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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 June 27, 2004
Commission file number 0-22624
FOAMEX INTERNATIONAL INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 05-0473908
- ------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue
Linwood, PA 19061
- ------------------------------- -------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (610) 859-3000
--------------
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
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES X NO
--- ---
The number of shares of the registrant's common stock outstanding as of August
2, 2004 was 24,443,463.
FOAMEX INTERNATIONAL INC.
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements (unaudited).
Condensed Consolidated Statements of Operations - Quarters and Two Quarters
Ended June 27, 2004 and June 29, 2003 3
Condensed Consolidated Balance Sheets as of June 27, 2004 and December 28, 2003 4
Condensed Consolidated Statements of Cash Flows - Two Quarters Ended
June 27, 2004 and June 29, 2003 5
Notes to Condensed Consolidated Financial Statements 6
Summarized Financial Information of Foamex Asia Company Limited 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 22
Item 4. Controls and Procedures. 23
Part II. Other Information
Item 1. Legal Proceedings. 24
Item 2. Changes in Securities. 24
Item 4. Submission of Matters to a Vote of Security Holders. 24
Item 6. Exhibits and Reports on Form 8-K. 25
Signatures 26
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Quarters Ended Two Quarters Ended
----------------------- -----------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
-------- -------- -------- --------
(thousands, except per share amounts)
NET SALES $314,140 $337,637 $627,758 $665,788
COST OF GOODS SOLD 273,959 298,963 547,818 596,577
-------- -------- -------- --------
GROSS PROFIT 40,181 38,674 79,940 69,211
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 21,807 19,315 47,792 40,214
RESTRUCTURING CHARGES (CREDITS) 1,716 (1,551) 2,244 (1,551)
-------- -------- -------- --------
INCOME FROM OPERATIONS 16,658 20,910 29,904 30,548
INTEREST AND DEBT ISSUANCE EXPENSE 18,598 19,378 37,209 38,489
INCOME (LOSS) FROM EQUITY INTEREST IN
JOINT VENTURES (2) 513 275 879
OTHER INCOME (EXPENSE), NET (740) (233) 252 (1,848)
-------- -------- -------- --------
INCOME (LOSS) BEFORE BENEFIT FOR
INCOME TAXES (2,682) 1,812 (6,778) (8,910)
BENEFIT FOR INCOME TAXES (65) (1,633) (2,046) (1,933)
-------- -------- -------- --------
NET INCOME (LOSS) $ (2,617) $ 3,445 $ (4,732) $ (6,977)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - BASIC $ (0.11) $ 0.14 $ (0.19) $ (0.29)
======== ======== ======== ========
NET INCOME (LOSS) PER SHARE - DILUTED $ (0.11) $ 0.13 $ (0.19) $ (0.29)
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 24,443 24,407 24,440 24,379
======== ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES - DILUTED 24,443 25,914 24,440 24,379
======== ======== ======== ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
3
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
June 27, 2004 December 28, 2003
------------- -----------------
ASSETS (thousands, except share data)
CURRENT ASSETS
Cash and cash equivalents $ 4,640 $ 6,613
Accounts receivable, net of allowances of $11,597 in 2004
and $10,505 in 2003 183,778 181,288
Inventories 100,227 95,882
Deferred income taxes 16,401 15,676
Other current assets 21,641 27,116
-------- --------
Total current assets 326,687 326,575
Property, plant and equipment 410,635 414,680
Less accumulated depreciation (258,297) (251,830)
-------- --------
NET PROPERTY, PLANT AND EQUIPMENT 152,338 162,850
GOODWILL 126,078 126,258
DEBT ISSUANCE COSTS, net of accumulated
amortization of $14,008 in 2004 and $10,648 in 2003 23,835 27,195
DEFERRED INCOME TAXES 111,526 109,658
SOFTWARE COSTS, net of accumulated amortization of $4,602 in
2004 and $3,603 in 2003 10,415 9,767
INVESTMENT IN AND ADVANCES TO AFFILIATES 15,291 14,503
OTHER ASSETS 20,315 13,100
-------- --------
TOTAL ASSETS $786,485 $789,906
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Revolving credit borrowings $115,130 $ 96,065
Current portion of long-term debt 8,931 8,937
Accounts payable 92,835 98,319
Accrued employee compensation and benefits 33,153 28,331
Accrued interest 11,910 12,376
Accrued customer rebates 13,356 18,077
Cash overdrafts 10,381 12,692
Other accrued liabilities 19,506 20,632
-------- --------
Total current liabilities 305,202 295,429
LONG-TERM DEBT 633,602 640,621
ACCRUED EMPLOYEE BENEFITS 43,174 43,348
OTHER LIABILITIES 12,952 13,624
-------- --------
Total liabilities 994,930 993,022
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIENCY
Preferred Stock, par value $1.00 per share:
Authorized 5,000,000 shares
Issued 15,000 shares - Series B in 2004 and 2003 15 15
Common Stock, par value $.01 per share:
Authorized 50,000,000 shares
Issued 27,932,463 shares in 2004 and 27,898,149 shares in 2003 279 279
Additional paid-in capital 102,328 102,155
Accumulated deficit (242,464) (237,732)
Accumulated other comprehensive loss (31,602) (30,832)
Common stock held in treasury, at cost:
3,489,000 shares in 2004 and 2003 (27,780) (27,780)
Shareholder note receivable (9,221) (9,221)
-------- --------
Total stockholders' deficiency (208,445) (203,116)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $786,485 $789,906
======== ========
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
4
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Two Quarters Ended
-------------------------
June 27, June 29,
2004 2003
--------- --------
OPERATING ACTIVITIES (thousands)
Net loss $(4,732) $(6,977)
Adjustments to reconcile net loss to net cash provided
by (used for) operating activities:
Depreciation and amortization 12,210 12,956
Amortization of debt issuance costs, debt premium
and debt discount 1,368 2,877
Gain on sale of assets (1,004) -
Other operating activities 5,360 688
Changes in operating assets and liabilities, net (23,922) 3,566
------- -------
Net cash provided by (used for) operating activities (10,720) 13,110
------- -------
INVESTING ACTIVITIES
Capital expenditures (3,110) (3,165)
Proceeds from sale of assets 2,243 -
Other investing activities (1,647) (2,197)
------- -------
Net cash used for investing activities (2,514) (5,362)
------- -------
FINANCING ACTIVITIES
Proceeds from (repayments of) revolving loans 19,064 (979)
Repayments of long-term debt (5,492) (29)
Decrease in cash overdrafts (2,311) (3,232)
------- -------
Net cash provided by (used for) financing activities 11,261 (4,240)
------- -------
Net increase (decrease) in cash and cash equivalents (1,973) 3,508
Cash and cash equivalents at beginning of period 6,613 4,524
------- -------
Cash and cash equivalents at end of period $ 4,640 $ 8,032
======= =======
Supplemental Information:
Cash paid for interest $36,307 $35,810
======= =======
The accompanying notes are an integral part of the unaudited
condensed consolidated financial statements.
5
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Foamex International Inc. (the "Company") operates in the flexible
polyurethane and advanced polymer foam products industry. The Company's
operations are primarily conducted through its wholly owned subsidiary, Foamex
L.P. Foamex L.P. conducts foreign operations through Foamex Canada Inc. ("Foamex
Canada"), Foamex Latin America, Inc. and Foamex Asia, Inc. Financial information
concerning the business segments of the Company is included in Note 10.
