<PAGE>
================================================================================
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 quarter ended September 27, 1997
Commission file number 1-14330
POLYMER GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 57-1003983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4838 Jenkins Avenue
North Charleston, South Carolina 29405
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (803) 566-7293
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 periods that
the registrant was required to file such reports), and (2) has been subject
to the filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On November 10, 1997 there were 32,000,000 Common Shares, $.01 par value
outstanding.
================================================================================
<PAGE>
Polymer Group, Inc.
Index to Form 10-Q
Page
Part I. Financial Information 3
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 10
Part II. Other Information 19
Signatures 20
Exhibit Index 21
Exhibit 22
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Polymer Group, Inc.
Condensed Consolidated Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Sept. 27, December 28,
1997 1996
--------------- ---------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and equivalents $ 40,995 $ 37,587
Marketable securities 30,887 10,892
Accounts receivable, net 70,727 64,752
Inventories 63,121 55,637
Other 20,234 15,559
-------- --------
Total current assets 225,964 184,427
Property, plant and equipment, net 422,177 406,527
Intangibles, loan acquisition and organization costs, net 101,738 96,932
Other 26,831 20,229
-------- --------
Total assets $776,710 $708,115
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 33,192 $ 36,059
Accrued liabilities and other 45,477 35,717
Current portion of long-term debt 945 19,497
-------- --------
Total current liabilities 79,614 91,273
-------- --------
Long-term debt, less current portion 444,841 362,745
Deferred income taxes 53,849 52,115
Other noncurrent liabilities 3,638 6,064
Shareholders' equity:
Series preferred stock - $.01 par value, 10,000,000
shares authorized, 0 shares issued and outstanding -- --
Common stock - $.01 par value, 100,000,000 shares
authorized, 32,000,000 shares issued and
outstanding 320 320
Non-voting common stock - $.01 par value, 3,000,000
shares authorized, 0 shares issued and
outstanding -- --
Additional paid-in capital 243,662 243,662
(Deficit) (46,866) (54,783)
Cumulative translation adjustment and other (2,348) 6,719
-------- --------
194,768 195,918
-------- --------
Total liabilities and shareholders' equity $776,710 $708,115
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
Polymer Group, Inc.
Consolidated Statements of Operations (Unaudited)
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $129,711 $135,042 $390,166 $386,350
Cost of goods sold 98,515 101,208 291,669 290,856
-------- -------- -------- --------
Gross profit 31,196 33,834 98,497 95,494
Selling, general and administrative
expenses 18,609 17,739 56,302 52,330
-------- -------- -------- --------
Operating income 12,587 16,095 42,195 43,164
Other (income) expenses:
Interest expense, net 8,578 7,089 22,110 26,694
Unrealized holding (gain) on marketable
securities (8,947) -- (8,947) --
Foreign currency transaction
(gains) losses, net (418) (586) (743) 2,987
-------- -------- -------- --------
(787) 6,503 12,420 29,681
-------- -------- -------- --------
Income before income taxes and
extraordinary item 13,374 9,592 29,775 13,483
Income taxes 4,426 4,061 9,853 5,837
-------- -------- -------- --------
Income before extraordinary item 8,948 5,531 19,922 7,646
Extraordinary item, (loss) from
extinguishment of debt, net of
income tax benefit of $5,959
in 1997 and $7,492 in 1996 (12,005) -- (12,005) (13,932)
-------- -------- -------- --------
Net income (loss) (3,057) 5,531 7,917 (6,286)
Redeemable preferred stock dividends
and accretion -- -- -- (3,020)
-------- -------- -------- --------
Net income (loss) applicable to
common stock $ (3,057) $ 5,531 $ 7,917 $ (9,306)
======== ======== ======== ========
Net income (loss) per common share:
Income before extraordinary item $ 0.28 $ 0.17 $ 0.62 $ 0.18
Extraordinary item, (loss) from
extinguishment of debt, net of
income tax benefit (0.38) -- (0.38) (0.53)
-------- -------- -------- --------
Net income (loss) applicable to
common stock $ (0.10) $ 0.17 $ 0.25 $ (0.35)
======== ======== ======== ========
Weighted average number of shares
outstanding 32,000 32,000 32,000 26,250
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
Polymer Group, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
----------------------------
Sept. 27, Sept. 28,
1997 1996
----------- -----------
<S> <C> <C>
Operating activities
Net income (loss) $ 7,917 $ (6,286)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary item, net of income tax benefit 12,005 13,932
Depreciation and amortization expense 29,815 27,258
Foreign currency transaction (gains) losses, net (743) 2,987
Unrealized holding (gain) on marketable securities
classified as trading (8,947) -
Change in marketable securities classified as trading (15,965) -
Changes in operating assets and liabilities, net of effects of
business acquisition:
Accounts receivable (4,947) (6,777)
Inventories (6,558) (2,408)
Accounts payable and other 6,916 (2,184)
----------- -----------
Net cash provided by operating activities 19,493 26,522
----------- -----------
Investing activities
Purchases of property, plant and equipment (46,072) (18,739)
Purchases of marketable securities classified as
available for sale (8,852) (18,173)
Proceeds from sales of marketable securities classified as
available for sale 14,714 11,575
Other, including business acquisition (14,499) (53,474)
----------- -----------
Net cash (used in) investing activities (54,709) (78,811)
----------- -----------
Financing activities
Issuance of common stock, net of costs incurred - 190,838
Proceeds from debt 442,245 295,400
Payments of debt (374,568) (365,927)
Redemption of preferred stock - (57,359)
Issuance of redeemable preferred stock - 10,000
Loan acquisition and debt prepayment costs (25,891) (11,188)
----------- -----------
Net cash provided by financing activities 41,786 61,764
----------- -----------
Effect of exchange rate changes on cash (3,162) (133)
----------- -----------
Net increase in cash and equivalents 3,408 9,342
Cash and equivalents at beginning of period 37,587 18,088
----------- -----------
Cash and equivalents at end of period $ 40,995 $ 27,430
=========== ===========
Noncash financing activities
Cumulative dividends on redeemable preferred stock $ - $ 3,020
</TABLE>
See accompanying notes.
