UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended July 4, 2009Oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the transition period
from                                         t
o
Commission file number: 1-14330



POLYMER GROUP, INC.(Exact name of registrant as specified in its charter)

Delaware

57-1003983(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer Identification No.)9335 Harris Corners Parkway, Suite 300
Charlotte, North Carolina(Address of principal executive offices)

28269(Zip Code)


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

Former name, former address and former fiscal year, if changed from last report:None

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ý No. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o

Smaller reporting company o(Do not check if a smaller reporting company)


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
o No ý

On September 7, 2009, there were 19,813,431 shares of Class A common stock, 86,169 shares of Class B common stock and 24,319 shares of
Class C common stock outstanding. No shares of Class D or Class E common stock were outstanding as of such date. The par value for each class of common stock is $.01 per share.



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POLYMER GROUP, INC.  INDEX TO FORM 10-Q



PageIMPORTANT INFORMATION REGARDING THIS FORM 10-Q


2PART I. FINANCIAL INFORMATION


3Item 1.

Financial Statements


3Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


41Item 3.

Quantitative and Qualitative Disclosures About Market Risk


65Item 4.

Controls and Procedures


67PART II. OTHER INFORMATIONItem 1.

Legal Proceedings


68Item 1A.

Risk Factors


68Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds


68Item 3.

Defaults Upon Senior Securities


68Item 4.

Submission of Matters to a Vote of Security Holders


68Item 5.

Other Information


68Item 6.

Exhibits


69Signatures


70


1

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Table of Contents

IMPORTANT INFORMATION REGARDING THIS FORM 10-Q

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

The
terms "Polymer Group," "Company," "we," "us," and "our" as used in this Form 10-Q refer to Polymer Group, Inc. and its subsidiaries.

Safe Harbor-Forward-Looking Statements

From time to time, we may publish forward-looking statements relative to matters such as, including, without limitation, anticipated
financial performance, business prospects, technological developments, new product introductions, cost savings, research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward- looking statements. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe,"
"expect," "anticipate," "intend," "target" or other words that convey the uncertainty of future events or outcomes.

Various
statements contained in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact are, or may be
deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements speak only as of the date of this report. Unless required by law, we do not undertake any obligation to update these statements and caution against any undue reliance
on them. These forward-looking statements are based on current expectations and assumptions about future events. Although management considers these expectations and assumptions to be reasonable, they
are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond
our control. See Item 1A. "Risk Factors" in our Annual Report on Form 10-K. There can be no assurance that these events will occur or that our results will be as estimated.

Important
factors that could cause actual results to differ materially from those discussed in such forward-looking statements include:



2

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Table of Contents



ITEM 1.    FINANCIAL STATEMENTS

POLYMER GROUP, INC.        CONSOLIDATED BALANCE SHEETS (Unaudited)        (In Thousands, Except Share Data)

July 4, 2009

January 3, 2009ASSETSCurrent assets:Cash and cash equivalents

$
88,515

$
45,718Accounts receivable, net


106,419


125,818Inventories


92,566


107,685Deferred income taxes


2,719


1,826Other current assets


30,625


30,124Assets of discontinued operations


29,864


31,760Total current assets


350,708


342,931Property, plant and equipment, net


348,966


338,262Intangibles and loan acquisition costs, net


7,072


7,938Deferred income taxes


2,685


580Other assets


11,773


12,751Total assets

$
721,204

$
702,462LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Short-term borrowings

$
8,834

$
11,987Accounts payable and accrued liabilities


130,077


125,957Income taxes payable


7,561


4,266Current portion of long-term debt


41,314


9,173Liabilities of discontinued operations


6,657


7,863Total current liabilities


194,443


159,246Long-term debt


356,640


392,505Deferred income taxes


17,918


14,286Other noncurrent liabilities


39,005


43,214Total liabilities


608,006


609,251Commitments and contingenciesPolymer Group, Inc. shareholders' equity:Preferred stock0 shares issued and outstanding





Class A common stock19,809,292 and 19,400,455 issued and outstanding at July 4, 2009 and January 3, 2009, respectively


198


194Class B convertible common stock86,835 and 93,949 shares issued and outstanding at July 4, 2009 and January 3, 3009,
respectively


1


1Class C convertible common stock24,319 and 24,319 shares issued and outstanding at July 4, 2009 and January 3, 2009,
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


195,857


192,796Retained deficit


(117,287
)

(131,089
)Accumulated other comprehensive income


21,798


18,370Total Polymer Group, Inc. shareholders' equity


100,567


80,272Noncontrolling interests


12,631


12,939Total equity


113,198


93,211Total liabilities and equity

$
721,204

$
702,462


See Accompanying Notes.

3

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Table of Contents

POLYMER GROUP, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)        (In Thousands, Except Per Share Data)

Three Months Ended
July 4, 2009

Three Months Ended
June 28, 2008Net sales

$
206,040

$
270,657Cost of goods sold


163,474


226,710Gross profit


42,566


43,947Selling, general and administrative expenses


25,088


29,496Special charges, net


5,881


1,388Other operating income, net


(2,624
)

(570
)Operating income


14,221


13,633Other expense:Interest expense, net


6,613


7,549Foreign currency and other loss, net


2,802


319Income before income taxes


4,806


5,765Income tax expense


957


3,545Income from continuing operations


3,849


2,220Income from discontinued operations


1,966


343Net income


5,815


2,563Less: net income attributable to noncontrolling interests


(1,569
)

(183
)Net income attributable to Polymer Group, Inc.

$
4,246

$
2,380Earnings (loss) per common share attributable to Polymer Group, Inc. common shareholders:Basic:Continuing operations

$
0.19

$
0.11Discontinued operations


0.10


0.02Attributable to noncontrolling interests


(0.08
)

(0.01
)Basic

$
0.21

$
0.12Diluted

$
0.21

$
0.12


See
Accompanying Notes.

4

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Table of Contents

POLYMER GROUP, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)        (In Thousands, Except Per Share Data)

Six Months
Ended
July 4, 2009

Six Months
Ended
June 28, 2008Net sales

$
416,050

$
528,297Cost of goods sold


324,064


442,468Gross profit


91,986


85,829Selling, general and administrative expenses


51,930


59,138Special charges, net


8,773


2,751Other operating income, net


(2,975
)

(1,862
)Operating income


34,258


25,802Other expense (income):Interest expense, net


14,006


15,666Gain on reacquisition of debt


(2,431
)

Foreign currency and other loss, net


4,958


806Income before income taxes


17,725


9,330Income tax expense


8,138


5,169Income from continuing operations


9,587


4,161Income (loss) from discontinued operations


3,907


(281
)Net income


13,494


3,880Less: net (income) loss attributable to noncontrolling interests


308


(76
)Net income attributable to Polymer Group, Inc.

$
13,802

$
3,804Earnings (loss) per common share attributable to Polymer Group, Inc. common shareholders:Basic:Continuing operations

$
0.48

$
0.21Discontinued operations


0.20


(0.01
)Attributable to noncontrolling interests


0.02


Basic

$
0.70

$
0.20Diluted

$
0.70

$
0.20


See
Accompanying Notes.

5

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Table of Contents

POLYMER GROUP, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)        (In Thousands)

Six Months
Ended
July 4, 2009

Six Months
Ended
June 28, 2008Operating activities:Net income attributable to Polymer Group, Inc.

$
13,802

$
3,804Adjustments to reconcile net income attributable to Polymer Group, Inc. to net cash provided by operating activities:Asset impairment charge


3,193


Deferred income taxes


158


1,561Depreciation and amortization


25,405


26,203Gain on reacquisition of debt


(2,431
)

Noncash compensation


1,805


2,201Changes in operating assets and liabilities:Accounts receivable, net


18,440


(16,018
)Inventories


17,120


(4,958
)Other current assets


(709
)

(6,430
)Accounts payable and accrued liabilities


(19,881
)

18,668Other, net


3,699


(5,143
)Net cash provided by operating activities


60,601


19,888Investing activities:Purchases of property, plant and equipment


(14,890
)

(20,911
)Proceeds from sale of assets


1,116


1,129Acquisition of intangibles and other


(142
)

(306
)Net cash used in investing activities


(13,916
)

(20,088
)Financing activities:Proceeds from borrowings


31,472


24,679Repayment of borrowings


(22,461
)

(29,647
)Reacquisition of debt


(12,333
)

Loan acquisition costs


(126
)

Net cash used in financing activities


(3,448
)

(4,968
)Effect of exchange rate changes on cash


(440
)

617Net increase (decrease) in cash and cash equivalents


42,797


(4,551
)Cash and cash equivalents at beginning of period


45,718


31,698Cash and cash equivalents at end of period

$
88,515

$
27,147


See
Accompanying Notes.

6

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Table of Contents

POLYMER GROUP, INC.        Notes to Consolidated Financial Statements

Note 1. Principles of Consolidation and Financial Statement Information

Principles of Consolidation

Polymer Group, Inc. (the "Company") is a publicly-traded, leading global innovator, manufacturer and marketer of engineered
materials, focused primarily on the production of nonwoven products. The Company has one of the largest global platforms in the industry, with fourteen manufacturing and converting facilities
throughout the world, and a presence in eight countries. The Company's main sources of revenue are the sales of primary and intermediate products to the hygiene, medical, wipes and industrial markets.

The
accompanying unaudited interim consolidated financial statements include the accounts of Polymer Group, Inc. and all majority-owned subsidiaries after elimination of all
significant intercompany accounts and transactions. The accounts of all foreign subsidiaries have been included on the basis of fiscal periods ended on the same dates as the accompanying unaudited
interim consolidated financial statements. All amounts are presented in United States ("U.S.") dollars, unless otherwise noted.

The
accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements of the Company and related
notes contained in the Annual Report on Form 10-K for the period ended January 3, 2009. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the U.S. ("U.S. GAAP") have been condensed or omitted pursuant to applicable rules and regulations. In the judgment of
management, these unaudited interim consolidated financial statements include all adjustments of a normal recurring nature and accruals necessary for a fair presentation of such statements. The
results of operations for the interim period are not necessarily indicative of the results which may be realized for the full year. The Consolidated Balance Sheet data included herein as of
January 3, 2009 have been derived from the audited consolidated financial statements included in the Company's Annual Report on Form 10-K.

Reclassification

Certain amounts previously presented in the consolidated financial statements for prior periods have been reclassified to conform with
the current period presentation. See Note 17 "Discontinued Operations."

Adjustment for Out-of-Period Items

The accompanying unaudited interim consolidated financial statements for the three and six month periods ended July 4, 2009
include certain out-of-period adjustments to correct certain profit sharing, foreign currency and income tax balances; such adjustments are not considered material to the
Company's consolidated financial statements for fiscal 2009 or prior periods. For the three months ended July 4, 2009, these adjustments have the effect of reducing Selling, general and administrative
expensesby $0.5 million; reducing foreign currency expense, included inForeign
currency and other loss, netby $0.5 million and reducingIncome tax expensein the amount of $0.6 million. For
the six months ended July 4, 2009, these adjustments have the effect of reducingSelling, general and administrative expensesby
$0.5 million; increasing foreign currency expense, included inForeign currency and other loss, netby $0.3 million and reducing Income tax expensein the amount of $1.4 million. The Company also recorded certain fresh start tax adjustments resulting in an increase in Additional paid-in capitalin the amount of approximately
$1.6 million.

7

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

Revenue Recognition

Revenue from product sales is recognized when title and risks of ownership pass to the customer, which is on the date of shipment to
the customer, or upon delivery to a place named by the customer, depending upon contract terms and when collectability is reasonably assured and pricing is fixed or determinable. Revenue includes
amounts billed to customers for shipping and handling. Provision for rebates, promotions, product returns and discounts to customers is recorded as a reduction in determining revenue in the same
period that the revenue is recognized.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the related disclosures within the accompanying notes. The accounting estimates that require management's most significant and subjective
judgments include the valuation of allowances for accounts receivable and inventory, the assessment of recoverability of long-lived assets, the recognition and measurement of
severance-related liabilities, the recognition and measurement of current and deferred income tax assets and liabilities (including the measurement of uncertain tax positions), the valuation and
recognition of share-based compensation, obligations under the Company's pension and retirement benefit plans and the fair value of financial instruments and non-financial assets and liabilities.
Actual results could differ from those estimates. These estimates are reviewed periodically to determine if a change is required.

Stock-Based Compensation

The Company accounts for stock-based compensation related to its employee share-based plans in accordance with the methodology defined
in Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)"), using the
modified prospective transition method. The compensation costs recognized subsequent to the adoption of SFAS No. 123(R) related to all new grants and any unvested portion of prior awards are
measured based on the grant-date fair value of the award. Consistent with the provisions of SFAS No. 123(R), awards are considered granted when all required approvals are obtained
and when the participant begins to benefit from, or be adversely affected by, subsequent changes in the price of the underlying shares and, regarding awards containing performance conditions, when the
Company and the participant reach a mutual understanding of the key terms of the performance conditions. Additionally, accruals for compensation costs for share-based awards with performance
conditions are based on the probable outcome of such performance conditions. The Company has estimated the fair value of each stock option grant by using the Black-Scholes option-pricing model.
Assumptions are evaluated and revised, as necessary, to reflect market conditions and experience.

Special Charges

The Company records severance-related expenses once they are both probable and estimable in accordance with the provisions of SFAS
No. 112 "Employers' Accounting for Postemployment Benefits," ("SFAS No. 112"), for severance provided under an ongoing benefit arrangement. One-time, involuntary benefit
arrangements and disposal costs, contract termination costs and other exit costs are accounted for under the provisions of SFAS No. 146, "Accounting for Costs Associated with Exit or

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

Disposal
Activities" ("SFAS No. 146"). The Company evaluates impairment of long-lived assets under the provisions of SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS No. 144").

Derivatives

The Company records all derivative instruments as either assets or liabilities on the balance sheet at their fair value in accordance
with SFAS No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities", as amended ("SFAS No. 133"). Changes in the fair value of a derivative are recorded each
period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, depending on the type of hedge transaction.
Ineffective portions, if any, of all hedges are recognized in current period earnings.

As
more fully described in Note 11 "Derivative and Other Financial Instruments and Hedging Activities" to the consolidated financial statements, the Company, in the normal course
of business, periodically enters into derivative financial instruments, principally swaps and forward contracts, with high-quality counterparties as part of its risk management strategy.
These financial instruments are limited to non-trading purposes and are used principally to manage market risks and reduce the Company's exposure to fluctuations in foreign currency and
interest rates. Most interest rate swaps and foreign exchange forward contracts are designated as cash flow hedges of the variability in cash flows associated with interest payments to be made on
variable rate debt obligations or fair value hedges of foreign currency-denominated transactions.

The
Company documents all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge
transactions and the methodologies that will be used for measuring effectiveness and ineffectiveness. This process includes linking all derivatives that are designated as cash flow or fair value
hedges to specific assets and liabilities on the balance sheet or to specific firm commitments. The Company then assesses, both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are expected to be highly effective in offsetting changes in fair values or cash flows of hedged items. Such assessments are conducted in accordance
with the originally documented risk management strategy and methodology for that particular hedging relationship.

For
cash flow hedges, the effective portion of recognized derivative gains and losses reclassified from other comprehensive income is classified consistent with the classification of the
hedged item. For example, derivative gains and losses associated with hedges of interest rate payments are recognized inInterest expense, netin the
Consolidated Statements of Operations.

For
fair value hedges, changes in the value of the derivatives, along with the offsetting changes in the fair value of the underlying hedged exposure are recorded in earnings each period
inForeign currency and other (gain) loss, netin the Consolidated Statements of Operations.

Gain on Reacquisition of Debt

The Company, through its subsidiaries, may make market purchases of its first lien term loan under its credit facility (see
Note 7 "Debt") from its existing lenders at a discount to the carrying value of the debt. Under these agreements, to the extent of the amount of debt acquired, the Company's subsidiary will
acquire the rights and obligations of a lender under the credit facility and the selling third-party lender

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

will
be released from its obligations under the credit facility. The Company accounts for such reacquisition of debt as a transfer of financial assets resulting in a sale and derecognizes such
liability in accordance with the provisions of Financial Accounting Standards Board ("FASB") Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" and includes such amounts inGain on Reacquisition of Debtin the Consolidated Statements of Operations.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income of $21.8 million at July 4, 2009 consisted of $42.5 million of currency
translation gains (net of income taxes of $7.4 million), ($17.2) million of transition net assets, gains or losses and prior service costs not recognized as components of net periodic
benefit costs (net of income taxes of $1.1 million) and $(3.5) million of cash flow hedge losses. Accumulated other comprehensive income of $18.4 million at January 3, 2009
consisted of $39.9 million of currency translation gains (net of income taxes of $6.9 million), ($17.0) million of transition net assets, gains or losses and prior service costs
not recognized as components of net periodic benefit costs (net of income taxes of $1.8 million) and $(4.5) million of cash flow hedge losses. Comprehensive income for the three months
ended July 4, 2009 and June 28, 2008 amounted to $10.8 million and $9.2 million, respectively. Comprehensive income for the six months ended July 4, 2009 and
June 28, 2008 amounted to $16.9 million and $14.7 million, respectively.

Recent Accounting Standards

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"), which clarifies the
definition of fair value whenever another
standard requires or permits assets or liabilities to be measured at fair value. Specifically, the standard clarifies that fair value should be based on the assumptions market participants would use
when pricing the asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 does not expand the use of fair
value to any new circumstances, and must be applied on a prospective basis except in certain cases. The standard also requires expanded financial statement disclosures about fair value measurements,
including disclosure of the methods used and the effect on earnings.

In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all
nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the
scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent
periods), and long-lived assets, such as property, plant and equipment and intangible assets, measured at fair value for an impairment assessment under SFAS No. 144.

The
Company adopted SFAS No. 157 on January 1, 2008 with respect to financial assets and liabilities recognized or disclosed at fair value in the financial statements on a
recurring basis, and the Company adopted SFAS No. 157 with respect to non-financial assets and liabilities as of January 4, 2009. The adoption of SFAS No. 157 did not have a
material impact on the Company's consolidated financial statements. See Note 12 "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" for the fair value measurement
disclosures for these assets and liabilities.

10

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

In
April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly," ("FSP FAS 157-4") to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability have
significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The FSP emphasizes that, regardless of whether the volume and level of
activity for an asset or liability have decreased significantly and regardless of which valuation technique was used, the objective of a fair value measurement under SFAS No. 157 remains the
sameto estimate the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date under current
market conditions. The FSP also requires expanded disclosures. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. The Company adopted FSP FAS 157-4 as of July 4, 2009 and applied its provisions prospectively by providing the
additional disclosures in its unaudited interim consolidated financial statements. See Note 12 "Fair Value of Financial Instruments" for additional information.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) changes how an entity accounts for the
acquisition of a business. While it retains the requirement to account for all business combinations using the acquisition method, the new rule will apply to a wider range of transactions or events
and requires, in general, acquisition-date fair value measurement of identifiable assets acquired, liabilities assumed and noncontrolling ownership interests held in the acquiree, among
other items. SFAS No. 141(R) eliminates the cost-based purchase method allowed under SFAS No. 141. The Company will apply the provisions of SFAS No. 141(R) to future
business combinations. In amending SFAS No. 141(R), the FASB also introduced changes to certain provisions of income tax accounting in SFAS No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). For reorganizations under SOP 90-7 undertaken before the adoption period of SFAS No. 141(R), release of a valuation allowance related to
pre-confirmation net operating losses and deductible temporary differences are now being reported as a reduction to income tax expense. Similarly, adjustments to uncertain tax positions
made after the confirmation date are now recorded in the income statement.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 160 changes the accounting
for, and the financial statement presentation of, noncontrolling equity interests in a consolidated subsidiary. Under SFAS No.160, all entities are required to report noncontrolling (minority)
interests in subsidiaries as a component of consolidated equity in the consolidated financial statements. In addition, the Statement requires transactions between an entity and noncontrolling
interests that do not result in deconsolidation to be treated as equity transactions and provides new guidance on accounting for deconsolidation. SFAS No. 160 is effective for fiscal years
beginning on or after December 15, 2008. SFAS No. 160 applies prospectively from the effective date except for the presentation and disclosure requirements, which must be applied
retrospectively.

11

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

The
Company adopted SFAS No. 160 on January 4, 2009. Accordingly, the Company has adjusted its comparative consolidated financial statements presented as
follows:



In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities: an amendment of FASB Statement No. 133" ("SFAS
No. 161") to expand the disclosure framework of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 161 requires companies with derivative
instruments to disclose information about how and why the Company uses derivative instruments; how the Company accounts for the derivative instruments and related hedged items under SFAS
No. 133; and how derivative instruments and related hedged items affect the unaudited interim consolidated financial statements. The expanded disclosure guidance also requires the Company to
provide information about its strategies and objectives for using derivative instruments; disclose credit-risk-related contingent features in derivative agreements and
information about counterparty credit risk; and present fair value of derivative instruments and related gains and losses in a tabular format. The Company adopted SFAS No. 161 as of
January 4, 2009 and applied its provisions prospectively by providing the additional disclosures in its unaudited interim consolidated financial statements.

