Foamex International Announces Second Quarter 2002 Results
LINWOOD, Pa.--Aug. 13, 2002--Foamex International Inc. , the leading manufacturer of flexible polyurethane and advanced polymer foam products in North America, today announced results for its second quarter and the six-month period ending June 30, 2002.Second Quarter 2002 Results
Sales
Net sales for the second quarter were $345.9 million, up 10.1% from $314.3 million in the second quarter of 2001 due to improved sales in the Automotive Products and Technical Products segments, partially offset by a decrease in the Foam Products segment. Gross profit was $45.4 million in 2002, down 9.0% from $49.9 million in 2001. Gross profit as a percentage of sales in 2002 decreased to 13.1% from 15.9% in 2001, reflecting additional costs associated with an odor problem caused by defective TDI provided by a chemical supplier in late 2001 and increases of 20% to 25% in the price of raw materials from major chemical manufacturers.
Earnings
Net income for the quarter was $81.4 million, or $3.04 per diluted share, including $77.3 million related to a previously disclosed deferred income tax adjustment. Net income for the quarter would have been $5.2 million, or $0.20 per diluted share if this adjustment had not been recorded, compared with net income of $10.6 million, or $0.42 per diluted share in the second quarter of 2001. As a result of the reversal of the valuation allowance on deferred income tax assets, the underlying effective tax rate in the second quarter was approximately 37%, compared to approximately 16% in the second quarter of 2001. Depending upon, among other factors, the Company's level of pre-tax earnings, the Company anticipates its effective tax rate to be approximately 37% for the balance of the year. The Company will continue to utilize its net operating loss carryforwards to the extent available to reduce cash tax payments.
Income from operations was $23.6 million for the 2002 second quarter, compared to $28.9 million in the second quarter of 2001. The second quarter of 2001 included goodwill amortization charges of $1.5 million, or $0.06 on a diluted per share basis. In addition to the factors contributing to the lower gross margin described above, particularly the defective TDI, the Company experienced increased selling, general and administrative expenses primarily due to professional services and employee-related expenses partially offset by lower bad debt expenses.
EBITDA for the 2002 second quarter was $31.9 million, down 14.1% from the 2001 period.
Interest and debt issuance expense for the quarter was $17.3 million, an increase of 6.7% from the 2001 quarter, due to higher debt levels as a result of the refinancing the Company completed in March 2002. The Company expects to realize reductions in interest expense in the third quarter due to the beneficial impacts of the interest rate swaps and the repurchase of $47.5 million par value of senior subordinated debt in July 2002. Consolidated net debt at June 30, 2002 was $670 million.
Commenting on the results, Peter Johnson, Foamex's President and Chief Operating Officer, said: "Despite the difficult economy, overall sales for the quarter were quite good in all our businesses. However, our operating results were hurt by several factors, including the raw material price increases we experienced in the quarter and the impact from costs related to an odor problem in bedding products sold by our Foam Products group.
"We saw substantial price increases in chemical raw materials during the second quarter that reduced our profit margins," continued Johnson. "In addition, our major chemical suppliers have initiated a further price increase effective September 1. The increases are difficult to manage, but we are working with both our customers and suppliers to address the issue. Additionally, we are expanding our supply base in an effort to mitigate these pricing pressures. While the business environment remains difficult, we are committed and focused on our business strategy and we are aggressively working toward generating long-term shareholder value and meeting our debt reduction commitments."
Outlook
Commenting on the Company's outlook, Thomas Chorman, Executive Vice President and Chief Financial and Administrative Officer of Foamex said: "In terms of our operational performance, we have seen good sales in the second quarter, beating both year over year comparisons and the prior quarter's performance. Furthermore, our repurchase of $47.5 million par value of senior subordinated notes in July and the interest rate swap transactions that we entered into on May 1 will reduce interest expense in the third quarter and prospectively."
Mr. Chorman continued: "While we are comfortable that the incremental costs related to the "odorous TDI" are now in the main behind us, we have and continue to experience reduced sales due to this fourth quarter 2001 event. The substantial price increases announced by our chemical suppliers may impact our results in the second half of this year."
Year-to-Date Results
Sales
Net sales for the six months ended June 30, 2002 were $660.0 million, up 7.1% from $616.2 million in the first half of 2001. Gross profit was $83.6 million in the first six months of 2002, down 8.2% from $91.1 million in 2001. Gross profit as a percentage of sales in the first half of 2002 decreased to 12.7% from 14.8% in 2001.
