Pillowtex slides back into red as sales slow
October 28, 2002,
With sales tumbling down by 8.9 percent, extending a year-long slide, textiles giant Pillowtex Corp. recorded a $9.3 million third-quarter loss, slipping back into a pool of red ink only four months after emerging from bankruptcy, and wiping out a modest second-quarter profit.
Despite the weakened sales and the reversion to the loss column, Pillowtex managed to sharply cut its losses from year-before levels, to $9.3 million from $48.3 million last year, as it slashed its interest expense and debt as it emerged from Chapter 11; reduced depreciation expense and operating lease costs coming out of bankruptcy; cut fixed costs as it shuttered unproductive plants as it streamlined operations; and shucked off bankruptcy-related costs.
Getting a lift from lower cotton costs and improved operating rates in the mill's remaining plants, average gross margin improved substantially, to 7.7 percent from 2.8 percent a year ago, despite a shift to a lower-margin mix of product. Gross margin dollars more than doubled, rising by 154.0 percent, to $18.7 million from $7.4 million the prior year.
But margin gains were largely offset by a steep increase in costs, which jumped up by 320 basis points, to 9.3 percent of sales from 6.1 percent a year ago. Measured in raw dollars, operating costs shot up by 39.4 percent, to $22.6 million from $16.2 million last year, compared with the 9.0 percent drop-off in sales. Part of the jump in costs, the company reported, stemmed from a national advertising campaign; and another $4 million was tied to one-time costs stemming from a series of top management changes, including a severance package for former president and coo Tony Williams, who was forced out during the second quarter.
Mike Harmon, Pillowtex cfo, said, "During the third quarter, our results were adversely impacted by a very competitive environment, a shift to a lower margin mix, a slowdown experienced by our retail customers in demand for home textiles products and an increase in SG&A due mostly to non-recurring costs related to changes in executive management."
Looking ahead, the profit outlook remains subdued. The company said "the difficult competitive environment, the shift to a lower-margin mix and the slowdown in retail sales will continue to adversely affect performance results for the foreseeable future."
In another major headache for an already beleaguered team of new senior managers, Pillowtex said it's going to have to find about $10.6 million to add to its depleted pension fund this year. The major mill said a dramatic decline in the U.S. stock market has reduced the value of its pension plan substantially. To make up the difference, Pillowtex said it expects to have to add about $10.6 million this year, another $8.0 million for the 2003 pension-plan year and another $22 million in January 2004.
Sliding back into a loss only months after quitting Chapter 11 and shedding most of its debt, and with its sales still skidding, Pillowtex badly rattled analysts and investors, who pummeled the company's stock in the hours after it released its earnings last Wednesday morning. The value of Pillowtex stock was slashed by more than half, falling by 56.4 percent, to $0.44 a share from $1.01. Shares in the major mill have now lost almost 95 percent of their value since a new issue of common stock began trading at $8.00 a share after Pillowtex emerged from Chapter 11.
Sending out one more unsettling signal, Pillowtex also cancelled a scheduled conference with top managers and Wall Street analysts and investors, saying it's is now in the process of preparing a revised business plan.
Pillowtex nearly ran afoul of debt covenants earlier when it missed sales and earnings targets built into its plan of reorganization, the foundation for its bankruptcy settlement with creditors. The covenants were waived by lenders through the end of this year, giving the company some breathing room and time to come up with a new, more realistic, set of projections. Pillowtex said it will provide its term-loan lenders with a new three-year forecast by Nov. 27, that will serve as the basis for a new round of negotiations which could lead to further amending financial covenants moving into 2003.
Tripping up the company and causing it to miss its targets was a weakened economy and sales environment, Pillowtex said. Since the original plan and forecasts were prepared, "the home textiles industry has experienced competitive pressures from both domestic and international competitors and a slowdown in the retail environment as evidenced by many retailers reporting lower sales in September compared to the prior-year period," the company said. "As a result, the assumptions on which financial projections were based … are no longer reasonable assumptions for projecting future financial performance for the company or for formulating financial covenants."
As of the close of the third quarter, Pillowtex said it is in compliance with financial covenants in its revolving credit facility and the amended term-loan agreement. In addition, Pillowtex said it had about $78 million available as of Oct. 21.
|Qtr. 9/28 (x000)||2002||2001||% change|
|Oper. income (EBIT)||(3,967)||(8,890)||—|
|Per share (diluted)||(0.49)||NAb||—|
|Average gross margin||7.7%||2.8%||—|
|Oper. income (EBIT)||(20,557)||(47,443)||—|
|Per share (diluted)||(0.54)||NAb||—|
|Average gross margin||4.7%||0.5%||—|
a-Third-quarter results include a $365,000 restructuring charge, compared with $26,000 in the same period a year ago. The 2001 third quarter included $4.6 million in bankruptcy costs; an $8.9 million loss from discontinued operations and a $3.3 million loss on the sale of a discontinued operation; and $4.6 million in preferred dividends and accretion.
b-Nine-month results include $4,598 in restructuring charges, compared with $6.5 million last year; a $31.1 million charge for the impairment of long-lived assets. Compared with $23.2 million in 2001; a gain of $856.4 million stemming from the cancellation of debt as part of the company's reorganization; a $391.1 million fresh-start adjustment; miscellaneous costs of $66.6 million vs. $25.8 million the prior year; an income-tax benefit of $7.5 million; and $7.5 million in preferred dividends and accretion, compared with $12.0 million the preceding year. The 2001 nine-month period included a $16.2 million loss from discontinued operations; and a $3.3 million loss on the disposal of discontinued operations.
NA - Earnings per share for the prior-year periods are non-comparable because of the cancellation the company's old common stock as it emerged bankruptcy, and the subsequent distribution to creditors of a new issue of common stock as part of the bankruptcy settlement.
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