ITEM 1.
BUSINESS
Company Overview
Business
International Textile Group, Inc. (“ITG”, the “Company”, “we”, “us” or “our”) is a global, diversified textile manufacturer headquartered in Greensboro, North Carolina, with operations in the United States, Mexico, and China. The Company believes it is one of the world’s largest and most diversified producers of denim fabrics and the largest producer of better denim fabrics for products distributed through department stores and specialty retailers. In addition, the Company believes it is one of the largest worsted wool manufacturers and commission printers and finishers in North America, and is a leading developer, marketer and manufacturer of performance synthetic apparel fabrics, automotive safety fabrics, technical and value added fabrics, contract fabrics for interior furnishings, and other textile products used in a variety of niche industrial and commercial applications. ITG’s long-term focus includes realizing the benefits of its global expansion, including reaching full production at the Company’s facilities in China, as described below.
The Company, a Delaware corporation incorporated in 1994, was formerly known as Safety Components International, Inc. (“SCI”). The Company combined with a company formerly known as International Textile Group, Inc. (“Former ITG”) in October 2006 (the “Merger”) in a negotiated transaction. Upon completion of the Merger, SCI changed its name to “International Textile Group, Inc.”
Former ITG was formed in August 2004 by certain entities affiliated with WL Ross & Co. LLC, our controlling stockholder (“WLR LLC”), to consolidate the businesses of leading textile and fabric manufacturers, including Burlington Industries, Inc. (a manufacturer of textile products for apparel and interior furnishing products) and Cone Mills Corporation (a manufacturer of textile products, primarily denim, for apparel and interior furnishing products).
ITG’s strategy is to be the preeminent global supplier of solution-based, value-added performance products and services for the textile supply chain. Combined with capabilities in the U.S., Mexico and China, the Company’s facilities are a key part of the Company’s comprehensive global supply chain solution that is intended to allow the Company to seamlessly supply products and related services to customers worldwide. We believe geographically aligning with our customers is a critical component of our success.
Products and Segments
The Company is organized and managed primarily according to product categories and manufacturing processes rather than by markets or end-use customers. The Company currently has four operating segments that are reported to the chief operating decision maker (“CODM”) and three reportable segments that are presented herein. The reporting of the Company’s operations to the CODM in four segments is consistent with how the Company is managed and how resources are allocated by the CODM.
Bottom-weight Woven Fabrics
The bottom-weight woven fabrics segment includes heavy weight woven fabrics with a high number of ounces of material per square yard. The Company produces apparel fabrics (including denim, cotton, synthetic and worsted) for use in garments, typically bottoms (i.e., pants or shorts). Demand for apparel fabric generally arises, directly or indirectly, from apparel wholesalers and retailers. Generally, wholesalers and retailers do not manufacture garments themselves, but instead they use “cut and sew” contractors who convert apparel fabric into finished garments. When an apparel wholesaler or retailer contracts for finished garments from the cut and sew contractors, they will usually specify which fabric manufacturers’ product is to be used. The cut and sew contractor then purchases apparel fabric directly from the designated fabric manufacturer.
Through its Cone Denim business unit, the Company manufactures and markets a wide variety of denim apparel fabrics for the global jeanswear market. Denims are generally “yarn-dyed,” which means that the yarn is dyed before the fabric is woven. The result is a fabric with variations in color that give denim its distinctive appearance. Denim fabrics are marketed under the Cone Denim® brand name to the premium and vintage jeanswear markets, where styling and innovation are important factors, as well as to the fashion and better basic jeanswear markets, where pricing is more important. The Company’s product developers and designers work directly with customers to provide differentiated denim products. In addition to a focus on product development, Cone Denim provides differentiated solutions to customers through its global network of plants and commercial ventures. This allows the Company to offer superior denim products to internationally known jeanswear brands and retailers who are seeking to differentiate themselves based on fashion, lifestyle branding and superior supply chain management.
Worsted and synthetic fabrics are marketed under the Burlington® WorldWide and Raeford® Uniform brand names. Worsted fabrics include 100% wool and wool blended fabrics primarily targeted at branded men’s apparel customers and the uniform career apparel trade. Worsted fabrics marketed under the Burlington WorldWide brand name are also produced for the military dress uniform business. The Company believes it is the largest producer of worsted fabrics for products produced for the U.S. military and fabrics protected by the Berry Amendment legislation, which generally requires that U.S. military uniform fabric be manufactured in the United States. Synthetic fabrics include 100% polyester, nylon and polyester blended fabrics with wool, rayon and spandex. These products are targeted for the production of men’s and women’s apparel, performance activewear and uniform career apparel. The Company also produces technical and value added fabrics used in a variety of niche industrial and commercial applications including highly engineered materials used in numerous applications and a broad range of industries, such as fire service apparel, ballistics materials, filtration, military fabrics and outdoor awnings and covers.
The Company owns and operates a dyeing and finishing plant in China, which supports the Company’s synthetic apparel business, primarily for customers who cut garments in the Eastern hemisphere. Targeted areas of growth for this plant include expansion of the protective barrier fabrics business as well as the activewear business in both the U.S. and Europe, increased commission processing of apparel and interior furnishings fabrics for other Chinese mills, and increased market share in the men's apparel business.
Through its automotive safety business, the Company produces automotive airbag fabrics, which are components of airbag modules. Component manufacturers such as the Company that sell their products to airbag module integrators are generally referred to as Tier 2 suppliers to the automotive industry. Airbag module integrators, which sell complete airbag modules to automobile manufacturers, are generally referred to as Tier 1 suppliers to the automotive industry. Tier 1 suppliers generally produce a majority of the components required for a complete airbag module, but outsource varying portions of non-proprietary components, such as airbag fabric and airbag cushions, to Tier 2 suppliers that specialize in the production of individual airbag components. The Company has positioned itself as one of only a limited number of independent airbag fabrics suppliers in North America, and also exports airbag fabric into Europe.
Commission Finishing
The Company manufactures fabrics for battle dress uniforms (camouflage) sold primarily to the U.S. government and to government contractors. The Company is a significant producer of military prints that are used to service the battle dress uniform business primarily for the U.S. government, but also for other governments and commercial interests. The Company believes it is one of the largest commission printers and finishers in North America. Commission textile dyeing, printing and finishing services are also provided by the Company for decorative fabrics and specialty prints. The Company’s capabilities in this business include preparation, surface enhancement, dyeing and finishing services.
All Other
The all other segment consists of operations related to transportation services and other miscellaneous items.
Discontinued Operations
On September 23, 2014, the Company completed the sale of the net assets related to Narricot Industries LLC (“Narricot”), and the Company deconsolidated all operations related to its ITG-Phong Phu Joint Venture facility in Vietnam (“ITG-PP”) as of May 25, 2012. The results of operations related to the Narricot and ITG-PP businesses are presented as discontinued operations for all periods presented in this Form 10-K. For more information regarding the sale of Narricot and the deconsolidation of ITG-PP, see Note 2 of the Notes to Consolidated Financial Statements.
Segment and Geographic Information
The Company generally attributes its revenues based on the shipping destination of products and attributes its long-lived assets to a particular country based on the location of the assets within each of the Company’s production facilities (see Item 2.
ITEM 2.
PROPERTIES
The Company’s corporate headquarters are located in Greensboro, North Carolina in a facility that is leased by the Company, and the Company owns all of its manufacturing facilities. The Company believes all facilities and machinery and equipment are in good condition and are suitable for the Company’s needs. The Company’s principal manufacturing and distribution facilities at December 31, 2015 are listed below:
PRINCIPAL PROPERTIES
____________
(1)
Bottom-weight woven fabrics segment
(2)
Commission finishing segment
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business and from time to time, we are involved in various pending or threatened legal proceedings. The Company may also be liable for environmental contingencies with respect to environmental cleanup activities. We cannot predict with certainty the outcome of any legal or environmental proceedings to which we are, or are threatened to become, a party. In our opinion, however, adequate liabilities have been recorded for losses that are probable to result from presently known and expected legal proceedings and environmental remediation requirements and are reasonably estimable. If such liabilities prove to be inadequate, however, it is reasonably possible that we could be required to record a charge to our earnings that could be material to our financial condition, results of operations and cash flows in a particular future period.
Primarily as a result of its production of automotive safety products, the Company is engaged in a business that could expose it to possible claims for injury resulting from the failure of its products. To date, however, the Company has not been named as a defendant in any automotive product liability lawsuit, nor has it been threatened with any such lawsuit. The Company maintains product liability insurance coverage, which management believes to be adequate. However, a claim brought against the Company resulting in a product recall program or a final judgment in excess of its insurance coverage could have a material adverse effect on the Company.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Company’s common stock is quoted on the OTC Markets Group Inc. over-the-counter “OTCQB” marketplace tier under the symbol “ITXN.” The OTCQB marketplace tier includes securities of companies in the OTC Markets Group Inc. electronic quotation system that are registered and current in their reporting with the applicable regulatory authority, such as the SEC. As a result of the significant concentration of stock ownership by affiliates of WLR LLC, as described elsewhere herein, there is only a limited public trading market in the Company’s common stock. There can be no assurances that an active trading market in the Company’s common stock will develop and, if it does develop, will be sustained. The following table sets forth the range of high and low bids on the common stock during each quarter within the years ended December 31, 2015 and 2014, respectively, as reported by the OTC Markets Group Inc. The prices in the table reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
As of February 29, 2016, there were approximately 340 holders of record of the Company’s common stock.
To date, the Company has not paid any cash dividends to its stockholders and does not currently have plans to do so in the foreseeable future. The Company intends to use earnings to fund its significant debt repayment obligations. Further, the Company’s various credit agreements (as described below) and certain other agreements by which the Company is bound may, from time to time, restrict the Company’s ability to pay dividends.
Equity Compensation Plan Information
In connection with the Merger, the Company assumed the Equity Incentive Plan (the “Equity Incentive Plan”) of Former ITG. No further grants of equity awards are authorized to be made under this plan, and as of December 31, 2015, a total of 1,679 shares may be issued under outstanding awards at a weighted average exercise price of $10.10 under this plan.
On April 1, 2008, the board of directors approved the Company’s 2008 Equity Incentive Plan (the “2008 Equity Plan”). Effective as of June 9, 2008, the stockholders of the Company approved and ratified the adoption of the 2008 Equity Plan. A total of 3,000,000 shares of the Company’s common stock and 1,000,000 shares of Series B convertible preferred stock (the “Series B Preferred Stock”) have been reserved for issuance under the 2008 Equity Plan. There have been no awards issued under the 2008 Equity Plan.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our Company
International Textile Group, Inc. (“ITG”, the “Company”, “we”, “us” or “our”) is a global, diversified textile manufacturer headquartered in Greensboro, North Carolina, with operations in the United States, Mexico, and China. The Company believes it is one of the world’s largest and most diversified producers of denim fabrics and the largest producer of better denim fabrics for products distributed through department stores and specialty retailers. In addition, the Company believes it is one of the largest worsted wool manufacturers and commission printers and finishers in North America, and is a leading developer, marketer and manufacturer of performance synthetic apparel fabrics, technical and value added fabrics, contract fabrics for interior furnishings, automotive safety fabrics, and other textile products used in a variety of niche industrial and commercial applications.
The Company is organized and managed primarily according to product categories and manufacturing processes rather than by markets or end-use customers. The Company currently has four operating segments that are reported to the chief operating decision maker (“CODM”) and three reportable segments that are presented herein. The bottom-weight woven fabrics segment consists of heavy weight woven fabrics with a high number of ounces of material per square yard, including woven denim fabrics, synthetic fabrics, worsted and worsted wool blend fabrics used for government uniform fabrics for dress U.S. military uniforms, airbag fabrics used in the automotive industry, and technical and value added fabrics used in a variety of niche industrial and commercial applications, including highly engineered materials used in numerous applications and a broad range of industries, such as for fire service apparel, ballistics materials, filtration, military fabrics and outdoor awnings and covers. The commission finishing segment consists of textile printing and finishing services for customers primarily focusing on decorative fabrics and specialty prints as well as government uniform fabrics primarily for battle fatigue U.S. military uniforms. The all other segment consists of expenses related to transportation services and other miscellaneous items. The narrow fabrics and ITG-PP businesses are presented as discontinued operations in the Company’s consolidated statements of operations for all periods presented in this report.
Strategy
ITG’s strategy is to be the preeminent global supplier of solution-based, value-added performance products and services for the textile supply chain. Combined with capabilities in the U.S. Mexico, and China, the Company’s facilities are a key part of the Company’s comprehensive global supply chain solution that is intended to allow the Company to seamlessly supply products and related services to customers worldwide. We believe geographically aligning with our customers is a critical component of our success.
Business and Industry Trends
The textile industry in general has seen a slowdown or leveling off of imports of textile products into the U.S. from other countries over the last few years due to, among other things, a narrowing of labor, energy and production cost differentials, the slowing pace of economic growth in China and an increased interest in U.S.-produced goods, partially offset in recent periods by lower shipping costs due to lower fuel prices and a strong U.S. dollar keeping the cost of foreign goods from rising. The strengthening of the U.S. dollar against the Mexican peso beginning in the fourth quarter of 2014 and continuing through 2015, as well as the devaluation of the Chinese yuan against the U.S. dollar beginning in the third quarter of 2015, have had a net positive effect on the Company’s operating expenses. Capital investment in the U.S. textile industry has increased in recent periods, compared to other domestic manufacturing spending which has decreased in certain sectors or remained flat overall. While improved consumer confidence and certain cyclical patterns in recent periods have led to gains in certain of our apparel fabrics businesses, competitive pressures, consolidations at the retail level affecting certain of our customers, the end or reduction of certain of our military programs, and continued uncertainty regarding longer-term macroeconomic growth prospects and the overall economic environment have negatively affected certain of our businesses. Uncertainty regarding unemployment levels, further government and municipal deficit reduction measures, and the prospects for sustained economic recovery continue to impact consumer and governmental spending, could have adverse effects in the significant markets in which we operate. The Company has taken, and expects to continue to take, steps to counter this continued economic uncertainty. These actions include, among other things, implementing cost saving initiatives and sourcing decisions, negotiating higher sales prices for certain products, negotiating new working capital and other financing arrangements, focusing on new product development, and a focus on consistent productivity improvements.
The Company’s bottom-weight woven fabrics segment has historically entered into firm purchase commitments for cotton and wool commodity raw materials, the principal raw materials used in the Company’s manufacture of apparel fabrics. Such non-cancellable firm purchase commitments are secured to provide the Company with a consistent supply of a commercially acceptable grade of raw materials necessary to meet expecting operating requirements as well as to meet the product specifications and sourcing requirements of anticipated future customer orders. While there has been some volatility in cotton pricing historically, pricing has stabilized over the last 18 months, in part due to Chinese release of supply resulting from an over accumulation of cotton reserves in past years. Despite general expectations for the 2015/2016 crop year to result in greater consumption than production, significant worldwide cotton inventories are expected to keep downward pressure on cotton futures prices. The price of the primary synthetic fibers and dyes and chemicals used in the Company’s products, nylon and polyester, is heavily influenced by petroleum prices which have also fluctuated over the last several years, also resulting in fluctuations in the Company’s gross margins. In response to increases in raw material or dyes and chemical costs in the open market or under our committed purchase contracts, we generally attempt to increase sales prices in order to maintain sufficient margins. However, if we incur increased raw material or other costs that we are unable to recoup through price increases, or experience interruptions in our raw materials supply, our business, results of operations, financial condition and cash flows may be materially adversely affected.
Restructuring Charges
Restructuring charges for 2014 included severance and other termination benefits and related costs of $3.0 million related to the restructuring of the Company’s executive structure, as well as severance and other termination benefits of $0.1 million due to workforce reductions at our worsted wool fabric manufacturing facility in Mexico.
Results of Operations
Net sales and income from continuing operations before income taxes for the Company’s reportable segments are presented below (in thousands). The Company evaluates performance and allocates resources based on profit or loss before interest, income taxes, restructuring and impairment charges, certain unallocated corporate expenses, and other income (expense) - net. Intersegment sales and transfers are recorded at cost or at arms’ length when required by certain transfer pricing rules. Intersegment net sales for 2015 and 2014 were primarily attributable to commission finishing sales of $0.5 million and $0.3 million, respectively.
Comparison of Year Ended December 31, 2015 to Year Ended December 31, 2014
Consolidated: Consolidated net sales in 2015 and 2014 were $610.4 million and $595.4 million, respectively. Higher sales volumes resulting from increased demand for denim and new programs in the worsted wool non-government uniform fabrics, higher sales volumes and an improved product mix related to new patterns in the commission finishing business, and higher selling prices and an improved product mix in the technical fabrics and synthetic fabrics businesses were partially offset by lower demand in the synthetic fabrics business, decreased sales volumes resulting from U.S. governmental budget constraints and program changes affecting certain military uniform businesses, competitive pressures in the airbag business, governmental budget constraints, and employment declines in the oil and gas industry affecting certain technical fabrics businesses, as well as lower selling prices and a less favorable product mix primarily in the denim and municipal government wool uniform businesses due to lower cotton costs, fashion shifts, and competitive pricing pressures.
Gross profit in 2015 was $87.6 million, or 14.4% of net sales, compared to $71.4 million, or 12.0% of net sales, in 2014. Gross profit margins increased primarily due to lower raw material and energy costs, higher sales volume in the Company’s denim fabric and municipal government wool fabric businesses, lower manufacturing costs due to higher production, higher selling prices and an improved product mix in the synthetic fabrics, technical fabrics and U.S. government wool uniform businesses, as well as favorable impacts from changes in foreign currency exchange rates. Such improvements were partially offset by lower selling prices and a less favorable product mix primarily in the denim and municipal government wool uniform businesses, higher labor costs, as well as lower sales volumes in the U.S. government wool uniform, synthetic fabrics, technical fabrics and airbag businesses. Operating income in 2015 was $42.9 million compared to $25.8 million in 2014. Operating income increased in 2015 as compared to the prior year period primarily due to the higher gross profit margins described above, lower restructuring charges of $3.1 million, and higher gains on disposal of property, plant and equipment of $0.8 million, partially offset by higher selling and administrative expenses of $2.1 million and a note receivable impairment charge of $1.2 million, each as described below.
Bottom-weight Woven Fabrics: Net sales in the bottom-weight woven fabrics segment were $568.2 million in 2015 compared to $563.2 million in 2014. The increase in net sales of $5.0 million was primarily due to higher sales volumes of $29.7 million from increased demand for denim and new programs in the wool uniform business, as well as $13.2 million resulting from higher selling prices and an improved product mix in the technical fabrics and synthetic fabrics businesses. Such improvements were partially offset by lower sales volumes of $15.2 million primarily resulting from lower demand and program changes in the synthetic fabrics business, U.S. governmental budget constraints and program changes affecting certain military wool uniform fabrics businesses, competitive pressures in the airbag business, and governmental budget constraints, military program shifts and declines in the oil and gas industry affecting certain technical fabrics businesses, as well as lower selling prices and a less favorable product mix of $22.9 million primarily in the denim and municipal government wool uniform businesses due to lower cotton costs, fashion shifts, and competitive pricing pressures.
Income in the bottom-weight woven fabrics segment was $49.0 million in 2015 compared to $34.4 million in 2014. The increase in income was primarily due to lower raw material and energy costs of $33.3 million, higher sales volumes in the Company’s municipal government wool fabric and denim fabric businesses of $4.6 million, $1.6 million of lower manufacturing costs due to increased production, higher selling prices and an improved product mix of $8.1 million in the synthetic fabrics, technical fabrics and U.S. government wool uniform businesses, as well as favorable impacts from changes in foreign currency exchange rates of $6.2 million. These increases were partially offset by lower selling prices and a less favorable product mix of $22.6 million primarily in the denim and municipal government wool uniform businesses, $8.7 million of lower sales volumes in the U.S. government wool uniform, synthetic fabrics, technical fabrics and airbag businesses, and higher selling and administration and labor costs of $7.9 million.
Commission Finishing: Net sales in the commission finishing segment were $41.9 million in 2015 compared to $31.7 million in 2014. The increase was primarily due to higher sales volumes and an improved product mix of $11.6 million related to new patterns as well as new customers in the segment’s governmental business, partially offset by $1.4 million of lower sales volumes and a less favorable product mix related to certain other commission finishing apparel markets. The commission finishing segment reported income from operations of $2.9 million in 2015 compared to $1.5 million in 2014, with such increase primarily due to higher sales volumes and an improved product mix in the segment’s governmental business, partially offset by higher labor costs, quality issues related to certain equipment in the first quarter of 2015, lower sales volumes and a less favorable product mix in certain commission finishing markets, and higher bad debt expense.
All Other: Net sales in the all other segment were $0.8 million and $0.9 million in 2015 and 2014, respectively, which primarily represented sales in the Company’s transportation business.
SELLING AND ADMINISTRATIVE EXPENSES: Consolidated selling and administrative expenses (including amounts allocated to the Company’s reportable segments discussed above and bad debt expense or recoveries) were $47.9 million in 2015 and $45.8 million in 2014. As a percentage of net sales, this expense was 7.8% in 2015 compared to 7.7% in 2014. Lower costs for salaries, employee disability expense, employee prescription drug claims, professional fees, insurance expense and outside sales commissions were offset by higher costs related to employee medical claims, higher incentive compensation expense, and bad debt expenses.
