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 28, 2003
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
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: None
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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
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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 2, 2004, 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
FOAMEX L.P.
FOAMEX CAPITAL CORPORATION
INDEX
Page
Part I
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 28
Item 9a. Controls and Procedures 28
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners
and Management 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accounting Fees and Services 29
Part IV
Item 15 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 29
Signatures 35
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 28,
2003, our operations are conducted directly and through our wholly-owned
subsidiaries, Foamex Canada Inc. ("Foamex Canada"), Foamex Latin America, Inc.
("Foamex Mexico") and Foamex Asia, Inc. ("Foamex Asia"). As of December 28,
2003, 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.
Throughout this Annual Report on Form 10-K, we incorporate by reference
information from parts of other documents filed with the Securities and Exchange
Commission (the "SEC"). The SEC allows us to disclose important information by
referring to it in this manner, and you should review that information.
We make our Annual Report on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, as well as any amendments to those reports,
available free of charge through our web site as soon as reasonably practicable
after we electronically file that material with, or furnish it to, the SEC. You
can learn more about us by reviewing our SEC filings on our web site. Our SEC
reports, available through www.sec.gov which is maintained by the SEC, can be
accessed through the investor relations' page of our web site, which is located
at www.foamex.com/investor.php.
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.
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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. 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 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; thermoformable foams,
to provide structure and shape in various substrate applications; acoustical
foams, to reduce noise and improve sound quality in the vehicle; barrier foam
products, which allow our customers to more efficiently process 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 molded seating cushions.
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.
Technical Products
We are one of the foam industry's prime innovators and producers of foams
used for industrial, specialty, consumer and transportation applications, which
we refer to as "Technical Products." Technical Products consist of reticulated
foams and other custom polyester and polyether foams specially formulated to
meet the needs of technical customers. 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. Other post processes such as felting, coating or laminating to
other foams or materials give these composites specific properties.
Reticulated foams particularly are well suited for fluid management such as
filtration, reservoiring and sound attenuation; non-reticulated foams are used
for energy management applications such as sound absorption and gasketing.
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 foams
used in x-rays. 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 and innovative 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 cushioning and
automotive customers and have five facilities in Mexico serving the automotive
and cushioning industries. Four 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 installed its first foam pourline
during 2003. This pourline, which was 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 16.3% of our net sales in 2003, 17.3% of our net
sales in 2002, and 15.7% of our net sales in 2001. 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 34.7% of our net
sales in 2003, 33.8% of our net sales in 2002 and 35.0% of our net sales in
2001. The loss of any one of these customers could have a material adverse
effect on our business.
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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 2003, we closed certain
carpet padding operations, foam pouring operations, and a foam fabrication
operation.
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. 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 increases in the average prices of raw
materials from major chemical manufacturers in the year ended December 28, 2003
from the prior year. 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 year ended December 28, 2003. 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 28, 2003, we employed approximately 5,100 persons.
Approximately 1,300 of these employees are located outside the United States and
approximately 1,700 employees are covered by collective bargaining agreements
with labor unions. These agreements expire on various dates through 2006. 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, Leggett & Platt
Incorporated, 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.
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
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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 $3.6 million for 2003, $4.8 million for 2002 and $3.1
million for 2001.
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 28, 2003, our total long-term debt and revolving
credit borrowings were approximately $745.6 million and our partners' deficiency
was approximately $325.1 million. As of December 28, 2003, we had approximately
$46.8 million in revolving loan availability and approximately $20.9 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 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; and
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.
If we are unable to comply with our financial covenants, our bank lenders could
cause all amounts outstanding under the Senior Secured Credit Facility and
Secured Term Loan to be due and payable immediately.
On August 18, 2003, Foamex L.P. and its bank lenders executed a $240.0
Million Senior Secured Credit Facility (the "$240.0 Million Senior Secured
Credit Facility") and an $80.0 million Secured Term Loan with another lender
(the "Secured Term Loan"), which, among other things, requires Foamex L.P. to
meet a financial covenant. Under the Senior Secured Credit Facility and the
Secured Term Loan, Foamex L.P. is subject to a fixed charge
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coverage ratio, as defined, of 1.00. If we are unable to comply with the
financial covenant, the bank lenders could cause all amounts outstanding under
the Senior Secured Credit Facility and Secured Term Loan 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 Foamex L.P.'s 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.
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 $2.3 million per year for each
1% increase in interest rates, based on the balance of variable rate debt
outstanding as of December 28, 2003. Our estimated debt service obligation for
2004 is $81.1 million, based on levels of debt and interest rates in effect at
December 28, 2003. In addition, Foamex L.P.'s 13 1/2% senior subordinated notes
(the "13 1/2% Senior Subordinated Notes"), currently in the face amount of $51.6
million, are due on August 15, 2005. 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.
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 Senior Secured Credit Facility, Secured Term
Loan and the indentures relating to Foamex L.P.'s 10 3/4% senior secured notes
due 2009 (the "10 3/4% Senior Secured Notes"), 9 7/8% senior subordinated notes
due 2007 (the "9 7/8% Senior Subordinated Notes") and 13 1/2% Senior
Subordinated Notes due 2005 restrict Foamex L.P. and its subsidiaries in
incurring additional indebtedness, but do not fully prohibit Foamex L.P. and its
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 over the past several years.
We attempt to offset raw material price increases through selling price
increases and manufacturing process efficiencies, but we were not able to fully
do so in 2003. 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.
