UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
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 33-11479
SYNTHETIC INDUSTRIES, INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 58-1049400
- ---------------------------------- ------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
309 LaFayette Road, Chickamauga, Georgia 30707
- ------------------------------------------------------------ ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (706) 375-3121
-------------------------
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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____
The number of shares of the Registrant's Common Stock, par value $1.00
per share, outstanding as of August 12, 1999 was 8,645,231.
<PAGE>
Part I-FINANCIAL INFORMATION SYNTHETIC INDUSTRIES, INC.
Item 1. Financial Information AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
ASSETS 1999 1998
---- -----
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ...........................................................................$ 324 $ 285
Accounts receivable, net of allowance for
doubtful accounts of $2,700 and $2,714........................................ 64,079 64,251
Inventory (Note 3).............................................................. 58,000 52,450
Other current assets ........................................................... 19,618 17,309
------- -------
TOTAL CURRENT ASSETS........................................................ 142,021 134,295
PROPERTY, PLANT AND EQUIPMENT, net (Note 4)....................................... 231,196 218,449
OTHER ASSETS...................................................................... 87,776 87,770
-------- -------
$460,993 $440,514
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 23,833 $ 26,438
Accrued expenses and other current liabilities.................................. 13,953 13,653
Income taxes payable............................................................ 4,087 285
Interest payable................................................................ 6,058 2,154
Current maturities of long-term debt (Note 5)................................... 1,259 5,500
-------- ---------
TOTAL CURRENT LIABILITIES................................................... 49,190 48,030
LONG-TERM DEBT (Note 5)........................................................... 246,375 236,843
DEFERRED INCOME TAXES ............................................................ 32,996 32,996
STOCKHOLDERS' EQUITY:
Common stock (par value $1.00 per share, authorized 25,000,000,
Issued 8,682,067 and 8,668,750, respectively)................................ 8,682 8,669
Treasury stock (36,836 and 71,546 shares, respectively)......................... (790) (1,534)
Additional paid-in capital ..................................................... 94,228 94,392
Cumulative translation adjustments.............................................. (5) 171
Retained earnings............................................................... 30,317 20,947
-------- ---------
TOTAL STOCKHOLDERS' EQUITY.................................................. 132,432 122,645
$460,993 $440,514
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1999 1998 1999 1998
------ ----- ---- -----
<S> <C> <C> <C> <C>
Net sales................................................... $103,976 $104,531 $275,663 $260,383
-------- -------- -------- --------
Costs and expenses:
Cost of sales............................................. 66,538 68,482 182,077 176,199
Selling expenses.......................................... 11,551 10,666 31,206 28,067
General and administrative expenses....................... 7,975 6,867 26,006 22,099
Plant consolidation costs (Note 8)........................ 920 - 4,300 -
Amortization of excess purchase price over net
assets acquired and other intangibles................... 747 761 2,227 2,073
-------- ------- -------- --------
87,731 86,776 245,816 228,438
Operating profit...................................... 16,245 17,755 29,847 31,945
------ ------ ------ ------
Other expenses:
Interest expense ......................................... 4,168 4,574 14,020 14,079
Amortization of deferred financing costs.................. 197 189 591 527
------- ------- -------- --------
4,365 4,763 14,611 14,606
----- ------- ------ ------
Income before income tax provision ......................... 11,880 12,992 15,236 17,339
Income tax provision (Note 7)............................... 4,574 5,237 5,866 7,000
------- ------ ---------- --------
NET INCOME ................................................. $7,306 $7,755 $9,370 $10,339
======= ====== ====== =======
Net income per share:
Basic................................................... $ 0.84 $ 0.90 $ 1.08 $ 1.19
Diluted................................................. 0.81 0.87 1.05 1.14
Average shares outstanding:
Basic.................................................. 8,675,610 8,668,750 8,672,651 8,665,972
Diluted................................................ 9,011,183 8,940,674 8,919,551 9,046,468
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 9,370 $ 10,339
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization...................................... 19,143 15,735
Write off of assets in connection with plant consolidation......... 843 -
Provision for bad debts............................................ 347 33
Deferred income taxes.............................................. - 1,500
Change in operating assets and liabilities, net of acquisition:
Accounts receivable................................................ (178) (3,183)
Inventories........................................................ (5,553) (4,442)
Other assets....................................................... (5,306) (2,963)
Accounts payable................................................... (2,628) 5,496
Accrued expenses and other current liabilities..................... 300 (598)
Income taxes payable............................................... 3,802 3,253
