WestPoint Forecasts A Better 2007

Don Hogsett, March 12, 2007

With fourth-quarter sales falling off by 18.2%, to $236.6 million, and picking up a $12 million tab to shutdown plants and overhaul its U.S. operations, WestPoint Home recorded an operating loss of $40.0 million, sharply wider than a prior-year loss of $5.4 million.

But sending out a signal that the worst may be behind for the major mill, WestPoint's new corporate parent, American Real Estate Partners (AREP), which bought it out of bankruptcy in August 2005, said it expects "much stronger results" this year.

In its 10-K annual report filed with the Securities and Exchange Commission, AREP, controlled by billionaire investor Carl Icahn, said WestPoint Home could be erasing its losses and breaking even on an operating basis by the end of this year.

WestPoint's parent, a holding company which controls gaming interests in Las Vegas as well as real estate, said it believes "the home fashions segment may potentially reach a break-even" operating profit by the end of 2007.

And as the home fashions supplier shuts down more of its U.S. plants, moving production offshore, margins should climb sharply higher, it said, helping the company to climb back on track. Gross margins, said AREP, "should more than double on average from 6% in 2006, to the low teens by the end of 2007."

But in the meantime, margins remain thin, and for all of 2006 clocked in at 5.8%, while operating costs, when measured as a percentage of declining sales, reached 15.8%.

For all of last year, WestPoint sales totaled $957.7 million, and the mill threw off an operating loss of $150.6 million. Since AREP owned WestPoint only since Aug. 8, 2005, full-year 2005 numbers are not available for a head-to-head comparison.

In an eventful year, as its new parent struggled to get its arms around the industry, WestPoint began a long-postponed process of moving some manufacturing operations offshore to lower-cost facilities. In December, WestPoint acquired bedding manufacturing operations in Bahrain that once supplied product to rival Springs Global, and took a 50% stake in a joint venture in Pakistan to produce bath products.

Off-shore investment is likely to accelerate, said WestPoint's parent. The mill, it said, "may expend additional amounts in connection with further joint venture and acquisitions, and such amounts may be significant."

Providing the cash, WestPoint's parent put $200 million into the division last year, buying a new issue of preferred stock. Making it easy for WestPoint, the preferred shares will pay a low dividend, and the dividend won't be paid for years to come. Additionally, AREP helped WestPoint Home secure a $250 million revolving line of credit from Bank of America. At year's end, WestPoint said there were no borrowings under the line of credit, but outstanding letters of credit of $40.1 million, leaving WestPoint with a cash availability in the range of $210 million, in addition to the $200 million AREP supplied when it bought the new issue of preferred shares.

WestPoint's operating loss tugged only modestly at the bottom line of its deep-pockets parent, and AREP recorded a fourth-quarter profit of $565.4 million, gaining on the sale of its Atlantic City gaming operations and oil and gas businesses. For all of 2006, AREP recorded a profit of $798.8 million, bounding back from a loss of $25.7 million the year before.

WestPoint Home 2006 Results

12 months 12/31 (x000) 2006
12-month 2005 results are not available for comparative purposes. WestPoint Home was acquired by AREP on August 8, 2005.
Sales $957,656
Restructuring charges 45,647
Average gross margin 5.8%
SG&A expenses 16.8%
Operating Loss (150,637)

American Real Estate Partners L.P.

Qtr. 12/31 (x000) 2006 2005 % CHANGE
Data necessary to calculate average gross margin and SG&A expenses as a percentage of sales was not included as a part of the consolidated statement of operations included in the company's 10-K annual report filed with the Securities and Exchange Commission.
a. Fourth quarter results include $16.9 million in interest income, compared with $7.4 million during the same period a year ago; $10.7 million in miscellaneous income, compared with $3.5 million last year; $3.1 million in income from the company's stake in an affiliate, compared with $800,000 a year ago; and a $573.5 million profit from discontinued operations stemming from the sale of its Atlantic City gaming operations and oil and gas business, compared with a $63.0 million profit the year before.
b.12-month results include interest income of $52.7 million, compared with $42.8 million in 2006; $99.3 million in miscellaneous income, compared with a miscellaneous loss of $12.9 million last year; a $12.6 million profit from the company's stake in an affiliate, compared with $1.4 million last year; and a $757.8 million profit from discontinued operations stemming from the sale of its Atlantic City gaming and oil and gas business, compared with a year-before loss of $25.7 million.
Sales $375,300 $404,500 -7.2
Oper. income (EBIT) (26,700) (800)
Net income 565,400a 63,000a 797.5
Per share (diluted) 8.96 1.00 796.0
Average gross margin
SG&A expenses
12 months
Sales $1,477,900 $901,000 64.0
Oper. income (EBIT) (89,800) 45,300
Net income 782,900b (20,300)
Per share (diluted) 12.69 (0.36)
Average gross margin
SG&A expenses

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