10-Q 1 polymergroup-9282013x10q.htm 10-Q PolymerGroup-9.28.2013-10Q
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 28, 2013
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  ý *

* 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  ý    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
 
x  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  ý
Number of common shares outstanding at November 1, 2013: 1,000. There is no public trading of the registrant's shares.



POLYMER GROUP, INC.
FORM 10-Q

INDEX
 


2


PART I — FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS

POLYMER GROUP, INC.
CONSOLIDATED BALANCE SHEETS
 
 
(Unaudited)
 
 
In thousands, except share data
 
September 28,
2013
 
December 29,
2012
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
74,678

 
$
97,879

Accounts receivable, net
 
143,944

 
131,569

Inventories, net
 
102,430

 
94,964

Deferred income taxes
 
3,841

 
3,832

Other current assets
 
39,365

 
33,414

Total current assets
 
364,258

 
361,658

Property, plant and equipment, net of accumulated depreciation of $151,359 and $106,134, respectively
 
470,395

 
479,169

Goodwill
 
80,877

 
80,608

Intangible assets, net
 
76,700

 
75,663

Deferred income taxes
 
1,650

 
945

Other noncurrent assets
 
26,802

 
24,026

Total assets
 
$
1,020,682

 
$
1,022,069

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term borrowings
 
$
216

 
$
813

Accounts payable and accrued liabilities
 
206,222

 
196,905

Income taxes payable
 
1,587

 
3,841

Deferred income taxes
 
139

 
479

Current portion of long-term debt
 
19,683

 
19,477

Total current liabilities
 
227,847

 
221,515

Long-term debt
 
592,489

 
579,399

Deferred income taxes
 
33,254

 
33,181

Other noncurrent liabilities
 
39,967

 
48,772

Total liabilities
 
893,557

 
882,867

Commitments and contingencies
 

 

Shareholders’ equity:
 
 
 
 
Common stock — 1,000 shares issued and outstanding
 

 

Additional paid-in capital
 
262,755

 
256,180

Retained earnings (deficit)
 
(124,609
)
 
(102,209
)
Accumulated other comprehensive income (loss)
 
(11,021
)
 
(14,769
)
Total shareholders' equity
 
127,125

 
139,202

Total liabilities and shareholders' equity
 
$
1,020,682

 
$
1,022,069

See accompanying Notes to Consolidated Financial Statements.

3


POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
In thousands
Three Months
Ended
September 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Net sales
$
288,979

$
290,097

 
$
867,599

$
881,512

Cost of goods sold
(240,779
)
(238,123
)
 
(723,143
)
(729,932
)
Gross profit
48,200

51,974

 
144,456

151,580

Selling, general and administrative expenses
(33,463
)
(33,044
)
 
(107,176
)
(102,354
)
Special charges, net
(7,093
)
(1,732
)
 
(10,647
)
(12,904
)
Other operating, net
(671
)
235

 
(1,975
)
754

Operating income (loss)
6,973

17,433

 
24,658

37,076

Other income (expense):
 
 
 
 
 
Interest expense
(13,185
)
(12,487
)
 
(37,592
)
(38,074
)
Foreign currency and other, net
2,298

(999
)
 
(22
)
(4,095
)
Income (loss) before income taxes
(3,914
)
3,947

 
(12,956
)
(5,093
)
Income tax (provision) benefit
(4,353
)
(2,593
)
 
(9,444
)
(5,912
)
Net income (loss)
$
(8,267
)
$
1,354

 
$
(22,400
)
$
(11,005
)
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
Currency translation
$
4,932

$
3,976

 
$
3,560

$
(1,292
)
Employee postretirement benefits, net of tax
63

206

 
188

(42
)
Other comprehensive income (loss)
4,995

4,182

 
3,748

(1,334
)
Comprehensive income (loss)
$
(3,272
)
$
5,536

 
$
(18,652
)
$
(12,339
)
See accompanying Notes to Consolidated Financial Statements.


4


POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
 
In thousands
Common Stock
 
Additional
Paid-in Capital
 
Retained
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Equity
Shares
 
Amount
 
Balance — December 29, 2012
1

 
$

 
$
256,180

 
$
(102,209
)
 
$
(14,769
)
 
$
139,202

Amounts due to shareholders

 

 
(222
)
 

 

 
(222
)
Common stock call option reclass

 

 
3,341

 

 

 
3,341

Net income (loss)

 

 

 
(22,400
)
 

 
(22,400
)
Share-based compensation

 

 
3,456

 

 

 
3,456

Employee benefit plans, net of tax

 

 

 

 
188

 
188

Currency translation

 

 

 

 
3,560

 
3,560

Balance — September 28, 2013
1

 
$

 
$
262,755

 
$
(124,609
)
 
$
(11,021
)
 
$
127,125

See accompanying Notes to Consolidated Financial Statements.

5


POLYMER GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
In thousands
Nine Months
Ended
September 28,
2013
 
Nine Months
Ended
September 29,
2012
Operating activities:
 
 
 
Net income (loss)
$
(22,400
)
 
$
(11,005
)
Adjustments for non-cash transactions:
 
 
 
Deferred income taxes
(321
)
 
103

Depreciation and amortization expense
51,642

 
49,466

(Gain) loss on financial instruments
(3,450
)
 
(147
)
(Gain) loss on sale of assets, net
198

 
(8
)
Non-cash compensation
3,456

 
621

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(12,527
)
 
9,079

Inventories
(7,489
)
 
5,010

Other current assets
(5,618
)
 
(3,584
)
Accounts payable and accrued liabilities
8,233

 
4,577

Other, net
(7,618
)
 
1,518

Net cash provided by (used in) operating activities
4,106

 
55,630

Investing activities:
 
 
 
Purchases of property, plant and equipment
(35,499
)
 
(40,146
)
Proceeds from sale of assets
25

 
1,657

Acquisition of intangibles and other
(4,486
)
 
(175
)
Net cash provided by (used in) investing activities
(39,960
)
 
(38,664
)
Financing activities:
 
 
 
Proceeds from long-term borrowings
18,490

 
10,977

Proceeds from short-term borrowings
1,879

 
4,943

Repayment of long-term borrowings
(5,266
)
 
(3,249
)
Repayment of short-term borrowings
(2,476
)
 
(6,894
)
Issuance of common stock
(222
)
 

Net cash provided by (used in) financing activities
12,405

 
5,777

Effect of exchange rate changes on cash
248

 
(386
)
Net change in cash and cash equivalents
(23,201
)
 
22,357

Cash and cash equivalents - beginning of period
97,879

 
72,742

Cash and cash equivalents - end of period
$
74,678

 
$
95,099

Supplemental disclosures of cash flow information:
 
 
 
Cash payments for interest
$
46,505

 
$
46,689

Cash payments for taxes, net of receipts
$
14,830

 
$
6,876

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, manufacturer and marketer of engineered 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 13 manufacturing and converting facilities located in 9 countries throughout the world. The Company operates through 4 reportable segments, with the main sources of revenue being the sales of primary and intermediate products to the hygiene, healthcare, wipes 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. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Polymer Group, Inc. Annual Report on Form 10-K for the year ended December 29, 2012.
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. 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. Although the Company continues to operate as the same legal entity subsequent to the Merger and related change in control, a new entity was created for accounting purposes as of January 28, 2011. As a result, the purchase price was allocated to assets acquired and liabilities assumed based on their estimated fair market values at the date of acquisition. Under the guidance of 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 being substantially wholly-owned. Therefore, the basis in shares of common stock of the Company has been "pushed down" to the Company from Scorpio Holdings Corporation, a Delaware corporation ("Holdings") that owns 100% of the issued and outstanding 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. Therefore, the financial results of 53-week fiscal years, and the associated 14-week quarters, will not be comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The three months ended September 28, 2013 and September 29, 2012 each contain operating results for 13 weeks. The nine months ended September 28, 2013 and September 29, 2012 each contain operating results for 39 weeks.
Note 3. Recent Accounting Pronouncements
In February 2013, the FASB issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, ASU 2013-02 requires an entity to present, either on the face of the income statement or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance concerns disclosure only and does not have an impact on the Company's financial results. See Note 11 for additional information.
In July 2013, the FASB issued Accounting Standards Update 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

7


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 is currently assessing the potential impacts, if any, on its financial results.
Note 4.  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.
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 are met, which permits the Company to present the balances sold under the programs 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 recorded with 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, Spain 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 $53.8 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.
The following is a summary of receivables sold to the third-party financial institutions that existed at the respective balance sheet dates:
In thousands
September 28,
2013
 
December 29, 2012
Trade receivables sold to financial institutions
$
52,152

 
$
48,767

Net amounts advanced from financial institutions
44,532

 
41,937

Amounts due from financial institutions
$
7,620

 
$
6,830

The Company sold $300.9 million and $279.1 million of receivables under the terms of the factoring agreements during the nine months ended September 28, 2013 and September 29, 2012, respectively. The Netherlands, which entered into a factoring agreement in March 2012, contributed to the year-over-year increase in receivables sold. The Company pays a factoring fee associated with the sale of receivables based on the dollar value of the receivables sold. During the three months ended September 28, 2013 and September 29, 2012, factoring fees incurred were $0.3 million and $0.3 million, respectively. Amounts incurred were $0.9 million and $0.9 million during the nine months ended September 28, 2013 and September 29, 2012, respectively.
Note 5.  Inventories, Net
At September 28, 2013 and December 29, 2012, the major classes of inventory were as follows: 

8


In thousands
September 28,
2013
 
December 29,
2012
Raw materials and supplies
$
43,472

 
$
41,070

Work in process
14,384

 
14,299

Finished goods
44,574

 
39,595

Total
$
102,430

 
$
94,964

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 $3.4 million and $3.3 million at September 28, 2013 and December 29, 2012, respectively.
Note 6. 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 28, 2013 and December 29, 2012:
In thousands
September 28,
2013
 
December 29, 2012
Technology
$
31,900

 
$
31,900

Customer relationships
17,051

 
16,869

Loan acquisition costs
19,472

 
19,472

Other
8,010

 
446

Total gross finite-lived intangible assets
76,433

 
68,687

Accumulated amortization
(23,233
)
 
(16,524
)
Total net finite-lived intangible assets
53,200

 
52,163

Tradenames (indefinite-lived)
23,500

 
23,500

Total
$
76,700

 
$
75,663

As of September 28, 2013, the Company had recorded intangible assets of $76.7 million. Included in this amount are loan acquisition costs incurred in association with the Merger. These expenditures represent the cost of obtaining financings that are capitalized in the balance sheet and amortized to Interest expense 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 28,
2013
 
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
 
Nine Months
Ended
September 29,
2012
Intangible assets
$
1,677

 
$
1,486

 
$
4,910

 
$
4,415

Loan acquisition costs
607

 
686

 
1,821

 
2,056

Total amortization
$
2,284

 
$
2,172

 
$
6,731

 
$
6,471

Estimated amortization expense on existing intangible assets for each of the next five years, including fiscal year 2013, is expected to approximate $8 million in 2013, $7 million in 2014, $7 million in 2015, $7 million in 2016 and $7 million in 2017.
Note 7.  Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:

9


In thousands
September 28,
2013
 
December 29,
2012
Accounts payable to vendors
$
143,543

 
$
127,969

Accrued salaries, wages, incentive compensation and other fringe benefits
24,382

 
21,759

Accrued interest
7,758

 
18,630

Other accrued expenses
30,539

 
28,547

Total
$
206,222

 
$
196,905

Note 8.  Debt
The following table presents the Company's long-term debt at September 28, 2013 and December 29, 2012: 
In thousands
September 28,
2013
 
December 29,
2012
Senior Secured Notes
$
560,000

 
$
560,000

ABL Facility

 

Bridge Facility

 

Argentina credit facilities:
 
 
 
Argentina Credit Facility — Nacion
9,175

 
11,674

Argentina Credit Facility — Galicia
3,454

 

