Attached files
| file | filename |
|---|---|
| EXCEL - IDEA: XBRL DOCUMENT - AVINTIV Specialty Materials Inc. | Financial_Report.xls |
| EX-31.1 - EXHIBIT - AVINTIV Specialty Materials Inc. | ex311-sox302certificationq.htm |
| EX-32.1 - EXHIBIT - AVINTIV Specialty Materials Inc. | ex321-sox906certificationq.htm |
| EX-31.2 - EXHIBIT - AVINTIV Specialty Materials Inc. | ex312-sox302certificationq.htm |
| EX-99.1 - EXHIBIT - AVINTIV Specialty Materials Inc. | iranrelateddisclosures-q3.htm |
| EX-32.2 - EXHIBIT - AVINTIV Specialty Materials Inc. | ex322-sox906certificationq.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES |
EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 27, 2014
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: 001-14330
_____________________________________________
POLYMER GROUP, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________
Delaware | 57-1003983 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
9335 Harris Corners Parkway, Suite 300 Charlotte, North Carolina 28269 | (704) 697-5100 | |
(Address of principal executive offices) | (Registrant's telephone number, including area code) | |
____________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ *
* The registrant is a voluntary filer of reports required to be filed by certain companies under Section 13 or 15(d) of the Securities Exchange Act of 1934 and has filed all reports that would have been required to have been filed by the registrant during the preceding 12 months had it been subject to such filing requirements during the entirety of such period.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | ||
Non-accelerated filer | þ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ | ||
Indicate by check mark whether the registrant is a shell company (defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Number of common shares outstanding at November 7, 2014: 1,000. There is no public trading of the registrant's common shares.
POLYMER GROUP, INC.
FORM 10-Q
INDEX
Page | |
2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
POLYMER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except share data | September 27, 2014 | December 28, 2013 | ||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 182,683 | $ | 86,064 | ||||
Accounts receivable, net | 262,074 | 194,827 | ||||||
Inventories, net | 182,205 | 156,074 | ||||||
Deferred income taxes | 9,672 | 2,318 | ||||||
Other current assets | 88,949 | 59,096 | ||||||
Total current assets | 725,583 | 498,379 | ||||||
Property, plant and equipment, net of accumulated depreciation of $223,653 and $175,159, respectively | 989,389 | 652,780 | ||||||
Goodwill | 201,987 | 115,328 | ||||||
Intangible assets, net | 171,753 | 169,399 | ||||||
Deferred income taxes | 3,621 | 2,582 | ||||||
Other noncurrent assets | 35,283 | 26,052 | ||||||
Total assets | $ | 2,127,616 | $ | 1,464,520 | ||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Short-term borrowings | $ | 15,802 | $ | 2,472 | ||||
Accounts payable and accrued liabilities | 311,340 | 307,731 | ||||||
Income taxes payable | 471 | 3,613 | ||||||
Deferred income taxes | 1,008 | 1,342 | ||||||
Current portion of long-term debt | 35,447 | 13,797 | ||||||
Total current liabilities | 364,068 | 328,955 | ||||||
Long-term debt | 1,440,130 | 880,399 | ||||||
Deferred consideration | 44,791 | — | ||||||
Deferred income taxes | 77,026 | 33,236 | ||||||
Other noncurrent liabilities | 62,258 | 62,191 | ||||||
Total liabilities | 1,988,273 | 1,304,781 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Common stock — 1,000 shares issued and outstanding | — | — | ||||||
Additional paid-in capital | 298,164 | 294,144 | ||||||
Retained earnings (deficit) | (211,514 | ) | (127,142 | ) | ||||
Accumulated other comprehensive income (loss) | (37,146 | ) | (8,106 | ) | ||||
Total Polymer Group, Inc. shareholders' equity | 49,504 | 158,896 | ||||||
Noncontrolling interests | 89,839 | 843 | ||||||
Total equity | 139,343 | 159,739 | ||||||
Total liabilities and equity | $ | 2,127,616 | $ | 1,464,520 | ||||
See accompanying Notes to Consolidated Financial Statements.
3
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Net sales | $ | 498,013 | $ | 288,979 | $ | 1,360,495 | $ | 867,599 | |||||||
Cost of goods sold | (417,521 | ) | (240,779 | ) | (1,118,952 | ) | (723,143 | ) | |||||||
Gross profit | 80,492 | 48,200 | 241,543 | 144,456 | |||||||||||
Selling, general and administrative expenses | (65,796 | ) | (33,463 | ) | (185,499 | ) | (107,176 | ) | |||||||
Special charges, net | (14,893 | ) | (7,093 | ) | (47,868 | ) | (10,647 | ) | |||||||
Other operating, net | 2,266 | (671 | ) | (2,658 | ) | (1,975 | ) | ||||||||
Operating income (loss) | 2,069 | 6,973 | 5,518 | 24,658 | |||||||||||
Other income (expense): | |||||||||||||||
Interest expense | (28,782 | ) | (13,185 | ) | (67,605 | ) | (37,592 | ) | |||||||
Debt modification and extinguishment costs | (4,987 | ) | — | (15,725 | ) | — | |||||||||
Foreign currency and other, net | (26,588 | ) | 2,298 | (11,626 | ) | (22 | ) | ||||||||
Income (loss) before income taxes | (58,288 | ) | (3,914 | ) | (89,438 | ) | (12,956 | ) | |||||||
Income tax (provision) benefit | 1,137 | (4,353 | ) | 850 | (9,444 | ) | |||||||||
Net income (loss) | (57,151 | ) | (8,267 | ) | (88,588 | ) | (22,400 | ) | |||||||
Less: Earnings attributable to noncontrolling interests | (1,923 | ) | — | (4,216 | ) | — | |||||||||
Net income (loss) attributable to Polymer Group, Inc. | $ | (55,228 | ) | $ | (8,267 | ) | $ | (84,372 | ) | $ | (22,400 | ) | |||
Other comprehensive income (loss): | |||||||||||||||
Currency translation, net of tax | $ | (32,511 | ) | $ | 4,932 | $ | (28,818 | ) | $ | 3,560 | |||||
Employee postretirement benefits, net of tax | — | 63 | — | 188 | |||||||||||
Other comprehensive income (loss) | (32,511 | ) | 4,995 | (28,818 | ) | 3,748 | |||||||||
Comprehensive income (loss) | (89,662 | ) | (3,272 | ) | (117,406 | ) | (18,652 | ) | |||||||
Less: Comprehensive income (loss) attributable to noncontrolling interests | (1,704 | ) | — | (3,994 | ) | — | |||||||||
Comprehensive income (loss) attributable to Polymer Group, Inc. | $ | (87,958 | ) | $ | (3,272 | ) | $ | (113,412 | ) | $ | (18,652 | ) | |||
See accompanying Notes to Consolidated Financial Statements.
4
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(UNAUDITED)
In thousands | Polymer Group, Inc. Shareholders' Equity | |||||||||||||||||||||||||||||
Common Stock | Additional Paid-in Capital | Retained Deficit | Accumulated Other Comprehensive Income (Loss) | Total Polymer Group, Inc. Shareholders' Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||||||
Balance — December 28, 2013 | 1 | $ | — | $ | 294,144 | $ | (127,142 | ) | $ | (8,106 | ) | $ | 158,896 | $ | 843 | $ | 159,739 | |||||||||||||
Issuance of stock | — | — | 750 | — | — | 750 | — | 750 | ||||||||||||||||||||||
Common stock call option reclass | — | — | 1,702 | — | — | 1,702 | — | 1,702 | ||||||||||||||||||||||
Net income (loss) | — | — | — | (84,372 | ) | — | (84,372 | ) | (4,216 | ) | (88,588 | ) | ||||||||||||||||||
Acquisition of noncontrolling interest | — | — | — | — | — | — | 92,990 | 92,990 | ||||||||||||||||||||||
Share-based compensation | — | — | 1,568 | — | — | 1,568 | — | 1,568 | ||||||||||||||||||||||
Currency translation, net of tax | — | — | — | — | (29,040 | ) | (29,040 | ) | 222 | (28,818 | ) | |||||||||||||||||||
Balance — September 27, 2014 | 1 | $ | — | $ | 298,164 | $ | (211,514 | ) | $ | (37,146 | ) | $ | 49,504 | $ | 89,839 | $ | 139,343 | |||||||||||||
See accompanying Notes to Consolidated Financial Statements.
5
POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
In thousands | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | ||||||
Operating activities: | ||||||||
Net income (loss) | $ | (88,588 | ) | $ | (22,400 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Debt modification charges | 11,670 | — | ||||||
Deferred income taxes | (1,154 | ) | (321 | ) | ||||
Depreciation and amortization expense | 88,288 | 51,642 | ||||||
Asset impairment charge | 6,851 | — | ||||||
Inventory step-up | 7,279 | — | ||||||
Accretion of deferred consideration | 1,355 | — | ||||||
(Gain) loss on financial instruments | (6,912 | ) | (3,450 | ) | ||||
(Gain) loss on sale of assets, net | 159 | 198 | ||||||
Non-cash compensation | 1,569 | 3,456 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (21,978 | ) | (12,527 | ) | ||||
Inventories | (6,677 | ) | (7,489 | ) | ||||
Other current assets | (1,314 | ) | (5,618 | ) | ||||
Accounts payable and accrued liabilities | (9,426 | ) | 8,233 | |||||
Other, net | 30,936 | (7,618 | ) | |||||
Net cash provided by (used in) operating activities | 12,058 | 4,106 | ||||||
Investing activities: | ||||||||
Purchases of property, plant and equipment | (53,809 | ) | (35,499 | ) | ||||
Proceeds from sale of assets | 2,635 | 25 | ||||||
Acquisition of intangibles and other | (182 | ) | (4,486 | ) | ||||
Acquisitions, net of cash acquired | (356,039 | ) | — | |||||
Net cash provided by (used in) investing activities | (407,395 | ) | (39,960 | ) | ||||
Financing activities: | ||||||||
Proceeds from long-term borrowings | 628,152 | 18,490 | ||||||
Proceeds from short-term borrowings | 21,594 | 1,879 | ||||||
Repayment of long-term borrowings | (121,070 | ) | (5,266 | ) | ||||
Repayment of short-term borrowings | (8,222 | ) | (2,476 | ) | ||||
Loan acquisition costs | (21,289 | ) | — | |||||
Debt modification costs | (4,055 | ) | — | |||||
Issuance of common stock | 750 | (222 | ) | |||||
Net cash provided by (used in) financing activities | 495,860 | 12,405 | ||||||
Effect of exchange rate changes on cash | (3,904 | ) | 248 | |||||
Net change in cash and cash equivalents | 96,619 | (23,201 | ) | |||||
Cash and cash equivalents at beginning of period | 86,064 | 97,879 | ||||||
Cash and cash equivalents at end of period | $ | 182,683 | $ | 74,678 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash payments for interest | $ | 72,044 | $ | 46,505 | ||||
Cash payments (receipts) for taxes, net | $ | 6,352 | $ | 14,830 | ||||
See accompanying Notes to Consolidated Financial Statements.
6
POLYMER GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Description of Business
Polymer Group, Inc. (“Polymer” or “PGI”), a Delaware corporation, and its consolidated subsidiaries (the “Company”) is a leading global innovator and manufacturer of specialty materials, primarily focused on the production of nonwoven products. The Company has one of the largest global platforms in the industry, with a total of 24 manufacturing and converting facilities located in 14 countries throughout the world. The Company operates through four reportable segments: North America, South America, Europe and Asia, with the main sources of revenue being the sales of primary and intermediate products to consumer and industrial markets.
Note 2. Basis of Presentation
The accompanying consolidated financial statements reflect the consolidated operations of the Company and have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) as defined by the Financial Accounting Standards Board (“FASB”) within the FASB Accounting Standards Codification (“ASC”). In the opinion of management, the accompanying consolidated financial statements contain all adjustments, which include normal recurring adjustments, necessary to present fairly the consolidated results for the periods presented. Certain reclassifications of amounts reported in prior periods have been made to conform with the current period presentation.
On January 28, 2011, pursuant to an Agreement and Plan of Merger, dated as of October 4, 2010, the Company was acquired by affiliates of the Blackstone Group (“Blackstone”), along with certain members of the Company's management (the "Merger"), for an aggregate purchase price valued at $403.5 million. As a result, the Company became a privately-held company. Under the guidance provided by the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin Topic 5J, “New Basis of Accounting Required in Certain Circumstances,” push-down accounting is required when such transactions result in an entity becoming substantially wholly-owned. Therefore, the basis in shares of common stock of the Company has been pushed down to the Company from PGI Specialty Materials, Inc., a Delaware corporation ("PGI-SMI") that owns 100% of the issued and outstanding common stock of Scorpio Acquisition Corporation, a Delaware corporation ("Parent") that owns 100% of the issued and outstanding common stock of the Company.
The Company's fiscal year is based on a 52 week period ending on the Saturday closest to each December 31. The three months ended September 27, 2014 and September 28, 2013 contain operating results for 13 weeks, respectively. The nine months ended September 27, 2014 and September 28, 2013 each contain operating results for 39 weeks.
Note 3. Recent Accounting Pronouncements
In August 2014, the FASB issued Accounting Standard Update (“ASU”) No. 2014-15, “Presentation of Financial Statements - Going Concern” (“ASU 2014-15”). The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. Management’s evaluation should be based on relevant conditions or events, considered in the aggregate, that are known and reasonably knowable at the date that the financial statements are issued. ASU 2014-15 is effective prospectively for reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material effect on its financial results.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which creates a comprehensive, five-step model for revenue recognition that requires a company to recognize revenue to depict the transfer of promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Under the new guidance, a company will be required to use more judgment and make more estimates when considering contract terms as well as relevant facts and circumstances when identifying performance obligations, estimating the amount of variable consideration in the transaction price and allocating the transaction price to each separate performance obligation. In addition, ASU 2014-09 enhances disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. Early application is not permitted. The Company is currently evaluating the impact of adopting ASU 2014-09 on its financial results.
7
In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" ("ASU 2014-08"), which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or a group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. In addition, ASU 2014-08 enhances disclosures for reporting discontinued operations. ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material effect on its financial results.
In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"), which requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013, with retroactive application permitted. The Company adopted this accounting pronouncement effective December 29, 2013.
Note 4. Acquisitions
Providência Acquisition
On January 27, 2014, the Company announced that PGI Polímeros do Brazil, a Brazilian corporation and wholly-owned subsidiary of the Company ("PGI Acquisition Company"), entered into a Stock Purchase Agreement with Companhia Providência Indústria e Comércio, a Brazilian corporation ("Providência") and certain shareholders named therein. Pursuant to the terms and subject to the conditions of the Stock Purchase Agreement, PGI Acquisition Company agreed to acquire a 71.25% controlling interest in Providência (the “Providência Acquisition”). Providência is a leading manufacturer of nonwovens primarily used in hygiene applications as well as industrial and healthcare applications. Based in Brazil, Providência has three locations, including one in the United States.
The Providência Acquisition was completed on June 11, 2014 (the "Providência Acquisition Date") for an aggregate purchase price of $424.6 million and funded with the proceeds from borrowings under an incremental term loan amendment to the Company's existing Senior Secured Credit Agreement as well as the proceeds from the issuance of $210.0 million of 6.875% Senior Unsecured Notes due in 2019.
The components of the purchase price are as follows:
In thousands | Consideration | ||
Cash consideration paid to selling stockholders | $ | 187,885 | |
Cash consideration deposited into escrow | 8,242 | ||
Deferred consideration | 47,931 | ||
Debt repaid | 180,532 | ||
Total consideration | $ | 424,590 | |
Total consideration paid included $47.9 million of deferred consideration, which shall accrete at a rate of 9.5% per annum compounded daily, which shall be paid to the selling stockholders to the extent certain existing and potential tax claims are resolved. Based on management's best estimate, resolution and payment of the existing and potential tax claims is anticipated in 2016 or later. As a result, the deferred consideration is classified as a noncurrent liability. Following the closing of the Providência Acquisition, pursuant to Brazilian Corporation Law and Providência’s Bylaws, PGI Acquisition Company launched a tender offer on substantially the same terms and conditions as the Stock Purchase Agreement to acquire the remaining outstanding capital stock of Providência from the minority shareholders (the “Mandatory Tender Offer”).
The Providência Acquisition was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations. As a result, the total purchase price has been allocated to assets acquired and liabilities assumed based on the preliminary estimate of fair market value of such assets and liabilities at the Providência Acquisition Date. Any excess of the purchase price is recognized as goodwill.
8
During the third quarter of 2014, the Company obtained new information related to the assets acquired and liabilities assumed of Providência. The facts and circumstances existed at the date of acquisition and, if known, would have affected the measurement of the amounts recognized at that date. In accordance with ASC 805, "Business Combinations" ("ASC 805"), measurement period adjustments are not included in current earnings, but recognized as of the date of acquisition with a corresponding adjustment to goodwill resulting from the change in preliminary amounts. As a result, the Company adjusted the preliminary allocation of the purchase price initially recorded at the Providência Acquisition Date to reflect these measurement period adjustments. The final valuation associated with the Providência Acquisition is expected to be completed during the first half of 2015.
The initial allocation of the purchase price and related measurement period adjustments are as follows:
In thousands | Preliminary June 11, 2014 | Measurement Period Adjustments | Adjusted June 11, 2014 | ||||||
Cash | $ | 20,621 | $ | — | $ | 20,621 | |||
Accounts receivable | 56,976 | (4,047 | ) | 52,929 | |||||
Inventory | 33,000 | 1,451 | 34,451 | ||||||
Other current assets | 27,748 | 4,100 | 31,848 | ||||||
Total current assets | 138,345 | 1,504 | 139,849 | ||||||
Property, plant and equipment | 400,000 | — | 400,000 | ||||||
Goodwill | 106,335 | 1,162 | 107,497 | ||||||
Intangible assets | 4,770 | (270 | ) | 4,500 | |||||
Other noncurrent assets | 12,288 | — | 12,288 | ||||||
Total assets acquired | $ | 661,738 | $ | 2,396 | $ | 664,134 | |||
Current liabilities | $ | 28,863 | $ | 2,742 | $ | 31,605 | |||
Total debt | 74,930 | — | 74,930 | ||||||
Deferred income taxes | 38,373 | (346 | ) | 38,027 | |||||
Other noncurrent liabilities | 1,992 | — | 1,992 | ||||||
Noncontrolling interest | 92,990 | — | 92,990 | ||||||
Total liabilities assumed | $ | 237,148 | $ | 2,396 | $ | 239,544 | |||
Net assets acquired | $ | 424,590 | $ | — | $ | 424,590 | |||
Cash, accounts receivable and current liabilities were stated at their historical carrying values, which approximate fair value, given the short-term nature of these assets and liabilities. The preliminary estimate of fair value for inventories was based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose of the inventory as well as the replacement cost of the inventory, where applicable. As a result, the Company increased the carrying value of inventory by $4.9 million. The preliminary estimate of fair value for property, plant and equipment was based on management's assessment of the acquired assets condition, as well as an evaluation of the current market value for such assets. In addition, the Company also considered the length of time over which the economic benefit of these assets is expected to be realized and adjusted the useful life of such assets accordingly as of the valuation date. As a result, the Company increased the carrying value of property, plant and equipment by $77.8 million. The preliminary estimate of fair value of the noncontrolling interest was based upon management's preliminary assessment of the current market value of the outstanding shares of stock.
The Company recorded intangible assets based on a preliminary estimate of fair value, and consisted of a finite-lived customer relationship intangible asset with an estimated fair value of $4.5 million. The valuation was determined using an income approach methodology using the multi-period excess earnings method. The average estimated useful life of the intangible asset is considered to be 15 years, determined based upon various accounting studies, historical acquisition experience, economic factors and future cash flows.
The excess of the purchase price over the preliminary amounts allocated to specific assets and liabilities is included in goodwill. The premium in the purchase price paid by the Company for the acquisition of Providência broadens our scale and further solidifies the Company's position as the largest manufacturer of nonwovens in the world. The Company anticipates that the broad base of clients associated with the acquisition of Providência will enhance the Company's position in hygiene products and markets as well as strengthen our position in the Americas. In the short-term, the Company anticipates realizing operational
9
and cost synergies at Providência that include purchasing optimization due to larger volumes, reduced manufacturing costs and lower general and administrative costs.
Acquisition related costs were as follows:
In thousands | Amount | ||
Loan acquisition costs | $ | 21,297 | |
Transaction expenses | 15,766 | ||
Total | $ | 37,063 | |
Capitalized loan acquisition costs related to the Providência Acquisition of $10.6 million were recorded within Intangible assets, net in the Consolidated Balance Sheets and are amortized over the term of the loan to which such costs relate. The remainder, $10.7 million, was expensed as incurred during the second quarter and included within Debt modification and extinguishment costs in the Consolidated Statements of Comprehensive Income (Loss). In accordance with ASC 805, transaction expenses related to the Providência Acquisition were expensed as incurred within Special charges, net in the Consolidated Statements of Comprehensive Income (Loss).
Fiberweb Acquisition
On September 17, 2013, PGI Acquisition Limited, a wholly-owned subsidiary of the Company, entered into an agreement with Fiberweb plc ("Fiberweb") containing the terms of a cash offer to purchase 100% of the issued and to be issued ordinary share capital of Fiberweb at a cash price of £1.02 per share (the "Fiberweb Acquisition"). Under the terms of the agreement, Fiberweb would become a wholly-owned subsidiary of the Company. The offer was effected by a court sanctioned scheme of arrangement of Fiberweb under Part 26 of the UK Companies Act 2006 and consummated on November 15, 2013 (the "Fiberweb Acquisition Date"). The aggregate purchase price was valued at $287.8 million and funded on November 27, 2013 with the proceeds of borrowings under a $268.0 million Senior Secured Bridge Credit Agreement and a $50.0 million Senior Unsecured Bridge Credit Agreement (together, the "Bridge Facilities"). The Bridge Facilities were subsequently refinanced, along with transaction expenses, with the proceeds from a $295.0 million Senior Secured Credit Agreement and a $30.7 million equity investment from Blackstone. Fiberweb is one of the largest global manufacturers of specialized technical fabrics with eight production sites in six countries.
The Fiberweb Acquisition was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations. As a result, the total purchase price was allocated to assets acquired and liabilities assumed based on the preliminary estimated fair market value of such assets and liabilities at the Fiberweb Acquisition Date. Any excess of the purchase price was recognized as goodwill. During the third quarter of 2014, the Company finalized its fair market value estimates of assets acquired and liabilities assumed with the assistance of a third-party valuation specialist. In accordance with ASC 805, measurement period adjustments are not included in current earnings, but recognized as of the date of acquisition with a corresponding adjustment to goodwill resulting from the change in preliminary amounts. As a result, the Company adjusted the preliminary allocation of the purchase price initially recorded at the Fiberweb Acquisition Date and retrospectively adjusted its Consolidated Balance Sheet at December 28, 2013 to reflect these measurement period adjustments. The preliminary allocation of the purchase price and related measurement period adjustments are as follows:
10
In thousands | Preliminary November 15, 2013 | Measurement Period Adjustments | Adjusted November 15, 2013 | ||||||
Cash | $ | 8,792 | $ | — | $ | 8,792 | |||
Accounts receivable | 49,967 | — | 49,967 | ||||||
Inventory | 71,050 | 31 | 71,081 | ||||||
Other current assets | 29,889 | — | 29,889 | ||||||
Total current assets | 159,698 | 31 | 159,729 | ||||||
Property, plant and equipment | 158,000 | 29,529 | 187,529 | ||||||
Goodwill | 38,514 | (4,815 | ) | 33,699 | |||||
Intangible assets | 85,000 | 996 | 85,996 | ||||||
Other noncurrent assets | 1,403 | — | 1,403 | ||||||
Total assets acquired | $ | 442,615 | $ | 25,741 | $ | 468,356 | |||
Current liabilities | $ | 84,185 | $ | 70 | $ | 84,255 | |||
Financing Obligation | 20,300 | — | 20,300 | ||||||
Total debt | 19,391 | — | 19,391 | ||||||
Deferred income taxes | 20,649 | 25,325 | 45,974 | ||||||
Other noncurrent liabilities | 9,479 | 346 | 9,825 | ||||||
Noncontrolling interest | 849 | — | 849 | ||||||
Total liabilities assumed | $ | 154,853 | $ | 25,741 | $ | 180,594 | |||
Net assets acquired | $ | 287,762 | $ | — | $ | 287,762 | |||
Cash, accounts receivable and current liabilities were stated at their historical carrying values, which approximate fair value, given the short-term nature of these assets and liabilities. The estimate of fair value for inventories was based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose of the inventory as well as the replacement cost of the inventory, where applicable. As a result, the Company increased the carrying value of inventory by $9.7 million. The estimate of fair value for property, plant and equipment was based on management's assessment of the acquired assets condition, as well as an evaluation of the current market value for such assets. In addition, the Company also considered the length of time over which the economic benefit of these assets is expected to be realized and adjusted the useful life of such assets accordingly as of the valuation date. As a result, the Company increased the carrying value of property, plant and equipment by $24.5 million.