Earnings
Net income for the first six months of 2002 was $85.9 million, or $3.23 per diluted share, compared to $16.5 million in 2001. Net income in the first six months of 2002 was increased by a $77.3 million deferred income tax adjustment and by $1.3 million related to the cumulative effect of a change in accounting principal related to the write-off of negative goodwill. Additionally, net income for the first six months of 2002 was reduced by an extraordinary charge of $4.2 million for the write-off of debt issuance costs in connection with the Company's debt refinancing, completed in the first quarter of 2002. Net income for the first half of 2002 would have been $11.7 million, or $0.44 per diluted share excluding the above items and if the deferred income tax adjustment had not been recorded, compared with net income of $16.5 million, or $0.66 per diluted share in the first half of 2001.
Income from operations was $45.7 million for the first half of 2002, compared to $53.1 million in 2001. Results for the first half of 2002 included restructuring, impairment and other credits of $1.5 million. Excluding these items, income from operations was $44.1 million in the six months ended June 30, 2002. Results for the same period in 2001 included goodwill amortization charges of $3.0 million.
EBITDA for the first half of 2002 was $62.8 million, down 10.2% from the 2001 period.
Interest and debt issuance expense for the first half was $31.6 million, a 5.8% decrease from the first half of 2001, due to lower average debt levels and lower effective interest rates.
Business Segment Performance
Foam Products
Foam Products net sales for the second quarter were $119.1 million, down 2.8% from the second quarter of 2001. The decrease primarily reflects a reduction in business from a major bedding manufacturer. Income from operations for the second quarter was $11.9 million, down 30.9% from the second quarter of 2001. This was due to increased raw material prices in the latter part of the quarter and higher manufacturing costs as the Company made adjustments to protect customers from further odor concerns.
For the six months ended June 30, 2002, Foam Products sales were $236.6 million, down 5.2% from $249.5 in the first half of 2001. Income from operations decreased 29.4% to $21.9 million from $31.0 million in the comparable 2001 period.
Carpet Cushion Products
Carpet Cushion Products net sales for the second quarter increased 5.0% to $60.4 million from $57.5 million the second quarter of 2001, despite overall market weakness and the loss of a major customer, which left the carpet business. Loss from operations was $1.2 million in the second quarter of 2002, primarily as a result of higher prices on scrap foam. Loss from operations was $0.8 million in the second quarter of 2001.
In June, Foamex announced that it had executed a letter of intent regarding a strategic exchange of assets, under which Foamex would transfer its carpet cushion business to Leggett & Platt in exchange for Leggett & Platt's polyurethane foam business and a cash payment. Foamex is currently in negotiations with Leggett & Platt regarding this potential transaction.
For the six months ended June 30, 2002, Carpet Cushion Products sales increased by 1.8% to $113.2 million from $111.2 million in the comparable 2001 period. This segment had a loss from operations of $4.2 million for the first half of 2002, compared to a $2.2 million loss in the 2001 period.
Automotive Products
Automotive Products net sales for the second quarter were $123.8 million, up 22.7% from the second quarter of 2001. The improvement primarily reflected a continued high build rate of new cars, continued development of new product programs and the impact of the General Foam acquisition in July 2001. Income from operations for the second quarter was $8.0 million, up 6.3% from the same period one year ago.
For the first six months of 2002, Automotive Products had net sales of $228.1 million, representing a 23.1% increase from net sales of $185.4 million in the comparable period in 2001. Income from operations increased 35.7% to $17.0 million in the first half of 2002 from $12.5 million in the 2001 period.
Technical Products
Net sales for Technical Products in the second quarter were $33.5 million, up 37.4% from net sales of $24.4 million in the second quarter of 2001. This increase primarily reflects sales from the acquisition of General Foam Corporation. Excluding this volume, Technical Products sales would have been down slightly versus the prior year. The decline reflected the continued slow-down in the technology industry. Income from operations for the second quarter was $7.7 million, up 25.3% from the second quarter of 2001.
For the six months ended June 30, 2002, net sales for Technical Products increased 23.5% to $64.4 million from $52.1 million in the first half of 2001. Income from operations decreased 1.4% to $13.8 million in the first half of 2002 from 14.0 million the comparable period in 2001.
Business Update
Price Increases
Some suppliers of polyol, TDI, and MDI, the principal products used to manufacture polyurethane foam, substantially increased prices during the quarter, and have notified Foamex that they will increase prices again in the third quarter. Foamex has taken steps to mitigate these higher raw material costs, including the price increases announced in June and expansion of our supply base. A further price increase may be necessary. (Effective July 1, 2002, Foamex raised prices by 16% across all Foamex product divisions except the Company's Carpet Cushion Group, which previously announced an increase of 8% effective June 3, 2002.)
