UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from .......... to ..........
Commission file number: 1-11432: 1-11436
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
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(Exact Name of registrant as Specified in its Charter)
Delaware 05-0475617
Delaware 22-3182164
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1000 Columbia Avenue, Linwood, PA 19061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 859-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether Foamex L.P. (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that Foamex
L.P. 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 Annual Report on Form 10-K or any
amendment to this Annual Report on Form 10-K. [X]
None of the voting securities of Foamex L.P. or Foamex Capital Corporation
are held by non-affiliates.
As of March 24, 2003, there were 1,000 shares of Foamex Capital
Corporation's common stock outstanding.
Foamex L.P. and Foamex Capital Corporation meet the conditions set forth in
General Instruction (I)(1)(a) and (b) of this Annual Report on Form 10-K and are
therefore filing this form with reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 13
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31
Part III
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners
and Management 31
Item 13. Certain Relationships and Related Transactions 31
Item 14. Controls and Procedures 31
Part IV
Item 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 32
Signatures 38
Certification of Chief Executive Officer 39
Certification of Chief Financial Officer 40
The Registrant will furnish a copy of any exhibit to this Annual Report on
Form 10-K upon the payment of a fee equal to the Registrant's reasonable expense
in furnishing such exhibit.
2
PART I
ITEM l. BUSINESS
General
Foamex L.P. (referred to in this document as "Foamex L.P., we, us and/or
our"), a wholly-owned subsidiary of Foamex International Inc. ("Foamex
International"), is engaged primarily in the manufacturing and distribution of
flexible polyurethane and advanced polymer foam products. As of December 29,
2002, Foamex L.P.'s operations are conducted directly and through its
wholly-owned subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex Latin
America, Inc. ("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia"). Foamex
Carpet Cushion, Inc. ("Foamex Carpet") was converted to a limited liability
company and was contributed by Foamex International to Foamex L.P. on March 25,
2002. The contribution of Foamex Carpet has been accounted for as a merger of
entities under common control and has been recorded in a manner similar to a
pooling of interests. Accordingly, all information in this annual report on Form
10-K includes Foamex Carpet. As of December 29, 2002, Foamex L.P.'s partners
were FMXI, Inc. ("FMXI") with a 1.7% managing general partnership interest and
Foamex International with a 98.3% limited partnership interest.
Segments
We are the largest manufacturer and distributor of flexible polyurethane
and advanced polymer foam products in North America. We have numerous
manufacturing facilities dedicated to specific product lines as well as
facilities with the capability to support multiple product lines. Each of our
business segments has a customer base that is significantly different from the
other segments. Our senior executives direct sales efforts for each of our
business segments.
Our five business segments are described below.
Foam Products
Our foam products are distributed directly from manufacturing facilities
and indirectly through independent fabricator distributors. These foams are used
by the bedding industry in quilts, toppers, cores and border rolls for
mattresses. In the furniture industry, they are generally used for upholstered
seating products and in the retail industry, for a broad range of products, such
as mattress overlay pads, leisure furniture, futons and pillows. Foam products
are generally sold in large volumes on a regional basis because of high shipping
costs.
Our bedding products are sold to mattress manufacturers. We also supply
cut-to-size seat cushions, back cushions and other pieces to the furniture
industry. Furniture foams are sold directly to manufacturers as well as through
distributors. The consumer products group sells therapeutic sleep products such
as mattress pads and bed pillows for the health care and consumer markets and a
broad line of home furnishing products to retailers throughout North America.
The development and introduction of value-added products continues to be a
priority including products incorporating Reflex(R) and viscoelastic or "memory"
foams for the bedding industry, which maintain their resiliency better than
other foams and materials. Reflex(R) materials include cushion wraps and cushion
cores and are advanced polymer cushioning products designed to improve comfort,
quality and durability in upholstered furniture and bedding products. Reflex(R)
was created using patented VPF(SM) manufacturing technology. We also have
introduced high efficiency thermal management foam products for applications in
work gloves and outerwear.
Carpet Cushion Products
We manufacture carpet cushion products, which include rebond, prime, felt
and rubber carpet padding. Prime carpet padding is made from virgin polyurethane
foam buns. Rebond carpet padding is primarily made from recycled foam, which is
shredded into small pieces, processed and then bonded using a polyurethane
chemical adhesive. Rebond manufacturing requires the management of a
comprehensive recycling business that includes an extensive internal and
external collection network from the automotive and foam industries on a
worldwide basis.
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Our fiber operation incorporates both mechanical and chemical bonding techniques
to produce high-end padding from virgin and recycled fibers. We produce high-end
rubber carpet padding utilizing both natural and synthetic rubber.
Automotive Products
We are one of the largest suppliers of polyurethane foam products to the
North American automotive industry. Our product lines include: foam rolls and
flame-laminated composites, to improve comfort and provide pleasing appearance
in seat covers and other interior soft-trim applications, which includes our new
SmoothBond(R) product, using patented VPF(SM) technology to provide unique
comfort characteristics in seating applications; CustomFit(R) semi-rigid
thermoformable foams, to provide structure and shape in headliner substrate
applications; Qylite(R) acoustical foams, to reduce noise and improve sound
quality in the vehicle. We provide a range of foams in this category for
applications such as dash insulators, hood insulators and interior trim
insulators; contoured foam products for motor vehicle floor carpet underlay
pads; barrier foam products, which provide soft-touch cushioning, while also
allowing our customers to more efficiently process the components with
low-pressure injection-molding or foam-in-place manufacturing methods; molded
energy-absorbing foams, to enhance occupant safety in vehicle crash situations
and allow our customers to meet federal regulatory safety standards for their
components; molded seating cushions, diversifying us further into molded
products to complement our core slab-based business.
We supply our product lines through a range of tiers in the automotive
industry supply chain, varying greatly depending on the specific application and
the original equipment manufacturer ("OEM"). Most frequently, we supply to Tier
1 system integrators, which in turn provide components and systems to the OEMs.
In conjunction with these efforts, we maintain direct contact with OEMs for
material specification development, appearance approvals, and new product
development initiatives.
We maintain our position in the automotive industry through a continuing
focus on new product development, flexible and efficient manufacturing
capabilities, and outstanding quality and service in our QS9000 registered
manufacturing facilities.
Technical Products
We are one of the foam industry's prime innovators and producers of
industrial, specialty, consumer and safety foams, which we refer to as
"Technical Products." Technical Products consist of reticulated foams and other
custom polyester and polyether foams, which are sometimes combined with other
materials to yield specific properties. Reticulation is the thermal or chemical
process used to remove the membranes from the interconnecting cells within foam.
This leaves a porous, skeletal structure allowing for the free flow of gases
and/or liquids. Felting and lamination with other foams or materials give these
composites specific properties.
Reticulated foams are well suited for filtration, reservoiring, sound
absorption and sound transmission. Industrial applications include carburetors,
computer cabinets, inkpad reservoirs, high-speed inkjet printers and speaker
grills. Medical applications include oxygenators for cardiopulmonary surgery,
instrument holders for sterilization, pre-op scrubbers impregnated with
anti-microbial agents and EKG pads containing conductive gels. Other Technical
Products have unique characteristics such as flame retardancy and fluid
absorption. Additional products sold within this group include foams for
refrigerated supermarket produce counters, mop heads, paint brushes and cosmetic
applications.
Due to the highly specialized nature of most Technical Products, our
research staff works with customers to design, develop and manufacture each
product to specification. In addition, we advertise in trade journals and
related media to attract customers and, more generally, to increase an awareness
of our capabilities for Technical Products.
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Other
Other consists primarily of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Marketing and Sales
Foam Products sells directly to major bedding and furniture manufacturers
and also through third party independent fabricators. In addition, we
manufacture and distribute foam-based consumer products such as futons, pillows,
mattress pads and children's furniture to retail chains. Our foam-based consumer
products sales efforts are primarily regionally based. The key strategic
elements supporting growth in these areas are a focus on marketing and sales
efforts, high quality, cost-competitive products and low freight costs through
optimal plant location. Plant locations are critical in this regionalized
business where the transportation cost typically comprises a significant portion
of product cost.
Carpet Cushion Products sells carpet padding to distributors and to major
home product and floor covering retail chains.
Our Automotive Products customer base includes all of the major Tier 1
interior system integrators. We compete for new business both at the beginning
of development of new models and upon the redesign of existing models. Once a
foam producer has been designated to supply parts for a new model program, the
foam producer usually produces parts for the life of the program. Competitive
factors in the market include product quality and reliability, cost and timely
service, technical expertise and development capability, new product innovation
and customer service.
We market our Technical Products through a network of independent
fabrication and distribution companies in North America, the United Kingdom and
Asia. These fabricators or distributors often further process or finish
Technical Products to meet the specific needs of end users. Our specialty and
technical foams service unique end user requirements and are generally sold at
relatively high margins. This business is characterized by a diversity and
complexity of both customers and applications.
International Operations
Our international operations are located in Canada, Mexico and Asia. We
operate four manufacturing facilities in Canada to service our bedding and
automotive customers and have six facilities in Mexico serving the automotive
and cushioning industries. Five of the Mexican facilities are located within the
Mexican free trade zones close to the U.S. border and primarily service
automotive customers. Our Mexico City facility services both automotive and foam
fabrication customers.
We participate in a joint venture with fabrication facilities in Singapore
and Thailand. In December 2001, we increased our non-controlling equity interest
in the joint venture to 70%. The joint venture expects to install its first foam
pourline during 2003. This pourline, which will be entirely financed by the
joint venture entity, will reduce foam shipping costs for sales to the region
and increase the range of markets served.
We have maintained a longstanding relationship with Recticel s.a.