5
<PAGE>
Polymer Group, Inc.
Notes to Consolidated Financial Statements
Note 1. Description of Business and Basis of Presentation
Polymer Group, Inc. ("Polymer Group" or the "Company") is a world-wide
manufacturer of flexible nonwoven and woven polyolefin fabrics. The Company's
principal lines of business include hygiene, medical, wiping and industrial and
specialty products. The Company operates manufacturing facilities in the United
States, Canada, Mexico, Germany and the Netherlands.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of the management of Polymer
Group, these unaudited consolidated financial statements contain all
adjustments of a normal recurring nature necessary for a fair presentation.
Operating results for the three and nine months ended September 27, 1997, are
not necessarily indicative of the results that may be expected for fiscal 1997.
Certain amounts previously presented in the consolidated financial statements
for prior periods have been reclassified to conform to current classification.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2. Inventories
Inventories are stated at the lower of costs or market using the first-in,
first-out method of accounting and consist of the following:
<TABLE>
<CAPTION>
Sept. 27, December 28,
1997 1996
--------------------------
<S> <C> <C>
(Unaudited)
Inventories:
Finished goods $32,855 $26,809
Work in process and stores and
maintenance 4,080 3,328
Raw materials 26,186 25,500
--------------------------
Total $63,121 $55,637
==========================
</TABLE>
Note 3. Net Income (Loss) Per Share
Net income (loss) per common share is determined by dividing net income (loss)
applicable to common stock by the average number of shares outstanding during
the period.
6
<PAGE>
Note 4. Refinancing
On July 3, 1997, the Company refinanced its outstanding indebtedness by: (i)
consummating the offering of $400.0 million 9% Senior Subordinated Notes
("Senior Subordinated Notes") due 2007 and the tender offer and related consent
solicitation for its $100 million 12-1/4% Senior Notes ("Senior Notes"); and
(ii) amending and restating its existing credit facility (collectively, the
"Refinancing"). In the tender offer and consent solicitation, the Company
purchased all of its outstanding Senior Notes for an amount in cash equal to
$1,103.64 per $1,000 aggregate amount, plus accrued interest. The Company also
solicited consents from tendering holders to amend the indenture under which the
Senior Notes were issued to eliminate substantially all of the protective
covenants contained therein, and paid a separate consent fee to holders who
tendered their notes and delivered consents prior to expiration of the consent
solicitation. The Company received consents relating to, and tenders of, all of
the outstanding Senior Notes. The amended credit facility provides for secured
revolving credit facilities with an aggregate commitment of up to $325.0 million
and a term of approximately six years. In connection with consummation of the
Refinancing, the Company recorded one-time charges of $12.0 million (net of tax)
for the write-off of previously capitalized debt issue costs and premiums paid
in connection with the repurchase of the Senior Notes. The Registration
Statement on Form S-4 (Reg. No. 333-32605) registering the exchange offer for
the Senior Subordinated Notes was declared effective by the Securities and
Exchange Commission ("SEC") on September 3, 1997 and the exchange offer was
completed on October 3, 1997.
Note 5. Selected Financial Data of Guarantors
Payment of the Senior Subordinated Notes is guaranteed jointly and severally on
a senior subordinated basis by all of the Company's direct and indirect
domestic subsidiaries and by each direct and indirect domestic subsidiary of the
Company (excluding unrestricted subsidiaries) formed or acquired after issuance
of the Senior Subordinated Notes. Management has determined that separate
complete financial statements of the guarantors are not material to users of the
financial statements. The following sets forth selected financial data of the
guarantor and non-guarantor subsidiaries (in thousands):
Condensed Consolidating Selected Balance Sheet Financial Data
As of September 27, 1997
<TABLE>
<CAPTION>
Combined Combined Reclassifica-
Guarantor Non-Guarantor The tions and
Subsidiaries Subsidiaries Company Eliminations Consolidated
----------------- ------------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Working capital $ 52,394 $ 69,339 $ 20,931 $ 3,686 $146,350
Total assets 1,086,183 338,475 930,694 (1,578,642) 776,710
Total debt 461,315 166,195 710,766 (892,490) 445,786
Shareholders' equity 564,422 118,625 194,768 (683,047) 194,768
</TABLE>
Condensed Consolidating Selected Balance Sheet Financial Data
As of December 28, 1996
<TABLE>
<CAPTION>
Combined Combined Reclassifica-
Guarantor Non-Guarantor The tions and
Subsidiaries Subsidiaries Company Eliminations Consolidated
----------------- ------------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Working capital $ 38,097 $ 47,034 $ 7,904 $ 119 $ 93,154