OTHER OPERATING INCOME-NET: Other operating income-net primarily includes grant income from the U.S. Department of Agriculture Wool Trust Fund of $3.2 million in 2015 and $3.0 million in 2014. Other operating income-net in 2015 and 2014 also includes net gains related to the disposal of other miscellaneous property and equipment of $1.1 million and $0.4 million, respectively.
IMPAIRMENT CHARGE: In 2014, the Company completed the sale of certain assets in the Company’s former narrow fabrics segment. The sale price included a three-year secured promissory note for $3.2 million which was deemed by the Company to be impaired during 2015. The Company recorded an impairment charge of $1.2 million in 2015 based on various appraisals and offers for the collateral underlying this note.
RESTRUCTURING CHARGES: Restructuring charges for 2014 included severance and other termination benefits and related costs of $3.0 million related to the restructuring of the Company’s executive structure, as well as severance and other termination benefits of $0.1 million due to workforce reductions at our worsted wool fabric manufacturing facility in Mexico.
INTEREST EXPENSE: Interest expense was $27.4 million in 2015 in comparison with $28.8 million in 2014. The decrease was primarily due to lower outstanding balances under the Company’s U.S. revolving credit facility and lower outstanding balances related to certain of the Company’s term loans due to scheduled and early repayments of such loans, and lower interest rates as a result of recent refinancings of certain of the Company’s bank credit facilities, partially offset by new term loans at the Company’s Parras Cone subsidiary related to the purchase of a new equipment and the construction of a natural gas powered cogeneration facility. The magnitude of such net decrease is lessened due to the fact that interest expense in 2014 was reduced by the cancellation, as of December 31, 2013, of $21.9 million in principal and accrued interest of the Company’s related party Tranche B Notes under a previously disclosed Stipulation and Settlement Agreement entered into by the Company in February 2014, which received court approval on August 29, 2014. Non-cash related party payable in-kind interest expense was $20.5 million in 2015 and $18.1 million in 2014 including the effect of the above legal settlement recorded in 2014.
OTHER INCOME (EXPENSE)-NET: In 2014, the Company recorded a gain of $9.4 million on the sale of its 50% equity interest in its Summit Yarn joint ventures. In 2014, the Company recorded a net recovery of $0.9 million in third party legal fees not related to current operations and recorded a $3.8 million recovery of such legal fees under a previously disclosed Stipulation and Settlement Agreement, resulting in a net gain of $4.7 million. Other income (expense) - net in 2015 and 2014 also included net foreign currency exchange gains of $2.3 million and net foreign currency exchange losses of $0.1 million, respectively, related to the Company’s operations in Mexico and China, as well as unrealized net gains on certain derivative instruments of $0.2 million in 2015.
INCOME TAX EXPENSE: Income tax expense was $1.1 million in 2015 compared to $3.5 million in 2014. Income tax expense in 2015 and 2014 reflects current and deferred income tax expense primarily related to the Company’s profitable subsidiaries in Mexico, including taxable income which is generated under that country’s maquiladora export assembly program. Income tax expense in 2015 also reflects a net decrease in the valuation allowance and the expiration of certain tax attributes of $5.5 million primarily related to profitable operations during the period, income tax expense of $3.3 million related to the negative impact of local foreign currency adjustments related to U.S. dollar-denominated net assets in Mexico and China, other foreign tax adjustments of $3.3 million, and state income tax expense and other U.S. tax adjustments of $0.2 million. Income tax expense in 2014 also reflects a net decrease in the valuation allowance of $8.0 million partially offset by other foreign tax adjustments in Mexico of $5.2 million, $2.1 million related to the negative impact of local foreign currency adjustments related to U.S. dollar-denominated net assets in Mexico, and state income tax expense and other U.S. tax adjustments of $0.2 million. The Company has recorded valuation allowances to reduce the U.S. and certain foreign deferred tax assets for the portion of the tax benefit that management considers that it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of these deferred tax assets will be dependent upon the generation of future taxable income in the jurisdictions in which these deferred tax assets were recognized.
DISCONTINUED OPERATIONS: Loss from discontinued operations in 2015 included less than $0.1 million related to the planned disposition of the assets of the idled ITG-PP facility. Loss from discontinued operations in 2014 included $6.4 million related to the Narricot business, including the loss on the disposal of its net assets of $0.5 million, and $0.1 million related to the planned disposition of the assets of the idled ITG-PP facility.
Liquidity and Capital Resources
The Company has a significant amount of debt outstanding and will require substantial cash flows to service this debt in future periods. A substantial portion of the Company’s debt, $73.4 million at December 31, 2015, is payable by various of the Company’s subsidiaries organized in foreign jurisdictions and is non-recourse to the ITG parent company. In addition, a substantial portion of the Company’s debt, $181.4 million at December 31, 2015, is payable to related parties, namely certain entities affiliated with WLR LLC, with a maturity date of June 30, 2019.
The Company amended or refinanced certain credit agreements in the fourth quarter of 2014 to extend the maturities of certain instruments to 2019 and lower interest rates on outstanding debt in the U.S. In January 2015, the Company’s subsidiaries in Mexico refinanced their outstanding term loans by entering into new term loan agreements resulting in outstanding amounts becoming due in January 2020. As a component thereof, the Company’s Parras Cone subsidiary obtained an option to increase borrowings by up to $7.0 million until January 2016; such option was reduced to $4.0 million upon the execution of an additional term loan facility in July 2015 as described below, and Parras Cone has borrowed the full $4.0 million against this commitment. In July 2015, Parras Cone entered into an additional six year, $7.0 million term loan agreement with proceeds to be used to build a natural gas powered cogeneration facility at its plant location in Mexico. Parras Cone can draw upon this $7.0 million commitment until July 2016. Through the date hereof, Parras Cone has borrowed $4.2 million against this $7.0 million commitment. In August 2015, Parras Cone entered into a revolving credit agreement that provides for borrowing availability of up to $18.0 million through August 2018. This agreement replaced its $18.0 million revolving receivables factoring agreement. In February 2016, Parras Cone entered into an additional 66 month, $2.5 million term loan agreement with proceeds to be used to purchase new machinery and equipment. During the third quarter of 2015, the Company’s Cone Denim Jiaxing subsidiary in China fully repaid its term loan prior to its scheduled maturity date.
The following table presents a summary of the Company’s debt obligations payable to unrelated third parties as of December 31, 2015 (in thousands). Amounts in the column labeled “U.S.” represent debt guaranteed by, or otherwise with recourse to, the ITG parent company. Amounts in the column labeled “International” represent debt of various of the Company’s international subsidiaries, but not guaranteed by, or with recourse to, the ITG parent company.
The ITG parent company (U.S.) has also guaranteed an additional $5.3 million of certain of the above international debt through stand-by letters of credit, which amounts are not included in the table above.
Notwithstanding the non-recourse nature of a significant portion of the debt in the table above, the failure by any of the Company’s international subsidiaries to timely meet their respective obligations when due could also materially adversely impact the Company’s ability to maintain its foreign operations, and result in the Company incurring significant non-cash impairment or other charges or have a material adverse effect on the Company’s ability to execute on its strategy.
During 2015, the Company’s principal sources of funds consisted of proceeds from net sales, net borrowings under revolving loans, and term loans and short term borrowings under bank financing facilities. The Company’s principal uses of cash during 2015 were to fund working capital needs which are generally lower at the beginning of the year and the end of the year due to seasonality and increase during the year to support mid-year sales, capital expenditures, pension plan contributions, and payment of principal, interest and fees on various indebtedness, and the Company expects that its cash uses in the foreseeable future will be for similar matters. Based on current expectations, we believe that the cash on hand, cash flow expected to be generated by our operations and funds available under our credit facilities and short-term borrowings should be sufficient to service our debt payments requirements in the near term, to satisfy our day-to-day working capital needs and to fund our planned capital expenditures. Any material deterioration in our results of operations, however, may result in a material reduction in cash from operations, our losing the ability to borrow under our U.S. revolving credit facility or replenish our short-term borrowings currently in place. Our success in generating future cash flows will depend, in part, on our ability to increase our sales, manage working capital efficiently, continue to reduce operating costs at our plants, and increase selling prices to offset any increase in raw material or other costs in all segments of our business.
In the event that the Company or one of its subsidiary borrowers is not able to timely meet its obligations under any financing agreement, a lender or other secured party may have rights to proceed against any collateral securing such obligations. The Company has estimated that the fair value of the collateral securing its obligations is sufficient to satisfy such debt obligations. However, the Company expects that if it is not timely able to meet its obligations under a financing agreement, it will seek to amend those agreements, or enter into replacement financing arrangements to satisfy its obligations. There can be no assurances as to the availability of any necessary long-term financing and, if available, that any potential source of long-term financing would be available on terms and conditions acceptable to the Company. The inability to complete any necessary financings at times, and on terms, acceptable to the Company, or the exercise of any available remedies by lenders, which could result in the acceleration of such indebtedness or, in some instances, the right to proceed against the underlying collateral, would negatively affect the Company’s ability to execute on its strategy and have a material adverse effect on the Company’s financial condition and future results of operations.
Comparison of Cash Flows for Year Ended December 31, 2015 to Year Ended December 31, 2014
OPERATING ACTIVITIES: Net cash provided by operating activities was $51.0 million in 2015 compared to $32.4 million in 2014. Cash flows from operating activities in 2015 were positively impacted by improved gross margins primarily as the result of lower raw material costs, the favorable impact from changes in foreign currency exchange rates and higher sales volumes in certain businesses, lower days sales outstanding in accounts receivable, lower cash tax payments, lower cash interest payments, as well as the elimination of net cash outflows related to the disposed Narricot business, partially offset by cash received as a part of a previously disclosed Stipulation and Settlement Agreement in 2014.
INVESTING ACTIVITIES: Net cash used in investing activities was $19.5 million in 2015 compared to net cash provided by investing activities of $1.8 million in 2014. Capital expenditures and deposits related to purchases of equipment were $20.2 million in 2015 and $13.1 million in 2014. Capital expenditures and deposits for equipment in 2015 were primarily related to upgrading equipment at our U.S. and Mexico facilities in 2015 and at our Mexico facilities in 2014, to support our manufacturing and cost reduction efforts in the bottom-weight woven fabrics segment. As we continue with our upgrading and cost reduction plans, we expect to spend approximately $22.0 million to $23.0 million on capital expenditures during all of 2016, including in connection with the construction of the above referenced natural gas powered cogeneration facility in Mexico. In 2014, the Company received net cash proceeds of $9.6 million and $4.2 million from the sale of Summit Yarn and the Narricot business, respectively. In 2015 and 2014, the Company received net cash proceeds of $0.8 million and $0.7 million, respectively, from the sale of other property, plant and equipment. Investing activities also included $0.1 million of investments in the Company’s unconsolidated affiliates in 2015, and $0.4 million of distributions from the Company’s unconsolidated affiliates in 2014.
FINANCING ACTIVITIES: Net cash used in financing activities of $27.5 million in 2015 includes the full repayment of $12.6 million outstanding under the Company’s factoring loan facility in Mexico, net repayments of short-term bank borrowings of $9.2 million, proceeds from the issuance of term loans of $8.2 million, repayment of term loans and capital lease obligations of $13.3 million, net repayments under revolving lines of credit of $0.4 million, and the payment of financing fees of $0.2 million. Net cash used in financing activities of $28.3 million in 2014 reflects mainly the net repayment of borrowings under revolving lines of credit of $22.2 million primarily using proceeds from the sale of Summit Yarn, the sale of the Narricot business and proceeds from the payment as a part of a previously disclosed Stipulation and Settlement Agreement, the repayment of term loans and capital lease obligations of $15.1 million, proceeds from the issuance of term loans of $9.5 million, net short-term bank borrowings of $0.6 million related mainly to the Company’s denim operations, and the payment of financing fees of $0.9 million.
See Notes 8 and 13 of the Notes to Consolidated Financial Statements included herein for a discussion of the Company’s long-term debt, short-term borrowings and preferred stock.
Commitments
As of December 31, 2015, the Company had raw material and service contract commitments totaling $34.0 million and capital expenditure commitments of $11.5 million related to new looms and other equipment upgrades at various U.S. and foreign plant locations not reflected as liabilities on the accompanying consolidated balance sheet. In July 2015, the Company committed to build a new natural gas generation facility at the Company’s Parras Cone plant location in Mexico. Construction of the natural gas facility began in August 2015 and is expected to be completed by the third quarter of 2016.
At December 31, 2015, the frozen Burlington Industries defined benefit pension plan had an actuarially determined projected benefit obligation in excess of plan assets of approximately $10.5 million. The Company contributed $2.5 million to this plan during each of fiscal year 2015 and 2014. The Company estimates making total contributions to this plan in the range of $1.1 million to $1.5 million in 2016, with such lower estimated funding amounts in 2016 primarily due to certain actuarially determined shortfall calculations from previous years becoming fully amortized in 2015. Actual future contributions will be dependent upon, among other things, plan asset performance, the liquidity of the plan assets, actual and expected future benefit payment levels (which are partially dependent upon employment reductions, if any, which may occur during any business restructuring) and other actuarial assumptions.
Off-Balance Sheet Arrangements
As of December 31, 2015, the Company and various consolidated subsidiaries of the Company were borrowers under various bank credit agreements (collectively, the “Facilities”). Certain of the Facilities are guaranteed by either the Company and/or various consolidated subsidiaries of the Company. The guarantees are in effect for the duration of the related Facilities. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 460, “Guarantees,” provides guidance on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued and specific disclosures related to product warranties. The Company does not provide product warranties within the disclosure provisions of FASB ASC 460. The Company did not have any off-balance sheet arrangements that were material to its financial condition, results of operations or cash flows as of December 31, 2015 or 2014, except as noted below.
In 2011, the Company entered into a Guaranty of Payment (as amended and restated, the “Guaranty”) in favor of WLR Recovery Fund IV, L.P. (“Fund IV”), which is controlled by WLR LLC. One member of our board of directors is also affiliated with various investment funds controlled by WLR LLC (collectively, the “WLR Affiliates”) that directly own a majority of our voting stock. As of December 31, 2015, Cone Denim (Jiaxing) Limited had outstanding short-term working capital loans from various Chinese financial institutions, including approximately $1.1 million guaranteed by a $1.4 million standby letter of credit with Fund IV pursuant to the Guaranty. The obligations of the Company under the Guaranty are payable in cash or, if cash is not permitted to be paid pursuant to the terms and conditions of the 2011 Credit Agreement and related documentation, then such amounts are payable in additional Tranche B Notes. Also pursuant to the Guaranty, the Company is required to pay a per annum amount equal to 10% of the amount of any such outstanding letters of credit. In 2015 and 2014, the Company incurred guarantee fees of $0.2 million and $0.6 million, respectively.
Derivative Instruments
Derivative instruments used periodically by the Company for foreign currency, cotton, wool and natural gas purchases consist primarily of forward purchase contracts. The Company does not utilize financial instruments for trading or other speculative purposes. The Company has historically qualified for the “normal purchases exception” under GAAP for derivatives related to its cotton and wool forward purchase contracts and certain of its natural gas contracts and, as a result, these derivative instruments are not marked to market in the Company’s consolidated financial statements. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currency, the U.S. dollar. The Company periodically uses certain derivative financial instruments to reduce exposure to the volatility of certain foreign currencies and has designated certain of such instruments as cash flow hedges under hedge accounting rules in 2015 and 2014. The Company did not designate its natural gas derivative contracts or its Euro foreign currency derivative contracts as hedges for any of the periods presented herein. The fair value of net derivative liabilities recognized in the December 31, 2015 and 2014 consolidated balance sheets were $2.3 million and $0.8 million, respectively. The total amount, net of income taxes, of net losses on derivative instruments recognized in the consolidated statements of operations was $3.8 million in 2015 and the total amount of net gains on derivative instruments recognized was less than $0.1 million in 2014. The amount, net of income taxes, recognized in other comprehensive loss related to the effective portion of derivative instruments was a loss of $1.3 million in 2015 and a loss of $0.5 million in 2014.
Seasonality
The strongest portion of the consumer apparel sales cycle is typically March through November as customers target goods to be sold at retail for the back-to-school fall, holiday and spring seasons. Consumer apparel fabric sales have become increasingly seasonal, as well, as customers have begun to rely more upon contract sewing and have sought to compress the supply cycle to mirror retail seasonality. Sales in the Company’s other businesses are generally not seasonal and can vary based on numerous factors. Our consolidated net sales from continuing operations in each of the first, second, third and fourth quarters of 2015 represented 23%, 26%, 26% and 25%, respectively, of our total net sales from continuing operations for the year.
Working capital requirements vary throughout the year. Working capital generally increases during the first half of the year as inventory builds up to support peak shipping periods and then moderates during the second half of the year, particularly during the fourth quarter, as those inventories are sold and accounts receivable are collected. Cash provided by operating activities is generally higher in the second half of the year due to generally higher earnings during that period and reduced working capital requirements.
Critical Accounting Policies, Assumptions and Use of Estimates
Management’s Discussion and Analysis of the Company’s Financial Condition and Results of Operations is based upon the Company’s consolidated financial statements. The consolidated financial statements of the Company are prepared in conformity with GAAP. The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make decisions that impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the valuation of trade receivables, inventories, goodwill and other intangible assets, impairment of long-lived assets, income taxes, and insurance costs, among others. These estimates and assumptions are based on managements’ best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including an evaluation of the current global economic climate. Management monitors economic conditions and other factors and adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile foreign currency and equity values and continued uncertainties in the global economic environment have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results may differ from these estimates under different assumptions or conditions. Changes in these estimates resulting from changes in one or more of these factors, or in the general economic environment or any other relevant factor will be reflected in the financial statements in the period in which such change occurs. The Company’s management believes the critical accounting policies listed below are the most important to the fair presentation of the Company’s financial condition and results of operations. These policies require the most significant judgments and estimates of the Company’s management in the preparation of the Company’s consolidated financial statements.
Revenue Recognition. Sales are recorded upon shipment or delivery, depending on when title and the risks and rewards of ownership passes, to unaffiliated customers, collectability is reasonably assured and pricing is fixed or determinable. The Company classifies amounts billed to customers for shipping and handling in net sales, and costs incurred for shipping and handling in cost of sales in the consolidated statement of income. Accruals are made for sales and other allowances based on the Company’s experience. Taxes assessed by a governmental authority that are imposed directly on a revenue-producing transaction are presented on a net basis in the consolidated statements of income.
Accounts Receivable, Net. Trade accounts receivable are recorded at the invoiced amount and bear interest in certain cases that is recognized as the interest is received. The Company continuously performs credit evaluations of its customers, considering numerous inputs including, but not limited to, each customer’s financial position; past payment history; cash flows; management capability; historical loss experience; and general and industry economic conditions and prospects. The Company estimates its allowance for doubtful accounts based on a combination of historical and current information regarding the balance of accounts receivable, as well as the current composition of the pool of accounts receivable. The Company determines past due status on accounts receivable based on the contractual terms of the original sale. Accounts receivable that management believes to be ultimately uncollectible are written off upon such determination. While our credit losses have historically been within our calculated estimates, it is possible that future losses could differ significantly from those estimates. The Company records sales returns as a reduction to sales, cost of sales, and accounts receivable and an increase to inventory based on return authorizations for off-quality goods. Returned products that are recorded as inventories are valued based upon expected realizability. We do not believe the likelihood is significant that materially higher bad debt losses or sales returns will occur based on prior experience.
Inventories. Inventories represent direct materials, labor and overhead costs incurred for products not yet delivered or returned. Inventories are valued at the lower of cost or market value using the FIFO method. ITG reviews its inventory on a quarterly basis to identify excess or slow moving products, discontinued and to-be-discontinued products, and off-quality merchandise. For those items in inventory that are so identified, ITG estimates their market value based on historical and expected realization trends. This evaluation requires forecasts of future demand, market conditions and selling prices. If the forecasted market value is less than cost, ITG writes down its inventory to reflect the lower value of that inventory. This methodology recognizes inventory exposures at the time such losses are evident rather than at the time goods are actually sold. However, if actual market conditions and selling prices were less favorable than we project, additional inventory write downs may be necessary.
Valuation of Long-lived Assets. In accordance with FASB ASC 360, “Property, Plant, and Equipment”, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. For assets held and used, an impairment may occur if projected undiscounted cash flows are not in excess of the carrying value of the assets. In such cases, additional analysis is conducted to determine the amount of loss to be recognized. The impairment loss is determined by the difference between the carrying amount of the asset and the fair value measured by the estimated future discounted cash flows or prices for similar assets. The analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical to determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. The Company reviews the estimated useful lives of intangible assets when impairment testing is performed. If events and circumstances warrant a change in the estimated useful life, the remaining carrying amount is amortized over the revised estimated useful life. Should business conditions deteriorate, which could impact our estimates of future cash flows and fair value, there exists the potential that additional impairment charges could be required, which charges could have a material adverse effect on our consolidated financial statements.
Goodwill, Intangible Assets and Deferred Charges. Goodwill represents the excess of cost over the fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB ASC 350, “Intangibles-Goodwill and Other”. The Company performs its annual goodwill impairment testing as of October 1 of each fiscal year, and the Company also tests goodwill for impairment between annual tests if events occur or circumstances change that raise questions about recoverability.