Interest payable................................................... 3,904 3,611
----------- ----------
Net cash provided by operating activities......................... 24,044 28,781
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............................ (27,858) (38,879)
Acquisition of business.............................................. - (6,000)
---------- ----------
Net cash used in investing activities ............................ (27,858) (44,879)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments under term loan............................................ - (25,000)
Borrowings under the Credit Facility.................................. 5,743 50,304
Redemption of 12 3/4% Senior subordinated notes....................... - (7,403)
Repayments under capital lease obligations and other long-term debt... (2,336) (1,427)
Proceeds from sale of treasury stock under Employee Stock Purchase Plan 451 -
Proceeds from exercise of stock options............................... 142 85
Deferred financing costs.............................................. - (649)
---------- ---------
Net cash provided by financing activities.......................... 4,000 15,910
Effect of exchange rate changes on cash........................... (147) (30)
--------- ---------
NET INCREASE (DECREASE) IN CASH ........................................ 39 (218)
CASH AT BEGINNING OF PERIOD............................................. 285 338
---------- --------
CASH AT END OF PERIOD................................................... $ 324 $ 120
========= ========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest ............................................................. $ 11,937 $10,468
Income taxes.......................................................... 2,064 2,224
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Net capital obligation for purchase of equipment...................... 1,884 $7,550
Treasury stock conversion............................................. - 1,759
Acquisition of business:
Fair value of assets acquired......................................... - $5,293
Liabilities assumed and incurred...................................... - 4,880
Cash paid............................................................. - 6,000
</TABLE>
See notes to consolidated financial statements
<PAGE>
SYNTHETIC INDUSTRIES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except share and per share amounts)
(Information as of June 30, 1999 and for the
periods ended June 30, 1999 and 1998 is unaudited)
1. ORGANIZATION
Synthetic Industries, Inc., a Delaware corporation (the "Company"), was a wholly
owned subsidiary of Synthetic Industries L.P. (the "Partnership") until November
1, 1996. On that day, the Company completed the underwritten public offering
(the "Offering") of 2,875,000 shares of its common stock, par value $1.00 per
share ("Common Stock").
The Company manufactures and markets a wide range of primarily
polypropylene-based materials designed for support, strength and stabilization
applications. The Company's products replace commonly used materials in diverse
applications including: floor covering, geotextiles, erosion control, concrete
reinforcement and furniture construction fabrics. The Company manufactures and
sells more than two thousand products in over 65 end-use markets predominately
in North America, Europe and the Far East.
2. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of June 30, 1999 and for the periods
ended June 30, 1999 and 1998 included herein have been prepared, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the financial position at June
30, 1999 and 1998, and the results of operations for the three and nine months
then ended, have been made on a consistent basis. Certain information and
footnote disclosures included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although management believes
that the disclosures herein are adequate to make the information presented not
misleading. It is suggested that these consolidated financial statements be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial statements included in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1998. Operating results for the three and nine months ended June 30, 1999 may
not necessarily be indicative of the results that may be expected for the full
year.
<PAGE>
3. INVENTORY
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---- -------
<S> <C> <C>
Finished goods.......................... $41,122 $37,689
Work in process......................... 6,763 7,107
Raw materials........................... 10,115 7,654
------- -------
$58,000 $52,450
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---- ------
<S> <C> <C>
Land.................................... $ 4,585 $ 4,585
Buildings and improvements.............. 44,969 42,588
Equipment under capital lease..... 12,800 12,500
Machinery and equipment and
leasehold improvements................ 292,884 266,972
---------- --------
355,238 326,645
Accumulated depreciation................ 124,042 108,196
------- --------
$231,196 $218,449
</TABLE>
5. LONG-TERM DEBT
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---- -----
<S> <C> <C>
Credit facility:
Securitization............................ $ 33,026 $ 29,162
Revolver.................................. 31,901 30,022
9 1/4% Senior Subordinated
Notes, due 2007......................... 170,000 170,000
Capital lease obligation....................... 11,539 10,647
Other........................................... 1,168 2,512
--------- ---------
247,634 242,343
Less current portion............................ 1,259 5,500
---------- ---------
Total long term portion......................... $246,375 $ 236,843
======== =========
</TABLE>
<PAGE>
At June 30, 1999 interest rates under the Securitization and Revolver
ranged from 5.66% to 7.75%, respectively with letters of credit outstanding
of $348, and availability under the Credit Facility was approximately
$28,000.
