**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|------------|---------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the  quarterly period ended March 31, 2007**                                                 |
| ** ** | ** ** | **Or**                                                                                                  |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition period from               to                **

**Commissionfile number: 1-14330**

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**POLYMER GROUP, INC.**

(Exact name of registrant asspecified in its charter)

| **Delaware**                                                                |   | **57-1003983**                        |
|-----------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                                            |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                                             |   |                                  |
| **9335  Harris Corners Parkway, Suite 300  Charlotte, North Carolina** |   | **28269**                             |
| (Address of principal  executive offices)                                   |   | (Zip Code)                            |

 

Registrant’s telephone number,including area code: **(704) 697-5100**

Former name, former addressand former fiscal year, if changed from last report: **None**

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes x   No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

| Large accelerated  filer o  |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   Yes o   No x

Indicate by check mark whetherthe registrant has filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Securities Exchange Act of 1934 subsequent to thedistribution of securities under a plan confirmed by a court.   Yes x   No o

On May 3,2007 there were 19,235,173 shares of Class A common stock, 128,181 sharesof Class B common stock and 24,319 shares of Class C commonstock outstanding. No shares of Class D or Class E common stock wereoutstanding as of such date. The par value for each class of common stock is$.01 per share.

 

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**POLYMERGROUP, INC.**

**INDEX TO FORM 10-Q**

|                                                     | ** ** | ** **                                                                                  | ** ** | **Page** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|------------|
| IMPORTANT INFORMATION REGARDING THIS FORM 10-Q |       |                                                                                        | 2          |     |       |
| **PART I.**                                    | ** ** | **FINANCIAL INFORMATION**                                                                   |       |     |       |   |   |
| Item 1.                                        |       | Financial  Statements                                                                       |       |     | 3          |   |   |
| Item 2.                                        |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       |     | 23         |   |   |
| Item 3.                                        |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |       |     | 35         |   |   |
| Item 4.                                        |       | Controls and Procedures                                                                     |       |     | 36         |   |   |
| **PART II.**                                   | ** ** | **OTHER INFORMATION**                                                                       |       |     |       |   |   |
| Item 1.                                        |       | Legal  Proceedings                                                                          |       |     | 37         |   |   |
| Item 1A.                                       |       | Risk  Factors                                                                               |       |     | 37         |   |   |
| Item 2.                                        |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       |     | 37         |   |   |
| Item 3.                                        |       | Defaults Upon Senior Securities                                                             |       |     | 37         |   |   |
| Item 4.                                        |       | Submission of Matters To a Vote of Security Holders                                         |       |     | 37         |   |   |
| Item 5.                                        |       | Other  Information                                                                          |       |     | 37         |   |   |
| Item 6.                                        |       | Exhibits                                                                                    |       |     | 37         |   |   |
| Signatures                                          |       |                                                                                        | 38         |     |       |

 

1

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**IMPORTANT INFORMATIONREGARDING THIS FORM 10-Q**

Readers should consider thefollowing information as they review this Form 10-Q:

**SafeHarbor-Forward-Looking Statements**

From time to time, Polymer Group, Inc. (the “Company”)may publish forward-looking statements relative to matters such as,including, without limitation, anticipated financial performance, businessprospects, technological developments, new product introductions, cost savings,research and development activities and similar matters. The Private SecuritiesLitigation Reform Act of 1995 provides a safe harbor for forward-lookingstatements. Forward-looking statements are generally accompanied by wordssuch as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,”“intend” or other words that convey the uncertainty of future events oroutcomes.

Various statements contained in this report, includingthose that express a belief, expectation or intention, as well as those thatare not statements of historical fact are, or may be deemed to be, forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements speak only as of the date ofthis report. Unless required by law, the Company does not undertake anyobligation to update these statements and cautions against any undue relianceon them. These forward-looking statements are based on currentexpectations and assumptions about future events. Although management considersthese expectations and assumptions to be reasonable, they are inherentlysubject to significant business, economic, competitive, regulatory and otherrisks, contingencies and uncertainties, most of which are difficult to predictand many of which are beyond the Company’s control. See Item 1A. “RiskFactors” in the Company’s Annual Report on Form 10-K. There can beno assurances that these events will occur or that the Company’s results willbe as estimated.

Important factors thatcould cause actual results to differ materially from those discussed in suchforward-looking statements include:

·                    generaleconomic factors including, but not limited to, changes in interest rates,foreign currency translation rates, consumer confidence, trends in disposableincome, changes in consumer demand for goods produced, and cyclical or otherdownturns;

·                    substantialdebt levels and potential inability to maintain sufficient liquidity to financethe Company’s operations and make necessary capital expenditures;

·                    inabilityto meet existing debt covenants;

·                    informationand technological advances;

·                    changesin environmental laws and regulations;

·                    costand availability of raw materials, labor and natural and other resources andthe inability to pass raw material cost increases along to customers;

·                    inabilityto achieve successful start-up on new or modified production lines;

·                    domesticand foreign competition;

·                    relianceon major customers and suppliers; and

·                    risksrelated to operations in foreign jurisdictions.

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**ITEM 1.**                 FINANCIALSTATEMENTS

**POLYMERGROUP, INC.CONSOLIDATED BALANCE SHEETS (Unaudited)(In Thousands, Except Share Data)**

| ** **                                                                                                                                                          | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                          | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                     |       |                     |       |                        |       |   |   | ** ** |   |
| Cash and cash equivalents                                                                                                                                           |       |                     | $          | 19,103                      |       |   |   | $ | 32,104 | ** ** |   |
| Accounts receivable, net                                                                                                                                            |       |                     | 142,686    |                        |       |   | 129,287 | ** ** |   |
| Inventories                                                                                                                                                         |       |                     | 138,488    |                        |       |   | 132,530 | ** ** |   |
| Deferred income taxes                                                                                                                                               |       |                     | 2,858      |                        |       |   | 2,787 | ** ** |   |
| Other current assets                                                                                                                                                |       |                     | 24,186     |                        |       |   | 19,531 | ** ** |   |
| Total current assets                                                                                                                                                |       |                     | 327,321    |                        |       |   | 316,239 | ** ** |   |
| Property, plant and  equipment, net                                                                                                                                 |       |                     | 408,953    |                        |       |   | 411,054 | ** ** |   |
| Intangibles and loan  acquisition costs, net                                                                                                                        |       |                     | 9,855      |                        |       |   | 10,206 | ** ** |   |
| Deferred income taxes                                                                                                                                               |       |                     | 393        |                        |       |   | 555 | ** ** |   |
| Other assets                                                                                                                                                        |       |                     | 3,249      |                        |       |   | 4,043 | ** ** |   |
| Total assets                                                                                                                                                        |       |                     | $749,771   |                        |       |   | $ | 742,097 | ** ** |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                       | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                |       |                     |       |                        |       |   |   | ** ** |   |
| Short-term borrowings                                                                                                                                               |       |                     | $          | 5,814                       |       |   |   | $ | 4,570 | ** ** |   |
| Accounts payable                                                                                                                                                    |       |                     | 91,200     |                        |       |   | 102,675 | ** ** |   |
| Accrued liabilities                                                                                                                                                 |       |                     | 44,316     |                        |       |   | 41,638 | ** ** |   |
| Income taxes payable                                                                                                                                                |       |                     | 2,295      |                        |       |   | 3,445 | ** ** |   |
| Deferred Income taxes                                                                                                                                               |       |                     | 295        |                        |       |   | 294 | ** ** |   |
| Current portion of long-term debt                                                                                                                                   |       |                     | 19,163     |                        |       |   | 4,170 | ** ** |   |
| Total current liabilities                                                                                                                                           |       |                     | 163,083    |                        |       |   | 156,792 | ** ** |   |
| Long-term debt                                                                                                                                                      |       |                     | 395,184    |                        |       |   | 402,416 | ** ** |   |
| Deferred income taxes                                                                                                                                               |       |                     | 22,709     |                        |       |   | 34,616 | ** ** |   |
| Other noncurrent liabilities                                                                                                                                        |       |                     | 32,270     |                        |       |   | 22,523 | ** ** |   |
| Total liabilities                                                                                                                                                   |       |                     | 613,246    |                        |       |   | 616,347 | ** ** |   |
| Minority interests                                                                                                                                                  |       |                     | 17,228     |                        |       |   | 16,654 | ** ** |   |
| Shareholders’ equity:                                                                                                                                          |       |                     |       |                        |       |   |   | ** ** |   |
| Preferred stock—0 shares issued and outstanding                                                                                                                |       |                     | —     |                        |       |   | — | ** ** |   |
| Class A common stock—19,130,600 and 19,133,728 shares issued and  outstanding at March 31, 2007 and December 30, 2006, respectively             |       |                     | 191        |                        |       |   | 191 | ** ** |   |
| Class B convertible common stock—130,654 and 135,721 shares  issued and outstanding at March 31, 2007 and December 30, 2006,  respectively |       |                     | 2          |                        |       |   | 2 | ** ** |   |
| Class C convertible common stock—24,319 and 24,319 shares  issued and outstanding at March 31, 2007 and December 30, 2006,  respectively   |       |                     | —     |                        |       |   | — | ** ** |   |
| Class D convertible common stock—0 shares issued and outstanding                                                                                          |       |                     | —     |                        |       |   | — | ** ** |   |
| Class E convertible common stock—0 shares issued and outstanding                                                                                          |       |                     | —     |                        |       |   | — | ** ** |   |
| Additional paid-in capital                                                                                                                                          |       |                     | 186,880    |                        |       |   | 173,368 | ** ** |   |
| Retained earnings (deficit)                                                                                                                                         |       |                     | (95,006    | )                           |       |   | (89,352 | ) |   |
| Accumulated other comprehensive income                                                                                                                              |       |                     | 27,230     |                        |       |   | 24,887 | ** ** |   |
| Total shareholders’ equity                                                                                                                                     |       |                     | 119,297    |                        |       |   | 109,096 | ** ** |   |
| Total liabilities and  shareholders’ equity                                                                                                                    |       |                     | $          | 749,771                     |       |   |   | $ | 742,097 | ** ** |   |

 

See Accompanying Notes

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**POLYMERGROUP, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

**(InThousands, Except Per Share Data)**

| ** **                                               | ** ** | **Three Months  Ended  March 31, 2007** | ** ** | **Three Months  Ended  April 1, 2006** | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Net sales                                                |       |                                                   | $          | 267,037                                               |       |   |   | $ | 260,441 |   |   |
| Cost of goods sold                                       |       |                                                   | 220,999    |                                                  |       |   | 217,237 |   |   |
| Gross profit                                             |       |                                                   | 46,038     |                                                  |       |   | 43,204 |   |   |
| Selling, general and  administrative expenses            |       |                                                   | 28,442     |                                                  |       |   | 32,398 |   |   |
| Special charges, net                                     |       |                                                   | 6,377      |                                                  |       |   | 1,633 |   |   |
| Foreign currency  (gain) loss, net                       |       |                                                   | (502       | )                                                     |       |   | 567 |   |   |
| Operating income                                         |       |                                                   | 11,721     |                                                  |       |   | 8,606 |   |   |
| Other expense (income):                                  |       |                                                   |       |                                                  |       |   |   |   |   |
| Interest expense, net                                    |       |                                                   | 8,134      |                                                  |       |   | 6,518 |   |   |
| Foreign currency and other (gain) loss, net              |       |                                                   | (1,802     | )                                                     |       |   | 491 |   |   |
| Income before income  tax expense and minority interests |       |                                                   | 5,389      |                                                  |       |   | 1,597 |   |   |
| Income tax expense                                       |       |                                                   | 4,589      |                                                  |       |   | 2,610 |   |   |
| Minority interests,  net of tax                          |       |                                                   | 510        |                                                  |       |   | 592 |   |   |
| Net income (loss)                                        |       |                                                   | $          | 290                                                   |       |   |   | $ | (1,605 | ) |   |
| Income (loss) per common share:                          |       |                                                   |       |                                                  |       |   |   |   |   |
| Basic                                                    |       |                                                   | $          | 0.02                                                  |       |   |   | $ | (0.08 | ) |   |
| Diluted                                                  |       |                                                   | $          | 0.01                                                  |       |   |   | $ | (0.08 | ) |   |

 

See Accompanying Notes.

