SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- --------- ------
OF THE SECURITIES EXCHANGE ACT OF 1934 OF THE SECURITIES EXCHANGE ACT OF 1934
X
- --------- ------
For the Fiscal Year Ended September 30, 2001 For the transition period from __________ to ________
Commission File No. 1-06922
GUILFORD MILLS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-1995928
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
4925 West Market Street
Greensboro, North Carolina 27407
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (336) 316-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on which Registered
------------------- -----------------------------------------
Common Stock, $.02 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 twelve (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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock (which consists solely of shares of
common stock) held by non-affiliates of the registrant at November 15, 2001 (a
total of 16,887,485 shares of common stock), computed by reference to the last
reported sale price ($0.60) of the Registrant's common stock on the New York
Stock Exchange on such date: $10,132,491.
Number of shares of the Registrant's common stock outstanding as of December 15,
2001: 18,627,076.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) is incorporated
by reference from the Registrant's definitive proxy statement, which involves
the election of directors, to be filed with the Commission pursuant to
Regulation 14A, or if such proxy statement is not filed with the Commission on
or before 120 days after the end of the fiscal year covered by this Report, such
information will be included in an amendment to this Report filed no later than
the end of such 120-day period.
NY2:\1115374\04\NWMM04!.DOC\51040.0001
Safe Harbor-Forward-Looking Statements
From time to time, the Company may publish forward-looking statements relative
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements.
All statements other than statements of historical fact included in or
incorporated by reference into this Form 10-K, including, without limitation the
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations" (Part II - Item 7) are, or may be deemed to be,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Important
factors that could cause actual results to differ materially from those
discussed in such forward-looking statements include:
1. general economic factors including, but not limited to, changes in interest
rates, foreign currency translation rates, consumer confidence, housing
starts, trends in disposable income, changes in consumer demand for goods
produced, and cyclical or other downturns
2. the overall level of automotive production and the production of specific
car models
3. fashion trends
4. information and technological advances
5. cost and availability of raw materials, labor and natural and other
resources
6. domestic and foreign competition
7. domestic and foreign governmental regulations and trade policies
8. reliance on major customers
9. success of marketing, advertising and promotional campaigns
10. inability to achieve cost reductions through consolidation and
restructuring
11. inability to obtain financing on favorable terms or to obtain amendments or
waivers with respect to non-compliance with certain covenants in loan
agreements and
12. the adverse impact of the receipt of the independent auditor's "going
concern" opinion on the Company's customer and supplier relationships,
including less favorable trade credit terms.
PART I
Item 1. Business
General
Guilford Mills, Inc. was incorporated under the laws of Delaware in August 1971,
and is the successor by merger to businesses previously conducted since 1946.
Guilford Mills, Inc. and its predecessors and subsidiaries are referred to as
the "Company" or "Guilford", unless the context indicates otherwise.
Guilford produces fabrics using a broad range of technologies for a variety of
customers and markets. It is one of the largest warp knitters in the world and a
leader in technological advances in textiles. The Company has identified four
segments in which it operates: Automotive, Apparel, Home Fashions and Other.
Fabrics produced in the Automotive segment are sold to original equipment
manufacturers (OEMs) and their suppliers. These fabrics are then used in the
production of seats and headliners of passenger cars, sports utility vehicles,
conversion vans and light and heavy trucks. Guilford is one of the three largest
producers of bodycloth in the United States and continues to be the dominant
headliner fabric manufacturer in the U.S. and Europe. Guilford also has
automotive fabric operations in Mexico and Brazil.
The Apparel segment fabrics have historically been used predominantly in women's
intimate apparel, ready-to-wear and swimwear garments. Other end uses included
team sportswear and linings. Guilford used a wide variety of technologies to
produce these fabrics, including circular knit, tricot, lace, spun warp and weft
insertion, and was one of the premier producers of spandex-containing fabrics
for the apparel market. Since the fourth quarter of fiscal 2000, the Company has
effected the strategic realignment of its apparel operations resulting in the
closing of facilities and the exit of domestic dyeing and finishing. The sector
participation and volumes will dramatically decrease in fiscal 2002.
The Home Fashions segment produces window curtains, knit and/or lace comforters,
sheets, shower curtains, pillowcases and bedskirts sold directly to department
stores, discount retailers and catalog houses. Guilford has relationships with
some of America's largest retailers, and sells products under its own house
brand names as well as through licensed brand agreements. This segment also
produces upholstery fabrics for use in office and residential furniture,
mattress ticking and window treatment applications.
2
The remainder of Guilford's fabrics are sold for use in a broad range of
industrial/specialty products, including geotextiles, medical and filtration
applications and are included in the Other segment. The Company's fibers
operations are also included in this segment. Guilford's extensive research and
development capabilities, which includes some 40 patents, are the driving force
in this highly technical segment.
Reference is made to Note 18 of the Consolidated Financial Statements under Item
8 "Financial Statements and Supplementary Data" of this document, for
information regarding revenue, profit and assets by segment.
Product Development
Working closely with the Company's customers, the Company has research and
development departments in the U.S., U.K., and Mexico, consisting of
approximately 90 employees, that are primarily responsible for the creation of
new fabrics and styles. Sample warping and knitting machines are used to develop
new fabrics which can be placed into production after customer acceptance. Total
expenditures for research and development for fiscal years 2001, 2000 and 1999
were approximately $11.5 million, $18.3 million and $17.2 million, respectively.
The Company has numerous trademarks, trade names, patents and certain licensing
agreements which it uses in connection with the advertising and promotion of its
products across segments. Management believes that the loss or expiration of
such trademarks, trade names and licensing agreements would not have a material
adverse effect on the Company's operations.
Working Capital Practices
The Company generally knits and dyes and finishes based on customer orders and,
therefore, significant amounts of inventory are not required to meet rapid
delivery to the Company's customers or to assure a continuous allotment of goods
from suppliers. Customers are allowed to return goods for valid reasons and
customer accommodations are not significant. To minimize the credit risk on such
accounts and to obtain larger credit lines for many customers, the Company
maintains credit insurance covering $19.8 million of certain outstanding
accounts receivable as of September 30, 2001. In addition, approximately 38% of
accounts receivable are factored without recourse. The Company has the ability
to borrow against such receivables, and has borrowed against them during fiscal
2001. The Company did not borrow against such receivables during fiscal 2000.
The Company generally takes advantage of discounts offered by vendors.
The Company experiences seasonal fluctuations in its sales in the Apparel
segment. Sales in the Automotive, Home Fashions and Other segments experience
insignificant seasonal fluctuations.
The Company has a large number of customers. No customer accounted for 10% or
more of total net sales during fiscal 2001, 2000 or 1999. The Company's net
sales reflect substantial direct and indirect sales to certain large automotive
original equipment manufacturers.
The backlog of orders believed to be firm as of the end of the current and
preceding fiscal years is not deemed to be material for an understanding of the
Company's business as most orders are deliverable within a few months.
Export Sales
U.S. export sales, as a percentage of total worldwide sales of the Company, were
approximately 4.4% in fiscal 2001, 7.0% in fiscal 2000 and 5.4% in fiscal 1999.
Raw Materials
Fabrics in all of the Company's segments are constructed primarily of synthetic
yarns: nylon and polyester. In fiscal 2001, the Company internally produced
approximately 20% of the polyester yarns used. The Company purchases its nylon
and the remaining polyester yarns from several domestic and foreign fiber
producers. The Company's Apparel segment also uses spandex, acetate and cotton.
A small amount of spandex is used in the Home Fashions segment. Spandex and
acetate are purchased substantially from one domestic producer each. In fiscal
2001 all yarns were readily available throughout the year and either were or
could be purchased from numerous sources. Management believes that an adequate
supply of yarns is available to meet the Company's requirements.
The chemicals and dyes used in the dyeing and finishing processes in all
segments are available in large quantities from various suppliers. The foam
backing used in the automotive fabric lamination process is purchased from two
suppliers in the United States and three suppliers in Europe. In fiscal 2001,
there was an adequate supply of foam.
Environmental Matters
The production processes, particularly dyeing and finishing operations, involve
the use and discharge of certain chemicals and dyes into the air and sewage
disposal systems. The Company installs pollution control devices as necessary to
meet existing and anticipated national, state and local pollution control
regulations. The Company, including its foreign subsidiaries, does not
3
anticipate that compliance with national, state, local and other provisions
which have been enacted or adopted regulating the discharge of materials into
the environment, or otherwise relating to the protection of the environment,
will have a material adverse effect upon its capital expenditures, earnings or
competitive position.
Reference is made to Note 13 of the Consolidated Financial under Item 8
"Financial Statements and Supplementary Data" of this document, for information
regarding certain other environmental matters.
Competition
In all of the Company's segments, the principal methods of competition are
pricing, styling and design, customer service and quality. In retail home
fashions, distribution channels are an additional principal method of
competition. The weight of each competitive factor varies by product line. In
the past few years, the Apparel and Home Fashions segments have been impacted by
imports of garments, window curtains and sheeting.
