Unifi Inc. reported earnings fell sharply in the third quarter ended March 25 due to rising raw material costs and sales mix challenges. The maker of synthetic and recycled performance fibers now expects operating earnings for the company’s fiscal year to be “well below” year-ago levels.

Third Quarter Fiscal 2018 Overview

  • Net sales increased $5.0 million, or 3.1 percent, to $165.9 million, compared to $160.9 million for the third quarter of fiscal 2017, and increased $4.6 million, or 2.9 percent, when excluding the impact of foreign currency translation;
  • Revenues from premium value-added (“PVA”) products grew 17 percent compared to the third quarter of fiscal 2017, and represented approximately 44 percent of consolidated net sales;
  • Gross margin was 10.0 percent, compared to 13.1 percent for the third quarter of fiscal 2017, impacted by elevated raw material costs and volume and sales mix challenges;
  • Operating income of $1.6 million, compared to $9.1 million for the third quarter of fiscal 2017, impacted by a decline in gross profit, an increase in selling, general and administrative expenses, and foreign currency losses;
  • Diluted EPS of 1 cent a share, compared to $0.50 for the third quarter of fiscal 2017; and
  • Fiscal 2018 profitability outlook lowered to account for third quarter results and expected continuation into the fourth quarter of raw material cost and domestic yarn demand challenges.

“As we previously announced, our performance during the third quarter was below our expectations,” said Kevin Hall, chairman and CEO of Unifi. “We were unable to counterbalance large headwinds that significantly weighed on short-term profitability. Persistently rising raw material costs, the difficult domestic landscape, sales mix challenges and foreign currency losses were the primary drivers of the disappointing bottom-line performance. In a heightened raw material cost environment, our pricing actions tend to lag behind the cost increases, but we believe we can correct this imbalance as raw material prices stabilize.”

Hall continued, “We remain committed in our efforts to expand our commercial capabilities as cost effectively as possible, while continuing to secure our position as the sustainability partner of choice, with a constant focus on recycling and innovation. We are focused on driving both top-line and bottom-line growth over the long-term, which will help us deliver on our goal of maximizing long-term shareholder value.”

Third Quarter Fiscal 2018 Operational Review

Operating income declined $7.5 million to $1.6 million in the third quarter of fiscal 2018, from $9.1 million in the third quarter of fiscal 2017. The decline in operating income was primarily due to a reduction in gross profit in the Polyester and Nylon segments, which accounted for $5.0 million of the decline and was partially offset by higher gross profit in the International segment. Foreign exchange losses in the quarter totaled $0.6 million compared to gains of $0.9 million in the same prior year period. Selling, general and administrative expenses increased $0.8 million from the same prior year period as a result of investments in the company’s commercial capabilities.

Net income was $0.2 million for the third quarter of fiscal 2018, compared to $9.2 million for the third quarter of fiscal 2017. Net income for the third quarter of fiscal 2018 was driven lower by domestic operating results, foreign currency losses, lower earnings from Parkdale America, LLC (“PAL”) and a higher effective tax rate. Net income for the third quarter of fiscal 2017 benefited from research and development tax credits and foreign currency gains. Diluted EPS was $0.01 for the third quarter of fiscal 2018 and $0.50 for the third quarter of fiscal 2017.

Adjusted EBITDA was $7.3 million for the third quarter of fiscal 2018, compared to $14.4 million for the third quarter of fiscal 2017. The decrease in Adjusted EBITDA resulted primarily from the combination of rising raw material costs, domestic volume and sales mix challenges and foreign currency losses that could not be offset quickly enough with higher selling prices and cost mitigation measures. Adjusted EBITDA is a non-GAAP financial measure. The schedules included in this press release reconcile Adjusted EBITDA to the most directly comparable GAAP financial measure.

Net debt (debt principal less cash and cash equivalents) was $85.8 million at March 25, 2018, compared to $94.0 million at June 25, 2017, as cash and cash equivalents grew from $35.4 million at June 25, 2017 to $40.6 million at March 25, 2018.

First Nine Months of Fiscal 2018 Operational Review

Net sales were $497.6 million for the first nine months of fiscal 2018, compared to $476.0 million for the first nine months of fiscal 2017. Gross margin was 12.6 percent for the first nine months of fiscal 2018, compared to 14.0 percent for the first nine months of fiscal 2017. Operating income was $19.5 million for the first nine months of fiscal 2018, compared to $30.7 million for the first nine months of fiscal 2017.

Net income was $20.9 million for the first nine months of fiscal 2018, compared to $23.2 million for the first nine months of fiscal 2017. Net income for the first nine months of fiscal 2018 included a $3.8 million tax benefit due to the reversal of a valuation allowance on certain historical net operating losses, higher operating expenses and foreign currency losses, while net income for the first nine months of fiscal 2017 included a loss on sale of business of $1.7 million, research and development tax credits and foreign currency gains. For the first nine months of fiscal 2018, Diluted EPS and Adjusted EPS were $1.12 and $0.92, respectively. For the first nine months of fiscal 2017, Diluted EPS and Adjusted EPS were $1.26 and $1.35, respectively.

Adjusted EPS does not include separate consideration for the impact of the federal tax reform legislation signed into law in December 2017. Adjusted EPS is a non-GAAP financial measure. The schedules included in this press release reconcile Adjusted EPS to the most directly comparable GAAP financial measure. Adjusted EBITDA was $37.0 million for the first nine months of fiscal 2018, compared to $46.8 million for the first nine months of fiscal 2017, reflecting, primarily, higher operating expenses and comparatively worse foreign currency impacts.

Revised Fiscal 2018 Outlook

Based on the company’s most recent results and the ongoing presence of elevated raw material costs, the company has updated the fiscal 2018 outlook. The company continues to expect sales volume growth driving revenue growth in the low-to-mid single digit percentage range for the year. However, many of the challenges that impacted the third quarter’s profitability remain ongoing. Thus, while fourth quarter profitability is expected to improve over third quarter results, the company expects fiscal 2018 operating income and adjusted EBITDA to be well below fiscal 2017 results. Capital expenditures are expected to total $28 million, which is $2 million below the prior outlook, and the ongoing effective tax rate is still expected to be in the mid-20 percent range.