The Company recorded intangible assets based on an estimate of fair value, and consisted of the following:
In thousands | Useful Life | Amount | |||
Technology | 15 years | $ | 31,827 | ||
Trade names | Indefinite | 11,412 | |||
Customer relationships | 20 years | 42,757 | |||
Total | $ | 85,996 | |||
The Company allocated $11.4 million to trade names, primarily related to Typar and Reemay. Management considered many factors in the determination that it will account for the asset as indefinite-lived, including the current market leadership position of the name as well as the recognition in the industry. Therefore, in accordance with current accounting guidance, the indefinite-lived intangible asset will not be amortized, but instead tested for impairment at least annually (more frequently if certain indicators are present).
The excess of the purchase price over the amounts allocated to specific assets and liabilities is included in goodwill. The premium in the purchase price paid by the Company for the acquisition of Fiberweb reflects the establishment of the largest manufacturer of nonwovens in the world. The Company anticipates that the improved diversity associated with the acquisition of Fiberweb will provide a foundation for enhanced access to customers in highly specialized, niche end markets as well as provide complementary solutions and new technologies to address our customer's desire for innovation and customized solutions. In the
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short-term, the Company anticipates realizing significant operational and cost synergies at Fiberweb that include purchasing optimization due to larger volumes, reduced manufacturing costs and lower general and administrative costs.
Acquisition related costs were as follows:
In thousands | Amount | ||
Loan acquisition costs | $ | 16,094 | |
Transaction expenses | 15,764 | ||
Total | $ | 31,858 | |
Loan acquisition costs related to the Fiberweb Acquisition were capitalized and recorded within Intangible assets, net in the Consolidated Balance Sheets and amortized over the term of the loan to which such costs relate. In accordance with ASC 805, transaction expenses related to the Fiberweb Acquisition were expensed as incurred within Special charges, net in the Consolidated Statements of Comprehensive Income (Loss).
Pro Forma Information
The following unaudited pro forma information assumes the acquisition of both Fiberweb and Providência occurred as of the beginning of the earliest period presented:
In thousands | Three Months Ended September 27, 2014 | Nine Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 28, 2013 | ||||||||
Net sales | $ | 498,013 | $ | 1,505,053 | $ | 495,215 | $ | 1,475,186 | ||||
Net income (loss) | (55,228 | ) | (121,007 | ) | (44,199 | ) | (57,341 | ) | ||||
The unaudited pro forma information does not purport to be indicative of the results that actually would have been achieved had the operations been combined during the periods presented, nor is it intended to be a projection of future results or trends. Net sales attributable to Providência for the three and nine months ended September 27, 2014 was $91.1 million and $111.8 million, respectively. Gross profit attributable to Providência for the three and nine months ended September 27, 2014 was $9.0 million and $14.5 million.
PGI Acquisition
On January 28, 2011, pursuant to an Agreement and Plan of Merger, dated as of October 4, 2010, the Company was acquired by Blackstone, along with certain members of the Company's management (the "Merger"), for an aggregate purchase price valued at $403.5 million. As a result, the Company became a privately-held company. The Merger was financed by $560.0 million in aggregate principal of debt financing as well as common equity capital. In addition, the Company repaid its existing outstanding debt.
The Merger was recorded using the acquisition method of accounting in accordance with the accounting guidance for business combinations and non-controlling interest. The purchase price has been allocated to assets acquired and liabilities assumed based on the estimated fair market value of such assets and liabilities at the date of merger and resulted in goodwill of $86.4 million and intangible assets of $72.0 million, of which $48.5 million related to definite-lived intangible assets and $23.5 million related to indefinite-lived tradenames. Cash and cash equivalents, accounts receivable and accounts payable were stated at their historical carrying values, which approximate their fair value, given the short-term nature of these assets and liabilities. Inventories were recorded at fair value, based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose the inventory as well as the replacement cost of the inventory, where applicable.
Note 5. Accounts Receivable Factoring Agreements
In the ordinary course of business, the Company may utilize accounts receivable factoring agreements with third-party financial institutions in order to accelerate its cash collections from product sales. In addition, these agreements provide the Company with the ability to limit credit exposure to potential bad debts, to better manage costs related to collections as well as to enable customers to extend their credit terms. These agreements involve the ownership transfer of eligible trade accounts receivable, without recourse or discount, to a third party financial institution in exchange for cash.
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The Company accounts for these transactions in accordance with ASC 860, "Transfers and Servicing" ("ASC 860"). ASC 860 allows for the ownership transfer of accounts receivable to qualify for sale treatment when the appropriate criteria is met, which permits the Company to present the balances sold under the program to be excluded from Accounts receivable, net on the Consolidated Balance Sheet. Receivables are considered sold when (i) they are transferred beyond the reach of the Company and its creditors, (ii) the purchaser has the right to pledge or exchange the receivables, and (iii) the Company has surrendered control over the transferred receivables. In addition, the Company provides no other forms of continued financial support to the purchaser of the receivables once the receivables are sold. Amounts due from financial institutions are included in Other current assets in the Consolidated Balance Sheet.
The Company has a U.S. based program where certain U.S. based receivables are sold to an unrelated third-party financial institution. Under the current terms of the U.S. agreement, the maximum amount of outstanding advances at any one time is $20.0 million, which limitation is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. In addition, the Company's subsidiaries in Mexico, Colombia, Brazil, Spain, France and the Netherlands have entered into factoring agreements to sell certain receivables to unrelated third-party financial institutions. Under the terms of the non-U.S. agreements, the maximum amount of outstanding advances at any one time is $79.5 million (measured at September 27, 2014 foreign exchange rates), which limitation is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold.
The following is a summary of receivables sold to the third-party financial institutions that existed at the following balance sheet dates:
In thousands | September 27, 2014 | December 28, 2013 | |||||
Trade receivables sold to financial institutions | $ | 93,836 | $ | 71,542 | |||
Net amounts advanced from financial institutions | 84,124 | 63,667 | |||||
Amounts due from financial institutions | $ | 9,712 | $ | 7,875 | |||
The Company sold $471.9 million and $300.9 million of receivables under the terms of the factoring agreements during the nine months ended September 27, 2014 and September 28, 2013, respectively. The year-over-year increase in receivables sold is primarily attributable to accounts receivable factoring agreements acquired with both the Fiberweb Acquisition and the Providência Acquisition. In addition, a new agreement that was established in France contributed to the increase. The Company pays a factoring fee associated with the sale of receivables based on the invoice value of the receivables sold. During the three months ended September 27, 2014 and September 28, 2013, factoring fees incurred were $0.4 million and $0.3 million, respectively. Amounts incurred were $1.2 million and $0.9 million during the nine months ended September 27, 2014 and September 28, 2013, respectively. These amounts are recorded within Foreign currency and other, net in the Consolidated Statements of Comprehensive Income (Loss).
Note 6. Inventories
At September 27, 2014 and December 28, 2013, the major classes of inventory were as follows:
In thousands | September 27, 2014 | December 28, 2013 | |||||
Raw materials and supplies | $ | 62,936 | $ | 55,544 | |||
Work in process | 20,765 | 19,102 | |||||
Finished goods | 98,504 | 81,428 | |||||
Total | $ | 182,205 | $ | 156,074 | |||
Inventories are stated at the lower of cost, determined on the first-in, first-out ("FIFO") method, or fair market value. The Company performs periodic assessments to determine the existence of obsolete, slow-moving and non-saleable inventories and records necessary provisions to reduce such inventories to net realizable value. Reserve balances, primarily related to obsolete and slow-moving inventories, were $5.4 million and $3.3 million at September 27, 2014 and December 28, 2013, respectively.
As a result of the acquisition of Providência, the Company increased the carrying value of inventory by $4.9 million as of the Providência Acquisition Date in order to adjust to estimated fair value in accordance with the accounting guidance for business combinations. The preliminary change in the fair value of the assets was based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose of the inventory as well as the replacement cost of the
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inventory, where applicable. The step-up in inventory value is amortized to Cost of goods sold over the period of Providência's normal inventory turns, which approximates one month.
As a result of the acquisition of Fiberweb, the Company increased the carrying value of inventory by $9.7 million as of the Fiberweb Acquisition Date in order to adjust to estimated fair value in accordance with the accounting guidance for business combinations. The change in the fair value of the assets was based on computations which considered many factors including the estimated selling price of the inventory, the cost to dispose of the inventory as well as the replacement cost of the inventory, where applicable. The step-up in inventory value was amortized to Cost of goods sold over the period of Fiberweb's normal inventory turns, which approximated two months.
Note 7. Intangible Assets
Indefinite-lived intangible assets are tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events or circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset. All other intangible assets with finite useful lives are being amortized on a straight-line basis over their estimated useful lives.
The following table sets forth the gross amount and accumulated amortization of the Company's intangible assets at September 27, 2014 and December 28, 2013:
In thousands | September 27, 2014 | December 28, 2013 | |||||
Technology | $ | 63,726 | $ | 63,705 | |||
Customer relationships | 64,339 | 60,078 | |||||
Loan acquisition costs | 40,618 | 30,067 | |||||
Other | 7,088 | 6,928 | |||||
Total gross finite-lived intangible assets | 175,771 | 160,778 | |||||
Accumulated amortization | (38,930 | ) | (26,291 | ) | |||
Total net finite-lived intangible assets | 136,841 | 134,487 | |||||
Tradenames (indefinite-lived) | 34,912 | 34,912 | |||||
Total | $ | 171,753 | $ | 169,399 | |||
As of September 27, 2014, the Company had recorded intangible assets of $171.8 million, which includes amounts associated with loan acquisition costs. These expenditures represent the cost of obtaining financings that are capitalized in the balance sheet and amortized over the term of the loans to which such costs relate.
The following table presents amortization of the Company's intangible assets for the following periods:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Intangible assets | $ | 1,274 | $ | 1,677 | $ | 7,773 | $ | 4,910 | |||||||
Loan acquisition costs | 1,670 | 607 | 3,970 | 1,821 | |||||||||||
Total | $ | 2,944 | $ | 2,284 | $ | 11,743 | $ | 6,731 | |||||||
Estimated amortization expense on existing intangible assets for each of the next five years, including fiscal year 2014, is expected to approximate $16 million in 2014, $16 million in 2015, $16 million in 2016, $15 million in 2017 and $15 million in 2018.
Note 8. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
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In thousands | September 27, 2014 | December 28, 2013 | |||||
Accounts payable to vendors | $ | 205,851 | $ | 209,031 | |||
Accrued compensation and benefits | 41,878 | 33,889 | |||||
Accrued interest | 12,794 | 19,063 | |||||
Other accrued expenses | 50,817 | 45,748 | |||||
Total | $ | 311,340 | $ | 307,731 | |||
Note 9. Debt
The following table presents the Company's outstanding debt at September 27, 2014 and December 28, 2013:
In thousands | September 27, 2014 | December 28, 2013 | |||||
Term Loans | $ | 706,510 | $ | 293,545 | |||
Senior Secured Notes | 504,000 | 560,000 | |||||
Senior Unsecured Notes | 210,000 | — | |||||
ABL Facility | — | — | |||||
Argentina credit facilities: | |||||||
Nacion Facility | 5,843 | 8,341 | |||||
Galicia Facility | 2,367 | 3,082 | |||||
China Credit Facility | 22,420 | 24,920 | |||||
Brazil export credit facilities: | |||||||
Itaú Facility ($) | — | — | |||||
Itaú Facility (R$) | 20,720 | — | |||||
Recovery Zone Facility Bonds | — | — | |||||
India Loans | 2,771 | 3,216 | |||||
Capital lease obligations | 946 | 1,092 | |||||
Total long-term debt including current maturities | 1,475,577 | 894,196 | |||||
Short-term borrowings | 15,802 | 2,472 | |||||
Total debt | $ | 1,491,379 | $ | 896,668 | |||
The fair value of the Company's long-term debt was $1,489.7 million at September 27, 2014 and $933.8 million at December 28, 2013. The fair value of long-term debt is based upon quoted market prices in inactive markets or on available rates for debt with similar terms and maturities (Level 2).
Term Loans
On December 19, 2013, the Company entered into a Senior Secured Credit Agreement (the loans thereunder, the "Term Loans") with a maturity date upon the earlier of (i) December 19, 2019 and (ii) the 91st day prior to the scheduled maturity of the Company's 7.75% Senior Secured Notes; provided that on such 91st day, such 7.75% Senior Secured Notes has an outstanding aggregate principal amount in excess of $150.0 million. The Term Loans provide for a commitment by the lenders to make secured term loans in an aggregate amount not to exceed $295.0 million, the proceeds of which were used to partially repay amounts outstanding under the Senior Secured Bridge Credit Agreement and the Senior Unsecured Bridge Credit Agreement.
Borrowings bear interest at a fluctuating rate per annum equal to, at the Company's option, (i) a base rate equal to the highest of (a) the federal funds rate plus ½ of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Citicorp North America, Inc. as its "prime rate" and (c) the LIBOR rate for a one-month interest period plus 1.0% (provided that in no event shall such base rate with respect to the Term Loans be less than 2.0% per annum), in each case plus an applicable margin of 3.25% or (ii) a LIBOR rate for the applicable interest period (provided that in no event shall such LIBOR rate with respect to the Term Loans be less than 1.0% per annum) plus an applicable margin of 4.25%. The applicable margin for the Term Loans is subject to a 25 basis point step-down upon the achievement of a certain senior secured net leverage ratio. The Company is required to repay installments on the Term Loans in quarterly installments in aggregate amounts equal to 1.0% per annum of their funded total principal amount, with the remaining amount payable on the maturity date.
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On June 10, 2014, the Company entered into an incremental term loan amendment (the "Incremental Amendment") to the existing Term Loans in which the Company obtained $415.0 million of commitments for incremental term loans from the existing lenders, the terms of which are substantially identical to the terms of the Term Loans. Pursuant to the Incremental Amendment, the Company borrowed $310.0 million, the proceeds of which were used to fund a portion of the consideration paid for the Providência Acquisition. The remaining commitments were available for borrowing until December 31, 2014. However, the Company used the proceeds from remaining commitments to repay existing indebtedness during the third quarter.
The Term Loans are secured (i) together with the Tranche 2 (as defined below) loans, on a first-priority lien basis by substantially all of the assets of the Company, and any existing and future subsidiary guarantors (other than collateral securing the ABL Facility on a first-priority basis), including all of the capital stock of the Company and each restricted subsidiary (which, in the case of foreign subsidiaries, will be limited to 65% of the capital stock of each first-tier foreign subsidiary) and (ii) on a second-priority basis by the collateral securing the ABL Facility, in each case, subject to certain exceptions and permitted liens. The Company may voluntarily repay outstanding loans at any time without premium or penalty, other than voluntary prepayment of Term Loans in connection with a repricing transaction on or prior to the date that is six months after the closing date of the Incremental Amendment and customary "breakage" costs with respect to LIBOR loans.
The agreement governing the Term Loans, among other restrictions, limit the Company's ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional debt or issue disqualified stock or preferred stock; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) repurchase stock; (v) incur certain liens; (vi) enter into transactions with affiliates; (vii) merge or consolidate; (viii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments to Polymer Group, Inc.; (ix) designate restricted subsidiaries as unrestricted subsidiaries; and (x) transfer or sell assets. In addition, the Term Loans contain certain customary representations and warranties, affirmative covenants and events of default.
Under the credit agreement governing the Term Loans, the Company's ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by the Company's ability to satisfy tests based on Adjusted EBITDA (defined as Consolidated EBITDA in the credit agreement governing the Terms Loans).
Senior Secured Notes
In connection with the Merger, the Company issued $560.0 million of 7.75% Senior Secured Notes due 2019 on January 28, 2011. The notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis, by each of the Polymer Group's wholly-owned domestic subsidiaries. Interest on the notes is paid semi-annually on February 1 and August 1 of each year. On July 23, 2014, the Company redeemed $56.0 million of the Senior Secured Notes at a redemption price of 103.0% of the aggregate principal amount plus any accrued and unpaid interest, to, but excluding, July 23, 2014. The redemption amount was funded by proceeds from the Incremental Amendment. Pursuant to ASC 470, "Modifications and Extinguishments" ("ASC 470"), the Company recognized a loss on debt extinguishment of $2.6 million, which included $0.9 million related to unamortized debt issuance costs. As the nature of this transaction related to a non-operating event, the loss on extinguishment is included in Debt modifications and extinguishment costs in the current period.
The indenture governing the Senior Secured Notes limits, subject to certain exceptions, the ability of the Company and its restricted subsidiaries to: (i) incur or guarantee additional debt or issue disqualified stock or preferred stock; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) incur certain liens; (v) enter into transactions with affiliates; (vi) merge or consolidate; (vii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments to Polymer Group, Inc.; (viii) designate restricted subsidiaries as unrestricted subsidiaries; and (ix) transfer or sell assets. It does not limit the activities of the Parent or the amount of additional indebtedness that Parent or its parent entities may incur. In addition, it also provides for specified events of default, which, if any of them occurs, would permit or require the principal of and accrued interest on the Senior Secured Notes to become or to be declared due and payable.
Under the indenture governing the Senior Secured Notes, the Company's ability to engage in certain activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by the Company's ability to satisfy tests based on Adjusted EBITDA (defined as EBITDA in the indenture governing the Senior Secured Notes).
Senior Unsecured Notes
In connection with the Providência Acquisition, the Company issued $210.0 million of 6.875% Senior Unsecured Notes due 2019 on June 11, 2014. The notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by each of the Polymer Group's wholly-owned domestic subsidiaries. Interest on the notes is paid semi-annually on June 1 and December 1 of each year.
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The indenture governing the Senior Unsecured Notes limits, subject to certain exceptions, the ability of the Company and its restricted subsidiaries to: (i) incur or guarantee additional debt or issue disqualified stock or preferred stock; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) incur certain liens; (v) enter into transactions with affiliates; (vi) merge or consolidate; (vii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments to Polymer Group, Inc.; (viii) designate restricted subsidiaries as unrestricted subsidiaries; and (iv) transfer or sell assets. It does not limit the activities of the Parent or the amount of additional indebtedness that Parent or its parent entities may incur. In addition, it also provides for specified events of default which, if any occurs, would permit or require the principal of and accrued interest on the Senior Unsecured Notes to become or to be declared due and payable.
Under the indenture governing the Senior Unsecured Notes, the Company's ability to engage in certain activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by the Company's ability to satisfy tests based on Adjusted EBITDA (defined as EBITDA in the indenture governing the Senior Unsecured Notes).
ABL Facility
On January 28, 2011, the Company entered into a senior secured asset-based revolving credit facility which was amended and restated on October 5, 2012 (the "ABL Facility") to provide for borrowings not to exceed $50.0 million, subject to borrowing base availability. The ABL Facility provides borrowing capacity available for letters of credit and borrowings on a same-day basis and is comprised of (i) a revolving tranche of up to $42.5 million (“Tranche 1”) and (ii) a first-in, last out revolving tranche of up to $7.5 million (“Tranche 2”). Provided that no default or event of default was then existing or would arise therefrom, the Company had the option to request that the ABL Facility be increased by an amount not to exceed $20.0 million. The facility matures on October 5, 2017.
On November 26, 2013, the Company entered into an amendment to the ABL Facility which increased the Tranche 1 revolving credit commitments by $30.0 million (for a total aggregate revolving credit commitment of $80.0 million) as well as made certain other changes to the agreement. In addition, the Company increased the amount by which the Company can request that the ABL Facility be increased at the Company's option to an amount not to exceed $75.0 million. The effectiveness of the amendment was subject to the satisfaction of certain specified closing conditions by no later than January 31, 2014, all of which were satisfied prior to such date.
Based on current average excess availability, the borrowings under the ABL Facility will bear interest at a rate per annum equal to, at the Company's option, either (A) British Bankers Association LIBOR Rate (“LIBOR”) (adjusted for statutory reserve requirements) plus a margin of (i) 2.00% in the case of Tranche 1 or (ii) 4.00% in the case of Tranche 2; or (B) the higher of (a) the rate of interest in effect for such day as publicly announced from time to time by Citibank, N.A. as its "prime rate" and (b) the federal funds effective rate plus ½ of 1.0% (“ABR”) plus a margin of (x) 1.00% in the case of Tranche 1 or (y) 3.00% in the case of the Tranche 2. As of September 27, 2014, the Company had no outstanding borrowings under the ABL Facility. The borrowing base availability was $61.9 million, however, outstanding letters of credit in the aggregate amount of $19.3 million left $42.6 million available for additional borrowings. The aforementioned letters of credit were primarily provided to certain administrative service providers and financial institutions. None of these letters of credit had been drawn on as of September 27, 2014.
The ABL Facility contains certain restrictions which limit the Company's ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional debt; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) repurchase stock; (v) incur certain liens; (vi) enter into transactions with affiliates; (vii) merge or consolidate or other fundamental changes; (viii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments; (ix) designate restricted subsidiaries as unrestricted subsidiaries; (x) transfer or sell assets and (xi) prepay junior financing or other restricted debt. In addition, it contains certain customary representations and warranties, affirmative covenants and events of default. If such an event of default occurs, the lenders under the ABL Facility would be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor.
Under the credit agreement governing the ABL Facility, the Company's ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part by, the Company's ability to satisfy tests based on Adjusted EBITDA (defined as Consolidated EBITDA in the credit agreement governing the ABL Facility).
Nacion Facility
In January 2007, the Company's subsidiary in Argentina entered into an arrangement with banking institutions in Argentina in order to finance the installation of a new spunmelt line at its facility near Buenos Aires, Argentina. The maximum borrowings available under the facility, excluding any interest added to principal, were 33.5 million Argentine pesos with respect to an Argentine
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peso-denominated loan and $26.5 million with respect to a U.S. dollar-denominated loan. The loans are secured by pledges covering (i) the subsidiary's existing equipment lines; (ii) the outstanding stock of the subsidiary; and (iii) the new machinery and equipment being purchased, as well as a trust assignment agreement related to a portion of receivables due from certain major customers of the subsidiary.
The interest rate applicable to borrowings under these term loans is based on LIBOR plus 290 basis points for the U.S. dollar-denominated loan and Buenos Aires Interbanking Offered Rate plus 475 basis points for the Argentine peso-denominated loan. Principal and interest payments began in July 2008 with the loans maturing as follows: annual amounts of $3.5 million beginning in 2011 and continuing through 2015, and the remaining $1.7 million in 2016.
In connection with the Merger, the Company repaid and terminated the Argentine peso-denominated loan. In addition, the U.S. denominated loan was adjusted to reflect its fair value as of the date of the Merger. As a result, the Company recorded a contra-liability in Long-term debt and will amortize the balance over the remaining life of the facility. At September 27, 2014, the face amount of the outstanding indebtedness under the U.S. dollar-denominated loan was $6.0 million, with a carrying amount of $5.8 million and a weighted average interest rate of 3.13%.
Galicia Facility
On September 27, 2013, the Company's subsidiary in Argentina entered into an arrangement with a banking institution in Argentina in order to partially finance the upgrade of a manufacturing line at its facility located near Buenos Aires, Argentina. The maximum borrowings available under the facility, excluding any interest added to principal, is 20.0 million Argentine pesos (approximately $3.5 million). The three-year term of the agreement began with the date of the first draw down on the facility, which occurred in the third quarter of 2013, with payments required in twenty-five equal monthly installments beginning after one year. Borrowings will bear interest at 15.25%. As of September 27, 2014, the outstanding balance under the facility was $2.4 million. The remainder of the upgrade is expected to be financed by existing cash balances and cash generated from operations.
China Credit Facility
In the third quarter of 2012, the Company's subsidiary in China entered into a three-year U.S. dollar denominated construction loan agreement (the “Hygiene Facility”) with a banking institution in China to finance a portion of the installation of a new spunmelt line at its manufacturing facility in Suzhou, China. The interest rate applicable to borrowings under the Hygiene Facility is based on three-month LIBOR plus an amount to be determined at the time of funding based on the lender's internal head office lending rate (520 basis points at the time the credit agreement was executed).
The maximum borrowings available under the facility, excluding any interest added to principal, were $25.0 million. At December 28, 2013, the outstanding balance under the Hygiene Facility was $24.9 million with a weighted average interest rate of 5.46%. The Company repaid $2.5 million of the principal balance during 2014 using a combination of existing cash balances and cash generated from operations. As a result, the outstanding balance under the Hygiene Facility was $22.4 million at September 27, 2014 with a weighted-average interest rate of 5.43%.
Brazil Export Credit Facilities
As a result of the acquisition of Providência, the Company assumed a U.S. dollar-denominated export credit facility with Itaú Unibanco S.A., pursuant to which Providência borrowed $52.4 million in the third quarter of 2011 for the purpose of financing certain export transactions from Brazil. Borrowings bear interest at 4.85% per annum, payable semi-annually. Principal payments are due in 11 equal installments, beginning in September 2013 and ending at final maturity in September 2018. The facility is secured by interests in the receivables related to the exports financed by the facility.