In the United States, the Company has five major warp knit competitors and many
other smaller competitors in the Apparel and Home Fashions segments. The Company
also competes with some garment manufacturers that have warp knit equipment to
manufacture their own fabrics. Some of these companies are divisions of large,
well-capitalized companies while others are small manufacturers. There are four
major and numerous smaller circular knit competitors in the Apparel segment. In
the Automotive segment, the Company has two major domestic competitors and
several smaller competitors. Guilford's automotive subsidiary in Europe competes
with seven warp knitters in Europe. It also competes with many producers of
circular knit and flat woven fabrics. The Company's operations in Mexico compete
primarily with four warp knitters in the Apparel segment and one warp knitter in
the Automotive segment. One of the Company's competitors produces approximately
50% of the automotive bodycloth fabric sold in the U.S. and therefore may be
deemed dominant in this market. None of the Company's other competitors are
deemed to be dominant with respect to their markets.
Employees
As of December 2, 2001, the Company employed 4,454 full-time employees
worldwide. Approximately 1,134 employees (including 447 in Europe and 505 in
Mexico) are represented by collective bargaining agreements.
Item 2. Properties
Set forth below is a listing of facilities owned and leased by the Company.
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Facility Location Segment(s) Leased/Owned
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Sales Offices, Design Studios California (2) Apparel Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Illinois (1) Apparel, Other Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Michigan (1) Automotive Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
New York (2) Apparel, Home Fashions, Other Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
North Carolina (1) Apparel, Home Fashions, Other Owned
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Germany (1) Automotive Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Spain (1) Automotive Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Manufacturing New York (5) Apparel, Home Fashions Owned (1), Leased (4)
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
North Carolina (8) Apparel, Automotive, Home Owned (6), Leased (2)
Fashions, Other
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Pennsylvania (2) Apparel, Home Fashions, Other Owned
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Brazil (1) Automotive Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Mexico (2) Apparel, Automotive, Home Owned
Fashions, Other
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Portugal (1) Automotive Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
United Kingdom (3) Automotive Owned
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Outlet Stores New York (4) Home Fashions Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Warehouses New York (1) Apparel Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
North Carolina (4) Apparel, Automotive, Home Leased
Fashions, Other
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
Mexico (5) Apparel, Automotive, Home Owned (2), Leased (3)
Fashions, Other
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
United Kingdom (1) Automotive Leased
- ------------------------------------- ------------------------------- ---------------------------------- --------------------------
4
Management believes the facilities and manufacturing equipment are in good
condition, well maintained, suitable and adequate for present production, based
on the Company's previously announced restructuring actions. Certain facilities
are idled and/or vacant as a result of those restructuring actions. Reference is
made to Note 4 of the Consolidated Financial Statements under Item 8 "Financial
Statements and Supplementary Data" of this document for information regarding
the restructuring actions. Some of the Company's manufacturing facilities are
utilized by more than one segment. Utilization of the facilities fluctuates from
time to time due to the seasonal nature of operations and market conditions. The
Company defines full utilization primarily as five day, three shift production.
On that basis, the manufacturing facilities are generally utilized approximately
80%. Fibers spinning operates on a continuous seven days per week. Cut-and-sew
operations in home fashions run five days, one to two shifts depending on the
product.
Item 3. Legal Proceedings
Reference is made to Note 13 of the Consolidated Financial under Item 8
"Financial Statements and Supplementary Data" of this document, for information
regarding legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the Company's
fourth quarter of fiscal 2001.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The high and low stock market prices are as reported under the ticker symbol
"GFD" on the New York Stock Exchange which is the principal market for the
Company's common stock. On September 28, 2001 there were 651 stockholders of
record.
Fiscal 2001
--------------------------------------------------------------------------
Quarter High Low Dividends
--------------------------------------------------------------------------
First $2.00 $1.00 $ -
Second 2.25 1.45 -
Third 2.44 1.51 -
Fourth 2.25 0.60 -
Year $2.44 $0.60 $ -
Fiscal 2000
--------------------------------------------------------------------------
Quarter High Low Dividends
--------------------------------------------------------------------------
First $9 1/8 $5 5/8 $0.11
Second 9 3/4 7 1/8 0.11
Third 8 1/4 4 0.11
Fourth 5 5/8 1 7/8 -
Year $9 3/4 $1 7/8 $0.33
During the third quarter of fiscal 2000, the Board of Directors suspended the
payment of dividends to shareholders. The revolving credit facility and senior
notes prohibit the payment of dividends throughout their respective terms.
On January 29, 2001, the New York Stock Exchange began quoting the market prices
of the Company's stock in decimal amounts, rather than fractional amounts, as
part of a larger program to quote all stock prices in decimal amounts.
On December 21, 2001, the Company announced that the New York Stock Exchange
(the "NYSE") informed the Company that the Company was not in compliance with
certain NYSE continued listing standards. Specifically, the average closing
5
price of the Company's common stock had fallen below $1.00 per share, and the
Company's market capitalization had fallen below $15 million, over a consecutive
30 trading day period.
Pursuant to NYSE rules, the Company intends to submit to the NYSE in January
2002 a business plan designed to demonstrate that the Company's common stock
will return to compliance with listing requirements before the NYSE's stated
deadlines. The Company's ability to submit an acceptable business plan to the
NYSE will be dependent upon the outcome of the Company's current negotiations
with its senior lenders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Liquidity and Capital Requirements". If, on
May 7, 2002, the Company's common stock does not trade above $1 per share and
have a $1 average share price over the preceding 30 trading days, then the
Company's common stock will be subject to suspension and delisting. If the NYSE
accepts the Company's business plan, then the Company will have up to 18 months
(subject to periodic monitoring by the NYSE for compliance with the plan) to
meet the minimum market capitalization requirement. Based upon the number of
shares of Company common stock currently outstanding, if the Company satisfies
the minimum per share price rule, then the Company will have already satisfied
the minimum market capitalization requirement. If the NYSE does not accept the
Company's business plan, then the Company's common stock will be subject to
suspension and delisting. Moreover, notwithstanding the general NYSE rules
permitting an issuer to cure a non-compliance with listing standards, the NYSE
also maintains the discretion to suspend and delist a security under appropriate
circumstances, even if the relevant cure or grace period has not expired. For
instance, the NYSE has advised the Company that a security which trades at an
abnormally low level, as determined by the NYSE, would be subject to immediate
suspension and delisting without regard to the cure periods typically offered to
issuers.
If the Company's common stock were delisted from the NYSE, trading of the
Company's common stock would thereafter have to be conducted in the
over-the-counter market, e.g., either on the OTC Bulletin Board or in "The Pink
Sheets."
Item 6. Selected Financial Data
(In thousands except per share data) 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Results of Operations
---------------------
Net sales $643,519 $814,226 $856,838 $894,534 $894,709
(Loss) income before extraordinary item (157,901) (20,974) 10,230 33,146 43,238
Net (loss) income (160,757) (20,974) 10,230 30,206 43,238
Per Share Data (1)
---------------
Basic:
(Loss) income before extraordinary item (8.33) (1.11) 0.47 1.32 1.92
Net (loss) income (8.48) (1.11) 0.47 1.20 1.92
Diluted:
(Loss) income before extraordinary item (8.33) (1.11) 0.47 1.30 1.78
Net (loss) income (8.48) (1.11) 0.47 1.19 1.78
Cash dividends 0.00 0.33 0.44 0.44 0.42
Balance Sheet Data
------------------
Working capital (145,400)(2) 213,110 127,660 211,278 213,974
Total assets 551,064 724,212 753,431 794,500 729,796
Long-term debt 1,542(2) 262,845 146,137 176,872 134,560
Stockholders' investment 141,509 309,772 340,945 385,177 408,896
(1) All share data has been restated to reflect the effect of a three-for-two
stock split effected in May 1997 in the form of a 50% stock dividend.
(2) Long-term debt of $239,842 is classified as current liabilities. See Note 9
under Item 8 "Financial Statements and Supplementary Data" of this document
for further information regarding classification of the Company's debt.
6
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
Guilford Mills, Inc. produces fabrics for a variety of customers and markets
using a broad range of technologies. It is one of the largest warp knitters in
the world and a leader in technological advances in textiles. The Company has
identified four segments in which it operates: Automotive, Apparel, Home
Fashions and Other.
Fabrics produced in the Automotive segment are sold to original equipment
manufacturers (OEMs) and their suppliers. These fabrics are then used in the
production of seats and headliners of passenger cars, sports utility vehicles,
conversion vans and light and heavy trucks. Guilford is one of the three largest
producers of bodycloth in the United States and continues to be the dominant
headliner fabric manufacturer in the U.S. and Europe. Guilford also has
automotive fabric operations in Mexico and Brazil.
The Apparel segment fabrics have historically been used predominantly in women's
intimate apparel, ready-to-wear and swimwear garments. Other end uses included
team sportswear and linings. Guilford used a wide variety of technologies to
produce these fabrics, including circular knit, tricot, lace, spun warp and weft
insertion, and was one of the premier producers of spandex-containing fabrics
for the apparel market. Since the fourth quarter of fiscal 2000, the Company has
effected the strategic realignment of its apparel operations resulting in the
closing of facilities and the exit of domestic dyeing and finishing. The sector
participation and volumes will dramatically decrease in fiscal 2002.
The Home Fashions segment produces window curtains, knit and/or lace comforters,
sheets, shower curtains, pillowcases and bedskirts sold directly to department
stores, discount retailers and catalog houses. Guilford has relationships with
some of America's largest retailers, and sells products under its own house
brand names as well as through licensed brand agreements. This segment also
produces upholstery fabrics for use in office and residential furniture,
mattress ticking and window treatment applications.