China credit facilities:
 
 
 
China Credit Facility — Healthcare
13,481

 
15,981

China Credit Facility — Hygiene
24,920

 
10,977

Capital lease obligations
1,142

 
244

Total debt
612,172

 
598,876

Less: Current maturities
(19,683
)
 
(19,477
)
Total long-term debt
$
592,489

 
$
579,399

The fair value of the Company's long-term debt was $646.7 million at September 28, 2013 and $640.0 million at December 29, 2012. 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).
Senior Secured Notes
In connection with the Merger, the Company issued $560.0 million of 7.75% Senior Secured Notes on January 28, 2011. The notes are due in 2019 and are fully and unconditionally guaranteed, jointly and severally on a senior secured basis, by each of Polymer's wholly-owned domestic subsidiaries. Interest is paid semi-annually on February 1 and August 1.
The agreement governing the Senior Secured Notes, among other restrictions, limits the Company's ability and the ability of the Company's 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; (ix) designate restricted subsidiaries as unrestricted subsidiaries; and (x) transfer or sell assets. However, subject to certain exceptions, the indenture permits the Company and its restricted subsidiaries to incur additional indebtedness, including senior indebtedness and secured indebtedness. The indenture also does not limit the amount of additional indebtedness that Parent or its parent entities may incur.
Under the agreement governing the Senior Secured Notes and under the credit agreement governing the senior secured asset-based revolving credit 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 as defined in the indenture.
ABL Facility
In connection with the Merger, the Company entered into a senior secured asset-based revolving credit facility (the "ABL Facility") to provide for borrowings not to exceed $50.0 million, subject to borrowing base availability. The ABL Facility provides

10


borrowing capacity available for letters of credit and borrowings on a same-day basis. The ABL Facility 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, subject to certain rights of the administrative agent, swing line lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to expire on January 28, 2015.
On October 5, 2012, the Company entered into an amended and restated ABL Facility. The amended and restated facility extended the maturity date to October 5, 2016 as well as made certain pricing and other changes to the original agreement. The Company maintained the option to request that the ABL Facility be increased by an amount not to exceed $20.0 million, subject to certain rights of the administrative agent, swing line lender and issuing banks with respect to the lenders providing commitments for such increase. As of September 28, 2013, the Company had no outstanding borrowings under the ABL Facility. Borrowing base availability was $30.3 million, however, outstanding letters of credit in the aggregate amount of $11.0 million left $19.3 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 28, 2013.
Based on current borrowing base availability, the borrowings under the ABL Facility will bear interest at a rate per annum equal to, at our option, either (A) Adjusted London Interbank Offered Rate (“LIBOR”) (adjusted for statutory reserve requirements) plus (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 administrative agent's Prime Rate and (b) the federal funds effective rate plus 0.5% (“ABR”) plus (x) 1.00% in the case of Tranche 1 or (y) 3.00% in the case of the Tranche 2.
The ABL Facility contains certain customary representations and warranties, affirmative covenants and events of default, including among other things payment defaults, breach of representations and warranties, covenant defaults, cross-defaults and cross acceleration to certain indebtedness, bankruptcy and insolvency defaults, certain events under ERISA, certain monetary judgment defaults, invalidity of guarantees or security interests, and change of control. 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.
Bridge Facility
On September 17, 2013, the Company entered into a Senior Secured Bridge Credit Agreement (the “Bridge Facility”) with a 365-day term. The Bridge Facility provides for a commitment by the lenders to make secured bridge loans in an aggregate amount not to exceed $318.0 million, the proceeds of which will primarily be used to fund the proposed acquisition of Fiberweb plc (“Fiberweb”) anticipated to be completed during the fourth quarter of 2013.
Borrowings will bear interest at a rate equal to the Eurodollar rate plus an applicable margin of 6.00% for the initial three-month period following the date of borrowing, increasing by 0.50% after each subsequent three-month period, subject to a specified maximum rate. Amounts outstanding will be senior secured obligations of the Company and unconditionally guaranteed, jointly and severally on a senior secured basis, by Holdings and Polymer’s 100% owned domestic subsidiaries. As of September 28, 2013, no amounts have been drawn down under the Bridge Facility.
The agreement governing the Bridge Facility, among other restrictions, limits the Company's ability and the ability of the Company's 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; (ix) designate restricted subsidiaries as unrestricted subsidiaries; and (x) transfer or sell assets. In addition, the Bridge Facility contains certain customary representations and warranties, affirmative covenants and events of default.
Argentina Credit Facility - Nacion
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 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.

11


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. dollar-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 28, 2013, the face amount of the outstanding indebtedness under the U.S. dollar-denominated loan was $9.5 million, with a carrying amount of $9.2 million and a weighted average interest rate of 3.16%.
Argentina Credit Facility - Galicia
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 28, 2013, the outstanding balance under the facility was $3.5 million. The remainder of the upgrade is expected to be financed by existing cash balances and cash generated from operations.
China Credit Facility Healthcare
In the third quarter of 2010, the Company's subsidiary in China entered into a three-year U.S. dollar-denominated construction loan agreement (the “Healthcare 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 three-year term of the agreement began with the date of the first draw down on the Healthcare Facility, which occurred in fourth quarter of 2010. The interest rate applicable to borrowings 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 (400 basis points at the time the credit agreement was executed), but in no event would the interest rate be less than 1-year LIBOR plus 250 points.
The maximum borrowings available under the facility, excluding any interest added to principal, were $20.0 million. The Company repaid $4.0 million of the principal balance in the fourth quarter of 2012. As a result, the outstanding balance under the Healthcare Facility was $16.0 million at December 29, 2012, with a weighted average interest rate of 5.44%. As of September 28, 2013, the outstanding balance under the Healthcare Facility was $13.5 million with a weighted-average interest rate of 5.39%. The outstanding balance is scheduled to be repaid during the fourth quarter of 2013 using a combination of existing cash balances and cash generated from operations.
China Credit Facility Hygiene
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. As of December 29, 2012, the outstanding balance under the Hygiene Facility was $11.0 million with a weighted-average interest rate of 5.51%. As of September 28, 2013, the outstanding balance under the Hygiene Facility was $24.9 million with a weighted average interest rate of 5.48%. The Company's first scheduled payment on the outstanding principal is due in late 2013.
Other Indebtedness
The Company periodically enters into short-term credit facilities in order to finance various liquidity requirements. At September 28, 2013, outstanding amounts related to such facilities were $0.2 million, which are being used to finance insurance premium payments. The weighted average interest rate on these borrowings was 2.44%. At December 29, 2012, amounts outstanding under these facilities was $0.8 million at a weighted average interest rate of 2.46%. Borrowings 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, Healthcare Facility or the Hygiene Facility. These letters of credit were primarily provided to certain raw material vendors and amounted to $6.5 million and $6.7 million at September 28, 2013 and December 29, 2012, respectively. None of these letters of credit have been drawn upon.

12


Note 9.  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:
 
As of September 28, 2013
 
As of December 29, 2012
In thousands
Notional
 
Fair Value
 
Notional
 
Fair Value
Designated hedges:
 
 
 
 
 
 
 
Hygiene Euro Contracts
$

 
$

 
$
22,554

 
$
(1,248
)
Undesignated hedges:
 
 
 
 
 
 
 
Bridge Loan Contract
296,315

 
2,868

 

 

Hygiene Euro Contracts
4,254

 
(217
)
 

 

Healthcare Euro Contracts

 

 

 

Total
$
300,569

 
$
2,651

 
$
22,554

 
$
(1,248
)
Asset derivatives are recorded within Other current assets and liability derivatives are recorded within Accounts payable and accrued expenses on the Consolidated Balance Sheets.
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 our potential future cash commitment related to the proposed acquisition of Fiberweb anticipated during the fourth quarter of 2013 (the ”Bridge Loan Contract”). The contract allows the Company to purchase a fixed amount of pounds sterling in the future at a specified U.S. Dollar rate. The Bridge Loan Contract does not qualify for hedge accounting treatment, therefore, it is considered an undesignated hedge. In addition, as the nature of this transaction is related to a non-operating notional amount, changes in fair value are recorded in Foreign currency and other, net in the current period.
Hygiene Euro Contracts
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

13


each contract is 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 remain highly effective and continue 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 will continue to recognize changes in the fair value of the contracts in current earnings as an undesignated hedge. 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. The final payment will be made in the fourth quarter of 2013.
Healthcare Euro Contracts
In January 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 healthcare line under construction in China (the "Healthcare Euro Contracts"). The contracts allowed the Company to purchase fixed amount of Euros on specified future dates, coinciding with the payment amounts and dates of equipment purchase contracts. The Healthcare Euro Contracts qualified for hedge accounting treatment and were considered a fair value hedge; therefore, changes in the fair value of each contract was recorded in Other operating, net along with the gain or loss on the recognized hedged asset or liability that was attributable to the hedged risk.
In July 2011, the Company completed commercial acceptance of the new healthcare 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 Healthcare Euro Contracts and will continue to recognize changes in the fair value of the contracts in current earnings as an undesignated hedge. 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 healthcare line and no longer recognized in current earnings. During the first quarter of 2012, the Company remitted the final payment on the healthcare line and simultaneously fulfilled its obligations under the Healthcare Euro Contracts.
The following table represents the amount of (gain) or loss associated with derivatives instruments in the Consolidated Statements of Comprehensive Income (Loss):
In thousands
Three Months
Ended
September 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Designated hedges:
 
 
 
 
 
Hygiene Euro Contracts
$

$
(768
)
 
$
(449
)
$
(1,143
)
Undesignated hedges:
 
 
 
 
 
Bridge Loan Contract
(2,868
)

 
(2,868
)

Hygiene Euro Contracts
(542
)

 
(582
)

Healthcare Euro Contracts


 

(147
)
Total
$
(3,410
)
$
(768
)
 
$
(3,899
)
$
(1,290
)
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 Bridge Loan Contract is recognized in Foreign currency and other, net as it relates to a non-operating notional amount.
Note 10.  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.

14


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 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 28,
2013
Assets
 
 
 
 
 
 
 
 
Bridge Loan Contract
$

 
$
2,868

 
$

 
 
$
2,868

Firm commitment

 

 

 
 

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Hygiene Euro Contracts
$

 
$
(217
)
 
$

 
 
$
(217
)
 
In thousands
Level 1
 
Level 2
 
Level 3
 
 
December 29, 2012
Assets
 
 
 
 
 
 
 
 
Firm commitment
$

 
$
1,248

 
$

 
 
$
1,248

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Hygiene Euro Contracts
$

 
$
(1,248
)
 
$

 
 
$
(1,248
)
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 Company determines fair value of its financial assets and liabilities using the following methodologies:

Firm Commitment — Assets recognized associated with an unrecognized firm commitment to purchase equipment. The fair value of the assets is based upon indicative price information obtained from a third-party financial institution that is the counterparty to the transaction.
Derivative instruments — These instruments consist of foreign exchange forward contracts. The fair value is based upon indicative price information obtained from a third-party financial institution that is the counterparty to the transaction.
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 28, 2013 are the same as those used at December 29, 2012. As a result, there have been no transfers between Level 1 and Level 2 categories.
Note 11.  Pension and Postretirement Benefit Plans
The Company sponsors 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

15


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 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Service cost
$
844

$
495

 
$
2,523

$
1,509

Interest cost
1,387

1,417

 
4,157

4,288

Return on plan assets
(1,880
)
(1,590
)
 
(5,628
)
(4,808
)
Curtailment / settlement (gain) loss


 

38

Net amortization of:
 
 
 
 
 
Transition costs and other
87

(14
)
 