Total assets 1,032,233 278,676 471,796 (1,074,590) 708,115
Total debt 442,447 114,692 260,790 (435,687) 382,242
Shareholders' equity 527,475 110,238 195,918 (637,713) 195,918
</TABLE>
7
<PAGE>
Note 5. Selected Financial Data of Guarantors (Continued)
Condensed Consolidating Statement of Operations Selected Financial Data
For the Nine Months Ended September 27, 1997
<TABLE>
<CAPTION>
Combined Combined Reclassifica-
Guarantor Non-Guarantor The tions and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ -------------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $249,167 $147,633 $ -- $ (6,634) $390,166
Operating income 17,103 20,622 4,470 -- 42,195
Income before
income taxes and
extraordinary item 10,308 18,099 1,368 -- 29,775
Income taxes (benefit) (1,223) 2,426 8,650 -- 9,853
Income (loss) before
extraordinary item 11,531 15,673 (7,282) -- 19,922
Extraordinary item (4,587) (839) (6,579) -- (12,005)
Equity in earnings
of subsidiaries -- -- 21,778 (21,778) --
Net income (loss) 6,944 14,834 7,917 (21,778) 7,917
</TABLE>
Condensed Consolidating Statement of Operations Selected Financial Data
For the Nine Months Ended September 28, 1996
<TABLE>
<CAPTION>
Combined Combined Reclassifica-
Guarantor Non-Guarantor The tions and
Subsidiaries Subsidiaries Company Eliminations Consolidated
------------ -------------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales $252,989 $134,704 $ -- $(1,343) $386,350
Operating income (loss) 21,332 21,868 (40) 4 43,164
Income (loss) before
income taxes and
extraordinary item 10,481 9,599 (6,601) 4 13,483
Income taxes 3,327 441 2,069 -- 5,837
Income (loss) before
extraordinary item 7,154 9,158 (8,670) 4 7,646
Extraordinary item (10,745) 793 (3,980) -- (13,932)
Equity in earnings (loss)
of subsidiaries -- -- 6,364 (6,364) --
Net income (loss) (3,591) 9,951 (6,286) (6,360) (6,286)
</TABLE>
Note 6. Functional Currency
On December 29, 1996, the Company changed the functional currency for its
Mexican subsidiary from the nuevo peso to the United States dollar due to
economic facts and circumstances including: (i) the cumulative inflation index
in Mexico has approximated 100% over a three-year period ended December 28,
1996; (ii) an increase in the volume of transactions denominated in dollars
including dollar-indexed transactions; and (iii) the cash flows of the Company's
Mexican subsidiary are directly affected since a substantial portion of
transactions are dollar denominated or dollar-indexed. In accordance with
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation" ("FAS 52"), the dollar translated amounts of nonmonetary assets,
primarily property, plant and equipment and goodwill, at December 29, 1996
became the accounting basis for these assets at December 29, 1996 and for
subsequent periods. Additionally, the Mexican-related cumulative translation
adjustment
8
<PAGE>
Note 6. Functional Currency (Continued)
at December 28, 1996 accumulated in shareholders' equity prior to this change in
functional currency remains as a separate component of shareholders' equity.
Note 7. New Accounting Standard
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("FAS 128") was issued. FAS 128 is designed to improve the earnings
per share information provided in financial statements by simplifying the
existing computational guidelines, revising the disclosure requirements, and
increasing the comparability of earnings per share data on an international
basis. FAS 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. The Company will adopt FAS 128 on its effective date. The
Company does not currently anticipate that the effect of adoption will have a
material impact upon its current earnings per share computation.
Note 8. Recent Developments
On October 29, 1997, DT Acquisition Inc. ("DTA"), a subsidiary of the Company,
commenced a cash tender offer to acquire the outstanding Common Shares and First
Preferred Shares of Dominion Textile Inc. ("Dominion" or "Dominion Textile"), a
corporation organized under the laws of Canada and headquartered in Montreal,
Canada. DTA is offering CDN$11.75 for each outstanding Common Share and
CDN$109.50 for each outstanding First Preferred Share. Dominion currently has
approximately 41 million Common Shares outstanding and 370 First Preferred
Shares outstanding. The Offers are subject to a number of customary conditions,
and, unless extended, expire on November 20, 1997. The Company, DTA and Galey &
Lord Incorporated ("Galey & Lord") also entered into an agreement pursuant to
which DTA agreed to sell the apparel fabric business of Dominion to Galey & Lord
if the tender offer for Dominion is successful.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's
consolidated results of operations and financial condition. The discussion
should be read in conjunction with the consolidated financial statements and
notes thereto contained in Part I of this report on Form 10-Q and with the
Company's Registration Statement on Form S-4 declared effective by the SEC on
September 3, 1997.