The remainder of Guilford's fabrics are sold for use in a broad range of
industrial/specialty products, including geotextiles, medical and filtration
applications and are included in the Other segment. The Company's fibers
operations are also included in this segment. Guilford's extensive research and
development capabilities, which includes some 40 patents, are the driving force
in this highly technical segment.
Guilford's business has undergone significant changes over the last decade and
especially in the last four years. Guilford had for many years been known
primarily as a producer of fabrics for apparel applications. While Guilford had
diversified into automotive fabrics in the 1970's, sales of apparel fabrics
remained dominant through most of the 1990's. From fiscal 1991 to 1997, the
Company's sales rose nearly 70%. The Company's performance mirrored that of the
entire industry. U.S. textile mill shipments peaked at a record $83.9 billion in
1997.
The Company's 1998 fiscal year, however, witnessed a year over year decline in
apparel sales. The principal cause of the decline, the Asian financial crisis,
proved to have devastating consequences on both the Company and the entire
textile industry. In 1997 and 1998, the currencies of most of the major Asian
textile exporting countries collapsed. The severe devaluation resulted in an
influx of low priced Asian yarns, fabrics and garments into the U.S. While the
initial impacts were on commodity products, by the Company's fiscal 2000,
imports had increased a staggering 61% in four years and Guilford's apparel
sales were decreasing in each of its sectors. Earnings of domestic textile
companies were directly affected and calendar year 2000 marked the first annual
loss for the industry in more than 50 years.
Given the difficult business conditions, the Company announced in July 2000 a
strategic realignment of its apparel operations designed to improve the
Company's cost structure and increase profitability. As conditions worsened, the
Company expanded and accelerated its apparel realignment plan in fiscal 2001. By
the end of fiscal 2001, the Company had closed or committed to close all of its
domestic apparel dyeing and finishing facilities. The Company will continue to
participate in the apparel segment, on a smaller scale, by producing out of its
two facilities in Mexico.
The closing of the Company's apparel plants also resulted in the exit of certain
Home Fashions fabrics sales. The Company will continue to allocate its resources
to its Automotive and Industrial (Other) businesses. These businesses, because
of their highly technical specifications, research and development requirements
and critical logistics, are believed to be far less susceptible to competition
from foreign imports.
Goods are manufactured in the United States, the United Kingdom, Portugal,
Mexico and Brazil. Historically, approximately 80% of the Company's net sales
originated from the United States. Guilford's foreign operations are subject to
fluctuations in foreign exchange rates that affect the Company's operating
results and financial position due to translation gains and losses recognized in
converting such activity to local currency and to U.S. dollars. Effective
January 1, 1999, the Mexican economy was no longer considered "highly
inflationary" for financial reporting purposes and the functional currency for
7
translating the balance sheet and the results of operations of the Company's
Mexican operation, Grupo Ambar S.A. de C.V. ("Grupo Ambar"), returned to the
Mexican peso from the U.S. dollar.
RESULTS OF OPERATIONS
2001 Compared to 2000 - Consolidated sales for fiscal 2001 were $643.5 million,
a decrease of 21.0% from fiscal 2000's $814.2 million. Sales declined in all
business segments, with the Apparel segment accounting for the largest amount of
the decrease.
The Automotive segment accounted for 51.8% of consolidated net sales in fiscal
2001, an increase from 46.7% in fiscal 2000. Sales were $333.5 million in fiscal
2001 and decreased 12.4% from $380.6 million in fiscal 2000. This primarily
resulted from the decrease in the U.S. car build in fiscal 2001 to 15.6 million
units compared to car build in fiscal 2000 of a record 17.4 million units.
Although Guilford increased its U.S. market share of the headliner business and
continued to penetrate the New Domestics OEMs bodycloth market, the
significantly lower car build resulted in decreased U.S. automotive segment
sales compared to fiscal 2000. Sales by the Company's U.K. automotive group fell
22.3% compared to fiscal 2000 due to the loss of market share of one of the
Company's major customers and lower build levels of another major customer.
Automotive fabric sales in Mexico increased by more than 11% due to the strength
of the car build during the first half of fiscal 2001. Sales in Brazil more than
doubled in fiscal 2001 but comprised only 2% of Guilford's Automotive segment
sales.
Apparel segment sales decreased 36.1% to $187.0 million in fiscal 2001 from
$292.5 million in fiscal 2000 and accounted for 29.1% of consolidated net sales.
Sales declined in all major product lines, as U.S. apparel manufacturers were
significantly impacted by the slowing economy, worldwide apparel overcapacity
and low-priced imports. Intimate apparel fabric sales were impacted by the
decline of mass-market programs by a major customer and vertical customers
opting to utilize their own manufacturing facilities. Swimwear fabric sales were
also impacted when one of the Company's largest swimwear customers filed for
bankruptcy protection. Fierce price competition from foreign suppliers caused
most of the decline in ready-to-wear fabric sales.
The Home Fashions segment accounted for 12.3% of consolidated net sales in
fiscal 2001 and sales decreased 17.0% from fiscal 2000. Sales for fiscal 2001
were $79.3 million versus $95.5 million in fiscal 2000. This segment was
particularly impacted by weakness in retail sales, especially during the second
half of the fiscal year. The majority of the decline was in the fabrics area,
especially mattress ticking, as many of the Company's customers struggled
financially. Direct-to-retail product sales declined by 6.6%, as department
stores and discounters alike saw their sales impacted by the weakened economy.
Sales in the Other segment fell 4.2% to $43.7 million in fiscal 2001 from $45.6
million in fiscal 2000. The Other segment represented 6.8% of consolidated net
sales in fiscal 2001. Growing sales of the Company's industrial fabrics used in
reverse osmosis filtration, as well as increases in fibers sales, have been more
than offset by declines in hook and loop closure sales, which have been
negatively impacted by the slowing economy.
Gross margin decreased by $74.6 million to $30.8 million or 4.8% of net sales in
fiscal 2001, from $105.4 million, or 12.9% of net sales in fiscal 2000. The
single most significant impact to gross margin was the sales volume decline and
corresponding capacity underutilization in all segments which caused nearly $60
million of the margin decrease. Gross margin was also negatively impacted by the
apparel strategic realignment related actions which resulted in an aggregate
$28.0 million of expenses in fiscal 2001 - plant closing/run-out inefficiencies
of $3.4 million, start-up of the Company's new facility in Altamira, Mexico of
$15.6 million and exited product line inventory write-downs of $9.0 million. The
Company was forced to lower its sales prices in the Apparel, Home Fashions and
Fibers businesses as a result of fierce foreign and domestic competition,
customer financial difficulties and a slowing economy. Currency devaluation in
Brazil offset margin improvements from increased sales volume in Brazil.
Manufacturing inefficiencies in the UK automotive operations were more than
offset by improvements in the U.S. operating facilities. The Company has reduced
fixed manufacturing overhead costs by exiting underutilized capacity throughout
fiscal 2001, the fiscal year impact of which was approximately $35 million.
Selling and administrative expenses decreased 15.4% to $82.3 million, or 12.8%
of sales, in fiscal 2001 from $97.2 million, or 11.9% of sales, in fiscal 2000.
The decrease from fiscal 2000 was due primarily to headcount reductions in
apparel and at corporate. The Company reduced the number of selling and
administrative employees by more than 100 during fiscal 2001. The Company also
continued to reduce discretionary expenses such as advertising and travel.
In conjunction with Guilford's strategic realignment of its apparel operations,
the Company has closed 4.5 domestic facilities, relocated certain equipment and
severed approximately 1,725 associates. The Company has closed two knitting and
dyeing and finishing plants in Greensboro, NC and two knitting, dyeing and
finishing plants in Cobleskill, NY. The Company has also downsized its
operations in Pine Grove, PA. With these actions, Guilford has substantially
ceased apparel and home fashions warp knit fabric production in the U.S. and has
8
exited stretch knit intimate apparel and swimwear fabrics and lace, home
fashions lace fabrics, certain apparel ready-to-wear products and certain home
fashion and other fabric products. The Company has transferred production of its
circular knit fabrics from facilities in the U.S. to Altamira, Mexico where it
expects to serve the women's ready-to-wear sector. The Pine Grove facility will
continue to produce industrial fabrics. Guilford's facility in Mexico City,
which produces many of the same apparel and home fashions fabrics as previously
produced in Pine Grove, has capacity to service existing customers which cut and
sew in Mexico. Team sportswear and linings fabrics will be produced in Mexico
City. The Company has recorded restructuring and impaired asset charges of $71.4
million in fiscal 2001 and $28.6 million in fiscal 2000 to affect this strategic
realignment.
The Company's operating loss increased to $122.8 million in fiscal 2001 from
$20.4 million in fiscal 2000. The decline of $102.4 million consisted of the
gross margin decrease of $74.6 million and incremental restructuring charges of
$42.7 million offset by selling and administrative expense decreases of $14.9
million. Operating income in the Automotive segment declined to $12.4 million in
fiscal 2001 from $24.8 million in fiscal 2000 as a result of sales decreases in
both the U.S. and the U.K. The Apparel segment experienced a significant
increase in operating loss, to $92.3 million in the current year from $39.8 in
the previous year. The majority of this decline was the result of the Company's
restructuring actions, as well as decreased sales and soft pricing. Operating
loss in the Home Fashions segment rose to a loss of $31.4 million, compared with
a fiscal 2000 loss of $1.8 million. This decline was due to the lower fabric
sales volume, weak pricing, and the effect of a restructuring action announced
in September 2001. The Other segment's operating loss was 11.5 million, compared
to $3.6 million in the previous year, as a result of lower hook and loop closure
sales and weak internal demand and soft pricing for fiber.