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**POLYMERGROUP, INC.**

**CONSOLIDATED STATEMENTSOF CASH FLOW (Unaudited)**

**(InThousands)**

| ** **                                                                                          | ** ** | **Three Months  Ended  March 31, 2007** | ** ** | **Three Months  Ended  April 1, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| Operating activities:                                                                               |       |                                                   |       |                                                  |       |   |   |   |   |
| Net income (loss)                                                                                   |       |                                                   | $          | 290                                                   |       |   |   | $ | (1,605 | ) |   |
| Adjustments to reconcile  net income (loss) to net cash provided by (used in) operating activities: |       |                                                   |       |                                                  |       |   |   |   |   |
| Deferred income taxes                                                                               |       |                                                   | 4,060      |                                                  |       |   | 1,295 |   |   |
| Investment and other gains                                                                          |       |                                                   | —     |                                                  |       |   | (220 | ) |   |
| Depreciation and amortization                                                                       |       |                                                   | 14,549     |                                                  |       |   | 14,763 |   |   |
| Pension settlement loss                                                                             |       |                                                   | 3,849      |                                                  |       |   | — |   |   |
| Noncash compensation                                                                                |       |                                                   | 711        |                                                  |       |   | 3,823 |   |   |
| Changes in operating  assets and liabilities, net of effect of acquisitions:                        |       |                                                   |       |                                                  |       |   |   |   |   |
| Accounts receivable, net                                                                            |       |                                                   | (12,922    | )                                                     |       |   | (14,555 | ) |   |
| Inventories                                                                                         |       |                                                   | (5,458     | )                                                     |       |   | (8,424 | ) |   |
| Other current assets                                                                                |       |                                                   | (4,655     | )                                                     |       |   | (2,382 | ) |   |
| Accounts payable and accrued liabilities                                                            |       |                                                   | (6,430     | )                                                     |       |   | 13,289 |   |   |
| Other, net                                                                                          |       |                                                   | (2,456     | )                                                     |       |   | (1,460 | ) |   |
| Net cash provided by (used in) operating  activities                                                |       |                                                   | (8,462     | )                                                     |       |   | 4,524 |   |   |
| Investing activities:                                                                               |       |                                                   |       |                                                  |       |   |   |   |   |
| Purchases of property, plant and equipment                                                          |       |                                                   | (10,963    | )                                                     |       |   | (30,845 | ) |   |
| Proceeds from sale of assets                                                                        |       |                                                   | 174        |                                                  |       |   | 1,357 |   |   |
| Acquisition of intangibles and other                                                                |       |                                                   | —     |                                                  |       |   | (942 | ) |   |
| Net cash used in investing activities                                                               |       |                                                   | (10,789    | )                                                     |       |   | (30,430 | ) |   |
| Financing activities:                                                                               |       |                                                   |       |                                                  |       |   |   |   |   |
| Proceeds from borrowings                                                                            |       |                                                   | 20,544     |                                                  |       |   | 32,110 |   |   |
| Repayment of borrowings                                                                             |       |                                                   | (11,545    | )                                                     |       |   | (13,686 | ) |   |
| Repayments of advances from equipment supplier                                                      |       |                                                   | (2,792     | )                                                     |       |   | — |   |   |
| Other, net                                                                                          |       |                                                   | —     |                                                  |       |   | (114 | ) |   |
| Net cash provided by financing activities                                                           |       |                                                   | 6,207      |                                                  |       |   | 18,310 |   |   |
| Effect of exchange  rate changes on cash                                                            |       |                                                   | 43         |                                                  |       |   | 142 |   |   |
| Net decrease in cash  and cash equivalents                                                          |       |                                                   | (13,001    | )                                                     |       |   | (7,454 | ) |   |
| Cash and cash  equivalents at beginning of period                                                   |       |                                                   | 32,104     |                                                  |       |   | 30,963 |   |   |
| Cash and cash equivalents at  end of period                                                         |       |                                                   | $          | 19,103                                                |       |   |   | $ | 23,509 |   |   |

 

See Accompanying Notes.

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**POLYMER GROUP, INC.Notes to Consolidated Financial Statements**

**Note 1.**   Principlesof Consolidation and Financial Statement Information

*Principles ofConsolidation*

Polymer Group, Inc. (the “Company”) is a publicly-traded,multinational manufacturer, marketer and seller of nonwoven and orientedpolyolefin products. The Company is one of the world’s leading producers ofnonwovens, and is a global, technology-driven developer, producer and marketerof engineered materials. With the broadest range of process technologies in thenonwovens industry, the Company is a global supplier to leading consumer andindustrial product manufacturers. The Company operates 21 manufacturingfacilities in nine countries throughout the world. The Company’s main sourcesof revenue are the sales of primary and intermediate products to the medical,hygiene, wipes, industrial and specialty markets.

The accompanying Consolidated Financial Statementsinclude the accounts of Polymer Group, Inc. and all majority-ownedsubsidiaries after elimination of all significant intercompany accounts andtransactions. The accounts of all foreign subsidiaries have been included onthe basis of fiscal periods ended on the same dates as the accompanyingConsolidated Financial Statements. All amounts are presented in U.S. dollars,unless otherwise noted.

The accompanying unauditedinterim Consolidated Financial Statements and related notes should be read inconjunction with the Consolidated Financial Statements of the Company andrelated notes as contained in the Annual Report on Form 10-K for theperiod ended December 30, 2006. In the judgment of management, theseunaudited interim Consolidated Financial Statements include all adjustments ofa normal recurring nature and accruals necessary for a fair presentation ofsuch statements. The Consolidated Balance Sheet data included herein as of December 30,2006 has been derived from the audited financial statements included in theCompany’s Annual Report on Form 10-K.

*Reclassification*

Certain amounts previously presentedin the Consolidated Financial Statements for prior periods have beenreclassified to conform with current period classification.

*Revenue Recognition*

Revenue from product sales isrecognized when title and risks of ownership pass to the customer. This isgenerally on the date of shipment to the customer, or upon delivery to a placenamed by the customer, dependent upon contract terms and when collectibility isreasonably assured and pricing is fixed or determinable. Revenue includesamounts billed to customers for shipping and handling. Provision for rebates,promotions, product returns and discounts to customers is recorded as areduction in determining revenue in the same period that the revenue isrecognized.

*Use of Estimates*

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe amounts reported in the financial statements and accompanying notes. Theaccounting estimates that require management’s most significant judgmentsinclude the valuation of allowances for accounts receivable and inventory, theassessment of recoverability of long-lived assets, the recognition andmeasurement of current and deferred income tax assets and liabilities and the 

6

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

valuationand recognition of share-based compensation. Actual results could differ fromthose estimates.

*Stock-BasedCompensation*

The Company accounts for stock-basedcompensation related to its employee share-based plans in accordance with themethodology defined in Statement of Financial Accounting Standards No. 123(R),“Share-Based Payment” (“SFAS No. 123(R)”), using the modified prospectivetransition method. The compensation costs recognized subsequent to the adoptionof SFAS No. 123(R) related to all new grants and any unvested portion ofprior awards are measured based on the grant-date fair value of the award.Consistent with the provisions of SFAS No. 123(R), awards are consideredgranted when all required approvals are obtained and when the participantbegins to benefit from, or be adversely affected by, subsequent changes in theprice of the underlying shares and, regarding awards containing performanceconditions, when the Company and the participant reach a mutual understandingof the key terms of the performance conditions. Additionally, accruals forcompensation costs for share-based awards with performance conditions are basedon the probable outcome of such performance conditions.

The Company has estimated thefair value of each stock option grant by using the Black-Scholes option-pricingmodel. Assumptions are evaluated and revised, as necessary, to reflect marketconditions and experience.

*Income Taxes*

On December 31, 2006, the first day of fiscal2007, the Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes, an Interpretation of FASB Statement No. 109” (“FIN 48”).FIN 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with FASB StatementNo. 109, “Accounting for Income Taxes,” by prescribing a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.Under FIN 48, the financial statement effects of a tax position shouldinitially be recognized when it is more likely than not, based on the technicalmerits, that the position will be sustained upon examination. A tax positionthat meets the more-likely-than-not recognition threshold should initially andsubsequently be measured as the largest amount of tax benefit that has agreater than 50% likelihood of being realized upon ultimate settlement with ataxing authority.

As a result of the implementation of FIN 48, theCompany increased the liability for unrecognized tax benefits by $5.9 millionand reduced retained earnings by $5.9 million for the cumulative effect ofapplying the standard. Additionally, with respect to pre-emergence taxpositions, consistent with the provisions of AICPA Statement of Position 90-7“Financial Reporting of Entities in Reorganization under the Bankruptcy Code”(“SOP 90-7”) the Company increased the liability for unrecognizedtax benefits, included in *Other noncurrentliabilities* in the Consolidated Balance Sheet, by $2.4 million,decreased deferred tax liabilities by $15.4 million, increased deferredtax assets by $0.1 million and increased additional paid-in capital by$13.1 million.

The Company continues to recognize interest and/orpenalties related to income taxes as a component of income tax expense.

7

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

***AccumulatedOther Comprehensive Income***

Accumulated othercomprehensive income of $27.2 million at March 31, 2007 consisted of$32.2 million of currency translation gains, $4.3 million oftransition net assets, gains or losses and prior service costs not recognizedas components of net periodic benefit costs and $0.7 million of cash flowhedge losses, all net of applicable income tax. Accumulated other comprehensiveincome of $24.9 million at December 30, 2006 consisted of$31.4 million of currency translation gains, $8.0 million oftransition net assets, gains or losses and prior service costs not recognizedas components of net periodic benefit costs and $1.5 million of cash flowhedge gains, all net of applicable income tax.

*Recent Accounting Standards*

In June 2006, the FASB issued Emerging IssuesTask Force Abstract 06-3 “How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross versus Net Presentation)’’ (“EITF 06-3”).EITF 06-3 permits entities to adopt a policy of presenting taxes oneither a gross basis (included in revenues and costs) or on a net basis(excluded from revenues). As required, the Company adopted the disclosurerequirements of EITF 06-3 as of the first quarter of fiscal 2007.The Company accounts for such taxes on a net basis.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS No. 157”). This standard establishes aframework for measuring fair value and also provides guidance for an expandedset of disclosure requirements related to fair value. The Company expects toadopt SFAS No. 157 effective in the first quarter of fiscal 2008 and hasnot yet assessed the impact of SFAS No. 157 on the Consolidated FinancialStatements.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115” (“SFASNo. 159”). SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other items at fair value, with unrealizedgains and losses on items for which the fair value option has been elected,reported in earnings at each subsequent reporting date. The Company isreviewing the provisions of SFAS No. 159, which is effective in the firstquarter of fiscal 2008, and has not yet completed the assessment of the impactof SFAS No. 159 on the Consolidated Financial Statements.

**Note 2.**   Concentrationof Credit Risks and Accounts Receivable Factoring Agreements

Accounts receivable potentially expose the Company toconcentration of credit risk, as defined by SFAS No. 105, “Disclosure ofInformation about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” The Company providescredit in the normal course of business and performs ongoing credit evaluationson its customers’ financial condition as deemed necessary, but generally does notrequire collateral to support such receivables. Customer balances areconsidered past due based on contractual terms and the Company does not accrueinterest on the past due balances. The provision for losses on uncollectibleaccounts is determined principally on the basis of past collection experienceapplied to ongoing evaluations of receivables and the risk of repayment. Theallowance for doubtful accounts was approximately $7.8 million and$7.6 million at March 31, 2007 and December 30, 2006, respectively,which management believes is adequate to provide for credit loss in the normalcourse of business, as well as losses for customers who have filed forprotection under bankruptcy laws. Once management determines that thereceivables are not recoverable, the amounts are removed from the financial 

8

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

records along with thecorresponding reserve balance. Sales to the Procter & Gamble Company (“P&G”)accounted for approximately 12% and 14% of the Company’s sales in the firstquarter of fiscal 2007 and 2006, respectively.

The Company has entered into afactoring agreement to sell without recourse, certain U.S. company-basedreceivables to an unrelated third-party financial institution. Under thecurrent terms of the factoring agreement, the maximum amount of outstandingadvances at any one time is $20.0 million, which limitation was subject tochange based on the level of eligible receivables, restrictions onconcentrations of receivables and the historical performance of the receivablessold. Additionally, the Company has entered into a factoring agreement to sellwithout recourse, certain non-U.S. company-based receivables to an unrelatedthird-party financial institution. Under the terms of the factoringagreement, the maximum amount of outstanding advances at any one time is$10.0 million, which limitation is subject to change based on the level ofeligible receivables, restrictions on concentrations of receivables and thehistorical performance of the receivables sold.

During the first quarter offiscal 2007, approximately $46.8 million of receivables have been soldunder the terms of the factoring agreements, compared to approximately $42.4million during the first quarter of fiscal 2006. The sale of these receivablesaccelerated the collection of the Company’s cash, reduced credit exposure andlowered the Company’s net borrowing costs. Sales of accounts receivable arereflected as a reduction of *Accountsreceivable, net* in the Consolidated Balance Sheets and any lossrecognized on the sale is reflected in *Foreign currency and other(gain) loss, net* in the Consolidated Statements of Operations onsuch sales, as they meet the applicable criteria of SFAS No. 140, ”Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities” (“SFAS No. 140”). The amount due from the factoringcompanies, net of advances received from the factoring companies, was$5.5 million and $6.6 million at March 31, 2007 and December 30,2006, respectively, and is shown in *Othercurrent assets* in the Consolidated Balance Sheets. The Company paysfactoring fees associated with the sale of receivables based on the dollarvalue of the receivables sold. Such fees are immaterial and are included in *Foreign currency and other (gain) loss, net* in theConsolidated Statements of Operations.

**Note 3.**   Special Charges, Net

TheCompany’s operating income includes special charges, net resulting fromcorporate-level decisions or Board actions, such as to consolidate and relocateits corporate offices, restructure certain operations or pursue certaintransaction opportunities. Additionally, the Company evaluates its long-livedassets for impairment whenever events or changes in circumstances, includingthose aforementioned, indicate that the carrying amounts may not be recoverable.A summary of such charges, net is presented in the following table (inthousands):

| ** **                                 | ** ** | **Three Months **

**Ended March 31,**

** 2007** | ** ** | **Three Months **

**Ended April 1, **

**2006** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| Restructuring and  plant realignment costs |       |                                                                       | $          | 6,207                                                                     |       |   |   | $ | 1,633 |   |   |
| Other                                      |       |                                                                       | 170        |                                                                      |       |   | — |   |   |
|                                       |       |                                                                       | $          | 6,377                                                                     |       |   |   | $ | 1,633 |   |   |

 

9

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

*Restructuring and plant realignment costs*

Accruedcosts for restructuring efforts are included in *Accruedliabilities* in the Consolidated Balance Sheets. These costsgenerally arise from restructuring initiatives intended to result in lowerworking capital levels and improved operating performance and profitabilitythrough: (i) reducing headcount at both the plant and corporate levels; (ii) improvingmanufacturing productivity and reducing corporate costs; and (iii) rationalizingcertain assets, businesses and employee benefit programs. A summary of thebusiness restructuring activity accounted for in accordance with SFAS StatementNo. 146 “Accounting for Costs Associated with Exit or Disposal Activities”(“SFAS No. 146”) and SFAS Statement No. 88 “Employer Accountingfor Settlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits” (“SFAS No. 88”) during the first three months offiscal 2007 is presented in the following table (in thousands):

| Balance accrued at  beginning of year           |   | $      | 2,044  |   |
|-------------------------------------------------|--------|--------|--------|--------|
| 2007 restructuring  and plant realignment costs |   | 6,207  |   |
| Cash payments                                   |   | (1,333 | )      |
| Pension settlement  loss                        |   | (3,849 | )      |
| Adjustments                                     |   | 6      |   |
| Balance accrued at end of  period               |   | $      | 3,075  |   |

 

The restructuring and plantrealignment costs in the first quarter of fiscal 2007 primarily relate to asettlement loss associated with a partial curtailment of a defined benefitpension plan at one of the Company’s Canadian operations and the Company’splanned closure of two of its plants in the United States, which wascommunicated to affected employees in January 2007.