Results of Operations
The following table sets forth the percentage relationships to net sales of
certain income statement items.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales by product category:
Hygiene 42.9% 45.7% 42.5% 44.8%
Medical 17.2 16.7 17.2 18.1
Wiping 19.1 16.6 19.2 17.2
Industrial and specialty 20.8 21.0 21.1 19.9
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Cost of goods sold:
Raw material costs 44.8 46.7 43.8 46.2
Labor costs 7.6 7.5 7.9 7.4
Overhead costs 23.5 20.8 23.1 21.7
----- ----- ----- -----
Total cost of goods sold 75.9 75.0 74.8 75.3
Gross profit 24.1 25.0 25.2 24.7
Selling, general and administrative
expenses 14.4 13.1 14.4 13.5
----- ----- ----- -----
Operating income 9.7 11.9 10.8 11.2
Other (income) expense
Interest expense, net 6.6 5.2 5.7 6.9
Unrealized holding (gain) on
marketable securities (6.9) - (2.3) -
Foreign currency (gains)
losses, net (0.3) (0.4) (0.2) 0.8
----- ----- ----- -----
(0.6) 4.8 3.2 7.7
Income before income taxes
and extraordinary item 10.3 7.1 7.6 3.5
Income taxes 3.4 3.0 2.5 1.5
----- ----- ----- -----
Income before extraordinary
item 6.9 4.1 5.1 2.0
Extraordinary item, net of income
tax benefit (9.3) - (3.1) (3.6)
----- ----- ----- -----
Net income (loss) (2.4)% 4.1% 2.0% (1.6)%
===== ===== ===== =====
</TABLE>
10
<PAGE>
Comparison of Three Months Ended September 27, 1997 and September 28, 1996
Net Sales
The following table sets forth components of the Company's net sales by product
category for the three months ended September 27, 1997 and the corresponding
increase/(decrease) over the comparable period last year:
<TABLE>
<CAPTION>
%
Third Qtr Third Qtr Increase/ Increase/
1997 1996 (Decrease) (Decrease)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Net sales by product category:
Hygiene $55,660 $61,756 $(6,096) (9.9)
Medical 22,323 22,530 (207) (0.9)
Wiping 24,775 22,456 2,319 10.3
Industrial and specialty 26,953 28,300 (1,347) (4.8)
-------- -------- -------
Total net sales $129,711 $135,042 $(5,331) (3.9)
======== ======== =======
</TABLE>
Consolidated net sales decreased $5.3 million, or 3.9%, from $135.0 million for
the three months ended September 28, 1996 to $129.7 million for the three months
ended September 27, 1997. Net sales increased $2.8 million as a result of the
acquisition of FNA Polymer Corp. ("FNA"), which was completed during the third
quarter of 1996, offset by unforeseeable delays and product conversions at two
key customers which resulted in lower volumes than originally scheduled, a mix-
shift toward lower cost spunbond and spunbond-meltblown-spunbond ("SMS")
technology which replaced thermal bond fabric sales, the pass-through of lower
raw material costs to customers and weaker European foreign currency translation
rates in the third quarter of 1997. Hygiene product sales decreased 9.9%, or
approximately $6.1 million, from $61.8 million in 1996 to $56.0 million in 1997.
External factors strongly influenced the hygiene product category during the
third quarter of 1997. Product qualification and program ramp-up delays in
Europe for sublayer and product design reconfigurations by the Company's two
largest customers were the prime cause for a net sales decrease of $3.6 million
relative to the comparable period in the prior year. Within the hygiene product
category, thermal bond product sales declined approximately $6.8 million during
the third quarter of 1997 versus the comparable period of 1996 as customers
converted to spunbond material faster than anticipated, which was offset by the
acquisition of FNA and by growth in spunbond/SMS and spunlace materials of
approximately $3.2 million. In addition, weaker European currencies and the
resulting translation conversion accounted for $2.5 million of the overall
decline in hygiene product sales. Medical product sales were $22.3 million in
the third quarter of 1997 as compared to $22.5 million for the third quarter of
1996. Volume growth for woundcare products was offset by lower exports of
surgical gown and drape fabric as the result of inventory reductions in Europe.
Raw material costs were stable during the third quarter of 1997 versus the
comparable period in 1996; however, Polymer Group incurred a $0.4 million
foreign currency translation loss within the medical product category during the
current quarter. Wiping product sales increased 10.3%, or approximately $2.3
million, from $22.5 million in 1996 to $24.8 million in 1997 despite an
unfavorable foreign currency translation loss of $2.1 million. Improved sales in
this product category were driven by growth in double re-crepe rollgood sales,
rollgood sales to converters and geographic and product line extensions. Sales
in the industrial and specialty product category decreased 4.8%, or
approximately $1.3 million, during the third quarter of 1997 to $27.0
11
<PAGE>
million from $28.3 million in 1996. Sales growth was strongest for woven slit
film products, microporous battery separators, filtration and sorbents,
furniture and bedding, and landscape and agricultural materials offset by lower
sales of products for home fashions, automotive and apparel interlining
applications.
Gross Profit
The following table sets forth components of the Company's cost of goods sold
for the three months ended September 27, 1997 and the corresponding
increase/(decrease) over the comparable period last year:
<TABLE>
<CAPTION>
%
Third Qtr Third Qtr Increase/ Increase/
1997 1996 (Decrease) (Decrease)
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Cost of goods sold:
Raw material costs $58,141 $ 63,037 $(4,896) (7.8)
Labor costs 9,912 10,173 (261) (2.6)
Overhead costs 30,462 27,998 2,464 8.8
--------- --------- ----------
Total cost of goods sold $98,515 $101,208 $(2,693) (2.7)
========= ========= ==========
Consolidated gross profit $31,196 $ 33,834 $(2,638) (7.8)
========= ========= ==========
</TABLE>
Gross profit decreased to $31.2 million, or 24.1% of consolidated net sales, for
the third quarter of 1997 versus $33.8 million for the comparable period of
1996. The approximate $2.6 million decrease in gross profit over the third
quarter of 1996 reflected volume declines attributable to unforeseeable delays
at two key customers, higher manufacturing costs associated with program ramp-up
delays in Europe and overhead absorption losses on lower thermal bond volume
offset somewhat by lower raw material costs.
