================================================================================
FORM 10-Q
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 July 2, 2000
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 1-06922
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 number)
incorporation or organization)
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 July 2, 2000 - 19,194,295
NY2:\955954\02\KHM@02!.DOC\51040.0001
<PAGE>
PAGE 2
GUILFORD MILLS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 2, 2000
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 October 3, 1999 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
October 3, 1999.
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. For comparative purposes, certain amounts have been
reclassified to conform with fiscal 2000 presentation. The following condensed
consolidated financial statements are included:
Consolidated Statements of Income for the thirteen weeks ended July 2,
2000 and July 4, 1999
Consolidated Statements of Income for the thirty-nine weeks ended July
2, 2000 and the forty weeks ended July 4, 1999
Condensed Consolidated Balance Sheets as of July 2, 2000 and
October 3, 1999
Condensed Consolidated Statements of Cash Flows for the thirty-nine
weeks ended July 2, 2000 and the forty weeks ended July 4, 1999
Condensed Notes to Consolidated Financial Statements
<PAGE>
PAGE 3
Guilford Mills, Inc.
CONSOLIDATED STATEMENTS OF INCOME For
the Thirteen Weeks Ended July 2, 2000 and July 4,
1999
(In thousands except per share data)
(Unaudited)
-------------------------------------------------------------------------------
2000 1999
-------------------------------------------------------------------------------
NET SALES $ 211,678 $ 217,923
COSTS AND EXPENSES:
Cost of goods sold 185,550 187,151
Selling and administrative 23,805 25,751
-------------------------------------------------------------------------------
209,355 212,902
-------------------------------------------------------------------------------
OPERATING INCOME 2,323 5,021
INTEREST EXPENSE 5,010 4,161
OTHER EXPENSE, NET 1,742 283
-------------------------------------------------------------------------------
INCOME(LOSS) BEFORE INCOME TAX BENEFIT (4,429) 577
INCOME TAX BENEFIT (1,832) (354)
-------------------------------------------------------------------------------
NET INCOME(LOSS) $ (2,597) $ 931
-------------------------------------------------------------------------------
NET INCOME(LOSS)PER SHARE:
Basic $ (0.14) $ 0.04
Diluted (0.14) 0.04
-------------------------------------------------------------------------------
DIVIDENDS PER SHARE $ 0.11 $ 0.11
-------------------------------------------------------------------------------
See accompanying condensed notes to consolidated financial statements.
<PAGE>
PAGE 4
Guilford Mills, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Thirty-Nine Weeks Ended July 2, 2000
and the Forty Weeks Ended July 4, 1999
(In thousands except per share data)
(Unaudited)
-------------------------------------------------------------------------------
2000 1999
(39 WEEKS) (40 Weeks)
-------------------------------------------------------------------------------
NET SALES $ 629,269 $ 651,106
COSTS AND EXPENSES:
Cost of goods sold 539,493 548,017
Selling and administrative 75,494 78,369
-------------------------------------------------------------------------------
614,987 626,386
-------------------------------------------------------------------------------
OPERATING INCOME 14,282 24,720
INTEREST EXPENSE 14,173 12,534
OTHER (INCOME) EXPENSE, NET (4,848) 1,913
-------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX PROVISION 4,957 10,273
INCOME TAX PROVISION 1,753 2,224
-------------------------------------------------------------------------------
NET INCOME $ 3,204 $ 8,049
-------------------------------------------------------------------------------
NET INCOME PER SHARE:
Basic $ 0.17 $ 0.36
Diluted 0.17 0.36
-------------------------------------------------------------------------------
DIVIDENDS PER SHARE $ 0.33 $ 0.33
-------------------------------------------------------------------------------
See accompanying condensed notes to consolidated financial statements.