262

(45
)
Net periodic benefit cost
$
438

$
308

 
$
1,314

$
982

During the fourth quarter of 2012, the Company completed the liquidation of two pension plans related to its former Dominion Textile, Inc. business in Canada. All pension benefits legally owed to plan participants were fully paid from plan assets by the end of 2012. Excess plan assets left in the trust after all participants were paid was $0.3 million and is reported within Other current assets in the Company's Consolidated Balance Sheet at December 29, 2012. The surplus was received by the Company in the first quarter of 2013. As a result of the liquidation of these plans during 2012, the Company recognized a settlement loss of $0.8 million within Special charges, net in the Company's Consolidated Statements of Comprehensive Income (Loss).
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. During the three and nine months ended September 28, 2013, employer contributions totaled $1.3 million and $4.0 million, respectively. Full year contributions are expected to approximate $5.3 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.
The components of the Company's postretirement related costs for the following periods are as follows:
In thousands
Three Months
Ended
September 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Service cost
$
14

$
14

 
$
44

$
49

Interest cost
45

55

 
137

163

Curtailment / settlement (gain) loss

(4
)
 

218

Net amortization of:
 
 
 
 
 
Transition costs and other
9

7

 
27

19

Net periodic benefit cost
$
68

$
72

 
$
208

$
449

For the three months ended September 28, 2013 and September 29, 2012, reclassifications out of accumulated other comprehensive income (loss) totaled $0.1 million and less than $0.1 million, respectively. For the nine months ended September 28, 2013 and September 29, 2012, reclassifications out of accumulated other comprehensive income (loss) totaled $0.3 million and less than $0.1 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.
Defined Contribution Plans

16


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 employee's contribution in the case of its 401(k) plans and makes safe harbor contributions based on the employee's eligibility to participate in the plan.  In the case of the non-qualified Executive Retirement Plan, the Company does not make any contributions.
Note 12.  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 28, 2013, the combination of the Company's income tax provision and recorded loss from operations before income taxes resulted in a negative effective tax rate of 72.9%. The effective tax rate for the nine months ended September 28, 2013 is different than the Company's statutory tax rate primarily due to losses in certain jurisdictions for which no income tax benefits are anticipated, settlement amounts paid in Mexico under an amnesty program, 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. As a result, the effective tax rate for the three months ended September 28, 2013 was negative 111.2%.
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 28, 2013, the Company has a net deferred tax liability of $27.9 million.
At September 28, 2013, the Company had unrecognized tax benefits of $22.1 million, of which $10.3 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 $22.1 million as of September 28, 2013. Included in the balance as of September 28, 2013 is $5.7 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 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.
In 2013, Mexico initiated a tax amnesty program that provides a reduction in taxes owed and the elimination of all related penalties and interest. In May 2013, the Company exercised its right under the amnesty program related to the country's Asset Tax. As a result, the Company recorded a discrete tax expense of $2.9 million during the three months ended June 29, 2013 associated with the amnesty program. In July 2013, the Company filed for tax amnesty for the 2007 tax year in Colombia, and expects to have the request for amnesty accepted during the fourth quarter.
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, the Netherlands, France, Germany, Spain, Mexico, Colombia, and Argentina. As of September 28, 2013, the Company has a number of open tax years with various taxing jurisdictions that range from 2003 to 2012. 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 13.  Special Charges, Net
As part of our business strategy, the Company incurs amounts 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, the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. These amounts are included in Special charges, net in the Statements of Comprehensive Income (Loss). A summary for each respective period is as follows:
 

17


In thousands
Three Months
Ended
September 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Restructuring and plant realignment costs
 
 
 
 
 
Internal redesign and restructure of global operations
$
231

$
806

 
$
2,172

$
8,916

Plant realignment costs
411

942

 
1,521

1,953

IS support initiative

5

 
25

779

Other restructure initiatives
20


 
63

163

Total restructuring and plant realignment costs
662

1,753

 
3,781

11,811

Acquisition and merger related costs
 
 
 
 
 
Blackstone acquisition costs
38

2

 
38

452

Fiberweb acquisition costs
6,177


 
6,220


Total acquisition and merger related costs
6,215

2

 
6,258

452

Other special charges
 
 
 
 
 
Colombia flood


 

57

Other charges
216

(23
)
 
608

584

Total other special charges
216

(23
)
 
608

641

Total special charges, net
$
7,093

$
1,732

 
$
10,647

$
12,904

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 existing markets.
Costs incurred for the respective periods presented consisted of the following:
In thousands
Three Months
Ended
September 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Employee separation
$
1

$
75

 
$
137

$
6,153

Professional consulting fees
95


 
1,497

1,588

Relocation, recruitment and other
135

731

 
538

1,175

Total
$
231

$
806

 
$
2,172

$
8,916

Plant Realignment Costs
The Company incurs costs associated with ongoing restructuring initiatives intended to result in lower working capital levels and improve operating performance and profitability. Costs associated with these initiatives include improving manufacturing productivity, reducing headcount, realignment of management structures, reducing corporate costs and rationalizing certain assets, businesses and employee benefit programs. Costs incurred for the respective periods presented primarily consisted of plant realignment initiatives in the Americas 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. Costs incurred for the respective periods presented primarily consisted of employee separation and severance expenses.
Other Restructuring Initiatives

18


The Company incurs costs associated with less significant ongoing restructuring initiatives resulting from the continuous evaluation of opportunities to optimize manufacturing facilities and the manufacturing process. Costs associated with these initiatives primarily relate to professional consulting fees.
Amounts accrued for Restructuring and Plant Realignment costs are included in Accounts payable and accrued expenses 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 28,
2013
 
Nine Months
Ended
September 29,
2012
Beginning balance
$
6,278

 
$
1,100

Additions
1,746

 
11,811

Cash payments
(6,386
)
 
(9,210
)
Adjustments
(71
)
 
(33
)
Ending balance
$
1,567

 
$
3,668

The Company accounts for its restructuring programs in accordance with ASC 712, "Compensation - Non-retirement Postemployment Benefits" ("ASC 712") and anticipates that the substantial majority of the remaining accrued liability will be paid by the end of 2013.
Acquisition and Merger Related Costs
Blackstone Acquisition Costs
As a result of the Merger on January 28, 2011, 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 the issuance of the Senior Secured Notes as well as the fee to enter into the ABL Facility, both of which have been capitalized as intangible assets on the Consolidated Balance Sheet as of the date of the Merger.
Fiberweb Acquisition Costs
As a result of the proposed acquisition of Fiberweb anticipated to be completed during the fourth quarter of 2013, the Company has incurred direct acquisition costs associated with the transaction. Costs include investment banking, legal, accounting and other fees for professional services.
Other Special Charges
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 costs may include various corporate-level initiatives.
Note 14.  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 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Foreign currency gains (losses)
$
(736
)
$
234

 
$
(2,170
)
$
752

Other operating income (expense)
65

1

 
195

2

Total
$
(671
)
$
235

 
$
(1,975
)
$
754


19


Note 15. 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 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:
In thousands
Three Months
Ended
September 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Foreign currency gains (losses)
$
(274
)
$
(754
)
 
$
(1,291
)
$
(2,565
)
Other non-operating income (expense)
2,572

(245
)
 
1,269

(1,530
)
Total
$
2,298

$
(999
)
 
$
(22
)
$
(4,095
)
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 our 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 fair value of the Bridge Loan Contract of $2.9 million are included in other non-operating income (expense) in the current period.
Note 16.  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; treated as an operating lease for accounting purposes. 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 monthly 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 us to maintain certain financial ratios and other requirements.
China Hygiene Expansion
In the second quarter of 2011, the Company entered into a firm purchase agreement to acquire a spunmelt line to be installed in Suzhou, China that will manufacture nonwoven products primarily for the hygiene market. The Company is funding the project using a combination of existing cash balances, internal cash flows and the Hygiene Facility. As a result of the firm commitment being denominated in Euros, we entered into a series of foreign exchange forward contracts with a third-party financial institution to purchase fixed amount of Euros on specified future dates that coincide with the payment amounts and the dates of the payments.

20


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 under the existing purchase agreement. As of September 28, 2013, the outstanding balance due was $4.3 million.
Note 17.  Segment Information
The Company is a leading global innovator, manufacturer and marketer of engineered materials, primarily focused on the production of nonwoven products. The Company operates through four segments, with the main source of revenue being the sales of primary and intermediate products to the hygiene, healthcare, wipes 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 Nonwoven segments.
During 2012, the Company restructured 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 existing markets. As part of the change, the Company combined the Latin America Nonwovens segment and the U.S. Nonwoven segment to create the Americas Nonwoven segment. The Company's segments are now as follows: Americas Nonwovens, Europe Nonwovens, Asia Nonwovens and Oriented Polymers segments. Segment information for all years has been revised to reflect the new structure.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies except that the segment results are prepared on a management basis that is consistent with the manner in which the Company desegregates financial information for internal review and decision making. Intercompany sales between the segments are eliminated.
Financial data by segment is as follows: 

21


In thousands
Three Months
Ended
September 28,
2013
Three Months
Ended
September 29,
2012
 
Nine Months
Ended
September 28,
2013
Nine Months
Ended
September 29,
2012
Net sales
 
 
 
 
 
Americas Nonwovens
$
160,767

$
163,321

 
$
473,216

$
494,750

Europe Nonwovens
67,901

67,825

 
219,113

219,506

Asia Nonwovens
44,886

42,900

 
125,280

115,771

Oriented Polymers
15,425

16,051

 
49,990

51,485

Total
$
288,979

$
290,097

 
$
867,599

$
881,512

 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
Americas Nonwovens
$
16,075

$
20,590

 
$
42,106

$
51,333

Europe Nonwovens
2,524

2,249

 
9,236

9,383

Asia Nonwovens
4,134

4,850

 
13,723

13,194

Oriented Polymers
547

779

 
3,570

3,800

Unallocated Corporate
(9,108
)
(9,284
)
 
(33,164
)
(27,802
)
Eliminations
(106
)
(19
)
 
(166
)
72

Subtotal
14,066

19,165

 
35,305

49,980

Special charges, net
(7,093
)
(1,732
)
 
(10,647
)
(12,904
)
Total
$
6,973

$
17,433

 
$
24,658

$
37,076

 
 
 
 
 
 
Depreciation and amortization expense
 
 
 
 
 
Americas Nonwovens
$
8,137

$
9,460

 
$
24,540

$
26,825

Europe Nonwovens
3,089

2,858

 
9,153

8,111

Asia Nonwovens
5,605

3,322

 
13,802

10,141

Oriented Polymers
348

351

 
1,044

1,063

Unallocated Corporate
430

411

 
1,282

1,270

Subtotal
17,609

16,402

 
49,821

47,410

Amortization of loan acquisition costs
607

686

 
1,821

2,056

Total
$
18,216

$
17,088

 
$
51,642

$
49,466

 
 
 
 
 
 
Capital spending
 
 
 
 
 
Americas Nonwovens
$
1,939

$
1,132

 
$
3,990

$
2,946

Europe Nonwovens
1,877

2,636

 
2,926

7,194

Asia Nonwovens
3,914

6,422

 
26,437

28,874

Oriented Polymers
572

284

 
798

454

Corporate
697

42

 
1,348

678

Total
$
8,999

$
10,516

 
$
35,499

$
40,146

 

22


In thousands
September 28,
2013
 
December 29,
2012
Division assets
 
 
 
Americas Nonwovens
$
483,902

 
$
513,765

Europe Nonwovens
196,880

 
202,139

Asia Nonwovens
278,101

 
248,790

Oriented Polymers
27,574

 
25,329

Corporate
34,225

 
32,046

Total
$
1,020,682

 
$
1,022,069

Note 18.  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 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 28, 2013, 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 subject 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. Based on the Company’s fiscal 2012 financial performance, the advisory fee for the fiscal year ended December 29, 2012 remained at $3.0 million. With respect to the fiscal 2013 advisory fee, the Company paid $3.0 million during the first quarter of 2013. These amounts are 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.
Other Relationships
Blackstone and its affiliates have ownership interests in a broad range of companies. We may enter 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.
Note 19.  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

23


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 28, 2013 and December 29, 2012, Condensed Consolidating Statements of Comprehensive Income (Loss) for the three and nine months ended September 28, 2013 and September 29, 2012, and Condensed Consolidating Statements of Cash Flows for the nine months ended September 28, 2013 and September 29, 2012 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.
During 2012, the Company made changes to its presentation of certain intercompany activities between PGI (Issuer), the Guarantors, the Non-Guarantors and corresponding Eliminations within its Condensed Consolidating Financial Statements contained herein. As a result, certain prior period intercompany activities included in this note disclosure for the Condensed Consolidating Balance Sheets, the Condensed Consolidating Statements of Comprehensive Income (Loss) and the Condensed Consolidating Statements of Cash Flows have been recast to correct the classification of certain intercompany transactions. Management has determined that the adjustments were not material to prior periods and the nature of the changes is not material to the overall presentation. Accordingly, prior period Condensed Consolidating Balance Sheets, the Condensed Consolidating Statements of Comprehensive Income (Loss) and Condensed Consolidating Statements of Cash Flows included herein are not comparable to presentation included in prior period disclosures.