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited
and do not include certain information and disclosures required by accounting
principles generally accepted in the United States of America for complete
financial statements. However, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, considered necessary to present
fairly the Company's consolidated financial position and results of operations
have been included. These interim financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Company's 2003 Annual Report on Form 10-K. Results for interim
periods are not necessarily indicative of trends or of results for a full year.
The condensed consolidated balance sheet as of December 28, 2003 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
2. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share.
Quarters Ended Two Quarters Ended
----------------------- -----------------------
June 27, June 29, June 27, June 29,
2004(a) 2003(b) 2004(a) 2003 (a)
------- -------- -------- --------
(thousands, except per share amounts)
Basic:
Net income (loss) $(2,617) $3,445 $(4,732) $(6,977)
======= ====== ======= =======
Weighted average common shares
outstanding 24,443 24,407 24,440 24,379
======= ====== ======= =======
Net income (loss) per share $ (0.11) $ 0.14 $ (0.19) $ (0.29)
======= ====== ======= =======
Diluted:
Net income (loss) $(2,617) $3,445 $(4,732) $(6,977)
======= ====== ======= =======
Weighted average common shares
outstanding 24,443 24,407 24,440 24,379
Incremental shares resulting from
Stock options - 7 - -
Convertible preferred stock - 1,500 - -
------- ------ ------- -------
Adjusted weighted average shares 24,443 25,914 24,440 24,379
======= ====== ======= =======
Net income (loss) per share $ (0.11) $ 0.13 $ (0.19) $ (0.29)
======= ====== ======= =======
6
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
2. EARNINGS PER SHARE (continued)
(a) There was no dilution resulting from potential incremental shares in
the quarter and two quarters ended June 27, 2004 and in the two
quarters ended June 29, 2003 because the Company had losses and the
inclusion of potential incremental shares would have been
antidilutive.
(b) The average number of stock options that were not included in the
diluted earnings per share calculation because the exercise price was
greater than the average market price aggregated 4,375,638 in the
quarter ended June 29, 2003.
3. STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), encourages, but does not require,
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. Accordingly, the Company
records expense in an amount equal to the excess, if any, of the quoted market
price on the grant date over the option price.
The following table includes as reported and proforma information required
by Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure ("SFAS No. 148"). Proforma
information is based on the fair value method under SFAS No. 123.
Quarters Ended Two Quarters Ended
----------------------- -----------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
-------- -------- -------- -------
(thousands, except per share amounts)
Net income (loss) as reported $(2,617) $3,445 $(4,732) $(6,977)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of tax provision (benefit) (2) 1 (1) 2
Deduct: Stock-based employee compensation
expense determined under fair value
based method, net of tax benefit (309) (36) (368) (497)
------- ------ ------- -------
Proforma net income (loss) $(2,928) $3,410 $(5,101) $(7,472)
======= ====== ======= =======
Basic income (loss) per share
As reported $ (0.11) $ 0.14 $ (0.19) $ (0.29)
======== ====== ======= =======
Proforma $ (0.12) $ 0.14 $ (0.21) $ (0.31)
======== ====== ======= =======
Diluted income (loss) per share
As reported $ (0.11) $ 0.13 $ (0.19) $ (0.29)
======= ====== ======= =======
Proforma $ (0.12) $ 0.13 $ (0.21) $ (0.31)
======= ====== ======= =======
4. RESTRUCTURING CHARGES (CREDITS)
During the quarter and two quarters ended June 27, 2004, the Company
recorded restructuring charges of $1.7 million and $2.2 million, respectively,
which were primarily related to lease costs and asset write offs in connection
with the closing of its New York office and the realignment of its automotive
operations.
The following tables set forth the components of the Company's
restructuring accruals and activity for the quarter and two quarters ended June
27, 2004:
7
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
4. RESTRUCTURING CHARGES (CREDITS) (continued)
Plant Closure Personnel
Total and Leases Reductions Other
----- ------------- ---------- -----
(millions)
Balance at March 28, 2004 $8.9 $7.2 $1.1 $0.6
Restructuring charges 1.7 1.3 0.4 -
Asset impairment (0.8) (0.8) - -
Cash spending (1.1) (0.6) (0.3) (0.2)
---- ---- ---- ----
Balance at June 27, 2004 $8.7 $7.1 $1.2 $0.4
==== ==== ==== ====
Balance at December 28, 2003 $9.7 $8.0 $0.9 $0.8
Restructuring charges 2.2 1.3 0.9 -
Asset impairment (0.8) (0.8) - -
Cash spending (2.4) (1.4) (0.6) (0.4)
---- ---- ---- ----
Balance at June 27, 2004 $8.7 $7.1 $1.2 $0.4
==== ==== ==== ====
The Company expects to spend approximately $3.0 million during the twelve
months ending July 3, 2005, with the balance to be spent through 2012 primarily
for lease termination costs which are recorded net of estimated sublease rental
income.
5. INVENTORIES
The components of inventories are listed below.
June 27, December 28,
2004 2003
-------- ------------
(thousands)
Raw materials and supplies $ 63,756 $61,855
Work-in-process 18,004 16,484
Finished goods 18,467 17,543
-------- -------
Total $100,227 $95,882
======== =======
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS
The components of long-term debt and revolving credit borrowings are listed
below.
June 27, December 28,
2004 2003
--------- ------------
(thousands)
Foamex L.P. Senior Secured Credit Facility
Term Loan (1) $ 42,728 $ 48,214
Foamex L.P. Secured Term Loan (1) 80,000 80,000
10 3/4% Senior secured notes due 2009 (2) (4) 310,867 311,950
9 7/8% Senior subordinated notes due 2007 (2) 148,500 148,500
13 1/2% Senior subordinated notes due 2005 (includes
$1,070 in 2004 and $1,543 in 2003 of unamortized
debt premium) (2) 52,655 53,128
Industrial revenue bonds (3) 7,000 7,000
Other (net of unamortized debt discount of $70 in 2004
and $93 in 2003) 783 766
-------- --------
642,533 649,558
Less current portion 8,931 8,937
-------- --------
Long-term debt $633,602 $640,621
======== ========
Revolving credit borrowings (1) $115,130 $ 96,065
======== ========
8
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
(1) Subsidiary debt of Foamex L.P., guaranteed by the Company, FMXI, Inc.
and Foamex Canada.
(2) Subsidiary debt of Foamex L.P. and Foamex Capital Corporation.
(3) Subsidiary debt of Foamex L.P.
(4) Includes $10.9 million in 2004 and $12.0 million in 2003 of deferred
credit on interest rate swap transactions.
Senior Secured Credit Facility
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and an initial
term loan of $50.0 million. The revolving credit facility includes a $50.0
million sublimit for letters of credit and availability is limited to eligible
amounts, as defined, of accounts receivable and inventory. At June 27, 2004,
Foamex L.P. had available borrowings of approximately $26.6 million and letters
of credit outstanding of $21.9 million. Borrowings under the term loan are
limited to eligible amounts, as defined, of equipment and real estate.