In
December 2008, the FASB issued FSP FAS 132(R)-1, "Employers Disclosures about Postretirement Benefit Plan Assets," which provides additional guidance regarding
employers' disclosures about plan assets of a defined benefit pension or other postretirement plan. This interpretation is effective for financial statements issued for fiscal years ending after
December 15, 2009. The Company will adopt the provisions of FSP 132(R)-1 as of January 2, 2010. The adoption of this interpretation will increase the disclosures in the
financial statements related to the assets of the Company's postretirement benefit plans.

In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," to require, on an
interim basis, disclosures about the fair value of financial instruments for public entities. FSP FAS 107-1 and
APB 28-1 is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may
elect early adoption only if it concurrently adopts both FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments." The Company adopted FSP FAS 107-1 and APB 28-1 effective July 4, 2009 by providing the
additional disclosures in its unaudited interim consolidated financial statements.

12

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 1. Principles of Consolidation and Financial Statement Information (Continued)

In
April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets," to provide guidance for determining the useful life of
recognized intangible assets and to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible
asset as determined under SFAS No. 142, "Goodwill and Other Intangible Assets." The FSP requires that an entity consider its own historical experience in renewing or extending similar
arrangements. However, the entity must adjust that experience based on entity-specific factors under SFAS No. 142. If the company lacks historical experience to consider for similar
arrangements, it would consider assumptions that market participants would use about renewal or extension, as adjusted for the entity-specific factors under SFAS 142. The Company adopted FSP
FAS 142-3 as of January 4, 2009. The Company capitalizes costs incurred to renew or extend the term of its intangible assets. In the six-month periods ended
July 4, 2009 and June 28, 2008, the Company incurred $0.1 million and $0.3 million, respectively, of renewal and extension costs for patents and trademarks related to
several of its products. The weighted-average period for amortizing the costs of patents and trademarks is six years. The Company currently expects to be able to continue to maintain these patents and
trademarks and thus does not anticipate any significant effect on its expected future cash flows related to those products.

In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No. 165") to establish general standards of accounting for, and disclosing of, events that occur after
the balance sheet date, but before financial statements are issued or available to be issued. SFAS No. 165 introduces new terminology, defines a date through which management must evaluate
subsequent events, and lists circumstances under which the Company must recognize and disclose events or transactions occurring after the balance sheet date. The Company adopted SFAS No. 165 as
of July 4, 2009, which was the required effective date for the Company.

In
June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" ("SFAS
No. 168") to replace SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" and establish the FASB Accounting Standards Codification (the "Codification")
as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied to nongovernmental entities. Under SFAS No. 168, accounting literature
references in consolidated financial statements issued beginning in the third quarter of fiscal 2009 will primarily
reference sections of the Codification instead of a specific original accounting pronouncement. The Company expects to adopt SFAS No. 168 in the third quarter of fiscal 2009 and does not
anticipate that this new accounting standard will have a significant impact on the consolidated financial statements.

Note 2. Concentration of Credit Risks and Accounts Receivable Factoring Agreements

Accounts receivable potentially expose the Company to a concentration of credit risk, as defined by SFAS No. 105, "Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk." The Company provides credit in the normal course of business and performs ongoing credit evaluations on
its customers' financial condition, as deemed necessary, but generally does not require collateral to support such receivables. Customer balances are considered past due based on contractual terms and
the Company does not accrue interest on the past due balances. Also, in an effort to reduce its credit exposure to certain customers, as well as accelerate its cash flows, the Company has sold on a
non-recourse basis, certain of its receivables pursuant to factoring agreements. The provision for losses on uncollectible accounts is

13

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 2. Concentration of Credit Risks and Accounts Receivable Factoring Agreements (Continued)

determined
principally on the basis of past collection experience applied to ongoing evaluations of the Company's receivables and evaluations of the risk of repayment. The allowance for doubtful
accounts was approximately $9.1 million and $8.1 million at July 4, 2009 and January 3, 2009, respectively, which management believes is adequate to provide for credit
losses in the normal course of business, as well as losses for customers who have filed for protection under bankruptcy laws. Once management determines that the receivables are not recoverable, the
amounts are removed from the financial records along with the corresponding reserve balance. Sales to the Procter & Gamble Company ("P&G") accounted for 10% and 11% of the Company's sales in
the first six months of fiscal 2009 and 2008, respectively.

The
Company has entered into a factoring agreement to sell, without recourse or discount, certain U.S. company-based receivables to an unrelated third-party financial institution. Under
the current terms of this factoring agreement, the maximum amount of outstanding advances at any one time is $20.0 million, which limitation is subject to change based on the level of eligible
receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. Additionally, the Company has entered into a factoring agreement to sell without
recourse or discount, certain non-U.S. company-based receivables to an unrelated third-party financial institution. Under the terms of this factoring agreement, the maximum amount of
outstanding advances at any one time is $10.0 million, which limitation is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the
historical performance of the receivables sold.

During
the first six months of fiscal 2009, approximately $97.6 million of receivables have been sold under the terms of these factoring agreements, compared to approximately
$118.6 million during the first six months of fiscal 2008. The sale of these receivables accelerated the collection of the Company's cash, reduced credit exposure and lowered the Company's net
borrowing costs. Such sales of accounts receivable are reflected as a reduction ofAccounts receivable, netin the Consolidated Balance Sheets as they
meet the applicable criteria of SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). The amount due from the
factoring companies, net of advances received from the factoring companies, was $4.3 million and $6.1 million at July 4, 2009 and January 3, 2009, respectively, and is
shown inOther current assetsin the Consolidated Balance Sheets. The Company pays factoring fees associated with the sale of receivables based on the
dollar value of the receivables sold. Such fees, which are considered to be primarily related to the Company's financing activities, are immaterial and are included inForeign
currency and other loss, netin the Consolidated Statements of Operations.

Note 3. Special Charges, Net

The Company's operating income includesSpecial charges, netand this amount represents the consequence of corporate-level decisions or
Board of Directors actions, principally associated with initiatives attributable to restructuring and realignment of manufacturing operations and management structures and pursuit of certain
transaction opportunities. Additionally, the Company evaluates its long-lived assets for impairment whenever events or changes in circumstances, including the

14

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 3. Special Charges, Net (Continued)

aforementioned,
indicate that the carrying amounts may not be recoverable. A summary of such charges, net is presented in the following table (in thousands):

Three Months
Ended
July 4, 2009

Three Months
Ended
June 28, 2008

Six Months
Ended
July 4, 2009

Six Months
Ended
June 28, 2008Asset impairment charges

$
1,593

$


$
3,193

$
Restructuring and plant realignment costs


4,204


1,398


5,488


2,750Other costs (credits)


84


(10
)

92


1$
5,881

$
1,388

$
8,773

$
2,751


Asset impairment charges

During the second quarter of fiscal 2009, the Company recorded a non-cash impairment charge of $1.6 million related
to the write-down of certain property and equipment in North Little Rock, Arkansas, resulting from the Company's planned closure of the facility consistent with its strategic direction, to
their estimated fair value less costs to sell. In accordance with the provisions of SFAS No. 144, certain of these assets, with a carrying value of $6.1 million, were written down to
their fair value of $4.5 million (net of costs to sell of $0.4 million).

During
the first quarter of fiscal 2009, the Company recorded a non-cash impairment charge of $1.6 million related to the write-down of assets held for
sale in Neunkirchen, Germany to their estimated fair value less costs to sell. In accordance with the provisions of SFAS No. 144, assets held for sale with a carrying value of
$4.7 million were written down to their fair value of $3.1 million (net of costs to sell of $0.3 million).

See
Note 12 "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" for the fair value measurement disclosures related to these assets.

Restructuring and plant realignment costs

Accrued costs for restructuring and plant realignment efforts are included inAccounts payable and accrued
liabilitiesin the Consolidated Balance Sheets. These costs generally arise from restructuring initiatives intended to result in lower working capital levels and improved
operating performance and profitability through: (i) reducing headcount at both the plant and corporate levels and the realignment of management structures; (ii) improving manufacturing
productivity and reducing corporate costs; and (iii) rationalizing certain assets, businesses and employee benefit programs. The following table summarizes the components of the accrued
liability with respect to the Company's business restructuring activities as of, and for, the six month period ended July 4, 2009 (in thousands):

Balance accrued at beginning of year

$
2,6722009 restructuring and plant realignment costs


5,488Cash payments


(4,965
)Adjustments


35Balance accrued at end of period

$
3,230


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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 3. Special Charges, Net (Continued)

The
restructuring and plant realignment costs in the second quarter of fiscal 2009 are comprised of: (i) $2.7 million of severance and other shut-down costs for
restructuring activities in Europe; (ii) $1.4 million of severance and other shutdown costs related to facilities in the United States; and (iii) $0.1 million of severance
costs related to restructuring initiatives in Canada.

The
restructuring and plant realignment costs in the first six months of fiscal 2009 are comprised of: (i) $3.2 million of severance and other shut-down costs
in Europe related to the ongoing restructuring efforts in the European operations; (ii) $2.1 million of severance and other shutdown costs related to facilities in the United States; and
(iii) $0.2 million of severance costs related to restructuring initiatives in Canada.

On
June 9, 2009, the Board of Directors of the Company approved a plan to consolidate its operations in the U.S. In June 2009, the Company communicated a plan to affected
employees that it planned to close the North Little Rock, Arkansas plant by the end of the first quarter of fiscal 2010 to better align the Company's capabilities with its long-term
strategic direction and reduce overall operating costs. The plant closing is expected to include the reduction of approximately 140 positions when such efforts are completed. During the second
quarter of fiscal 2009, the Company recognized $1.1 million of employee termination costs related to the planned closure of the North Little Rock plant. The Company estimates that it will
recognize total cash restructuring charges in fiscal 2009 and 2010 of approximately $17.0 million to $18.0 million, comprised of approximately $1.5 million related to employee
termination expenses and $15.5 million to $16.5 million for equipment relocation and associated shut-down costs. Additionally, the current year charges include
$0.6 million of employee termination costs and $0.4 million of other shut-down costs related to previously announced facility closings.



The restructuring and plant realignment costs in the first six months of fiscal 2008 totaled $2.8 million. This was comprised of
$2.8 million of equipment relocation, other shut-down costs and employee termination costs related to the previously announced closure of the Neunkirchen, Germany facility, which
ceased production activities as of September 29, 2007, $0.2 million of employee termination costs related to the closure of the Landisville, New Jersey plant, which was announced on
May 30, 2008, and $0.2 million of credits pertaining to ongoing restructuring initiatives in the United States and Canada.

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 4. Inventories

Inventories are 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):

July 4,
2009

January 3,
2009Finished goods

$
46,423

$
50,382Work in process


14,306


16,805Raw materials and supplies


31,837


40,498$
92,566

$
107,685


Inventories
are net of reserves, primarily for obsolete and slow-moving inventories, of approximately $9.9 million and $11.2 million at July 4, 2009 and
January 3, 2009, respectively. Management believes that the reserves are adequate to provide for losses in the normal course of business.

Note 5. Intangibles and Loan Acquisition Costs

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

July 4,
2009

January 3,
2009Cost:Proprietary technology

$
2,814

$
2,667Loan acquisition costs


8,954


9,205Other


2,121


2,15313,889


14,025Less accumulated amortization


(6,817
)

(6,087
)$
7,072

$
7,938


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

Three Months
Ended
July 4,
2009

Three Months
Ended
June 28,
2008

Six Months
Ended
July 4,
2009

Six Months
Ended
June 28,
2008Amortization of:Intangibles with finite lives, included in selling, general and administrative expenses

$
173

$
155

$
348

$
318Loan acquisition costs included in interest expense, net


273


346


608


691Total amortization expense

$
446

$
501

$
956

$
1,009


Intangibles
are generally amortized over periods generally ranging from 4 to 6 years. Loan acquisition costs are amortized over the life of the related debt.

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 6. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities in the Consolidated Balance Sheets includes amounts payable to equipment suppliers of $23.6 million as of July 4, 2009 and
salaries, wages, incentive compensation and other fringe benefits of $16.5 million and $20.2 million as of July 4, 2009 and January 3, 2009, respectively.

Note 7. Debt

Long-term debt consists of the following (in thousands):

July 4,
2009

January 3,
2009Credit 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average interest at 2.61% and 3.72% as of July 4, 2009 and January 3, 2009, respectively; due in
mandatory quarterly payments of approximately $1.0 million, subject to additional payments from annual excess cash flows, as defined by the Credit Facility, with the balance due November 22, 2012

$
349,234

$
366,200Argentine Facility:Argentine Peso Loaninterest at 18.85% as of July 4, 2009 and 14.50% at January 3, 2009, denominated in Argentine pesos
due in 26 remaining quarterly payments of approximately $0.2 million ($0.4 million for three quarterly payments in 2010) beginning in February 2010


6,303


7,170Argentine Peso Loan for working capitalinterest at 18.85% as of July 4, 2009 and 14.50% at January 3, 2009, denominated
in Argentine pesos due in 12 remaining quarterly payments of approximately $0.1 million ($0.2 million for three quarterly payments in 2010) beginning in January 2010


1,890


2,218United States Dollar Loaninterest at 4.22% as of July 4, 2009 and 5.72% at January 3, 2009, denominated in U.S. dollars
due in 26 remaining quarterly payments of approximately $0.9 million ($1.7 million per quarter in 2010) beginning in March 2010


25,880


25,880Mexico Term Loaninterest at 9.01% as of July 4, 2009; denominated in U.S. dollars due in 22 quarterly payments of approximately
$0.7 million scheduled to begin in October 2009


14,500


Other


147


210397,954


401,678Less: Current maturities


(41,314
)

(9,173
)$
356,640

$
392,505


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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 7. Debt (Continued)

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 $410.0 million first-lien term loan and a $45.0 million secured revolving credit facility at the original borrowing date.

All
borrowings under the Credit Facility are U.S. dollar denominated and are guaranteed, on a joint and several basis, by each and all of the direct and indirect domestic subsidiaries of
the Company. The Credit Facility and the related guarantees are secured by (i) a lien on substantially all of the assets of the Company, its domestic subsidiaries and certain of its
non-domestic subsidiaries, (ii) a pledge of all or a portion of the stock of the domestic subsidiaries of the Company and of certain non-domestic subsidiaries of the
Company, and (iii) a pledge of certain secured intercompany notes. Commitment fees under the Credit Facility are equal to 0.50% of the daily unused amount of the revolving credit commitment.
The Credit Facility limits restricted payments to $5.0 million, including cash dividends, in the aggregate since the effective date of the Credit Facility. The Credit Facility contains
covenants and events of default customary for financings of this type, including leverage and interest expense coverage covenants, as well as default provisions related to certain types of defaults by
the Company or its subsidiaries in the performance of their obligations regarding borrowings in excess of $10.0 million. The Credit Facility requires that the Company maintain a leverage ratio
of not more than 3.50:1.00 as of July 4, 2009, with a decrease occurring effective April 3, 2010, at which time the leverage ratio requirement will be 3.00:1.00 on a
go-forward basis, thereby narrowing the margin for compliance. The interest expense coverage ratio requirement at July 4, 2009 was that it not be less than 3.00:1.00, with a change
occurring April 3, 2010, at which time the requirement will be 3.25:1.00 on a go-forward basis. The Company was in compliance with the financial covenants under the Credit Facility
at July 4, 2009. These ratios are calculated on a trailing four-quarter basis. As a result, any decline in the Company's future operating results will negatively impact its coverage
ratios. Although the Company expects to remain in compliance with these covenant requirements, the Company's failure to comply with these financial covenants, without waiver or amendment from its
lenders, could have a material adverse effect on its liquidity and operations, including limiting the Company's ability to borrow under the Credit Facility. On August 21, 2009, the Company
received a waiver from its Lenders with respect to its requirement to furnish to the Administrative Agent and the Lenders certain financial information related to the
quarter ended July 4, 2009 within the deadlines set forth in the Credit Facility and the parties agreed that no such failure to timely provide such information shall be considered a Default or
Event of Default under the Credit Facility provided that such information is provided within 60 days after the date which would have resulted in an Event of Default. The Company has provided
such information within the prescribed timeframe and is in compliance with its obligations under the Credit Facility.

The
first-lien term loan requires mandatory payments of approximately $1.0 million per quarter and requires the Company to use a percentage of proceeds from excess
cash flows, as defined by the Credit Facility and determined based on year-end results, to reduce its then outstanding balances under the Credit Facility. Excess cash flows required to be
applied to the repayment of the Credit Facility are generally calculated as 50% of the net amount of the Company's available cash generated from operations adjusted for the cash effects of interest,
taxes, capital expenditures, changes in working capital and certain other items. The amount of excess cash flows for future periods is based on year-end results; however, the Company
currently estimates that the excess cash flow requirement with respect to fiscal 2009, which would be payable by March 2010, will be approximately $30.0 million and has classified this amount,
in addition to the mandatory payments of approximately $1.0 million per quarter,

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 7. Debt (Continued)

in
theCurrent portion of long-term debtin the Consolidated Balance Sheets as of July 4, 2009. No additional amounts were required
to be paid under the excess cash flow provisions of the Credit Facility with respect to fiscal 2008. The Company may, at its discretion and based on projected operating cash flows, the current market
value of its term loan and anticipated cash requirements, elect to make additional repayments of debt under the Credit Facility in excess of the mandatory debt repayments and excess cash flow
payments, or may reacquire its debt in conjunction with its debt repurchase program.

The
Company, through its subsidiaries, may make market purchases of its first lien term loan under its Credit Facility from its existing lenders at a discount to the carrying value of
its debt. Under these agreements, to the extent of the amount of debt acquired, the Company's subsidiary will acquire the rights and obligations of a lender under the Credit Facility and the selling
third-party lender will be released from its obligations under the Credit Facility. The Company accounts for such reacquisition of debt as a transfer of financial assets resulting in a sale and
derecognizes such liability in accordance with the provisions of SFAS No. 140. During the first quarter of fiscal 2009, the Company reacquired $15.0 million of debt, via cash payment,
and recognized a gain on such reacquisition of $2.4 million, net of the write-off of deferred financing fees of $0.2 million, and has included such amount in Gain on Reacquisition of Debtin
the Consolidated Statements of Operations.

The
interest rate applicable to borrowings under the Credit Facility is based on the three-month or the one-month London Interbank Offered Rate ("LIBOR") plus a specified
margin. The applicable margin for borrowings under both the first-lien term loan and the revolving credit facility is 225 basis points. The Company may, from time to time, elect to use an
Alternate Base Rate for its borrowings under the revolving credit facility and term loan based on the
bank's base rate plus a margin of 75 to 125 basis points based on the Company's total leverage ratio.

In
accordance with the terms of the Credit Facility, the Company maintained its position in a cash flow hedge agreement originally entered into in February 2007. The cash flow hedge
agreement effectively converted $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 5.085% and terminated on June 29, 2009.
Additionally, in February 2009, the Company entered into another cash flow hedge agreement, which was effective June 30, 2009 and matures on June 30, 2011, and effectively converts
$240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 1.96%. The cash flow hedge agreements are more fully described in Note 11,
"Derivatives and Other Financial Instruments and Hedging Activities" and Note 12, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities."

There
were no daily borrowings under the revolving credit facility for the period from January 4, 2009 to July 4, 2009, and as of July 4, 2009 or January 3,
2009. Subject to certain terms and conditions, a maximum of $25.0 million of the Credit Facility may be used for revolving letters of credit. As of July 4, 2009, the Company has
effectively reserved capacity under the revolving credit facility in the amount of $2.5 million relating to standby and documentary letters of credit outstanding. These letters of credit are
primarily provided to certain administrative service providers. None of these letters of credit had been drawn on at July 4, 2009. The revolving credit portion of the Credit Facility matures on
November 22, 2010.

As
of July 4, 2009, the Company also had other outstanding letters of credit in the amount of $1.8 million primarily provided to certain raw material vendors. None of these
letters of credit had been drawn on at July 4, 2009.

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 7. Debt (Continued)

Subsidiary Indebtedness

In fiscal 2008, the Company's operations in Argentina entered into short-term credit facilities to finance working capital
requirements. The outstanding indebtedness under these short-term borrowing facilities was $8.8 million and $12.0 million as of July 4, 2009 and January 3,
2009, respectively. These facilities mature at various dates through December 2009. As of July 4, 2009, the average interest rate of these borrowings was
8.11%. Borrowings under these facilities are included inShort-term borrowingsin the Consolidated Balance Sheets.