8
We depend on a limited number of suppliers of TDI and polyol.
There are a limited number of major suppliers of TDI and polyol. 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. 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 34.7% of our
net sales in 2003, 33.8% of our net sales in 2002, and 35.0% of our net sales in
2001. Sales to Johnson Controls, our largest customer, accounted for 16.3% of
our net sales in 2003, 17.3% of our net sales in 2002, and 15.7% of our net
sales in 2001. 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.
Our customers' financial condition may have a material adverse effect on our
business, financial condition and results of operations.
In the ordinary course of business, we extend trade credit to our
customers. In the event our customers, in the aggregate or certain significant
customers, are not able to pay us for our products on a timely basis or at all,
this could have a material adverse effect on our business, financial condition
and results of operations.
We could incur significant costs if we are unable to renew leases for certain of
our manufacturing facilities.
We lease certain of our foam pouring facilities. In the event we are unable
to renew our leases at these facilities, we could incur significant costs in
relocating our manufacturing operations. Such costs could include the actual
removal and relocation of equipment and inventory, the lost production time
associated with the transition, relocation of certain key employees, training
employees at the relocated manufacturing facilities, and additional costs for
preparing the new locations for operations. In addition, we may not be able to
secure the required permits at an optimal location. If we were unable to renew
leases and were forced to relocate, the costs associated with such relocation
could have a material adverse effect on our business, financial condition and
results of operations.
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 11 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
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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.
ITEM 2. PROPERTIES
As of December 28, 2003, we maintained 56 manufacturing and distribution
facilities. Total floor space in use at our 17 owned manufacturing and
distribution facilities is approximately 3.4 million square feet and total floor
space in use at our 39 leased manufacturing and distribution facilities is
approximately 4.5 million square feet. Forty-seven of these facilities are
located throughout 33 cities in the United States, four facilities are located
in Canada, and five facilities are located in Mexico. We have approximately 1.9
million square feet of idle space of which approximately 1.1 million is leased.
The lease for one of our foam pouring facilities expires in 2004. It is
conceivable that this lease may not be extended or renewed. Like any other
lease, if we are unable to extend or renew this lease, the costs associated with
a relocation could have a material adverse effect on our business, financial
condition, cash flow and results of operations. Except as described above, we do
not anticipate any problem in renewing or replacing any of the leases expiring
in 2004.
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 February 24, 2004, we and Trace International Holdings, Inc.
("Trace") were two of multiple defendants in 529 actions filed on behalf of
approximately 652 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
10
the limits of those policies are exhausted, Trace will be unable 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.
Litigation--Other
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on 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 28, 2003, we have accrued approximately $1.1 million for litigation,
claims 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 28, 2003, we had accruals of approximately $2.5 million
for environmental matters, including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to PRP sites and other matters.
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not 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 11 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
11
do not expect additional costs, if any, to be material to our results of
operations, financial position or cash flows.
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 28, 2003, 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 28, 2003 and 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
-------------------------
2003 2002
-------- --------
(thousands)
FMXI $ - $ -
Foamex International - (105)
----- -----
$ - $(105)
===== =====
Limitations on Distributions
Our financing agreements restrict our ability to make distributions to our
partners.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical consolidated financial
data of Foamex L.P. The financial data should be read in conjunction with the
consolidated financial statements and related notes thereto included in this
Annual Report on Form 10-K.
Fiscal Year (1)
----------------------------------------------------------------
2003 2002 2001 (2) 2000 1999
----------- ---------- ---------- ---------- ----------
(thousands)
Statements of Operations Data
Net sales $1,304,560 $1,328,094 $1,252,904 $1,257,778 $1,294,639
Income (loss) from continuing
operations (3)(4) $ (27,413) $ (27,204) $ (2,261) $ 19,603 $ 20,061
12
Fiscal Year (1)
----------------------------------------------------------------
2003 2002 2001 (2) 2000 1999
----------- ---------- ---------- ---------- ----------
(thousands)
Balance Sheet Data
Total assets $ 665,155 $ 695,283 $ 767,650 $ 753,584 $ 783,218
Long-term debt, classified as current (5) $ 96,065 $ - $ - $ - $ -
Long-term debt, excluding current portion $ 640,621 $ 738,540 $ 648,232 $ 687,758 $ 725,297
Partners' deficiency $ (325,131) $ (305,786) $ (178,128) $ (158,503) $ (160,481)
(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 it 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).
2003 - $(1.8) million
2002 - $ 4.8 million
2001 - $36.1 million
2000 - $ 6.3 million
1999 - $10.5 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.
(5) Revolving credit borrowings under Foamex L.P.'s $240.0 Million Senior
Secured Credit Facility are classified as current as required by Emerging
Issues Task Force Issue No. 95-22, "Balance Sheet Classification of
Borrowings Outstanding Under Revolving Credit Agreements that Include both
a Subjective Acceleration Clause and a Lockbox Arrangement ("EITF No.
95-22").
13
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.
EXECUTIVE SUMMARY
Overview
We operate in the flexible polyurethane and advanced polymer foam products
industry. Our operations are 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
11 to the consolidated financial statements. Please see Part I, Item 1
"Business" for a more complete description of the activities of our business
segments.
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 and corporate overhead. 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.
14
Automotive Products - distributes automotive foam products and laminates to
major Tier 1 suppliers and original equipment manufacturers, or "OEMs".
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 2003, our largest customer provided 16.3% of our net sales and our
five largest customers provided 34.7% 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.