On October 4, 1998, the Company entered into a 7.03% eight-year capital
lease for the acquisition of equipment of $5,300 and repaid the balance of
the May 15, 1996 capital lease of $3,416.
6. COMPREHENSIVE INCOME
Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires additional disclosure of amounts
comprising comprehensive income. Comprehensive income is broadly defined as
the change in the equity of a business enterprise for translation and other
events and circumstances from nonowner sources. The Company has other
comprehensive income in the form of foreign currency cumulative translation
adjustments which resulted in total comprehensive income, net of tax, of
$7,326 and $7,694 for the quarters ended June 30, 1999 and 1998,
respectively, and $9,262 and $10,321 for the nine months ended June 30,
1999 and 1998, respectively.
7. INCOME TAXES
The provision for income taxes in the consolidated statements of operations
reflects the effective tax rate of 38.5% and 40.3% for the three and nine
months ended June 30, 1999 and 1998, respectively.
8. PLANT CONSOLIDATION COSTS
On November 18, 1998 the Company announced its plans to combine its
non-woven manufacturing facility in Spartanburg, SC into its modern
facility in Ringgold, GA. As a result, the Company recorded pretax charges
of $920 and $4,300 ($0.06 and $0.30 per diluted share on an after tax
basis) for the three and nine months ended June 30, 1999, respectively. The
charges reflect severance provisions of $1,100 related to workforce
reductions of approximately 105 employees, equipment relocation costs of
$2,357 and a charge of $843, net of depreciation, for the write off of
abandoned assets. As of June 30, 1999, payments of approximately $3,300
have been made for these charges.
<PAGE>
9. LITIGATION
The Company and its subsidiaries are parties to litigation arising out of
their business operations. Such litigation primarily involves claims for
personal injury, property damage, breach of contract and claims involving
employee relations and certain administrative proceedings. The Company
believes such claims are either adequately covered by insurance or do not
involve a risk of material loss to the Company.
In connection with a dissolution of the Partnership that was proposed in
1996, the Company, its directors and certain other of the Company's
officers who are affiliated with the General Partner were named in two
putative class and derivative action lawsuits filed in California and
Delaware by certain limited partners of the Partnership. On April 16, 1999,
preliminary approval of a settlement agreement in connection with these
lawsuits was granted by the United States District Court for the Northern
District of California. The settlement was granted final approval by that
Court at a hearing held on May 24, 1999, and on such date an order and
final judgment (the "Order") was entered by the Court and the lawsuit in
California was dismissed with prejudice. Pursuant to the Settlement
Agreement approved by the Order the plaintiffs are required to dismiss the
Delaware lawsuit, and upon the approval of the dismissal by the Delaware
court and the expiration of the Delaware appeal period, the Delaware
lawsuit will be dismissed with prejudice.
Pursuant to the Settlement Agreement, an independent committee of the
Company's Board of Directors (the "Committee") commenced in June 1999 a
sales process during which the Committee, with the help of a financial
advisor, is seeking offers from qualified buyers to purchase the Company.
The primary objective of the sale process is to maximize value for the
Company's shareholders. If an acceptable offer to acquire the Company is
not received during the process, the Partnership will be liquidated and its
shares of the Company's common stock will be distributed in an orderly
manner (after satisfaction of liabilities). As a part of the sales process,
the General Partner will resign as soon as the lawsuits are dismissed with
prejudice in both California and Delaware, and a trustee will be appointed
for the Partnership to wind up the affairs of the Partnership in connection
with the aforementioned sales process.
On October 1, 1998, a class action complaint was filed against Kaufman and
Broad Home Corporation ("Kaufman and Broad") in Los Angeles County Superior
Court in connection with alleged defects in fiber reinforced concrete slabs
in homes constructed by Kaufman and Broad. Kaufman and Broad denied the
plaintiffs' allegations and filed a cross-complaint against the Company.
