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 April 3, 2010Oro

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


For the transition period from                             to
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 since 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 the definitions 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 May 5, 2010, there were 21,363,313 shares of Class A common stock, 82,917 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.



---





Table of Contents

POLYMER GROUP, INC.
INDEX TO FORM 10-Q



PageIMPORTANT INFORMATION REGARDING THIS FORM 10-Q


3PART I. FINANCIAL INFORMATION


4Item 1.

Financial Statements


4Item 2.

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


40Item 3.

Quantitative and Qualitative Disclosures About Market Risk


64Item 4.

Controls and Procedures


66PART II. OTHER INFORMATION


68Item 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 5.

Other Information


68Item 6.

Exhibits


68Signatures


69


2

---





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 anticipated.

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



3

---







Table of Contents

ITEM 1.    FINANCIAL STATEMENTS

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

April 3,
2010

January 2,
2010ASSETSCurrent assets:Cash and cash equivalents

$
54,265

$
59,521Accounts receivable, net


144,912


127,976Inventories


106,863


106,770Deferred income taxes


3,643


3,612Other current assets


43,701


34,382Total current assets


353,384


332,261Property, plant and equipment, net


317,454


331,293Intangibles and loan acquisition costs, net


8,506


9,006Deferred income taxes


2,890


2,777Other assets


26,970


27,029Total assets

$
709,204

$
702,366LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Short-term borrowings

$
6,670

$
3,690Accounts payable and accrued liabilities


164,098


147,992Income taxes payable


1,034


3,940Current portion of long-term debt


15,332


16,921Total current liabilities


187,134


172,543Long-term debt


318,952


322,021Deferred income taxes


20,372


21,425Other noncurrent liabilities


38,656


37,248Total liabilities


565,114


553,237Commitments and contingenciesPolymer Group, Inc. shareholders' equity:Preferred stock0 shares issued and outstanding





Class A common stock21,099,971 and 20,875,378 issued and outstanding at April 3, 2010 and January 2, 2010, respectively


211


209Class B convertible common stock82,919 and 83,807 shares issued and outstanding at April 3, 2010 and January 2, 2010,
respectively


1


1Class C convertible common stock24,319 and 24,319 shares issued and outstanding at April 3, 2010 and January 2, 2010,
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


212,379


211,768Retained deficit


(112,672
)

(112,885
)Accumulated other comprehensive income


36,041


41,998Total Polymer Group, Inc. shareholders' equity


135,960


141,091Noncontrolling interests


8,130


8,038Total equity


144,090


149,129Total liabilities and equity

$
709,204

$
702,366


See Accompanying Notes.

4

---





Table of Contents

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

Three Months
Ended
April 3, 2010

Three Months
Ended
April 4, 2009Net sales

$
280,595

$
210,010Cost of goods sold


233,021


160,591Gross profit


47,574


49,419Selling, general and administrative expenses


33,520


26,842Acquisition and integration expenses


1,524


Special charges, net


4,217


2,891Other operating (income), net


(917
)

(352
)Operating income


9,230


20,038Other expense (income):Interest expense, net


8,655


7,393Gain on reacquisition of debt





(2,431
)Foreign currency and other loss, net


60


2,156Income before income tax expense and discontinued operations


515


12,920Income tax expense


214


7,182Income from continuing operations


301


5,738Income from discontinued operations





1,941Net income


301


7,679Less: net (income) loss attributable to noncontrolling interests


(88
)

1,877Net income attributable to Polymer Group, Inc.

$
213

$
9,556Earnings per common share attributable to Polymer Group, Inc. common shareholders:Basic:Continuing operations

$
0.01

$
0.39Discontinued operations





0.10Basic

$
0.01

$
0.49Diluted

$
0.01

$
0.49


See
Accompanying Notes.

5

---





Table of Contents

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

Three Months
Ended
April 3, 2010

Three Months
Ended
April 4, 2009Operating activities:Net income attributable to Polymer Group, Inc.

$
213

$
9,556Adjustments to reconcile net income attributable to Polymer Group, Inc. to net cash provided by operating activities:Asset impairment charge





1,600Deferred income taxes


(1,479
)

1,010Depreciation and amortization


12,684


12,700Gain on reacquisition of debt





(2,431
)Gain on sale of assets, net


(31
)

Non-cash compensation


1,255


423Changes in operating assets and liabilities:Accounts receivable, net


(19,630
)

12,329Inventories


(1,384
)

11,170Other current assets


(5,974
)

(3,303
)Accounts payable and accrued liabilities


18,260


(20,272
)Other, net


(2,573
)

1,208Net cash provided by operating activities


1,341


23,990Investing activities:Purchases of property, plant and equipment


(4,713
)

(3,439
)Proceeds from sale of assets


31


Acquisition of intangibles and other


(111
)

(77
)Net cash used in investing activities


(4,793
)

(3,516
)Financing activities:Proceeds from borrowings


14,582


10,762Repayment of borrowings


(16,064
)

(9,624
)Reacquisition of debt





(12,375
)Loan acquisition costs


(16
)

Net cash used in financing activities


(1,498
)

(11,237
)Effect of exchange rate changes on cash


(306
)

(684
)Net increase (decrease) in cash and cash equivalents


(5,256
)

8,553Cash and cash equivalents at beginning of period


59,521


45,718Cash and cash equivalents at end of period

$
54,265

$
54,271


See
Accompanying Notes.

6

---





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 nine 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 2, 2010. 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 2, 2010 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 5 "Discontinued Operations."

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 and in accordance with the Financial Accounting Standards
Board ("FASB") Accounting Standards Codification ("Codification" or "ASC") 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

7

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

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

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, valuation
of 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 ASC Topic 718,
"CompensationStock Compensation" ("ASC 718"). The compensation costs recognized are measured based on the grant-date fair value of the award. Consistent with ASC 718, 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 ASC 712,
"CompensationNonretirement Postemployment Benefits" ("ASC 712"), 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 in accordance with ASC 420, "Exit or Disposal Cost Obligations" ("ASC 420"). The Company reviews long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying values may not be recoverable from future undiscounted cash flows. If the carrying amounts are not
recoverable, the Company, consistent with the provisions of ASC 360, records a non-cash charge associated with the write-down of such assets to estimated fair value. Fair value
is estimated based on the present value of expected future cash flows, appraisals and other indicators of value.

Derivatives

The Company records all derivative instruments as either assets or liabilities on the balance sheet at their fair value in accordance
with ASC 815, "Derivatives and Hedging" ("ASC 815"). 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 earnings.

As
more fully described in Note 13 "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

8

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

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

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 have been 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 (defined in
Note 9 "Debt") from its existing lenders at a discount to the carrying value of the debt. Under these agreements the Company's subsidiary will acquire the rights and obligations of a lender
under the Credit Facility, to the extent of the amount of debt acquired, 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 authoritative literature and includes such amounts in Gain on Reacquisition of
Debtin the Consolidated Statements of Operations.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income of $36.0 million at April 3, 2010 consisted of $41.3 million of currency
translation gains (net of income taxes of $5.7 million), ($2.5) million of transition net assets, gains or losses and prior service costs not recognized as components of net periodic benefit
costs and $(2.8) million of cash flow hedge losses. Accumulated
other comprehensive income of $42.0 million at January 2, 2010 consisted of $47.9 million of currency translation gains (net of income taxes of $7.9 million), ($2.6)
million of transition net assets, gains or losses and prior service costs not recognized as components of net periodic benefit costs and $(3.3) million of cash flow hedge losses. Comprehensive loss
for the three months ended April 3, 2010 was $5.7 million. Comprehensive income for the three months ended April 4, 2009 was $7.3 million.

9

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

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

Recent Accounting Standards

In June 2009, the FASB issued authoritative guidance which established the ASC as the source of authoritative U.S. GAAP
recognized by the FASB to be applied to nongovernmental entities. Under the new guidance, as prescribed by ASC 105, "Generally Accepted Accounting Principles", 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 adopted the authoritative guidance in the third quarter of fiscal 2009.

In
September 2006, the FASB issued authoritative guidance that amends ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820") by issuing ASC 820-10-65. ASC
820-10-65 provides additional guidance on estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. ASC
820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly, and 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 ASC 820 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. ASC 820-10-65 also requires expanded disclosures. ASC 820-10-65 was 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 ASC 820-10-65 as of July 4, 2009 and applied its
provisions prospectively by providing the additional disclosures in its unaudited interim consolidated financial statements. See Note 14 "Fair Value of Financial Instruments and
Non-Financial Assets and Liabilities" for additional information.

In
April 2009, guidance as prescribed by ASC 825, "Financial Instruments" ("ASC 825") was issued and requires, on an interim basis, disclosures about the fair value of financial
instruments for public entities. ASC 825 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 early adopt ASC 825 only if it concurrently adopts both ASC 320, "InvestmentsDebt and Equity Securities" and ASC 820-10-65. The Company adopted ASC 825
effective July 4, 2009.

In
May 2009, the FASB issued authoritative guidance, as prescribed by ASC 855, "Subsequent Events", which established standards of accounting for events that occur after the balance
sheet date and disclosures of events that occur after the balance sheet date but before the financial statements are issued. The new guidance introduces new terminology, defines a date through which
management must evaluate subsequent events, and lists circumstances under which the Company must recognize and disclose subsequent events or transactions occurring after the balance sheet date. This
guidance was effective for interim or annual financial periods ending after June 15, 2009 and was applied by the Company as of July 4, 2009. In February 2010, the FASB issued Accounting
Standards Update ("ASU"), 2010-09, "Amendments to Certain Recognition and Disclosure Requirements" ("ASU 2010-09") which is effective as of February 24, 2010. ASU
2010-09 clarified the guidance to indicate that SEC filers are required to evaluate subsequent events through the date financial statements are issued, but are not required to disclose the
date through which subsequent events were evaluated.

In
June 2009, the FASB issued authoritative guidance to revise the approach to determine when a variable interest entity ("VIE") should be consolidated. The new consolidation model for
VIEs considers whether the Company has the power to direct the activities that most significantly impact the VIEs economic performance and shares in the significant risks and rewards of the entity.
The new guidance

10

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

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

on
VIEs requires companies to continually reassess VIEs to determine if they are required to apply the new criteria, as prescribed by ASC 810, to determine the accounting and reporting requirements
related to VIEs. In December 2009, the FASB issued ASU 2009-17, "Amendments to Accounting for Variable Interest Entities," ("ASU 2009-17") to amend ASC 810 to clarify
how enterprises should account for and disclose their involvement with VIEs. The Company adopted the revised guidance for the accounting for VIEs, pursuant to ASC 810, effective January 3,
2010. The adoption of the revised accounting guidance for VIEs did not have a significant effect on the Company's consolidated financial statements. See Note 4 "Acquisitions" for additional
information.

In
August 2009, the FASB issued ASU, 2009-05, "Measuring Liabilities at Fair Value", to amend ASC 820 to clarify how
entities should estimate the fair value of liabilities. ASC 820, as amended, includes clarifying guidance for circumstances in which a quoted price in an active market is not available, the
effect of the existence of liability transfer restrictions, and the effect of quoted prices for the identical liability, including when the identical liability is traded as an asset. The amended
guidance in ASC 820 on measuring liabilities at fair value is effective for the first interim or annual reporting period beginning after August 28, 2009, with earlier application
permitted.
The Company adopted the amended guidance in ASC 820 beginning July 5, 2009 by providing additional disclosures in its interim consolidated financial statements.

In
October 2009, the FASB issued ASU 2009-13, "Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task
Force", to amend certain guidance in ASC 605,Revenue Recognition ("ASC 605"), specifically as related to"Multiple-Element
Arrangements" ("ASC 605-25"). The amended guidance in ASC 605-25: (1) modifies the separation criteria by eliminating the criterion that requires objective and reliable
evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the
inception of the arrangement, to all deliverables based on their relative selling price. The amended guidance in ASC 605-25 is effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010, with early application and retrospective application permitted. The Company prospectively applied the amended
guidance in ASC 605-25 beginning January 3, 2010. The adoption of the amendments to ASC 605-25 did not have a significant effect on the Company's consolidated
financial statements.

In
January 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about
Fair Value Measurements. This guidance clarifies and requires new disclosures about fair value measurements. The clarifications and requirement to disclose the amounts and
reasons for significant transfers between Level 1 and Level 2, as well as significant transfers in and out of Level 3 of the fair value hierarchy established by ASC 820, were
adopted by the Company in the first quarter of fiscal 2010. Note 14, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" reflects the amended disclosure
requirements. Additionally, the new guidance also requires that purchases, sales, issuance, and settlements be presented gross in the Level 3 reconciliation, which is used to price the hardest
to value instruments (the "disaggregation guidance"). The disaggregation guidance will be effective beginning with interim periods in fiscal year 2011. Since this guidance only amends the disclosure
requirements, the Company does not anticipate that the adoption of ASU No. 2010-06 will have a material impact on its consolidated financial statements.

11

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

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

Accounts receivable potentially expose the Company to a 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 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 $8.5 million
and $9.1 million at April 3, 2010 and January 2, 2010, 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 13% and 10% of the Company's sales in the first quarter of fiscal 2010 and 2009,
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 factoring agreements to sell without
recourse or discount, certain non-U.S. company-based receivables to unrelated third-party financial institutions. Under the terms of the Company's senior credit facility agreements, the
maximum amount of non-U.S. outstanding advances at any one time is $20.0 million.

During
the first quarter of fiscal 2010, approximately $55.1 million of gross receivables have been sold under the terms of these factoring agreements, compared to approximately
$55.2 million during the first quarter of fiscal 2009. The sale of these receivables accelerated the collection of the
Company's cash and reduced credit exposure. Such sales of accounts receivable are reflected as a reduction ofAccounts receivable, netin the
Consolidated Balance Sheets as they meet the applicable criteria noted in ASC 860, "Transfers and Servicing" ("ASC 860"), for financial instruments. The gross amount of trade receivables sold to the
factoring companies and, therefore, excluded from the Company's accounts receivable, was $36.9 million and $35.1 million as of April 3, 2010 and January 2, 2010,
respectively. The amount due from the factoring companies, net of advances received from the factoring companies, was $7.6 million and $6.1 million at April 3, 2010 and
January 2, 2010, respectively, and is shown inOther current assetsin the Consolidated Balance Sheets. Net of amounts due from factoring
companies, the net outstanding balance of factored receivables was $29.3 million and $29.0 million at April 3, 2010 and January 2, 2010, respectively. 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.

