Foamex International Inc. Business report FY2006

Business Highlights

Financial overview

in million dollars	FY2006	FY2005	Rate of change (%)	Factors
Overall
Sales	1,357.2	1,282.9	5.8	Net sales for 2006 increased 5.8% to USD 1,357.2 million from USD 1,283.0 million in 2005. The increase is due to higher selling prices in all operating segments partially offset by lower volumes in Foam Products and Carpet Cushion Products.
Operating income	120.1	41.5	189.4	Income from operations in 2006 was USD 120.1 million , or 8.8% of net sales, increasing USD 78.6 million from USD 41.5 million, or 3.2% of net sales, reported in 2005 primarily due to the increased gross profit. Selling, general and administrative expenses were essentially unchanged from 2005 as the accrual of incentive compensation under a plan approved by the Bankruptcy Court on October 30, 2006 was offset by lower professional fees and reduced bad debt expense. The 2006 period included USD 7.9 million of restructuring charges related to the closure of manufacturing facilities, while the 2005 period included a USD 29.7 million gain from the sale of its rubber and felt carpet cushion businesses and goodwill impairment charges of USD 35.5 million.
Automotive Products Segment
Sales	429.7	393.1	9.3	Automotive Products net sales for 2006 increased 9.3% to USD 429.7 million from USD 393.1 million in 2005 due primarily to increased selling prices and additional volume from new business.
Operating income	25.6	17.5	46.3	Income from operations increased USD 8.1 million to USD 25.6 million primarily due to higher selling prices partially offset by raw material cost increases since the beginning of 2005, and operating efficiencies at its facility in Mexico City. Income from operations represented 5.9% of net sales in 2006 and 4.4% of net sales in 2005.
Technical Products
Sales	143.4	127.7	12.3	Technical Products net sales for 2006 increased 12% to USD 143.4 million from USD 127.7 million in 2005, primarily due to increased selling prices. Increased volumes for new products were largely offset by decreases in others.
Operating income	38.5	32.7	17.8	Income from operations increased USD 5.8 million to USD 38.5 million in 2006 compared to USD 32.7 million in 2005 as the sales increase and lower manufacturing costs were partially offset by higher raw material costs. Income from operations represented 26.9% of net sales in 2006 compared to 25.6% of net sales in 2005.

Restructuring
-Restructuring charges relating to the closure of two manufacturing facilities, including a foam pouring facility, located in Toronto, Canada aggregated USD 6.4 million. The provision includes severance required for a workforce of approximately 177 employees. Restructuring charges also include USD 0.8 million of plant closing costs and severance for 78 employees at the Company's foam pouring facility in Orlando, Florida where foam production ceased in the second quarter. The remaining restructuring charges of USD 0.7 million relate to several facilities including those that produced consumer products.

Outlook
Although demand in the first quarter of 2007 remains soft in the furniture, bedding and carpet cushion markets, the Company believes operating income for the full year will exceed USD 110 million. During 2007, the Company expects depreciation and amortization of approximately USD 18 million. The Company anticipates capital expenditures will be approximately USD 20 to USD 22 million, of which approximately USD 8 to 10 million is related to maintenance activity and the remainder represents investments in initiatives designed to drive operational efficiencies and growth. Based on its post-emergence capital structure, the Company expects to pay interest of between USD 50 and 55 million annually. The Company does not expect to be a significant federal income taxpayer in 2007 due to the Company's net operating loss carry forwards. The Company remains committed to returning value to its stockholders through debt reduction and expects that the Company will pay off approximately USD 50 million of debt during 2007.

R&D

Structure
The Company's primary research and development facility is in Eddystone, Pennsylvania.

R&D Expenditure

USD in millions	FY2006	FY2005	FY2004	FY2003	FY2002
R&D	3.2	2.3	2.8	3.6	4.8

Product Development and New Product Introduction
Examples of the Company's ability to react to changing industry requirements include its development of thermo formable headliners, tri-laminates, advanced cutting technology and energy absorbing foams.