*Canadian restructuring*

During the first quarter offiscal 2006, as part of its restructuring and related cost reduction measures,the Company negotiated certain changes with the union representing theemployees of one of the Company’s Canadian operations, including a partialcurtailment of a defined benefit pension plan. No net gain or loss was incurredas a result of the partial curtailment. However, based on elections made byplan participants during the second quarter of fiscal 2006, and as approved byCanadian regulatory authorities on January 16, 2007, the Company incurreda settlement loss associated with employees who have exited the plan. The lossincurred as a result of the partial settlement of the defined benefit pensionplan, consisting of the recognition of previously unamortized actuarial losses inthe amount of approximately $3.8 million, was recognized in the first quarterof fiscal 2007 commensurate with governmental approval of the terms of thesettlement and upon fulfillment by the Company of its funding requirements in February 2007.

*Other restructuring costs*

In January 2007, theCompany communicated a plan to affected employees that it planned to close twoof its plants in the United States. The plant closures will include thereduction of approximately 170 positions when such consolidation efforts arecompleted. During the first quarter of fiscal 2007, approximately $2.3 millionof employee severance and equipment relocation costs were recognized relatingto these planned closures. Additionally, the Company incurred approximately$0.1 million of costs related to the corporate headquarters relocationundertaken in fiscal 2006 and other initiatives.

10

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

*Investigation and othercosts*

Additionally, in the first quarter of fiscal 2007, theCompany incurred ancillary costs in the amount of approximately$0.2 million relating to the investigation completed by the Board ofDirectors in fiscal 2006.

**Note 4.**   Inventories

Inventoriesare stated at the lower of cost or market primarily using the first-in,first-out method of accounting and consist of the following (in thousands):

| ** **      | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|-----------------|------------|--------------------------|------------|-----------------------------|------------|
| Finished goods  |       | $                        | 70,456     |                        |       | $ | 64,897 |   |   |
| Work in process |       | 19,868                   |       |                        | 17,462     |   |   |
| Raw materials   |       | 48,164                   |       |                        | 50,171     |   |   |
|            |       | $                        | 138,488    |                        |       | $ | 132,530 |   |   |

 

Inventories are net ofreserves, primarily for obsolete and slow-moving inventories, of approximately$10.0 million and $9.6 million at March 31, 2007 and December 30,2006, respectively. Management believes that the reserves are adequate toprovide for losses in the normal course of business.

**Note 5.**   Intangiblesand Loan Acquisition Costs

Intangiblesand loan acquisition costs consist of the following (in thousands):

| ** **                     | ** ** | **March 31,** | ** ** | **December 30,** | ** ** |
|--------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Cost:                          |       |               |       |                  |       |   |   |   |   |
| Proprietary technology         |       |               | $          | 1,451                 |       |   |   | $ | 1,352 |   |   |
| Loan acquisition costs         |       |               | 9,191      |                  |       |   | 9,191 |   |   |
| Other                          |       |               | 1,837      |                  |       |   | 1,817 |   |   |
|                           |       |               | 12,479     |                  |       |   | 12,360 |   |   |
| Less accumulated  amortization |       |               | (2,624     | )                     |       |   | (2,154 | ) |   |
|                           |       |               | $          | 9,855                 |       |   |   | $ | 10,206 |   |   |

 

Componentsof amortization expense are shown in the table below (in thousands):

| ** **                                                                               | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                               | ** ** | **March 31,**               | ** ** | **April 1,** | ** ** |
| ** **                                                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Amortization of:                                                                         |       |                             |       |   |   |   |   |
| Intangibles with finite  lives, included in selling, general and administrative expenses |       |                             | $          | 125 |   |   | $ | 1,091 |   |
| Loan acquisition costs  included in interest expense, net                                |       |                             | 345        |   |   | 325 |   |
| Total amortization expense                                                               |       |                             | $          | 470 |   |   | $ | 1,416 |   |

 

11

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

Intangibles are amortized overperiods ranging from 5 to 17 years. Loan acquisition costs are amortizedover the life of the related debt.

**Note 6.**   AccruedLiabilities

Accrued liabilities in theConsolidated Balance Sheets include salaries, wages and other fringe benefitsof $18.3 million and $15.6 million as of March 31, 2007 and December 30,2006, respectively.

**Note 7.**   Debt

Long-termdebt consists of the following (in thousands):

| ** **                                                                                                                                                                                                                                                                                                                  | ** ** | **March 31,** | ** ** | **December 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                  | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Credit Facility, as  defined below, interest rates for U.S. dollar borrowings are based on a  specified base plus a specified margin and are subject to certain terms and  conditions:                                                                                                                                      |       |               |       |                  |       |   |   |
| First Lien Term Loan—interest at 7.57% and 7.61% as of March 31,  2007 and December 30, 2006, respectively; due in mandatory quarterly  payments of approximately $1.0 million, subject to additional payments  from annual excess cash flows, as defined, with the balance due  November 22, 2012 |       | $                  | 404,875    |                  |       | $ | 405,900 |   |   |
| Argentine Facility:                                                                                                                                                                                                                                                                                                         |       |               |       |                  |       |   |   |
| Argentine Peso Loan—interest at 14.93% as of March 31, 2007; denominated  in Argentine pesos with quarterly principal payments scheduled to begin in June  2008                                                                                                                                                   |       | 1,147              |       |                  | —     |   |   |
| United States Dollar Loan—interest at 8.26% as of March 31,  2007; denominated in U.S. dollars with quarterly principal payments scheduled  to begin in June 2008                                                                                                                                            |       | 7,652              |       |                  | —     |   |   |
| Other                                                                                                                                                                                                                                                                                                                       |       | 673                |       |                  | 686        |   |   |
|                                                                                                                                                                                                                                                                                                                        |       | 414,347            |       |                  | 406,586    |   |   |
| Less: Current  maturities                                                                                                                                                                                                                                                                                                   |       | (19,163            | )          |                  | (4,170     | ) |   |
|                                                                                                                                                                                                                                                                                                                        |       | $                  | 395,184    |                  |       | $ | 402,416 |   |   |

 

*Credit Facility*

The Company’s Credit Facility (the “Credit Facility”),which was entered into on November 22, 2005 and amended as of December 8,2006, consists of a $45.0 million secured revolving credit facility and a$410.0 million first-lien term loan.

All borrowings under the Credit Facility are U.S.dollar denominated and are guaranteed, on a joint and several basis, by eachand all of the direct and indirect domestic subsidiaries of the Company. TheCredit Facility and the related guarantees are secured by (i) a lien onsubstantially all of the assets of the Company, its domestic subsidiaries andcertain of its non-domestic subsidiaries, (ii) a pledge of all or aportion of the stock of the domestic subsidiaries of the Company and of certainnon-domestic subsidiaries of the Company, and (iii) a pledge of certainsecured intercompany notes. 

12

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

Commitment fees under theCredit Facility are equal to 0.50% of the daily unused amount of the revolvingcredit commitment. The Credit Facility limits restricted payments to$5.0 million, including cash dividends, in the aggregate since theeffective date of the Credit Facility. The Credit Facility contains covenantsand events of default customary for financings of this type, including leverageand interest expense coverage covenants. The Company was in compliance with allsuch financial covenants at March 31, 2007 and December 30, 2006 andexpects to remain in compliance through the remainder of fiscal 2007.

The first-lien term loan requires mandatory paymentsof approximately $1.0 million per quarter and requires the Company toapply a percentage of proceeds from excess cash flows, as defined by the CreditFacility and determined based on year-end results, to reduce its thenoutstanding balances under the Credit Facility. Excess cash flows required tobe applied to the repayment of the Credit Facility are generally calculated as50.0% of the net amount of the Company’s available cash generated fromoperations adjusted for the cash effects of interest, taxes, capital expenditures,changes in working capital and certain other items. The amounts of excess cashflows for future periods are based on year-end results, however, the Companycurrently estimates that the excess cash flow payment with respect to fiscal2007, which would be payable in March 2008, will be approximately $15.0million and has classified this amount, in addition to the mandatory paymentsof approximately $1.0 million per quarter, in the *Currentportion of long-term debt* in the Consolidated Balance Sheet as ofMarch 31, 2007. No excess cash flow payment was required to be made withrespect to fiscal 2006 due to the magnitude of the major capital expenditureprojects.

The interest rate applicable to borrowings under theCredit Facility is based on three-month London Interbank Offered Rate (“LIBOR”)plus a specified margin. The applicable margin for borrowings under both thefirst-lien term loan and the revolving credit facility is 225 basis points. TheCompany may, from time to time, elect to use an Alternate Base Rate (“ABR”) forits borrowings under the revolving credit facility based on the bank’s baserate plus a margin of 75 to 125 basis points based on the Company’s totalleverage ratio. There were no borrowings under the revolving credit facility asof March 31, 2007 or as of December 30, 2006. As of March 31,2007, capacity under the revolving credit facility had been reserved foroutstanding letters of credit in the amount of $15.3 million, as describedbelow. Average daily borrowings under the revolving credit facility, which werelargely ABR-based borrowings, for the period from December 31, 2006 to March 31,2007 were $5.1 million at an average rate of 9.50%. The revolving creditportion of the Credit Facility matures on November 22, 2010.

In accordance with the terms of the Credit Facility,the Company maintained its position in a cash flow hedge agreement originallyentered into in May 2004. This cash flow hedge agreement effectivelyconverts $212.5 million of notional principal amount of debt from avariable LIBOR rate to a fixed LIBOR rate of 3.383%. The cash flow hedgeagreement terminates on May 8, 2007 and is described more fully inNote 11 to the Consolidated Financial Statements. Additionally, in February 2007,the Company entered into another cash flow hedge agreement, which is effective May 8,2007, matures June 29, 2009 and effectively converts $240.0 million ofnotional principal amount of debt from a variable LIBOR rate to a fixed LIBORrate of 5.085%.

Subject to certain terms andconditions, a maximum of $25.0 million of the Credit Facility may be usedfor revolving letters of credit. As of March 31, 2007, the Company had$15.3 million of standby and documentary letters of credit outstandingunder the Credit Facility. Letters of credit are in place to 

13

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

provideadded assurance for certain raw material vendors and administrative serviceproviders. None of these letters of credit had been drawn on at March 31,2007.

*Subsidiary Indebtedness*

In fiscal 2006, the Company’s operations in Chinaentered into short-term credit facilities denominated in Chinese renminbi withfinancial institutions in China. These short-term credit facilities areintended to finance working capital requirements. These facilities haveoutstanding indebtedness of $4.6 million at both March 31, 2007 and December 30,2006 and mature at various dates through June 2007. All of theseborrowings are shown in *Short-term borrowings*in the Consolidated Balance Sheets.

In January 2007, theCompany’s joint venture in Argentina entered into an arrangement with a bankinginstitution in Argentina to finance the installation of a new spunmelt line atthe joint venture facility near Buenos Aires, Argentina. The borrowings aresecured by pledges covering (i) the joint venture’s existing equipmentlines; (ii) the outstanding stock of the joint venture; and (iii) thenew machinery and equipment being purchased, as well as a trust assignmentagreement related to a portion of receivables due from certain major customersof the joint venture. As of March 31, 2007, the outstanding indebtednesswas approximately $8.8 million, consisting of a $1.1 million Argentinepeso-denominated loan and a $7.7 million U.S. dollar-denominated loan. Accruedinterest on these loans, which is shown in *Accrued liabilities*in the Consolidated Balance Sheets, will become part of the loan balance at theconclusion of the construction period, at which time the principal paymentamounts will be determined. The interest rate applicable to borrowings underthese term loans is based on LIBOR plus 290 basis points for the U.S.dollar-denominated loan and Buenos Aires Interbanking Offered Rate (“BAIBOR”)plus 475 basis points for the Argentine peso-denominated loan. Principalpayments are scheduled to begin in December 2007 with the loans maturingin March 2018. These dates are subject to change based on the date of thelast loan advance paid to the joint venture. Additionally, in March 2007,the Company’s operations in Argentina entered into a short-term credit facilitydenominated in U.S. dollars with a financial institution in Argentina. Thisshort-term credit facility is intended to finance working capital requirementsand had an outstanding balance of $1.2 million at March 31, 2007 andmatures on September 4, 2007. This borrowing is shown in *Short-term borrowings* in the Consolidated Balance Sheets.

In March 2006, one of theCompany’s wholly-owned Canadian subsidiaries entered into a term loan totalingapproximately $0.6 million with an agency of the Canadian government,which agency focuses on generating capital investment in the country. Theprincipal of the term loan is due September 1, 2008. Provided that theterm loan is repaid on September 1, 2008, no interest is due. However, ifthe Company elects not to pay the loan on September 1, 2008, the Companywill begin making monthly payments of principal and interest at 6.25% per year.

**Note 8.**   IncomeTaxes

The Company recognized incometax expense of $4.6 million for the three months ended March 31, 2007on consolidated income before income taxes of $5.4 million. This incometax expense is significantly different than such expense determined at the U.S.federal statutory rate primarily due to losses in the U.S. and certain foreignjurisdictions for which no income tax benefits were recognized or whererecognition was limited to the extent of existing deferred tax liabilities.Additionally, the income tax was impacted by foreign withholding taxes, forwhich tax credits are not anticipated, U.S. 