12

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 3. Special Charges, Net

The Company's operating income includesSpecial charges, netand this amount represents the consequences 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 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
April 3, 2010

Three Months
Ended
April 4, 2009Asset impairment charges

$


$
1,600Restructuring and plant realignment costs


4,192


1,284Other costs (credits)


25


7$
4,217

$
2,891


Asset impairment charges

During the first quarter of fiscal 2009, the Company recorded non-cash impairment charges 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. See Note 14 "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 three month period ended April 3, 2010 (in thousands):

Balance accrued at beginning of year

$
2,8032010 restructuring and plant realignment costs


4,192Cash payments


(4,762
)Adjustments


Balance accrued at end of period

$
2,233


The
restructuring and plant realignment costs in the first quarter of fiscal 2010 are comprised of: (i) $4.0 million of severance and other shut-down costs for
restructuring activities in the United States; (ii) $0.1 million of severance and other shut-down costs for restructuring initiatives in Europe; and
(iii) $0.1 million of severance costs for restructuring initiatives in Argentina.

13

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 3. Special Charges, Net (Continued)

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 its North Little Rock, Arkansas manufacturing 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 included the reduction of approximately 140 positions when such efforts are completed. During the first
quarter of fiscal 2010, the Company recognized $0.3 million of employee termination costs, $3.6 million for equipment relocation and associated shut-down costs related to the
closure of the North Little Rock plant and $0.1 million for shutdown costs related to other plants. The Company estimates that it will recognize total cash restructuring charges of
approximately $17.5 million to $18.5 million during portions of fiscal 2009 and 2010, comprised of approximately $2.0 million related to employee termination expenses and
$15.5 million to $16.5 million for equipment relocation and associated shut-down costs. Of the total spending, $15.2 million has been recognized from the commencement
in 2009 through the end of the first quarter of fiscal 2010, including $11.2 million recognized in fiscal 2009. The Company expects to recognize the remaining $2.3 million to
$3.3 million by the end of fiscal 2010.

In
March 2010, the Company communicated a plan to affected employees that it planned to close and dispose of the coating manufacturing line associated with its Argentina manufacturing
operation in the second quarter of fiscal 2010 as part of the region's strategic plan. The closing included the reduction of approximately eighteen positions, of which six occurred in the first
quarter with the remaining twelve positions by the end of April 2010. The Company recognized $0.1 million for employee termination costs in the first quarter of fiscal 2010, which related to
the six terminations that were finalized in the first quarter. The Company closed the manufacturing line in April 2010 and expects to sell the equipment for an amount in excess of its net book value,
less costs to sell. Accordingly, no impairment charge was recorded in the first quarter of fiscal 2010. The Company expects to use the proceeds to reduce its bank debt in Argentina.



The restructuring and plant realignment costs in the first quarter of fiscal 2009 totaled $1.3 million. This was comprised of:
(i) $0.6 million of severance and other shut-down costs associated with the previously announced closure of the Neunkirchen, Germany manufacturing plant;
(ii) $0.6 million of severance and other shut-down costs related to facilities in the United States; and (iii) $0.1 million of severance costs related to
restructuring initiatives in Canada.

Note 4. Acquisitions



On October 30, 2009, the Company announced that it completed a purchase transaction to purchase the remaining 40% stake in
Dominion Nonwovens Sudamericana, S.A. from its partner, Guillermo E. Kraves. The purchase price was approximately $4.1 million. In accordance with ASC 810, the Company has accounted for
this transaction as an equity transaction, and no gain or loss has been recognized on the transaction. The carrying amount of this noncontrolling interest has been adjusted in the amount of
$0.6 million to reflect the change in ownership, and the difference between the purchase price and the amount by which the noncontrolling interest was adjusted resulted in a reduction to
paid-in

14

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 4. Acquisitions (Continued)

capital
of $3.5 million. Additionally, the Company also paid $2.4 million to an affiliate of Mr. Kraves in satisfaction of amounts previously accrued for services.



On December 2, 2009, the Company completed the initial phase of the acquisition, from Grupo Corinpa, S.L. ("Grupo Corinpa"), of
certain assets and the operations of the nonwovens businesses of Tesalca-99, S.A. and Texnovo, S.A. (together with Tesalca-99, S.L., "Tesalca-Texnovo" or the
"Sellers"), which are headquartered in Barcelona, Spain (the "Transaction"). The acquisition was completed by the Company through PGI Spain, which operates as a new wholly owned subsidiary of the
Company.

The
acquired assets include the net operating working capital as of November 30, 2009 (defined as current assets less current liabilities excluding financial liabilities
associated with the operations) valued at $10.9 million, the customer lists and the current book of business. Concurrent with the Transaction, the Company entered into a seven year lease
(beginning December 2, 2009 and ending December 31, 2016) with Tesalca-Texnovo that provides that PGI Spain is entitled to the full and exclusive use of the Seller's land, building and
equipment during the term of the lease (the "Building and Equipment Lease"). PGI Spain is obligated to make total lease payments of approximately €29.0 million to
Tesalca-Texnovo during the term of the Building and Equipment Lease agreement. The first lease payment of approximately €1.25 million was made on March 31, 2010 and
further quarterly payments of approximately €1.25 million will be due for the first three years of the lease. Further, the quarterly lease payments for the remaining four years
will be approximately €0.9 million per quarter. Pursuant to ASC 840, the Building and Equipment Lease agreement has been accounted for as an operating lease. Furthermore,
pursuant to ASC 840-20-25-2, PGI Spain will recognize rent expense
on a straight-line basis over the lease term inCost of goods soldin its Consolidated Statements of Operations. See Note 18,
"Commitments and Contingencies" for additional information on the Building and Equipment Lease.

Further,
as part of the Transaction, PGI Spain granted the Sellers a put option over the assets underlying the Building and Equipment Lease (the "Phase II Assets") until
December 31, 2012 (the "Put Option"). The Sellers right to exercise the Put Option is dependent upon whether the results of the operations of PGI Spain meet the EBITDAR (earnings before
interest, taxes, depreciation, amortization and rent, all as defined in the acquisition agreement) performance projection of €7.7 million, excluding lease payments ("EBITDAR
Projection"), for either fiscal year 2010 or 2011 (the "Performance Period"). Furthermore, the Sellers granted PGI Spain a call option over the assets underlying the Phase II Assets, which
expires on December 31, 2012 (the "Call Option"). If the results of the operations of PGI Spain do not meet the EBITDAR Projection for the Performance Period, then the Sellers Put Option cannot
be exercised and thus would expire at the end of its term. In the event that either the Put Option or Call Option is not exercised, the parties are obligated to continue with the Building and
Equipment Lease until December 31, 2016.

Consideration
for the acquired assets consisted of approximately 1.049 million shares of the Company's Class A common stock ("Issued Securities"), which represented
approximately 5.0% of the outstanding share capital of the Company on December 2, 2009, taking into account the Issued Securities. The Issued Securities are subject to certain restrictions,
including that the Issued Securities are not registered pursuant to the Securities Act of 1933 (see Note 15 "Earnings Per Share and

15

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 4. Acquisitions (Continued)

Shareholder's
Equity" for further details). On December 2, 2009, the fair value of the Issued Securities approximated $14.5 million.

During
the first quarter of fiscal 2010, the Company incurred $1.5 million of acquisition and integration related expenses attributable to the acquisition of Tesalca-Texnovo.
These expenses were attributable to accountant, legal and advisory fees of $0.7 million associated with due diligence and the closing of the transaction. In addition, $0.8 million was
incurred for employee termination costs pursuant to a facility restructuring. In January 2010, the Company communicated a plan to affected employees that it planned to restructure its manufacturing
operations in Spain during the first quarter of fiscal 2010 to reduce its overall cost structure. The realignment included the reduction of approximately ten positions in the first quarter of fiscal
2010. There were no such expenses during the first quarter of fiscal 2009. In accordance with ASC 805, these expenses are recorded as a period cost inAcquisition and
integration expensesin the Company's Consolidated Statements of Operations.

The
Company recorded intangible assets of €0.6 million and €1.8 million associated with customer relationships and goodwill, respectively,
in
the purchase price allocation. The customer relationships intangible asset has an economic useful life of 5 years.

Contrary
to the Company's expectations previously discussed in Item 8 of Part II to the Company's Annual Report on Form 10-K for fiscal year 2009, the
Company recently concluded that Tesalca-Texnovo does not meet the criteria to be considered a variable interest entity. The Company reached this conclusion in accordance with its reevaluation of ASC
810, based on both the accounting guidance prior to the revisions that came into effect on January 3, 2010 and the revised accounting guidance that came into effect on January 3, 2010.
Accordingly, the Company has concluded that it would not be appropriate to consolidate the financial results of Tesalca-Texnovo within its consolidated financial statements.

Note 5. Discontinued Operations

During fiscal 2009, the Company determined that, in accordance with ASC 360, the assets of Fabpro Oriented Polymers LLC ("Fabpro") represented 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 are eliminated from the ongoing operations of
the Company as a result of the 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.

As
a result, this business has been accounted for as a discontinued operation in accordance with the authoritative guidance for the first quarter ended April 4, 2009. Accordingly,
the results of operations of Fabpro have been segregated from continuing operations and included inIncome from discontinued operationsin the
Consolidated Statements of Operations. In accordance with the authoritative guidance related to the reporting 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.

16

---





Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 5. Discontinued Operations (Continued)

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
April 4, 2009Net sales

$
17,223Pre-tax income (loss)

$
1,941Income tax expense


Net income (loss)

$
1,941


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 for the first quarter of fiscal 2009. 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.

Note 6. 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):

April 3,
2010

January 2,
2010Finished goods

$
55,659

$
58,974Work in process


14,756


13,281Raw materials and supplies


36,448


34,515$
106,863

$
106,770


Inventories
are net of reserves, primarily for obsolete and slow-moving inventories, of approximately $6.9 million and $8.1 million at
April 3, 2010 and January 2, 2010, respectively. Management believes that the reserves are adequate to provide for losses in the normal course of business.

Note 7. Intangibles and Loan Acquisition Costs

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

April 3,
2010

January 2,
2010Cost:Goodwill

$
2,424

$
2,588Customer relationships


766


818Proprietary technology


3,143


3,027Loan acquisition costs


4,394


4,378Other


2,113


2,11412,840


12,925Less accumulated amortization


(4,334
)

(3,919
)$
8,506

$
9,006


17

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 7. Intangibles and Loan Acquisition Costs (Continued)

As
discussed earlier in Note 4 "Acquisitions", the Company recognized both goodwill and customer relationships as intangible assets attributable to the Spain
acquisition. The customer relationships intangible asset has an economic useful life of 5 years and will be amortized over a 5-year period.

In
accordance with ASC 350, the Company will not amortize the goodwill, but instead will evaluate goodwill for impairment at least on an annual basis beginning with fiscal year 2010.
Furthermore, the Company will perform a test for impairment on a more frequent basis should an event occur that indicates the goodwill might be impaired.

In
September 2009, the Company amended its Credit Facility, which included a substantial modification to its first lien term loan, which modification has been treated as an
extinguishment of debt pursuant to ASC 470-50, "Debt". As a result, a portion of the unamortized loan acquisition costs associated with the November 2005 financing in the amount of
$3.5 million were written-off and, together with $1.6 million of third-party costs incurred in connection with the amendment, were included inLoss on
extinguishment of debtin the Consolidated Statements of Operations in the third quarter of fiscal 2009. In addition, approximately $2.6 million of financing costs
associated with the amendment of the Credit Facility were capitalized in the third quarter of fiscal 2009. See Note 9 "Debt" for additional disclosures related to the amendment to the Credit
Facility.

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

Three Months
Ended
April 3, 2010

Three Months
Ended
April 4, 2009Amortization of:Intangibles with finite lives, included in selling, general and administrative expenses

$
197

$
175Loan acquisition costs included in interest expense, net


215


335Total amortization expense

$
412

$
510


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.

Note 8. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilitiesin the Consolidated Balance Sheets includes salaries, wages, incentive compensation and other
fringe benefits of $19.7 million and $17.9 million as of April 3, 2010 and January 2, 2010, respectively.

18

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt

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

April 3,
2010

January 2,
2010Credit Facility, as defined below, interest rates for U.S. dollar borrowings are based on a specified base plus a specified margin; 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, and are subject to certain terms and conditions:First Lien Term Loan (Tranche 1)interest at 2.53% and 2.50% as of April 3, 2010 and January 2, 2010, respectively,
with any remaining unpaid balance due November 22, 2012

$
16,097

$
17,123First Lien Term Loan (Tranche 2)interest at 7.00% and 7.00% as of April 3, 2010 and January 2, 2010, respectively,
with any remaining unpaid balance due November 22, 2014


273,346


273,346Argentine Facility:Argentine Peso Loaninterest at 18.85% as of April 3, 2010 and 18.85% at January 2, 2010, denominated in Argentine pesos
due in 25 remaining quarterly payments of approximately $0.2 million ($0.4 million for three quarterly payments in 2010) beginning in February 2010


5,968


6,307Argentine Peso Loan for working capitalinterest at 18.85% as of April 3, 2010 and 18.85% at January 2, 2010, denominated
in Argentine pesos due in 11 remaining quarterly payments of approximately $0.1 million ($0.2 million for three quarterly payments in 2010) beginning in January 2010


1,730


1,892United States Dollar Loaninterest at 3.17% as of April 3, 2010 and 3.25% as of January 2, 2010, denominated in U.S.
dollars due in 25 remaining quarterly payments of approximately $0.9 million ($1.7 million per quarter in 2010) beginning in March 2010


24,154


25,880Mexico Term Loaninterest at 8.09% as of April 3, 2010 and 8.05% as of January 2, 2010; denominated in U.S. dollars due in
19 remaining quarterly payments of approximately $0.7 million


12,523


13,841Other


466


553334,284


338,942Less: Current maturities


(15,332
)

(16,921
)$
318,952

$
322,021


Credit Facility

Prior to the most recent amendment (discussed herein), the Company's credit facility (the "Credit Facility"), which was entered into on
November 22, 2005 and amended as of December 8, 2006, consisted of a $410.0 million first-lien term loan (the "Term Loan") and a $45.0 million secured revolving
credit facility (the "Revolving Credit Facility") maturing on November 22, 2010. In addition, the interest

19

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

rate
for both the Term Loan and the Revolving Credit Facility was based on a spread over the London Interbank Offered Rate ("LIBOR") of 2.25%, or 1.25% over a defined Alternate Base Rate. The Credit
Facility also included customary representations and warranties, covenants and events of default, including, in certain circumstances, acceleration of obligations thereunder upon an event of default.