24



Condensed Consolidating Balance Sheet
As of September 28, 2013
 
In thousands
PGI
(Issuer)
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,535

 
$
11,975

 
$
61,168

 
$

 
$
74,678

Accounts receivable, net

 
23,482

 
120,462

 

 
143,944

Inventories, net
(181
)
 
23,245

 
79,366

 

 
102,430

Deferred income taxes

 
613

 
3,841

 
(613
)
 
3,841

Other current assets
5,773

 
8,386

 
25,206

 

 
39,365

Total current assets
7,127

 
67,701

 
290,043

 
(613
)
 
364,258

Property, plant and equipment, net
1,767

 
92,529

 
376,099

 

 
470,395

Goodwill

 
20,718

 
60,159

 

 
80,877

Intangible assets, net
21,922

 
40,302

 
14,476

 

 
76,700

Net investment in and advances to (from) subsidiaries
685,438

 
797,496

 
(234,657
)
 
(1,248,277
)
 

Deferred income taxes

 

 
1,650

 

 
1,650

Other noncurrent assets
300

 
5,613

 
20,889

 

 
26,802

Total assets
$
716,554

 
$
1,024,359

 
$
528,659

 
$
(1,248,890
)
 
$
1,020,682

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
216

 
$

 
$

 
$

 
$
216

Accounts payable and accrued liabilities
26,455

 
38,675

 
141,092

 

 
206,222

Income taxes payable

 

 
1,587

 

 
1,587

Deferred income taxes
(14
)
 

 
19

 
134

 
139

Current portion of long-term debt
143

 

 
19,540

 

 
19,683

Total current liabilities
26,800

 
38,675

 
162,238

 
134

 
227,847

Long-term debt
560,152

 

 
32,337

 

 
592,489

Deferred income taxes
601

 
9,045

 
24,355

 
(747
)
 
33,254

Other noncurrent liabilities
1,876

 
11,557

 
26,534

 

 
39,967

Total liabilities
589,429

 
59,277

 
245,464

 
(613
)
 
893,557

Common stock

 

 
16,966

 
(16,966
)
 

Other shareholders’ equity
127,125

 
965,082

 
266,229

 
(1,231,311
)
 
127,125

Total shareholders' equity
127,125

 
965,082

 
283,195

 
(1,248,277
)
 
127,125

Total liabilities and shareholders' equity
$
716,554

 
$
1,024,359

 
$
528,659

 
$
(1,248,890
)
 
$
1,020,682


25



Condensed Consolidating Balance Sheet
As of December 29, 2012
 
In thousands
PGI
(Issuer)
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
486

 
$
28,285

 
$
69,108

 
$

 
$
97,879

Accounts receivable, net

 
22,350

 
109,219

 

 
131,569

Inventories, net

 
23,843

 
71,121

 

 
94,964

Deferred income taxes

 
613

 
3,832

 
(613
)
 
3,832

Other current assets
1,821

 
7,710

 
23,883

 

 
33,414

Total current assets
2,307

 
82,801

 
277,163

 
(613
)
 
361,658

Property, plant and equipment, net
27,711

 
99,660

 
351,798

 

 
479,169

Goodwill

 
20,718

 
59,890

 

 
80,608

Intangible assets, net
24,313

 
42,422

 
8,928

 

 
75,663

Net investment in and advances to (from) subsidiaries
679,818

 
723,861

 
(188,670
)
 
(1,215,009
)
 

Deferred income taxes

 

 
945

 

 
945

Other noncurrent assets
275

 
5,787

 
17,964

 

 
24,026

Total assets
$
734,424

 
$
975,249

 
$
528,018

 
$
(1,215,622
)
 
$
1,022,069

LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Short-term borrowings
$
813

 
$

 
$

 
$

 
$
813

Accounts payable and accrued liabilities
28,511

 
33,344

 
135,050

 

 
196,905

Income taxes payable

 
89

 
3,752

 

 
3,841

Deferred income taxes
331

 

 
14

 
134

 
479

Current portion of long-term debt
107

 

 
19,370

 

 
19,477

Total current liabilities
29,762

 
33,433

 
158,186

 
134

 
221,515

Long-term debt
560,043

 

 
19,356

 

 
579,399

Deferred income taxes
273

 
9,149

 
24,506

 
(747
)
 
33,181

Other noncurrent liabilities
5,144

 
15,540

 
28,088

 

 
48,772

Total liabilities
595,222

 
58,122

 
230,136

 
(613
)
 
882,867

Common stock

 

 
36,083

 
(36,083
)
 

Other shareholders’ equity
139,202

 
917,127

 
261,799

 
(1,178,926
)
 
139,202

Total shareholders' equity
139,202

 
917,127

 
297,882

 
(1,215,009
)
 
139,202

Total liabilities and shareholders' equity
$
734,424

 
$
975,249

 
$
528,018

 
$
(1,215,622
)
 
$
1,022,069


 










26



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)
$
(3,272
)
 
$
23,413

 
$
1,603

 
$
(25,016
)
 
$
(3,272
)


Condensed Consolidating Statement of Comprehensive Income (Loss)
For the Three Months Ended September 29, 2012

In thousands
PGI
(Issuer)
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
92,443

 
$
203,125

 
$
(5,471
)
 
$
290,097

Cost of goods sold
12

 
(78,461
)
 
(165,145
)
 
5,471

 
(238,123
)
Gross profit
12

 
13,982

 
37,980

 

 
51,974

Selling, general and administrative expenses
(9,141
)
 
(5,491
)
 
(18,412
)
 

 
(33,044
)
Special charges, net
(759
)
 
294

 
(1,267
)
 

 
(1,732
)
Other operating, net
(7
)
 
19

 
223

 

 
235

Operating income (loss)
(9,895
)
 
8,804

 
18,524

 

 
17,433

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(12,485
)
 
4,690

 
(4,692
)
 

 
(12,487
)
Intercompany royalty and technical service fees
1,563

 
1,853

 
(3,416
)
 

 

Foreign currency and other, net
18,932

 
(19,092
)
 
(839
)
 

 
(999
)
Equity in earnings of subsidiaries
686

 
7,754

 

 
(8,440
)
 

Income (loss) before income taxes
(1,199
)
 
4,009

 
9,577

 
(8,440
)
 
3,947

Income tax (provision) benefit
2,553

 
(3,260
)
 
(1,886
)
 

 
(2,593
)
Net income (loss)
$
1,354

 
$
749

 
$
7,691

 
$
(8,440
)
 
$
1,354

Comprehensive income (loss)
$
5,536

 
$
5,180

 
$
9,258

 
$
(14,438
)
 
$
5,536






27



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)
$
(18,652
)
 
$
48,449

 
$
6,939

 
$
(55,388
)
 
$
(18,652
)


Condensed Consolidating Statement of Comprehensive Income (Loss)
For the Nine Months Ended September 29, 2012
 
In thousands
PGI
(Issuer)
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net sales
$

 
$
286,210

 
$
610,967

 
$
(15,665
)
 
$
881,512

Cost of goods sold
42

 
(246,998
)
 
(498,641
)
 
15,665

 
(729,932
)
Gross profit
42

 
39,212

 
112,326

 

 
151,580

Selling, general and administrative expenses
(27,420
)
 
(18,051
)
 
(56,883
)
 

 
(102,354
)
Special charges, net
(6,082
)
 
(2,004
)
 
(4,818
)
 

 
(12,904
)
Other operating, net
3

 
240

 
511

 

 
754

Operating income (loss)
(33,457
)
 
19,397

 
51,136

 

 
37,076

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(41,624
)
 
17,968

 
(14,418
)
 

 
(38,074
)
Intercompany royalty and technical service fees
4,492

 
5,295

 
(9,787
)
 

 

Foreign currency and other, net
18,934

 
(18,854
)
 
(4,175
)
 

 
(4,095
)
Equity in earnings of subsidiaries
32,229

 
16,078

 

 
(48,307
)
 

Income (loss) before income taxes
(19,426
)
 
39,884

 
22,756

 
(48,307
)
 
(5,093
)
Income tax (provision) benefit
8,421

 
(7,465
)
 
(6,868
)
 

 
(5,912
)
Net income (loss)
$
(11,005
)
 
$
32,419

 
$
15,888

 
$
(48,307
)
 
$
(11,005
)
Comprehensive income (loss)
$
(12,339
)
 
$
32,562

 
$
15,864

 
$
(48,426
)
 
$
(12,339
)


28



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:
 
 
 
 
 
 
 
 
 
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
)
Issuance of common stock
(222
)
 

 

 

 
(222
)
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


29



Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 29, 2012
 
In thousands
PGI
(Issuer)
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
(73,342
)
 
$
70,705

 
$
58,267

 
$

 
$
55,630

Investing activities:
 
 
 
 
 
 
 
 
 
Purchases of property, plant and equipment
(20,399
)
 
(2,483
)
 
(17,264
)
 

 
(40,146
)
Proceeds from the sale of assets

 
1,646

 
11

 

 
1,657

Acquisition of intangibles and other
(175
)
 

 

 

 
(175
)
Intercompany investing activities, net
57,118

 
(37,389
)
 
(25,118
)
 
5,389

 

Net cash provided by (used in) investing activities
36,544

 
(38,226
)
 
(42,371
)
 
5,389

 
(38,664
)
Financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from long-term borrowings

 

 
10,977

 

 
10,977

Proceeds from short-term borrowings
1,943

 

 
3,000

 

 
4,943

Repayment of long-term borrowings
(79
)
 

 
(3,170
)
 

 
(3,249
)
Repayment of short-term borrowings
(1,894
)
 

 
(5,000
)
 

 
(6,894
)
Intercompany financing activities, net
41,253

 
(23,530
)
 
(12,334
)
 
(5,389
)
 

Net cash provided by (used in) financing activities
41,223

 
(23,530
)
 
(6,527
)
 
(5,389
)
 
5,777

Effect of exchange rate changes on cash

 

 
(386
)
 

 
(386
)
Net change in cash and cash equivalents
4,425

 
8,949

 
8,983

 

 
22,357

Cash and cash equivalents at beginning of period
3,135

 
14,574

 
55,033

 

 
72,742

Cash and cash equivalents at end of period
$
7,560

 
$
23,523

 
$
64,016

 
$

 
$
95,099




30


Note 20.  Subsequent Events
On October 22, 2013, the Company agreed to amend the Bridge Facility in order to add, in addition to other parties, Blackstone Holdings Co. L.L.C., a subsidiary of Blackstone, as an initial lender. The Bridge Facility provides for a commitment by the lenders to make secured bridge loans, the proceeds of which will be used to fund the proposed acquisition of Fiberweb anticipated to be completed during the fourth quarter of 2013.
On October 24, 2013, the Board of Fiberweb approved the Scheme of Arrangement (the "Scheme") and other associated matters to implement the acquisition of Fiberweb by the Company. The resolutions proposed were approved by the requisite majorities of Fiberweb shareholders. Completion of the acquisition remains subject to the satisfaction or waiver of certain conditions set out in the Scheme document, including court sanction of the Scheme and court confirmation of the associated reduction of capital. It is expected that the transaction will become effective on or around November 15, 2013.