Substantially all the assets of Foamex L.P. and its domestic subsidiaries and
Foamex Canada are pledged as collateral for the related borrowings. Borrowings
under the revolving credit facility and the term loan bear interest at floating
rates based upon and including a margin over either LIBOR or a Base Rate, as
defined. At June 27, 2004, the weighted average interest rates were 4.55% and
4.50% for the revolving loans and the term loan, respectively. The term loan
requires quarterly installment payments of approximately $1.8 million, which
commenced on September 30, 2003. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007. The $240.0 Million Senior
Secured Credit Facility includes both a subjective acceleration clause and a
lockbox arrangement which requires all lockbox receipts be used to repay
revolving credit borrowings. Accordingly, borrowings under the revolving credit
facility are classified as current in the accompanying condensed consolidated
balance sheets as of June 27, 2004 and December 28, 2003 as required by Emerging
Issues Task Force Issue No. 95-22, "Balance Sheet Classification of Borrowings
Outstanding Under Revolving Credit Agreements that Include both a Subjective
Acceleration Clause and a Lockbox Arrangement" ("EITF No. 95-22").
The $80.0 million term loan facility (the "Secured Term Loan") will mature
on April 30, 2007. Borrowings under this facility will bear interest at a rate
that is 9.25% plus the greater of the Reference Rate, as defined, or 4.25%. The
minimum rate, which is in effect as of June 27, 2004, is 13.50%. In addition,
Foamex L.P. is subject to a 1.00% facility fee which is payable annually on the
anniversary date. Borrowings under the Secured Term Loan are collateralized by
the same collateral as the $240.0 Million Senior Secured Credit Facility. An
intercreditor agreement governs the distribution of collateral among the lenders
under the $240.0 Million Senior Secured Credit Facility and the Secured Term
Loan.
10 3/4% Senior Secured Notes
The 10 3/4% Senior Secured Notes were issued by Foamex L.P. and Foamex
Capital Corporation on March 25, 2002 and are due on April 1, 2009. The notes
are guaranteed on a senior basis by all of Foamex L.P.'s domestic subsidiaries
that guarantee the $240.0 Million Senior Secured Credit Facility. The notes are
secured on a second-priority basis (subject to permitted liens) on substantially
the same collateral that secures the obligations under the $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan. The notes rank effectively
junior to all senior indebtedness that is secured by first priority liens and
senior in right of payment to all subordinated indebtedness. Interest is payable
April 1 and October 1. The notes may be redeemed at the option of Foamex L.P.,
in whole or in part, at any time on or after April 1, 2006. The initial
redemption is at 105.375% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after April 1, 2008. Additionally, on or before April 1, 2005, up
to 35.0% of the principal amount of the notes may be redeemed at a redemption
price equal to 110.750% of the principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption with the net proceeds of one
or more equity offerings.
9
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101.0% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any.
Effective May 1, 2002, the Company completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. The Company
designated, documented and accounted for these interest rate swaps as fair value
hedges of the Company's 10 3/4% Senior Secured Notes due April 1, 2009. The risk
being hedged in these transactions was the change in fair value of the Company's
10 3/4% Senior Secured Notes based on changes in the benchmark interest rate,
LIBOR. The effect of these interest rate swap transactions was to convert the
fixed interest rate on the senior secured notes to floating rates reset twice
per year to correspond with the interest payment dates for the 10 3/4% Senior
Secured Notes. On September 18, 2002, the Company unwound the interest rate swap
transactions in exchange for net cash proceeds of $18.4 million, including $3.6
million realized through lower effective interest rates while the swap
transactions were in effect. The unwinding resulted in a deferred credit of
$14.8 million which is being amortized through April 1, 2009, using the
effective interest rate method.
9 7/8% Senior Subordinated Notes
The 9 7/8% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on June 15, 2007. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable June 15 and
December 15. The notes may be redeemed at the option of Foamex L.P., in whole or
in part, at any time on or after June 15, 2002. The initial redemption was
104.938% of their principal amount, plus accrued and unpaid interest, if any,
thereon to the date of redemption and declining annually to 100.0% on or after
June 15, 2005. At June 27, 2004, the redemption price was 101.646% plus accrued
and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon. The notes are subordinated in right of payment to all
senior indebtedness and are pari passu in right of payment to the 13 1/2% Senior
Subordinated Notes (described below).
13 1/2% Senior Subordinated Notes
The 13 1/2% Senior Subordinated Notes were issued by Foamex L.P. and Foamex
Capital Corporation and are due on August 15, 2005. The notes represent
uncollateralized general obligations of Foamex L.P. and are subordinated to all
Senior Debt, as defined in the Indenture. Interest is payable semiannually on
February 15 and August 15. The notes may be redeemed at the option of Foamex
L.P., in whole or in part, at any time on or after August 15, 2000. The initial
redemption was 106.75% of their principal amount, plus accrued and unpaid
interest, if any, thereon to the date of redemption and declining annually to
100.0% on or after August 15, 2004. At June 27, 2004, the redemption price was
101.6875% plus accrued and unpaid interest.
Upon the occurrence of a change of control, as defined, each holder will
have the right to require Foamex L.P. to tender for such notes at a price in
cash equal to 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, thereon. The notes are subordinated in right of the
payment of all senior indebtedness and are pari passu in right of payment to the
9 7/8% Senior Subordinated Notes (described above).
Industrial Revenue Bonds ("IRBs")
IRB debt includes a $1.0 million bond that matures on October 1, 2005 and a
$6.0 million bond that matures in 2013. Interest is based on a variable rate, as
defined, with options available to Foamex L.P. to convert to a fixed rate. At
June 27, 2004, the interest rate was 1.20% on the $1.0 million bond and 1.15% on
the $6.0 million bond. The maximum interest rate for either of the IRBs is 15.0%
per annum.
10
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
6. LONG-TERM DEBT AND REVOLVING CREDIT BORROWINGS (continued)
If Foamex L.P. exercises its option to convert the bonds to a fixed
interest rate structure, the IRBs are redeemable at the option of the
bondholders. The obligations are collateralized by certain properties, which
have an approximate net carrying value of $10.8 million at June 27, 2004.
Other
Other debt includes a non-interest bearing promissory note with a principal
amount of $0.9 million at June 27, 2004 issued in connection with increasing the
Company's interest in an Asian joint venture to 70.0% in 2001. The promissory
note had unamortized discount of $0.1 million at June 27, 2004.
Debt Covenants
The indentures and other indebtedness agreements contain certain covenants
that limit, among other things, the ability of the Company's subsidiaries (i) to
pay distributions or redeem equity interests, (ii) to make certain restrictive
payments or investments, (iii) to incur additional indebtedness or issue
Preferred Equity Interests, as defined, (iv) to merge, consolidate or sell all
or substantially all of its assets, or (v) to enter into certain transactions
with affiliates or related persons. In addition, certain agreements contain
provisions that, in the event of a defined change of control or the occurrence
of an undefined material adverse change in the ability of the obligor to perform
its obligations, the indebtedness must be repaid, in certain cases, at the
option of the holder. Under the most restrictive of the distribution
restrictions, the Company could be paid by its subsidiaries, as of June 27,
2004, funds only to the extent to enable the Company to meet its tax payment
liabilities and its normal operating expenses of up to $1.5 million annually, so
long as no default or event of default has occurred.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the four quarters ended June 27, 2004, Foamex L.P.'s fixed
charge coverage ratio was 1.04. Foamex L.P. is also subject to a maximum annual
capital expenditure amount which is $36.0 million for the year ending January 2,
2005.