("Recticel"), a leading manufacturer of flexible polyurethane foam in Europe. We
have in the past exchanged technical information and expertise relating to foam
manufacturing with Recticel.
Major Customers
Sales to Johnson Controls, which are included in Automotive Products,
accounted for approximately 17.3% of our net sales in 2002, 15.7% of our net
sales in 2001, and 12.3% of our net sales in 2000. No other customer accounted
for more than 10.0% of our net sales during any of the past three years. Net
sales to our five largest customers comprised approximately 33.8% of our net
sales in 2002, 35.0% of our net sales in 2001 and 29.7% of our net sales in
2000. The loss of any one of these customers could have a material adverse
effect on our business.
5
Manufacturing and Raw Materials
Our manufacturing and distribution facilities are strategically located to
service our major customers because the high freight cost in relation to the
cost of the foam product generally results in distribution being most
cost-effective within a 200 to 300 mile radius. During 2002, we closed certain
rebond carpet padding operations, foam pouring operations, and a foam
fabrication operation. We have identified additional operations to be closed
during 2003. In many cases, the volume from these closed operations will be
absorbed by our existing facilities in order to improve capacity utilization. In
some but not all instances, our other existing facilities will have to be
upgraded to absorb the transferred volume. We may lose some revenue due to
closing these operations.
Our fabrication process involves cutting foam buns into various shapes and
sizes to meet customer specifications. Fabricated foam is sold to customers and
is utilized by us to produce our foam-based consumer products. Scrap foam, a
byproduct of foam production and fabrication, is used to produce rebond carpet
padding.
Raw materials account for a significant portion of our manufacturing costs.
The two principal chemicals used in the manufacture of flexible polyurethane
foam are toluene diisocyanate, or "TDI," and polyol. We generally have
alternative suppliers for each major raw material. We believe that we could find
alternative sources of supply should we cease doing business with any one of our
major suppliers, although there may be some delay in replacing a major supplier,
especially a supplier of TDI and/or polyol. There are a limited number of major
suppliers of TDI and polyol. Our principal supplier of TDI and polyol is The Dow
Chemical Company. Although we have not experienced a significant shortage of
available materials, a disruption in our ability to obtain TDI and/or polyol
that continues for a significant period of time could cause us to suspend our
manufacturing operations, which could have a material adverse effect on our
business and results of operations.
The prices of TDI and polyol have historically been cyclical and volatile.
The prices of these raw materials are influenced by demand, manufacturing
capacity, oil prices and the current geopolitical instability and its impact on
oil production and prices. We experienced 32.0% to 37.0% increases in the price
of raw materials from major chemical manufacturers during the fiscal year ended
December 29, 2002. Our major chemical suppliers have announced their intention
to increase prices by approximately 10.0% to 12.0% effective April 1, 2003. We
attempt to offset raw material price increases through selling price increases
and manufacturing process efficiencies, but we were only partially able to do so
in the fiscal year ended December 29, 2002. In the future, we may not be
successful in implementing selling price increases to fully recover raw material
cost increases. Competitive pricing pressure may also require us to adjust our
selling prices or lose volume.
A key material needed in the manufacture of rebond carpet padding is scrap
foam. We internally generate a substantial portion of the scrap foam used in the
production of rebond carpet padding from our other operations. Historically, the
market price of rebond carpet padding has fluctuated with the market price of
scrap foam.
Employees
As of December 29, 2002, we employed approximately 5,800 persons.
Approximately 1,700 of these employees are located outside the United States and
approximately 2,200 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2004. We
consider relations with our employees to be good.
Competition
The flexible polyurethane foam industry is highly competitive with price,
quality and service being significant competitive factors. Our competitors in
the polyurethane foam industry include E. R. Carpenter Company, Hickory Springs
Manufacturing Company, Vitafoam, Inc., Flexible Foam Products, Inc., Future
Foam, Inc. and The Woodbridge Group. None of these competitors individually
competes in all of the business segments in which we do business.
6
Patents and Trademarks
We own various patents and trademarks registered in the United States and
in numerous foreign countries. The registered processes and products were
developed through ongoing research and development activities to improve
quality, reduce costs and expand markets through development of new applications
for flexible polyurethane foam products. While we consider our patents and
trademarks to be a valuable asset, we do not believe that our competitive
position is dependent on patent protection or that our operations are dependent
upon any individual patent, trademark or tradename.
Research and Development
We believe we have a leading research and development capability in the
flexible polyurethane foam industry. Our primary research and development
facility is located in Eddystone, Pennsylvania. Expenditures for research and
development amounted to $4.8 million for 2002, $3.1 million for 2001 and $2.5
million for 2000.
Foamex L.P., Recticel, and Beamech Group Limited, an unaffiliated third
party, have an interest in Prefoam AG, a Swiss corporation that develops new
manufacturing technology for the production of polyurethane foam including the
VPF(SM) manufacturing process. Recticel and affiliates of Recticel are
shareholders of Foamex International. Foamex L.P., Recticel and their affiliates
have a royalty-free license to use technology developed by the Swiss
corporation. We and Recticel have exchanged know-how, trade secrets, engineering
and other data, designs, specifications, chemical formulations, technical
information, market information and drawings which are necessary or useful for
the manufacture, use or sale of foam products. We anticipate that we will
continue to do so in the future.
Risk Factors
In addition to the other information in this Annual Report on Form 10-K,
investors should carefully consider the following factors about us. Certain
statements in "Risk Factors" are forward-looking statements. See
"Forward-Looking Information."
Our substantial debt could impair our financial condition.
We continue to be highly leveraged and have substantial debt service
obligations. As of December 29, 2002, our total debt was approximately $738.6
million and our partners' deficiency was approximately $305.8 million. As of
December 29, 2002, we had approximately $27.6 million in revolving loan
availability and approximately $20.6 million in outstanding letters of credit.
We may also incur additional debt in the future, subject to certain limitations
contained in our debt instruments.
The degree to which we are leveraged could have important consequences. For
example:
o our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate
purposes or other purposes may be limited;
o a significant portion of our cash flow from operations must be
dedicated to the payment of interest and, beginning in 2004, principal
on our debt, which reduces the funds available for operations;
o some of our debt is and will continue to be at variable rates of
interest, which may result in higher interest expense in the event of
increases in interest rates or inability to achieve certain financial
conditions;
o our debt agreements contain, and any agreements to refinance our debt
likely will contain, financial and restrictive covenants, and our
failure to comply with them may result in an event of default which,
if not cured or waived, could have a material adverse effect on us;
and
7
o On February 26, 2003, Standard and Poor's Rating Services ("S&P")
announced that it had lowered its corporate credit rating on Foamex
L.P. from "B+" to "B". In their announcement, S&P cited their view
that our weak operating performance, higher raw material costs, and a
sluggish domestic economy, which if not reversed will likely elevate
near-term liquidity concerns. The S&P action could have a negative
impact on the cost of our future borrowings, if any, and the extension
of trade credit.
We and our bank lenders executed an amendment to the Amended Credit Facility on
November 15, 2002 revising our financial covenants. If we are unable to comply
with our revised financial covenants, our bank lenders could cause all amounts
outstanding under the Amended Credit Facility to be due and payable immediately.
On November 15, 2002, we and the bank lenders executed an amendment to the
Amended Credit Facility, which, among other things, revised the financial
covenants. In addition, borrowings under the Amended Credit Facility are subject
to a borrowing base calculation, which could limit borrowings under the
revolving credit facility to less than the maximum commitment. Also, we are
subject to other financial covenants through December 28, 2003. A minimum
EBDAIT, as defined, covenant is tested monthly, on a cumulative basis, beginning
with December 2002. Our minimum EBDAIT covenants have higher thresholds in the
second half of 2003. Our ability to comply with this covenant will be
substantially dependent on an improved gross profit margin and lower
administrative costs compared to the latter part of 2002. If we are unable to
comply with the revised financial covenants, the bank lenders could cause all
amounts outstanding under the Amended Credit Facility to be due and payable
immediately. In addition, any event of default or declaration of acceleration
under one debt instrument could also result in an event of default under one or
more of our other debt instruments, which unless cured or waived, would have a
material adverse effect on us and could impair our ability to continue as a
going concern.
If we breach any of the financial covenants under our various indentures, credit
facilities or guarantees, our debt service obligations could be accelerated.
If we breach any of the financial covenants under our various indentures,
credit facilities or guarantees, our substantial debt service obligations could
be accelerated. Furthermore, any breach of any of the financial covenants under
our subsidiaries' indentures or credit facilities could result in the
acceleration of all the indebtedness of our subsidiaries. In the event of any
such simultaneous acceleration, we would not be able to repay all of the
indebtedness under our various guarantees or under our subsidiaries' indentures,
guarantees or credit facilities.
We may not be able to generate sufficient cash flow to meet our debt service
obligations.
Our ability to generate sufficient cash flow from operations to make
scheduled payments on our debt service obligations will depend on our future
financial performance, which will be affected by a range of economic,
competitive and business factors, many of which are outside of our control. Our
annual debt service obligations will increase by $2.2 million per year for each
1% increase in interest rates, based on the balance of variable rate debt
outstanding as of December 29, 2002. Our estimated debt service obligation for
2003 is $69.7 million, based on levels of debt and interest rates in effect at
December 29, 2002. If we do not generate sufficient cash flow from operations to
satisfy our debt service obligations, we may have to undertake alternative
financing plans, such as refinancing or restructuring our debt, selling assets,
reducing or delaying capital investments or seeking to raise additional capital.
