UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 1996
Commission File Number 0-21548
SYNTHETIC INDUSTRIES L.P.
(Exact name of Registrant as specified in its charter)
Delaware 13-3397585
(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)
(706) 375-3121
(Registrant's telephone number, including area code)
Indicate by check mark whether 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 ___
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL INFORMATION SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
DECEMBER 31, SEPTEMBER 30,
ASSETS 1996 1996
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents (Note 3) $ 30,808 $ 103
Accounts receivable, net of allowance for
doubtful accounts of $3,062 and $3,036 37,322 47,861
Inventory (Note 4) 49,084 39,142
Other current assets 14,595 14,655
TOTAL CURRENT ASSETS 131,809 101,761
PROPERTY, PLANT AND EQUIPMENT, net (Note 5) 143,142 137,974
OTHER ASSETS 83,202 84,021
$358,153 $323,756
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable $ 28,731 $ 20,227
Accrued expenses and other current liabilities 9,380 10,026
Income taxes payable (Note 7) 1,466 1,407
Interest payable 1,475 6,024
Current maturities of long-term debt (Note 6) 673 659
TOTAL CURRENT LIABILITIES 41,275 38,343
LONG-TERM DEBT (Note 6) 190,186 194,353
DEFERRED INCOME TAXES (Note 7) 26,308 25,875
MINORITY INTEREST IN SUBSIDIARY (Note 8) 34,160 -
PARTNERS' CAPITAL:
General Partners' Equity 655 649
Limited Partners' Equity 65,119 64,536
TOTAL PARTNERS' CAPITAL 65,774 65,185
$358,153 $323,756
See notes to consolidated financial statements
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS, EXCEPT UNIT AND PER UNIT AMOUNTS)
(UNAUDITED)
FOR THREE MONTHS ENDED DECEMBER 31,
1996 1995
Net sales $70,857 $64,608
Costs and expenses:
Cost of sales 50,043 49,917
Selling expenses 6,938 5,716
General and administrative expenses 5,896 4,971
Amortization of excess of purchase price over net
assets acquired and other intangibles 648 648
63,525 61,252
Operating income 7,332 3,356
Other expenses:
Interest expense, net 5,410 5,680
Amortization of deferred financing costs 176 173
5,586 5,853
Income (loss) before income tax provision (benefit)
and minority interest 1,746 (2,497)
Income tax provision (benefit) (Note 7) 857 (600)
Income (loss) before minority interest 889 (1,897)
Minority interest in subsidiary 300 -
NET INCOME (LOSS) $ 589 $ (1,897)
NET INCOME (LOSS) ATTRIBUTABLE TO:
General Partner 6 (19)
Limited Partner 583 (1,878)
$ 589 $ (1,897)
NET INCOME (LOSS) PER
LIMITED PARTNERSHIP UNIT $ 729 $ (2,348)
Limited partnership units outstanding,
December 31, 1996, 1995 800 800
See notes to consolidated financial statements
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED DECEMBER 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 589 $ (1,897)
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Minority Interest in Subsidiary 300 -
Depreciation and amortization 4,480 4,008
Provision for bad debts 49 42
Deferred income taxes 27 (720)
Change in assets and liabilities:
Decrease in accounts receivable 10,490 10,701
(Increase) decrease in inventory (9,942) 4,267
Decrease in other current assets 461 268
Increase (decrease) in accounts payable 8,504 (3,181)
Decrease in accrued expenses and other
current liabilities (646) (1,769)
Decrease (increase) in income taxes payable 59 (791)
Decrease in interest payable (4,549) (4,191)
Cash provided by operating activities 9,822 6,737
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (8,824) (7,394)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the term loan - 19,500
Repayments under term loan - (500)
Net repayments under secured revolving
credit line (3,993) (17,833)
Deferred financing costs - (62)
Proceeds from underwritten public offering 33,860 -
Payments of capital lease obligation and
other long term debt (160) (9)
Cash provided by financing activities 29,707 1,096
Effect of exchange rate changes on cash - (18)
NET INCREASE IN CASH AND CASH EQUVALENTS 30,705 421
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 103 108
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,808 $ 529
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 9,959 $ 9,871
Income taxes 771 911
See notes to consolidated financial statements
SYNTHETIC INDUSTRIES L.P.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE INFORMATION)
(INFORMATION AS OF DECEMBER 31, 1996 AND FOR THE
PERIODS ENDING DECEMBER 31, 1996 AND 1995 IS UNAUDITED)
1.ORGANIZATION
Synthetic Industries L.P. (the "Partnership") is a limited partnership organized
under the laws of Delaware. In December 1986, the Partnership acquired all of
the issued and outstanding shares of Synthetic Industries, Inc. (the "Company").