Maturities of Long-Term Debt
Scheduled maturities of long-term debt as of June 27, 2004 are shown below
(thousands):
Two quarters ending January 2, 2005 $ 5,359
2005 60,579
2006 7,143
2007 251,585
2008 -
Thereafter 306,000
--------
630,666
Unamortized debt premium/discount and fair
value adjustment, net 11,867
--------
Total $642,533
========
11
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
7. RETIREE BENEFIT PLANS
Components of net periodic pension benefit cost are listed below:
Quarters Ended Two Quarters Ended
------------------------ -----------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
-------- -------- -------- --------
(thousands)
Service cost $ 950 $1,117 $2,220 $2,088
Interest cost 1,869 1,788 3,671 3,336
Expected return on plan assets (1,696) (1,438) (3,394) (2,680)
Amortization of transition assets (19) (19) (37) (36)
Amortization of prior service benefit (28) (34) (55) (61)
Amortization of net loss 657 716 1,361 1,337
------ ------ ------ ------
Net periodic pension benefit cost $1,733 $2,130 $3,766 $3,984
====== ====== ====== ======
The Company previously disclosed that it anticipated estimated retiree
benefit plan contributions of $11.8 million for fiscal 2004. During the quarter
and two quarters ending June 27, 2004, the Company contributed $2.8 million and
$2.9 million, respectively, and there has been no change in estimated
contributions for fiscal 2004. Actuarial valuations are in process for fiscal
2004 that will determine the actual contribution requirements.
8. INCOME TAXES
The effective income tax benefit rate was 30.2% for the two quarters ended
June 27, 2004 and was based on the forecasted 2004 annual rate applied to the
year-to-date loss before taxes. The lower effective tax rate compared to the
Federal statutory rate of 35% was primarily related to the Company's Mexican
subsidiaries. Based on the revised forecast, the annual estimated effective tax
rate was lower compared to the estimate from the first quarter of 2004. The
income tax benefit for the quarter ended June 27, 2004, reflects an adjustment
to the lower rate.
The effective income tax rate was 21.7% for the two quarters ended June 29,
2003 and was based on the forecasted 2003 annual rate applied to the
year-to-date loss before taxes. The lower effective tax rate compared to the
Federal statutory rate of 35% was primarily related to a high percentage of
forecasted equity income from a joint venture, for which no deferred tax
liabilities were recognized. Based on the revised earnings forecast, the annual
estimated effective tax rate was higher compared to the estimate from the first
quarter of 2003. The income tax provision for the quarter ended June 29, 2003,
includes an adjustment for the higher rate, which resulted in a net income tax
benefit for the quarter.
9. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are listed below.
Quarters Ended Two Quarters Ended
---------------------- ------------------------
June 27, June 29, June 27, June 29,
2004 2003 2004 2003
-------- -------- -------- --------
(thousands)
Net income (loss) $(2,617) $3,445 $(4,732) $(6,977)
Foreign currency translation adjustments (570) 2,569 (770) 4,136
------- ------ ------- -------
Total comprehensive income (loss) $(3,187) $6,014 $(5,502) $(2,841)
======= ====== ======= =======
12
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
10. SEGMENT RESULTS
Foam Products manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications and foam-based consumer
products, such as mattress pads and children's furniture. Carpet Cushion
Products manufactures and distributes rebond, prime, felt and rubber carpet
padding. Automotive Products supplies foam products and laminates to major tier
one suppliers and original equipment manufacturers. Technical Products
manufactures and markets reticulated foams and other specialty foams for
reservoiring, filtration, gasketing and sealing applications. The "Other" column
in the table below represents certain manufacturing operations in Mexico City,
corporate expenses not allocated to other business segments and restructuring
charges (credits).
Segment results are presented below.
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- ---------
(thousands)
Quarter ended June 27, 2004
Net sales $126,089 $ 53,596 $ 96,620 $31,253 $ 6,582 $314,140
Income (loss) from operations $ 12,332 $ 3,428 $ 7,991 $ 8,458 $(15,551) $ 16,658
Depreciation and amortization $ 2,525 $ 717 $ 639 $ 678 $ 1,285 $ 5,844
Quarter ended June 29, 2003
Net sales $122,809 $ 54,089 $123,540 $30,616 $ 6,583 $337,637
Income (loss) from operations $ 10,929 $ 1,620 $ 9,423 $ 9,794 $(10,856) $ 20,910
Depreciation and amortization $ 2,674 $ 803 $ 747 $ 732 $ 1,895 $ 6,851
Two quarters ended June 27, 2004
Net sales $260,484 $ 99,694 $190,620 $62,340 $ 14,620 $627,758
Income (loss) from operations $ 28,612 $ 4,731 $ 13,014 $17,314 $(33,767) $ 29,904
Depreciation and amortization $ 5,341 $ 1,491 $ 1,266 $ 1,391 $ 2,721 $ 12,210
Two quarters ended June 29, 2003
Net sales $241,039 $103,226 $244,685 $63,004 $ 13,834 $665,788
Income (loss) from operations $ 17,866 $ 1,004 $ 18,860 $18,726 $(25,908) $ 30,548
Depreciation and amortization $ 5,430 $ 1,601 $ 1,432 $ 1,455 $ 3,038 $ 12,956
11. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is party to various lawsuits, both as defendant and plaintiff,
arising in the normal course of business. It is the opinion of management that
the disposition of these lawsuits will not, individually or in the aggregate,
have a material adverse effect on the Company's financial position, results of
operations or cash flows. If management's assessment of the Company's liability
relating to these actions is incorrect, these actions could have a material
adverse effect on the Company's consolidated financial position, results of
operations and cash flows.
As of June 27, 2004, the Company had accrued approximately $1.5 million for
litigation and other matters in addition to the environmental matters discussed
below.
Environmental and Health and Safety
The Company is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, is from time to time involved in
administrative and judicial proceedings and inquiries relating to
13
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
11. COMMITMENTS AND CONTINGENCIES (continued)
environmental matters. As of June 27, 2004, the Company had accruals of
approximately $2.3 million for environmental matters, including approximately
$2.1 million related to remediating and monitoring soil and groundwater
contamination and approximately $0.2 million related to sites where the Company
has been designated as a Potentially Responsible Party or "PRP" and other
matters. Additional losses, if any, in excess of amounts currently accrued,
cannot be reasonably estimated at this time. If there are additional matters or
if our current estimates are incorrect, there could be a material adverse effect
on the Company's financial position, results of operations and cash flows.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule, which requires flexible polyurethane foam
manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. The
Company does not believe that this standard will require it to make material
expenditures for its Canadian plants.
The Company has reported to the appropriate state authorities that it found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites.
The Company has either upgraded or closed all underground storage tanks at
its facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. The Company is currently designated as a PRP by the
EPA or by state environmental agencies or other PRPs, pursuant to CERCLA or
analogous state statutes, with respect to eleven sites. Estimates of total
cleanup costs and fractional allocations of liability are often provided by the
EPA, the state environmental agency or the committee of PRPs with respect to the
specified site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, the Company does not expect
additional costs, if any, to be material to liquidity, results of operations or
financial position.
