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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-7023
QUAKER FABRIC CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-1933106
(State of incorporation) (I.R.S. Employer Identification No.)
941 Grinnell Street, Fall River, Massachusetts 02721
(Address of principal executive offices)
(508) 678-1951
(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 X No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of April 26, 2001, 15,728,032 shares of Registrant's Common Stock,
$0.01 par value, were outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, December 30,
2001 2000
--------------- --------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash $ 560 $ 440
Accounts receivable, less reserves of $1,811 and $1,873 at
March 31, 2001 and December 30, 2000, respectively 44,892 42,735
Inventories 46,255 43,831
Prepaid and refundable income taxes 1,948 2,977
Production supplies 1,241 1,875
Prepaid expenses and other current assets 4,240 4,407
----------- ----------
Total current assets 99,136 96,265
Property, plant and equipment, net 140,329 141,929
Other assets:
Goodwill, net 5,577 5,625
Deferred financing costs, net 220 238
Other assets 1,877 1,979
----------- ----------
Total assets $ 247,139 $ 246,036
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations $ 1,795 $ 1,975
Accounts payable 16,343 18,761
Accrued expenses 10,033 8,991
----------- ----------
Total current liabilities 28,171 29,727
Long-term debt, less current portion 51,500 52,700
Capital lease obligations, less current portion 628 697
Deferred income taxes 23,241 22,400
Other long-term liabilities 2,188 2,179
Redeemable preferred stock:
Series A convertible, $0.01 par value per share, liquidation preference
$1,000 per share, 50,000 shares authorized, none issued -- --
Stockholders' equity:
Common stock, $0.01 par value per share, 40,000,000 shares authorized;
15,722,610 and 15,716,629 shares issued and outstanding as of
March 31, 2001 and December 30, 2000, respectively 157 157
Additional paid-in capital 83,722 83,696
Retained earnings 58,933 55,860
Other accumulated comprehensive loss (1,401) (1,380)
----------- ----------
Total stockholders' equity 141,411 138,333
----------- ----------
Total liabilities and stockholders' equity $ 247,139 $ 246,036
=========== ==========
The accompanying notes are an integral part of these consolidated
financial statements
1
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
----------------------------------
March 31, April 1,
2001 2000
------------------- -------------
(Unaudited)
Net sales $ 79,836 $ 75,237
Cost of products sold 62,517 58,930
------------ ---------
Gross margin 17,319 16,307
Selling, general and administrative expenses 11,496 11,620
------------ --------
Operating income 5,823 4,687
Other expenses:
Interest expense 1,017 1,261
Other, net 4 7
------------ ---------
Income before provision for income taxes 4,802 3,419
Provision for income taxes 1,729 1,197
------------ ---------
Net income $ 3,073 $ 2,222
============ =========
Earnings per common share - basic (Note 1) $ 0.20 $ 0.14
============ =========
Earnings per common share - diluted (Note 1) $ 0.19 $ 0.14
============ =========
Weighted average shares outstanding - basic (Note 1) 15,724 15,690
============ =========
Weighted average shares outstanding - diluted (Note 1) 16,333 16,107
============ =========
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QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three Months Ended
--------------------------------------------
March 31, April 1,
2001 2000
------------------- -------------------
(Unaudited)
Net income $ 3,073 $ 2,222
Foreign currency translation adjustment 4 61
Derivative instrument adjustment (25) --
---------- ---------
Comprehensive income $ 3,052 $ 2,283
=========== =========
The accompanying notes are an integral part of these consolidated financial
statements
2
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended
----------------------------------------
March 31, April 1,
2001 2000
-------------- -----------
(Unaudited)
Cash flows from operating activities:
Net income $ 3,073 $ 2,222
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,649 3,521
Deferred income taxes 841 411
Changes in operating assets and liabilities:
Accounts receivable (net) (2,157) (758)
Inventories (2,424) (1,005)
Prepaid expenses and other assets 1,932 524
Accounts payable and accrued expenses (1,376) (3,259)
Other long-term liabilities 9 (16)
-------- --------
Net cash provided by operating activities 3,547 1,640
-------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,983) (3,497)
-------- --------
Net cash used for investing activities (1,983) (3,497)
-------- --------
Cash flows from financing activities:
Repayments of capital lease obligations (249) (251)
Change in revolving credit facility (1,200) 2,200
Repayments of long-term debt -- (18)
Proceeds from exercise of common stock options and
issuance of shares under the employee stock
purchase plan 26 30
Capitalization of financing costs -- (20)
-------- --------
Net cash provided by (used in)
financing activities (1,423) 1,941
-------- --------
Effect of exchange rates on cash (21) 61
-------- --------
Net increase in cash 120 145
Cash, beginning of period 440 332
-------- --------
Cash, end of period $ 560 $ 477
======== ========
The accompanying notes are an integral part of these consolidated financial
statements
3
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements reflect
all normal and recurring adjustments that are, in the opinion of management,
necessary to present fairly the financial position of Quaker Fabric Corporation
and Subsidiaries (the "Company") as of March 31, 2001 and December 30, 2000 and
the results of their operations and cash flows for the three months ended March
31, 2001 and April 1, 2000. The unaudited consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with accounting
principles generally accepted in the United States have been omitted pursuant to
those rules and regulations, although the Company believes that the disclosures
are adequate to make the information presented not misleading. Operating results
for the three months ended March 31, 2001 are not necessarily indicative of the
results expected for the full fiscal year or any future period. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 30, 2000. Certain reclassifications have been made to the prior year
financial statements for consistent presentation with the current year.