<PAGE>
PAGE 5
Guilford Mills, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
July 2, 2000 and October 3, 1999
(In thousands)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
JULY 2, October 3,
2000 1999
(UNAUDITED)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 11,214 $ 22,554
Accounts receivable, net 155,879 160,071
Inventories 138,506 136,772
Other current assets 22,889 19,344
----------------------------------------------------------------------------------------------------------------------
Total current assets 328,488 338,741
----------------------------------------------------------------------------------------------------------------------
Property, net 308,239 312,415
Other assets 102,509 102,275
----------------------------------------------------------------------------------------------------------------------
Total assets $ 739,236 $ 753,431
----------------------------------------------------------------------------------------------------------------------
LIABILITIES
Short-term borrowings $ 6,328 $ 112,009
Current maturities of long-term debt 509 532
Other current liabilities 74,783 98,540
----------------------------------------------------------------------------------------------------------------------
Total current liabilities 81,620 211,081
----------------------------------------------------------------------------------------------------------------------
Long-term debt 268,793 146,137
Other liabilities 54,147 55,268
----------------------------------------------------------------------------------------------------------------------
Total long-term liabilities 322,940 201,405
----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' INVESTMENT
Common stock 655 655
Capital in excess of par 120,532 120,532
Retained earnings 360,683 363,812
Accumulated other comprehensive loss (16,285) (12,279)
Other stockholders' investment (130,909) (131,775)
----------------------------------------------------------------------------------------------------------------------
Total stockholders' investment 334,676 340,945
----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' investment $ 739,236 $ 753,431
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying condensed notes to consolidated financial statements.
<PAGE>
PAGE 6
<TABLE>
<CAPTION>
Guilford Mills, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Thirty-Nine Weeks Ended July 2, 2000 and the Forty Weeks Ended July 4, 1999
(In thousands)
(Unaudited)
----------------------------------------------------------------------------------------------------------------------
2000 1999
(39 WEEKS) (40 Weeks)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,204 $ 8,049
Depreciation and amortization 50,091 48,948
Other adjustments to net income, net (5,479) 6,990
Net changes in operating assets and liabilities (28,509) (5,603)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,307 58,384
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property (45,854) (42,827)
Other investing activities, net 5,811 2,779
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (40,043) (40,048)
----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term (repayments) borrowings, net (105,507) 7,623
Payments of long-term debt (707) (145,405)
Proceeds from issuance of long-term debt, net of deferred financing costs paid 122,456 140,233
Purchases of treasury shares (46) (12,769)
Other financing activities, net (6,333) (24,718)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 9,863 (35,036)
----------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (467) (659)
----------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (11,340) (17,359)
BEGINNING CASH AND CASH EQUIVALENTS 22,554 30,447
----------------------------------------------------------------------------------------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 11,214 $ 13,088
----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying condensed notes to consolidated financial statements.
<PAGE>
PAGE 7
GUILFORD MILLS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 2, 2000
(In thousands except share data)
(Unaudited)
1. Reclassifications -- For comparative purposes, certain amounts for fiscal
1999 have been reclassified to conform to the fiscal 2000 presentation.
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.
3. Foreign Currency Translation -- The Company has a majority-owned foreign
subsidiary that operates in Mexico. During the Company's first quarter in fiscal
1999, the economy in Mexico was considered highly inflationary and the financial
results for the Company's Mexican subsidiary were remeasured. Remeasurement
adjustments are included in the results of operations along with transaction
gains and losses for the first quarter of fiscal 1999. Effective with the
Company's second quarter in fiscal 1999, Mexico's economy was no longer
considered highly inflationary and the financial results for the Company's
Mexican subsidiary have been translated. Translation gains or losses are
reflected in the stockholders' investment section of the balance sheet in
accumulated other comprehensive loss.
4. Per Share Information -- 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 weighted average shares used in computing basic net income for
the thirteen weeks ended July 2, 2000 and July 4, 1999 were 18,899,000 and
22,059,000, respectively. The weighted average shares used in computing basic
net income for the thirty-nine weeks ended July 2, 2000 and the forty weeks
ended July 4, 1999 were 18,899,000 and 22,456,000, respectively.
Diluted earnings per share information also considers the dilutive effect of
stock options and restricted stock grants. The weighted average shares used in
computing diluted net income per share for the thirteen weeks ended July 2, 2000
and July 4, 1999 were 18,939,000 and 22,059,000, respectively. The weighted
average shares used in computing diluted net income per share for the
thirty-nine weeks ended July 2, 2000 and the forty weeks ended July 4, 1999 were
18,958,000 and 22,467,000 respectively.
