Unifi Inc. reported sales and pre-tax profitability declined in the fourth quarter ended June 30 that were in-line with expectations. The fabric supplier showed sequential quarter improvement on profitability and cash flows, and forecast volume and revenue growth and significant improvement in profitability for fiscal 2020.
Fourth Quarter Fiscal 2019 Highlights
- Achieved expected sales volume growth of 6 percent from the fourth quarter of fiscal 2018, despite continued pressure from low-cost imports into the United States.
- Revenues from premium value-added (“PVA”) products grew 13.4 percent compared to the fourth quarter of fiscal 2018 and represented approximately 51 percent of consolidated net sales.
- Generated $8.8 million of positive operating cash flows.
- Reset selling, general and administrative expenses (“SG&A”) to a prospective annual run-rate of approximately $51.0 million via previously communicated cost reduction efforts.
- Secured exclusivity on proprietary design of new texturing equipment in the Americas, with installation commencing in calendar 2020, demonstrating the company’s commitment to its leading manufacturing position. These additions are expected to be completed with no significant change to the company’s annual capital expenditure run-rate of $25 million.
Fourth Quarter Fiscal 2019 Financial Summary
- Low-cost import inventories in the United States remained elevated during the quarter, prolonging competitive pressures on the company’s domestic operations, driving lower fixed cost absorption and a weaker sales mix.
- Net sales decreased to $179.5 million from $181.3 million for the fourth quarter of fiscal 2018, but increased $2.3 million, or 1.3 percent, when excluding the impact of foreign currency translation.
- Gross margin was 10.2 percent, compared to 13.2 percent for the fourth quarter of fiscal 2018.
- Operating income was $5.3 million, compared to $9.3 million for the fourth quarter of fiscal 2018.
- Diluted earnings per share (“EPS”) was $0.05, compared to $0.58 for the fourth quarter of fiscal 2018, primarily driven by lower earnings from both domestic operations and Parkdale America, LLC (“PAL”) and a corresponding unfavorable effective tax rate, while the fourth quarter of fiscal 2018 included a $0.19 benefit to EPS from the reversal of an uncertain tax position.
“Despite the persistent headwinds we faced throughout fiscal 2019, we achieved our fourth quarter volume and profitability expectations, made progress towards revitalizing our position in the Americas, and exited fiscal 2019 with momentum,” said Tom Caudle, president and chief operating officer of Unifi. “Throughout a challenging fiscal 2019, we grew our top-line by 4 percent, took aggressive steps to better align our cost structure, entered fiscal 2020 having achieved our goal to reduce our future SG&A by approximately 15 percent from its prior annual run-rate, and made further commitment to the Americas by announcing our use of exclusive new texturing technology in the coming years. Overall, I am proud of our team as we remain focused on delivering long-term shareholder value, and our short-term initiatives continue to fuel a resurgence for this unique global company.”
Update on Recent Trade Developments
Imports of polyester textured yarn from China and India – which increased approximately 79 percent from calendar years 2013 to 2017 and continued to grow during calendar year 2018 – placed considerable pressure on margins in the United States during fiscal 2019.
On June 26, 2019, the U.S. Department of Commerce (the “Commerce Department”) announced affirmative preliminary antidumping duty determinations on imports of polyester textured yarn from (i) China at rates of 65 percent or more and (ii) India at rates of 10 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, antidumping duties are applied retroactively for subject imports from China, beginning 90 days prior to the date that the duties go into effect.
As previously announced on April 29, 2019, the Commerce Department established 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, and countervailing duties are applied retroactively for subject imports from China, beginning 90 days prior to the date that the duties went into effect.
U.S. importers of the subject yarns are currently required to post cash deposits to cover the antidumping and countervailing duties issued under the preliminary determinations.
Final determinations of dumping, subsidization and injury are expected by the end of calendar 2019.