14

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

state incometaxes and foreign taxes calculated at statutory rates less than the U.S.federal statutory rate.

During the three months ended April 1,2006, the Company recognized income tax expense of $2.6 million onconsolidated pre-tax income of $1.6 million. This income tax expense issignificantly higher than the U.S. federal statutory rate primarily due tolosses in the U.S. and certain foreign jurisdictions for which no income taxbenefits were recognized. Additionally, the income tax expense was impacted byforeign withholding taxes, for which tax credits are not anticipated, U.S.state income taxes, and foreign taxes calculated at statutory rates less thanthe U.S. federal statutory rate.

See Note 1 to the consolidated financial statementsfor a discussion of the adoption of FIN 48.

Management judgment isrequired in determining tax provisions and evaluating tax positions. Althoughmanagement believes its tax positions and related provisions reflected in theConsolidated Financial Statements are fully supportable, it recognizes thatthese tax positions and related provisions may be challenged by various taxauthorities. These tax positions and related provisions are reviewed on anongoing basis and are adjusted as additional facts and information becomeavailable, including progress on tax audits, changes in interpretations of taxlaws, developments in case law and closing of statute of limitations. During2007, the Company concluded the tax examination by the Internal Revenue Servicefor the tax years 2003 and 2004. As of March 31, 2007, the Company has notax audits in process and has open tax years with various taxing jurisdictionsthat range from 1998 to 2006.

**Note 9.**   Pensionand Postretirement Benefit Plans

The Company and its subsidiaries sponsor multipledefined benefit plans and other postretirement benefits that cover certainemployees. Benefits are primarily based on years of service and the employee’scompensation. It is the Company’s policy to fund such plans in accordance withapplicable laws and regulations.

Componentsof net periodic benefit costs for the three months ended March 31, 2007and April 1, 2006 are as follows (in thousands):

| ** **                                                | ** ** | **Pension  Benefits** | ** ** | **Postretirement  Benefits** | ** ** |
|-----------------------------------------------------------|------------|-----------------------|------------|------------------------------|------------|
| ** **                                                | ** ** | **2007**              | ** ** | **2006**                     | ** ** | **2007** | ** ** | **2006** | ** ** |
| Current service costs                                     |       | $                     | 588        |                         | $          | 913 |   | $ | 43 |   | $ | 58 |   |
| Interest costs on  projected benefit obligation and other |       | 1,376                 |       | 1,529                        |       | 114 |   | 132 |   |
| Return on plan assets                                     |       | (1,681                | )          | (1,749                       | )          | — |   | — |   |
| Amortization of transition  obligation and other          |       | (25                   | )          | 110                          |       | (68 | ) | (31 | ) |
| Settlement loss                                           |       | 3,849                 |       | —                       |       | — |   | — |   |
| Periodic benefit cost, net                                |       | $                     | 4,107      |                         | $          | 803 |   | $ | 89 |   | $ | 159 |   |

 

As of March 31, 2007, the Company had contributed$4.6 million to its pension and postretirement benefit plans for the 2007benefit year. The Company presently anticipates contributing an additional $2.6 millionto fund its plans in 2007, for a total of $7.2 million.

During the first quarter offiscal 2006, as part of its restructuring and related cost reduction measures,the Company negotiated certain changes with the union representing theemployees of 

15

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

one of theCompany’s Canadian operations, including a partial curtailment of a definedbenefit pension plan. No net gain or loss was incurred as a result of thepartial curtailment. However, based on elections made by plan participantsduring the second quarter of fiscal 2006, and as approved by Canadianregulatory authorities on January 16, 2007, the Company incurred asettlement loss associated with employees who have exited the plan. The lossincurred as a result of the partial settlement of the defined benefit pensionplan, consisting of the recognition of previously unamortized actuarial losses inthe amount of approximately $3.8 million, was recognized in the first quarterof fiscal 2007 commensurate with governmental approval of the terms of thesettlement and upon fulfillment by the Company of its funding requirements in February 2007.

**Note 10.**   StockOption and Restricted Stock Plans

*Stock Option Plans*

The 2003 Stock Option Plan (the “2003 Option Plan”)was approved by the Company’s Board of Directors and shareholders and isadministered by the Compensation Committee of the Board of Directors. The stockoptions have a five-year life and vest, based on the achievement of variousservice and financial performance criteria, over a four-year period, with theinitial awards beginning their vesting terms as of January 4, 2004.Vesting of the stock options is accelerated on the occurrence of a change incontrol. As of March 31, 2007 and December 30, 2006, the Company hadawarded grants of non-qualified stock options to purchase 310,500 sharesof the Company’s Class A Common Stock. Accordingly, at March 31,2007, there remain 89,500 stock options available to be awarded pursuant to the2003 Option Plan.

The Company accounts for the2003 Option Plan in accordance with the methodology defined in SFAS No. 123(R).The compensation costs related to the 2003 Option Plan were $0.5 millionand $0.2 million for the three months ended March 31, 2007 and April 1,2006, respectively, and were included in *Selling,general and administrative expenses* in the Consolidated Statementsof Operations.

*Restricted Stock Plans*

The Company’s shareholders and Board of Directors approvedthe 2004 Restricted Stock Plan for Directors (the “2004 Restricted Plan”),which expires in 2014, for the issuance of restricted shares of the Company’s Class ACommon Stock to Directors of the Company, as defined in the 2004 RestrictedPlan. The 2004 Restricted Plan approved for issuance 200,000 restricted sharesand is administered by the Restricted Stock Committee, which is a committee ofthe Company’s Board of Directors not eligible to receive restricted sharesunder the 2004 Restricted Plan. In the first quarter of fiscal 2007 and thefirst quarter of fiscal 2006, the Company awarded 2,874 and 5,660 restrictedshares, respectively, to members of the Company’s Board of Directors for theirBoard service to the Company. The cost associated with these restricted stockgrants, which vest over periods ranging to eighteen months, totaledapproximately $55.0 thousand and $45.0 thousand for each of the periodsnoted above and was included in *Selling, generaland administrative expenses* in the Consolidated Statement ofOperations. As of March 31, 2007, 129,433 shares of the Company’s Class ACommon Stock are available to be awarded under the 2004 Restricted Plan.

The Company’s 2005 EmployeeRestricted Stock Plan (the “2005 Stock Plan”) was approved by the Company’s shareholdersand Board of Directors and is administered by the Compensation Committee of theCompany’s Board of Directors. The 2005 Stock Plan, which expires in 2015, 

16

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements (Continued)**

approved forissuance 482,000 restricted shares to employees of the Company. TheCompensation Committee may, from time to time, award up to 384,000 shares ofrestricted stock under the 2005 Stock Plan to such employees and in suchamounts and with specified restrictions as it determines appropriate in thecircumstances. The award of restricted stock by the Compensation Committee inexcess of the 384,000 shares will also require the approval of the Board ofDirectors of the Company. Vesting of the restricted shares is accelerated on theoccurrence of a change in control. During the first quarters of fiscal 2007 and2006, 800 and 272,000 restricted shares, respectively, were awarded to certainemployees of the Company. Generally, these shares vest 25% on each of the grant’sanniversary dates based on a combination of service and performance factors.Approximately 100,000 of the initial shares awarded in the first quarter offiscal 2006 vested immediately. In addition, 11,869 shares were surrenderedduring the first quarter of fiscal 2007 by employees to satisfy withholdingrequirements. The compensation costs associated with these restricted sharestotaled $0.2 million and $3.5 million for the three months ended March 31,2007 and April 1, 2006, respectively, and were included in *Selling, general and administrative expenses*in the Consolidated Statement of Operations. As of March 31, 2007,274,401 shares of the Company’s Class A Common Stock are availablefor future grant under the 2005 Stock Plan.

**Note 11.**   Derivativeand Other Financial Instruments and Hedging Activities

The Company uses derivative financial instruments tomanage market risks and reduce its exposure to fluctuations in interest ratesand foreign currencies. All hedging transactions are authorized and executedunder clearly defined policies and procedures, which prohibit the use offinancial instruments for trading purposes.

The Company uses interest-rate derivative instrumentsto manage its exposure related to movements in interest rates with respect toits debt instruments. As indicated in Note 7 to the Consolidated FinancialStatements, to mitigate its interest rate exposure as required by the CreditFacility, the Company entered into a pay-fixed, receive-variable interestrate swap, thus effectively converting the variable LIBOR-based interestpayments associated with $212.5 million of the debt to fixed amounts at aLIBOR rate of 3.383%. The notional amount of this contract, which expires on May 8,2007, was $212.5 million at both March 31, 2007 and December 30,2006. Cash settlements are made quarterly and the floating rate is resetquarterly, coinciding with the reset dates of the current Credit Facility.Additionally, on February 8, 2007, the Company entered into a similar pay-fixed,receive-variable interest rate swap contract to become effective on May 8,2007. The notional principal amount of this contract, which expires on June 29,2009, is $240.0 million and effectively fixes the LIBOR interest rate on thatamount of debt at 5.085%. Cash settlements will be made quarterly and thefloating rate will be reset quarterly, coinciding with the reset dates of thecurrent Credit Facility.

17

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements  (Continued)**

In accordance with SFAS No. 133,the Company designated these swaps as cash flow hedges of the variability ofinterest payments with changes in the fair value of the swap recorded to *Accumulated other comprehensive income* in the ConsolidatedBalance Sheets. The fair value of the interest rate swap that expires on May 8,2007, based on current settlement values, was $0.5 million and$1.5 million as of March 31, 2007 and December 30, 2006,respectively. Those amounts are included in *Othernoncurrent assets* in the Consolidated Balance Sheets. The fair valueof the interest rate swap that expires on June 29, 2009, based on currentsettlement values, was an obligation of $1.2 million as of March 31,2007. That amount is included in *Othernoncurrent liabilities* in the Consolidated Balance Sheets.

The impact of these swaps on *Interest expense, net* in the ConsolidatedStatements of Operations was a decrease of $1.1 million and $0.6 millionfor the three months ended March 31, 2007 and April 1, 2006,respectively.

**Note 12.**   EarningsPer Share and Shareholders’ Equity

Thefollowing is a reconciliation of basic net earnings per common share to dilutednet earnings per common share for the quarter ended March 31, 2007 (inthousands, except per share data):

| ** **                                                                | ** ** | **Net Income  (EPS Numerator)** | ** ** | **Average Shares  Outstanding  (EPS Denominator)** | ** ** | **Earnings Per  Common Share** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------------------|------------|
| Basic                                                                     |       |                                      | $          | 290                                                          |       |                                     |       | 19,262.6 |   |   |   | $ | 0.02 |   |   |
| Potential shares exercisable under share-based plans                      |       |                                      |       |                                                         |       |                                     | 219.8      |   |   |   |   |   |   |
| Less: shares which could be repurchased under treasury stock  method |       |                                      |       |                                                         |       |                                     | (85.1      | ) |   |   |   |   |   |
| Diluted                                                                   |       |                                      | $          | 290                                                          |       |                                     |       | 19,397.3 |   |   |   | $ | 0.01 |   |   |

 

Calculations have not beenpresented to reconcile basic earnings per common share to diluted earnings percommon share for the three months ended April 1, 2006 as the impact ofsuch calculations are anti-dilutive. Average shares outstanding for the threemonths ended April 1, 2006 were 19,246,662**.**

As of March 31,2007, the Company’s authorized capital stock consisted of the following classesof stock:

| **Type**                               | ** ** | ** ** | ** ** | **Par Value** | ** ** | **Authorized Shares** | ** ** |
|----------------------------------------|------------|------------|------------|--------------------|------------|----------------------------|------------|
| Preferred stock                        |       |       | $          | .01                |       |                       |       | 173,000 |   |   |
| Class A common  stock             |       |       | $          | .01                |       |                       |       | 39,200,000 |   |   |
| Class B  convertible common stock |       |       | $          | .01                |       |                       |       | 800,000 |   |   |
| Class C  convertible common stock |       |       | $          | .01                |       |                       |       | 118,453 |   |   |
| Class D  convertible common stock |       |       | $          | .01                |       |                       |       | 498,688 |   |   |
| Class E convertible  common stock |       |       | $          | .01                |       |                       |       | 523,557 |   |   |

 

All classes of the commonstock have similar voting rights. In accordance with the Amended and RestatedCertificate of Incorporation, all shares of Class B, C, D and E CommonStock may be 

18

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements  (Continued)**

convertedinto an equal number of shares of Class A Common Stock. The shares ofpreferred stock may be issued from time to time with such designation,preferences, participation rights and optional or special rights (including,but not limited to, dividend rates, voting rights, maturity dates and the like)as determined by the Board of Directors.

**Note 13.**   SegmentInformation

The Company’s reportable segments consist of itsprimary operating divisions—Nonwovens and Oriented Polymers. This reflects howthe overall business is managed on a regular basis by the Company’s seniormanagement and the Board of Directors. Each of these businesses sells todifferent end-use markets, such as hygiene, medical, wipes and industrial andspecialty markets. Sales to P&G accounted for more than 10% of the Company’ssales in each of the periods presented. Sales to this customer are reportedprimarily in the Nonwovens segment and the loss of these sales would have amaterial adverse effect on this segment. The Company recorded charges and/orincome in the Consolidated Statements of Operations during the three monthsended March 31, 2007 and the three months ended April 1, 2006relating to special charges, net that have not been allocated to the segmentdata.

