repayment of long-term debt (note 6) (12,569) —

Dividends paid (4,328) (3,528)

Issue of shares on exercise of stock options (note 7(d)) 1,407 1,490

Purchase of shares for cancellation (note 7(e)) (2,826) (161)

Cash provided by financing activities 9,696 44,364

Net (decrease) increase in cash position during the year (2,016) 23,854

Cash position at beginning of year 47,492 23,638

Cash position at end of year $ 45,476 $ 47,492

Cash position includes cash and short-term deposits, net of bank indebtedness.



23

1 . Sign if ica nt Account ing Po liciesa) Principles of Consolidation

The financial statements consolidate the accounts of ShawIndustries Ltd. and its wholly-owned subsidiaries. Thecompany accounts for its joint venture, Bredero – Shaw, bythe proportionate consolidation method. Included in the jointventure are certain non-wholly-owned subsidiaries which giverise to a minority interest in the net assets and net results.

b) Use of EstimatesBecause a precise determination of many assets and liabilitiesis dependent upon future events, the preparation of financialstatements for a period necessarily involves the use ofestimates and assumptions available as of the date of thefinancial statements.

c) Revenue RecognitionRevenue from the sale of products is recognized upon ship-ment to customers. Revenue from inspection, repair and otherservices provided in respect of customer-owned property isrecognized as services are performed under specific contractsand other arrangements.

d) Deferred Project CostsCosts related to the preparation of production facilities forfixed term projects are deferred and amortized on a basis tomatch the costs with the revenue from production on thespecific projects.

e) Foreign Currency TranslationForeign operations which are financially and operationallyindependent are classified as self-sustaining. Foreign opera-tions which are dependent upon other operations within thecompany are classified as integrated.

Assets and liabilities of self-sustaining foreign operations aretranslated at year-end exchange rates. Income and expenseitems are translated at average exchange rates for the year.The foreign exchange impact of these translations is includedin the cumulative translation account on the consolidatedbalance sheets.

Monetary assets and liabilities of the company and its inte-grated foreign operations denominated in foreign currenciesare translated at year-end exchange rates. All other assets andliabilities, along with depreciation expense denominated inforeign currencies are translated at historical exchange rates.Income and expense items other than depreciation are trans-lated at average exchange rates for the year. Foreign exchangegains or losses resulting from the translation of long-term debtare deferred and amortized over the remaining term of thedebt. All other foreign exchange gains or losses are included inthe determination of net income for the year.

f) Derivative Financial InstrumentsThe company manages foreign exchange risk through the use offorward exchange contracts and option contracts. Gains, lossesor premiums on such instruments entered into for the purposesof hedging this foreign exchange exposure are deferred andamortized over the life of the hedged asset or liability or areincluded as a component of the hedged transactions.

g) InventoriesInventories are valued at the lower of cost on a first-in, first-out basis and net realizable value.

h) Capital AssetsCapital assets are recorded at cost and are depreciated overtheir useful lives on the straight-line basis at annual rates of4% to 5% on buildings and 10% to 20% on machinery andequipment.

i) GoodwillGoodwill is stated at cost less accumulated amortization andis amortized on a straight-line basis over its useful life to amaximum of thirty-three years. The company periodicallyassesses whether there has been a permanent impairment inthe carrying value of goodwill by determining whether theunamortized goodwill balance can be recovered based on thefair value of the operation.

j) Comparative FiguresComparative figures have been reclassified where necessary tocorrespond with the current year’s presentation.

2 . I n v e n t o r i e s(In thousands) 1 9 9 8 1 9 9 7

Raw materials and supplies $ 63,604 $ 46,572Work in process 4,590 7,884Finished goods 24,486 10,232

$ 92,680 $ 64,688

3 . Capi tal Assets (In thousands) 1 9 9 8 1 9 9 7

CostLand and land improvements $ 18,297 $ 17,671Buildings 51,833 40,603Machinery and equipment 224,019 177,114Capital projects in progress 24,152 12,005

318,301 247,393

Accumulated depreciationLand improvements 5,994 4,994Buildings 28,018 25,094Machinery and equipment 134,290 113,681

168,302 143,769

$ 149,999 $ 103,624

Notes to Consolidated Financial Statements


24

4 . Oth er Assets (In thousands) 1 9 9 8 1 9 9 7

Goodwill (net of accumulated amortization of $3,460, 1997 – $1,135)(notes 12 and 13) $ 56,199 $ 57,712

Deferred project costs 2,590 8,260Investment in associated company 2,126 1,820

$ 60,915 $ 67,792

5 . Derivat ive Financial In stru m e n t sDerivative instruments include foreign exchange options andforward exchange contracts and are only used to hedge foreignexchange exposures related to commercial activities. They are notused by the company for speculative purposes. At December 31,1998, the company had the notional amount of $10.9 million(1997 – $25.4 million) of forward contracts outstanding. Thenotional amounts are used to express the volume of the trans-actions and do not represent exposure to loss. The differencebetween the carrying values and fair values of these contractswas not significant.