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.
Operations
The following table includes key elements of our financial statements
expressed as a percentage of net sales for the years 1999 through 2003, except
for net cash provided by (used for) operating activities which is expressed in
millions of dollars.
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Net Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 89.0% 89.2% 85.8% 86.3% 86.1%
Gross Profit Margin 11.0% 10.8% 14.2% 13.7% 13.9%
Selling, General and
Administrative Expenses 6.2% 7.1% 6.3% 5.4% 5.8%
Operating Income Margin 4.9% 3.4% 5.0% 7.7% 7.3%
Interest and Debt
Issuance Expense 6.8% 5.2% 5.0% 6.0% 5.6%
Net Cash Provided by (Used
For) Operating Activities $18.1 $(49.6) $108.7 $52.9 $68.6
As demonstrated by the table above, our results in the last two years have
significantly deteriorated when compared to the prior three years. Our gross
profit margin has been reduced by approximately three percentage points while
selling general and administrative expenses and interest and debt issuance
expense have both increased as a percentage of net sales, as well as in absolute
dollar terms. Net sales dollars have been relatively flat over the 5 year period
with 2003 representing an increase of less than one percent compared to 1999.
Our management is focusing on restoring former levels of profitability by
concentrating on the following key areas:
15
o Managing raw material costs.
o Maintaining selling price increases to customers to recover raw
material and manufacturing cost increases.
o Controlling and reducing labor and overhead costs both in
manufacturing and administration.
o Developing new and more consumer-focused products and entering new
markets with increased profit potential.
Our major chemical suppliers increased the cost of our raw materials
several times in late 2002. Prices stabilized during 2003 but average unit
prices for 2003 were higher than for 2002. There can be no assurance that
chemical prices will not increase in 2004. We manage raw material costs by
seeking alternative sources of supply, locking in prices when possible and
negotiating discounts and rebates for volume purchases.
We have been only partially successful in raising selling prices to recover
raw material and other cost increases. Selling price increases, reduced cost and
increased mix of higher profit products are the major factors in restoring gross
profit margin percentage to the 14% level experienced in 1999-2001 from the 11%
level of 2002 and 2003.
We are focused on reducing both manufacturing costs and administrative
expenses. We believe that our manufacturing operations are now of the
appropriate scale and location to meet demand for our products as a result of
closing several facilities in 2002 and 2003. We believe that manufacturing costs
can be further reduced by emphasizing efficiency and better supply chain
management. Our focus areas for further reductions in administrative expenses
are employee related costs and professional service fees. Effective February 10,
2004, the Chairman of Foamex International resigned by mutual agreement with the
Foamex International Board of Directors. As a result of this resignation, we may
close our New York office, which was primarily used by the former Chairman of
Foamex International.
In late 2003, we began to market an all foam mattress product that is
vacuum packed in a box and designed to be carried home and self-installed by the
consumer. We believe this product provides the consumer with convenience and
price advantages when compared to traditional bedding products. We plan to
develop and market additional consumer products and enter other consumer
markets. We believe that we can achieve higher net sales and gross profit
through this approach. We will also continue our development efforts in our
other product offerings, especially our Technical Products.
If we can restore our gross profit margin to 14% or more and reduce and
control administrative costs, we may be able to restore operating income to the
level experienced in 1999 and 2000 and cash flow from operations to the level
experienced in 1999, 2000 and 2001. At those levels we should be able to reduce
borrowings and also cash interest expense. Our next large required debt
repayment is $51.6 million principal of our 13 1/2% Senior Subordinated Notes
due August 15, 2005.
Financing
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and a Secured Term Loan with
another lender. Proceeds borrowed under these new facilities were used to repay
all outstanding balances under the Foamex L.P. Amended Credit Facility (the
"Amended Credit Facility") which was terminated as of August 18, 2003. In
addition, Foamex Canada's revolving credit facility that did not have any
outstanding borrowings and had availability of approximately $5.9 million was
terminated as of August 18, 2003. The termination of the Amended Credit Facility
resulted in a write off of debt issuance costs of $12.9 million.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and
16
inventory. At December 28, 2003, Foamex L.P. had available borrowings of
approximately $46.8 million and letters of credit outstanding of $20.9 million.
Borrowings under the term loan are limited to eligible amounts, as defined, of
equipment and real estate. Substantially all the assets of Foamex L.P. and its
domestic subsidiaries and Foamex Canada are pledged as collateral for the
related borrowings. Borrowings under the revolving credit facility and the term
loan bear interest at floating rates based upon and including a margin over
either LIBOR or a Base Rate, as defined. At December 28, 2003, the weighted
average interest rates were 4.53% and 4.42% for the revolving loans and the term
loan, respectively. The term loan requires quarterly installment payments of
approximately $1.8 million. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007. The $240.0 Million Senior
Secured Credit Facility includes both a subjective acceleration clause and a
lockbox arrangement which requires all lockbox receipts be used to repay
revolving credit borrowings. Accordingly, borrowings under the revolving credit
facility are classified as current in the accompanying balance sheet as of
December 28, 2003 as required by EITF No. 95-22.