On September 22, 2014, the Company entered into an assignment agreement with Itaú Unibanco S.A in order to transfer its rights and obligations under the agreement to the Company. The purchase price for the assigned interest totaled $45.2 million, which the Company funded with a portion of the proceeds from the Incremental Amendment. Pursuant to ASC 470, the Company recognized a loss on debt extinguishment of $2.4 million. As the nature of this transaction related to a non-operating event, the loss on extinguishment is included in Debt modifications and extinguishment costs in the current period.
As a result of the acquisition of Providência, the Company assumed a Brazilian real-denominated export credit facility with Itaú Unibanco S.A., pursuant to which Providência borrowed R$50.0 million in the first quarter of 2013 for the purpose of financing certain export transactions from Brazil. Borrowings bear interest at 8.0% per annum, payable quarterly. The facility matures in February 2016 and is unsecured. At September 27, 2014, outstanding borrowings under the facility totaled $20.7 million.
Recovery Zone Facility Bonds
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As a result of the acquisition of Providência, the Company assumed a loan agreement in connection with the issuance of a like amount of recovery zone facility bonds by the Iredell County Industrial Facilities and Pollution Control Financing Authority. The proceeds of $9.1 million were used to finance, in part, the construction of a manufacturing facility in Statesville, North Carolina. The borrowings bear interest at a floating rate, which is reset weekly, and are supported by a letter of credit. On July 21, 2014, the Company repaid the aggregate principal amount of indebtedness with a portion of the proceeds from the Incremental Amendment.
India Indebtedness
As a result of the acquisition of Fiberweb, the Company assumed control of Terram Geosynthetics Private Limited, a joint venture located in Mundra, India in which the Company maintains a 65% controlling interest. As part of the net assets acquired, the Company assumed $3.8 million of debt (including short-term borrowings) that was entered into with a banking institution in India. Amounts outstanding primarily relate to a 14.70% term loan, due in 2017, used to purchase fixed assets. Other amounts relate to a short-term credit facility used to finance working capital requirements (included in Short-term borrowings in the Consolidated Balance Sheets) and an existing automobile loan. Combined, the outstanding balances totaled $3.1 million at September 27, 2014.
Other Indebtedness
The Company periodically enters into short-term credit facilities in order to finance various liquidity requirements, including insurance premium payments and short-term working capital needs. At September 27, 2014 and December 28, 2013, outstanding amounts related to such facilities were $15.4 million and $0.4 million, respectively. Borrowings under these facilities are included in Short-term borrowings in the Consolidated Balance Sheets.
The Company also has documentary letters of credit not associated with the ABL Facility or the Hygiene Facility. These letters of credit were primarily provided to certain raw material vendors and amounted to $12.2 million and $8.5 million at September 27, 2014 and December 28, 2013, respectively. None of these letters of credit have been drawn upon.
Note 10. Derivative Instruments
In the normal course of business, the Company is exposed to certain risks arising from business operations and economic factors. These fluctuations can increase the cost of financing, investing and operating the business. The Company may use derivative financial instruments to help manage market risk and reduce the exposure to fluctuations in interest rates and foreign currencies. These financial instruments are not used for trading or other speculative purposes.
All derivatives are recognized on the Consolidated Balance Sheet at their fair value as either assets or liabilities. On the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow hedge), or (3) an undesignated instrument. Changes in the fair value of a derivative that is designated as a fair value hedge and determined to be highly effective are recorded in current earnings, along with the gain or loss on the recognized hedged asset or liability that is attributable to the hedged risk. Changes in the fair value of a derivative that is designated as a cash flow hedge and considered highly effective are recorded in Accumulated other comprehensive income (loss) until they are reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value hedges to specific assets and liabilities on the Consolidated Balance Sheet and linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid.
The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the designated derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items. When a derivative is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively, in accordance with current accounting standards.
The following table presents the fair values of the Company's derivative instruments for the following periods:
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As of September 27, 2014 | As of December 28, 2013 | ||||||||||||||
In thousands | Notional | Fair Value | Notional | Fair Value | |||||||||||
Designated hedges: | |||||||||||||||
Hygiene Euro Contracts | $ | — | $ | — | $ | — | $ | — | |||||||
Undesignated hedges: | |||||||||||||||
Providência Contracts | 154,413 | 6,912 | — | — | |||||||||||
Providência Instruments | 26,891 | (778 | ) | — | — | ||||||||||
Hygiene Euro Contracts | — | — | — | — | |||||||||||
Total | $ | 181,304 | $ | 6,134 | $ | — | $ | — | |||||||
Asset derivatives are recorded within Other current assets and liability derivatives are recorded within Accounts payable and accrued expenses on the Consolidated Balance Sheets.
Providência Contracts
On January 27, 2014, the Company entered into a series of financial instruments with a third-party financial institution used to minimize foreign exchange risk on the future consideration to be paid for the Providência Acquisition and the Mandatory Tender Offer (the "Providência Contracts"). Each contract allows the Company to purchase fixed amounts of Brazilian Reais (R$) in the future at specified U.S. dollar rates, coinciding with either the Providência Acquisition or the Mandatory Tender Offer. The Providência Contracts do not qualify for hedge accounting treatment, and therefore, are considered undesignated hedges. As the nature of this transaction is related to a non-operating notional amount, changes in fair value were recorded in Foreign currency and other, net in the current period.
The primary financial instrument was related to the Providência Acquisition and consisted of a foreign exchange forward contract with an aggregate notional amount equal to the estimated purchase price. Prior to the Providência Acquisition Date, the Company amended the primary financial instrument to reduce the notional amount to align with the consideration to be paid to the selling stockholders, which resulted in a realized gain for the Company. Upon consummation of the Providência Acquisition, the Company purchased the required Brazilian Real at the rate specified per the terms of the contract. In addition, the primary financial instrument was settled in the Company's favor due to a strengthening U.S. Dollar. As a result, the Company fulfilled its obligations under the terms of the contract that specifically relate to the primary financial instrument and adjusted the fair value to zero with a realized gain of $18.9 million recognized within Foreign currency and other, net. The remaining financial instruments relate to a series of options that expire between 1 year and 5 years associated with the Mandatory Tender Offer and the deferred portion of the consideration paid for the Providência Acquisition.
Providência Instruments
As a result of the acquisition of Providência, the Company assumed a variety of derivative instruments used to reduce the exposure to fluctuations in interest rates and foreign currencies. These financial instruments include an interest rate swap, forward foreign exchange contracts and call option contracts (the "Providência Instruments"). The counterparty to each financial instrument is a third-party financial institution. The Providência Instruments do not qualify for hedge accounting treatment, and therefore, are considered undesignated derivatives. As the nature of these transactions relate to operating notional amounts, changes in the fair value of each contract is recorded in Other operating, net in the current period.
Bridge Loan Contract
On September 17, 2013, the Company entered into a foreign exchange forward contract with a third-party financial institution used to minimize foreign exchange risk on the Secured Bridge Facility and Unsecured Bridge Facility, the proceeds of which were used to fund the Fiberweb Acquisition (the ”Bridge Loan Contract”). The contract allowed the Company to purchase a fixed amount of pounds sterling in the future at a specified U.S. Dollar rate. The Bridge Loan Contract did not qualify for hedge accounting treatment, therefore, it was considered an undesignated hedge. As the nature of this transaction is related to a non-operating notional amount, changes in fair value were recorded in Foreign currency and other, net in the current period.
The Fiberweb Acquisition was funded on November 27, 2013, at which time the Company purchased the underlying pounds sterling amount at the U.S. Dollar rate specified in the contract. Upon settlement, the Company benefited from a strengthening U.S. Dollar, whereby less U.S. Dollars were required to purchase the fixed notional amount. As a result, the Company fulfilled its obligations under the terms of the contract, adjusted the fair value of the Bridge Loan Contract to zero with no gain or loss recognized and terminated the agreement.
Hygiene Euro Contracts
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On June 30, 2011, the Company entered into a series of foreign exchange forward contracts with a third-party financial institution used to minimize foreign exchange risk on certain future cash commitments related to the new hygiene line under construction in China (the "Hygiene Euro Contracts"). The contracts allow the Company to purchase fixed amount of Euros on specified future dates, coinciding with the payment amounts and dates of equipment purchase contracts. The Hygiene Euro Contracts qualify for hedge accounting treatment and are considered a fair value hedge; therefore, changes in the fair value of each contract are recorded in Other operating, net along with the gain or loss on the recognized hedged asset or liability that is attributable to the hedged risk. Since inception, the Company amended the equipment purchase contract on the hygiene line to which the Hygiene Euro Contracts are linked. However, the Company modified the notional amounts of the Hygiene Euro Contracts to synchronize with the underlying updated contract payments. As a result, the Hygiene Euro Contracts remained highly effective and continued to qualify for hedge accounting treatment.
In May 2013, the Company completed commercial acceptance of the new hygiene line under construction in China and recorded a liability for the remaining balance due. As a result, the Company removed the hedge designation of the Hygiene Euro Contracts and continued to recognize changes in the fair value of the contracts in current earnings as an undesignated hedge until the final payment date. However, changes in the fair value of the hedged asset that is attributable to the hedged risk has been capitalized in the cost base of the hygiene line and no longer recognized in current earnings. During the fourth quarter of 2013, the Company remitted the final payment on the hygiene line and simultaneously fulfilled its obligations under the Hygiene Euro Contracts.
The following table represents the amount of (gain) or loss associated with derivative instruments in the Consolidated Statements of Comprehensive Income (Loss):
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Designated hedges: | |||||||||||||||
Hygiene Euro Contracts | $ | — | $ | — | $ | — | $ | (449 | ) | ||||||
Undesignated hedges: | |||||||||||||||
Providência Contracts | 5,925 | — | (16,504 | ) | — | ||||||||||
Providência Instruments | (528 | ) | — | (527 | ) | — | |||||||||
Bridge Loan Contract | — | (2,868 | ) | — | (2,868 | ) | |||||||||
Hygiene Euro Contracts | — | (542 | ) | — | (582 | ) | |||||||||
Total | $ | 5,397 | $ | (3,410 | ) | $ | (17,031 | ) | $ | (3,899 | ) | ||||
Gains and losses associated with the Company's designated fair value hedges are offset by the changes in the fair value of the underlying transactions. However, once the hedge is undesignated, the fair value of the hedge is no longer offset by the fair value of the underlying transaction. Changes in the fair value of derivative instruments are recognized in Other operating, net on the Consolidated Statements of Comprehensive Income (Loss) as they relate to notional amounts used in primary business operations. However, changes in the value of the Providência Contracts are recognized in Foreign currency and other, net as it related to a non-operating notional amount.
Note 11. Fair Value of Financial Instruments
The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is comprised of three levels that are described below:
Level 1 — Inputs based on quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs other than Level 1 quoted prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 — Unobservable inputs based on little or no market activity and that are significant to the fair value of the assets and liabilities, therefore requiring an entity to develop its own assumptions.
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability based on
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the best information available under the circumstances. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following tables present the fair value and hierarchy levels for the Company's assets and liabilities, which are measured at fair value on a recurring basis as of the following periods:
In thousands | Level 1 | Level 2 | Level 3 | September 27, 2014 | |||||||||||
Assets | |||||||||||||||
Providência Contracts | $ | — | $ | 6,912 | $ | — | $ | 6,912 | |||||||
Liabilities | |||||||||||||||
Providência Instruments | $ | — | $ | (778 | ) | $ | — | $ | (778 | ) | |||||
ASC 820 "Fair Value Measurements and Disclosures" (ASC 820) defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair values of cash and cash equivalents, accounts receivable, inventories, short-term borrowings and accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of these instruments. The methodologies used by the Company to determine the fair value of its financial assets and liabilities at September 27, 2014 are the same as those used at December 28, 2013. As a result, there have been no transfers between Level 1 and Level 2 categories.
The Company utilizes a third-party valuation specialist to provide the fair value of the Providência Contracts. To value the position, quantitative models that utilize multiple market inputs (including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors) are utilized. Prior to the consummation of the Providência Acquisition, management considered the probability of the Providência Acquisition being finalized as a component of the valuation. As a result, the Company considered the fair value of the Providência Contracts a Level 3 fair value determination. Subsequent to the Providência Acquisition and after the settlement of the primary financial instrument included in the Providência Contracts, management no longer is required to consider the probability of the Providência Acquisition being finalized as a component of the valuation. Therefore, the fair value of the remaining Providência Contracts are considered a Level 2 fair value determination.
Goodwill is tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events and circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset. In light of the recent acquisition of Providência, the Company realigned its reportable segments during the third quarter of 2014 to more closely reflect our corporate and business strategies and to promote additional productivity and growth. As part of the change, the Company realigned its reportable segments and divided the former Americas Nonwovens operating segment (which included the U.S. spunmelt operations, Mexico, Argentina and Colombia) into North America and South America. North America now includes the U.S. spunmelt operations and Mexico. The South America operating segment consists of both the Argentina and Colombia components as well as the recently acquired Providência operations in Brazil. As a result of the change to this new organizational structure, the Company has reallocated $46.0 million goodwill from the previously reported Americas Nonwovens reportable segment to North America ($39.1 million) and South America ($6.9 million) based on the relative fair values of their respective portions in accordance with ASC 350, "Intangibles - Goodwill and Other" ("ASC 350").
When reporting units are changed, ASC 350 requires that goodwill be tested for impairment both before and after the reorganization. As a result, the Company performed a qualitative assessment and determined that goodwill was not impaired at any of the reporting units prior to the reorganization. Subsequent to the reorganization and reallocation of goodwill, the Company performed an interim goodwill impairment test on the North American and Argentina/Colombia reporting units, using a two-step impairment test to determine if the allocated goodwill is recoverable. The first step compares the carrying amount of the reporting unit to its estimated fair value. If the estimated fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step of the impairment test is not necessary. To the extent that the carrying value of the reporting unit exceeds its estimated fair value, a second step is performed, wherein the reporting unit's carrying value of goodwill is compared to the implied fair value of goodwill. To the extent that the carrying value exceeds the implied fair value, impairment exists and must be recognized.
Using third-party valuations, the estimated fair value of the reporting units were determined using a discounted cash flow (income approach) valuation methodology based on the best information available as of the date of the assessment. Key assumptions regarding estimated cash flows include profit margins, long-term forecasts, discount rates, terminal growth rates and the estimated fair value of certain assets and liabilities. The Company had limited data with which to perform the interim goodwill impairment test at the same level of detail used for the annual impairment test. As a result, management made various assumptions when
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completing step one and step two of the analysis, which were consistent with its previous annual impairment test. The Company determined that the North American reporting units passed step one, however, the Colombia/Argentina reporting unit failed the step one impairment calculation and it was necessary to proceed to step two.
In step two, the Company is required to use the fair value calculated in step one and apply the fair value to the assets and liabilities of the reporting unit based on a hypothetical purchase price allocation. The implied fair value of goodwill is determined in the allocation process and compared to the book value of goodwill. Based on this analysis, the Company determined the fair value of goodwill allocated to the Colombia/Argentina reporting unit to be zero and that all of its allocated goodwill would be impaired. As a result, the Company recorded a non-cash impairment charge of $6.9 million. Management considers the estimate of fair value to be preliminary and expects to complete a final step 2 analysis during the fourth quarter. The amount is considered a non-recurring Level 3 fair value determination.
At December 28, 2013, the Company did not have any financial assets or liabilities required to be measured at fair value on a recurring basis. However, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In the fourth quarter of 2013, the Company performed an impairment test on long-lived assets in Argentina. Based on third-party valuations, the Company determined the fair value of the long-lived assets to be $14.4 million. Personal property was valued using the cost and market approaches and the cost approach for construction in progress. Land was valued using a combination of the cost, income and sales comparison approaches. Key assumptions included market rent rates ($5 per square foot), management fees (5%) and an overall capitalization rate (12%). The amount is considered a non-recurring Level 3 fair value determination.
Note 12. Pension and Postretirement Benefit Plans
The Company and its subsidiaries sponsor multiple defined benefit plans that cover certain employees. Postretirement benefit plans, other than pensions, provide healthcare benefits for certain eligible employees. Benefits are primarily based on years of service and the employee’s compensation.
Pension Plans
The Company has both funded and unfunded pension benefit plans. It is the Company’s policy to fund such plans in accordance with applicable laws and regulations in order to ensure adequate funds are available in the plans to make benefit payments to plan participants and beneficiaries when required.
The components of the Company's pension related costs for the following periods are as follows:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Service cost | $ | 850 | $ | 844 | $ | 2,598 | $ | 2,523 | |||||||
Interest cost | 3,176 | 1,387 | 8,097 | 4,157 | |||||||||||
Expected return on plan assets | (4,016 | ) | (1,880 | ) | (10,256 | ) | (5,628 | ) | |||||||
Curtailment / settlement (gain) loss | — | — | — | — | |||||||||||
Net amortization of: | |||||||||||||||
Actuarial (gain) loss | (4 | ) | 87 | (12 | ) | 262 | |||||||||
Transition costs and other | — | — | — | — | |||||||||||
Net periodic benefit cost | $ | 6 | $ | 438 | $ | 427 | $ | 1,314 | |||||||
The Company’s practice is to fund amounts for its qualified pension plans at least sufficient to meet the minimum requirements set forth in applicable employee benefit laws and local tax laws. In addition, the Company manages these plans to ensure that all present and future benefit obligations are met as they come due. Full year contributions are expected to approximate $5.0 million.
Postretirement Plans
The Company sponsors several Non-U.S. postretirement plans that provide healthcare benefits to cover certain eligible employees. These plans have no plan assets, but instead are funded by the Company on a pay-as-you-go basis in the form of direct benefit payments.
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The components of the Company's postretirement related costs for the following periods are as follows:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Service cost | $ | 9 | $ | 14 | $ | 27 | $ | 44 | |||||||
Interest cost | 94 | 45 | 281 | 137 | |||||||||||
Curtailment / settlement (gain) loss | — | — | — | — | |||||||||||
Net amortization of: | |||||||||||||||
Actuarial (gain) loss | 5 | 9 | 15 | 27 | |||||||||||
Transition costs and other | — | — | — | — | |||||||||||
Net periodic benefit cost | $ | 108 | $ | 68 | $ | 323 | $ | 208 | |||||||
For the three months ended September 27, 2014 and September 28, 2013, reclassifications out of accumulated other comprehensive income (loss) totaled less than $0.1 million and $0.1 million, respectively. For the nine months ended September 27, 2014 and September 28, 2013, reclassifications out of accumulated other comprehensive income (loss) totaled less than $0.1 million and $0.3 million, respectively. These amounts related to net actuarial gains/losses included in the computation of net periodic benefit cost for both pension and postretirement benefit plans. At September 27, 2014, Accumulated other comprehensive income (loss) was a loss of 37.1 million, of which $15.8 million related to pension and postretirement benefit plans.
Defined Contribution Plans
The Company sponsors several defined contribution plans through its domestic subsidiaries covering employees who meet certain service requirements. The Company makes matching contributions to the plans based upon a percentage of the employees’ contribution in the case of its 401(k) plans or upon a percentage of the employees’ salary or hourly wages in the case of its non-contributory money purchase plans.
Note 13. Income Taxes
The Company accounts for its provision for income taxes in accordance with ASC 740, "Income Taxes," which requires an estimate of the annual effective tax rate for the full year to be applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year. For the nine months ended September 27, 2014, the Company's effective tax rate was 0.9% (compared with a negative effective tax rate of 72.9% for the nine months ended September 28, 2013). The effective tax rate difference for the nine months ended September 27, 2014 compared with the prior year is primarily driven by significant losses in 2014 in jurisdictions where the Company has a full valuation allowance, combined with pretax income generated in taxpaying jurisdictions. This results in a disproportionate tax impact relative to the consolidated pre-tax loss. In addition, the rate was impacted by a tax benefit in Brazil and a partial release of a valuation allowance in Argentina. During the nine months ended September 28, 2013, the Company's effective rate was impacted by its participation in a Mexico amnesty tax program that resulted in a discrete tax expense increase relative to the Company's consolidated pretax loss for the period. The effective tax rate for the nine months ended September 27, 2014 is different than the Company's statutory tax rate primarily due to losses in certain jurisdictions for which no income tax benefits are anticipated, foreign withholding taxes for which tax credits are not anticipated, changes in the amounts of tax uncertainties and foreign taxes calculated at statutory rates different than the U.S. statutory rate.
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes and (b) operating loss and tax credit carryforwards. A valuation allowance is recorded when, based on the weight of the evidence, it is more likely than not that some portion, or all, of the deferred tax asset will not be realized. The realization of the deferred tax asset depends on the ability to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdiction. At September 27, 2014, the Company has a net deferred tax liability of $64.7 million.
At September 27, 2014, the Company had unrecognized tax benefits of $19.5 million, of which $8.6 million relates to accrued interest and penalties. These amounts are included within Other noncurrent liabilities within the accompanying Consolidated Balance Sheet. The total amount of unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate is $19.5 million as of September 27, 2014. Included in the balance as of September 27, 2014 is $3.5 million related to tax positions for which it is reasonably possible that the total amounts could significantly change during the next twelve months. This amount
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is comprised of items which relate to the lapse of statute of limitations or the settlement of issues. The Company recognizes interest and/or penalties related to income taxes as a component of income tax expense.
Management judgment is required in determining tax provisions and evaluating tax positions. Although management believes its tax positions and related provisions reflected in the consolidated financial statements are fully supportable, it recognizes that these tax positions and related provisions may be challenged by various tax authorities. These tax positions and related provisions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretations of tax laws, developments in case law and closing of statute of limitations. The Company’s tax provision includes the impact of recording reserves and any changes thereto.
The major jurisdictions where the Company files income tax returns include the United States, Canada, China, India, the Netherlands, France, Germany, Spain, United Kingdom, Italy, Mexico, Colombia, Brazil, and Argentina. As of September 27, 2014, the Company has a number of open tax years with various taxing jurisdictions that range from 2003 to 2013. The results of current tax audits and reviews related to open tax years have not been finalized, and management believes that the ultimate outcomes of these audits and reviews will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Note 14. Special Charges
As part of our business strategy, the Company incurs amounts related to corporate-level decisions or actions by the Board of Directors. These actions are primarily associated with initiatives attributable to acquisition integration, restructuring and realignment of manufacturing operations and management structures as well as the pursuit of certain transaction opportunities when applicable. In addition, the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances including the aforementioned, indicate that the carrying amounts may not be recoverable. These amounts are included in Special charges, net in the Consolidated Statements of Comprehensive Income (Loss).
A summary for each respective period is as follows:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Restructuring and plant realignment costs: | |||||||||||||||
Internal redesign and restructure of global operations | $ | 531 | $ | 231 | $ | 967 | $ | 2,172 | |||||||
Plant realignment costs | 130 | 411 | 10,125 | 1,521 | |||||||||||
IS support initiative | — | — | — | 25 | |||||||||||
Other restructure initiatives | 121 | 20 | 121 | 63 | |||||||||||
Total restructuring and plant realignment costs | 782 | 662 | 11,213 | 3,781 | |||||||||||
Acquisition and integration related costs: | |||||||||||||||
Blackstone costs | — | 38 | — | 38 | |||||||||||
Providência costs | 4,347 | — | 19,227 | — | |||||||||||
Fiberweb costs | 2,626 | 6,177 | 10,106 | 6,220 | |||||||||||
Total acquisition and merger related costs | 6,973 | 6,215 | 29,333 | 6,258 | |||||||||||
Other charges: | |||||||||||||||
Goodwill impairment | 6,851 | — | 6,851 | — | |||||||||||
Other charges | 287 | 216 | 471 | 608 | |||||||||||
Total other charges | 7,138 | 216 | 7,322 | 608 | |||||||||||
Total | $ | 14,893 | $ | 7,093 | $ | 47,868 | $ | 10,647 | |||||||
Restructuring and Plant Realignment Costs
Internal redesign and restructuring of global operations
During 2012, the Company initiated the internal redesign and restructuring of its global operations for the purposes of realigning and repositioning the Company to consolidate the benefits of its global footprint, align resources and capabilities with future growth opportunities and provide for a more efficient structure to serve targeted markets.
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Costs incurred for the respective periods presented consisted of the following:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Employee separation | $ | — | $ | 1 | $ | 1 | $ | 137 | |||||||
Professional consulting fees | 436 | 95 | 436 | 1,497 | |||||||||||
Relocation, recruitment and other | 95 | 135 | 530 | 538 | |||||||||||
Total | $ | 531 | $ | 231 | $ | 967 | $ | 2,172 | |||||||
Plant Realignment Costs
The Company incurs costs associated with restructuring initiatives intended to result in improved operating performance, profitability and working capital levels. Costs associated with these initiatives include reducing headcount, improving manufacturing productivity, realignment of management structures, reducing corporate costs and rationalizing certain assets, businesses and employee benefit programs. Costs incurred for the current period primarily relate to costs incurred to realize cost improvement initiatives associated with the acquisition and integration of Fiberweb. Amounts in the prior period primarily consist of plant realignment initiatives in the North America and Europe regions.