The difference between the number of weighted average shares used to calculate
basic and diluted earnings per share was due entirely to the number of
outstanding stock options and restricted stock. During the quarterly periods
ended July 2, 2000 and July 4, 1999, outstanding stock options and shares of
restricted stock of 1,956,000 and 1,871,000, respectively, were antidilutive and
not included in the calculation of diluted net income per share. During the
nine-month periods ended July 2, 2000 and July 4, 1999, outstanding stock
options and shares of restricted stock of 2,011,000 and 1,593,000, respectively,
were antidilutive for either part or all of the period and not included in the
calculation of diluted net income per share.
The Company has authorized 1,000,000 shares of $1 par preferred stock. As of
July 2, 2000 and October 3, 1999, no such shares were issued.
<PAGE>
PAGE 8
5. 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.
Inventories at July 2, 2000 and October 3, 1999 consisted of the following:
<TABLE>
<CAPTION>
July 2, October 3,
2000 1999
------------------ -----------------
<S> <C> <C>
Finished Goods $ 48,211 $ 45,143
Raw Materials and work in process 94,560 96,527
Manufacturing supplies 8,469 8,056
------------------ -----------------
Total inventories valued at FIFO cost 151,240 149,726
Less - Adjustments to reduce FIFO cost to LIFO cost, net (12,734) (12,954)
------------------ -----------------
Total inventories $138,506 $136,772
================== =================
</TABLE>
6. Accumulated Depreciation -- Accumulated depreciation at July 2, 2000 and
October 3, 1999 was $540,324 and $497,871, respectively.
7. Debt Refinancing - On May 26, 2000, the Company entered into a new $130,000
revolving credit facility, replacing a $150,000 revolving credit facility. The
new revolving credit facility is secured by substantially all of the Company's
assets and will mature on May 26, 2003. This facility has higher effective
interest rates and more restrictive covenants than the Company's previous
facility. At the same time the Company entered into the new revolving credit
facility, its 7.06% Senior Notes due 2008 became ratably secured with the bank
facility. Proceeds from the new revolving credit facility were used to repay
borrowings on uncommitted lines of credit and the previous revolving credit
facility.
8. Comprehensive Income(Loss) -- For the thirteen weeks ended July 2, 2000 and
July 4, 1999, total comprehensive loss was ($6,312) and ($2,211), respectively.
Included in total comprehensive loss for the periods were net income(loss) of
($2,597) and $931, respectively, and foreign currency translation losses of
($3,715) and ($3,142), respectively. Comprehensive income(loss) was ($809) and
$3,009, consisting of net income of $3,197 and $8,049 and foreign currency
translation losses of ($4,006) and ($5,040) for the nine-month periods ended
July 2, 2000 and July 4, 1999, respectively.
9. Financial Instruments -- During fiscal 2000, the Company adopted a policy to
manage the exposure related to sales denominated in the Euro through the use of
forward exchange contracts. The duration of these contracts is less than 12
months and attempts to match the anticipated receivable collections. For the
quarterly and nine-month periods ended July 2, 2000 realized gains totaled $931
and $2,061, respectively. At July 2, 2000 the net nominal amount of the
remaining contracts was $6,965 and unrealized mark-to-market gains, recorded in
other current assets in the balance sheet, were $742. These transactions do not
qualify as hedges for financial reporting purposes and, as a result, changes in
the fair value of the contracts are recorded as other income in the statement of
income.