In
January 2007, the Company's subsidiary in Argentina entered into an arrangement with banking institutions in Argentina to finance the installation of a new spunmelt line at the joint
venture facility near Buenos Aires, Argentina. The maximum borrowings available under the arrangement, excluding any interest added to principal, amount to 26.5 million Argentine pesos with
respect to an Argentine peso-denominated loan and $30.3 million with respect to a U.S. dollar-denominated loan and are secured by pledges covering (i) the subsidiary's
existing equipment lines; (ii) the outstanding stock of the subsidiary; and (iii) the new machinery and equipment being purchased, as well as a trust assignment agreement related to a
portion of receivables due from certain major customers of the subsidiary. As of July 4, 2009, the outstanding indebtedness was approximately $34.1 million, consisting of
$8.2 million Argentine peso-denominated loans and a $25.9 million U.S. dollar-denominated loan. As of January 3, 2009, the outstanding indebtedness was approximately
$35.3 million, consisting of $9.4 million Argentine peso-denominated loans and a $25.9 million U.S. dollar-denominated loan. Current maturities of this debt amount to
$4.5 million as of July 4, 2009. The interest rate applicable to borrowings under these term loans is based on LIBOR plus 290 basis points for the U.S. dollar-denominated loan and Buenos
Aires Interbanking Offered Rate plus 475 basis points for the Argentine peso-denominated loan. Principal and interest payments began in July 2008 with the loans maturing as follows:
approximately $1.9 million in September 2012, approximately $25.9 million in April 2016 and the balance of $6.3 million maturing in May 2016.

In
April 2009, the Company amended its Argentine Facility to effectively defer 2009 scheduled payments under the facility for a period of twelve months; accordingly, the Company has
classified previously scheduled current maturities, in the amount of $2.4 million, as long-term debt in its Consolidated Balance Sheet as of July 4, 2009 consistent with the
provisions of SFAS No. 6, "Classification of Short-Term Obligations Expected to be Refinanced."

In
March 2009, the Company's subsidiary in Mexico entered into a term credit facility (the "Mexico Credit Facility") with a banking institution in Mexico to finance a portion of the
installation of a new spunmelt line near San Luis Potosi, Mexico. The maximum borrowings available under the Mexico Credit Facility, excluding any interest added to principal, amount to
$14.5 million with respect to a U.S. dollar-denominated loan and are secured by pledges covering (i) the subsidiary's existing equipment lines; and (ii) the new machinery and
equipment being purchased. The interest rate applicable to borrowings under the Mexico Credit Facility is based on one-month LIBOR plus 780 basis points. A series of 22 principal payments
are scheduled to commence October 1, 2009; interest payments commenced on July 1, 2009. As of July 4, 2009, outstanding indebtedness under the Mexico Credit Facility was
approximately $14.5 million.

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 8. Income Taxes

During the three and six months ended July 4, 2009, the Company recognized income tax expense of $1.0 million and $8.1 million, respectively, on consolidated income
before income taxes from continuing operations of $4.8 million and $17.7 million. During the three and six months ended June 28, 2008, the Company recognized income tax expense of
$3.5 million and $5.2 million, respectively, on consolidated income before income taxes from continuing operations of $5.8 million and $9.3 million, respectively. The
Company's income tax expense in any period is different than such expense determined at the U.S. federal statutory rate primarily due to losses in certain jurisdictions for which no income tax
benefits are anticipated, foreign withholding taxes for which tax credits are not anticipated, U.S. state income taxes, changes in the amounts recorded for tax uncertainties under the provisions of
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, and Interpretation of FASB Statement No. 109" ("FIN 48"), and foreign taxes calculated at statutory rates
different than the U.S. federal statutory rate. Additionally, for the three and six months ended July 4, 2009, the Company recorded credits for out-of-period adjustments
in the amounts of $0.6 million and $1.4 million, respectively. The Company also recorded certain fresh tax adjustments resulting in an increase inAdditional
paid-in capitalin the amount of approximately $1.6 million.

At
implementation of FIN 48, the Company recorded a liability for unrecognized tax benefits of $9.7 million, which included $5.0 million of interest and penalties.
Additionally, the Company increased its unrecognized tax benefits during fiscal 2007 and 2008 by $4.6 million and $2.2 million, respectively.

During
the six months ended July 4, 2009, the Company decreased the liability for unrecognized tax benefits by $1.1 million, net of additional interest and penalties of
$0.1 million. The decrease in the FIN 48 liability from January 3, 2009 includes $1.3 million related to the expiration of statute of limitations in China and
$1.4 million related to the closure of a French audit. During the six months ended June 28, 2008, the Company increased the liability for unrecognized tax benefits by
$2.0 million, which included interest and penalties of $1.0 million.

The
total unrecognized tax benefits of $15.4 million as of July 4, 2009 represent the amount of unrecognized tax benefits that, if recognized, would affect the effective
income tax rate in future periods. Included in the balance of unrecognized tax benefits as of July 4, 2009 was $2.0 million related to tax positions for which it is reasonably possible
that the total amounts could significantly change during the next twelve months. This amount represents a decrease in unrecognized tax benefits comprised of items related to negotiations of the
settlement of foreign taxes and the lapse of statutes of limitations.

Management
judgment is required in determining tax provisions and evaluating tax positions. Although management believes its tax positions and related provisions reflected in the
consolidated financial statements are fully supportable, it recognizes that these tax positions and related provisions may be challenged by various tax authorities. These tax positions and related
provisions are reviewed on an ongoing basis and are adjusted as additional facts and information become available, including progress on tax audits, changes in interpretations of tax laws,
developments in case law and closing of statute of limitations. The Company's tax provision includes the impact of recording reserves and any changes thereto.

As
of July 4, 2009, the Company has a number of open tax years. The major jurisdictions where the Company files income tax returns include Argentina, Canada, China, Colombia,
France, Germany, Mexico, The Netherlands, and the United States. The U.S. federal tax returns have been examined through fiscal 2004 and the foreign jurisdictions generally remain open and subject to
examination by the relevant tax authorities for the tax years 2001 through 2008. Although the results of current tax audits

22

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 8. Income Taxes (Continued)

and
reviews related to open tax years have not been finalized, management believes that the ultimate outcomes will not have a material adverse effect on the Company's financial position, results of
operations or cash flows.

The
Company continues to recognize interest and/or penalties related to income taxes as a component of income tax expense. There were income tax refunds receivable of $2.1 million
and $2.3 million at July 4, 2009 and January 3, 2009, respectively. These amounts are included inOther current assetsin the
Consolidated Balance Sheets.

Note 9. Pension and Postretirement Benefit Plans

The Company and its subsidiaries sponsor multiple defined benefit plans and other postretirement benefits that cover certain employees. Benefits are primarily based on years of service
and the employee's compensation. It is the Company's policy to fund such plans in accordance with applicable laws and regulations.

Components
of net periodic benefit costs for the three and six months ended July 4, 2009 and June 28, 2008 are as follows (in thousands):

Pension BenefitsThree Months Ended

Six Months EndedJuly 4, 2009

June 28, 2008

July 4, 2009

June 28, 2008Current service costs

$
515

$
636

$
1,018

$
1,260Interest costs on projected benefit obligation and other


1,637


1,694


3,239


3,364Return on plan assets


(1,523
)

(1,886
)

(3,013
)

(3,747
)Amortization of transition obligation and other


124


(25
)

245


(48
)Periodic benefit cost, net

$
753

$
419

$
1,489

$
829




Postretirement BenefitsThree Months Ended

Six Months EndedJuly 4, 2009

June 28, 2008

July 4, 2009

June 28, 2008Current service costs

$
9

$
9

$
17

$
18Interest costs on projected benefit obligation and other


72


85


142


170Amortization of transition obligation and other


(83
)

(97
)

(163
)

(194
)Periodic benefit cost, net

$
(2
)
$
(3
)
$
(4
)
$
(6
)


As
of July 4, 2009, the Company had contributed $4.3 million to its pension and postretirement benefit plans for the 2009 benefit year. The Company's contributions include
amounts required to be funded with respect to a defined benefit pension plan relating to one of the Company's Canadian operations. Such requirements include the funding of a projected benefit
obligation calculated based on actuarial assumptions prescribed by Canadian regulations ("Funding Valuation"). As of June 1, 2007

23

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Pension and Postretirement Benefit Plans (Continued)

(the
date of the most recent Funding Valuation), the projected benefit obligation per the Funding Valuation exceeded the projected benefit obligation calculated in accordance with SFAS No. 87,
"Employers' Accounting for Pensions." The Company presently anticipates contributing an additional $0.9 million to fund its plans in 2009, for a total of $5.2 million.

Note 10. Stock Option and Restricted Stock Plans

Stock Option Plan

The Polymer Group, Inc. 2003 Stock Option Plan (the "2003 Option Plan"), which expires December 3, 2013, was approved by
the Company's Board of Directors and shareholders and is administered by the Compensation Committee of the Board of Directors. The 2003 Option Plan approved the issuance of 400,000
non-qualified stock options to acquire shares of the Company's Class A Common Stock. All options awarded provide for an exercise price of $6.00 per share, have a
five-year life and vest, based on the achievement of various service and financial performance criteria, over a four-year period, with the initial awards beginning their
vesting terms as of January 4, 2004. Vesting of the stock options may be accelerated on the occurrence of a change in control, as defined in the 2003 Option Plan, or other events. With respect
to post-vesting restrictions, the 2003 Option Plan provides that each option must be exercised, if at all, upon the earlier to occur of (i) the date that is five years after the
award date of the option or (ii) concurrently upon the consummation of a change in control. As of July 4, 2009 and January 3, 2009, the Company had awarded grants of
non-qualified stock options to purchase 176,622 shares and 178,622 shares of the Company's Class A Common Stock, respectively. In addition, 164,372 stock options
expired without exercise during fiscal 2008. Accordingly, at July 4, 2009, there remain 212,437 stock options not awarded pursuant to the 2003 Option Plan. In March 2009, the Board of Directors
approved a measure to cease making awards under the 2003 Option Plan.

The
Company accounts for the 2003 Option Plan in accordance with the methodology defined in SFAS No. 123(R). As of April 4, 2009, with respect to the 176,622 options
to purchase Class A Common Stock awarded under the 2003 Option Plan, 9,165 are subject to future vesting based on the attainment of future performance targets, which targets had not been
established as of April 4, 2009. Accordingly, pursuant to the provisions of SFAS No. 123(R), 167,457 options to purchase Class A Common Stock have been considered granted
under the 2003 Option Plan as of April 4, 2009. During the first six months of fiscal 2009, 18,055 options were forfeited as the performance targets for fiscal 2008 were not achieved. Of
such options forfeited, 16,055 are subject to 2009 performance targets and are considered re-granted options in fiscal 2009 in accordance with SFAS No. 123(R). During the first six
months of fiscal 2008, the Compensation Committee approved vesting of previously granted stock options and restricted stock at rates in excess of the vesting earned based on actual performance for
fiscal 2007. Actual performance for fiscal 2007 would have resulted in vesting approximately 51% of the stock options and restricted stock grants subject to the annual financial performance vesting
requirement under the Company's 2003 Option Plan and/or the Company's 2005 Stock Plan, defined below. The Compensation Committee, in exercise of its discretion, granted participants vesting credit
equal to 100% of target. As a result, the Company recognized compensation expense in the first quarter of fiscal 2008 associated with the vesting of such awards not earned through the achievement of
performance targets for fiscal 2007. On March 12, 2008, the Compensation Committee, in exercise of its discretion, granted 58 participants vesting credit equal to 100% of target representing
46,603 additional awards with a fair value at the grant date of $0.3 million. As a result, the Company recognized compensation expense in

24

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 10. Stock Option and Restricted Stock Plans (Continued)

the
first quarter of fiscal 2008 associated with the vesting of such awards not earned through the achievement of performance targets for fiscal 2007. The compensation costs related to the 2003 Option
Plan were $0.1 million and $0.6 million for the three and six months ended June 28, 2008, respectively, and were included inSelling, general and
administrative expensesin the Consolidated Statements of Operations. Such costs for the three and six months ended July 4, 2009 were not material.

Information
regarding the Company's stock options granted, as defined by SFAS No. 123(R), and outstanding as of July 4, 2009 is as follows:

Vested

Expected
to VestFor options granted and outstanding:Number of options


128,183


39,275Weighted average exercise price

$
6.00

$
6.00Aggregate intrinsic value (in 000s)

$
244

$
75For nonvested options:Compensation cost not yet recognized (in 000s)




$
259Weighted average period of recognition (years)





0.9


SFAS
No. 123(R) requires the estimation of forfeitures when recognizing compensation expense and that the estimate of forfeiture be adjusted over the requisite service period
should actual forfeitures differ from such estimates. Changes in estimated forfeitures, if significant, are recognized through a cumulative adjustment, which is recognized in the period of change and
which impacts the amount of unamortized compensation expense to be recognized in future periods.

Restricted Stock Plans



The Company's shareholders and Board of Directors approved the 2004 Polymer Group, Inc. Restricted Stock Plan for Directors (the
"2004 Restricted Plan"), which expires in 2014, for the issuance of restricted shares of the Company's Class A Common Stock to directors of the Company, as defined in the 2004 Restricted Plan.
The 2004 Restricted Plan approved for issuance 200,000 restricted shares and is administered by a committee of the Company's Board of Directors not eligible to receive restricted shares under the 2004
Restricted Plan. In May 2009, the Company's shareholders approved an increase in the number of shares reserved for issuance under the 2004 Restricted Plan from 200,000 shares to
300,000 shares.

In
the first six months of fiscal 2009 and fiscal 2008, the Company awarded 52,612 and 6,277 restricted shares, respectively, to members of the Company's Board of Directors for their
Board service to the Company. The cost associated with these restricted stock grants, which vest over periods ranging to eighteen months, totaled approximately $0.1 million and
$0.2 million for the three
and six months ended July 4, 2009, respectively, and were included inSelling, general and administrative expensesin the Consolidated Statements
of Operations. For the three and six months ended June 28, 2008, these costs approximated $0.1 million and $0.2 million, respectively.

Additionally,
in April 2007, 50,000 restricted shares were issued pursuant to the terms of the Executive Employment Agreement entered into with the Company's Chief Executive Officer.
Such

25

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 10. Stock Option and Restricted Stock Plans (Continued)

shares
vest over a four year service period effective April 23, 2007, and such vesting will be accelerated upon a change in control, as defined therein, and the completion of a minimum service
period. The compensation costs associated with such restricted shares issued under the terms of the Executive Employment Agreement totaled $0.1 million and $0.2 million for the three and
six months ended July 4, 2009 and were included inSelling, general and administrative expensesin the Consolidated Statements of Operations. For
the three and six months ended June 28, 2008, these costs approximated $0.1 million and $0.2 million, respectively. Compensation cost not yet recognized for such nonvested
restricted shares issued under the terms of the Executive Employment Agreement was approximately $0.6 million as of July 4, 2009, and the weighted average period of recognition for such
compensation was 0.9 years as of July 4, 2009.

As
of July 4, 2009, there remain 107,647 shares of the Company's Class A Common Stock available to be awarded under the 2004 Restricted Plan.



The Polymer Group, Inc. 2005 Employee Restricted Stock Plan (the "2005 Stock Plan") was approved by the Company's Board of
Directors and shareholders and is administered by the Compensation Committee of the Company's Board of Directors. The 2005 Stock Plan, which expires in 2015, approved for issuance 482,000 restricted
shares to employees of the Company. Other than for certain shares initially awarded and immediately vested on January 20, 2006, March 12, 2008 and April 9, 2009, shares awarded
under the 2005 Stock Plan primarily vest 25% on each of the grant's anniversary dates based on a combination of service and/or the achievement of certain performance targets. Vesting of the restricted
shares, other than those shares issued pursuant to the terms of the Executive Employment Agreement entered into with the Company's Chief Executive Officer, may be accelerated on the occurrence of a
change in control, as defined in the 2005 Stock Plan, or other events. Vesting of shares awarded under the Executive Employment Agreement will be accelerated under a change in control, as defined
therein, and the completion of a minimum service period.

During
the first six months of fiscal 2009, 32,237 restricted shares were considered re-granted to certain employees of the Company in accordance with SFAS No. 123(R).
In addition, 45,395 shares were surrendered during the first six months of fiscal 2009 by employees to satisfy withholding requirements and 60,047 shares were forfeited. During the first
six months of fiscal 2008, 143,935 restricted shares were awarded to certain employees of the Company. In addition, 34,353 shares were surrendered during the first six months of fiscal 2008 by
employees to satisfy withholding requirements and 8,325 shares were forfeited.

The
compensation costs associated with the 2005 Stock Plan totaled $0.5 million and $0.6 million for the three and six months ended July 4, 2009, respectively, and
were included inSelling, general and administrative expensesin the Consolidated Statements of Operations. For the three and six months ended
June 28, 2008, these costs approximated $0.2 million and $1.3 million, respectively. As of July 4, 2009, awards of 384,329 shares of the Company's Class A
Common Stock were outstanding and 97,671 shares were not awarded under the 2005 Stock Plan. In March 2009, the Board of Directors approved a measure to cease making awards under the 2005 Stock
Plan.

The
Company accounts for the 2005 Stock Plan in accordance with the methodology defined in SFAS No. 123(R). As of July 4, 2009, of the 384,059 shares awarded and
outstanding under the 2005 Stock Plan, 22,525 shares are subject to future vesting based on the attainment of future performance

26

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 10. Stock Option and Restricted Stock Plans (Continued)

targets,
which targets had not been established as of July 4, 2009. Accordingly, pursuant to the provisions of SFAS 123(R), 361,804 restricted shares are considered granted under the
2005 Stock Plan as of July 4, 2009. Compensation cost not yet recognized for nonvested restricted shares considered granted under the 2005 Stock Plan was approximately $1.2 million as of
July 4, 2009, and the weighted average period of recognition for such compensation was 1.1 years as of July 4, 2009.



The Polymer Group, Inc. 2008 Long-Term Stock Incentive Plan (the "2008 LTI Stock Plan") was approved by the
Company's shareholders and Board of Directors and is administered by the Compensation Committee of the Company's Board of Directors. The 2008 LTI Stock Plan, which expires in 2018 unless terminated by
the Company's Board of Directors sooner, originally reserved for issuance 425,000 shares of the Company's Class A Common Stock to employees of the Company. In May 2009, the Company's
shareholders approved an increase in the number of shares reserved for issuance under the 2008 LTI Stock Plan from 425,000 shares to 1,075,000 shares. The Compensation Committee may,
from time to time, award a variety of equity-based incentives under the 2008 LTI Stock Plan to such employees and in such amounts and with specified restrictions as it determines appropriate in the
circumstances.
Such awards may be granted under the 2008 LTI Stock Plan in the form of either incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock, restricted
stock units, stock awards, performance awards or other types of stock awards that involve the issuance of, or that are valued by reference to, shares of the Company's Class A Common Stock.
Vesting, which will be determined by the Compensation Committee of the Company's Board of Directors, may be accelerated on the occurrence of a change in control, as defined therein, or other events.

During
fiscal 2008, various awards were approved and issued to certain employees of the Company under the 2008 LTI Stock Plan. As of January 3, 2009, awards of 45,947
service-based restricted shares of the Company's Class A Common Stock and 138,022 restricted stock units were outstanding and unvested. As to the restricted stock units, 122,512 awards
would vest based on the achievement of 2008 performance targets and the completion of requisite service periods. All restricted stock units will be settled in the form of restricted shares upon
vesting. The compensation costs associated with the 2008 LTI Stock Plan totaled $0.8 million and $0.9 million for the three and six months of fiscal 2009, respectively, and are included
inSelling, general and administrative expensesin the Consolidated Statements of Operations. The compensation costs related to the 2008 LTI Stock Plan
was $0.1 million for the three and six months ended June 28, 2008. During the first quarter of fiscal 2009, 122,512 performance-based restricted stock units were forfeited since the
performance criteria were not satisfied and the awards contained no carryforward provisions. During the second quarter of fiscal 2009, the Company awarded 297,853 service-based restricted shares of
the Company's Class A Common Stock and 144,322 restricted stock units, of which 128,746 would vest based on the achievement of 2009 performance targets and the completion of requisite service
periods. In addition, 39,136 shares were surrendered to satisfy withholding tax obligations, 5,176 restricted stock units were converted to restricted shares and 1,529 restricted stock units
were forfeited. As of July 4, 2009, awards of 309,840 shares of the Company's Class A Common Stock and 168,683 restricted stock units were outstanding, and 596,477 shares
were available for future grant under the 2008 LTI Stock Plan. Compensation cost not yet recognized for awards under the 2008 LTI Stock Plan was approximately

27

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 10. Stock Option and Restricted Stock Plans (Continued)

$1.7 million
as of July 4, 2009, and the weighted average period of recognition for such compensation was 0.8 years as of July 4, 2009.

Note 11. Derivative and Other Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from business operations and economic factors. The Company uses derivative financial instruments to manage market risks and reduce its
exposure to fluctuations in interest rates and foreign currencies. All hedging transactions are authorized and executed under clearly defined policies and procedures, which prohibit the use of
financial instruments for trading purposes.