The Secured Term Loan will mature on April 30, 2007. Borrowings under this
facility will bear interest at a rate that is 9.25% plus the greater of the
Reference Rate, as defined, or 4.25%. The minimum rate, which is in effect as of
December 28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00%
facility fee which is payable annually on the anniversary date. Borrowings under
the Secured Term Loan are collateralized by the same collateral as the $240.0
Million Senior Secured Credit Facility. An intercreditor agreement governs the
distribution of collateral among the lenders under the $240.0 Million Senior
Secured Credit Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which was $17.7 million for the year ended
December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Our 13 1/2% Senior Subordinated Notes with a face value of $51.6 million
are due on August 15, 2005. We must generate sufficient cash flow to repay these
notes or we must obtain additional financing. We cannot determine at this time
if we will be able to obtain financing at a reasonable cost, or at all. The 13
1/2% Senior Subordinated Notes will be required to be classified as a current
liability on our consolidated balance sheet beginning in the third quarter of
2004.
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:
Revenue Recognition
We record net sales when product title and the risks and rewards of
ownership passes to the customer, the sales price is fixed and determinable and
collection is reasonably assured. Products are shipped FOB shipping point. Net
sales are reduced by allowances for estimated discounts, returns and customer
rebates based on our experience. Balances for allowances and rebates are
reviewed at least quarterly and are adjusted if warranted.
Accounts 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
17
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.
Goodwill
We evaluate the recoverability of goodwill on an annual basis as required
by Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). We perform this annual evaluation as of the
first day of the fourth fiscal quarter, or more frequently if events or changes
in circumstances, such as declining sales, earnings or cash flows or material
adverse changes in the business climate, indicate that the carrying value of
goodwill might be impaired. Goodwill is considered to be impaired when the net
book value of a reporting unit exceeds it estimated fair value. Fair values are
primarily established using a discounted cash flow methodology. The
determination of discounted cash flows is based on businesses' strategic plans
and long range planning forecasts.
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. The services of an outside actuary are used
to assist management in their evaluation of the liability for workers'
compensation and automobile 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.
We assumed weighted average discount rates of 7.25%, 7.00% and 6.50% to
calculate pension expense for 2001, 2002 and 2003, respectively. A 0.50%
reduction in this assumption would increase the interest component of pension
expense by approximately $0.6 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
2003, 2002 and 2001. A 0.50% reduction in this assumption would increase pension
expense by approximately $0.4 million. Amortization of losses has been and
continues to be a significant component of pension expense and this amortization
is expected to increase by approximately $0.4 million in 2004. The losses have
resulted from actual returns that were less than the expected return assumption,
particularly over the 2000-2002 period, and funding levels that have not been
sufficient to offset the growth in benefit obligations. In 2003, actual returns
were significantly higher than the expected return assumption and we expect
pension expense to decrease by $1.4 million to $1.8 million in 2004 primarily
because of the growth in plan assets. We anticipated funding of $11.8 million to
retiree benefit plans in 2004.
18
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.
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 and
principal 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 for the next 12 months. Scheduled principal payments on
our debt are not significant until the second half of 2005. The ability of us to
make distributions to Foamex International is restricted by the terms of our
financing agreements.
Cash and cash equivalents were $6.6 million at December 28, 2003 compared
to $4.4 million at December 29, 2002. Working capital at December 28, 2003 was
$18.7 million and the current ratio was 1.06 to 1 compared to working capital at
December 29, 2002 of $118.0 million and a current ratio of 1.59 to 1. The
decrease in working capital is primarily due to the requirement to classify
$96.1 million of borrowings under the revolving credit portion of its $240.0
Million Senior Secured Credit Facility as current in accordance with EITF No.
95-22 (see Note 7 to the consolidated financial statements).
Total long-term debt and revolving credit borrowings at December 28 2003
was $745.6 million, a $7.0 million increase from December 29, 2002. As of
December 28 2003, there were revolving credit borrowings of $96.1 million under
the $240.0 Million Senior Secured Credit Facility with $46.8 million available
for borrowings and $20.9 million of letters of credit outstanding. Revolving
credit borrowings at December 28, 2003 reflect working capital requirements.
On November 15, 2002, Foamex L.P. and its bank lenders executed an
amendment to the Amended Credit Facility. Under the amendment, Foamex L.P. was
subject to minimum net worth, minimum EBDAIT, as defined, and maximum capital
expenditure covenants through periods ended December 28, 2003. The minimum
EBDAIT covenant was tested monthly, on a cumulative basis, beginning with
December 2002. Foamex L.P. was in compliance with the revised covenants at
December 29, 2002 and throughout 2003 until the Amended Credit Facility was
terminated on August 18, 2003.
On August 18, 2003, Foamex L.P. entered into a $240.0 Million Senior
Secured Credit Facility with a new group of lenders and a Secured Term Loan with
another lender. Proceeds borrowed under these new facilities were used to repay
all outstanding balances under the Foamex L.P. Amended Credit Facility (the
"Amended Credit Facility"). In addition, Foamex Canada's revolving credit
facility that did not have any outstanding borrowings and had availability of
approximately $5.9 million was terminated. The termination of the Amended Credit
Facility resulted in a write off of debt issuance costs of $12.9 million in
2003.
The $240.0 Million Senior Secured Credit Facility consists of a revolving
credit facility with a maximum availability of $190.0 million and a term loan of
$50.0 million. The revolving credit facility includes a $50.0 million sublimit
for letters of credit and availability is limited to eligible amounts, as
defined, of accounts receivable and
19
inventory. Borrowings under the term loan are limited to eligible amounts, as
defined, of equipment and real estate. Substantially all the assets of Foamex
L.P. and its domestic subsidiaries and Foamex Canada are pledged as collateral
for the related borrowings. Borrowings under the revolving credit facility and
the term loan bear interest at floating rates based upon and including a margin
over either LIBOR or a Base Rate, as defined. At December 28, 2003, the weighted
average interest rates were 4.53% and 4.42% for the revolving loans and the term
loan, respectively. The term loan requires quarterly installment payments of
approximately $1.8 million. All borrowings under the $240.0 Million Senior
Secured Credit Facility will mature on April 30, 2007.