The possibility exists that new environmental legislation and/or
environmental regulations may be adopted, or other environmental conditions,
including the presence of previously unknown environmental contamination, may be
found to exist or a reassessment of the potential exposure to pending
environmental matters may be necessary due to new information or future
developments, that may require expenditures not currently anticipated and that
may be material.
14
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
SUMMARIZED FINANCIAL INFORMATION OF FOAMEX ASIA COMPANY LIMITED
(Amounts in Baht)
(unaudited)
Quarters Ended
------------------------------------
June 30, June 30,
2004 2003
------------- -------------
Net sales 366,692,534 344,002,602
=========== ===========
Net income (loss) (4,887,644) 30,060,505
=========== ===========
Two Quarters Ended
------------------------------------
June 30, June 30,
2004 2003
------------- -------------
Net sales 760,491,420 753,908,457
=========== ===========
Net income 8,676,435 53,321,371
=========== ===========
As of
------------------------------------
June 30, December 31,
2004 2003
------------- -------------
Total assets 1,316,348,195 1,386,481,689
============= =============
15
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements are based on management's present expectations and beliefs about
future events. As with any projection or forecast, they are inherently
susceptible to uncertainty and changes in circumstances, and we are under no
obligation to, and expressly disclaim any obligation to, update or alter
forward-looking statements whether as a result of such changes, new information,
subsequent events or otherwise.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 27, 2004 COMPARED TO THE
QUARTER ENDED JUNE 29, 2003
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- ---------
(thousands)
Quarter ended June 27, 2004
Net sales $126,089 $ 53,596 $ 96,620 $31,253 $ 6,582 $314,140
Income (loss) from operations $ 12,332 $ 3,428 $ 7,991 $ 8,458 $(15,551) $ 16,658
Depreciation and amortization $ 2,525 $ 717 $ 639 $ 678 $ 1,285 $ 5,844
Income (loss) from operations
as a percentage of net sales 9.8% 6.4% 8.3% 27.1% n.m.* 5.3%
Quarter ended June 29, 2003
Net sales $122,809 $ 54,089 $123,540 $30,616 $ 6,583 $337,637
Income (loss) from operations $ 10,929 $ 1,620 $ 9,423 $ 9,794 $(10,856) $ 20,910
Depreciation and amortization $ 2,674 $ 803 $ 747 $ 732 $ 1,895 $ 6,851
Income (loss) from operations
as a percentage of net sales 8.9% 3.0% 7.6% 32.0% n.m.* 6.2%
* not meaningful
Income from Operations
Net sales for the quarter ended June 27, 2004 decreased 7% to $314.1
million from $337.6 million in the quarter ended June 29, 2003. The decrease was
primarily attributable to lower net sales in the Automotive Products segment due
to lower volume, including sourcing actions by major customers, partially offset
by higher net sales in the Foam Products segment.
The gross profit was $40.2 million, or 12.8% of net sales, in the quarter
ended June 27, 2004 compared to $38.7 million, or 11.5% of net sales, in the
2003 period. Gross profit margin continues to improve from the unusually low
levels experienced in late 2002 and early 2003 primarily due to profit
improvements in Foam Products and lower costs in Carpet Cushion Products,
partially offset by the lower volume in the Automotive Products segment. We
expect that the gross profit margin in the second half of 2004 will be lower,
primarily due to the net effects of anticipated increases in the costs of
chemical raw materials, but should approximate gross profit margins achieved in
the second half of 2003.
Income from operations for the quarter ended June 27, 2004 was $16.7
million, or 5.3% of net sales, which represented a 20% decrease from the $20.9
million, or 6.2% of net sales, reported in the 2003 period. The improved gross
profit margin, described above, was offset by higher selling, general and
administrative expenses which increased $2.5 million, or 13%, due primarily to
higher litigation related costs and higher professional fees. Results include
net restructuring charges of $1.7 million in 2004 and net restructuring credits
of $1.6 million in 2003. Restructuring items are discussed under "Other" below.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Foam Products
Foam Products net sales for the quarter ended June 27, 2004 increased 3% to
$126.1 million from $122.8 million in the 2003 period primarily due to higher
volumes of value-added viscoelastic products. Income from operations increased
13% to $12.3 million in the quarter ended June 27, 2004 from $10.9 million in
the 2003 period principally as a result of this improved volume mix. Income from
operations was 9.8% of net sales in 2004, up from 8.9% of net sales in 2003.
Carpet Cushion Products
Carpet Cushion Products net sales for the quarter ended June 27, 2004
decreased 1% to $53.6 million from $54.1 million in the 2003 period. Income from
operations of $3.4 million in the quarter ended June 27, 2004 was 112% more than
the $1.6 million income from operations reported in the 2003 period primarily as
a result of lower raw material costs. Income from operations represented 6.4% of
net sales in 2004 and 3.0% of net sales in 2003.
Automotive Products
Automotive Products net sales for the quarter ended June 27, 2004 decreased
22% to $96.6 million from $123.5 million in the 2003 period as a result of lower
volumes from sourcing actions by major customers. We anticipate this trend of
lower volume in this segment will continue with total 2004 net sales expected to
be approximately $370.0 million compared to $447.1 million in 2003. Income from
operations decreased 15% to $8.0 million compared to $9.4 million in the 2003
period primarily due to the decline in sales volume. Income from operations
represented 8.3% of net sales in 2004 and 7.6% of net sales in 2003.
Technical Products
Technical Products net sales for the quarter ended June 27, 2004 increased
2% to $31.3 million from $30.6 million in the 2003 period. Increases in unit
volume were partially offset by lower average selling prices due to product mix.
Income from operations decreased 14% to $8.5 million in the 2004 period compared
to $9.8 million in the 2003 period due to higher material and operating costs
and lower volumes of higher margin products. Income from operations represented
27.1% of net sales in 2004 compared to 32.0% of net sales in 2003.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
charges (credits). The net sales associated with this segment resulted from the
Company's Mexico City operations. The loss from operations was $15.6 million in
the quarter ended June 27, 2004 and $10.9 million in the quarter ended June 29,
2003 and primarily reflects corporate expenses not allocated to operating
segments.
During the quarter ended June 27, 2004, we recorded restructuring charges
of $1.7 million primarily related to lease costs and asset write offs in
connection with the closing of the New York office and the realignment of
automotive operations. During the quarter ended June 29, 2003, we recorded
restructuring credits of $1.6 million from the reversal of prior restructuring
charges no longer required.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $18.6 million in the quarter ended
June 27, 2004, which represented a 4% decrease from the 2003 period expense of
$19.4 million. The decrease is primarily due to lower amortization of debt
issuance costs.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Other Income (Expense), Net
Other expense, net was $0.7 million for the quarter ended June 27, 2004
compared to $0.2 million for the quarter ended June 29, 2003. The 2004 period
includes foreign currency transaction losses related to operations in Mexico and
Canada of $0.6 million compared to $0.2 million in 2003.