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives. The Company continually monitors conditions that may affect the carrying value of its intangible assets. When conditions indicate a potential impairment of such assets, the Company evaluates the estimated fair value of the assets. When the estimated fair value of an asset is less than the carrying value of the asset, the impaired asset is written down to its estimated fair value, with a charge to operations in the period in which impairment is determined. Should future business conditions deteriorate, which could impact our estimates of future cash flows and fair value, there exists the potential that additional impairment charges could be required, which charges could have a material adverse effect on our consolidated financial statements.
Costs incurred in connection with line-of-credit financing activities are deferred and amortized over the lives of the respective financing instruments using the straight-line method, which approximates the effective interest rate method, and are charged to interest expense. Recognition of such deferred costs may be accelerated upon certain modifications or exchanges of the underlying financing instruments.
Insurance. Insurance liabilities are recorded based upon the claim reserves established through actuarial methods and estimates, as well as historical claims experience, demographic factors, severity factors, expected trend rates and other actuarial assumptions. To mitigate a portion of its insurance risks, the Company maintains insurance for individual claims exceeding certain dollar limits. Provisions for estimated losses in excess of insurance limits are provided at the time such determinations are made. The accruals associated with the exposure to these liabilities, as well as the methods used in such evaluations, are reviewed by management for adequacy at the end of each reporting period and adjustments, if any, are currently reflected in earnings. Actual costs may vary from these estimates.
Commitments and Contingencies. Liabilities for loss contingencies, including environmental remediation costs not within the scope of FASB ASC 410, “Asset Retirement and Environmental Obligations”, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies, net of estimated insurance recoveries, are expensed as incurred. Any recoveries of costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related liability, in accordance with FASB ASC 210-20, “Balance Sheet - Offsetting”. The Company accrues for losses associated with environmental remediation obligations not within the scope of FASB ASC 410 when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
Income Taxes. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions, the most significant of which are Mexico and China. Income taxes are accounted for under the rules of FASB ASC 740, “Income Taxes”, and a full income tax provision is computed for each reporting period. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change in rate. A valuation allowance is provided for deferred income tax assets when, in the opinion of management, it is more likely than not that some or all of its deferred income tax assets will not be realized. In evaluating the expected future realization of its deferred income tax assets, ITG considers both positive and negative evidence related to expected future reversals of existing taxable temporary differences, projections of future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years, and potential tax-planning strategies. The Company records interest and penalties related to income tax settlements in income tax expense in the consolidated statement of income. Significant judgments are required in order to determine the realizability of the deferred income tax assets. Changes in the expectations regarding the realization of deferred income tax assets could materially impact income tax expense in future periods. For uncertain income tax positions on the Company’s income tax returns, the Company first determines whether it is more likely than not that each income tax position would be sustained upon audit. The Company then estimates and measures any tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities. If the Company later modifies its evaluations, the Company records the related changes in the tax provision during the period in which such determinations are made.
For a discussion of recently adopted accounting pronouncements that are of significance, or potential significance, to the Company, see “Recently Adopted Accounting Pronouncements” in Note 1 to the Company’s consolidated financial statements included elsewhere herein.
For a discussion of recently issued accounting pronouncements that are of significance, or potential significance, to the Company, see “Recently Issued Accounting Pronouncements” in Note 1 to the Company’s consolidated financial statements included elsewhere herein.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item appears in Items 15(a) (1) and (2) of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management, under the supervision and with the participation of its principal executive and principal financial officer, conducted an evaluation as of the end of the period covered by this report, of the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of such date.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined by Exchange Act Rule 13a-15(f), for the Company. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the direction of the Company’s principal executive officer and principal financial officer, management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 in accordance with the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has concluded that such internal control over financial reporting was effective as of December 31, 2015.
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the permanent exemption from the internal control audit provided for certain filers under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
The following table provides the names, ages and positions of the individuals who currently serve as members of the board of directors, or as executive officers, of the Company.
Kenneth T. Kunberger is the President and Chief Executive Officer, and a director of the Company. He has held this position since May 2014. Previously, he was Chief Operating Officer of the Company, a position he held since December 2011. Prior to that, he served as President of ITG Apparel & Specialty Fabrics Group for the Company, a position he held since January 2009 and prior to that, was President of the Burlington Worldwide division of ITG from the completion of the Merger to January 2009. Prior thereto, he held that position with Former ITG from its inception in August 2004. Prior to that, he served as Executive Vice President, Sales and Marketing, of the Sportswear and Casualwear divisions of Burlington Industries from 1998 to 2002, as President of Burlington Industries Worldwide-North America division from 2002 to 2004, and as President of Burlington Industries’ Apparel Fabrics division in 2004. Through his more than 30 years of experience in the textile industry, Mr. Kunberger has significant experience with, and an understanding of, the management of multi-location, global operations, including specifically with respect to manufacturing, marketing and sales issues and the operational and organizational issues involved. In addition, as our chief executive officer, he is uniquely able to advise the board of directors on the opportunities and challenges of managing the Company, as well as its day-to-day operations and risks.
Robert E. Garren is Vice President, Human Resources and Corporate Communications of the Company. Mr. Garren has been Vice President, Human Resources and Corporate Communication of ITG since the completion of the Merger. Prior thereto, he held those positions with Former ITG from its inception in August 2004. Prior to that, he served as Vice President, Human Resources and Corporate Communications of Burlington Industries from 2003 to 2004 and as Director of Compensation and Benefits of Burlington Industries from 1998 to 2003.
Craig J. Hart is Vice President and Treasurer of the Company. Mr. Hart joined ITG in December 2007 from Remy International, Inc., a manufacturer of various electrical and automotive components and parts, where he had served as Treasurer since 2004. Mr. Hart joined Remy International, Inc. in February 1997. Previously, he worked for Pontarelli Builders, a contractor and construction company, as Director of Financial Services and prior thereto, at a family wealth management office in Chicago, IL in various financial roles.
Neil W. Koonce is Vice President, General Counsel and Secretary of the Company. Mr. Koonce has been the Vice President and General Counsel of the Company since the completion of the Merger and has been the Secretary of the Company since January 2012. Prior to the Merger, he was the Vice President and General Counsel of Former ITG from its inception in August 2004. Mr. Koonce served as General Counsel of Cone Mills Corporation from 1987 to 1989, General Counsel and Vice President of Cone Mills Corporation from 1989 to 1999 and Vice President, General Counsel and Secretary of Cone Mills Corporation from 1999 to 2004.
Gail A. Kuczkowski is Executive Vice President and Chief Financial Officer. She has held these positions since December 2011. Previously, she held the position of Vice President and Chief Accounting Officer since joining the Company in January 2008. On April 17, 2009, Ms. Kuczkowski was also designated as the officer performing the functions of the principal financial officer of the Company. Prior to joining the Company, Ms. Kuczkowski served as Director, Global Accounting at INVISTA, an integrated fiber and polymers business, from September 2006 and as Assistant Corporate Controller from May 2004 until September 2006. Prior thereto, she served as Chief Financial Officer for US/Canada of KoSa, a producer of commodity and specialty polyester fibers, polymers and intermediates, from December 2002 to May 2004. Ms. Kuczkowski began her career at Price Waterhouse (now PricewaterhouseCoopers), a public accounting and financial consulting firm.
James W. Payne is President of the Carlisle Finishing LLC business segment and his responsibilities also currently include the manufacturing operations of Burlington Finishing and effective November 1, 2014, Safety Components facilities of the Company. Mr. Payne’s responsibilities also included Narricot Industries LLC until the business was sold in September 2014. Mr. Payne has been the President of the Carlisle Finishing LLC business since January 2007. Previously he was President of the Carlisle Finishing division and held that position since the completion of the Merger. Prior to that, Mr. Payne was the President of the Carlisle Finishing division of Former ITG since 2005 and Executive Vice President of the Carlisle Finishing division of Former ITG from August 2004 to 2005. Prior to that, he served as Executive Vice President of the Carlisle Finishing division of Cone Mills from 1997 to 2004.
Jeffrey H. Peck is President of the Burlington Worldwide Group and has served in this role since January 2012. Previously he oversaw the Apparel and Specialty Fabrics division and was responsible for the worsted and specialty fabrics markets for the Company, a position he had held since January 2009. Prior to that, Mr. Peck was Executive Vice President for the Burlington Worldwide division of ITG, responsible for the synthetic and specialty fabrics apparel markets from 2007 to 2009. Prior to that, he served as Managing Director of the Burlington WorldWide operations in Asia and was based in Hong Kong for a two-year assignment. Prior to that, Mr. Peck served as Executive Vice President of the Burlington WorldWide division of Former ITG. Prior to that, he held a similar position for Burlington Industries from 2001 to 2004.
William P. Carmichael has been a director of the Company since November 2012. Mr. Carmichael, a private consultant, co-founded The Succession Fund in 1998 to provide an exit strategy to owners of privately held companies. This Fund was sold in 2007. Prior to forming The Succession Fund, Mr. Carmichael worked for Price Waterhouse (now PricewaterhouseCoopers) for four years, and has twenty-six years of experience in various financial positions with global consumer product companies. Mr. Carmichael currently serves on the boards of directors of The Finish Line, Inc., hh gregg, Inc., and as Trustee of the Columbia Funds, Tri-Continental Corporation and Columbia Seligman Premium Technology Growth Company. Mr. Carmichael also served on the following boards, Cobra Electronics Corporation until August 2014, McMoRan Exploration from June 2010 to 2013, and Simmons Bedding from 2004 to 2010. Mr. Carmichael is a member of the advisory council of NYSE Governance Services. Mr. Carmichael brings to the Company considerable expertise in investments and in mergers and acquisitions in small and middle market companies. In addition, Mr. Carmichael’s experience serving on the board of directors of several other public companies allows us to leverage his experiences with respect to, among other things, appropriate oversight and related board actions.
John W. Gildea has been a director of the Company since February 2012. Mr. Gildea founded Gildea Management Company, a management company specializing in investments in middle market companies in the United States and Europe, in 1984. Mr. Gildea currently serves on the board of directors of Misonix, Inc., and Sothic Capital, a UK based distressed fund. He also served on the board of directors of Country Pure, a private company, from 2010 to 2014, America Service Group Inc. from 2006 to 2011 and Sterling Chemicals, Inc. from 2002 to 2011. Mr. Gildea brings to the Company considerable expertise in investments in middle market companies in the United States and Europe, which we believe provides significant insight to the Company. In addition, Mr. Gildea’s experience serving on the board of directors of several other public companies allows us to leverage his experiences with respect to, among other things, appropriate oversight and related board actions.
Su Yeo has been a director of the Company since June 2015 and she is a principal of WLR LLC. Ms. Yeo is an experienced and versatile financial services executive with over 18 years of experience in principal investing, debt restructuring and investment banking roles. Prior to joining W.L. Ross & Co., Ms. Yeo spent more than 16 years at Morgan Stanley and Lehman Brothers where she was involved globally in mergers and acquisitions, capital raises, principal investments and corporate workouts and restructurings. Ms. Yeo brings to the Company considerable expertise in investments and in mergers and acquisitions, and the Company believes her experience and skills benefit the board of directors’ discussions related to financing, corporate development, corporate governance, and strategic opportunities.
The term of office of each executive officer expires when a successor is elected and qualified. There was no, nor is there presently, any arrangement or understanding between any officer or director and any other person (except directors or officers acting solely in their capacities as such) pursuant to which the officer or director was selected.
Director Qualifications
The Company believes the members of its board of directors have the proper mix of relevant experience and expertise given the Company’s businesses and organizational structure, together with a level of demonstrated integrity, judgment, leadership and collegiality, to effectively advise and oversee management in executing the Company’s strategy.
Nominating Committee; Nominating Procedure
The Company’s board of directors does not have a standing nominating committee (and consequently does not have a nominating committee charter), and all directors participate in the consideration of director-nominees. The Company believes that it is not necessary to have a standing nominating committee because of the fact that certain entities affiliated with WLR LLC own approximately 82% of the outstanding common stock and approximately 84% of the voting power of the Company and, therefore, have the ability to control the election of all directors. The board of directors of the Company does not currently have a formal policy for stockholder recommendations for director-nominees for the aforementioned reasons.
Audit Committee
The Company’s board of directors has a standing audit committee currently composed of two directors, William P. Carmichael (chair) and Su Yeo. The Company’s board of directors has determined that Mr. Carmichael is an audit committee financial expert (within the meaning of Item 407(d) of Regulation S-K, promulgated under the Exchange Act) with respect to the Company. In making such determination, the board took into consideration, among other things, the express provision in Item 407(d) of Regulation S-K that the designation of a person as an audit committee financial expert shall not impose any greater responsibility or liability on that person than the responsibility and liability imposed on such person as a member of the audit committee and the board of directors, nor shall it affect the duties and obligations of other audit committee members or the board. The common stock of the Company is not traded on the New York Stock Exchange (the “NYSE”) or any other national securities exchange; however, the Company’s board of directors has determined that Mr. Carmichael is independent within the meaning of NYSE Rule 303A.02 and Rule 10A-3(b) promulgated under Section 10A of the Exchange Act.
Code of Ethics
The Company has adopted a code of ethics, the Standard of Business Conduct that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, as well as to its directors and other employees. A copy of this code of ethics has been filed as an Exhibit to this Form 10-K.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Exchange Act, the Company’s directors and executive officers, and any persons who beneficially own more than 10% of the Company’s common stock, are required to file initial reports of ownership and reports of certain changes in ownership with the SEC. Based solely upon our review of copies of such reports, we believe that our directors and executive officers, and beneficial owners of more than 10% of our common stock, timely complied with all applicable filing requirements for our 2015 fiscal year.
Stockholder Communications with the Board of Directors
The Company currently does not have a formal process for stockholders to send communications to the board of directors. Because the Company’s public stockholder base is small, the Company’s board of directors believes a formal process is unnecessary.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The Company’s board of directors has a standing compensation committee with Mr. Gildea serving as chair. The common stock of the Company is listed on the OTC Markets Group Inc. (formerly known as Pink OTC Markets Inc.) over-the-counter “OTCQB” marketplace tier and not on the NYSE or any other national securities exchange; therefore, the members of the compensation committee are not required to be independent within the meaning of NYSE Rule 303A.02.
The general functions of the compensation committee include approval (or recommendation to the board of directors) of the compensation arrangements for the Company’s senior management, directors and other key employees, review of benefit plans in which officers and directors are eligible to participate, and the making of grants under the Company’s equity compensation plans. The Company’s compensation committee does not have a charter.
Summary Compensation Table
The following table sets forth information regarding the compensation of the Named Executive Officers, consisting of our current principal executive officer and the other two most highly compensated individuals who served as executive officers at December 31, 2015.
Summary Compensation Table
Notes:
1.
For 2015 and 2014, represents amounts earned under the Company's applicable annual cash incentive program, referred to as the Management Incentive Plan ("MIP"). For additional detail on the MIP and the determination of the cash awards thereunder, see "Management Incentive Plan."
2.
2015 amounts for Mr. Kunberger, Mr. Peck and Ms. Kuczkowski include car allowances, Company matching contributions to the Company’s 401(k) plan, premiums for supplemental long-term disability coverage, premiums for life insurance benefits and contractual interest payments made on vested retention and bonus awards.
Management Incentive Plan
Under the MIP, cash incentive bonus opportunities, defined as a percentage of base salary, are established for each participant. Each participant then has the opportunity to earn a threshold, target, or maximum bonus amount that is contingent upon achieving the performance goals set by the Compensation Committee.
In 2015, the Compensation Committee established performance goals for the named executive officers under the MIP with 60% of the bonus opportunity based on earnings before interest, taxes, depreciation, amortization, restructuring and impairment charges and other non-operating income and 40% based on net working capital (accounts receivable, inventory and accounts payable) and cash flow performance. In 2014, the compensation committee established performance goals for the named executive officers under the MIP with 60% of the bonus opportunity based on earnings before interest, taxes, depreciation, amortization, impairment charges and other non-operating income and 40% based on cash flow performance. Both of the above earnings and cash flow measures excluded the following items from their calculations: approved capital expenditures financed by debt, and MIP expense and cash payments. In 2015 and 2014, MIP awards for Mr. Kunberger and Ms. Kuczkowski were based on total company performance, and MIP awards for Mr. Peck were based on business unit performance.
Bonus payments are paid to participants in the calendar year following the end of the plan year. The compensation committee retains the right, in its sole discretion, to adjust awards (individually or in the aggregate) to recognize extraordinary situations.
Employment Agreements, Termination of Employment Arrangements and Change of Control Payments
The Company has entered into an employment agreement with Mr. Kunberger. The employment agreement provides that Mr. Kunberger will be eligible to receive severance payments in the event of a termination without “cause” or resignation for “good reason” (both as defined in the employment agreement). In the event of a termination without cause or resignation with good reason, Mr. Kunberger would be entitled to a prorated portion of his target bonus amount (as specified in the employment agreement) for the year in which the termination occurs and to payments equal to two times his base salary, car allowance, and club dues benefit, plus two times the average of his previous two years’ annual bonus. Mr. Kunberger would also receive an amount equal to the COBRA premiums for himself and any eligible dependents, with a full gross-up for all applicable federal, state, and local taxes, for the period he and/or his dependents remain eligible for COBRA, but not to exceed eighteen months from the termination date. These severance payments would be due to Mr. Kunberger as outlined above in the event of termination without cause, for good reason, or in connection with a change of control of the Company, as defined in the employment agreement. In addition to the severance payments noted above, any unvested equity awards for Mr. Kunberger would become fully vested and the holding requirement would cease to apply in the event of a change of control of the Company.
In addition, the Company has entered into severance agreements with Mr. Peck and Ms. Kuczkowski which provide that they will be eligible to receive severance payments equal to eighteen months base salary in the event of termination without “cause” or resignation for “good reason” (both as defined in the severance agreement).
Benefit Plans
The Company maintains a tax-qualified Section 401(k) defined contribution plan. Under this plan, the Company provides a matching contribution of 100% of the first 3% of a participant’s eligible compensation which is contributed to this plan, and 50% of the next 2% of the participant’s eligible contributed compensation up to the federal limits on earnings and contributions. The Company does not maintain any active, ongoing nonqualified deferred compensation plan.
The Company maintains a legacy defined benefit pension plan, the Retirement System of Burlington Industries LLC and Affiliated Companies (the “Plan”), covering certain employees of the Company and its affiliated companies. The Plan was amended effective October 1, 2003 to suspend employee contributions and to prevent participation of new members, effectively “freezing” the Plan. The Plan provides an annual benefit payable to an eligible participant at age 65 equal to the greater of (a) the sum of (i) the number of years of the member’s continuous participation prior to October 1, 1984, multiplied by the sum of 0.75% of the first $12,000 of such participant’s annual salary at September 30, 1984, plus 1.5% of the excess over $12,000, and (ii) one-half of the participant’s contributions after September 30, 1984, (b) one-half of the participant’s total contributions or (c) an amount determined under applicable Federal law requiring a minimum return on a participant’s personal contributions. This benefit represents a life annuity with a guaranteed minimum return on personal contributions and may, at the participant’s election, be paid as a lump sum.
Outstanding Equity Awards at Fiscal Year-End
No equity awards to the Named Executive Officers were outstanding as of December 31, 2015.
Director Compensation
The Company has available for use a combination of cash and stock-based incentive compensation to attract and retain certain qualified candidates to serve on its board. In setting director compensation, the Company considers the significant amount of time that directors expend in fulfilling their duties as directors as well as the expertise and knowledge required. Compensation levels are reviewed periodically by the board of directors and adjusted as deemed appropriate. Executive officers who serve as directors of the Company are not entitled to additional compensation for such services. In addition, the board of directors of the Company has deemed it appropriate that only non-employee directors who are not affiliated with WLR LLC should receive compensation for service as a member of the Board. Each non-employee director not affiliated with WLR LLC receives an annual retainer of $40,000 for services as a director. In addition to this retainer, each of those directors receives $1,500 per day for all board and committee meetings attended in person, and $750 per day for all board and committee meetings attended by telephone or video conference. Further, the Chair of the Audit Committee receives an annual retainer of $10,000 and the Chair of the Compensation Committee receives an annual retainer of $5,000. All fees are paid on a quarterly basis. The Company also reimburses non-employee directors for expenses incurred in attending board and committee meetings.
In addition, from time to time, certain of the Company’s directors may be entitled to certain additional compensation for providing services to the Company other than in the ordinary course of their service as a director.
The amounts set out in the table below consist of all amounts paid to non-employee members of the Company’s board of directors for their service as a board member of the Company in 2015. The Committee chose not to make any equity-based awards in 2015.
2015 Director Compensation (1)
__________________
(1)
See the Summary Compensation Table above for information on the compensation paid to Kenneth T. Kunberger. Mr. Bosworth and Dr. Tessoni each retired from the Company’s board of directors as of April 1, 2015. Mr. Wax retired from the Company’s board of directors as of June 17, 2015. Mr. Tepner retired from the Company’s board of directors as of August 31, 2015. Mr. Gibbons retired from the Company’s board of directors as of February 29, 2016.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to the beneficial ownership of shares of ITG common stock, Series C preferred stock (the “Series C Preferred Stock”) and Series A convertible preferred stock (the “Series A Preferred Stock”) as of March 15, 2016 by (1) each person (including any group deemed a “person” under Section 13(d)(3) of the Exchange Act) known to ITG to beneficially own more than 5% of ITG’s common stock, (2) each of ITG’s Named Executive Officers, (3) each of ITG’s directors and (4) all directors and current executive officers of ITG as a group. Information relating to beneficial ownership is based upon “beneficial ownership” concepts set forth in rules of the SEC. Under those rules, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of, or to direct the disposition of, such security. The person is also deemed to be a beneficial owner of any security of which that person has a right to acquire beneficial ownership (such as by exercise of options) within 60 days. Under such rules, more than one person may be deemed to be a beneficial owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which he or she may disclaim any beneficial interest. Except as indicated in notes to the table, directors and executive officers possessed sole voting and investment power with respect to all of their respective shares in the table. Shares not outstanding which are subject to options exercisable within 60 days by persons in the group or a named individual are deemed to be outstanding for the purpose of computing the percentage of outstanding shares of common stock owned by the group or such individual.
