ITG Group is one of the most important textile group related to denim industry. Cone Denim is a part of the ITG group and Cone needs no introduction having being serving denim industry for over a 100 years.. In this report which is a partial reproduction from company’s own report for the 1st quarter of 2012 , it is reflected that the company has been badly affected by the economic downturn and the increase in raw material prices in 2010/11. The company is trying , through various cost reduction and marketing initiatives to reduce the impact of these macro economic factors.
ITG Financial Report For Jan-March ‘12
International Textile Group, Inc.is a global, diversified textile manufacturer headquartered in Greensboro, North Carolina, with operations principally in the United States, China, and Mexico. ITG’s long-term focus includes realizing the benefits of its global expansion, including reaching full production at ITG facilities in China, as described below, and continuing to seek other strategic growth opportunities.
The Company believes it is one of the world’s largest and most diversified producers of denim fabrics and the largest producer of better denim fabrics for products distributed through department stores and specialty retailers. In addition, the Company believes it is one of the largest worsted wool manufacturers and commission printers and finishers in North America, and is a leading developer, marketer and manufacturer of other fabrics and textile products.
The Company is organized and managed primarily according to product categories and manufacturing processes rather than by markets or end-use customers. The Company currently has five operating segments that are reported to the chief operating decision maker ("CODM") and four reportable segments that are presented herein.
- The bottom-weight woven fabrics segment includes heavy weight woven fabrics with a high number of ounces of material per square yard, including woven denim fabrics, synthetic fabrics, worsted and worsted wool blend fabrics used for government uniform fabrics for dress U.S. military uniforms, airbag fabrics used in the automotive industry, and technical and value added fabrics used in a variety of niche industrial and commercial applications, including highly engineered materials used in numerous applications and a broad range of industries, such as for fire service apparel, ballistics materials, filtration, military fabrics and outdoor awnings and covers.
- The commission finishing segment consists of textile printing and finishing services for customers primarily focusing on decorative fabrics and specialty prints as well as government uniform fabrics primarily for battle fatigue U.S. military uniforms.
- The narrow fabrics segment consists of narrow webbing products for safety restraint products such as seat belts and military and technical uses.
- The all other segment consists of expenses related to the idled Cone Denim de Nicaragua and ITG-PP joint venture plant facilities, transportation services and other miscellaneous items.
The Company’s facilities in China experienced increasing capacity utilization during 2011 as the economy improved from the significant downturn starting in 2008. As previously disclosed, in April 2009, the Company idled its Cone Denim de Nicaragua facility until further strategic alternatives are finalized. In addition, as previously disclosed the Company idled its Vietnam facility while in arbitration with its joint venture partner.
Business and Industry Trends
The global economic environment continues to be uncertain and volatile. Concerns related to continued high unemployment, government and municipal budgetary issues and the prospects for sustained economic recovery continue to impact consumer, military and municipal spending and our businesses, which could continue to have adverse effects in the significant markets in which we operate. The Company has taken, and expects to continue to take, steps to counter this continued economic uncertainty. These actions include, among other things, negotiating higher sales prices for certain products, negotiating new working capital financing arrangements, focusing on new product development projects and implementing cost saving initiatives.
During the latter part of 2010, cotton prices began increasing dramatically and reached historical highs in the first half of 2011 due to weather-related and other supply disruptions, which, when combined with increasing demand for cotton, particularly in Asia, created concerns about continued short-term availability in addition to increased costs for the Company’s products. While cotton prices have recently declined from the historical highs, cotton and wool prices continue to fluctuate and remain high as compared to historical levels. The Company’s bottom-weight woven fabrics segment has historically entered into firm purchase commitments for cotton and wool commodity raw materials used in the manufacture of apparel fabrics. Such non-cancellable firm purchase commitments are secured to provide the Company with a consistent supply of a commercially acceptable grade of raw materials necessary to meet its operating requirements as well as to meet the product specifications and sourcing requirements with respect to anticipated future customer orders. Because of the Company’s commitments related to raw materials, declines in selling prices below the committed price have had, and could continue to have, a negative impact on the Company’s results.