We may not be able to refinance or restructure our debt or sell assets on a
timely basis, on acceptable terms or at all. Furthermore, the proceeds of any
refinancing, restructuring or asset sale may not generate sufficient cash flow
to meet our debt service obligations. In addition, we may not be able to obtain
additional financing on acceptable terms, if at all, or may not be permitted to
obtain additional financing under the terms of our various debt instruments then
in effect. Our inability to generate sufficient cash flow to satisfy our debt
service obligations, or to refinance our obligations on commercially reasonable
terms, would have a material adverse effect on our business, financial condition
and results of operations.
8
We may incur more debt, which could exacerbate the risks described above.
We and our subsidiaries may be able to incur substantial additional
indebtedness in the future. The Amended Credit Facility and the indentures
relating to our 10 3/4% senior secured notes due 2009, 9 7/8% senior
subordinated notes due 2007 and 13 1/2% senior subordinated notes due 2005
restrict us and our subsidiaries in incurring additional indebtedness, but do
not fully prohibit us and our subsidiaries from doing so. If new debt is added
to our and our subsidiaries' current debt levels, the related risks, including
those described above, that we and they now face could intensify, which could
have a material adverse effect on us.
The price and availability of raw materials account for a significant portion of
our manufacturing costs. We have experienced significant increases in raw
material costs and may continue to do so.
The two principal chemicals used in the manufacture of flexible
polyurethane foam are toluene diisocyanate, or "TDI," and polyol. The prices of
TDI and polyol are influenced by demand, manufacturing capacity and oil and
natural gas prices. Historically, the price of raw materials has been cyclical
and volatile, and our principal suppliers of raw materials used in the
manufacture of flexible polyurethane foam have significantly increased the price
of raw materials several times.
We experienced 32.0% to 37.0% increases in the price of raw materials from
major chemical manufacturers during the fiscal year ended December 29, 2002. Our
major chemical suppliers have announced their intention to increase prices by
approximately 10.0% to 12.0% effective April 1, 2003. We attempt to offset raw
material price increases through selling price increases and manufacturing
process efficiencies, but we were only partially able to do so in the fiscal
year ended December 29, 2002. Our suppliers of TDI and polyol, as well as our
other suppliers, may increase raw material prices in the future and we may not
be able to implement additional selling price increases to fully offset raw
material cost increases. This could have a material adverse effect on our
business, financial condition and results of operations.
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. Our
principal supplier of TDI and polyol is The Dow Chemical Company. Although we
have not experienced a significant shortage of available materials, a disruption
in our ability to obtain TDI and/or polyol that continues for a significant
period of time could cause us to suspend our manufacturing operations, which
could have a material adverse effect on our business and results of operations.
We must effectively manage our other operating expenses.
In addition to our ability to effectively increase selling prices in
response to raw material cost increases, we must manage and control our other
operating expenses. We experienced an increase in other operating expenses and
selling, general and administrative expenses in 2002. If we are unable to
achieve reductions in other operating expenses and in our selling, general and
administrative expenses, this could have a material adverse effect on our
business, financial condition and results of operations.
We rely on a few large customers for a significant portion of our net sales.
A few of our customers are material to our business and operations. Sales
to our five largest customers together accounted for approximately 33.8% of our
net sales in 2002, 35.0% of our net sales in 2001 and 29.7% of our net sales in
2000. Sales to Johnson Controls, our largest customer, accounted for 17.3% of
our net sales in 2002, 15.7% of our net sales in 2001 and 12.3% of our net sales
in 2000. Johnson Controls has informed us that it intends to reduce its
purchases of certain products from us in 2003, in an effort to diversify its
supply base, which may result in up to a $70.0 million reduction in our net
sales to them. The loss, or a substantial decrease in the amount, of purchases
by any of our major customers could adversely affect our financial position and
results of operations.
9
We are subject to extensive federal, state, local and foreign environmental laws
and regulations.
Our past and present business operations and the past and present ownership
and operation of our real property are subject to extensive and changing
federal, state, local and foreign environmental laws and regulations, including
those relating to the use, handling, storage, discharge and disposal of
hazardous substances, the discharge or emission of materials into the
environment and the remediation of environmental contamination. We are currently
remediating soil and groundwater contamination in excess of state standards at
several of our current and former facilities. Further, we are currently
designated a Potentially Responsible Party, or "PRP," by the United States
Environmental Protection Agency, or "EPA", or by state environmental agencies or
by other PRPs relating to eight sites. We have accrued our estimated costs for
remediation of these sites. If there are additional sites or our estimates are
not correct, there could be a material adverse effect on our financial condition
and results of operations. We cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted or what environmental conditions
may be found to exist on our properties. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws, and discovery of new
conditions may require us to make additional expenditures, which may be
material.
Our business is cyclical.
The polyurethane foam business is cyclical to the extent that our customers
are in cyclical industries. We are especially subject to the cyclical nature of
the automotive, housing, technology and furniture and bedding industries. A
protracted downturn in the businesses of our customers in any of these
industries, either simultaneously or sequentially, could have a material adverse
effect on our results of operations.
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the completion of various restructuring/consolidation plans,
the achievement of management's business plans, our capital and debt structure
(including various financial covenants), litigation and changes in environmental
legislation and environmental conditions. The forward-looking statements
contained in this Annual Report on Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
10
ITEM 2. PROPERTIES
As of December 29, 2002, we maintained 62 manufacturing and distribution
facilities, including six facilities that will be closed as part of
restructuring plans during 2003. Total floor space in use at our 18 owned
manufacturing and distribution facilities is approximately 3.5 million square
feet and total floor space in use at our 44 leased manufacturing and
distribution facilities is approximately 5.2 million square feet. Fifty-two of
these facilities are located throughout 38 cities in the United States, four
facilities are located in Canada, and six facilities are located in Mexico. We
do not anticipate any problem in renewing or replacing any of the leases
expiring in 2003. In addition, we have approximately 1.4 million square feet of
idle space of which approximately 0.9 million is leased.
We maintain administrative offices in Linwood, Pennsylvania and New York,
New York.
Property information by business segment is not reported because many of
our facilities produce products for multiple business segments.
ITEM 3. LEGAL PROCEEDINGS
Litigation--Breast Implants
As of March 11, 2003, we and Trace International Holdings, Inc. ("Trace")
were two of multiple defendants in 961 actions filed on behalf of approximately
1,087 recipients of breast implants in various United States courts and one
Canadian provincial court, some of which allege substantial damages, but most of
which allege unspecified damages for personal injuries of various types. Three
of these cases seek to allege claims on behalf of all breast implant recipients
or other allegedly affected parties, but no class has been approved or certified
by the courts. During 1995, we, Foamex International and Trace were granted
summary judgments and dismissed as defendants from all cases in the federal
courts of the United States and the state courts of California. Appeals for
these decisions were withdrawn and the decisions are final. The number of
pending cases has steadily declined over the last several years from a peak of
3,486 cases on behalf of approximately 5,766 individuals. Despite the 1995
Summary Judgment, some cases have been filed against us and Trace in federal
courts. These have been dismissed and, in many cases, the actions were re-filed
in state courts. No cases relating to breast implants are pending against us or
Trace in federal courts at this time. None of Foamex International, we, or Trace
nor any of our carriers has paid to settle any claims relating to breast
implants, and no judgment has ever been entered against Foamex International,
Trace, or us or any of our carriers in respect of these matters.
Although breast implants do not contain foam, certain silicone gel implants
were produced using a polyurethane foam covering fabricated by independent
distributors or fabricators from bulk foam purchased from us or from Trace.
Neither we nor Trace recommended, authorized, or approved the use of foam for
these purposes. We are also indemnified by Trace for any such liabilities
relating to foam manufactured prior to October 1990. Trace's insurance carrier
has continued to pay our litigation expenses after Trace's filing of a petition
for relief under the Bankruptcy Code on July 21, 1999. Trace's insurance
policies continue to cover certain liabilities of Trace, but if the limits of
those policies are exhausted, it is unlikely that Trace will be able to continue
to provide additional indemnification. While it is not feasible to predict or
determine the outcome of these actions, based on management's present assessment
of the merits of pending claims, without taking into account the indemnification
provided by Trace, the coverage provided by Trace's and our liability insurance
and potential indemnity from the manufacturers of polyurethane covered breast
implants, management believes that it is not reasonably possible that the
disposition of the matters that are pending or that may reasonably be
anticipated to be asserted will result in a loss that is material to our
consolidated financial position, results of operations or cash flows. If
management's assessment of our liability relating to these actions is incorrect,
these actions could have a material adverse effect on our financial position,
results of operations and cash flows.
11
Litigation--Other
During the second quarter of 2001, we were notified by an insurance
provider concerning a dispute involving the reimbursement of liability claims
paid on behalf of Trace. The insurance provider is contending that we are liable
for claims of approximately $6.1 million. We intend to strongly defend this
claim and consider the claim to be without merit. If management's assessment of
our liability relating to this action is incorrect, this action could have a
material adverse effect on our financial position, results of operations and
cash flows.
We and our subsidiaries are party to various other lawsuits, both as
defendant and plaintiff, arising in the normal course of business. It is the
opinion of management that the disposition of these lawsuits will not,
individually or in the aggregate, have a material adverse effect on our
financial position or results of operations. If management's assessment of the
liability relating to these actions is incorrect, these actions could have a
material adverse effect on our consolidated financial position, results of
operations and cash flows. As of December 29, 2002, we have accrued
approximately $0.7 million for litigation and other legal matters in addition to
the environmental matters discussed below.
Environmental and Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, we had accruals of approximately $2.7 million
for environmental matters, including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.4 million relating to PRP sites and other matters.