The Company manufactures and markets a wide range of polypropylene-based fabric
and fiber products designed for industrial applications. The Company's diverse
mix of products are marketed to the floor covering, construction and technical
textile markets for such end-use applications as carpet backing, geotextiles,
erosion control, concrete reinforcement and furniture construction fabrics.
Prior to November 1, 1996, the Company was a wholly owned subsidiary of
Synthetic Industries L.P. As a result of the Company's underwritten public
offering (Note 8) on November 1, 1996, Synthetic Industries L.P. owns
approximately 67% of the Company's outstanding common stock as of December 31,
1996.
Since its organization in 1986, the Partnership has conducted no business except
(I) engaging in the transactions described in a confidential offering memorandum
dated January 16, 1987, as supplemented, relating to the offering and sale of
units of limited partnership interest in the Partnership (the "Units"); and (II)
owning and voting its share of the Company's Common Stock (the "Shares").
2.INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements as of December 31, 1996 and for the
periods ended December 31, 1996 and 1995 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 December 31, 1996 and 1995, and the results of operations for the
three months ended December 31, 1996 and 1995 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 of the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1996. Operating results for the three
months ended December 31, 1996 may not necessarily be indicative of the results
that may be expected for the full year.
3. CASH AND CASH EQUIVALENTS
The Company classifies as cash equivalents all highly liquid investments with
maturities of three months or less. At December 31, 1996, cash equivalents were
composed primarily of investments in United States government securities and
overnight time deposits.
4.INVENTORY
December 31, September 30,
1996 1996
Finished goods $ 27,692 $ 22,555
Work in process 9,446 7,937
Raw materials 11,946 8,650
$ 49,084 $ 39,142
5.PROPERTY, PLANT AND EQUIPMENT
December 31, September 30,
1996 1996
Land $ 4,458 $ 4,458
Buildings and improvements 29,298 29,298
Machinery and equipment and
leasehold improvements 188,210 179,386
221,966 213,142
Accumulated depreciation 78,824 75,168
$143,142 $ 137,974
6. LONG-TERM DEBT
December 31, September 30,
1996 1996
Secured revolving credit facility:
Secured revolving credit portion - 3,993
Term loan portion 45,000 45,000
12 3/4% senior subordinated
debentures 140,000 140,000
Capital lease obligation 4,548 4,698
Other 1,311 1,321
190,859 195,012
Less current portion 673 659
Total long term portion $190,186 $ 194,353
On October 20, 1995, the Company and its lenders entered into the Fourth
Amended and Restated Revolving Credit Agreement (as amended to date, the
"Amended Credit Facility"). The Amended Credit Facility, with a
termination date of October 20, 2001, provides for term loan borrowings of
$45,000 of which $10,000 is payable in 1999 and $17,500 is payable in each
of 2000 and 2001.
The Amended Credit Facility provides for a revolving credit portion of a
maximum amount of $40,000, of which, at December 31, 1996, the Company
had $38,869 available for borrowing.
On February 11, 1997, the Company issued $170,000 in aggregate principal
amount of 9 1/4% senior subordinated notes due 2007. (See Subsequent
Events.)
7.INCOME TAXES
The provision (benefit) for income taxes is as follows:
Three Months Ended December 31,
1996 1995
Current:
Federal $ 620 $ -
State 90 -
Foreign 120 120
830 120
Deferred:
Federal (115) (600)
State 142 (120)
27 (720)
Total provision (benefit) $ 857 $ (600)
The federal income tax provision for the three months ended December 31, 1996
and 1995 reflect the non-deductibility of certain expenses for income tax
purposes such as amortization of goodwill. Deferred income taxes result from
temporary differences between tax bases of assets and liabilities and their
reported amounts in the financial statements.
8. UNDERWRITTEN PUBLIC OFFERING
On July 31, 1996, the board of directors of the Company (the "Board"),
approved an amendment to the Company's Certificate of Incorporation to
effect a recapitalization of the Company's Common Stock, pursuant to which
the number of authorized shares of the Company's Common Stock was increased
to 25,000,000 shares (the "Recapitalization"). As part of the
Recapitalization, the Board approved a 115,740.74-for-1 stock split of the
issued and outstanding shares of Common Stock. The Recapitalization,
including the stock split, became effective immediately prior to the initial
public offering.
On November 1, 1996, the Company sold 2,875,000 shares of Common Stock in an
underwritten public offering. The net proceeds to the Company from the sale
(after payment of underwriting discounts and commissions and expenses) were
approximately $33,860 which is accounted for as minority interest in
subsidiary in the consolidated financial statements of Synthetic Industries
L.P.