31


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 report. 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 refer to Polymer Group, Inc. and its consolidated subsidiaries. The term "Parent" as used within this report 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 refers to Scorpio Holdings Corporation, a Delaware corporation that owns 100% of the Parent.
Our Overview
We are a leading global innovator, manufacturer and marketer of engineered materials, primarily focused on the production of nonwoven products. Nonwovens are a high-performance and low-cost fabric-like alternative to traditional textiles, paper and other materials. They can be made with specific value-added characteristics including absorbency, tensile strength, softness and barrier properties, among others. Our nonwoven products are critical components used in consumer and industrial products, including hygiene, healthcare, wipes and industrial 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
Industrial:    Filtration, cable wrap, house wrap, furniture and bedding, agriculture, landscape, industrial
packaging and other specialty areas
We have one of the largest global platforms in the industry, with a total of 13 manufacturing and converting facilities located in 9 countries throughout the world, including a significant presence in Europe, Asia and Latin America. Our manufacturing facilities are strategically located near many of our key customers in order to increase our effectiveness in addressing local and regional demand, as many of our products do not ship economically over long distances. 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. We believe that we have one of the broadest and most advanced technology portfolios in the industry.
On January 28, 2011, pursuant to an Agreement and Plan of Merger, dated as of October 4, 2010, we were acquired by affiliates of the Blackstone Group ("Blackstone"), along with certain members of our management (the "Merger"), for an aggregate purchase price valued at $403.5 million. As a result, we 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, we repaid our existing outstanding debt.
Our Industry
We compete primarily in the global nonwovens market, which management estimates to have exceeded $25 billion in 2012. 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.

32


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.
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 announced an intent to install, or installed, additional capacity in excess of what we believe to be current market demand in the regions where we conduct business; specifically in the Americas, Europe and Asia. 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 we look forward, we will be challenged by the fact that new nonwovens manufacturing capacity has either entered or will enter the regional markets in which we conduct business. As a result, we have taken a number of actions to refocus our global footprint and optimize our operations around disposable applications and high-growth markets.
Going forward, we believe the global nonwovens market will continue to be driven by:
Increase in global demand for disposable products driven by the increase in sanitary standards;
Increase 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
Shift to materials and technology that deliver a lower total cost of use.
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 we expect to help support our future growth. As a result, despite the current market environment, 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
On September 17, 2013, we announced a firm intention to make an offer to acquire 100% of the issued and to be issued share capital of Fiberweb plc ("Fiberweb") at a price of £1.02 per share (the "Acquisition"). It is currently envisaged that the Acquisition will be effected by way of a court sanctioned scheme of arrangement of Fiberweb and be completed during the fourth quarter of 2013. Total share capital on a fully diluted basis is expected to approximate £185 million ($295 million). Fiberweb is one of the largest global manufacturers of specialized technical fabrics with seven production sites in five countries.
On September 17, 2013, we entered into a Senior Secured Bridge Credit Agreement (the “Bridge Facility”) with a 365-day term. The Bridge Facility provides for a commitment by the lenders to make secured bridge loans in an aggregate amount not to exceed $318.0 million, the proceeds of which will be used to fund the proposed acquisition of Fiberweb plc anticipated to be completed during the fourth quarter of 2013. Borrowings will bear interest at a rate equal to the Eurodollar rate plus an applicable margin of 6.00% for the initial three-month period following the date of borrowing, increasing by 0.50% after each subsequent three-month period, subject to a specified maximum rate.
On September 17, 2013, we entered into a foreign exchange forward contract with a third-party financial institution used to minimize foreign exchange risk on our potential future cash commitment related to the proposed acquisition of Fiberweb anticipated during the fourth quarter of 2013. The forward contract allows us to purchase a fixed amount of pounds sterling in the future at a specified U.S. Dollar rate. The forward contract does not qualify for hedge accounting treatment, therefore, it is considered an undesignated hedge.
On June 18, 2013, we announced the appointment of J. Joel Hackney Jr. as President and Chief Executive Officer ("CEO"), effective June 19, 2013. In accordance with his employment agreement, Mr. Hackney received a sign-on bonus at the start of his employment and is eligible to receive reimbursement of all reasonable relocation expenses incurred. Simultaneously, we announced the planned retirement of Veronica Hagen, effective August 31, 2013, as well as her retirement as President and CEO, effective June 19, 2013. Ms. Hagen will continue to serve on the Company's Board of Directors and worked with her successor to ensure a seamless transition. Ms. Hagen received her base salary at her current rate through her retirement date and is receiving a cash severance payment payable over an 18-month period following the date of her retirement.
On June 12, 2013, our Board of Directors approved a plan to relocate our Nanhai, China manufacturing facilities to another manufacturing facility which will be constructed within the same district as our current facilities as well as increase our current

33


capital investment. The authorization included the execution of an agreement with the Nanhai District People's Government (the "Government"), which will allow the Government to reclaim the land currently occupied by the existing Nanhai manufacturing facilities and will further provide certain Government support and incentives to assist in the relocation.
Possession of the land at the new location has occurred and initial construction is expected to begin during the fourth quarter of 2013, with the final shut-down of the existing facilities and start-up of the new facility estimated to occur by the first half of 2016 with no disruption to customers. We estimate total construction, relocation and other associated costs of this project to approximate 225 RMB ($36 million), which will be primarily funded through cash generated by operations. Government incentives are expected to approximate 165 RMB($26 million). We have accelerated the depreciation of the existing facilities and related assets being decommissioned in order to properly align the remaining useful lives with the timing of the relocation. Associated amounts are expected to be in the range of $8 to $10 million recognized over the next three years.
On March 22, 2013, a wholly-owned subsidiary of the Company entered into an amendment to an existing Equipment Lease Agreement (the "Agreement') associated with our spunmelt line in Waynesboro, Virginia, which commenced commercial production in the third quarter of 2011. The line was principally funded by a seven year equipment lease with a capitalized cost of $53.6 million. The amendment (i) amends the Total Leverage Ratio covenant in the Agreement to extend by one year each of the time periods in which the required Total Leverage Ratio “steps down” to a more restrictive ratio, (ii) amends the definition of Total Debt, which is used in the calculation of Total Leverage Ratio, to provide for the subtraction of the total amount of unrestricted cash from the aggregate principal amount of all indebtedness when calculating Total Debt, and (iii) removes our option to purchase the equipment on the second anniversary of the commencement date.
Results of Operations
We operate our business in four segments: Americas Nonwovens, Europe Nonwovens, Asia Nonwovens (collectively, the “Nonwovens Segments”) and Oriented Polymers. This reflects how the overall business is currently managed by our senior management and reviewed by the Board of Directors.
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 sustained raw material cost declines; and
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 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 utilities (primarily electricity), direct labor, and variable overhead. Utility rates vary depending on the regional market and provider. In Asia, we have experienced a trend of increasing utility rates that we do not expect to stabilize in the near-term. Our focus on operating efficiencies and initiatives associated with sustainability has resulted in a general trend of lower kilowatts used per ton produced over the last three years. 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.

34


The level of our net sales 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. However, we are exposed to short-term changes in raw material cost, which can have an impact on our gross profit.
In addition, our sales are impacted by our selling prices, which is influenced by the cost of our raw material inputs. Historically, changes in input costs have been passed through to customers either by contractual mechanisms or business practices. This can result in increases in net sales during periods of significant raw material cost increases as well as declines in net sales during periods of significant raw material cost declines. As a result, financial statement items that use percentage of net sales as an economic indicator are influenced by the changes in our selling prices. In general, average prices for polypropylene resin and other raw material costs modestly trended downward throughout 2012, after spiking early in the year. However, we saw a significant increase during the first quarter with a modest increase during the third quarter of 2013, with declines during the second quarter. As a result, we continue to operate in a volatile environment of high raw material prices relative to the prior year.
Three Months Ended September 28, 2013 Compared to the Three Months Ended September 29, 2012
The following table sets forth the period change for each category of the Statements of Comprehensive Income (Loss) for the three months ended September 28, 2013 as compared to the three months ended September 29, 2012, 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 28, 2013
 
Three Months Ended September 29, 2012
 
Period Change Favorable (Unfavorable)
September 28, 2013
September 29, 2012
Net sales
$
288,979

 
$
290,097

 
$
(1,118
)
100.0
 %
100.0
 %
Cost of goods sold:
 
 
 
 
 
 
 
  Raw materials
(158,734
)
 
(153,786
)
 
(4,948
)
54.9
 %
53.0
 %
  Labor
(15,532
)
 
(18,871
)
 
3,339

5.4
 %
6.5
 %
  Overhead
(66,513
)
 
(65,466
)
 
(1,047
)
23.0
 %
22.6
 %
  Gross profit
48,200

 
51,974

 
(3,774
)
16.7
 %
17.9
 %
Selling, general and administrative expenses
(33,463
)
 
(33,044
)
 
(419
)
11.6
 %
11.4
 %
Special charges, net
(7,093
)
 
(1,732
)
 
(5,361
)
2.5
 %
0.6
 %
Other operating, net
(671
)
 
235

 
(906
)
0.2
 %
(0.1
)%
  Operating income (loss)
6,973

 
17,433

 
(10,460
)
2.4
 %
6.0
 %
Other income (expense):
 
 
 
 
 
 
 
  Interest expense
(13,185
)
 
(12,487
)
 
(698
)
4.6
 %
4.3
 %
  Foreign currency and other, net
2,298

 
(999
)
 
3,297

(0.8
)%
0.3
 %
Income (loss) before income taxes
(3,914
)
 
3,947

 
(7,861
)
(1.4
)%
1.4
 %
Income tax (provision) benefit
(4,353
)
 
(2,593
)
 
(1,760
)
1.5
 %
0.9
 %
Net income (loss)
$
(8,267
)
 
$
1,354

 
$
(9,621
)
(2.9
)%
0.5
 %
Net Sales
Net sales for the three months ended September 28, 2013 were $289.0 million, a $1.1 million decrease compared with the three months ended September 29, 2012. A reconciliation presenting the components of the period change by each of our operating divisions is as follows:

35


 
Nonwovens
 
Oriented
Polymers
 
Total
In millions
Americas
 
Europe
 
Asia
 
Total
 
Beginning of period
$
163.3

 
$
67.8

 
$
42.9

 
$
274.0

 
$
16.1

 
$
290.1

Changes due to:
 
 
 
 
 
 
 
 
 
 
 
Volume
(4.6
)
 
(4.7
)
 
4.3

 
(5.0
)
 
(0.4
)
 
(5.4
)
Price/product mix
2.1

 
1.0

 
(2.8
)
 
0.3

 
(0.1
)
 
0.2

Currency translation

 
3.8

 
0.5

 
4.3

 
(0.2
)
 
4.1

Sub-total
(2.5
)
 
0.1

 
2.0

 
(0.4
)
 
(0.7
)
 