The Secured Term Loan will mature on April 30, 2007. Borrowings under this
facility bear interest at a rate that is 9.25% plus the greater of Reference
Rate, as defined, or 4.25%. The minimum rate, which is in effect as of December
28, 2003, is 13.50%. In addition, Foamex L.P. is subject to a 1.00% facility fee
which is payable annually on the anniversary date. Borrowings under the Secured
Term Loan are collateralized by the same collateral as the $240.0 Million Senior
Secured Credit Facility. An intercreditor agreement governs the distribution of
collateral among the lenders under the $240.0 Million Senior Secured Credit
Facility and the Secured Term Loan.
Under the $240.0 Million Senior Secured Credit Facility and the Secured
Term Loan, Foamex L.P. is subject to a minimum fixed charge coverage ratio, as
defined, of 1.00. For the two quarters ended December 28, 2003, Foamex L.P.'s
fixed charge coverage ratio was 1.09. Foamex L.P. is also subject to a maximum
annual capital expenditure amount which was $17.7 million for the year ended
December 28, 2003 and will be $36.0 million for the year ending January 2, 2005.
Effective May 1, 2002, Foamex L.P. completed a series of interest rate swap
transactions with notional amounts aggregating $300.0 million. Foamex L.P.
designated, documented and accounted for these interest rate swaps as fair value
hedges of its 10 3/4% Senior Secured Notes due April 1, 2009. The risk being
hedged in these transactions was the change in fair value of the 10 3/4% Senior
Secured Notes based on changes in the benchmark interest rate, LIBOR. The effect
of these interest rate swap transactions was to convert the fixed interest rate
on the 10 3/4% Senior Secured Notes to floating rates reset twice per year to
correspond with the interest payment dates for the 10 3/4% Senior Secured Notes.
On September 18, 2002, Foamex L.P. unwound the interest rate swap transactions
in exchange for a net cash proceeds of $18.4 million, including $3.6 million
realized through lower effective interest rates while the swap transactions were
in effect. The unwinding resulted in a deferred credit of $14.8 million, which
is being amortized over the term of the 10 3/4% Senior Secured Notes, using the
effective interest rate method.
As discussed above, our 13 1/2% Senior Subordinated Notes with a face value
of $51.6 million are due on August 15, 2005. We must generate sufficient cash
flow to repay these notes or obtain additional financing. We may not be able to
obtain financing at a reasonable cost, or at all.
Cash Flow from Operating Activities
Cash provided by operating activities in 2003 was $18.1 million compared to
cash used of $49.6 million in the 2002. Cash provided by operating activities
consisted principally of depreciation and amortization of $26.0 million and
amortization and write off of $17.4 million of costs associated with debt,
reduced by our net loss of $27.4 million. We also had cash costs of $11.3
million to pay restructuring liabilities.
Cash Flow from Investing Activities
Cash used in investing activities totaled $8.6 million for 2003. Cash
requirements included capital expenditures of $6.5 million and capitalized
software development costs of $3.3 million. Cash used for investing activities
in 2002 included capital expenditure of $15.6 million and capitalized software
development costs of $8.0 million. Estimated capital expenditures for 2004 are
approximately $10.0 million. In addition, we expect to spend approximately $4.2
million for internally developed software in 2004, a portion of which may be
capitalized.
Cash Flow from Financing Activities
Cash used for financing activities was $7.2 million in 2003 compared to
cash provided by of $60.0 million in 2002. During 2003, we utilized $130.0
million of proceeds from new term loans and an increase in revolving credit
20
borrowings of $44.2 million to repay $162.2 million of term loans under our
former Amended Credit Facility and to pay $11.9 million of debt issuance costs.
Contractual Obligations
Our contractual obligations as of December 28, 2003 are shown in the
following table:
Payment due by Period
-------------------------------------------------------------------
Contractual Obligations Total 2004 2005-06 2007-08 2009 and beyond
- ----------------------- ------- -------- --------- ------------ ---------------
(millions of dollars)
Long-Term Debt, including
Capital Leases $732.2 $ 8.9 $ 67.7 $349.6 (1) $306.0
Interest (2) $297.5 $ 72.2 $135.8 $ 73.0 $ 16.5
Operating Leases $ 44.9 $ 14.1 $ 16.7 $ 8.2 $ 5.9
Purchase Obligations (3) $592.5 $224.7 $125.9 $122.9 $119.0
Restructuring Liabilities $ 9.7 $ 3.9 $ 1.9 $ 1.3 $ 2.6
Employee Benefits and Other (4)
(1) Includes $96.1 million of revolving credit borrowings due in 2007 but
classified as current in the consolidated balance sheet to comply with EITF
95-22. See Note 7 to the consolidated financial statements.
(2) Includes interest applicable only to borrowings outstanding at December 28,
2003 computed using interest rates in effect as of December 28, 2003
through the due dates of the borrowings as defined by the applicable
financing agreements.
(3) Includes outstanding purchase orders and other commitments to purchase
minimum quantities of materials or services.
