FORM 10-Q-A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-6922
GUILFORD MILLS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-1995928
- -------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) number)
4925 West Market Street, Greensboro, N.C. 27407
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code - (336) 316-4000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Number of shares of common stock outstanding
at June 28, 1998 - 25,698,480
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Page 2
GUILFORD MILLS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 28,1998
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
The condensed consolidated financial statements included herein have
been prepared by Guilford Mills, Inc. (the "Company" or "Guilford"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. The Condensed Consolidated Balance Sheet as of September 28, 1997
has been taken from the audited financial statements as of that date. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's latest annual report on Form 10-K for
the year ended September 28, 1997.
The condensed consolidated financial statements included herein reflect
all adjustments (none of which are other than normal recurring accruals) which
are, in the opinion of management, necessary for a fair presentation of the
information included. The following condensed consolidated financial statements
are included:
Consolidated Statements of Income for the thirty-nine weeks ended June
28, 1998 and June 29, 1997
Consolidated Statements of Income for the thirteen weeks ended June 28,
1998 and June 29, 1997
Condensed Consolidated Balance Sheets as of June 28, 1998 and
September 28, 1997
Condensed Consolidated Statements of Cash Flows for the thirty-nine
weeks ended June 28, 1998 and June 29, 1997
Condensed Notes to Consolidated Financial Statements
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Guilford Mills, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Thirty-Nine Weeks Ended June 28, 1998 and June 29, 1997
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------- --------------------- ---------------------
June 28, June 29,
1998 1997
-------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Net Sales $ 674,593 $ 668,365
-------------------------------------------------------------------------- --------------------- ---------------------
Costs and Expenses:
Cost of goods sold 548,473 538,359
Selling and administrative 73,710 71,609
-------------------------------------------------------------------------- --------------------- ---------------------
622,183 609,968
-------------------------------------------------------------------------- --------------------- ---------------------
Operating Income 52,410 58,397
Interest Expense 8,825 12,999
Other Expense, Net 593 3,110
-------------------------------------------------------------------------- --------------------- ---------------------
Income Before Income Tax Provision 42,992 42,288
Income Tax Provision 14,402 14,861
-------------------------------------------------------------------------- --------------------- ---------------------
Net Income $ 28,590 $ 27,427
-------------------------------------------------------------------------- --------------------- ---------------------
Net Income Per Share:
Basic $ 1.12 $ 1.26
Diluted 1.10 1.15
-------------------------------------------------------------------------- --------------------- ---------------------
Dividends Per Share $ .33 $ .31
-------------------------------------------------------------------------- --------------------- ---------------------
</TABLE>
See accompanying condensed notes to consolidated financial statements.
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Guilford Mills, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Thirteen Weeks Ended June 28, 1998 and June 29, 1997
(In thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------- --------------------- ---------------------
June 28, June 29,
1998 1997
-------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Net Sales $ 232,768 $ 238,358
-------------------------------------------------------------------------- --------------------- ---------------------
Costs and Expenses:
Cost of goods sold 186,306 187,248
Selling and administrative 23,942 24,234
-------------------------------------------------------------------------- --------------------- ---------------------
210,248 211,482
-------------------------------------------------------------------------- --------------------- ---------------------
Operating Income 22,520 26,876
Interest Expense 3,216 3,665
Other Expense, Net 349 1,051
-------------------------------------------------------------------------- --------------------- ---------------------
Income Before Income Tax Provision 18,955 22,160
Income Tax Provision 6,109 7,617
-------------------------------------------------------------------------- --------------------- ---------------------
Net Income $ 12,846 $ 14,543
-------------------------------------------------------------------------- --------------------- ---------------------
Net Income Per Share:
Basic $ .50 $ .67
Diluted .49 .59
-------------------------------------------------------------------------- --------------------- ---------------------
Dividends Per Share $ .11 $ .11
-------------------------------------------------------------------------- --------------------- ---------------------
</TABLE>
See accompanying condensed notes to consolidated financial statements.