This table is based, in part, upon information supplied to ITG by its officers, directors and principal stockholders, and Schedules 13D filed with the SEC, as applicable.
------
NOTES:
*
Represents less than 1% of the outstanding class of stock.
(1)
Shares of Series C Preferred Stock generally do not have any voting rights except as may be prescribed under the Delaware General Corporation Law; provided, however, that for so long as any shares of Series C Preferred Stock are outstanding, certain fundamental corporate actions set forth in the Certificate of Designation of Series C Preferred Stock may not be taken without the consent or approval of the holders of 66 2/3% of the outstanding Series C Preferred Stock.
(2)
Shares of Series A Preferred Stock vote together with shares of the Company’s common stock on all matters submitted to a vote of the Company’s stockholders. Each share of Series A Preferred Stock is entitled to one vote per share on all such matters.
(3)
WLR Recovery Fund II, L.P. (“Fund II”) directly owns 268,244 shares of common stock, WLR Recovery Fund III L.P. (“Fund III”) directly owns 4,356,639 shares of common stock and International Textile Holdings, Inc. (“Holdings”) directly owns 9,709,272 shares of common stock of the Company. Fund II is the majority stockholder of Holdings, WLR Recovery Associates II LLC (“Associates II”) is the general partner of Fund II and WLR Recovery Associates III LLC (“Associates III”) is the general partner of Fund III. Wilbur L. Ross, Jr., our controlling stockholder and who served as the Chairman of our board of directors until November 2014, is the managing member of each of Associates II and Associates III. Accordingly, Associates II, Associates III and Mr. Ross may be deemed to share voting and dispositive power over the shares of common stock owned by Fund II, Fund III and Holdings. WLR Recovery Fund IV, L.P. (“Fund IV”) directly owns 114,250 shares of Series C Preferred Stock and WLR IV Parallel ESC, L.P. (“ESC”) directly owns 378 shares of Series C Preferred Stock. WLR/GS Master Co-Investment, L.P. directly owns 2,900,099 shares of Series A Preferred Stock. Mr. Ross has certain voting and dispositive power with respect to securities owned by Fund IV, ESC and WLR/GS Master Co-Investment, L.P. As a result, Mr. Ross may be deemed to beneficially own such shares of Series C Preferred Stock owned by Fund IV and ESC as well as such shares of Series A Preferred Stock owned by WLR/GS Master Co-Investment, L.P. To the extent Mr. Ross is deemed to beneficially own any of the foregoing shares, he disclaims such ownership. The address of Mr. Ross and such entities is, c/o WL Ross & Co. LLC, 1166 Avenue of the Americas, 25th Floor New York, New York 10036.
(4)
Excludes shares beneficially owned by WLR LLC and affiliated entities. Ms. Yeo is a director of the Company and a Principal of WLR LLC. Ms. Yeo disclaims beneficial ownership of all shares held by WLR LLC and affiliated entities.
(5)
Includes all shares held by WLR LLC and affiliated entities. Ms. Yeo is a director of the Company and a Principal of WLR LLC. Ms. Yeo disclaims beneficial ownership of all shares held by WLR LLC and affiliated entities.
The information required to be disclosed in this Item 12 by Item 201(d) of Regulation S-K is included in Item 5 “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in this Form 10-K.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Wilbur L. Ross, Jr., who served as the Chairman of our Board of Directors until November 2014, is Chairman and Chief Strategy Officer of WLR LLC. Su Yeo, a member of our board of directors, is a principal at WLR LLC.
WLR LLC may from time-to-time provide advisory services to the Company (consisting of consulting and advisory services in connection with strategic and financial planning, investment management and administration and other matters relating to our business and operations of a type customarily provided by sponsors of U.S. private equity firms to companies in which they have substantial investments, including any consulting or advisory services that the Company’s board of directors reasonably requests). In return for such services, WLR LLC may charge a quarterly management fee of $0.5 million and is reimbursed for any reasonable out-of-pocket expenses (including expenses of third-party advisors retained by WLR LLC). Per the Note Purchase Agreement, as amended, the payment of the management fees may not occur while a default or event of default has occurred and is continuing or would arise as a result of such payment, or at any time while payable in-kind (“PIK”) interest on the Company’s Tranche A senior subordinated notes (see Note 8 “Long-Term Debt and Short-Term Borrowings”) was unpaid. As a result, WLR LLC did not charge the Company for management fees in 2015 or 2014. At December 31, 2015, $2.5 million related to management fees was payable to WLR LLC on a non-interest bearing basis.
The Company has entered into a marketing and service arrangement with OCM India Limited (“OCM”), which is owned by certain affiliates of WLR LLC. Under the arrangement, the Company provides certain operations, marketing and service assistance to OCM in exchange for a service fee. In 2015 and 2014, the Company received $0.1 million and $0.2 million, respectively, from OCM for service fees and sales commissions.
From time to time, the WLR Affiliates have purchased or received PIK Interest Tranche B Notes. The Company also issued additional Tranche B Notes of $1.2 million in 2014 to Fund IV in connection with the Guaranty as described below. Under a previously disclosed Stipulation and Settlement Agreement, $21.9 million in principal and accrued interest of the Tranche B Notes outstanding as of December 31, 2013 was cancelled, together with all additional interest that accrued on such notes from December 31, 2013 through August 29, 2014. The largest aggregate principal amount outstanding under the Tranche B Notes during 2015 and 2014 was $181.4 million and $173.5 million, respectively. The Company has not repaid any principal on any of the Tranche B Notes, and all interest on the Tranche B Notes to date has been accrued or converted to additional principal amounts. At December 31, 2015 and 2014, $181.4 million and $160.9 million aggregate principal amount of Tranche B Notes was outstanding, respectively, with an interest rate of 12.0%, including interest that has been converted to principal.
Also under the previously disclosed Stipulation and Settlement Agreement, $11.4 million (11,475 shares) and $257.6 million (10,304,963 shares) of Series C Preferred Stock and Series A Preferred Stock, respectively, and certain related dividends in arrears were cancelled in 2014.
The Company has obligations under an amended Guaranty of Payment (as amended and restated, the “Guaranty”) in favor of Fund IV. Pursuant to the Guaranty, the Company has guaranteed the prompt payment, in full, of the reimbursement obligations of Fund IV under certain letter of credit agreements to which Fund IV was a party and under which Fund IV agreed to be responsible for certain obligations of ITG-PP, up to a total amount of $15.5 million. Under the 2011 Credit Agreement, the lenders (i) were entitled to receive payment under a $3.7 million evergreen standby letter of credit executed by Fund IV (the “Fund IV LC”), or (ii) the Company’s investments in ITG-PP discussed above were required to be repaid to the Company by ITG-PP no later than one month prior to the March 31, 2016 expiration date of the Fund IV LC. In August 2014, the Company entered into Consent and Amendment No. 11 to the 2011 Credit Agreement which provided, among other things, for the termination of the Fund IV LC. On October 14, 2014, the Fund IV LC was terminated and an additional $1.2 million of principal amount of Tranche B Notes were issued in satisfaction of the Company’s obligations thereunder for accrued guaranty fees. Cone Denim (Jiaxing) Limited has outstanding short-term working capital loans from various Chinese financial institutions, including approximately $1.1 million guaranteed by a $1.4 million standby letter of credit with a WLR Affiliate pursuant to the Guaranty. The obligations of the Company are payable in cash or, if cash is not permitted to be paid pursuant to the terms and conditions of the 2011 Credit Agreement and related documentation, then such amounts are payable in additional Tranche B Notes. Also pursuant to the Guaranty, the Company is required to pay a per annum amount equal to 10% of the amount of any such outstanding letters of credit. In 2015 and 2014, the Company incurred guarantee fees of $0.2 million and $0.6 million, respectively, and the amount of such accrued guaranty fees outstanding as of December 31, 2015 was $1.2 million.
The Company, Fund IV and the agent under the Company’s 2011 Credit Agreement have entered into a support agreement pursuant to which the lenders under the 2011 Credit Agreement can draw upon an evergreen standby letter of credit in the amount of $17.0 million (the “WLR LC”) executed by Fund IV if the Company’s excess availability (as defined in the 2011 Credit Agreement) falls below certain predefined levels; no such amounts have been drawn by the lenders as of December 31, 2015. On December 18, 2014, the Company entered into Amendment No. 12 to the 2011 Credit Agreement. This amendment provides for, among other things, future reductions of the WLR LC of up to $5.0 million, or termination of the WLR LC, based upon amounts of the term loan repaid under the 2011 Credit Agreement, the maintenance of a specified fixed charge coverage ratio, the level of average excess availability, and certain other conditions.
Director Independence
The common stock of the Company is not traded on the NYSE or any other national securities exchange; however, for purposes of determining director independence, the Company has adopted the independence definitions as set out in Section 303A.02 of the New York Stock Exchange's Listed Company Manual. Based on the independence standards and all of the relevant facts and circumstances, the Company’s board of directors determined that Mr. Carmichael and Mr. Gildea had no material relationship with the Company and thus are independent under Section 303A.02 of the listing standards of the NYSE.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The Company’s independent registered public accounting firm for the Company’s 2015 and 2014 fiscal years was Grant Thornton LLP. The following table provides information on the fees billed to the Company by Grant Thornton LLP and other member firms of Grant Thornton International Ltd. for its services to the Company during the Company’s fiscal years ended December 31, 2015 and 2014.
In the above table, in accordance with applicable SEC rules, “audit fees” are fees billed by the independent registered public accounting firm for professional services for the audit of the consolidated financial statements included in the Company’s Annual Report on Form 10-K, including audits of the foreign subsidiary statutory reports of the Company’s foreign subsidiaries for their respective fiscal years, and reviews of financial statements included in the Company’s quarterly reports on Form 10-Q, or for services that are normally provided by auditors in connection with statutory and regulatory filings or engagements. In the above table, “tax fees” are fees billed by the independent registered public accounting firm to the Company for tax compliance work for certain of the Company’s foreign subsidiaries for their respective fiscal years.
The audit committee of the Company’s board of directors has established a policy requiring its approval of all audits, and any non-audit, services prior to the provision of these services by the Company’s independent registered public accounting firm. Pursuant to this policy, the audit committee annually approves a detailed request for annual audit and other permitted services up to specified dollar limits. In determining whether to pre-approve permitted services, the audit committee considers whether such services are consistent with SEC rules and regulations. If the Company’s management believes additional services are necessary or that the dollar amount of previously approved services must be increased, management must seek specific prior approval for these services from the audit committee. To ensure prompt handling of unexpected matters, the Company’s audit committee has delegated to its chairperson the authority to pre-approve permissible non-audit services and fees and to amend or modify pre-approvals that have been granted by the entire audit committee. A report of any such actions taken by the committee chairperson must be provided to the audit committee at the audit committee meeting following such action. None of the services described above were approved by the audit committee pursuant to the exception provided by Rule 2-01(c)(7)(i)(C) of Regulation S-X of the SEC during either of the periods presented.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
The Company’s consolidated financial statements, related notes thereto and report of our independent registered public accounting firm required by Item 8 are listed in the index on page herein.
(2)
Unless otherwise attached, all financial statement schedules are omitted because they are not applicable or the required information is shown in the Company’s consolidated financial statements or the notes thereto.
(3)
Exhibits:
2.1
Agreement and Plan of Merger, dated as of August 29, 2006, by and among Safety Components International, Inc., SCI Merger Sub, Inc. and International Textile Group Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the year ended December 31, 2006)
3.1
Second Amended and Restated Certificate of Incorporation of International Textile Group, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on October 26, 2006)
3.2
Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on March 8, 2007)
3.3
Certificate of Increase of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on July 3, 2012)
3.4
Certificate of Increase of Series A Convertible Preferred Stock of International Textile Group, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No.000-23938) for the quarter ended June 30, 2013)
3.5
Certificate of Designation of Series B Convertible Preferred Stock (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the SEC on June 11, 2008)
3.6
Certificate of Designation of Series C Preferred Stock (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on July 30, 2012)
3.7
Amended and Restated Bylaws of International Textile Group, Inc. (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on October 26, 2006)
4.1
Form of Stockholders Agreement, dated as of March 2, 2007, by and among International Textile Group, Inc., WLR Recovery Fund II, L.P., WLR Recovery Fund III, L.P. and WLR/GS Master Co-Investment, L.P., and the other investors from time to time party thereto (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2006)
4.2 Form of Senior Subordinated Note (Tranche A) (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2011)
4.3
Form of Senior Subordinated Note (Tranche B) entered into in December 2009 (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2009)
4.4
Form of Senior Subordinated Note (Tranche B) entered into in September 2010 and January 2011 (incorporated by reference to Exhibit 4.6 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2010)
*10.0
Form of Addendum to Employment Agreement with certain officers of International Textile Group, Inc. (incorporated by reference to Exhibit 10.0 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2009)
*10.1
Form of Stock Option Agreement - Class A and B (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended March 31, 2001)
*10.2
Form of Stock Option Agreement - Class C (incorporated by reference to Exhibit 10.25 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 29, 2002)
*10.3
International Textile Group, Inc. Amended and Restated Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2006)
*10.4
International Textile Group, Inc. Amended and Restated Stock Option Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2006)
*10.5
Employment Agreement, effective as of May 1, 2014, by and between International Textile Group, Inc. and Kenneth T. Kunberger (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2014)
*10.6
Agreement and General Release, dated April 30, 2014, by and between International Textile Group, Inc. and Joseph L. Gorga (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (File No. 0000-23938) for the quarter ended March 31, 2014)
*10.7
Form of Severance Letter with certain officers of International Textile Group, Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2006)
*10.8
Form of Addendum to Severance Letter with certain officers of International Textile Group, Inc. (incorporated by reference to Exhibit 10.10.1 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2009)
*10.9
Form of Severance Letter with certain officers of International Textile Group, Inc. (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2009)
*10.10
Form of Severance Letter with certain officers of International Textile Group, Inc., (incorporated by reference to Exhibit 10.10 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2014)
*10.11
Form of Indemnification Agreement entered into with certain officers and directors (incorporated by reference to Exhibit 10.30.1 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on December 8, 2005)
*10.12
Form of Amended and Restated Indemnification Agreement entered into with certain officers and directors (incorporated by reference to Exhibit 10.10.1 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2005)
*10.13
Form of Indemnification Agreement for officers and directors (incorporated by reference to Exhibit 10.1 to Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2009)
*10.14
International Textile Group, Inc. 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-23938), filed with the SEC on June 11, 2008)
*10.15
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K (File No. 000-23938), filed with the Commission on June 11, 2008)
*10.16
Form of Performance Share Award Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K (File No. 000-23938), filed with the Commission on June 11, 2008)
10.17
Description of arrangement regarding certain management services provided by W.L. Ross & Co. LLC to International Textile Group, Inc. (incorporated by reference to Exhibit 10.14 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2006)
10.18
Form of Amended and Restated Credit Agreement, originally dated as of March 30, 2011, (as amended to date), by and among International Textile Group, Inc. and certain of its subsidiaries, as borrowers, General Electric Capital Corporation, as agent and lender, and the other lenders and other parties signatory thereto (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2014)
10.19
English translation of Term Loan Agreement, dated as of March 23, 2011, by and among Burlington Morelos S.A. de C.V. and Banco Nacional de Mexico, S.A., as lender thereto (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q (File 000-23938) for the quarter ended March 31, 2011)
10.20
English translation of Simple Credit Agreement Secured by a Second Package Mortgage, dated as of March 27, 2013, by and among Burlington Morelos, S.A. de C.V. and subsidiary companies, and Banco Nacional de Mexico, S.A. as lender thereto, (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2013)
10.21
English translation of amended and restated Factoring Discount Line Opening Agreement, dated as of August 15, 2014, by and among Parras Cone de Mexico, S.A. de C.V. and Banco Nacional de Mexico, S.A., as lender thereto (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended September 30, 2014)
10.22
English translation of secured Credit Agreement, dated as of June 18, 2013, by and among Parras Cone de Mexico, S.A. de C.V. and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No.000-23938) for the quarter ended June 30, 2013)
10.23
English translation of secured Credit Agreement, dated as of April 15, 2014, by and among Parras Cone de Mexico, S.A. de C.V., and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2014)
10.24
English translation of Loan Agreement, dated as of January 28, 2015, by and among Parras Cone de Mexico, S.A. de C.V., and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2014)
10.25
English translation of Loan Agreement, dated as of July 6, 2015, by and among Parras Cone de Mexico, S.A. de C.V., and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarterly period ended June 30, 2015)
10.26
English translation of Loan Agreement, dated as of February 3, 2016, by and among Parras Cone de Mexico, S.A. de C.V., and Banco Nacional de Mexico, S.A. as lender thereto
10.27
English translation of Revolving Credit Loan Agreement, dated as of August 14, 2015, by and among Parras Cone de Mexico, S.A. de C.V., and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarterly period ended June 30, 2015)
10.28
English translation of Loan Agreement, dated as of January 28, 2015, by and among Burlington Morelos, S.A. de C.V. and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2014)
10.29
English translation of form of promissory note relating to secured Credit Agreement dated as of June 18, 2013, by and among Parras Cone de Mexico, S.A. de C.V. and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2013)
10.30
English translation of form of promissory noted relating to secured Credit Agreement dated as of April 15, 2014, by and among Parras Cone de Mexico, S.A. de C.V. and Banco Nacional de Mexico, S.A. as lender thereto (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2014)
10.31
Stock Exchange Agreement, dated as of March 8, 2007, by and between WLR Recovery Fund III, L.P., the other individuals listed on the signature page thereto and International Textile Group, Inc. (incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2006)
10.32
Debt Exchange Agreement, dated as of July 24, 2012, by and among International Textile Group, Inc. and each of WLR Recovery Fund III, L.P., WLR Recovery Fund IV, L.P. and WLR IV Parallel ESC, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on July 30, 2012)
10.33
Senior Subordinated Note Purchase Agreement, dated as of June 6, 2007, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on June 12, 2007)
10.34
Amendment No. 1 to Senior Subordinated Note Purchase Agreement, dated as of April 15, 2008, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2008)
10.35
Amendment No. 2 to Senior Subordinated Note Purchase Agreement, dated as of December 24, 2008, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 000-23938) filed with the Commission on December 31, 2008)
10.36
Amendment No. 3 to the Senior Subordinated Note Purchase Agreement dated as of December 22, 2009, by and among International Textile Group, Inc. and purchasers signatory thereto (incorporated by reference to Exhibit 10.59 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2009)
10.37
Amendment No. 4 to Senior Subordinated Note Purchase Agreement, dated as of March 16, 2011, by and among International Textile Group, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2011)
10.38
Amendment No. 5 to Senior Subordinated Note Purchase Agreement, dated as of March 30, 2011, by and among International Textile Group, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended March 31, 2011)
10.39
Amendment No. 6 to Senior Subordinated Note Purchase Agreement, dated as of May 23, 2011, by and among International Textile Group, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2011)
10.40
Amendment No. 7 to Senior Subordinated Note Purchase Agreement, dated as of June 17, 2011, by and among International Textile Group, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2011)
10.41
Amendment No. 8 to Senior Subordinated Note Purchase Agreement, dated as of June 30, 2014, by and among International Textile Group, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2014)
10.42
Amendment No. 9 to Senior Subordinate Note Purchase Agreement, dated as of August 27, 2014, by and among International Textile Group, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended September 30, 2014)
10.43
Consent and Modification of Senior Subordinated Note Purchase Agreement and Tranche B Notes, dated as of August 12, 2010, by and among International Textile Group, Inc. and purchasers signatory thereto (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended September 30, 2010)
10.44
Consent to Senior Subordinated Note Purchase Agreement dated as of January 7, 2011, by and among International Textile Group, Inc. and the purchasers signatory thereto (incorporated by reference to Exhibit 10.65 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2010)
10.45
Limited Waiver Agreement (May 8, 2009) to Senior Subordinated Note Purchase Agreement, dated as of December 24, 2008, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2009)
10.46
Limited Waiver Agreement (June 1, 2009) to Senior Subordinated Note Purchase Agreement, dated as of December 24, 2008, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2009)
10.47
Limited Waiver Agreement (June 26, 2009) to Senior Subordinated Note Purchase Agreement, dated as of December 24, 2008, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2009)
10.48
Limited Waiver Agreement (July 22, 2009) to Senior Subordinated Note Purchase Agreement, dated as of December 24, 2008, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.8 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2009)
10.49
Limited Waiver Agreement to Senior Subordinated Note Purchase Agreement, dated as of July 22, 2009, among International Textile Group, Inc. and each of the purchasers signatory thereto (incorporated by reference to Exhibit 10.9 to the Company’s Quarterly Report on Form 10-Q (File No. 000-23938) for the quarter ended June 30, 2009)
10.50
Sixth Amended and Restated Support Agreement by and between International Textile Group, Inc. and WLR Recovery Fund IV, LP, and General Electric Capital Corporation dated December 18, 2014 (incorporated by reference to Exhibit 10.47 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2014)
*10.51
International Textile Group, Inc. Management Incentive Plan for 2015
*10.52
International Textile Group, Inc. 2016 Management Incentive Plan
14.1
International Textile Group, Inc. Standards of Business Conduct (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K (File No. 000-23938) for the fiscal year ended December 31, 2006)
21.1
Subsidiaries of International Textile Group, Inc.