Benefit for Income Taxes
As required on a quarterly basis, the estimated effective tax rate was
revised during the quarter ended June 27, 2004, to reflect an updated annual
forecast. Based on the revised forecast, the annual estimated effective tax rate
was lower compared to the estimate from the first quarter of 2004. Consequently,
the income tax benefit for the quarter ended June 27, 2004, includes an
adjustment for the lower rate. See the income tax discussion below for the two
quarters ended June 27, 2004 concerning the revised annual effective tax rate
for 2004.
RESULTS OF OPERATIONS FOR THE TWO QUARTERS ENDED JUNE 27, 2004 COMPARED TO THE
TWO QUARTERS ENDED JUNE 29, 2003
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- ---------
(thousands)
Two Quarters ended June 27, 2004
Net sales $260,484 $ 99,694 $190,620 $62,340 $ 14,620 $627,758
Income (loss) from operations $ 28,612 $ 4,731 $ 13,014 $17,314 $(33,767) $ 29,904
Depreciation and amortization $ 5,341 $ 1,491 $ 1,266 $ 1,391 $ 2,721 $ 12,210
Income (loss) from operations
as a percentage of net sales 11.0% 4.7% 6.8% 27.8% n.m.* 4.8%
Two Quarters ended June 29, 2003
Net sales $241,039 $103,226 $244,685 $63,004 $ 13,834 $665,788
Income (loss) from operations $ 17,866 $ 1,004 $ 18,860 $18,726 $(25,908) $ 30,548
Depreciation and amortization $ 5,430 $ 1,601 $ 1,432 $ 1,455 $ 3,038 $ 12,956
Income (loss) from operations
as a percentage of net sales 7.4% 1.0% 7.7% 29.7% n.m.* 4.6%
* not meaningful
Income from Operations
Net sales for the two quarters ended June 27, 2004 decreased 6% to $627.8
million from $665.8 million in the two quarters ended June 29, 2003. The
decrease was primarily attributable to lower net sales in the Automotive Product
segment due to lower volume, including sourcing actions by major customers,
partially offset by higher net sales in the Foam Products segment.
The gross profit was $79.9 million, or 12.7% of net sales, in the two
quarters ended June 27, 2004 compared to $69.2 million, or 10.4% of net sales,
in the 2003 period. Gross profit margin continues to improve from the unusually
low levels experienced in late 2002 and early 2003 primarily due to profit
improvements in Foam Products and lower costs in Carpet Cushion Products,
partially offset by lower volume in the Automotive Products segment. We expect
that the gross profit margin in the second half of 2004 will be lower, primarily
due to the net effects of anticipated increases in the costs of chemical raw
materials, but should approximate gross profit margins achieved in the second
half of 2003.
Income from operations for the two quarters ended June 27, 2004 was $29.9
million, or 4.8% of net sales, which represented a 2% decrease from the $30.5
million, or 4.6% of net sales, reported during the 2003 period. The improved
gross profit margin, described above, was offset by higher selling, general and
administrative expenses which increased $7.6 million, or 19%, due partially to a
$3.7 million bad debt charge as a result of a customer
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
bankruptcy and employee termination costs in the first quarter and litigation
related costs and higher professional fees in the second quarter. Results
include net restructuring charges of $2.2 million in 2004 and net restructuring
credits of $1.6 million in 2003. Restructuring items are discussed under "Other"
below.
Foam Products
Foam Products net sales for the two quarters ended June 27, 2004 increased
8% to $260.5 million from $241.0 million in the 2003 period primarily due to
higher volumes of value-added viscoelastic products. Income from operations
increased 60% to $28.6 million in the two quarters ended June 27, 2004 from
$17.9 million in the 2003 period principally as a result of the improved volume
mix. Income from operations was 11.0% of net sales in 2004, up from 7.4% of net
sales in 2003.
Carpet Cushion Products
Carpet Cushion Products net sales for the two quarters ended June 27, 2004
decreased 3% to $99.7 million from $103.2 million in the 2003 period principally
due to volume declines. Income from operations was $4.7 million in the two
quarters ended June 27, 2004 compared to $1.0 million in the 2003 period due
primarily to lower material and operating costs. Income from operations
represented 4.7% of net sales in 2004 and 1.0% of net sales in 2003.
Automotive Products
Automotive Products net sales for the two quarters ended June 27, 2004
decreased 22% to $190.6 million from $244.7 million in the 2003 period as a
result of lower volumes from sourcing actions by major customers. Income from
operations decreased 31% to $13.0 million compared to $18.9 million in the 2003
period primarily due to lower sales volume. Income from operations represented
6.8% of net sales in 2004 and 7.7% of net sales in 2003.
Technical Products
Technical Products net sales for the two quarters ended June 27, 2004
decreased 1% to $62.3 million from $63.0 million in the 2003 period primarily
due to lower average selling prices as a result of product mix, partially offset
by higher unit volume. Income from operations decreased 8% to $17.3 million in
the 2004 period compared to $18.7 million in the 2003 period primarily due to
lower volumes of higher margin products. Income from operations represented
27.8% of net sales in 2004 compared to 29.7% of net sales in 2003.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
charges (credits). The increase in net sales associated with this segment
resulted from our Mexico City operations. The loss from operations was $33.8
million in the two quarters ended June 27, 2004 and $25.9 million in the two
quarters ended June 29, 2003 and reflected generally higher corporate expenses
in 2004 and included restructuring items discussed below.
During the two quarters ended June 27, 2004, we recorded restructuring
charges of $2.2 million primarily related to lease costs and asset write offs in
connection with the closing of the New York office and the realignment of
automotive operations. During the two quarters ended June 29, 2003, we recorded
restructuring credits of $1.6 million primarily from the reversal of prior
restructuring charges no longer required.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $37.2 million in the two quarters
ended June 27, 2004, which represented a 3% decrease from the 2003 period
expense of $38.5 million. The decrease is primarily due to lower amortization of
debt issuance costs.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Other Income (Expense), Net
Other income, net was $0.3 million for the two quarters ended June 27, 2004
compared to other expense, net of $1.8 million for the two quarters ended June
29, 2003. The 2004 period includes foreign currency transaction losses related
to operations in Mexico and Canada of $0.3 million compared to $1.7 million in
2003. Also included in 2004 were gains of $1.0 million on asset disposals.
Benefit for Income Taxes
The effective tax rate was 30.2% for the two quarters ended June 27, 2004
and was based on the forecasted annual rate for 2004 applied to the loss for the
two quarters ended June 27, 2004. The lower effective tax rate compared to the
Federal statutory rate of 35% was primarily related to our Mexican subsidiaries.
The effective tax benefit rate for 2003 was 21.7%. The lower effective tax
rate compared to the Federal statutory rate of 35% was primarily related to a
high percentage of forecasted equity income from a joint venture, for which no
deferred tax liabilities are recognized.
We have net deferred tax assets of $124.4 million as of June 27, 2004 that
primarily represent the benefit of future tax deductions and net operating loss
carryforwards available to offset future taxable income in the U.S. In order to
realize these assets, we must generate sufficient U.S. taxable income in the
future. Our net operating loss carryforwards of approximately $267.3 million as
of December 28, 2003 expire from 2010 to 2023. If we are unable to generate
sufficient future taxable income to utilize the net operating loss carryforwards
on a timely basis, we may need to establish a valuation allowance against some
or all of our deferred tax assets. We evaluate our deferred tax assets on a
quarterly basis to determine if there is a change in circumstances that may
cause a change in our judgment about the realizability of deferred tax assets.