Third quarter 1997 raw material costs were $58.1 million, or 44.8% of net sales,
compared to $63.0 million, or 46.7% of net sales, for the comparable period last
year reflecting the continued trend in lower raw material costs offset by higher
levels of material usage in North America and Europe. Direct labor costs were
$9.9 million, or 7.6% of net sales in the third quarter of 1997, compared to
$10.2 million, or 7.5% of net sales in the third quarter of 1996. Overhead
costs increased $2.5 million from $28.0 million or 20.8% of net sales in the
third quarter of 1996 to approximately $30.5 million or 23.5% of net sales in
the third quarter of 1997. The 8.8% increase in overhead expenses between third
quarter 1997 and third quarter 1996 was attributable to higher depreciation on
completed capital expenditures ($0.7 million); incremental overhead costs
associated with the acquisition of FNA ($0.7 million); and higher overhead costs
(excluding depreciation) in North America ($0.5 million), Europe ($0.2 million)
and Mexico ($0.4 million).
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 14.4% of net sales in the
third quarter of 1997 and approximately 14.5% of net sales in the first and
second quarters of 1997 compared to 13.1% of net sales in the third quarter of
1996. Consolidated selling, general and administrative expenses for the third
quarter of 1997 were $18.6 million, up approximately
12
<PAGE>
$0.9 million versus $17.7 million for the third quarter of 1996 due primarily to
additional costs associated with the FNA acquisition ($0.6 million), higher
research and development costs related to product development ($0.6 million),
offset by lower net selling, warehouse, distribution and other costs ($0.3
million).
Other
Interest expense increased $1.5 million from $7.1 million in the third quarter
of 1996 to $8.6 million in the third quarter of 1997. Interest expense as a
percentage of net sales increased from 5.2% in the third quarter of 1996 to 6.6%
in the third quarter of 1997. The increase in interest expense is principally
due to a higher average amount of indebtedness outstanding in the third quarter
of 1997 resulting from the Refinancing as discussed in Note 4. Refinancing of
Notes to Consolidated Financial Statements. During the three months ended
September 27, 1997, the Company recorded an unrealized holding gain on
marketable securities of $8.9 million for those investments considered to be
held for "trading" in accordance with Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115").
Net foreign currency transaction gains were approximately $0.4 million during
the third quarter of 1997 versus $0.6 million in the third quarter of 1996.
The Company provided for income taxes of approximately $4.4 million for the
three months ended September 27, 1997, representing an effective tax rate of
33.1%. The provision for income taxes at the Company's effective rate differed
from the provision for income taxes at the statutory rate due primarily to the
utilization of net operating loss carryforwards and to tax strategies initiated
at the time of the Company's initial public offering of common stock ("IPO")
during the second quarter of 1996. Polymer Group provided for income taxes of
$4.1 million during the third quarter of 1996, representing an effective tax
rate of 42.3%.
Income Before Extraordinary Item
Polymer Group's income before extraordinary item was $8.9 million, or $.28 per
share, in the third quarter of 1997 as compared to $5.5 million, or $0.17 per
share, in the comparable period last year. The approximate $3.4 million
increase between third quarter 1997 and third quarter 1996 is attributable
primarily to an unrealized holding gain on marketable securities of $8.9 million
and a lower effective income tax rate offset by higher interest expense of $1.5
million as a result of the Refinancing and lower operating income of $3.5
million resulting from volume declines attributable to unforeseeable delays at
two key customers, higher manufacturing costs associated with program ramp-up
delays in Europe and overhead absorption losses on lower thermal bond volume
which was offset to some extent by lower raw material costs.
Extraordinary Item
As a result of the Refinancing, the Company recorded one-time charges of
$12.0 million (net of tax) for the write-off of previously capitalized debt
issue costs and premiums paid in connection with the repurchase of the Senior
Notes.
13
<PAGE>
Comparison of Nine Months Ended September 27, 1997 and September 28, 1996
Net Sales
The following table sets forth components of the Company's net sales by product
category for the nine months ended September 27, 1997 and the corresponding
increase/(decrease) over the comparable period last year:
<TABLE>
<CAPTION>
Year to Date Year to Date %
Third Qtr Third Qtr Increase/ Increase/
1997 1996 (Decrease) (Decrease)
------------ ------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Net sales by product category:
Hygiene $165,808 $172,961 $(7,153) (4.1)
Medical 67,067 69,808 (2,741) (3.9)
Wiping 74,790 66,399 8,391 12.6
Industrial and specialty 82,501 77,182 5,319 6.9
-------- -------- -------
Total net sales $390,166 $386,350 $ 3,816 1.0
======== ======== =======
</TABLE>
Consolidated net sales increased $3.8 million, or 1.0%, from $386.4 million for
the nine months ended September 28, 1996 to $390.2 million for the nine months
ended September 27, 1997. Net sales increased $19.6 million as a result of the
acquisition of FNA, offset by lower average selling prices in the hygiene and
medical product categories, unforeseeable delays and product conversions at two
key customers which resulted in lower volumes than originally scheduled, a mix-
shift toward lower cost spunbond and SMS technology which replaced thermal bond
fabric sales, the pass-through of lower raw material costs to customers and
weaker European foreign currency translation rates during 1997. Hygiene product
sales decreased 4.1%, or approximately $7.2 million, from $173.0 million in 1996
to $165.8 million in 1997. External factors have strongly influenced the hygiene
product category during 1997. Product qualification and program ramp-up delays
in Europe for sublayer and product design reconfigurations by the Company's two