Interest expense increased $6.4 million to $25.3 million in fiscal 2001 million
from $18.9 million in fiscal 2000, as the Company was required to pay
significantly higher interest rates on its amended debt. The average short-term
interest rate was approximately 9% in fiscal 2001 and 8% in fiscal 2000. In
addition, the average debt outstanding increased to $283.3 million in fiscal
2001 from $265.5 million in fiscal 2000.
Other expense was $0.9 million in fiscal 2001 compared to other income of $6.3
million in fiscal 2000. Fiscal 2001 included $2.8 million in equity investee
losses, partially offset by a $1.2 million gain from shares returned to the
Company related to a 1996 acquisition of a business and $0.7 million of
insurance proceeds. Fiscal 2000 other income consisted primarily of $7.1 million
in gains which occurred when two insurance mutuals, of which the Company was a
member as a policyholder, underwent demutualizations and converted to stock
enterprises, and $2.9 million in gains on foreign currency hedging, partially
offset by a $3.7 million loss from an equity investee.
The effective income tax rate for fiscal 2001 was 1.6% versus 36.4% for fiscal
2000. This reduction in the effective rate relates primarily to valuation
allowances recorded during fiscal 2001. These valuation allowances were
necessary because the Company has net operating loss and tax credit
carryforwards that, due to restructuring actions taken during the current year
and other factors, could expire unused. Management's assessment is that the
character and nature of future taxable income may not allow the Company to
realize certain tax benefits of net operating losses and tax credits within the
prescribed carryforward period.
Loss before the extraordinary item in fiscal 2001 was $157.9 million or 24.5% of
sales. Loss per share before extraordinary item was $8.33 per basic and diluted
share, compared to fiscal 2000's net loss of $21.0 million or 2.6% of sales and
$1.11 per basic and diluted share. Net loss after the extraordinary charge was
$160.8 million or 25.0% of net sales. Basic and diluted loss per share was $8.48
in fiscal 2001 compared to basic and diluted loss per share of $1.11 in fiscal
2000. Average shares outstanding remained essentially unchanged from fiscal 2000
to fiscal 2001.
2000 Compared to 1999 - Consolidated sales for fiscal 2000 were $814.2 million,
a decrease of 5.0% from fiscal 1999's $856.8 million. Increased sales in the
Automotive segment were more than offset by sales declines in the other three
segments, particularly in the Apparel segment.
Automotive segment sales were $380.6 million, or 46.8% of consolidated net
sales, in fiscal 2000 compared to $361.3 million in fiscal 1999, an increase of
5.3%. This resulted primarily from an increase in the U.S. car build in fiscal
2000 to 17.4 million units compared to car build in fiscal 1999 of 16.9 million
units. Additionally, further penetration into the New Domestics OEMs allowed
Guilford to gain bodycloth market share in the overall U.S. vehicle market.
Internationally, a decrease in sales in the U.K. operations was offset by
increases in Mexico and Brazil. In the U.K., lower build levels and loss of
market share of a major customer, along with the strength of the British pound
sterling compared to the Euro, caused the majority of the decrease. The sales
increase in Mexico was the result of the return of a major customer, combined
with increased sales to existing customers. Sales in Brazil, while small, grew
by nearly 64% over fiscal 1999 due to an increase in the Brazilian car build and
additional market penetration by Guilford.
9
Apparel segment sales were $292.5 million, or 35.9% of consolidated net sales,
in fiscal 2000 compared to $336.5 million in fiscal 1999, a decrease of 13.1%.
The entire U.S. apparel industry has been negatively affected by lower-priced
fabrics and garments from overseas. While each of the intimate apparel,
ready-to-wear, swimwear and other apparel sectors had year over year declines,
the largest decreases were in the warp knit ready-to-wear, linings,
robewear/sleepwear and solid swimwear product lines. In addition, the Company's
sales in this segment have been impacted by financial difficulties experienced
by some key customers and a weak lace market. Sales of the Company's
Lycra(R)-containing fabrics, used in shapewear, circular knit ready-to-wear and
printed swimwear, increased over fiscal 1999.
The Home Fashions segment sales were $95.5 million, or 11.7% of consolidated net
sales, in fiscal 2000 compared to $111.5 million in fiscal 1999, a decrease of
14.3%. Decreased sales of home fashions fabrics, especially mattress ticking,
caused the majority of the decline. Increased sales in direct-to-retail window
curtains and bedding were more than offset by the discontinuation of the
Company's circular knit sheeting business. The segment also has been impacted by
the financial instability of several large retailers.
Sales in the Other segment were $45.6 million, or 5.6% of consolidated net
sales, in fiscal 2000 compared to $47.5 million in fiscal 1999, a decrease of
4.0%. The continued decline in the Company's sales of hook and loop closure
fabrics, caused mostly by lower sales to a large customer, was partially offset
by sales increases in fibers and other fabrics, particularly in Mexico.
Gross margin decreased to $105.4 million or 12.9% of net sales in fiscal 2000
from $134.5 million or 15.7% of net sales in fiscal 1999. The largest decrease
came in the Apparel segment, where the most significant impact to margin was the
volume decline. Related decreased production caused under-utilization of
equipment. The lower volume caused a decline in gross margin of $15.4 million in
Apparel. The Company reduced fixed costs in several of its facilities to
partially offset the impact of these volume declines. Additionally, the Company
has reduced prices of certain products in order to compete with lower-priced
imports. In the Automotive segment, gross margin was negatively impacted by
higher prices charged by outside processors which were necessary to meet
unexpected demand in the U.S. The high demand also caused inefficiencies
associated with running consecutive 7-day per week operations. Excess costs and
expenses totaled $8.5 million and more than offset incremental gross margin of
$5.7 million from volume increases. Gross margin in the U.K.'s automotive
business declined $1.4 million due to lower volume and equipment utilization.
The strength of the sterling negatively impacted gross margin by $2.9 million.
Gross margins in the automotive business for both Mexico and Brazil improved in
fiscal 2000 compared to fiscal 1999 due to higher sales and strong consumer
demand. Gross margin in the Home Fashions segment improved in fiscal 2000
compared to fiscal 1999, largely due to the fiscal 1999 decision to exit the
low-margin sheeting business and focus on higher margin opportunities in window
curtains and satin bedding. Gross margin in the Other segment decreased due to
lower demand for hook and loop fabric ($2.3 million), lower prices for fibers,
and most significantly, under-utilization of fiber spinning and warping
capacity. The fibers operations' gross margin declined by $3.4 million in fiscal
2000.
Selling and administrative expenses of $97.2 million, or 11.9% of sales, in
fiscal 2000 decreased 5.5% from $102.9 million, or 12.0% of sales, in fiscal
1999. The decrease was due to a Company-wide effort to reduce discretionary
expenses such as travel, advertising and professional fees totaling $2.7
million. In addition, fiscal 1999 included a $3.1 million non-recurring bad debt
expense.
During the fourth quarter of fiscal 2000, Guilford committed to a comprehensive
restructuring plan intended to reduce capacity and improve the profitability of
its apparel operations. The plan included discontinuing the knitting, dyeing and
finishing operations at the Company's Fishman and Greenberg facilities, in
Greensboro, NC. A portion of the Greenberg operations have been transitioned to
the Company's new facility in Altamira, Mexico, while other production would be
transferred to Guilford facilities in the U.S. As a result of this plan, the
Company recorded a restructuring charge of $28.6 million in the fourth quarter
of fiscal 2000. The net after-tax effect of this charge was $0.95 per share in
fiscal 2000. This charge was comprised of $17.3 million in equipment impairment
charges (impairment was determined by comparing the net book value of the assets
against the fair market value); $9.1 million in accrued severance costs payable
to the approximately 950 affected employees; $1.6 million in equipment
relocation and other costs; and $0.6 million for supplies obsolescence and other
costs. The Company expected to recognize additional period costs of $13.0
million during fiscal 2001 related to these actions.
The Company had an operating loss of $20.4 million in fiscal 2000 compared to an
operating profit of $32.1 million in fiscal 1999. Operating income for the
Automotive segment declined $5.2 million to $24.8 million in fiscal 2000. This
decrease was due to the volume decline in the U.K. and manufacturing
inefficiencies in the U.S. The Apparel segment experienced the largest decline
in operating income, a decrease of $45.6 million, to an operating loss of $39.8
million. This decline was due primarily to the restructuring plan, and also to
lower sales, soft pricing and excess capacity as a result of increased foreign
competition. The Home Fashions segment's operating loss improved by $4.5
million, to a loss of $1.8 million, mainly due to the elimination of the low
margin circular knit sheeting business. Finally, the segment identified as Other
10
experienced an operating income decrease of $6.4 million to a loss of $3.6
million, as a result of lower fabric sales, weak internal fiber demand and lower
pricing.
Interest expense increased $2.3 million to $18.9 million from $16.6 million in
fiscal 1999, primarily as a result of increased borrowings to finance
operations. The average short-term interest rate was approximately 8% in fiscal
2000 and 6% in fiscal 1999.