On August 8, 2001, the EPA proposed a National Emission Standard for
Hazardous Air Pollutants, or "NESHAP", for Flexible Polyurethane Foam
Fabrication Operations. The proposed NESHAP regulates emissions of methylene
chloride and other Hazardous Air Pollutants and restricts air emissions from
flame lamination sources. We do not believe that this standard, if adopted, will
require us to make material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. We do
not believe that this standard, if adopted, will require us to make material
expenditures for our Canadian plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The Comprehensive Environmental Response, Compensation and Liability Act,
or "CERCLA," and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to eight sites. Estimates of total cleanup costs
and fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site.
12
Based on these estimates (to the extent available) and on known information, in
each case and in the aggregate, we do not expect additional costs, if any, to be
material to our results of operations or financial position.
In 2003, capital expenditures for safety and environmental compliance
projects are anticipated to be approximately $1.5 million. Although it is
possible that new information or future developments could require us to
reassess the potential exposure relating to all pending environmental matters,
including those described above, management believes that, based upon all
currently available information, the resolution of these environmental matters
will not have a material adverse effect on our operations, financial position,
capital expenditures or competitive position. The possibility exists, however,
that new environmental legislation and/or environmental regulations may be
adopted, or other environmental conditions, including the presence of previously
unknown environmental contamination, may be found to exist or a reassessment of
the potential exposure to pending environmental matters may be necessary due to
new information or future developments, that may require expenditures not
currently anticipated and that may be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Foamex L.P. is a privately held limited partnership. There is no
established public trading market for its securities.
(b) As of December 29, 2002, there were two holders of Foamex L.P.'s
equity securities.
(c) Listed below are the net cash receipts in accordance with tax sharing
agreements. At December 29, 2002, we have a liability of approximately
$0.3 million to our partners in accordance with the tax sharing
agreement.
Tax Sharing Distributions
2002 2001
-------- --------
(thousands)
FMXI $ - $ -
Foamex International (105) 120
----- ----
$(105) $120
===== ====
2001 Distribution
In 2001, we distributed $3.7 million in cash pro rata to our partners.
Limitations on Distributions
Our financing agreements restrict our ability to make distributions to our
partners.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of Foamex L.P. All of the data gives retroactive effect to the common
control merger of Foamex L.P. and subsidiaries and Foamex Carpet Cushion, Inc.,
which has been accounted for in a manner similar to a pooling of interests as
described in Note 1 to the consolidated financial statements. The selected
consolidated financial data should be read in conjunction with the consolidated
financial statements of Foamex L.P. and related notes thereto included in this
Annual Report on Form 10-K.
13
Fiscal Year (1)
------------------------------------------------------------------
2002 2001 (2) 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(thousands)
Statements of Operations Data
Net sales $1,328,094 $1,252,904 $1,257,778 $1,294,639 $1,260,559
Income (loss) from continuing
operations (3)(4) $ (24,410) $ (2,261) $ 19,603 $ 20,061 $ (15,519)
Balance Sheet Data
Total assets $ 695,283 $ 767,650 $ 753,584 $ 783,218 $ 863,851
Long-term debt, classified as current (5) - - - - $ 771,092
Long-term debt, excluding current portion $ 738,540 $ 648,232 $ 687,758 $ 725,297 -
Partners' deficiency $ (305,786) $ (178,128) $ (158,503) $ (160,481) $ (196,407)
(1) We changed to a fiscal year from a calendar year during 2002. We have a 52
or 53-week fiscal year ending on the Sunday closest to the end of the
calendar year. The 2002 fiscal year included the 52 weeks ended December
29, 2002 after adjustment for December 31, 2001 which was included in the
prior year.
(2) Includes the results of operations of General Foam Corporation from July
25, 2001, the date the business was acquired.
(3) Includes net restructuring, impairment and other charges (credits), as
discussed in Note 5 to the consolidated financial statements included in
this Annual Report on Form 10-K. Listed below are the pre-tax charges
(credits).
2002 - $ 4.8 million
2001 - $36.1 million
2000 - $ 6.3 million
1999 - $10.5 million
1998 - $(9.9) million
(4) The provision for income taxes in 2000 and 1999 reflected the partial
reversal of the deferred income tax valuation allowance recognized in 1998.
The 1998 provision for income taxes of $16.0 million for continuing
operations consisted primarily of an increase in the valuation allowance
for deferred income tax assets.
(5) At December 31, 1998, we classified approximately $771.1 million of
long-term debt as current, in response to financial conditions at year-end
1998.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those projected in such statements. In connection with
certain forward-looking statements contained in this Annual Report on Form 10-K
and those that may be made in the future by or on behalf of us which are
identified as forward-looking, we note that there are various factors that could
cause actual results to differ materially from those set forth in any such
forward-looking statements, such as the ability to implement customer selling
price increases in response to higher raw material costs, raw material price
increases, general economic conditions, the interest rate environment, the level
of automotive production, carpet production, furniture and bedding production,
and housing starts, the completion of various restructuring/consolidation plans,
the achievement of management's business plans, our capital and debt structure
(including various financial covenants), litigation and changes in environmental
legislation and environmental conditions. The forward-looking statements
contained in this Annual Report on Form 10-K were prepared by management and are
qualified by, and subject to, significant business, economic, competitive,
regulatory and other uncertainties and contingencies, all of which are difficult
or impossible to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the forward-looking statements
contained in this Annual Report on Form 10-K will be realized or that actual
results will not be significantly higher or lower. The forward-looking
statements have not been audited by, examined by, compiled by or subjected to
agreed-upon procedures by independent accountants, and no third party has
independently verified or reviewed such statements. Readers of this Annual
Report on Form 10-K should consider these facts in evaluating the information
contained herein. In addition, our business and operations are subject to
substantial risks which increase the uncertainty inherent in the forward-looking
statements contained in this Annual Report on Form 10-K. The inclusion of the
forward-looking statements contained in this Annual Report on Form 10-K should
not be regarded as a representation by us or any other person that any of the
forward-looking statements contained in this Annual Report on Form 10-K will be
achieved. In light of the foregoing, readers of this Annual Report on Form 10-K
are cautioned not to place undue reliance on the forward-looking statements
contained herein.
Overview
We operate in the flexible polyurethane and advanced polymer foam products
industry. Operations were conducted directly and through our wholly-owned
subsidiaries, Foamex Canada, Foamex Mexico and Foamex Asia. Business segments
are listed below and business segment financial information is included in Note
12 to the consolidated financial statements.
An executive vice president heads each of our principal operating segments.
Each executive vice president is responsible for developing budgets and plans as
well as directing the operations of the segment. The performance of each
operating segment is measured based upon income from operations, excluding
restructuring, impairment and other charges. We do not allocate restructuring,
impairment and other charges to operating segments because many of our
facilities produce products for multiple segments.
Foam Products - manufactures and markets cushioning foams for bedding,
furniture, packaging and health care applications, and foam-based consumer
products, such as mattress pads and children's furniture.
Carpet Cushion Products - manufactures and distributes rebond, prime, felt
and rubber carpet padding.
Automotive Products - distributes automotive foam products and laminates to
major Tier 1 suppliers and original equipment manufacturers, or "OEMs".
15
Technical Products - manufactures and markets reticulated and other
specialty foams used for reservoiring, filtration, gasketing and sealing
applications.
Other - primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to the other business segments and
restructuring, impairment and other charges (credits).
Our sales are primarily to markets in the United States. These sales are
impacted by economic conditions in several sectors of the United States economy,
including consumer spending, sales of new and existing homes, the overall level
of passenger car and light truck production and seasonality. We typically
experience two seasonally slow periods during each year, in early July and in
late December, due to scheduled plant shutdowns and holidays.
A small number of major customers produce a significant portion of our
sales. In 2002, our largest customer provided 17.3% of our net sales and our
five largest customers provided 33.8% of our net sales. Two of the five largest
customers are customers of the Automotive Products segment and three are
customers of the Foam Products segment.
There are a limited number of suppliers of TDI and polyol, the major
chemicals used in the production of foam. Our principal supplier of these
chemicals has historically been The Dow Chemical Company. While we have not
experienced shortages of raw materials, a disruption in our ability to obtain
these chemicals would have a material adverse effect on our business.
TDI and polyol are oil-based chemicals and, as such, the prices of these
chemicals are significantly influenced by crude oil production and prices and by
world political instability, particularly in the Middle East. The conflict in
that part of the world could significantly impact the price of these raw
materials.
The following discussion should be read in conjunction with the
consolidated financial statements and related notes included in this Annual
Report on Form 10-K.
Overview of 2002
Operations
We had income from operations of $45.5 million in the six months ended June
30, 2002 and a loss from operations of $3.2 million in the six months ended
December 29, 2002. Contributing factors to this significant negative turnaround
in operating results included the following:
o Significant increases in raw material prices from major chemical
manufacturers reduced our gross profit margin from 12.7% in the first
half of 2002 to 8.7% in the second half of 2002. We experienced 20.0%
to 25.0% increases in raw material prices beginning in June 2002 and
further 10% increases beginning in November 2002. The two price
increases raised raw material costs by 32.0% to 37.0% by the end of
2002. We achieved only limited success in raising selling prices to
offset these cost increases during 2002.
o Selling, general and administrative expenses were $39.7 million in the
first half of 2002 and $54.6 million in the second half of 2002. This
increase was partially attributable to organizational and proposed
public offering costs of $3.6 million related to the formation of
Symphonex Inc., a proposed new subsidiary which would have included
our Technical Products segment and other related activities, and $1.3
million of costs associated with the proposed sale of our Carpet
Cushion Products segment. The public offering of Symphonex Inc. has
been deferred indefinitely and the proposed sale of the Carpet Cushion
Products segment has been terminated. In addition, in the second half
of 2002 we experienced an increase in professional fees, primarily due
to information technology consulting and accounting fees, and an
increase in bad debt expense, primarily due to one large write off of
the balance due from a customer that ceased operations.