(4) We have obligations to provide employee benefits including those under our
defined benefit and defined contribution retirement plans and our medical
benefit plan. In addition, we are partially self-insured for a number of
risks including workers' compensation, automobile and general liability.
Due to the many variables involved, accurate estimates of these future
obligations cannot be made. In 2003, payments for these obligations
aggregated approximately $34.6 million.
RESULTS OF OPERATIONS
Carpet
Foam Cushion Automotive Technical
Products Products Products Products Other Total
-------- -------- ---------- --------- -------- ----------
2003 (dollars in thousands)
Net sales $507,586 $208,855 $447,068 $117,450 $ 23,601 $1,304,560
Income (loss) from operations $ 43,983 $ 5,395 $ 33,399 $ 32,115 $(50,456) $ 64,436
Depreciation and amortization $ 11,002 $ 3,275 $ 2,815 $ 2,931 $ 6,022 $ 26,045
Income (loss) from operations
as a percentage of net sales 8.7% 2.6% 7.5% 27.3% n.m.(a) 4.9%
2002
Net sales $471,005 $234,001 $466,718 $124,124 $ 32,246 $1,328,094
Income (loss) from operations $ 45,466 $ 1,239 $ 34,146 $ 35,185 $(71,459) $ 44,577
Depreciation and amortization $ 13,632 $ 5,904 $ 3,721 $ 2,815 $ 5,520 $ 31,592
Income (loss) from operations
as a percentage of net sales 9.7% 0.5% 7.3% 28.3% n.m.(a) 3.4%
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 $ 81,144 $ 7,422 $ 27,040 $ 32,692 $(85,133) $ 63,165
Depreciation and amortization $ 11,018 $ 5,390 $ 4,150 $ 2,670 $ 10,760 $ 33,988
Income (loss) from operations
as a percentage of net sales 16.2% 3.2% 7.2% 29.4% n.m.(a) 5.0%
(a) Not meaningful.
Business segment results include revenues and costs that are specifically
identifiable and costs shared by business segments have been allocated based on
utilization. At the end of 2003, we changed our measure of segment operating
income to exclude an allocation of corporate overhead, as our management no
longer evaluates the performance of our segments using this allocation. Rather
we now attempt to manage and control these costs independent of segment
performance. Segment results for 2002 and 2001 have been adjusted to reflect
this change for comparative purposes.
2003 Compared to 2002
Net sales for 2003 decreased 2% to $1,304.6 million from $1,328.1 million
in 2002. An increase in Foam Products net sales were more than offset by
decreases in the other segments. Selling price increases in all segments were
more than offset, in the aggregate, by reductions in volume. The volume
reductions were primarily due to the requirement to increase selling prices and
plant closures as we shifted away from unprofitable business.
Gross profit was $143.7 million, or 11.0%, in 2003 compared to $143.7
million, or 10.8%, in 2002. Gross profit margin has improved throughout 2003
from the depressed levels experienced in the second half of 2002 as we have been
successful at recovering some of the raw material cost increases experienced in
the second half of 2002 and we have realized manufacturing cost savings.
Income from operations for 2003 was $64.4 million, or 4.9% of net sales,
which represented a 45% increase from the $44.6 million, or 3.4% of net sales,
reported for 2002. Selling general and administrative expenses decreased $13.3
million, or 14%, due primarily to lower employee costs and professional fees. In
2002, we incurred $4.9 million of organizational and transaction costs in
connection with a proposed public offering of a subsidiary, which was
subsequently terminated, and a proposed sale of the Carpet Cushion products
segment. Restructuring, impairment and other credits discussed below were $1.8
million in 2003, while we recorded restructuring, impairment and other charges
of $4.8 million in 2002.
Foam Products
Foam Products net sales for 2003 increased 8% to $507.6 million from $471.0
million in 2002 primarily due to increases in selling prices to customers and
increased volumes of consumer products, partially offset by decreases in volume
in other markets. Income from operations decreased 3%, to $44.0 million in 2003
from $45.5 million in 2002, primarily due to increases in the cost of raw
materials. Income from operations was 8.7% of net sales in 2003, and 9.7% of net
sales in 2002.
Carpet Cushion Products
Carpet Cushion Products net sales for 2003 decreased 11% to $208.9 million
from $234.0 million in 2002. Average selling prices increased but were more than
offset by an approximate 16% decline in volumes, as we closed several carpet
cushion facilities in 2002 and 2003 to focus this business on more profitable
markets. Income from operations increased $4.2 million, or 335%, primarily due
to cost containment from the streamlining of operations and higher selling
prices. Income from operations represented 2.6% of net sales in 2003 and 0.5% of
net sales in 2002.
22
Automotive Products
Automotive Products net sales for 2003 decreased 4% to $447.1 million from
$466.7 million in 2002. Sales declined throughout the second half of 2003 as a
major customer decreased its purchases from us in an effort to diversify its
supplier base. While some of this business has been recovered from other
customers, automotive products net sales were just over $100 million per quarter
in the second half of 2003, which is an annual rate of more than $60.0 million
less than the 2002 net sales. For the full year 2003, volumes were down about 1%
and average selling prices were down about 3% due to lower fabric costs passed
on to customers. Income from operations decreased $0.7 million, or 2%, as the
lower sales were partially offset by lower manufacturing costs, resulting from a
plant closure in early 2003 and labor and overhead reductions. Income from
operations represented 7.5% of net sales in 2003 and 7.3% of net sales in 2002.