The relief has not yet been specified. The Company answered Kaufman and
Broad's cross-complaint, denying generally and specifically the allegations
that Kaufman and Broad had been injured or was entitled to any relief by
any reason, act or omission by or on behalf of the Company. The Company
intends to vigorously defend against all claims by the plaintiffs and
Kaufman and Broad in this complaint.
On April 29, 1999, approximately 158 plaintiffs filed claims against the
Company in two Los Angeles County Superior Court cases in connection with
claims that Fibermesh(R) used in the concrete slabs in the plaintiff's
homes was defective and not fit for its intended purpose. The plaintiff's
homes were constructed by Kaufman and Broad, which has settled the
plaintiff's claims. The relief sought has not yet been specified. The
Company has denied any allegations of wrongdoing and intends to vigorously
defend against all claims by the plaintiffs in these complaints.
<PAGE>
10. SUBSEQUENT EVENT
On July 7, 1999, the Company acquired all of the outstanding shares ,
certain assets of an affiliated company and rights to the international
name of Bon Terra, Inc., a manufacturer and marketer of natural erosion
control products, for $3,100 in cash. The acquisition will be accounted for
using the purchase method of accounting and, accordingly, the purchase
price will be allocated to the assets acquired and the liabilities assumed
based upon the fair market value at the date of acquisition. The excess
purchase price over the fair values of the net assets acquired, estimated
at approximately $600 will be amortized on a straight-line basis over 20
years.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion of the financial condition and results of operations of
the Company should be read in conjunction with the information contained in the
Consolidated Financial Statements, including the notes thereto. The following
discussion includes forward-looking statements that involve certain risks and
uncertainties. See "Forward Looking Statements." Dollars are in thousands,
except per share data.
Liquidity and Capital Resources
To finance its capital expenditure program and fund its operational
needs, the Company has relied upon cash provided by operations, supplemented as
necessary by bank lines of credit and long-term indebtedness. Cash provided by
operating activities amounted to $24,044 and $28,781 for the nine months ended
June 30, 1999 and 1998, respectively. These amounts for the periods ended June
30, 1999 and 1998 reflect net income of $9,370 and $10,339, respectively, after
deducting noncash charges of $20,333 and $17,268 and net working capital changes
of ($5,659) and $1,174 for each respective period.
Capital expenditures were $27,858 for the nine months ended June 30,
1999 as compared to $44,879 for the same period of fiscal 1998. In addition, on
October 4, 1998, the Company entered into a 7.03% eight-year capital lease for
the acquisition of equipment of $5,300 and repaid the balance of the May 15,
1996 capital lease of $3,416. Capital expenditures planned for the balance of
fiscal 1999 are approximately $9,000, primarily to expand the capacity of the
Company's nonwoven manufacturing facilities, subject to prevailing market
conditions. In addition, on July 7, 1999, the Company acquired all of the
outstanding shares, certain assets of an affiliated company and rights to the
international name of Bon Terra, Inc., a manufacturer and marketer of natural
erosion control products, for $3,100 in cash.
Other sources of liquidity include the December 18, 1997 five-year
credit facility between the Company and its lenders, with BankBoston as agent
(the "Credit Facility") and the $170,000 aggregate principal amount of 9.25%
Senior Subordinated Notes due February 15, 2007 (the "Notes").
The Credit Facility consists of up to a $40 million asset based
securitization program (the "Securitization") and a $60 million senior secured
revolver facility (the "Revolver"), collateralized by the Company's accounts
receivable and substantially all of the Company's assets, excluding real
property, respectively. At June 30, 1999, the balances under the Securitization
and Revolver were $33,026 and $31,901, respectively, at interest rates ranging
from 5.66% to 7.75%, with letters of credit outstanding of $348.
Availability under the Credit Facility was approximately $28,000 at June 30,
1999.
The Notes, which represent unsecured obligations of the Company, are
redeemable at the option of the Company at any time on or after February 15,
2002, at an initial redemption price of 104.625% of their principal amount
together with accrued interest, with declining redemption prices thereafter.
Interest on the Notes is payable semi-annually on February 15 and August 15 in
the amount of $7,863.
<PAGE>
Based on current levels of operations and anticipated growth, the
Company's management expects net cash from operations and available credit
facilities to be sufficient to fund the Company's short-term and long-term debt
obligations, permit anticipated capital expenditures and fund the working
capital needs of the Company for the next twelve months.
