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March 4, 2004

MORGAN
JOSEPH

Foamex International Inc. (FMXI):

Primed For A

Recovery, In Need Of Cost Relief; Hold The Bonds.


Table 1: Security Details
Issuer

Issue

Coupon

Amount

Maturity

Ratings

Price

YTW

Foamex LP/
Capital Corp

Sr Secd
nd
(2 lien)

10.75%

$300mm

04/901/09

B3/B-

92.5

12.2%

Foamex LP

Senior
Sub Nts

13.50%

$53.5mm

08/15/05

Caa2/CCC+

93

19.3%

Foamex LP

Senior
Sub Nts

9.875%

$148.5mm

02/15/07

Caa2/CCC+

73

19.3%

* Source: Company reports

HIGH YIELD RESEARCH

Summary and recommendation: We continue with our recommendation to hold the Foamex
bonds (prior report dated 11/13/03). Following several rounds of debilitating raw material price
increases beginning in mid-02, FMXI has stabilized its business by raising prices to keep pace
with costs, cutting employment, consolidating facilities, and aiding liquidity through a new
lending agreement. Even with these steps, EBITDA remains considerably below historical levels
and total debt of $732mm, a hefty 8.4X EBITDA, remains daunting. We note that while FMXI
subordinated debt is cheap in the context of triple-C quality issuers, our near-term outlook for the
company provides little justification for higher bond prices.
Looking ahead to 2004, we believe that the key issues facing the company include the following:

Sales remain subdued, with recent quarterly declines near 4% likely to be repeated into
the first half of 2004. While some of this erosion represents the loss of marginal business,
automotive segment volume will lead the decline (desourcing of a piece of Johnson
Controls business). Our forecasts assume a recovery in technical products (especially ink
jet printer foams) following 2003s surprise shortfall.
FMXI has demonstrated its ability to offset raw material price costs through price
increases, but slippage can occur (as we expect in Q1:04). FMXI is attempting to get
ahead of the pricing curve through some combination of improved/expanded
relationships with key suppliers and higher value-added products to restore gross margins
to the 13%+ range of earlier prosperous periods.
Our forecasts assume successful reductions in SG&A, with the company executing on its
plan to cut out $5-$6mm in 2004.
Liquidity is thin. A $3mm cushion at year-end (relative to the credit facilitys key 1.00X
fixed charge coverage test) should expand through Q1:04, but otherwise remains stressed.
Management guidance on key financial metrics is limited. Since FMXIs business is very
volatile, short-term results may vary significantly from our estimates.

Table 2: Financial Summary


$ millions

2001

2002

2003

2004 E

$1,253

$1,328

$1,305

$1,278

EBITDA

134

81

87

93

Interest Expense

63

71

73

73

Total Debt

629

722

732

724

EBITDA / Int Expense

2.2X

1.2X

1.2X

1.3X

9.0X

8.4X

7.8X

Total Revenues

EBITDA / Tot Debt


5.1X
Source: Company reports and Morgan Joseph & Co. Inc. estimates.

Howard Goldberg
212-218-3701
HGOLDBERG@MORGANJOSEPH.COM

The Disclosure section may be found on the last page of this report.

Foamex International Inc.

March 4, 2004

Recent Results Q4:03 (see Table 6 for details): Sales of $315mm were down 3.7% YOY, exceeding
guidance. Reported EBITDA of $20.9mm fell shy of our $22mm estimate, with a relatively healthy gross
margin of 11.8% offset by unusually high SG&A expenses. Management did not quantify any amounts
related to higher bad debt expenses or spending in pursuit of opportunities in China, though we suspect
these were more than enough to make up the $1.1mm shortfall in our estimates. For this reason, we believe
that FMXI has a head start on its programs to reduce SG&A in 04.
Capital expenditures were only $1.8mm in Q4 and $6.5mm for the year. Notwithstanding management
assurance that capex has been adequate, spending in relation to depreciation and amortization ($26mm) or
net p,p&e ($165mm) is quite small. The company plans to spend in excess of $10mm in 04. Working
capital appears to have been well-managed during Q4, with receivables, inventory and payables generating
roughly $10mm in cash. However, we estimate that total financing costs in Q4 were near $30mm (semiannual bond interest, credit facility interest plus $1.8mm amortization), causing year-end borrowings to go
up $10mm.