Earnings Per Common Share
Basic earnings per common share is computed by dividing net income by
the weighted average number of common shares outstanding during the period. For
diluted earnings per share, the denominator also includes dilutive outstanding
stock options determined using the treasury stock method. The following table
reconciles weighted average common shares outstanding to weighted average common
shares outstanding and dilutive potential common shares.
Three Months Ended
---------------------
Mar. 31, Apr.1,
2001 2000
---- ----
(In thousands)
Weighted average common shares outstanding 15,724 15,690
Dilutive potential common shares 609 417
------- -------
Weighted average common shares outstanding
and dilutive potential common shares 16,333 16,107
====== ======
Antidilutive options 865 1,058
====== ======
Note 2 - COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires companies to
report all changes in equity during a period, except those resulting from
investment by owners and distributions to owners, in a financial statement for
the period in which they are recognized.
4
Accordingly, the accompanying consolidated financial statements include a
Statement of Comprehensive Income, which encompasses net income and foreign
currency translation adjustments.
Note 3 - INVENTORIES
Inventories are stated at the lower of cost or market and include
materials, labor and overhead. Cost is determined by the last-in, first-out
(LIFO) method.
Inventories at March 31, 2001 and December 30, 2000 consisted of the
following:
March 31, December 30,
2001 2000
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Raw materials $ 20,598 $ 21,689
Work in process 9,812 8,641
Finished goods 15,723 13,379
------- -------
Inventory at FIFO 46,133 43,709
LIFO reserve 122 122
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Inventory at LIFO $ 46,255 $ 43,831
========= =======
Note 3 - SEGMENT REPORTING
The Company operates as a single business segment consisting of sales
of two products, upholstery fabric and specialty yarns. Management evaluates the
Company's financial performance in the aggregate and allocates the Company's
resources without distinguishing between yarn and fabric products.
Gross foreign and export sales from the United States to unaffiliated
customers by major geographical area were as follows:
Three Months Ended
------------------
Mar. 31, Apr. 1,
2001 2000
---- ----
North America (excluding USA) $ 6,377 $ 5,848
Middle East 1,257 640
South America 687 323
Europe 1,136 1,313
All Other 884 1,167
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$10,341 $ 9,291
======= ========
5
Gross sales by product category are as follows:
Three Months Ended
------------------
Mar 31, Apr. 1,
2001 2000
---- ----
Fabric $76,024 $69,507
Yarn 4,681 6,490
-------- -------
$80,705 $75,997
======== =======
Note 4 - RECENT ACCOUNTING PRONOUNCEMENTS
In Fiscal 2000, the Company adopted Emerging Issues Task Force (EITF)
Issue 00-10, "Accounting for Shipping and Handling Fees and Costs" (EITF 00-10).
At adoption, EITF 00-10 required the Company to classify amounts billed to a
customer in a sales transaction related to shipping and handling as revenues and
classify similar costs in a sales transaction as cost of goods sold. The net
effect of the adoption of EITF 00-10 resulted in the Company reclassifying net
shipping costs from "selling, general and administrative" expenses to "net
sales" and "cost of products sold" within the consolidated statement of income.
In December 1999, the Securities Exchange Commission (SEC) staff
released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 provides interpretive guidance on the
recognition, presentation and disclosure of revenue in the financial statements.
The adoption of SAB 101 did not have a material affect on the Company's
consolidated financial results.
