Unifi Inc. reported an operating loss in the second quarter ended December 30 due to higher product costs, lower regional yarn volumes and a weaker sales mix. Sales increased slightly.

Second Quarter Fiscal 2019 Overview

  • Net sales increased slightly to $167.7 million from $167.5 million for the second quarter of fiscal 2018. Revenues from premium value-added (“PVA”) products represented approximately 47 percent of consolidated net sales.
  • Gross margin was 8.4 percent, compared to 13.5 percent for the second quarter of fiscal 2018, primarily impacted by higher product costs, lower regional yarn volumes and a weaker sales mix.
  • Operating income (loss) was ($0.8) million, compared to $7.8 million for the second quarter of fiscal 2018, primarily impacted by lower gross profit.
  • Diluted earnings per share (“EPS”) was $0.06, compared to $0.63 for the second quarter of fiscal 2018, where the second quarter of fiscal 2018 included more favorable tax benefits. The second quarter of fiscal 2019 included higher earnings from Parkdale America, LLC (“PAL”).

“As previously announced, the spike in polyester raw material costs in September and October of 2018 and the resulting demand disruption created an even more challenging environment for our regional business, and our performance missed expectations,” said Kevin Hall, CEO of Unifi.

Hall added, “External pressures in the regional business included elevated raw material costs and suppressed demand for certain textured and covered yarns. The volatile nature of these external pressures made navigating the regional environment even more difficult. Internal pressures included the implementation of selling price increases that left us less competitive, elevated inventory levels, and the result of weaker leverage of our cost structure. The combination of these external and internal pressures caused weaker fixed cost absorption and lower operating margins.”

Hall continued, “While the ongoing expansion of our PVA portfolio remains paramount to our Partner, Innovate and Build Strategy, it is imperative that we compete more aggressively in our regional commodity business to maintain our prominent market position and remain on the leading edge of textile innovation and sustainability. By synchronizing our efforts to strengthen our core yarn portfolio alongside pursuing our PVA growth engine, we will remain the innovative and sustainable solutions partner of choice.”

Second Quarter Fiscal 2019 Operational Review

Net sales in the second quarter of fiscal 2019 increased to $167.7 million, compared to $167.5 million for the second quarter of fiscal 2018. When excluding the impact of foreign currency translation, net sales increased $5.5 million, or 3.3 percent. International revenue growth was led by PVA product sales, partially offset by unfavorable foreign currency translation impacts and economic weakness in Brazil. Domestically, revenue declined primarily as a result of one less shipping week due to the timing of the holiday shutdown occurring within the second quarter of fiscal 2019 (as opposed to occurring in the third quarter of fiscal 2018), suppressed demand and competitive pressure from imports, partially offset by higher selling prices implemented since the second quarter of fiscal 2018.

Gross margin was 8.4 percent for the second quarter of fiscal 2019, compared to 13.5 percent for the second quarter of fiscal 2018. The decrease in gross margin was primarily attributable to lower regional yarn volumes driving weaker fixed cost absorption, higher polyester raw material costs and a weaker sales mix.

Operating income (loss) for the second quarter of fiscal 2019 was ($0.8) million compared to $7.8 million for the second quarter of fiscal 2018. The decrease in operating income was primarily due to the $8.5 million decrease in gross profit. Gross profit included a $1.2 million unfavorable foreign currency impact due to comparatively weaker currency translation for the International Segment, and a weaker economic environment had further adverse impacts in Brazil.

Net income was $1.2 million for the second quarter of fiscal 2019, compared to $11.8 million for the second quarter of fiscal 2018. Net income for the second quarter of fiscal 2019 was impacted by a comparably higher effective tax rate, partially offset by $1.1 million greater pre-tax earnings from PAL due to improved costs and operating leverage. Net income for the second quarter of fiscal 2018 included a $3.8 million tax benefit due to the reversal of a valuation allowance on certain historical net operating losses, along with favorability related to the enactment of U.S. tax reform legislation. For the second quarter of fiscal 2019, net income was benefited by $2.0 million from tax credits related to prior fiscal years. Diluted EPS was $0.06 for the second quarter of fiscal 2019 compared to $0.63 for the second quarter of fiscal 2018.