(1.1
)
End of period
$
160.8

 
$
67.9

 
$
44.9

 
$
273.6

 
$
15.4

 
$
289.0

Nonwovens Segments
Net sales for the three months ended September 28, 2013 were $273.6 million, a $0.4 million decrease compared with the three months ended September 29, 2012. The decrease in net sales was primarily driven by volume reductions in the Americas and Europe, which had a combined net impact of $9.3 million. European results reflected stabilization of underlying demand in our industrial markets, as well as additional volume in the healthcare market. However, they were more than offset by reductions in the consumer disposable and hygiene markets. Volume decreases in the Americas were driven by the exit of certain low-margin business in the healthcare market during 2012 and lower consumer disposable volume. However, these amounts were partially offset by incremental growth of $4.3 million in Asia, primarily driven by higher volumes sold in the hygiene markets as well as healthcare product sales from the new spunmelt line installed in 2011. In addition, we completed the installation of our new spunmelt line in May 2013, which we anticipate will provide additional sales volume to the hygiene market in Asia.
For the three months ended September 28, 2013, net selling prices increased $0.3 million compared with the three months ended September 29, 2012. The pricing increase, which included $2.1 million in the Americas and $1.0 million in Europe, resulted from our passing through higher raw material costs associated with index-based selling agreements and market-based trends. In addition, favorable foreign currency impacts of $4.3 million resulted in the higher translation of sales generated in our foreign jurisdictions located in Europe and Asia. However, these amounts were partially offset by lower net selling prices in Asia. The pricing decrease, primarily a result of product mix movements in the hygiene market, impacted net sales by $2.8 million.
Oriented Polymers
Net sales for the three months ended September 28, 2013 were $15.4 million, a $0.7 million decrease compared with the three months ended September 29, 2012. The decrease was primarily driven by lower demand in the construction and industrial packaging markets, resulting in lower net sales of $0.4 million. In addition, unfavorable foreign currency impacts of $0.2 million resulted in lower translation of sales generated in foreign jurisdictions. Lower net selling prices, a result from our passing through lower raw material cost associated with index-based selling agreements and market-based pricing trends, impacted net sales by $0.1 million.
Gross Profit
Gross profit for the three months ended September 28, 2013 was $48.2 million, a $3.8 million decrease compared with the three months ended September 29, 2012. As a result, gross profit as a percentage of net sales decreased to 16.7% from 17.9%. The decrease in gross profit was primarily driven by lower net spreads (the difference between the change in raw material costs and selling prices) of $4.5 million, primarily impacting the Americas and Asia. In addition, volume reductions in the Americas and Europe more than offset the benefits of additional capacity and improved manufacturing efficiencies in Asia. As a percentage of net sales, the raw material component of cost of goods sold increased to 54.9% from 53.0%, reflecting the $4.9 million increase in raw material costs. In addition, our overhead component increased by $1.0 million primarily associated with overall volume-related manufacturing inefficiencies and increased depreciation in Asia. As a percentage of net sales, our overhead component increased to 23.0% from 22.6%. However, the $3.3 million reduction of our labor component of cost of goods sold reflects the positive benefits of our cost reduction initiatives implemented during 2012. As a result, labor as a percentage of net sales decreased to 5.4% from 6.5%.
Operating Income
Operating income for the three months ended September 28, 2013 was $6.9 million, a $10.5 million decrease compared with the three months ended September 29, 2012. A reconciliation presenting the components of the period change by each of our operating divisions is as follows:

36


 
Nonwovens
 
 
 
 
 
 
In millions
Americas
 
Europe
 
Asia
 
Total
 
Oriented
Polymers
 
Corporate/
Other
 
Total
Beginning of period
$
20.6

 
$
2.2

 
$
4.9

 
$
27.7

 
$
0.8

 
$
(11.1
)
 
$
17.4

Changes due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
Volume
(2.3
)
 
(1.3
)
 
2.1

 
(1.5
)
 
(0.1
)
 

 
(1.6
)
Price/product mix
2.1

 
1.0

 
(2.8
)
 
0.3

 
(0.1
)
 

 
0.2

Raw material cost
(5.6
)
 
0.6

 
0.8

 
(4.2
)
 
(0.5
)
 

 
(4.7
)
Manufacturing costs
1.4

 
(0.5
)
 
2.0

 
2.9

 
(0.4
)
 

 
2.5

Currency translation
(0.1
)
 
0.3

 
(0.4
)
 
(0.2
)
 
0.5

 

 
0.3

Depreciation and amortization
1.3

 
(0.2
)
 
(2.3
)
 
(1.2
)
 

 

 
(1.2
)
Special charges

 

 

 

 

 
(5.3
)
 
(5.3
)
All other
(1.4
)
 
0.4

 
(0.2
)
 
(1.2
)
 
0.4

 
0.1

 
(0.7
)
Sub-total
(4.6
)
 
0.3

 
(0.8
)
 
(5.1
)
 
(0.2
)
 
(5.2
)
 
(10.5
)
End of period
$
16.0

 
$
2.5

 
$
4.1

 
$
22.6

 
$
0.6

 
$
(16.3
)
 
$
6.9

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 28, 2013 were $33.5 million, a $0.4 million increase compared with the three months ended September 29, 2012. As a result, selling, general and administrative expenses as a percentage of net sales increased to 11.6% for the three months ended September 28, 2013 from 11.4% for the three months ended September 29, 2012. The increase in selling, general and administrative expenses was primarily driven by costs of $0.3 million related to the announced retirement of our previous Chief Executive Officer and simultaneous appointment of our new Chief Executive Officer. In addition, we recorded an incremental $0.3 million of non-cash stock-based compensation expense. Combined, the $0.7 million of expenses had a 0.2 point impact on selling, general and administrative expenses as a percentage of net sales. Other factors that contributed to the increase included depreciation and amortization expense as well as third-party fees and expenses. However, these amounts were more than offset by the result of cost reduction initiatives implemented during 2012.
Special Charges, net
As part of our business strategy, we may incur costs related to corporate-level decisions or Board of Director actions. These actions are 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 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 proposed acquisition of Fiberweb
$0.4 million related to separation and severance expenses associated with our plant realignment cost initiatives
$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
Special charges for the three months ended September 29, 2012 were $1.7 million and consisted of the following components:
$0.9 million related to separation and severance expenses associated with our plant realignment cost initiative
$0.8 million related to cost associated with our internal redesign and restructuring of global operations 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

37


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. For the three months ended September 29, 2012, other operating income totaled $0.2 million, primarily associated with foreign currency gains.
Other Income (Expense)
Interest expense for the three months ended September 28, 2013 was $13.2 million, a $0.7 million increase compared to the three months ended September 29, 2012. Lower weighted-average interest rates on outstanding debt offset the increase in average outstanding debt levels, which included the credit facility entered into during the third quarter of 2012 associated with the new spunmelt line constructed in China. However, amounts associated with capitalized interest decreased by $0.5 million.
Foreign currency and other, net provided $2.3 million for the three months ended September 28, 2013. 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. For the three months ended September 29, 2012, foreign currency and other, net was an expense of $1.0 million, primarily associated with $0.8 million foreign currency losses on non-operating assets and liabilities. Other expenses incurred included factoring fees and other non-operating expenses.
Income Tax (Provision) Benefit
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. During the three months ended September 29, 2012, we recognized an income tax provision of $2.6 million on consolidated pre-tax book income from continuing operations of $3.9 million. Our income tax expense in 2013 and 2012 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.
Nine Months Ended September 28, 2013 Compared to the Nine Months Ended September 29, 2012
The following table sets forth the period change for each category of the Statements of Comprehensive Income (Loss) for the nine months ended September 28, 2013 as compared to the nine months ended September 29, 2012, as well as each category as a percentage of net sales:

38


 
 
 
 
 
 
Percentage of Net Sales for the Respective Period End
In thousands
Nine Months Ended September 28, 2013
 
Nine Months Ended September 29, 2012
 
Period Change Favorable (Unfavorable)
September 28, 2013
September 29, 2012
Net sales
$
867,599

 
$
881,512

 
$
(13,913
)
100.0
 %
100.0
 %
Cost of goods sold:
 
 
 
 
 
 
 
  Raw materials
(475,568
)
 
(480,067
)
 
4,499

54.8
 %
54.5
 %
  Labor
(51,906
)
 
(57,453
)
 
5,547

6.0
 %
6.5
 %
  Overhead
(195,669
)
 
(192,412
)
 
(3,257
)
22.6
 %
21.8
 %
  Gross profit
144,456

 
151,580

 
(7,124
)
16.7
 %
17.2
 %
Selling, general and administrative expenses
(107,176
)
 
(102,354
)
 
(4,822
)
12.4
 %
11.6
 %
Special charges, net
(10,647
)
 
(12,904
)
 
2,257

1.2
 %
1.5
 %
Other operating, net
(1,975
)
 
754

 
(2,729
)
0.2
 %
(0.1
)%
  Operating income (loss)
24,658

 
37,076

 
(12,418
)
2.8
 %
4.2
 %
Other income (expense):
 
 
 
 
 
 
 
  Interest expense
(37,592
)
 
(38,074
)
 
482

4.3
 %
4.3
 %
  Foreign currency and other, net
(22
)
 
(4,095
)
 
4,073

 %
0.5
 %
Income (loss) before income taxes
(12,956
)
 
(5,093
)
 
(7,863
)
(1.5
)%
(0.6
)%
Income tax (provision) benefit
(9,444
)
 
(5,912
)
 
(3,532
)
1.1
 %
0.7
 %
Net income (loss)
$
(22,400
)
 
$
(11,005
)
 
$
(11,395
)
(2.6
)%
(1.2
)%
Net Sales
Net sales for the nine months ended September 28, 2013 were $867.6 million, a $13.9 million decrease compared with the nine months ended September 29, 2012. A reconciliation presenting the components of the period change by each of our operating divisions is as follows:
 
Nonwovens
 
Oriented
Polymers
 
Total
In millions
Americas
 
Europe
 
Asia
 
Total
 
Beginning of period
$
494.7

 
$
219.5

 
$
115.8

 
$
830.0

 
$
51.5

 
$
881.5

Changes due to:
 
 
 
 
 
 
 
 
 
 
 
Volume
(12.8
)
 
(6.7
)
 
11.4

 
(8.1
)
 
(2.0
)
 
(10.1
)
Price/product mix
(8.7
)
 
1.0

 
(2.7
)
 
(10.4
)
 
0.8

 
(9.6
)
Currency translation

 
5.3

 
0.8

 
6.1

 
(0.3
)
 
5.8

Sub-total
(21.5
)
 
(0.4
)
 
9.5

 
(12.4
)
 
(1.5
)
 
(13.9
)
End of period
$
473.2

 
$
219.1

 
$
125.3

 
$
817.6

 
$
50.0

 
$
867.6

Nonwovens Segments
Net sales for the nine months ended September 28, 2013 were $817.6 million, a $12.4 million decrease compared with the nine months ended September 29, 2012. The decrease in net sales was primarily driven by lower net selling prices in the Americas and Asia. Combined, these regions impacted net sales by $11.4 million. The pricing decrease, a result of raw material trends and a competitive pricing environment, was partially offset by higher net selling prices in Europe due to improved product mix. In addition, favorable foreign currency impacts of $6.1 million resulted in the higher translation of sales generated in our foreign jurisdictions located in Europe and Asia.
For the nine months ended September 28, 2013, volumes decreased by $8.1 million compared with the nine months ended September 29, 2012. The decrease in volume was primarily driven by reductions in the Americas, a result of an increased competitive environment within the hygiene markets and the exit of certain low-margin business in the healthcare market in late 2012. However, the volume reduction was partially offset by increased sales of industrial products as demand increased with the overall markets. Volumes decreased in Europe as the stabilization of underlying demand in our industrial markets, were more than offset by reductions in the hygiene markets. In addition, incremental growth of $11.4 million in Asia was primarily driven by higher volumes