On November 18, 1998 the Company announced plans to combine its non-woven
manufacturing facilities. The Company recorded pre-tax charges of $920 and
$4,300 ($0.06 and $0.30 per share on an after tax basis) for the three and nine
month period ending June 30, 1999, respectively. These charges were primarily
related to severance and other employee related costs, equipment relocation
costs and a charge for the write off of certain abandoned assets. The move has
been completed and is expected to increase operating efficiencies by reducing
overhead costs and centralizing production in a modern facility resulting in
expected pre-tax savings of approximately $1,500 to $2,000 annually. As of June
30, 1999, approximately $3,300 of payments have been made against these charges.
Results of Operations
The following table sets forth the percentage relationships to net sales of
certain income statement items for the three and nine months ended June 30, 1999
and 1998.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
----- ----- ----- ----
<S> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales............................. 64.0 65.5 66.1 67.7
------ ---- ---- ----
Gross profit.............................. 36.0 34.5 33.9 32.3
Selling expenses.......................... 11.1 10.2 11.3 10.8
General and administrative
expenses.......................... 7.7 6.6 9.4 8.5
Plant consolidation costs................. 0.9 0.0 1.6 0.0
Amortization of intangibles............... 0.7 0.7 0.8 0.8
--- --- --- ---
Operating profit....................... 15.6 17.0 10.8 12.2
Interest expense.......................... 4.0 4.4 5.1 5.4
Amortization of deferred
financing costs................... 0.2 0.2 0.2 0.2
--- --- --- ---
Income before
provision for taxes............ 11.4 12.4 5.5 6.6
Provision for
income taxes.................. 4.4 5.0 2.1 2.7
--- --- --- ---
Net income................................ 7.0% 7.4% 3.4% 3.9%
==== ==== ==== ====
</TABLE>
<PAGE>
Results of Operations for the Three Months Ended June 30
Net sales for the third quarter of fiscal 1999 were $103,976 compared to
$104,531 for the same period of fiscal 1998, a decrease of $555, or 0.5%. Carpet
backing sales for the third quarter of fiscal 1999 were $43,955 compared to
$44,438 for the same period of fiscal 1998, a decrease of $483, or 1.1%,
reflecting a combination of higher unit growth offset by lower average selling
prices. Construction and civil engineering product sales for the third quarter
of fiscal 1999 were $38,369 compared to $40,662 for the same period of fiscal
1998, a decrease of $2,293, or 5.6%, reflecting slower than anticipated
increases in new highway projects and consolidation in the waste containment
market place which has temporarily reduced capital spending in the industry.
Technical textiles sales for the third quarter of fiscal 1999 were $21,652
compared to $19,431 for the same period of fiscal 1998, an increase of $2,221,
or 11.4%, as a result of strong growth in the Company's furniture and bedding,
agricultural and filtration product lines.
Gross profit for the third quarter of fiscal 1999 was $37,438 compared to
$36,049 for the same period of fiscal 1998, an increase of $1,389, or 3.9%. As a
percentage of sales, gross profit increased to 36.0% from 34.5%. This increase
was primarily due to lower on average polypropylene costs and increased sales
volume in higher margin business, partially offset by lower average selling
prices.
Selling, general and administrative expenses for the third quarter of
fiscal 1999 were $19,526 compared to $17,533 for the same period of fiscal 1998,
an increase of $1,993, or 11.4%. As a percentage of sales, selling, general and
administrative expenses increased from 16.8% to 18.8%, reflecting lower average
selling prices and increased expenditures for Construction and Civil Engineering
sales and engineering support staff and market development and increased
marketing expenses, particularly in Construction and Civil Engineering.
Operating income for the third quarter of fiscal 1999 was $16,245 as
compared to $17,755 for the same period of fiscal 1998, a decrease of $1,510, or
8.5%. As a percentage of sales, operating income decreased to 15.6% in fiscal
1999 from 17.0% in fiscal 1998. This decrease was primarily due to plant
consolidation costs in the third quarter of fiscal 1999 of $920 and higher
selling, general and administrative costs, partially offset by increased sales
volume and lower on average polypropylene costs. Operating income, excluding
plant consolidation costs, was $17,165.
Interest expense for the third quarter of fiscal 1999 was $4,168 compared
to $4,574 for the same period of fiscal 1998, a decrease of $406, or 8.9%, due
to lower on average interest rates applied on higher outstanding debt. The
effective income tax rate for the third quarter of fiscal 1999 and 1998 was
38.5% and 40.3%, respectively.