Table 3 Segment Data ($ in millions) (1)


Segment
Foam Products Revenues
EBITDA
Carpet Cushion Revenues
EBITDA
Auto Products

Revenues
EBITDA

Technical Products Revs


EBITDA
Total

Revenues (2)
EBITDA (2)

2000

2001

2002

2003

$519

$500

$471

$508

73

82

39.4

33

256

231

234

209

10

1.3

(6)

342

378

467

447

28

26

29

25

107

111

124

117

32

26

23

24

1,258

1,253

1,328

1,305

130

131

83

88

(1) Revenues are as reported. Beginning with Q4:03 FMXI ceased reporting segment EBITDA; our figures are estimates.
(2) Includes Other segment accounting for about 2% of revenues and modest EBITDA losses, including corporate adjustments.
Source: Company reports and Morgan Joseph & Co. Inc. estimates.

Forecasts : FMXI ought to enjoy its final easy YOY comparison in Q1, despite a sales decline which we
estimate will approach 5% (due largely to auto products) to about $312mm. We are reasonably comfortable
that SG&A will be returned to more normal Q2-Q3:03 levels, and have anticipated sequential gross margin
softness because of polyol and TDI price increases effective January 1. Management was imprecise on the
call, so we are unsure of the magnitude (Q4 11.8% to Q1E 10.6%). An additional 50b.p. erosion is worth
$1.5mm relative to our $19.5mm estimate.
With another raw material price increase slated for April 1, prospects for Q2 are decidedly unfavorable
relative to last years peak quarter, when FMXI earned $26.2mm in EBITDA. We consider it likely that
FMXI will give up much of its Q1 gain in Q2, and begin the second half looking for a back-ended
recovery. Better alliances with key suppliers, more value-added technology and consumer products, and
possible price initiatives suggest that this is not out of reach.
FMXI restated results for the first three quarters of 2003, which we have updated on table 6. In the
aggregate the changes were not material, although we point out that we are unable to make appropriate
retroactive adjustments to these quarterly numbers. This may affect comparisons to 2004 periods.
Capital Structure: FMXIs capital structure is described in detail below and laid out in Table 4.
Bank facilities: On August 18, 2003 the company announced a new bank credit agreement consisting
of a $240mm asset-based credit facility and an $80mm secured term loan. The $240mm facility, led by
Bank of America, includes a $190mm revolver commitment and a $50mm term loan, and is due 4/07.
2

Foamex International Inc.

March 4, 2004

The $80mm term loan was provided by Silver Point Finance, and matures concurrently. These
facilities replace a smaller-sized financing of $262mm, providing increased liquidity to FMXI, and
pushes out about $190mm in maturities which were scheduled to come due 2004-07. Key provisions
include the following:
The company must maintain at least a 1.00X fixed charge coverage ratio annually through
2007 (no escalation). Fixed charges include interest payments, certain principal payments
(excluding the 13.5s), and cash distributions and restructuring expenses (with allowances).
Capital expenditures are limited to $17.7mm in 2003 $24.8mm in 2004, and $27.5mm
thereafter. There is a one year carryover of unused amounts.
FMXI may borrow $10mm to repurchase subordinated debt (subject to availability
requirements). Some investors seem to believe a repurchase of the 13.5s is highly likely; we
suggest the company is more apt to preserve any excess liquidity, given its experiences over
the past year.
10.75% Senior Notes (Second Lien): These bonds were issued as a 144A in March 2002 in the
principal amount of $300mm (excluding a $14mm deferred credit on an interest rate swap, which is
added to principal in FMXIs financials). They were guaranteed on a senior basis by domestic
restricted subsidiaries that are guarantors of FMXIs credit facilities, and that guarantee remains under
the new structure. Further, the Notes are secured on a second-priority basis.
The 13.5% and 9.875% Senior Subordinated Notes rank pari passu. Importantly, one distinction
between the two issues is that .in connection with Asset Sales, Foamex is required to offer to
repurchase the 9.875% Notes before it offers to repurchase the 13.5% Notes. Refinancing of the 13.5s
is permitted under the new credit facilities. We believe that the refinancing of the 13.5s prior to
maturity will require much stronger performance; the bonds become par callable in August 2004.
Table 4 Capital Structure ($ in millions)
Issue
Credit facility
IRBs, other
Tot first priority
nd
10.75% 2 priority (1)
st
nd
1 + 2 priority
13.50% Sr Subs (2)
9.75% Sr Subs
Total debt
Current maturities (inc above)
Letters of Credit
Cash Overdrafts
Cash balances
Source: Company reports and Morgan Joseph & Co. Inc.
debt premium.