<PAGE>
Page 5
Guilford Mills, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, 1998 and September 28, 1997
(In thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------- --------------------- ---------------------
June 28, September 28,
1998 1997
(Unaudited)
-------------------------------------------------------------------------- --------------------- ---------------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 21,142 $ 24,349
Accounts receivable, net 172,239 167,347
Inventories 159,285 141,898
Other current assets 13,677 15,023
-------------------------------------------------------------------------- --------------------- ---------------------
Total current assets 366,343 348,617
Property, net 322,838 308,523
Other assets 106,966 72,656
-------------------------------------------------------------------------- --------------------- ---------------------
Total assets $ 796,147 $ 729,796
-------------------------------------------------------------------------- --------------------- ---------------------
Liabilities
Short-term borrowings $ 37,207 $ 6,677
Current maturities of long-term debt 11,832 12,542
Other current liabilities 105,946 115,424
-------------------------------------------------------------------------- --------------------- ---------------------
Total current liabilities 154,985 134,643
Long-term debt 140,992 134,560
Deferred income taxes and other deferred liabilities 74,848 51,697
-------------------------------------------------------------------------- --------------------- ---------------------
Total liabilities 370,825 320,900
-------------------------------------------------------------------------- --------------------- ---------------------
Commitments and Contingencies -- --
Stockholders' Investment
Preferred stock -- --
Common stock 655 655
Capital in excess of par 118,134 117,110
Retained earnings 364,724 344,656
Other stockholders' investment (58,191) (53,525)
-------------------------------------------------------------------------- --------------------- ---------------------
Total stockholders' investment 425,322 408,896
-------------------------------------------------------------------------- --------------------- ---------------------
Total liabilities and stockholders' investment $ 796,147 $ 729,796
-------------------------------------------------------------------------- --------------------- ---------------------
</TABLE>
See accompanying condensed notes to consolidated financial statements.
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Guilford Mills, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Thirty-Nine Weeks Ended June 28, 1998 and June 29, 1997
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------- --------------------- ---------------------
June 28, June 29,
1998 1997
-------------------------------------------------------------------------- --------------------- ---------------------
Cash Flows From Operating Activities:
<S> <C> <C>
Net income $28,590 $ 27,427
Depreciation and amortization 47,946 46,899
Other adjustments to net income, net (678) 436
Net changes in operating assets and liabilities (25,883) (1,703)
-------------------------------------------------------------------------- --------------------- ---------------------
Net cash provided by operating activities 49,975 73,059
-------------------------------------------------------------------------- --------------------- ---------------------
Cash Flows From Investing Activities:
Additions to property (61,478) (42,238)
Purchase of business, net of cash acquired -- (7,119)
Additions to acquisition purchase price (18,500) --
Other investing activities, net 4,779 (581)
-------------------------------------------------------------------------- --------------------- ---------------------
Net cash used in investing activities (75,199) (49,938)
-------------------------------------------------------------------------- --------------------- ---------------------
Cash Flows From Financing Activities:
Short-term borrowings (repayments), net 48,224 (7,019)
Payment of long-term debt (13,540) (13,309)
Purchase of treasury shares (7,516) --
Other financing activities, net (5,431) (2,368)
-------------------------------------------------------------------------- --------------------- ---------------------
Net cash provided by (used in) financing activities 21,737 (22,696)
-------------------------------------------------------------------------- --------------------- ---------------------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 280 1,222
-------------------------------------------------------------------------- --------------------- ---------------------
Net (Decrease) Increase In Cash and Cash
Equivalents (3,207) 1,647
Beginning Cash and Cash Equivalents 24,349 31,448
-------------------------------------------------------------------------- --------------------- ---------------------
Ending Cash and Cash Equivalents $21,142 $ 33,095
-------------------------------------------------------------------------- --------------------- ---------------------
Noncash transactions:
Accrual of remaining acquisition purchase price $17,000 --
</TABLE>
See accompanying condensed notes to consolidated financial statements.