16
o Restructuring, impairment and other charges increased $6.3 million in
the second half of the year compared to the first six months.
Our results for 2003 will be principally dependent on our success in
maintaining and increasing margins through selling price increases and cost
efficiencies to offset past and future raw material cost increases. We
implemented significant price increases in late 2002, but further selling price
increases are needed to increase gross profit margins to acceptable levels. We
are developing alternative sources of supply for raw materials in an effort to
stabilize and reduce raw material costs. We also expect the reorganization of
our facilities, operations and management to result in savings of approximately
$8.0 to $10.0 million on an annualized basis, in addition to the anticipated
annualized savings of approximately $25.0 to $27.0 million from the business
reorganization that began in the fourth quarter of 2001.
There were a number of unusual items that impacted 2002. Accounting changes
as a result of the adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" and Statement of Financial
Accounting Standards No. 141, "Business Combinations" produced a net charge to
income of $72.0 million. We had net extraordinary charges as a result of the
early extinguishment of debt in the amount of $2.8 million.
Financing
On March 25, 2002, we completed a refinancing of a major portion of our
debt structure. The refinancing included the issuance of $300.0 million of 10
3/4% Senior Secured Notes due April 1, 2009 and amendment of the Foamex L.P.
credit facility ("Amended Credit Facility") to provide for term loans with
maturity dates of June 30, 2005 through December 29, 2006, and a $100.0 million
revolving credit facility that matures on June 30, 2005. Net proceeds were used
to pay a portion of debt outstanding under the credit facility and the proceeds
from a new term loan under the Amended Credit Facility was used to repay debt
due to a related party. Additionally, the financial debt covenants contained in
the Amended Credit Facility were adjusted to reflect changes in the capital
structure and business environment. Subsequently, we purchased and retired $49.0
million of the 13 1/2% senior subordinated notes, including unamortized debt
premium of $2.5 million, and $1.5 million of the 9 7/8% senior subordinated
notes.
On November 15, 2002, we and our bank lenders executed an amendment to the
Amended Credit Facility. We would have been unable to comply with certain
financial covenants as of September 29, 2002. Under the amendment, compliance
with certain existing covenants was suspended through September 28, 2003 with
the covenants revised and reinstated thereafter. Instead, Foamex L.P. is subject
to other financial covenants through December 28, 2003 and was in compliance
with such covenants at December 29, 2002. A minimum EBDAIT, as defined, covenant
is tested monthly, on a cumulative basis beginning with December 2002, in
addition to revised minimum net worth, as defined, and maximum capital
expenditures, as defined, covenants, measured quarterly. Our ability to comply
with the EBDAIT covenant will be substantially dependent on the achievement of
an improved gross profit margin and reduction of administrative costs compared
to the last six months of 2002. Additionally, we are subject to a borrowing base
calculation that may limit our ability to borrow funds in the future.
Critical Accounting Policies
We prepared the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. As
such, we are required to make certain estimates, judgments, and assumptions that
we believe are reasonable based upon the information available. These estimates,
judgments and assumptions affect the reported amounts of the assets and
liabilities and revenues and expenses. Our significant accounting policies are
discussed in Note 2 to the consolidated financial statements. The accounting
policies which we believe are the most critical to aid in fully understanding
and evaluating our reported financial results and which require management to
exercise judgment include the following:
17
Revenue Recognition
We record net sales when product title and risk of loss passes to the
customer, which is primarily at the time of shipment. Net sales are reduced by
allowances for estimated discounts, returns and customer rebates. Balances for
allowances and rebates are reviewed at least quarterly and are adjusted if
warranted.
Account Receivable and Allowance for Uncollectible Accounts
We actively monitor customer payments in conjunction with customer credit
evaluations. Accordingly, an estimate of uncollectible accounts is maintained
and is based on historical collection experience and specific customer
collection issues. A significant change in the financial condition of one or
more of our larger customers could have a material adverse impact on future
financial results.
Long-Lived Assets
We have a significant investment in long-lived assets consisting primarily
of property, plant and equipment. Impairment losses are recognized when events
indicate that certain long-lived assets may be impaired and a projection of
future undiscounted cash flows generated from the assets are less than the
current carrying value of the assets. These cash flow projections are based on
the combination of historical results adjusted for estimated future market
conditions and operating plans. To the extent that these estimates change,
impairment losses could have a material adverse impact on future financial
results.
Self Insurance
We are partially self-insured for a number of risks up to certain limits
including workers compensation, medical, automobile and general liability.
Commercial insurance policies are carried for amounts in excess of the
self-insured amounts. Management exercises significant judgment in estimating
the ultimate liability for claims.
Retiree Benefit Plans
We provide defined benefit pension plans that cover most of our employees.
Projected benefit obligations, pension expense and amounts included in other
comprehensive income are impacted by a number of assumptions. These assumptions
include the discount rate on projected benefit obligations, and the expected
long-term rate of return on plan assets. The discount rate on projected benefit
obligations enables us to state expected future cash flows at a present value on
the measurement date. We have little latitude in selecting this rate, as it is
required to represent the market rate for high-quality fixed income investments.
A lower discount rate increases the present value of benefit obligations and
increases pension expense. The decrease in the discount rate on projected
benefit obligations from 7.0% to 6.5% is expected to increase pension expense by
$0.5 million. To determine the expected long-term rate of return on pension plan
assets, we consider the current and expected asset allocations, as well as
historical and expected returns on various categories of plan assets. We assumed
that long-term returns on our pension plans were 9.0% in 2002 and 2001 and 10.0%
in 2000. Amortization of losses has been and continues to be a significant
component of pension expense and this amortization is expected to increase by
approximately $1.0 million in 2003. The losses have resulted from actual returns
that are significantly less than the expected return assumption, particularly
over the last three years, and funding levels that have not been sufficient to
offset the growth in benefit obligations. We expect pension expense to increase
by a total of approximately $2.0 million in 2003.
Claims and Litigation
We receive claims for damages that are outside of our insurance coverages.
Management evaluates these claims and records its estimate of liabilities when
such liabilities are considered probable and an amount or reasonable range can
be estimated.
18
Environmental Remediation
We have a number of manufacturing facilities and certain idle facilities
that require remediation of soil and/or groundwater contamination. As required
by applicable State and/or Federal compliance programs, many of these sites are
in the monitoring stage that requires periodic sampling of contamination levels
in conjunction with ongoing assessments of remediation actions. Accordingly, the
recognition of environmental liabilities requires estimates concerning the
duration of monitoring and associated costs, often projected to extend for a
number of years. To the extent that these estimates change, additional
environmental costs could have a material adverse impact on future financial
results. See the section below entitled "Environmental Health and Safety" for
additional information.
LIQUIDITY AND CAPITAL RESOURCES
Our operating cash requirements consist principally of accounts receivable,
inventory and accounts payable requirements, scheduled payments of interest on
outstanding indebtedness, capital expenditures, and employee benefit plans. We
believe that cash flow from our operating activities, cash on hand and periodic
borrowings under our credit facility will be adequate to meet liquidity
requirements. Scheduled principal payments on our debt are not significant until
the second half of 2004. If our cash flow is not adequate to meet liquidity
requirements, there would be a material adverse effect on our financial position
as well as our ability to continue as a going concern.
Cash and cash equivalents were $4.4 million at December 29, 2002 compared
to $15.1 million at December 31, 2001. Working capital at December 29, 2002 was
$118.0 million and the current ratio was 1.6 to 1 compared to working capital at
December 31, 2001 of $63.6 million and a current ratio of 1.3 to 1. The increase
in working capital is primarily due to increases in accounts receivable and
inventories and decreases in current portion of long-term debt and accounts
payable, partially offset by decreases in other current assets and increases in
accrued interest and cash overdrafts.
Total debt at December 29, 2002 was $738.6 million, a $72.3 million
increase from December 31, 2001, including a deferred credit of $14.2 million
related to interest rate swap transactions. (See Note 8 to the consolidated
financial statements.) As of December 29, 2002, there were revolving credit
borrowings of $51.8 million under the Foamex L.P. credit facility with $27.6
million available for borrowings and $20.6 million of letters of credit
outstanding. Foamex Canada did not have any outstanding borrowings as of
December 29, 2002 under Foamex Canada's short-term revolving credit agreement,
with unused availability of approximately $5.1 million. The increased debt
balance reflects the issuance of $300.0 million of 10 3/4% Senior Secured Notes
due 2009 on March 25, 2002, offset by $280.0 million of debt repayments from
proceeds of the offering. Revolving credit borrowings at December 29, 2002
reflect working capital requirements.
In 2002, we purchased and retired $49.0 million of the 13 1/2% senior
subordinated notes, including unamortized debt premium of $2.5 million, and $1.5
million of the 9 7/8% senior subordinated notes for a total purchase price of
$48.5 million.
On October 16, 2002, we announced that we had obtained a waiver of
financial covenants under the Amended Credit Facility for the period ended
September 29, 2002 since we would not have been in compliance with the
covenants. The waiver was effective until November 30, 2002 and reduced the
commitment under the revolving credit facility from $100.0 million to $70.0
million for the period the waiver was in effect. On November 15, 2002, we and
our bank lenders executed an amendment to the Amended Credit Facility. Under the
amendment, we are subject to minimum net worth, minimum EBDAIT, as defined, and
maximum capital expenditure covenants through periods ending December 28, 2003.
