No soft landings for Pillowtex

Don Hogsett, April 7, 2003

Kannapolis, NC — Losing money for a third straight quarter since emerging from bankruptcy, and now facing the possible sale of the company, urged by creditors who want to cash out, embattled textiles titan Pillowtex Corp. recorded a fourth-quarter loss of $17.4 million, something of an improvement over an even deeper loss of $54.5 million last year.

The troubled producer generated the deep, double-digit loss even after $856 million in debt was wiped off its books last year as part of a sweeping overhaul during 18 months in Chapter 11.

But shoring up the top line, the company modestly boosted its sales by 0.7 percent during the closing quarter, to $241.0 million from $239.3 million last year, snapping a string of double-digit sales declines and recovering from the earlier loss of the Ralph Lauren license in basic bedding and a subsequent shortfall in sales.

Taking a bite out of the bottom line, average gross margin continued to shrink during the quarter, by 250 basis points, or 2.5 percentage points, to 4.1 percent from 6.6 percent a year ago. Gross margin dollars tumbled by 38.0 percent, to $9.8 million from $15.8 million the preceding years.

Hacking away at costs, Pillowtex improved its expense ratio — operating costs measured as a percentage of sales

— by 100 basis points, or 1.0 percentage points, to 8.3 percent of sales from 9.3 percent last year. Measured in absolute dollars, costs were whittled down by 9.9 percent, to $20.0 million from $22.2 million, generating a cash savings of $2.2 million.

But however much it cut in the way of costs, it still wasn’t enough to offset the worsening margin erosion, and Pillowtex produced an operating loss of $10.2 million, worse than last year’s $6.3 million deficit, as costs continued to substantially exceed the company’s meager profit margin.

As its financial condition continued to worsen, the company is coming under considerable pressure to start making money or to sell itself off, in whole or in pieces.

Indeed, as part of its 10-K federal filing of 12-month financial results, Pillowtex said, in a routine boiler-plate caution required by federal regulators, “there is substantial doubt” about the company’s ability “to continue as a going concern.”

And putting itself squarely on the auction block, Pillowtex has hired investment banker Credit Suisse First Boston to help it find a way out, likely through a sale.

Wiping out a staggering debt load as it emerged from Chapter 11 last year, Pillowtex recorded a profit of $301.5 million for all of 2002, compared with a loss of $239.1 million in 2001 and an even deeper loss of $271.3 million in 2000. For the three-year period of 1998 to 2001, Pillowtex has racked up a daunting loss of more than half a billion dollars, $542.3 million.

Providing a lift to the bottom line, and generating the company’s first profit since 1998, Pillowtex posted a one-time gain on the cancellation of debt of $856.4 million. But eating away at the proceeds, the big textiles producer recorded an offsetting $391.1 million fresh start adjustment charge as it emerged from Chapter 11, and paid a further fistful of restructuring and reorganization costs.

For all of last year, average gross margin widened to 4.6 percent from 1.9 percent, benefiting from lower overhead costs following the shutdown of some of its plants and lower raw material and natural gas prices.

Costs climbed higher by about $200,000, to $73.1 million, due largely to a $6 million in one-time costs tied to top-management changes.

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