10. Segment Information -- Segment information for the quarterly periods ended
July 2, 2000 and July 4, 1999 was as follows:
<TABLE>
<CAPTION>
HOME
JULY 2, 2000 APPAREL AUTOMOTIVE FASHIONS OTHER TOTAL
------------- -------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
External sales $74,296 $99,312 $26,349 $11,721 $211,678
Intersegment sales 27,863 27,863
Operating profit(loss) (3,462) 5,909 808 (933) 2,323
Interest expense 5,010
Other expense, net 1,742
Income(loss) before
income taxes (4,429)
============= ============== ================ ============= =============
</TABLE>
<PAGE>
PAGE 9
<TABLE>
<CAPTION>
JULY 4, 1999 APPAREL AUTOMOTIVE HOME FASHIONS OTHER TOTAL
<S> <C> <C> <C> <C> <C>
External sales $86,547 $93,875 $25,547 $11,954 $217,923
Intersegment sales 33,261 33,261
Operating profit(loss) (321) 8,957 (5,234) 1,619 5,021
Interest expense 4,161
Other expense, net 283
Income before income taxes 577
============= ============== ================ ============= =============
Segment information for the nine-month periods ended July 2, 2000 and July 4,
1999 was as follows:
JULY 2, 2000 APPAREL AUTOMOTIVE HOME FASHIONS OTHER TOTAL
------------- -------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
External sales $220,940 $298,348 $75,176 $34,805 $629,269
Intersegment sales 86,439 86,439
Operating profit(loss) (6,948) 20,487 470 267 14,276
Interest expense 14,173
Other income, net (4,847)
Income before income taxes 4,950
============= ============== ================ ============= =============
JULY 4, 1999
External sales $252,785 $272,451 $90,726 $35,144 $651,106
Intersegment sales 96,950 96,950
Operating profit(loss) 3,730 23,379 (3,329) 940 24,720
Interest expense 12,534
Other expense, net 1,913
Income before income taxes 10,273
============= ============== ================ ============= =============
</TABLE>
11. Other expense - Other expense for the third quarter of fiscal 2000 included
the hedging loss of $380 comprised of $1,311 of market-to-market loss and $931
of realized gain and a $1,008 loss related to the Company's investment in Unger
Fabrik. For the nine months ended July 2, 2000, a hedging gain of $2,802, of
which $742 was unrealized, a demutualization gain of $5,530, and a loss of
$2,991 related to the Company's Unger Fabrik investment were included in other
income.
12. Subsequent Event - Subsequent to the end of the third quarter, the Company
announced a strategic realignment of its apparel operations designed to provide
a more competitive cost structure and to increase profitability. In connection
with the realignment, the Company will discontinue the dyeing and finishing
operations at its Fishman plant once current production is completed and will
also reduce its dyeing and finishing capacity at its Greenberg plant, both in
Greensboro, North Carolina. The Company will continue to produce fabrics for the
apparel segment in its remaining apparel plants in Pine Grove, Pennsylvania and
Cobleskill, New York and also in the Company's soon to be completed
manufacturing facility in Tampico, Mexico.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
---------------------
The third quarter periods of fiscal 2000 and 1999 each consisted of thirteen
weeks. The nine-month period of fiscal 2000 consisted of thirty-nine weeks. The
nine-month period of fiscal 1999 had forty weeks.
<PAGE>
PAGE 10
Net sales for the third quarter of fiscal 2000 decreased $6.2 million, or 2.8%
to $211.7 million, compared to net sales of $217.9 million in the third quarter
of the prior year. For the nine-month period ended July 2, 2000, net sales were
$629.3 million, a decrease of $21.8 million from net sales of $651.1 million for
the nine months ended July 4, 1999.
Sales in the Automotive segment increased 5.8% in the third quarter of fiscal
2000 to $99.3 million as compared to $93.9 million for the same quarter in the
prior year. The continued strength of the North American automobile production,
which generated higher U.S. bodycloth sales, and the return of a major customer
in Mexico caused the sales increase from the prior year. The Company continued
to supply bodycloth for several popular models and continued to penetrate other
models that are increasing in market share. Partially offsetting the sales
growth were Euro currency exposures and unfavorable product mix changes within
the U.K. operations. For the nine months ended July 2, 2000, Automotive sales
were $298.3 million compared to $272.5 million in the first nine months of
fiscal 1999, an increase of 9.5%. This increase was also attributable to the
strength of the U.S. automotive market and higher sales in Mexico.