19

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements  (Continued)**

Financialdata by segment is as follows (in thousands):

| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
| **Net sales**                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 223,513    |   | $ | 210,652 |   |
| Oriented Polymers                                                       |       | 43,524                           |       | 49,789 |   |
| Eliminations                                                            |       | —                           |       | — |   |
|                                                                    |       | $                                | 267,037    |   | $ | 260,441 |   |
| **Operating income**                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 21,443     |   | $ | 17,307 |   |
| Oriented Polymers                                                       |       | 1,775                            |       | 3,409 |   |
| Unallocated Corporate                                                   |       | (5,120                           | )          | (10,542 | ) |
| Eliminations                                                            |       | —                           |       | 65 |   |
|                                                                    |       | 18,098                           |       | 10,239 |   |
| Special charges, net                                                    |       | (6,377                           | )          | (1,633 | ) |
|                                                                    |       | $                                | 11,721     |   | $ | 8,606 |   |
| **Depreciation and amortization  expense included in operating income** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 11,527     |   | $ | 11,702 |   |
| Oriented Polymers                                                       |       | 2,454                            |       | 2,745 |   |
| Unallocated Corporate                                                   |       | 223                              |       | (9 | ) |
| Depreciation and amortization expense included in operating income      |       | 14,204                           |       | 14,438 |   |
| Amortization of loan acquisition costs                                  |       | 345                              |       | 325 |   |
|                                                                    |       | $                                | 14,549     |   | $ | 14,763 |   |
| **Capital spending**                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Nonwovens                                                               |       | $                                | 10,805     |   | $ | 30,295 |   |
| Oriented Polymers                                                       |       | 253                              |       | 520 |   |
| Corporate                                                               |       | (95                              | )          | 30 |   |
|                                                                    |       | $                                | 10,963     |   | $ | 30,845 |   |

 

| ** **           | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|----------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Division  assets** | ** ** | ** **               | ** ** |                        | ** ** | ** ** |   |
| Nonwovens            |       | $                        | 735,738    |                        |       | $ | 735,315 |   |   |
| Oriented Polymers    |       | 119,450                  |       |                        | 116,839    |   |   |
| Corporate            |       | 1,577                    |       |                        | 390        |   |   |
| Eliminations         |       | (106,994                 | )          |                        | (110,447   | ) |   |
|                 |       | $                        | 749,771    |                        |       | $ | 742,097 |   |   |

 

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements  (Continued)**

**Geographic Data:**

Geographic data for theCompany’s operations, based on the geographic region that sales are made from,are presented in the following table (in thousands):

| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
| **Net sales**                                                      | ** ** | ** **                       | ** ** | ** ** | ** ** |
| United States                                                           |       | $                                | 119,581    |   | $ | 121,588 |   |
| Canada                                                                  |       | 28,292                           |       | 31,479 |   |
| Europe                                                                  |       | 52,943                           |       | 47,029 |   |
| Asia                                                                    |       | 18,178                           |       | 11,555 |   |
| Latin America                                                           |       | 48,043                           |       | 48,790 |   |
|                                                                    |       | $                                | 267,037    |   | $ | 260,441 |   |
| **Operating income**                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| United States                                                           |       | $                                | 1,928      |   | $ | (3,563 | ) |
| Canada                                                                  |       | 1,178                            |       | 1,082 |   |
| Europe                                                                  |       | 4,262                            |       | 3,934 |   |
| Asia                                                                    |       | 2,060                            |       | 1,396 |   |
| Latin America                                                           |       | 8,670                            |       | 7,390 |   |
|                                                                    |       | 18,098                           |       | 10,239 |   |
| Special charges, net                                                    |       | (6,377                           | )          | (1,633 | ) |
|                                                                    |       | $                                | 11,721     |   | $ | 8,606 |   |
| **Depreciation and amortization  expense included in operating income** | ** ** | ** **                       | ** ** | ** ** | ** ** |
| United States                                                           |       | $                                | 5,255      |   | $ | 6,031 |   |
| Canada                                                                  |       | 1,915                            |       | 2,193 |   |
| Europe                                                                  |       | 2,242                            |       | 2,372 |   |
| Asia                                                                    |       | 1,865                            |       | 1,056 |   |
| Latin America                                                           |       | 2,927                            |       | 2,786 |   |
| Depreciation and  amortization expense included in operating income     |       | 14,204                           |       | 14,438 |   |
| Amortization of loan  acquisition costs                                 |       | 345                              |       | 325 |   |
|                                                                    |       | $                                | 14,549     |   | $ | 14,763 |   |

 

| ** **                                             | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|--------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Identifiable assets (including  intangible assets)** | ** ** | ** **               | ** ** |                        | ** ** | ** ** |   |
| United States                                          |       | $                        | 303,028    |                        |       | $ | 303,728 |   |   |
| Canada                                                 |       | 77,454                   |       |                        | 76,640     |   |   |
| Europe                                                 |       | 197,899                  |       |                        | 193,666    |   |   |
| Asia                                                   |       | 92,186                   |       |                        | 91,914     |   |   |
| Latin America                                          |       | 186,198                  |       |                        | 186,596    |   |   |
| Eliminations                                           |       | (106,994                 | )          |                        | (110,447   | ) |   |
|                                                   |       | $                        | 749,771    |                        |       | $ | 742,097 |   |   |

 

**Note 14.**   ForeignCurrency and Other (Gain) Loss, Net

Components of foreigncurrency (gain) loss are shown in the table below (in thousands):

| ** **                         | ** ** | **Three Months Ended   March 31, 2007** | ** ** | **Three Months Ended  April 1, 2006** | ** ** |
|------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Included in operating income       |       |                                                             | $          | (502                                                      | )          |   |   | $ | 567 |   |   |
| Included in other expense (income) |       |                                                             | (40        | )                                                         |       |   | 376 |   |   |
|                               |       |                                                             | $          | (542                                                      | )          |   |   | $ | 943 |   |   |

 

21

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**POLYMER GROUP, INC. Notes to Consolidated Financial Statements  (Continued)**

For international subsidiaries which have the U.S.dollar as their functional currency, local currency transactions are remeasuredinto U.S. dollars, using current rates of exchange for monetary assets and liabilities.Gains and losses from the remeasurement of such monetary assets and liabilitiesare reported in *Foreign currency (gain) loss, net*in the Consolidated Statements of Operations. Likewise, for internationalsubsidiaries which have the local currency as their functional currency, gainsand losses from the remeasurement of monetary assets and liabilities notdenominated in the local currency are reported in *Foreigncurrency (gain) loss, net* in the Consolidated Statements ofOperations. Additionally, currency gains and losses have been incurred onintercompany loans between subsidiaries, and to the extent that such loans arenot deemed to be permanently invested, such currency gains and losses are alsoreflected in *Foreign currency and other (gain) loss, net*in the Consolidated Statement of Operations.

The Company includes gains and losses on receivables,payables and other operating transactions as a component of operating income in*Foreign currency loss, net*. Otherforeign currency gains and losses, primarily related to intercompany loans anddebt, are included in *Foreign currency and other(gain) loss, net*.

Additionally, included in *Foreign currency and other (gain) loss, net* for the threemonths ended March 31, 2007 is the cash recovery from the minorityshareholder of the Company’s Argentine subsidiary of legal and other costsassociated with a prior period legal action of approximately $1.8 million.

**Note 15.**   LegalProceedings, Commitments and Contingencies

The Company is not currently a party to any materialpending legal proceedings other than routine litigation incidental to thebusiness of the Company. During 2005, the Company was served with a lawsuit by acustomer alleging breach of contract and other charges. The discovery phase iscontinuing and there is not currently enough information to formulate anassessment of the ultimate outcome of the claim. Accordingly, management is notable to estimate the amount of the loss, if any, at this time. The Companyintends to vigorously defend this action and believes that it has reasonablearguments available in its defense. However, there is a possibility thatresolution of this matter, or others that may arise in the normal course ofbusiness, could result in a loss in excess of established reserves, if any.

The Company has severalcommitted capital projects, including the installation of a new spunmelt lineat the joint venture facility near Buenos Aires, Argentina. Remaining paymentsdue related to these planned capital expenditures as of March 31, 2007totaled approximately $29.9 million and are expected to be expended overthe remainder of fiscal 2007. The Company is using local financing to supportthe capital expansion in Argentina.

**Note 16.**   SupplementalCash Flow Information

Noncash investing or financing activities in the firstthree months of fiscal 2007 included the surrender of 11,869 shares of theCompany’s Class A Common Stock to the Company by participants in the 2005Stock Plan in the amount of $0.3 million to satisfy employee withholdingtax obligations.

There were no noncash investing or financingactivities in the first three months of fiscal 2006.

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**ITEM 2.**                 MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis providesinformation which management believes is relevant to an assessment andunderstanding of the Company’s consolidated results of operations and financialcondition. The discussion should be read in conjunction with the consolidatedfinancial statements and notes thereto contained in this Quarterly Report on Form 10-Qand in the Company’s Annual Report on Form 10-K for the fiscal yearended December 30, 2006. In addition, it should be noted that the Company’sgross profit margins may not be comparable to other companies since someentities classify shipping and handling costs in cost of goods sold and others,including the Company, include such costs in selling, general andadministrative expenses. Similarly, some entities, including the Company,include foreign currency gains and losses resulting from operating activitiesas a component of operating income, and some entities classify all foreigncurrency gains and losses outside of operating income.

During the two-year period ended December 30,2006, the Company was engaged in a major capital expansion program whichincluded adding new spunmelt capacity in Cali, Colombia, in Mooresville, NorthCarolina and in Suzhou, China. Capital expenditures during this period totaled$147.1 million and consisted primarily of the aforementioned three newspunmelt facilities. The new capacity installations have resulted inimprovements in sales and profitability.

The Cali line, which was installed in the latter partof fiscal 2005, experienced several quarters of suboptimal manufacturingperformance associated with equipment issues which hindered production outputand sales. These issues were resolved, and the Cali line has performed atexpected levels since the second half of fiscal 2006.

The Mooresville line initiated production in thelatter part of the second quarter of fiscal 2006 and has performed withinexpected levels since its start up. The Mooresville line has performed atplanned levels from a productivity and profitability perspective since thefourth quarter of fiscal 2006.

The Suzhou line initiated operations in the latterpart of the third quarter of fiscal 2006 and commenced production without anysignificant manufacturing complications. As such, the Suzhou line onlycontributed marginally to sales and profitability during the fourth quarter offiscal 2006. Sales and profitability for the first quarter of fiscal 2007 werewithin the Company’s expectations as the Suzhou line continued thequalification process for high grade finished medical fabric transitioning fromhygiene and lower grades of medical fabrics.

Additionally, the Company has announced theconstruction of a new spunmelt line at the joint venture facility near BuenosAires, Argentina, which is expected to initiate operations in the fourthquarter of fiscal 2007.

The Company reviews itsbusiness on an ongoing basis relative to current and expected market conditions,attempting to match its production capacity and cost structure to the demandsof the markets in which it participates, and strives to continuously streamlineits manufacturing operations consistent with world-class standards.Accordingly, in the future the Company may or may not decide to undertakecertain restructuring efforts to improve its competitive position, especiallyin the more mature markets of the U.S., Europe and Canada. In such maturemarkets, the prices for commodity roll goods continue to fluctuate based onsupply and demand dynamics relative to the assets employed in that geographicregion. The Company actively and continuously pursues initiatives to prolongthe useful life of its long-lived assets through product and process innovation.In some instances the Company may decide, as was the case with its currentplans to consolidate operations in the U.S., as further described in Note 3to the Consolidated Financial Statements included in Item 1 of Part Ito this Quarterly Report on Form 10-Q, that its fixed cost structurewill be enhanced through consolidation. To the extent further decisions aremade to improve the Company’s long-term 

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performance,such actions could result in the incurrence of cash restructuring charges andasset impairment charges associated with the consolidation, and such chargescould be material.

**Results of Operations**

Thefollowing table sets forth the percentage relationships to net sales of certainconsolidated statement of operations items:

| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
| Net sales                                                |       |                             | 100.0      | % |   |   | 100.0 | % |   |
| Cost of goods sold:                                      |       |                             |       |   |   |   |   |   |   |
| Materials                                                |       |                             | 53.2       |   |   |   | 52.5 |   |   |
| Labor                                                    |       |                             | 7.8        |   |   |   | 7.9 |   |   |
| Overhead                                                 |       |                             | 21.8       |   |   |   | 23.0 |   |   |
|                                                     |       |                             | 82.8       |   |   |   | 83.4 |   |   |
| Gross profit                                             |       |                             | 17.2       |   |   |   | 16.6 |   |   |
| Selling, general and  administrative expenses            |       |                             | 10.6       |   |   |   | 12.5 |   |   |
| Special charges, net                                     |       |                             | 2.4        |   |   |   | 0.6 |   |   |
| Foreign currency  (gain) loss, net                       |       |                             | (0.2       | ) |   |   | 0.2 |   |   |
| Operating income                                         |       |                             | 4.4        |   |   |   | 3.3 |   |   |
| Other expense (income):                                  |       |                             |       |   |   |   |   |   |   |
| Interest expense, net                                    |       |                             | 3.1        |   |   |   | 2.5 |   |   |
| Foreign currency and other (gain) loss, net              |       |                             | (0.7       | ) |   |   | 0.2 |   |   |
| Income before income  tax expense and minority interests |       |                             | 2.0        |   |   |   | 0.6 |   |   |
| Income tax expense                                       |       |                             | 1.7        |   |   |   | 1.0 |   |   |
| Minority interests, net  of tax                          |       |                             | 0.2        |   |   |   | 0.2 |   |   |
| Net income (loss)                                        |       |                             | 0.1        | % |   |   | (0.6 | )% |   |

 

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**Comparison of ThreeMonths Ended March 31, 2007 and April 1, 2006**

TheCompany’s reportable segments consist of its two operating divisions, Nonwovensand Oriented Polymers. For additional information regarding segment data, seeNote 13 “Segment Information” to the Consolidated Financial Statementsincluded in Item 1 of Part I to this Quarterly Report on Form 10-Q.The following table sets forth components of the Company’s net sales andoperating income by operating division for the three months ended March 31,2007, the three months ended April 1, 2006 and the corresponding change(in millions):

| ** **                                 | ** ** | **Three Months  Ended  March 31, 2007** | ** ** | **Three Months  Ended  April 1, 2006** | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|------------|
| Net sales                                  |       |                                                   |       |                                                  |       |       |       |   |   |   |   |   |   |
| Nonwovens                                  |       |                                                   | $          | 223.5                                                 |       |       |       | $ | 210.6 |   |   |   | $ | 12.9 |   |   |
| Oriented Polymers                          |       |                                                   | 43.5       |                                                  |       |       | 49.8       |   |   |   | (6.3 | ) |   |
| Eliminations                               |       |                                                   | —     |                                                  |       |       | —     |   |   |   | — |   |   |
|                                       |       |                                                   | $          | 267.0                                                 |       |       |       | $ | 260.4 |   |   |   | $ | 6.6 |   |   |
| Operating income                           |       |                                                   |       |                                                  |       |       |       |   |   |   |   |   |   |
| Nonwovens                                  |       |                                                   | $          | 21.3                                                  |       |       |       | $ | 17.3 |   |   |   | $ | 4.0 |   |   |
| Oriented Polymers                          |       |                                                   | 1.8        |                                                  |       |       | 3.4        |   |   |   | (1.6 | ) |   |
| Unallocated Corporate, net of eliminations |       |                                                   | (5.0       | )                                                     |       |       | (10.5      | ) |   |   | 5.5 |   |   |
|                                       |       |                                                   | 18.1       |                                                  |       |       | 10.2       |   |   |   | 7.9 |   |   |
| Special charges, net                       |       |                                                   | (6.4       | )                                                     |       |       | (1.6       | ) |   |   | (4.8 | ) |   |
|                                       |       |                                                   | $          | 11.7                                                  |       |       |       | $ | 8.6 |   |   |   | $ | 3.1 |   |   |

 

The amounts for specialcharges, net have not been allocated to the Company’s reportable businessdivisions because the Company’s management does not evaluate such charges on adivision-by-division basis. Division operating performance is measured andevaluated before such items.