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GUILFORD MILLS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 28, 1998
(In thousands except share data)
(Unaudited)
1. Restatement -- As publicly announced on October 26, 1998, the Company
uncovered potential accounting irregularities related to inappropriate
reductions of certain material costs and a corresponding understatement of
accounts payable amounts at its Hofmann Laces unit. As a result, the Audit
Committee of the Company's Board of Directors ("Audit Committee") engaged Weil,
Gotshal & Manges LLP ("Weil Gotshal") as special legal counsel and Weil Gotshal
engaged Arthur Andersen LLP ("Andersen") to perform an independent investigation
into these potential accounting irregularities. On November 24, 1998 the Company
announced that the Audit Committee, assisted by Weil Gotshal and Andersen, had
completed an investigation of the financial impact of the accounting
irregularities at the Hofmann Laces unit. As a result of the findings of this
investigation, the Company has restated its previously reported financial
results for the first three quarters of the fiscal year ended September 27,
1998.
The restated financial statements, as set forth herein, reverse the net impact
of the inappropriate amounts.
A summary of significant affects of the restatement is as follows (in thousands
except per share data):
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
June 28, 1998 June 28, 1998
(unaudited) (unaudited)
----------------------------------- -----------------------------------
As Previously As Previously
Reported As Restated Reported As Restated
----------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net Sales $ 232,768 $ 232,768 $ 674,593 $ 674,593
Cost and Expenses 210,765 210,248 620,083 622,183
----------------- -------------- ---------------- ---------------
Operating Income 22,003 22,520 54,510 52,410
Interest Expense 3,216 3,216 8,825 8,825
Other Expense, Net 349 349 593 593
----------------- -------------- ---------------- ---------------
Income before income tax provision 18,438 18,955 45,092 42,992
Income tax provision 6,074 6,109 15,380 14,402
----------------- -------------- ---------------- ---------------
Net Income $ 12,364 $ 12,846 $ 29,712 28,590
================= ============== ================ ===============
Net Income per share:
Basic $ .49 $ .50 $ 1.17 $ 1.12
Diluted .48 .49 1.15 1.10
</TABLE>
Following the October 26, 1998 press release, three purported class action
lawsuits have been filed on behalf of purchasers of the Company's common stock
against the Company and certain of its officers and directors. These lawsuits
purport to allege claims under Section 10(b) and 20(a) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, in connection with
the Company's public disclosure of accounting irregularities at the Hofmann
Laces unit in fiscal year 1998. Specifically, the actions allege that, during
the class period (January 20, 1998 through October 26, 1998), defendants
materially misrepresented the Company's financial condition and overstated the
Company's reported earnings. No specific amount of damages is sought in these
complaints. The Company intends to vigorously defend the lawsuits. It is
management's opinion that the final resolution of these matters will not have
a material adverse effect on the Company's financial position or future results
of operations.
2. Seasonal Fluctuations-- Results for any portion of a year are not necessarily
indicative of the results to be expected for a full year, due to seasonal
aspects of the textile industry.
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Page 8
3. Per Share Information -- The Company has adopted the provisions of Statement
of Financial Accounting Standards No. 128, "Earnings Per Share", and therefore
has restated prior period earnings per share data to conform to this statement.
Basic earnings per share information has been computed by dividing net income by
the weighted average number of shares of common stock, par value $.02 per share,
outstanding during the periods presented. The average shares used in computing
basic net income per share for the thirty-nine weeks ended June 28, 1998 and
June 29, 1997 were 25,456,000 and 21,843,000, respectively. The average shares
used in computing basic net income for the thirteen weeks ended June 28, 1998
and June 29, 1997 were 25,472,000 and 22,008,000, respectively.
Diluted earnings per share information also considers as applicable (i) any
dilutive effect for stock options and restricted stock grants and (ii) the
dilutive effect, if any, assuming that the Company's convertible debentures were
converted at the beginning of the respective reporting period, with earnings
being increased by the interest expense, net of income taxes, that would not
have been incurred had conversion taken place. The average shares used in
computing diluted net income per share for the thirty-nine weeks ended June 28,
1998 and June 29, 1997 were 25,877,000 and 25,348,000, respectively. The average
shares used in computing diluted net income per share for the thirteen-week
period ended June 28, 1998 and June 29, 1997 were 25,884,000 and 25,527,000,
respectively.
