Dan River's 3Q earnings, operating income down

Don Hogsett, November 19, 2001

DANVILLE, VA — The third-quarter results from Dan River Inc. presented a grim financial picture for one of the nation's largest home textiles manufacturers.

The company actually reported net income of $1.8 million for the quarter, but that figure included a one-time income-tax benefit of $5 million related to the reversal of income-tax reserves. Without that benefit, Dan River had a net loss of $3.2 million, or 15 cents a share.

Also, Dan River's operating income took an 81 percent dive in the quarter, to just under $3.8 million from $19.8 million in the third quarter of 2000. Dan River's third-quarter sales were $159.4 million, off 9.2 percent from last year.

In the wake of the numbers, Joseph Lanier Jr., chairman and ceo, announced that the company had obtained a waiver from its creditors on the third-quarter financial covenants in its bank credit agreement. The waiver extends through Dec. 10, and Dan River has agreed to reduce its maximum borrowing availability under its revolving line of credit to $120 million during the waiver period.

"At the end of the third quarter, our liquidity was in excess of $45 million [including cash on hand and availability under our $150 million working-capital line of credit]," Lanier said. With the waiver, "we have liquidity (cash and borrowing availability) of approximately $20 million, which we expect will provide us with adequate liquidity as discussions with our lenders continue."

Looking at its business segments, Dan River's home fashions sales slipped 4 percent in the third quarter, to $123.7 million. The home fashions sector's operating profit dropped nearly 60 percent, coming in at $6.7 million. In other business areas, Dan River saw its apparel fabrics sales fall nearly 27 percent, while sales of engineered products lost more than 14 percent.

The sales shortfall bears the brunt of the blame for the rest of Dan River's numbers. The company was able to deal with expenses during the third quarter, actually trimming 5 percent off selling, general and administrative expense dollars. As a percentage of sales, though, SG&A rose 40 basis points, to 9.8 percent.

Although cost of sales were virtually flat between last year's and this year's third quarter, Dan River's average gross margin fell 850 basis points, to 12.2 percent — again because of the decline in sales.

Lanier was able to find some positives out of the home fashions sector's performance, observing that sales for the first nine months of 2001 in this area actually grew 3.5 percent, to $361.2 million.

"In the home fashions segment, overall operating performance improved as a result of better capacity utilization and absorption of fixed charges," he stated. "Successful efforts in our inventory reduction program have brought inventories to targeted levels at $167 million, a reduction of $39 million year to date. Debt outstanding was reduced by an additional $6 million from the second quarter, or $27 million to date."

Lanier warned, however, that Dan River's tough times are far from over. The Sept. 11 terrorist attacks and their effect on the U.S. economy "will negatively impact our fourth-quarter results," he said. "We currently expect sales for the fourth quarter to come in at about $145 million and to incur a loss of approximately 30 cents to 45 cents per share."

Dan River Inc.

QTR. 10/29 2001 2000 % CHG
( ): Denotes loss a: Includes a one-time benefit of $5 million from the reversal of income-tax reserves. Without this benefit, the company's third-quarter loss was $3.2 million, or 15 cents a share.
Sales $159,390 $175,458 -9.2
Oper. income (EBIT) 3,782 19,828 -80.9
Net income 1,812a 5,993 -69.8
Per share (diluted) 0.08 0.28 -71.4
Average gross margin 12.2% 20.7%
SG&A expenses 9.8% 9.4%
Nine months
Sales 485,249 497,639 -2.5
Oper. income (EBIT) 3,516 48,544 -92.8
Net income (10,847) 13,025
Per share (diluted) -0.50 0.59
Average gross margin 10.9% 19.9%
SG&A expenses 10.2% 10.1%

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