<PAGE>
Net income for the third quarter of fiscal 1999 was $7,306 compared to
$7,755 for the third quarter of fiscal 1998, a decrease of $449, or 5.8%.
Excluding plant consolidation costs, net income would have been $7,872, an
increase of $117 or 1.5%, over net income for the same period of fiscal 1998.
Earnings before interest, taxes, depreciation and amortization ("EBITDA")1 for
the third quarter of fiscal 1999 were $22,420 compared to $22,985 for the same
period of fiscal 1998, a decrease of $565, or 2.5%. Excluding plant
consolidation costs, EBITDA was $23,340, an increase of $355, or 1.5% over the
same period of fiscal 1998.
Basic earnings per share for the third quarter of fiscal 1999 were $0.84
compared to $0.90 for the same period of fiscal 1998 based on weighted average
shares outstanding of 8,675,610 and 8,668,750 for fiscal 1999 and 1998,
respectively. Diluted earnings per share for the third quarter of fiscal 1999
were $0.81 compared to $0.87 for the same period of fiscal 1998 based on
weighted average shares outstanding of 9,011,183 and 8,940,674 for fiscal 1999
and 1998, respectively. These decreases were primarily due to the factors
discussed above. Excluding plant consolidation costs, diluted earnings per share
would have been $0.87.
Results of Operations for the Nine Months Ended June 30
Net sales for the first nine months of fiscal 1999 were $275,663 compared
to $260,383 for the same period of fiscal 1998, an increase of $15,280, or 5.9%.
Carpet backing sales for the first nine months of fiscal 1999 were $127,314
compared to $124,312 for the same period of fiscal 1998, an increase of $3,002,
or 2.4%, reflecting higher unit growth, partially offset by lower average
selling prices. Construction and civil engineering product sales for the first
nine months of fiscal 1999 were $93,585 compared to $83,365 for the same period
of fiscal 1998, an increase of $10,220, or 12.3%, reflecting approximately
$6,000 contributed by the Novocon International acquisition and higher sales
unit volume. Technical textiles sales for the first nine months of fiscal 1999
were $54,764 compared to $52,706 for same period of fiscal 1998, an increase of
$2,058, or 3.9% as a result of strong growth in the Company's furniture and
bedding, agricultural and filtration product lines.
Gross profit for the first nine months of fiscal 1999 was $93,586 compared
to $84,184 for the same period of fiscal 1998, an increase of $9,402, or 11.2%.
As a percentage of sales, gross profit increased to 33.9% from 32.3%. This
increase was primarily due to lower on average polypropylene costs and increased
sales volume in higher margin business, partially offset by lower average
selling prices.
Selling, general and administrative expenses for the first nine months of
fiscal 1999 were $57,212 compared to $50,166 for the same period of fiscal 1998,
an increase of $7,046, or 14.0%, reflecting increased expenditures for sales and
support staff. As a percentage of sales, selling, general and administrative
expenses increased from 19.3% to 20.7%, reflecting lower average selling prices.
Operating income for the first nine months of fiscal 1999 was $29,847 as
compared to $31,945 for the same period of fiscal 1998, a decrease of $2,098, or
6.6%. As a percentage of sales, operating income decreased to 10.8% in fiscal
1999 from 12.2% in fiscal 1998. Excluding plant consolidation costs, operating
income was $34,147.
<PAGE>
Interest expense for the first nine months of fiscal 1999 was $14,020
compared to $14,079 for the same period of fiscal 1998, a decrease of $59, or
0.4%. The effective income tax rate for the first nine months of fiscal years
1999 and 1998 was 38.5% and 40.4%, respectively.
Net income for the first nine months of fiscal 1999, was $9,370 compared to
$10,339 for the same period of fiscal 1999, a decrease of $969, or 9.4%.
Excluding the plant consolidation costs, net income would have been $12,014, an
increase of $1,675, or 16.2%, over net income for the same period of fiscal
1998. EBITDA for the first nine months of fiscal 1999 were $48,399 compared to
$47,153 for the same period of fiscal 1998, an increase of $1,246, or 2.6%.
Excluding plant consolidation costs, EBITDA would have been $52,699, an increase
of $5,546 or 11.8% over the same period of fiscal 1998.