The reconciliations of the numerator (income available to common
stockholders) and the denominator (average number of common shares outstanding)
of the earnings per share calculations for the thirteen weeks and thirty-nine
weeks ended on June 28, 1998 and June 29, 1997, respectively, are as follows
(net income and share amounts in thousands):
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
June 28, June 29,
1998 1997
------------------------------ -----------------------------
Net Net
Income Shares EPS Income Shares EPS
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $28,590 25,456 $1.12 $27,427 21,843 $1.26
===== =====
Add effect of dilutive securities:
Options and Restricted Stock -- 421 -- 140
6% Convertible Debt -- -- 1,808 3,365
-----------------------------
------------------------------
Diluted EPS $28,590 25,877 $1.10 $29,235 25,348 $1.15
============================== =============================
Thirteen Weeks Ended
June 28, June 29,
1998 1997
------------------------------ -----------------------------
Net Net
Income Shares EPS Income Shares EPS
Basic EPS $12,846 25,472 $0.50 $14,543 22,008 $0.67
===== =====
Add effect of dilutive securities:
Options and Restricted Stock -- 412 -- 154
6% Convertible Debt -- -- 603 3,365
-----------------------------
==============================
Diluted EPS $12,846 25,884 $0.49 $15,146 25,527 $0.59
============================== =============================
</TABLE>
4. Inventories -- Inventories are carried at the lower of cost or market. Cost
is determined by using the LIFO (last-in, first-out) method for the majority of
inventories. Cost for all other inventories has been determined principally by
the FIFO (first-in, first-out) method.
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Page 9
Inventories at June 28, 1998 and September 28, 1997 consisted of the
following:
<TABLE>
<CAPTION>
June 28, September 28,
1998 1997
------------------ -----------------
<S> <C> <C>
Finished Goods $ 62,553 $ 53,404
Raw Materials and work in process 106,765 98,499
Manufacturing supplies 8,775 8,758
------------------ -----------------
Total inventories valued at FIFO cost 178,093 160,661
Less -- Adjustments to reduce FIFO cost to LIFO cost, net (18,808) (18,763)
------------------
-----------------
Total inventories $159,285 $141,898
================== =================
</TABLE>
5. Accumulated Depreciation -- Accumulated depreciation at June 28, 1998 and
September 28, 1997 was $449,538 and $409,654, respectively.
<PAGE>
Page 9
6. Other Assets -- On February 28, 1998, the Company entered into an agreement
to accelerate the payment of the contingent purchase price pursuant to the Stock
Purchase Agreement, dated January 12, 1996, between Guilford Mills, Inc. and
Bruno Hofmann. This resulted in recording $34.0 million of cost in excess of net
assets acquired related to the acquisition of Hofmann Laces Ltd. and affiliated
companies, which is being amortized on a straight line basis over the remaining
estimated life of 38 years. Intangible assets increased from $19.1 million at
September 28, 1997 to $53.6 million as of June 28, 1998.
7. Common Stock -- On June 24, 1998, the Board of Directors approved the
repurchase of up to 2.5 million shares of the Company's common stock which
represented approximately 10% of the common shares outstanding. As of August 7,
1998, 1.2 million shares have been repurchased at an aggregate cost of
approximately $21.4 million.
8. Financial Instruments and Derivatives -- In June 1998, the Financial
Accounting Standards Board issued Statement of Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities. The statement
establishes accounting and reporting standards requiring that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting. The statement could increase volatility in earnings and other
comprehensive income. Statement 133 is effective for fiscal years beginning
after June 15, 1999. Statement 133 cannot be applied retroactively. Management
does not believe that this statement will have a material impact on the
Company's future results of operations and financial position.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Net sales for the nine months ended June 28, 1998 were $674.6 million,
an increase of $6.2 million, or .9%, over net sales of $668.4 million for the
nine months ended June 29, 1997. Net sales for the third quarter of fiscal 1998
were $232.8 million, a decrease of $5.6 million, or 2.3%, over net sales of
$238.4 million for the comparable period of the prior year.
