Polymer Group, Inc. the third quarter and nine-month periods ended September 27, 2008.
-- Sales continued to reach record levels during the quarter, up 17.5% to $301.0 million over the third quarter of 2007 and up 9.0% to $865.7 million for the first nine months compared to the same period of the prior year.
-- Gross profit for the quarter was up 8.5% over the prior year to $43.0 million; however, margins were negatively impacted by significant increases in raw material costs during the quarter. Year-to-date, gross profit was $131.8 million compared to $130.0 million for the first nine months of 2007.
-- Net income in the third quarter increased 43.8% over the second quarter of 2008 to $3.4 million, or $0.18 per share, and improved $24.3 million from the net loss of $20.9 million recorded in third quarter of 2007. For the first nine months of fiscal 2008, net income improved to $7.2 million compared to a loss of $19.4 million for the same period in 2007.
-- The decline in raw material costs experienced since August is expected to result in an improvement in gross profit margins and bottom line profitability in the fourth quarter.
THIRD QUARTER RESULTS
PGI reported record sales for the third quarter of $301.0 million, up 17.5% over the prior year. The top line growth was driven predominantly by higher selling prices in response to higher raw material costs, but also included positive contributions from an improved mix in many market segments and higher overall volumes in the Nonwovens business of $12.6 million. Volume growth was achieved in Latin America, predominantly in Argentina, where the company added capacity at the end of last year, and in Asia where steady increases in high grade medical fabric production have resulted in higher volumes and an improved profit mix. Additionally, the company's proprietary Spinlace(R) product volumes were contributing at full capacity during the quarter. Sales in the Oriented Polymers business were negatively impacted by lower volumes; however, positive contributions from improved product mix and higher selling prices resulted in year-over-year sales growth.
While gross profit of $43.0 million for the third quarter was $3.3 million higher than the third quarter of 2007, profitability was negatively impacted during the quarter by the large run up in raw material unit costs in July, specifically in polypropylene, on the heels of cost increases already experienced late in the second quarter. These cost increases were greater than the increase in selling prices that the company was able to achieve during the same period. The impact of higher raw material costs was partially offset by improved price/mix of sales and lower depreciation charges, resulting from fiscal 2007 impairments, during fiscal 2008. The raw material component of the cost of goods sold as a percentage of net sales increased from 53.3% in 2007 to 56.8% in 2008.
Operating income for the third quarter of 2008 was $9.0 million compared to a loss of $7.2 million in the third quarter of 2007 and operating income of $14.0 million in the second quarter of 2008. Included in operating income were special charges of $1.7 million in the third quarter of 2008 primarily related to exit costs associated with our previously announced plant closures and consolidations in the US and Europe. Special charges amounted to $20.4 million in the third quarter of 2007 and $1.8 million in the second quarter of 2008. Selling, general and administrative (SG&A) expenses were lower than the previous quarter by $0.7 million, due primarily to the absence of certain separation costs recognized in the second quarter. However, total SG&A was higher than the prior year by $3.9 million, with $1.1 million of this increase due to strengthening foreign currencies and an additional $1.0 million dollars resulting from higher export and distribution expenses associated with new volumes in Argentina.
PGI reported net income for the third quarter of $3.4 million compared to $2.4 million in the second quarter and a loss of $20.9 million in the third quarter of 2007.
For the nine months ended September 27, 2008, sales were $865.7 million, up $71.4 million, or 9.0%, from the same period in 2007. Net sales improved in the Nonwovens segment over comparable 2007 results by 9.8%, and net sales in fiscal 2008 in the Oriented Polymers segment increased 4.7% from 2007 results. The primary driver of increased sales was price increases resulting from the pass-through of higher raw material costs. Net volume in the Nonwovens segment declined $7.1 million compared to the prior year period due primarily to declines in the U.S. and Europe from underperforming business lines that were exited. These volume declines were partially offset by volume growth in Asia and Latin America. The increases in the developing regions consisted of hygiene sales in Latin America, including sales generated by the company's new facility in Argentina, and growth in Asia that was predominantly driven by year-over-year growth in medical sales. The Oriented Polymers segment increased sales by $6.0 million from the nine-month period of fiscal 2007 primarily as a result of higher selling prices, partially offset by lower sales volumes.
Gross profit was $131.8 million compared to $130.0 million the prior year, primarily reflecting the impact of raw material costs that have increased significantly in recent periods and manufacturing inefficiencies associated with new line and new product start-ups during the year, and offset by lower depreciation charges resulting from impairments recognized in 2007 and other manufacturing gains.
SG&A costs for the first nine months were up 10.3% compared to the same period in the prior year. $4.2 million of the $8.5 million increase was due to translation of costs incurred outside of the U.S. in strengthening foreign currencies. Additionally, freight and distribution costs, primarily incurred in Latin America, were up $2.2 million and management separation costs of $1.6 million also contributed to higher year-over-year expenses. Special charges were $4.8 million for the first nine months of 2008, compared to $30.2 million the prior year. The charges in 2008 primarily consisted of remaining costs associated with the European plant closure announced in 2007 and activities associated with the closure of the plant in Landisville, NJ. Operations at the Landisville facility officially ceased during the third quarter. Operating income in the first nine months of 2008 was $35.1 million compared to $17.4 million for the first nine months of the previous year due primarily to the factors discussed above.
Net income for the first nine months of 2008 amounted to $7.2 million, or $0.37 per share, compared to a loss of $19.4 million, or $1.00 per share, for the first nine months of 2007.
PGI's chief executive officer, Veronica (Ronee) M. Hagen, stated, "Our performance in the third quarter was overshadowed by the extreme fluctuations in the raw material market. However, underlying volume demand was stable during the quarter in the disposable nonwovens applications, reflecting PGI's more defensive model in a turbulent economic environment. We continued to achieve growth in our developing regions of Latin American and Asia, despite a challenging market environment in South America. Our proprietary Spinlace(TM) line was running at full capacity during the quarter and we began rolling the product out in our converted wipes business both in the U.S. and Europe. While we began to experience some softening in the durable goods applications in the industrial markets, certain product applications contributed offsetting volume gains during the quarter."
"Beginning in September, we have experienced a dramatic drop in raw material costs that we expect to continue through the remainder of the year. As such, we expect to end the year with a very strong fourth quarter with higher margins and bottom line profitability, producing an improved second half of 2008 compared to the first half," Hagen said.
The company continued to manage the balance sheet and investments relative to cash flows during the quarter. For the first nine months, cash flows from operations increased 33.4% to $34.4 million compared to $25.8 million for the first nine months of 2007. Capital expenditures for the quarter were $7.5 million compared to $26.1 million in the third quarter of 2007 and were $28.4 million for the first nine months of 2008 compared to $46.4 million for the same period the prior year. Operating working capital, defined as accounts receivable plus inventories less trade accounts payable and accrued liabilities, decreased to $135.8 million and represented 11.2% of annualized sales compared to 12.8% of annualized sales for the third quarter of 2007 and 12.2% of annualized sales at the end of the second quarter. The company reduced debt during the quarter to $416.5 million compared to $427.0 million at the end of the 2007 fiscal year.
Polymer Group, Inc. , one of the world's leading producers of nonwovens, is a global, technology-driven developer, producer and marketer of engineered materials. With the broadest range of process technologies in the nonwovens industry, PGI is a global supplier to leading consumer and industrial product manufacturers. The company operates 17 manufacturing and converting facilities in 8 countries throughout the world.