largest customers contributed to a net sales decrease between 1997 and 1996 of
approximately $1.5 million. Within the hygiene product category, thermal bond
product sales declined approximately $20.7 million on a year to date basis in
1997 versus the comparable period of 1996 as customers converted to spunbond
material faster than anticipated, which was offset by the acquisition of FNA of
$8.1 million and by growth in spunbond/SMS and spunlace materials of $11.1
million. In addition, weaker European currencies and the resulting translation
conversion accounted for $5.6 million of the overall decline in hygiene product
sales. Medical product sales decreased $2.7 million from $69.8 million on a year
to date basis in 1996 as compared to $67.1 million in 1997. Lower raw material
costs of approximately $4.0 million which were passed through to customers in
the form of lower average selling prices, unfavorable European foreign currency
translation rates which reduced sales by approximately $1.1 million and other
net decreases, including lower exports of surgical gown and drape fabric as the
result of inventory reductions in Europe, of approximately $0.2 million offset
sales increases of $2.6 million attributable to the acquisition of FNA. Within
the wiping product category, sales increased 12.6%, or approximately $8.4
million, from $66.4 million in 1996 to $74.8 million in 1997 despite year to
date unfavorable foreign currency translation losses of $5.0 million. Improved
sales in this product category were driven by higher volumes of food service and
specialty wiping products and by growth in double re-crepe rollgood sales,
rollgood sales to converters and geographic and product line extensions. Sales
in the
14
<PAGE>
industrial and specialty product category increased 6.9%, or approximately $5.3
million, on a year to date basis in 1997 to $82.5 million from $77.2 million
during the comparable period in 1996. Sales growth within the industrial and
specialty product category was attributable to the acquisition of FNA and woven
slit films offset by unfavorable European foreign currency translation rates and
lower sales of products for home fashions, automotive and apparel interlining
applications.
Gross Profit
The following table sets forth components of the Company's cost of goods sold
for the nine months ended September 27, 1997 and the corresponding
increase/(decrease) over the comparable period last year:
<TABLE>
<CAPTION>
Year to Date Year to Date %
Third Qtr Third Qtr Increase/ Increase/
1997 1996 (Decrease) (Decrease)
------------ ------------ ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Cost of goods sold:
Raw material costs $170,785 $178,664 $(7,879) (4.4)
Labor costs 30,622 28,650 1,972 6.9
Overhead costs 90,262 83,542 6,720 8.0
-------- -------- -------
Total cost of goods sold $291,669 $290,856 $ 813 0.3
======== ======== =======
Consolidated gross profit $ 98,497 $ 95,494 $ 3,003 3.1
======== ======== =======
</TABLE>
Gross profit increased to $98.5 million, or 25.2% of consolidated net sales, on
a year to date basis in 1997 versus $95.5 million for the comparable period of
1996. The approximate $3.0 million increase in gross profit over 1996 reflected
the benefit of the acquisition of FNA offset by volume declines attributable to
unforeseeable delays at two key customers, higher manufacturing costs associated
with program ramp-up delays in Europe and overhead absorption losses on lower
thermal bond volume offset somewhat by lower raw material costs.
Year to date raw material costs in 1997 were $170.8 million, or 43.8% of net
sales, compared to $178.7 million, or 46.2% of net sales, for the comparable
period last year reflecting the continued trend in lower raw material costs
offset somewhat by higher levels of material usage in North America and Europe.
Direct labor costs were $30.6 million, or 7.9% of net sales in 1997, compared to
$28.7 million, or 7.4% of net sales in the comparable period of last year.
Overhead costs increased $6.7 million from $83.5 million, or 21.7% of net sales,
in 1996 to approximately $90.3 million, or 23.1% of net sales, in 1997. The
8.0% increase in overhead expenses between 1997 and 1996 was attributable
primarily to higher depreciation on completed capital expenditures of $2.2
million and incremental overhead costs of $3.1 million associated with the
acquisition of FNA.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 14.4% of net sales in 1997 and
13.5% of net sales in 1996. Year to date consolidated selling, general and
administrative expenses for 1997 were $56.3 million, up approximately $4.0
million versus $52.3 million for 1996 due primarily to additional costs of
$1.9 million associated with the FNA acquisition and higher costs of $2.1
million related primarily to the development of Metal-Set and Apex products.
15
<PAGE>
Other
Interest expense on a year to date basis decreased $4.6 million from $26.7
million in 1996 to $22.1 million in 1997. Interest expense as a percentage of
net sales decreased from 6.9% in 1996 to 5.7% in 1997. The decrease in interest
expense is principally due to a lower average amount of indebtedness outstanding
in 1997 prior to the Refinancing. See Note 4. Refinancing of Notes to
Consolidated Financial Statements. The Company recorded an unrealized holding
gain on marketable securities of $8.9 million for those investments considered
to be held for "trading" in accordance with FAS 115.
Net foreign currency transaction gains were approximately $0.7 million in 1997
compared to foreign currency transaction losses of approximately $3.0 million in
1996.
The Company provided for income taxes of approximately $9.9 million for the nine
months ended September 27, 1997, representing an effective tax rate of 33.1%.
The provision for income taxes at the Company's effective rate differed from the
provision for income taxes at the statutory rate due primarily to the
utilization of net operating loss carryforwards and to tax strategies initiated
at the time of the Company's IPO during the second quarter of 1996. Polymer
Group provided for income taxes of $5.8 million on a year to date basis in 1996,
representing an effective tax rate of 43.3%.