Technical Products
Net sales for Technical Products in 2003 decreased 5% to $117.5 million
from $124.1 million in 2002 primarily due to a decrease in volume of 9%
partially offset by an increase in average selling prices. Income from
operations decreased 9% to $32.1 million in 2003 compared to $35.2 million in
2002 due to higher raw material and overhead costs. Income from operations
represented 27.3% of net sales in 2003 and 28.3% of net sales in 2002.
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 $8.6 million, or 27%, decrease in net sales
associated with this segment primarily resulted from the Mexico City operation
and was primarily due to a decline in the consumer products business. The loss
from operations was $50.5 million in 2003 and included restructuring, impairment
and other credits of $1.8 million, discussed below. The loss from operations in
2002 was $71.5 million, including restructuring, impairment and other charges of
$4.8 million, discussed below. Corporate overhead expenses and employee costs
decreased $7.8 million in 2003 compared to 2002.
Restructuring, Impairment and Other Charges
In 2003, we recorded restructuring credits of $1.8 million consisting of a
$3.2 million reduction in the liability primarily for severance and termination
benefits no longer required as the actions contemplated under the related plans
have been substantially completed, and a charge of $1.1 million for additional
lease termination costs for a closed facility as a result of changes in real
estate market conditions. Additionally, we recorded a $0.3 million restructuring
charge reported in the Other segment as a result of an employee termination plan
for approximately 300 employees at our Mexico City operations. The actions under
this plan were substantially completed in 2003.
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 with the remainder occuring in 2003.
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.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $88.4 million in 2003, which
represented a 27% increase from 2002 expense of $69.7 million. The 2003 and 2002
periods include charges of $12.9 million and $4.9 million, respectively,
relating to the write off of debt issuance costs as a result of early
extinguishment of debt. Higher average debt levels, higher effective interest
rates and higher amortization of debt issuance costs all contributed to the
increase in 2003.
23
Income from Equity Interest in Joint Ventures
The income from an equity interest in an Asian joint venture was $1.2
million in 2003 and $1.6 million in 2002. Income from an equity interest in a
joint venture in Eastern Europe was $0.3 million in 2003 and $0.1 million in
2002.
Other Income (Expenses), Net
Other expense, net was $3.4 million in 2003 compared to $2.0 million in
2002. We incurred foreign currency transaction losses of $2.7 million in 2003
compared to foreign currency transaction losses of $2.3 million in 2002.
Provision 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.
Cumulative Effect of Accounting Change
The cumulative effect of accounting change in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of SFAS No. 142.
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 $143.7 million, or 10.8%, in 2002 compared to
$178.5 million, or 14.2%, in 2001 primarily as a result of 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
expenses 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 $44.6 million, which represented a 29%
decrease from the $63.2 million reported for 2001. Income from operations was
3.4% of net sales in 2002 compared to 5.0% of net sales in 2001. The decrease is
attributable to the reduced gross profit margins as discussed above. In
addition, selling, general and administrative expenses increased by $15.0
million, or 19%, which included $3.6 million of organizational costs in
connection with a proposed public offering of a subsidiary which was
subsequently terminated. Selling, general and administrative expenses also
included $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. Partially offsetting the decrease in gross profit and increased
selling, general and administrative expenses was a decline of $31.3 million in
restructuring, impairment and other charges which is more fully discussed below.
24
Foam Products
Foam Products net sales for 2002 decreased 6% 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 12.3% in 2002, down from 18.8% in 2001. Income from
operations decreased 44%, to $45.5 million in 2002 from $81.1 million in 2001,
primarily due to increased raw material costs, lower net sales and higher
manufacturing costs. Income from operations was 9.7% of net sales in 2002, down
from 16.2% of net sales in 2001.
Carpet Cushion Products
Carpet Cushion Products net sales for 2002 increased 1% 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. Income 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 0.5% of net sales in
2002 and 3.2% of net sales in 2001.
Automotive Products
Automotive Products net sales for 2002 increased 24% 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 were informed that our
largest customer intends to reduce its purchases of certain products from us in
2003 to diversify its supply base. Automotive Products gross profit margin was
8.4% in 2002 and 2001 and reflects the impact of higher raw material costs
offsetting the contribution from increased net sales. Income from operations
represented 7.3% of net sales in 2002 and 7.2% of net sales in 2001.
Technical Products
Net sales for Technical Products in 2002 increased 12% 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 increased 8% to $35.2
million in 2002 compared to $32.7 million in 2001. The decrease reflects the
contribution from higher net sales offset by higher material costs and the costs
related to a proposed public offering of a subsidiary as described above. Income
from operations represented 28.3% of net sales in 2002 compared to 29.4% 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 4% decrease in net sales associated with this
segment primarily resulted from the Mexico City operation. The loss from
operations was $71.5 million in 2002 and included restructuring, impairment and
other charges, discussed below. The loss from operations in 2001 was $85.1
million, including restructuring, impairment and other charges of $36.1 million,
discussed below. Corporate overhead expenses and employee costs increased by
$16.1 million in 2002.
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.
25
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
facilities closures reduced the number of planned terminations to approximately
500. Approximately 340 employees were terminated in 2002.
Interest and Debt Issuance Expense
Interest and debt issuance expense was $69.7 million in 2002, which
represented a 10% 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.
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% ownership interest in the joint
venture since December 2001. Previously our ownership interest was 49%.
Provision 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.