Apparel segment sales for the third quarter ended July 2, 2000 declined 14.1% to
$74.3 million from $86.5 million in the comparable quarter of the prior year.
All of the apparel sectors experienced a sales decrease from the prior year.
Sales of elastics/intimate apparel fabrics, including lace products, were lower
than in the prior year as the Company's primary customers, faced with weaker
retail sales, concentrated on eliminating existing inventory. Ready-to-wear
fabric sales were down due to low-priced competition, diminished emphasis on
velvets and circular knit manufacturing problems. While sales of printed
swimwear were flat during the quarter, solid swimwear sales were down due to the
acquisition by a third party of a major customer. Mature commodity fabric
(linings, sleepwear and robewear) sales declined primarily as a result of a
decline in demand for these products and lower sales to a major customer who
filed bankruptcy late in fiscal 1999. Apparel sales in the first nine months of
fiscal 2000 were $220.9 million and decreased 12.6% from sales in the first nine
months of fiscal 1999 of $252.8 million.
Sales in the Home Fashions segment for the third quarter of fiscal 2000
increased 3.5% to $26.4 million from $25.5 million in the prior year. The
increase was due to strong bedding sales including several new top-of-bed
programs introduced late in fiscal 1999 and strong satin bedding shipments.
Additionally, window curtain sales to all major customers were up 30-40%. The
retail increases were partially offset by decreases in fabric sales. Home
Fashions sales for the first nine months were $75.2 million, a decrease of 17.1%
from sales of $90.7 million in fiscal 1999. This decrease was due primarily to
exiting the cotton jersey knit sheeting program.
Third quarter sales in the Other segment, which includes specialty fabrics and
fibers, decreased 2.5% to $11.7 million compared to $12.0 million in the third
quarter of the previous year. This decrease resulted from the continued loss of
sales of hook and loop closure fabrics which was partially offset by higher
sales in Mexico, where the economy has been strong, and in the Company's fibers
operations. Year-to-date, Other sales were $34.8 million and slightly lower than
sales of $35.1 million in fiscal 1999.
Gross margin for the third quarter of fiscal 2000 decreased to $26.1 million or
12.3% of net sales, from $30.8 million or 14.1% of net sales, for the same
quarter a year ago. The decrease was predominately the result of declining sales
volume in the Apparel and Other segments and in the U.K. automotive operations.
Apparel profitability was further impacted by a negative sales mix with a
decline of the Company's value added elastics/intimate business and poor
manufacturing performance in the Company's circular knit operations. While the
Company has reduced the impact of capacity underutilization in certain
facilities by shifting production to U.S. Automotive products, the U.S.
Automotive operations continued to suffer from operating inefficiencies caused
by continuous seven-day production and duplicate costs. The effect of raw
material price increases has been minimal, as the Company has been able to avoid
higher prices from domestic suppliers with lower-priced foreign materials. For
the first nine months, gross margin was $89.8 million or 14.3% of net sales, a
decrease from the prior year's gross margin of $103.1 million or 15.8% of net
sales.
Selling and administrative expenses for the third quarter of fiscal 2000 were
$23.8 million compared to $25.8 million for the prior year, a decrease of 7.8%.
The decrease was the result of tight cost controls in every business unit.
Year-to-date sales and administrative expenses were down 3.7% ($75.5 vs. $78.4
million). Severance costs of $1.2 million related to downsizing in the Apparel
<PAGE>
PAGE 11
segment which occurred in the first quarter and normal salary increases have
been more than offset by reductions in all other areas.
Interest expense for the third quarter of fiscal 2000 was $5.0 million compared
to $4.2 million for the third quarter last year. The increase in interest
expense was attributable to an overall increase in the level of debt and higher
weighted average interest rates. For the first nine months of fiscal 2000,
interest expense was $14.2 million versus $12.5 million in fiscal 1999. The
increase was again the result of an overall higher debt level as well as the
full effect of interest on private placement debt, which replaced lower rate
borrowings during the first quarter of fiscal 1999.