Other income was $6.3 million in fiscal 2000 compared to other expense of $3.4
million in fiscal 1999. Fiscal 2000 other income consisted primarily of $7.1
million in gains which occurred when two insurance mutuals, of which the Company
was a member as a policyholder, underwent demutualizations and converted to
stock enterprises, and $2.9 million in gains on foreign currency hedging,
partially offset by a $3.7 million loss from an equity investee. Fiscal 1999
other expense was comprised of losses from equity investees of $1.8 million,
investment write-offs of $0.7 million, and various other expenses of $0.9
million.
The effective tax rate for fiscal 2000 was 36.4% and resulted in an income tax
benefit of $12.0 million. This compared to an effective income tax rate of 15.8%
for fiscal 1999. The lower rate in 1999 was the result of a one-time net benefit
of $3.7 million derived from a dividend paid by Guilford's U.K. subsidiaries to
the parent under the Advance Corporation Tax (ACT) rules and the U.S.-U.K.
Income Tax Treaty.
Net loss in fiscal 2000 was $21.0 million or 2.6% of net sales, compared to
fiscal 1999's net income of $10.2 million or 1.2% of sales. Basic and diluted
loss per share were $1.11 in fiscal 2000 compared to basic and diluted earnings
per share of $0.47 in fiscal 1999. Average shares outstanding decreased in
fiscal 2000 from fiscal 1999 due to the full year impact of the Company's 1999
repurchases of nearly 1.0 million shares of the Company's common stock in the
open market and nearly 3.1 million shares from a beneficial owner in a private
transaction.
Liquidity and Capital Requirements
The textile industry has continued to experience tightened lending practices
from traditional financial institutions due principally to precipitous earnings
declines and uncertainty within the industry. The industry has likewise been
generally unable to obtain additional capital from appropriate financial
markets. The absence of a long term commitment by Guilford's domestic lenders
has exacerbated the Company's poor performance due to increased concerns by both
trade credit and customer constituencies.
On May 26, 2000, the Company entered into a $130 million revolving credit
facility replacing a $150 million revolving credit facility. The 3-year
revolving credit facility is secured by substantially all of the Company's
assets. Concurrent with the new revolving credit facility, the Company's Senior
Notes due 2008 became ratably secured with the bank facility. Since obtaining
these debt agreements, the Company has executed 9 amendments/waivers,
principally required due to payment deferrals and non-compliance with financial
covenants. Such non-compliance was substantially caused by the precipitous
decline in apparel segment sales and operating results and the Company's
corresponding operational restructuring actions. The successive amendments
contained higher effective interest rates, more restrictive covenants and
mandatory prepayments which were subsequently deferred.
Faced with limited liquidity, significant debt levels, high interest rates, and
shrinking revenues and margins, Guilford has exited many of its cash-consuming
apparel operations. In addition, the Company continues to manage working capital
and capital spending closely. The Company expects to retire a portion of its
debt through the sale of idle and non-core assets. The Company is currently
actively marketing numerous facilities and is positioning to divest itself of
additional assets.
On September 30, 2001 (and for the second and third quarters of fiscal 2001),
the Company was not in compliance with certain terms of its senior loan
agreements. The Company received waivers of such non-compliance from its
lenders. Since October 2001, the Company has continued to receive waivers while
negotiating with its senior lenders toward a mutually satisfactory restructuring
of the Company's indebtedness owed to such lenders. The Company remains in
active negotiations with its lenders over the terms of such a restructuring and
is hopeful that a restructuring can be reached. There can be no assurances,
however, that a satisfactory debt restructuring will be consummated. In
addition, if the Company's lender negotiations are not successfully concluded or
the current waiver is not extended beyond its expiration date of January 18,
2002, then the Company would be in default under its senior loan agreements. As
a result, borrowings outstanding under domestic debt agreements have been
classified as current liabilities in the Company's consolidated balance sheet as
of September 30, 2001.
The occurrence of an event of default under the Company's senior loan agreements
entitles the lenders to exercise certain rights, including the right to declare
all amounts outstanding immediately due and payable, and the right to liquidate
the collateral securing such loans. The Company's senior debt is secured by
11
substantially all of the Company's domestic assets as well as by 65% of the
stock the Company holds in its foreign subsidiaries. If the lenders were to
exercise the above-described rights upon the occurrence of an event of default,
then the Company would be forced to seek protection from its creditors under the
bankruptcy laws, as the Company lacks sufficient liquidity to repay the
outstanding amounts owed to the lenders and the Company does not expect to be
able to obtain satisfactory alternate financing arrangements on a timely basis.
Cash provided by operations decreased to $11.4 million in fiscal 2001 compared
to $51.6 million in fiscal 2000. The decrease resulted primarily from increased
net operating losses and a reduction in accrued liabilities, partially offset by
significantly lower accounts receivable and inventories.
Working capital was negative $145.4 million at the end of fiscal 2001, compared
to positive $213.1 million in the prior year. The decrease in working capital
was primarily the result of $239.8 million of long term debt that was required
to be classified as current, as described above. The decrease in working capital
was also the result of decreases in the Company's cash and cash equivalents of
$14.1 million, accounts receivable of $44.8 million, and inventories of $36.6
million. The decrease in accounts receivable was the result of the overall
decrease in sales, while inventory declines were also partially a result of the
Company's restructuring actions and its continued focus on cash preservation.
Cash used by investing activities decreased to $43.7 million in fiscal 2001 from
$58.0 million in the prior year. The decrease was substantially related to lower
capital expenditures, as fiscal 2000 included a larger portion of the
expenditures related to the Company's apparel transition to Mexico. Capital
expenditures were $53.2 million in fiscal 2001 compared to $66.2 million in
fiscal 2000. Fiscal 2001 capital expenditures included $14.2 million for the
transition to Mexico and $15.8 million for other restructuring related
expenditures. The Company generally maintains its average capital expenditures
near the average depreciation expense; however, capital expenditure levels for
fiscal 2002 are expected to be significantly below depreciation expense as the
Company has completed much of its operational restructuring.
Cash provided by financing activities was $18.4 million in fiscal 2001, compared
to $8.3 million in fiscal 2000. The lower fiscal 2000 amount included a cash
outflow of $6.3 million for dividend payments to shareholders. During the third
quarter of fiscal 2000, the Board of Directors suspended the payment of
dividends to shareholders. The revolving credit facility and senior notes
prohibit the payment of dividends throughout their respective terms.
At the end of fiscal 2001, cash and cash equivalents totaled $9.8 million.
Availability under the Company's line of credit fluctuated from a maximum of
$28.0 million to a minimum of $0 during fiscal 2001. There was no borrowing
availability under the Company's factored receivables at September 30, 2001. As
of September 30, 2001, the Company had availability under its revolving line of
credit of $9.3 million. During the first quarter of fiscal 2002, availability
under the Company's revolving line of credit ranged from a maximum of $16.9
million to a minimum of $0.
As part of the original 1996 purchase agreement between Guilford Mills and the
former owner of Hofmann Laces, the Company agreed to pay additional
consideration based upon the Company's price-earnings' multiple and Hofmann
Laces' performance through the end of calendar year 2000. The purchase agreement
was amended in fiscal year 1998 to fix the amount of the additional payment. A
$17.0 million payment of the acquisition price was made during fiscal 1998 with
the final cash payment of $17.3 million, including interest, being made during
fiscal 1999.
Raw material prices were stable overall in fiscal 2001 and had an insignificant
impact on Guilford's liquidity.
Inflation
The Company believes that the relatively moderate inflation rate of the past
decade has not significantly impacted its operations.
Contingencies
The Company is involved in various litigation and environmental matters arising
in the ordinary course of business. These are discussed in Note 13 to the
consolidated statements which are included herein under Item 8 "Financial
Statements and Supplementary Data" of this document. Although the final outcome
of these legal and environmental matters cannot be determined, based on the
facts presently known, it is management's opinion that the final resolution of
these matters will not have a material adverse effect on the Company's financial
position or future results of operations.
Outlook
The U.S. textile industry has suffered significant declines in sales, production
and earnings since 1997 when the Asian financial crisis prompted many of that
continent's countries to export low-priced textile and apparel products into the
then-robust U.S. marketplace. Combined with the national economic slowdown of
the past 6 to 9 months, the environment has become even more competitive, with
domestic and foreign apparel manufacturers competing for a share of a shrinking
12
market. This downturn has been magnified by the terrorist attacks of September
11, 2001, which threaten to extend the economic slowdown for months to come.
The events of the last four years have caused margin erosion and declining
capacity utilization, especially in Guilford's apparel operations. Consequently,
the Company has both accelerated and expanded its strategic realignment of the
apparel business, which eliminated domestic dyeing and finishing capacity. These
actions, culminating with the announcements during the fourth quarter of fiscal
2001 of one plant closing and a second plant downsizing, are expected to result
in significant margin improvement and fixed cost reductions. Central to the
Company's apparel strategy are the anticipated successes of a state-of-the-art
operation in Altamira, Mexico, which began production in May 2001, and the
growth of the Company's Mexico City apparel operation. In management's opinion,
textile manufacturers in the Western Hemisphere can be competitive and NAFTA
trade opportunities afford Mexican apparel fabric manufacturers such as Guilford
logistical advantages over the Far East and Indian subcontinent. Guilford's
Apparel and Other fabric sales for fiscal 2002 are expected to decline to
approximately $80 million from the record levels of $550 million in fiscal 1997.