On
September 17, 2009, the Company entered into Amendment No. 2 (the "Amendment") to the Credit Agreement. As a result of the Amendment, the Company extended the maturity
date of approximately $295.7 million of its then-outstanding $317.6 million Term Loan to November 22, 2014. As a result of the Amendment, availability under the
Revolving Credit Facility matures in two tranches: $15.0 million (Tranche 1) on November 22, 2010 and $30.0 million (Tranche 2) on November 22, 2013, unless
the Tranche 1 Term Loan exceeds $10.0 million on August 24, 2012. If that condition is met, then the Tranche 2 Revolver matures on August 24, 2012. In conjunction
with the execution of the Amendment, the Company repaid approximately $24.0 million of net outstanding borrowings under the Term Loan.

The
Amendment also: (i) allows for additional Term Loan tranches that extend the maturity date of the Term Loan to November 22, 2014 at an interest rate of LIBOR plus 4.5%
(with a LIBOR floor of 2.5%); (ii) allows for additional Revolving Credit Facility tranches that extend the maturity date of the Revolving Credit Facility to November 22, 2013 at an
interest rate of LIBOR plus 4.5% (with a LIBOR floor of 2.5%); (iii) removes the requirement for future step downs or step ups in financial covenants; (iv) establishes price protection
for the new tranches requiring matching yields if any future tranches are established at yields at least 25 basis points above the current loan tranches; (v) revised certain definitions and
baskets related to permitted investments, acquisitions and assets sales; and (vi) required repayment of $24.0 million of net outstanding borrowings under the Term Loan at the closing. If
outstanding borrowings under the original Term Loan tranche that matures November 22, 2012 exceed $10.0 million on August 24, 2012, the new Revolving Credit Facility tranche will
mature August 24, 2012.

As
of April 3, 2010, the Term Loan consists of $16.1 million of net outstanding amounts maturing on November 22, 2012 ("Tranche 1 Term Loan") and
$273.3 million maturing on November 22, 2014 ("Tranche 2 Term Loan"). Similarly, as of April 3, 2010, the Revolving Credit Facility consisted of $15.0 million of
availability maturing on November 22, 2010 ("Tranche 1 Revolver") and $30.0 million of availability maturing on November 22, 2013 ("Tranche 2 Revolver"), under
which, there were no amounts outstanding as of April 3, 2010. Interest will continue to be payable on a quarterly basis. Principal payments of approximately $1.0 million will continue to
be due quarterly.

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 Tranche 1 Revolver and
0.75% of the daily unused amount of the Tranche 2 Revolver. 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

20

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

a
leverage ratio of not more than 3.50:1.00 as of April 3, 2010 and through the remaining term of the Credit Facility. The interest expense coverage ratio requirement at April 3, 2010
and through the remaining term of the Credit Facility requires that it not be less than 3.00:1.00. The Company was in compliance with the financial covenants under the Credit Facility at
April 3, 2010. 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.

The
Term Loan requires mandatory payments of approximately $1.0 million per quarter. Under the Amendment, the Company has the option to either prorate such principal payments
across the two tranches or to apply them to the tranche with the earliest maturity date. In addition, the Credit Facility, as amended, 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. Any such amount would be
payable in March 2011 and classified, 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 April 3, 2010. The Company currently estimates that there will not be any additional excess cash flow requirement with
respect to fiscal 2010. There was no additional excess cash flow requirement with respect to fiscal 2009. The Company may, at its discretion and based on projected operating cash flows, the current
market value of the 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 the Term Loan under its Credit Facility from its existing lenders at a discount to the carrying value of its debt.
Under these agreements the Company's subsidiary will acquire the rights and obligations of a lender under the Credit Facility to the extent of the amount of debt acquired, 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 ASC 860. During the first quarter of fiscal 2009, the Company reacquired $15.0 million of principal amount 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 Tranche 1 Term Loan and Tranche 1 Revolver is based on the three-month or the one-month LIBOR plus a
specified margin. The applicable margin for borrowings under both the Tranche 1 Term Loan and Tranche 1 Revolver is 225 basis points. Further, 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.

21

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

The
interest rate applicable to borrowings under the Tranche 2 Term Loan and Tranche 2 Revolver is based on LIBOR plus a margin of 450 basis points, with a LIBOR floor of
250 basis points.

In
accordance with the terms of the Credit Facility, the Company maintained its position in an interest rate swap agreement originally entered into in February 2007. The 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 interest rate swap 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%. These agreements are more fully described in Note 13, "Derivatives and
Other Financial Instruments and Hedging Activities" and Note 14, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities."

There
were no borrowings under the Revolving Credit Facility as of April 3, 2010 or January 2, 2010. Average daily borrowings under the Revolving Credit Facility, which
were primarily LIBOR rate-based borrowings, were $3.4 million at an average interest rate of 4.88% for the period from January 3, 2010 to April 3, 2010. 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 April 3, 2010, the Company has effectively reserved
capacity under the Revolving Credit Facility in the amount of
$10.7 million relating to standby and documentary letters of credit outstanding. These letters of credit are primarily provided to certain administrative service providers and financial
institutions. None of these letters of credit had been drawn on at April 3, 2010.

As
of April 3, 2010, the Company also had other outstanding letters of credit in the amount of $2.7 million primarily provided to certain raw material vendors. None of
these letters of credit had been drawn on at April 3, 2010.

In
fiscal 2009, the Company entered into short-term credit facilities to finance insurance premium payments. The outstanding indebtedness under these short-term
borrowing facilities was $0.8 million and $0.3 million as of April 3, 2010 and January 2, 2010, respectively. These facilities mature at various dates through October 2010.
Borrowings under these facilities are included inShort-term borrowingsin the Consolidated Balance Sheets.

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 $5.8 million and $3.4 million as of April 3, 2010 and January 2,
2010, respectively. These facilities mature at various dates through September 2010. As of April 3, 2010, the average interest rate of these borrowings was 3.44%. 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

22

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 9. Debt (Continued)

assignment
agreement related to a portion of receivables due from certain major customers of the subsidiary. As of April 3, 2010, the outstanding indebtedness was approximately
$31.9 million, consisting of 7.7 million Argentine peso-denominated loans and a $24.2 million U.S. dollar-denominated loan. As of January 2, 2010, 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. Current maturities of this debt amount to $8.4 million as of April 3, 2010. 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 $1.7 million in September 2012, approximately $24.2 million in April 2016 and the
balance of $6.0 million maturing in May 2016.

In
April 2009, the Company amended its Argentine Facility to effectively defer $3.8 million of 2009 scheduled payments under the facility for a period of twelve months.
Accordingly, the Company has classified such payments, along with scheduled 2010 maturities, as current portion of long-term debt in its Consolidated Balance Sheet as of April 3,
2010 and January 2, 2010.

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 three-month LIBOR plus 780 basis points. A series of 22 quarterly principal payments
commenced on October 1, 2009; interest payments commenced on July 1, 2009. As of April 3, 2010, outstanding indebtedness under the Mexico Credit Facility was approximately
$12.5 million.

Note 10. Income Taxes

During the three months ended April 3, 2010, the Company recognized income tax expense of $0.2 million on consolidated income before income taxes from continuing operations
of $0.5 million. During the three months ended April 4, 2009, the Company recognized income tax expense of $7.2 million on consolidated income before income taxes from continuing
operations of $12.9 million. 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,
institution of a flat tax regime in Mexico, U.S. state income taxes, changes in the amounts recorded for tax uncertainties in accordance with ASC 740-10, "Income Taxes", and foreign taxes
calculated at statutory rates different than the U.S. federal statutory rate.

23

---





Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 10. Income Taxes (Continued)

The total unrecognized tax benefits of $19.5 million as of April 3, 2010 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 April 3, 2010 was $2.7 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.

During
the three months ended April 3, 2010, the Company increased the liability for unrecognized tax benefits by $1.1 million, net of additional interest and penalties of
$0.7 million. During the three months ended April 4, 2009, the Company increased the liability for unrecognized tax benefits by $0.9 million, which included interest and penalties
of $0.3 million.

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 April 3, 2010, 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, Spain 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 2003 through 2009. Although the results of current tax audits 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 $2.2 million
and $3.9 million at April 3, 2010 and January 2, 2010, respectively. These amounts are included inOther current assetsin the
Consolidated Balance Sheets.

Note 11. 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.

24

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 11. Pension and Postretirement Benefit Plans (Continued)

Components
of net periodic benefit costs for the three months ended April 3, 2010 and April 4, 2009 are as follows (in thousands):

Pension Benefits

Postretirement BenefitsThree Months Ended

Three Months EndedApril 3, 2010

April 4, 2009

April 3, 2010

April 4, 2009Current service costs

$
502

$
503

$
19

$
8Interest costs on projected benefit obligation and other


1,596


1,602


85


70Return on plan assets


(1,480
)

(1,490
)

(11
)

Amortization of transition obligation and other


51


121


(63
)

(80
)Periodic benefit cost, net

$
669

$
736

$
30

$
(2
)


As
of April 3, 2010, the Company had contributed $1.8 million to its pension and postretirement benefit plans for the 2010 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. The Company presently anticipates contributing an additional
$4.3 million to fund its plans in 2010, for a total of $6.1 million.

Note 12. 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 April 3, 2010 and January 2, 2010, the Company had awarded grants of
non-qualified stock options to purchase 174,097 shares and 174,097 shares of the Company's Class A Common Stock, respectively, of which 117,612 options have an exercise date of
April 25, 2010. At April 3, 2010, there remain 214,612 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 ASC 718. As of April 3, 2010, with respect to the 174,097 options to purchase Class A Common Stock awarded
under the 2003 Option Plan, none are subject to future vesting based on the attainment of future performance targets that have not been established as of April 3, 2010. Accordingly, pursuant to
ASC 718, 174,097 options to purchase Class A Common Stock have been considered granted under the 2003 Option Plan as of April 3, 2010. During the first three months of fiscal 2010, no
options were forfeited. During the first three months of

25

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Stock Option and Restricted Stock Plans (Continued)

fiscal
2009, 18,055 options were forfeited as the performance targets for fiscal 2008 were not achieved. Of such options forfeited, 16,055 were made subject to 2009 performance targets and are
considered re-granted options in fiscal 2009 in accordance with ASC 718. The compensation costs related to the 2003 Option Plan were not material for each of the three month periods ended
April 3, 2010 and April 4, 2009 and were included inSelling, general and administrative expensesin the Consolidated Statements of
Operations.

Information
regarding the Company's stock options granted, as defined by ASC 718, and outstanding as of April 3, 2010 is as follows:

Vested

Expected
to VestFor options granted and outstanding:Number of options


141,278


32,820Weighted average exercise price

$
6.00

$
6.00Aggregate intrinsic value (in 000s)

$
1,483

$
345For nonvested options:Compensation cost not yet recognized (in 000s)




$
134Weighted average period of recognition (years)





0.6


ASC
718 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 three months of fiscal 2010 and fiscal 2009, the Company awarded 16,926 and 46,810 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 twenty-four months, totaled approximately $0.2 million and
$0.1 million for each of the periods noted above and was included inSelling, general and administrative expensesin the Consolidated Statements
of Operations. Compensation cost not yet recognized for awards under the 2004 Directors Plan was approximately $0.2 million and the weighted average period of recognition for such compensation
was 1.0 years as of April 3, 2010.

26

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Stock Option and Restricted Stock Plans (Continued)

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 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 for the first quarter of fiscal
2010 and the first quarter of fiscal 2009 and were included inSelling, general and administrative expensesin the Consolidated Statements of
Operations. Compensation cost not yet recognized for such nonvested restricted shares issued under the terms of the Executive Employment Agreement was approximately $0.4 million and the
weighted average period of recognition for such compensation was 0.7 years as of April 3, 2010.

As
of April 3, 2010, there remain 71,141 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 first four 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.

In
March 2009, the Board of Directors approved a measure to cease making awards under the 2005 Stock Plan. During the first quarter of fiscal 2010, 11,309 shares were surrendered by
employees to satisfy withholding requirements. During the first quarter of fiscal 2009, 32,237 restricted shares were considered re-granted to certain employees of the Company in
accordance with ASC 718. In addition, 6,143 shares were surrendered during the first quarter of fiscal 2009 by employees to satisfy withholding requirements and 32,747 shares were forfeited.

The
compensation costs associated with the 2005 Stock Plan totaled $0.2 million and $0.2 million for the three months ended April 3, 2010 and April 4, 2009,
respectively, and were included inSelling, general and administrative expensesin the Consolidated Statements of Operations. As of April 3,
2010, 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.

The
Company accounts for the 2005 Stock Plan in accordance with ASC 718. As of April 3, 2010, of the 372,009 shares awarded and outstanding under the 2005 Stock Plan, 22,525
shares are subject to future vesting based on the attainment of future performance targets, which targets had not been established as of April 3, 2010. Accordingly, pursuant to the provisions
of ASC 718, 349,484 restricted shares are considered granted under the 2005 Stock Plan as of April 3, 2010. Compensation cost not yet recognized for nonvested restricted shares considered
granted under the 2005 Stock Plan was

27

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Stock Option and Restricted Stock Plans (Continued)

approximately
$0.9 million as of April 3, 2010, and the weighted average period of recognition for such compensation was 1.0 years as of April 3, 2010.



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 or other events, as defined.

Beginning
in fiscal year 2008, various awards were approved and issued to certain employees of the Company under the 2008 LTI Stock Plan. In the first quarter of fiscal 2010, 252,728
restricted stock units were converted to restricted stock, of which 83,398 vested upon award, based on the Company achieving the maximum level of the performance targets for fiscal 2009. In addition,
during the first quarter of fiscal 2010, 29,177 shares were surrendered by employees to satisfy withholding requirements and 413 shares were forfeited. All restricted stock units will be settled in
the form of restricted shares upon vesting. In 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.

As
of April 3, 2010, awards of 539,556 restricted shares of the Company's Class A Common Stock and 42,345 restricted stock units were outstanding, of which 125,231 shares
were vested. As of April 3, 2010, 493,099 shares are considered available for future grant under the 2008 LTI Stock Plan. The compensation costs associated with the 2008 LTI Stock Plan totaled
$0.8 million and $0.1 million for the first three months of fiscal 2010 and 2009, respectively, and are included inSelling, general and administrative
expensesin the Consolidated Statements of Operations. Compensation cost not yet recognized for awards under the 2008 LTI Stock Plan was approximately $1.9 million as of
April 3, 2010, and the weighted average period of recognition for such compensation was 0.8 years as of April 3, 2010.