Basic earnings per share for the first nine months of fiscal 1999 were
$1.08 compared to $1.19 for the same period of fiscal 1998 based on weighted
average shares outstanding of 8,672,651 and 8,665,972 for fiscal 1999 and 1998,
respectively. Diluted earnings per share for the first nine months of fiscal
1999 was $1.05 compared to $1.14 for the same period of fiscal 1998 based on
weighted average shares outstanding of 8,919,551 and 9,046,468 for fiscal 1999
and 1998, respectively. Excluding plant consolidation costs, earnings per share
would have been $1.35 per share on a diluted basis.
Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which must be adopted for fiscal years beginning after December
15, 1997. Under the new standard, companies will be required to report certain
information about operating segments in consolidated financial statements.
Operating segments will be determined based on the method that management
organizes its businesses for making operating decisions and assessing
performance. SFAS 131 also requires companies to report certain information
about their products and services, the geographic areas in which they operate,
and their major customers. SFAS 131 will not have a material effect on the
Company's results of operations or financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which must be adopted for fiscal quarters of fiscal years beginning after
June 15,1999, (in 1999 the FASB delayed the effective date of SFAS 133 by one
year). SFAS 133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. SFAS 133 will not have a material effect on the
Company's results of operations or financial condition.
<PAGE>
Year 2000 Readiness Disclosures
The Company is preparing its computer systems and hardware to deal
with the issues related to the year 2000. This is necessary because certain
computer programs have been written using two digits rather than four to define
the applicable year. As a result, software may recognize a date using the two
digits "00" as the year 1900 rather than the year 2000. Computer programs that
do not recognize the proper date could generate erroneous data or cause systems
to fail. In addition, many of the Company's vendors and service providers are
also faced with similar issues related to the year 2000.
In January 1998, the Company formally implemented a plan to become
year 2000 compliant. The Company evaluated and tested business and technical
information system hardware and software as to year 2000 compliance and
functionality. The Company's basic integrated software applications, Infinium
and CAMS, are represented to be year 2000 compliant by their respective vendors.
Internal testing was completed in March 1999 that verified vendor
representations. Minimal code renovations were necessary in CAMS and have been
completed. Validation processes will be ongoing in 1999, thereby providing
sufficient time to address unforeseen issues and develop contingency plans for
external supply chain dependencies that could affect the Company and the
Company's business partners. The inventory process and assigning priorities are
complete for manufacturing process control, instrumentation and embedded
systems. Documentation from respective equipment manufacturers and resources is
complete, and the Company believes that the repair of this equipment is
complete. Contingency plans for production work arounds are in process and
scheduled for completion by October 1999. The Company has been proactive in
contacting external business partners to communicate and exchange status
information.
Costs associated with required modification to become year 2000 compliant
have not been material to the company's financial position and have been
expensed as incurred. The Company does not believe that future costs will have a
material adverse effect on the Company's results of operations or financial
condition.
The Company is developing contingency plans to ensure that it will be able
to operate the critical areas of its business. Contingency plans include
developing alternative business processes for our business dependencies with
customers and suppliers who may experience year 2000 interruptions. . These
plans will be monitored for completion as we approach the year 2000. Although
the Company is making every reasonable effort to identify and successfully
resolve any year 2000 issues that are within our control, there can be no
assurance that the efforts or the contingency plans related to the Company's
systems or those of third parties relied upon will be successful or that any
failure to convert, upgrade, or appropriately plan for contingencies would not
have a material adverse effect on the Company's results of operations or
financial condition.
Forward Looking Statements
The discussion of the Company's business and operations in this report
includes several instances of forward-looking statements, which are based upon
management's good faith assumptions relating to the financial, market,
operating, and other relevant environments that will exist and affect the
Company's business and operations in the future. No assurance can be made that
the assumptions upon which management based its forward-looking statements will
prove to be correct, or that the Company's business and operations will not be
affected in any substantial manner by other factors not currently foreseeable by
management or beyond the Company's control. All forward-looking statements
involve risk and uncertainty, including those described in this report, and such
statements shall be deemed in the future to be modified in their entirety by the
Company's public pronouncement, including those contained in all future reports
and other documents filed by the company with the Securities and Exchange
Commission.
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See the Company's most recent annual report filed on Form 10-K (Item 7A).
