Coteminas Hit by Springs Losses

Don Hogsett, June 4, 2007

Hamstrung by a $141.5 million loss at its Springs Global cross-border operation, Brazilian parent Coteminas said profits last year were slashed by more than half even as it virtually tripled its sales as it layered on results of the former Springs Industries, which it acquired in November 2005.

With margins under strong pressure as it picked up the tab for shutting down Springs' U.S. plants as it shifts production off shore, Coteminas said profits tumbled by 53.2%, to $22.3 million from $47.7 million the prior year.

Operating profits, before any one-time items or income-tax relief, skidded down even further, sliding by 94.6%, to $5.3 million from $97.7 million the preceding year, as losses at Springs Global acted as a heavy drag and the weakness of the U.S. dollar took a further toll. The company said, "Operating earnings were strongly affected by the high production costs of plants located in the United States and by the appreciation of the Brazilian real compared to the U.S. dollar."

Most of the damage to the bottom line was done by pressure on margins, which were squeezed thinner by more than half. Average gross margin was throttled down to 11.9% from 26.8% the preceding year, a number that hammers home the substantial advantage enjoyed by Coteminas at its low-cost Brazilian home base.

Breaking out the damage done to the bottom line, Coteminas said "Fiscal year profit was affected by non-recurring expenses due to the closing of plants in the United States, in the amount of $12.9 million, and losses on foreign investments, due to the appreciation of the Brazilian real, compred to the dollar, in the amount of $15.1 million.

In a financial report filed in Brazil, Coteminas said, "The gross margin of 11.9% was much lower than necessary, as 2006 was a transition year." The newly powerful global player said, "In 2006, the cost of products sold was affected by the high cost of converting plants located in the United States."

Springs Global, said Coteminas, "is consolidating the production of nine of its fabric units in the United States to Brazil, Argentina and Mexico."

While margins narrowed sharply, Coteminas showed off its frugal side by holding costs steady even as sales almost tripled. Measured as a percentage of sales, operating costs were virtually flat at 11.6%, up slightly from 11.5% the year before. Coteminas said operating costs "are being reduced by consolidating numerous activities into shared service centers, and we expect this area to significantly improve within the next few years."

In its Brazilian financial filing, Coteminas said the U.S. market accounted for about $1.3 billion in sales, about 75% of the $1.7 billion total.

Coteminas (Companhia de Tecidos Norte de Minas)

12 mos. ended 12/31/06 (x000) 2006 2005 % change
All amounts are expressed in U.S. dollars, converted from Brazilian reals using the exchange rate effective on Dec. 31, 2006, the close of the company's fiscal year.
Sales $1,672,723 $636,922 162.6
Oper. income (EBIT) 5,300 97,715 -94.6
Net income 22,336 47,737 -53.2
Per share 3.83 7.86 -51.3
Average gross margin 11.9% 26.8%
SG&A expenses 11.6% 11.5%

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