IS Support Initiative
During 2012, the Company launched an initiative to utilize a third-party service provider for its Information Systems support tactical functions, including: service desk; desktop/end-user computing; server administration; network services; data center operations; database and applications development; and maintenance. Cost incurred for the respective periods presented primarily consisted of employee separation and severance expenses.
Other Restructuring Initiatives
The Company incurs costs associated with less significant ongoing restructuring initiatives resulting from the continuous evaluation of opportunities to optimize manufacturing facilities and manufacturing processes. Costs associated with these initiatives primarily relate to professional consulting fees.
Restructuring Reserve
Amounts accrued for Restructuring and Plant Realignment costs are included in Accounts payable and accrued liabilities in the Consolidated Balance Sheets. Changes in the Company's reserves for the respective periods presented were as follows:
In thousands | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||
Beginning balance | $ | 8,457 | $ | 6,278 | |||
Additions | 10,615 | 1,746 | |||||
Cash payments | (12,277 | ) | (6,386 | ) | |||
Adjustments | (391 | ) | (71 | ) | |||
Ending balance | $ | 6,404 | $ | 1,567 | |||
The Company accounts for its restructuring programs in accordance with ASC 712, "Compensation - Non-retirement Postemployment Benefits" ("ASC 712") and ASC 420, "Exit of Disposal Cost Obligations" ("ASC 420"). Programs in existence prior to the acquisition of Fiberweb are substantially complete as of September 27, 2014. As a result of the acquisition of Fiberweb, the Company has initiated several restructuring programs to integrate and optimize the combined footprint. Total projected costs for these programs are expected to range between $16.0 million and $23.0 million with payments continuing into 2015. Cost incurred since the Fiberweb Acquisition Date totaled $14.2 million.
Acquisition and Integration Related Costs
Providência Costs
26
In association with the Providência Acquisition, the Company incurred direct acquisition costs associated with the transaction including investment banking, legal, accounting and other fees for professional services. Other expenses included direct financing costs associated with both the Senior Unsecured Notes and the Incremental Amendment to the Term Loans. These costs have been capitalized as intangible assets on the Consolidated Balance Sheet as of the date of the Providência Acquisition. However, a portion of these costs related to the Incremental Term loan were expensed as incurred.
Fiberweb Costs
In association with the Fiberweb Acquisition, the Company has launched several initiatives focused on the integration of Fiberweb into the existing operations and underlying processes of the Company. These initiatives include cost reduction initiatives and costs associated with integrating the back office activities of the combined business. As a result, the Company incurred costs directly associated with these activities which include legal, accounting and other fees for professional services.
Other Special Charges
Goodwill Impairment
Goodwill is tested and reviewed annually for impairment during the fourth quarter or whenever there is a significant change in events and circumstances that indicate that the fair value of the asset may be less than the carrying amount of the asset. In light of the recent acquisition of Providência, the Company realigned its reportable segments during the third quarter of 2014 to more closely reflect our corporate and business strategies and to promote additional productivity and growth. Using third-party valuations, the Company reviewed the recoverability of goodwill allocated to the Colombia/Argentina reporting unit and determined that the fair value of goodwill was zero. As a result, the Company recorded a non-cash impairment charge of $6.9 million. See Note 11 for additional information.
Other Charges
Other charges consist primarily of expenses related to the Company’s pursuit of other business opportunities. The Company reviews its business operations on an ongoing basis in light of current and anticipated market conditions and other factors and, from time to time, may undertake certain actions in order to optimize overall business, performance or competitive position. To the extent any such decisions are made, the Company would likely incur costs associated with such actions, which could be material. Other charges may also include various corporate-level initiatives.
Note 15. Other Operating, Net
Transactions that are denominated in a currency other than an entity's functional currency are subject to changes in exchange rates with the resulting gains and losses recorded within current earnings. The Company includes these gains and losses related to receivables and payables as well as the impacts of other operating transactions as a component of Operating income (loss).
Amounts associated with these components for the respective periods are as follows:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Foreign currency gains (losses) | $ | 1,503 | $ | (736 | ) | $ | (5,079 | ) | $ | (2,170 | ) | ||||
Other operating income (expense) | 763 | 65 | 2,421 | 195 | |||||||||||
Total | $ | 2,266 | $ | (671 | ) | $ | (2,658 | ) | $ | (1,975 | ) | ||||
Note 16. Foreign Currency and Other, Net
Transactions that are denominated in a currency other than an entity's functional currency are subject to changes in exchange rates with the resulting gains and losses recorded within current earnings. The Company includes these gains and losses related to intercompany loans and third-party debt as well as other non-operating activities as a component of Other income (expense).
Amounts associated with these components for the respective periods are as follows:
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In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Foreign currency gains (losses) | $ | (19,534 | ) | $ | (274 | ) | $ | (21,676 | ) | $ | (1,291 | ) | |||
Other non-operating income (expense) | (7,054 | ) | 2,572 | 10,050 | 1,269 | ||||||||||
Total | $ | (26,588 | ) | $ | 2,298 | $ | (11,626 | ) | $ | (22 | ) | ||||
On January 27, 2014, the Company entered into a series of foreign exchange forward contracts with a third-party financial institution used to minimize foreign exchange risk on the future consideration to be paid for the Providência Acquisition and the Mandatory Tender Offer. The primary financial instrument was related to the Providência Acquisition and consisted of a foreign exchange forward contract with an aggregate notional amount equal to the estimated purchase price. The remaining financial instruments relate to a series of options that expire between 1 year and 5 years associated with the Mandatory Tender Offer and the deferred portion of the consideration to be paid for the Providência Acquisition. As the nature of these transactions are related to a non-operating notional amount, changes in fair value are included in other non-operating income (expense).
On June 11, 2014, the Company settled the primary financial instrument which provided $18.9 million of income realized at the date of acquisition. In addition, the Company recognized a loss of $5.9 million in the current period associated with the changes in fair value of the options related to the Mandatory Tender Offer and the deferred portion of the purchase price. Other amounts relate to non-operating expenses, including factoring fees.
On September 17, 2013, the Company entered into a foreign exchange forward contract with a third-party financial institution used to minimize foreign exchange risk on the potential future cash commitment related to the proposed acquisition of Fiberweb anticipated during the fourth quarter of 2013. As the nature of this transaction is related to a non-operating notional amount, changes in the fair value of the Bridge Loan Contract of $2.9 million are included in other non-operating income (expense).
Note 17. Commitments and Contingencies
The Company is involved from time to time in various litigations, claims and administrative proceedings arising out of the ordinary conduct of its business. Amounts recorded for identified contingent liabilities are estimates, which are reviewed periodically and adjusted to reflect additional information when it becomes available. Subject to the uncertainties inherent in estimating future costs for contingent liabilities, management believes that any liability which may result from these legal matters would not have a material adverse effect on the Company's business or financial condition.
Environmental
The Company is subject to a broad range of federal, foreign, state and local laws and regulations relating to pollution and protection of the environment. The Company believes that it is currently in substantial compliance with applicable environmental requirements and does not currently anticipate any material adverse effect on its operations, financial or competitive position as a result of its efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of the Company’s business and, accordingly, there can be no assurance that material environmental liabilities will not arise.
Equipment Lease Agreement
In the third quarter of 2011, the Company's state-of-the-art spunmelt line in Waynesboro, Virginia commenced commercial production. The plant expansion increased capacity to meet demand for nonwoven materials in the hygiene and healthcare applications in the U.S. The line was principally funded by a seven year equipment lease with a capitalized cost of $53.6 million. From the commencement of the lease to its fourth anniversary date, the Company will make annual lease payments of $8.3 million. From the fourth anniversary date to the end of the lease term, the Company's annual lease payments may change, as defined in the lease agreement. The aggregate future lease payments under the agreement, subject to adjustment, are expected to approximate $58 million. The lease includes covenants, events of default and other provisions that requires the Company to maintain certain financial ratios and other requirements.
Providência Tax Claims
Total consideration paid for the acquisition of Providência includes $47.9 million of deferred purchase price (the "Deferred Consideration"). The Deferred Consideration accretes at a rate of 9.5% per annum compounded daily, which shall be paid to the selling stockholders to the extent certain existing and potential tax claims of Providência ("Providência Tax Claims") are resolved in Providência's favor. At September 27, 2014, the outstanding balance of the Deferred Consideration was $44.8 million. If the Company incurs actual tax liability with respect to the Providência Tax Claims, the amount of the Deferred Purchase Price owed
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to the selling stockholders will be reduced by the amount of such actual tax liability. The Company will be responsible for any actual tax liability in excess of the Deferred Purchase Price. The Deferred Consideration is reflected on the Consolidated Balance Sheet as a noncurrent liability as the settlement of existing and potential claims is expected to be greater than one year.
Financing Obligation
As a result of the acquisition of Fiberweb, the Company acquired a manufacturing facility in Old Hickory, Tennessee, the assets of which included a utility plant used to generate steam for use in its manufacturing process. Upon completion of its construction in 2011, the utility plant was sold to a unrelated third-party and subsequently leased back by Fiberweb for a period of 10 years. The transaction was appropriately accounted for by Fiberweb under International Financial Reporting Standards ("IFRS") as a sale-leaseback whereby the assets were excluded from the balance sheet and monthly lease payments were recorded as rent expense.
The Company determined that current accounting guidance under GAAP disallowed sale-leaseback treatment if there was continuing involvement with the property. As a result, the transaction is not accounted for as a sale-leaseback, but as a direct financing lease under GAAP, recognizing the assets as part of property, plant and equipment and a related financing obligation as a long-term liability. Cash payments to the lessor are allocated between interest expense and amortization of the financing obligation. At the end of the lease term, the Company will recognize the sale of the utility plant, however, no gain or loss will be recognized as the financing obligation will equal the expected carrying value of the assets. At September 27, 2014, the outstanding balance of the financing obligation was $18.9 million, which is included in Other noncurrent liabilities in the Consolidated Balance Sheets.
Note 18. Segment Information
The Company is a leading global, technology-driven developer, producer and marketer of engineered materials, primarily focused on the production of nonwoven products. The Company operates through four reportable segments, with the main source of revenue being the sales of primary and intermediate products to consumer and industrial markets. The Company has one major customer that accounts for over 10% of its business, the loss of which would have a material adverse impact on reported financial results. Sales to this customer are reported within each of the reportable segments.
Segment information is based on the “management” approach which designates the internal reporting used by management for making decisions and assessing performance. The Company manages its business on a geographic basis, as each region provides similar products and services. The reportable segments are consistent with the manner in which financial information is desegregated for internal review and decision making. The accounting policies of the reportable segments are the same as those described in Note 3, “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements in Part II, Item 8 of the Company’s 2013 Form 10-K. Intercompany sales between the segments are eliminated.
In light of the recent acquisition of Providência, the Company realigned its reportable segments during the third quarter of 2014 to more closely reflect our corporate and business strategies and to promote additional productivity and growth. Reportable segments are now as follows: North America, South America, Europe and Asia. The operations previously reported in the Oriented Polymers segment are now included within the North America segment, along with the operations in Mexico. The South America segment includes the Providência operations in Brazil in addition to our previously existing operations in Colombia and Argentina. The Europe and Asia segments remain unchanged. Prior year information has been updated to conform to the current year presentation.
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Financial data by reportable segment is as follows:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Net sales: | |||||||||||||||
North America | $ | 214,490 | $ | 137,230 | $ | 603,214 | $ | 409,454 | |||||||
South America | 107,963 | 38,962 | 204,954 | 113,752 | |||||||||||
Europe | 125,958 | 67,901 | 409,037 | 219,113 | |||||||||||
Asia | 49,602 | 44,886 | 143,290 | 125,280 | |||||||||||
Total | $ | 498,013 | $ | 288,979 | $ | 1,360,495 | $ | 867,599 | |||||||
Operating income (loss): | |||||||||||||||
North America | $ | 22,670 | $ | 14,478 | $ | 63,427 | $ | 40,347 | |||||||
South America | (3,454 | ) | 2,144 | 3,248 | 5,329 | ||||||||||
Europe | 2,377 | 2,524 | 12,703 | 9,236 | |||||||||||
Asia | 2,068 | 4,134 | 10,927 | 13,723 | |||||||||||
Unallocated Corporate | (6,652 | ) | (9,108 | ) | (36,742 | ) | (33,164 | ) | |||||||
Eliminations | (47 | ) | (106 | ) | (177 | ) | (166 | ) | |||||||
Subtotal | 16,962 | 14,066 | 53,386 | 35,305 | |||||||||||
Special charges, net | (14,893 | ) | (7,093 | ) | (47,868 | ) | (10,647 | ) | |||||||
Total | $ | 2,069 | $ | 6,973 | $ | 5,518 | $ | 24,658 | |||||||
Depreciation and amortization expense: | |||||||||||||||
North America | $ | 16,475 | $ | 6,379 | $ | 35,988 | $ | 19,193 | |||||||
South America | 8,295 | 2,106 | 13,068 | 6,391 | |||||||||||
Europe | 7,249 | 3,089 | 21,034 | 9,153 | |||||||||||
Asia | 5,247 | 5,605 | 16,343 | 13,802 | |||||||||||
Unallocated Corporate | (2,163 | ) | 430 | (2,115 | ) | 1,282 | |||||||||
Subtotal | 35,103 | 17,609 | 84,318 | 49,821 | |||||||||||
Amortization of loan acquisition costs | 1,670 | 607 | 3,970 | 1,821 | |||||||||||
Total | $ | 36,773 | $ | 18,216 | $ | 88,288 | $ | 51,642 | |||||||
Capital spending: | |||||||||||||||
North America | $ | 6,221 | $ | 1,704 | $ | 23,079 | $ | 3,662 | |||||||
South America | 3,489 | 807 | 7,223 | 1,126 | |||||||||||
Europe | 4,399 | 1,877 | 8,420 | 2,926 | |||||||||||
Asia | 5,134 | 3,914 | 12,618 | 26,437 | |||||||||||
Corporate | 766 | 697 | 2,469 | 1,348 | |||||||||||
Total | $ | 20,009 | $ | 8,999 | $ | 53,809 | $ | 35,499 | |||||||
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In thousands | September 27, 2014 | December 28, 2013 | |||||
Division assets: | |||||||
North America | $ | 918,441 | $ | 644,913 | |||
South America | 570,278 | 135,373 | |||||
Europe | 322,723 | 351,591 | |||||
Asia | 259,555 | 265,729 | |||||
Corporate | 56,619 | 66,914 | |||||
Total | $ | 2,127,616 | $ | 1,464,520 | |||
Note 19. Certain Relationships and Related Party Transactions
In connection with the Merger, Holdings entered into a shareholders agreement (the “Shareholders Agreement”) with Blackstone and certain members of the Company's management. The Shareholders Agreement governs certain matters relating to ownership of Holdings, including with respect to the election of directors of our parent companies, restrictions on the issuance or transfer of shares, including tag-along rights and drag-along rights, other special corporate governance provisions and registration rights (including customary indemnification provisions). As of September 27, 2014, the Board of Directors of the Company includes two Blackstone members, four outside members and the Company’s Chief Executive Officer as an employee director. Furthermore, Blackstone has the power to designate all of the members of the Board of Directors of the Company and the right to remove any or all directors, with or without cause.
Management Services Agreement
Upon the completion of the Merger, the Company became party to a management services agreement (“Management Services Agreement”) with Blackstone Management Partners V L.L.C. (“BMP”), an affiliate of Blackstone. Under the Management Services Agreement, BMP (including through its affiliates) has agreed to provide certain monitoring, advisory and consulting services for an annual non-refundable advisory fee, to be paid at the beginning of each fiscal year, equal to the greater of (i) $3.0 million or (ii) 2.0% of the Company’s consolidated EBITDA (as defined under the credit agreement governing our ABL Facility) for the immediately preceding fiscal year. The amount of such fee shall be initially paid based on the Company’s then most current estimate of the Company’s projected EBITDA amount for the fiscal year immediately preceding the date upon which the advisory fee is paid. After completion of the fiscal year to which the fee relates and following the availability of audited financial statements for such period, the parties will recalculate the amount of such fee based on the actual consolidated EBITDA for such period and the Company or BMP, as applicable, shall adjust such payment as necessary based on the recalculated amount. Since the Merger, the Company's annual advisory fee has been $3.0 million, which the Company pays at the beginning of each year. The amount is included in Selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income (Loss).
In addition, in the absence of an express agreement to provide investment banking or other financial advisory services to the Company, and without regard to whether such services were provided, BMP will be entitled to receive a fee equal to 1.0% of the aggregate transaction value upon the consummation of any acquisition, divestiture, disposition, merger, consolidation, restructuring, refinancing, recapitalization, issuance of private or public debt or equity securities (including an initial public offering of equity securities), financing or similar transaction by the Company. The Company accrued $5.3 million payable to BMP related to the Providência Acquisition. This amount is included in Special charges, net in the Consolidated Statement of Operations.
Other Relationships
Blackstone and its affiliates have ownership interests in a broad range of companies. We have entered into commercial transactions in the ordinary course of our business with some of these companies, including the sale of goods and services and the purchase of goods and services.
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Note 20. Financial Guarantees and Condensed Consolidating Financial Statements
Polymer’s Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally on a senior secured basis, by each of Polymer’s 100% owned domestic subsidiaries (collectively, the “Guarantors”). As substantially all of Polymer’s operating income and cash flow is generated by its subsidiaries, funds necessary to meet Polymer’s debt service obligations may be provided, in part, by distributions or advances from its subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of Polymer’s subsidiaries, could limit Polymer’s ability to obtain cash from its subsidiaries for the purpose of meeting its debt service obligations, including the payment of principal and interest on the Senior Secured Notes. Although holders of the Senior Secured Notes will be direct creditors of Polymer’s principal direct subsidiaries by virtue of the guarantees, Polymer has subsidiaries that are not included among the Guarantors (collectively, the “Non-Guarantors”), and such subsidiaries will not be obligated with respect to the Senior Secured Notes. As a result, the claims of creditors of the Non-Guarantors will effectively have priority with respect to the assets and earnings of such companies over the claims of creditors of Polymer, including the holders of the Senior Secured Notes.
The following Condensed Consolidating Financial Statements are presented to satisfy the disclosure requirements of Rule 3-10 of Regulation S-X. In accordance with Rule 3-10, the subsidiary guarantors are all 100% owned by PGI (the “Issuer”). The guarantees on the Senior Secured Notes are full and unconditional and all guarantees are joint and several. The information presents Condensed Consolidating Balance Sheets as of September 27, 2014 and December 28, 2013, Condensed Consolidating Statements of Comprehensive Income (Loss) for the three and nine months ended September 27, 2014 and September 28, 2013, and Condensed Consolidating Statements of Cash Flows for the nine months ended September 27, 2014 and September 28, 2013 of (1) PGI (Issuer), (2) the Guarantors, (3) the Non-Guarantors and (4) consolidating eliminations to arrive at the information for the Company on a consolidated basis.