**Net Sales**

Net saleswere $267.0 million in the first three months of fiscal 2007, an increaseof $6.6 million or 2.5% over first quarter 2006 net sales of$260.4 million. Net sales for 2007 improved in the Nonwovens Division overcomparable 2006 results by 6.1%, and net sales in 2007 in the Oriented PolymersDivision decreased 12.7% from 2006 results. A reconciliation of the change innet sales between the three months ended April 1, 2006 and the threemonths ended March 31, 2007 is presented in the following table(in millions):

| Net sales—three  months ended April 1, 2006  |   | $      | 260.4  |   |
|--------------------------------------------------------|--------|--------|--------|--------|
| Change in sales due  to:                               |   |   |   |
| Volume                                                 |   | 6.9    |   |
| Price/mix                                              |   | (4.8   | )      |
| Foreign currency translation                           |   | 4.5    |   |
| Net sales—three months ended  March 31, 2007 |   | $      | 267.0  |   |

 

The increase in net sales during the first quarter offiscal 2007 was due to volume gains and foreign currency translation, partiallyoffset by price/mix erosion. Volume gains occurred in substantially all of theregions comprising the nonwovens segment. As raw material costs have increasedor decreased, the Company has attempted to pass raw material costs along to itscustomers, where allowable by contract terms and where acceptable based onmarket conditions. In 

25

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general, with respect tocontracted business, there is usually a one-quarter lag between the change inraw material cost and the change in sales price.

A significant component of the $12.9 million increasein nonwovens sales was due to volume growth, primarily generated in the Asiaregion, with most of the increase resulting from shipments from the Company’snew spunmelt facility in Suzhou, China, which commenced production in the fourthquarter of fiscal 2006, and by the new spunmelt facility at Mooresville, NorthCarolina, which initiated operations in the latter part of the second quarterof fiscal 2006. The Latin America region’s improvement in sales volume waspaced by year-over-year increases in hygiene and industrial sales, whereasEurope continued to experience increased sales in their industrial business.Oriented Polymers’ net sales for 2007 decreased $6.3 million from the firstquarter 2006 level. Oriented Polymers’ sales volumes and selling prices havebeen negatively impacted by reduced housing starts affecting their industrialbusiness, imported commodity products affecting lumberwrap volumes and reducedagricultural sales.

Both the Canadian dollar andthe Euro were stronger against the U.S. dollar during 2007 compared to2006. As a result, net sales increased $4.5 million due to the favorableforeign currency translation. Further discussion of foreign currency exchangerate risk is contained in “Quantitative and Qualitative Disclosures AboutMarket Risk” included in Item 3 of Part I to this Quarterly Report onForm 10-Q.

**Gross Margin**

Gross margin in the firstquarter of 2007 improved to 17.2% from 16.6% in the first quarter of 2006,driven by improved sales volumes and lower manufacturing and fixed overheadcosts, which offset the impact of the declines in the price/mix of sales during2007. The raw material component of the cost of goods sold as a percentage ofnet sales increased from 52.5% in 2006 to 53.2% in 2007.

**Operating Income**

Areconciliation of the change in operating income between the three months endedApril 1, 2006 and the three months ended March 31, 2007 is presentedin the following table (in millions):

| Operating income—three  months ended April 1, 2006  |   | $      | 8.6    |   |
|---------------------------------------------------------------|--------|--------|--------|--------|
| Change in operating  income due to:                           |   |   |   |
| Price/mix                                                     |   | (4.8   | )      |
| Lower raw material costs                                      |   | 0.3    |   |
| Volume                                                        |   | 3.2    |   |
| Lower manufacturing costs                                     |   | 3.6    |   |
| Foreign currency                                              |   | 0.4    |   |
| Lower depreciation and amortization expense                   |   | 0.2    |   |
| Higher special charges, net                                   |   | (4.8   | )      |
| Decreased share-based compensation costs                      |   | 3.1    |   |
| All other, including lower SG&A costs                     |   | 1.9    |   |
| Operating income—three  months ended March 31, 2007 |   | $      | 11.7   |   |

 

Consolidated operating income was $11.7 millionin 2007 as compared to $8.6 million in 2006. Operating income waspositively impacted by the volume gains in the nonwovens markets, partiallyoffset by volume declines in the oriented polymers markets as noted above inthe net sales discussion. The net improvement in operating income waspositively impacted by lower noncash compensation costs related to share-basedawards made under the Company’s stock option and restricted stock plans. Alsocontributing to the improvement in operating income was lower 

26

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manufacturing costs, which wasattributable to the improvement in efficiencies and absorption of costsassociated with the continued ramp-up of new lines and products within each ofthe regions, primarily on the spunmelt lines. Special charges, net in 2007 primarilyrelate to a settlement loss associated with a partial curtailment of a definedbenefit pension plan at one of the Company’s Canadian operations and theinitial costs related to the Company’s announced closure of two of its plantsin the United States, which was communicated to affected employees in January 2007and expected to be completed by the end of fiscal 2007.

Selling, general andadministrative expenses decreased $4.0 million, from $32.4 million in2006 to $28.4 million in 2007, largely due to the lower noncashstock-based compensation costs described in the previous paragraph.

**Interest and OtherExpense**

Net interest expense increased $1.6 million, from$6.5 million during the three months ended April 1, 2006 to$8.1 million during the three months ended March 31, 2007. Theincrease in net interest expense was largely due to the lower interestcapitalization of approximately $1.0 million with respect to major capitalexpenditure projects in the first quarter of fiscal 2007 compared to the firstquarter of fiscal 2006. Additionally, the interest rates on the Company’slong-term debt have increased in 2007 compared to 2006.

Foreign currency and other(gain) loss, net improved by $2.3 million, from a loss of$0.5 million in the first quarter of fiscal 2006 to a gain of$1.8 million in the first quarter of fiscal 2007. Included as a gain inForeign currency and other (gain) loss, net for the three months ended March 31,2007 is the cash recovery from a minority shareholder of the Company’sArgentine subsidiary of legal and other costs associated with a prior periodlegal action of approximately $1.8 million.

**Income Tax Expense**

The Company recognized incometax expense of $4.6 million for the three months ended March 31, 2007on consolidated income before income taxes of $5.4 million for suchperiod. The tax expense is significantly different than such expense determinedat the U.S. federal statutory tax rate primarily due to losses in the U.S. andcertain foreign jurisdictions for which no income tax benefits were recognizedor where recognition was limited to the extent of existing deferred tax liabilities.Additionally, the income tax expense was impacted by foreign withholding taxes,for which tax credits are not anticipated, U.S. state income taxes and foreigntaxes calculated at statutory rates less than the U.S. federal statutory rate.During the three months ended April 1, 2006, the Company recognized anincome tax expense of $2.6 million on consolidated pre-tax income of $1.6 million.This income tax expense is significantly higher than the U.S. federal statutoryrate primarily due to losses in the U.S. and certain foreign jurisdictions forwhich no income tax benefits were recognized. Additionally, the income taxexpense was impacted by foreign withholding taxes, for which tax credits arenot anticipated, U.S. state income taxes, and foreign taxes calculated atstatutory rates less than the U.S. federal statutory rate.

**Net Income (Loss)**

As a result of the above, the Company recognized netincome of $0.3 million, or $.02 per share, for the three months ended March 31,2007 compared to a net loss of $1.6 million, or $.08 per share, for thethree months ended April 1, 2006.

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**LIQUIDITY AND CAPITALRESOURCES**

TheCompany’s principal sources of liquidity for operations and expansions arecurrently funds generated from operations and borrowing availabilities underthe Credit Facility, consisting of a revolving credit facility of $45.0 millionand a first-lien term loan of $410.0 million. The revolving credit portionof the Credit Facility terminates on November 22, 2010 and the remainingbalance (after mandatory annual payments of $4.1 million and additionalpayments, if any, under the excess cash flow provision of the Credit Facility)of the first-lien term loan is due November 22, 2012. The Credit Facility,as amended, contains covenants and events of default customary for financingsof this type, including leverage and interest expense coverage covenants. At March 31,2007, the Company was in compliance with all such financial covenants.Additionally, as of March 31, 2007, the Company had no outstandingborrowings under the revolving credit facility and capacity under the revolvingcredit facility had been reserved for outstanding letters of credit in theamount of $15.3 million.

| ** **                       | ** ** | **March 31,  2007** | ** ** | **December 30,  2006** | ** ** |
|----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **(In Millions)**   | ** ** |
| **Balance sheet data:**          | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Cash and cash equivalents        |       |                     | $          | 19.1                        | ** ** |   |   | $ | 32.1 | ** ** |   |
| Working capital                  |       |                     | 164.2      | ** **                  |       |   | 159.4 | ** ** |   |
| Total assets                     |       |                     | 749.8      | ** **                  |       |   | 742.1 | ** ** |   |
| Total debt                       |       |                     | 420.2      | ** **                  |       |   | 411.2 | ** ** |   |
| Total shareholders’  equity |       |                     | 119.3      | ** **                  |       |   | 109.1 | ** ** |   |
|                                  |            |                          |            |                             |            |  |  |  |  |  |  |

 

| ** **                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 31,  2007**         | ** ** | **April 1,  2006** | ** ** |
| ** **                                          | ** ** | **(In Millions)**           | ** ** |
| **Cash flow data:**                                 | ** ** |                             | ** ** | ** ** |   | ** ** | ** ** |
| Net cash provided by (used in) operating activities |       |                             | $          | (8.5 | ) |   | $ | 4.5 |   |
| Net cash used in investing activities               |       |                             | (10.8      | ) |   | (30.4 | ) |
| Net cash provided by  financing activities          |       |                             | 6.2        |   |   | 18.3 |   |
|                                                     |            |                                  |            |  |  |  |  |  |  |

 

**Operating Activities**

Net cash used in operating activities was$8.5 million during the first quarter of fiscal 2007, a $13.0 milliondecrease from the net cash of $4.5 million provided by operatingactivities during the first quarter of fiscal 2006.

The Company had working capital of approximately $164.2 millionat March 31, 2007 compared with $159.4 million at December 30,2006. Accounts receivable at March 31, 2007 was $142.7 million ascompared to $129.3 million at December 30, 2006, an increase of$13.4 million. Accounts receivable represented approximately 49 days ofsales outstanding at March 31, 2007 compared to 45 days of salesoutstanding at December 30, 2006. Inventories at March 31, 2007 were$138.5 million, an increase of $6.0 million from inventories at December 30,2006 of $132.5 million. The Company had inventory representingapproximately 57 days of cost of sales on hand at March 31, 2007compared to 54 days of cost of sales on hand at December 30, 2006.Accounts payable at March 31, 2007 was $91.2 million as compared to$102.7 million at December 30, 2006, a decrease of$11.5 million. Accounts payable represented approximately 38 days of costof sales outstanding at March 31, 2007 compared to 42 days of cost ofsales outstanding at December 30, 2006. The absolute dollar increases inaccounts receivable and inventories in 2007 versus 2006 were largely related tosales dollar increases, sales increases in regions with longer payment cycles,inventory builds to transition the medical fabric finishing from the Company’soperations in the United States to China and to facilitate other plantconsolidation efforts. The decrease in accounts payable 

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was impacted by the Company’sdecision to take advantage of available vendor discounts related to earlypayment of trade payables.

The Company’s restructuring and plant realignmentactivities in fiscal 2007 are discussed in Note 3 “Special Charges, Net”to the Consolidated Financial Statements included in Item 1 of Part I tothis Quarterly Report on Form 10-Q.