2001
$361
10
371
0
371
98
150
629
4

2002
2003
2004E
$214
$224mm
$217mm
8
8
7
222
232
224
300
300
300
522
532
524
52
52
52
149
149
149
723
733
725
0
7
7
21
21
4
18
N/A
15
5
7
estimates (1) excludes deferred credit on interest rate swap. 2) excludes unamortized

Company Description: FMXI is the largest manufacturer and distributor of flexible polyurethane and
advanced polymer foam products in North America, and is believed to be the largest in each of its four
principal product areas, described below:
Foam products (39% 2003 sales and 38% Operating Income) Consists of cushioning foams for
bedding (quilts, toppers, border rolls) furniture (upholstered seating products), mattress pads and
related items. Major customers include bedding products manufacturers Sealy and Simmons.
Carpet cushion (16% 2003 sales and 5% EBITDA) Manufactures rebond (made from recycled
materials), prime, felt and rubber carpet padding. Distributors and major retailers, such as Home
Depot, are major customers. An agreement to sell this business to Leggett & Platt in mid-2002 for
$70mm fell through. While management has not intimated this business is for sale, it is clear that a
3

Foamex International Inc.

March 4, 2004

figure anywhere near $70mm for a business with modest EBITDA would be viewed favorably by
bondholders.
Automotive (34% 2003 sales and 29% EBITDA) Manufactures automotive products in such areas as
foam rolls, laminates, headliner substrates, and acoustical products. FMXI distributes to major tier one
suppliers and OEMs, such as Johnson Controls (JCI, 17.3% of total 2002 sales, or $229mm), Lear
Corporation, and Daimler Chrysler. In early 2003 JCI informed FMXI that, in an effort to diversify its
supply base, it would cut its purchases from FMXI by up to $70mm, a portion of which was
recognized in 2003. Management indicates $60mm of this desourcing will take place in 2004, most of
which we estimate will occur in Q1 and Q2.
Technical Products (9% 2003E sales and 20% EBITDA) Includes reticulated foams used in
applications to provide filtration, reservoiring, and sound absorption. Specific uses include automotive
gasketing, inkjet cartridges, and acoustical computer foams. Sales fell 15% in Q3, as management
stated that customers bought forward earlier this year on concerns about FMXIs vitality. Q4 revenues
recovered somewhat, though were still down 2%. Hewlett Packard and Briggs & Stratton are major
customers.

Foamex International Inc.

March 4, 2004

Foamex International Inc.


Morgan Joseph & Co.
Howard Goldberg
3/3/2004
212-218-3701
Table 6
Quarterly Financial Summary
$000
1Q02
INCOME STATEMENT
March

2002 - not restated


2Q02
3Q02
June
Sep

2003
4Q02
Dec

1Q03
March

2Q03
June

3Q03
Sep

4Q03
Dec

2002

2003

2004E

restated

these numbers do not exactly foot to restated '02

Net Sales
Sales % Change - yr/yr
Cost of Goods Sold
Gross Profit
Gross Margin
Selling, General & Administrative
SG&A Percent Sales
Depreciation & Amortization
EBITDA
EBITDA % Change - yr/yr
EBITDA Margin
Restructuring and Other Charges
Interest Expense
Income - Equity Interest in JV
Other expense, net

314,062
4.0%
276,384
37,678
12.0%
17,683
5.6%
7,930
27,925
(15.0%)
8.9%
(1,538)
18,629
730
350

17,338
398
(27)

340,823
4.5%
310,009
30,814
9.0%
24,993
7.3%
7,514
13,335
(61.3%)
3.9%
(1,107)
16,510
386
370

327,311
5.4%
299,598
27,713
8.5%
25,491
7.8%
7,980
10,202
(66.4%)
3.1%
10,011
18,454
220
(92)

328,151
4.5%
297,614
30,537
9.3%
20,899
6.4%
6,105
15,743
(43.6%)
4.80%
19,111
366
(1,615)

337,637
(2.4%)
298,963
38,674
11.5%
19,315
5.7%
6,851
26,210
(21.6%)
7.76%
(1,551)
19,378
513
(233)

323,542
(5.1%)
286,196
37,346
11.5%
19,394
6.0%
6,294
24,246
81.8%
7.5%
314
18,650
495
(13,852)

315,230
(3.7%)
278,097
37,133
11.8%
22,980
7.3%
6,750
20,903
104.9%
6.6%
(522)
18,335
92
(646)

1,328,094
6.0%
1,184,392
143,702
10.8%
94,744
7.1%
31,640
80,598
(40.4%)
6.1%
4,799
70,931
1,734
41