Any valuation allowance that may be required to be established as a result of
this evaluation process could have a material adverse effect on future results
of operations.
Liquidity and Capital Resources
Our operations are conducted through our wholly owned subsidiary, Foamex
L.P. Our liquidity requirements consist primarily of the operating cash
requirements of Foamex L.P.
Foamex L.P.'s liquidity requirements consist principally of the need to
fund accounts receivable, inventory and accounts payable, scheduled payments of
principal and interest on outstanding indebtedness, capital expenditures and
software development costs, and employee and non-employee benefits. Cash flow
from operations for the two quarters ended June 27, 2004 was negative due to
working capital requirements, primarily for accounts receivable and inventory.
Periodic borrowings under Foamex L.P.'s revolving credit facility ($26.6 million
available at June 27, 2004) and cash flows from operating activities are the
principal sources of cash needed to meet liquidity requirements. We expect that
cash flow from operations and the availability of borrowings under the revolving
credit facility will increase in the second half of the year. Scheduled
principal payments on Foamex L.P.'s debt become more significant in the second
half of 2005 when the $51.6 million of 13 1/2% Senior Subordinated Notes mature
(see Note 6 to the condensed consolidated financial statements).
Cash and cash equivalents were $4.6 million at June 27, 2004 compared to
$6.6 million at December 28, 2003. Working capital at June 27, 2004 was $21.5
million and the current ratio was 1.07 to 1 compared to working capital at
December 28, 2003 of $31.1 million and a current ratio of 1.11 to 1.
Total long-term debt and revolving credit borrowings at June 27, 2004 were
$757.7 million, up $12.0 million from December 28, 2003. As of June 27, 2004,
there were $115.1 million of revolving credit borrowings under the $240.0
Million Senior Secured Credit Facility with $26.6 million available for
borrowings and $21.9 million of letters of credit outstanding. Revolving credit
borrowings at June 27, 2004 primarily reflect working capital requirements.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and an initial
term loan of $50.0 million. The revolving credit facility includes a $50.0
million sublimit for letters of credit and availability is limited to eligible
amounts, as defined, of accounts receivable and inventory. Borrowings under the
term loan are limited to eligible amounts, as defined, of equipment and real
estate. Substantially all the assets of Foamex L.P. and its domestic
subsidiaries and Foamex Canada are pledged as collateral for the related
borrowings. Borrowings under the revolving credit facility and the term loan
bear interest at floating rates based upon and including a margin over either
LIBOR or a Base Rate, as defined. At June 27, 2004, the weighted average
interest rates were 4.55% and 4.50% for the revolving loans and the term loan,
respectively. The margin for borrowings under the revolving credit facility and
term loan will increase by 0.50% as of September 1, 2004, which will increase
annualized interest expense by approximately $0.8 million based on current
borrowing levels. The term loan requires quarterly installment payments of
approximately $1.8 million. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007.
The $80.0 million Secured Term Loan will mature on April 30, 2007.
Borrowings under this facility bear interest at a rate that is 9.25% plus the
greater of Reference Rate, as defined, or 4.25%. The minimum rate, which was in
effect as of June 27, 2004, is 13.50%. In addition, Foamex L.P. is subject to a
1.00% facility fee which is payable annually on the anniversary date. Borrowings
under the Secured Term Loan are collateralized by the same collateral as the
$240.0 Million Senior Secured Credit Facility. An intercreditor agreement
governs the distribution of collateral among the lenders under the $240.0
Million Senior Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the four quarters ended June 27, 2004, Foamex L.P.'s fixed
charge coverage ratio was 1.04, which translates into $3.3 million of excess
coverage. Although we do not anticipate our fixed charge coverage ratio will
fall below the required minimum, if we are not able to maintain or improve our
operating results and manage our fixed charges, we may not be able to meet our
required fixed charge coverage ratio. If we are not able to meet the fixed
charge coverage ratio and we are not able to obtain waivers or amendments under
the $240.0 Million Senior Secured Credit Facility and the Secured Term Loan,
there would be a material adverse impact on our financial condition. Foamex L.P.
is also subject to a maximum annual capital expenditure amount which is $36.0
million for the year ending January 2, 2005.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. We must generate sufficient cash flow to repay these
notes or obtain additional financing. We continue to evaluate a number of
refinancing options. However, we may not be able to obtain financing at a
reasonable cost, or at all, which may have a material adverse effect on our
financial condition. We may, from time to time, directly or indirectly make
purchases of these notes or our other public debt in the open market or in
private transactions.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of the 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions
in exchange for a net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
is being amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
We anticipate contributing a total of $11.8 million to our pension plans in
2004 and have contributed $2.9 million for the two quarters ended June 27, 2004.
Actuarial valuations are in process for fiscal 2004 that will determine the
actual funding requirements.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Cash Flow from Operating Activities
Cash used for operating activities in the two quarters ended June 27, 2004
was $10.7 million compared to cash provided of $13.1 million in the two quarters
ended June 29, 2003. Accounts receivable and inventories increased $11.7 million
before changes in allowances while other assets increased $7.2 million. The
increase in accounts receivable is primarily due to higher net sales in the last
two months of the current quarter when compared to the last two months of 2003,
while the inventory increase is due to purchase of major chemical raw materials
in anticipation of price increases for these items. Other assets increased
primarily as a result of cash collateral deposits under our insurance program.
Cash Flow from Investing Activities
Investing activities used $2.5 million of cash for the two quarters ended
June 27, 2004. Cash requirements included capital expenditures of $3.1 million
and capitalized software development costs of $1.6 million. These uses were
partially offset by proceeds from asset disposals of $2.2 million. In the two
quarters ended June 29, 2003, cash used for investing activities was $5.4
million, which consisted of capital expenditures of $3.2 million and capitalized
software development costs of $2.2 million. The estimated capital expenditures
and software development costs for the full year 2004 are expected to be
approximately $6.0 to $8.0 million and approximately $4.0 million, respectively.
Cash Flow from Financing Activities
Cash provided by financing activities was $11.3 million for the two
quarters ended June 27, 2004 and consisted principally of $19.1 million of
revolving credit borrowings partially offset by scheduled payments of the term
loan under the $240.0 Million Senior Secured Credit Facility and the net
proceeds from the asset sale used to make an additional payment on the Term Loan
as required under the facility. In addition, cash overdrafts decreased by $2.3
million. Cash used for financing activities in 2003 was $4.2 million consisting
primarily of a decrease in cash overdrafts and repayments of revolver
borrowings.
Environmental Matters
We are subject to extensive and changing environmental laws and
regulations. Expenditures to date in connection with our compliance with such
laws and regulations did not have a material adverse effect on our operations,
financial position, capital expenditures or competitive position. The amount of
liabilities recorded in connection with environmental matters as of June 27,
2004 was $2.3 million. Although it is possible that new information or future
developments could require us to reassess our potential exposure to all pending
environmental matters, including those described in Note 11 to our condensed
consolidated financial statements, we believe that, based upon all currently
available information, the resolution of all such pending environmental matters
will not have a material adverse effect on our operations, financial position,
capital expenditures or competitive position.