The minimum EBDAIT covenant is tested monthly on a cumulative basis beginning
with December 2002. We were in compliance with the revised covenants at December
29, 2002. In addition, we were subject to a minimum EBDAIT, as defined, covenant
for the quarter ended September 29, 2002 and were in compliance. Compliance with
existing covenants on leverage, fixed charge coverage and interest coverage
ratios is suspended through periods ending September 28, 2003, but the covenants
are revised and will be reinstated thereafter. All the financial covenants were
established based on a business plan provided to the lenders. In addition,
borrowings under the Amended Credit Facility will be subject to a borrowing base
calculation, which could limit borrowings under the revolving credit facility to
less than the maximum commitment. As of February 23,
19
2003, the borrowing base calculation does not limit borrowings under the Amended
Credit Facility. The cost of obtaining the amendment aggregated approximately
$4.0 million, including bank and legal fees.
On February 26, 2003, Standard and Poor's Rating Services ("S&P") announced
that it had lowered its corporate credit rating on Foamex L.P. from "B+" to "B".
In their announcement, S&P cited their view that our weak operating performance,
higher raw material costs, and a sluggish domestic economy, which if not
reversed will likely elevate near-term liquidity concerns. The S&P action could
have a negative impact on the cost of our future borrowings, if any, and the
extension of trade credit.
Our minimum EBDAIT covenants have higher thresholds in the second half of
2003. Management's current plans to achieve EBDAIT covenants require continued
customer selling price management in response to raw material cost changes,
successful implementation of on-going cost savings initiatives, plant closures,
improved operating efficiencies, improved working capital management and reduced
capital expenditures. Management is also continuing to evaluate strategic
alternatives in an effort to reduce our debt. There can be no assurance that we
will be successful in achieving our plans or complying with the amended
covenants, as there are a number of factors beyond our control, including raw
material cost changes and customer acceptances of selling price increases that
are necessary for us to be successful. Additionally, compliance with the
financial covenants may not be met if business conditions are not as anticipated
or other unforeseen events impact results unfavorably. In the event that such
noncompliance appears likely, or occurs, we will seek the lenders' further
approval of amendments to, or waivers of, such financial covenants.
Historically, we have been able to renegotiate financial covenants and/or obtain
waivers. Management currently believes that obtaining waivers and/or amendments
in the future may be difficult, or not possible, if required. If amendments or
waivers are not obtained, we would be in default and lenders could demand
immediate payment of our outstanding debt under the Amended Credit Facility. In
addition, it is possible that the holders of our Senior Secured Notes and Senior
Subordinated Notes could also demand immediate payment. We may not be able to
secure additional financing at a reasonable cost, or at all. The lack of
financing would have a material adverse effect on our financial position and
could impair our ability to continue as a going concern.
During 2002, we purchased, pursuant to the terms of an existing agreement,
the 5% stock interest held by the director of Foamex de Mexico S.A. de C.V. for
a cash payment of $1.0 million. In addition, during 2002 we entered into an
employment agreement with one director and a consulting agreement with another
director. Payments under these agreements were to aggregate at least $0.7
million and $0.2 million, respectively, on an annual basis. The employment
agreement with the director was terminated effective January 31, 2003.
We were required to cause a registration statement under the Securities Act
of 1933 for our 10 3/4% Senior Secured Notes to be effective within 180 days of
March 25, 2002. We filed the registration statement, but it was not effective
until January 30, 2003 and therefore we are liable for liquidated damages from
September 23, 2002 until January 30, 2003. The liquidated damages were at the
rate of $15,000 per week for the first 90 days, escalating by $15,000 per week
for each additional 90 days until a maximum of $150,000 per week is reached. At
December 29, 2002, we had an accrual for liquidated damages of $0.2 million.
Effective May 1, 2002, we completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. We designated,
documented and accounted for these interest rate swaps as fair value hedges of
our 10 3/4% Senior Secured Notes due April 1, 2009. The risk being hedged in
these transactions was the change in fair value of the 10 3/4% Senior Secured
Notes based on changes in the benchmark interest rate, LIBOR. The effect of
these interest rate swap transactions was to convert the fixed interest rate on
the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, we unwound the interest rate swap transactions in
exchange for a net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
will be amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
20
Cash Flow from Operating Activities
Cash used in operating activities in 2002 was $49.6 million compared to
cash provided of $108.7 million in the 2001 reflecting significantly higher
working capital requirements principally relating to inventories and accounts
payable.
Cash Flow from Investing Activities
Cash used in investing activities totaled $21.1 million for 2002. Cash
requirements included capital expenditures of $15.6 million. Other investing
activities include software development costs of $5.9 million in 2002. In 2001,
cash used in investing activities was $38.1 million, which included $22.5
million of capital expenditures and $17.6 million for an acquisition. Estimated
capital expenditures for 2003 are approximately $19.0 million including
approximately $1.5 million for safety and environmental activities. In addition,
we expect to spend approximately $6.8 million for internally developed software
in 2003, a portion of which may be capitalized.
Cash Flow from Financing Activities
Cash provided by financing activities was $60.0 million in 2002 compared to
cash used of $60.4 million in 2001. We completed the offering of $300.0 million
of 10 3/4% Senior Secured Notes on March 25, 2002. We used $280.0 million of net
proceeds from these notes and $56.6 million of new term loans to repay revolving
loans of $125.0 million, term loans of $140.0 million and long-term debt to a
related party of $31.6 million. We also purchased and retired $49.0 million of
the 13 1/2% senior subordinated notes, including unamortized debt premium of
$2.5 million and $1.5 million of the 9 7/8% senior subordinated notes. Cash used
during 2001 primarily reflected debt repayments.
Contractual Obligations and Commercial Commitments
At December 29, 2002, we had obligations to repay a total of $722.0 million
of principal of long-term debt borrowed under a number of arrangements. The
amortization schedule for our long-term debt payments is included in Note 8 to
the consolidated financial statements. At December 29, 2002, we had outstanding
letters of credit aggregating $20.6 million.
We also have commitments for operating leases as discussed in Note 15 to
the consolidated financial statements that require minimum payments totaling
$52.2 million, with $44.5 million due through December 31, 2007 and the balance
in later years. We have entered into contracts for information technology
services and certain raw materials that have minimum purchase commitments
estimated at $84.8 million in 2003, $98.0 million in 2004, $39.9 million in
2005, $39.4 million in 2006, $36.1 million in 2007 and $32.2 million for each of
the years 2008 to 2010.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- -----------
2002 (dollars in thousands)
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 24,000 $(12,440) $ 25,430 $ 20,402 $(15,092) $ 42,300
Depreciation and amortization $ 15,466 $ 6,469 $ 3,856 $ 2,982 $ 2,819 $ 31,592
Income (loss) from operations
as a percentage of net sales 5.1% (5.3)% 5.4% 16.4% n.m.(a) 3.2%
21
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- -----------
2001 (dollars in thousands)
Net sales $499,668 $230,965 $377,753 $111,043 $ 33,475 $1,252,904
Income (loss) from operations $ 66,634 $ (6,572) $ 21,445 $ 23,080 $(39,860) $ 64,727
Depreciation and amortization $ 15,732 $ 8,181 $ 4,991 $ 3,312 $ 1,812 $ 34,028
Income (loss) from operations
as a percentage of net sales 13.3% (2.8)% 5.7% 20.8% n.m.(a) 5.2%
2000
Net sales $519,197 $256,439 $342,386 $106,697 $ 33,059 $1,257,778
Income (loss) from operations $ 55,227 $ 2,218 $ 22,417 $ 29,027 $(11,506) $ 97,383
Depreciation and amortization $ 17,813 $ 7,742 $ 5,785 $ 2,663 $ 2,625 $ 36,628
Income (loss) from operations
as a percentage of net sales 10.6% 0.9% 6.5% 27.2% n.m.(a) 7.7%
(a) Not meaningful.
2002 Compared to 2001
Net sales for 2002 increased 6.0% to $1,328.1 million from $1,252.9 million
in 2001. The increase was primarily attributable to improved sales in the
Automotive Products and Technical Products segments, partially offset by a
decrease in the Foam Products segment. The improvement in sales partially
reflected the impact of sales related to the acquisition discussed in Note 3 to
the consolidated financial statements.
The gross profit margin was $141.4 million, or 10.6%, in 2002 compared to
$180.1 million, or 14.4%, in 2001 primarily as a result of the 32.0% to 37.0%
increases in the cost of our major chemical raw materials during the second half
of 2002. The gross profit margin was further reduced by higher manufacturing
costs principally in the Foam Products segment, unfavorable yields, higher
manufacturing overhead expense and unfavorable production mix. We are seeking to
improve gross profit margins through customer selling price increases, selective
elimination of unprofitable customer accounts and products, and reductions in
manufacturing overhead expenses.
Income from operations for 2002 was $42.3 million, which represented a
34.6% decrease from the $64.7 million reported for 2001. Income from operations
was 3.2% of net sales in 2002 compared to 5.2% of net sales in 2001. The
decrease attributable to the reduced gross profit margin is discussed above. In
addition, selling, general and administrative expenses increased by $15.0
million, or 19.0%, which included $3.6 million of organizational and proposed
public offering costs related to the formation of Symphonex Inc. The proposed
public offering of Symphonex Inc. has been deferred indefinitely. Selling,
general and administrative expenses also include $1.3 million of transaction
costs associated with the proposed sale of our Carpet Cushion Products segment
which was subsequently terminated. The remainder of the increase was primarily
due to higher professional service fees for information technology and
accounting services and employee related expenses, partially offset by reduced
goodwill amortization and lower bad debt expense.