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Condensed Consolidating Balance Sheet
As of September 27, 2014
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
ASSETS | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 4,026 | $ | 112,897 | $ | 65,760 | $ | — | $ | 182,683 | |||||||||
Accounts receivable, net | — | 43,990 | 218,084 | — | 262,074 | ||||||||||||||
Inventories, net | (837 | ) | 50,697 | 132,345 | — | 182,205 | |||||||||||||
Deferred income taxes | 385 | 2,438 | 9,672 | (2,823 | ) | 9,672 | |||||||||||||
Other current assets | 10,120 | 10,838 | 67,991 | — | 88,949 | ||||||||||||||
Total current assets | 13,694 | 220,860 | 493,852 | (2,823 | ) | 725,583 | |||||||||||||
Property, plant and equipment, net | 4,237 | 205,007 | 780,145 | — | 989,389 | ||||||||||||||
Goodwill | — | 55,999 | 145,988 | — | 201,987 | ||||||||||||||
Intangible assets, net | 36,489 | 120,011 | 15,253 | — | 171,753 | ||||||||||||||
Net investment in and advances to (from) subsidiaries | 1,452,933 | 473,936 | (754,385 | ) | (1,172,484 | ) | — | ||||||||||||
Deferred income taxes | — | — | 3,621 | — | 3,621 | ||||||||||||||
Other noncurrent assets | 289 | 9,383 | 25,611 | — | 35,283 | ||||||||||||||
Total assets | $ | 1,507,642 | $ | 1,085,196 | $ | 710,085 | $ | (1,175,307 | ) | $ | 2,127,616 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Short-term borrowings | $ | 119 | $ | — | $ | 15,683 | $ | — | $ | 15,802 | |||||||||
Accounts payable and accrued liabilities | 35,619 | 58,817 | 216,904 | — | 311,340 | ||||||||||||||
Income taxes payable | 239 | 769 | (537 | ) | — | 471 | |||||||||||||
Deferred income taxes | — | (148 | ) | 8 | 1,148 | 1,008 | |||||||||||||
Current portion of long-term debt | 7,142 | — | 28,305 | — | 35,447 | ||||||||||||||
Total current liabilities | 43,119 | 59,438 | 260,363 | 1,148 | 364,068 | ||||||||||||||
Long-term debt | 1,413,551 | — | 26,579 | — | 1,440,130 | ||||||||||||||
Deferred income taxes | 974 | 9,626 | 70,397 | (3,971 | ) | 77,026 | |||||||||||||
Other noncurrent liabilities | 494 | 26,994 | 79,561 | — | 107,049 | ||||||||||||||
Total liabilities | 1,458,138 | 96,058 | 436,900 | (2,823 | ) | 1,988,273 | |||||||||||||
Common stock | — | — | 16,966 | (16,966 | ) | — | |||||||||||||
Polymer Group, Inc. shareholders’ equity | 49,504 | 989,138 | 166,380 | (1,155,518 | ) | 49,504 | |||||||||||||
Noncontrolling interests | — | — | 89,839 | — | 89,839 | ||||||||||||||
Total equity | 49,504 | 989,138 | 273,185 | (1,172,484 | ) | 139,343 | |||||||||||||
Total liabilities and equity | $ | 1,507,642 | $ | 1,085,196 | $ | 710,085 | $ | (1,175,307 | ) | $ | 2,127,616 | ||||||||
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Condensed Consolidating Balance Sheet
As of December 28, 2013
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
ASSETS | |||||||||||||||||||
Current Assets: | |||||||||||||||||||
Cash and cash equivalents | $ | 2,068 | $ | 13,103 | $ | 70,893 | $ | — | $ | 86,064 | |||||||||
Accounts receivable, net | — | 46,828 | 147,999 | — | 194,827 | ||||||||||||||
Inventories, net | — | 46,428 | 109,646 | — | 156,074 | ||||||||||||||
Deferred income taxes | 385 | 2,438 | 2,318 | (2,823 | ) | 2,318 | |||||||||||||
Other current assets | 1,887 | 12,696 | 44,513 | — | 59,096 | ||||||||||||||
Total current assets | 4,340 | 121,493 | 375,369 | (2,823 | ) | 498,379 | |||||||||||||
Property, plant and equipment, net | 2,756 | 207,256 | 442,768 | — | 652,780 | ||||||||||||||
Goodwill | — | 54,683 | 60,645 | — | 115,328 | ||||||||||||||
Intangible assets, net | 31,525 | 125,146 | 12,728 | — | 169,399 | ||||||||||||||
Net investment in and advances to (from) subsidiaries | 1,013,856 | 615,314 | (363,414 | ) | (1,265,756 | ) | — | ||||||||||||
Deferred income taxes | — | — | 2,582 | — | 2,582 | ||||||||||||||
Other noncurrent assets | 298 | 8,869 | 16,885 | — | 26,052 | ||||||||||||||
Total assets | $ | 1,052,775 | $ | 1,132,761 | $ | 547,563 | $ | (1,268,579 | ) | $ | 1,464,520 | ||||||||
LIABILITIES AND EQUITY | |||||||||||||||||||
Current liabilities: | |||||||||||||||||||
Short-term borrowings | $ | 410 | $ | — | $ | 2,062 | $ | — | $ | 2,472 | |||||||||
Accounts payable and accrued liabilities | 36,510 | 61,950 | 209,271 | — | 307,731 | ||||||||||||||
Income taxes payable | 369 | — | 3,244 | — | 3,613 | ||||||||||||||
Deferred income taxes | — | — | 194 | 1,148 | 1,342 | ||||||||||||||
Current portion of long-term debt | 3,039 | — | 10,758 | — | 13,797 | ||||||||||||||
Total current liabilities | 40,328 | 61,950 | 225,529 | 1,148 | 328,955 | ||||||||||||||
Long-term debt | 850,767 | — | 29,632 | — | 880,399 | ||||||||||||||
Deferred income taxes | 974 | 12,543 | 23,689 | (3,970 | ) | 33,236 | |||||||||||||
Other noncurrent liabilities | 1,810 | 31,718 | 28,663 | — | 62,191 | ||||||||||||||
Total liabilities | 893,879 | 106,211 | 307,513 | (2,822 | ) | 1,304,781 | |||||||||||||
Common stock | — | — | 16,966 | (16,966 | ) | — | |||||||||||||
Polymer Group, Inc. shareholders’ equity | 158,896 | 1,026,550 | 222,241 | (1,248,791 | ) | 158,896 | |||||||||||||
Noncontrolling interests | — | — | 843 | — | 843 | ||||||||||||||
Total equity | 158,896 | 1,026,550 | 240,050 | (1,265,757 | ) | 159,739 | |||||||||||||
Total liabilities and equity | $ | 1,052,775 | $ | 1,132,761 | $ | 547,563 | $ | (1,268,579 | ) | $ | 1,464,520 | ||||||||
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Condensed Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended September 27, 2014
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | 46 | $ | 145,542 | $ | 352,150 | $ | 275 | $ | 498,013 | |||||||||
Cost of goods sold | (93 | ) | (117,548 | ) | (299,605 | ) | (275 | ) | (417,521 | ) | |||||||||
Gross profit | (47 | ) | 27,994 | 52,545 | — | 80,492 | |||||||||||||
Selling, general and administrative expenses | (14,412 | ) | (13,534 | ) | (37,850 | ) | — | (65,796 | ) | ||||||||||
Special charges, net | (3,886 | ) | (229 | ) | (10,778 | ) | — | (14,893 | ) | ||||||||||
Other operating, net | 146 | 96 | 2,024 | — | 2,266 | ||||||||||||||
Operating income (loss) | (18,199 | ) | 14,327 | 5,941 | — | 2,069 | |||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (20,569 | ) | 2,806 | (11,019 | ) | — | (28,782 | ) | |||||||||||
Debt modification and extinguishment costs | (2,612 | ) | — | (2,375 | ) | — | (4,987 | ) | |||||||||||
Intercompany royalty and technical service fees | 2,301 | 1,150 | (3,451 | ) | — | — | |||||||||||||
Foreign currency and other, net | (6,803 | ) | 979 | (20,764 | ) | — | (26,588 | ) | |||||||||||
Equity in earnings of subsidiaries | (12,803 | ) | (27,303 | ) | — | 40,106 | — | ||||||||||||
Income (loss) before income taxes | (58,685 | ) | (8,041 | ) | (31,668 | ) | 40,106 | (58,288 | ) | ||||||||||
Income tax (provision) benefit | 3,457 | (4,818 | ) | 2,498 | — | 1,137 | |||||||||||||
Net income (loss) | (55,228 | ) | (12,859 | ) | (29,170 | ) | 40,106 | (57,151 | ) | ||||||||||
Less: Earnings attributable to noncontrolling interests | — | — | (1,923 | ) | — | (1,923 | ) | ||||||||||||
Net income (loss) attributable to Polymer Group, Inc. | $ | (55,228 | ) | $ | (12,859 | ) | $ | (27,247 | ) | $ | 40,106 | $ | (55,228 | ) | |||||
Comprehensive income (loss) attributable to Polymer Group, Inc. | $ | (87,958 | ) | $ | (45,806 | ) | $ | (51,084 | ) | $ | 96,890 | $ | (87,958 | ) | |||||
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Condensed Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended September 28, 2013
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | — | $ | 93,021 | $ | 201,840 | $ | (5,882 | ) | $ | 288,979 | ||||||||
Cost of goods sold | (93 | ) | (77,996 | ) | (168,572 | ) | 5,882 | (240,779 | ) | ||||||||||
Gross profit | (93 | ) | 15,025 | 33,268 | — | 48,200 | |||||||||||||
Selling, general and administrative expenses | (9,078 | ) | (6,060 | ) | (18,325 | ) | — | (33,463 | ) | ||||||||||
Special charges, net | (6,539 | ) | (37 | ) | (517 | ) | — | (7,093 | ) | ||||||||||
Other operating, net | 36 | (92 | ) | (615 | ) | — | (671 | ) | |||||||||||
Operating income (loss) | (15,674 | ) | 8,836 | 13,811 | — | 6,973 | |||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (14,800 | ) | 6,924 | (5,309 | ) | — | (13,185 | ) | |||||||||||
Intercompany royalty and technical service fees | 1,425 | 1,681 | (3,106 | ) | — | — | |||||||||||||
Foreign currency and other, net | 2,815 | (5 | ) | (512 | ) | — | 2,298 | ||||||||||||
Equity in earnings of subsidiaries | 15,695 | 989 | — | (16,684 | ) | — | |||||||||||||
Income (loss) before income taxes | (10,539 | ) | 18,425 | 4,884 | (16,684 | ) | (3,914 | ) | |||||||||||
Income tax (provision) benefit | 2,272 | (2,815 | ) | (3,810 | ) | — | (4,353 | ) | |||||||||||
Net income (loss) | $ | (8,267 | ) | $ | 15,610 | $ | 1,074 | $ | (16,684 | ) | $ | (8,267 | ) | ||||||
Comprehensive income (loss) attributable to Polymer Group, Inc. | $ | (3,272 | ) | $ | 23,413 | $ | 1,603 | $ | (25,016 | ) | $ | (3,272 | ) | ||||||
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Condensed Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended September 27, 2014
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | 46 | $ | 441,790 | $ | 946,836 | $ | (28,177 | ) | $ | 1,360,495 | ||||||||
Cost of goods sold | (223 | ) | (354,160 | ) | (792,746 | ) | 28,177 | (1,118,952 | ) | ||||||||||
Gross profit | (177 | ) | 87,630 | 154,090 | — | 241,543 | |||||||||||||
Selling, general and administrative expenses | (37,442 | ) | (41,994 | ) | (106,063 | ) | — | (185,499 | ) | ||||||||||
Special charges, net | (22,823 | ) | (2,443 | ) | (22,602 | ) | — | (47,868 | ) | ||||||||||
Other operating, net | 157 | 395 | (3,210 | ) | — | (2,658 | ) | ||||||||||||
Operating income (loss) | (60,285 | ) | 43,588 | 22,215 | — | 5,518 | |||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (53,987 | ) | 9,406 | (23,024 | ) | — | (67,605 | ) | |||||||||||
Debt modification and extinguishment costs | (13,350 | ) | — | (2,375 | ) | — | (15,725 | ) | |||||||||||
Intercompany royalty and technical service fees | (4,898 | ) | 3,943 | 955 | — | — | |||||||||||||
Foreign currency and other, net | 16,114 | 854 | (28,594 | ) | — | (11,626 | ) | ||||||||||||
Equity in earnings of subsidiaries | 21,647 | (25,764 | ) | — | 4,117 | — | |||||||||||||
Income (loss) before income taxes | (94,759 | ) | 32,027 | (30,823 | ) | 4,117 | (89,438 | ) | |||||||||||
Income tax (provision) benefit | 10,387 | (10,403 | ) | 866 | — | 850 | |||||||||||||
Net income (loss) | (84,372 | ) | 21,624 | (29,957 | ) | 4,117 | (88,588 | ) | |||||||||||
Less: Earnings attributable to noncontrolling interests | — | — | (4,216 | ) | — | (4,216 | ) | ||||||||||||
Net income (loss) attributable to Polymer Group, Inc. | $ | (84,372 | ) | $ | 21,624 | $ | (25,741 | ) | $ | 4,117 | $ | (84,372 | ) | ||||||
Comprehensive income (loss) attributable to Polymer Group, Inc. | $ | (113,412 | ) | $ | (7,620 | ) | $ | (44,583 | ) | $ | 52,203 | $ | (113,412 | ) | |||||
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Condensed Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended September 28, 2013
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Net sales | $ | — | $ | 275,850 | $ | 607,758 | $ | (16,009 | ) | $ | 867,599 | ||||||||
Cost of goods sold | (129 | ) | (234,710 | ) | (504,313 | ) | 16,009 | (723,143 | ) | ||||||||||
Gross profit | (129 | ) | 41,140 | 103,445 | — | 144,456 | |||||||||||||
Selling, general and administrative expenses | (33,053 | ) | (17,824 | ) | (56,299 | ) | — | (107,176 | ) | ||||||||||
Special charges, net | (8,364 | ) | (176 | ) | (2,107 | ) | — | (10,647 | ) | ||||||||||
Other operating, net | 55 | (313 | ) | (1,717 | ) | — | (1,975 | ) | |||||||||||
Operating income (loss) | (41,491 | ) | 22,827 | 43,322 | — | 24,658 | |||||||||||||
Other income (expense): | |||||||||||||||||||
Interest expense | (37,274 | ) | 13,111 | (13,429 | ) | — | (37,592 | ) | |||||||||||
Intercompany royalty and technical service fees | 4,181 | 4,985 | (9,166 | ) | — | — | |||||||||||||
Foreign currency and other, net | 2,815 | (252 | ) | (2,585 | ) | — | (22 | ) | |||||||||||
Equity in earnings of subsidiaries | 42,848 | 6,679 | — | (49,527 | ) | — | |||||||||||||
Income (loss) before income taxes | (28,921 | ) | 47,350 | 18,142 | (49,527 | ) | (12,956 | ) | |||||||||||
Income tax (provision) benefit | 6,521 | (4,502 | ) | (11,463 | ) | — | (9,444 | ) | |||||||||||
Net income (loss) | $ | (22,400 | ) | $ | 42,848 | $ | 6,679 | $ | (49,527 | ) | $ | (22,400 | ) | ||||||
Comprehensive income (loss) attributable to Polymer Group, Inc. | $ | (18,652 | ) | $ | 48,449 | $ | 6,939 | $ | (55,388 | ) | $ | (18,652 | ) | ||||||
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Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 27, 2014
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Net cash provided by (used in) operating activities | $ | 127,723 | $ | 178,124 | $ | (293,789 | ) | $ | — | $ | 12,058 | ||||||||
Investing activities: | |||||||||||||||||||
Purchases of property, plant and equipment | (2,469 | ) | (22,092 | ) | (29,248 | ) | — | (53,809 | ) | ||||||||||
Proceeds from the sale of assets | — | — | 2,635 | — | 2,635 | ||||||||||||||
Acquisition of intangibles and other | (182 | ) | — | — | — | (182 | ) | ||||||||||||
Acquisitions, net of cash acquired | (356,039 | ) | — | — | — | (356,039 | ) | ||||||||||||
Intercompany investing activities, net | (361,604 | ) | (421,262 | ) | 2,651 | 780,215 | — | ||||||||||||
Net cash provided by (used in) investing activities | (720,294 | ) | (443,354 | ) | (23,962 | ) | 780,215 | (407,395 | ) | ||||||||||
Financing activities: | |||||||||||||||||||
Issuance of common stock | 750 | — | — | — | 750 | ||||||||||||||
Proceeds from long-term borrowings | 628,000 | — | 152 | — | 628,152 | ||||||||||||||
Proceeds from short-term borrowings | 1,265 | — | 20,329 | — | 21,594 | ||||||||||||||
Repayment of long-term borrowings | (61,478 | ) | — | (59,592 | ) | — | (121,070 | ) | |||||||||||
Repayment of short-term borrowings | (1,556 | ) | — | (6,666 | ) | — | (8,222 | ) | |||||||||||
Loan acquisition costs | (21,289 | ) | — | — | — | (21,289 | ) | ||||||||||||
Debt modification costs | (1,680 | ) | — | (2,375 | ) | — | (4,055 | ) | |||||||||||
Intercompany financing activities, net | 50,517 | 365,024 | 364,674 | (780,215 | ) | — | |||||||||||||
Net cash provided by (used in) financing activities | 594,529 | 365,024 | 316,522 | (780,215 | ) | 495,860 | |||||||||||||
Effect of exchange rate changes on cash | — | — | (3,904 | ) | — | (3,904 | ) | ||||||||||||
Net change in cash and cash equivalents | 1,958 | 99,794 | (5,133 | ) | — | 96,619 | |||||||||||||
Cash and cash equivalents at beginning of period | 2,068 | 13,103 | 70,893 | — | 86,064 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 4,026 | $ | 112,897 | $ | 65,760 | $ | — | $ | 182,683 | |||||||||
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Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 28, 2013
In thousands | PGI (Issuer) | Guarantors | Non-Guarantors | Eliminations | Consolidated | ||||||||||||||
Net cash provided by (used in) operating activities | $ | (42,502 | ) | $ | 46,834 | $ | (226 | ) | $ | — | $ | 4,106 | |||||||
Investing activities: | |||||||||||||||||||
Purchases of property, plant and equipment | (23,703 | ) | (2,663 | ) | (9,133 | ) | — | (35,499 | ) | ||||||||||
Proceeds from the sale of assets | — | — | 25 | — | 25 | ||||||||||||||
Acquisition of intangibles and other | (260 | ) | — | (4,226 | ) | — | (4,486 | ) | |||||||||||
Intercompany investing activities, net | 6,408 | (59,073 | ) | (5,000 | ) | 57,665 | — | ||||||||||||
Net cash provided by (used in) investing activities | (17,555 | ) | (61,736 | ) | (18,334 | ) | 57,665 | (39,960 | ) | ||||||||||
Financing activities: | |||||||||||||||||||
Issuance of common stock | (222 | ) | — | — | — | (222 | ) | ||||||||||||
Proceeds from long-term borrowings | 234 | — | 18,256 | — | 18,490 | ||||||||||||||
Proceeds from short-term borrowings | 1,879 | — | — | — | 1,879 | ||||||||||||||
Repayment of long-term borrowings | (109 | ) | — | (5,157 | ) | — | (5,266 | ) | |||||||||||
Repayment of short-term borrowings | (2,476 | ) | — | — | — | (2,476 | ) | ||||||||||||
Loan acquisition costs | — | — | — | — | — | ||||||||||||||
Intercompany financing activities, net | 61,800 | (1,408 | ) | (2,727 | ) | (57,665 | ) | — | |||||||||||
Net cash provided by (used in) financing activities | 61,106 | (1,408 | ) | 10,372 | (57,665 | ) | 12,405 | ||||||||||||
Effect of exchange rate changes on cash | — | — | 248 | — | 248 | ||||||||||||||
Net change in cash and cash equivalents | 1,049 | (16,310 | ) | (7,940 | ) | — | (23,201 | ) | |||||||||||
Cash and cash equivalents at beginning of period | 486 | 28,285 | 69,108 | — | 97,879 | ||||||||||||||
Cash and cash equivalents at end of period | $ | 1,535 | $ | 11,975 | $ | 61,168 | $ | — | $ | 74,678 | |||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. It should be noted that our gross profit margins may not be comparable to other companies since some entities classify shipping and handling costs in cost of goods sold and others, including us, include such costs in selling, general and administrative expenses. Similarly, some entities, including us, include foreign currency gains and losses resulting from operating activities as a component of operating income, and some entities classify all foreign currency gains and losses outside of operating income.
The terms "Polymer Group," " PGI," "the Company," "we," "us," and "our" and similar terms in this Report on Form 10-Q refer to Polymer Group, Inc. and its consolidated subsidiaries. The term "Parent" as used within this Report on Form 10-Q refers to Scorpio Acquisition Corporation, a Delaware corporation that owns 100% of the issued and outstanding capital stock of Polymer Group, Inc. The term "Holdings" as used within this Report on Form 10-Q refers to PGI Specialty Materials, Inc., a Delaware corporation that owns 100% of the Parent.
Overview
We are a leading global innovator and manufacturer of specialty materials, which are designed and engineered for use in a broad range of products that make the world safer, cleaner and healthier. We primarily manufacture nonwovens, which are fabric-like materials produced from polypropylene resins. Our materials can be made with specific value-added characteristics including absorbency, tensile strength, softness and barrier properties, among others. Our products are critical components used in consumer and industrial products for use in a wide array of applications. Primary applications in each of our target markets are as follows:
• Hygiene: | Baby diapers, feminine hygiene products and adult incontinence products |
• Healthcare: | Single-use surgical gowns and drapes, hospital apparel and infection control supplies |
• Wipes: | Household, personal care and commercial cleaning wipes and dryer sheets |
• Building and Geosynthetics: | House wrap, cable wrap, construction, roofing, agriculture, forestry/horticulture geosynthetics, road underlayment, liners and railroad materials |
• Technical Specialties: | Filtration, composites, industrial packaging, furniture and bedding, technical nonwovens and other specialty areas |
Over the past five years, we have undertaken a series of capital expansions and business acquisitions that have broadened our technology base, increased our product lines and expanded our global presence. As a result of the 2013 acquisition of Fiberweb plc ("Fiberweb"), one of the largest manufacturers of specialty technical materials, we have solidified our position as the largest manufacturer of nonwovens in the world. Our recent acquisition in Brazil broadens our presence in the growing South American market and further strengthens our position as a global leader in nonwovens industry. Our facilities (24 manufacturing and converting facilities located in 14 countries on four continents) are strategically located near many of our key customers in order to increase our effectiveness in addressing local and regional demand. We work closely with our customers, which include well-established multinational and regional consumer and industrial product manufacturers, to provide engineered solutions to meet increasing demand for more sophisticated products.
Our Industry
We compete primarily in the global nonwovens market, which is estimated to be approximately $30 billion globally in 2013. Nonwovens are broadly defined as engineered sheet or web structures, made from polymers and/or natural fibers that are bonded together by entangling fiber or filaments mechanically, thermally or chemically. They are flat sheets that are made directly from separate fibers or from molten plastic or plastic film. By definition, they are not made by weaving or knitting and do not require converting the fibers to yarn.
Nonwovens can be created through several different manufacturing techniques. Principal technologies utilized in the industry today include:
• | Spunmelt technology uses thermoplastic polymers that are melt-spun to manufacture continuous-filament fabrics. |
• | Carded technologies (chemical, thermal and spunlace) involve fibers laid on a conveyor belt, teased apart and consolidated into a web and then bonded with chemical adhesive, heat or high pressure water, respectively. |
• | Air-laid technology uses high-velocity air to condense fibers. |
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• | Wet-laid technology drains fibers through a wire screen similar to papermaking. |
The global nonwovens market has historically experienced stable growth and favorable pricing dynamics. However, since late 2010, several of our competitors, primarily in the hygiene markets, installed or announced an intent to install, capacity in excess of what we believe to be current market demand in the regions that we conduct business. As additional nonwovens manufacturing capacity entered into commercial production, in excess of market demand, the short-term to mid-term excess supply created unfavorable market dynamics, resulting in a downward pressure on selling prices.
As a result, we have undertaken a series of actions to expand our global capabilities as well as focus on economic leadership. We believe these initiatives will help drive performance in our businesses, improve our overall cost structure and drive value for our stakeholders. The acquisition of Fiberweb further promotes our global capabilities with a differentiated product offering, but also increases our technological diversity with entry into an even broader array of products and applications, both of which reduces our exposure to any one region or manufacturing facility. Our recent acquisition in Brazil broadens our presence in the growing South American market.
Going forward, we believe the global nonwovens market will continue to be driven by:
• | Increases in global demand for disposable products driven by the increase in sanitary standards; |
• | Increases in performance standards such as barrier properties, strength, softness and other attributes; |
• | Global economic development coupled with the development of new nonwoven applications and technologies; and |
• | Shifts to materials and technology that deliver a lower total cost of use. |
We believe we have one of the broadest and most advanced technology portfolios in the industry. Our current global footprint, coupled with our access to capital, enables us to continue to realize cost synergies and greater growth from our core operations. In addition, we are investing in technology and new initiatives which will help fuel our future growth. As a result, we believe we are well positioned to remain competitive within our markets as well as leverage our solid foundation across the company to drive future growth.
Recent Developments
European Restructuring
On March 7, 2014, we announced our plan to exit the European roofing business in an effort to optimize our portfolio. The plan included (1) the possible shutdown of selected manufacturing lines at our Berlin, Germany facility; (2) the possible closure of our manufacturing facilities in Aschersleben, Germany with the consolidation of its converting activities to Berlin and (3) possible workforce reductions at both facilities. In July 2014, we ceased production of roofing materials in Berlin and shut down one of our manufacturing lines. As a result, we reclassified the remaining carrying value of the line to a held for sale asset on the Consolidated Balance Sheet at June, 28, 2014, and on July 9, 2014, signed a contract to sell the manufacturing line for €1.6 million recognizing no gain or loss on the sale. With respect to the manufacturing operations in Aschersleben, Germany, management continues to evaluate opportunities to sell the entire manufacturing facility or the equipment and related spare parts individually. We anticipate this will occur sometime in the fourth quarter 2014 after first fulfilling certain production commitments to existing customers, all of which is subject to continued compliance with our legal obligations. Total cash restructuring costs for the exit plan (including both facilities) are expected to be within the range of €2.0 million to €6.5 million, a majority of which relate to employee-related expenses, including termination expenses, site closure costs and advisory fees. The remaining charges are related to equipment relocation, startup and other costs. We do not expect to incur any material non-cash impairment charges, given we began the acceleration of depreciation of the existing facilities and related assets being decommissioned in order to properly align the remaining useful lives of the assets with timing of the planned sale, shutdown/consolidation.
Providência Acquisition
On January 27, 2014, we announced that PGI Polímeros do Brazil, a Brazilian corporation and wholly-owned subsidiary of the Company ("PGI Acquisition Company"), entered into a Stock Purchase Agreement with Companhia Providência Indústria e Comércio, a Brazilian corporation ("Providência") and certain shareholders named therein. Pursuant to the terms and subject to the conditions of the Stock Purchase Agreement, PGI Acquisition Company agreed to acquire a 71.25% controlling interest in Providência (the “Providência Acquisition”). Providência is a leading manufacturer of nonwovens primarily used in hygiene applications as well as industrial and healthcare applications. Based in Brazil, Providência has three locations, including one in the United States.
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The Providência Acquisition was completed on June 11, 2014 (the "Providência Acquisition Date") for an aggregate purchase price of $424.6 million and funded with the proceeds from borrowings under an incremental term loan amendment to our existing Senior Secured Credit Agreement as well as the proceeds from the issuance of $210.0 million of 6.875% Senior Unsecured Notes due in 2019. Following the closing of the Providência Acquisition, pursuant to Brazilian Corporation Law and Providência’s Bylaws, PGI Acquisition Company launched a tender offer on substantially the same terms and conditions as the Stock Purchase Agreement to acquire the remaining outstanding capital stock of Providência from the minority shareholders (the “Mandatory Tender Offer”).
On January 27, 2014, we entered into a series of financial instruments with a third-party financial institution used to minimize foreign exchange risk on the future consideration to be paid for the Providência Acquisition and the Mandatory Tender Offer (the "Providência Contracts"). Each contract allows us to purchase a fixed amounts of Brazilian Reais (R$) in the future at specified U.S. dollar rates, coinciding with either the Providência Acquisition or the Mandatory Tender Offer. The primary financial instrument was related to the Providência Acquisition and consisted of a foreign exchange forward contract settled upon consummation of the transaction. The remaining financial instruments relate to a series of options that expire between 1 year and 5 years associated with the Mandatory Tender Offer and the deferred portion of the consideration paid for the Providência Acquisition.
Prior to completing the Providência Acquisition, Providência announced that production on three spunmelt lines at its Sao Jose dos Pinhais manufacturing facility were partially interrupted. The interruption was the result of an order by the Brazilian Ministry of Labor, pending remedial action by Providência to bring the facility into compliance with applicable Brazilian workplace safety regulations. The three lines were shut down from April 1, 2014 until early July 2014 when clearance was received from the Brazilian Ministry of Labor and production resumed. During the shut down period, the impact to sales volumes is estimated to be in excess of 6,500 metrics tons. In addition, the lines experienced certain start-up inefficiencies during the third quarter which continued as the facility began to resume more normalized operations near the end of the third quarter. During the shutdown and the subsequent ramp-up period, Providência incurred additional costs to bring the manufacturing lines into compliance as well as incurred higher relative overhead costs and increased scrap rates, which negatively impacted operating profit.
Fiberweb Acquisition
On September 17, 2013, PGI Acquisition Limited, a wholly-owned subsidiary of the Company, entered into an agreement with Fiberweb containing the terms of a cash offer to purchase 100% of the issued and to be issued ordinary share capital of Fiberweb at a cash price of £1.02 per share (the "Fiberweb Acquisition"). Under the terms of the agreement, Fiberweb would become a wholly-owned subsidiary of the Company. The offer was effected by a court sanctioned scheme of arrangement of Fiberweb under Part 26 of the UK Companies Act 2006 and consummated on November 15, 2013 (the "Acquisition Date"). The aggregate purchase price was valued at $287.8 million and funded on November 27, 2013 with the proceeds of borrowings under a $268.0 million Senior Secured Bridge Credit Agreement and a $50.0 million Senior Unsecured Bridge Credit Agreement (together, the "Bridge Facilities"). The Bridge Facilities were subsequently refinanced, along with transaction expenses, with the proceeds from a $295.0 million Senior Secured Credit Agreement and a $30.7 million equity investment from Blackstone. Fiberweb is one of the largest global manufacturers of specialized technical fabrics with eight production sites in six countries.
Results of Operations
We operate our business on a regional basis with profit accountability aligned with our physical presence. This reflects how the overall business is currently managed by our senior management and reviewed by the Board of Directors. In light of the recent acquisition of Providência, we realigned our reportable segments during the third quarter of 2014 to more closely reflect our corporate and business strategies and to promote additional productivity and growth. Reportable segments are now as follows: North America, South America, Europe and Asia. The operations previously reported in the Oriented Polymers segment are now included within the North America segment, along with the operations in Mexico. The South America segment includes the Providência operations in Brazil in addition to our previously existing operations in Colombia and Argentina. The Europe and Asia segments remain unchanged.