23.1
Consent of Grant Thornton LLP
31.1
Certification of Principal Executive Officer as required by Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial and Accounting Officer as required by Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1
Charter of the Audit Committee of the Board of Directors (incorporated by reference to Exhibit 10.1 to Form 10-K/A (File No. 000-23938) filed on April 29, 2009)
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
__________
* Management contract or compensatory plan or arrangement
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.
INTERNATIONAL TEXTILE GROUP, INC.
By: /s/ Gail A. Kuczkowski
Gail A. Kuczkowski
Executive Vice President and Chief Financial Officer
Date: March 23, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name and Signature
Title
Date
/s/ Kenneth T. Kunberger
Director, President and Chief Executive Officer
March 23, 2016
Kenneth T. Kunberger
/s/ Gail A. Kuczkowski
Executive Vice President and Chief Financial Officer
March 23, 2016
Gail A. Kuczkowski
(Principal Financial and Accounting Officer)
/s/ William P. Carmichael
Director
March 23, 2016
William P. Carmichael
/s/ John W. Gildea
Director
March 23, 2016
John W. Gildea
/s/ SU YEO
Director
March 23, 2016
Su Yeo
INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
International Textile Group, Inc. and Subsidiary Companies:
We have audited the accompanying consolidated balance sheets of International Textile Group, Inc. (a Delaware corporation) and Subsidiary Companies (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income (loss), stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of International Textile Group, Inc. and Subsidiary Companies as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2015 and 2014, related to the presentation of debt issuance costs and deferred income taxes
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 23, 2016
INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements
INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Income
(Amounts in thousands, except per share data)
See accompanying Notes to Consolidated Financial Statements
INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Comprehensive Income (Loss)
(Amounts in thousands)
See accompanying Notes to Consolidated Financial Statements
INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Stockholders’ Deficit
(Amounts in thousands, except share data)
See accompanying Notes to Consolidated Financial Statements
INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
See accompanying Notes to Consolidated Financial Statements
INTERNATIONAL TEXTILE GROUP, INC. AND SUBSIDIARY COMPANIES
Notes To Consolidated Financial Statements
Note 1 Nature of Business and Significant Accounting Policies
(a)
Nature of Business
International Textile Group, Inc. (“ITG”, the “Company”, “we”, “us” or “our”) is a global, diversified textile manufacturer headquartered in Greensboro, North Carolina, with operations in the United States, Mexico, and China. The Company believes it is one of the world’s largest and most diversified producers of denim fabrics and the largest producer of better denim fabrics for products distributed through department stores and specialty retailers. In addition, the Company believes it is one of the largest worsted wool manufacturers and commission printers and finishers in North America, and is a leading developer, marketer and manufacturer of other fabrics and textile products.
(b)
Principles of Consolidation
The consolidated financial statements include the financial statements of International Textile Group, Inc. and its wholly and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in unconsolidated affiliates in which the Company owns 20% to 50% of the voting stock or has significant influence are accounted for using the equity method. Investments in unconsolidated affiliates in which the Company does not have significant influence and owns less than 20% of the voting stock are accounted for using the cost method. In addition, the Company evaluates its relationships with entities in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810-10-25, “Consolidation - Recognition - Variable Interest Entities,” to identify whether they are variable interest entities as defined therein and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then results and financial position of that entity are included in the Company’s consolidated financial statements in accordance with FASB ASC 810-10-25.
(c)
Cash and Cash Equivalents
Cash and cash equivalents include time deposits and other short-term investments with an original maturity of three months or less; at times such amounts on deposit with an entity may exceed Federal Deposit Insurance Corporation or other similar insurance limits.
(d)
Accounts Receivable, Net
Trade accounts receivable are recorded at the invoiced amount and bear interest in certain cases that is recognized as the interest is received. The Company continuously performs credit evaluations of its customers, considering numerous inputs including, but not limited to, each customer’s financial position; past payment history; cash flows and management capability; the historical loss experience with respect to such customer; and general and industry economic conditions and prospects. The Company estimates its allowance for doubtful accounts based on a combination of historical and current information regarding the overall balance of accounts receivable, as well as the current composition of the pool of accounts receivable. The Company determines past due status on accounts receivable based on the contractual terms of the original sale. Accounts receivable that management believes to be ultimately uncollectible are written off upon such determination. The Company records sales returns as a reduction to sales, cost of sales, and accounts receivable and an increase to inventory based on return authorizations for off-quality goods. Returned products that are recorded as inventories are valued based upon expected realizability.
(e)
Inventories
Inventories represent direct materials, labor and overhead costs incurred for products not yet delivered or returned. Inventories are valued at the lower of cost or market value using the first-in, first-out (“FIFO”) method. The Company reviews its inventory on a quarterly basis to identify excess or slow moving products, discontinued and to-be-discontinued products, and off-quality merchandise. For those items in inventory that are so identified, the Company estimates their market value based on historical and expected realization trends. This evaluation requires forecasts of future demand, market conditions and selling prices. If the forecasted market value is less than cost, the Company writes down the value of its inventory to reflect the lower value of that inventory. This methodology recognizes inventory exposures at the time such losses are evident rather than at the time goods are actually sold.
(f)
Investments in Unconsolidated Affiliates
Investments in unconsolidated affiliates are accounted for by either the equity or cost methods, generally depending upon ownership levels. The equity method of accounting is used when the Company’s investment in voting stock of an entity gives it the ability to exercise significant influence over the operating and financial policies of the investee. The equity method of accounting is used for unconsolidated affiliated companies in which the Company holds 20% to 50% of the voting stock of, or has significant influence over, the investee. Unconsolidated affiliate companies in which the Company does not have significant influence and owns less than 20% of the voting stock are accounted for using the cost method. These investments in unconsolidated affiliates are assessed periodically for impairment and are written down if and when the carrying amount is not considered fully recoverable.
(g)
Property, Plant and Equipment and Long-lived Assets Held for Sale
Property, plant and equipment are stated at cost less accumulated depreciation. Plant and equipment under capital leases are stated at the present value of future minimum lease payments, and amortization charges are included in depreciation expense. Depreciation and amortization of property, plant and equipment is calculated over the estimated useful lives of the related assets principally using the straight-line method: 15 years for land improvements, 10 to 40 years for buildings and 2 to 12 years for machinery, fixtures, and equipment (see Note 5). Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the underlying lease. The Company capitalizes certain interest costs as a component of the cost of construction in progress. The Company has purchased land-use rights from government entities in certain foreign countries that allow the use of land for periods of up to 50 years. Such amounts, which are not significant to the Company’s consolidated balance sheet, are recorded in property, plant and equipment and are amortized over various periods in accordance with local government regulations. Renewals or betterments of significant items are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. Long-lived assets or disposal groups are classified as held for sale when all the applicable criteria of FASB ASC 360, “Property, Plant, and Equipment”, are met; such assets are measured at the lower of their carrying amount or estimated fair value less costs to sell. A long-lived asset is not depreciated while it is classified as held for sale. The results of operations of a business component that either has been disposed of or is classified as held for sale is reported in discontinued operations in accordance with FASB ASC 360. The Company allocates interest to discontinued operations based on debt that is required to be repaid as a result of the disposal transactions.
(h)
Goodwill, Intangible Assets and Deferred Charges
Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of FASB ASC 350, “Intangibles-Goodwill and Other”. The Company performs its annual goodwill impairment testing as of October 1 of each fiscal year, and the Company also tests goodwill for impairment between annual tests if events occur or circumstances change that raise questions about recoverability. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives. The Company continually monitors conditions that may affect the carrying value of its intangible assets. When conditions indicate potential impairment of such assets, the Company evaluates the estimated fair value of the assets. When the estimated fair value of an asset is less than the carrying value of the asset, the value of the asset is written down to its estimated fair value, with a non-cash charge to operations in the period in which impairment is determined. The use of different estimates or assumptions could result in materially different results. Costs incurred in connection with line-of-credit financing activities are deferred and amortized over the lives of the respective financing instruments using the straight-line method, which approximates the effective interest rate method, and are charged to interest expense. Recognition of such deferred costs may be accelerated upon certain modifications or exchanges of the underlying financing instruments.
(i)
Impairment of Long-lived Assets
In accordance with FASB ASC 360, “Property, Plant, and Equipment”, long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. For assets held and used, an impairment may occur if projected undiscounted cash flows are not in excess of the carrying value of the assets. In such cases, additional analysis is conducted to determine the amount of impairment to be recognized. The non-cash impairment loss is determined by the difference between the carrying amount of the asset and the fair value measured by future discounted cash flows or prices for similar assets. The analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical to determining whether any impairment loss should be recorded and the amount of such charge if an impairment is deemed to be necessary. The Company reviews the estimated useful lives of intangible assets when impairment testing is performed. If events and circumstances warrant a change in the estimated useful life, the remaining carrying amount is amortized over the revised estimated useful life. The use of different estimates or assumptions could result in materially different results.
(j)
Payable in-Kind Interest
In accordance with the terms of certain debt instruments, at certain dates, payable in-kind interest (“PIK Interest”) is either added to the principal amount of the related debt or is capitalized through the issuance of additional interest-bearing notes. The accrual of such PIK Interest is included in interest expense in the consolidated statements of income and is included in non-cash interest expense in the consolidated statements of cash flows as a component of operating cash flows. Upon the repayment of all or a portion of such debt, any accrued PIK Interest that has not been capitalized under the terms of the underlying debt instruments is classified as cash used in operating activities in the consolidated statements of cash flows. Repayment of the principal amount of debt, including PIK Interest that has been capitalized under the terms of the underlying debt, is classified as cash used in financing activities in the consolidated statements of cash flows.
(k)
Pensions and Other Postretirement Benefits
The valuation of pension and other postretirement benefits requires the use of assumptions and estimates to develop actuarial valuations of expenses, assets, and liabilities. Assumptions are made with respect to, among other things, discount rates, mortality rates, investment returns, projected benefits and Company contributions. The actuarial assumptions used are reviewed periodically and compared with external benchmarks. The discount rate is determined by projecting the plans’ expected future benefit payment obligations, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that results in the same projected benefit obligation. Estimated returns on plan assets are based on long-term expectations given current investment objectives and historical results. In accordance with FASB ASC 715, “Compensation - Retirement Benefits”, the Company recognizes the funded status of each plan in the consolidated balance sheets.
(l)
Insurance
Insurance liabilities are recorded based upon the claim reserves established through actuarial methods and estimates, including historical claims experience, demographic factors, severity factors, expected trend rates and other actuarial assumptions. To mitigate a portion of its risks, the Company maintains insurance for individual claims exceeding certain dollar limits. Provisions for estimated losses in excess of insurance limits are provided at the time such determinations are made. The accruals associated with the exposure to these potential liabilities, as well as the methods used in such evaluations, are reviewed by management for adequacy at the end of each reporting period and adjustments, if any, are reflected in earnings.
(m)
Revenue Recognition
Sales are recorded upon shipment or delivery, depending on when title and the risks and rewards of ownership passes to unaffiliated customers, collectability is reasonably assured and pricing is fixed or determinable. The Company classifies amounts billed to customers for shipping and handling in net sales, and costs incurred for shipping and handling in cost of sales in the consolidated statements of income. Accruals are made for sales returns and other allowances based on the Company’s experience. Taxes assessed by a governmental authority that are imposed directly on a revenue-producing transaction are presented on a net basis in the consolidated statements of income.
(n)
Income Taxes
The Company is subject to income taxes in the U.S. and in numerous foreign jurisdictions, the most significant of which are Mexico and China. Income taxes are accounted for under the rules of FASB ASC 740, “Income Taxes”, and a full income tax provision is computed for each reporting period using the asset and liability approach of accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period of the change in rate. A valuation allowance is provided for deferred income tax assets when, in the opinion of management, it is more likely than not that some or all of the Company’s deferred income tax assets will not be realized. In evaluating the expected future realization of its deferred income tax assets, ITG considers both positive and negative evidence related to expected future reversals of existing taxable temporary differences, projections of future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years, and potential tax-planning strategies. The Company records interest and penalties related to income tax settlements in income tax expense in the consolidated statements of income. Significant judgments are required in order to determine the realizability of the deferred income tax assets. Changes in the expectations regarding the realization of deferred income tax assets could materially impact income tax expense in future periods. For uncertain income tax positions on the Company’s income tax returns, the Company first determines whether it is more likely than not that each income tax position would be sustained upon audit. The Company then estimates and measures any tax benefit as the amount that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities. If the Company later modifies its evaluations, the Company records the related changes in the tax provision during the period in which such determinations are made. Provision has been made for income taxes on unremitted earnings of subsidiaries and affiliates, except earnings which are deemed to be indefinitely invested at the subsidiary affiliate level.
(o)
Derivative Instruments
The Company accounts for derivative instruments in accordance with FASB ASC 815, “Derivatives and Hedging”. Under these rules, all derivatives, except those qualifying for the “normal purchases and normal sales” exception, are required to be recognized on the balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. At the inception of the hedge contract, the Company determines whether the derivative meets the criteria for hedge accounting treatment or whether the financial instrument is not designated as a hedge for accounting purposes. The Company formally documents its hedge relationships, identifying the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The effective portion of the change in the fair value of a derivative that is designated as a cash flow hedge is recorded in the “Accumulated other comprehensive loss, net” line of the Company’s consolidated balance sheets. Because the Company’s hedged items are components of cost of goods sold, realized gains and losses on derivative contracts are recorded in cost of goods sold upon settlement of those contracts, and cash flows from the settlement of derivative contracts are reported in operating activities. Unrealized gains and losses on derivative contracts not designated as hedging instruments are recorded in “other income (expense) - net” in the consolidated statements of income since these amounts represent non-cash changes in the fair values of open contracts that are not expected to correlate with the amounts and timing of the recognition of the hedged items.
(p)
Commitments and Contingencies
Liabilities for loss contingencies, including environmental remediation costs not within the scope of FASB ASC 410, “Asset Retirement and Environmental Obligations”, arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is deemed probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies, net of estimated recoveries, are expensed as incurred. Any recoveries of costs from third parties, which are probable of realization, are separately recorded as assets, and are not offset against the related liability, in accordance with FASB ASC 210-20, “Balance Sheet - Offsetting”. The Company accrues for losses associated with environmental remediation obligations not within the scope of FASB ASC 410 when such losses are deemed probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental remediation obligations are not discounted to their present value.
(q)
Stock-Based Compensation
The Company’s equity incentive plans are described in Note 14. FASB ASC 718, “Compensation - Stock Compensation”, requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value of the award. Unvested stock options are amortized on a straight-line basis over the remaining vesting periods as compensation expense based on the grant date fair value. Excess tax benefits related to stock option exercises are to be reflected as financing cash inflows. The Company’s policy is to issue shares upon exercise of stock options from newly issued shares.
(r)
Foreign Currency Translation
The U.S. dollar is the functional currency of the Company’s foreign subsidiaries primarily due to the amount and volume of transactions denominated in U.S. dollars, including sales transactions and related accounts receivable, purchase transactions and related inventories and accounts payable, financing transactions and certain intercompany transactions. In addition, the foreign subsidiaries’ sales prices are determined predominantly by worldwide competitive and economic factors. As a result, the effects of remeasuring assets and liabilities into U.S. dollars are included in the accompanying consolidated statements of income in “other income (expense) - net.”
(s)
Fair Value of Financial Instruments
The accompanying consolidated financial statements include certain financial instruments, and the fair value of such instruments may differ from amounts reflected on a historical basis. Such financial instruments consist of cash deposits, accounts receivable, notes receivable, advances to affiliates, accounts payable, certain accrued liabilities, short-term borrowings and long-term debt. The Company recognizes interest income on impaired loans only upon the receipt of cash which is applied first to overdue interest and then to overdue principal amounts.
(t)
Segment Information
The Company is organized and managed primarily according to product categories and manufacturing processes rather than by markets or end-use customers. The Company currently has four operating segments that are reported to the chief operating decision maker (“CODM”) and three reportable segments that are presented herein. The reporting of the Company’s operations to the CODM in four segments is consistent with how the Company is managed and how resources are allocated by the CODM. Segment data for all periods presented in the accompanying consolidated financial statements has been recast to conform to the current presentation as reported to the CODM.
(u)
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts recorded in the consolidated financial statements and the related notes to consolidated financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to the valuation of receivables, inventories, goodwill, intangible assets, other long-lived assets, guarantee obligations, and assumptions used in the calculation of, among others, income taxes, pension and postretirement benefits, and legal and environmental costs, and of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments. These estimates and assumptions are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management monitors economic conditions and other factors and adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile foreign currencies and equity values as well as changes in global consumer spending can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results may differ materially from these estimates under different assumptions or conditions. Changes in these estimates resulting from changes one or more of these factors, or in the general economic environment are reflected in the financial statements in the period in which such changes occurs. Management believes that its estimates impacting the accompanying consolidated financial statements, including for these matters, are reasonable based on facts currently available.
(v)
Research and Development Expenses
Research and development costs are charged to operations when incurred and are recorded as a component of selling and administrative expenses in the accompanying consolidated statements of income. Costs associated with research and development were approximately $5.6 million in 2015 and $6.2 million in 2014.
(w)
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising costs were approximately $0.7 million and $0.6 million in 2015 and 2014, respectively, and were recorded as a component of selling and administrative expenses in the accompanying consolidated statements of income.
(x)
Fiscal Year
The Company uses a calendar fiscal year from January 1 to December 31.
Recently Adopted Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”. Under this ASU, a discontinued operation is (1) a component of an entity or group of components that has been disposed of by sale, disposed of other than by sale or is classified as held for sale that represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (2) an acquired business or nonprofit activity that is classified as held for sale on the date of the acquisition. The guidance does not change the presentation requirements for discontinued operations in the financial statement where net income is presented. The standard expands the disclosures for discontinued operations and requires new disclosures related to individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following the disposal date, and retained equity method investments in a discontinued operation. ASU 2014-08 was effective prospectively for reporting periods beginning on or after December 15, 2014. The Company adopted ASU 2014-08 on January 1, 2015 and will apply the guidance prospectively to any disposal activities.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. Under ASU 2015-03, the costs of issuing debt is no longer recorded as an intangible asset, except when incurred before receipt of the funding from the associated debt liability or for line-of-credit arrangements as described below. Rather, debt issuance costs related to a recognized debt liability are now presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The costs continue to be amortized to interest expense using the effective interest method. ASU 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements - Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting”. ASU 2015-15 amended ASU 2015-03 to include the SEC staff’s position that it would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are outstanding borrowings under that line-of-credit arrangement. ASU 2015-15 is effective for fiscal years and interim periods beginning after December 15, 2015 with early adoption permitted, and it requires retrospective application to all prior periods presented in the financial statements. The Company early adopted ASU 2015-03 and ASU 2015-15 as of December 31, 2015. Requiring presentation of debt issuance costs as a direct reduction of the related debt liability (rather than as an asset) is consistent with the presentation of debt discounts under GAAP. It also reflects the SEC staff’s views regarding the treatment of equity issuance costs as a reduction of the gross proceeds of an equity offering. Further, it conforms GAAP to FASB Concepts Statement No. 6, which states, “Debt issue cost is not an asset for the same reason that debt discount is not - it provides no future economic benefit. Debt issue cost in effect reduces the proceeds of borrowing and increases the effective interest rate and thus may be accounted for the same as debt discount.” In addition, it converges the guidance in GAAP with that in International Financial Reporting Standards (“IFRS”), under which transaction costs that are directly attributable to the issuance of a financial liability are treated as an adjustment to the initial carrying amount of the liability. The Company’s December 31, 2014 consolidated balance sheet has been recast to apply the provisions of ASU 2015-03 and ASU 2015-15 as follows:
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes”. ASU 2015-17 is part of the FASB’s simplification initiative aimed at reducing complexity in accounting standards. Current GAAP require the deferred taxes for each jurisdiction (or tax-paying component of a jurisdiction) to be presented as a net current asset or liability and net noncurrent asset or liability. This requires a jurisdiction-by-jurisdiction analysis based on the classification of the assets and liabilities to which the underlying temporary differences relate, or, in the case of loss or credit carryforwards, based on the period in which the attribute is expected to be realized. Any valuation allowance is then required to be allocated on a pro rata basis, by jurisdiction, between current and noncurrent deferred tax assets. To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. As a result, each jurisdiction will now only have one net noncurrent deferred tax asset or liability. ASU 2015-17 does not change the existing requirement that only permits offsetting within a jurisdiction; therefore, companies are still prohibited from offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. ASU 2015-17 is effective for public business entities in fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted for all entities as of the beginning of an interim or annual reporting period. The guidance may be applied either prospectively or retrospectively by reclassifying the comparative balance sheet. The Company early adopted ASU 2015-15 as of December 31, 2015. ASU 2015-17 conforms GAAP and IFRS and is intended to reduce complexity in financial reporting. The Company’s December 31, 2014 consolidated balance sheet has been recast to apply the provisions of ASU 2015-17 as follows:
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts With Customers”, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. ASU 2014-09 was originally proposed to be effective for the Company for annual periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, which defers the effective date of ASU 2014-09 for one year, making ASU 2014-09 effective for annual periods beginning after December 15, 2017 for all public business entities, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact, if any, that ASU 2014-09 and ASU 2015-14 will have on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved After the Requisite Service Period”. ASU 2014-12 requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. ASU 2014-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted. The Company does not expect that ASU 2014-12 will have a material effect on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. ASU 2014-15 defines and clarifies that substantial doubt exists when conditions and events indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date financial statements are issued or available to be issued and requires management to perform the assessment every interim and annual period. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. ASU 2014-15 does not impact companies’ financial statements. Adoption of this standard is not expected to have an impact on the Company’s financial statement disclosures.