6 . L o n g - t e rm Debt(In thousands) 1 9 9 8 1 9 9 7

Promissory note, unsecured and bearing interest at 10% per annum, due in equal installments between July 31, 1999 and July 31, 2001 (U.S. $25.0 million, 1997 – U.S. $33.3 million) (note 13(a)) $ 38,333 $ 47,973

Term loan, unsecured and bearing interest at a floating rate based on LIBOR, due in installments between December 31, 2000 and December 31, 2005(DEM 22.0 million, 1997 – nil) (note 12) 20,205 —

Interest bearing obligation, unsecured and at a floating rate, due August 1, 1999 (DEM 4.0 million, 1997 – nil) (note 12) 3,674 —

Non-interest bearing obligation, unsecured, due December 31, 2003(DEM 4.5 million, 1997 – nil) (note 12) 4,133 —

66,345 47,973Deferred exchange losses (2,430) (1,410)

63,915 46,563Less current portion 15,888 11,993

$ 48,027 $ 34,570

Long-term debt repayments during each of the next five years atcurrent rates of exchange are as follows:

(In thousands)

1999 $ 15,8882000 15,8092001 16,8192002 4,0412003 8,174Thereafter 5,614

$ 66,345

7 . Ca pital S tocka) As at December 31, the following shares were outstanding:

(In thousands except share information) 1 9 9 8 1 9 9 7

44,010,715 (1997 – 42,895,779) Class A Subordinate Voting Shares $ 6,091 $ 4,641

16,680,166 (1997 – 17,419,950) Class B Multiple Voting Shares 1,280 1,337

$ 7,371 $ 5,978

b) Effective June 1, 1998, both Class A and Class B shares weresplit on a three-for-one basis. All comparative share figureshave been restated accordingly.

c) Class A shares are entitled to one vote per share and receive anon-cumulative dividend premium of 10% of the dividendspaid to holders of Class B shares. Class B shares are entitledto ten votes per share and are convertible at any time intoClass A shares on a one-for-one basis. During 1998, 549,484(1997 – 620,274) Class B shares were converted into 549,484(1997 – 620,274) Class A shares.

d) Under the company’s 1989 employee stock option plan, optionsare granted to senior officers and employees to acquire Class Ashares at a nominal price. The number of shares which may bereceived under this plan varies with the growth in the marketvalue of the shares. During 1998, options were granted underthe 1989 plan which could result in the issue of up to 68,400(1997 – 97,875) Class A shares, and options which could haveresulted in the issue of up to 59,625 (1997 – nil) Class Ashares were cancelled. As a result of the exercise of optionsgranted in previous years, 115,452 (1997 – 470,307) Class Ashares were issued during 1998.

Under the company’s 1992 employee stock option plan, optionsfor 900,000 Class A shares were granted during 1992 at aprice of $3.125 per share, being the fair market value at thedate of the grant. During 1998, 450,000 (1997 – 450,000)options were exercised and 450,000 (1997 – 450,000) shareswere issued under this plan.

Under the company’s 1995 director stock option plan, optionsfor 51,000 Class A shares were granted during 1996 at a priceof $4.50 per share, being the fair market value at the date ofthe grant. During 1998, options for an additional 9,000 (1997– nil) Class A shares were granted at a price of $12.50 pershare, being the fair market value at the date of the grant. Nooptions (1997 – 18,000) were exercised during 1998, and noClass A shares (1997 – 18,000) were issued under this plan.

Under the company’s 1997 employee stock option plan, optionsfor 300,000 Class A shares were granted during 1997 at a priceof $14.00 per share, being the fair market value at the date ofthe grant. No options were exercised and no shares were issuedunder this plan during 1998 or 1997.


25

At December 31, 1998, options issued and outstanding underthe 1989, 1992, 1995 and 1997 plans could result in the issueof a maximum of 954,900 (1997 – 1,509,525) Class A sharesup to December 9, 2004.