Other Compensation Arrangement

On March 31, 2010, the Company entered into new employment agreement with its Chief Executive Officer that provides for a
one-time award of equity and cash at the expiration date of the agreement (the "Retirement Incentive"). The equity award component is dependent upon an ending stock price at the
measurement date, defined in the agreement, and will range between 20,000 shares and 100,000

28

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 12. Stock Option and Restricted Stock Plans (Continued)

shares.
The cash award will be equal to thirty percent of the future value of the awarded, which shall be neither less than $250,000 nor greater than $1,000,000.

Management
has concluded that the stock award component should be accounted for as a "Equity-classified award" as defined with ASC 718, since the Company intends to issue PGI common
shares. In addition, the Company currently intends for the future stock award to be issued under the 2008 LTI Stock Plan. Further, management has concluded that the cash award should be accounted for
as a "Liability-classified award" as defined with ASC 718, since the Company intends to pay cash for this compensation component. Accordingly, the Company will recognize compensation expense of
$1.4 million during the period beginning March 31, 2010 through April 22, 2013, on a pro-rata basis.

Note 13. 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. On
February 12, 2009, as disclosed in Note 9 "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 (the "2009 Swap"), which effectively converts the variable LIBOR-based interest payments associated with $240.0 million of the 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 ASC 815, the Company designated the 2009 Swap as a cash flow hedge of the variability of interest payments with changes in fair value of the 2009 Swap recorded in Accumulated other comprehensive
incomein the Consolidated Balance Sheets. As of September 17, 2009, in conjunction with the Amendment and in
accordance with ASC 815-30, the Company concluded that 92% (which represents the approximate percentage of the Tranche 1 Term Loan debt considered extinguished by the Amendment), of
the 2009 Swap was no longer effective; accordingly, 92% of $3.9 million related to the 2009 Swap and included inAccumulated Other Comprehensive
Incomewas frozen and will be reclassified to earnings as future interest payments are made throughout the term of the 2009 Swap. This portion of the notional amount no longer
met the criteria for cash flow hedge accounting treatment in accordance with ASC 815. See Note 14 "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" for
the fair value measurement disclosures for these assets and liabilities.

Through
June 2009, the Company had 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% (the "2007 Swap"). 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.

29

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 13. Derivative and Other Financial Instruments and Hedging Activities (Continued)

The
impact of these swaps onInterest expense, netin the Consolidated Statements of Operations were increases of $1.0 million and
$2.2 million for the three months ended April 3, 2010 and April 4, 2009, respectively.

On
February 10, 2010, the Company entered into a series of foreign exchange forward contracts (put options and call options) with a third-party financial institution that provided
for a floor and ceiling price on payments related to the Company's new line under construction in Suzhou, China. The objective of the combination foreign exchange forward contracts 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 2012, was €25.6 million, which will result in a U.S. dollar equivalent range
of $34.6 million to $36.2 million. Cash settlements under the forward contracts coincide with the payment dates on the equipment purchase contract. As of April 3, 2010, the
Company has recorded the asset associated with the previously unrecognized firm commitment and the liability associated with the hedging agreement. The following table summarizes the aggregate
notional amount and estimated fair value of the Company's derivative instruments as of April 3, 2010 and January 2, 2010 (in thousands):

As of April 3, 2010

As of January 2, 2010Notional

Fair Value

Notional

Fair ValueCash flow hedges:Interest rate swaps (1)

$
18,693

$
310

$
18,693

$
283Interest rate swapsundesignated (1)


221,307


3,561


221,307


3,256Foreign currency hedges:Foreign exchange contracts


34,562


636





Foreign exchange contractsundesignated











Net value

$
274,562

$
4,507

$
240,000

$
3,539


(1)Comprised
of a $240.0 million notional amount interest rate swap agreement that was executed, became effective on June 20, 2009 and matures on
June 30, 2011.


30

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 13. Derivative and Other Financial Instruments and Hedging Activities (Continued)




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 Cash Flow Hedging Relationships

April 3, 2010

April 4, 2009

April 3, 2010

April 4, 2009Derivatives designated as hedging instruments:Interest rate contracts

$
533

$
112

$
(1,049
)
$
(2,194
)Derivatives not designated as hedging instruments


N/A


N/A


N/A


N/A


(1)Amount
of Gain (Loss) (Effective Portion) Reclassified from Accumulated Other Comprehensive Income into Income is located in Interest Expense, netin the Consolidated Statements of Operations. There is no
ineffective portion.


See
Note 14, "Fair Value of Financial Instruments and Non-Financial Assets and Liabilities" for additional disclosures related to the Company's derivative instruments.

Note 14. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities

The Company adopted ASC 820, 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 financial derivatives
are valued based on the prevailing market yield information on the date of measurement. The guidance establishes three levels of inputs that may be used to measure fair value, 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 are 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, that reflect the Company's assumptions about the pricing of an asset or
liability.

31

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 14. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities (Continued)

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 April 3, 2010 and January 2, 2010. The firm commitment identified within the table below is recorded on the Company's Consolidated Balance
Sheets withinProperty, plant and equipment, netand the foreign exchange contract identified within the table below is recorded on the Company's
Consolidated Balance Sheets withinAccounts 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 withinOther noncurrent liabilities(in thousands):

As of
April 3, 2010

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other
Observable Inputs
(Level 2)

Unobservable Inputs
(Level 3)Firm commitment

$
636




$
636


Derivative liabilities:Interest rate swap agreements


(3,871
)




(3,871
)

Foreign exchange contract


(636
)




(636
)






As of
January 2, 2010

Quoted Prices in Active Markets for Identical Assets (Level 1)

Significant Other
Observable Inputs
(Level 2)

Unobservable Inputs
(Level 3)Derivative liabilities:Interest rate swap agreements


(3,539
)




(3,539
)




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 $0.3 million during the first quarter of fiscal 2010 was allocated in accordance with ASC 820, with $0.3 million charged to Interest
expense, net in the Consolidated Statement of Operations.

The
Company has estimated the fair values 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 and
short-term borrowings are reasonable estimates of their fair values. The carrying amount and estimated fair value of the Company's long-term debt as of April 3, 2010 and
January 2, 2010 is presented in the following table (in thousands):

As of April 3, 2010

As of January 2, 2010Carrying Value

Fair Value

Carrying Value

Fair ValueLong-term debt (including current portion)

$
334,284

$
331,770

$
338,942

$
333,189


See
Note 13, "Derivatives and Other Financial Instruments and Hedging Activities" for additional disclosures related to the Company's derivative instruments.

32

---





Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 15. Earnings Per Share and Shareholders' Equity

The
following is a reconciliation of basic income from continuing operations per common share attributable to Polymer Group, Inc. common shareholders to diluted income from
continuing operations per common share attributable to Polymer Group, Inc. common shareholders for the three months ended April 3, 2010 (in thousands, except per share data):

Income from
Continuing Operations
(EPS Numerator)

Average Shares
Outstanding
(EPS Denominator)

Earnings Per
Common ShareThree months ended April 3, 2010Basic

$
213


20,517.0

$
0.01Potential shares exercisable under share-based plans





644.7Less: shares which could be repurchased under treasury stock method





(194.0
)Diluted

$
213


20,967.7

$
0.01


Under
the treasury stock method, for the three months ended April 3, 2010 shares represented by the exercise of 4,920 nonvested restricted shares were not included
in diluted earnings per share because to do so would have been anti-dilutive.

The
following is a reconciliation of basic income from continuing operations per common share to diluted income from continuing operations per common share attributable to PGI common
shareholders for the three months ended April 4, 2009 (in thousands, except per share data):

Income from
Continuing Operations
(EPS Numerator)

Average Shares
Outstanding
(EPS Denominator)

Earnings Per
Common ShareThree months ended April 4, 2009Basic

$
7,615


19,386.5

$
0.39Potential shares exercisable/earned under share-based plans





4.4Less: shares which could be repurchased under treasury stock method





(2.7
)Diluted

$
7,615


19,388.2

$
0.39


Under
the treasury stock method, shares represented by the exercise of 167,457 options, and 50,495 nonvested restricted shares, were not included in diluted earnings per
share because to do so would have been anti-dilutive.

As
of April 3, 2010, 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


33

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 15. Earnings Per Share and Shareholders' Equity (Continued)

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.

A
reconciliation of equity attributable to Polymer Group, Inc. and the noncontrolling interests for the three months ended April 3, 2010 is as follows (in thousands):

Polymer Group, Inc. ShareholdersTotal

Comprehensive
Income (loss)

Retained
Deficit

Accumulated
Other
Comprehensive
Income

Common
Stock

Paid-in
Capital

Noncontrolling
InterestBalance, January 2, 2010

$
149,129




$
(112,885
)
$
41,998

$
210

$
211,768

$
8,038Compensation recognized on share-based awards


1,257











2


1,255Surrender of shares to satisfy withholding tax obligations


(644
)













(644
)Comprehensive income (loss):Net income


301

$
213


213











88Other comprehensive income (loss), net of tax:Cash flow hedge adjustment, net of reclassification adjustment


533


533





533Employee benefit plans


91


91





91Currency translation adjustments


(6,577
)

(6,581
)




(6,581
)







4Other comprehensive loss


(5,953
)

(5,957
)













4Comprehensive loss


(5,652
)
$
(5,744
)













92Balance, April 3, 2010

$
144,090




$
(112,672
)
$
36,041

$
212

$
212,379

$
8,130


Note 16. 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 ASC 360, presented Fabpro as a discontinued operation for all reported periods presented. 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 months ended April 2010 and the three months ended April 4, 2009 relating to acquisition and
integration expenses and special charges, net that have not been allocated to the segment data.

34

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 16. Segment Information (Continued)

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

Three Months EndedApril 3,
2010

April 4,
2009Net salesNonwovens

$
256,199

$
191,628Oriented Polymers


24,396


18,382$
280,595

$
210,010Operating incomeNonwovens

$
24,068

$
27,945Oriented Polymers


(392
)

1,334Unallocated Corporate


(8,705
)

(6,350
)14,971


22,929Acquisition and integration expenses


(1,524
)

Special charges, net


(4,217
)

(2,891
)$
9,230

$
20,038Depreciation and amortization expenseNonwovens

$
12,036

$
11,302Oriented Polymers


147


381Unallocated Corporate


286


190Depreciation and amortization expense included in operating income


12,469


11,873Amortization of loan acquisition costs


215


335$
12,684

$
12,208Capital spendingNonwovens

$
4,508

$
3,338Oriented Polymers


205


56Corporate





45$
4,713

$
3,439




April 3,
2010

January 2,
2010Division assetsNonwovens

$
734,905

$
741,419Oriented Polymers


40,765


36,255Corporate


6,579


3,763Eliminations


(73,045
)

(79,071
)$
709,204

$
702,366


35

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 16. Segment Information (Continued)

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 EndedApril 3,
2010

April 4,
2009Net salesUnited States

$
80,089

$
76,214Canada


23,501


17,941Europe


72,101


38,687Asia


31,371


24,204Latin America


73,533


52,964$
280,595

$
210,010Operating incomeUnited States

$
(4,198
)
$
6,135Canada


(796
)

1,481Europe


2,961


847Asia


6,170


5,815Latin America


10,834


8,65114,971


22,929Acquisition and integration expenses


(1,524
)

Special charges, net


(4,217
)

(2,891
)$
9,230

$
20,038Depreciation and amortization expenseUnited States

$
3,692

$
3,703Canada


137


375Europe


1,463


1,822Asia


1,984


2,333Latin America


5,193


3,640Depreciation and amortization expense included in operating income


12,469


11,873Amortization of loan acquisition costs


215


335$
12,684

$
12,208


36

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 16. Segment Information (Continued)



April 3,
2010

January 2,
2010Property, plant and equipment, netUnited States

$
84,474

$
91,700Canada


5,334


5,052Europe


29,936


33,203Asia


56,523


54,596Latin America


141,187


146,742$
317,454

$
331,293


Note 17. Foreign Currency and Other (Gain) Loss, Net

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

Three Months EndedApril 3,
2010

April 4,
2009Included in operating income

$
(730
)
$
36Included in other expense (income)


(209
)

2,031$
(939
)
$
2,067


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 18. 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.

The
Company has a commitment to make payments of approximately $37.4 million (€27.8 million, using the € to $ exchange rate as of
April 3, 2010) that are attributable to the Building and Equipment Lease agreement between PGI Spain and Tesalca-Texnovo. See Note 4, "Acquisitions" for additional disclosures related to
the Building and Equipment Lease agreement.

37

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 18. Commitments and Contingencies (Continued)

In
December 2009, the Company announced plans to install new spunmelt equipment in the United States and China, with construction associated with the projects to begin in 2010. The
Company expects to invest approximately $132 million to $140 million, in aggregate, in the projects. Funding for the investments is expected to be generated from a combination of
internally generated funds and proceeds from financing sources, including an operating lease in the U.S. for up to $50 million. Subject to execution of an operating lease, the Company expects
to recognize capital expenditures of $82 million to $90 million associated with the projects during the 24-month period that includes fiscal years 2010 and 2011. As of
April 3, 2010, the Company had entered into a firm purchase commitment (the "Purchase Agreement") to acquire and install the aforementioned line at the Company's facility in Suzhou, China. As
of April 3, 2010, the total remaining payments with respect to the China expansion project were approximately $62.5 million, which are expected to be expended through second quarter of
fiscal year 2012.

Additionally,
the Purchase Agreement contemplates that the Company would acquire an additional spunmelt line to be installed in the United States (the "U.S. Spunmelt Line"), and as such,
provide for a discounted price structure. Should the Company not enter into a new firm purchase commitment with the equipment manufacturer for the U.S. Spunmelt Line by June 1, 2010, the
Company's obligation under the Purchase Agreement would increase by approximately €1.5 million. Currently, the Company is seeking funding alternatives for the U.S. Spunmelt
Line, which would include approximately $50.0 million of operating lease proceeds.

The
Company is working with banks in China to secure up to $30.0 million in outside financing for this capital project. If the Company is unable to secure outside financing, the
capital project will be funded using a combination of existing cash balances, internal cash flows and existing U.S. based credit facilities.

Note 19. Supplemental Cash Flow Information

Noncash investing or financing activities in the first three months of fiscal 2010 included the surrender of 40,374 shares of the Company's Class A Common Stock to the Company by
participants in the various stock compensation plans in the amount of $0.6 million to satisfy employee withholding tax obligations.

Noncash
investing or financing activities in the first three months of fiscal 2009 included the surrender of 6,143 shares of the Company's Class A Common Stock to the Company by
participants in the various stock compensation plans in the amount of $0.1 million to satisfy employee withholding tax obligations.