For the nine months ended June 28, 1998, net sales in the apparel
market declined to $254.4 million as compared to $261.0 million for the same
period of the prior year, a decline of 2.5%. For the quarter ended June 28,
1998, net sales in the apparel market decreased 6.2%, to $91.3 million compared
to $97.3 million in the previous year. Sales of elastics/intimate apparel,
including lace products, remained strong and increased for the quarter and the
nine month period primarily due to continued market penetration and strong
shapewear sales to key customers. Sales of swimwear products decreased for the
quarter and for the nine-month period. This quarter's decrease was attributable
to a softening of demand in key geographical locations due to unfavorable
weather conditions and due to a shift in consumer demand from value
<PAGE>
Page 10
added printed fabrics to textured solids. Despite the softness in the market,
the Company has experienced growth in the sales of textured solid fabrics. Sales
of ready to wear fabrics decreased for the quarter and for the nine-month period
due to the impact of Asian imports and continued allocation of production
capacity to home fashion products.
Sales of worldwide automotive fabrics increased 3.9% for the nine-month
period ended June 28, 1998 to $260.1 million from $250.4 million for the
comparable period of the prior year. Sales of worldwide automotive fabrics
increased slightly for the third quarter of fiscal 1998 to $88.0 million as
compared to $87.2 million for the same quarter of the previous year. Automotive
sales in the United States increased for the current quarter and for the nine
month period due to increased sales of certain platforms, pricing adjustments
and increased RV and conversion van market share. This was partially offset by a
decline in New Domestic sales due to trim level selections, temporary delivery
delays and a delay in the launch of a certain automotive placement. The GM
strike did not significantly impact the Company's third quarter sales and due to
the recent GM settlement announcement is not expected to significantly impact
fourth quarter sales.
Automotive sales in Europe decreased for the third quarter of fiscal 1998 and
decreased slightly for the nine-month period. The decrease is primarily
attributable to lack of market share growth of a certain customer placement,
pricing pressures and the continued strength of the sterling relative to other
key European currencies over the nine-month period.
Home fashion sales for the nine months of fiscal 1998 increased 21.6%
to $114.2 million as compared to $93.9 million in the prior year. Home fashion
sales for the quarter increased by 23.0% to $39.1 million from $31.8 million in
the prior year. The increase for the quarter and for the nine-month period in
home fashion sales is significantly attributable to the cotton jersey knit
sheeting program, the introduction of new comforter products and reorders of a
significant name brand window treatment program. These increases were partially
offset by overall declines in the sale of window and shower curtains, mattress
tickings and furniture fabric products.
Sales of Industrial/Specialty market fabrics for the nine-month period
ended June 28, 1998 declined 27.3% to $45.9 million from $63.1 million in the
comparable period of the prior year. Sales for the quarter declined by 34.8% to
$14.4 million as compared to $22.1 million for the third quarter of the previous
year. This decline in the quarter and the nine-month period is primarily
attributable to a decrease in the sales volume of hook and loop closure fabrics
due to a decline in market share of a customer's premium diaper product and
resourcing of the European business to a local supplier.
Gross margin for the first nine months of fiscal 1998 decreased to
$126.1 million compared to $130.0 million for the first nine months of fiscal
1997. This resulted in a lower gross margin percentage of 18.7% versus 19.5% for
the comparable nine-month period. For the quarter ended June 28, 1998, gross
margin decreased to $46.5 million, or 20.0% of net sales, from $51.1 million, or
21.4% of net sales, for the same quarter a year ago. The decrease in gross
margin for the quarter ended June 28, 1998 was attributable to various factors
including sales volume declines in swimwear and stretch velvets, price
concessions for certain polyester commodity fabrics due to Asian competitive
factors, continued pressure on OEM pricing, certain quality and delivery issues
and reduced production levels due to lower sales volumes in order to avoid
inventory build. Additionally, margins on the cotton jersey sheeting have been
impacted by price concessions to retailers caused by foreign competition. The
Company's continued emphasis on high margin value-added products, productivity
and cost improvements, as well as raw material price concessions partially
offset this quarter's volume and performance related decreases.