At December 31, 1998, 4,753,767 (1997 – 4,764,594) Class Ashares were reserved with respect to options available forfuture grant under the existing plans.

e) During the year, under a normal course issuer bid program, thecompany purchased 190,300 (1997 – 16,350) Class B sharesfor cancellation.

8 . Cumula t ive Translation Account (In thousands) 1 9 9 8 1 9 9 7

Balance at beginning of year $ (8,049) $ 7,631Translation of self-sustaining

foreign operations 7,130 (7,029)Impact of foreign exchange option hedging

investment in joint venture — (8,651)

Balance at end of year $ (919) $ (8,049)

9 . Pension Ob ligationsThe company’s pension obligations under various defined benefitplans for employees’ service up to December 31, 1998 are esti-mated to be $15.1 million (1997 – $13.0 million). The pensionplans have assets with a market value of $14.8 million (1997 –$13.0 million) available to meet these obligations.

1 0 . Other Income (In thousands) 1 9 9 8 1 9 9 7

Interest on short-term deposits $ 3,816 $ 3,451Equity in earnings of associated company 60 648

$ 3,876 $ 4,099

1 1 . Income Ta x e sThe company’s effective income tax rate is composed of the following:

1 9 9 8 1 9 9 7

Combined basic Canadian federal and provincial income tax rate 44.6% 44.6%

Canadian manufacturing and processing profits deductions (9.0) (9.0)

Expected rate 35.6 35.6Tax rate differential on earnings of

foreign subsidiaries (2.3) (2.0)Unrecognized tax losses of foreign subsidiaries (0.3) 1.0Other 4.0 1.8

37.0% 36.4%

The company has income tax losses carried forward of $8.6 million,the benefits of which have not been recognized in the financialstatements. These tax losses may be utilized to offset taxableincome from certain jurisdictions in future years. Tax losses of $1.4million carry forward indefinitely. The remainder will expire, to theextent that they are not utilized, as follows: 1999 – $1.0 million;2000 – $0.4 million; 2001 – $1.0 million; 2002 – $3.2 million; and2003 – $1.6 million.

1 2 . A c q u i s i t i o n sAcquisitions in 1998 included the December 31 purchase of theDSG Group of companies, based in Meckenheim, Germany, forconsideration of $46.4 million comprised of cash in the amount of$38.6 million, an interest bearing obligation in the amount of $3.7million due on August 1, 1999, and a non-interest bearing obliga-tion due on December 23, 2003 in the amount of $4.1 million. Inaddition, the company has accrued closing and integration costs inthe amount of $4.1 million. Due to the proximity of the acquisitionto the balance sheet date, it was not possible to accurately assignthe consideration paid to the assets and liabilities acquired.Because it has not been possible to allocate the cost of thepurchase to its component parts, the cost of the DSG Group ofcompanies has been presented as a single line item on the con-solidated balance sheet. When the allocation process is complete,the purchase price will be allocated to the identifiable assets andliabilities of the DSG Group of companies based on their fair valueswith any purchase price in excess of the fair value of the iden-tifiable assets and liabilities to be allocated to goodwill. Thisallocation will be reflected in the 1998 financial statements on aretroactive basis, when the company issues its next annualfinancial statements.

Bredero – Shaw also completed an acquisition in August 1998, thecompany’s share of which totalled $8.3 million resulting in $0.8million being recorded as goodwill. This goodwill represented theexcess of the consideration paid over the fair value of the netassets acquired and is being amortized over five years.

Effective January 31, 1997, the company purchased the heatshrinkable products’ assets and business of Markel Corporation,a Pennsylvania based manufacturer of tubing products for cashconsideration of $4.5 million. The purchase price was allocated asfollows: $1.7 million to capital assets, $1.7 million to goodwill, and$1.1 million to working capital.

Effective June 1, 1997, the company purchased the assets andbusiness of Quality Examination & Developing Services (Europe)Limited, based in England, and of its subsidiaries: QED ServicesPte. Ltd., QED International S.A. and QED (Australia) Pty Limited forcash consideration of $2.5 million. These assets are used toperform radiographic inspection services for pipeline girth weldsand other forms of radiography and non-destructive testing. Thepurchase price was allocated as follows: $2.1 million to capitalassets and $0.4 million to working capital.


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These transactions have been accounted for by the purchasemethod with the results of operations included in the FinancialStatements from the dates of acquisition.