While we have been able to pass on some of these increased raw material costs through to our customers, the Company’s margins were negatively impacted in 2011 and in the three months ended March 31, 2012 by higher raw material prices. In response to the cost increases in raw materials, we have increased sales prices and we expect to continue to attempt to increase sales prices as necessary in response to higher costs or committed purchase contracts in order to provide sufficient margins. However, the Company has had difficulty maintaining higher sales prices as certain raw material market prices have fallen despite the higher raw material costs that remained in the Company’s inventories through the three months ended March 31, 2012. If the Company incurs increased raw material or other costs that it is unable to recoup through price increases, or experiences interruptions in its raw materials supply, our business, results of operations, financial condition and cash flows may be adversely affected.
Restructuring Charges and Asset Impairments
As a result of the macro-economic conditions discussed above and the continued financial challenges facing the Company, the Company initiated a restructuring plan in late 2011 that focused on reducing overall operating expenses by including manufacturing and other cost reduction initiatives, such as
- workforce reductions at the bottom-weight woven fabric segment’s White Oak denim facility
- and administrative functions to improve efficiencies.
As described above, the Company announced in December 2011 that the ITG-PP joint venture facility(at Vietnam) would be idled for an unknown period of time beginning in January 2012 and ITG-PP incurred direct costs related to the decision to idle the facility . The 2012 restructuring charges are primarily related to the idling of the Company’s ITG-PP joint venture facility in the amount of $2.5 million and workforce reductions at the Company’s White Oak denim facility in the amount of $0.1 million. The 2011 provision for restructuring charges of less than $0.1 million was primarily related to the Company’s multi-segment selling and administrative cost reduction plan.
Results of Operations
Net sales and income (loss) from continuing operations before income taxes for the Company’s reportable segments are presented below (in thousand US Dollars). The Company evaluates performance and allocates resources based on profit or loss before interest, income taxes, expenses associated with refinancing activities, restructuring and impairment charges, certain unallocated corporate expenses, and other income (expense) – net. Intersegment sales and transfers are recorded at cost or at arms’ length when required by certain transfer pricing rules. Intersegment net sales for the three months ended March 31, 2012 and 2011 were primarily attributable to commission finishing sales of $4.9 million and $5.0 million, respectively.
Three Months Ended March 31, March 31, 2012 2011 Net Sales: Bottom-weight Woven Fabrics $ 140,970 $ 135,766 Commission Finishing 11,839 10,690 Narrow Fabrics 7,530 6,665 All Other 6,393 9,905 166,732 163,026 Intersegment sales (4,870 ) (5,040 ) $ 161,862 $ 157,986 Income (Loss) From Continuing Operations Before Income Taxes: Bottom-weight Woven Fabrics $ 1,459 $ 8,525 Commission Finishing 407 136 Narrow Fabrics (361 ) (327 ) All Other (1,393 ) (5,334 ) Total reportable segments 112 3,000 Corporate expenses (3,001 ) (3,844 ) Other operating income - net 3 403 Restructuring charges (2,033 ) (14 ) Interest expense (13,791 ) (11,557 ) Other income (expense) - net (2,501 ) (972 ) (21,211 ) (12,984 ) Income tax expense (890 ) (1,014 ) Equity in loss of unconsolidated affiliates (378 ) (24 ) Loss from continuing operations (22,479 ) (14,022 ) Discontinued operations: Loss from discontinued operations, net of taxes - (29 ) Gain on disposal, net of taxes - 2,110 Income from discontinued operations - 2,081 Net loss (22,479 ) (11,941 ) Less: net loss attributable to non controlling interests (1,874 ) (2,019 ) Net loss attributable to International Textile Group, Inc. $ (20,605 ) $ (9,922 )
($ in ‘000s)
Comparison of Three Months Ended March 31, 2012 to Three Months Ended March 31, 2011
Consolidated: Consolidated net sales in the three months ended March 31, 2012 and 2011 were $161.9 million and $158.0 million, respectively, an increase of $3.9 million, or 2.5%, in the three months ended March 31, 2012 compared to the three months ended March 31, 2011. This increase was primarily due to an improved product mix in the Company’s technical fabrics business and higher selling prices charged to recover higher raw material costs at most of the Company’s other businesses. Net sales also increased due to sales volume increases primarily in the airbag and selected synthetic fabrics businesses due to improved economic conditions in the automotive industry and selected synthetic fabrics retail apparel markets. These increases were partially offset by volume declines in most of the Company’s other product lines primarily due to continued general unfavorable economic conditions affecting those markets as well as increased pricing pressures and municipal government budget cuts affecting demand at certain businesses. The Company also experienced reduced sales of $2.9 million at its cotton fabric and garment manufacturing complex in Vietnam due to the idling of that facility in January 2012 as described above.