1,304,560
(1.8%)
1,160,870
143,690
11.0%
82,588
6.3%
26,000
87,102
8.1%
6.68%
(1,759)
75,474
1,466
(16,346)

1,278,000
(2.0%)
1,131,500
146,500
11.5%
77,000
6.0%
23,500
93,000
6.8%
7.28%
1,000
73,500
2,000
-

(11,040)
(3,695)

(25,931)
(4,606)

(10,722)
(300)

1,812
(1,633)

(14,369)
(3,370)

(4,214)
(701)

(25,079)
(85,691)

(27,493)
(6,004)

(3,000)
(900)

(7,345)

(21,325)

(10,422)

3,445

(10,999)

(3,513)

60,612

(21,489)

(2,100)

18,154
3705

18,811
2028
726,916
0.96x
10.62x

18,878
1137
720,877
1.39x
11.01x

18,250
1518
721,446
1.33x
9.44x

17,935
1830

69,643
15582
721,863
1.16x
8.96x

73,874
6,513
731,585
1.18x
8.40x

72,500
9,500
723,585
1.28x
7.78x

345,898
10.1%
298,951
46,947
13.6%
21,796
6.3%
8,301
33,452
(10.7%)
9.7%

TOTAL PRETAX INCOME


Total Income Tax Expense

3,284
851

8,184
(74,822)

NET INC (LOSS)

2,433

83,006

Key Credit Stats


Interest expense
Capital expenditures
Total Debt
EBITDA/Interest
Total Debt / EBITDA
Debt Structure
Revolving Credit
Term Loan
Other
10.75% Sr Nts 4/01/09 B3/B13.5% Sr Sb 8/15/05 Caa2/CCC+
9.875% Sr Sb 6/15/07 Caa2/CCC+
Total Debt
Bank debt/EBITDA
Bank debt + 10.75s/EBITDA
Balance Sheet Items
Cash
A/R
Inventory
A/P

18,329
6354
722,877
1.52x

17,038
3731
721,495
1.96x

16,210
1792
670,524
0.82x

0
162,206
8,904
300,000
101,767
150,000
722,877

0
162,206
8,210
300,260
100,819
150,000
721,495

0
162,188
8,083
300,000
51,753
148,500
670,524

56,889
162,188
7,754
300,000
51,585
148,500
726,916
3.20x
7.70x

50,844
162,188
7,760
300,000
51,585
148,500
720,877
3.48x
8.51x

83,442
130,000
7,919
300,000
51,585
148,500
721,446
2.79x
6.82x

51,823
162,188
7,767
300,000
51,585
148,500
721,863
2.66x
6.38x

96,000
128,000
7,500
300,000
51,585
148,500
731,585
2.57x
6.02x

96,000
120,000
7,500
300,000
51,585
148,500
723,585
2.32x
5.55x

34,170
187,044
103,971
139,401

54,174
199,679
106,482
119,510

16,101
208,913
112,408
143,594

2,725
210,475
109,551
122,886

8,032
189,655
96,788
101,708

4,946
196,100
100,800
110,200

4,524
191,546
98,010
87,400

6,600
180,800
98,700
101,700

5,000
180,000
97,000
100,000

Source: Company reports, Morgan Joseph estimates

0.56x

1.17x

High Yield Department


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I, Howard Goldberg, the author of this research report, certify that the views expressed in this report accurately reflect
my personal views about the subject securities and issuers, and no part of my compensation was, is, or will be
directly or indirectly tied to the specific recommendations or views contained in this research report.
The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not
considered to be all-inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the
securities mentioned herein. Morgan Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of
their families, may have a position in the securities mentioned herein, and, before or after your receipt of this report,
may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the
Firm from time to time in the open market or otherwise. Opinions expressed are our present opinions only and are
subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates to the opinions or
information provided herein. Additional information is available upon request.
Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph
& Co. Inc.
Morgan Joseph & Co. Inc. may receive or intends to seek compensation for investment banking services from the
subject company.
All prices are indications only, and are subject to change without notice. Prices are informational in nature only, and
are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or debt referred to
herein. Investors in securities referenced herein should understand that statements regarding future prospects might
not be realized. Investors should note that income from such securities, if any, may fluctuate and that each securitys
price or value may rise or fall. Accordingly, investors may receive fewer funds than originally invested. Past
performance is not necessarily a guide to future performance.

Copyright 2004 by Morgan Joseph & Co. Inc.