13. Joint Ve n t u re Op erat ions

a) Amendment to Joint Venture AgreementEffective August 1, 1997 the joint venture agreement betweenDresser Industries, Inc. and the company was amended toprovide each party with a 50% ownership position and equalentitlement to worldwide earnings, with no change to the jointcontrol of operations. In addition, the term of the agreementwas extended to October 31, 2030 with a buy-sell arrangementin place after August 1, 2002. Under the terms of the buy-sellarrangement, either party could provide notice of terminationincluding a buy-sell price to the other party. The party receiv-ing the notice of termination would, within a certain time-frame, be obligated to buy the other party’s interest in the jointventure or sell its own interest, at the stated price.

As consideration for entering into these long-term arrange-ments, the company agreed to pay Dresser Industries aninducement in the amount of U.S. $41.7 million payable in fiveequal annual installments plus interest calculated at 10% perannum on the outstanding balance. The excess of this induce-ment payment over the additional 0.1% share of the jointventure’s net assets acquired by the company has beenrecorded as goodwill and is being amortized over the extendedterm of the joint venture agreement.

Effective September 29, 1998, Dresser Industries, Inc. wasacquired by the Halliburton Company.

b) Proportionately Consolidated Financial InformationThe company’s joint venture operations are comprised ofBredero – Shaw. The company’s share of joint venture assetsand liabilities, accounted for on the basis of ownership, and ofrevenue, expenses, net income and cash flow, accounted for on

the basis of entitlement under the relevant shareholders’agreements, is summarized as follows (in Canadian dollars):

(In thousands) 1 9 9 8 1 9 9 7

Current assets $ 117,327 $ 111,531Capital assets, net 63,280 41,520Other assets 3,285 10,080Current liabilities 103,603 89,518Deferred income taxes 4,660 1,097Minority interest 2,589 1,654

Revenue $ 465,632 $ 312,538Operating and other expenses 409,200 275,706Minority interest (1,417) 664


Cash provided by (used in):Operating activities $ 77,477 $ 50,012Investing activities (29,738) (13,729)Financing activities — —

1 4 . Segmented Inform a t i o nThe company provides products and services to three generalsegments of the global energy industry: exploration and production,pipeline and petrochemical and industrial. The exploration andproduction segment is comprised of Mark Products which manu-factures geophysical sensors, cables and connectors, OMSCOIndustries which manufactures drill string components andGuardian Oilfield Services which provides oilfield tubular man-agement services. The pipeline segment includes the company’sinterest in Bredero – Shaw which manufactures pipecoating, liningand insulation products, Canusa – CPS which manufactures heatshrinkable sleeves and adhesives for pipeline joint protection andShaw Pipeline Services which provides weld inspection services forland and marine pipeline construction. The petrochemical andindustrial segment is comprised of Shawflex which manufactureswire and cable for process instrumentation and control applica-tions and Canusa – EMI which manufactures heat shrinkabletubing for electrical, electronic and utility applications.


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Financial information by operating segment is as follows (in thousands of dollars):

Exploration Petrochemical Financialand Production Pipeline and Industrial and Corporate Eliminations Total

1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997

Revenue – customer 169,800 169,678 528,382 358,238 70,836 62,785 — — — — 769,018 590,701– intersegment — — 1,309 929 494 876 — — (1,803) (1,805) — —

– total 169,800 169,678 529,691 359,167 71,330 63,661 — — (1,803) (1,805) 769,018 590,701

Income from operations 17,835 24,363 98,885 70,353 10,985 6,881 (11,882) (10,559) — — 115,823 91,038Equity in earnings of

affiliate — — 60 648 — — — — — — 60 648

Segment income 17,835 24,363 98,945 71,001 10,985 6,881 (11,882) (10,559) — — 115,883 91,686

Interest income 3,816 3,451Interest expense 6,975 3,916

Income before income taxes and minorityinterest 112,724 91,221

Income taxes 41,683 33,223Minority interest (1,417) 664

Net income 69,624 58,662

Total assets 143,602 111,853 244,653 253,812 101,937 40,234 66,892 29,233 (187) (2,863) 556,897 432,269Capital expenditures,

net of disposals 22,555 12,099 27,285 16,457 2,824 2,006 2,654 683 — — 55,318 31,245Depreciation and

amortization 6,883 4,938 13,388 8,548 2,073 2,550 1,073 321 — — 23,417 16,357

Revenue and capital assets by geographic segment are as follows, with the ‘Other’ geographic segment including operations in Mexico, Colombia,Brazil, Africa, Azerbaijan and the Middle East (in thousands of dollars):