9. SUBSEQUENT EVENTS
On February 11, 1997, the Company issued $170,000 in aggregate principal
amount of 9 1/4% Senior Subordinated Notes due 2007 (the "Notes"). Most of
the net proceeds from the Notes were utilized to repurchase approximately
$132,000 principal amount of the Company's 12 3/4% Senior Subordinated
Debentures due December 1, 2002 (the "12 3/4% Debentures") which were
tendered in accordance with a tender offer therefor that was commenced by the
Company on January 8, 1997. As a result of the early repurchase of the 12
3/4% Debentures, the Company will incur an extraordinary loss of
approximately $11,590 in the second quarter of fiscal 1997.
The General Partner of the Registrant has been notified, but has not been
served with process, of a putative class action lawsuit filed February 11,
1997 in the Delaware Court of Chancery by a limited partner of the Registrant
alleging, among other things, breach of the General Partner's fiduciary duty
to the limited partners in connection with the November 1, 1997 initial
public offering of common stock of the Registrant's subsidiary, Synthetic
Industries, Inc., and seeking, among other things, removal of the General
partner. The General partner believes that the claims against the General
partner in this action are without merit and that the ultimate resolution
will not have a material adverse effect on the Registrant.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE INFORMATION)
Since its organization in 1986 and subsequent admission of Limited Partners,
the Partnership has conducted no business except owning and voting the Shares.
As a result, the discussion and analysis of financial condition and results of
operations presented below relates to the operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
To finance its capital expenditures 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 was $9,822 for the three months ended December 31, 1996.
Cash provided by operating activities resulted primarily from net income before
minority interest of $889 after deducting non-cash charges of $4,556, a decrease
in accounts receivable due to collections, an increase in accounts payable
balances due to higher inventory quantities, partially offset by increased
inventory quantities and interest payments on the 12 3/4% Debentures.
Also contributing to the increase in cash and cash equivalents at December 31,
1996 as compared to September 30, 1996 were proceeds from the sale of 2,875,000
shares of Common Stock in an underwritten public offering completed November 1,
1996. The net proceeds to the Company from the sale (after payment of
underwriting discounts and commissions and expenses) were approximately $33,860.
These proceeds, together with the February 11, 1997 issuance of $170,000 in
aggregate principal amount of the Company's 9 1/4% Senior Subordinated Notes due
February 15, 2007, will be utilized primarily to retire approximately $132,000
of the 12 3/4% Debentures and to repay certain outstanding indebtedness under
the Company's Fourth Amended and Restated Revolving Credit and Security
Agreement, dated as of October 20, 1995, as subsequently amended, among the
Company, the lenders party thereto and The First National Bank of Boston, as
agent (the "Credit Facility").
The Credit Facility provides for potential borrowing capacity of up to $85,000
and is comprised of term loan borrowings of $45,000 (of which $10,000 is payable
in 1999 and $17,500 is payable in each of 2000 and 2001) and a revolving credit
loan portion (the "Revolver") of up to $40,000. The Revolver provides for
availability based on a borrowing formula consisting of 85% of eligible accounts
receivable and 50% of eligible inventory, subject to certain limitations. At
December 31, 1996, there was $38,869 available under the Revolver. The Company
is currently in the process of renegotiating the Credit Facility which is due to
expire on October 1, 2001.
Capital expenditures planned in fiscal 1997 of approximately $40,000, of which
$8,824 has been spent to date, are primarily to expand capacity of the Company's
manufacturing facilities, subject to prevailing market conditions.
Based on current levels of operations and anticipated growth, the Company's
management expects that available cash and cash from operations will provide
sufficient cash flow to satisfy the debt service requirements of the Company's
long-term debt obligations, including the Credit Facility and lease agreements,
permit anticipated capital expenditures and fund the Company's working capital
requirements for the next twelve months.
RESULTS OF OPERATIONS FOR THE FIRST QUARTER
FISCAL 1997 COMPARED TO FISCAL 1996
The following table sets forth the percentage relationships to net sales of
certain income statement items for the quarters ended December 31, 1996 and
1995.
December 31,
1996 1995
Net sales 100.0% 100.0%
Cost of sales 70.6 77.3
Gross profit 29.4 22.7
Selling expenses 9.8 8.8
General and administrative
expenses 8.3 7.7
Amortization of intangibles 0.9 1.0
Operating income 10.4 5.2
Interest expense 7.6 8.8
Amortization of deferred
financing costs 0.3 0.3
Income (loss) before
provision for taxes
and minority interest 2.5 (3.9)
Provision (benefit) for
income taxes 1.2 (0.9)
Income (loss) before
minority interest 1.3 -
Minority Interest in Subsidiary .4 -
Net income (loss) .8% (3.0)%
Net sales for the quarter ended December 31, 1996 were $70,857 compared to
$64,608 for the same period of fiscal 1996, an increase of $6,249, or 9.7%.