Note 20. Subsequent Events

On April 7, 2010, the Company announced that its Board of Directors is evaluating strategic alternatives to unlock shareholder value created by the Company's strong performance in
fiscal 2009, its continued investment in growth initiatives and its significant improvement in financial flexibility. The strategic alternatives could include, among other things, the sale, merger or
recapitalization of the Company. The Company has not set a definitive timetable for completion of its evaluation and there can be no assurances that the process will result in any transaction being
announced or being completed.

38

---



Table of Contents

POLYMER GROUP, INC.

Notes to Consolidated Financial Statements (Continued)

Note 20. Subsequent Events (Continued)

Effective
May 4, 2010, the Company converted $10.0 million of its Tranche 1 Revolver commitments to Tranche 2 Revolver commitments. The additional
$10.0 million of Tranche 2 Revolver commitments will assume the same maturity date (November 22, 2013) and interest rate (LIBOR plus 4.5%, with a LIBOR floor of 2.5%) as the
existing Tranche 2 Revolver. The Company incurred an administrative fee of $0.2 million, which will be recorded asLoan acquisition costsin the second quarter of fiscal 2010, related to this refinancing. See Note 9, "Debt" for additional information on the Tranche 1 Revolver.

On
January 19, 2010, the Company entered into the Purchase Agreement to acquire a new spunmelt line to be installed at the Company's manufacturing facility in Suzhou, China. The
Purchase Agreement contemplated that the Company would acquire an additional spunmelt line to be installed in the United States (the "U.S. Spunmelt Line"), and as such, provided for a discounted price
structure. The contract originally included a requirement that should the Company not enter into a new firm purchase commitment with the equipment manufacturer for the U.S. Spunmelt Line by
January 19, 2011, the Company's obligation under the Purchase Agreement would increase by approximately €1.5 million. On May 1, 2010, the Company amended the
Purchase Agreement to change the requirement to enter into a purchase contract for a second line from
January 19, 2011 to June 1, 2010 in order to gain the opportunity for an accelerated delivery of the second line. Currently, the Company is seeking funding alternatives for the U.S.
Spunmelt Line to include approximately $50.0 million of operating lease proceeds.

39

---





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 nine 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 change in macro-economic conditions in 2008 and 2009
negatively impacted certain market segments, specifically durable products used in industrial applications. The 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 in the range of 3.0% to 5.0% CAGR, with higher growth rates expected 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. 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 technology and raw materials, which should
result in the development of high-performance nonwovens, leading to new uses and markets. We believe our 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

40

---



Table of Contents

industry
averages depending upon the regions and markets we choose to operate in and the technology that we develop.

The
Nonwovens segment develops and sells products in various consumer and industrial markets, including hygiene, medical, industrial, and wiping. Nonwovens segment sales were
approximately $804.8 million, $971.4 million and $885.7 million of our consolidated net sales for fiscal 2009, 2008 and 2007, respectively, and represented approximately 91%, 91%
and 89% of our consolidated net sales in each of those years.

Nonwovens
are categorized as either disposable or durable. 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
$77.8 million, $101.8 million and $114.1 million for fiscal 2009, 2008 and 2007, respectively, and represented approximately 9%, 9% and 11% 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 Financial Accounting Standards Accounting Standards Codification ("ASC") Topic 360, the assets of Fabpro
Oriented Polymers, LLC ("Fabpro") represented 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 were 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 a 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.

41

---



Table of Contents

Approximately
three-fourths of our sales are generated from disposable products that are not as significantly impacted by macro market swings, providing a base of volume demand that is
relatively stable during times of economic downturns. In late 2008 and continuing through 2009, the general worldwide economy experienced a downturn resulting in slower economic activity due to the
effects of several factors, including: the subprime lending and general credit market crisis, the collateral effects on the finance and banking industries, decreased consumer confidence and demand,
reduced corporate profits and spending, adverse business conditions, increased energy costs, concerns about inflation and liquidity concerns. Certain portions of our business were
negatively affected by the macro economic changes, most specifically the portion of our business serving the industrial markets associated with durable goods applications. The most notable impacts
were in our European and North American regions where we experienced significant decreases in our sales volumes. If certain of the markets we serve deteriorate further based on a resurgence of
recessionary trends, our business, financial condition and results of operations may be materially and adversely affected. Conversely, as worldwide economic purchase volumes declined, the cost of our
raw materials declined significantly, beginning in the fourth quarter of 2008. This dramatic change, combined with other specific business initiatives to improve profits, resulted in a positive impact
to our overall earnings in 2009, primarily in the first six months, offsetting the negative impacts of lower volumes.

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 $5.2 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
fiscal 2009, we experienced increases in the cost of polypropylene resin versus the cost of such resin at the end of fiscal 2008 and are experiencing significant volatility in
resin prices. During the first quarter of fiscal 2010, raw material costs have continued to increase significantly versus the end of fiscal 2009 and we announced a global price increase in response.
Additionally, on a global basis, other

42

---



Table of Contents

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. If raw material prices were to continue to increase at this pace, our results may be materially and adversely affected.

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 affect our business until alternative supply
arrangements were secured or alternative suppliers were qualified with customers. We have not experienced, and do not expect, any significant disruptions in supply as a result of shortages in raw
materials.

Business Acquisitions



On December 2, 2009, we completed the initial phase of the acquisition, from Grupo Corinpa, S.L. ("Grupo Corinpa"), of
certain assets and the operations of the nonwovens businesses of Tesalca-99, S.A. and Texnovo, S.A. (together with Tesalca-99, S.L., "Tesalca-Texnovo" or
the "Sellers"), which are headquartered in Barcelona, Spain (the "Spain Business Acquisition"). We completed the Spain Business Acquisition through PGI Spain, which operates as a new wholly
owned subsidiary.

The
acquired assets include the net operating working capital as of November 30, 2009 (defined as current assets less current liabilities excluding financial liabilities
associated with the operations), the customer lists and the current book of business. Concurrent with the Spain Business Acquisition,
we entered into a seven year lease (beginning December 2, 2009 and ending December 31, 2016) with Tesalca-Texnovo that provides that PGI Spain is entitled to the full and
exclusive use of the Sellers' land, building and equipment during the term of the lease (the "Building and Equipment Lease"). PGI Spain is obligated to remit approximately
€29.0 million to Tesalca-Texnovo during the term of the Building and Equipment Lease agreement. Pursuant to ASC 840, the Building and Equipment Lease agreement has been
accounted for as an operating lease. Furthermore, pursuant to ASC 840-20-25-2, PGI Spain will recognize rent expense on a straight-line basis
over the lease term.

Further,
as part of the Spain Business Acquisition, PGI Spain granted the Sellers a put option over the assets underlying the Building and Equipment Lease (the "Phase II Assets")
until December 31, 2012 (the "Put Option"). The Sellers' right to exercise the Put Option is dependent upon whether the results of the operations of PGI Spain meet the annual EBITDAR (earnings
before interest, taxes, depreciation, amortization and rent, all as defined in the acquisition agreement) performance projection of €7.7 million, excluding lease payments
("EBITDAR Projection"), for either fiscal year 2010 or 2011 (the "Performance Period"). Furthermore, the Sellers granted PGI Spain a call option over the assets underlying the Phase II Assets,
which expires on December 31, 2012 (the "Call Option"). If the results of the operations of PGI Spain do not meet the EBITDAR Projection for the Performance Period, then the Sellers' Put Option
cannot be exercised and thus would expire at the end of its term. In the event that either the Put Option or Call Option is not exercised, the parties are obligated to continue with the Building and
Equipment Lease until December 31, 2016.

Consideration
for the acquired assets consisted of approximately 1.049 million shares of our Class A common stock ("Issued Securities"), which represented approximately
5.0% of our outstanding share capital, on December 2, 2009, taking into account the Issued Securities. The Issued Securities are subject to certain restrictions, including that the Issued
Securities are not registered pursuant to the Securities Act of 1933. On December 2, 2009, the fair value of the Issued Securities approximated $14.5 million.

43

---



Table of Contents

Contrary
to the Company's expectations previously discussed in Item 8 of Part II to the Company's Annual Report on Form 10-K for fiscal year 2009, we
recently concluded that Tesalca-Texnovo does not meet the criteria to be considered a variable interest entity. We reached this conclusion in accordance with our reevaluation of ASC 810, based
on both the accounting guidance prior to the revisions that came into effect on January 3, 2010 and the revised accounting guidance that came into effect on January 3, 2010. Accordingly,
we have concluded that it would not appropriate to consolidate the financial results of Tesalca-Texnovo within its consolidated financial statements.

For
further details regarding this acquisition, see Note 4 "Acquisitions" to the consolidated financial statements included in Item 1 of Part I to this Quarterly
Report on Form 10-Q.



In the fourth quarter of fiscal 2009, we completed the acquisition of the 40% non-controlling ownership interest in our
Argentina business, Dominion Nonwovens Sudamericana, S.A. The purchase price was approximately $4.1 million. For further details regarding this transaction, see Note 4
"Acquisitions" to the consolidated financial statements included in Item 1 of Part I to this Quarterly Report on Form 10-Q.

Recent Expansion Initiatives

On January 19, 2010, we entered into a firm purchase commitment (the "Purchase Agreement") to acquire a new spunmelt line to be
installed at our manufacturing facility in Suzhou, China. We are currently working with banks in China to secure outside financing for a portion of this capital project. If we are unable to secure
outside financing, the capital project will be funded using a combination of existing cash balances, internal cash flows and existing U.S. based credit facilities.

The
Purchase Agreement contemplates that we would acquire an additional spunmelt line to be installed in the United States (the "U.S. Spunmelt Line"), and as such, provides for a
discounted price structure. Should we not enter into a new firm purchase commitment with the equipment manufacturer for the U.S. Spunmelt Line by June 1, 2010, our obligation under the
Purchase Agreement would increase by approximately €1.5 million. Currently, we are seeking funding for the U.S. Spunmelt Line.

We
have completed six expansions in the past five years, including four in high growth regions in Latin America and Asia, to address growing demand for regional hygiene and global
medical products. Capital expenditures during the five-year period ended January 2, 2010 totaled $285.6 million and included five fully commercialized spunmelt facilities,
including start-ups in Mexico (mid-2009), Argentina (late 2007), Suzhou, China (late 2006), Mooresville, North Carolina (late 2006) and Colombia (late 2005) and the
retrofit of an existing hydroentanglement line at our Benson, North Carolina facility (late 2007).

Plant Consolidation and Realignment

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. 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.

On
June 9, 2009, the Board of Directors approved management's plan to consolidate our operations in the U.S. in order to better align our manufacturing capabilities with our
long-term strategic direction and to reduce overall operating costs. Our plans included the closure of our North Little Rock,

44

---



Table of Contents

Arkansas
manufacturing plant and the relocation of certain equipment from that manufacturing facility to our Benson, North Carolina manufacturing plant. These activities also include the
upgrade of certain assets and capabilities at the Benson, North Carolina plant. We anticipate that these actions, when fully implemented, will result in improved profitability and a more
efficient manufacturing cost structure, which will be partially offset by the loss of margin from exited businesses. We estimate the net effect of these initiatives to contribute additional profits of
approximately $6.0 million to $9.0 million on an annualized basis.

Further,
in January 2009, we made the decision to exit our automotive business as our industrial business had been negatively impacted as a result of the economic downturn.

In
fiscal 2009, we incurred special charges, net of $20.8 million, including $17.0 million of restructuring and plant realignment costs, $3.4 million of
non-cash asset impairment charges resulting from our evaluation of our long-lived assets for recoverability, and other costs of $0.4 million. These restructuring costs
are continuing into fiscal 2010 until the planned relocation of the assets and the closure of our facility in North Little Rock, Arkansas is complete.

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 certain 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 1 of Part I to this Quarterly Report on Form 10-Q, 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 are
significantly impacted by variability in raw material costs, including polypropylene resin and other resins and fibers. For the fiscal year ended January 2, 2010, we generated an overall gross
margin of approximately 21%, which is significantly higher than historical gross margins, which ranged from 15% to 16% from fiscal 2006 through fiscal 2008. There are many contributors to the
improvement in gross margin percentage, with the increase in fiscal year 2009 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 as profits improved on a lower sales dollar base to reflect lower raw material costs. During the first quarter of
fiscal 2010, there was a significant increase in the cost of polypropylene resin and other raw materials. Additionally, the potential exists for significant volatility in resin prices in fiscal 2010
and we expect an increase in contracted selling prices in the second quarter of fiscal 2010 due to the quarterly lag effect of the recent increase in average raw material costs for the March quarter
of fiscal 2010 versus the December quarter of fiscal 2009. Therefore, the results generated for the first three months of fiscal 2010 may not be indicative of financial performance achieved for the
remainder of the 2010 fiscal year. The first quarter of fiscal 2010 was also impacted by the contribution of the operations of our business in Spain that was acquired on December 2, 2009,
resulting in higher volumes, sales and expenses when compared to the first quarter of 2009.

45

---



Table of Contents

The
following table sets forth the percentage relationships to net sales of certain Consolidated Statement of Operations items for the three months ended April 3, 2010 in
comparison to such items for the three months ended April 4, 2009 and in comparison with the 2008 and 2009 fiscal years:

Three Months EndedFiscal Year EndedApril 3,
2010

April 4,
20092009

2008Net sales


100.0
%

100.0
%

100.0
%

100.0
%Cost of goods sold:Materials


46.9


55.0


52.3


44.4Labor


8.1


7.2


7.2


8.3Overhead


24.2


21.4


23.5


23.879.2


83.6


83.0


76.5Gross profit


20.8


16.4


17.0


23.5Selling, general and administrative expenses


13.0


11.0


11.9


12.8Acquisition and integration expenses


0.2





0.5


Special charges, net


2.4


1.9


1.6


1.4Other operating (income) loss, net


(0.4
)

0.5


(0.3
)

(0.2
)Operating income


5.6


3.0


3.3


9.5Other expense (income):Interest expense, net


3.0


2.9


3.1


3.5Gain on reacquisition of debt


(0.3
)







(1.2
)Loss on extinguishment of debt


0.6








Foreign currency and other (gain) loss, net


0.8


(0.2
)

0.0


1.0Income before income taxes and discontinued operations


1.5


0.3


0.2


6.2Income tax expense


1.1


0.6


0.1


3.4Income (loss) from continuing operations


0.4


(0.3
)

0.1


2.8Income from discontinued operations


0.5


0.2





0.9Gain on sale of discontinued operations


1.0








Net income from discontinued operations


1.5


0.2





0.9Net income (loss)


1.9


(0.1
)

0.1


3.7Less: net (income) loss attributable to noncontrolling interests


0.2


0.6


0.0


0.9Net income attributable to Polymer Group, Inc.