Cumulative Effect of Accounting Change
The cumulative effect of accounting change in 2002 includes a goodwill
impairment charge of $72.0 million as a result of the adoption of SFAS No. 142.
OTHER
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 28, 2003, we had accruals of approximately $2.5 million
for environmental matters including approximately $2.3 million related to
remediating and monitoring soil and groundwater contamination and approximately
$0.2 million relating to sites where we had been designated as a Potentially
Responsible Party or "PRP" by the EPA or a state authority 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.
26
On August 31, 2002, Environment Canada, the Canadian environmental
regulatory agency, finalized a rule which would require flexible polyurethane
foam manufacturing operations to reduce methylene chloride (dichloromethane) air
emissions. The rule establishes a 50.0% reduction in methylene chloride
emissions by December 1, 2004 and 100.0% reductions by January 1, 2007. This
standard will not 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 11 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 additional
costs, if any, to be material to liquidity, results of operations or financial
position.
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.
Claims and Litigation
We and our subsidiaries are party to various lawsuits, both as defendant
and plaintiff, arising in the normal course of business. It is the opinion of
management that the disposition of these lawsuits will not, individually or in
the aggregate, have a material adverse effect on our financial position, results
of operations or cash flows. If management's assessment is incorrect, such
actions could have a material adverse effect on our consolidated financial
position, results of operations and cash flows. As of December 28, 2003, we had
accrued approximately $1.1 million for litigation and other legal matters in
addition to the environmental matters discussed above.
Inflation, Raw Material Costs and Other Matters
On average, inflation rates for the domestic economy continue to be
relatively low. Although long-term inflation rates are difficult to predict, we
believe we have the flexibility in operations and capital structure to maintain
a competitive position. The prices of the two principal chemicals used by us in
manufacturing, TDI and polyol, are influenced by demand and manufacturing
capacity. In addition, the prices of TDI and polyol are significantly influenced
by crude oil production and prices and by world political instability,
particularly in the Middle East. Results for 2003 and 2002 were negatively
impacted by higher average costs for raw materials. In 2001, the beginning of
the economic slowdown resulted in excess manufacturing capacity for the major
chemical
27
suppliers. This, coupled with declining oil prices, resulted in lower costs for
raw materials in 2001. We experienced significant increases in the prices of raw
material from major chemical manufacturers during 2002. We sought to recover
these cost increases through manufacturing process efficiencies and selling
price increases, but were only partially able to do so during 2003 and 2002. We
may not be successful in implementing further selling price increases to fully
recover raw material cost increases and competitive pricing pressure may require
us to adjust selling prices or lose volume. Results of operations have been and
could be adversely affected by delays in implementing, or inability to
implement, additional selling price increases to offset raw material cost
increases. Additionally, we must reduce and control our other operating and
corporate expenses including selling, general and administrative expenses to
offset raw material cost increases. A failure to recover cost increases could
result in debt covenant violations which may lead to lenders demanding immediate
payment of our outstanding debt and impair our ability to continue as a going
concern.
The lease for one of our foam pouring facilities expires in 2004. It is
conceivable that this lease may not be extended or renewed. Like any other
lease, if we are unable to extend or renew this lease, the costs associated with
a relocation could have a material adverse effect on our business, financial
condition, cash flow and results of operations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt securities with variable interest rates are subject to market risk
for changes in interest rates. On December 28, 2003, indebtedness with variable
interest rates totaled $231.3 million. On an annualized basis, if the interest
rates on these debt instruments increased by 1.0%, interest expense would
increase by approximately $2.3 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
An index to the financial statements and financial statement schedules is
included in Item 15(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9a. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Foamex L.P. maintains disclosure controls and procedures (as defined in
Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) that are designed to ensure that information required to
be disclosed in reports filed under the Exchange Act, as amended, is recorded,
processed, summarized and reported within the specified time periods. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
executed, can provide only reasonable assurance of achieving the desired control
objectives.
Foamex L.P. carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and Chief
Financial Officer, on the effectiveness of the design and operation of Foamex
L.P.'s disclosure controls and procedures pursuant to the Exchange Act rule as
of the end of the fiscal period covered by this report on Form 10-K. Based upon
that evaluation, each of the Chief Executive Officer and Chief Financial Officer
concluded that Foamex L.P.'s disclosure controls and procedures are effective in
providing reasonable assurance that material information required to be included
in Foamex L.P.'s Exchange Act reports is made known to management on a timely
basis during the period when Foamex L.P.'s periodic reports are being prepared.
28
Changes in Internal Controls
Foamex L.P. determined during the fourth quarter of 2003 that the value of
certain in-transit raw material inventory was overstated due to a calculation
error made during a transition to a new module of an enterprise wide transaction
processing software package in February 2003. This error was reported to Foamex
L.P.'s auditors and to the audit committee of Foamex International's Board of
Directors. As a result, Foamex L.P. restated its financial statements for each
of the three quarters of 2003 for this error and other adjustments previously
identified by management that were not individually or in the aggregate material
to the respective periods. Foamex L.P. has instituted procedures intended to
ensure that the value of the in-transit raw material inventory is more
effectively monitored.
Except as discussed above, there have been no significant changes in
internal control over financial reporting that occurred during the quarter
covered by this report that has materially affected or is reasonably likely to
materially affect, our internal control over financial reporting.
PART III
The information required by this Part III (Items 10, 11, 12, 13 and 14) is
not applicable since Foamex L.P. is a wholly-owned subsidiary of Foamex
International.
PART IV
ITEM 15. E