Adjusted EBITDA was $4.9 million for the second quarter of fiscal 2019, compared to $13.9 million for the second quarter of fiscal 2018. The decrease in Adjusted EBITDA resulted primarily from lower gross profit. Adjusted EBITDA is a non-GAAP financial measure. The schedules included in this press release reconcile Adjusted EBITDA to Net income, the most directly comparable GAAP financial measure.

Net debt (debt principal less cash and cash equivalents) was $104.5 million at December 30, 2018, compared to $86.3 million at June 24, 2018. In December 2018, the company refinanced its existing credit facility, extending the maturity date to 2023 and improving the variable rate pricing terms. During the second quarter of fiscal 2019, the company retired $25.0 million of debt, driving the primary reduction in cash and cash equivalents from $44.9 million at June 24, 2018 to $26.7 million at December 30, 2018. However, there was no significant change in debt principal from June 24, 2018 to December 30, 2018, primarily due to an increase in inventories.

First Six Months of Fiscal 2019 Operational Review

The first six months of fiscal 2019 consisted of 27 weeks for the company’s domestic operations, compared to 26 weeks in the first six months of fiscal 2018. However, the timing of the company’s seasonal shutdown period reduced the number of shipping days in the second quarter of 2019 such that the first six months of fiscal 2019 had approximately the same number of shipping days as were present in the first six months of fiscal 2018.

Net sales were $349.3 million for the first six months of fiscal 2019, compared to $331.7 million for the first six months of fiscal 2018, and increased $29.5 million, or 8.9 percent, when excluding the impact of foreign currency translation. Gross margin was 9.8 percent for the first six months of fiscal 2019, compared to 13.9 percent for the first six months of fiscal 2018. Operating income was $4.9 million for the first six months of fiscal 2019, compared to $17.9 million for the first six months of fiscal 2018. Net income was $3.0 million for the first six months of fiscal 2019, compared to $20.8 million for the first six months of fiscal 2018. Net income for the first six months of fiscal 2018 included more favorable tax benefits and higher earnings from PAL when compared to net income for the first six months of fiscal 2019.

Fiscal 2019 Outlook

Fiscal 2019 contains 53 fiscal weeks, with the additional week included in the first fiscal quarter. In consideration of profitability pressures from raw material costs that occurred in the first half of fiscal 2019, as well as suppressed demand in certain regions and a weaker sales mix, the company anticipates the following outlook, consistent with the second quarter business update provided on January 14, 2019:

  • Mid-single-digit percentage growth for net sales;
  • Operating income between $19.0 million and $23.0 million;
  • Adjusted EBITDA between $42.0 million and $46.0 million;
  • Capital expenditures of approximately $25.0 million; and
  • An effective tax rate in the mid-40 percent range, with a cash-based tax rate in the high-30 percent range.

“Our fiscal 2019 second-half outlook assumes some moderate gross margin improvement due to lower raw material costs and improved sales and production volumes from the seasonality that typically lifts our second-half,” said Hall. “Gross margins in this second-half outlook are expected to benefit from a more favorable price-to-cost relationship. However, lingering competitive dynamics and downward pricing pressure are expected to prevent a full recapture of the recent margin lost during the periods of rising and elevated raw material costs.”

Hall concluded, “Our regional business continues to face a challenging environment, and it is critical that we strengthen our competitive position and accelerate sales opportunities that improve cost leverage on our regional assets, at the same time that we continue expansion of our PVA platforms globally. International PVA sales remain a solid growth engine, and the REPREVE brand resonates with customers worldwide, as sustainability goals are increasingly imperative for our direct and indirect customers. With our continued PVA momentum and a renewed focus on driving improved leverage from our regional cost structure, we remain confident that our Partner, Innovate and Build Strategy will drive long-term shareholder value.”