On January 3, 2007, theBoard of Directors of the Company approved a plan that was communicated toaffected employees that it intended to close its Rogers, Arkansas andGainesville, Georgia plants in the United States and transfer portions of thebusiness to other locations in North America and Asia. The restructuring planincluded the reduction of approximately 170 production and administrative staffpositions. As a result of this decision, the Company estimates that it willrecognize cash restructuring charges of approximately $7.0 million duringfiscal year 2007. The Company anticipates proceeds of approximately $4.0million to $5.0 million from the sale of idled facilities and equipment. Duringthe first quarter of fiscal 2007, approximately $2.3 million has beenrecognized as a restructuring and plant realignment charge with respect to theplant consolidations. Additionally, with respect to certain restructuring andplant realignment efforts initiated in fiscal 2006, including the corporateheadquarters consolidation, the Company recognized additional relocation costsof $0.1 million in the first quarter of fiscal 2007. Also, during the firstquarter of fiscal 2006, as part of its restructuring and related cost reductionmeasures, the Company negotiated certain changes with the union representingthe employees of one of the Company’s Canadian operations, including a partialcurtailment of a defined benefit pension plan. No net gain or loss was incurredas a result of the partial curtailment. However, based on elections made byplan participants during the second quarter of fiscal 2006, and as approved byCanadian regulatory authorities on January 16, 2007, the Company incurreda settlement loss associated with employees who have exited the plan. The lossincurred as a result of the partial settlement of the defined benefit pensionplan, in the amount of approximately $3.8 million, was recognized in thefirst quarter of fiscal 2007 commensurate with governmental approval of theterms of the settlement and upon fulfillment by the Company of its funding requirements.

**Investing and FinancingActivities**

Net cash used for investing activities amounted to$10.8 million and $30.4 million in the first three months of fiscal2007 and fiscal 2006, respectively. Capital expenditures during 2007 totaled$11.0 million, a decrease of $19.8 million from capital spending of$30.8 million in 2006. A significant portion of the capital expendituresin 2007 related to the construction of a new spunmelt line at the joint venturefacility near Buenos Aires, Argentina. Also, investing activities during 2007and 2006 included proceeds from the sale of assets of $0.2 million and$1.4 million, respectively. In addition, investing activities during 2006included $0.9 million for acquisition-related activities.

Net cash provided by financingactivities amounted to $6.2 million and $18.3 million in the first threemonths of fiscal 2007 and fiscal 2006, respectively. In 2007, the Companyborrowed, on a net basis, $9.0 million of debt whereas the Companyborrowed, on a net basis, $18.4 million of debt during 2006. Additionally,in 2007, the Company repaid the remaining balance of $2.8 million related to anadvance received in 2006 from an equipment supplier.

**Dividends**

The Board of Directors has notdeclared a dividend on the Company’s common stock since the Company emergedfrom Chapter 11 bankruptcy proceedings on March 5, 2003 (the“Effective Date”). The Credit Facility limits restricted payments, includingcash dividends, to $5.0 million in the aggregate since the effective dateof the Credit Facility. The Company does not have any plans to pay dividends onits common stock in future periods.

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**Liquidity Summary**

As discussed more fully in Note 7 to theConsolidated Financial Statements included in Item 1 of Part I to thisQuarterly Report on Form 10-Q, the Company has a Credit Facility,which it entered into on November 22, 2005 and amended as of December 8,2006, which consists of a $45.0 million secured revolving credit facilitymaturing in 2010 and a $410.0 million first-lien term loan maturing in2012.

All borrowings under the Credit Facility areU.S. dollar denominated and are guaranteed, on a joint and several basis,by each and all of the direct and indirect domestic subsidiaries of theCompany. The Credit Facility and the related guarantees are secured by (i) alien on substantially all of the assets of the Company, its domesticsubsidiaries and certain of its non-domestic subsidiaries, (ii) a pledgeof all or a portion of the stock of the domestic subsidiaries of the Companyand of certain non-domestic subsidiaries of the Company, and (iii) apledge of certain secured intercompany notes. Commitment fees under the CreditFacility are equal to 0.50% of the daily unused amount of the revolving creditcommitment. The Credit Facility limits restricted payments to$5.0 million, including cash dividends, in the aggregate since theeffective date of the Credit Facility. The Credit Facility contains covenantsand events of default customary for financings of this type, including leverageand interest expense coverage covenants. The Company was in compliance with thefinancial covenants under the Credit Facility at March 31, 2007 andexpects to remain in compliance through fiscal 2007.

The first-lien term loan requires mandatory paymentsof approximately $1.0 million per quarter and requires the Company to usea percentage of proceeds from excess cash flows, as defined by the CreditFacility and determined based on year-end results, to reduce its then outstandingbalances under the Credit Facility. Excess cash flows required to be applied tothe repayment of the Credit Facility are generally calculated as 50.0% of thenet amount of the Company’s available cash generated from operations adjustedfor the cash effects of interest, taxes, capital expenditures, changes inworking capital and certain other items. Additionally, no excess cash flowpayment was required to be made with respect to fiscal 2006 due to themagnitude of the major capital expenditures. The Company currently estimatesthat the excess cash flow payment with respect to fiscal 2007, which would bepayable in March 2008, will be approximately $15.0 million and hasincluded such amount, in addition to the mandatory payments of approximately$1.0 million per quarter, in *Current portion oflong-term debt* in the Consolidated Balance Sheets as of March 31,2007.

The interest rate applicable to borrowings under theCredit Facility is based on three-month London Interbank Offered Rate (“LIBOR”)plus a specified margin. The applicable margin for borrowings under both thefirst-lien term loan and the revolving credit facility is 225 basispoints. The Company may, from time to time, elect to use an ABR for itsborrowings under the revolving credit facility based on the bank’s base rateplus a margin of 75 to 125 basis points based on the Company’s totalleverage ratio. The Company had no outstanding borrowings at March 31,2007 under the revolving credit facility. As of March 31, 2007, capacityunder the revolving credit facility had been reserved for outstanding lettersof credit in the amount of $15.3 million. Average daily borrowings underthe revolving credit facility, which were largely ABR-based borrowings, for theperiod of January 1, 2007 to March 31, 2007 were $5.1 million atan average rate of 9.50%. The revolving credit portion of the Credit Facilitymatures on November 22, 2010.

Additionally, in accordance with the terms of theCredit Facility, the Company maintained its position in a cash flow hedgeagreement, effectively converting $212.5 million of notional principalamount of debt from a variable LIBOR rate to a fixed LIBOR rate of 3.383%. Thecash flow hedge agreement has been maintained in accordance with the terms ofthe Credit Facility and it terminates on May 8, 2007. Additionally, in February 2007,the Company entered into another cash flow hedge agreement, which is effective May 8,2007, matures June 29, 2009 and effectively converts $240.0 million ofnotional principal amount of debt from a variable LIBOR rate to a fixed LIBORrate of 5.085%. 

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Solely as a result of thechange in the terms of the interest rate swaps, the Company estimates thatinterest costs will increase by approximately $2.4 million in fiscal 2007versus fiscal 2006.

The Company has entered into factoring agreements tosell without recourse, certain U.S. and non-U.S. company-based receivables tounrelated third-party financial institutions. Under the terms of the factoringagreement related to the sale of U.S. company-based receivables, the maximumamount of outstanding advances at any one time is $20.0 million, whichlimitation is subject to change based on the level of eligible receivables,restrictions on concentrations of receivables and the historical performance ofthe receivables sold. Under the terms of the factoring agreement related to thesale of non-U.S. company-based receivables, the maximum amount of outstandingadvances at any one time is $10.0 million, which limitation is subject tochange based on the level of eligible receivables, restrictions onconcentrations of receivables and the historical performance of the receivablessold. The sale of these receivables accelerated the collection of the Company’scash, reduced credit exposure and lowered the Company’s net borrowing costs.The Credit Facility provides the Company the availability to increase the saleof non-U.S.-based receivables, under factoring agreements, to $20.0 million.

As discussed in Note 15 to the ConsolidatedFinancial Statements included in Item 1 of Part I to this Quarterly Reporton Form 10-Q,the Company has several committed capital projects, including the installationof a new spunmelt line at the joint venture facility near Buenos Aires,Argentina. Remaining payments due related to these planned expansions as of March 31,2007 totaled approximately $29.9 million and are expected to be expendedduring fiscal 2007. As discussed more fully in Note 7 to the ConsolidatedFinancial Statements included in Item 1 of Part I to this Quarterly Reporton Form 10-Q, the Company has obtained financing to fund asubstantial portion of the Argentine expansion plan.

Based on the ability togenerate positive cash flows from its operations and the financial flexibilityprovided by the Credit Facility, as amended, the Company believes that it hasfinancial resources to meet its operating needs, fund its capital expendituresand make all necessary contributions to its retirement plans.

**Off-Balance SheetArrangements**

The Company does not have anyoff-balance sheet arrangements.

**Effect of Inflation**

Inflation generally affectsthe Company by increasing the costs of labor, overhead and equipment. Theimpact of inflation on the Company’s financial position and results of operationswas minimal during the first quarter of both 2007 and 2006. However, theCompany continues to be impacted significantly by raw material costs. See “Quantitativeand Qualitative Disclosures About Market Risk” included in Item 3 of Part Ito this Quarterly Report on Form 10-Q.

**New AccountingStandards**

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS No. 157”). This standard establishes aframework for measuring fair value and also provides guidance for an expandedset of disclosure requirements related to fair value. The Company expects toadopt SFAS No. 157 effective in the first quarter of fiscal 2008 and hasnot yet assessed the impact of SFAS No. 157 on the Consolidated FinancialStatements.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities, including an amendment of FASB Statement No. 115” (“SFASNo. 159”). SFAS No. 159 permits entities to choose to measure manyfinancial instruments and certain other 

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items atfair value, with unrealized gains and losses on items for which the fair valueoption has been elected in earnings at each subsequent reporting date. TheCompany is reviewing the provisions of SFAS No. 159, which is effective inthe first quarter of fiscal 2008 and has not yet completed the assessment ofthe impact of SFAS No. 159 on the Consolidated Financial Statements.

**Critical AccountingPolicies And Other Matters**

The Company’s discussion and analysis of its financialposition and results of operations are based upon its consolidated financialstatements that have been prepared in accordance with accounting principlesgenerally accepted in the United States (“U.S. GAAP”). The preparation offinancial statements in conformity with U.S. GAAP requires the appropriateapplication of certain accounting policies, many of which require management tomake estimates and assumptions about future events that may affect the reportedamounts of assets, liabilities, revenues and expenses, and the disclosure ofcontingent assets and liabilities. Since future events and their impact cannotbe determined with certainty, the actual results will inevitably differ fromthe estimates. The Company evaluates these estimates and assumptions on anongoing basis, including but not limited to those related to revenuerecognition, including the effects of sales returns and allowances and creditrisks, inventories, income taxes, and impairment of long-lived assets.Estimates and assumptions are based on historical and other factors believed tobe reasonable under the circumstances. The impact and any associated risksrelated to estimates, assumptions, and accounting policies are discussed within“Management’s Discussion and Analysis of Operations and Financial Condition,”as well as in the Notes to the Consolidated Financial Statements, ifapplicable, where such estimates, assumptions, and accounting policies affectthe Company’s reported and expected results.

The Company believes the following accounting policiesare critical to its business operations and are essential in understanding theresults of operations; such policies affect the more significant judgments andestimates used in the preparation of its Consolidated Financial Statements:

*RevenueRecognition:*   Revenue from product sales isrecognized when title and risks of ownership pass to the customer. This isgenerally on the date of shipment to the customer, or upon delivery to a placenamed by the customer, dependent upon contract terms and when collectibility isreasonably assured and pricing is fixed or determinable. Revenue includesamounts billed to customers for shipping and handling. Provision for rebates,promotions, product returns and discounts to customers is recorded as areduction in determining revenue in the same period that the revenue isrecognized. Management bases its estimate of the expense to be recorded eachperiod on historical returns and allowance levels. Management does not believethe likelihood is significant that materially higher deduction levels willresult based on prior experience.

*AccountsReceivable and Concentration of Credit Risks:*   Accountsreceivable potentially expose the Company to a concentration of credit risk, asdefined by Statement of Financial Accounting Standards No. 105, “Disclosureof Information about Financial Instruments with Off-Balance Sheet Risk andFinancial Instruments with Concentration of Credit Risk.” The Company providescredit in the normal course of business and performs ongoing credit evaluationson its customers’ financial condition as deemed necessary, but generally doesnot require collateral to support such receivables. The Company alsoestablishes an allowance for doubtful accounts based upon factors surroundingthe credit risk of specific customers, historical trends and other information.Also, in an effort to reduce its credit exposure to certain customers, as wellas accelerate its cash flows, the Company sells, on a non-recourse basis,certain of its receivables pursuant to factoring agreements. At March 31,2007, a reserve of $7.8 million has been recorded as an allowance againsttrade accounts receivable. Management believes that the allowance is adequateto cover potential losses resulting from uncollectible accounts receivable anddeductions resulting from sales returns and allowances. While the Company’scredit losses have historically been within its calculated estimates, it ispossible that future losses could differ significantly from these estimates.

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*InventoryReserves:*   The Company maintains reserves forinventories valued primarily using the first in, first out (FIFO) method. Suchreserves for inventories can be specific to certain inventory or general basedon judgments about the overall condition of the inventory. General reserves areestablished based on percentage write-downs applied to inventories agedfor certain time periods, or for inventories that are slow-moving. Specificreserves are established based on a determination of the obsolescence of theinventory and whether the inventory value exceeds amounts to be ultimatelyrecovered upon the sale of the goods. Estimating sales prices, establishingmarkdown percentages and evaluating the condition of the inventories requirejudgments and estimates which may impact the inventory valuation and grossprofits. The actual amount of obsolete or unmarketable inventory has beenmaterially consistent with previously established reserves. Managementbelieves, based on its prior experience of managing and evaluating therecoverability of its slow moving or obsolete inventory, that such establishedreserves are materially adequate. If actual market conditions and product salesare less favorable than projected, additional inventory writedowns may benecessary.