The Company's substantially completed Apparel and Other fabrics operational
restructuring marks a dramatic turning point in the Company's 56-year history.
The Apparel fabrics business, which in 1997 represented more than 60% of
Guilford's consolidated sales, is expected to be less than 15% in fiscal 2002.
Based on its Apparel fabric business, the Company developed innovative
automotive and industrial fabrics. The Company's diversification into these
market segments have provided flexibility and a base from which Guilford can
re-emerge as a leading fabric producer. Where many of the Company's textile
industry peers have been solely reliant on the difficult apparel and home
fashions markets, Guilford has not. Automotive and industrial sales are expected
to comprise more than 70% of fiscal 2002 sales.
A key component in the continued strong profitability of the Automotive segment
will be the number of vehicles built, especially in the U.S. and U.K. As a
result of the economic slowdown, analysts project a moderate decline in the car
build in the next few months in both countries, but anticipate the build levels
to improve as consumer confidence rebounds. As a result of the highly specified,
technical requirements of both Automotive and Industrial/Specialty products,
management believes these areas to be less susceptible to low-priced imports
into the U.S.
The Company's direct-to-retail Home Fashions business, which has also been
plagued by low cost imports and a weak retail environment, has and will continue
to undergo additional changes. Licensing agreements have continued to cause a
shift in product mix towards top-of-bed and have resulted in a more diverse
customer base. In addition, with the exit of lace roll good manufacturing in our
Cobleskill, NY manufacturing facility the business will be free to source its
raw materials worldwide at more competitive prices.
With the Company's apparel operational restructuring substantially completed,
Guilford intends to focus on its continuing businesses. The Company's Automotive
segment is profitable, well-established, technically superior and is a key
supplier to the industry. Guilford has strategically located Mexican facilities,
industry relationships and product "know-how" aimed at ultimately increasing the
Company's Apparel segment sales. While the Company's manufacturing operations
afford it many opportunities, Guilford's ability to implement its business plan
is dependent upon the Company effecting a satisfactory debt restructuring as
discussed in greater detail in the "Liquidity and Capital Requirements" section
above.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk for changes in interest rates and foreign
currency exchange rates. Guilford has limited exposure to commodity price risk.
The Company does not hold or issue any financial instruments for trading or
other speculative purposes.
Interest Rate Risk: The Company's obligations under the bank credit agreement
bear interest at floating rates and therefore, the Company is impacted by
changes in prevailing interest rates. However, the senior notes bear fixed
interest coupons and therefore are not subject to the risk of interest rate
fluctuations. A 10% change in market interest rates that affect the Company's
financial instruments would impact earnings during fiscal 2002 by approximately
$1.1 million before taxes and would change the fair value of the Company's
financial instruments by approximately $4.1 million.
13
Foreign Currency Risk: The Company is subject to foreign currency risk primarily
related to sales and expenditures and other transactions denominated in foreign
currencies and investments in foreign subsidiaries. The Company manages the
exposure related to capital expenditures and other firm commitments denominated
in foreign currencies primarily through forward exchange contracts with
durations of generally less than 12 months. The Company enters into these
contracts in the normal course of business. The changes in market value of such
contracts have a high correlation to the price changes in the currency of the
related hedged transactions. On September 30, 2001, the Company had the
following outstanding foreign currency forward contract:
(1) (2) (3) (4) (5)
Forward Currency Contract Nominal Amount Average Rate Fair Value Gain (Loss)
(Hedge of Firm Commitments) (In thousands)
- ------------------------------------------------------------------------------------ -------------
Receive U.S. Dollar/Pay British Pound $6,151 1.4662 $6,151 $0
- -------------------------------------- --------------- -------------- -------------- -------------
(1). Contract matures within 12 months
(2) Nominal contract amount as reflected in the underlying contract
(3) Weighted average contract rate represent the rate of exchange, stated
in the currency sold, as reflected in the underlying contract
(4) Fair value equals the contract amount presented in U.S. dollar
equivalents based upon the year-end exchange rate obtained from brokers
or referenced from publicly available market information
(5) Gain(Loss) represents the net unrecognized gain(loss) based upon the
year-end exchange rate
Effective in fiscal 2000, the Company adopted a policy to manage the exposure
related to sales denominated in foreign currencies through the use of forward
exchange contracts. In fiscal 2000, these forward exchange contracts covered
approximately 75% of the Company's anticipated sales in the Euro, which
represented the majority of the Company's foreign currency sales. The duration
of these contracts was less than 12 months and matched the anticipated
receivable collections. The Company determined that its anticipated sales in the
Euro for fiscal 2001 were naturally hedged by anticipated Euro payables.
Commodity Price Risk: The Company is a purchaser of cotton and generally buys
cotton based upon market prices that are established with the vendor as part of
the purchase process. Guilford does not use commodity financial instruments to
hedge cotton prices due to the high correlation between the cost of cotton and
the ultimate selling price of the Company's product.
14
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
As of September 30, 2001 and October 1, 2000 and for the years ended September
30, 2001, October 1, 2000 and October 3, 1999
Page(s)
-------
Statement of Management's Responsibility............................. 16
Report of Independent Public Accountants............................. 17
Consolidated Balance Sheets.......................................... 18
Consolidated Statements of Operations................................ 19
Consolidated Statements of Stockholders' Investment.................. 20
Consolidated Statements of Cash Flows................................ 21
Notes to the Consolidated Financial Statements....................... 22 to 37
Schedule II - Analysis of Valuation and Qualifying Accounts.......... 38
Quarterly Information (Unaudited).................................... 39
15
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
----------------------------------------
The management of Guilford Mills, Inc. has the responsibility for the
preparation and integrity of all information contained in the Annual Report. The
financial statements, including footnotes, have been prepared in accordance with
accounting principles generally accepted in the United States and include
amounts that are based on management's best estimates and judgments.
The Company maintains an internal accounting control system designed to provide
reasonable assurance of the safeguarding and accountability of Company assets,
and to ensure that its financial records provide a reliable basis for the
preparation of financial statements and other data. The system includes an
appropriate division of responsibility and is documented by written policies and
procedures that are communicated to employees with significant roles in the
financial reporting process and updated as necessary. In addition, the
achievement of effective operations is promoted by this system. There are limits
inherent in all systems of internal control based on the recognition that the
cost of such systems should not exceed the benefits derived and the likelihood
of achievement of objectives can be affected by human judgment, failure or
circumvention. Management believes the Company's system of internal controls
provides an appropriate balance.
The control environment is complemented by an internal auditing program,
comprised of internal and external business advisors who independently assess
the effectiveness of the internal controls and report findings to management
throughout the year. The group delivers increased value by aligning with the
business objectives to reduce risk and create cost efficiencies. The Company's
financial statements have been audited by independent public accountants who
have expressed their opinion with respect to the fairness of the presentation of
these statements in conformity with accounting principles generally accepted in
the United States. They objectively and independently review the performance of
management in carrying out its responsibility for reporting operating results
and financial condition. Their opinion is based on procedures which they believe
to be sufficient to provide reasonable assurances that the financial statements
contain no material errors. Management has made available to the independent
public accountants all of the Company's financial records and related data, as
well as the minutes of the stockholders' and directors' meetings.
Recommendations by both internal and external auditors concerning internal
control deficiencies are considered and are implemented with an appropriate
urgency by management.
The Audit Committee of the Board of Directors, which is formally chartered, is
comprised solely of non-employee directors who meet periodically with the
independent auditors, management and the Company's internal auditors to review
the work of each and to evaluate the accounting, auditing, internal controls and
financial reporting matters. The independent auditors and the Company's internal
auditors have free access to the Audit Committee, without the presence of
management.
/s/ Kim A. Thompson
- -------------------
Kim A. Thompson
Vice President/Chief Financial Officer
16
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of Directors of Guilford Mills, Inc.:
We have audited the accompanying consolidated balance sheets of Guilford Mills,
Inc. (a Delaware corporation) and subsidiaries as of September 30, 2001 and
October 1, 2000, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended September 30, 2001. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Guilford Mills, Inc. and
subsidiaries as of September 30, 2001 and October 1, 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended September 30, 2001, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered substantial losses from
operations, its lenders have waived covenant violations only through January 18,
2002 and it is uncertain if they will continue to waive their right to
accelerate the due date of the debt or enter into a new long-term debt
agreement. These facts raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule titled "Schedule II - Analysis of
Valuation and Qualifying Accounts" in Item 8 is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Greensboro, North Carolina,
January 14, 2002.
