Unifi Inc. reported a net loss in the third quarter ended March 31 and reduced its earnings guidance for the year. The yarns specialist said it’s being hurt by foreign currency headwinds and pricing pressures from increased imports of polyester textured yarn from China and India.

Third Quarter Fiscal 2019 Overview

  • Net sales increased to $180.0 million from $165.9 million for the third quarter of fiscal 2018. Revenues from premium value-added (“PVA”) products grew 13.5 percent compared to the third quarter of fiscal 2018 and represented approximately 47 percent of consolidated net sales.
  • Gross margin was 7.7 percent, compared to 10.0 percent for the third quarter of fiscal 2018, primarily impacted by competitive pressures, especially from low cost imports into the U.S.
  • Operating income was $0.8 million, compared to $1.6 million for the third quarter of fiscal 2018, adversely impacted by lower gross profit due to competitive pressures and unfavorable foreign currency translation.
  • (Loss) Earnings per share (“EPS”) was ($0.08), compared to $0.01 for the third quarter of fiscal 2018, primarily driven by a significant and unfavorable effective tax rate due in large part to lower domestic earnings.

Update on Recent Trade Petitions

  • Imports of polyester textured yarn from China and India – which increased approximately 79 percent from 2013 to 2017 and which continued to grow during the first half of 2018 – remained elevated during fiscal 2019, creating considerable pressure on margins and competitiveness in the U.S.
  • On April 29, 2019, the U.S. Department of Commerce (the “Commerce Department”) announced affirmative preliminary countervailing duty determinations on unfairly subsidized imports of polyester textured yarn from (i) China at rates of 32 percent or more and (ii) India at rates of 7 percent or more. In addition, due to the “critical circumstances” resulting from a significant spike in Chinese imports in the months immediately following the filing of the company’s October 2018 trade petitions, the Commerce Department preliminarily determined that these duties will be applied retroactively for Chinese imports, beginning 90 days prior to the date that the duties go into effect.
  • Preliminary antidumping determinations are expected on June 26, 2019, and final determinations of dumping, subsidization and injury are expected by the end of calendar 2019. Similar to preliminary countervailing duties, the antidumping duties will apply retroactively for Chinese imports, beginning 90 days prior to the date that the duties go into effect.

“While we continue to see positive indicators in global revenue and momentum in our sustainable and innovative PVA product portfolios, a number of headwinds and shortfalls have reduced our short-term profitability,” said Tom Caudle, president and chief operating officer of Unifi. “These headwinds include unfavorable foreign currency translation impacts, a surge in imports of polyester textured yarn from China following the filing of our October 2018 trade petitions, and softness in certain markets. Amid these pressures, we were pleased to see the Commerce Department’s preliminary countervailing duty and critical circumstances determinations. These announcements are critical steps in advancing our efforts to better compete against the subsidized imported yarns that have flooded our market in recent years, and we will continue in our efforts to pursue these important trade actions in the coming months.”

Caudle concluded, “Separate from the recent trade activity, we have transitioned our leadership team to a leaner and more agile structure with deep roots in operational excellence and a balanced focus on profitability. We also launched and are continuing to execute against a cost reduction plan, which includes a considerable step-down in our run-rate of general and administrative expenses. Our global strategy to Partner, Innovate and Build is creating opportunities for future growth while we take appropriate action to restore profitability in the Americas businesses. This includes increasing the utilization of our assets, supporting and expanding our sustainable and innovative portfolios, and optimizing the supply chain and cost structure to better deliver efficient and effective solutions to meet the demands of our customers. We remain confident in our path forward and have made calculated changes to our organization that empower our teams and strengthen our ability to remain the leader in synthetic and recycled textile solutions.”

Third Quarter Fiscal 2019 Operational Review

Net sales in the third quarter of fiscal 2019 increased to $180.0 million, compared to $165.9 million for the third quarter of fiscal 2018. When excluding the impact of foreign currency translation, net sales increased $19.4 million, or 11.7 percent. International revenue growth was led by PVA product sales, partially offset by unfavorable foreign currency translation impacts and softness in Brazil. Domestically, revenue increased primarily as a result of one more shipping week due to the timing of the holiday shutdown occurring within the second quarter of fiscal 2019, partially offset by competitive pressure from polyester yarn imports into the U.S.