2.1
%

0.5
%

0.1
%

4.6
%


Comparison of Three Months Ended April 3, 2010 and April 4, 2009

Our reportable segments consist of our two operating divisions, Nonwovens and Oriented Polymers. For additional information regarding
segment data, see Note 16 "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

46

---



Table of Contents

components
of our net sales and operating income (loss) by operating division for the three months ended April 3, 2010, the three months ended April 4, 2009 and the corresponding change
(in millions):

Three months endedApril 3,
2010

April 4,
2009

ChangeNet salesNonwovens

$
256.2

$
191.6

$
64.6Oriented Polymers


24.4


18.4


6.0$
280.6

$
210.0

$
70.6Operating income (loss)Nonwovens

$
24.0

$
27.9

$
(3.9
)Oriented Polymers


(0.4
)

1.3


(1.7
)Unallocated Corporate, net of eliminations


(8.7
)

(6.3
)

(2.4
)14.9


22.9


(8.0
)Acquisition and integration expenses


(1.5
)




(1.5
)Special charges, net


(4.2
)

(2.9
)

(1.3
)$
9.2

$
20.0

$
(10.8
)


The
amounts for acquisition and integration expenses and 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 $280.6 million for the three months ended April 3, 2010, an increase of $70.6 million, or 33.6%,
from the comparable period of fiscal 2009 net sales of $210.0 million. Net sales for fiscal 2010 improved in the Nonwovens segment from comparable 2009 results by 33.7%, and net sales in fiscal
2010 in the Oriented Polymers segment increased 32.6% from 2009 results. A reconciliation of the change in net sales between the three months ended April 3, 2010 and the three months ended
April 4, 2009 is presented in the following table (in millions):

Nonwovens

Oriented
Polymers

TotalNet salesthree months ended April 4, 2009

$
191.6

$
18.4

$
210.0Change in sales due to:Volume


45.8


5.9


51.7Price/mix


16.3


(0.9
)

15.4Foreign currency translation


2.5


1.0


3.5Net salesthree months ended April 3, 2010

$
256.2

$
24.4

$
280.6


The
net volume increase of $45.8 million in Nonwovens sales is primarily attributable to additional sales generated from PGI Spain, and increases in Latin America and Asia volumes
in excess of twenty percent compared to the first quarter of 2009, partially offset by a decline in the U.S. as we exited certain business lines associated with our plant consolidation initiative. In
our Latin America region, volume increased due to increased sales volumes achieved in our Mexico operations, made possible by the installation of a new line during the second half of 2009, continued
sales growth in our Argentina facility and an improvement in certain hygiene markets in South America where economic and political environments in certain countries negatively impacted sales demand in
2009, primarily affecting our

47

---



Table of Contents

operations
in Colombia. The Asia volume increases reflect continued growth in the medical and hygiene markets. The predominant amount of the volume decline in the U.S. was related to product volume
sold from carded technologies and the associated closure of our North Little Rock facility. Oriented Polymers' sales volumes for building, packaging and agriculture products improved as demand in the
industrial markets we participate in is showing some recovery from the depressed levels of 2009.

Sales
in the Nonwovens segment were also positively impacted by higher price/mix, primarily due to price increases resulting from the pass-through of higher raw material
costs. The higher sales prices also reflect an improved sales mix impact, primarily in Asia where our sales of high grade medical products increased and accounted for a larger portion of total sales.
As raw material costs have steadily increased beginning in late 2009 and during fiscal 2010, we have raised 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 lag between the change in raw material cost and the change in sales price. The magnitude of the lag
varies within the business and the company implemented initiatives during fiscal 2009 to improve its ability to better match the frequency of selling price changes with changes in raw material costs.
The lag is most pronounced in our U.S. region due to the high concentration of business subject to specific price escalators.

Most
currencies were stronger against the U.S. dollar during 2010 compared to 2009. As a result, net sales increased $3.5 million due to the favorable foreign currency
translation, primarily in the European and Canadian regions. Further discussion of foreign currency exchange rate risk is contained in Item 3 "Quantitative and Qualitative Disclosures About
Market Risk" included below.

Gross margin as a percent of sales

Gross margin as a percent of sales for the three months ended April 3, 2010 declined to 17.0% from 23.5% in the first quarter of
fiscal 2009, primarily driven by higher sales levels, which reflected higher raw material costs. In the first quarter of 2009, our gross margin
as a percent of sales benefitted from the significant drop in raw material costs experienced in the fourth quarter 2008 and into the first quarter of 2009 without a corresponding drop in sales prices
due to the sales price lag mentioned above. As raw material prices increased in second half of 2009 and into the first quarter of 2010, we did not experience the same benefit for the three month
period ending April 3, 2010. Manufacturing costs were higher predominantly due to activities and costs associated with the relocation, reinstallation and startup of the U.S. carded equipment
restructuring during the 2010 fiscal quarter. On a global basis, our labor and energy costs were higher in the first quarter of 2010 compared to the first quarter of 2009. Additionally, while there is
no depreciation expense in cost of goods sold associated with PGI Spain, the operating lease payments are reflected in the cost of goods sold, which impacts the gross profit margin as well. The raw
material component of the cost of goods sold as a percentage of net sales increased from 44.4% in 2009 to 52.3% in 2010, whereas our labor and overhead components of the cost of goods sold decreased
as a percentage of net sales from the three month period of fiscal 2009 to the comparable period of 2010. As a percentage of sales, labor decreased from 8.3% to 7.2% and overhead decreased from 23.8%
to 23.5%. All of the above percentages were also impacted by increases in selling prices resulting from the pass-through of higher raw material costs.

48

---



Table of Contents

Operating income

A reconciliation of the change in operating income between the three months ended April 4, 2009 and the three months ended
April 3, 2010 is presented in the following table (in millions):

Operating incomethree months ended April 4, 2009

$
20.0Change in operating income due to:Volume


14.0Price/mix


13.8Higher raw material costs


(21.8
)Higher manufacturing costs


(6.3
)Foreign currency


(1.1
)Higher depreciation and amortization expense


(0.6
)Higher acquisition and integration expenses


(1.5
)Higher special charges, net


(1.3
)Increased share-based compensation costs


(0.8
)All other, primarily higher SG&A spending


(5.2
)Operating incomethree months ended April 3, 2010

$
9.2


Consolidated
operating income was $9.2 million for the three months ended April 3, 2010 as compared to $20.0 million of income in the comparative period in 2009. The
volume growth detailed above, including the additional gross profit generated from PGI Spain, contributed $14.0 million of additional profit compared to the prior year period. Raw material
costs were $21.8 million higher in first quarter 2010 compared to 2009. This higher cost was partially offset by increases in sales price/mix of $13.8 million, primarily resulting from
selling price increases related to the pass-through of higher raw material costs associated with both index-based selling agreements and market based pricing trends. The increase in
average selling price also reflects the results of selling effectiveness initiatives and changes in product mix. The net affect of the above factors and initiatives resulted in a decrease in our
operating income of $8.0 million in 2010 compared to 2009. A large portion of the impact is accounted for by the effects of the sales price to raw material lag effect with respect to contracted
business in a rising raw material environment, whereby in 2009 we experienced a positive impact as selling prices were higher in the first quarter of 2009 relative to raw material costs in the
previous quarter. Manufacturing costs were $6.3 million higher than the prior year, predominantly accounted for by increases in the U.S. region. The U.S. business was unfavorably impacted due
to the timing associated with the start-up activities related to our carded consolidation efforts involving the Benson, North Carolina and North Little Rock, Arkansas plants, coupled with
higher employee costs across the region. While spending has decreased for the U.S. carded locations as expected, the 2010 production volumes are temporarily negatively impacted by the timing of the
machinery and equipment relocation, installation and start-up activities. This resulted in higher inefficiencies and under absorption of variable and fixed costs. We expect the
start-up activities and transitioned volumes to be implemented during the second quarter and expect to then begin to realize benefits of the consolidation. Changes in foreign currency
exchange rates on a year-over-year basis negatively impacted operating income by $1.1 million.

Selling,
general and administrative (SG&A) expenses increased $6.7 million, from $26.8 million in 2009 to $33.5 million in 2010, due primarily to the incremental
SG&A associated with PGI Spain. Additionally, other volume-related expenses, such as distribution costs, increased along with the movement of foreign currencies versus the U.S. dollar, higher
compensation costs, and other spending associated with investments in capabilities to enable us to better address future market needs and execute on our strategic plan. Non-cash stock
compensation expenses were $0.8 million higher in the first quarter of 2010 as certain performance-based restricted stock grants vested during the quarter. Additionally, we recognized
$2.3 million of incentive compensation costs during the quarter associated

49

---



Table of Contents

with
a decision by the Board of Directors to make a discretionary payment associated with our 2009 performance, a portion of which was paid in December 2009 and the remainder paid in March 2010. There
was $0.7 million of incentive compensation expense recognized in the first quarter of 2009 for expense related to the 2008 short term incentive plan performance period. Selling, general and
administrative costs as a percent of net sales decreased from 12.8% in the first quarter of fiscal 2009 to 11.9% for the same period of fiscal 2010. This percentage is also impacted by higher selling
prices resulting from the pass-through of raw material cost changes.

Special
charges for the three months ended April 3, 2010 of approximately $4.2 million included restructuring and plant realignment costs of (i) $4.0 million
of severance and other shutdown costs related to facilities in the United States, (ii) $0.1 million of severance and other shutdown costs related to facilities in Europe; and
(iii) $0.1 million of severance costs related to facilities in Latin America. Additionally, we incurred $1.5 million of acquisition and integration expenses associated with the
Spain Business Acquisition in the first quarter 2010.

Interest and Other Expense

Net interest expense increased $1.3 million, from $7.4 million during the three months ended April 4, 2009 to
$8.7 million during the three months ended April 3, 2010. The increase in net interest expense was largely due to higher interest rates on the term loan borrowings and the impact
associated with the interest rate swap which also includes the portion of the swap that was frozen inAccumulated other comprehensive incomerelated to
the amendment of our Credit Facility (defined below) in September 2009, partially offset by the impact of reduced term loan borrowings.

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, we entered into a new cash flow hedge agreement, which became effective
June 30, 2009 and matures on June 30, 2011 which, originally, effectively converted $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR
rate of 1.96%.

In
connection with the amendment of our Credit Facility in September 2009, substantially all of the borrowings under the Credit Facility are subject to a LIBOR floor of 2.5%. As a result
of the new LIBOR floor, the effectiveness of the Interest Rate Swap has been modified. See Item 3 "Quantitative and Qualitative Disclosures About Market Risk" included below and Note 13
"Derivatives and Other Financial Instruments and Hedging Activities" included in Item 1 of Part I of this Quarterly Report on Form 10-Q. As the LIBOR hedge is lower
than the LIBOR floor of 2.5%, while the Interest Rate Swap is in place, if LIBOR rates are lower than 1.96%, we will pay additional interest costs equal to the difference in the actual LIBOR rate and
the 1.96% hedge rate. If actual LIBOR rates are higher than the 1.96% hedge rate, but below the LIBOR floor of 2.5%, we will receive a credit for the difference between the actual rate and the hedge
rate. If actual LIBOR rates are higher than the LIBOR floor of 2.5%, we will pay interest at the 1.96% LIBOR rate plus the applicable margin.

During
the three months ended April 4, 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 (gain), net improved by $2.3 million, from a $2.2 million loss during the first quarter of fiscal 2009 to a $0.1 million gain in the
first quarter of fiscal 2010, primarily due to the effect of movement in foreign currency rates.

50

---





Table of Contents

Income Tax Expense

During the three months ended April 3, 2010, we recognized income tax expense of $0.2 million on consolidated income
before income taxes and discontinued operations of $0.5 million. During the three months ended April 4, 2009, we recognized income tax expense of $7.2 million on consolidated
income before income taxes and discontinued operations of $12.9 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, the institution of a flat
tax regime in Mexico, 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.

Discontinued Operations

Income from operation of discontinued business is comprised of the net operating results of Fabpro for the first quarter of fiscal
2009. 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. We completed the
sale of Fabpro during the third quarter of fiscal 2009. Income from discontinued operations was $1.9 million during the three months ended April 4, 2009.

Net (Income) 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. During the first quarter of fiscal 2009, these interests included 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). We completed a buyout of our minority interest partner in Argentina in the fourth quarter of
fiscal 2009.

Net Income Attributable to Polymer Group, Inc.

As a result of the above, we recognized net income attributable to Polymer Group, Inc. of $0.2 million, or $0.01 per
share, for the three months ended April 3, 2010 compared to net income attributable to Polymer Group, Inc. of $9.6 million, or $0.49 per share, for the three months ended
April 4, 2009.

Adjusted EBITDA

Adjusted EBITDA from continuing operations, a non-GAAP financial measure defined below, for the first quarter of fiscal
2010 was $27.8 million compared to $37.8 million in the first quarter of 2009. As previously noted, Adjusted EBITDA in the first quarter of 2009 benefitted from the significant drop in
raw material costs. The lack of such benefit in 2010, combined with an increasing raw material environment, higher costs
associated with the transition of business in the U.S. and higher SG&A costs, more than offset contributions from higher sales volumes and the profit contribution from PGI Spain. Depreciation and
amortization expense included in Adjusted EBITDA of $12.5 million increased by $0.6 million from 2009 to 2010.

NON-GAAP FINANCIAL MEASURE

Adjusted EBITDA (as defined below) is used in this document as a "non-GAAP financial measure," which is a measure of our
financial performance that is different from measures calculated and presented in accordance with generally accepted accounting principles, or GAAP, within the meaning of applicable Securities and
Exchange Commission rules. A non-GAAP financial measure, such as EBITDA or Adjusted EBITDA, should not be viewed as an alternative to GAAP measures of performance such as

51

---



Table of Contents

(1) net
income determined in accordance with GAAP or (2) operating cash flows determined in accordance with GAAP. The calculation of Adjusted EBITDA may not be comparable to the
calculation of similarly titled measures reported by other companies.

As
defined in our credit agreement, Adjusted EBITDA equals net income (loss) before income and franchise tax expense (benefit), interest expense, net, depreciation and amortization,
noncontrolling interests net of cash distributions, write-off of loan acquisition costs, non-cash compensation, foreign currency gain and losses, net, and special charges, net
of unusual or non-recurring gains. We present Adjusted EBITDA, as defined in its credit agreement, as the measurement used as a basis for determining compliance with several covenants
thereunder. It is also generally consistent with the metric used by management as a performance measurement for certain performance-based incentive compensation plans. In addition, we consider
Adjusted EBITDA an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in
our industry.