In January 2015, the FASB issued ASU 2015-01, “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. ASU 2015-01 is effective for fiscal years and interim periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect that the adoption of ASU 2015-01 will have a material impact on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”. ASU 2015-05 provides guidance to entities about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a software cloud computing arrangement contains a software license, entities should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, entities should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize to ASC 840-10, “Leases”, to determine the asset acquired in a software licensing arrangement. For public companies, ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company does not expect that the adoption of ASU 2015-05 will have a material impact on its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. ASU 2015-11 simplifies the subsequent measurement of inventories by replacing the three measurements under the current lower of cost or market test with one measurement under a lower of cost or net realizable value test. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance applies only to inventories for which cost is determined by methods other than the last in first-out (“LIFO”) method or the retail inventory method. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact, if any, that ASU 2015-11 is expected to have on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable fair values, eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value, requires use of the exit price notion when measuring fair value, requires separate presentation in certain financial statements, and requires an evaluation of the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect that the adoption of ASU 2016-01 will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability in its balance sheet, initially measured at the present value of the lease payments, for both financing and operating leases (other than leases with a term of twelve months or less). ASU 2016-02 also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and it also requires additional qualitative and quantitative disclosures. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)”. ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public companies, ASU 2016-05 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of ASU 2016-05 will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force)”. ASU 2016-06 simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by clarifying that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. For public companies, ASU 2016-06 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of ASU 2016-06 will have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, “Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting”. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest. It also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. For all companies, ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, applied prospectively. Earlier application is permitted. The Company does not expect that the adoption of ASU 2016-07 will have a material impact on its consolidated financial statements.
Note 2 Discontinued Operations
On September 23, 2014, the Company completed the sale of certain assets of Narricot Industries LLC (“Narricot ”) which represented the Company’s former narrow fabrics segment. The sale price consisted of $4.2 million in cash and a three-year, 6.5% promissory note for $3.2 million. The promissory note provides that only interest was payable for the six month period ended March 2015, and thereafter principal and interest are payable in equal monthly installments through September 2017. Amounts due under the promissory note are secured by a first lien on all of the property, plant and equipment of Narricot sold in the transaction (see Note 21 for information about a 2015 impairment charge related to the promissory note).
As of May 25, 2012, the Company deconsolidated its ITG-Phong Phu Joint Venture (“ITG-PP”), a cotton-based fabrics and garment manufacturing operation in Vietnam as a result of the entry into an enforcement agreement pursuant to which Vietnam Technological Commercial Joint Stock Bank (“Techcombank”) took possession of certain assets of ITG-PP in accordance with the terms of its credit agreement with ITG-PP. The obligations of ITG-PP are non-recourse to the Company or any other subsidiary of the Company, but are secured by the assets of ITG-PP. As of the date hereof, no final sale of the assets has occurred.
Because the disposal or transfer of assets and obligations of the Narricot and ITG-PP businesses comprised the entire business operations of such entities and the Company has no significant continuing cash flows from, or continuing involvement with, such operations, the results of operations of the Narricot and ITG-PP businesses are presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. ITG-PP did not have any net sales in 2015 or 2014.
In accordance with GAAP, the Company allocates parent company interest to discontinued operations based on parent company debt that is required to be repaid from proceeds of the transaction giving rise to the disposition. No parent company interest has been allocated to the ITG-PP discontinued operations due to the uncertainty of any amounts to be received by the Company.
Net sales and certain other components included in discontinued operations were as follows (in thousands):
Note 3 Inventories
The major classes of inventory are as follows (in thousands):
Note 4 Investments in and Advances to Unconsolidated Affiliates
In August 2014, the Company sold its 50% equity interests in the Summit Yarn LLC and Summit Yarn Holdings joint ventures (together, “Summit Yarn”) for cash proceeds of $9.6 million to its joint venture partner, Parkdale America, LLC. The Company recorded a gain on the sale of Summit Yarn of $9.4 million in 2014. Prior to the sale of Summit Yarn, the Company’s results of operations included various related party transactions entered into in the normal course of business with this joint venture (see Note 16). Such related party transactions have been eliminated through the cost of goods sold and the equity in income (loss) of unconsolidated affiliates lines in the Company’s 2014 consolidated statement of income.
The Company owns 49% of NxGen Technologies, LLC (“NxGen”), which is in the business of designing airbags, airbag systems and inflator units. The results of NxGen are included in the equity in losses of unconsolidated affiliates line in the Company’s consolidated statements of income.
Note 5 Property, Plant, and Equipment
Property, plant, and equipment consisted of the following (in thousands):
The Company periodically performs assessments of the useful lives of its depreciable assets. In evaluating useful lives, the Company considers how long assets will remain functionally efficient and effective given such factors as quality of construction and estimated economic environments, competitive factors and technological advancements. If the assessment indicates that an asset may be used for a longer or shorter period than previously estimated, the useful life of such asset is revised, resulting in a change in estimate. Changes in estimates are accounted for on a prospective basis by depreciating the asset’s current then-carrying value over its revised estimated remaining useful life. Depreciation and amortization expense related to property, plant and equipment was $11.6 million and $12.2 million for 2015 and 2014, respectively.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, the Company updates each quarter the test of recoverability of the value of its long-lived assets pursuant to the provisions of FASB ASC 360, “Property, Plant, and Equipment”. Such recoverability reviews and tests, primarily based on fair value measured by prices for similar assets, did not result in any impairment charges in 2015 or 2014, except as related to discontinued operations in 2014 as described in Note 21. The Company cannot predict the occurrence of any future events or conditions that might adversely affect the carrying value of long-lived assets. A decline in general economic or industry-specific business conditions could result in future impairment charges with respect to the Company’s long-lived assets, including any of its property, plant and equipment.
Note 6 Goodwill, Intangible Assets and Deferred Charges
Goodwill, intangible assets and deferred charges are comprised of the following (in thousands):
The goodwill balance at December 31, 2015 and 2014 of $2.7 million relates to the commission finishing segment. No impairment was recorded as a result of the Company’s annual evaluation as of October 1, 2015 or 2014.
The following table reflects the changes in the net carrying amount of other intangible assets (in thousands):
Amortization expense for definite-lived intangible assets and deferred charges for 2015 and 2014 was $0.2 million and $0.7 million, respectively. The estimated future amortization expense for definitive-lived intangible assets and deferred charges, based on balances as of December 31, 2015 is as follows (in thousands):
Note 7 Sundry Payables and Accrued Liabilities
The major categories of sundry payables and accrued liabilities are as follows (in thousands):
Note 8 Long-Term Debt and Short-Term Borrowings
Total outstanding long-term debt of the Company consisted of the following (in thousands):
(1)
Non-recourse to the U.S. parent company.
U.S. Credit Facility
On March 30, 2011, the Company and certain of its U.S. subsidiaries entered into an Amended and Restated Credit Agreement with General Electric Capital Corporation (“GE Capital”), as agent and lender, and certain other lenders (as amended, the “2011 Credit Agreement”). As amended to date, the 2011 Credit Agreement provides for a revolving credit facility of $85.0 million (the “U.S. Revolver”) and a term loan of $5.8 million (the “U.S. Term Loan”). On March 1, 2016, Wells Fargo & Company completed the purchase of portions of GE Capital’s commercial and corporate finance businesses, and all rights and obligations under the 2011 Credit Agreement were assigned to Wells Fargo Bank, N.A. as agent and lender as of that date.
The U.S. Term Loan is due and payable on January 1, 2017, and outstanding amounts under the U.S. Revolver are due and payable on December 18, 2019. The U.S. Term Loan requires repayments of $0.3 million per month until maturity. Borrowings under the 2011 Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”), plus an applicable margin, or other published bank rates, plus an applicable margin, at the Company’s option. At December 31, 2015, there was $10.6 million outstanding under the U.S. Revolver at a weighted average interest rate of 3.2% and $2.8 million principal outstanding under the U.S. Term Loan at a weighted average interest rate of 3.3% (effective interest rate of 8.7%). As of December 31, 2015, the Company had $8.3 million of standby letters of credit issued in the normal course of business that reduced borrowing availability under the U.S. Revolver, none of which had been drawn upon. At December 31, 2015, the Company’s average adjusted availability (as defined under the 2011 Credit Agreement) under the U.S. Revolver was $55.6 million. Depending on amounts borrowed and average adjusted availability, the U.S. Revolver requires the payment of an unused commitment fee in the range of 0.25% to 0.375% annually, payable monthly.
If the Company’s excess availability (as defined in the 2011 Credit Agreement) falls below certain predefined levels, the lenders under the 2011 Credit Agreement can draw upon a standby letter of credit in the amount of $17.0 million (the “WLR LC”); no such amounts had been drawn by the lenders as of December 31, 2015. Amendment No. 12 to the 2011 Credit Agreement provides for reductions of the WLR LC of up to $5.0 million, or termination of the WLR LC, based upon amounts of the U.S. Term Loan repaid under the 2011 Credit Agreement, the maintenance of a specified fixed charge coverage ratio, the level of average excess availability, and certain other conditions. The WLR LC has been provided by WLR Recovery Fund IV, L.P. (“Fund IV”), which is controlled by WL Ross & Co. LLC, our controlling stockholder (“WLR LLC”). One member of our board of directors is also affiliated with various investment funds controlled by WLR LLC (collectively, the “WLR Affiliates”) that directly own a majority of our voting stock.
The obligations of the Company (and certain of its U.S. subsidiaries) under the 2011 Credit Agreement are secured by certain of the Company’s (and its U.S. subsidiaries’) U.S. assets, a pledge by the Company (and its U.S. subsidiaries) of the stock of their respective U.S. subsidiaries and a pledge by the Company (and its U.S. subsidiaries) of the stock of certain of their respective foreign subsidiaries.
The 2011 Credit Agreement contains affirmative and negative covenants and events of default customary for agreements of this type. The Company was in compliance with such covenants as of December 31, 2015. The 2011 Credit Agreement also contains a cross default and cross acceleration provision relating to that certain Note Purchase Agreement, originally dated as of June 6, 2007 (as amended, the “Note Purchase Agreement”).
Subsidiary Credit Facilities
In January 2015, a wholly-owned subsidiary of the Company, Burlington Morelos S.A. de C.V. (“Burlington Morelos”), entered into a five year, $12.2 million term loan with Banco Nacional de Mexico, S.A. (“Banamex”) with principal repayments of $0.2 million per month until January 2020, with the remaining principal balance due in February 2020. The obligations of Burlington Morelos under such term loan are denominated in U.S. dollars and are secured by a pledge of all property, plant and equipment of Burlington Morelos and its subsidiaries. The interest rate on borrowings under this term loan agreement is variable at LIBOR plus 3.5%. At December 31, 2015, the principal amount outstanding under the Burlington Morelos term loan was $10.7 million at an interest rate of 3.7% (effective interest rate of 4.1%).
In January 2015, a wholly-owned subsidiary of the Company, Parras Cone de Mexico, S.A. de C.V. (“Parras Cone”), entered into a $10.6 million term loan agreement. The term loan agreement requires principal repayments of $0.1 million per month until January 2020, with the remaining principal balance due in February 2020. The obligations of Parras Cone under this loan are denominated in U.S. dollars, are secured by all of the assets of Parras Cone, and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under this term loan is variable at LIBOR plus 3.5%. The term loan facility contained an option to increase borrowings by up to $7.0 million until January 2016, and such option was reduced to $4.0 million upon the execution of a new term loan facility in July 2015 as described below. At December 31, 2015, Parras Cone has borrowed the entire $4.0 million available under this additional loan commitment. At December 31, 2015, total principal amount outstanding under the Parras Cone term loan was $13.2 million at a weighted average interest rate of 3.7% (effective interest rate of 4.0%).
In July 2015, Parras Cone entered into a separate $7.0 million term loan agreement, with the proceeds from borrowings thereunder to be used for construction of a natural gas powered cogeneration facility at its plant location in Mexico. Under this agreement, Parras Cone can draw upon a $7.0 million commitment until July 2016. The term loan requires equal monthly principal repayments based on the outstanding principal balance beginning in February 2017 and continuing through a period not to exceed 72 months from the date of the draw. The obligations of Parras Cone under such term loan are denominated in U.S. dollars, are secured by all of the assets of Parras Cone and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under the term loan agreement is variable at LIBOR plus 2.95% for the first three years of the term loan and LIBOR plus 2.75% thereafter. As of the date hereof, Parras Cone has borrowed $4.2 million under this agreement at a contractual and effective interest rate of 3.2%.
In August 2015, Parras Cone entered into a revolving credit agreement that provides for borrowing availability of up to $18.0 million with a maturity date of August 17, 2018. Borrowings under this facility are denominated in U.S. dollars and are secured by all of the assets of Parras Cone and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under the Parras Cone revolving credit agreement is variable at LIBOR plus 3.25%. At December 31, 2015, the amount outstanding under the Parras Cone revolving credit facility was $13.9 million at a contractual and effective interest rate of 3.5%. Amounts borrowed were used in part to repay outstanding amounts under Parras Cone’s March 2013 factoring agreement, which had a maturity date of March 6, 2017, and which was replaced by this agreement.
The credit facilities entered into by the Company’s subsidiaries in Mexico described above contain customary provisions for default for agreements of this nature. Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights as a secured party. Such term loans also contain certain customary financial covenant requirements applicable to the Company’s subsidiaries in Mexico. In addition, Burlington Morelos and its subsidiaries are restricted under such term loans from making annual capital expenditures in excess of certain percentages (as defined in the term loan agreements) of annual consolidated net sales of such consolidated group. As of December 31, 2015, Burlington Morelos and its subsidiaries were in compliance with such covenants. Borrowings under these credit facilities are non-recourse to the ITG parent company.
In 2006 and 2007, Cone Denim (Jiaxing) Limited obtained financing from Bank of China to fund its capital expenditures in excess of partner equity contributions, which contributions were in accordance with applicable Chinese laws and regulations. The loan was scheduled to be repaid in monthly principal installments of no less than $0.5 million until January 2016. The Company fully repaid this term loan in the third quarter of 2015.
Senior Subordinated Notes - Related Party
In June 2007, the Company issued senior subordinated notes with an original maturity date of June 6, 2011 (the “Notes”). Prior to the occurrence of a Qualified Issuance (as defined in the Note Purchase Agreement) of its debt and/or equity securities, interest on the Notes is payable in-kind (“PIK”) on a quarterly basis, either by adding such interest to the principal amount of the Notes, or through the issuance of additional interest-bearing Notes. At each interest payment date occurring after the completion of a Qualified Issuance, 75% of the then-accrued but unpaid interest on the Notes will be payable in cash, and the remaining portion will continue to be payable in-kind.
At various times, the WLR Affiliates purchased from holders certain of the Notes with an original interest rate of 12% per annum which were thereafter amended, restated and reissued in the form of Tranche B Notes. The Tranche B Notes are classified as “Senior subordinated notes - related party, including PIK interest” in the Company’s accompanying consolidated balance sheets. The Tranche B Notes bear PIK interest at 12% per annum and mature on June 30, 2019.
As previously disclosed, in 2014, $21.9 million in principal and accrued interest of the Tranche B Notes outstanding as of December 31, 2013 was cancelled, together with all additional interest that accrued on such notes from December 31, 2013 through August 29, 2014. In 2014, the Company reversed $1.4 million of PIK interest expense that had been recorded in that period, 2014 related to such cancelled Tranche B Notes. At December 31, 2015, $181.4 million aggregate principal amount was outstanding under the Tranche B Notes, including PIK interest.
Debt Maturities
As of December 31, 2015, aggregate maturities of long-term debt for each of the next five 12-month periods were as follows: $6.8 million, $4.9 million, $19.0 million, $197.0 million and $7.7 million.
Short-term Borrowings
The Company and certain of its subsidiaries had short-term borrowing arrangements with certain financial institutions or suppliers in the aggregate amount of $32.4 million at December 31, 2015 and $43.8 million at December 31, 2014, with weighted average interest rates of 5.0% and 6.6%, respectively. At December 31, 2015, such amounts included the following arrangements: ITG and its U.S. subsidiaries had outstanding short-term financing obligations from certain cotton and other suppliers in the amount of $0.7 million; Cone Denim (Jiaxing) Limited had outstanding short-term working capital loans in an aggregate amount of $27.1 million from various Chinese financial institutions, including approximately $5.9 million secured by land and buildings at Jiaxing Burlington Textile Company and $1.1 million guaranteed by a $1.4 million standby letter of credit with a WLR Affiliate; and Jiaxing Burlington Textile Company had outstanding short-term working capital loans from certain Chinese financial institutions in the amount of $4.6 million, which are guaranteed by standby letters of credit from the U.S. parent company. For 2015 and 2014, the average balance of the Company’s short-term borrowings was $41.5 million and $45.5 million, respectively, with weighted average interest rates of 5.9% and 6.6%, respectively. The maximum month-end amount of the Company’s short-term borrowings in 2015 and 2014 was $46.5 million and $48.6 million, respectively.
Guarantees
FASB ASC 460, “Guarantees,” provides guidance on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued and specific disclosures related to product warranties. As of December 31, 2015, the Company and various of its consolidated subsidiaries were borrowers under various bank credit agreements (collectively, the “Facilities”). Certain of the Facilities are guaranteed by either the Company and/or various of its consolidated subsidiaries. The guarantees are in effect for the duration of the related Facilities. The Company does not provide product warranties within the disclosure provisions of FASB ASC 460. The Company did not have any off-balance sheet arrangements that were material to its financial condition, results of operations or cash flows as of or for the periods ended December 31, 2015 or December 31, 2014, except as noted herein.
In 2011, the Company entered into a Guaranty of Payment (as amended and restated, the “Guaranty”) in favor of Fund IV. As of December 31, 2015, Cone Denim (Jiaxing) Limited had outstanding short-term working capital loans from various Chinese financial institutions, including approximately $1.1 million guaranteed by a $1.4 million standby letter of credit with Fund IV pursuant to the Guaranty. The obligations of the Company under the Guaranty are payable in cash or, if cash is not permitted to be paid pursuant to the terms and conditions of the 2011 Credit Agreement and related documentation, then such amounts are payable in additional Tranche B Notes. Also pursuant to the Guaranty, the Company is required to pay a per annum amount equal to 10% of the amount of any such outstanding letters of credit. In 2015 and 2014, the Company incurred guarantee fees of $0.2 million and $0.6 million, respectively.
Note 9 Leases
As of December 31, 2015, minimum future obligations under capital leases and noncancelable operating leases were as follows (in thousands):
Capital leases are primarily for production machinery and equipment with imputed interest rates of 3.9% to 6.2%. Operating leases pertain to office facilities and a variety of machinery and equipment. Certain operating leases, principally for office facilities, contain escalation clauses for increases in operating costs, property taxes and insurance. For 2015 and 2014, rental expense for operating leases was $2.8 million and $2.6 million, respectively.
Note 10 Income Taxes
The Company files a consolidated U.S. federal income tax return with International Textile Group, Inc. as the parent company. The Company also has subsidiaries operating in various jurisdictions outside the United States and files income tax returns in the required jurisdictions. In certain foreign jurisdictions, the Company’s subsidiaries have operated under tax incentive programs that provided reduced or zero tax rates for certain subsidiaries for certain periods that remain currently open for examination by local authorities. Foreign entities record income tax expense based on the applicable laws and requirements of their respective tax jurisdictions.
Income tax (benefit) expense attributable to income from continuing operations consisted of (in thousands):
The Company’s income tax expense for 2015 and 2014 is different from the amount computed by applying the U.S. federal income tax rate of 35% to income from continuing operations before income tax expense as follows (in thousands):
The temporary basis differences that gave rise to deferred income tax assets and deferred income tax liabilities consisted of the following (in thousands):
Gross deferred income tax assets as of December 31, 2015 and 2014 were reduced by valuation allowances of $199.8 million and $208.1 million, respectively, for the portions of tax benefits that management considers it is more likely than not that some or all of its deferred income tax assets will not be realized. In determining whether it is more likely than not that deferred income tax assets would be realized, the Company evaluates various sources of expected future taxable income such as the future reversal of existing taxable temporary differences, future taxable income exclusive of reversing taxable temporary differences and carryforwards, taxable income in prior carryback years, and tax planning strategies. The Company believes that the valuation allowances recorded against deferred income tax assets are appropriate based on current facts and circumstances.