Gross margin was 7.7 percent for the third quarter of fiscal 2019, compared to 10.0 percent for the third quarter of fiscal 2018. The decrease in gross margin was primarily attributable to competitive pressures, which contributed to weaker fixed cost absorption, a less favorable sales mix and lower conversion margin (selling price less raw material cost).

Operating income for the third quarter of fiscal 2019 was $0.8 million compared to $1.6 million for the third quarter of fiscal 2018. The decrease in operating income was primarily due to a $2.8 million decrease in gross profit, partially offset by bonus and equity compensation forfeitures triggered by recently-announced executive departures. Gross profit was adversely impacted by unfavorable foreign currency impacts due to comparatively weaker foreign currency translation and conversion margin pressure for the International Segment.

Net loss was $1.5 million for the third quarter of fiscal 2019, compared to net income of $0.2 million for the third quarter of fiscal 2018. Net loss for the third quarter of fiscal 2019 was impacted by a significantly higher effective tax rate, partially offset by $0.9 million greater pre-tax earnings from Parkdale America, LLC (“PAL”) as a result of higher conversion margin and better operating leverage. EPS was ($0.08) for the third quarter of fiscal 2019 compared to $0.01 for the third quarter of fiscal 2018.

Adjusted EBITDA was $6.8 million for the third quarter of fiscal 2019, compared to $7.3 million for the third quarter of fiscal 2018. The decrease in Adjusted EBITDA resulted primarily from lower gross profit, partially offset by lower compensation expenses.

Net debt (debt principal less cash and cash equivalents) was $109.0 million at March 31, 2019, compared to $86.3 million at June 24, 2018. Cash and cash equivalents decreased from $44.9 million at June 24, 2018 to $27.9 million at March 31, 2019. This reduction in cash and cash equivalents was primarily driven by the retirement of $25.0 million in debt during the second quarter of fiscal 2019. However, debt principal and operating cash flows were adversely impacted by an increase in inventories and reduced earnings.

First Nine Months of Fiscal 2019 Operational Review

The first nine months of fiscal 2019 consisted of 40 weeks for the company’s domestic operations, compared to 39 weeks in the first nine months of fiscal 2018. Net sales were $529.3 million for the first nine months of fiscal 2019, compared to $497.6 million for the first nine months of fiscal 2018, and increased $49.0 million, or 9.8 percent, when excluding the impact of foreign currency translation. Gross margin was 9.1 percent for the first nine months of fiscal 2019, compared to 12.6 percent for the first nine months of fiscal 2018. Operating income was $5.7 million for the first nine months of fiscal 2019, compared to $19.5 million for the first nine months of fiscal 2018. Net income was $1.5 million for the first nine months of fiscal 2019, compared to $20.9 million for the first nine months of fiscal 2018.

Outlook

Fiscal 2019 contains 53 fiscal weeks, with the additional week included in the first fiscal quarter. For fiscal 2019, the company now expects:

  • Mid-single-digit percentage growth from fiscal 2018 for net sales;
  • Operating income between $10.0 million and $12.0 million;
  • Adjusted EBITDA between $33.0 million and $35.0 million;
  • Capital expenditures of approximately $25.0 million; and
  • An effective tax rate and a cash-based tax rate each between 70 percent and 80 percent.

When reporting second-quarter results on February 4,  Unifi expected operating income between $19.0 million and $23.0 million and adjusted EBITDA between $42.0 million and $46.0 million. Unifi had expected an effective tax rate in the mid-40 percent range, with a cash-based tax rate in the high-30 percent range. The forecast for sales and capital expenditures remains the same.

“As a result of continued headwinds and reduced third quarter performance, our prior fiscal 2019 profitability and effective tax rate guidance is out of reach, while net sales growth and capital expenditures expectations remain unchanged,” said Tom Caudle. “We believe fourth quarter Adjusted EBITDA performance above $10.0 million is attainable given current demand levels and recent stabilization of the raw material cost environment.”

Caudle concluded, “As we look beyond fiscal 2019, we remain optimistic. In combination with our ongoing growth efforts that drive our innovative and recycled portfolios, the considerable reduction in our overhead costs should provide meaningful improvement in our profitability, while further momentum on recent trade activity is expected to provide an additional lift to our domestic operations. By growing U.S. earnings, we would also expect to see a significant improvement in our effective tax rate.”