The
Company uses interest-rate derivative instruments to manage its exposure related to movements in interest rates with respect to its debt instruments. As disclosed in
Note 7 "Debt," to mitigate its interest rate exposure as required by the Credit Facility, the Company entered into a pay-fixed, receive-variable interest rate swap, effectively
converting the variable LIBOR-based interest payments associated with $240.0 million of the debt to fixed amounts at a LIBOR rate of 5.085%. This interest rate swap agreement became effective
on May 8, 2007 and expired on June 29, 2009. Cash settlements were made quarterly and the floating rate was reset quarterly, coinciding with the reset dates of the Credit Facility.

On
February 12, 2009, the Company entered into a pay-fixed, receive-variable interest rate swap, which effectively converts the variable LIBOR-based interest payments
associated with $240.0 million of the Company's first-lien term loan to fixed amounts at a LIBOR rate of 1.96%. This interest rate swap agreement became effective on June 30,
2009 and expires on June 30, 2011. Cash settlements will be made monthly and the floating rate will be reset monthly, coinciding with the reset dates of the Credit Facility.

In
accordance with SFAS No. 133, the Company designated these swaps as cash flow hedges of the variability of interest payments with changes in fair value of the swap recorded in Accumulated other comprehensive
incomein the Consolidated Balance Sheets. See Note 12 "Fair Value of Financial Instruments and Non-Financial
Assets and Liabilities" for the fair value measurement disclosures for these assets and liabilities.

The
impact of these swaps onInterest expense, netin the Consolidated Statements of Operations was an increase of $2.3 million and
$4.5 million for the three and six months ended July 4, 2009, respectively. For the three and six months ended June 28, 2008, the impact was an increase of $1.5 million and
$1.6 million, respectively.

On
September 30, 2008, the Company entered into a series of foreign exchange forward contracts with a third-party financial institution, the objective of which is to hedge the
changes in fair value of a firm commitment to purchase equipment attributable to changes in foreign currency rates between the Euro and U.S. dollar through the date of acceptance of the equipment. The
notional amount of the contracts with the third party, which expire on various dates through fiscal 2009, was $33.3 million. Cash settlements under the forward contracts coincide with the
payment dates on the equipment purchase contract. As of July 4, 2009, the Company has recorded the assets and liabilities associated with the previously unrecognized firm commitment which
resulted in the planned termination of the hedging agreement.

28

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 11. Derivative and Other Financial Instruments and Hedging Activities (Continued)

The following table summarizes the aggregate notional amount and estimated fair value of the Company's derivative instruments as of July 4, 2009 and January 3, 2009 (in
thousands):

As of July 4, 2009

As of January 3, 2009Notional

Fair Value

Notional

Fair ValueCash flow hedges:Interest rate swaps (1)

$
240,000

$
3,490

$
240,000

$
4,458Foreign currency hedges:Foreign exchange contracts








33,322


1,388Foreign exchange contractsundesignated


23,622


761





Net value

$
263,622

$
4,251

$
273,322

$
5,846


---

The
following tables summarize the effect on income by derivative instruments for the following periods:

For the Three Months Period EndedAmount of Gain
(Loss) Recognized
in Accumulated
OCI on Derivative
(Effective Portion)

Amount of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)(1)Derivatives in SFAS No. 133 Cash Flow Hedging Relationships

July 4,
2009

June 28,
2008

July 4,
2009

June 28,
2008Derivatives designated as hedging instruments under SFAS No. 133:Interest rate contracts

$
(983
)
$
2,050

$
(2,264
)
$
(1,464
)Derivatives not designated as hedging instruments under SFAS No. 133


N/A


N/A


N/A


N/A


---

29

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 11. Derivative and Other Financial Instruments and Hedging Activities (Continued)

For the Six Months Period EndedAmount of Gain
(Loss) Recognized
in Accumulated
OCI on Derivative
(Effective Portion)

Amount of Gain
(Loss) Reclassified
from Accumulated
OCI into Income
(Effective Portion)(1)Derivatives in SFAS No. 133 Cash Flow Hedging Relationships

July 4,
2009

June 28,
2008

July 4,
2009

June 28,
2008Derivatives designated as hedging instruments under SFAS No. 133:Interest rate contracts

$
(3,490
)
$
(2,173
)
$
(4,458
)
$
(1,640
)Derivatives not designated as hedging instruments under SFAS No. 133


N/A


N/A


N/A


N/A


---

Note 12. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities

The Company adopted the provisions of SFAS No. 157, which outlines a valuation framework and creates a fair value hierarchy that distinguishes between market assumptions based on
market data (observable inputs) and a reporting entity's own assumptions about market data (unobservable inputs). The standard increases the consistency and comparability of fair value measurements
and related disclosures. Fair value is identified, under the standard, as the price that would be received to sell an asset or paid to transfer a liability at the measurement date (an exit price).

The
Company has financial derivative instruments that are measured under SFAS No. 157. The financial derivatives are valued based on the prevailing market yield information on the
date of measurement. Financial assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as defined in SFAS 157. The three levels are as follows:

Level 1Inputs
are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2Inputs
include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that
are not active (markets with few transactions), inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that
derived principally from or are corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3Unobservable
inputs, only used to the extent that observable inputs are not available, reflect the Company's assumptions about the pricing of an asset or
liability.

In
accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's financial assets and liabilities that are required to be measured
at fair value, on a recurring basis, as of July 4, 2009. The foreign exchange contracts identified within the table below are

30

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities (Continued)

recorded
on the Company's Consolidated Balance Sheets within bothProperty, plant and equipment, netandAccounts payable and
accrued liabilities. The interest rate swap agreements that are identified within the table below are recorded on the Company's Consolidated Balance Sheets within Other noncurrent
liabilities(in thousands):

As of
July 4, 2009

Quoted Prices in
Active Markets
for Identical
Assets Level 1

Significant Other
Observable
Inputs Level 2

Unobservable
Inputs
Level 3Derivative assets:Foreign exchange contract

$
761




$
761


Derivative liabilities:Interest rate swap agreements


(3,490
)




(3,490
)

Foreign exchange contract


(761
)




(761
)




The
fair value of the interest rate swap agreements and foreign forward exchange contracts are based on indicative price information obtained via a third-party valuation. The unrealized
loss in the interest rate swap's fair value of $0.9 million during the first six months of fiscal 2009 was reported as an adjustment toAccumulated Other Comprehensive
Incomein the Consolidated Balance Sheet as of July 4, 2009.

In
accordance with the fair value hierarchy described above, the following table shows the fair value of the Company's non-financial assets and liabilities that are required to be
measured at fair value, on a non-recurring basis, as of July 4, 2009 (in thousands):

Period Ended
July 4, 2009

Quoted Prices in
Active Markets
for Identical
Assets Level 1

Significant Other
Observable
Inputs Level 2

Unobservable
Inputs
Level 3Long-lived assets held for sale(1)

$
3,086




$
3,086


Long-lived assets held and used(2)


4,500





3,000

$
1,500


---

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities (Continued)

The
Company has estimated the fair values of financial instruments as required by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," using available market
information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value for non-traded financial
instruments.
Accordingly, such estimates are not necessarily indicative of the amounts that the Company would realize in a current market exchange. The carrying value of cash and cash equivalents, accounts
receivable, inventories, other accounts payable and accrued liabilities are reasonable estimates of their fair values. The carrying amount and estimated fair value of the Company's
long-term debt and short-term borrowings as of July 4, 2009 and January 3, 2009 is presented in the following table (in thousands):

As of July 4, 2009

As of January 3, 2009Carrying Value

Fair Value

Carrying Value

Fair ValueLong-term debt (including current portion)

$
397,954

$
360,831

$
401,678

$
293,475Short-term borrowings


8,834


8,834


11,987


11,987$
406,788

$
369,665

$
413,665

$
305,462


Note 13. Earnings Per Share and Shareholders' Equity

The following is a reconciliation of basic net earnings per common share to diluted net earnings per common share for the three and six months ended July 4, 2009 (in thousands,
except per share data):

Net Income
(EPS Numerator)

Average Shares
Outstanding
(EPS Denominator)

Earnings Per
Common ShareThree months ended July 4, 2009Basic

$
4,246


19,694.7

$
0.21Potential shares exercisable under share-based plans





241.9Less: shares which could be repurchased under treasury stock method





(141.5
)Diluted

$
4,246


19,795.1

$
0.21Six months ended July 4, 2009Basic

$
13,802


19,694.7

$
0.70Potential shares exercisable under share-based plans





179.2Less: shares which could be repurchased under treasury stock method





(163.9
)Diluted

$
13,802


19,710.0

$
0.70


Under
the treasury stock method, shares represented by the exercise of 50,897 options, and 74,177 nonvested restricted shares, were not included in diluted earnings per share
because to do so would have been anti-dilutive.

32

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 13. Earnings Per Share and Shareholders' Equity (Continued)

The
following is a reconciliation of basic net earnings per common share to diluted net earnings per common share for the three and six months ended June 28, 2008 (in thousands,
except per share data):

Net Income
(EPS Numerator)

Average Shares
Outstanding
(EPS Denominator)

Earnings Per
Common ShareThree months ended June 28, 2008Basic

$
2,380


19,285.5

$
0.12Potential shares exercisable/earned under share-based plans





310.6Less: shares which could be repurchased under treasury stock method





(138.8
)Diluted

$
2,380


19,457.3

$
0.12Six months ended June 28, 2008Basic

$
3,804


19,255.1

$
0.20Potential shares exercisable/earned under share-based plans





326.2Less: shares which could be repurchased under treasury stock method





(152.7
)Diluted

$
3,804


19,428.6

$
0.20


Under
the treasury stock method, shares represented by the exercise of 37,500 options, and 96,328 nonvested restricted shares, were not included in diluted earnings per share because to
do so would have been anti-dilutive.

As
of July 4, 2009, the Company's authorized capital stock consisted of the following classes of stock:

Type

Par Value

Authorized SharesPreferred stock

$
.01


173,000Class A common stock

$
.01


39,200,000Class B convertible common stock

$
.01


800,000Class C convertible common stock

$
.01


118,453Class D convertible common stock

$
.01


498,688Class E convertible common stock

$
.01


523,557


All
classes of the common stock have the same voting rights. In accordance with the Amended and Restated Certificate of Incorporation, all shares of Class B, C, D and E Common
Stock may be converted into an equal number of shares of Class A Common Stock. The shares of preferred 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.

All
authorized shares of the Class D Common Stock and Class E Common Stock are issuable upon the exercise, at $.01 per share, of Series A warrants to purchase shares
of Class D common stock and Series B warrants to purchase shares of Class E common stock, respectively ("Warrants"). Such

33

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 13. Earnings Per Share and Shareholders' Equity (Continued)

Warrants
have (i) customary adjustments for stock splits, stock dividends, and consolidations, (ii) specified anti-dilution protection for sales of securities by the Company
at a price below the fair market value of such securities if offered to common stockholders and (iii) specified anti-dilution protection for sales of securities by the Company at a
discount that exceeds 25% of the fair market value of such securities. Except as set forth in the preceding sentence, the Warrants do not have anti-dilution provisions. The Warrants
(a) are exercisable in the event of a notice provided by the Company of a distribution to shareholders of a minimum amount ($600 million in the case of the Series A Warrants, and
$1.15 billion in the case of the Series B Warrants), and (b) terminate upon the earlier to occur of (i) March 4, 2010, or (ii) a change in control of the
Company (as defined in the warrant certificates). Pursuant to the adjustment provisions of the warrant certificates, the Company may be required, immediately prior to exercise of the warrants, to
increase the authorized shares of Class D Common Stock and Class E Common Stock presented in the table above relating to the Series A Warrants and the Series B Warrants,
respectively, if the authorized shares are insufficient for the number of Warrants to be exercised.

A
reconciliation of equity attributable to Polymer Group, Inc. and the noncontrolling interests for the three and six months ended July 4, 2009 is as follows (in
thousands):

Polymer Group, Inc. ShareholdersTotal

Comprehensive
Income

Retained
Deficit

Accumulated
Other
Comprehensive
Income

Common
Stock

Paid-in
Capital

Noncontrolling
InterestBalance, January 3, 2009

$
93,211




$
(131,089
)
$
18,370

$
195


192,796

$
12,939Compensation recognized on share-based awards


1,809











4


1,805Surrender of shares to satisfy withholding tax obligations


(354
)













(354
)Recognition of tax benefits from utilization of preconfirmation net operating loss carryforwards and other fresh start adjustments


1,610














1,610Comprehensive income:Net income


13,494

$
13,494


13,802











(308
)Other comprehensive income, net of tax:Cash flow hedge adjustment, net of reclassification adjustment


968


968





968Employee benefit plans


410


410





410Currency translation adjustments


2,050


2,050





2,050Other comprehensive income


3,428


3,428Comprehensive income


16,922

$
16,922Balance, July 4, 2009

$
113,198




$
(117,287
)
$
21,798

$
199

$
195,857

$
12,631


34

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 14. Segment Information

The Company's reportable segments consist of its primary operating divisionsNonwovens and Oriented Polymers. This reflects how the overall business is managed by the
Company's senior management and reviewed by the Board of Directors. Each of these businesses sells to different end-use markets, such as hygiene, medical, wipes and industrial markets.
Sales to P&G accounted for more than 10% of the Company's sales in each of the periods presented. Sales to this customer are reported primarily in the Nonwovens segment and the loss of these sales
would have a material adverse effect on this segment. The segment information presented in the table below excludes the results of Fabpro. The Company concluded that Fabpro qualifies as an asset held
for sale and, consistent with the provisions of SFAS No. 144, has presented Fabpro as a discontinued operation. The Company completed the sale of Fabpro during the third quarter of fiscal 2009.
The Company recorded charges in the Consolidated Statements of Operations during the three and six months ended July 4, 2009 and the three and six months ended June 28, 2008 relating to
special charges, net that have not been allocated to the segment data.

Financial
data by segment for continuing operations is as follows (in thousands):

Three Months Ended

Six Months EndedJuly 4,
2009

June 28,
2008

July 4,
2009

June 28,
2008Net salesNonwovens

$
187,259

$
241,512

$
378,887

$
473,126Oriented Polymers


18,781


29,145


37,163


55,171$
206,040

$
270,657

$
416,050

$
528,297Operating incomeNonwovens

$
24,861

$
19,969

$
52,806

$
40,189Oriented Polymers


262


1,275


1,596


2,193Unallocated Corporate


(5,021
)

(6,223
)

(11,371
)

(13,829
)20,102


15,021


43,031


28,553Special charges, net


(5,881
)

(1,388
)

(8,773
)

(2,751
)$
14,221

$
13,633

$
34,258

$
25,802Depreciation and amortization expenseNonwovens

$
11,505

$
11,632

$
22,807

$
22,836Oriented Polymers


408


528


789


1,405Unallocated Corporate


190


60


380


257Depreciation and amortization expense included in operating income


12,103


12,220


23,976


24,498Amortization of loan acquisition costs


273


346


608


691$
12,376

$
12,566

$
24,584

$
25,189Capital spendingNonwovens

$
11,347

$
7,842

$
14,685

$
20,067Oriented Polymers


14


314


70


406Corporate


90


176


135


438$
11,451

$
8,332

$
14,890

$
20,911


35

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 14. Segment Information (Continued)

July 4, 2009

January 3, 2009Division assetsNonwovens

$
711,097

$
717,814Oriented Polymers


43,012


39,194Corporate


20,314


1,619Discontinued Operations


29,864


31,760Eliminations


(83,083
)

(87,925
)$
721,204

$
702,462


Geographic
Data:

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

Three Months Ended

Six Months EndedJuly 4,
2009

June 28,
2008

July 4,
2009

June 28,
2008Net salesUnited States

$
71,524

$
96,258

$
147,738

$
190,974Canada


18,186


27,797


36,127


52,955Europe


36,591


51,594


75,278


103,346Asia


26,139


29,386


50,343


57,432Latin America


53,600


65,622


106,564


123,590$
206,040

$
270,657

$
416,050

$
528,297Operating incomeUnited States

$
2,173

$
2,784

$
8,308

$
2,009Canada


29


784


1,510


1,469Europe


432


2,733


1,279


5,538Asia


5,178


3,879


10,993


7,284Latin America


12,290


4,841


20,941


12,25320,102


15,021


43,031


28,553Special charges, net


(5,881
)

(1,388
)

(8,773
)

(2,751
)$
14,221

$
13,633

$
34,258

$
25,802Depreciation and amortization expenseUnited States

$
3,536

$
3,778

$
7,239

$
7,743Canada


400


519


775


1,371Europe


1,912


2,005


3,734


3,985Asia


2,335


2,198


4,668


4,326Latin America


3,920


3,720


7,560


7,073Depreciation and amortization expense included in operating income


12,103


12,220


23,976


24,498Amortization of loan acquisition costs


273


346


608


691$
12,376

$
12,566

$
24,584

$
25,189


36

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 14. Segment Information (Continued)

July 4, 2009

January 3, 2009Property, plant and equipment, netUnited States

$
96,488

$
105,379Canada


5,042


5,558Europe


34,634


37,354Asia


58,774


62,826Latin America


154,028


127,145$
348,966

$
338,262


Note 15. Foreign Currency and Other (Gain) Loss, Net

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

Three Months
Ended

Six Months
EndedJuly 4, 2009

June 28, 2008

July 4, 2009

June 28, 2008Included in operating income

$
(2,233
)
$
(570
)
$
(2,200
)
$
(1,862
)Included in other expense (income)


2,436


(707
)

4,467


(406
)$
203

$
(1,277
)
$
2,267

$
(2,268
)


For international subsidiaries which have the U.S. dollar as their functional currency, local currency transactions are remeasured into U.S. dollars, using current rates of
exchange for monetary assets and liabilities. Gains and losses from the remeasurement of such monetary assets and liabilities are reported inOther operating income,
netin the Consolidated Statements of Operations. Likewise, for international subsidiaries which have the local currency as their functional currency, gains and losses from the
remeasurement of monetary assets and liabilities not denominated in the local currency are reported inOther operating income, netin the Consolidated
Statements of Operations. Additionally, currency gains and losses have been incurred on intercompany loans between subsidiaries, and to the extent that such loans are not deemed to be permanently
invested, such currency gains and losses are reflected inForeign currency and other loss, netin the Consolidated Statements of Operations.

The
Company includes gains and losses on receivables, payables and other operating transactions as a component of operating income inOther operating income,
net. Other foreign currency gains and losses, primarily related to intercompany loans and debt and other non-operating activities, are included in Foreign currency and other loss, net.

Note 16. Commitments and Contingencies

The Company is not currently a party to any pending legal proceedings other than routine litigation incidental to the business of the Company, none of which are deemed material.

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 17. Discontinued Operations

During the fiscal quarter ended July 4, 2009, the Company determined that, pursuant to SFAS No. 144, the assets of Fabpro represent assets held for sale. Accordingly, the
operations of Fabpro, previously included in the Oriented Polymers segment, have been reported as discontinued operations, as the cash flows of Fabpro will be eliminated from the ongoing operations of
the Company as a result of the anticipated disposal transaction, and the Company will have no continuing involvement in the operations of the business after the disposal transaction. The Company
decided to sell this business as part of its continuing effort to evaluate its businesses and product lines for strategic fit within its operations. The Company completed the sale of Fabpro during the
third quarter of fiscal 2009. See Note 19 "Subsequent Events."

As
a result, this business has been accounted for as a discontinued operation in accordance with SFAS No. 144 for the periods presented in this report. Accordingly, the results of
operations of Fabpro have been segregated from continuing operations and included inIncome from discontinued operationsin the Consolidated Statements
of Operations. Additionally, the operating assets and liabilities have been segregated and included inAssets of discontinued operationsand Liabilities of discontinued
operationsin the Consolidated Balance Sheets. In accordance with SFAS No. 95, Statement of Cash Flows", the Company
elected not to separate the disclosure of cash flows pertaining to discontinued operations. Net cash flows from investing and financing activities of the discontinued operation were not significant.

The
following amounts, which relate to our Oriented Polymers segment, have been segregated from continuing operations and included inIncome from discontinued
operations (in thousands):

Three Months
Ended

Six Months
EndedJuly 4,
2009

June 28,
2008

July 4,
2009

June 28,
2008Net sales

$
13,638

$
20,216

$
30,871

$
36,349Pre-tax income (loss)

$
1,966

$
343

$
3,907

$
(281
)Income tax expense











Net income (loss)

$
1,966

$
343

$
3,907

$
(281
)


During
the three and six months ended July 4, 2009, pre-tax income of discontinued operations includes interest expense allocated to Fabpro resulting from interest on
debt that is required to be repaid as a result of the disposal transaction of $0.2 million and $0.4 million, respectively. During the three and six months ended June 28, 2008,
pre-tax income of discontinued operations includes such interest expense of $0.4 million and $1.0 million, respectively. Income tax expense associated with the income of
Fabpro reflects a benefit for the utilization of net operating loss carryforwards, for which a valuation allowance had been previously established.