Far East, PacificCanada United States Europe and Other Eliminations Total

1998 1997 1998 1997 1998 1997 1998 1997 1998 1997 1998 1997

Revenue – customer 176,766 175,452 195,503 209,823 287,865 122,404 108,883 83,022 — — 769,018 590,701– intersegment 42,709 29,340 10,424 7,687 1,984 2,238 20 — (55,137) (39,265) — —

– total 219,475 204,792 205,927 217,510 289,849 124,642 108,903 83,022 (55,137) (39,265) 769,018 590,701

Capital assets, net 50,751 41,451 57,483 24,471 38,174 34,949 3,720 3,015 (129) (261) 149,999 103,624

1 5 . The Year 2000 IssueThe Year 2000 Issue arises because many computer systemsuse two digits rather than four to identify a year. Date-sensi-tive systems may recognize the year 2000 as 1900 or someother year, resulting in errors when information using year2000 dates is processed. In addition, similar problems mayarise in some systems which use certain dates in 1999 torepresent something other than a date. The effects of the Year2000 Issue may be experienced before, on, or after January 1,

2000, and, if not addressed, the impact on operations andfinancial reporting may range from minor errors to significantsystems failures which could affect an entity’s ability toconduct normal business operations. It is not possible to becertain that all aspects of the Year 2000 Issue affecting thecompany, including those related to the efforts of customers,suppliers or other third parties, will be fully resolved.


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Six Year ReviewYears Ended December 31(In thousands except per share inform a t i o n ) 1 9 9 8 1 9 9 7 1 9 9 6 1 9 9 5 1 9 9 4 1 9 9 3

Operat in g Resu ltsRevenue $ 769,018 $ 590,701 $ 457,548 $ 341,756 $ 344,204 $ 227,738

EBITDA (note) 137,883 108,707 70,299 47,326 57,503 38,153Net income for the year 69,624 58,662 36,585 20,361 30,452 14,056

Cash Flo wCash from operating activities $ 102,412 $ 75,172 $ 47,040 $ 36,590 $ 3,526 $ 24,811Additions to capital assets 57,952 32,971 26,470 13,611 25,067 5,349

Financia l Pos i tionWorking capital $ 116,910 $ 116,517 $ 108,934 $ 93,541 $ 76,089 $ 71,483

Long-term debt 48,027 34,570 — — 274 742

Shareholders’ equity 319,534 248,527 207,744 172,739 158,802 134,834Total assets 556,897 432,269 337,138 242,484 258,288 178,895

Per Share In format ion (Class A a nd Class B)

Net income

Basic $ 1.15 $ 0.98 $ 0.62 $ 0.34 $ 0.50 $ 0.23

Fully diluted $ 1.13 $ 0.95 $ 0.60 $ 0.33 $ 0.48 $ 0.22

Dividends

Class A $ 0.0734 $ 0.0605 $ 0.0550 $ 0.0500 $ 0.0470 $ 0.0403

Class B $ 0.0663 $ 0.0550 $ 0.0500 $ 0.0455 $ 0.0427 $ 0.0367 Shareholders’ equity $ 5.26 $ 4.12 $ 3.50 $ 2.90 $ 2.64 $ 2.18

Note: Earnings Before Interest, Taxes, Depreciation and Amortization

Quarterly Information (Unaudited)(In thousands except per share information) First Second Third Fourth Total

Revenue – 1998 $ 186,553 $ 212,024 $ 209,486 $ 160,955 $ 769,018– 1997 129,989 147,820 152,159 160,733 590,701

Net income – 1998 19,776 21,239 17,838 10,771 69,624– 1997 14,333 14,452 14,383 15,494 58,662


Basic – 1998 $ 0.33 $ 0.34 $ 0.29 $ 0.19 $ 1.15– 1997 $ 0.24 $ 0.24 $ 0.24 $ 0.26 $ 0.98

Fully diluted – 1998 $ 0.32 $ 0.34 $ 0.29 $ 0.18 $ 1.13– 1997 $ 0.23 $ 0.24 $ 0.23 $ 0.25 $ 0.95


29

Directors and Officers Primary Operating Locations

D i re c t o r s

W.J. DeyellNanoose Bay C o n s u l t a n t

G.M. Farq u h a r s on ( 1)( 2 )

To ronto P a rt n e rLang Michener

A . F. Griffit hs ( 1 )

To ronto Corporate Dire c t o r

G . F. Hyland ( 3 )

To ronto P resident and Chief Executive Offic e rShaw Industries Ltd.