For the quarter ended July 2, 2000, other expense, net was $1.7 million compared
to $0.3 million for the prior year's comparable period. Included in other
expense for the third quarter was a $1.3 million market-to-market loss and $0.9
million of realized gain and a $1.0 million loss related to the Company's
investment in Unger Fabrik, a cut and sew operation. For the nine months ended
July 2, 2000, other income, net was $4.8 million and included foreign currency
hedging gains of $2.8 million, demutualization gains of $5.5 million and a loss
of $3.0 million related to the Company's Unger Fabrik investment. For the
comparable period of fiscal 1999, other expense was $1.9 million.
The income tax provision for the first nine months of fiscal 2000 was $1.8
million, or 35.4% of income before income taxes, compared to $2.2 million, or
21.4% of income before income taxes for the same period a year ago. The
estimated effective tax rate increased year over year primarily as a result of
the fiscal 1999 tax provision reflecting a one-time net benefit of $3.7 million
derived from a dividend paid by Guilford's UK subsidiaries to the parent under
the Advance Corporation Tax (ACT) rules and the US-UK Income Tax Treaty.
For the quarter ended July 2, 2000, the net loss was $2.6 million, or $(0.14)
per diluted share, compared to net income of $0.9 million, or $0.04 per diluted
share, for the third quarter a year ago. Net income for the nine months ended
July 2, 2000 was $3.2 million, or $0.17 per diluted share, compared to $8.0
million, or $0.36 per diluted share, for the comparable nine-month period in the
prior year.
Liquidity and Capital Requirements
----------------------------------
At July 2, 2000, working capital was $246.9 million compared to $127.7 million
at October 3, 1999. The increase in working capital resulted primarily from the
reclassification of borrowings from short-term to long-term debt with the
securing of the 3-year revolving credit facility. Additionally, decreases in
other current liabilities of $23.8 million were due primarily to accounts
payable decreases and lower compensation accruals.
The Company generally maintains the annual capital expenditures near the
depreciation expense. However, for the remainder of fiscal 2000 and for the next
fiscal year, capital expenditures are expected to be above depreciation expense
due to the Company's expansion in Mexico. This development in Mexico will be
funded through the Company's available credit facilities and cash flows.
On May 26, 2000, the Company entered into a new $130 million revolving credit
facility, replacing a $150 million revolving credit facility. The new revolving
credit facility is secured by substantially all of the Company's assets and will
mature on May 26, 2003. The new revolving credit facility has higher effective
interest rates and more restrictive covenants than the Company's previous
facility. At the same time the Company entered into the new revolving credit
facility, its 7.06% Senior Notes due 2008 became ratably secured with the bank
facility. Proceeds from the new revolving credit facility were used to repay
borrowings on uncommitted lines of credit and the previous revolving credit
facility. In addition, the Company's previously uncommitted credit facilities
have been terminated. The Company maintains limited flexibility with respect to
its working capital needs through the $130 million revolving credit facility and
the ability to receive advances of up to $30 million against its factored
accounts receivable. At July 2, 2000, borrowing availability under the Company's
revolving credit facility was $8.3 million. There were no advances against
factored accounts receivables. The textile industry has continued to experience
tightened lending practices from traditional financial institutions due
principally to lower reported earnings. Management believes that while the
Company has less liquidity under current facilities than previously, it has the
ability to obtain additional capital from the appropriate financial markets if
<PAGE>
PAGE 12
required. The Company believes that internally generated operating funds and
funds available under its credit facilities will be sufficient to meet its needs
for normal working capital and capital spending as permitted under the terms of
the revolving credit facility.
On July 27, 2000, the Company announced a strategic realignment of its apparel
operations designed to provide a more competitive cost structure and to increase
profitability. Total costs associated with the restructuring are expected to be
approximately $35 million to $40 million. These costs will be incurred during
the fourth quarter of fiscal 2000 and all of fiscal year 2001. The Company will
record a restructuring charge in the fourth quarter of fiscal 2000 of
approximately $16 million to $19 million and expects to incur an additional $6
million in related costs for an estimated impact on fourth quarter earnings of
$0.75 to $0.85 per share. The remaining costs will be incurred in fiscal year
2001. The net savings from the cost cutting initiatives are expected to have a
positive impact on EPS of $0.27 to $0.34 for fiscal year 2001. The Company
expects the net savings to be greater in future periods. As a result of this
restructuring the Company anticipates that it will not be in compliance, as of
the end of its fiscal year ending October 1, 2000, with certain covenants in its
revolving credit facility and agreements relating to the Senior Notes and has
commenced discussions with its lenders to obtain appropriate amendments or
waivers. Management believes it will obtain the amendments or waivers but
expects the amendments or waivers will require increases to the effective
interest rate and covenant modifications for the Revolving Credit Facility and
the Senior Notes.