FASB ASC 740-10-25, “Income Taxes - Other Considerations or Special Areas - Recognition”, states that all earnings of a foreign subsidiary are presumed to represent temporary differences in income recorded for financial reporting purposes and taxable income (and therefore requires deferred income tax liabilities to be recorded) unless management asserts that the subsidiary has invested, or will invest, its undistributed earnings indefinitely in foreign jurisdictions. If this assertion can be supported, such temporary difference is treated as a permanent difference, and no deferred income tax liability is required to be recorded. The indefinite reinvestment assertion is made by the Company on a subsidiary-by-subsidiary basis. The Company maintains that the undistributed earnings of the majority of its foreign subsidiaries will be indefinitely reinvested in foreign jurisdictions; therefore no deferred income tax liability has been recorded with respect to these subsidiaries’ earnings. Although a determination of the tax that would be due if such earnings were not indefinitely reinvested is not practicable due to the significant U.S. net operating loss carryforwards and the U.S. full valuation allowance on such net deferred income tax assets, any impact would not be material. The amount of cash and cash equivalents located at the Company’s foreign subsidiaries was approximately $12.0 million at December 31, 2015.
As described in Note 2, ITG-PP was deconsolidated as of May 25, 2012 for financial reporting purposes under GAAP. The entire amount of the tax impact ultimately recorded by the Company has been, and is expected to be, reduced by a valuation allowance as management believes that it is more likely than not that any tax benefits will not be realized. Because the final sale of the ITG-PP assets and subsequent liquidation of ITG-PP have not yet occurred, management does not currently have the necessary information to determine the ultimate impact of these transactions on the Company’s income taxes. Management does not expect that the ultimate tax impact of the deconsolidation, the final sale of ITG-PP assets, and the ultimate liquidation of ITG-PP will have a material impact on the Company’s consolidated balance sheet, results of operations or cash flows.
The Company currently has tax loss and credit carryforwards in the U.S., Mexico, and in various other foreign jurisdictions. The U.S. federal tax loss carryforward as of December 31, 2015 is $475.3 million and will expire at various times from 2026 through 2034. U.S. state net operating loss carryforwards were $219.5 million at December 31, 2015 and expire on various dates from 2016 to 2035. North Carolina and South Carolina jobs tax credit carryforwards of $28.8 million at December 31, 2015 expire at various times from 2016 through 2021. Foreign tax loss carryforwards as of December 31, 2015 are approximately $8.6 million and will expire at various times from 2016 through 2025.
The Company’s liability for uncertain tax positions at December 31, 2015 and 2014 was related to U.S. and Mexico jurisdictions. Activity related to uncertain tax positions is as follows (in thousands):
Tax legislation in Mexico effective as of January 1, 2014 included a provision to obligate taxpayers to recapture previous benefits related to consolidated reporting of “Asset Tax” liabilities. The recapture liability that the Company quantified includes amounts the Company believes are not owed according to its interpretation of the new law. Accordingly, the Company recorded a recapture liability of $1.7 million as of December 31, 2014 for this uncertain tax position.
The liability for uncertain tax positions of $1.6 million at December 31, 2015, if recognized, would reduce the Company’s effective tax rate. The amount of related interest and penalties accrued as of December 31, 2015 was not material to the consolidated financial statements.
The statute of limitations related to the Company’s consolidated U.S. federal income tax return is currently open for tax years 2004 and forward. The expiration of the statutes of limitation related to the non-U.S. and state income tax returns that the Company and its subsidiaries file varies by jurisdiction and state.
Note 11 Retirement and Other Postretirement Benefits
The Company’s U.S. wholly-owned subsidiary, Burlington Industries LLC, has a defined benefit pension plan that was closed to new participants in 2003 and is based on total participant contributions through September 30, 2003. On July 29, 2003, the plan was amended to provide that no further participant contributions could be made to the plan after September 30, 2003 and that no service or participation after such date would be recognized in calculating a pension benefit. The funding policy for this plan is to contribute periodically an amount based on the Employee Retirement Income Security Act of 1974 (“ERISA”) funding requirements as determined by the plan’s actuary. Benefits consist of a pension payable for life following termination or, at the option of the participant, a one-time lump sum cash payment equal to the discounted present value of the pension, based on the participant’s age and the amount of the participant’s contributions as determined under the provisions of the plan and applicable law. All participants are fully vested. In addition, the Company has a noncontributory life insurance plan covering certain former employees of Burlington Industries LLC that was closed to new participants in 1973. The Company’s policy is to fund the cost of the life insurance plan as expenses are incurred. The cost of such postretirement benefits was accrued over the participants’ service lives.
Amounts recognized in the accompanying consolidated balance sheets related to the Burlington Industries LLC pension and postretirement benefit plans consisted of the following (in thousands):
Components of net expense (benefit) and other amounts recognized in accumulated other comprehensive loss for the Burlington Industries LLC pension and postretirement benefit plans were as follows (in thousands):
Obligations, plan assets and the funded status of the Burlington Industries LLC pension and postretirement benefit plans were as follows (in thousands):
Weighted average assumptions used to determine net benefit cost of the Burlington Industries LLC pension and postretirement plans for the 2015 and 2014 periods were as follows:
The weighted average discount rates used to determine the benefit obligations of the Burlington Industries LLC pension and postretirement benefit plans as of December 31, 2015 and 2014 were as follows:
The discount rates are determined by projecting the plans’ expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that resulted in the same projected benefit obligation. The expected long-term rate of return on plan assets is based on a weighted average of the returns on individual asset categories in the portfolio. The expected return is based on historical returns as well as general market conditions.
An investment committee consisting of members of senior management of the Company is responsible for supervising, monitoring and evaluating the invested assets of the Company’s funded pension plan. The investment committee abides by documented policies and procedures relating to investment goals, targeted asset allocations, risk management practices, allowable and prohibited investment holdings, diversification, the relationship between plan assets and benefit obligations, and other relevant factors and considerations. The objective of the Company’s investment policies and strategies for the Burlington Industries LLC pension plan is to achieve a targeted return over the long term that increases the ratio of assets to liabilities at a level of risk deemed appropriate by the Company while maintaining compliance with ERISA, common law fiduciary responsibilities and other applicable regulations and laws. The investment objective is measured over rolling one-, three- and five-year periods. The Burlington Industries LLC pension plan invests primarily in passive investments and predominantly in the debt (fixed income) and equity asset classes. Investment in additional asset classes with differing rates of returns, return variances and correlations may be utilized to reduce risk by providing diversification relative to debt and equity asset classes. Additionally, the Company diversifies investments within asset classes to reduce the potential impact of losses in single investments. The Burlington Industries LLC pension plan’s asset allocation policy is the principal method for achieving its targeted return. The asset allocation targets are approximately 65% equity securities, 25% fixed income securities, 5% commodities, and 5% real estate, cash or cash equivalents and other diversifying assets, with alternative investments and variances allowed within certain ranges. Actual asset allocation is monitored monthly relative to established policy targets and ranges. A variance from these ranges triggers a review and rebalancing toward the target allocation with due consideration given to the liquidity of the investments and transaction costs.
The fair values of plan assets in the Burlington Industries LLC pension plan at December 31, 2015 and 2014 are shown below (in thousands). See Note 21 for a discussion of the levels of the fair value hierarchy under FASB ASC 820.
__________
(a)
Investments in commodity index funds that invest in various commodity-linked derivative instruments backed by a portfolio of inflation-indexed securities and other fixed income instruments, including bonds, debt securities and other similar instruments issued by various U.S. and non-U.S. public- or private-sector entities, primarily through investments in leveraged or unleveraged commodity index-linked notes.
(b)
Investments in U.S. government agency, public, corporate, mortgage-backed, and asset-backed securities as well as investment-grade international dollar-denominated bonds which seeks to track the performance of a broad, market-weighted bond index, all with maturities of more than one year.
(c)
Investments in several private equity funds that invest in diverse industries in the U.S.
The following table shows a reconciliation of the beginning and ending balances for assets valued using significant unobservable inputs (Level 3) (in thousands):
The investment assets of the Company’s pension plan are valued using the following valuation methods:
Cash and cash equivalents: Values are based on cost, including the effects of foreign currency exchange rates, which approximates fair value
U.S. government and government agency issues: Values are based on those provided by reputable pricing vendors, who typically use pricing matrices or models that use observable inputs
Corporate bonds: Values are based on those provided by reputable pricing vendors, who typically use pricing matrices or models that use observable inputs
Common stock: Values are based on the closing prices on the valuation date in an active market on national and international stock exchanges
Mutual funds: Values are based on the net asset value of the units held in the respective fund which are obtained from national and international exchanges
Partnership investments: Values are based on the estimated fair value of the participation by the Company in the investment as determined by the general partner or investment manager of the respective partnership
Other holdings: Values vary by investment type, but primarily are determined by reputable pricing vendors, who use pricing matrices or models that use observable inputs
The Company expects to contribute between $1.1 million to $1.5 million to its U.S. pension plan and $0.1 million to $0.3 million to its U.S. postretirement plan in 2016, depending on plan asset performance and actual benefit payment levels.
The following benefit payments are expected to be made in the following fiscal years related to the Burlington Industries LLC pension and postretirement benefit plans. The expected benefit payments are based on the same assumptions used to measure the plans’ benefit obligations at December 31, 2015 (in thousands).
Certain of the Company’s wholly-owned international subsidiaries in Mexico have recorded liabilities for seniority premium (retirement) benefit plans in the aggregate amount of $1.0 million at each of December 31, 2015 and 2014. Such plans have no plan assets.
The measurement date used to determine pension and postretirement benefit measures for the Company’s plans is December 31. Amounts recognized in accumulated other comprehensive loss for all plans consisted of $5.5 million and $6.0 million at December 31, 2015 and 2014, respectively. The estimated net loss for the pension and postretirement benefit plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in the next fiscal year is $0.4 million.
Note 12 Defined Contribution Plan
The Company has a 401(k) Savings Plan for all U.S. employees (and certain employees in foreign countries) that provides for employer contributions based on defined plan formulas and the level of the employee’s contribution. During the years ended December 31, 2015 and 2014, cash contributions of $2.0 million were made each year by the Company to the 401(k) Savings Plan and charged to operations in each period.
Note 13 Stockholders’ Deficit
Preferred Stock
As of December 31, 2015, the Company had 100,000,000 shares of preferred stock authorized, including 5,000,000 shares of Series C Preferred Stock (the “Series C Preferred Stock”), of which 114,628 shares were issued and outstanding at December 31, 2015 and 2014, 15,000,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), of which 3,165,071 shares were issued and outstanding at December 31, 2015 and 2014, and 5,000,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”), none of which were issued or outstanding at December 31, 2015 or 2014. The Company’s certificate of incorporation provides that the board of directors is authorized to create and issue additional series of preferred stock in the future, with voting powers, dividend rates, redemption terms, repayment rights and obligations, conversion terms, restrictions and such other preferences and qualifications as shall be stated in the resolutions adopted by the board of directors at the time of creation.
The terms of the Series C Preferred Stock provide that, among other things:
●
each share of Series C Preferred Stock has an initial liquidation preference of $1,000 (the “Series C Preferred Stock Liquidation Value”);
●
the Series C Preferred Stock is not convertible;
●
the Series C Preferred Stock, with respect to dividend rights and rights upon liquidation, winding up or dissolution, ranks (i) senior to the Company’s Series A Preferred Stock, Series B Preferred Stock, common stock and all classes and series of stock which expressly provide they are junior to the Series C Preferred Stock or which do not specify their rank; (ii) on parity with each other class or series of stock, the terms of which specifically provide they will rank on parity with the Series C Preferred Stock; and (iii) junior to each other class or series of stock of the Company, the terms of which specifically provide they will rank senior to the Series C Preferred Stock;
●
dividends on the Series C Preferred Stock are cumulative and accrue and are payable quarterly, in arrears, when, as and if declared by the board out of funds legally available therefor, at an annual rate of 8.0%, and are payable in additional shares of Series C Preferred Stock;
●
shares of Series C Preferred Stock are redeemable at the option of the Company at any time upon notice to the holder thereof and payment of 100% of the Series C Preferred Stock Liquidation Value, plus accrued dividends; and
●
shares of Series C Preferred Stock generally do not have any voting rights except as may be prescribed under the Delaware General Corporation Law; provided, however, that for so long as any shares of Series C Preferred Stock are outstanding, certain fundamental corporate actions set forth in the Certificate of Designation of Series C Preferred Stock may not be taken without the consent or approval of the holders of 66 2/3% of the outstanding Series C Preferred Stock.
Shares of Series A Preferred Stock vote together with shares of the Company’s common stock on all matters submitted to a vote of the Company’s stockholders. Each share of Series A Preferred Stock is entitled to one vote per share on all such matters. Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, into 2.5978 shares of the Company’s common stock. Notwithstanding the foregoing, however, for a period of up to six months from and after the time of an initial filing by the Company relating to a Public Offering (as defined in the Certificate of Designation of Series A Convertible Preferred Stock), any then-applicable conversion rights would be suspended. Upon the consummation of any such Public Offering, each share of Series A Preferred Stock will automatically convert into a number of shares of the Company’s common stock equal to $25.00 (subject to certain adjustments, the “Series A Preferred Stock Liquidation Value”) at the time of conversion divided by the product of (i) the price per share of common stock sold in such Public Offering and (ii) 0.75. The Company may redeem any and all shares of Series A Preferred Stock upon notice to the holders thereof and payment of 110% of the Series A Preferred Stock Liquidation Value. Dividends on the Series A Preferred Stock are cumulative and accrue and are payable quarterly, in arrears, when, as and if declared by the board out of funds legally available therefor, at an annual rate of 7.5%. Dividends are payable in additional shares of Series A Preferred Stock.
Shares of Series B Preferred Stock are authorized to be issued pursuant to the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). The certificate of designation relating to the Series B Preferred Stock provides the following:
●
shares of Series B Preferred Stock rank (i) senior to the Company’s common stock and all other classes of stock which by their terms provide that they are junior to the Series B Preferred Stock or do not specify their rank, (ii) on parity with all other classes of stock which by their terms provide that such classes rank on parity with shares of Series B Preferred Stock, and (iii) junior to the Company’s Series A Preferred Stock, Series C Preferred Stock and all other classes of stock which by their terms provide that they are senior to the Series B Preferred Stock, in each case with respect to rights on dividends and on a liquidation, winding up or dissolution of the Company;
●
upon any liquidation, winding up or dissolution of the Company, holders of shares of Series B Preferred Stock will be entitled to receive $25.00 per share, plus any declared but unpaid dividends, prior and in preference to any payment on any junior securities;
●
shares of Series B Preferred Stock will automatically convert into shares of the Company’s common stock upon the completion of a qualified Public Offering of common stock by the Company at a ratio equal to $25.00 divided by the public offering price per share in such Public Offering. Notwithstanding this, however, if the total number of shares of common stock to be issued upon such conversion would exceed the maximum number of shares of common stock then available for issuance pursuant to awards under the Plan, then the conversion ratio for the Series B Preferred Stock will be adjusted such that the total number of shares of common stock to be issued upon such conversion will equal the number of shares of common stock then available for issuance pursuant to awards under the Plan; and
●
shares of Series B Preferred Stock will vote together with all other classes and series of stock of the Company on all matters submitted to a vote of the Company’s stockholders. Each share of Series B Preferred Stock will be entitled to one vote per share on all such matters.
There were no shares of Series B Preferred Stock outstanding during any period presented.
Under a previously disclosed Stipulation and Settlement Agreement entered into by the Company in February 2014, which received court approval on August 29, 2014, $11.4 million (11,475 shares) and $257.6 million (10,304,963 shares) of Series C Preferred Stock and Series A Preferred Stock, respectively, and certain related dividends in arrears were cancelled in 2014. Pursuant to the certificates of designation of the Series C Preferred Stock and the Series A Preferred Stock, the Company is prohibited from paying dividends, if declared by the Company’s board of directors, on such preferred stock until funds are legally available therefor. As of December 31, 2015, dividends in arrears on preferred stock were $20.1 million, or $175.52 per share, on the Series C Preferred Stock, and $13.0 million, or $4.10 per share, on the Series A Preferred Stock, each payable in additional shares of such preferred stock.
Common Stock
The Company has 150,000,000 shares of common stock authorized at $0.01 par value per share, of which 17,468,327 shares were issued and outstanding at December 31, 2015 and 2014.
Accumulated Other Comprehensive Loss
The components of, and changes in, accumulated other comprehensive loss (net of income taxes of $0.3 million and $0.1 million as of and for the years ended December 31, 2015 and 2014, respectively) were as follows (in thousands):
(1)
See Note 18, "Derivative Instruments".
(2)
These components are included in the computations of net periodic benefit costs. See Note 11 for additional information about the Company's pension and postretirement benefit plans.
The U.S. dollar is the functional currency of the Company’s foreign subsidiaries; therefore, there is no accumulated other comprehensive income or loss related to foreign currency translation adjustments.
Note 14 Stock-Based Compensation
Under the Company’s equity incentive and stock option plans adopted in 2005, the Company was authorized to award restricted nonvested shares of common stock, options to purchase common stock, or Performance Unit/Share awards (as defined therein). During fiscal year 2005, certain stock option awards were granted with a maximum term of 10 years. No additional grants are permitted to be made under these plans.
On April 1, 2008, the board of directors approved, and effective as of June 9, 2008, the stockholders approved, the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). A total of 3,000,000 shares of the Company’s common stock and 1,000,000 shares of Series B Preferred Stock have been reserved for issuance under the 2008 Plan. The 2008 Plan authorizes the granting of awards to participants in the following forms: (i) stock options; (ii) stock appreciation rights (“SARs”) payable in cash, shares of common stock or Series B Preferred Stock or both; (iii) restricted stock and restricted stock units; (iv) performance shares and performance units payable in cash, shares of common stock or Series B Preferred Stock or both; and (v) other stock-based awards. For purposes of awards of performance shares or performance units, management objectives set by the Company’s compensation committee for awards may be based on one or more criteria related to earnings, cash flows, share or equity values, or other pre-established financial or non-financial objectives. The maximum number of shares of common stock with respect to one or more awards under the 2008 Plan that may be granted during any one calendar year or for any other performance period to any one participant is 450,000. The maximum number of shares of Series B Preferred Stock with respect to one or more awards under the 2008 Plan that may be granted during any one calendar year or for any other performance period to any one participant is 225,000. A performance unit paid to a participant with respect to any performance period may not exceed $3,500,000 times the number of years in the performance period. No awards have been granted under the 2008 Plan.
No stock options or other equity based awards were granted in any period presented. Stock option activity for the periods indicated below was as follows:
At December 31, 2015, the remaining contractual life of outstanding stock options was 5 months. At December 31, 2015, the number of stock options exercisable was 1,679 and the weighted average exercise price of those options was $10.10. At December 31, 2015, the aggregate intrinsic value of outstanding stock options, options currently exercisable, and options expected to vest were each zero.
There was no stock-based compensation expense charged to income in either of 2015 or 2014, and there was no unrecognized compensation cost for stock-based awards as of December 31, 2015 and 2014.
Note 15 Reconciliation to Diluted Loss Per Share
The following data reflects the amounts used in computing income (loss) from continuing operations per common share and the effect on the weighted average number of shares of dilutive potential common stock issuances (in thousands).
Based on the number of shares of Series A Preferred Stock outstanding as of December 31, 2015 and the Liquidation Value thereof on such date, the Series A Preferred Stock could potentially be converted at the option of the holders thereof into 9,569,111 shares of the Company’s common stock. The following shares (based on the weighted average number of shares contingently convertible during the year, in thousands) that could potentially dilute basic earnings per share in the future were not included in the diluted earnings per share computations because their inclusion would have been antidilutive. For additional information on the cancellation of certain shares of Series A Preferred Stock, see Note 13, “Stockholders’ Deficit”.
Note 16 Related Party Transactions
WLR LLC may from time-to-time provide advisory services to the Company (consisting of consulting and advisory services in connection with strategic and financial planning, investment management and administration and other matters relating to our business and operations of a type customarily provided by sponsors of U.S. private equity firms to companies in which they have substantial investments, including any consulting or advisory services that the Board of Directors reasonably requests). In return for such services, WLR LLC may charge a quarterly management fee of $0.5 million and is reimbursed for any reasonable out-of-pocket expenses (including expenses of third-party advisors retained by WLR LLC). Per the Note Purchase Agreement, the payment of the management fees could not occur while payable in-kind (“PIK”) interest on the Tranche A Notes was unpaid. As a result, WLR LLC did not charge the Company any management fees in 2015 or 2014. Management fees of $2.5 million from prior periods remain outstanding and are recorded as a non-interest bearing noncurrent liability in the Company’s December 31, 2015 and 2014 consolidated balance sheets.