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 17. Discontinued Operations (Continued)

The
following assets and liabilities have been segregated and included in Assets of discontinued operationsand Liabilities of discontinued operations, as
appropriate, in the Consolidated Balance Sheets (in thousands):

July 4,
2009

January 3,
2009Accounts receivable, net

$
8,549

$
8,185Inventories


12,648


14,221Property, plant and equipment, net


8,637


9,328Other assets


30


26Assets of discontinued operations

$
29,864

$
31,760




July 4,
2009

January 3,
2009Accounts payable and accrued liabilities

$
6,657

$
7,863Liabilities of discontinued operations

$
6,657

$
7,863


Note 18. Supplemental Cash Flow Information

Noncash investing or financing activities in the first six months of fiscal 2009 included the surrender of 84,561 shares of the Company's Class A Common Stock to the
Company by participants in the various stock compensation plans in the amount of $0.4 million to satisfy employee withholding tax obligations. Also, the Company recorded $24.0 million of
property, plant and equipment additions, for which payment had not been made as of July 4, 2009. The Company also recorded certain fresh start adjustments to reduce certain tax liabilities and
resulting in an increase inAdditional paid-in capitalin the amount of approximately $1.6 million.

Noncash
investing or financing activities in the first six months of fiscal 2008 included the surrender of 38,290 shares of the Company's Class A Common Stock to the
Company by participants in the various stock compensation plans in the amount of $0.5 million to satisfy employee withholding tax obligations.

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Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 19. Subsequent Events

The Company evaluated its July 4, 2009 financial statements for subsequent events through September 11, 2009, the date the financials were issued. Other than the matters
discussed below, the Company is not aware of any subsequent events which would require recognition or disclosure in the financial statements.

On
August 21, 2009, the Company entered into Waiver No. 1 to the Credit Facility which granted the following waivers under the Credit Facility:



On
September 11, 2009, the Company furnished the Q2 Financial Information to the lenders within the time period prescribed by the Waiver No. 1; effective therewith, the
Company was in compliance with such provisions contained under the Credit Facility.

On
September 1, 2009, the Company completed the sale of Fabpro to an affiliate of Tricor Pacific Capital, Inc. for cash consideration (after expenses) of approximately
$32.9 million, of which proceeds of $31.6 million were used by the Company to reduce amounts outstanding under the first lien term loan of the Credit Facility. See Note 17
"Discontinued Operations."

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Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information which management believes is relevant to an
assessment and understanding of our consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes
thereto contained in Item 1 of Part I to this Quarterly Report on Form 10-Q. In addition, it should be noted that our gross profit margins may not be comparable to
other companies since some entities classify shipping and handling costs in cost of goods sold and others, including us, include such costs in selling, general and administrative expenses. Similarly,
some entities, including us, include foreign currency gains and losses resulting from operating activities as a component of operating income, and some entities classify all foreign currency gains and
losses outside of operating income.

Overview

We are a leading global innovator, manufacturer and marketer of engineered materials, focused primarily on the production of nonwovens.
Nonwovens are high value-added, high performance and low-cost alternative materials developed as an outgrowth of paper, textile and chemical technologies, with critical characteristics
including absorbency, tensile strength, softness and barrier properties. Our products, which typically comprise only a small percentage of the final product's total cost, are the critical substrates
and components for disposable consumer applications such as baby diapers, feminine hygiene products, household and personal wipes, disposable medical applications, such as surgical gowns and drapes,
and for various durable industrial applications including furniture and bedding, filtration and protective apparel.

We
have one of the largest global platforms in our industry, with fourteen manufacturing and converting facilities throughout the world, and a presence in eight countries. We are
strategically located near many of our key customers in order to increase our effectiveness in addressing local and regional demand as many of our products do not ship economically over long
distances. We work closely with our customers, which include well-established multi-national and regional consumer and industrial product manufacturers, and use innovative technologies to
provide engineered solutions to meet increasing consumer demand for more sophisticated products. We believe that we are one of the leading participants in the majority of the markets in which we
compete and have, we believe, one of the broadest and most advanced technology portfolios in the industry.

We
compete primarily in the worldwide nonwovens market. According to certain industry sources, the nonwovens market was in excess of $20.0 billion in annual sales in 2008.
Historically, the global market has been expected to grow at a five-year compound annual growth rate (CAGR) of 6.0 to 8.0%. The recent decline in macro-economic conditions have negatively
impacted certain market segments, specifically durable products used in industrial applications. The recent severe and unexpected decline in the global marketplace has made long-term
growth forecasts difficult. Based on available data, we still expect continued growth in the market, specifically in the developing regions and in end-use market segments that are more
disposable in nature. Demand in certain developing regions is still forecasted to grow in excess of a 10.0% CAGR over the next five years. However, the overall growth rate expectation is lower than
prior year indications. Demand in developed regions (North America, Western Europe and Japan) over this period is expected to increase by a 1.0 to 3.0% CAGR, driven by increased penetration, the
development of new applications for nonwovens and a recovery of certain underlying markets beginning in 2010. We believe that future growth will depend upon the continuation of improvements in raw
materials and technology, which should result in the development of high-performance nonwovens, leading to new uses and markets. We believe our unique global platform and technological
leadership, with an increasing presence in the higher-growth developing regions, will allow us to achieve growth and increased profitability. However, our growth rate may differ from the industry
averages depending upon the regions and markets we choose to operate in and the technology that we develop.

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Table of Contents

The
Nonwovens segment develops and sells products in various consumer and industrial markets, including hygiene, medical, industrial, and wiping. Nonwovens segment sales were
approximately $971.4 million, $885.7 million and $848.3 million of our consolidated net sales for fiscal 2008, 2007 and 2006, respectively, and represented approximately 91%, 89%
and 88% of our consolidated net sales in each of those years.

Nonwovens
are categorized as either disposable (estimated to be approximately 50% to 55% of worldwide industry sales) or durable (estimated to be approximately 45% to 50% of worldwide
industry sales). We primarily compete in disposable products, which account for approximately 70% of our total nonwoven sales. We believe that disposable products are less cyclical and will have
higher growth rates in the future, driven primarily by the increasing adoption of these materials in developing economies due to rising per capita income and population growth. We sell a diverse array
of durable products to a variety of niche industrial end markets. Our products are a mix of roll goods and downstream and integrated finished products. We endeavor to add value to our products through
our printing, laminating and small roll converting capabilities and, in some instances, convert product ourselves and sell directly to the end consumer. With this downstream presence we are a more
valuable supplier to our customers with a more efficient distribution chain and knowledge of the consumer of the end product.

The
Oriented Polymers segment provides flexible packaging products that utilize coated and uncoated oriented polyolefin fabrics. Oriented Polymers segment sales were approximately
$101.8 million, $114.1 million and $117.6 million for fiscal 2008, 2007 and 2006, respectively, and represented approximately 9%, 11% and 12% of our consolidated net sales in each
of those years.

The
Oriented Polymers segment utilizes extruded polyolefin processes and woven technologies to produce a wide array of products for industrial packaging, building products, agriculture
and protective apparel markets. These include housewrap, lumberwrap, fiberglass packaging tubes, steel wrap, coated bags for specialty chemicals and mineral fibers, performance fabrics for firemen
turnout gear and other performance fabrics. Our woven slit film component of the business primarily competes in niche markets, delivering more complex products versus supplying uncoated markets such
as carpet backing fabric, geotextiles and bags. The industrial packaging markets in which we compete include applications such as lumberwrap, steel wrap and fiberglass packaging. The building products
applications include high-strength protective coverings, printed billboard material and specialized components that are integrated into a variety of industrial products
(e.g., roofing substrates and flame-retardant fabric). We maintain leading market positions in this segment, as evidenced by our #2 position in North America in flame-retardant performance
fabrics. We are focusing efforts on diversifying away from large volume, commodity products within this division through continued product innovation.

During
the quarter ended July 4, 2009, we determined that, pursuant to SFAS No. 144, the assets of Fabpro Oriented Polymers, LLC ("Fabpro") represent assets held for
sale. Accordingly, the operations of Fabpro, previously included in the Oriented Polymers segment, have been reported as discontinued operations, as the cash flows of Fabpro will be eliminated from
our ongoing operations, and we will have no continuing involvement in the operations of the business after the disposal transaction. We decided to sell this business as part of our continuing effort
to evaluate our businesses and product lines for strategic fit within our operations. We completed the sale of Fabpro during the third quarter of fiscal 2009.

As
a result, Fabpro has been accounted for as discontinued operation for the periods presented in this report. Accordingly, the results of operations of Fabpro have been segregated from
continuing operations and included inIncome from discontinued operationsin the Consolidated Statements of Operations included in Item 1 of
Part I to this Quarterly Report on Form 10-Q. Additionally, the operating assets and liabilities have been segregated and included inAssets of
discontinued operationsandLiabilities of discontinued operationsin the Consolidated Balance Sheets included in Item 1
of Part I to this Quarterly Report on Form 10-Q.

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Table of Contents

In
2008 and 2009, general worldwide economic conditions have experienced a downturn due to the sequential effects of the subprime lending crisis, general credit market crisis, collateral
effects on the finance and banking industries, increased energy costs, concerns about inflation, slower economic activity, decreased consumer confidence, reduced corporate profits and spending,
adverse business conditions and liquidity concerns. We continue to see softness in the durable goods applications in the industrial markets; however, our overall business model is one that is
relatively defensive in that approximately two-thirds of our sales are generated from disposable products that are not as impacted by macro market swings.

Raw Materials

The primary raw materials used to manufacture most of our products are polypropylene resin, polyester fiber, polyethylene resin and, to
a lesser extent, rayon and tissue paper. These primary raw materials are available from multiple sources and we purchase such materials from a variety of global suppliers. In certain regions of the
world, we may source certain raw materials from a limited number of suppliers or on a sole-source basis. The prices of polypropylene, polyethylene and polyester are a function of, among
other things, manufacturing capacity, demand and the price of crude oil and natural gas liquids. Historically, the prices of polypropylene and polyethylene resins and polyester fibers have fluctuated.
We have not
historically hedged the exposure to raw material increases, but we have certain customer contracts that contain price adjustment provisions which provide for the pass-through of any cost
increases or decreases in raw materials, although there is often a lag between the time that we incur the new raw material cost and the time that we adjust the selling price to our customers. In
periods of rising raw material costs, to the extent we are not able to pass along price increases of raw materials, or to the extent any such price increases are delayed, our cost of goods sold would
increase and our operating profit would correspondingly decrease. Increases in raw material costs that cannot be passed on to customers could have a material adverse effect on our results of
operations and financial condition. By way of example, if the price of polypropylene was to rise $.01 per pound, and we were not able to pass along any of such increase to our customers, we would
realize a decrease of approximately $4.0 million, on an annualized basis, in our reported pre-tax operating income. In the event of such an increase, the impact on operating income
would be reduced by any pass-through of the increase in the form of higher selling prices on contract business. There can be no assurance that the prices of our raw materials, including polypropylene,
polyethylene and polyester, will not substantially increase in the future, or that we will be able to pass on any increases to our customers not covered by contracts with price escalation clauses. In
periods of declining raw material costs, our cost of goods would decrease and our operating profit would correspondingly increase; however, such increases would be offset, in whole or in part, by
reductions in selling prices offered to customers by contract or in light of current market conditions. See Item 3 "Quantitative and Qualitative Disclosures About Market Risk" included in this
Form 10-Q.

During
the first eight months of fiscal 2008, the cost of polypropylene resin, our largest volume raw material, increased significantly, particularly during the May 2008 to August 2008
timeframe and, during the fourth quarter of fiscal 2008, the cost of polypropylene resin decreased dramatically. During the first eight months of fiscal 2009, we have experienced increases in the cost
of polypropylene resin versus the cost of such resin at the end of fiscal 2008 and expect a significant increase in September of 2009. Additionally, on a global basis, other raw material costs
continue to fluctuate, in a much narrower range, in response to certain global economic factors, including the regional supply versus demand dynamics for the raw materials and the volatile price of
oil.

We
believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us because other manufacturers with whom we conduct
business would be able to fulfill our requirements. However, the loss of certain of our suppliers could, in the short-term, adversely

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Table of Contents

affect
our business until alternative supply arrangements were secured or alternative suppliers were qualified with customers.

Recent Expansion Initiatives

In fiscal 2007, we completed two major capital projects: (i) construction of a new spunmelt line at our facility near Buenos
Aires, Argentina, which initiated commercial production during the first quarter of fiscal 2008; and (ii) the retrofit of an existing hydroentanglement line at our Benson, North Carolina
facility to produce Spinlace products, which started-up in the fourth quarter of fiscal 2007.

In
the second quarter of fiscal 2009, our previously announced state-of-the-art spunmelt line in San Luis Potosi, Mexico, which serves medical and
hygiene customers in the U.S. and Mexico, commenced commercial production.

Plant Consolidation and Re-alignment

We review our businesses on an ongoing basis relative to current and expected market conditions, attempting to match our production
capacity and cost structure to the demands of the markets in which we participate, and strive to continuously streamline our manufacturing operations consistent with world-class standards. We
announced three plant consolidation plans in the U.S. and Europe that were initiated in fiscal 2007 and completed in early fiscal 2008 to better align our cost structure. We announced an additional
plant closing in the U.S. in May of 2008, which ceased production in the third quarter of fiscal 2008. Our strategy with respect to the consolidation efforts in the U.S. and Europe is focused on the
elimination of cash fixed costs at the closed plant sites, and the transfer of business and equipment to sites in regions with lower variable costs and which are closer to our customers, as necessary
and practical, to retain the existing business with the potential to expand sales volumes. We announced the decision to exit our automotive business in January 2009 as our industrial business has been
negatively impacted as a result of the current economic downturn, and subsequently announced an additional plant closing in the U.S. in June 2009 aimed at the reduction of cash fixed costs.

In
the future, we may or may not decide to undertake certain restructuring efforts to improve our competitive position, especially in the more mature markets of the U.S., Europe and
Canada. In such mature markets, the prices for commodity roll goods continue to fluctuate based on supply and demand dynamics relative to the assets employed in that geographic region. We actively and
continuously pursue initiatives to prolong the useful life of our long-lived assets through product and process innovation. In some instances we may decide, as was the case with our plans
to consolidate operations in the U.S. and Europe, and as further described in Note 3 "Special Charges, Net" to the consolidated financial statements included in Item 8 of Part II
to our 2008 Annual Report on Form 10-K, that our fixed cost structure will be enhanced through consolidation. To the extent further decisions are made to improve our
long-term performance, such actions could result in cash restructuring charges and asset impairment charges associated with the consolidation, and such charges could be material.

Results of Operations

As described above in "Raw Materials" and in Item 3 "Quantitative and Qualitative Disclosures About Market Risk," we may be
significantly impacted by variability in raw material costs, including polypropylene resin and other resins and fibers. For the six months ended July 4, 2009, we generated an overall gross
margin of approximately 22%, which is significantly higher than historical gross margins, which ranged from 15% to 16% from fiscal 2006 through mid-fiscal 2008. There are many contributors
to the improvement in gross margin, with the increase primarily generated by dramatic declines in raw material costs experienced during the fourth quarter of fiscal 2008, which had a significant
positive impact on gross margin for the first quarter of fiscal 2009. During the first six months of fiscal 2009, there has been a moderate increase in the cost of polypropylene resin and we have
experienced significant

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increases
during the third quarter of fiscal 2009. Additionally, we expect to see increases in contracted selling prices in the third quarter of fiscal 2009 due to the quarterly lag effect of the
recent increase in average raw material costs for the June quarter of fiscal 2009 versus the March quarter of fiscal 2009. Due to these factors, we expect to experience a decline in gross margin
during the third quarter of fiscal 2009 versus the gross margin generated for the first six months of fiscal 2009. As a result, we do not consider the results generated for the first six months of
fiscal 2009 to be indicative of financial performance expected for the remainder of the 2009 fiscal year.

The
following table sets forth the percentage relationships to net sales of certain Consolidated Statement of Operations items for the three and six months ended July 4, 2009 in
comparison to such items for the three and six months ended June 28, 2008 and in comparison with the 2007 and 2008 fiscal years:

Three Months Ended

Six Months EndedFiscal Year EndedJuly 4,
2009

June 28,
2008

July 4,
2009

June 28,
20082008

2007Net sales


100.0
%

100.0
%

100.0
%

100.0
%

100.0
%

100.0
%Cost of goods sold:Materials


55.0


53.6


46.2


55.3


45.2


55.2Labor


7.2


7.6


8.0


7.0


8.2


7.2Overhead


21.4


22.6


25.1


21.5


24.5


21.483.6


83.8


79.3


83.8


77.9


83.8Gross profit


16.4


16.2


20.7


16.2


22.1


16.2Selling, general and administrative expenses


11.0


10.3


12.2


10.9


12.5


11.2Special charges, net


1.9


6.2


2.9


0.5


2.1


0.5Other operating (income) loss, net


0.5


(0.1
)

(1.3
)

(0.2
)

(0.7
)

(0.4
)Operating income (loss)


3.0


(0.2
)

6.9


5.0


8.2


4.9Other expense (income):Interest expense, net


2.9


3.0


3.2


2.8


3.4


3.0Gain on reacquisition of debt














(0.6
)

Foreign currency and other (gain) loss, net


(0.2
)

(0.2
)

1.4


0.1


1.1


0.1Income (loss) before income taxes


0.3


(3.0
)

2.3


2.1


4.3


1.8Income tax expense


0.6


0.9


0.4


1.3


2.0


1.0Income (loss) from continuing operations


(0.3
)

(3.9
)

1.9


0.8


2.3


0.8Income (loss) from discontinued operations


0.2


0.0


1.0


0.2


0.9


(0.1
)Net income (loss)


(0.1
)

(3.9
)

2.9


1.0


3.2


0.7Less: net (income) loss attributable to noncontrolling interests


(0.6
)

0.2


0.8


0.1


(0.1
)

Net income (loss) attributable to Polymer Group, Inc.


0.5
%

(4.1
)%

2.1
%

0.9
%

3.3
%

0.7
%


Comparison of Three Months Ended July 4, 2009 and June 28, 2008

Our reportable segments consist of our two operating divisions, Nonwovens and Oriented Polymers. For additional information regarding
segment data, see Note 14 "Segment Information" to the unaudited interim consolidated financial statements included in Item 1 of Part I to this Quarterly Report on
Form 10-Q. The segment information presented in the table below excludes the results of Fabpro, as the operating results of Fabpro are presented as a discontinued operation. The
following table sets forth

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components
of our net sales and operating income (loss) by operating division for the three months ended July 4, 2009, the three months ended June 28, 2008 and the corresponding change
(in millions):

Three months endedJuly 4,
2009

June 28,
2008

ChangeNet salesNonwovens

$
187.2

$
241.5

$
(54.3
)Oriented Polymers


18.8


29.2


(10.4
)$
206.0

$
270.7

$
(64.7
)Operating income (loss)Nonwovens

$
24.8

$
20.0

$
4.8Oriented Polymers


0.3


1.3


(1.0
)Unallocated Corporate, net of eliminations


(5.0
)

(6.3
)

1.320.1


15.0


5.1Special charges, net


(5.9
)

(1.4
)

(4.5
)$
14.2

$
13.6

$
0.6


The
amounts for special charges, net have not been allocated to our reportable business divisions because our management does not evaluate such charges on a
division-by-division basis. Division operating performance is measured and evaluated before such items.

Net sales

Net sales were $206.0 million for the three months ended July 4, 2009, a decrease of $64.7 million, or 23.9%, from
the comparable period of fiscal 2008 net sales of $270.7 million. Net sales for fiscal 2009 declined in the Nonwovens segment from comparable 2008 results by 22.5%, and net sales in fiscal 2009
in the Oriented Polymers segment decreased 40.0% from 2008 results. A reconciliation of the change in net sales between the three months ended July 4, 2009 and the three months ended
June 28, 2008 is presented in the following table (in millions):

Nonwovens

Oriented
Polymers

TotalNet salesthree months ended June 28, 2008

$
241.5

$
29.2

$
270.7Change in sales due to:Volume


(24.8
)

(9.7
)

(34.5
)Price/mix


(17.6
)

0.1


(17.5
)Foreign currency translation


(11.9
)

(0.8
)

(12.7
)Net salesthree months ended July 4, 2009

$
187.2

$
18.8

$
206.0


The
net volume decline of $24.8 million in Nonwovens sales includes declines in all regions except Asia, but predominantly in the U.S. and Europe. The sales volume declines in the
U.S. and Europe were primarily due to the U.S. plant closure in the third quarter of fiscal 2008, and recessionary impacts that are negatively affecting the industrial and wiping businesses located in
the U.S and European regions. Oriented Polymers' sales volumes continued to be negatively impacted by reduced housing starts affecting their industrial business, imported commodity products affecting
lumberwrap volumes, reduced demand for protective apparel fabrics and recessionary impacts.

Sales
in the Nonwovens segment were also negatively impacted by lower price/mix primarily due to price decreases resulting from the pass-through of lower raw material costs.
As raw material costs have decreased, we have reduced selling prices to our customers where required by contract terms, and

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where
appropriate based on market conditions. In general, with respect to contracted business, there is usually a one-quarter lag between the change in raw material cost and the change in
sales price.