The Board of Directors, at its July 26, 2000 meeting, decided to suspend the
Company's quarterly dividend in light of current business conditions.
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. Subsequently, through
negotiations with the EPA, Gold entered into a Final Administrative Consent
Order, 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. In addition, upon
instruction by the EPA, 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.
During fiscal 1992, the Company received a Notice of Violation from the North
Carolina Division of Environmental Management concerning ground water
contamination on or near one of its facilities. The Company 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. The Company
has removed all underground storage tanks at all its U.S. facilities.
At July 2, 2000, environmental accruals amounted to $3.9 million of which $2.9
million was non-current and was included in other non-current liabilities in the
accompanying balance sheet.
Several 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 were consolidated by order of the Court on January
8, 1999. A Consolidated and Amended Class Action Complaint (the "Consolidated
Complaint") was filed on February 8, 1999. The Consolidated Complaint purports
to allege claims under Sections 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 Consolidated Complaint alleges that, during
the alleged 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 the
Consolidated Complaint.
<PAGE>
PAGE 13
On April 9, 1999, defendants filed a motion to dismiss the Consolidated
Complaint. On July 21, 1999, the Court entered an order dismissing all claims
against one of the Company's officers but denied the motion to dismiss of the
Company and the remaining individual defendant (Bruno Hofmann).
The Court granted plaintiffs' motion for class certification by Order dated
March 22, 2000. On May 8, 2000, the parties reached a settlement agreement in
principle with respect to this lawsuit. Under the terms of this agreement in
principle, the parties have agreed to settle the litigation for $2.35 million,
all of which will be covered by insurance. The agreement in principle is subject
to (i) notice to class members with an opportunity for such class members to
opt-out, and (ii) Court approval. A hearing as to whether a settlement should be
approved is scheduled for September 19, 2000.
The Company announced that it has consented to the entry of a cease and desist
order, issued by the Securities and Exchange Commission ("SEC") on July 24,
2000, relating to the previously announced SEC investigation into accounting
irregularities at the Company's Hofmann Laces unit. Without admitting or denying
any findings in the order, the Company agreed to cease and desist from
committing or causing any violation of certain provisions of the federal
securities laws. No monetary fines or penalties were imposed against the
Company. No current officer, director or employee of the Company or Hofmann
Laces was charged by the SEC with any wrongdoing nor were any fines or penalties
imposed against any such person. In a separate SEC proceeding relating to the
Hofmann Laces accounting investigation, a former controller of the Hofmann Laces
unit consented to the entry of a permanent injunction, requiring him to pay a
$25,000 civil penalty. The entry of these orders concludes the SEC's
investigation into the Hofmann Laces accounting matter.
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.
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.
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
5. cost and availability of raw materials, labor and natural and other
resources
6. domestic and foreign competition
7. domestic and foreign governmental regulations and trade policies
8. reliance on major customers
9. success of marketing, advertising and promotional campaigns
10. inability to achieve cost reductions through consolidation and
restructuring
<PAGE>
PAGE 14
11. inability to obtain financing on favorable terms or to obtain
amendments or waivers with respect to non-compliance with certain
covenants in loan agreements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk for changes in interest rates and foreign
currency exchange rates and has limited exposure to commodity price risk. The
Company does not hold or issue any financial instruments for trading purposes.