In accordance with SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," the Company has adopted SFAS No. 133, "Accounting for
Certain Derivative Instruments and Hedging Activities," and SFAS No. 138
"Accounting for Certain Derivative Instruments and Hedging Activities, an
Amendment of FASB Statement No. 133" (collectively, SFAS 133 as amended),
effective December 31, 2000. SFAS 133 as amended requires that derivatives be
recorded on the balance sheet as an asset or liability at fair value. The
statement provides that the gain or loss on a derivative instrument designated
and qualifying as a fair value hedging instrument, as well as the offsetting
loss or gain on the hedged item attributable to the hedged risk, be recognized
currently in earnings in the same accounting period. SFAS 133 as amended
provides that the effective portion of the gain or loss on a derivative
instrument designated and qualifying as a cash flow hedging instrument be
reported as a component of "other comprehensive income" and be reclassified into
earnings in the same period during which the hedged forecasted transaction
affects earnings. The ineffective portion of a derivative's change in fair value
is recognized currently through earnings regardless of whether the instrument is
designated as a hedge. The effect of adopting SFAS No. 133 in the first quarter
of 2001 resulted in a $25 thousand loss to "Other Comprehensive Income."
6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's fiscal year is a 52 or 53 week period ending on the
Saturday closest to January 1. "Fiscal 2000" ended December 30, 2000 and "Fiscal
2001" will end December 29, 2001. The first three months of Fiscal 2000 and
Fiscal 2001 ended April 1, 2000 and March 31, 2001, respectively.
Results of Operations - Quarterly Comparison
Net sales for the first quarter of 2001 increased $4.6 million or
6.1%, to $79.8 million from $75.2 million for the first quarter of 2000. The
average gross sales price per yard increased 8.4%, to $5.55 for the first
quarter of 2001 from $5.12 for the first quarter of 2000. This increase was
principally due to an increase in the average selling price of middle to
better-end fabrics. The gross volume of fabric sold increased 0.8%, to 13.7
million yards for the first quarter of 2001 from 13.6 million yards for the
first quarter of 2000. The Company sold 0.8% fewer yards of middle to better-end
fabrics and 5.8% more yards of promotional-end fabrics in the first quarter of
2001 than in the first quarter of 2000. The average gross sales price per yard
of middle to better-end fabrics increased by 8.9%, to $6.10 in the first quarter
of 2001 as compared to $5.60 in the first quarter of 2000. The average gross
sales price per yard of promotional-end fabric increased by 9.5%, to $3.93 in
the first quarter of 2001 as compared to $3.59 in the first quarter of 2000.
Gross fabric sales within the United States increased 9.1%, to $65.7
million in the first quarter of 2001 from $60.2 million in the first quarter of
2000. Foreign and Export sales increased 11.3%, to $10.3 million in the first
quarter of 2001 from $9.3 million in the first quarter of 2000. Gross yarn sales
decreased 27.9%, to $4.7 million in the first quarter of 2001 from $6.5 million
in the same period of 2000.
The gross margin percentage was 21.7% for the first quarters of both
2001 and 2000. Notwithstanding higher sales in the first quarter of 2001
compared to the first quarter of 2000, the gross margin percentage remained
constant primarily due to higher fixed costs including rising energy costs in
the first quarter of 2001, and modest raw material price increases in the first
quarter of 2001.
Selling, general and administrative expenses decreased to $11.5
million for the first quarter of 2001 from $11.6 million for the first quarter
of 2000. Selling, general and administrative expenses as a percentage of net
sales decreased to 14.4% in the first quarter of 2001 from 15.4% in the first
quarter of 2000. The decrease in selling, general and administrative expenses
was primarily due to a decrease in fabric sampling expenses, while the decrease
as a percentage of net sales is attributable to the allocation of fixed costs
over a higher sales base.
Interest expense was approximately $1.0 million for the first quarter
of 2001 and $1.3 million for the first quarter of 2000. Lower average levels of
senior debt and lower rates of interest were the primary reasons.
7
The Company provides for income taxes on an interim basis, using the
estimated annual effective income tax rate. The Company's estimated tax rate was
36.0% for the first quarter of 2001 and 35.0% for the first quarter of 2000. The
effective income tax rate is lower than the combined federal and state statutory
rates due primarily to the foreign sales corporation tax benefit at the federal
level and investment tax credits at the state level.
Net income for the first quarter of 2001 increased to $3.1 million, or
$0.19 per common share-diluted, from $2.2 million or $0.14 per common
share-diluted, for the first quarter of 2000. For a discussion of "Earnings Per
Share," see Note 2 to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 30, 2000.