Gross Profit Drivers
Our net sales are driven principally by the following factors:
• | Volumes sold, which are tied to our available production capacity and customer demand for our products; |
• | Prices, which are tied to the quality of our products, the overall supply and demand dynamics in our regional markets, and the cost of our raw material inputs, as changes in input costs have historically been passed through to customers through either contractual mechanisms or business practices. This can result in significant increases in total net sales during periods of sustained raw material cost increases as well as significant declines in net sales during periods of raw material cost declines; and |
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• | Product mix, which is tied to demand from various markets and customers, along with the type of available capacity and technological capabilities of our facilities and equipment. Average selling prices can vary for different product types, which impacts our total revenue trends. |
Our primary costs of goods sold (“COGS”) include:
• | Raw material costs (primarily polypropylene resins, which generally comprise over 75% of our raw material purchases) represent approximately 60% to 70% of COGS. We purchase raw materials, including polypropylene resins, from a number of qualified vendors located in the regions in which we operate. Polypropylene is a petroleum-based commodity material and its price historically has exhibited volatility. As discussed in the revenue factors above, we have historically been able to mitigate volatility in polypropylene prices through changes in our selling prices to customers, enabling us to maintain a more stable gross profit per kilogram; |
• | Other variable costs include direct labor, utilities (primarily electricity), maintenance and variable overhead. Utility rates vary depending on the regional market and provider. Labor generally represents less than 10% of COGS and varies by region. Historically, we have been able to mitigate wage rate inflation with operating initiatives resulting in higher productivity and improvements in throughput and yield; and |
• | Fixed overhead consists primarily of depreciation expense, which is impacted by our level of capital investments and structural costs related to our locations. We believe our strategically located manufacturing facilities provide sufficient scale to maintain competitive unit manufacturing costs. |
The level of our revenue and COGS vary due to changes in raw material cost. As a result, our gross profit margin as a percent of net sales can vary significantly from period to period. As such, we believe total gross profit provides a clearer representation of our operating trends. Changes in raw material costs historically have not resulted in a significant sustained impact on gross profit, as we have been able to effectively mitigate changes in raw material costs through changes in our selling prices to customers in order to maintain a more steady gross profit per kilogram sold.
Three Months Ended September 27, 2014 Compared to the Three Months Ended September 28, 2013
The following table sets forth the period change for each category of the Statement of Comprehensive Income (Loss) for the three months ended September 27, 2014 as compared to the three months ended September 28, 2013, as well as each category as a percentage of net sales:
Percentage of Net Sales for the Respective Period End | |||||||||||||
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Period Change Favorable (Unfavorable) | September 27, 2014 | September 28, 2013 | ||||||||
Net sales | $ | 498,013 | $ | 288,979 | $ | 209,034 | 100.0 | % | 100.0 | % | |||
Cost of goods sold | (417,521 | ) | (240,779 | ) | (176,742 | ) | 83.8 | % | 83.3 | % | |||
Gross profit | 80,492 | 48,200 | 32,292 | 16.2 | % | 16.7 | % | ||||||
Selling, general and administrative expenses | (65,796 | ) | (33,463 | ) | (32,333 | ) | 13.2 | % | 11.6 | % | |||
Special charges, net | (14,893 | ) | (7,093 | ) | (7,800 | ) | 3.0 | % | 2.5 | % | |||
Other operating, net | 2,266 | (671 | ) | 2,937 | (0.5 | )% | 0.2 | % | |||||
Operating income (loss) | 2,069 | 6,973 | (4,904 | ) | 0.4 | % | 2.4 | % | |||||
Other income (expense): | |||||||||||||
Interest expense | (28,782 | ) | (13,185 | ) | (15,597 | ) | 5.8 | % | 4.6 | % | |||
Debt modification and extinguishment costs | (4,987 | ) | — | (4,987 | ) | 1.0 | % | — | % | ||||
Foreign currency and other, net | (26,588 | ) | 2,298 | (28,886 | ) | 5.3 | % | (0.8 | )% | ||||
Income (loss) before income taxes | (58,288 | ) | (3,914 | ) | (54,374 | ) | (11.7 | )% | (1.4 | )% | |||
Income tax (provision) benefit | 1,137 | (4,353 | ) | 5,490 | (0.2 | )% | 1.5 | % | |||||
Net income (loss) | (57,151 | ) | (8,267 | ) | (48,884 | ) | (11.5 | )% | (2.9 | )% | |||
Less: Earnings attributable to noncontrolling interests | (1,923 | ) | — | (1,923 | ) | 0.4 | % | — | % | ||||
Net income (loss) attributable to Polymer Group, Inc. | $ | (55,228 | ) | $ | (8,267 | ) | $ | (46,961 | ) | (11.1 | )% | (2.9 | )% |
Net Sales
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Net sales for the three months ended September 27, 2014 were $498.0 million, a $209.0 million increase compared with the three months ended September 28, 2013. A reconciliation presenting the components of the period change by each of our operating segments is as follows:
In millions | North America | South America | Europe | Asia | Total | ||||||||||||||
Prior period | $ | 137.2 | $ | 39.0 | $ | 67.9 | $ | 44.9 | $ | 289.0 | |||||||||
Changes due to: | |||||||||||||||||||
Volume | 76.5 | 68.3 | 57.3 | 3.2 | 205.3 | ||||||||||||||
Price/product mix | 1.0 | 0.7 | 0.4 | 1.4 | 3.5 | ||||||||||||||
Currency translation | (0.2 | ) | — | 0.3 | 0.1 | 0.2 | |||||||||||||
Sub-total | 77.3 | 69.0 | 58.0 | 4.7 | 209.0 | ||||||||||||||
End of period | $ | 214.5 | $ | 108.0 | $ | 125.9 | $ | 49.6 | $ | 498.0 | |||||||||
For the three months ended September 27, 2014, volumes increased $205.3 million compared with the three months ended September 28, 2013. The primary driver of the increase related to the contributions from Fiberweb, which represented an incremental $107.3 million for the period. In addition, our recent acquisition of Providência provided $91.1 million of net sales since the date of acquisition. Incremental volume growth of $3.2 million in Asia was driven by higher volumes sold in the hygiene and healthcare markets, both of which were supported by our recent capacity expansions. In Europe, increased sales into the technical specialties and wipes product markets increased net sales by $4.0 million. Improvements in the hygiene market provided $0.4 million of incremental volume growth in South America. Volumes decreased $0.7 million in North America, primarily driven by lower wipes and industrial markets sales.
For the three months ended September 27, 2014, net selling prices increased $3.5 million compared with the three months ended September 28, 2013. The pricing increase was primarily driven by product mix movements of $1.4 million in Asia. The increase was a result of a larger proportion of current quarter sales in the healthcare market compared with more prior quarter sales in the hygiene market, which have higher average selling prices. Improved pricing of $1.0 million in North America reflects the impacts of pricing initiatives implemented during the year. In addition, we experienced improved pricing of $0.7 million in South America and $0.4 million in Europe. The pricing increase primarily resulted from our passing through higher raw material costs associated with index-based selling agreements and market-based pricing trends.
Gross Profit
Gross profit for the three months ended September 27, 2014 was $80.5 million, a $32.3 million increase compared with the three months ended September 28, 2013. The primary driver of the increase related to the contributions from Fiberweb, which represented an incremental $21.6 million for the period, including contributions associated with integration synergies. In addition, contributions from Providência were $9.0 million, including $1.6 million related to the non-recurring amortization expense of the inventory step-up established as a result of the acquisition as well as the negative impact of start-up inefficiencies in Brazil as certain lines were returning to normal operations during the quarter.
Increases in net sales within each of our geographic regions, primarily in Europe and Asia, further provided incremental gross profit. In addition, the reduction of our labor component of cost of goods sold reflects the positive benefits of our cost reduction initiatives. However, these amounts were partially offset by lower net spreads (the difference between the change in raw material costs and selling prices) of $3.2 million as raw material costs increased, primarily impacting the North America and Asia segments. Other costs that impacted gross profit include an increase to our overhead component of cost of goods sold, primarily related to manufacturing costs in South America. As a result, gross profit as a percentage of net sales for the three months ended September 27, 2014 increased to 16.2% from 16.7% for the three months ended September 28, 2013.
Operating Income (Loss)
Operating income for the three months ended September 27, 2014 was $2.1 million, a $4.9 million decrease compared with the three months ended September 28, 2013. A reconciliation presenting the components of the period change by each of our operating divisions is as follows:
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In millions | North America | South America | Europe | Asia | Corporate/ Other | Total | |||||||||||||||||
Prior period | $ | 14.5 | $ | 2.2 | $ | 2.5 | $ | 4.1 | $ | (16.3 | ) | $ | 7.0 | ||||||||||
Changes due to: | |||||||||||||||||||||||
Volume | 15.0 | (2.8 | ) | (4.5 | ) | 1.0 | — | 8.7 | |||||||||||||||
Price/product mix | 1.0 | 0.7 | 0.4 | 1.4 | — | 3.5 | |||||||||||||||||
Raw material cost | (2.3 | ) | (1.3 | ) | (0.7 | ) | (2.4 | ) | — | (6.7 | ) | ||||||||||||
Manufacturing costs | 0.5 | (2.1 | ) | 0.8 | 0.2 | — | (0.6 | ) | |||||||||||||||
Currency translation | (0.2 | ) | 1.6 | — | (2.3 | ) | 5.3 | 4.4 | |||||||||||||||
Depreciation and amortization | 0.8 | 0.1 | — | 0.4 | (0.1 | ) | 1.2 | ||||||||||||||||
Purchase accounting | (5.5 | ) | (2.0 | ) | 3.8 | — | — | (3.7 | ) | ||||||||||||||
Special charges | — | — | — | — | (7.8 | ) | (7.8 | ) | |||||||||||||||
All other | (1.1 | ) | 0.1 | 0.1 | (0.3 | ) | (2.7 | ) | (3.9 | ) | |||||||||||||
Sub-total | 8.2 | (5.7 | ) | (0.1 | ) | (2.0 | ) | (5.3 | ) | (4.9 | ) | ||||||||||||
End of period | $ | 22.7 | $ | (3.5 | ) | $ | 2.4 | $ | 2.1 | $ | (21.6 | ) | $ | 2.1 | |||||||||
The amounts for acquisition and integration expenses as well as special charges have not been allocated to our reportable business divisions because our management does not evaluate such charges on a division-by-division basis. Division operating performance is measured and evaluated before such items.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 27, 2014 were $65.8 million, a $32.3 million increase compared with the three months ended September 28, 2013. The increase was primarily related to the inclusion of Fiberweb, which added an incremental $15.8 million of costs for the period. In addition, expenses related to our recent acquisition of Providência added $11.1 million to selling, general and administrative expenses. Other selling general and administrative expenses increased $5.5 million compared to the prior year. Factors that contributed to the increase include higher incentive compensation and Blackstone-related management fees as well as increased selling, marketing and freight expenses. In addition, we incurred higher employee-related expenses and costs related to third-party fees and expenses. As a result, selling, general and administrative expenses as a percentage of net sales increased to 13.2% for the three months ended September 27, 2014 from 11.6% for the three months ended September 28, 2013. The three months ended September 28, 2013 include $0.7 million of expenses related to the announced retirement, and simultaneous appointment of, our Chief Executive Officer position.
Special Charges, net
As part of our business strategy, we incur costs related to corporate-level decisions or Board of Director actions. These actions are primarily associated with initiatives attributable to restructuring and realignment of manufacturing operations and management structures as well as the pursuit of certain transaction opportunities when applicable. In addition, we evaluate our long-lived assets for impairment whenever events or changes in circumstances including the aforementioned, indicate that the carrying amounts may not be recoverable.
Special charges for the three months ended September 27, 2014 were $14.9 million and consisted of the following components:
• | $6.9 million related to non-cash goodwill impairment charge in South America segment |
• | $4.3 million related to professional fees and other transaction costs associated with our acquisition of Providência |
• | $2.6 million related to integration costs associated with our acquisition of Fiberweb |
• | $0.5 million related to cost associated with our internal redesign and restructuring of global operations initiatives |
• | $0.1 million related to separation and severance expenses associated with our plant realignment cost initiatives |
• | $0.5 million related to other corporate initiatives |
Special charges for the three months ended September 28, 2013 were $7.1 million and consisted of the following components:
• | $6.2 million related to professional fees and other transaction costs associated with our acquisition of Fiberweb |
• | $0.4 million related to separation and severance expenses associated with our plant realignment cost initiatives |
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• | $0.2 million related to cost associated with our internal redesign and restructuring of global operations initiatives |
• | $0.3 million related to other corporate initiatives |
The amounts included in Special charges, net have not been allocated to our reportable business divisions because our management does not evaluate such charges on a division-by-division basis. Division operating performance is measured and evaluated before such items.
Other Operating, net
For the three months ended September 27, 2014, other operating expense totaled $2.3 million, of which $1.5 million was associated with foreign currency losses. These losses were partially offset by $0.8 million related to other operating income. Other operating expense for the three months ended September 28, 2013 was $0.7 million. Amounts associated with foreign currency losses on operating assets and liabilities totaled $0.7 million. These losses were partially offset by less than $0.1 million of other operating income.
Other Income (Expense)
Interest expense for the three months ended September 27, 2014 and the three months ended September 28, 2013 was $28.8 million and $13.2 million, respectively. The increase primarily relates to interest expense and amortization of debt issuance costs associated with the Term Loans and the Senior Unsecured Notes, both of which were used to fund our recent acquisitions. Combined, we realized an additional $13.4 million of expense associated with changes to our debt structure as a result of the Fiberweb and Providência transactions.
During the three months ended September 27, 2014, we redeemed $56.0 million of the Senior Secured Notes at a redemption price of 103.0% of the aggregate principal amount plus any accrued and unpaid interest. As a result, we recognized a loss on debt extinguishment of $2.6 million. In addition, we entered into an assignment agreement with a third-party financial institution to transfer, to us, their rights and obligations under an export credit facility acquired in the acquisition of Providência. Fees related to the assignment totaled $2.4 million during the period. These costs are included within Debt modification and extinguishment costs.
Foreign currency and other, net was an expense of $26.6 million for the three months ended September 27, 2014. The main driver of the expense related to $19.5 million associated with foreign currency losses on non-operating assets and liabilities. A majority of the loss occurred in South America as the U.S. dollar strengthened significantly against local currencies in Brazil and Argentina. In addition, non-operating asset values in Europe created currency losses as the Euro weakened against the U.S. dollar. Other non-operating expenses totaled $7.1 million and included $5.9 million associated with the changes in fair value of a series options related to the Mandatory Tender Offer and the deferred portion of the purchase price. In addition, we incurred $0.5 million of non-operating expenses, primarily associated with factoring fees as well as $0.7 million of expenses related to Providência. For the three months ended September 28, 2013, foreign currency and other, net provided $2.3 million. The main driver of the benefit related to a foreign exchange forward contract associated with our proposed acquisition of Fiberweb, which provided $2.9 million to the quarter. The gain was partially offset by $0.3 million associated with foreign currency losses on non-operating assets and liabilities. In addition, we incurred $0.3 million related to other non-operating expenses, primarily associated with factoring fees..
Income Tax (Provision) Benefit
During the three months ended September 27, 2014, we recognized an income tax benefit of $1.1 million on consolidated pre-tax book loss from continuing operations of $58.3 million. During the three months ended September 28, 2013, we recognized income tax provision of $4.4 million on consolidated pre-tax book loss from continuing operations of $3.9 million. The combination of our income tax provision and our recorded loss from operations before income taxes resulted in a negative effective tax rate for the period. Our income tax expense in 2014 and 2013 is different than such expense determined at the U.S. federal statutory rate due to losses in certain jurisdictions for which no income tax benefits are anticipated, foreign withholding taxes for which tax credits are not anticipated, changes in the amounts recorded for tax uncertainties, foreign taxes calculated at statutory rates different than the U.S. federal statutory rate, and the application of intraperiod tax allocation rules.
Earnings Attributable to Noncontrolling Interests
Earnings attributable to noncontrolling interests for the three months ended September 27, 2014 was a loss of $1.9 million. Noncontrolling interests represent the minority partners' interest in the income or loss of consolidated subsidiaries which are not wholly-owned by us. Our acquisition of Providência represents a 71.25% controlling interest. As a result, we incurred $1.8 million related to the noncontrolling interest during the current period. In association with the acquisition of Fiberweb, the Company
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assumed control of Terram Geosynthetics Private Limited, a joint venture located in Gujarat, India in which we maintain a 65% controlling interest. As a result, we incurred $0.1 million related to the noncontrolling interest during the current period.
Nine Months Ended September 27, 2014 Compared to the Nine Months Ended September 28, 2013
The following table sets forth the period change for each category of the Statement of Comprehensive Income (Loss) for the nine months ended September 27, 2014 as compared to the nine months ended September 28, 2013, as well as each category as a percentage of net sales:
Percentage of Net Sales for the Respective Period End | |||||||||||||
In thousands | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | Period Change Favorable (Unfavorable) | September 27, 2014 | September 28, 2013 | ||||||||
Net sales | $ | 1,360,495 | $ | 867,599 | $ | 492,896 | 100.0 | % | 100.0 | % | |||
Cost of goods sold | (1,118,952 | ) | (723,143 | ) | (395,809 | ) | 82.2 | % | 83.3 | % | |||
Gross profit | 241,543 | 144,456 | 97,087 | 17.8 | % | 16.7 | % | ||||||
Selling, general and administrative expenses | (185,499 | ) | (107,176 | ) | (78,323 | ) | 13.6 | % | 12.4 | % | |||
Special charges, net | (47,868 | ) | (10,647 | ) | (37,221 | ) | 3.5 | % | 1.2 | % | |||
Other operating, net | (2,658 | ) | (1,975 | ) | (683 | ) | 0.2 | % | 0.2 | % | |||
Operating income (loss) | 5,518 | 24,658 | (19,140 | ) | 0.4 | % | 2.8 | % | |||||
Other income (expense): | |||||||||||||
Interest expense | (67,605 | ) | (37,592 | ) | (30,013 | ) | 5.0 | % | 4.3 | % | |||
Debt modification and extinguishment costs | (15,725 | ) | — | (15,725 | ) | 1.2 | % | — | % | ||||
Foreign currency and other, net | (11,626 | ) | (22 | ) | (11,604 | ) | 0.9 | % | — | % | |||
Income (loss) before income taxes | (89,438 | ) | (12,956 | ) | (76,482 | ) | (6.6 | )% | (1.5 | )% | |||
Income tax (provision) benefit | 850 | (9,444 | ) | 10,294 | (0.1 | )% | 1.1 | % | |||||
Net income (loss) | (88,588 | ) | (22,400 | ) | (66,188 | ) | (6.5 | )% | (2.6 | )% | |||
Less: Earnings attributable to noncontrolling interests | (4,216 | ) | — | (4,216 | ) | 0.3 | % | — | % | ||||
Net income (loss) attributable to Polymer Group, Inc. | $ | (84,372 | ) | $ | (22,400 | ) | $ | (61,972 | ) | (6.2 | )% | (2.6 | )% |
Net Sales
Net sales for the nine months ended September 27, 2014 were $1,360.5 million, a $492.9 million increase compared with the nine months ended September 28, 2013. A reconciliation presenting the components of the period change by each of our operating segments is as follows:
In millions | North America | South America | Europe | Asia | Total | ||||||||||||||
Prior period | $ | 409.4 | $ | 113.8 | $ | 219.1 | $ | 125.3 | $ | 867.6 | |||||||||
Changes due to: | |||||||||||||||||||
Volume | 187.9 | 88.6 | 184.2 | 21.0 | 481.7 | ||||||||||||||
Price/product mix | 7.0 | 2.6 | (1.3 | ) | (3.6 | ) | 4.7 | ||||||||||||
Currency translation | (1.1 | ) | — | 7.0 | 0.6 | 6.5 | |||||||||||||
Sub-total | 193.8 | 91.2 | 189.9 | 18.0 | 492.9 | ||||||||||||||
End of period | $ | 603.2 | $ | 205.0 | $ | 409.0 | $ | 143.3 | $ | 1,360.5 | |||||||||
For the nine months ended September 27, 2014, volumes increased by $481.7 million compared with the nine months ended September 28, 2013. The primary driver of the increase related to the contributions from Fiberweb, which represented an incremental $340.9 million for the period. In addition, our recent acquisition of Providência provided $111.8 million of net sales since the date of acquisition. Incremental volume growth of $21.0 million in Asia was driven by higher volumes sold in the hygiene and healthcare markets, both of which were supported by our recent capacity expansions. In Europe, increased sales into the technical specialties and wipes product markets increased net sales by $9.2 million. Improvements in the hygiene market provided
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$4.2 million of incremental volume growth in South America. Volumes decreased $5.4 million in North America, primarily driven by lower wipes and industrial markets sales as well as the timing of customer orders.
For the nine months ended September 27, 2014, net selling prices increased $4.7 million compared with the nine months ended September 28, 2013. The pricing increase was primarily driven by higher net selling prices of $7.0 million in North America, which reflects the impacts of pricing initiatives implemented during the year. In addition, we experienced pricing improvements in South America of $2.6 million. The pricing increase, which primarily resulted from our passing through higher raw material costs associated with index-based selling agreements and market-based pricing trends, more than offset lower selling prices of $1.3 million in Europe. Product mix movements in Asia impacted net sales by $3.6 million. The decrease was a result of a larger proportion of current year sales in the hygiene market compared with more prior year sales in the healthcare market, which have higher average selling prices.
Gross Profit
Gross profit for the nine months ended September 27, 2014 was $241.5 million, a $97.1 million increase compared with the nine months ended September 28, 2013. The primary driver of the increase related to the contributions from Fiberweb, which represented an incremental $76.1 million for the period, including contributions associated with integration synergies. In addition, contributions from Providência were $14.5 million, including $4.9 million related to the non-recurring amortization expense of the inventory step-up established as a result of the acquisition as well as the negative impact of start-up inefficiencies in Brazil as certain lines were returning to normal operations during the third quarter.
Increases in net sales within each of our geographic regions, primarily in Europe and Asia, further provided incremental gross profit. In addition, our reduction of our labor component of cost of goods sold reflects the positive benefits of our cost reduction initiatives. However, these amounts were partially offset by lower net spreads (the difference between the change in raw material costs and selling prices) of $10.3 million as raw material costs increased, primarily impacting the Asia and South America segments. Other costs that impacted gross profit include an increase to our overhead component of cost of goods sold, primarily related to increased manufacturing costs in South America and increased depreciation in Asia. These amounts were partially offset by improved manufacturing efficiencies in North America and Asia. As a result, gross profit as a percentage of net sales for the nine months ended September 27, 2014 increased to 17.8% from 16.7% for the nine months ended September 28, 2013.
Operating Income (Loss)
Operating income for the nine months ended September 27, 2014 was $5.5 million, a $19.2 million decrease compared with the nine months ended September 28, 2013. A reconciliation presenting the components of the period change by each of our operating divisions is as follows:
In millions | North America | South America | Europe | Asia | Corporate/ Other | Total | |||||||||||||||||
Prior period | $ | 40.4 | $ | 5.3 | $ | 9.2 | $ | 13.7 | $ | (43.9 | ) | $ | 24.7 | ||||||||||
Changes due to: | |||||||||||||||||||||||
Volume | 32.1 | 1.4 | 0.8 | 7.0 | — | 41.3 | |||||||||||||||||
Price/product mix | 7.0 | 2.5 | (1.3 | ) | (3.6 | ) | — | 4.6 | |||||||||||||||
Raw material cost | (7.2 | ) | (5.0 | ) | (0.1 | ) | (2.6 | ) | — | (14.9 | ) | ||||||||||||
Manufacturing costs | 1.8 | (2.9 | ) | 0.1 | 1.2 | — | 0.2 | ||||||||||||||||
Currency translation | 0.1 | 7.0 | 0.9 | (2.1 | ) | 0.1 | 6.0 | ||||||||||||||||
Depreciation and amortization | 2.4 | 0.5 | (0.2 | ) | (2.5 | ) | — | 0.2 | |||||||||||||||
Purchase accounting | (9.6 | ) | (4.6 | ) | 2.5 | — | — | (11.7 | ) | ||||||||||||||
Special charges | — | — | — | — | (37.2 | ) | (37.2 | ) | |||||||||||||||
All other | (3.6 | ) | (1.0 | ) | 0.8 | (0.2 | ) | (3.7 | ) | (7.7 | ) | ||||||||||||
Sub-total | 23.0 | (2.1 | ) | 3.5 | (2.8 | ) | (40.8 | ) | (19.2 | ) | |||||||||||||
End of period | $ | 63.4 | $ | 3.2 | $ | 12.7 | $ | 10.9 | $ | (84.7 | ) | $ | 5.5 | ||||||||||
The amounts for acquisition and integration expenses as well as special charges have not been allocated to our reportable business divisions because our management does not evaluate such charges on a division-by-division basis. Division operating performance is measured and evaluated before such items.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 27, 2014 were $185.5 million, a $78.3 million increase compared with the nine months ended September 28, 2013. The increase was primarily related to the inclusion of Fiberweb, which added an incremental $54.1 million of costs for the period. In addition, expenses related to our recent acquisition of Providência added $18.8 million to selling, general and administrative expenses. Other selling general and administrative expenses increased $5.4 million compared to the prior year. Factors that contributed to the increase include higher incentive compensation and Blackstone-related management fees as well as increased selling, marketing and freight expenses. However, these costs were partially offset by a reduction in third-party fees and expenses and lower stock-based compensation expense. As a result, selling, general and administrative expenses as a percentage of net sales increased to 13.6% for the nine months ended September 27, 2014 from 12.4% for the nine months ended September 28, 2013. The nine months ended September 28, 2013 include $5.3 million of expenses related to the announced retirement, and simultaneous appointment of, our Chief Executive Officer position.