Foam Products
Foam Products net sales for 2002 decreased 5.7% to $471.0 million from
$499.7 million in 2001. The decrease primarily reflected reduction in business
from a major bedding manufacturer and the slow recovery of sales after an odor
issue caused by defective chemicals from a major supplier in late 2001. Foam
Products gross profit margin was 10.8% in 2002, down from 17.9% in 2001. Income
from operations decreased 64.0%, to $24.0 million in 2002 from $66.6 million in
2001, primarily due to increased raw material costs, lower net sales and higher
manufacturing costs. Income from operations was 5.1% of net sales in 2002, down
from 13.3% in 2001.
22
Carpet Cushion Products
Carpet Cushion Products net sales for 2002 increased 1.3% to $234.0 million
from $231.0 million in 2001. We were able to increase our market share in spite
of market weakness and overcome the loss of sales to one large retail customer
that exited the carpet business. Loss from operations, which principally
reflected higher raw material and other operating costs during 2002 and included
expenses of $1.3 million in 2002 associated with the proposed sale of the
business which was subsequently terminated, represented 5.3% of net sales in
2002 and 2.8% of net sales in 2001.
Automotive Products
Automotive Products net sales for 2002 increased 23.6% to $466.7 million
from $377.8 million in 2001. The improvement primarily reflected a continued
high build rate for new cars and new product programs. We have been informed
that our largest customer intends to reduce its purchases of certain products
from us in 2003 to diversify its supply base. This may result in reduced sales
to this customer of up to $70.0 million in 2003, some of which may be replaced
by sales to other customers. Automotive Products gross profit margin was 8.2% in
2002 compared to 8.4% in 2001 and reflects the impact of higher raw material
costs offsetting the contribution from increased net sales. Income from
operations represented 5.4% of net sales in 2002 and 5.7% of net sales in 2001.
Technical Products
Net sales for Technical Products in 2002 increased 11.8% to $124.1 million
from $111.0 million in 2001. Higher sales partially reflected sales from the
acquisition of General Foam Corporation in July 2001 (see Note 3 to the
consolidated financial statements). Income from operations decreased 11.6% to
$20.4 million in 2002 compared to $23.1 million in 2001. The decrease reflects
the contribution from higher net sales offset by higher material costs and the
costs related to Symphonex Inc. as described above. Income from operations
represented 16.4% of net sales in 2002 compared to 20.8% in 2001.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring,
impairment and other charges. The 3.7% decrease in net sales associated with
this segment primarily resulted from the Mexico City operation. The loss from
operations was $15.1 million in 2002 and included restructuring, impairment and
other charges, discussed below. The loss from operations in 2001 was $39.9
million, including restructuring, impairment and other charges.
Restructuring, Impairment and Other Charges
In 2002, we recorded net restructuring, impairment and other charges of
$4.8 million. Fourth quarter charges of $10.0 million included severance and
other termination benefits for approximately 200 employees and exit costs and
remaining lease payments related to the reorganization of executive and
corporate management and the closure of six operations. Approximately 60 of the
planned terminations occurred during 2002. The charges also included $2.5
million of asset impairments, primarily for leasehold improvements and machinery
and equipment in the Carpet Cushion Products segment. Earlier in 2002, we
recorded restructuring, impairment and other credits of $5.2 million including a
reversal of approximately $3.7 million from the reevaluation of the 2001
Operational Reorganization Plan.
In 2001, we recorded restructuring, impairment and other charges of $36.1
million, primarily related to our 2001 Operational Reorganization Plan including
plant facility closures, reductions in management and support personnel, and
cost reductions in purchasing and logistics. The charge included an impairment
charge of $13.8 million (net of anticipated proceeds of $4.6 million) to reduce
certain assets, primarily leasehold improvement and equipment, included within
the Foam Products and Carpet Cushion Products segments to their estimated fair
values. Approximately 700 employee terminations including plant personnel,
support staff and executives and management were originally planned pursuant to
the 2001 Operational Reorganization Plan. The subsequent reevaluation of
23
facilities closures reduced the number of planned terminations to approximately
500. Approximately 340 employees were terminated in 2002.
We will have substantially completed the remaining actions contemplated by
the 2001 Operational Reorganization Plan in early 2003 and expect to complete
the facility closures and personnel reductions related to the 2002 restructuring
plan during 2003, primarily in the first six months. Terminations of
approximately 300 employees are planned to take place in 2003.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $66.6 million in 2002, which
represented a 5.3% increase from 2001 expense of $63.2 million. The increase was
attributable to higher amortization of debt issuance cost. We capitalized
interest of $0.3 million in 2002 compared to $1.4 million in 2001. We expect
2003 interest and debt issuance expense to be at or higher than the 2002 level.
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.6
million in both 2002 and 2001. We have a 70.0% ownership interest in the joint
venture since December 2001. Previously our ownership interest was 49.0%.
Provision (Benefit) for Income Taxes
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, we have provided for the income taxes of certain states in which
we are subject to taxes and for certain subsidiaries, which are subject to
Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. Foamex L.P. has a tax sharing agreement that provides for
the payment of distributions to our partners for amounts that would be required
to be paid if we were a corporation filing separate tax returns. Our ability to
make such distributions is limited by the terms of our credit agreement and
indentures.
Extraordinary Items, Net of Income Taxes
In connection with the refinancing transaction completed on March 25, 2002,
we wrote off debt issuance costs associated with the early extinguishments of
long-term debt due to a related party and the revolving credit facility,
resulting in an extraordinary loss of $4.2 million, net of income tax benefit of
$0.1 million. We purchased and retired $49.0 million of the 13 1/2% senior
subordinated notes, including unamortized debt premium of $2.5 million, and $1.5
million of the 9 7/8% senior subordinated notes resulting in an extraordinary
gain of $1.4 million. These extraordinary items will be reclassified upon the
adoption of Statement of Financial Accounting Standards No. 145 in 2003.
Cumulative Effect of Accounting Changes
The cumulative effect of accounting change in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142").
2001 Compared to 2000
Net sales for 2001 decreased 0.4% to $1,252.9 million from $1,257.8 million
in 2000. The decline was primarily attributable to lower sales in Foam Products
and Carpet Cushion Products, partially offset by a significant improvement in
Automotive Products sales. Technical Products also recorded improved sales.
24
The gross profit margin was 14.4% in 2001 compared to 13.7% in 2000.
Certain raw material cost reductions had the effect of improving the gross
profit margin percentage in 2001 by approximately 1.4 percentage points. These
2001 cost reductions are not anticipated to continue in 2002. Selling, general
and administrative expenses were 16.0% higher in 2001. The increase included the
impact of higher professional fees, including those associated with a change in
independent accountants, higher bad debt expense related to economic conditions
and increased compensation and benefit costs.
Income from operations in 2001 was $64.7 million, which represented a 33.5%
decrease from the $97.4 million recorded during 2000. Results included
restructuring, impairment and other charges of $36.1 million in 2001 and $6.3
million in 2000. Restructuring, impairment and other charges recorded during
2001 are discussed under "Other" below. Excluding the restructuring, impairment
and other charges for comparison purposes, income from operations would have
been $100.8 million in 2001 compared to $103.7 million in 2000. On this basis,
income from operations was 8.0% of net sales in 2001 and 8.2% in 2000. In
addition to the raw material cost reductions discussed above, cost reduction
programs and increases in certain selling prices were also positive factors.
Foam Products
Foam Products net sales for 2001 decreased 3.8% to $499.7 million from
$519.2 million in 2000. The decrease primarily reflected the domestic economic
slowdown that impacted the markets for furniture manufacturers and other foam
fabricators. Despite the sales decline, income from operations increased 20.7%,
from $55.2 million in 2000 to $66.6 million in 2001. The increase was primarily
the impact of raw material cost reductions, discussed above, which primarily
benefited the Foam Products segment. Income from operations was 13.3% of net
sales in 2001, up from 10.6% in 2000.
Carpet Cushion Products
Carpet Cushion Products net sales for 2001 decreased 9.9% to $231.0 million
from $256.4 million in 2000. The sales decline continued to reflect competitive
pressures that resulted in lower sales volumes across all product lines. Lower
selling prices in certain product lines and a lower value shipment mix also
contributed to the sales decline. The factors contributing to the sales decline
translated to a loss from operations of $6.6 million in 2001 compared to income
from operations of $2.2 million in 2000. The loss from operations represented
2.8% of net sales in 2001 and income from operations represented 0.9% of net
sales in 2000.
Automotive Products
Automotive Products net sales for 2001 increased 10.3% to $377.8 million
from $342.4 million in 2000. The improvement primarily reflected new product
programs and renewed activity following inventory corrections in the domestic
automotive industry earlier in the year. Income from operations declined 4.3%,
from $22.4 million in 2000 to $21.4 million in 2001. Income from operations
represented 5.7% of net sales in 2001 and 6.5% in 2000. The lower results in
2001 were primarily attributed to intense pricing competition and higher raw
material costs.
Technical Products
Net sales for Technical Products in 2001 were up 4.1% to $111.0 million
from $106.7 million in 2000. Higher sales primarily reflected sales from the
acquisition of certain assets from General Foam Corporation, discussed in Note 3
to the consolidated financial statements. Income from operations decreased 20.5%
to $23.1 million in 2001 compared to $29.0 million in 2000. The decline
reflected a lower value shipment mix and the impact of an economic downturn in
the technology industry, especially during the first half of 2001. Income from
operations represented 20.8% of net sales in 2001 compared to 27.2% in 2000.
Other
Other primarily consists of certain manufacturing operations in Mexico
City, corporate expenses not allocated to business segments and restructuring
and other charges. Net sales were slightly higher in 2001 compared to 2000. The
loss from operations was $39.9 million in 2001 and included restructuring,
impairment and other charges of
25
$36.1 million, discussed below. The $11.5 million loss from operations in 2000
included restructuring, impairment and other charges totaling $6.3 million. The
2000 loss also included professional fees associated with the resolution of
certain change in control issues following the Trace bankruptcy and the
settlement of certain shareholder litigation.