Carpet backing sales for the quarter ended December 31, 1996 were $36,922
compared to $33,553 for the same period of fiscal 1996, an increase of $3,369,
or 10.0%. This increase was the result of higher unit volume and higher average
selling prices. Construction and civil engineering product sales for the quarter
ended December 31, 1996 were $21,072 compared to $19,400 for the same period of
fiscal 1996, an increase of $1,672, or 8.6%. Technical textiles sales for the
quarter ended December 31, 1996 were $12,863 compared to $11,655 for fiscal
1996, an increase of $1,208, or 10.4%.
Gross profit for the quarter ended December 31, 1996 was $20,814 compared to
$14,691 for the same period of fiscal 1996, an increase of $6,123, or 41.7%. As
a percentage of sales, gross profit increased to 29.4% from 22.7%. This
increase was primarily due to increased sales volume and lower average
polypropylene costs.
Polypropylene is the basic raw material used in the manufacture of
substantially all of the Company's products, accounting for approximately 50% of
the Company's cost of goods sold. The Company believes that the selling prices
of its products have adjusted over time to reflect changes in polypropylene
prices. Higher prices of polypropylene, however, without offsetting selling
price increases could have a significant negative effect on the Company's
results of operations and financial condition. Due to the level of competition,
the Company, historically, has been able to pass through only a portion of the
polypropylene cost increases through higher selling prices of certain product
lines.
The Company has not experienced any shortage of supply of polypropylene;
however, continuous increases in demand or major supply disruptions without
offsetting increases in manufacturing capacities could cause future supply
shortages.
Selling expenses for the quarter ended December 31, 1996 were $6,938 compared
to $5,716 for the same period of fiscal 1996, an increase of $1,222, or 21.4%.
This increase was primarily due to increased expenditures associated with higher
sales volume as well as increased marketing expenses. These expenses are related
to the Company's expectation of higher sales in fiscal 1997 resulting from the
completion of the fiscal 1996 capacity expansion program. As a percentage of
sales, selling expenses increased from 8.8% to 9.8%.
General and administrative expenses for the quarter ended December 31, 1996
were $5,881 compared to $4,971 for the same period of fiscal 1996, an increase
of $910, or 18.3%. As a percentage of sales, general and administrative expenses
increased from 7.7% to 8.3%. The increase in general and administrative
expenses was primarily due to infrastructure expenditures, which included an
increased investment in the Company's Management Information System, to support
anticipated Company growth.
Operating income for the first quarter of fiscal 1997 was $7,347 as compared
to $3,356 for the same period of fiscal 1996, an increase of $3,991, or 118.9%.
As a percentage of sales, operating income increased to 10.4% in fiscal 1997
from 5.2% in fiscal 1996. This was primarily due to higher sales volumes and
lower average raw material costs offset by slightly increased selling and
general and administrative costs.
Total interest expense for the first quarter of fiscal 1997 was $5,410
compared to $5,680 for the same period of fiscal 1996, a decrease of $270, or
4.8%, due to interest income of $172 as well as lower average total debt
outstanding at slightly lower interest rates.
The effective income tax rate for the three months ended December 31, 1996 was
49% due primarily to the effect of nondeductible expenses, including the
amortization of goodwill, on higher taxable income in fiscal 1997.
Income before minority interest for the first quarter of fiscal 1997 was $889
compared to net loss of $1,897 for the first quarter of fiscal 1996, an increase
of $2,786, or 146.9%. Earnings before interest, taxes, depreciation and
amortization ("EBITDA")1 for the first quarter of fiscal 1997 were $11,651
compared to $7,191 for the first quarter of fiscal 1996, an increase of $4,460,
or 62.0%. The increase in net income, as well as EBITDA, was primarily due to
higher sales volumes and lower average raw material costs offset by slightly
increased selling and general and administrative costs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-Q
(a) Exhibits
1 4.0 Second Amended and Restated Limited Partnership Agreement of
Synthetic Industries L.P. dated November 11, 1986.
1 10.1 Form of Registration Rights Agreement between Synthetic
Industries, L.P. and Synthetic Industries, Inc. dated as of October
31, 1996.
27. Financial Data Schedule
- --------------
1 Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (333-09377) as filed with the Securities and
Exchange Commission on September 13, 1996 and incorporated herein by
reference.
(b) Reports on Form 8-K
None
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 L.P.
By: SI MANAGEMENT L.P.
General Partner
By: SYNTHETIC MANAGEMENT G.P.
General Partner
By: CHILL INVESTMENTS, INC.
Managing General Partner
By: /s/ Leonard Chill
Leonard Chill
President
Dated: February 13,1997
_______________________________
1 The Company believes that EBITDA is helpful in understanding cash flow from
operations that is available for debt service, taxes and capital expenditures.
EBITDA is not a concept in accordance with generally accepted accounting
principles and is not a substitute for operating income, net income or cash
flows from operating activities.
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