Liquidity and Capital Resources
The Company historically has financed its operations and capital
requirements through a combination of internally generated funds, borrowings
under the Credit Agreement (as hereinafter defined), and debt and equity
offerings. The Company's capital requirements have arisen principally in
connection with (i) the purchase of equipment to expand production capacity,
introduce new technologies to broaden and differentiate the Company's products
and improve the Company's quality and productivity performance, (ii) an increase
in the Company's working capital needs related to its sales growth, and (iii)
investment in the Company's IT systems.
Capital expenditures in the first three months of 2000 and 2001 were
$3.5 million and $2.0 million, respectively. Capital expenditures were funded by
operating cash flow and borrowings. Management anticipates that capital
expenditures will total approximately $12.0 million in 2001, consisting of
approximately $7.0 million for new production equipment to expand finishing
capacity and support the Company's marketing, productivity, quality, service and
financial objectives. Management believes that operating income and borrowing
under the Credit Agreement will provide sufficient funding for the Company's
capital expenditures and working capital needs for the foreseeable future.
The Company issued $45.0 million of Senior Notes due October 2005 and
2007 (the Senior Notes) during 1997. The Senior Notes bear interest at a fixed
rate of 7.09% on $15.0 million and 7.18% on $30.0 million. Annual principal
payments begin on October 10, 2003 with a final payment due October 10, 2007.
For a discussion of the Senior Notes, see Note 5 to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 30, 2000.
The Company also has a $70.0 million Credit Agreement with a bank
which expires December 31, 2002 (the Credit Agreement). As of March 31, 2001,
the Company had $6.5 million outstanding under the Credit Agreement and unused
availability of $63.4 million net of an outstanding letter of credit of
approximately $100 thousand. For a discussion of the "Credit Agreement," see
Note 5 to the Consolidated Financial Statements included in the Company's Annual
Report on Form 10-K for the year ended December 30, 2000.
8
Quantitative and Qualitative Disclosures about Market Risk
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments
The Company purchases foreign exchange contracts as a cash flow hedge
of the forecasted purchase of equipment. Under the disclosure rules of SFAS No.
133, the Company has evaluated the contracts and recorded a $25 thousand loss to
"Other Comprehensive Income" and a current liability for the same amount.
Because of the size of the contracts and their short term nature, the Company
believes that changes in their fair market value would not have a material
adverse effect on the Company's operations and financial performance.
The Company uses excess cash to reduce borrowings under its revolving
credit agreement. Occasionally the Company will invest excess cash in short-term
Euro dollar deposits or money market accounts that are carried on the Company's
books at amortized cost, which approximates fair market value.
Primary Market Risk Exposures
The Company's primary market risk exposures are in the areas of
interest rate risk and foreign currency exchange rate risk. The Company's
long-term obligations are sensitive to changes in interest rates. Interest rate
changes would result in a change in the fair value of these financial
instruments due to the difference between the market interest rate and the rate
at the date of issuance of the financial instrument. Further, the Company has
cash flow and earnings risk related to borrowings under its Revolving Credit
Agreement. The interest rate on those borrowings fluctuates with changes in
short-term borrowing rates. A ten-percent decrease in period-end 2001 and 2000
market interest rates would not result in a material negative impact to the
Company.
The Company is also exposed to currency exchange rate fluctuations
related to its operations in Mexico and Brazil. Operations in Mexico are
denominated in Mexican pesos, and operations in Brazil are denominated in
Brazilian Reals. The Company has not engaged in formal currency hedging
activities to date, but does have a limited natural hedge in that Quaker's
expenses in Mexico and Brazil are primarily denominated in local currency, and
the Company also attempts to minimize exchange rate risk by converting non-U.S.
currency to U.S. dollars as often as practicable. The Company generally views
its investment in foreign subsidiaries with a functional currency other than the
Company's reporting currency as long-term. The Company's investment in foreign
subsidiaries is sensitive to fluctuations in foreign currency exchange rates.
The effect of a change in foreign exchange rates on the Company's net investment
in foreign subsidiaries is reflected in the "Other accumulated comprehensive
loss" component of shareholder' equity. A ten-percent depreciation in the
functional currencies, relative to the U.S. dollar, would not result in a
material reduction of shareholders' equity in 2001 or 2000.
9
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
NONE
(B) There were no reports on Form 8K filed during the three
months ended March 31, 2001.
10
QUAKER FABRIC CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
QUAKER FABRIC CORPORATION
Date: April 26, 2001 By: /s/ Paul J. Kelly
--------------------------- -----------------------------
Paul J. Kelly
Vice President - Finance
and Treasurer
11