Restructuring, Impairment and Other Charges
In December 2001, we announced our 2001 Operational Reorganization Plan to
reduce operating costs and accelerate revenue growth. The major initiatives of
the 2001 Operational Reorganization Plan included plant facility closures,
headcount reductions, purchasing and logistics cost reductions and sales and
marketing management consolidation.
We identified a total of 17 plant operations to be closed. Costs associated
with this aspect of the 2001 Operational Reorganization Plan included lease
termination costs and severance and termination benefits aggregating $14.1
million. Additionally, we identified salaried positions to be eliminated, mainly
in support function areas. Severance, termination and other costs associated
with these positions were estimated to be $4.4 million.
Further, we evaluated the recoverability of certain other long-lived
assets, both associated and not associated with the Operational Reorganization
Plan, in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed". As a result, we
recorded an impairment provision of $13.8 million (net of anticipated proceeds
of $4.6 million) to reduce these assets to their estimated fair values.
Severance and termination benefits as a result of the 2001 Operational
Reorganization Plan were expected to be incurred for approximately 700
employees. We expected to spend approximately $12.4 million during 2002 with the
balance to be spent through 2012, primarily for lease costs. Other one-time
period expenses during the fourth quarter consisted primarily of executive
severance of $1.9 million and consulting fees related to the Operational
Reorganization Plan in the amount of $1.2 million.
In addition, we recorded $0.4 million for restructuring plans prior to the
fourth quarter of 2001 that included severance for 41 employees and $1.4 million
related to executive severance recorded in other charges. We also recorded a net
restructuring credit of $1.2 million related to changes in estimates to prior
restructuring plans.
During 2000, we recorded $6.2 million for restructuring plans that included
severance for 102 employees. We also recorded a net restructuring charge of
approximately $0.1 million related to changes in estimates to prior years'
restructuring plans. Also during 2000, we received $3.6 million of net proceeds
from the sale of assets related to restructuring plans.
Interest and Debt Issuance Expense
Interest and debt issuance expense totaled $63.2 million in 2001, which
represented a 15.9% decrease from $75.2 million recorded in 2000. The decrease
was attributable to lower average debt levels and lower effective interest
rates. We capitalized interest of $1.4 million and $0.8 million in 2001 and
2000, respectively, as a component of the construction cost of plant and
equipment.
Income from Equity Interest in Joint Ventures
Income from an equity interest in an Asian joint venture totaled $1.6
million and $1.7 million in 2001 and 2000, respectively.
Other Expense, Net
Other expense, net for 2001 was $1.9 million. Expense items totaled $2.8
million and included letter of credit fees. Interest income recorded in 2001 was
$0.9 million.
26
Other expense, net in 2000 totaled $1.6 million and primarily included $1.2
million of costs associated with a buyout proposal and $0.7 million letter of
credit fees offset by $0.6 million of interest income.
Income Tax Expense
Foamex L.P., as a limited partnership, is not subject to Federal income
taxes; therefore no current or deferred provision has been provided for such
taxes. However, we have provided for the income taxes of certain states in which
we are subject to taxes and for certain subsidiaries, which are subject to
Federal and state income taxes and for subsidiaries located in foreign
jurisdictions that file separate tax returns. The partners will provide for
their respective shares of income or loss in their Federal or applicable state
income tax returns. We have a tax sharing agreement that provides for the
payment of distributions to our partners for amounts that would be required to
be paid if we were a corporation filing separate tax returns. Our ability to
make such distributions is limited by the terms of our credit agreement and
indentures.
OTHER
Foamex International and Change in Control Developments
Trace International Holdings, Inc. ("Trace") is a privately held company,
which owned approximately 29% of Foamex International's outstanding voting
common stock at September 30, 2000, and whose former Chairman also serves as our
Chairman. Foamex International's common stock owned by Trace was pledged as
collateral against certain of Trace's obligations. Certain credit agreements and
promissory notes, pursuant to which approximately $401.1 million of debt was
outstanding as of September 30, 2000, provided that a "change of control" would
be an event of default and could result in the acceleration of such
indebtedness. "Change of control" means, for this purpose, that (i) a person or
related group, other than Trace, beneficially owns more than 25% of Foamex
International's outstanding voting stock and (ii) such voting stock constitutes
a greater percentage of such voting stock than the amount beneficially owned by
Trace. Additionally, certain of our indentures and those of Foamex Capital
Corporation ("FCC"), a wholly-owned subsidiary, relating to senior subordinated
notes contain similar "change of control" provisions, which require us and FCC
to tender for such notes at a price in cash equal to 101% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon, if there is
such a "change of control".
On July 21, 1999, Foamex International was informed by Trace that it filed
a petition for relief under Chapter 11 of the Bankruptcy Code in Federal Court
in New York City. Subsequently, on January 24, 2000, an order was signed
converting the Trace bankruptcy from Chapter 11 to Chapter 7 of the Bankruptcy
Code. A trustee was appointed to oversee the liquidation of Trace's assets.
Neither Trace's bankruptcy filing nor the conversion to Chapter 7 constituted a
"change of control" under the provisions of the debt agreements described above.
On July 31, 2000, Foamex International announced that it had entered into
an agreement (the "Exchange Agreement") with The Bank of Nova Scotia relating to
a portion of the 7,197,426 shares of Foamex International common stock pledged
by Trace to The Bank of Nova Scotia. The Exchange Agreement provided for the
transfer of the pledged stock to The Bank of Nova Scotia in a manner that would
not constitute a "change of control" as described above. These transactions were
conditioned upon bankruptcy court approval of a settlement agreement between The
Bank of Nova Scotia and the trustee for the Trace bankruptcy, which was entered
on October 18, 2000. On November 2, 2000, the transactions contemplated by the
Exchange Agreement and the settlement agreement were consummated, and did not
constitute a "change of control". As a result, Trace no longer owns any shares
of Foamex International common stock.
Under the Exchange Agreement, The Bank of Nova Scotia initially received
1,500,000 shares of Foamex International common stock from the Trace bankruptcy
estate and exchanged these common stock shares for 15,000 shares of a new class
of non-voting non-redeemable convertible preferred stock (the "Series B
Preferred Stock"). Each share of the Series B Preferred Stock can be converted
into 100 shares of Foamex International common stock but only if such conversion
would not trigger a "change of control" event, as discussed above. The Series B
Preferred Stock (a) is entitled to dividends only if a dividend is declared on
Foamex International's common stock, (b) ranks senior to any future preferred
stock issued by Foamex International and (c) is entitled to a liquidation
27
preference of $100 per share. Following this exchange, The Bank of Nova Scotia
became the owner of 24.41% of the outstanding shares of Foamex International's
common stock when the remaining 5,697,426 shares of Foamex International common
stock were transferred to The Bank of Nova Scotia from the Trace bankruptcy
estate. Certain equity transactions, primarily the exercise of stock options,
have reduced the Bank of Nova Scotia's common stock ownership percentage to
23.6% at February 15, 2003.
Environmental Health and Safety
We are subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, including those relating to the use,
handling, storage, discharge and disposal of hazardous substances, the discharge
or emission of materials into the environment, and the remediation of
environmental contamination, and as a result, are from time to time involved in
administrative and judicial proceedings and inquiries relating to environmental
matters. As of December 29, 2002, we had accruals of approximately $2.7 million
for environmental matters including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.4 million relating to PRP sites and other matters. Additional losses, if any,
in excess of amounts currently accrued, cannot be reasonably estimated at this
time. If there are additional matters or if any current estimates are incorrect,
there could be a material adverse effect on our financial position, results of
operations and cash flows.
On August 8, 2001, the EPA proposed a National Emission Standard for
Hazardous Air Pollutants or "NESHAP" for Flexible Polyurethane Foam Fabrication
Operations. The proposed NESHAP regulates emissions of methylene chloride and
other Hazardous Air Pollutants and restricts air emissions from flame lamination
sources. We do not believe that this standard, if adopted, will require us to
make material expenditures.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, proposed a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The proposed rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2003 and 100.0% reductions by January 1, 2007. We do
not believe that this standard, if adopted, will require us to make material
expenditures for our Canadian plants.
We have reported to the appropriate state authorities that we have found
soil and/or groundwater contamination in excess of state standards at certain
locations. Seven sites are currently in various stages of investigation or
remediation. Accordingly, the extent of contamination and the ultimate liability
is not known with certainty for all sites. During 2000, we reached an
indemnification agreement with the former owner of the Morristown, Tennessee
facility. The agreement allocates the incurred and future remediation costs
between the former owner and us. The estimated allocation of future costs for
the remediation of this facility is not significant, based on current known
information. The former owner was Recticel Foam Corporation, a subsidiary of
Recticel.
We have either upgraded or closed all underground storage tanks at our
facilities in accordance with applicable regulations.
The CERCLA and comparable state laws impose liability without fault for the
costs of cleaning up contaminated sites on certain classes of persons that
contributed to the release of hazardous substances into the environment at those
sites, for example, by generating wastes containing hazardous substances which
were disposed at such sites. We are currently designated as a PRP by the EPA or
by state environmental agencies or other PRPs, pursuant to CERCLA or analogous
state statutes, with respect to eight sites. Estimates of total cleanup costs
and fractional allocations of liability are often provided by the EPA, the state
environmental agency or the committee of PRPs with respect to the specified
site. Based on these estimates (to the extent available) and on known
information, in each case and in the aggregate, we do not expect addition