Income Before Extraordinary Item
Polymer Group's income before extraordinary item was $19.9 million, or $.62 per
share, for the nine months ended September 27, 1997 as compared to $7.6 million,
or $0.18 per share, in the comparable period last year. The approximate $12.2
million increase between 1997 and 1996 is attributable primarily to an
unrealized holding gain on marketable securities of $8.9 million, lower year to
date interest expense and a lower effective income tax rate offset by volume
declines attributable to unforeseeable delays at two key customers, higher
manufacturing costs associated with program ramp-up delays in Europe and
overhead absorption losses on lower thermal bond volume, which was offset to
some extent by lower raw material costs.
Extraordinary Item
As a result of the Refinancing, the Company recorded one-time charges of $12.0
million (net of tax) for the write-off of previously capitalized debt issue
costs and premiums paid in connection with the repurchase of the Senior Notes.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
September 27, December 28,
1997 1996
-------------------------------------
(In Thousands)
<S> <C> <C>
Balance sheet data:
Cash and equivalents, and marketable
securities $ 71,882 $ 48,479
Current assets 225,964 184,427
Current liabilities (excluding current portion
of long-term debt) 78,669 71,776
Working capital 147,295 112,651
Total assets 776,710 708,115
Debt (including current portion) 445,786 382,242
Shareholders' equity 194,768 195,918
Nine Months Ended
September 27, September 28,
1997 1996
-------------------------------------
(In Thousands)
Cash flow data:
Net cash provided by operating activities $ 19,493 $ 26,522
Net cash (used in) investing activities (54,709) (78,811)
Net cash provided by financing activities 41,786 61,764
</TABLE>
During the nine months ended September 27, 1997, the Company's operations
generated $19.5 million of cash. The Company's working capital (excluding
current portion of long-term debt) increased $34.6 million from $112.7 million
at December 28, 1996 to $147.3 million at September 27, 1997. Cash and
equivalents and marketable securities were $71.9 million at September 27, 1997
as compared to $48.5 million at December 28, 1996. Marketable securities
increased approximately $20.0 million from $10.9 million at December 28, 1996 to
$30.9 million at September 27, 1997 due primarily to the Company's investment in
Dominion Textile. See Note 8. Recent Developments of Notes to Consolidated
Financial Statements.
Capital expenditures for the nine months ended September 27, 1997 totaled $46.1
million, an increase of $27.3 million over the comparable period last year due
primarily to expansion of adhesive bond and reticulon capacity, and a new 4.2
meter wide SMS line at the Company's Mooresville, North Carolina plant site.
Approximately $22.0 million has been expended on a cumulative basis through the
end of the third quarter of 1997. Commercialization of this new line is expected
to be completed during fourth quarter 1997. The Company anticipates that capital
expenditures will be approximately $11.8 million for the remainder of 1997.
17
<PAGE>
On July 3, 1997, the Company refinanced its outstanding indebtedness by: (i)
consummating the offering of the Senior Subordinated Notes due 2007 and the
tender offer and related consent solicitation for its Senior Notes; and (ii)
amending and restating its existing credit facility. In the tender offer and
consent solicitation, the Company purchased all of its outstanding Senior Notes
for an amount in cash equal to $1,103.64 per $1,000 aggregate amount, plus
accrued interest. The Company also solicited consents from tendering holders to
amend the indenture under which the Senior Notes were issued to eliminate
substantially all of the protective covenants contained therein, and paid a
separate consent fee to holders who tendered their notes and delivered consents
prior to expiration of the consent solicitation. The Company received consents
relating to, and tenders of, all of the outstanding Senior Notes. The amended
credit facility provides for secured revolving credit facilities with an
aggregate commitment of up to $325.0 million and a term of approximately six
years. In connection with consummation of the Refinancing, the Company recorded
one-time charges of $12.0 million (net of tax) for the write-off of previously
capitalized debt issue costs and premiums paid in connection with the repurchase
of the Senior Notes. The Registration Statement on Form S-4 (Reg. No. 333-32605)
registering the exchange offer for the Senior Subordinated Notes was declared
effective by the SEC on September 3, 1997 and the exchange offer was completed
on October 3, 1997.
The Company believes that based on current levels of operations and anticipated
growth, its cash from operations, together with other available sources of
liquidity, including but not limited borrowings under the amended credit
facility, will be adequate over the next several years to make required debt
payments, including interest thereon, permit anticipated capital expenditures
and fund the Company's working capital requirements.
Effect of Inflation
Inflation generally affects the Company by increasing the cost of labor,
equipment and new materials. The Company believes that inflation had no
material effect on the Company's business during the nine months ended September
27, 1997.
Foreign Currency
The Company's substantial foreign operations expose it to the risk of exchange
rate fluctuations. If foreign currency denominated revenues are greater than
costs, the translation of foreign currency denominated costs and revenues into
U.S. dollars will improve profitability when the foreign currency strengthens
against the U.S. dollar and will reduce profitability when the foreign currency
weakens. See Note 6. Foreign Currency of Notes to Consolidated Financial
Statements for a discussion of the Company's change in functional currency from
the nuevo peso to the United States dollar for its Mexican operation.