*IncomeTaxes:*   The Company records an income taxvaluation allowance when, based on the weight of the evidence, it is morelikely than not that some portion, or all, of the deferred tax asset will notbe realized. The ultimate realization of the deferred tax asset depends on theability of the Company to generate sufficient taxable income of the appropriatecharacter in the future and in the appropriate taxing jurisdictions. Inassessing the realization of the deferred tax assets, consideration is givento, among other factors, the trend of historical and projected future taxableincome, the scheduled reversal of deferred tax liabilities, the carryforwardperiod for net operating losses and tax credits, as well as tax planningstrategies available to the Company. Additionally, the Company has not providedU.S. income taxes for undistributed earnings of certain foreign subsidiariesthat are considered to be retained indefinitely for reinvestment. Certainjudgments, assumptions and estimates are required in assessing such factors andsignificant changes in such judgments and estimates may materially affect thecarrying value of the valuation allowance and deferred income tax expense orbenefit recognized in the Company’s Consolidated Financial Statements.

The Company adopted FASB Interpretation No. 48,“Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109” (“FIN 48”) effective December 31, 2006, thefirst day of fiscal 2007. In accordance with FIN 48, the Companyrecognizes a tax benefit associated with an uncertain tax position when, in itsjudgment, it is more likely than not that the position will be sustained uponexamination by a taxing authority. For a tax position that meets themore-likely-than-not recognition threshold, the Company initially andsubsequently measure the tax benefit as the largest amount that it judges tohave a greater than 50% likelihood of being realized upon ultimate settlementwith a taxing authority. The liability associated with unrecognized taxbenefits is adjusted periodically due to changing circumstances, such as theprogress of tax audits, case law developments and new or emerging legislation.Such adjustments are recognized entirely in the period in which they areidentified. The effective tax rate includes the net impact of changes in theliability for unrecognized tax benefits and subsequent adjustments asconsidered appropriate by management.

A number of years may elapse before a particularmatter for which a liability related to an unrecognized tax benefit is auditedand finally resolved. The number of years with open tax audits varies byjurisdiction. While it is often difficult to predict the final outcome or thetiming of resolution of any particular tax matter, the Company believes itsliability for unrecognized tax benefits is adequate. Favorable resolution of anunrecognized tax benefit could be recognized as a reduction in the effectivetax rate in the period of resolution. Unfavorable settlement of an unrecognizedtax benefit could increase the effective tax rate and may require the use ofcash in the period of resolution. The liability for unrecognized tax benefitsis generally presented as noncurrent. However, if the Company anticipatespaying cash within one year to settle an uncertain tax position, the liabilityis presented as current.

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Additionally, consistent with the provisions of SOP 90-7,recognition of tax benefits from preconfirmation net operating losscarryforwards and other deductible temporary differences not recognized at the EffectiveDate will be applied to reduce goodwill to zero, then to reduce intangibleassets that existed at the Effective Date with any excess tax benefits crediteddirectly to *Additional Paid-in Capital*.

*Impairmentof Long-Lived Assets:*   Long-lived assets,excluding goodwill, are reviewed for impairment whenever events or changes incircumstances indicate that the carrying amounts may not be recoverable.Goodwill is reviewed annually. For assets held and used, an impairment mayoccur if projected undiscounted cash flows are not adequate to cover thecarrying value of the assets. In such cases, additional analysis is conductedto determine the amount of the loss to be recognized. The impairment loss isdetermined by the difference between the carrying amount of the asset and thefair value measured by future discounted cash flows. The analysis, whenconducted, requires estimates of the amount and timing of projected cash flowsand, where applicable, judgments associated with, among other factors, theappropriate discount rate. Such estimates are critical in determining whetherany impairment charge should be recorded and the amount of such charge if animpairment loss is deemed to be necessary. In addition, future events impactingcash flows for existing assets could render a writedown necessary thatpreviously required no writedown.

For assets held for disposal,an impairment charge is recognized if the carrying value of the assets exceedsthe fair value less costs to sell. Estimates are required of fair value,disposal costs and the time period to dispose of the assets. Such estimates arecritical in determining whether any impairment charge should be recorded andthe amount of such charge if an impairment loss is deemed to be necessary. Actualcash flows received or paid could differ from those used in estimating theimpairment loss, which would impact the impairment charge ultimatelyrecognized. As of March 31, 2007, based on the Company’s current operatingperformance, as well as future expectations for the business, the Company doesnot anticipate any material writedowns for long-lived asset impairments.However, conditions could deteriorate, which could impact our future cash flowestimates, and there exists the potential for further consolidation andrestructuring in the more mature markets of the U.S. and Europe, either ofwhich could result in an impairment charge that could have a material effect onthe Company’s Consolidated Financial Statements.

**Recent SEC Review ofPeriodic Reports**

Section 408 of theSarbanes-Oxley Act of 2002 requires that the staff of the Securities andExchange Commission (the “SEC Staff”) review the filings of all reportingcompanies not less frequently than once every three years. In accordance withthat requirement, the SEC Staff recently completed a review of the Company’sAnnual Report on Form 10-K for the year ended December 30, 2006and issued a letter commenting on certain aspects of the Company’s filing. TheCompany is in the process of formulating its response to the SEC Staff.

**Environmental**

The Company is subject to abroad range of federal, foreign, state and local laws and regulations relatingto the pollution and protection of the environment. The Company believes thatit is currently in substantial compliance with applicable environmentalrequirements and does not currently anticipate any material adverse effect onits operations, financial or competitive position as a result of its efforts tocomply with environmental requirements. Some risk of environmental liability isinherent, however, in the nature of the Company’s business and, accordingly,there can be no assurance that material environmental liabilities will notarise.

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**ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The Company is exposed tomarket risks for changes in foreign currency rates and interest rates and hasexposure to commodity price risks, including prices of its primary rawmaterials. The overall objective of the Company’s financial risk managementprogram is to seek a reduction in the potential negative earnings impact ofchanges in interest rates, foreign exchange rates and raw material pricingarising in our business activities. The Company manages these financialexposures, where possible, through operational means and by using variousfinancial instruments. These practices may change as economic conditionschange.

**Long-Term Debt andInterest Rate Market Risk**

The Company’s long-term borrowings under the CreditFacility are variable interest rate debt. As such, the Company’s interestexpense will increase as interest rates rise and decrease as interest ratesfall. It is the Company’s policy to enter into interest rate derivativetransactions only to meet its stated overall objective. The Company does notenter into these transactions for speculative purposes. To that end, as furtherdescribed in Notes 7 and 11 to the Consolidated Financial Statementsincluded in Item 1 of Part I to this Quarterly Report on Form 10-Q,the Company entered into an interest rate swap contract to effectively convert$212.5 million of its variable-rate debt to fixed-rate debt. The interestrate swap contract matures on May 8, 2007.

Additionally, on February 8,2007, the Company entered into a similar pay-fixed, receive-variable interestrate swap contract to become effective on May 8, 2007. The notionalprincipal amount of this new contract, which expires on June 29, 2009, is$240.0 million and effectively fixes the LIBOR interest rate on that amount ofdebt at 5.085%. Hypothetically, a 1% change in the interest rate affecting allof the Company’s financial instruments not protected by the new interest rateswap contract would change interest expense by approximately $1.8 million.

**Foreign CurrencyExchange Rate Risk**

The Company manufactures, markets and distributescertain of its products in Europe, Canada, Latin America and Asia. As a result,the Company’s results of operations could be significantly affected by factorssuch as changes in foreign currency rates in the foreign markets in which theCompany maintains a manufacturing or distribution presence. However, suchcurrency fluctuations have much less effect on local operating results becausethe Company, to a significant extent, sells its products within the countriesin which they are manufactured. During the first quarter of both 2007 and 2006,certain currencies of countries in which the Company conducts foreign currencydenominated business moved against the U.S. dollar and had a significantimpact on sales and operating income. See “Management’s Discussion and Analysisof Financial Condition and Results of Operations” included in Item 2 of Part Ito this Quarterly Report on Form 10-Q.

The Company has nothistorically hedged its exposure to foreign currency risk. However, in mostforeign operations, there is a partial natural currency hedge due to similaramounts of costs of materials and production as revenues in such localcurrencies. Also, the Company periodically reviews its hedge strategy withrespect to its U.S. dollar exposure on certain foreign currency-based obligationssuch as firm commitments related to certain capital expenditure projects. TheCompany is also subject to political risk in certain of its foreign operationsand has utilized insurance programs in certain circumstances to mitigate itspolitical risk.

**Raw Material andCommodity Risks**

The primary raw materials used in the manufacture ofmost of the Company’s products are polypropylene resin, polyester fiber,polyethylene resin, and, to a lesser extent, rayon, tissue paper and cotton.The prices of polypropylene, polyethylene and polyester are a function of,among other 

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things, manufacturingcapacity, demand and the price of crude oil and natural gas liquids. TheCompany has not historically hedged its exposure to raw material increases, buthas attempted to move more customer programs to contracts with price escalationprovisions which would allow the Company to pass-through any cost increases inraw materials, although there is often a one-quarter lag between the time theCompany is required to pay the increased raw material price and the time thatthe Company is able to pass the increase on to its customers. Raw materialprices as a percentage of sales have increased from 52.5% in the first threemonths of 2006 to 53.2% in the first three months of 2007.

The prices of raw materials in the North Americanmarket rose substantially in the fourth quarter of 2005 as a direct result ofthe hurricanes that impacted the Gulf Coast. The raw material prices in theNorth American markets decreased slightly during fiscal 2006 as the refineriesand chemical processing sites returned to more normal production levels, buthave not returned to their pre-fourth quarter of fiscal 2005 levels. During thefirst quarter of fiscal 2007, the North American costs have trended slightlyhigher. Additionally, on a global basis, raw material costs continue tofluctuate, although in a much narrower range, in response to certain globaleconomic factors, including regional supply versus demand dynamics for the rawmaterials and the volatile price of oil.

To the extent the Company isnot able to pass along price increases of raw materials, or to the extent anysuch price increases are delayed, the Company’s cost of goods sold wouldincrease and its operating profit would correspondingly decrease. By way ofexample, if the price of polypropylene were to rise $.01 per pound, and theCompany was not able to pass along any of such increase to its customers, theCompany would realize a decrease of approximately $4.0 million, on anannualized basis, in its reported pre-tax operating income. Material increasesin raw material prices that cannot be passed on to customers could have amaterial adverse effect on the Company’s results of operations and financialcondition. See “Management’s Discussion and Analysis of Financial Condition andResults of Operations” included in Item 2 of Part I to this QuarterlyReport on Form 10-Q.

**ITEM 4. CONTROLSAND PROCEDURES**

Under the direction of our Chief Executive Officer andChief Financial Officer, management has carried out an evaluation of theeffectiveness of the Company’s disclosure controls and procedures, as such itemis defined in Rule 13a-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”), as of the end of the period coveredby this report. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer have concluded that these disclosure controls and procedureswere effective as of March 31, 2007.

There were no changes in the Company’s internalcontrol over financial reporting, as such item is defined in Exchange Act Rule 13a-15(f),during the quarter ended March 31, 2007 that have materially affected, orare reasonably likely to materially affect, the Company’s internal control overfinancial reporting.

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**PART II. OTHERINFORMATION**

**ITEM 1. LEGALPROCEEDINGS**

Other than as reported in theCompany’s Form 10-K for the period ended December 30, 2006under the caption “Item 3. Legal Proceedings,” the Company is notcurrently a party to any material pending legal proceedings. See Note 15to the Consolidated Financial Statements included in Item 1 of Part Ito this Quarterly Report of Form 10-Q for additional details.

**ITEM 1A. RISKFACTORS**

Not applicable.

**ITEM 2. UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

During the first quarter offiscal 2007, 5,067 shares of the Company’s Class B Common Stock wereconverted into 5,067 shares of the Company’s Class A Common Stock.These conversions were exempt from registration based on section 3(a)(9) ofthe Securities Act of 1933.

**ITEM 3. DEFAULTSUPON SENIOR SECURITIES**

Not applicable.

**ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

Not applicable.

**ITEM 5. OTHERINFORMATION**

(a)           OnMay 10, 2007, the Company issued a press release announcing its financialresults for the first quarter of fiscal 2007. A copy of the press release isfurnished as Exhibit 99.1 hereto.

**ITEM 6. EXHIBITS**

Exhibitsrequired to be filed with this Form 10-Q are listed below:

| Exhibit  Number | ** ** | ** **                                                                                                                                                                               | **Document Description** | ** ** |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|------------|
| 10.1            |       | Executive Employment  Agreement dated March 29, 2007 between Polymer Group, Inc. and  Veronica M. Hagen.                                                                       |
| 10.2            |       | Amendment No. 1,  dated March 30, 2007, to the Executive Employment Agreement dated  March 24, 2006 between Polymer Group, Inc. and Willis C.  Moore, III. |
| 31.1            |       | Certification of  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                |
| 31.2            |       | Certification of  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                |
| 32.1            |       | Certification by the  Chief Executive Officer pursuant to 18 U.S.C. Section 1350                                                                                                    |
| 32.2            |       | Certification by the Chief  Financial Officer pursuant to 18 U.S.C. Section 1350                                                                                                    |
| 99.1            |       | Press release dated  May 10, 2007 reporting financial results for the first quarter of fiscal  2007                                                                                 |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

|                         |     | POLYMER GROUP, INC. |
|-------------------------|----------|--------------------------|
|                    |     |                     |
|                    |     |                     |
|                    |     |                     |
| Date: May 10, 2007 |     | By:                      |   | /s/ VERONICA M. HAGEN |
| * *                | * * | * *                 |   | Veronica M. Hagen |
| * *                | * * | * *                 |   | *Chief  Executive Officer* |
| * *                | * * | * *                 |   | * * |
| * *                | * * | * *                 |   | * * |
| Date: May 10, 2007 |     | By:                      |   | /s/ WILLIS C. MOORE, III |
| * *                | * * | * *                 |   | Willis C.  Moore, III |
| * *                | * * | * *                 |   | *Chief  Financial Officer* |

 

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