During the third quarter ended July 2, 2000, the Company did not experience any
material changes with respect to its sensitivity or management of interest rate
or commodity price risk. However, the Company is subject to foreign currency
risk primarily related to sales and expenditures and other transactions
denominated in foreign currencies and investments in foreign subsidiaries. The
Company manages the exposure related to this risk through forward exchange
contracts with maturities generally less than 12 months. The changes in the
market value of such contracts have a high correlation to the price changes in
the currency of the related hedged or anticipated transactions to which they
relate. On July 2, 2000, the Company had the following outstanding foreign
currency forward contracts:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Forward
Currency Nominal Average Gain
Contracts Amount Rate Fair Value (Loss)
<S> <C> <C> <C> <C>
(Hedge of Firm Commitments) (In thousands)
--------------------------------------------------------------------------------------------------
Receive Swiss Francs/Pay U.S. Dollar
1,408 1.6951 1,468 60
-------------------- ----------------- ------------------- ------------------- -------------------
Receive German Deutsche Marks/ Pay U.S. Dollar
1,448 2.0209 1,428 (20)
-------------------- ----------------- ------------------- ------------------- -------------------
Receive Euro/Pay Mexican Peso
375 12.8590 296 (79)
-------------------- ----------------- ------------------- ------------------- -------------------
Receive U.S. Dollar/Pay British Pound
8,250 1.5109 8.250 -
-------------------- ----------------- ------------------- ------------------- -------------------
(Hedge of Anticipatory Flows) (In thousands)
--------------------------------------------------------------------------------------------------
Receive British Pound/Pay Euro
10,701 0.66320 11,348 647
-------------------- ----------------- ------------------- ------------------- -------------------
Receive Euro/Pay British Pound
3,736 0.60795 3,830 94
-------------------- ----------------- ------------------- ------------------- -------------------
</TABLE>
(1) Contracts generally mature within 12 months
(2) Nominal contract amount as reflected in the underlying contract
(3) Weighted average contract rates represent the rates of exchange as
reflected in the underlying contract
(4) Fair value equals the contract amount presented in U.S. dollar
equivalents based upon the July 2, 2000 exchange rates obtained from
brokers or referenced from publicly available market information
(5) Gain/(loss) on firm commitments represents the net unrecognized
gain/(loss) based upon the July 2, 2000 exchange rate. Gain on
anticipatory commitments represents the unrealized gain in other income
based upon the July 2, 2000 exchange rate
<PAGE>
PAGE 15
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings.
------------------
Reference is made to the discussion under the caption "Contingencies and Future
Operations" in Item 2 of Part I of this Form 10-Q, which discussion is
incorporated herein by reference.
Items 2 - 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits:
(3) Certificate of Correction of the Restated Certificate of
Incorporation of the Company.
(4) Rights Agreement, dated as of July 26, 2000, between the
Company and American Stock Transfer & Trust Company, as Rights
Agent (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the SEC on
August 9, 2000).
(10)(a) Revolving Credit Agreement, dated May 26, 2000, among the
Company and the banks listed therein.
(10)(b)* Form of Severance Agreement between the Company and certain of
its officers.
(10)(c)* Form of Severance Agreement between the Company and certain of
its employees.
(27) Financial Data Schedule.
* Denotes management contract or compensatory plan or arrangement
(b) Reports on Form 8-K. Not Applicable
<PAGE>
PAGE 16
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: August 16, 2000 By: Terrence E. Geremski
------------------------------
Terrence E. Geremski
Executive Vice President/
Chief Financial Officer
<PAGE>
PAGE 17
EXHIBIT INDEX
-------------
Exhibit No. Description
---------- -----------
(3) Certificate of Correction of the Restated Certificate of
Incorporation of the Company.
(4) Rights Agreement, dated as of July 26, 2000, between the
Company and American Stock Transfer & Trust Company, as Rights
Agent (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K filed with the SEC on
August 9, 2000).
(10)(a) Revolving Credit Agreement, dated May 26, 2000, among the
Company and the banks listed therein.
(10)(b)* Form of Severance Agreement between the Company and certain of
its officers.
(10)(c)* Form of Severance Agreement between the Company and certain of
its employees.
(27) Financial Data Schedule.
* Denotes management contract or compensatory plan or arrangement