Included
below is a reconciliation of Net Income Attributable to Polymer Group, Inc. to Adjusted EBITDA, which illustrates the differences in these measures of operating
performance.

The
following table reconciles Adjusted EBITDA to net income attributable to Polymer Group Inc. for the periods presented (in thousands):

Three Months
Ended
April 3, 2010

Three Months
Ended
April 4, 2009Net income attributable to Polymer Group, Inc.

$
213

$
9,556Income & franchise tax expense


391


7,453Interest expense, net


8,655


7,393Depreciation and amortization included in operating income


12,469


11,874Noncontrolling interests, net of tax & cash disbursements


88


(1,877
)Non-cash compensation


1,255


423Foreign currency (gain) loss, net


(939
)

2,063Special charges, net


4,217


2,891Less income from discontinued operations





(1,941
)Unusual or non-recurring charges, net


1,492


Adjusted EBITDA

$
27,841

$
37,835


Fiscal
2009 data included in the calculation for the three months ended April 4, 2009 has been adjusted for the effect of discontinued operations.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity for operations and expansion are currently funds generated from operations and borrowing
availability under the credit facility ("Credit Facility"), consisting of a Term Loan of $410.0 million and a Revolving Credit Facility of $45.0 million at the original borrowing date.
As a result of an amendment to the Credit Facility on September 17, 2009 (the "Amendment"), the maturity date of approximately $295.7 million of our then-outstanding
$317.6 million Term Loan was extended to November 22, 2014, with the remainder due November 22, 2012 (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). In addition, the maturity date of approximately $30.0 million of our available
$45.0 million Revolving Credit Facility was extended to November 22, 2013, under certain circumstances

52

---



Table of Contents

summarized
below, with the remaining $15.0 million of availability maturing on November 22, 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 April 3, 2010, we were in compliance with such financial covenants. See "Liquidity Summary" below for
further discussion of financial covenants. Additionally, as of April 3, 2010, 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 $10.7 million. As of April 3, 2010, we also had other
outstanding letters of credit in the amount of $2.7 million primarily for certain raw material vendors. None of these letters of credit had been drawn on at April 3, 2010.

April 3,
2010

January 2,
2010(In Millions)Balance sheet data:Cash and cash equivalents

$
54.3

$
59.5Working capital


166.2


159.7Total assets


709.2


702.4Total debt


341.0


342.6Total shareholders' equity


144.1


149.1


We
had working capital of approximately $166.2 million at April 3, 2010 compared with $159.7 million at January 2, 2010. As compared to year-end,
our working capital balances increased due to higher sales volumes which impacted accounts receivables balances with an offsetting increase in trade accounts payable. These balances were also impacted
by higher raw material costs. The raw material impact on inventory balances was essentially fully offset by lower unit volumes on hand at the end of the first quarter compared to the beginning of the
year.

Accounts
receivable at April 3, 2010 was $144.9 million as compared to $128.0 million on January 2, 2010, an increase of $16.9 million. The net
increase in accounts receivable during the first quarter of fiscal 2010 is primarily attributable to (a) higher sales volumes, (b) higher overall selling prices and (c) decreased
reserves for potentially uncollectible accounts, partially offset by the effects of currency movements. Even though overall accounts receivable increased, past-due balances were lower at
the end of the first quarter, which resulted in a lower reserve requirement. Accounts receivable represented approximately 47 days of sales outstanding at April 3, 2010 as compared to
48 days of sales outstanding at January 2, 2010. We believe that our reserves adequately protect us against foreseeable increased collection risk.

We
have 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.

Inventories
at April 3, 2010 were $106.9 million, an increase of $0.1 million from inventories at January 2, 2010 of $106.8 million. The net increase
in inventory during the first quarter of fiscal 2010 is due to (a) higher unit costs related to inventory at the end of the first quarter of fiscal 2010 compared to year-end 2009
and (b) a reduction in inventory reserves, partially offset by the effects of currency movements. The overall increase was comprised of component increases in raw materials and
work-in-process of $1.9 million and $1.5 million, respectively, largely offset by a net decrease in finished goods of $3.3 million. We had inventory
representing approximately 42 days of cost of sales on hand at April 3, 2010 compared to 49 days of cost of sales on hand at January 2, 2010.

Accounts
payable and accrued liabilities at April 3, 2010 were $164.1 million as compared to $148.0 million at January 2, 2010, an increase of
$16.1 million. The increase in accounts payable and accrued liabilities during the first quarter of fiscal 2010 was primarily related to improved terms with certain vendors achieved during the
year associated with our global procurement initiatives and higher

53

---



Table of Contents

raw
material unit costs at the end of the first quarter of 2010 compared to the end of fiscal year 2009, partially offset by the effects of currency movements. Accounts payable and accrued liabilities
balances can also be impacted by accruals with respect 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
changes in restructuring accruals. Accounts payable and accrued liabilities represented approximately 64 days of cost of sales outstanding at April 3, 2010 compared to 68 days of
cost of sales outstanding at January 2, 2010.

Three Months EndedApril 3,
2010

April 4,
2009(In Millions)Cash flow data:Net cash provided by operating activities

$
1.3

$
24.0Net cash used in investing activities


(4.8
)

(3.5
)Net cash used in financing activities


(1.5
)

(11.2
)


Operating Activities

Net cash provided by operating activities was $1.3 million during the first three months of fiscal 2010, a $22.7 million
decrease from the $24.0 million provided by operating activities during the first three months of fiscal 2009. During the first quarter of 2009, working capital levels were significantly
impacted as volumes were declining and sales prices were lower to reflect lower raw material costs. As such, working capital required $0.1 million of cash during the first quarter of fiscal
2009. During the first quarter of 2010, working capital levels increased, requiring a $8.7 million use of cash. This difference contributed significantly in the decrease in operating cash flows
compared to the prior year period. Additionally, we experienced lower income from operations, including lower cash gross profit and higher SG&A, of $10.3 million and incurred higher special
charges of $1.5 million, higher acquisition and integration expenses of $1.5 million, and higher interest and income tax was paid year over year of approximately $2.0 million. As
sales volumes increase and as raw material costs increase, inventory and accounts
receivable balances are expected to rise, resulting in higher levels of working capital balances and a use of cash going forward. As such, the level of net cash provided by operating activities in
fiscal year 2009 is not expected to be sustained in 2010.

Our
restructuring and plant realignment activities in the first quarter of fiscal years 2010 and 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 of $4.2 million in the first quarter of fiscal 2010 are comprised of: (i) $0.2 million of employee severance and
retention costs and $3.7 million of equipment relocation and other shutdown costs related to the North Little Rock, Arkansas facility; (ii) $0.1 million related to employee
severance related to the anticipated sale of line 2 in Argentina; and (iii) $0.2 million of other shutdown costs related to previously announced facility closings, primarily in Europe
and U.S.

The
restructuring and plant realignment costs of $1.3 million in the first quarter of fiscal 2009 are comprised of: (1) $0.6 million of severance and other shutdown
costs in Europe, including costs associated with the previously announced closure of the Neunkirchen, Germany facility; (ii) $0.6 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.

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

54

---



Table of Contents

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 future sales volumes.

We
review our business 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. Accordingly, in the future we may 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 certain 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 current plans to consolidate operations in the U.S., as further
described in Note 3 "Special Charges, Net" to our consolidated financial statements included in Item 1 of Part I to this Quarterly Report on Form 10-Q, 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.

We
expect to make future cash payments, primarily through the fourth quarter of fiscal 2010, of approximately $7.0 million to $8.0 million associated with approved
restructuring initiatives, of which $2.8 million has been accrued as of April 3, 2010. In addition, we currently anticipate future proceeds from the sale of closed facilities and idled
equipment in the range of $4.0 million to $7.0 million, which is expected to be received in fiscal 2010 or 2011.

Investing and Financing Activities

Net cash used for investing activities amounted to $4.8 million and $3.5 million in the first three months of fiscal 2010
and fiscal 2009, respectively. Capital expenditures during the first three months of fiscal 2010 totaled $4.7 million, an increase of $1.3 million from capital spending of
$3.4 million in the same period in 2009. A significant portion of the capital expenditures in 2010 related to the construction of a new spunmelt line at our facility in Suzhou, China. We
estimate our annual minimum sustaining capital expenditures to be $5.0 million to $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.

As
discussed in further detail in Note 13, "Derivative and Other Financial Instruments and Hedging Activities" to our consolidated financial statements included in Item 1
of Part I to this Quarterly Report on Form 10-Q, on February 8, 2010 we entered into a series of foreign exchange forward contracts (put options and call options) with
a third-party financial institution (the "2010 FX Forward Contracts") that provide for a floor and ceiling price (collar) for changes in foreign currency rates between the Euro and
U.S. dollar through the date of acceptance of the equipment associated with the new spunmelt equipment to be installed in Suzhou, China. The objective of the combination 2010 FX Forward
Contracts is to hedge the changes in fair value of the firm commitment related to the aforementioned Purchase Agreement. The call/put options set a maximum and minimum strike price of 1.41 and 1.35
(Euro to U.S. dollar), respectively. The cash settlements under the 2010 FX Forward Contracts coincide with the payment dates on the Purchase Agreement. The notional amount of the
contracts with the third party, which expire on various dates in fiscal year 2010 through early fiscal 2012, was €25.6 million, which will result in U.S. dollar
equivalent range of $34.5 million to $36.1 million.

Net
cash used in financing activities amounted to $1.5 million in the first three months of fiscal 2010, compared to $11.2 million of net cash used in financing activities
in the first three months of fiscal 2009. In the first three months of 2010, we repaid, on a net basis, $1.5 million of debt whereas we borrowed, on

55

---



Table of Contents

a
net basis, $1.1 million of debt in the first three months of fiscal 2009. Additionally, in the first three months of 2009, we used $12.4 million to repurchase $15.0 million of
our first-lien term loan.

Dividends

Our Board of Directors has not declared a dividend on our common stock since emergence from bankruptcy in March 2003.

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 9 "Debt" to our 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 which we amended on December 8, 2006 and
September 17, 2009, which consists of a $410.0 million (at the original loan date) Term Loan and a $45.0 million Revolving Credit Facility. As of April 3, 2010, the Term
Loan consisted of $16.1 million of net outstanding amounts maturing on November 22, 2012 ("Tranche 1 Term Loan") and $273.3 million maturing on November 22, 2014
("Tranche 2 Term Loan"). As of April 3, 2010,, the Revolving Credit Facility consisted of $15.0 million of availability maturing on November 22, 2010 ("Tranche 1
Revolver") and $30.0 million of availability maturing on November 22, 2013 ("Tranche 2 Revolver"), under which there are no amounts outstanding as of April 3, 2010.
Effective May 4, 2010, the Company further converted $10.0 million of its Tranche 1 Revolver commitments to Tranche 2 Revolver commitments (the "2010 Revolver Conversion").
Interest will continue to be payable on a quarterly basis. Principal payments of $1.0 million will continue to be due quarterly.

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 the assets of 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 Tranche 1 Revolver and 0.75% of the daily unused amount of the
Tranche 2 Revolver. 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, as amended, requires that we maintain a
leverage ratio of not more than 3.50:1.00 as of April 3, 2010 and through the remaining term of the Credit Facility. The interest expense coverage ratio requirement at April 3, 2010 and
for the remaining term of the Credit Facility requires that it not be less than 3.00:1.00. We were in compliance with the financial covenants under the Credit Facility at April 3, 2010. These
ratios are calculated on a trailing four-quarter basis. As a result, any decline in our future operating results, or any increases in indebtedness not supported by sufficient increases in
Consolidated EBITDA (as defined in the Credit Facility) 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.

The
Term Loan requires mandatory payments of approximately $1.0 million per quarter. Under the Amendment, we have the option to either prorate such principal payments across the
two tranches or to

56

---



Table of Contents

apply
them to the tranche with the earliest maturity date. In addition, the Credit Facility, as amended, 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. There was no excess cash flow requirement with respect to fiscal
2009. We may, at our discretion and based on projected operating cash flows, the current market value of the 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.

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 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 the Term Loan as allowed under the provisions of the
Credit Facility. Under these agreements, 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 derecognize such liability in accordance with the
provisions of FASB ASC 860 "Transfers and Servicing." In March 2009, we purchased, through a subsidiary, $15.0 million of 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 either of the three-month or the one-month LIBOR plus a specified margin. The applicable
margin for borrowings under both the Tranche 1 Term Loan and the Tranche 1 Revolver is 225 basis points. The applicable margin for borrowings under the Tranche 2 Term Loan and the
Tranche 2 Revolver is 450 basis points (with a LIBOR floor of 2.5%). Further, 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.

We
maintained a portion of 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 an interest
rate swap agreement (the "2009 Swap"), 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%. We originally designated the 2009 Swap as a cash flow hedge of the variability of interest payments with changes in fair value of the 2009
Swap recorded inAccumulated other comprehensive incomein the Consolidated Balance Sheets. As of September 17, 2009, in conjunction with the
Amendment we concluded that 92% (which represents the approximate percentage of the Tranche 1 Term Loan debt considered extinguished by the Amendment) of the 2009 Swap was no longer effective;
accordingly, 92% of $3.9 million of cumulative liability related to the 2009 Swap, and included inAccumulated Other Comprehensive Income, was
frozen and will be reclassified as a charge to earnings as future interest payments are made throughout the term of the 2009 Swap, as this portion of the notional amount no longer meets the criteria
for cash flow hedge accounting. The cash flow hedge agreements are more fully described in Note 13, "Derivatives and Other Financial Instruments and

57

---



Table of Contents

Hedging
Activities" and Note 14, "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 borrowings under the Revolving Credit Facility as of April 3, 2010 or January 2, 2010. Average daily borrowings under that facility, which were primarily
LIBOR Rate-based
borrowings, were $3.4 million at an average interest rate of 4.885% for the period from January 3, 2010 to April 3, 2010. 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 April 3, 2010, we have effectively reserved capacity under the Revolving Credit Facility in the
amount of $10.7 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 April 3, 2010. As a result of the Amendment and the previously discussed 2010 Revolver Conversion, availability under the Revolving Credit Facility
matures in two tranches: $5.0 million (Tranche 1) on November 22, 2010 and $40.0 million (Tranche 2) on November 22, 2013, unless the Tranche 1 Term
Loan exceeds $10.0 million on August 24, 2012. If that condition is met, then the Tranche 2 Revolver matures on August 24, 2012.