Safe Harbor Statement under the Private Securities Litigation Act of 1995
Except for historical information contained herein, the matters set forth within
the management's discussion and analysis of this Form 10-Q are forward looking
statements. Certain risks and uncertainties could cause actual results to
differ materially from those set forth in the forward looking statements. The
following factors could cause actual results to differ materially from
historical results or those anticipated: adverse economic conditions,
competition in the Company's markets, fluctuation in raw material costs, and
other risks detailed in documents filed by Polymer Group with the Securities and
Exchange Commission.
18
<PAGE>
Part II. Other Information
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits required to be filed with this report on Form 10-Q are
listed in the following Exhibit Index.
The Company did not file any reports on Form 8-K during the quarter
ended September 27, 1997.
19
<PAGE>
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.
POLYMER GROUP, INC.
By: /s/ Jerry Zucker
Jerry Zucker
Chairman, President, Chief Executive Officer and Director
(Principal Executive Officer)
By: /s/ James G. Boyd
James G. Boyd
Executive Vice President, Treasurer and Director
(Principal Financial Officer and Principal
Accounting Officer)
November 10, 1997
20
<PAGE>
Exhibit Index
Exhibit
Number
- ------
3.1(i) Form of Amended and Restated Certificate of Incorporation of the
Company.(1)
3.1(ii) Certificate of Designation of the Company.(2)
3.2 Amended and Restated By-laws of the Company.(1)
4.1 Indenture dated as of July 1, 1997 among the Company, the Guarantors
and Harris Trust and Savings Bank, as trustee.(2)
4.2 Forms of Series A and Series B 9% Senior Subordinated Notes due 2007
(contained in Exhibit 4.1 as Exhibit A and B thereto,
respectively).(2)
4.3 Form of Guarantee (contained in Exhibit 4.2).(2)
4.4 Registration Rights Agreement dated as of July 3, 1997 among the
Company, the Guarantors and Chase Securities Inc.(2)
4.5 Amended and Restated Credit Agreement dated July 3, 1997 by and among
the Company, the Guarantors named therein, the lenders named therein
and The Chase Manhattan Bank, as agent.(2)
The Registrant will furnish to the Commission, upon request, each
instrument defining the rights of holders of long-term debt of the
Registrant and its subsidiaries where the amount of such debt does not
exceed 10 percent of the total assets of the Registrant and its
subsidiaries on a consolidated basis.
10 Purchase Agreement, dated June 30, 1997, by and among the Company, the
Guarantors named therein and Chase Securities Inc., as Initial
Purchaser, with respect to the 9% Senior Subordinated Notes due
2007.(2)
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule.
99.1 Form of Letter of Transmittal relating to the Exchange Offer.(2)
99.2 Form of Notice of Guaranteed Delivery relating to the Exchange
Offer.(2)
99.3 Form of Tender Instructions relating to the Exchange Offer.(2)
(1) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-1 (Reg. No. 333-2424).
(2) Incorporated by reference to the respective exhibit to the Company's
Registration Statement on Form S-4 (Reg. No. 333-32605).
<PAGE>
Exhibit 11
Polymer Group, Inc.
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- --------------------------
Sept. 27, Sept. 28, Sept. 27, Sept. 28,
1997 1996 1997 1996
------------------------- --------------------------
<S> <C> <C> <C> <C>
Primary income (loss) per common share
Net income (loss) $(3,057) $ 5,531 $ 7,917 $(9,306)
======================= ======================
Common shares:
Weighted average number of shares outstanding 32,000 32,000 32,000 26,250
Adjustments:
Common share equivalents -- -- -- --
Warrants to purchase common stock -- -- -- --
----------------------- ----------------------
Average number of common shares, as adjusted 32,000 32,000 32,000 26,250
======================= ======================
Primary income (loss) per common share $ (0.10) $ 0.17 $ 0.25 $ (0.35)
======================= ======================
Income (loss) per common share assuming
full dilution
Net income (loss) $(3,057) $ 5,531 $ 7,917 $(9,306)
======================= ======================
Common shares:
Weighted average number of shares outstanding 32,000 32,000 32,000 26,250
Adjustments:
Common share equivalents -- -- -- --
Warrants to purchase common stock -- -- -- --
----------------------- ----------------------
Average number of common shares, as adjusted 32,000 32,000 32,000 26,250
======================= ======================
Income (loss) per common share assuming
full dilution $ (0.10) $ 0.17 $ 0.25 $ (0.35)
======================= ======================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Polymer Group Inc. Form 10-Q for the quarter ended September 27, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 40,995
<SECURITIES> 30,887
<RECEIVABLES> 75,143
<ALLOWANCES> 4,416
<INVENTORY> 63,121
<CURRENT-ASSETS> 225,964
<PP&E> 507,805
<DEPRECIATION> 85,628
<TOTAL-ASSETS> 776,710
<CURRENT-LIABILITIES> 79,614
<BONDS> 444,841
0
0
<COMMON> 320
<OTHER-SE> 194,448
<TOTAL-LIABILITY-AND-EQUITY> 776,710
<SALES> 390,166
<TOTAL-REVENUES> 390,166
<CGS> 291,669
<TOTAL-COSTS> 291,669
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,110
<INCOME-PRETAX> 29,775
<INCOME-TAX> 9,853
<INCOME-CONTINUING> 19,922
<DISCONTINUED> 0
<EXTRAORDINARY> (12,005)
<CHANGES> 0
<NET-INCOME> 7,917
<EPS-PRIMARY> .25<F1>
<EPS-DILUTED> .25<F1>
<FN>
<F1> Income before extraordinary item per common share was $.62 for the nine
months ended September 27, 1997.
</FN>
</TABLE>