Selling and administrative expenses increased to $73.7 million, or
10.9% of net sales, for the nine months ended June 28, 1998, compared to $71.6
million, or 10.7% of net sales, for the same period a year ago. For the quarter
ended June 28, 1998, selling and administrative expenses were $23.9 million, or
10.3% of net sales, compared to $24.2 million, or 10.2% of net sales, for the
same quarter a year ago. The increase in selling and administrative expenses for
the nine month period ended June 28, 1998 was attributable to certain design,
marketing and research and development efforts related to new products, new
technologies, trade show participation and cooperative developments throughout
the Company. This increase was also attributable to sales volume and promotion
related increases especially related to retail home fashions. For the quarter,
lower incentive compensation expense more than offset the increases.
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Page 11
Interest expense for the nine months ended June 28, 1998 was $8.8
million compared to $13.0 million for the same period a year ago. For the
quarter ended June 28, 1998, interest expense was $3.2 million compared to $3.7
million for the same prior year quarter. The decrease in interest expense was
primarily attributable to the decrease in long term debt as a result of the
conversion of the convertible debentures during the third quarter of fiscal
1997. Short-term interest expense increased slightly for the quarter due to an
increase in average short-term borrowings of approximately $8.0 million.
Other expense, net for the nine months ended June 28, 1998 was $0.6
million compared to $3.1 million for the same period a year ago. For the quarter
ended June 28, 1998, other expense, net was $0.3 million compared to $1.0
million for the same prior year period. This decrease for the quarter and
nine-month period is primarily attributable to sales of property and
investments.
The income tax provision for the first nine months of 1998 was $14.4
million, or 33.5% of income before income taxes, compared to $14.9 million, or
35.1% of income before income taxes for the same period a year ago. The decrease
in the effective tax rate was primarily due to the statutory rate reduction in
Europe, lower effective state tax rates, the impact of certain income tax
credits and increased benefits from the Foreign Sales Corporation.
Net income for the nine months ended June 28, 1998 was $28.6 million,
or $1.12 per basic share, compared to $27.4 million, or $1.26 per basic share,
for the comparable period of the previous year. For the quarter ended June 28,
1998, net income was $12.8 million, or $.50 per basic share, compared to net
income of $14.5 million, or $.67 per basic share, for the same quarter a year
ago.
Liquidity and Capital Requirements
At June 28, 1998, working capital was $211.4 million compared to $214.0
million at September 28, 1997. The decrease in working capital is primarily due
to the increase in short term borrowings to fund seasonal inventory
requirements. The Company maintains flexibility with respect to its seasonal
working capital needs through a committed revolving credit facility of $150
million and its continued access to other traditional sources of funds,
including uncommitted lines of credit aggregating $185 million, and the ability
to receive advances against its factored accounts receivable. At June 28, 1998,
no borrowings were outstanding against the Company's $150 million credit
facility, and the Company's borrowing utilization under its uncommitted bank
lines of credit was $112.0 million. Management believes that the Company's
financial position and operating performance will continue to provide the
Company with the ability to obtain necessary capital from the appropriate
financial markets.
Contingencies and Future Operations
Since January 1992, the Company has been involved in discussions with
the United States Environmental Protection Agency ("EPA") regarding remedial
actions at its Gold Mills, Inc. ("Gold") facility in Pine Grove, Pennsylvania
which was acquired in October 1986. Between 1988 and 1990, the Company
implemented a number of corrective measures at the facility in conjunction with
the Pennsylvania Department of Environmental Resources and incurred
approximately $3.5 million in costs. Subsequently, through negotiations with the
EPA, Gold entered into a Final Administrative Consent Order with the EPA,
effective October 14, 1992. Pursuant to such order, Gold has performed (i)
certain measures designed to prevent any potential threats to the environment at
the facility and (ii) an investigation to fully determine the nature of any
release of hazardous substances at the facility. The Company has not received a
response to its report filed with the EPA. Upon receipt of EPA comments, Gold
will conduct a study to evaluate alternatives for any corrective action which
may be necessary at the facility. The failure of Gold to comply with the terms
of the Consent Order may result in the imposition of monetary penalties against
Gold. In the fourth quarter of 1992, a pre-tax charge of $8.0 million was
provided for the estimated future cost of the additional remediation.