Fourth Quarter Fiscal 2019 Compared to Fourth Quarter Fiscal 2018
Sales volumes grew 6 percent, led by PVA product sales in Asia. However, unfavorable foreign currency translation of $4.1 million decreased net sales in the fourth quarter of fiscal 2019 to $179.5 million, compared to $181.3 million. Gross profit decreased from $23.9 million to $18.3 million, adversely impacted by pressures from low-cost competition, primarily in the United States, lower fixed cost absorption and a weaker sales mix, further negatively impacted by unfavorable foreign currency translation. Within the company’s PVA portfolio, certain products carry a lower gross margin profile, and sales of such products grew considerably, contributing to a weaker mix of PVA sales. Operating income decreased from $9.3 million to $5.3 million, primarily due to the $5.6 million decrease in gross profit and $1.4 million of severance charges. However, operating income benefited from lower SG&A, primarily due to lower compensation expenses in connection with the company’s reduction in general and administrative positions.
Net income was $1.0 million, compared to $10.8 million, and EPS was $0.05, compared to $0.58. Net income was negatively impacted by a significantly higher effective tax rate in connection with lower domestic earnings and the addition of a $1.1 million valuation allowance on certain state net operating losses and credits, along with lower earnings from PAL. Net income for the fourth quarter of fiscal 2018 benefited from the reversal of an uncertain tax position in the amount of $3.4 million.
Adjusted EBITDA was $12.7 million, compared to $15.3 million. 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.
Fiscal 2019 Compared to Fiscal 2018
Fiscal 2019 consisted of 53 weeks for the company’s domestic operations, compared to 52 weeks in fiscal 2018. Sales volumes increased 7 percent from fiscal 2018, led by PVA product sales in Asia. Net sales increased to $708.8 million, compared to $678.9 million. However, unfavorable foreign currency translation negatively impacted fiscal 2019 net sales by $21.4 million. When adjusting for this impact, net sales exhibited strong growth and increased $51.3 million, or 7.6 percent, year over year. Gross margin was 9.4 percent, compared to 12.7 percent. Operating income was $11.0 million, compared to $28.8 million. Net income was $2.5 million, compared to $31.7 million. Diluted EPS was $0.13 and $1.70 for fiscal 2019 and 2018, respectively. Adjusted EBITDA was $36.3 million, compared to $52.3 million, driven primarily by unfavorable raw material cost fluctuations and competitive import pressures.
Net debt (debt principal less cash and cash equivalents) was $105.8 million at June 30, 2019, compared to $86.3 million at June 24, 2018. Cash and cash equivalents decreased from $44.9 million at June 24, 2018 to $22.2 million at June 30, 2019. The 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. Debt principal and operating cash flows were adversely impacted by an increase in inventories and reduced earnings.
For fiscal 2020, the company expects the following, assuming no significant volatility in raw material costs:
- High-single-digit percentage growth from fiscal 2019 for sales volumes;
- Mid-single-digit percentage growth from fiscal 2019 for net sales;
- Operating income between $22.0 million and $27.0 million, over 100 percent growth from fiscal 2019;
- Adjusted EBITDA between $47.0 million and $52.0 million, over 25 percent growth from fiscal 2019;
- Capital expenditures of approximately $25.0 million; and
- An effective tax rate in the mid-20 percent range.
Caudle concluded, “As we look to fiscal 2020, we remain optimistic. The combination of our ongoing growth efforts to drive our innovative and recycled portfolios globally and the deliberate and considerable reduction of our SG&A cost structure should provide meaningful improvement in our profitability, while further momentum on recent trade activity is expected to lift our domestic operations. Assuming a stable raw material cost environment for fiscal 2020, we are projecting continued top-line expansion, a doubling of operating income, substantial improvement in our effective tax rate and a significant increase in net income and Adjusted EBITDA.”
Business Segment Update
In the fourth quarter of fiscal 2019, the company increased its reportable segments from three to four, primarily in connection with the growth of sales for the company’s subsidiaries in Asia. The company is now reporting the Polyester, Nylon, Brazil and Asia Segments.