39


sold in the hygiene markets as well as healthcare product sales from the new spunmelt line installed in 2011. In addition, we completed the installation of our new spunmelt line in May 2013, which we anticipate will provide additional sales volume to the hygiene market in Asia.
Oriented Polymers
Net sales for the nine months ended September 28, 2013 were $50.0 million, a $1.5 million decrease compared with the nine months ended September 29, 2012. The decrease was primarily driven by a reduction in volume attributable to lower demand in the construction and industrial packaging markets, resulting in lower net sales of $2.0 million. In addition, unfavorable foreign currency impacts of $0.3 million resulted in lower translation of sales generated in foreign jurisdictions. However, these reductions were partially offset by higher net selling prices of $0.8 million, which resulted from our passing through higher raw material cost associated with index-based selling agreements and market-based pricing trends.
Gross Profit
Gross profit for the nine months ended September 28, 2013 was $144.5 million, a $7.1 million decrease compared with the nine months ended September 29, 2012. The overall decrease in gross profit was primarily driven by lower net sales of $13.9 million, of which $21.5 million impacted the Americas. The reductions were partially offset by net sales in Asia which benefited from our newly added capacity. In addition, our overhead component increased by $3.3 million primarily associated with volume-related manufacturing inefficiencies, particularly in the Americas as well as increased depreciation in Asia. As a result, our overhead component as a percentage of net sales increased to 22.6% from 21.8%. These amounts were partially offset by the lower overall cost for the raw materials of resin and fibers, especially polypropylene resin, as well as a decrease in our labor component of cost of goods sold which reflects the positive benefits of our cost reduction initiatives implemented during 2012. Combined, they reduced cost of goods sold by $10.0 million. As a percentage of net sales, the raw material component of cost of goods sold increased to 54.8% from 54.5% and the labor component of cost of goods sold decreased to 6.0% from 6.5%. Overall, lower net spreads and lower volumes more than offset improved manufacturing efficiencies. As a result, gross profit as a percentage of net sales for the nine months ended September 28, 2013 decreased to 16.7% from 17.2% for the nine months ended September 29, 2012.
Operating Income
Operating income for the nine months ended September 28, 2013 was $24.7 million, a $12.4 million decrease compared with the nine months ended September 29, 2012. A reconciliation presenting the components of the period change by each of our operating divisions is as follows:
 
Nonwovens
 
 
 
 
 
 
In millions
Americas
 
Europe
 
Asia
 
Total
 
Oriented
Polymers
 
Corporate/
Other
 
Total
Beginning of period
$
51.3

 
$
9.4

 
$
13.2

 
$
73.9

 
$
3.8

 
$
(40.6
)
 
$
37.1

Changes due to:
 
 
 
 
 
 
 
 
 
 
 
 
 
Volume
(4.6
)
 
(1.0
)
 
4.4

 
(1.2
)
 
(0.5
)
 

 
(1.7
)
Price/product mix
(8.7
)
 
1.0

 
(2.7
)
 
(10.4
)
 
0.8

 

 
(9.6
)
Raw material cost
2.5

 
0.7

 
0.7

 
3.9

 
(0.2
)
 

 
3.7

Manufacturing costs
0.2

 
(1.1
)
 
3.4

 
2.5

 
(1.3
)
 

 
1.2

Currency translation
(0.4
)
 
0.9

 
(1.0
)
 
(0.5
)
 
0.5

 

 

Depreciation and amortization
2.3

 
(1.0
)
 
(3.7
)
 
(2.4
)
 

 

 
(2.4
)
Special charges

 

 

 

 

 
2.3

 
2.3

All other
(0.5
)
 
0.3

 
(0.6
)
 
(0.8
)
 
0.5

 
(5.6
)
 
(5.9
)
Sub-total
(9.2
)
 
(0.2
)
 
0.5

 
(8.9
)
 
(0.2
)
 
(3.3
)
 
(12.4
)
End of period
$
42.1

 
$
9.2

 
$
13.7

 
$
65.0

 
$
3.6

 
$
(43.9
)
 
$
24.7

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

40


Selling, general and administrative expenses for the nine months ended September 28, 2013 were $107.2 million, a $4.8 million increase compared with the nine months ended September 29, 2012. As a result, selling, general and administrative expenses as a percentage of net sales increased to 12.4% for the nine months ended September 28, 2013 from 11.6% for the nine months ended September 29, 2012. The increase in selling, general and administrative expenses was primarily driven by costs of $4.2 million related to the announced retirement of our previous Chief Executive Officer and simultaneous appointment of our new Chief Executive Officer. In addition, we recorded $1.7 million of non-cash stock-based compensation expense. Combined, the $5.9 million of expenses had a 0.7 point impact on selling, general and administrative expenses as a percentage of net sales. Other factors that contributed to the increase included depreciation and amortization expense as well as third-party fees and expenses. In addition, shipping and handling costs increased as activity between regions increased with the ramp up of certain new products. However, these amounts were more than offset by the result of cost reduction initiatives implemented during 2012.
Special Charges, net
As part of our business strategy, we may incur costs related to corporate-level decisions or Board of Director actions. These actions are 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 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 proposed 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
Special charges for the nine months ended September 29, 2012 were $12.9 million and consisted of the following components:
$8.9 million related to cost associated with our internal redesign and restructuring of global operations initiatives
$1.9 million related to separation and severance expenses associated with our plant realignment cost initiatives
$0.8 million related to separation and severance expenses associated with our IS support initiative
$0.5 million related to professional fees and other transaction costs associated with the Merger
$0.8 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
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. For the nine months ended September 29, 2012, other operating income totaled $0.7 million, primarily associated with foreign currency gains.
Other Income (Expense)
Interest expense for the nine months ended September 28, 2013 was $37.6 million, a $0.5 million decrease compared to the nine months ended September 29, 2012. Lower weighted-average interest rates on outstanding debt more than offset the increase in average outstanding debt levels, which included the credit facility entered into during the third quarter of 2012 associated with the new spunmelt line constructed in China. In addition, amounts associated with capitalized interest increased by $0.2 million.
Foreign currency and other, net was an expense of less than $0.1 million for the nine months ended September 28, 2013. 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 quarter. For the nine months ended September 29, 2012, foreign currency and other, net was an expense of $4.1 million, of which $2.6 million was primarily associated with foreign currency losses on non-operating assets and liabilities. Other expenses incurred

41


included factoring fees and other non-operating expenses as well as $0.7 million related to the release of a FIN 48 tax indemnification asset.
Income Tax (Provision) Benefit
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. During the nine months ended September 29, 2012, we recognized an income tax provision of $5.9 million on consolidated pre-tax book loss from continuing operations of $5.1 million. Our income tax expense in 2013 and 2012 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. In addition, we recognized a $2.9 million discrete tax item related to a tax amnesty program in Mexico during the nine months ended September 28, 2013.
Liquidity and Capital Resources
The following table contains several key indicators to measure our financial condition and liquidity:
In millions
September 28,
2013
 
December 29,
2012
Balance Sheet Data:
 
 
 
Cash and cash equivalents
$
74.7

 
$
97.9

Operating working capital (1)
40.2

 
29.6

Total assets
1,020.7

 
1,022.1

Total debt
612.4

 
599.7

Total shareholders’ equity
127.1

 
139.2

(1) Operating working capital represents account receivable plus inventory less accounts payable and accrued expenses
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 and 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. As a result, we are significantly leveraged. Accordingly, our liquidity requirements are significant, primarily due to our debt service requirements. Cash interest payments for the nine months ended September 28, 2013 were $46.5 million. We had $74.7 million of cash on hand and an additional $19.3 million of availability under our ABL Facility as of September 28, 2013, none of which was outstanding at the balance sheet date. The availability under our ABL Facility is determined in accordance with a borrowing base which can decline 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

42


foreign jurisdiction earnings by means of a dividend, the repatriated cash would be subject to foreign jurisdiction withholding tax requirements. We believe that any such dividend activity and the related tax effect would not be material.
At September 28, 2013, we had $74.7 million of cash and cash equivalents on hand, of which $61.2 million was held by our 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 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 28, 2013
 
Nine Months Ended September 29, 2012
Cash Flow Data:
 
 
 
Net cash provided by (used in) operating activities
$
4.1

 
$
55.6

Net cash provided by (used in) investing activities
(40.0
)
 
(38.7
)
Net cash provided by (used in) financing activities
12.4

 
5.8

Total
$
(23.5
)
 
$
22.7

Operating Activities
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. We continue to focus on working capital management. However, increases in accounts receivable and inventory reflect the impact of higher raw material prices and their associated lag on selling prices.
Net cash provided by operating activities for the nine months ended September 29, 2012 was $55.6 million, of which net income provided $39.0 million after adjusting for non-cash transactions and $16.6 million was generated by changes in working capital. The primary driver of the working capital inflow related to a $9.1 million decrease in accounts receivable during the period, a result of lower overall selling prices and an increase in amounts sold through factoring agreements. Days sales outstanding were 41 days at September 29, 2012 compared with 44 days at year-end. In addition, inventory decreased $5.0 million, primarily due to the lower overall purchase price of raw materials, which reduced inventory days on hand to 38 days compared with 39 days at year-end. Accounts payable and accrued liabilities provided $4.6 million due to the timing of vendor payments other general accruals. As a result, accounts payable days were 72 days at September 29, 2012 compared with 71 days at year-end. Other current assets increased $3.6 million primarily due to the timing of prepaid items as well as the timing of payments from our factoring agents.
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

43


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 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
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.
Net cash used in investing activities for the nine months ended September 29, 2012 was $38.7 million. The main driver of the outflow related to $40.1 million of total property, plant and equipment expenditures, primarily associated with our manufacturing expansion project in China. Other items included in our capital expenditures relate to machinery and equipment upgrades that extend the useful life and/or increased the functionality of the asset. These amounts were partially offset by $1.7 million of proceeds recognized in the first quarter of 2012 associated with the sale of a former manufacturing facility in North Little Rock, Arkansas.
Financing Activities
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.
Net cash provided by financing activities for the nine months ended September 29, 2012 was $5.8 million. Proceeds from borrowings totaled $15.9 million, of which $11.0 million related to a credit facility funding our manufacturing expansion project in China. Other proceeds related to short-term credit facilities used to finance working capital requirements at our subsidiary in Argentina. In addition, we utilize short-term credit facilities to finance insurance premium payments. These amounts were more than offset by repayments of $10.1 million, of which $6.9 million related to short-term borrowing.
Indebtedness
The following table summarizes our outstanding debt at September 28, 2013:
In thousands
Currency
 
Matures
 
Interest Rate
 
Outstanding Balance
Senior Secured Notes
USD
 
2019
 
7.75%
 
$
560,000

ABL Facility
USD
 
2016
 
 

Bridge Facility
GBP
 
2014
 
 

Argentina credit facilities:
 
 
 
 
 
 
 
Argentina Credit Facility — Nacion
USD
 
2016
 
3.16%
 
9,175

Argentina Credit Facility — Galicia
ARS
 
2016
 
15.25%
 
3,454

China credit facilities:
 
 
 
 
 
 
 
China Credit Facility — Healthcare
USD
 
2013
 
5.43%
 
13,481

China Credit Facility — Hygiene
USD
 
2015
 
5.48%
 
24,920

Capital lease obligations
Various
 
2013 - 2015
 
Various
 
1,142

Total debt
 
 
 
 

 
612,172

Less: Current maturities
Various
 
2013
 
Various
 
(19,683
)
Total long-term debt
 
 
 
 