Symphonex
In July, Foamex formed Symphonex, a new wholly-owned Foamex International company. The new subsidiary will include the Technical Products Group, Foamex Asia, and the continued development of the micro-fuel cell for commercial application. At that time, the Company also announced that Virginia Ann Kamsky was named Chairman and CEO of Symphonex and Executive Vice President of Foamex International. By bringing these businesses together as a company distinct from Foamex's core businesses, the Company believes it will more quickly realize the potential of these areas and products for Foamex and its shareholders.
"Project Transformation" Operational Restructuring Program
In December, Foamex announced its comprehensive profit enhancement plan, Project Transformation, leveraging Foamex's VPF technology to reduce costs, spur revenue growth, and drive increased long-term profitability and shareholder value. The Company continues to expect to meet its targets, although some aspects of the project will be affected if the asset exchange with L&P is successfully concluded.
As previously announced, Foamex has outsourced its information technology (IT) function to EDS in a move designed to build a world-class technology infrastructure and reduce annual IT expenses by over $2 million annually for the next 5 years. Under the agreement EDS will provide and manage a common, leveraged IT infrastructure that will help standardize and streamline business processes, systems and operations across Foamex's North American facilities.
During the quarter Foamex also announced that it had consolidated its outside temporary manufacturing staffing vendors to one provider, Onsite Companies, under a new a four-year contract. The Company expects this move to reduce its costs by at least $1 million annually.
Interest Expense Reduction
As previously announced, effective May 1, 2002, the Company completed a series of interest rate swap transactions on $300 million of long-term debt. The effect of these interest rate swap transactions is to convert the fixed interest rate on the Company's 10 3/4% senior secured notes due April 1, 2009 to floating rates reset twice per year. Given current market interest rates, the Company expects to realize significant cost savings in annual interest expense as a result. Additionally, the repurchase of senior subordinated notes in the third quarter of 2002 will further reduce interest expense.
Conference Call and Replay
Foamex management will host a conference call today, Tuesday, August 13, 2002, at 10:00 a.m. EDT to discuss the Company's second quarter 2002 results. Investors can access the conference call in the U.S. by dialing (888) 458-9977 (international callers, dial (712) 271-3820), asking to be connected to the Foamex investor call led by Peter Johnson.
In addition, interested parties may listen to the conference call over the Internet at www.foamex.com. To listen, go to the website 15 minutes early to register and download and install any necessary audio software. For those unable to participate, a rebroadcast will be made available at the Company's web site after the call. It will be available shortly after the call.
About Foamex International Inc.
Foamex, headquartered in Linwood, PA, is the world's leading producer of comfort cushioning for bedding, furniture, carpet cushion and automotive markets. The Company also manufactures high-performance polymers for diverse applications in the industrial, aerospace, defense, electronics and computer industries as well as filtration and acoustical applications for the home. For more information visit the Foamex web site at http://www.foamex.com.
Forward-Looking Statements
This press release contains, and oral statements made from time to time by representatives of the Company may contain, 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. Such forward-looking statements include, without limitation, those relating to completion of the operational restructuring as currently contemplated and the currently anticipated benefits of the restructuring, including those relating to the work force reductions, cost savings and restructuring charges from Project Transformation, the expected benefits of expanding the use of VPF technology, the Company's ability to introduce new products, enhance sales growth and margins and the outlook for the Company's financial performance. These forward-looking statements are affected by risks, uncertainties and assumptions that the Company makes about, among other things, its ability to implement customer selling price increases in response to higher raw material costs, raw material price increases, general economic conditions, conditions in the capital markets, the interest rate environment, the level of automotive production, carpet production, furniture and bedding production and housing starts, the completion of various restructuring/consolidation plans, the achievement of management's business plans, its capital and debt structure (including various financial covenants), litigation and changes in environmental legislation and environmental conditions and other factors mentioned in the documents filed by the Company with the Securities and Exchange Commission. While the Company believes that its assumptions regarding the foregoing matters are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that the Company's forward-looking statements will prove to be accurate. Additional information that could cause actual results to vary materially from the results anticipated may be found in the Company's most recent Form 10-K and other reports filed with the Securities and Exchange Commission. Readers should be aware that any forward-looking statement made in this press release or elsewhere by the Company speaks only as of the date on which it is made, and the Company disclaims any obligation or intent to update any of the factors listed above or forward-looking statements.