Most
currencies were weaker against the U.S. dollar during 2009 compared to 2008. As a result, net sales decreased $12.7 million due to the unfavorable foreign currency
translation. Further discussion of foreign currency exchange rate risk is contained in Item 3 "Quantitative and Qualitative Disclosures About Market Risk" included below.

Gross margin

Gross margin for the three months ended July 4, 2009 improved to 20.7% from 16.2% in the second quarter of fiscal 2008,
primarily driven by lower raw material costs (which were partially offset by lower selling prices required by contract terms, and where appropriate based on market conditions), lower volumes and
higher manufacturing costs, including increased spending in certain cost categories coupled with lower absorption related to volume decreases, during fiscal 2009. The raw material component of the
cost of goods sold as a percentage of net sales decreased from 55.3% in 2008 to 46.2% in 2009. Partially as a result of lower sales volumes, coupled with higher spending in certain areas, our labor
and overhead components of the cost of goods sold increased as a percentage of net sales from the three month period of fiscal 2008 to the comparable period of 2009. As a percentage of sales, labor
increased from 7.0% to 8.0% and overhead increased from 21.5% to 25.1%. All of the above percentages were also impacted by reductions in selling prices resulting from the pass-through of
lower raw material costs.

Operating income

A reconciliation of the change in operating income (loss) between the three months ended June 28, 2008 and the three months
ended July 4, 2009 is presented in the following table (in millions):

Operating incomethree months ended June 28, 2008

$
13.6Change in operating income due to:Price/mix


(19.2
)Lower raw material costs


30.9Volume


(7.3
)Higher manufacturing costs


(4.1
)Foreign currency


1.5Lower depreciation and amortization expense


0.1Higher special charges, net


(4.5
)Increased share-based compensation costs


(1.0
)All other, primarily lower SG&A spending


4.2Operating incomethree months ended July 4, 2009

$
14.2


Consolidated
operating income was $14.2 million in the three months ended July 4, 2009 as compared to $13.6 million of income in the comparative period in 2008. The
cost of certain raw materials, especially polypropylene resin had a $30.9 million positive impact on operating income for the second quarter of fiscal 2009, which was partially offset by sales
price/mix of $19.2 million primarily resulting from price decreases related to the pass-through of lower raw material costs. Operating income was also negatively impacted by lower
sales volumes, higher manufacturing costs in certain locations, including increased spending in certain cost categories coupled with lower absorption related to volume decreases, and higher special
charges.

Selling,
general and administrative expenses decreased $4.4 million, from $29.5 million in 2008 to $25.1 million in 2009, due primarily to the movement of foreign
currencies versus the U.S. dollar of approximately $1.4 million and the absence of executive separation and termination costs of

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approximately
$1.6 million in fiscal 2008. Selling, general and administrative costs as a percent of net sales increased from 10.9% in the second quarter of fiscal 2008 to 12.2% for the same
period of fiscal 2009. This percentage is impacted by the reduction in selling prices resulting from the pass-through of lower raw material costs.

Special
charges for the three months ended July 4, 2009 of approximately $5.9 million included a non-cash impairment charge of $1.6 million related to the write-down
of certain property and equipment in North Little Rock, Arkansas, to estimated fair value less costs to sell, and restructuring and plant realignment costs comprised of: (i) $2.7 million
of severance and other shut-down costs for restructuring activities in Europe related to the ongoing restructuring efforts of the European operations; (ii) $1.4 million of severance and
other shutdown costs related to facilities in the United States; and (iii) $0.1 million of severance costs related to restructuring initiatives in Canada.

Interest and Other Expense

Net interest expense decreased $0.9 million, from $7.5 million during the three months ended June 28, 2008 to
$6.6 million during the three months ended July 4, 2009. The decrease in net interest expense was largely due to the impact of reduced term loan borrowings and lower interest rates,
partially offset by higher interest costs related to subsidiary debt obligations.

During
fiscal 2007, we entered into a cash flow hedge agreement, effective May 8, 2007 and which expired on June 29, 2009, which effectively converted $240.0 million
of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 5.085%. Additionally, in February 2009, the Company entered into a new cash flow hedge agreement, which became
effective June 30, 2009 and matures on June 30, 2011, and which effectively converts $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed
LIBOR rate of 1.96%.

Foreign
currency and other loss, net increased by $2.5 million, from $0.3 million in the second quarter of fiscal 2008 to $2.8 million in the second quarter of
fiscal 2009, primarily due to movement in foreign currency rates.

Income Tax Expense

During the three months ended July 4, 2009, we recognized income tax expense of $1.0 million on consolidated income
before income taxes of $4.8 million. During the three months ended June 28, 2008, we recognized income tax expense of $3.5 million on consolidated income before income taxes of
$5.8 million. Our income tax expense in any period is different than such expense determined at the U.S. federal statutory rate primarily due to losses in certain jurisdictions for which no
income tax benefits are anticipated, foreign withholding taxes for which tax credits are not anticipated, U.S. state income taxes, changes in the amounts recorded for tax uncertainties and foreign
taxes calculated at statutory rates different than the U.S. federal statutory rate. Additionally, income tax expense for the three months ended July 4, 2009 includes
out-of-period credits in the amount of approximately $0.6 million.

Income from Discontinued Operations

Discontinued operations are comprised of the net operating results of Fabpro for the second quarters of fiscal 2009 and fiscal 2008.
During the second quarter of fiscal 2009, we concluded that Fabpro constituted an asset held for sale and, accordingly, we have presented Fabpro as a discontinued operation. Income from discontinued
operations increased $1.6 million, from $0.4 million during the three months ended June 28, 2008 to $2.0 million during the three months ended July 4, 2009.

Net Loss Attributable to Noncontrolling interests

Noncontrolling interests represents the minority partners' interest in the income or loss of consolidated subsidiaries which are not
wholly owned by us. These interests include a 40% minority interest in Dominion Nonwovens Sudamerica S.A. (our Argentine subsidiary) and a 20% minority interest in Nanhai Nanxin
Non-Woven Co. Ltd. (one of our subsidiaries in China).

Net Income Attributable to Polymer Group, Inc.

As a result of the above, we recognized net income attributable to Polymer Group, Inc. of $4.2 million, or $0.21 per
share, for the three months ended July 4, 2009 compared to $2.4 million, or $.12 per share, for the three months ended June 28, 2008.

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Comparison of Six Months Ended July 4, 2009 and June 28, 2008

Our reportable segments consist of our two operating divisions, Nonwovens and Oriented Polymers. For additional information regarding
segment data, see Note 14 "Segment Information" to the unaudited interim consolidated financial statements included in Item 1 of Part I to this Quarterly Report on
Form 10-Q. The segment information presented in the table below excludes the results of Fabpro and sets forth components of our net sales and operating income (loss) by operating
division for the six months ended July 4, 2009, the six months ended June 28, 2008 and the corresponding change (in millions):

Six months endedJuly 4,
2009

June 28,
2008

ChangeNet salesNonwovens

$
378.9

$
473.1

$
(94.2
)Oriented Polymers


37.2


55.2


(18.0
)$
416.1

$
528.3

$
(112.2
)Operating income (loss)Nonwovens

$
52.8

$
40.2

$
12.6Oriented Polymers


1.6


2.2


(0.6
)Unallocated Corporate, net of eliminations


(11.3
)

(13.9
)

2.643.1


28.5


14.6Special charges, net


(8.8
)

(2.7
)

(6.1
)$
34.3

$
25.8

$
8.5


The
amounts for special charges, net have not been allocated to our reportable business divisions because our management does not evaluate such charges on a
division-by-division basis. Division operating performance is measured and evaluated before such items.

Net sales

Net sales were $416.1 million for the six months ended July 4, 2009, a decrease of $112.2 million, or 21.2%, from
the comparable period of fiscal 2008 net sales of $528.3 million. Net sales for fiscal 2009 declined in the Nonwovens segment from comparable 2008 results by 19.9%, and net sales in fiscal 2009
in the Oriented Polymers segment decreased 32.6% from 2008 results. A reconciliation of the change in net sales between the six months ended July 4, 2009 and the six months ended
June 28, 2008 is presented in the following table (in millions):

Nonwovens

Oriented
Polymers

TotalNet salessix months ended June 28, 2008

$
473.1

$
55.2

$
528.3Change in sales due to:Volume


(43.3
)

(17.4
)

(60.7
)Price/mix


(29.4
)

1.5


(27.9
)Foreign currency translation


(21.5
)

(2.1
)

(23.6
)Net salessix months ended July 4, 2009

$
378.9

$
37.2

$
416.1


The
net volume decline of $43.3 million in Nonwovens sales includes declines in all regions except Asia, but predominantly in the U.S. and Europe. The sales volume declines in the
U.S. and Europe were primarily due to the U.S. plant closure in the third quarter of fiscal 2008, and recessionary impacts that are negatively affecting the industrial and wiping businesses located in
the U.S and European regions.

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Oriented
Polymers' sales volumes continued to be negatively impacted by reduced housing starts affecting their industrial business, imported commodity products affecting lumberwrap volumes, reduced
demand for protective apparel fabrics and recessionary impacts.

Sales
in the Nonwovens segment were also negatively impacted by lower price/mix primarily due to price decreases resulting from the pass-through of lower raw material costs.
As raw material costs have decreased, we have reduced selling prices to our customers where required by contract terms, and where appropriate based on market conditions. In general, with respect to
contracted business, there is usually a one-quarter lag between the change in raw material cost and the change in sales price.

Most
currencies were weaker against the U.S. dollar during 2009 compared to 2008. As a result, net sales decreased $23.6 million due to the unfavorable foreign currency
translation. Further discussion of foreign currency exchange rate risk is contained in Item 3 "Quantitative and Qualitative Disclosures About Market Risk" included below.

Gross margin

Gross margin for the six months ended July 4, 2009 improved to 22.1% from 16.2% in the first six months of fiscal 2008,
primarily driven by lower raw material costs (which were partially offset by lower selling prices required by contract terms, and where appropriate based on market conditions), offset by lower volumes
and higher manufacturing costs, including increased spending in certain cost categories coupled with lower absorption related to volume decreases during fiscal 2009. The raw material component of the
cost of goods sold as a percentage of net sales decreased from 55.2% in 2008 to 45.2% in 2009. Partially as a result of lower sales volumes, coupled with higher spending in certain areas, our labor
and overhead components of the cost of goods sold increased as a percentage of net sales from the six-month period of fiscal 2008 to the comparable period of 2009. As a percentage of
sales, labor increased from 7.2% to 8.2%, and overhead increased from 21.4% to 24.5%. All of the above percentages were also impacted by lower selling prices resulting from the
pass-through of lower raw material costs.

Operating income

A reconciliation of the change in operating income (loss) between the six months ended June 28, 2008 and the six months ended
July 4, 2009 is presented in the following table (in millions):

Operating incomesix months ended June 28, 2008

$
25.8Change in operating income due to:Price/mix


(30.6
)Lower raw material costs


65.1Volume


(15.9
)Higher manufacturing costs


(10.1
)Foreign currency


0.5Lower depreciation and amortization expense


0.7Higher special charges, net


(6.0
)Decreased share-based compensation costs


0.4All other, primarily lower SG&A spending


4.4Operating incomesix months ended July 4, 2009

$
34.3


Consolidated
operating income was $34.3 million in the six months ended July 4, 2009 as compared to $25.8 million of income in the comparative period in 2008. The
cost of certain raw materials, especially polypropylene resin, had a $65.1 million positive impact on operating income, which was partially offset by sales price/mix of $30.6 million
primarily resulting from price decreases related to the pass-through of lower raw material costs. Operating income was also negatively impacted by lower

50

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sales
volumes, higher manufacturing costs in certain locations, including increased spending in certain cost categories coupled with lower absorption related to volume decreases, and higher special
charges.

Selling,
general and administrative expenses decreased $7.2 million, from $59.1 million in 2008 to $51.9 million in 2009, due primarily to the movement of foreign
currencies versus the U.S. dollar of approximately $2.9 million, lower incentive compensation costs of approximately $1.4 million and the absence of executive separation and termination
costs of approximately $1.6 million in fiscal 2008. Selling, general and administrative costs as a percent of net sales increased from 11.2% in the first six months of fiscal 2008 to 12.5% for
the same period of fiscal 2009. This percentage is impacted by the reduction in selling prices resulting from the pass-through of lower raw material costs.

Special
charges for the six months ended July 4, 2009 of approximately $8.8 million included non-cash impairment charges of $3.2 million related to the write-down of
certain property and equipment In North Little Rock, Arkansas, and Neunkirchen, Germany to their estimated fair value less ccsts to sell, and restructuring and plant realignment costs comprised of:
(i) $3.2 million of severance and other shut-down costs in Europe related to the ongoing restructuring efforts of the European operations; (ii) $2.1 million of severance
and other shutdown costs related to facilities in the United States; and (iii) $0.2 million of severance costs related to restructuring initiatives in Canada.

Interest and Other Expense

Net interest expense decreased $1.7 million, from $15.7 million during the six months ended June 28, 2008 to
$14.0 million during the six months ended July 4, 2009. The decrease in net interest expense was largely due to the impact of reduced term loan borrowings and lower interest rates,
partially offset by higher interest costs related to subsidiary debt obligations.

During
fiscal 2007, we entered into a cash flow hedge agreement, effective May 8, 2007 and which expired on June 29, 2009, which effectively converted $240.0 million
of notional principal amount of
debt from a variable LIBOR rate to a fixed LIBOR rate of 5.085%. Additionally, in February 2009, the Company entered into a new cash flow hedge agreement, which became effective June 30, 2009
and matures on June 30, 2011, which effectively converts $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 1.96%.

During
the first quarter of fiscal 2009, we reacquired $15.0 million of debt, via cash payment, and recognized a gain on such reacquisition of $2.4 million, net of the
write-off of deferred financing fees of $0.2 million.

Foreign
currency and other loss, net increased by $4.2 million, from $0.8 million in the first six months of fiscal 2008 to $5.0 million in the first six months of
fiscal 2009, primarily due to movement in foreign currency rates.

Income Tax Expense

During the six months ended July 4, 2009, we recognized income tax expense of $8.1 million on consolidated income before
income taxes of $17.7 million. During the six months ended June 28, 2008, we recognized income tax expense of $5.2 million on consolidated income before income taxes of
$9.3 million. Our income tax expense in any period is different than such expense determined at the U.S. federal statutory rate primarily due to losses in certain jurisdictions for which no
income tax benefits are anticipated, foreign withholding taxes for which tax credits are not anticipated, U.S. state income taxes, changes in the amounts recorded for tax uncertainties and foreign
taxes calculated at statutory rates different than the U.S. federal statutory rate. Additionally, income tax expense for the six months ended July 4, 2009 includes
out-of-period credits in the amount of approximately $1.4 million.

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Income from Discontinued Operations

Discontinued operations are comprised of the net operating results of Fabpro for the six-month periods of fiscal 2009 and
2008. During the second quarter of fiscal 2009, we concluded that Fabpro constituted an asset held for sale and, accordingly, we
have presented Fabpro as a discontinued operation. Income from discontinued operations increased $4.2 million, from a loss of $0.3 million during the six months ended June 28,
2008 to income of $3.9 million during the six months ended July 4, 2009.

Net Loss Attributable to Noncontrolling interests

Noncontrolling interests represents the minority partners' interest in the income or loss of consolidated subsidiaries which are not
wholly owned by us. These interests include a 40% minority interest in Dominion Nonwovens Sudamerica S.A. (our Argentine subsidiary) and a 20% minority interest in Nanhai Nanxin
Non-Woven Co. Ltd. (one of our subsidiaries in China).

Net Income Attributable to Polymer Group, Inc.

As a result of the above, we recognized net income attributable to Polymer Group, Inc. of $13.8 million, or $0.70 per
share, for the six months ended July 4, 2009 compared to $3.8 million, or $.20 per share, for the six months ended June 28, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity for operations and expansions are currently funds generated from operations and borrowing
availabilities under the Credit Facility, consisting of a first-lien term loan of $410.0 million and a revolving credit facility of $45.0 million at the original borrowing
date. The revolving credit portion of the Credit Facility terminates on November 22, 2010 and the remaining balance (after mandatory annual payments of $4.1 million and additional
payments, if any, under the excess cash flow provision of the Credit Facility or optional payments) of the first-lien term loan is due November 22, 2012. We currently estimate that,
pursuant to the excess cash flow provision of the Credit Facility, we will be required to make a $30.0 million additional payment in March 2010. The Credit Facility, as amended, contains
covenants and events of default customary for financings of this type, including leverage and interest expense coverage covenants. At July 4, 2009, we were in compliance with such financial
covenants. See "Liquidity Summary" below for further discussion of financial covenants. Additionally, as of July 4, 2009, we had no outstanding borrowings under the revolving credit facility
and capacity under the revolving credit facility had been reserved for outstanding letters of credit in the amount of $2.4 million. As of July 4, 2009, we also had other outstanding
letters of credit in the
amount of $1.8 million primarily for certain raw material vendors. None of these letters of credit had been drawn on at July 4, 2009.

July 4,
2009

January 3,
2009(In Millions)Balance sheet data:Cash and cash equivalents

$
88.5

$
45.7Working capital


156.3


183.7Total assets


721.2


702.5Total debt


406.8


413.7Total equity


113.2


93.2


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Six Months EndedJuly 4,
2009

June 28,
2008(In Millions)Cash flow data:Net cash provided by operating activities

$
60.6

$
19.9Net cash used in investing activities


(13.9
)

(20.1
)Net cash used in financing activities


(3.5
)

(5.0
)


Operating Activities

Net cash provided by operating activities was $60.6 million during the first six months of fiscal 2009, a $40.7 million
increase from the $19.9 million provided by operating activities during the first six months of fiscal 2008.

We
had working capital of approximately $156.3 million at July 4, 2009 compared with $183.7 million at January 3, 2009. Accounts receivable at July 4,
2009 was $106.4 million as compared to $125.8 million on January 3, 2009, a decrease of $19.4 million. The net decrease in accounts receivable during the first six months
of fiscal 2009 is primarily attributable to (i) the effects of currency movements, (ii) lower unit selling prices resulting from the pass-through of raw material decreases
and (iii) increased reserves for potentially uncollectible accounts, partially offset by an increase in the days sales outstanding. Although accounts receivable represented approximately
47 days of sales outstanding at July 4, 2009 as compared to 45 days of sales outstanding at January 3, 2009, we believe that our increased reserves adequately protect us
against foreseeable increased collection risk.

In
fiscal 2004, we entered into factoring agreements to sell, without recourse or discount, certain trade receivables to unrelated third-party financial institutions. Under the current
terms of these factoring agreements, there are maximum amounts of outstanding advances at any one time. Given the continued tightness in the global credit markets and the present difficulties
experienced by some of the companies that participate in the factoring market, we may decide to curtail our factoring programs, resulting in a decrease in such sources of funds and increases in our
receivable balances and corresponding days sales outstanding. During the third quarter of fiscal 2009, we have significantly curtailed factoring of our U.S. company-based receivables resulting in a
decrease in funding of approximately $11.0 million.

Inventories
at July 4, 2009 were $92.6 million, a decrease of $15.1 million from inventories at January 3, 2009 of $107.7 million, with component
decreases in finished goods, work-in-process and raw materials of $4.0 million, $2.5 million and $8.6 million, respectively. The net decrease in inventory
during the first six months of fiscal 2009 is primarily attributable to (i) the effects of currency movements, (ii) lower unit costs related to inventory at the end of the second quarter
of fiscal 2009 compared to year-end 2008 costs, and (iii) lower quantities of goods on hand at July 4, 2009, partially offset by a reduction in inventory
reserves of approximately $1.3 million during the first six months of fiscal 2009. We had inventory representing approximately 52 days of cost of sales on hand at July 4, 2009
compared to 47 days of cost of sales on hand at January 3, 2009.

Accounts
payable and accrued liabilities at July 4, 2009 were $130.1 million as compared to $126.0 million at January 3, 2009, an increase of
$4.1 million. Accounts payable and accrued liabilities represented approximately 73 days of cost of sales outstanding at July 4, 2009 compared to 55 days of cost of sales
outstanding at January 3, 2009. The net increase in accounts payable and accrued liabilities from January 3, 2009 to July 4, 2009 included an increase of approximately
$23.6 million related to amounts due and payable relating to the purchase of equipment, which was offset by decreases due to the effects of currency movements, more timely payment of trade
payables in Latin America and lower raw material unit costs. Excluding the increase due to capital spending, accounts payable and accrued liabilities represented approximately 59 days of cost
of sales outstanding at July 4, 2009. Accounts payable and accrued liabilities balances can also be impacted by accruals with respect

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to
incentive compensation plans and the timing of payroll cycles, acceptance of vendor discounts, changes in terms regarding purchases of raw materials from certain vendors, as well as the movement of
certain purchases of raw materials, for which there is limited availability, to vendors that require us to pay cash prior to delivery and reductions in restructuring accruals.

