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18 Jun 2003
MOODY'S DOWNGRADES THE RATINGS OF AVONDALE INCORPORATED. ASSIGNS STABLE OUTLOOK.
Approximately $125 million of rated debt affected
New York, June 18, 2003 -- Moody's Investors Service downgraded the ratings of Avondale Mills,
Inc.'s and those of its parent company, Avondale Incorporated
(collectively "Avondale"). The following ratings were
Avondale Mills, Inc:
$125 million issue of 10.25% senior subordinated
notes due 5/1/06 lowered to B3 from B2.
The senior implied rating lowered to B1 from Ba3;
The senior unsecured issuer rating lowered to B2 from B1.
The rating outlook is stable.
The downgrade reflects the decrease in cash from operations, significant
leverage on a free cash flow basis (defined as total debt, plus
the off-balance sheet accounts receivable securitization program,
to cash from operations less capital spending and dividends) for the trailing
twelve months ending 2/28/03, weak though improving return on assets
and a steady dividend program (currently at 8% of EBIT).
Moody's notes that lower selling prices and intensified foreign
competition resulted in a sizable declines in Avondale's revenues
over the last four years. Extraordinary declines in inventory in
fiscal 2001, together with lower cost absorption from volume declines
in the current period, contributed to a decline in the level of
cash flow from operations in the trailing twelve month period.
However, the ratings are supported by the company's market
position as a leading domestic, integrated supplier of apparel textiles,
its improved product mix, and recent increase in profitability margins
as a result of on-going cost control measures, internalization
of yarn production and plant rationalization program initiated in fiscal
2002 which is contributing to improved EBIT return on average assets.
Further, the ratings reflect strong financial and operational management.
The stable rating outlook reflects Moody's opinion that Avondale's
cost and operational rationalization programs should provide sufficient
profit margins and cash levels for the near term. An ability to
improve internal cash generation to repay debt may result in a positive
rating outlook. However, continued weakness in the apparel
sector could cause deterioration in cash generation via price deflation
or insufficient overhead absorption. Such a trend could negatively
affect the outlook or the ratings.
The B3 rating on the senior subordinated notes reflects the contractual
subordination of the notes to the claims of secured lenders under the
bank facility and other senior indebtedness. On February 28,
2003, Avondale had approximately $21 million outstanding
under its revolving credit facility.
In the last several years, the company's revenues have consistently
declined due to both the weakened demand for domestic apparel textiles
and increased competition from the cheaper, foreign sourced fabrics
and packaged goods, as well as the company's internalization
of yarn production and shift in product mix. While revenues declined
at a compounded annual rate of 9.5% for the last three years,
Avondale improved its profitability margins and return on assets with
its plant rationalization program initiated in fiscal 2002. Year-over-year
EBITDA margin improved to 12% for the trailing twelve months period
ending 2/28/03, from 7.8% for a comparable period
a year ago. Similarly, return on assets, measured as
EBIT-to-average total assets, while still low,
increased to 8% for the trailing twelve months period ending 2/28/03,
from approximately 1% for a comparable period a year ago.
The low return on assets may indicate a need for further asset rationalization
if the unit volume weakens any further.
Despite recent profitability improvements, the company's cash
flow from operations weakened as depicted by a year-over-year
decline in cash flow from operating activities, excluding proceeds
from the sale of accounts receivable, to approximately $51.3
million for the trailing twelve months period ending 2/28/03 from approximately
$95 million for a comparable period a year ago. The majority
of the variance in sources of operating cash is caused by the unusually
high reduction in working capital in 1Q02 which is included in the trailing
twelve months ending March 1, 2002. This unusually high reduction
in inventory of $35 million is considered an anomaly from the historical
trends. Free cash flows, as measured as cash flow from operations,
excluding proceeds from sales of accounts receivable, less capital
spending and dividends, were reduced by the ongoing dividends of
approximately $5 million per annum (sizeable as a percentage of
EBIT) and the capital spending program of over $13 million.
Thus free cash flow is modest, at $32.9 million,
or approximately 4.9% of revenues, for the trailing
twelve months period ending 2/28/03. While free cash flow is flat
when compared to a year ago, capital expenditures were $49
million higher in the prior period. Therefore effectively,
free cash flow dropped $49 million from the prior period.
Adjusted debt, inclusive of the off-balance sheet accounts
receivable securitization program, to free cash flow for the trailing
twelve months ending 2/28/03 is approximately 7 times. While this
is an improvement from 8.5 times a year ago, such leverage
is considered high for a company in a mature industry with serious competitive
threats. Going forward, Moody's anticipates leverage
to remain flat assuming that Avondale will be able to maintain its current
level of operating cash flow in an environment characterized by a prolonged
period of unit volume declines, and some cash charges from plant
Interest protection measures are adequate, at approximately 2 times,
as measured by EBIT to interest expense for the trailing twelve months
period ending 2/28/03, and the fixed charge coverage, inclusive
of operating leases and the current portion of the long-term debt,
at 1.6 times for the period
Moody's believes that Avondale's current market share in denim
and other apparel fabrics, along with the weak financial position
of many competitors, may provide opportunities for earnings growth
from improved market share should demand for domestic apparel textiles
improve. However, decreasing unit volumes suggest there is
no significant demand increase in the near-term. Should
decreasing revenues impact Avondale's profitability and the cash
flow generation in the near-term, the outlook or the ratings
could be negatively affected.
Avondale Mills, Inc. with the headquarters in Monroe,
Georgia, is a wholly owned operating subsidiary of Avondale Incorporated.
The company is a leading manufacturer and marketer of indigo-dyed
denim, piece-dyed workwear and sportswear fabrics,
and cotton and cotton-blend yarns.
Andris G. Kalnins
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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