If the Company’s excess availability falls below certain predefined levels, the lenders under the 2011 Credit Agreement can draw upon a standby letter of credit in the amount of $17.0 million (the “WLR LC”); no such amounts had been drawn by the lenders as of December 31, 2015. Amendment No. 12 to the 2011 Credit Agreement provides for reductions of the WLR LC of up to $5.0 million, or termination of the WLR LC, based upon amounts of the term loan repaid under the 2011 Credit Agreement, the maintenance of a specified fixed charge coverage ratio, the level of average excess availability, and certain other conditions. The WLR LC has been provided by WLR Recovery Fund IV, L.P. (“Fund IV”), which is controlled by WLR LLC. One member of our board of directors is also affiliated with various investment funds controlled by WLR LLC (collectively, the “WLR Affiliates”) that directly own a majority of our voting stock
From time to time, the WLR Affiliates have purchased or received as PIK Interest Tranche B Notes. The Company issued additional Tranche B Notes of $1.2 million in 2014 in connection with the Guaranty (see Note 8). The outstanding amount of Tranche B Notes ($181.4 million at December 31, 2015, including outstanding PIK Interest) is classified as “Senior subordinated notes - related party, including PIK interest” in the Company’s accompanying consolidated balance sheet at December 31, 2015. The maturity date of the Tranche B Notes is June 2019. Under a previously disclosed Stipulation and Settlement Agreement entered into by the Company in February 2014, which received court approval on August 29, 2014, $21.9 million in principal and accrued interest of the Tranche B Notes outstanding as of December 31, 2013 was cancelled, together with all additional interest that accrued on such notes from December 31, 2013 through August 29, 2014 during 2014. Also under the previously disclosed Stipulation and Settlement Agreement, $11.4 million (11,475 shares) and $257.6 million (10,304,963 shares) of Series C Preferred Stock and Series A Preferred Stock, respectively, and certain related dividends in arrears were cancelled during 2014.
In 2011, the Company entered into the Guaranty in favor of Fund IV. Pursuant to the Guaranty, the Company has guaranteed the prompt payment, in full, of the reimbursement obligations of Fund IV under certain letter of credit agreements to which Fund IV was a party and under which Fund IV agreed to be responsible for certain obligations of ITG-PP, up to a total amount of $15.5 million. Under the 2011 Credit Agreement, the lenders (i) were entitled to receive payment under a $3.7 million evergreen standby letter of credit executed by Fund IV (the “Fund IV LC”), or (ii) the Company’s investments in ITG-PP discussed above were required to be repaid to the Company by ITG-PP no later than one month prior to the March 31, 2016 expiration date of the Fund IV LC. In August 2014, the Company entered into Consent and Amendment No. 11 to the 2011 Credit Agreement which provided, among other things, for the termination of the Fund IV LC. On October 14, 2014, the Fund IV LC was terminated and an additional $1.2 million of principal amount of Tranche B Notes were issued in satisfaction of the Company’s obligations thereunder for accrued guaranty fees. Cone Denim (Jiaxing) Limited has outstanding short-term working capital loans from various Chinese financial institutions, including approximately $1.1 million guaranteed by a $1.4 million standby letter of credit with Fund IV pursuant to the Guaranty. The obligations of the Company are payable in cash or, if cash is not permitted to be paid pursuant to the terms and conditions of the 2011 Credit Agreement and related documentation, then such amounts are payable in additional Tranche B Notes. Also pursuant to the Guaranty, the Company is required to pay a per annum amount equal to 10% of the amount of any such outstanding letters of credit. In 2015 and 2014, the Company incurred such guarantee fees of $0.2 million and $0.6 million, respectively, and the amount of such accrued guaranty fees outstanding as of December 31, 2015 was $1.2 million.
The Company has entered into a marketing and service arrangement with OCM India Limited (“OCM”), which is owned by certain affiliates of WLR LLC. Under the arrangement, the Company provides certain operations, marketing and service assistance to OCM in exchange for a service fee. In 2015 and 2014, the Company billed $0.1 million and $0.2 million, respectively, to OCM for service fees and sales commissions.
In August 2014, the Company sold its 50% equity interests in Summit Yarn (see Notes 4, 23 and 24). Purchases of raw materials from Summit Yarn for the years ended December 31, 2015 and 2014 were $57.2 million and $60.6 million, respectively. In addition, the Company billed Summit Yarn, LLC $3.4 million in 2014 for certain utilities it paid on behalf of Summit Yarn, LLC in Mexico.
Note 17 Segment and Other Information
The Company is organized and managed primarily according to product categories and manufacturing processes rather than by markets or end-use customers. The Company currently has four operating segments that are reported to the chief operating decision maker (“CODM”) and three reportable segments that are presented herein. The bottom-weight woven fabrics segment consists of heavy weight woven fabrics with a high number of ounces of material per square yard, including woven denim fabrics, synthetic fabrics, worsted and worsted wool blend fabrics used for government uniform fabrics for dress U.S. military uniforms, airbag fabrics used in the automotive industry, and technical and value added fabrics used in a variety of niche industrial and commercial applications, including highly engineered materials used in numerous applications and a broad range of industries, such as for fire service apparel, ballistics materials, filtration, military fabrics and outdoor awnings and covers. The commission finishing segment consists of textile printing and finishing services for customers primarily focusing on decorative fabrics and specialty prints as well as government uniform fabrics primarily for battle fatigue U.S. military uniforms. The all other segment consists of expenses related to transportation services and other miscellaneous items. The narrow fabrics and ITG-PP businesses are presented as discontinued operations in the Company’s consolidated statements of operations for all periods presented (see Note 2).
Net sales, income from continuing operations before income taxes, and total assets for the Company’s reportable segments are presented below (in thousands). The Company evaluates performance and allocates resources based on profit or loss before interest, income taxes, restructuring and impairment charges, certain unallocated corporate expenses, and other income (expense)-net. Intersegment net sales for 2015 and 2014 were primarily attributable to commission finishing sales of $0.5 million and $0.3 million, respectively.
The following items are included in income before income taxes (in thousands):
The following items are included in the determination of total assets (in thousands):
The Company’s equity in losses of unconsolidated affiliates is included in the bottom-weight woven fabrics segment for the years ended December 31, 2015 and 2014. The following table presents sales from continuing operations and tangible long-lived assets by geographic area as of and for the fiscal years ended December 31, 2015 and 2014 (in thousands). The Company generally attributes its revenues based on the shipping destination of the products and attributes its long-lived assets to a particular country based on the location of the assets within each of the Company’s production facilities.
Note 18 Derivative Instruments
Derivative instruments used periodically by the Company for foreign currency, cotton, wool and natural gas purchases consist primarily of forward purchase contracts. The Company does not utilize financial instruments for trading or other speculative purposes. The Company has historically qualified for the “normal purchases exception” under GAAP for derivatives related to its cotton and wool forward purchase contracts and certain of its natural gas contracts and, as a result, these derivative instruments are not marked to market in the Company’s consolidated financial statements. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currency, the U.S. dollar. The Company periodically uses certain derivative financial instruments to reduce exposure to volatility of certain foreign currencies and has designated certain of such instruments as cash flow hedges under hedge accounting rules in 2015 and 2014. At December 31, 2015 and 2014, the Company had the following outstanding forward purchase contracts that were entered into to hedge forecasted purchases in certain of the subsequent monthly periods ending on the indicated dates:
The fair value of the Company’s derivative instruments recognized in the December 31, 2015 and 2014 consolidated balance sheets consisted of the following (in thousands):
The effect of derivative instruments on the financial performance of the Company was as follows (in thousands):
The Company did not exclude any amounts of its foreign currency cash flow hedges from effectiveness testing during any periods presented herein, and such tests resulted in the hedges being effective, or expected to be effective, in offsetting the variability of the designated forecasted cash flows. The maximum duration of foreign currency cash flow hedge contracts do not exceed twelve months; therefore, gains and losses reported in accumulated other comprehensive loss are expected to be reclassified into earnings within the next twelve months. The estimated net loss related to cash flow hedges that will be reclassified from accumulated other comprehensive loss into earnings over the next twelve months is $2.1 million.
The Company did not designate its natural gas derivative contracts or its Swiss Franc and Euro foreign currency derivative contracts as hedges for any of the periods presented herein. Accordingly, unrealized gains and losses on certain commodity derivative contracts are recorded in “other income (expense) - net” since these amounts represent non-cash changes in the fair values of such open contracts that are not expected to correlate with the amounts and timing of the recognition of the hedged items. Because the Company’s hedged commodity items are components of cost of goods sold, realized gains and losses on commodity derivative contracts are recorded in cost of goods sold upon settlement of those contracts. The Company’s Swiss Franc and Euro foreign currency derivative contracts are used to hedge the future cash flows related to the purchase of certain machinery and equipment. Accordingly, gains and losses on these derivative contracts are recorded as a component of the amount of deposits on, or cost of, the machinery and equipment; such gains and losses were not material in 2015 or 2014.
Note 19 Commitments and Contingencies
Asbestos materials are present at certain of the Company’s facilities, and applicable regulations would require the Company to handle and dispose of these items in a special manner if these facilities were to undergo certain major renovations or if they were demolished. FASB ASC 410, “Asset Retirement and Environmental Obligations,” provides guidance on the recognition and/or disclosure of liabilities related to legal obligations to perform asset retirement activity. In accordance with FASB ASC 410, the Company has not recognized a liability associated with these obligations, because the fair value of such liabilities cannot be reasonably estimated due to the absence of any plans to renovate, demolish or otherwise change the use of these facilities. The Company expects to maintain these facilities by repair and maintenance activities that do not involve the removal of any of these items and has not identified any need for major renovations caused by technology changes, operational changes or other factors. In accordance with FASB ASC 410, the Company will recognize a liability in the period in which sufficient information becomes available to reasonably estimate its fair value. As of December 31, 2015, the Company did not have any liabilities recorded for these obligations.
As of December 31, 2015, the Company had raw material and service contract commitments totaling $34.0 million and capital expenditure commitments of $11.5 million related to new looms and other equipment upgrades at various U.S. and foreign plant locations not reflected as liabilities on the accompanying consolidated balance sheet. In July 2015, the Company committed to build a natural gas powered cogeneration facility at the Company’s Parras Cone plant location in Mexico. Construction of the facility began in August 2015 and is expected to be completed by the third quarter of 2016. These commitments were not reflected as liabilities on the accompanying consolidated balance sheet because the Company had not received or taken title to the related assets.
Raw material commitments are mainly related to firm purchase commitments for cotton and wool used in the manufacture of apparel fabrics. Such non-cancellable firm purchase commitments are secured to provide the Company with a consistent supply of a commercially acceptable grade of raw materials necessary to meet its operating requirements as well as to meet the product specifications and sourcing requirements with respect to anticipated future customer orders.
The Company and its subsidiaries have and expect to have, from time to time, various claims and other lawsuits pending against them arising in the ordinary course of business. The Company may also be liable for environmental contingencies with respect to environmental cleanup activities. The Company makes provisions in its financial statements for litigation and claims based on the Company’s assessment of the possible outcome of such litigation and claims, including the possibility of settlement. It is not possible to determine with certainty the ultimate liability of the Company in any of the matters described above, if any, but in the opinion of management, except as may otherwise be described above, their outcome is not expected to have a material adverse effect upon the financial condition or results of operations or cash flows of the Company.
Note 20 Restructuring Activities
The charges for restructuring included in income from continuing operations included the following (in thousands):
In April 2014, the Company implemented an initiative to reduce its corporate administrative cost structure. Because the Company’s size, complexity and business structure has decreased in recent years, the Company’s board of directors determined that cost savings could be achieved with the restructuring of the Company’s executive structure. As a result of this restructuring, the Company and one of its executive officers entered into an agreement in April 2014 that provides certain benefits through December 30, 2017. Such benefits and other related corporate costs in the aggregate amount of $3.0 million were recorded in 2014.
Hourly and salaried workforce reductions of 53 employees undertaken at our worsted wool fabric manufacturing facility in Mexico resulted in severance and other termination benefits of $0.1 million recorded in 2014 in the bottom-weight woven fabrics segment. These workforce reductions were primarily attributable to the outlook for lower product demand at this facility at that time.
Following is a summary of activity related to restructuring accruals (in thousands). The Company expects to pay $0.7 million during each of 2016 and 2017 to reduce its severance and COBRA benefits liability outstanding at December 31, 2015.
Note 21 Fair Value Measurements
FASB ASC 820, “Fair Value Measurement”, requires disclosure of a fair value hierarchy of inputs that the Company uses to value an asset or a liability. Under FASB ASC 820 there is a common definition of fair value to be used and a hierarchy for fair value measurements based on the type of inputs that are used to value the assets or liabilities at fair value.
The levels of the fair-value hierarchy are described as follows:
Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date,
Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, or
Level 3: Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company enters into natural gas forward purchase contracts, foreign-currency forward purchase contracts and other derivative instruments from time to time, in addition to any commodity derivative contracts that are designated as normal purchases. These derivative contracts are principally with financial institutions and other commodities brokers, the fair values of which are obtained from third-party broker quotes.
The following table provides a summary of the fair values of certain of the Company’s assets and liabilities measured on a recurring basis under FASB ASC 820 as of December 31, 2015 and 2014 (in thousands):
As disclosed in Note 2, the Company completed the sale of certain assets of Narricot, which represented the Company’s former narrow fabrics segment, to certain subsidiaries of Asheboro Elastics Corp. (collectively “AEC”) in 2014. The sale price included a three-year, 6.5% promissory note for $3.2 million which provides that only interest was payable for the six month period ended March 2015, and thereafter principal and interest are payable in equal monthly installments through September 2017. Amounts due under the promissory note are secured by a first lien on all of the property, plant and equipment of Narricot sold in the transaction. AEC has made only the scheduled interest payments, and no scheduled principal payments, from June 2015 to December 2015. In December 2015, AEC sold certain assets and applied proceeds of $0.09 million against the overdue principal amounts, resulting in $0.6 million of past due principal payments outstanding, and a total outstanding principal balance of $2.9 million, as of December 31, 2015. The Company considers the AEC note to be impaired based on the lack of principal payments received since June 2015. The Company has deemed it probable that it will not receive a significant portion of the principal and interest outstanding on this note in the near term or in future periods from AEC. The Company has various appraisals as well as a written third party assessment relating to the value of the underlying collateral. If the Company attempts to foreclose on the collateral, the Company will attempt to obtain the highest value therefor; however, the Company has estimated that the collateral is valued at approximately $1.7 million in an orderly liquidation, net of selling commissions. Accordingly, the Company recorded an impairment charge of $1.2 million as of December 31, 2015 by applying the practical expedient of using a reasonable estimate of the fair value of the collateral to estimate fair value of the note as allowed under FASB ASU 310, “Receivables“. Such charge is presented on the "impairment charge" line in income from operations in the consolidated statement of income for 2015. The Company recognizes interest income on impaired loans only upon the receipt of cash, which is applied first to overdue interest and then to overdue principal amounts.
During 2014, long-lived assets held and used with a carrying amount of $4.4 million were written down to their estimated fair value of $0.4 million, resulting in an impairment charge of $4.0 million. Such charge is included in loss from discontinued operations in the consolidated statement of income for 2014. In accordance with the provisions of FASB ASC 360, the impairment charges represent the amounts by which the carrying value of the asset group exceeded the estimated fair values of such assets as measured by the market approach with the assistance of brokers and independent third-party appraisers. See Note 5 for additional information regarding impairment of long lived assets.
The Company cannot predict future events that might adversely affect the carrying value of assets. Any decline in economic conditions or other factors could result in additional impairment charges.
The accompanying consolidated financial statements include certain financial instruments, and the fair value of such instruments may differ from amounts reflected on a historical basis. Such financial instruments consist of cash deposits, accounts receivable, notes receivable, advances to affiliates, accounts payable, certain accrued liabilities, short-term borrowings and long-term debt. Based on certain procedures and analyses performed as of December 31, 2015 related to expected yield (under Level 2 of the fair value hierarchy), the Company estimated that the fair value of its Notes was approximately the principal plus accrued interest at December 31, 2015. The estimate of fair value of borrowings under the Company’s various bank loans and other financial instruments (under Level 2 of the fair value hierarchy) generally approximates the carrying values at December 31, 2015 because of the short-term nature of these loans and instruments and/or because certain loans contain variable interest rates that fluctuate with market rates.
Note 22 Other Operating Income - Net
Other operating income-net in 2015 and 2014 includes grant income from the U.S. Department of Commerce Wool Trust Fund of $3.2 million and $3.0 million, respectively. In addition, other operating income-net in 2015 and 2014 includes net gains related to the disposal of miscellaneous property and equipment of $1.1 million and $0.4 million, respectively.
Note 23 Other Income (Expense) - Net (in thousands)
In August 2014, the Company sold its 50% equity interests in the Summit Yarn LLC and Summit Yarn Holdings joint ventures (together, “Summit Yarn”) for cash proceeds of $9.6 million to the other joint venture partner, Parkdale America, LLC. The
Company recorded a gain on the sale of Summit Yarn of $9.4 million in 2014.
Note 24 Business and Credit Concentrations
The primary materials used in the production of the Company’s products include cotton, wool, nylon and polyester. In addition, the Company relies heavily on naturally occurring resources such as fuel, as well as certain chemicals, in the production of its products. The materials and other resources used in the production of the Company’s products are subject to fluctuations in price and availability. For instance, cotton prices and availability vary from season to season depending largely upon the crop yields and demand. The price of nylon and polyester is influenced by demand, manufacturing capacity and costs, petroleum prices and the cost of polymers used in producing polyester. The Company attempts to pass along certain of these raw material price increases to its customers in order to protect its profit margins. Its success in so doing is dependent upon market dynamics present at the time of any proposed price increases. With limited exceptions, increases in prices of materials or the resources used in the production of products have historically not been able to be, and in the future may not be able to be, fully passed along to customers of the Company through increases in prices of the Company’s products. The Company’s inability to pass on the effects of any such material price increases to its customers may materially adversely affect the Company’s results of operations, cash flows or financial position. Decreased material or resource availability could impair the Company’s ability to meet its production requirements on a timely basis. If any production delays occur, it could have a potentially adverse effect on the Company’s results of operations or cash flows.
The Company’s business is dependent on the success of, and its relationships with, its largest customers. No single customer accounted for 10% or more of the Company’s consolidated accounts receivable as of December 31, 2015. One customer, V.F. Corporation, accounted for approximately 10% of the Company’s consolidated accounts receivable as of December 31, 2014, and such customer accounted for approximately 12% of the Company’s consolidated net sales in 2015 and approximately 10% of the Company’s consolidated net sales in 2014, which sales were in the bottom-weight woven fabrics segment. Additionally, the Company believes that two of its customers, Levi Strauss & Co. (in the bottom-weight woven fabrics segment) and the U.S. Department of Defense (in the bottom-weight woven fabrics and commission finishing segments), are able to direct certain of their respective producers to purchase products directly from the Company for use in these customers’ products. Although neither Levi Strauss & Co. nor the U.S. Department of Defense are directly liable for the payment by any of those producers for products purchased from the Company, the Company believes that continued sales to the producers of Levi Strauss & Co. and U.S. Department of Defense products are dependent upon the Company maintaining strong supplier/customer relationships with each of Levi Strauss & Co. and the U.S Department of Defense.
In August 2014, the Company sold its 50% equity interest in the Summit Yarn LLC and Summit Yarn Holdings joint ventures (together, “Summit Yarn”) to the other joint venture partner, Parkdale America, LLC (“Parkdale”) (see Note 23). The Company’s yarn purchase agreement with Summit Yarn was amended upon completion of the sale of the joint ventures to provide for a continuing long-term supply of yarn for certain of the Company’s operations. Purchases of raw materials from Summit Yarn and Parkdale were approximately $57.2 million in 2015 and $60.6 million in 2014, which purchases were in the bottom-weight woven fabrics segment.
The loss of or reduction in business from any key customer or supplier could have a material adverse effect on the Company’s overall results of operations, cash flows or financial position.
Certain of the Company’s consolidated subsidiaries are subject to restrictions in relevant financing documents that limit the cash dividends they can pay and loans they may make to the Company. Of the Company’s consolidated cash balance of $12.3 million at December 31, 2015, approximately $0.2 million held by certain subsidiaries was restricted due to certain contractual arrangements. In addition, certain of the Company’s foreign consolidated subsidiaries are subject to various governmental statutes and regulations that restrict and/or limit loans and dividend payments they may make to the Company. At December 31, 2015, the Company’s proportionate share of restricted net assets of its consolidated subsidiaries was approximately $25.3 million.
Note 25 Subsequent Event
In February 2016, Parras Cone entered into a separate $2.5 million term loan agreement, with the proceeds from borrowings thereunder to be used for new machinery and equipment at its plant location in Mexico. The term loan requires equal monthly principal repayments based on the outstanding principal balance beginning in August 2016 and continuing through a period not to exceed 66 months from the date of the draw. The obligations of Parras Cone under such term loan are denominated in U.S. dollars, are secured by all of the assets of Parras Cone and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under the term loan agreement is variable at LIBOR plus 3.5%.
EXHIBIT INDEX
Exhibit Number
Exhibit
10.26
English translation of Loan Agreement, dated as of February 3, 2016, by and among Parras Cone de Mexico, S.A. de C.V., and Banco Nacional de Mexico, S.A. as lender thereto
*10.51
International Textile Group, Inc. Management Incentive Plan for 2015
*10.52
International Textile Group, Inc. 2016 Management Incentive Plan
21.1
Subsidiaries of International Textile Group, Inc.
23.1
Consent of Grant Thornton LLP
31.1
Certification of Principal Executive Officer as required by Rule 13a- 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Principal Financial and Accounting Officer as required by Rule 13a- 14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
__________
* Management contract or compensatory plan or arrangement