17
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and October 1, 2000
(In thousands except share data)
- --------------------------------------------------------------------------- --------------- ---------------
2001 2000
- --------------------------------------------------------------------------- --------------- ---------------
Assets
Cash and cash equivalents $ 9,809 $ 23,874
Accounts receivable, net 103,484 148,270
Inventories 90,937 127,550
Prepaid income taxes 5,511 7,680
Other current assets 14,212 15,485
- --------------------------------------------------------------------------- --------------- ---------------
Total current assets 223,953 322,859
Property, net 267,833 298,687
Other assets 59,278 102,666
- --------------------------------------------------------------------------- --------------- ---------------
Total assets $ 551,064 $ 724,212
- --------------------------------------------------------------------------- --------------- ---------------
Liabilities
Short-term borrowings $ 33,724 $ 10,915
Current maturities of long-term debt 21,501 530
Long-term debt classified current 239,842 -
Accounts payable 45,632 54,400
Other current liabilities 28,654 43,904
- --------------------------------------------------------------------------- --------------- ---------------
Total current liabilities 369,353 109,749
- --------------------------------------------------------------------------- --------------- ---------------
Long-term debt 1,542 262,845
Deferred income taxes 7,668 14,052
Other liabilities 30,992 27,794
- --------------------------------------------------------------------------- --------------- ---------------
Total long-term liabilities 40,202 304,691
- --------------------------------------------------------------------------- --------------- ---------------
Commitments and Contingencies (Notes 13 & 14)
Stockholders' Investment
Preferred stock, $1 par; 1,000,000 shares authorized, none issued - -
Common stock, $.02 par; 65,000,000 shares authorized; 32,750,094 shares issued;
18,627,076 shares outstanding at September 30, 2001
and 19,194,295 shares outstanding at October 1, 2000 655 655
Capital in excess of par 119,984 120,371
Retained earnings 175,748 336,505
Accumulated other comprehensive loss (24,548) (17,164)
Unamortized stock compensation (805) (2,084)
Treasury stock, at cost (14,123,018 shares at September 30, 2001 and
13,555,799 shares at October 1, 2000) (129,525) (128,511)
- --------------------------------------------------------------------------- --------------- ---------------
Total stockholders' investment 141,509 309,772
- --------------------------------------------------------------------------- --------------- ---------------
Total liabilities and stockholders' investment $ 551,064 $ 724,212
- --------------------------------------------------------------------------- --------------- ---------------
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
18
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years ended September 30, 2001, October 1, 2000 and October 3, 1999
(In thousands except per share data)
-------------------------------------------------------------- ---------------- ---------------- ---------------
2001 2000 1999
(52 weeks) (52 weeks) (53 weeks)
-------------------------------------------------------------- ---------------- ---------------- ---------------
Net Sales $ 643,519 $ 814,226 $ 856,838
-------------------------------------------------------------- ---------------- ---------------- ---------------
Costs and Expenses:
Cost of goods sold 612,707 708,813 722,290
Selling and administrative 82,274 97,192 102,871
Restructuring and impaired asset charges 71,375 28,643 (470)
-------------------------------------------------------------- ---------------- ---------------- ---------------
766,356 834,648 824,691
-------------------------------------------------------------- ---------------- ---------------- ---------------
Operating (Loss) Income (122,837) (20,422) 32,147
-------------------------------------------------------------- ---------------- ---------------- ---------------
Other Expense:
Interest expense 25,292 18,882 16,598
Impaired investments 11,451 - -
Other expense (income), net 911 (6,322) 3,394
-------------------------------------------------------------- ---------------- ---------------- ---------------
37,654 12,560 19,992
-------------------------------------------------------------- ---------------- ---------------- ---------------
(Loss) Income Before Income Tax (Benefit)
Provision and Extraordinary Item (160,491) (32,982) 12,155
Income Tax (Benefit) Provision (2,590) (12,008) 1,925
-------------------------------------------------------------- ---------------- ---------------- ---------------
(Loss) Income Before Extraordinary Item (157,901) (20,974) 10,230
Extraordinary Item, Net of Tax (Note 9) (2,856) - -
-------------------------------------------------------------- ---------------- ---------------- ---------------
Net (Loss) Income $ (160,757) $ (20,974) $ 10,230
-------------------------------------------------------------- ---------------- ---------------- ---------------
(Loss) Income Per Share Before Extraordinary Item:
Basic $ (8.33) $ (1.11) $ 0.47
Diluted (8.33) (1.11) 0.47
-------------------------------------------------------------- ---------------- ---------------- ---------------
Net (Loss) Income Per Share:
Basic $ (8.48) $ (1.11) $ 0.47
Diluted (8.48) (1.11) 0.47
-------------------------------------------------------------- ---------------- ---------------- ---------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
19
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
For the Years Ended September 30, 2001, October 1, 2000 and October 3, 1999
(In thousands, except per share data)
- ------------------------------------------------------------------------------------------------------------------------
Current Year Common Stock Capital in
Comprehensive ------------------ Excess of Retained
Income (Loss) Shares $ Amount Par Earnings
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1998 32,750 $ 655 $ 119,648 $ 363,606
Comprehensive income:
Net income $ 10,230 10,230
Other comprehensive income, net of tax:
Foreign currency translation loss (4,036)
Pension equity adjustment (666)
-----------------
Total comprehensive income $ 5,528
-----------------
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations
Compensation under restricted stock plan
Stock option exercises 53
Other transactions, including return of treasury
stock received as payment for options exercised 61
Purchases of treasury stock
U.S. income tax benefit from stock options and
restricted stock 770
Cash dividends ($.44 per share) (10,024)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 3, 1999 32,750 655 120,532 363,812
Comprehensive income:
Net Loss $ (20,974) (20,974)
Other comprehensive loss, net of tax:
Foreign currency translation loss (5,274)
Pension equity adjustment 389
-----------------
Total comprehensive loss $ (25,859)
-----------------
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations
Compensation under restricted stock plan
U.S. income tax expense from restricted stock (161)
Cash dividends ($.33 per share) (6,333)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 2000 32,750 655 120,371 336,505
Comprehensive income:
Net Loss $ (160,757) (160,757)
Other comprehensive loss, net of tax:
Foreign currency translation loss (2,251)
Pension equity adjustment (5,133)
-----------------
Total comprehensive loss $ (168,141)
-----------------
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations
Compensation under restricted stock plan
Cancellation of grants of shares under the
restricted stock plan (35)
U.S. income tax expense from restricted stock (123)
Return of shares by former owner
of Hofmann Laces
Issuance of treasury stock to retiring members of
the Board of Directors under phantom stock plan (229)
- ------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 32,750 $ 655 $ 119,984 $ 175,748
- ------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
** TABLE CONTINUED ....**
20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT (CONTINUED)
For the Years Ended September 30, 2001, October 1, 2000 and October 3, 1999
(In thousands, except per share data)
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated
Other Unamortized Treasury Stock
Comprehensive Stock ----------------- Total
Loss Compensation Shares $ Amount Equity
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 27, 1998 $ (7,577) $ (4,759) 9,524 $ (86,396) $ 385,177
Comprehensive income:
Net income 10,230
Other comprehensive income, net of tax:
Foreign currency translation loss (4,036) (4,036)
Pension equity adjustment (666) (666)
Total comprehensive income
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations 6 (94) (94)
Compensation under restricted stock plan 1,449 1,449
Stock option exercises (13) 121 174
Other transactions, including return of treasury
stock received as payment for options exercised 1 (52) 9
Purchases of treasury stock 4,033 (42,044) (42,044)
U.S. income tax benefit from stock options and
restricted stock 770
Cash dividends ($.44 per share) (10,024)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 3, 1999 (12,279) (3,310) 13,551 (128,465) 340,945
Comprehensive income:
Net Loss (20,974)
Other comprehensive loss, net of tax:
Foreign currency translation loss (5,274) (5,274)
Pension equity adjustment 389 389
Total comprehensive loss
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations 5 (46) (46)
Compensation under restricted stock plan 1,226 1,226
U.S. income tax expense from restricted stock (161)
Cash dividends ($.33 per share) (6,333)
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 1, 2000 (17,164) (2,084) 13,556 (128,511) 309,772
Comprehensive income:
Net Loss (160,757)
Other comprehensive loss, net of tax:
Foreign currency translation loss (2,251) (2,251)
Pension equity adjustment (5,133) (5,133)
Total comprehensive loss
Vesting of shares under the restricted stock
plan, less return of shares to treasury stock
to satisfy recipients' individual tax obligations 11 (25) (25)
Compensation under restricted stock plan 1,136 1,136
Cancellation of grants of shares under the
restricted stock plan 143 20 (108) 0
U.S. income tax expense from restricted stock (123)
Return of shares by former owner
of Hofmann Laces 573 (1,232) (1,232)
Issuance of treasury stock to retiring members of
the Board of Directors under phantom stock plan (37) 351 122
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2001 $ (24,548) $ (805) 14,123 $ (129,525) $ 141,509
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
20-A
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 2001, October 1, 2000, and October 3, 1999
(In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
(52 WEEKS) (52 weeks) (53 weeks)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (160,757) $ (20,974) $ 10,230
Non-cash items included in net (loss) income:
Depreciation and amortization 56,636 64,692 64,633
Unexpended restructuring costs 57,947 26,538 (470)
Gain on forward contracts - (2,856) -
Gain on sale of investments - (7,131) -
Gain on return of shares (1,232) - -
Extraordinary loss on debt extinguishment 4,725 - -
Gain on disposition of property (2,144) (70) (2,239)
Loss on equity method investments 14,286 3,730 1,835
Provision for bad debts 1,299 1,404 4,748
Minority interest in net (loss) income (172) 60 92
Deferred income taxes (1,149) (14,050) (20)
Increase in cash surrender value of life insurance, net of policy loans (2,810) (2,705) (3,186)
Compensation earned under restricted stock plan 1,279 1,226 1,449
Changes in assets and liabilities:
Receivables 38,246 6,434 4,817
Inventories 35,645 6,755 16,302
Other current assets 193 (3,425) (5,468)
Accounts payable (8,506) (3,273) 902
Accrued liabilities (17,072) (5,303) 2,675
Other assets and liabilities (5,010) 503 (3,441)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,404 51,555 92,859
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property (53,163) (66,187) (48,609)
Proceeds from dispositions of property 2,666 7 2,260
Proceeds from sale of other assets 11,652 2,094 1,491
Increase in other assets - - (1,207)
Proceeds from settlement of forward contracts - 2,856 -
Proceeds from sale of investments - 7,131 -
Investment in equity investee (4,874) (3,879) (995)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (43,719) (57,978) (47,060)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings (repayment), net 22,134 (101,165) 51,802
Payments of long-term debt (113,751) (22,389) (176,353)
Proceeds from issuance of long-term debt, net of deferred financing costs paid 110,029 138,164 140,233
Payment of purchase agreement - - (17,000)
Cash dividends - (6,333) (10,024)
Proceeds from exercise of common stock options - - 174
Purchases of treasury stock - - (42,044)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 18,412 8,277 (53,212)
- -----------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (162) (534) (480)
- -----------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (14,065) 1,320 (7,893)
BEGINNING CASH AND CASH EQUIVALENTS 23,874 22,554 30,447
- -----------------------------------------------------------------------------------------------------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 9,809 $ 23,874 $ 22,554
- -----------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 26,550 $ 20,449 $ 12,971
Cash (received) paid for income taxes, net (3,209) 696 13,851
- -----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
21
Notes to Consolidated Financial Statements
(In thousands except share data)
1. Description of Business and Summary of Significant Accounting Policies:
Description of Business - Guilford Mills, Inc. (the "Company") is a fabric
producer, which processes and sells warp knit, circular knit, flat woven and
woven velour fabrics as well as lace. The Company sells its finished fabrics to
customers who manufacture a broad range of automotive, apparel, home fashions
and specialty products. The Company also cuts and sews lace fabrics into
finished home fashions products which are sold directly to retailers.