As
of April 3, 2010, we also had other outstanding letters of credit in the amount of $2.7 million primarily provided to certain raw material vendors. None of these letters
of credit had been drawn on at April 3, 2010.

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 April 3, 2010,
this debt is comprised of long-term facilities of $44.4 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 amount to approximately $11.0 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 $5.8 million at April 3, 2010, which facilities mature at various
dates through September 2010 and are shown inShort-term borrowingsin our Consolidated Balance Sheets included in Item 1 of
Part I to this Quarterly Report on Form 10-Q.

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. Pursuant to the terms of the Credit Facility, we have a 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 Credit Facility, we are also permitted to factor non-U.S. company-based receivables up to a maximum of $20.0 million.We have executed
factoring agreements for receivables associated with our Mexican and Spanish business operations and have factored receivables under those agreements. The sale of these receivables accelerated the
collection of our cash, reduced credit exposure and lowered our net borrowing costs. The gross amount of trade receivables factored, and, therefore, excluded from our accounts receivable, was
$36.9 million and $35.1 million as of April 3, 2010 and January 2, 2010, respectively.

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 in this Annual Report on
Form 10-K. 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 Term Loan.

58

---



Table of Contents

As
discussed in Note 18, "Commitments and Contingencies" to our consolidated financial statements included in Item 1 of Part I to this Quarterly Report on
Form 10-Q, we have committed capital projects, including the installment of a new spunmelt line at the Company's facility in Suzhou, China. Total remaining payments with respect to
major capital expansion projects as of April 3, 2010 totaled approximately $62.5 million, which are expected to be substantially expended through the second quarter of fiscal 2012.

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. 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, 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 other than previously disclosed.

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 three months of fiscal 2010 and fiscal 2009. However, we continue to be impacted by variability in 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 June 2009, the Financial Accounting Standards Board ("FASB") issued authoritative guidance which established the FASB Accounting
Standards Codification (the "Codification" or "ASC") as the source of authoritative U.S. generally accepted accounting principles ("U.S. GAAP") recognized by the FASB to be applied
to nongovernmental entities. Under the new guidance, as prescribed by ASC 105, "Generally Accepted Accounting Principles", 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 adopted the authoritative
guidance in the third quarter of fiscal 2009.

In
September 2006, the FASB issued authoritative guidance that amends ASC 820, "Fair Value Measurements and Disclosures" ("ASC 820") by issuing
ASC 820-10-65. ASC 820-10-65 provides additional guidance on estimating fair value when the volume and level of activity for an asset or
liability have significantly decreased. ASC 820-10-65 also includes guidance on identifying circumstances that indicate a transaction is not orderly, and 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 ASC 820 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. ASC 820-10-65 was effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15, 2009. We adopted ASC 820-10-65 as of July 4, 2009 and applied its provisions prospectively by
providing the additional disclosures in our unaudited interim consolidated financial statements. See Note 17 "Fair Value of Financial Instruments and Non-financial Assets and
Liabilities" in Item 8 of Part II to this Annual Report on Form 10-K for additional information.

In
April 2009, guidance as prescribed by ASC 825, "Financial Instruments" ("ASC 825") was issued and requires, on an interim basis, disclosures about the fair value of financial
instruments for public

59

---



Table of Contents

entities.
ASC 825 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
early adopt ASC 825 only if it concurrently adopts both ASC 320, "InvestmentsDebt and Equity Securities" and ASC 820-10-65. We adopted
ASC 825 effective July 4, 2009 by providing the additional disclosures in our unaudited interim consolidated financial statements.

In
May 2009, the FASB issued authoritative guidance, as prescribed by ASC 855, "Subsequent Events", which established standards of accounting for events that occur after the balance
sheet date and disclosures of events that occur after the balance sheet date but before the financial statements are issued. The new guidance introduces new terminology, defines a date through which
management must evaluate subsequent events, and lists circumstances under which we must recognize and disclose subsequent events or transactions occurring after the balance sheet date. This guidance
was effective for interim or annual financial periods ending after June 15, 2009 and was applied by us as of July 4, 2009. In February 2010, the FASB issued Accounting Standards
Update ("ASU") 2010-09, "Amendments to Certain Recognition and Disclosure Requirements" ("ASU 2010-09"), which was effective as of February 24, 2010.
ASU 2010-09 clarified the guidance to indicate that SEC filers are required to evaluate subsequent events through the date financial statements are issued, but are not required to
disclose the date through which subsequent events were evaluated.

In
June 2009, the FASB issued authoritative guidance to revise the approach to determine when a variable interest entity ("VIE") should be consolidated. The new consolidation model for
VIEs considers whether we have the power to direct the activities that most significantly impact the VIEs economic performance and share in the significant risks and rewards of the entity. The new
guidance on VIEs requires companies to continually reassess VIEs to determine if they are required to apply the new criteria, as prescribed by ASC 810, to determine the accounting and reporting
requirements related to VIEs. In December 2009, the FASB issued ASU, 2009-17, "Amendments to Accounting for Variable Interest Entities" ("ASU 2009-17"), to amend
ASC 810 to clarify how enterprises should account for and disclose their involvement with VIE's. The adoption of the revised accounting guidance for VIEs did not have a significant effect on
our consolidated financial statements. See Note 4 "Acquisitions" in Item 1 of Part I to this Quarterly Report on Form 10-Q for additional information.

In
August 2009, the FASB issued Accounting Standards Update ("ASU") 2009-05, "Measuring Liabilities at Fair Value", to amend
ASC 820 to clarify how entities should estimate the fair value of liabilities. ASC 820, as amended, includes clarifying guidance for circumstances in which a quoted price in an active
market is not available, the effect of the existence of liability transfer restrictions, and the effect of quoted prices for the identical liability, including when the identical liability is traded
as an asset. The amended guidance in ASC 820 on measuring liabilities at fair value is effective for the first interim or annual reporting period beginning after August 28, 2009, with
earlier application permitted. We adopted the amended guidance in ASC 820 beginning July 5, 2009 by providing additional disclosures in our interim consolidated financial statements.

In
October 2009, the FASB issued ASU 2009-13, "Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging
Issues Task Force", to amend certain guidance in ASC 605,Revenue Recognition ("ASC 605"), specifically as related
to"Multiple-Element Arrangements" ("ASC 605-25"). The amended guidance in ASC 605-25: (1) modifies the separation criteria by eliminating
the criterion that requires objective and reliable evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that
arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price. The amended guidance in ASC 605-25 is
effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early application and retrospective application permitted. We prospectively applied the amended
guidance in ASC 605-25 beginning January 3, 2010. The adoption of the amendments to ASC 605-25 did not have a significant effect on our consolidated
financial statements.

60

---





Table of Contents

In January 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures
(Topic 820)Improving Disclosures about Fair Value Measurements. This guidance clarifies and requires new disclosures about fair value measurements. We
adopted the clarifications and requirement to disclose the amounts and reasons for significant transfers between Level 1 and Level 2, as well as significant transfers in and out of
Level 3 of the fair value hierarchy established by ASC 820, in the first quarter of fiscal 2010. Note 14, "Fair Value of Financial Instruments and Non-Financial Assets
and Liabilities" reflects the amended disclosure requirements. Additionally, the new guidance also requires that purchases, sales, issuance, and settlements be presented gross in the Level 3
reconciliation, which is used to price the hardest to value instruments (the "disaggregation guidance"). The disaggregation guidance will be effective beginning with interim periods in fiscal year
2011. Since this guidance only amends the disclosure requirements, we do not anticipate that the adoption of ASU No. 2010-06 will have a material impact on our consolidated
financial statements.

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 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 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. 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. 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. At
April 3, 2010, a reserve of $8.5 million has been recorded as an allowance against trade

61

---



Table of Contents

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 which are primarily 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 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 write-downs 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 carry forward 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.

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.

62

---



Table of Contents

In
periods prior to fiscal year 2009 and consistent with previous authoritative U.S. GAAP guidance, recognition of tax benefits from preconfirmation net operating loss carry
forwards 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 revised authoritative guidance, effective for fiscal years beginning on or after December 15, 2008 with respect to accounting for business
combinations and also introduced changes to certain provisions of income tax accounting. For reorganizations undertaken before the adoption period of the revised guidance, 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 write-down necessary that previously
required no write-down.

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
April 3, 2010, based on our current operating performance, as well as future expectations for the business, we do not anticipate any material write downs 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 the current authoritative guidance for stock compensation. The compensation costs 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 authoritative guidance, 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 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 in the authoritative guidance), such as expected

63

---



Table of Contents

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 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 in substantial compliance with current applicable environmental requirements and do not currently anticipate any material adverse effect on our operations,
financial or competitive position as a result of our efforts to comply with environmental requirements. In the past several years, we have witnessed increased climate change related legislation and
regulation and we recognize that additional legislation and regulation could be enacted as the United States government and the international community attempt to address climate change matters on a
global basis. In summary, risk of environmental liability is inherent due to 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, primarily subject to a 2.5% LIBOR
floor. As such, to the extent not protected by interest rate hedge agreements, our interest expense will increase as LIBOR rates rise above 2.5% and decrease as LIBOR rates fall to 2.5%. 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 Note 9 "Debt" and Note 13 "Derivatives and Other Financial Instruments and Hedging Activities" to our unaudited interim consolidated financial statements included in
Item 1 of Part I to this Quarterly Report on Form 10-Q, in February 2009, we entered into the 2009 Swap, which was effective June 30, 2009 and matures on
June 30, 2011 and, originally, effectively converted $240.0 million of notional principal amount of debt from a variable LIBOR rate to a fixed LIBOR rate of 1.96%.

However,
as of September 17, 2009, in conjunction with the Amendment we concluded that 92% of the notional amount of the 2009 Swap no longer meets the criteria for cash flow hedge
accounting, primarily due to the institution of a LIBOR floor applicable to extended portions of the Credit Facility. As a result, to the extent that LIBOR rates decline we are exposed to interest
rate risk associated with approximately $220 million of the notional amount of the 2009 Swap. The 2009 Swap agreement is more fully described in Note 13, "Derivatives and Other Financial
Instruments and Hedging Activities" and Note 14, "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.

64

---



Table of Contents

Hypothetically,
a 1% change in the interest rate affecting all of our subsidiary indebtedness would change interest expense by approximately $0.4 million. With respect to the
Credit Facility, excluding the effect of the 2009 Swap, to the extent that LIBOR rates, hypothetically, remain at all times above the LIBOR floor of 2.5%, a 1% change in interest rates would change
interest expense by approximately $2.9 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%.

The
estimated fair value of our long-term debt, including current portion, at April 3, 2010 was approximately $331.8 million.

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
quarter of both 2010 and 2009, 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 obligations such as firm commitments related to certain capital expenditure projects. 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.

In
addition, on February 8, 2010 we entered into a series of foreign exchange forward contracts (put options and call options) with a third-party financial institution that
provided for a floor and ceiling price (collar) for changes in foreign currency rates between the Euro and U.S. dollar through the date of acceptance of the equipment associated with the new spunmelt
equipment to be installed in Suzhou, China The objective of the combination 2010 FX Forward Contracts is to hedge the changes in fair value of the firm commitment related to the agreement to
purchase the equipment. The cash settlements under the 2010 FX Forward Contracts coincide with the payment dates on the equipment purchase agreement. The notional amount of the 2010
FX Forward Contracts with the third party, which expire on various dates in fiscal year 2010 through early fiscal 2012, was €25.6 million, which will result in U.S.
dollar equivalent range of $34.5 million to $36.1 million. See Note 13, "Derivatives and Other Financial Instruments and Hedging Activities" to
our consolidated financial statements included in Item 1 of Part I to this Quarterly Report on Form 10-Q for further discussion of the 2010 FX Forward
Contracts.

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. We

65

---



Table of Contents

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 affect our business until alternative supply arrangements were secured or
alternative suppliers were qualified with customers. We have not experienced, and do not expect, any significant disruptions in supply as a result of shortages in raw materials.

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 increased from 44.2% in the three months ended April 4, 2009 to 52.3% in the three months ended
April 3, 2010.

During
the first quarter of fiscal 2010, the cost of polypropylene resin, our largest volume raw material, increased significantly. During the first quarter of fiscal 2009, we
experienced a moderate increase in the cost of polypropylene resin. Additionally, on a global basis, other raw material costs continue to 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 $5.2 million, on an
annualized basis, in our reported pre-tax operating income. Significant 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, if sales prices do not decrease at a corresponding rate, our cost of goods sold would decrease and our
operating profit would correspondingly increase. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 2 of Part I to this
Quarterly Report on Form 10-Q.

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed iby the
Company n Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and
that such information is accumulated and communicated to the Company's management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.

Under
the direction of the Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of the Company's 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.

66

---



Table of Contents

Changes in Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate 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 and includes those policies and
procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company's assets; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and
that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company's management and directors; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

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. During the third quarter of fiscal 2009, management identified a material
weakness 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. During the third and
fourth quarters of fiscal 2009, management (i) increased the Company's personnel within the global tax function, (ii) conducted training regarding accounting for income taxes for global
finance and tax personnel, and (iii) made modifications to documentation used to prepare and reconcile income tax balances. However, given that these activities were performed in close
proximity to the end of fiscal year 2009, management has not yet been able to conclude that these enhancements to internal control over financial reporting have been operating for a sufficient period
of time to determine that they are both effectively designed and operating. Based on this assessment, management concluded that the Company's internal control over financial reporting was not yet
effective as of April 3, 2010.

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.

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 April 3, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over
financial reporting.

67

---





Table of Contents

PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

We are not currently a party or subject to any pending legal proceedings other than ordinary 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 first quarter of fiscal 2010, 888 shares of our Class B Common Stock were converted into 888 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, as amended.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 5.    OTHER INFORMATION

On May 13, 2010, we issued a press release announcing our financial results for the first quarter of fiscal 2010. A copy of the
press release is furnished as Exhibit 99.1 hereto.

ITEM 6.    EXHIBITS

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

Exhibit
Number

Document Description10.1

Executive Employment Agreement, dated as of March 31, 2010, between Polymer Group, Inc. and Veronica M. Hagen31.1

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 135099.1

Press release, dated May 13, 2010, reporting financial results for the first quarter of fiscal 2010


68

---





Table of Contents

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: May 14, 2010

By:

/s/ VERONICA M. HAGEN Veronica M. Hagen Chief Executive OfficerDate: May 14, 2010

By:

/s/ DENNIS E. NORMAN Dennis E. Norman Chief Financial Officer
(Principal Financial Officer)


69

---