Gross profit in the three months ended March 31, 2012 was $9.2 million, or 5.7% of net sales in the three months ended March 31, 2012, compared to $12.6 million in the three months ended March 31, 2011, or 8.0% of net sales. Gross profit margins were negatively impacted primarily by higher raw material costs that were not fully offset by higher selling prices as well as manufacturing inefficiencies at certain locations due to volume declines, partially offset by reduced losses at the idled ITG-PP facility of $3.2 million. Operating loss in the three months ended March 31, 2012 was $4.9 million compared to $0.5 million in the three months ended March 31, 2011 with such reduction primarily due to the lower gross profit margins described above and higher restructuring charges of $2.6 million mainly related to the idling of the ITG-PP joint venture facility, partially offset by lower selling and administrative expenses described below.
Bottom-weight Woven Fabrics: Net sales in the bottom-weight woven fabrics segment in the three months ended March 31, 2012 increased $5.2 million to $141.0 million as compared to the $135.8 million recorded in the three months ended March 31, 2011. The increase in sales primarily resulted from $14.9 million of higher selling prices charged to recover higher raw material costs and improved product mix primarily as the result of the development of new higher margin products, as well as higher sales volumes of $5.0 million primarily in the airbag and synthetic fabrics businesses due to improved economic conditions in the automotive industry and selected synthetic fabrics retail apparel markets. Improvements in this segment were partially offset by lower sales volumes of $14.7 million primarily in the denim business due to general unfavourable economic conditions affecting demand in that market, as well as increased pricing pressures, and, to a lesser extent, in certain of the technical fabrics businesses due to municipal government budget cuts.
Income in the bottom-weight woven fabrics segment was $1.5 million in the three months ended March 31, 2012 compared to $8.5 million in the three months ended March 31, 2011. The decrease in income was primarily due to higher raw material costs of $9.5 million primarily in the denim business, lower selling prices of $0.6 million and higher energy costs of 0.3 million. These reductions were partially offset by an improved product mix of $1.7 million primarily in the technical fabrics business, lower labor costs of $0.9 million due to reduced production volumes and favourable impacts from changes in foreign currency exchange rates of $0.9 million.
Commission Finishing: Net sales in the commission finishing segment were $11.8 million in the three months ended March 31, 2012 compared to $10.7 million in the three months ended March 31, 2011. The increase from the prior year period was primarily due to sales volume increases of $1.3 million due to increased sales to certain U.S. and foreign militaries. Commission finishing markets in the 2012 and 2011periods were also negatively affected by diminished discretionary income and consumer spending in the U.S. as well as increased competition. Income in the commission finishing segment was $0.4 million in the three months ended March 31, 2012 compared to $0.1 million in the three months ended March 31, 2011. The increase in operating results was primarily due to higher sales volumes in the government sector and lower raw material, energy and labor costs, partially offset by manufacturing inefficiencies.
Narrow Fabrics: Net sales in the narrow fabrics segment were $7.5 million and $6.7 million in the three months ended March 31, 2012 and 2011, respectively. The increase from the prior year was primarily due to higher sales volumes of $0.3 million primarily related to the segment’s seat belt business due to improved economic conditions in the automotive industry, and $0.6 million related to higher selling prices to recover higher raw material costs and a more favourable product mix related to certain government contracts. Loss in the narrow fabrics segment was $0.4 million in the three months ended March 31, 2012, compared to $0.3 million in the three months ended March 31, 2011. The decrease in operating results was primarily due to higher raw material and energy costs and manufacturing inefficiencies, partially offset by higher selling prices and a more favourable product mix of $0.6 million.
All Other: Net sales in the all other segment in the three months ended March 31, 2012 and 2011 were $6.4 million and $9.9 million, respectively. The decrease from the prior year period was primarily due to lower sales at the ITG-PP facility in Vietnam which was idled in January 2012. Loss in the all other segment was $1.4 million in the three months ended March 31, 2012 as compared to $5.3 million in the three months ended March 31, 2011. Operating losses in this segment were primarily due to depreciation and other carrying costs related to the idled ITG-PP facility and, to a lesser extent, the idled Cone Denim de Nicaragua facility. Operating losses at the ITG-PP facility were lower in the 2012 period as compared to the 2011 period as a result of the idling of the Vietnam facility in January 2012 as described above.