Our
restructuring and plant realignment activities in fiscal 2009 are discussed in Note 3 "Special Charges, Net" to the unaudited interim consolidated financial statements
included in Item 1 of Part I to this Quarterly Report on Form 10-Q.

The
restructuring and plant realignment costs in the first six months of fiscal 2009 are comprised of: (i) $3.2 million of severance and other shut-down costs
in Europe; (ii) $2.1 million of severance and other shutdown costs related to facilities in the United States; and (iii) $0.2 million of severance costs related to
restructuring initiatives in Canada. The restructuring and plant realignment costs in the first six months of fiscal 2008 are comprised of: (i) $2.8 million of equipment relocation,
other shut-down costs and employee termination costs related to the previously announced closure of the Neunkirchen, Germany facility, which ceased production activities as of
September 29, 2007, (ii) $0.2 million of employee termination costs related to the previously announced closure of the Landisville, New Jersey plant, and
(iii) $0.2 million of credits pertaining to ongoing restructuring initiatives in the United States and Canada.

We
expect to make future cash payments, primarily through the second quarter of fiscal 2010, of approximately $20.0 million to $21.0 million associated with approved
restructuring initiatives, of which $3.2 million has been accrued as of July 4, 2009.

Investing and Financing Activities

Net cash used for investing activities amounted to $13.9 million and $20.1 million in the first six months of fiscal 2009
and fiscal 2008, respectively. Capital expenditures during the first six months of 2009 totaled $14.9 million, a decrease of $6.0 million from capital spending of $20.9 million in
the same period in 2008. A significant portion of the capital expenditures in 2009 related to the construction of a new spunmelt line at our facility near San Luis Potosi, Mexico. Also, investing
activities during the first six months of fiscal 2009 and 2008 included proceeds from the sale of assets of $1.1 million in each period. We estimate our annual minimum sustaining capital
expenditures to be as high as $10.0 million. As business conditions and working capital requirements change, we actively manage our capital expenditures, enabling us to appropriately balance
cash flows from operations with capital expenditures.

Net
cash used in financing activities amounted to $3.5 million in the first six months of fiscal 2009, compared to $5.0 million of net cash used in financing activities in
the first six months of fiscal 2008. In the first six months of 2009, we borrowed, on a net basis, $9.0 million whereas we repaid, on a net basis, $5.0 million of debt in the first six
months of fiscal 2008. Additionally, in the first six months of 2009, we used $12.3 million to repurchase $15.0 million of our first-lien term loan.

Dividends

Our Board of Directors has never declared a dividend on our common stock.

The
Credit Facility limits restricted payments, including cash dividends, to $5.0 million in the aggregate since the effective date of the Credit Facility. We do not currently
have any plans to pay dividends on our common stock.

Liquidity Summary

As discussed more fully in Note 7 to our unaudited interim consolidated financial statements included in Item 1 of
Part I to this Quarterly Report on Form 10-Q, we have a Credit Facility, which we entered into on November 22, 2005 and amended as of December 8, 2006, which
consists of a

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$410.0 million
(at the original loan date) first-lien term loan maturing in 2012 and a $45.0 million secured revolving credit facility maturing in 2010.

All
borrowings under the Credit Facility are U.S. dollar denominated and are guaranteed, on a joint and several basis, by each and all of our direct and indirect domestic subsidiaries.
The Credit Facility and the related guarantees are secured by (i) a lien on substantially all of our assets, our domestic subsidiaries and certain of our non-domestic subsidiaries,
(ii) a pledge of all or a portion of the stock of our domestic subsidiaries and of certain of our non-domestic subsidiaries, and (iii) a pledge of certain secured
intercompany notes. Commitment fees under the Credit Facility are equal to 0.50% of the daily unused amount of the revolving credit commitment. The Credit Facility limits restricted payments to
$5.0 million, including cash dividends, in the aggregate since the effective date of the Credit Facility. The Credit Facility contains covenants and events of default customary for financings
of this type, including leverage and interest expense coverage covenants, as well as default provisions related to certain types of defaults by us or our subsidiaries in the performance of our
obligations regarding borrowings in excess of $10.0 million. The Credit Facility requires that we maintain a leverage ratio of not more than 3.50:1.00 as of July 4, 2009, with a decrease
occurring effective April 3, 2010, at which time the leverage ratio requirement will be 3.00:1.00 on a go-forward basis, thereby narrowing the margin for compliance. The interest
expense coverage ratio requirement at July 4, 2009 was that it not be less than 3.00:1.00, with a change occurring April 3, 2010, at which time the requirement will be 3.25:1.00 on a
go-forward basis. We were in compliance with the financial covenants under the Credit Facility at July 4, 2009. These ratios are calculated on a trailing four-quarter
basis. As a result, any decline in our future operating results will negatively impact our coverage ratios. Although we expect to remain in compliance with these covenant requirements, our failure to
comply with these financial covenants, without waiver or amendment from our lenders, could have a material adverse effect on our liquidity and operations, including limiting our ability to borrow
under the Credit Facility. On August 21, 2009, we received a waiver from our Lenders with respect to our requirement to furnish to the Administrative Agent and the Lenders certain financial
information related to the quarter ended July 4, 2009 within the deadlines set forth in the Credit Facility and the parties agreed that no such failure to timely provide such information shall
be considered a Default or Event of Default under the Credit Facility provided that such information is provided within 60 days after the date which would have resulted in an Event of Default.
We have provided such information within the prescribed timeframe and are in compliance with our obligations under the Credit Facility.

The
first-lien term loan requires mandatory payments of approximately $1.0 million per quarter and requires us to use a percentage of proceeds from excess cash flows,
as defined by the Credit Facility and determined based on year-end results, to reduce our then outstanding balances under the Credit Facility. Excess cash flows required to be applied to
the repayment of the Credit Facility are generally calculated as 50% of the net amount of our available cash generated from operations adjusted for the cash effects of interest, taxes, capital
expenditures, changes in working capital and certain other items. The amount of excess cash flows for future periods is based on year-end results; however, we currently estimate that the
excess cash flow requirement with respect to fiscal 2009, which would be payable in March 2010, will be approximately $30.0 million and have classified this amount, in addition to the mandatory
payments of approximately $1.0 million per quarter, in theCurrent portion of long-term debtin the Consolidated Balance Sheets as of
July 4, 2009 included in Item 1 of Part I to this Quarterly Report on Form 10-Q. No additional amounts were required to be paid under the excess cash flow
provisions of the Credit Facility with respect to fiscal 2008. We may, at our discretion and based on projected operating cash flows, the current market value of our term loan and anticipated cash
requirements, elect to make additional repayments of debt under the Credit Facility in excess of the mandatory debt repayments and excess cash flow payments, or may reacquire our debt in conjunction
with our debt repurchase program.

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We
may, through our subsidiaries, make market purchases of our first lien term loan under the Credit Facility from our existing lenders at a discount to the carrying value of our debt.
Under these agreements, to the extent of the amount of debt acquired, our subsidiary will acquire the rights and obligations of a lender under the Credit Facility and the selling third-party lender
will be released from their obligations under the Credit Facility. We will account for such reacquisition of debt as a transfer of financial assets resulting in a sale and derecognizes such liability
in accordance with the provisions of FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."

In
February 2009, we entered into discussions with the Administrative Agent of our Credit Facility whereby one of our wholly owned subsidiaries would purchase assignments of our
first-lien term loan over the next two years via open market transactions at a discount to the carrying amount in order to effectively buy back up to $70.0 million of our term loan
as allowed under the provisions of the Credit Facility. In March 2009 we purchased, through a subsidiary, $15.0 million of our first-lien term loan, via cash payment, and recognized
a gain on such reacquisition of $2.4 million, net of the write-off of deferred financing fees of $0.2 million, and has included such amount inGain on
Reacquisition of Debtin the Consolidated Statements of Operations included in Item 1 of Part I to this Quarterly Report on Form 10-Q.

The
interest rate applicable to borrowings under the Credit Facility is based on the three-month or the one-month London Interbank Offered Rate ("LIBOR") plus a specified
margin.
The applicable margin for borrowings under both the first-lien term loan and the revolving credit facility is 225 basis points. We may, from time to time, elect to use an Alternate Base
Rate for our borrowings under the revolving credit facility and term loan based on the bank's base rate plus a margin of 75 to 125 basis points based on our total leverage ratio.

In
accordance with the terms of the Credit Facility, we maintained our position in a cash flow hedge agreement originally entered in February 2007. The cash flow hedge agreement
effectively converted $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 5.085% and terminated on June 29, 2009. Additionally, in
February 2009, we entered into another cash flow hedge agreement, which was effective June 30, 2009 and matures on June 30, 2011, and effectively converts $240.0 million of
notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 1.96%. The cash flow hedge agreements are more fully described in Note 11, "Derivatives and Other Financial
Instruments and Hedging Activities" and Note 12, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" included in Item 1 of Part I to this Quarterly
Report on Form 10-Q.

There
were no daily borrowings under the revolving credit facility for the period from January 4, 2009 to July 4, 2009, and as of July 4, 2009 or January 3,
2009. Subject to certain terms and conditions, a maximum of $25.0 million of the Credit Facility may be used for revolving letters of credit. As of July 4, 2009, we have effectively
reserved capacity under the revolving credit facility in the amount of $2.5 million relating to standby and documentary letters of credit outstanding. These letters of credit are primarily
provided to certain administrative service providers. None of these letters of credit had been drawn on at July 4, 2009. The revolving credit portion of the Credit Facility matures on
November 22, 2010.

As
of July 4, 2009, we also had other outstanding letters of credit in the amount of $1.8 million primarily provided to certain raw material vendors. None of these letters
of credit had been drawn on at July 4, 2009.

We
have also incurred third-party debt in fiscal years 2008 and 2009 to finance the recent installation of our new spunmelt lines in Argentina and in Mexico. As of July 4, 2009,
this debt is comprised of long-term facilities of $48.6 million, for which we began to make principal and interest payments in the third quarter of fiscal 2008 with the loans
maturing in 2012 through 2016. Current maturities of this debt

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amount
to approximately $7.1 million. Additionally, our operations in Argentina entered into multiple short-term credit facilities intended to finance working capital requirements.
Outstanding indebtedness under these facilities was $8.8 million at July 4, 2009, which facilities mature at various dates through December 2009 and are shown in Short-term borrowingsin our
unaudited interim Consolidated Balance Sheets.

We
have entered into factoring agreements to sell, without recourse, certain of our U.S. and non-U.S. company-based receivables to unrelated third party financial
institutions. Under the terms of the factoring agreement related to the sale of U.S. company-based receivables, the maximum amount of outstanding advances at any one time is $20.0 million,
which limitation is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. Under the terms
of the factoring agreement related to the sale of non-U.S. company-based receivables, the maximum amount of outstanding advances at any one time is $10.0 million, which limitation
is subject to change based on the level of eligible receivables, restrictions on concentrations of receivables and the historical performance of the receivables sold. The sale of these receivables
accelerated the collection of our cash, reduced credit exposure and lowered our net borrowing costs. The Credit Facility permits us to increase the sale of non-U.S. based receivables,
under factoring agreements, to $20.0 million. During the third quarter of fiscal 2009, we have significantly curtailed factoring of our U.S. company-based receivables resulting in a decrease in
funding of approximately $11.0 million.

With
respect to the restructuring and plant realignment activities discussed in Note 3 "Special Charges, Net" to our unaudited interim consolidated financial statements included
in Item 1 of Part I to this Quarterly Report on Form 10-Q, we expect to make future cash payments, primarily through the second quarter of fiscal 2010, of
approximately $20.0 million to $21.0 million, of which $3.2 million has been accrued as of July 4, 2009. Additionally, we currently anticipate future proceeds in the range
of approximately $7.6 million to $8.2 million from the sale of idled facilities and equipment, most of which is expected to be received in fiscal 2010.

As
we announced on July 27, 2009, lenders holding approximately $303.0 million of our term loan and $30.0 million of our revolving credit facility have elected to
extend the maturity dates of their commitments via an amendment and extension transaction, which transaction has not yet been finalized.

Under
the amendment, if all closing conditions are satisfied and the amendment becomes effective, the extended term loan would mature in November 2014 and would bear an interest rate of
LIBOR plus 4.5%. Furthermore, the extended revolving credit facility would mature in November 2013 and would bear an interest rate of LIBOR plus 4.5%. If outstanding borrowings under the original term
loan tranche that matures November 2012 exceed $10.0 million on August 2012, the new revolving credit facility tranche will mature August 2012.

The
amendment as proposed would, among other things:



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Other
terms of the proposed amendment include the establishment of a LIBOR floor of 2.5% for the new term loan and revolving credit facility tranches; price protection for the new term
loan tranche requiring a matching yield if any future term loan tranches are established at yields at least 25 basis points above the new term loan tranche; and changes to certain definitions and
baskets related to permitted investments, acquisitions and assets sales. There is no assurance that the amend and extend transaction will be completed; in the event that the transaction is completed
in its current form, as indicated above, the Company will use currently available funds in the amount of approximately $28 million to make the required repayment and pay the amendment fees.

During
the second quarter of fiscal 2009, we concluded that it was appropriate to report Fabpro as a discontinued operation. The cash flows from Fabpro are included primarily in the
operating activities portion of our Statement of Cash Flows. Investing and financing activities of Fabpro were not significant during any of the periods presented on in this Quarterly Report on
Form 10-Q. We do not expect the absence of the cash flows generated by Fabpro to have a significant impact on our future liquidity and capital resources. On September 1,
2009, we completed the sale of Fabpro and received net proceeds from the sale of approximately
$32.9 million. Of such net proceeds, $31.6 million has been applied to reduce amounts outstanding under the first-lien term loan.

We
have experienced negative impacts in certain of our businesses, primarily in the industrial sector, from the deterioration in global economic conditions and are experiencing
significant volatility in raw material pricing. Additionally, as a result of recent increases in raw materials and expected reductions in contracted selling prices, we expect gross margins to decline
during the third quarter of fiscal 2009. However, based on our ability to generate positive cash flows from operations and the financial flexibility provided by the Credit Facility, as amended, we
believe that we currently have the financial resources necessary to meet our operating needs (including the expected $30.0 million excess cash flow payment payable by March 2010 under the
Credit Facility, which payment would be reduced by the repayment of the first lien term loan, if any, associated with the proposed amend and extend transaction mentioned above), fund our capital
expenditures and make all necessary contributions to our retirement plans in the foreseeable future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Effect of Inflation

Inflation generally affects us by increasing the costs of labor, overhead and equipment. The impact of inflation on our financial
position and results of operations was minimal during the first six months of both 2009 and 2008. However, we continue to be impacted by raw material costs. See "Quantitative and Qualitative
Disclosures About Market Risk" included in Item 3 of Part I to this Quarterly Report on Form 10-Q.

New Accounting Standards

In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" ("SFAS
No. 157"), which clarifies the definition of fair value whenever another standard requires or permits assets or liabilities to be measured at fair value. Specifically, the standard clarifies
that fair value should be based on the assumptions market participants would use when pricing the asset or liability, and establishes a fair
value hierarchy that prioritizes the information used to develop those assumptions. SFAS No. 157 does not expand the use of fair value to any new circumstances, and must be applied on a
prospective basis except in certain cases. The standard also requires expanded financial statement disclosures about fair value measurements, including disclosure of the methods used and the effect on
earnings.

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In
February 2008, FASB Staff Position ("FSP") FAS No. 157-2, "Effective Date of FASB Statement No. 157" ("FSP No. 157-2") was issued. FSP
No. 157-2 defers the effective date of SFAS No. 157 to fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, for all
nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Examples of items within the
scope of FSP No. 157-2 are nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination (but not measured at fair value in subsequent
periods), and long-lived assets, such as property, plant and equipment and intangible assets, measured at fair value for an impairment assessment under SFAS No. 144.

We
adopted SFAS No. 157 on January 1, 2008 with respect to financial assets and liabilities recognized or disclosed at fair value in the financial statements on a recurring
basis, and we adopted SFAS No. 157 with respect to non-financial assets and liabilities as of January 4, 2009. The adoption of SFAS No. 157 did not have a material impact on our
consolidated financial statements. See Note 12 "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" in Item 1 of Part I to this Quarterly Report on
Form 10-Q for the fair value measurement disclosures for these assets and liabilities.

In
April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly," ("FSP FAS 157-4") to provide additional guidance on estimating fair value when the volume and level of activity for an asset or liability have
significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. The FSP emphasizes that, regardless of whether the volume and level of
activity for an asset or liability have decreased significantly and regardless of which valuation technique was used, the objective of a fair value measurement under SFAS No. 157 remains the
sameto estimate the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date under current
market conditions. The FSP also requires expanded disclosures. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. We adopted FSP FAS 157-4 as of July 4, 2009 and applied its provisions prospectively by providing the additional
disclosures in its unaudited interim consolidated financial statements. See Note 12 "Fair
Value of Financial Instruments" in Item 1 of Part I to this Quarterly Report on Form 10-Q for the fair value measurement disclosures for these assets and liabilities.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) changes how an entity accounts for the
acquisition of a business. While it retains the requirement to account for all business combinations using the acquisition method, the new rule will apply to a wider range of transactions or events
and requires, in general, acquisition-date fair value measurement of identifiable assets acquired, liabilities assumed and noncontrolling ownership interests held in the acquiree, among
other items. SFAS No. 141(R) eliminates the cost-based purchase method allowed under SFAS No. 141. We will apply the provisions of SFAS No. 141(R) to future business
combinations. In amending SFAS No. 141(R), the FASB also introduced changes to certain provisions of income tax accounting in SFAS No. 109, "Accounting for Income Taxes" ("SFAS
No. 109"). For reorganizations under SOP 90-7 undertaken before the adoption period of SFAS No. 141(R), release of a valuation allowance related to
pre-confirmation net operating losses and deductible temporary differences are now being reported as a reduction to income tax expense. Similarly, adjustments to uncertain tax positions
made after the confirmation date are now recorded in the income statement.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS No. 160"). SFAS No. 160 changes the accounting
for, and the financial statement presentation of, noncontrolling equity interests in a consolidated subsidiary. Under SFAS No.160, all entities are required to report noncontrolling (minority)
interests in subsidiaries as a

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component
of consolidated equity in the consolidated financial statements. In addition, the Statement requires transactions between an entity and noncontrolling interests that do not result in
deconsolidation to be treated as equity transactions and provides new guidance on accounting for deconsolidation. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. SFAS No. 160 applies prospectively from the effective date except for the presentation and disclosure requirements, which must be applied retrospectively.

We
adopted SFAS No. 160 on January 4, 2009. Accordingly, we have adjusted our comparative consolidated financial statements presented as follows:



In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities: an amendment of FASB Statement No. 133" ("SFAS
No. 161") to expand the disclosure framework of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 161 requires companies with derivative
instruments to disclose information about how and why we use derivative instruments; how we account for the derivative instruments and related hedged items under SFAS No. 133; and how
derivative instruments and related hedged items affect our unaudited interim consolidated financial statements. The expanded disclosure guidance also requires us to provide information about its
strategies and objectives for using derivative instruments; disclose credit-risk-related contingent features in derivative agreements and information about counterparty credit
risk; and present fair value of derivative instruments and related gains and losses in a tabular format. We adopted SFAS No. 161 as of January 4, 2009 and applied its provisions
prospectively by providing the additional disclosures in our unaudited interim consolidated financial statements.

In
December 2008, the FASB issued FSP FAS 132(R)-1, "Employers Disclosures about Postretirement Benefit Plan Assets," which provides additional guidance regarding
employers' disclosures about plan assets of a defined benefit pension or other postretirement plan. This interpretation is effective for financial statements issued for fiscal years ending after
December 15, 2009. We will adopt the provisions of FSP 132(R)-1 as of January 2, 2010. The adoption of this interpretation will increase the disclosures in the financial
statements related to the assets of our postretirement benefit plans.

In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," to require, on an
interim basis, disclosures about the fair value of financial instruments for public entities. FSP FAS 107-1 and APB 28-1 is effective for interim and annual
periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. An entity may elect early adoption only if it concurrently adopts both FSP
FAS 157-4 and FSP FAS 115-2 and FAS 124-2, "Recognition and Presentation of
Other-Than-Temporary Impairments." We adopted FSP FAS 107-1 and APB 28-1 effective July 4, 2009 by providing the additional
disclosures in our unaudited interim consolidated financial statements.