Market Risk
The Company has debt securities with variable interest rates subject to
market risk for changes in interest rates. On June 27, 2004, indebtedness with
variable interest rates aggregated $244.9 million. On an annualized basis, if
the interest rates on these debt instruments increased by 1.0%, interest expense
would increase by approximately $2.4 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See the "Market Risk" section under Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
22
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES.
The Company maintains disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) that are
designed to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the specified time periods. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any system of controls and procedures, no matter how well designed and executed,
can provide only reasonable assurance of achieving the desired control
objectives.
On April 2, 2004, the Company filed a current report on Form 8-K, which
disclosed that the Company's former independent public accountants had
communicated certain matters to the Company involving internal controls that
they considered to be reportable conditions under standards established by the
American Institute of Certified Public Accountants. A reportable condition is an
internal control weakness that represents a significant deficiency in the design
or operation of internal control which could adversely affect an organization's
ability to record, process, summarize and report financial data consistent with
management's assertions in the financial statements. These reportable conditions
concerned matters relating to: (1) the integration of the Company's information
technology systems; (2) the design and operation of access and security controls
of the Company's information technology systems; (3) inventory procedures,
processes and systems, including both performance and review and (4) the
preparation of the Company's quarterly financial reports.
Management, under the guidance of the Audit Committee, is in the process of
remediating the reportable conditions. The Company continues to install a new
enterprise-wide information technology system. The Company expects to
substantially complete the implementation during 2006. Several modules of the
system have already been installed and others are currently in the process of
being implemented. The Company believes it has addressed and remediated the
information technology security issues. The Company has implemented improved
inventory procedures and processes at each of its facilities and is taking
appropriate actions to ensure their effectiveness, including training of
personnel and additional management oversight. The Company performs monthly
physical counts and reconciliations of inventory at each of its plants and will
continue to do so until perpetual inventory records are available as
manufacturing modules of the enterprise-wide information technology system are
implemented at its facilities. The inventory procedures are formally documented
and include requirements that account reconciliations are reviewed monthly and a
checklist of the tasks performed are prepared and reviewed monthly. The Company
has strengthened and continues to address the controls over the preparation of
its quarterly financial reports including more extensive and stringent
analytical review procedures applied to its results as well as developing task
logs and checklists to facilitate the accuracy and completeness of its financial
statements and required disclosures. The Company has codified and standardized
closing journal entries across its facilities and has formalized the review and
approval process for such journal entries. Additionally, the Company has
implemented a standardized consolidation and reporting system in the United
States, Canada and Mexico.
The Company does not consider the reportable conditions discussed above,
either individually or in the aggregate, to be a material weakness as that term
is defined under standards established by the American Institute of Certified
Public Accountants. As discussed above, the Company is taking actions to
remediate the reportable conditions and has concluded that the existence of the
reportable conditions does not have a material impact on its disclosure controls
and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15 as of June 27, 2004 and have
concluded that the Company's disclosure controls and procedures were effective
as of June 27, 2004. The Company's management, including the Chief Executive
Officer and the Chief Financial Officer, also evaluated the Company's internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. Other than as described above, there have been no changes
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
23
FOAMEX INTERNATIONAL INC. AND SUBSIDIARIES
Part II - Other Information.
Item 1. Legal Proceedings.
Reference is made to the description of the legal proceedings
contained in the Company's Annual Report on Form 10-K for the year
ended December 28, 2003. The information from Note 11 to the condensed
consolidated financial statements is incorporated herein by reference.
Item 2. Change in Securities.
Information concerning stockholder approval of a proposal to increase
by 2,500,000 the number of shares of Common Stock that are available
for awards under the Foamex International Inc. 2002 Stock Award Plan
is incorporated herein by reference to Item 4. Submission of Matters
to a Vote of Security Holders.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on May 25, 2004.
Listed below is a summary of the proposals voted on.
Election of Directors
All seven of the nominees for director received the votes necessary
for election to serve for one-year terms or until their successors
have been duly elected and qualified.
Director For Withhold Authority
--------------------- ---------- ------------------
Raymond E. Mabus, Jr. 21,590,555 593,961
Robert J. Hay 19,892,260 2,292,256
S. Dennis N. Belcher 21,520,239 664,277
Thomas E. Chorman 21,551,531 632,985
Luis J. Echarte 21,578,874 605,642
Henry Tang 21,497,330 687,186
Raul Valdes-Fauli 21,532,074 652,442
Foamex International Inc. 2002 Stock Award Plan
Stockholders approved the proposal to increase by 2,500,000 the number
of shares of Common Stock that are available for awards under the
Foamex International Inc. 2002 Stock Award Plan.
For Against Abstentions Broker Non-Votes
---------- --------- ----------- ----------------
12,610,017 1,339,029 27,127 8,208,343
Selection of KPMG LLP as Independent Accountants
Stockholders approved the ratification of KPMG LLP as independent
accountants for the year ending January 2, 2005.
For Against Abstentions
---------- --------- -----------
21,997,711 178,205 8,600
24
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.15.4 Amendment No. 2 to Credit Agreement, dated as of June 15,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Bank of
America, N.A. as Administrative Agent.
4.16.4 Amendment No. 2 to Credit Agreement, dated as of June 25,
2004, among Foamex L.P., as Borrower, the affiliates of
Borrower party hereto, the lenders party hereto, and Silver
Point Finance, LLC as Administrative Agent.
10.11.15 Separation Agreement and Release between John V. Tunney and
Foamex International Inc., Foamex L.P. and all other
affiliates and subsidiaries of Foamex International Inc.
dated as of June 19, 2004.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) The Company filed the following Current Reports on Form 8-K for
the quarter ended June 27, 2004:
Form 8-K dated April 4, 2004, was filed for Item 4 "Changes in
Registrant's Certifying Accountant", concerning the dismissal of
Deloitte & Touche LLP as the Company's independent accountants
and the appointment of KPMG LLP as the Company's new independent
accountants effective as of March 26, 2004.
Form 8-K dated April 4, 2004, was filed for Item 4 "Changes in
Registrant's Certifying Accountant", concerning the dismissal of
Deloitte & Touche LLP as the Company's independent accountants
and the appointment of KPMG LLP as the Company's new independent
accountants for the Foamex L.P. 401(k) Savings Plan for the
fiscal year ended December 31, 2003.
Form 8-K/A dated April 12, 2004, was filed for Item 4 "Changes in
Registrant's Certifying Accountant", furnishing a copy of
Deloitte & Touche LLP letter dated April 7, 2004 to the
Securities and Exchange Commission.
Form 8-K/A dated April 12, 2004, was filed for Item 4 "Changes in
Registrant's Certifying Accountant", furnishing a copy of
Deloitte & Touche LLP letter dated April 7, 2004 to the
Securities and Exchange Commission.
Form 8-K dated May 6, 2004, was filed for Item 12, "Results of
Operations and Financial Condition", furnishing a copy of the
Company's earnings press release for the quarter ended March 28,
2004.
25
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.
FOAMEX INTERNATIONAL INC.
Date: August 5, 2004 By: /s/ K. Douglas Ralph
----------------------------------
K. Douglas Ralph
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer)
Date: August 5, 2004 By: /s/ Bruno Fontanot
----------------------------------
Bruno Fontanot
Senior Vice President - Finance
and Chief Accounting Officer
26