Principles of Consolidation - The consolidated financial statements include the
accounts of Guilford Mills, Inc. and its majority-owned and controlled
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Fiscal Year End - The Company's fiscal year ends on the Sunday nearest to
September 30. Fiscal year 2001 ended September 30, 2001, fiscal year 2000 ended
October 1, 2000 and fiscal year 1999 ended October 3, 1999. Such years include
the results of operations for 52, 52 and 53 weeks, respectively.
Use of Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the reported amounts of revenues and expenses. Actual
results may differ from those estimates.
Reclassifications - For comparative purposes, certain amounts in the 2000 and
1999 financial statements have been reclassified to conform to the 2001
presentation.
Cash Equivalents - All highly liquid investments with an original maturity of
three months or less are considered to be cash equivalents.
Accounts Receivable and Concentration of Credit Risk - The Company maintains
credit insurance and uses factors as a means to reduce credit risk. As of
September 30, 2001, credit insurance is maintained covering $19,800 of certain
outstanding accounts receivable. The Company factors a portion of its trade
accounts receivable to two factors, which provide credit approval on a
non-recourse basis. As of September 30, 2001 and October 1, 2000, approximately
38% and 19%, respectively, of the Company's trade accounts receivable were
factored. The factoring agreements allow the Company to borrow against the
factored receivables using negotiated interest rates prior to the maturity
dates. The Company borrowed against the factored receivables during fiscal 2001,
and the balance of those borrowings was $28,817, with no borrowing availability
remaining, at September 30, 2001. These borrowings are reflected in short-term
borrowings on the balance sheet. There were no borrowings against the factored
receivables at October 1, 2000. The Company performs on-going credit evaluations
of its non-factored customers' financial condition and generally does not
require collateral from those customers. The Company's fabrics are used
primarily in the apparel, automotive, and home fashions markets with a multitude
of customers in numerous geographical locations throughout the world. There is
no disproportionate concentration of credit risk. During fiscal 2001, 2000 and
1999, no single customer accounted for 10% or more of net sales, however, the
Company's net sales reflected substantial direct and indirect sales to certain
large automotive original equipment manufacturers.
Allowances for doubtful accounts were $10,967 and $11,080 at September 30, 2001
and October 1, 2000, respectively. The Company maintains fully reserved
receivables for accounts which are either in bankruptcy or have been turned over
to a collection agency and also reserves for sales returns and allowances and
customer chargebacks.
Minority Interest - Minority interest represents the minority stockholders'
proportionate share of the equity of Grupo Ambar, S.A. de C.V. At September 30,
2001, the Company owned 95% of the capital stock of Grupo Ambar, S.A. de C.V.
Minority interest is included in other long-term liabilities in the accompanying
consolidated balance sheets.
Inventories - Inventories are carried at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method for approximately 37% and
48% of inventories in fiscal 2001 and 2000, respectively. Cost for all other
inventories has been determined principally by the first-in, first-out (FIFO)
method.
Property - Property is carried at cost, and depreciation is provided for
financial reporting purposes primarily on the straight-line method. Accelerated
methods are used for income tax reporting purposes. Depreciation rates are
reviewed annually and revised, if necessary, to reflect estimated remaining
useful lives, which range from three to thirty-five years. Labor and interest
costs for the purchase and construction of qualifying fixed assets are
capitalized and are amortized over the related assets' estimated useful lives.
Certain property whose value has been determined to be impaired has been written
down to fair market value (See Note 4).
22
Investment in Affiliated Companies - The equity method of accounting is used for
investments in which the Company has significant influence. Generally this
represents common stock ownership or partnership equity of at least 20% and not
more than 50%. For equity method investments that have been reduced to $0
through equity method losses, additional equity losses incurred have been used
to reduce loans to and investment in other securities or assets of the investee.
The cost method of accounting is used for investments in which the Company does
not have significant influence. Generally this represents common stock ownership
or partnership equity of less than 20%.
Goodwill and Intangible Assets - Goodwill has been amortized using the
straight-line method over periods ranging from twenty to forty years. Goodwill
amortization was $1,916, $1,920 and $2,115 in fiscal 2001, 2000 and 1999,
respectively. Accumulated amortization at September 30, 2001 and October 1, 2000
was $45,172 and $14,267, respectively. Under the terms of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", the Company
recognized goodwill impairments totaling $28,989 at the end of fiscal 2001, as a
result of closures or exits from certain of the Company's acquired businesses.
Management believes that net goodwill included in other assets at September 30,
2001 is realizable based on the currently projected business performance of the
entities to which the goodwill applies. Significant deteriorations in the
markets in which these businesses operate or in the operations or financial
condition of significant customers could impact these projections and,
therefore, impact the future carrying value of the underlying goodwill.
Long-term Assets - The Company reviews the carrying value of long-term assets
for impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated to be
generated during the remaining life to the net carrying value of the asset.
Income Taxes - Deferred or prepaid income taxes are provided for differences in
timing of expense and income recognition between income tax and financial
reporting in accordance with SFAS No. 109, "Accounting for Income Taxes". United
States income taxes are not provided on the earnings of foreign operations as
those are intended to be permanently reinvested. In the event earnings are
repatriated, credits received in the United States for foreign income taxes
previously paid will be available to substantially reduce the United States tax
liability. In fiscal 1999, the Company repatriated $20,000, to take advantage of
the expiring Advanced Corporation Tax rules and the U.S.-U.K. Income Tax Treaty.
Undistributed earnings of foreign operations were $2,684 at September 30, 2001
and $10,388 at October 1, 2000.
Foreign Currency Translation/Remeasurement - The financial statements of certain
majority-owned foreign subsidiaries are translated into dollars at the year-end
rate of exchange for asset and liability accounts and the average rate of
exchange for income statement accounts. Resulting translation gains or losses
are reflected in accumulated other comprehensive loss in the stockholders'
investment section of the accompanying balance sheets and do not affect the
results of operations. Financial results of certain majority-owned foreign
subsidiaries in highly inflationary economies or for which the U.S. dollar is
the functional currency are remeasured using a combination of current and
historical exchange rates. Remeasurement adjustments are included in the results
of operations along with transaction gains and losses for the period.
The Company has a majority-owned foreign subsidiary that operates in Mexico.
Mexico became highly inflationary January 1, 1997 and subsequent financial
results for the Company's Mexican subsidiary were remeasured. Effective January
1, 1999, Mexico's economy was no longer considered highly inflationary for
financial reporting purposes because the cumulative Mexican inflation rate for
the immediately preceding three years fell below 100%. As a result, subsequent
to January 1, 1999, the financial results for the Mexican subsidiary have been
translated using year-end and average exchange rates as described above.
Revenue Recognition - The Company recognizes a sale when goods are shipped. The
Company estimates and records provisions for sales returns and allowances in the
period that the sale is reported based on its historical experience or
contractual agreements.
Shipping and Handling Costs - The Company includes any costs associated with
shipping and handling products within cost of goods sold.
Research and Development - The Company expenses research and development costs
as incurred. Such costs were $11,499, $18,269 and $17,181 in fiscal 2001, 2000
and 1999, respectively.
Per Share Information - Basic income (loss) per share information has been
determined by dividing the respective net income (loss) amounts by the weighted
average number of shares of common stock outstanding during the periods. Diluted
23
income (loss) per share information also considers an additional dilutive effect
for stock options and shares issued under the restr