Special Charges, net
As part of our business strategy, we incur costs related to corporate-level decisions or Board of Director actions. These actions are primarily associated with initiatives attributable to restructuring and realignment of manufacturing operations and management structures as well as the pursuit of certain transaction opportunities when applicable. In addition, we evaluate our long-lived assets for impairment whenever events or changes in circumstances including the aforementioned, indicate that the carrying amounts may not be recoverable.
Special charges for the nine months ended September 27, 2014 were $47.9 million and consisted of the following components:
• | $19.2 million related to professional fees and other transaction costs associated with our acquisition of Providência |
• | $10.1 million related to separation and severance expenses associated with our plant realignment cost initiatives |
• | $10.1 million related to professional fees and other transaction costs associated with our acquisition of Fiberweb |
• | $6.9 million related to non-cash goodwill impairment charge in South America segment |
• | $1.0 million related to cost associated with our internal redesign and restructuring of global operations initiatives |
• | $0.6 million related to other corporate initiatives |
Special charges for the nine months ended September 28, 2013 were $10.6 million and consisted of the following components:
• | $6.2 million related to professional fees and other transaction costs associated with our acquisition of Fiberweb |
• | $2.2 million related to cost associated with our internal redesign and restructuring of global operations initiatives |
• | $1.5 million related to separation and severance expenses associated with our plant realignment cost initiatives |
• | $0.7 million related to other corporate initiatives |
The amounts included in Special charges, net have not been allocated to our reportable business divisions because our management does not evaluate such charges on a division-by-division basis. Division operating performance is measured and evaluated before such items.
Other Operating, net
For the nine months ended September 27, 2014, other operating expense totaled $2.7 million, of which $5.1 million was associated with foreign currency losses. These losses were partially offset by $2.4 million related to other operating income. Other operating expense for the nine months ended September 28, 2013 was $2.0 million. Amounts associated with foreign currency losses on operating assets and liabilities totaled $2.2 million. These losses were partially offset by $0.2 million of other operating income.
Other Income (Expense)
Interest expense for the nine months ended September 27, 2014 and the nine months ended September 28, 2013 was $67.6 million and $37.6 million, respectively. The increase primarily relates to interest expense and amortization of debt issuance costs associated with the Term Loans and the Senior Unsecured Notes, both of which were used to fund our recent acquisitions. Combined, we realized an additional $23.8 million of expense associated with changes to our debt structure as a result of the Fiberweb and Providência transactions.
During the nine ended September 27, 2014, we redeemed $56.0 million of the Senior Secured Notes at a redemption price of 103.0% of the aggregate principal amount plus any accrued and unpaid interest. As a result, we recognized a loss on debt extinguishment of $2.6 million. In addition, we entered into an assignment agreement with a third-party financial institution to
50
transfer, to us, their rights and obligations under an export credit facility acquired in the acquisition of Providência. Fees related to the assignment totaled $2.4 million during the period. In association with the acquisition of Providência, we incurred $21.3 million of loan acquisition costs, of which $10.7 million was expensed as incurred during the second quarter of 2014. These amounts are included within Debt modification and extinguishment costs.
Foreign currency and other, net was an loss of $11.6 million for the nine months ended September 27, 2014. The main driver of the expense related to $21.7 million associated with foreign currency losses on non-operating assets and liabilities. A majority of the loss occurred in South America as the U.S. dollar strengthened significantly against local currencies in Brazil and Argentina. In addition, non-operating asset values in Europe created currency losses as the Euro weakened against the U.S. dollar. Other non-operating income totaled $10.1 million and included the settlement of a foreign exchange forward contracts associated with the Providência Acquisition, which provided $18.9 million of income realized at the date of acquisition. However, these amounts were partially offset by $1.4 million of non-operating expenses, primarily associated with factoring fees as well as $5.0 million of expenses associated with Providência. Other costs recognized included $2.4 million associated with the changes in fair value of a series options related to the Mandatory Tender Offer and the deferred portion of the purchase price. For the nine months ended September 28, 2013, foreign currency and other was an expense of less than $0.1 million. Items impacting the results include $1.3 million associated with foreign currency losses on non-operating assets and liabilities as well as $1.1 million of other non-operating expenses, primarily associated with factoring fees. In addition, we incurred $0.5 million related to the release of a FIN 48 tax indemnification asset. However, these amounts were offset by the benefit related to a foreign exchange forward contract associated with our proposed acquisition of Fiberweb, which provided $2.9 million to the period.
Income Tax (Provision) Benefit
During the nine months ended September 27, 2014, we recognized an income tax benefit of $0.9 million on consolidated pre-tax book loss from continuing operations of $89.4 million. During the nine months ended September 28, 2013, we recognized income tax provision of $9.4 million on consolidated pre-tax book loss from continuing operations of $13.0 million. The combination of our income tax provision and our recorded loss from operations before income taxes resulted in a negative effective tax rate for the period. Our income tax expense in 2014 and 2013 is different than such expense determined at the U.S. federal statutory rate due to losses in certain jurisdictions for which no income tax benefits are anticipated, foreign withholding taxes for which tax credits are not anticipated, changes in the amounts recorded for tax uncertainties, foreign taxes calculated at statutory rates different than the U.S. federal statutory rate, and the application of intraperiod tax allocation rules.
Earnings Attributable to Noncontrolling Interests
Earnings attributable to noncontrolling interests for the nine months ended September 27, 2014 was a loss of $4.2 million. Noncontrolling interests represent the minority partners' interest in the income or loss of consolidated subsidiaries which are not wholly-owned by us. Our acquisition of Providência represents a 71.25% controlling interest. As a result, we incurred $4.0 million related to the noncontrolling interest during the current period. In association with the acquisition of Fiberweb, the Company assumed control of Terram Geosynthetics Private Limited, a joint venture located in Gujarat, India in which we maintain a 65% controlling interest. As a result, we incurred $0.2 million related to the noncontrolling interest during the current period.
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Liquidity and Capital Resources
The following table contains several key measures of our financial condition and liquidity:
In millions | September 27, 2014 | December 28, 2013 | |||||
Balance Sheet Data: | |||||||
Cash and cash equivalents | $ | 182.7 | $ | 86.1 | |||
Operating working capital (1) | 132.9 | 43.2 | |||||
Total assets | 2,127.6 | 1,464.5 | |||||
Total debt | 1,491.4 | 896.7 | |||||
Total Polymer Group, Inc. shareholders’ equity | 49.5 | 158.9 | |||||
(1) Operating working capital represents accounts receivable plus inventory less accounts payable and accrued liabilities
We assess our liquidity in terms of our ability to generate cash to fund our operating, investing and financing activities. In doing so, we review and analyze our current cash on hand, the number of days our sales are outstanding, inventory turns, capital expenditure commitments and income tax rates. Our cash requirements primarily consist of the following:
•Debt service requirements
•Funding of working capital
•Funding of capital expenditures
Our primary sources of liquidity include cash balances on hand, cash flows from operations, cash inflows from the sale of certain accounts receivables through our factoring arrangements, proceeds from notes offerings, borrowing availability under our existing credit facilities and our ABL Facility. We expect our cash on hand and cash flow from operations (which may fluctuate due to short-term operational requirements), combined with the current borrowing availability under our existing credit facilities and our ABL Facility, to provide sufficient liquidity to fund our current obligations, projected working capital requirements and capital spending during the next twelve month period and our ongoing operations, projected working capital requirements and capital spending during the foreseeable future.
On January 28, 2011, pursuant to an Agreement and Plan of Merger, dated as of October 4, 2010, we were acquired by affiliates of Blackstone along with certain members of the Company's management for an aggregate purchase price of $403.5 million. In addition, we have subsequently increased our debt balances in association with our acquisitions of Fiberweb and Providência. As a result, we are highly leveraged and our liquidity requirements are significant, primarily due to our debt service requirements. Cash interest payments for the nine months ended September 27, 2014 were $72.0 million. We had $182.7 million of cash and cash equivalents on hand and an additional $42.6 million of undrawn availability under our ABL Facility as of September 27, 2014. The availability under our ABL Facility is determined in accordance with a borrowing base which can fluctuate due to various factors.
We currently have multiple intercompany loan agreements, and in certain circumstances, management services agreements in place that allow us to repatriate foreign subsidiary cash balances to the U.S. without being subject to significant amounts of either foreign jurisdiction withholding taxes or adverse U.S. taxation. In addition, our U.S. legal entities have royalty arrangements, associated with our foreign subsidiaries’ use of U.S. legal entities intellectual property rights that allow us to repatriate foreign subsidiary cash balances, subject to foreign jurisdiction withholding tax requirements. Should we decide to permanently repatriate foreign jurisdiction earnings by means of a dividend, the repatriated cash would be subject to foreign jurisdiction withholding tax requirements.
At September 27, 2014, we had $182.7 million of cash and cash equivalents on hand, of which $65.8 million was held by subsidiaries outside of the U.S., the majority of which was available for repatriation through various intercompany arrangements. In addition, our U.S. legal entities in the past have also borrowed cash, on a temporary basis, from our foreign subsidiaries to meet U.S. obligations via short-term intercompany loans. Our U.S. legal entities may in the future borrow from our foreign subsidiaries.
Our liquidity and our ability to fund our capital requirements is dependent on our future financial performance, which is subject to general economic, financial and other factors that are beyond our control and many of which are described under "Item 1A - Risk Factors" in our most recently filed Annual Report on Form 10-K. If those factors significantly change or other unexpected factors adversely affect us, our business may not generate sufficient cash flow from operations or we may not be able to obtain future financings to meet our liquidity needs. We anticipate that to the extent additional liquidity is necessary to fund our operations, it would be funded through borrowings under our ABL Facility, incurring other indebtedness, additional equity financings or a
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combination of these potential sources of liquidity. We may not be able to obtain this additional liquidity on terms acceptable to us or at all.
Cash Flows
The following table sets forth the major categories of cash flows:
In millions | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||
Cash Flow Data: | |||||||
Net cash provided by (used in) operating activities | $ | 12.0 | $ | 4.1 | |||
Net cash provided by (used in) investing activities | (407.4 | ) | (40.0 | ) | |||
Net cash provided by (used in) financing activities | 495.9 | 12.4 | |||||
Total | $ | 100.5 | $ | (23.5 | ) | ||
Operating Activities
Net cash provided by operating activities for the nine months ended September 27, 2014 was $12.0 million, of which net income provided $20.5 million after adjusting for non-cash transactions. Working capital requirements used $39.4 million, after adjusting for the net assets purchased in the Providência Acquisition, and was significantly impacted by cash outflows for transaction and integration related spending during the current period. The primary driver of the working capital outflow related to a $22.0 million increase in accounts receivable, which resulted from increased sales during the period as well as from our passing through higher raw material costs associated with index-based selling agreements and market-based pricing trends. Days sales outstanding was 48 days at September 27, 2014 as compared 45 days at year end. Inventory increased $6.7 million as a result of the higher average purchase price of raw materials. Inventory on hand was 40 days at September 27, 2014 compared with 41 days at year end. Other current assets increased $1.3 million (after a $6.9 million adjustment for the non-cash impact of the Providência Contracts) primarily due to the timing of prepaid items as well as the timing of payments from our factoring agents. In addition, accounts payables and accrued expenses decreased $9.4 million. Trade accounts payable were impacted by the timing of supplier payments while accrued expenses were impacted by the timing of vendor payments and the bi-annual interest payment associated with our Senior Secured Notes, restructuring programs and employee-related expenses. As a result, accounts payable days decreased to 68 days at September 27, 2014 from 80 days at year end. We continues to focus on working capital management, however, changes in raw material prices and the associated lag effect on selling prices can impact accounts receivable and inventory balances.
Net cash provided by operating activities for the nine months ended September 28, 2013 was $4.1 million, of which net income provided $29.1 million after adjusting for non-cash transactions and working capital requirements used $17.4 million. The primary driver of the working capital outflow related to a $12.5 million increase in accounts receivable, which resulted from our passing through higher raw material costs associated with index-based selling agreements and market-based pricing trends. At September 28, 2013, days sales outstanding was 45 days compared with 44 days at year-end. In addition, inventory increased $7.5 million, primarily a result of the higher overall purchase price of raw materials. Inventory on hand was 39 days compared with 38 days at year-end. A portion of the increase to these two components was due to the installation and ramp up of our Asia hygiene manufacturing line in May 2013. Other current assets increased $5.6 million primarily due to the timing of prepaid items as well as higher amounts due from our factoring agents. These amounts were partially offset by an increase in accounts payable and accruals, which provided $8.2 million. Trade accounts payable were impacted by the timing of supplier payments and higher raw material costs. Accrued expenses were impacted by the timing of vendor payments, partially offset by cash payments for our restructuring programs. Accounts payable days was 78 days at September 28, 2013 compared with 79 days at year-end.
As sales volume and raw material costs vary, inventory and accounts receivable balances are expected to rise and fall accordingly, which in turn, result in changes in our levels of working capital and cash flows going forward. In addition, we review our business on an ongoing basis relative to current and expected market conditions, attempting to match our production capacity and cost structure to the demands of the markets in which we participate, and strive to continuously streamline our manufacturing operations consistent with world-class standards. Accordingly, in the future we may decide to undertake certain restructuring efforts to improve our competitive position. To the extent from time to time further decisions are made to restructure our business, such actions could result in cash restructuring charges and asset impairment charges, which could be material. Cash tax payments are significantly influenced by, among other things, actual operating results in each of our tax jurisdictions, changes in tax law, changes in our tax structure and any resolutions of uncertain tax positions.
Investing Activities
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Net cash used in investing activities for the nine months ended September 27, 2014 was $407.4 million. The primary driver of the outflow related to the Providência Acquisition, where we acquired Providência for an aggregate purchase price of $424.6 million, of which $356.0 was cash consideration, net of cash acquired. Property, plant and equipment expenditures totaled $53.8 million and related to machinery and equipment upgrades that extend the useful life and/or increased the functionality of the asset as well as other various projects.
Net cash used in investing activities for the nine months ended September 28, 2013 was $40.0 million. The main driver of the outflow related to $35.5 million of total property, plant and equipment expenditures, primarily associated with our manufacturing expansion project in China. Other items included in our capital expenditures relates to machinery and equipment upgrades that extend the useful life and/or increased the functionality of the asset. In addition, we acquired $4.5 million of intangible assets, primarily related to the purchase of land-use rights in connection with the plan to relocate our Nanhai, China manufacturing facilities.
Financing Activities
Net cash provided by financing activities for the nine months ended September 27, 2014 was $495.9 million. The primary driver of the inflow related to the $415.0 million of proceeds from borrowings under our Senior Secured Credit Agreement as well as the proceeds from the issuance of $210.0 million of 6.875% Senior Unsecured Notes. These amounts were used to fund the Providência Acquisition and repay a portion of our outstanding debt. Other borrowings totaled $21.6 million and primarily related to short-term credit facilities used to finance various investments in Non-U.S. jurisdictions and certain liquidity requirements. These amounts were partially offset by repayments of $129.3 million and $25.3 million of costs associated with our debt.
Net cash provided by financing activities for the nine months ended September 28, 2013 was $12.4 million. Proceeds from borrowings totaled $20.4 million, of which $13.9 million related to a credit facility funding our manufacturing expansion project in China. Proceeds of $3.5 million related to a new credit facility in Argentina used to fund the upgrade of one of our manufacturing lines. Other proceeds were related to short-term facilities. These amounts were partially offset by repayments of $7.7 million.
Indebtedness
The following table summarizes our outstanding debt at September 27, 2014:
In thousands | Currency | Matures | Interest Rate | Outstanding Balance | ||
Term Loans | USD | 2018 | 5.25% | $ | 706,510 | |
Senior Secured Notes | USD | 2019 | 7.75% | 504,000 | ||
Senior Unsecured Notes | USD | 2019 | 6.875% | 210,000 | ||
ABL Facility | USD | 2016 | — | — | ||
Argentina credit facilities: | ||||||
Nacion Facility | USD | 2016 | 3.13% | 5,843 | ||
Galicia Facility | ARS | 2016 | 15.25% | 2,367 | ||
China Credit Facility | USD | 2015 | 5.43% | 22,420 | ||
Brazil export credit facilities: | ||||||
Itaú Facility ($) | USD | 2018 | 4.85% | — | ||
Itaú Facility (R$) | BRL | 2016 | 8.00% | 20,720 | ||
Recovery Zone Facility Bonds | USD | 2030 | 2.50% | — | ||
India Loans | INR | 2017 | 14.70% | 2,771 | ||
Capital lease obligations | Various | 2014-2018 | Various | 946 | ||
Total long-term debt including current maturities | 1,475,577 | |||||
Short-term borrowings | Various | 2014 | Various | 15,802 | ||
Total debt | $ | 1,491,379 | ||||
Term Loans
On December 19, 2013, we entered into a Senior Secured Credit Agreement (the loans thereunder, the "Term Loans") with a maturity date upon the earlier of (i) December 19, 2019 and (ii) the 91st day prior to the scheduled maturity of our 7.75% Senior Secured Notes; provided that on such 91st day, such 7.75% Senior Secured Notes has an aggregate principal amount in excess of $150.0 million. The Term Loans provide for a commitment by the lenders to make secured term loans in an aggregate amount
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not to exceed $295.0 million, the proceeds of which were used to partially repay amounts outstanding under the Senior Secured Bridge Credit Agreement and the Senior Unsecured Bridge Credit Agreement.
Borrowings bear interest at a fluctuating rate per annum equal to, at our option, (i) a base rate equal to the highest of (a) the federal funds rate plus ½ of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Citicorp North America, Inc. as its "prime rate" and (c) the LIBOR rate for a one-month interest period plus 1.0% (provided that in no event shall such base rate with respect to the Term Loans be less than 2.0% per annum), in each case plus an applicable margin of 3.25% or (ii) a LIBOR rate for the applicable interest period (provided that in no event shall such LIBOR rate with respect to the Term Loans be less than 1.0% per annum) plus an applicable margin of 4.25%. The applicable margin for the Term Loans is subject to a 25 basis point step-down upon the achievement of a certain senior secured net leverage ratio. We are required to repay installments on the Term Loans in quarterly installments in aggregate amounts equal to 1.0% per annum of their funded total principal amount, with the remaining amount payable on the maturity date.
On June 10, 2014, we entered into an incremental term loan amendment (the "Incremental Amendment") to the existing Term Loans in which we obtained $415.0 million of commitments for incremental term loans from the existing lenders, the terms of which are substantially identical to the terms of the Term Loans. Pursuant to the Incremental Amendment, we borrowed $310.0 million, the proceeds of which were used to fund a portion of the consideration paid for the Providência Acquisition. The remaining commitments were available for borrowing until December 31, 2014. However, we used the proceeds from remaining commitments to repay existing indebtedness during the third quarter.
The Term Loans are secured (i) together with the Tranche 2 loans, on a first-priority lien basis by substantially all of the assets of ours, and any existing and future subsidiary guarantors (other than collateral securing the ABL Facility on a first-priority basis), including all of the capital stock of ours and each restricted subsidiary (which, in the case of foreign subsidiaries, will be limited to 65% of the capital stock of each first-tier foreign subsidiary) and (ii) on a second-priority basis by the collateral securing the ABL Facility, in each case, subject to certain exceptions and permitted liens. We may voluntarily repay outstanding loans at any time without premium or penalty, other than a voluntary prepayment of Term Loans in connection with a repricing transaction on or prior to the date that is six months after the closing date of the Incremental Amendment and customary "breakage" costs with respect to LIBOR loans.
The agreement governing the Term Loans, among other restrictions, limits our ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional debt or issue disqualified stock or preferred stock; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) repurchase stock; (v) incur certain liens; (vi) enter into transactions with affiliates; (vii) merge or consolidate; (viii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments to Polymer Group, Inc.; (ix) designate restricted subsidiaries as unrestricted subsidiaries; and (x) transfer or sell assets. In addition, the Term Loans contain certain customary representations and warranties, affirmative covenants and events of default.
Under the credit agreement governing the Term Loans, our ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Adjusted EBITDA (defined as Consolidated EBITDA in the credit agreement governing the Terms Loans).
Senior Secured Notes
In connection with the Merger, we issued $560.0 million of 7.75% Senior Secured Notes due 2019 on January 28, 2011. The notes are fully and unconditionally guaranteed, jointly and severally on a senior secured basis, by each of the Polymer Group's wholly-owned domestic subsidiaries. Interest on the notes is paid semi-annually on February 1 and August 1 of each year. On July 23, 2014, we redeemed $56.0 million of the Senior Secured Notes at a redemption price of 103.0% of the aggregate principal amount plus any accrued and unpaid interest, to, but excluding, July 23, 2014. The redemption amount was funded by proceeds from the Incremental Amendment. Pursuant to ASC 470, "Modifications and Extinguishments" ("ASC 470"), we recognized a loss on debt extinguishment of $2.6 million, which included $0.9 million related to unamortized debt issuance costs. As the nature of this transaction related to a non-operating event, the loss on extinguishment is included in Debt modifications and extinguishment costs in the current period.
The indenture governing the Senior Secured Notes limits, subject to certain exceptions, the ability of us and our restricted subsidiaries to: (i) incur or guarantee additional debt or issue disqualified stock or preferred stock; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) incur certain liens; (v) enter into transactions with affiliates; (vi) merge or consolidate; (vii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments to Polymer Group, Inc.; (viii) designate restricted subsidiaries as unrestricted subsidiaries; and (ix) transfer or sell assets. It does not limit the activities of the Parent or the amount of additional indebtedness that Parent or its parent
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entities may incur. In addition, it also provides for specified events of default, which, if any of them occurs, would permit or require the principal of and accrued interest on the Senior Secured Notes to become or to be declared due and payable.
Under the indenture governing the Senior Secured Notes, our ability to engage in certain activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Adjusted EBITDA (defined as EBITDA in the indenture governing the Senior Secured Notes).
Senior Unsecured Notes
In connection with the Providência Acquisition, we issued $210.0 million of 6.875% Senior Unsecured Notes due 2019 on June 11, 2014. The notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis, by each of the Polymer Group's wholly-owned domestic subsidiaries. Interest on the notes is paid semi-annually on June 1 and December 1 of each year.
The indenture governing the Senior Unsecured Notes limits, subject to certain exceptions, the ability of us and our restricted subsidiaries to: (i) incur or guarantee additional debt or issue disqualified stock or preferred stock; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) incur certain liens; (v) enter into transactions with affiliates; (vi) merge or consolidate; (vii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments to Polymer Group, Inc.; (viii) designate restricted subsidiaries as unrestricted subsidiaries; and (iv) transfer or sell assets. It does not limit the activities of the Parent or the amount of additional indebtedness that Parent or its parent entities may incur. In addition, it also provides for specified events of default which, if any occurs, would permit or require the principal of and accrued interest on the Senior Unsecured Notes to become or to be declared due and payable.
Under the indenture governing the Senior Unsecured Notes, our ability to engage in certain activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part, by our ability to satisfy tests based on Adjusted EBITDA (defined as EBITDA in the indenture governing the Senior Unsecured Notes).
ABL Facility
On January 28, 2011, we entered into a senior secured asset-based revolving credit facility which was amended and restated on October 5, 2012 (the "ABL Facility") to provide for borrowings not to exceed $50.0 million, subject to borrowing base availability. The ABL Facility provides borrowing capacity available for letters of credit and borrowings on a same-day basis and is comprised of (i) a revolving tranche of up to $42.5 million (“Tranche 1”) and (ii) a first-in, last out revolving tranche of up to $7.5 million (“Tranche 2”). Provided that no default or event of default was then existing or would arise therefrom, we had the option to request that the ABL Facility be increased by an amount not to exceed $20.0 million. The facility matures on October 5, 2017.
On November 26, 2013, we entered into an amendment to the ABL Facility which increased the Tranche 1 revolving credit commitments by $30.0 million (for a total aggregate revolving credit commitment of $80.0 million) as well as made certain other changes to the agreement. In addition, we increased the amount by which we can request that the ABL Facility be increased at our option to an amount not to exceed $75.0 million. The effectiveness of the amendment was subject to the satisfaction of certain specified closing conditions by no later than January 31, 2014, all of which were satisfied prior to such date.