<PAGE>
Page 12
During the fourth quarter of 1992, the Company also received a Notice
of Violation from the North Carolina Division of Environmental Management
concerning ground water contamination on or near one of its North Carolina
facilities. The Company has voluntarily agreed to allow the installation of
monitoring wells at the site but denies that such contaminants originated from
the Company's operations or property. An additional pre-tax charge of $1.3
million was provided in the fourth quarter of 1992 to reflect the estimated
future costs of monitoring this and other environmental matters including the
removal of underground storage tanks at the Company's facilities. The Company
has removed substantially all underground storage tanks at its facilities. At
June 28, 1998, environmental accruals amounted to $5.5 million of which $4.5
million is non-current and is included in other deferred liabilities in the
balance sheet.
The Company is also involved in various litigation arising in the
ordinary course of business. Although the final outcome of these legal and
environmental matters cannot be determined, based on the facts presently known,
it is management's opinion that the final resolution of these matters will not
have a material adverse effect on the Company's financial position or future
results of operations.
The Asian economy has experienced significant market and economic
uncertainties. While the fundamentals of our core businesses are sound, the
Asian crisis has had and will continue to have an impact on certain sectors of
our business.
The Year 2000 issue affecting most entities, including the Company,
results from the possible inability of internal and external computer systems
and applications to recognize and process data pertaining to years after 1999.
Over the last five years, the Company has committed significant resources to the
reengineering of its business processes and information systems. The education,
identification, evaluation, implementation and testing of changes to systems and
applications to achieve Year 2000 compliance within the Company's operational,
manufacturing and financial areas have been an integral part of this process.
Based upon recently completed Year 2000 compliance assessments of both internal
information technology and embedded systems, the Company expects to successfully
implement any systems and programming changes necessary prior to the turn of the
century in all of its domestic and international operations. The planning,
inventory and impact analysis phases have been completed. The remediation phase
of the project is expected to be completed by March, 1999 and the final testing
phase is scheduled for July, 1999. The Company expects to finalize any necessary
contingency plans by the spring of 1999. Management believes that the cost of
the remediation plan for completion of Year 2000 compliance tasks will not have
a material effect on the Company's future results of operations or financial
condition. The Company continues to work with its customers, suppliers, and
other third parties to identify external weaknesses and provide solutions. Year
2000 compliance questionnaires have been forwarded to our material third
parties. While the Company continues to gather responses to such questionnaires,
of the 50 percent response rate received thus far, no material business
interruption issues have been identified. There can be no assurance, however,
that there will not be a delay in, increased costs or a material disruption of
business activities associated with Year 2000 readiness.
Safe Harbor-Forward-Looking Statements
From time to time, the Company may publish forward-looking statements
relative to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The Private Securities Litigation Reform Act of
1995 provides a safe harbor for forward-looking statements.
<PAGE>
Page 13
All statements other than statements of historical fact included in this
document, including, without limitation the statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are,
or may be deemed to be, forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. Important factors that could cause actual results to differ materially
from those discussed in such forward-looking statements include:
1. general economic factors including, but not limited to, changes in
interest rates, foreign currency translation rates, consumer
confidence, housing starts, trends in disposable income, changes in
consumer demand for goods produced, and cyclical or other downturns
2. the overall level of automotive production and the production of
specific car models
3. fashion trends
4. information and technological advances including Year 2000 issues
5. cost and availability of raw materials, labor and other resources
6. domestic and foreign competition
7. domestic and foreign governmental regulations and trade policies
8. reliance on significant customers
9. success of marketing, advertising and promotional campaigns
10. inability to achieve cost reductions through consolidation and
restructuring of acquired companies
PART II. OTHER INFORMATION
Items 1. - 6. Not Applicable
<PAGE>
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUILFORD MILLS, INC.
(Registrant)
Date: December 7, 1998 By: /s/ Terrence E. Geremski
------------------------------
Terrence E. Geremski
Executive Vice President/
Chief Financial Officer
<PAGE>
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GUILFORD MILLS, INC.
(Registrant)
Date: December 7, 1998 By:
---------------------------
Terrence E. Geremski
Executive Vice President/
Chief Financial Officer
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