There have been no material changes in the information provided therein from
September 30, 1998 to June 30, 1999.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are parties to litigation arising out of
their business operations. Such litigation primarily involves claims for
personal injury, property damage, breach of contract and claims involving
employee relations and certain administrative proceedings. The Company
believes such claims are either adequately covered by insurance or do not
involve a risk of material loss to the Company.
In connection with a dissolution of the Partnership that was proposed in
1996, the Company, its directors and certain other of the Company's
officers who are affiliated with the General Partner were named in two
putative class and derivative action lawsuits filed in California and
Delaware by certain limited partners of the Partnership. On April 16, 1999,
preliminary approval of a settlement agreement in connection with these
lawsuits was granted by the United States District Court for the Northern
District of California. The settlement was granted final approval by that
Court at a hearing held on May 24, 1999, and on such date an order and
final judgment (the "Order") was entered by the Court and the lawsuit in
California was dismissed with prejudice. Pursuant to the Settlement
Agreement approved by the Order the plaintiffs are required to dismiss the
Delaware lawsuit, and upon the approval of the dismissal by the Delaware
court and the expiration of the Delaware appeal period, the Delaware
lawsuit will be dismissed with prejudice.
Pursuant to the Settlement Agreement, an independent committee of the
Company's Board of Directors (the "Committee") commenced in June 1999 a
sales process during which the Committee, with the help of a financial
advisor, is seeking offers from qualified buyers to purchase the Company.
The primary objective of the sale process is to maximize value for the
Company's shareholders. If an acceptable offer to acquire the Company is
not received during the process, the Partnership will be liquidated and its
shares of the Company's common stock will be distributed in an orderly
manner (after satisfaction of liabilities). As a part of the sales process,
the General Partner will resign as soon as the lawsuits are dismissed with
prejudice in both California and Delaware, and a trustee will be appointed
for the Partnership to wind up the affairs of the Partnership in connection
with the aforementioned sales process.
<PAGE>
Prior to March 23, 1999, approximately 158 plaintiffs had filed claims
against Kaufman and Broad Home Corporation (including its subsidiaries and
affiliates) ("Kaufman and Broad") in two Los Angeles County Superior Court
cases in connections with claims of alleged defects in fiber reinforced
concrete slabs. On or about March 23, 1999, the plaintiffs settled claims
against the Kaufman and Broad. On April 29, 1999, the plaintiffs filed
amended complaints naming the Company as a defendant in these actions. The
relief sought has not yet been specified. The Company has denied any
allegations of wrongdoing and intends to vigorously defend against all
claims by the plaintiffs in these complaints.
On October 1, 1998, a class action complaint was filed against Kaufman and
Broad in Los Angeles County Superior Court, again in connection with
alleged defects in fiber reinforced concrete slabs. Kaufman and Broad
denied the plaintiffs' allegations and filed a cross-complaint against the
Company. The relief has not yet been specified. The Company answered
Kaufman and Broad's cross-complaint, denying generally and specifically the
allegations that Kaufman and Broad had been injured or was entitled to any
relief by any reason, act or omission by or on behalf of the Company. The
Company intends to vigorously defend against all claims by the plaintiffs
and Kaufman and Broad in this complaint.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1 27.0 Financial Data Schedule
- --------------
1 Filed herewith
(b) Reports of Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SYNTHETIC INDUSTRIES, INC.
By: /s/ Leonard Chill
Leonard Chill
Chairman
Dated: August 12, 1999
By: /s/ Joseph Sinicropi
Joseph Sinicropi
Chief Financial Officer
Dated: August 12, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Synthetic Industries, Inc. as of
June 30, 1999, and the related condensed consolidated statement of income
and cash flows for the nine months ended June 30, 1999, and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000809803
<NAME> Synthetic Industries, Inc.
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 324
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<RECEIVABLES> 66,779
<ALLOWANCES> 2,700
<INVENTORY> 58,000
<CURRENT-ASSETS> 142,021
<PP&E> 355,238
<DEPRECIATION> 124,042
<TOTAL-ASSETS> 460,993
<CURRENT-LIABILITIES> 49,190
<BONDS> 170,000
0
0
<COMMON> 8,682
<OTHER-SE> 123,750
<TOTAL-LIABILITY-AND-EQUITY> 460,993
<SALES> 275,663
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<OTHER-EXPENSES> 14,611
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