	Interior Soft-Trim Laminates
		The Company is the market leader in providing foam rolls and laminated composites for interior soft-trim applications. The Company provides a full range of products for seating laminates, headliner laminates, and barrier composites.
	Qylite Acoustical Solutions
		The Company introduced Qylite, a full product line of lightweight acoustical materials, using its proprietary chemical formulations and processing technologies to reduce driver distraction by providing a quieter passenger compartment. Its Qylite provides a range of materials with differing acoustical functions, such as sound absorption, barrier/decoupler systems, and sealing. Each of these materials can be further enhanced through a variety of fabrication and post-processing technologies, and can synergize with other materials in layered composites produced with its flame-lamination technology. Application examples include: -Dash Insulators - Supersoft, thermoformable, SMT, convoluted, EA -Hood Insulators - Thermoformable or SMT, die-cut -Floor Carpet Underlay - SMT decoupler/absorbers -Door panel absorbers -Headliner laminate absorbers -Seat strainer/barrier/decouplers or absorbers -Luggage compartment acoustical components -Quarter panel trim absorbers Qylite product types currently include: -Qylite 100V - Ultra-lightweight, supersoft polyurethane dash insulator decoupler material, made with its patented VPF manufacturing process, and proprietary chemistry. -Qylite 250V - Thermoformable dash insulator material, manufactured with its patented VPF process. -Qylite 400 - High-Performance sound absorber with value price
	CustomFit Headliner Cores
		The Company's proprietary CustomFit polyurethane foam technology is the foundation of its headliner products, providing a tri-laminated headliner substrate composite to automotive interior integrators for use as the core of a thermoformable headliner. Constructed of layers of polyurethane, fabric and encapsulated fiber mat, CustomFit headliners are lighter in weight and easier to handle than fiberglass headliners of the past, which often presented installation challenges during assembly. In addition, CustomFit helps headliners conform better to the intricacies of today's rooflines, enhancing design flexibility, aesthetics and acoustical properties such as noise, vibration and harshness (NVH).
	Energy Absorbing Foams
		Driven by demand for improved automotive safety, the Company is applying proprietary technologies to the development of advanced energy absorbing (EA) polymers. Its energy absorbing foams can already be found in door panels for side-impact protection and as knee bolsters in instrument panels. This special engineered foam enhances passengers' safety and also diminishes interior vehicle noise.
	Molded Seat Pads
		The Company offers a full range of molded flexible foams for automotive seating applications, such as: -Cushions -Backs -Armrests -Headrests Its manufacturing capabilities include dual density/dual ILD foam pouring, insert molding, in-house formulation blending and full lab capability. Its technology group in Eddystone, PA provides advanced chemical formulation know-how, and leverages its furniture and bedding industry experience to optimize comfort in seating applications.
	CPC (Continuous Platform Cutting)
		This technology is the most recent the Company's innovation targeted to improve the floor carpet underlay process. CPC is a proprietary, patented technology that can allow an entire floor carpet underlay, or other large part, to be cost effectively fabricated as a single, lightweight polyurethane foam component, with the surface contoured perfectly to fit the shape of the vehicle floor pan. This durable construction, which is also applicable to other large vehicle surfaces, improves retention of acoustical properties over the vehicle's life better than available alternatives and facilitates a clean, lint-free, easy-to-handle assembly component. Using this technology, the company supplies General Motors through Lear corporation with custom-fit floor underlays for the Buick Rendezvous (since 2001) as well as the Pontiac Aztek (since 1999).
	SMT
		SMT is a patented process developed by the Company that allows the creation of a single piece of foam with varying features and properties. SMT(R) enables the foam surface to be modified in six key ways: pattern type, position, size and spacing, as well as depth of cut and level. The Company's automotive engineers have taken advantage of SMT(TM) technology to create an advanced foam-backed carpet system for vehicle interiors.
	Smoothbond
		A VPF-based foam with entirely new performance characteristics and physical properties developed specifically to met the needs of Honda. An anti-wrinkle foam engineered for seating lamination to improve comfort while maintaining surface quality, the company expects broader application across Honda product lines and others in the industry to adopt Smoothbond this year.
	VPF (Variable Pressure Foaming)
		VPF technology is an environmentally-friendly process that yields branded proprietary polymer products in a wide range of densities and hardnesses that can not be made by any other manufacturer. The VPF process does not use CFCs, eliminates volatile organic blowing agents from the foaming process and actually exceeds the Clean Air Act requirement.