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Leaner Pillowtex exits Ch. 11

Eighteen months after declaring bankruptcy amid a hostile financial environment, rapidly rising debt and sluggish sales, Pillowtex Corporation has emerged from Chapter 11.

According to the major manufacturer and supplier of home textiles, Pillowtex satisfied all conditions of its Plan of Reorganization and emerged from bankruptcy protection on May 24. The plan was confirmed by the United States bankruptcy court on May 1.

At the time of its filing, Pillowtex declared more than $1.1 billion in debt. But after a year-and-a-half of aggressively trimming down costs, including the shuttering of more than a dozen plants and subsequent layoffs of approximately 4,500 employees throughout the company, the debt load has been whittled down to approximately $205 million, less than one-fifth of the original number.

Approximately 8,300 employees remain with Pillowtex, which continues to own and operate 20 facilities throughout the United States and Canada.

Despite the positive announcement from one of the country's major mills, Pillowtex's first quarter was far from rosy. The company posted a $53.7 million loss, up from the $51.9 million from the same period a year earlier. First quarter sales also declined, dropping to $240.9 million from $273.8 million. Mike Harmon, cfo and executive vp, said Pillowtex expects to return to profitability in the second half of this year.

Jeff Stewart, a fixed income research analyst with the Charlotte, NC-based Wachovia Securities, said it was generally impossible to gauge the results of Pillowtex's emergence and its viability until the company posts a clean quarter.

Of the factors that led to Chapter 11, "the single biggest mistake was the company took on a tremendous amount of debt," Harmon told Home Textiles Today. "There was the acquisition of Fieldcrest Cannon in 1997, followed by the acquisition of Leshner Mills in 1998. Those things, combined with the business slowdown in 2000, all added up."

One determining factor may be Pillowtex's gross margin for the first quarter of 2002, which was reported at 3.9 percent, up 0.9 percent from a year earlier. That number, however, is still far below the 13.7 percent posted by rival Dan River Inc.

"That number is small and in order to make budget, that number has to improve materially," Stewart told Home Textiles Today.

"The reorganization process provided an opportunity for our company to restructure to meet the current needs of the home fashions market more effectively," said Tony Williams, president and coo, in a statement released by the company. "The benchmarks we have set for success are clear — strong brand marketing, more effective employment of our manufacturing capacity, the development of strategic sourcing partnerships and a fanatical focus on quality. Taken together our goal is to be the industry leader in customer service. With the reorganization behind us, we are now in a position to focus our full attention to meet that goal and do so with a much improved balance sheet.

Harmon said the company's emergence was financed by a $112 million term loan and $200 million in a syndicated revolving credit facility. He also said the company has roughly $100 million of availability under the revolving credit facility.

Harmon also said that the day Pillowtex emerged from bankruptcy, the company's interest expense dropped $20 million, depreciation dropped $30 million and operating lease expense fell by $15 million. He added that reaction from retailers has been very positive, and that when Pillowtex filed its reorganization plan in December 2001, business began to pick up the following month.

According to Harmon, Pillowtex has inked agreements to new foreign suppliers for Pillowtex's various towel and sheet businesses, which should help keep the major mill competitive in an age of increasing global sourcing. Many of the company's various brands, including its extremely popular and lucrative Cannon brand, have been refocused and re-launched and new promotions are planned for spring 2003.

The company also said that it "anticipates changing its name in the near future." The new name has been a closely guarded secret for several months.

"We'll know by the end of the third quarter whether this is going to work. It just remains to be seen," Stewart said.

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