Non-GAAP Measures
Information in this press release presents EBDAIT and EBITDA, as well as adjusted net income and earnings per share figures, as we believe the information is useful. We define EBDAIT as income from operations plus depreciation and amortization, restructuring, impairment and other charges and income from equity interest in joint ventures. We define EBITDA as income before provision for income taxes plus interest and debt issuance expense and depreciation and amortization. These non-GAAP measures should not be considered as any measure of performance or liquidity under generally accepted accounting principles such as net income and cash flows from operating activities and such measures may not be comparable to similarly titled measures of other companies.
Foamex International Inc. and Subsidiaries
Consolidated Statements of Operations
($ Thousands, except EPS data)
(Unaudited)
Second Quarter Comparative Year to Date Comparative
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $345,898 $314,261 $659,960 $616,168
Cost of
Goods Sold 300,512 264,365 576,336 525,096
------- ------- ------- -------
Gross Profit 45,386 49,896 83,624 91,072
Selling, General &
Administrative
Expenses 21,796 21,055 39,479 37,978
Restructuring,
Impairment and Other
Charges (Credits) - (77) (1,538) (48)
- ---- ------- ----
Income from
Operations 23,590 28,918 45,683 53,142
Interest and Debt
Issuance Expense 17,338 16,249 31,643 33,597
Income from Equity
Interest in
Joint Venture 398 324 1,128 663
Other Expense, Net (27) (390) (237) (552)
---- ----- ----- -----
Income before Provision
(Benefit) for
Income Taxes 6,623 12,603 14,931 19,656
Provision (Benefit)
for Income Taxes (74,822) 1,983 (73,851) 3,143
------- ------- ------- -------
Income before
Extraordinary Charge
and Change in
Accounting
Principle 81,445 10,620 88,782 16,513
Extraordinary Charge,
Net of
Income Taxes - - (4,204) -
Cumulative Effect of
Change in
Accounting Principle - - 1,319 -
- - ----- -
Net Income (Loss) $81,445 $10,620 $85,897 $16,513
======= ======= ======= =======
----------------------------------------------------------------------
EBDAIT (a) $31,939 $37,465 $61,504 $70,331
======= ======= ======= =======
EBITDA (b) $31,912 $37,152 $62,805 $69,917
======= ======= ======= =======
Earnings Per Share - Basic:
Income before
Extraordinary Charge
and Change in
Accounting
Principle $3.35 $0.45 $3.67 $0.70
Extraordinary Charge - - (0.17) -
Change in
Accounting Principle - - 0.05 -
- - ---- -
Net Income $3.35 $0.45 $3.55 $0.70
===== ===== ===== =====
Weighted Average
Shares
Outstanding 24,282 23,569 24,198 23,565
====== ====== ====== ======
Earnings Per Share - Diluted:
Income before
Extraordinary Charge
and Change in
Accounting
Principle $3.04 $0.42 $3.34 $0.66
Extraordinary Charge - - (0.16) -
Change in
Accounting Principle - - 0.05 -
- - ---- -
Net Income $3.04 $0.42 $3.23 $0.66
===== ===== ===== =====
Weighted Average
Shares
Outstanding 26,783 25,265 26,559 25,170
====== ====== ====== ======
Foamex L.P. and Subsidiaries (c)
Selected Comparative Financial Data
($ Thousands)
(Unaudited)
Second Quarter Comparative Year to Date Comparative
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $345,898 $314,261 $659,960 $616,168
Income from
Operations $22,896 $29,101 $45,485 $53,516
% of Sales 6.6% 9.3% 6.9% 8.7%
EBDAIT(a) $31,245 $37,658 $61,306 $70,725
% of Sales 9.0% 12.0% 9.3% 11.5%
EBITDA(b) $31,219 $37,454 $62,640 $70,455
% of Sales 9.0% 11.9% 9.5% 11.4%
Notes to Consolidated Statements of Operations and Selected
Comparative Financial Data
(a) EBDAIT consists of income from operations plus depreciation and
amortization, restructuring, impairment and other charges (credits)
and income from equity interest in joint venture.
(b) EBITDA consists of income before provision for income taxes plus
interest and debt issuance expense and depreciation and amortization.
(c) The Selected Comparative Financial Data for Foamex L.P. and
Subsidiaries includes Foamex Carpet Cushion LLC which was contributed
to Foamex L.P. on March 25, 2002. The contribution has been accounted
for as a merger of entities under common control and has been recorded
in a manner similar to a pooling of interests.