Quaker sees profits cut in half

Don Hogsett, May 5, 2003

With sales falling off at an almost double-digit pace, and its margins squeezed thin, first-quarter profits at Quaker Fabric Corp. were virtually slashed in half, dropping by 48.8 percent, to $3.7 million from $7.0 million last year.

With business weakening in its domestic and international markets, Quaker sales declined by 9.8 percent during the opening quarter, to $90.2 million from $100.0 million last year.

With sales weakening, average gross margin thinned substantially, by 160 basis points, or 1.6 percentage points, to 21.0 percent of sales from 22.6 percent the preceding year. Gross margin dollars tumbled by 16.1 percent, to $19.0 million from $22.6 million.

Costs climbed higher when measured as a percentage of sales, increasing by 130 basis points, or 1.3 percentage points, to 15.8 percent from 14.5 percent the prior year. But measured in absolute dollars, costs were actually whittled down by 1.7 percent, to $14.3 million from $14.5 million last year, generating a cash savings of $246,000.

Caught between the falling sales and weaker margins, operating profits tumbled by 41.8 percent, to $4.7 million from $8.1 million, a shortfall of $3.4 million. Operating margin — operating profits measured as a percentage of sales — fell to 5.2 percent from 8.1 percent a year ago.

Larry Liebenow, president and ceo, said the sales shortfall reflected "considerable softness in overall domestic and international demand." U.S. sales declined by $7.6 million, and export sales fell by another $2.1 million, "most of which was attributable to a falloff in sales into the Middle East," said Liebenow. Additionally, yarn sales fell by $600,000, "and the outlook for this particular market suggests that our yarn sales are likely to remain under pressure."

Putting margins under pressure, falling sales "made it more difficult for us to absorb our fixed costs," said Liebenow. Putting margins under further pressure, he said, were "increases in our energy, insurance and depreciation costs."

Quaker's order backlog fell by 48.8 percent at the end of the quarter, to $26.3 million from $51.5 million. And this year's second quarter, said Liebenow, "will reflect only 12 weeks of full operations due to the timing of the company's annual shutdown period for planned maintenance." We expect overall market conditions to remain difficult until we begin to see some improvement in the general economy."

Quaker Fabric Corp.

Qtr. 4/5 (x000) 2003 2002 % change
a-First-quarter results include $24,000 in miscellaneous income, compared with $5,000 in miscellaneous expenses during the prior-year period.
Sales $90,225 $100,032 -9.8
Oper. income (EBIT) 4,716 8,103 -41.8
Net income 2,313a 4,428a -47.8
Per share (diluted) 0.14 0.26 -46.2
Average gross margin 21.0% 22.6%
SG&A expenses 15.8% 14.5%

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