 
$
592,489

    
Senior Secured Notes

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In connection with the Merger, we issued $560.0 million of 7.75% Senior Secured Notes on January 28, 2011. The notes are due in 2019 and are fully and unconditionally guaranteed, jointly and severally on a senior secured basis, by each of Polymer's wholly-owned domestic subsidiaries. Interest is paid semi-annually on February 1 and August 1.
The agreement governing the Senior Secured Notes, among other restrictions, limits our ability and the ability of 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) 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; (ix) designate restricted subsidiaries as unrestricted subsidiaries; and (x) transfer or sell assets. However, subject to certain exceptions, the indenture permits us and our restricted subsidiaries to incur additional indebtedness, including senior indebtedness and secured indebtedness. The indenture also does not limit the amount of additional indebtedness that Parent or its parent entities may incur.
Under the agreement governing the Senior Secured Notes and under the credit agreement governing the senior secured asset-based revolving credit 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 as defined in the indenture.
ABL Facility
In connection with the Merger, we entered into a senior secured asset-based revolving credit facility (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. The ABL Facility 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, subject to certain rights of the administrative agent, swing line lender and issuing banks with respect to the lenders providing commitments for such increase. The facility was set to expire on January 28, 2015.
On October 5, 2012, we entered into an amended and restated ABL Facility. The amended and restated facility extended the maturity date to October 5, 2016 as well as made certain pricing and other changes to the original agreement. We maintain the option to request that the ABL Facility be increased by an amount not to exceed $20.0 million, subject to certain rights of the administrative agent, swing line lender and issuing banks with respect to the lenders providing commitments for such increase. As of September 28, 2013, we had no outstanding borrowings under the ABL Facility. Borrowing base availability was $30.3 million, however, outstanding letters of credit in the aggregate amount of $11.0 million left $19.3 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 28, 2013.
Based on current borrowing base availability, the borrowings under the ABL Facility will bear interest at a rate per annum equal to, at our option, either (A) Adjusted London Interbank Offered Rate (“LIBOR”) (adjusted for statutory reserve requirements) plus (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 administrative agent's Prime Rate and (b) the federal funds effective rate plus 0.5% (“ABR”) plus (x) 1.00% in the case of Tranche 1 or (y) 3.00% in the case of the Tranche 2.
The ABL Facility contains certain customary representations and warranties, affirmative covenants and events of default, including among other things payment defaults, breach of representations and warranties, covenant defaults, cross-defaults and cross acceleration to certain indebtedness, bankruptcy and insolvency defaults, certain events under ERISA, certain monetary judgment defaults, invalidity of guarantees or security interests, and change of control. 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.
Bridge Facility
On September 17, 2013, we entered into a Bridge Facility with a 365-day term. The Bridge Facility provides for a commitment by the lenders to make secured bridge loans in an aggregate amount not to exceed $318.0 million, the proceeds of which will primarily be used to fund the proposed acquisition of Fiberweb anticipated to be completed during the fourth quarter of 2013.
Borrowings will bear interest at a rate equal to the Eurodollar rate plus an applicable margin of 6.00% for the initial three-month period following the date of borrowing, increasing by 0.50% after each subsequent three-month period, subject to a specified maximum rate. Amounts outstanding will be senior secured obligations of ours and unconditionally guaranteed, jointly and

45


severally on a senior secured basis, by Holdings and Polymer’s 100% owned domestic subsidiaries. As of September 28, 2013, no amounts have been drawn down under the Bridge Facility.
The agreement governing the Bridge Facility, among other restrictions, limits our ability and the ability of 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) 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; (ix) designate restricted subsidiaries as unrestricted subsidiaries; and (x) transfer or sell assets. In addition, the Bridge Facility contains certain customary representations and warranties, affirmative covenants and events of default.
Argentina Credit Facility - Nacion
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 28, 2013, the face amount of the outstanding indebtedness under the U.S. dollar-denominated loan was $9.5 million, with a carrying amount of $9.2 million and a weighted average interest rate of 3.16%.
Argentina Credit Facility - Galicia
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 28, 2013, the outstanding balance under the facility was $3.5 million. The remainder of the upgrade is expected to be financed by existing cash balances and cash generated from operations.
China Credit Facility — Healthcare
In the third quarter of 2010, our subsidiary in China entered into a three-year U.S. dollar-denominated construction loan agreement (the “Healthcare 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 three-year term of the agreement began with the date of the first draw down on the Healthcare Facility, which occurred in fourth quarter of 2010. The interest rate applicable to borrowings 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 (400 basis points at the time the credit agreement was executed), but in no event would the interest rate be less than 1-year LIBOR plus 250 points.
The maximum borrowings available under the facility, excluding any interest added to principal, were $20.0 million. We repaid $4.0 million of the principle balance in the fourth quarter of 2012. As a result, the outstanding balance under the Healthcare Facility was $16.0 million at December 29, 2012, with a weighted average interest rate of 5.44%. As of September 28, 2013, the outstanding balance under the Healthcare Facility was $13.5 million with a weighted-average interest rate of 5.39%. The outstanding balance is scheduled to be repaid during 2013 using a combination of existing cash balances and cash generated from operations.
China Credit Facility Hygiene
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

46


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 29, 2012, the outstanding balance under the Hygiene Facility was $11.0 million with a weighted average interest rate of 5.51%. As of September 28, 2013, the outstanding balance under the Hygiene Facility was $24.9 million with a weighted-average interest rate of 5.48%. Our first payment on the outstanding principal is due in late 2013.
Other Subsidiary Indebtedness
We periodically enter into short-term credit facilities in order to finance various liquidity requirements. At September 28, 2013, outstanding amounts related to such facilities were $0.2 million, which are being used to finance insurance premium payments. The weighted average interest rate on these borrowings was 2.44%. At December 29, 2012, amounts outstanding under these facilities were $0.8 million at a weighted average interest rate of 2.46%. Borrowings are included in Short-term borrowings in the Consolidated Balance Sheets.
We also have documentary letters of credit not associated with the ABL Facility, Healthcare Facility or the Hygiene Facility. These letters of credit were primarily provided to certain raw material vendors and amounted to $6.5 million and $6.7 million at September 28, 2013 and December 29, 2012, 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 $53.8 million under the non-U.S. based programs. At September 28, 2013, the amount of trade accounts receivable sold to third-party financial institutions, and therefore excluded from our accounts receivable balance, was $52.2 million. Amounts due from the third-party financial institutions were $7.6 million at September 28, 2013. Factoring of our trade accounts receivable improves our cash conversion cycle. If we were to discontinue the use of these arrangements or if the amounts of receivables sold under these programs fluctuates significantly, we may experience short-term variability in our cash conversion cycle.
Reconciliation of Non-GAAP Financial Measures
We report our financial results in accordance with Generally Accepted Accounting Principles in the United States (“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 agreement governing the Senior Secured Notes and in our ABL Facility. As a result, one should not consider Adjusted EBITDA in isolation or as a substitute for our results 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) in order to show the differences in these measures of operating performance:

47


In thousands
Three Months Ended September 28, 2013
Three Months Ended September 29, 2012
 
Nine Months Ended September 28, 2013
Nine Months Ended September 29, 2012
Net income (loss)
$
(8,267
)
$
1,354

 
$
(22,400
)
$
(11,005
)
Interest expense, net
13,185

12,487

 
37,592

38,074

Income and franchise tax
4,431

2,661

 
9,680

6,149

Depreciation & amortization (a)
17,609

16,402

 
49,821

47,410

Purchase accounting adjustments (b)

190

 

706

Non-cash compensation (c)
519

202

 
3,456

621

Special charges, net (d)
7,093

1,732

 
10,647

12,904

Foreign currency and other non-operating, net (e)
(1,562
)
765

 
2,192

3,343

Severance and relocation expenses (f)
885

200

 
4,127

1,377

Unusual or non-recurring charges, net
444

305

 
736

411

Business optimization expense (g)
99

137

 
224

843

Management, monitoring and advisory fees (h)
854

750

 
2,879

2,250

Adjusted EBITDA
$
35,290

$
37,185

 
$
98,954

$
103,083


(a)
Excludes amortization of loan acquisition costs that are included in interest expense.
(b)
Reflects fair market value adjustments as a result of purchase accounting associated with the Merger, primarily related to the step-up in inventory value.
(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 with 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 Blackstone management services agreement.
Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Standards
In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"), which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, ASU 2013-02 requires an entity to present, either on the face of the income statement or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under Generally Accepted Accounting Principles ("GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income in the financial statements. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance concerns disclosure only and did not have an impact on our financial results.
In July 2013, the FASB issued Accounting Standards Update 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

48


with deferred tax assets. ASU 2013-11 is effective prospectively for reporting periods beginning after December 15, 2013, with retroactive application permitted. We are currently assessing the potential impacts, if any, on our financial results.
Critical Accounting Policies and Practices
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 28, 2013, 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 29, 2012.
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 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.

49


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 29, 2012 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.
The majority of our long-term financing consists of $560.0 million of 7.75% fixed-rate, Senior Secured Notes due 2019. However, the remaining portion of our indebtedness does 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 rates affecting our outstanding variable interest rate subsidiary indebtedness, as of September 28, 2013, would change our interest expense by approximately $0.5 million.
Foreign Currency Exchange Rate Risk
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 June 30, 2011, we 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 a new spunmelt line under construction in China. The contracts allow us to purchase fixed amounts of Euros on specified future dates, coinciding with the payment amounts and dates of equipment purchase contracts. At September 28, 2013, the remaining notional amount of these contracts was $4.3 million.
On September 17, 2013, we entered into a foreign exchange forward contract with a third-party financial institution used to minimize foreign exchange risk on our potential future cash commitment related to the proposed acquisition of Fiberweb anticipated to be completed during the fourth quarter of 2013. The Bridge Loan Contract allows us to purchase a fixed amount of pounds sterling in the future at a specified U.S. Dollar rate. At September 28, 2013, the notional amount of this contract was £185 million.
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.

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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 volumes for fiscal 2013, 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 $6.1 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
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.
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, as of the end of the period covered by this report, in ensuring that 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 28, 2013 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 29, 2012.
ITEM 4. MINE SAFETY DISCLOSURE
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. Because the SEC defines the term “affiliate” broadly, it includes any entity controlled by us as well as any person or entity that controls us or is under common control with us (“control” is also defined broadly by the SEC). 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 28, 2013. Except as described below, we are not presently aware of any such reportable transactions or dealings by other such companies.
Blackstone informed us that Travelport Limited, a company that may be considered one of its affiliates, included a disclosure in its current report on Form 10-Q as required by Section 13(r) of the Exchange Act. We have no involvement in or control over the activities of this company, any of its respective predecessor companies or any of their subsidiaries, and we have not independently verified or participated in the preparation of any of their disclosures.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibits required in connection with this Quarterly Report on Form 10-Q are listed below.

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Exhibit No.
 
Description
 
 
 
10.1
 
Senior Secured Bridge Credit Agreement, dated as of September 17, 2013, among Polymer Group, Inc., Scorpio Acquisition Corporation, the lenders from time to time party thereto, Citicorp North America, Inc. as administrative agent, Barclays Bank plc as syndication agent and Citigroup Global Markets Inc. and Barclays Bank plc as joint lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on September 17, 2013)
 
 
 
10.2
 
Guaranty, dated as of September 17, 2013 among Scorpio Acquisition Corporation, the subsidiaries of Scorpio Acquisition Corporation party thereto and Citicorp North America Inc., as administrative agent (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on September 17, 2013)
 
 
 
10.3
 
Amendment No. 1, dated as of October 22, 2013, among Polymer Group, Inc., Scorpio Acquisition Corporation, Citicorp North America, Inc., as administrative agent, and the lenders party thereto from time to time, to the Senior Secured Bridge Credit Agreement, dated as of September 17, 2013, among Polymer Group, Inc., Scorpio Acquisition Corporation, the lenders from time to time party thereto, Citicorp North America, Inc., as administrative agent, Barclays Bank PLC as syndication agent and Citigroup Global Markets Inc. and Barclays Bank PLC as joint lead arrangers and joint bookrunners (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on October 25, 2013)

 
 
 
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
 
 
 
101
 
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended September 28, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements 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 Section 13 or 15(d) 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.  

Signature
 
Title
 
Date
/s/ J. Joel Hackney, Jr.
 
 
 
 
J. Joel Hackney, Jr.
 
President and Chief Executive Officer and Director (Principal Executive Officer)
 
November 5, 2013
 
 
 
 
 
/s/ Dennis E. Norman
 
 
 
 
Dennis E. Norman
 
Executive Vice President, Chief Financial Officer & Treasurer (Principal Financial Officer)
 
November 5, 2013
 
 
 
 
 
/s/ James L. Anderson
 
 
 
 
James L. Anderson
 
Vice President & Chief Accounting Officer (Principal Accounting Officer)
 
November 5, 2013



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