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In
April 2008, the FASB issued FSP FAS 142-3, "Determination of the Useful Life of Intangible Assets," to provide guidance for determining the useful life of
recognized intangible assets and to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible
asset as determined under SFAS No. 142, "Goodwill and Other Intangible Assets." The FSP requires that an entity consider its own historical experience in renewing or extending similar
arrangements. However, the entity must adjust that experience based on entity-specific factors under SFAS No. 142. If the company lacks historical experience to consider for similar
arrangements, it would consider assumptions that market participants would use about renewal or extension, as adjusted for the entity-specific factors under SFAS 142. We adopted FSP
FAS 142-3 as of January 4, 2009. We capitalize costs incurred to renew or extend the term of its intangible assets. In the six-month periods ended July 4,
2009 and June 28, 2008, we incurred $0.1 million and $0.3 million, respectively, of renewal and extension costs for patents and trademarks related to several of our products. The
weighted-average period for amortizing the costs of patents and trademarks is six years. We currently expect to be able to continue to maintain these patents and trademarks and thus do not anticipate
any significant effect on our expected future cash flows related to those products.

In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS No. 165) to establish general standards of accounting for, and disclosing of, events that occur after
the balance sheet date, but before financial statements are issued or available to be issued. SFAS No. 165 introduces new terminology, defines a date through which management must evaluate
subsequent events, and lists circumstances under which we must recognize and disclose events or transactions occurring after the balance sheet date. We adopted SFAS No. 165 as of July 4,
2009, which was the required effective date for us.

In
June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles" ("SFAS
No. 168") to replace SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" and establish the FASB Accounting Standards Codification (the "Codification")
as the source of authoritative U.S. generally accepted accounting principles recognized by the FASB to be applied to nongovernmental entities. Under SFAS No. 168, accounting literature
references in consolidated financial statements issued beginning in the third quarter of fiscal 2009 will primarily reference sections of the Codification instead of a specific original accounting
pronouncement. We expect to adopt SFAS No. 168 in the third quarter of fiscal 2009 and do not anticipate that this new accounting standard will have a significant impact on the consolidated
financial statements.

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Critical Accounting Policies and Other Matters

The analysis and discussion of our financial position and results of operations is based upon our consolidated financial statements
that have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with
U.S. GAAP requires the appropriate application of certain accounting policies, many of which require management to make estimates and assumptions about future events that may affect the
reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Since future events and their impact cannot be determined with certainty, the
actual results will inevitably differ from the estimates. We evaluate these estimates and assumptions on an ongoing basis including, but not limited to, those related to revenue recognition, accounts
receivable, including concentration of credit risks, inventories, income taxes, impairment of long-lived assets, stock-based compensation and restructuring. Estimates and assumptions are
based on historical and other factors believed to be reasonable under the circumstances. The impact and any associated risks related to estimates, assumptions, and accounting policies are discussed
within "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as well as in the notes to the consolidated financial statements, if applicable, where such estimates, assumptions, and
accounting policies affect our reported and expected results.

We
believe the following accounting policies are critical to our business operations and the understanding of results of operations and affect the more significant judgments and
estimates used in the preparation of our consolidated financial statements:

Revenue recognition:Revenue from product sales is recognized when title and risks of ownership pass to the customer, which is on the
date of
shipment to the customer, or upon delivery to a place named by the customer, depending upon contract terms and when collectibility is reasonably assured and pricing is fixed or determinable. Revenue
includes amounts billed to customers for shipping and handling. Provision for rebates, promotions, product returns and discounts to customers is recorded as a reduction in determining revenue in the
same period that the revenue is recognized. We base our estimate of the expense to be recorded each period on historical returns and allowance levels. We do not believe the likelihood is significant
that materially higher deduction levels will result based on prior experience.

Accounts receivable and concentration of credit risks:Accounts receivable potentially expose us to a concentration of credit risk, as
defined by
SFAS No. 105, "Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration of Credit Risk." We provide credit in
the normal course of business and perform ongoing credit evaluations on our customers' financial condition as deemed necessary, but generally do not require collateral to support such receivables. We
also establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. Also, in an effort to reduce our credit
exposure to certain customers, as well as accelerate our cash flows, we have sold, on a non-recourse basis, certain of our receivables pursuant to factoring agreements. During the third
quarter of fiscal 2009, we have significantly curtailed factoring of our U.S. company-based receivables. At July 4, 2009, a reserve of $9.0 million has been recorded as an allowance
against trade accounts receivable. We believe that the allowance is adequate to cover potential losses resulting from uncollectible accounts receivable and deductions resulting from sales returns and
allowances. While our credit losses have historically been within our calculated estimates, it is possible that future losses could differ significantly from these estimates.

Inventory reserves:We maintain reserves for inventories valued using the first in, first out (FIFO) method. Such reserves for
inventories can be
specific to certain inventory or general based on judgments about the overall condition of the inventory. Specific reserves are established based on a determination of the obsolescence of the
inventory and whether the inventory value exceeds amounts to

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be
recovered through the expected sales price of such inventories, less selling costs. Reserves are also established based on percentage write-downs applied to inventories aged for certain time
periods, or for inventories that are slow-moving. Estimating sales prices, establishing markdown percentages and evaluating the condition of the inventories require judgments and
estimates, which may impact the inventory valuation and gross profits. We believe, based on our prior experience of managing and evaluating the recoverability of our slow moving or obsolete inventory,
that such established reserves are materially adequate. If actual market conditions and product sales were less favorable than we have projected, additional inventory writedowns may be necessary.

Income taxes:We record an income tax valuation allowance when, based on the weight of the evidence, it is more likely than not that
some portion, or
all, of the deferred tax asset will not be realized. The ultimate realization of the deferred tax asset depends on our ability to generate sufficient taxable income of the appropriate character in the
future and in the appropriate taxing jurisdictions. In assessing the realization of the deferred tax assets, consideration is given to, among other factors, the trend of historical and projected
future taxable income, the scheduled reversal of deferred tax liabilities, the carryforward period for net operating losses and tax credits, as well as tax planning strategies available to us.
Additionally, we have not provided U.S. income taxes for undistributed earnings of certain foreign subsidiaries that are considered to be retained indefinitely for reinvestment. Certain judgments,
assumptions and estimates are required in assessing such factors and significant changes in such judgments and estimates may materially affect the carrying value of the valuation allowance and
deferred income tax expense or benefit recognized in our consolidated financial statements.

In
accordance with FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN 48"), we recognize a
tax benefit associated with an uncertain tax position when, in our judgment, it is more likely than not that the position will be sustained upon examination by a taxing authority. For a tax position
that meets the more-likely-than-not recognition threshold, we initially and subsequently measure the tax benefit as the largest amount that we judge to have a
greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority. The liability associated with unrecognized tax benefits is adjusted periodically due to changing
circumstances, such as the progress of tax audits, case law developments and new or emerging legislation. Such adjustments are recognized entirely in the period in which they are identified. The
effective tax rate includes the net impact of changes in the liability for unrecognized tax benefits and subsequent adjustments as considered appropriate by management.

A
number of years may elapse before a particular matter for which a liability related to an unrecognized tax benefit is audited and finally resolved. The number of years with open tax
audits varies by jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe our liability for unrecognized tax benefits
is adequate. Favorable resolution of an unrecognized tax benefit could be recognized as a reduction in the effective tax rate in the period of resolution. Unfavorable settlement of an unrecognized tax
benefit could increase the effective tax rate and may require the use of cash in the period of resolution. Accordingly, our future results may include favorable or unfavorable adjustments due to the
closure of tax examinations, new regulatory or judicial pronouncements, changes in tax laws or other relevant events.

In
prior periods and consistent with the provisions of SOP 90-7, recognition of tax benefits from preconfirmation net operating loss carryforwards and other deductible
temporary differences not previously recognized were applied to reduce goodwill to zero, then to reduce intangible assets that existed at the date of emergence from bankruptcy with any excess tax
benefits credited directly to Additional Paid in Capital.

In
December 2007, the FASB issued SFAS No. 141(R), effective for fiscal years beginning on or after December 15, 2008. In amending SFAS No. 141(R), the FASB also
introduced changes to certain provisions of income tax accounting in SFAS No. 109, "Accounting for Income Taxes" ("SFAS No. 109").

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For
reorganizations under SOP 90-7 undertaken before the adoption period of SFAS No. 141(R), release of a valuation allowance related to pre-confirmation net
operating losses and deductible temporary differences are now being reported as a reduction to income tax expense. Similarly, adjustments to uncertain tax positions made after the confirmation date
are now recorded in the income statement.

Impairment of long-lived assets:Long-lived assets, excluding goodwill, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amounts may not be recoverable. For assets held and used, an impairment may occur if projected undiscounted cash flows are not adequate to cover the
carrying value of the assets. In such cases, additional analysis is conducted to determine the amount of the loss to be recognized. The impairment loss is determined by the difference between the
carrying amount of the asset and the fair value measured by future discounted cash flows. The analysis, when conducted, requires estimates of the amount and timing of projected cash flows and, where
applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of
such charge if an impairment loss is deemed to be necessary. In addition, future events impacting cash flows for existing assets could render a writedown necessary that previously required no
writedown.

For
assets held for disposal, an impairment charge is recognized if the carrying value of the assets exceeds the 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 are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment
loss is deemed to be necessary. Actual cash flows received or paid could differ from those used in estimating the impairment loss, which would impact the impairment charge ultimately recognized. As of
July 4, 2009, based on our current operating performance, as well as future expectations for the business, we do not anticipate any material writedowns for long-lived asset
impairments. However, conditions could deteriorate, which could impact our future cash flow estimates, and there exists the potential for further consolidation and restructuring in the more mature
markets of the U.S., Europe and Canada, either of which could result in an impairment charge that could have a material effect on our consolidated financial statements.

Stock-based compensation:We account for stock-based compensation related to our employee share-based plans in accordance with the
methodology
defined in SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)"). The compensation costs recognized subsequent to the adoption of SFAS No. 123(R) related to all new grants
and any unvested portion of prior grants have been measured based on the grant-date fair value of the award. Consistent with the provisions of SFAS No. 123(R), awards are considered
granted when all required approvals are obtained and when the participant begins to benefit from, or be adversely affected by, subsequent changes in the price of the underlying shares and, regarding
awards containing performance conditions, when we and the participant reach a mutual understanding of the key terms of the performance conditions. Additionally, accruals for compensation costs for
share-based awards with performance conditions are based on the probability of the achievement of such performance conditions.

We
have estimated the fair value of each stock option grant by using the Black-Scholes option-pricing model. Under SFAS No. 123(R) and the option pricing model, the estimate of
fair value is based on the share price and other pertinent factors at the grant date (as defined pursuant to SFAS No. 123(R)), such as expected volatility, expected dividend yield,
risk-free interest rate, forfeitures and expected lives. Assumptions are evaluated and revised, as necessary, to reflect market conditions and experience. Although we believe the
assumptions are appropriate, differing assumptions would affect compensation costs.

Restructuring:Accruals have been recorded in conjunction with our restructuring actions. These accruals include estimates primarily
related to
facility consolidations and closures, census reductions and contract termination costs. Actual costs may vary from these estimates. Restructuring-related

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accruals
are reviewed on a quarterly basis, and changes to the restructuring actions are appropriately recognized when identified.

Environmental

We are subject to a broad range of federal, foreign, state and local laws and regulations relating to the pollution and protection of
the environment. We believe that we are currently in substantial compliance with applicable environmental requirements and do not currently anticipate any material adverse effect on our operations,
financial condition or competitive position as a result of our efforts to comply with environmental requirements. Some risk of environmental liability is inherent, however, in the nature of our
business and, accordingly, there can be no assurance that material environmental liabilities will not arise.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks for changes in foreign currency rates and interest rates and we have exposure to commodity price risks,
including prices of our primary raw materials. The overall objective of our financial risk management program is to seek a reduction in the potential negative earnings impact of changes in interest
rates, foreign exchange rates and raw material pricing arising in our business activities. We manage these financial exposures, where possible, through operational means and by using various financial
instruments. These practices may change as economic conditions change.

Long-Term Debt and Interest Rate Market Risk

Our long-term borrowings under the Credit Facility are variable interest rate debt. As such, to the extent not protected by
interest rate hedge agreements, our interest expense will increase as interest rates rise and decrease as interest rates fall. It is our policy to enter into interest rate derivative transactions only
to meet our stated overall objective. We do not enter into these transactions for speculative purposes. To that end, as further described in Notes 7 and 11 to our unaudited interim consolidated
financial statements included in Item 1 of Part I to this Quarterly Report on Form 10-Q, we have entered into an interest rate swap contract which effectively converts
$240.0 million of our variable-rate debt to fixed-rate debt. The interest rate swap contract matures on June 30, 2011 and effectively fixes the LIBOR interest
rate on that amount of debt at 1.96%. Hypothetically, a 1% change in the interest rate affecting all of our financial instruments not protected by the new interest rate swap contract would change
interest expense by approximately $1.7 million.

Previously,
the Company had a similar pay-fixed, receive variable interest rate swap contract that matured on June 20, 2009 and effectively fixed the LIBOR interest
rate on a notional principal debt amount of $240.0 million at 5.085%.

Foreign Currency Exchange Rate Risk

We manufacture, market and distribute certain of our products in Europe, Canada, Latin America and Asia. As a result, our results of
operations could be significantly affected by factors such as changes in foreign currency rates in the foreign markets in which we maintain a manufacturing or distribution presence. However, such
currency fluctuations have much less effect on local operating results because we, to a significant extent, sell our products within the countries in which they are manufactured. During the first six
months of both 2009 and 2008, certain currencies of countries in which we conduct foreign currency denominated business moved against the U.S. dollar and had a significant impact on sales, with a
lesser effect on operating income. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" above.

We
have not historically hedged our exposure to foreign currency risk. However, we periodically review our hedge strategy with respect to our U.S. dollar exposure on certain foreign
currency based

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obligations
such as firm commitments related to certain capital expenditure projects. Accordingly, on September 30, 2008, we entered into a series of foreign exchange forward contracts with a
third-party financial institution, the objective of which is to hedge the changes in fair value of a firm commitment to purchase equipment attributable to changes in foreign currency rates between the
Euro and U.S. dollar through the date of acceptance of the equipment. The original notional amount of the contracts with the third party, which expire on various dates through fiscal 2009, was
$33.3 million. Cash settlements under the forward contracts coincide with the payment dates on the equipment purchase contract. As of July 4, 2009, we recorded the assets and liabilities
associated with the previously unrecognized firm commitment which resulted in the planned termination of the hedge relationship.

In
addition, in most foreign operations, there is a partial natural currency hedge due to similar amounts of costs of materials and production as revenues in such local currencies.
Furthermore, in certain circumstances, we have utilized insurance programs to mitigate our currency risk exposure associated with the potential inconvertibility of local currency into U.S. dollars (or
other hard currency) and to transfer such hard currency out of the foreign countries where certain of our foreign businesses are domiciled.

Raw Material and Commodity Risks

The primary raw materials used in the manufacture of most of our products are polypropylene resin, polyester fiber, polyethylene resin,
and, to a lesser extent, rayon and tissue paper. The prices of polypropylene, polyethylene and polyester are a function of, among other things, manufacturing capacity, demand and the price of crude
oil and natural gas liquids. In certain regions of the world, we may source certain key raw materials from a limited number of suppliers or on a sole source basis. The loss of certain of our suppliers
could adversely affect our business until alternative supply arrangements were secured or alternative suppliers were qualified with customers. We have not historically hedged our exposure to raw
material increases, but we have certain customer contracts with price adjustment provisions which provide for the pass-through of any cost increases or decreases in raw materials, although
there is often a delay between the time we incur the new raw material cost and the time that we are able to adjust the selling price to our customers. Raw material costs as a percentage of sales have
decreased from 55.2% in the first six months of 2008 to 45.2% in the first six months of 2009.

During
the first eight months of fiscal 2008, the cost of polypropylene resin, our largest volume raw material, increased significantly, particularly during the May 2008 to August 2008
timeframe and,
during the fourth quarter of fiscal 2008, the cost of polypropylene resin decreased dramatically. During the first eight months of fiscal 2009, we have seen increases in the cost of polypropylene
resin versus the cost of such resin at the end of fiscal 2008 and expect a significant increase in September of 2009. Additionally, on a global basis, other raw material costs continue to fluctuate,
including recent reductions in the cost of rayon fiber, in a much narrower range. These costs primarily fluctuate in response to certain global economic factors, including the regional supply versus
demand dynamics for the raw materials and the volatile price of oil.

In
periods of rising raw material costs, to the extent we are not able to pass along price increases of raw materials, or to the extent any such price increases are delayed, our cost of
goods sold would increase and our operating profit would correspondingly decrease. By way of example, if the price of polypropylene was to rise $.01 per pound, and we were not able to pass along any
of such increase to our customers, we would realize a decrease of approximately $4.0 million, on an annualized basis, in our reported pre-tax operating income. Material increases in
raw material prices that cannot be passed on to customers could have a material adverse effect on our results of operations and financial condition. In periods of declining raw material costs, our
cost of goods sold would decrease and our operating profit would correspondingly increase; however, such increase would be offset, in whole or in part, by reductions to selling prices offered to
customers by contract or in light of current market conditions. See

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"Management's
Discussion and Analysis of Financial Condition and Results of Operations" included above.

ITEM 4.    CONTROLS AND PROCEDURES

A.    Evaluation of Disclosure Controls and Procedures

Under the direction of the Chief Executive Officer and the Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and
procedures, as such item is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end of the period covered by this report.
Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level
because of the material weaknesses in the Company's internal control over financial reporting described below. Notwithstanding the existence of these material weaknesses, the Company's management
believes
that the consolidated financial statements and other financial information included in this report fairly present in all material respects the Company's financial condition, results of operations and
cash flows as of, and for, the periods presented.

B.    Changes in Internal Control over Financial Reporting

Management is responsible for establishing and maintaining effective internal control over financial reporting for the Company as such term is defined in
Rule 13a-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A
material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis. As of the end of the period covered by this report, management identified a
deficiency in the Company's internal control over financial reporting associated with processes related to the preparation and adjustment of the Company's income tax accounts. Management's
determination resulted from the identification of certain out-of-period adjustments and from an assessment that the Company did not have a sufficient complement of personnel on
a global basis experienced in income tax accounting in accordance with accounting principles generally accepted in the United States. Management also identified a deficiency in the Company's internal
control over financial reporting associated with reconciliation of intercompany balances. Management's determination resulted from a review of current procedures regarding reconciliation of
intercompany balances, which revealed that such procedures are incomplete. There is a reasonable possibility that each of these control deficiencies could result in a misstatement of the Company's
results of operations that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, the Company has
concluded that each of these control deficiencies constitutes a material weakness.

The
Company's management and Board of Directors plan to remediate the income tax weakness by (i) increasing personnel resources within the global tax function (ii) by
instituting training for global finance and tax personnel regarding the provisions of SFAS No. 109 "Accounting for Income Taxes", and (iii) by making modifications to documentation used
to prepare and reconcile income tax balances. With respect to the weakness described regarding reconciliation of intercompany balances, the Company will institute additional controls to ensure that
such balances are analyzed on a recurring basis.

Other
than as described above, there were no changes in the Company's internal control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f), during the quarter ended July 4, 2009 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over
financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are not currently a party to any pending legal proceedings other than routine litigation incidental to our business, none of which
are deemed material.

ITEM 1A.    RISK FACTORS

Not applicable.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the second quarter of fiscal 2009, 823 shares of our Class B Common Stock were converted into 823 shares of our
Class A Common Stock. These conversions were exempt from registration based on Section 3(a)(9) of the Securities Act of 1933.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our stockholders held their Annual Meeting on May 22, 2009, and considered and voted to adopt and approve the following matters
(the numbers below represent shares of Class A, B and C Common Stock):



Name of Director

Votes in Favor

Votes WithheldRamon Betolaza


18,734,818


15,388Elizabeth Fessenden


18,734,920


15,286Veronica Hagen


18,734,887


15,319Keith B. Hall


18,734,857


15,349William B. Hewitt


18,707,482


42,724James A. Ovenden


18,734,857


15,349Mark Patterson


17,935,954


814,252Charles E. Volpe


18,709,349


40,857




Votes in Favor

Votes Against

Votes Abstaining

Broker Non Votes15,452,177


1,676,033


3,061


1,618,935




Votes in Favor

Votes Against

Votes Abstaining

Broker Non Votes16,275,245


851,924


4,102


1,618,935


ITEM 5.    OTHER INFORMATION

Not applicable.

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ITEM 6.    EXHIBITS

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

Exhibit
Number

Document Description10.1

Amended and Restated Polymer Group, Inc. Long-Term Stock Incentive Plan, effective as of May 22, 2009 (incorporated by reference to Annex I to the Definitive Proxy Statement on Schedule 14A filed on
April 24, 2009).10.2

Amended and Restated Polymer Group, Inc. 2004 Restricted Stock Plan, effective as of May 22, 2009 (incorporated by reference to Annex II to the Definitive Proxy Statement on Schedule 14A filed on
April 24, 2009).31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 135032.2

Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

POLYMER GROUP, INC.Date: September 11, 2009

By:

/s/ VERONICA M. HAGEN Veronica M. Hagen Chief Executive OfficerDate: September 11, 2009

By:

/s/ ROBERT J. KOCOUREK Robert J. Kocourek Chief Financial Officer


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