J.J. MurphyD a l l a sManaging Dire c t o rSMG Management L.L.C.

R.J. RitchieC a l g a ryP resident and Chief Executive Offic e rCanadian Pacific Railway

J . F. Robinson, FCA (1) (2)

London P re s i d e n tXylan Inc.

JR Shaw ( 3 )

C a l g a ryExecutive Chairman Shaw Communications Inc.

L.E. Shaw ( 3 )

Barbados C h a i rman of the BoardShaw Industries Ltd.

V.L. ShawTo ro n t oAssistant to the Chairm a nShaw Industries Ltd.

Z.D. Simo ( 2) ( 3 )

Oakville Corporate Dire c t o r

( 1 ) Member of Audit Committee( 2 ) Member of Compensation

C o m m i t t e e( 3 ) Member of Executive Committee

Corporate Off i c e r s

L.E. ShawC h a i rman of the Board

G.F. HylandP resident and Chief Executive Offic e r

W.P. BuckleyExecutive Vi c e - P resident

B.J. ConroySenior Vi c e - P resident and Chief Financial Offic e r

P.H. LangdonVi c e - P resident, Human Resources and Assistant Secre t a ry

R.E. SteeleVi c e - P resident, Te c h n o l o g y

G.M. FarquharsonS e c re t a ry

Mark Pro d u c t sA division of Shaw Resource Services, Inc.10502 Fallstone RoadHouston, Texas 77099P h o n e : (281) 498-0600F a x : (281) 498-8707

OMSCO IndustriesA division of Shaw Resource Services, Inc.6418 Esperson Stre e tHouston, Texas 77011P h o n e : (713) 844-3700F a x : (713) 926-7103

P I P E L I N E

Shaw Pipeline S e rvices Ltd.8010 – 40th Street S.E.C a l g a ry, Albert aT2C 2Y3P h o n e : (403) 279-2400F a x : (403) 279-2879

BREDERO – SHAW

B re d e ro Price Coaters Ltd.258 Bath RoadSlough SL1 4DXE n g l a n dP h o n e : (44) 1753 568600F a x : (44) 1753 567448

Shaw Pipe Pro t e c t i o n L i m i t e dShaw Court1200 – 630, 3rd Avenue S.W.C a l g a ry, Alberta T2P 4L4P h o n e : (403) 263-2255Fax: (403) 264-3649

S h a w fle xA division of Shaw Industries Ltd.25 Bethridge RoadTo ronto, OntarioM9W 1M7P h o n e : (416) 743-7111F a x : (416) 743-2565

G u a rdian Oilfield S e rv i c e sA division of Shaw Industries Ltd.950-78th Av e n u eEdmonton, Albert aT6P 1L7P h o n e : (780) 440-1444F a x : (780) 440-4261

Canusa – CPSA division of Shaw Industries Ltd.25 Bethridge RoadTo ronto, OntarioM9W 1M7P h o n e : (416) 241-0128F a x : (416) 241-6890

Bre d e ro Price Co.2350 N. Sam Houston Pkwy. E.Suite 500Houston, Texas 77032P h o n e : (281) 886-2350F a x : (281) 886-2351

B re d e ro Price International B.V.400 Orc h a rd Road#12-08-09 Orc h a rd To w e rS i n g a p o re 238875P h o n e : (65) 732-2355F a x : (65) 732-9073

Canusa – EMIA division of Shaw Industries Ltd.25 Bethridge RoadTo ronto, OntarioM9W 1M7P h o n e : (416) 743-7111F a x : (416) 743-7199

PETROCHEMICAL AND INDUSTRIAL

E X P L O R ATION AND PRODUCTION


A u d i t o r sE rnst & Young L L P

Stock ListingThe To ronto Stock Exchange

Class ‘‘A’’S u b o rdinate Voting Share sTrading Symbol: SHL.A

Class ‘‘ B ’’Multiple Voting Share sTrading Symbol: SHL.B

Transfer Agent and R e g i s t r a rM o n t real Trust Companyof Canada

B a n k e r sThe To ronto-Dominion Bank

Head Off i c e25 Bethridge RoadTo ronto, Ontario, CanadaM9W 1M7

Te l e p h o n e : 4 1 6 - 7 4 3 - 7 1 1 1F a c s i m i l e : 4 1 6 - 7 4 3 - 7 1 9 9

Annual MeetingT h u r s d a y, May 6, 199911:00 a.m.The Royal York HotelTo ronto, Ontario, Canada

Printed in Canada


Documents

1998 - Morningstar, Inc