Based on current average excess availability, the borrowings under the ABL Facility will bear interest at a rate per annum equal to, at our option, either (A) British Bankers Association LIBOR Rate (“LIBOR”) (adjusted for statutory reserve requirements) plus a margin of (i) 2.00% in the case of Tranche 1 or (ii) 4.00% in the case of Tranche 2; or (B) the higher of (a) the rate of interest in effect for such day as publicly announced from time to time by Citibank, N.A. as its "prime rate" and (b) the federal funds effective rate plus ½ of 1.0% (“ABR”) plus a margin of (x) 1.00% in the case of Tranche 1 or (y) 3.00% in the case of the Tranche 2. As of September 27, 2014, the Company had no outstanding borrowings under the ABL Facility. The borrowing base availability was $61.9 million, however, outstanding letters of credit in the aggregate amount of $19.3 million left $42.6 million available for additional borrowings. The aforementioned letters of credit were primarily provided to certain administrative service providers and financial institutions. None of these letters of credit had been drawn on as of September 27, 2014.
The ABL Facility contains certain restrictions which limit our ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional debt; (ii) pay dividends and make other distributions on, or redeem or repurchase, capital stock; (iii) make certain investments; (iv) repurchase stock; (v) incur certain liens; (vi) enter into transactions with affiliates; (vii) merge or consolidate or other fundamental changes; (viii) enter into agreements that restrict the ability of subsidiaries to make dividends or other payments; (ix) designate restricted subsidiaries as unrestricted subsidiaries; (x) transfer or sell assets and (xi) prepay junior financing or other restricted debt. In addition, it contains certain customary representations and warranties, affirmative covenants and events
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of default. If such an event of default occurs, the lenders under the ABL Facility would be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor.
Under the credit agreement governing the ABL Facility, our ability to engage in activities such as incurring additional indebtedness, making investments, refinancing certain indebtedness, paying dividends and entering into certain merger transactions is governed, in part by, our ability to satisfy tests based on Adjusted EBITDA (defined as Consolidated EBITDA in the credit agreement governing the ABL Facility).
Nacion Facility
In January 2007, our subsidiary in Argentina entered into an arrangement with banking institutions in Argentina in order to finance the installation of a new spunmelt line at its facility located near Buenos Aires, Argentina. The maximum borrowings available under the facility, excluding any interest added to principal, were 33.5 million Argentine pesos with respect to an Argentine peso-denominated loan and $26.5 million with respect to a U.S. dollar-denominated loan. The loans are secured by pledges covering (i) the subsidiary's existing equipment lines; (ii) the outstanding stock of the subsidiary; and (iii) the new machinery and equipment being purchased, as well as a trust assignment agreement related to a portion of receivables due from certain major customers of the subsidiary.
The interest rate applicable to borrowings under these term loans is based on LIBOR plus 290 basis points for the U.S. dollar-denominated loan and Buenos Aires Interbanking Offered Rate plus 475 basis points for the Argentine peso-denominated loan. Principal and interest payments began in July 2008 with the loans maturing as follows: annual amounts of $3.5 million beginning in 2011 and continuing through 2015, and the remaining $1.7 million in 2016.
In connection with the Merger, we repaid and terminated the Argentine peso-denominated loans. In addition, the U.S. dollar-denominated loan was adjusted to reflect its fair value as of the date of the Merger. As a result, we recorded a contra-liability in Long-term debt and will amortize the balance over the remaining life of the facility. At September 27, 2014, the face amount of the outstanding indebtedness under the U.S. dollar-denominated loan was $6.0 million, with a carrying amount of $5.8 million and a weighted average interest rate of 3.13%.
Galicia Facility
On September 27, 2013, our subsidiary in Argentina entered into an arrangement with a banking institution in Argentina in order to partially finance the upgrade of a manufacturing line at its facility located near Buenos Aires, Argentina. The maximum borrowings available under the facility, excluding any interest added to principal, is 20.0 million Argentine pesos (approximately $3.5 million). The three-year term of the agreement began with the date of the first draw down on the facility, which occurred in the third quarter of 2013, with payments required in twenty-five equal monthly installments beginning after one year. Borrowings will bear interest at 15.25%. As of September 27, 2014, the outstanding balance under the facility was $2.4 million. The remainder of the upgrade is expected to be financed by existing cash balances and cash generated from operations.
China Credit Facility
In the third quarter of 2012, our subsidiary in China entered into a three-year U.S. dollar-denominated construction loan agreement (the “Hygiene Facility”) with a banking institution in China to finance a portion of the installation of a new spunmelt line at its manufacturing facility in Suzhou, China. The interest rate applicable to borrowings under the Hygiene Facility is based on three-month LIBOR plus an amount to be determined at the time of funding based on the lender's internal head office lending rate (520 basis points at the time the credit agreement was executed).
The maximum borrowings available under the facility, excluding any interest added to principal, were $25.0 million. At December 28, 2013, the outstanding balance under the Hygiene Facility was $24.9 million with a weighted-average interest rate of 5.46%. We repaid $2.5 million of the principal balance during 2014 using a combination of existing cash balances and cash generated from operations. As a result, the outstanding balance under the Hygiene Facility was $22.4 million at September 27, 2014 with a weighted average interest rate of 5.43%.
Brazil Export Credit Facilities
As a result of the acquisition of Providência, we assumed a U.S. dollar-denominated export credit facility with Itaú Unibanco S.A., pursuant to which Providência borrowed $52.4 million in the third quarter of 2011 for the purpose of financing certain export transactions from Brazil. Borrowings bear interest at 4.85% per annum, payable semi-annually. Principal payments are due in 11 equal installments, beginning in September 2013 and ending at final maturity in September 2018. The facility is secured by interests in the receivables related to the exports financed by the facility.
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On September 22, 2014, we entered into an assignment agreement with Itaú Unibanco S.A in order to transfer their rights and obligations under the agreement to us. The purchase price for the assigned interest totaled $45.2 million, which we funded with a portion of the proceeds from the Incremental Amendment. Pursuant to ASC 470, we recognized a loss on debt extinguishment of $2.4 million. As the nature of this transaction related to a non-operating event, the loss on extinguishment is included in Debt modifications and extinguishment costs in the current period.
As a result of the acquisition of Providência, we assumed a Brazilian real-denominated export credit facility with Itaú Unibanco S.A., pursuant to which Providência borrowed R$50.0 million in the first quarter of 2013 for the purpose of financing certain export transactions from Brazil. Borrowings bear interest at 8.0% per annum, payable quarterly. The facility matures in February 2016 and is unsecured. At September 27, 2014, outstanding borrowings under the facility totaled $20.7 million.
Recovery Zone Facility Bonds
As a result of the acquisition of Providência, we assumed a loan agreement in connection with the issuance of a like amount of recovery zone facility bonds by the Iredell County Industrial Facilities and Pollution Control Financing Authority. The proceeds of $9.1 million were used to finance, in part, the construction of a manufacturing facility in Statesville, North Carolina. The borrowings bear interest at a floating rate, which is reset weekly, and are supported by a letter of credit. On July 21, 2014, the Company repaid the aggregate principal amount of indebtedness with a portion of the proceeds from the Incremental Amendment.
India Indebtedness
As a result of the acquisition of Fiberweb, we assumed control of Terram Geosynthetics Private Limited, a joint venture located in Mundra, India in which we maintain a 65% controlling interest. As part of the net assets acquired, we assumed $3.8 million of debt (including short-term borrowings) that was entered into with a banking institution in India. Amounts outstanding primarily relate to a 14.70% term loan, due in 2017, used to purchase fixed assets. Other amounts relate to a short-term credit facility used to finance working capital requirements (included in Short-term borrowings in the Consolidated Balance Sheets) and an existing automobile loan. Combined, the outstanding balances totaled $3.1 million at September 27, 2014.
Other Indebtedness
We periodically enter into short-term credit facilities in order to finance various liquidity requirements, including insurance premium payments and short-term working capital needs. At September 27, 2014 and December 28, 2013, outstanding amounts related to such facilities were $15.4 million and $0.4 million, respectively. Borrowings under these facilities are included in Short-term borrowings in the Consolidated Balance Sheets.
We also have documentary letters of credit not associated with the ABL Facility or the Hygiene Facility. These letters of credit were primarily provided to certain raw material vendors and amounted to $12.2 million and $8.5 million at September 27, 2014 and December 28, 2013, respectively. None of these letters of credit have been drawn on.
Factoring Agreements
In the ordinary course of business, we may utilize accounts receivable factoring arrangements with third-party financial institutions in order to accelerate its cash collections from product sales. These arrangements involve the ownership transfer of eligible U.S. and non-U.S. trade accounts receivable, without recourse or discount, to a third party financial institution in exchange for cash. The maximum amount of outstanding advances at any one time is $20.0 million under the U.S. based program and $79.5 million under the non-U.S. based program. At September 27, 2014 , the net amount of trade accounts receivable sold to third-party financial institutions, and therefore excluded from our accounts receivable balance, was $93.8 million. Amounts due from the third-party financial institutions were $9.7 million at September 27, 2014 . In the future, we may increase the sale of receivables or enter into additional factoring agreements.
Covenant Compliance; Reconciliation of Non-GAAP Financial Measures
We report our financial results in accordance with GAAP. In addition, we present Adjusted EBITDA as a supplemental financial measure in order to provide a more complete understanding of the factors and trends affecting our business. Adjusted EBITDA is a non-GAAP financial measure that should be considered supplemental to, not a substitute for or superior to, the financial measure calculated in accordance with GAAP. It has limitations in that it does not reflect all of the costs associated with the operations of our business as determined in accordance with GAAP. In addition, this measure may not be comparable to non-GAAP financial measures reported by other companies. We believe that Adjusted EBITDA provides important supplemental information to both management and investors regarding financial and business trends used in assessing our financial condition as well as provides additional information to investors about the calculation of, and compliance with, certain financial covenants in the indentures governing the Senior Secured Notes, the Senior Unsecured Notes and the credit agreements governing the Term Loans and our ABL Facility. As a result, one should not consider Adjusted EBITDA in isolation or as a substitute for our results
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reported under GAAP. We compensate for these limitations by analyzing results on a GAAP basis as well as on a non-GAAP basis, predominantly disclosing GAAP results and providing reconciliations from GAAP results to non-GAAP results.
The following table shows a reconciliation of Adjusted EBITDA from the most directly comparable GAAP measure, Net income (loss) attributable to Polymer Group, Inc., in order to show the differences in these measures of operating performance:
In thousands | Three Months Ended September 27, 2014 | Three Months Ended September 28, 2013 | Nine Months Ended September 27, 2014 | Nine Months Ended September 28, 2013 | |||||||||||
Net income (loss) attributable to Polymer Group, Inc. | $ | (55,228 | ) | $ | (8,267 | ) | $ | (84,372 | ) | $ | (22,400 | ) | |||
Net income attributable to noncontrolling interest | (1,923 | ) | — | (4,216 | ) | — | |||||||||
Interest expense, net | 28,782 | 13,185 | 67,605 | 37,592 | |||||||||||
Income and franchise tax | (1,036 | ) | 4,431 | (464 | ) | 9,680 | |||||||||
Depreciation & amortization (a) | 35,103 | 17,609 | 84,318 | 49,821 | |||||||||||
Purchase accounting adjustments(b) | 1,750 | — | 7,653 | — | |||||||||||
Non-cash compensation (c) | 504 | 519 | 1,569 | 3,456 | |||||||||||
Special charges, net (d) | 14,893 | 7,093 | 47,868 | 10,647 | |||||||||||
Foreign currency and other non-operating, net (e) | 25,085 | (1,562 | ) | 16,705 | 2,192 | ||||||||||
Debt modification and extinguishment costs | 4,987 | — | 15,725 | — | |||||||||||
Severance and relocation expenses (f) | 633 | 885 | 2,653 | 4,127 | |||||||||||
Unusual or non-recurring charges, net | 649 | 444 | 1,276 | 736 | |||||||||||
Business optimization expense (g) | 999 | 99 | 1,132 | 224 | |||||||||||
Management, monitoring and advisory fees (h) | 2,733 | 854 | 4,408 | 2,879 | |||||||||||
Adjusted EBITDA | $ | 57,931 | $ | 35,290 | $ | 161,860 | $ | 98,954 | |||||||
(a) | Excludes amortization of loan acquisition costs that are included in interest expense. |
(b) | Reflects adjustments to inventory related to the step-up in value pursuant to GAAP resulting from the application of purchase accounting in relation to the acquisition of Fiberweb and Providência. |
(c) | Reflects non-cash compensation costs related to employee and director restricted stock, restricted stock units and stock options. |
(d) | Reflects costs associated with non-cash asset impairment charges, the restructuring and realignment of manufacturing operations and management organizational structures, pursuit of certain transaction opportunities and other charges included in Special charges, net. |
(e) | Reflects (gains) losses from foreign currency translation of intercompany loans, unrealized (gains) losses on interest rate and foreign currency hedging transactions, (gains) losses on sales of assets outside the ordinary course of business, factoring costs and certain other non-operating (gains) losses recorded in Foreign Currency and Other, net as well as (gains) losses from foreign currency transactions recorded in Other Operating, net. |
(f) | Reflects severance and relocation expenses not included under Special charges, net as well as costs incurred with the CEO Transition. |
(g) | Reflects costs incurred to improve IT and accounting functions, costs associated with establishing new facilities and certain other expenses. |
(h) | Reflects management, monitoring and advisory fees paid under the Blackstone management agreement. |
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Standards
In August 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) No. 2014-15, “Presentation of Financial Statements - Going Concern” (“ASU 2014-15”). The new guidance addresses management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. Management’s evaluation should be based on relevant conditions or events, considered in the aggregate, that are known and reasonably knowable at the date that the financial statements are issued. ASU 2014-15 is effective prospectively for reporting periods beginning after December 15, 2016, with early adoption permitted. We do not expect that the adoption of this guidance will have a material effect on our financial results.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09"), which creates a comprehensive, five-step model for revenue recognition that requires a company to recognize revenue to depict the
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transfer of promised goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Under the new guidance, a company will be required to use more judgment and make more estimates when considering contract terms as well as relevant facts and circumstances when identifying performance obligations, estimating the amount of variable consideration in the transaction price and allocating the transaction price to each separate performance obligation. In addition, ASU 2014-09 enhances disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016 and allows for either full retrospective or modified retrospective adoption. Early application is not permitted. We are currently evaluating the impact of adopting ASU 2014-09 on our financial results.
In April 2014, the FASB issued ASU No. 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of and Entity" ("ASU 2014-08"), which changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or a group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. In addition, ASU 2014-08 enhances disclosures for reporting discontinued operations. ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014, with early adoption permitted. We do not expect that the adoption of this guidance will have a material effect on our financial results.
In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"), which requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013, with retroactive application permitted. We adopted this accounting pronouncement effective December 29, 2013.
Critical Accounting Policies and Other Matters
Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with those accounting principles requires management to use judgment in making estimates and assumptions based on the relevant information available at the end of each period. These estimates and assumptions have a significant effect on reported amounts of assets and liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities because they result primarily from the need to make estimates and assumptions on matters that are inherently uncertain. Actual results may differ from estimates.
Management believes there have been no significant changes during the quarter ended September 27, 2014, to the items that we disclosed as our critical accounting policies and estimates in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 28, 2013.
CAUTIONARY STATEMENT FOR FORWARD LOOKING STATEMENTS
From time to time, we may publish forward-looking statements relative to matters, including, without limitation, anticipated financial performance, business prospects, technological developments, new product introductions, cost savings, research and development activities and similar matters. Forward-looking statements are generally accompanied by words such as “anticipate”, “believe”, “estimate”, “expect”, “forecast”, “intend”, “may”, “plans”, “predict”, “project”, “schedule”, “seeks”, “should”, “target” or other words that convey the uncertainty of future events or outcomes. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.
Various statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements speak only as of the date of this report.
These forward-looking statements are based on current expectations and assumptions about future events. Although management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many
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of which are beyond our control. There can be no assurance that these events will occur or that our results will be as anticipated. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements.
Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, among other things:
• | general economic factors including, but not limited to, changes in interest rates, foreign currency translation rates, consumer confidence, trends in disposable income, changes in consumer demand for goods produced, and cyclical or other downturns; |
• | cost and availability of raw materials, labor and natural and other resources, and our ability to pass raw material cost increases along to customers; |
• | changes to selling prices to customers which are based, by contract, on an underlying raw material index; |
• | substantial debt levels and potential inability to maintain sufficient liquidity to finance our operations and make necessary capital expenditures; |
• | ability to meet existing debt covenants or obtain necessary waivers; |
• | achievement of objectives for strategic acquisitions and dispositions; |
• | ability to achieve successful or timely start-up of new or modified production lines; |
• | reliance on major customers and suppliers; |
• | domestic and foreign competition; |
• | information and technological advances; |
• | risks related to operations in foreign jurisdictions; and |
• | changes in environmental laws and regulations, including climate change-related legislation and regulation. |
The risks described in the “Risk Factors” section of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K filed for the fiscal year ended December 28, 2013 are not exhaustive. Other sections of this Form 10-Q describe additional factors that could adversely affect our business, financial condition or results of operations. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to fluctuations in currency exchange rates, interest rates and commodity prices which could impact our results of operations and financial condition. As a result, we employ a financial risk management program, whose objective is to seek a reduction in the potential negative earnings impact of changes in interest rates, foreign exchange rates and raw material pricing arising in our business activities. To manage these exposures, we primarily use operational means. However, to manage certain of these exposures, we used derivative instruments as described below. Derivative instruments utilized by us in our hedging activities are viewed as risk management tools, involve little complexity and are not used for trading or speculative purposes. To minimize the risk of counterparty non-performance, agreements are made only through major financial institutions with significant experience in such derivative instruments.
Long-Term Debt and Interest Rate Market Risk
Our objective in managing exposure to interest rate changes is to manage the impact of interest rate changes on earnings and cash flows as well as to minimize our overall borrowing costs. To achieve these objectives, we may use financial instruments such as interest rate swaps, in order to manage our mix of floating and fixed-rate debt.
Our long-term financing consists of our $560.0 million of 7.75% fixed-rate, Senior Secured Notes due 2019 and $210 million of 6.875% fixed-rate, Senior Unsecured Notes due 2019. However, the remaining portion of our indebtedness, including the Term Loans, do have variable interest rates, for which we have not hedged the risks attributable to fluctuations in interest rates. Hypothetically, a 1% change in the interest rate affecting our outstanding variable interest rate indebtedness, as of September 27, 2014, would change our interest expense by approximately $7.4 million.
Foreign Currency Exchange Rate Risk
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We have operations throughout the world that manufacture and sell their products in various international markets. As a result, we are exposed to movements in exchange rates of various currencies against the U.S. dollar as well as against other currencies throughout the world. Such currency fluctuations have much less effect on our local operating results because we, to a significant extent, sell our products within the countries in which they are manufactured.
On January 27, 2014, we entered into a series of financial instruments with a third-party financial institution used to minimize foreign exchange risk on the future consideration to be paid for the Providência Acquisition and the Mandatory Tender Offer. Each contract allows us to purchase a fixed amounts of Brazilian Reais (R$) in the future at specified U.S. Dollar rates, coinciding with either the Providência Acquisition or the Mandatory Tender Offer. At June 28, 2014, the remaining financial instruments relate to a series of options that expire between 1 and 5 years associated with the Mandatory Tender Offer and the deferred portion of the consideration paid for the Providência Acquisition. In addition, we assumed a variety of derivative instruments in the Providência Acquisition used to reduce the exposure to fluctuations in interest rates and foreign currencies. These financial instruments include an interest rate swap, forward foreign exchange contracts and call option contracts.
Raw Material and Commodity Risks
The primary raw materials used in the manufacture of most of our products are polypropylene resin, polyester fiber, polyethylene resin, and, to a lesser extent, rayon and tissue paper. The prices of polypropylene, polyethylene and polyester are a function of, among other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. In certain regions of the world, we may source certain key raw materials from a limited number of suppliers or on a sole source basis. In addition, to the extent that we cannot procure our raw material requirements from a local country supplier, we will import raw materials from outside refiners. We believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us because other suppliers with whom we conduct business would be able to fulfill our long-term requirements. However, the loss of certain of our suppliers or the delay in the import of raw materials could, in the short-term, adversely affect our business until alternative supply arrangements are secured and the respective suppliers were qualified with our customers, or when importation delays of raw material are resolved. We have not historically experienced, and do not expect, any significant disruptions in the long-term supply of raw materials.
We have not historically hedged our exposure to raw material increases with synthetic financial instruments. However, we have certain customer contracts with price adjustment provisions which provide for index-based pass-through of changes in the underlying raw material costs, although there is often a delay between the time we incur the new raw material cost and the time that we are able to adjust the selling price to our customers. On a global basis, raw material costs continue to fluctuate in response to certain global economic factors, including the regional supply versus demand dynamics for the raw materials and the volatile price of oil.
In periods of rising raw material costs, to the extent we are not able to pass along price increases of raw materials, or to the extent any such price increases are delayed, our cost of goods sold would increase and our operating profit would correspondingly decrease. Based on budgeted purchase volume for fiscal 2014, if the price of polypropylene was to rise $.01 per pound and we were not able to pass along any of such increase to our customers, we would realize a $9.3 million impact in our cost of goods sold. Significant increases in raw material prices that cannot be passed on to customers could have a material adverse effect on our results of operations and financial condition. In periods of declining raw material costs, if sales prices do not decrease at a corresponding rate, our cost of goods sold would decrease and our operating profit would correspondingly increase.
ITEM 4. CONTROLS AND PROCEDURES
In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released COSO 2013, an update of its Internal Control - Integrated Framework (1992). The COSO 2013 Framework formalizes the principles embedded in the original COSO 1992, incorporates business and operating environment changes over the past two decades, and improves the original 1992 framework’s ease of use and application. We plan to complete our transition to COSO 2013 in the fourth quarter of 2014. We do not expect that the transition to COSO 2013 will have a significant impact on our underlying compliance with the applicable provisions of the Sarbanes-Oxley Act of 2002, including internal control over financial reporting and disclosure controls and procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
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Under the supervision and with the participation of our management including our Chief Executive Officer and the Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures, as such item is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level, as of the end of the period covered by this report, in ensuring that material information required to be disclosed in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the requisite time periods and is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act during the three months ended September 27, 2014 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are engaged in the defense of certain claims and lawsuits arising out of the ordinary course and conduct of our business, the outcomes of which are not determinable at this time. We have insurance policies covering such potential losses where such coverage is cost effective. In our opinion, any liability that might be incurred by us upon the resolution of these claims and lawsuits will not, in the aggregate, have a material adverse effect on our financial condition or results of operations.
We are subject to a broad range of federal, foreign, state and local laws and regulations relating to pollution and protection of the environment. We believe that we are currently in substantial compliance with applicable environmental requirements and do not currently anticipate any material adverse effect on our operations, financial or competitive position as a result of our efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of our business and, accordingly, there can be no assurance that material environmental liabilities will not arise.
ITEM 1A. RISK FACTORS
There have been no material changes to our risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
Iran Related Disclosure
Under the Iran Threat Reduction and Syrian Human Rights Act of 2012, which added Section 13(r) of the Exchange Act, we are required to include certain disclosures in our periodic reports if we or any of our “affiliates” knowingly engaged in certain specified activities during the period covered by the report and hereby incorporate by reference Exhibit 99.1 of this report, which includes disclosures publicly filed and/or provided to Blackstone by certain of its affiliates, which may be considered to be our affiliates. We are not presently aware that we have knowingly engaged in any transaction or dealing reportable under Section 13(r) of the Exchange Act during the three months ended September 27, 2014. Except as described in Exhibit 99.1, we are not presently aware of any such reportable transactions or dealings by other such companies. We have no involvement in or control over the activities of these companies, any of their respective predecessor companies or any of their subsidiaries, and we have not independently verified or participated in the preparation of any of their disclosures.
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ITEM 6. EXHIBITS
(a) Exhibits
Exhibits required in connection with this Quarterly Report on Form 10-Q are listed below:
Exhibit No. | Description | |
31.1 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer | |
31.2 | Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer | |
32.1 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer | |
32.2 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer | |
99.1 | Section 13(r) Disclosure | |
101 | The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 27, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statement of Comprehensive Income (Loss); (iii) Consolidated Statements of Changes in Stockholders' Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements. | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POLYMER GROUP, INC. | |||
(Registrant) | |||
Date: | November 12, 2014 | By: | /s/ J. Joel Hackney, Jr. |
J. Joel Hackney, Jr. | |||
President and Chief Executive Officer and Director (Principal Executive Officer) | |||
Date: | November 12, 2014 | By: | /s/ Dennis E. Norman |
Dennis E. Norman | |||
Executive Vice President, Chief Financial Officer & Treasurer (Principal Financial Officer) | |||
Date: | November 12, 2014 | By: | /s/ James L. Anderson |
James L. Anderson | |||
Vice President & Chief Accounting Officer (Principal Accounting Officer) | |||
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