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Price Pressures and Soft Demand Plague Unifi Q2 Results

Operating in a complicated trade and raw materials environment, yarn maker Unifi nevertheless spun out gains in sales and operating income.

In a Nutshell: Unifi Inc., an innovator and manufacturer of recycled and synthetic yarns, reported continued improvement in operating income and cash flows, and updated its full-year fiscal 2020 outlook.

The company took note of the ruling last month by the U.S. International Trade Commission (USITC) that set antidumping and countervailing duty rates on polyester textured yarn from China and India. ITC said these imports were “causing material injury to the domestic industry.”

Unifi, based in Greensboro, N.C., and Nan Ya Plastics Corp. of Lake City, S.C., had filed petitions with the Commerce Department and the USITC in October 2018, alleging dumped and subsidized imports.

The company said Wednesday the ruling sets the stage for “a more balanced U.S. market for polyester textured yarn” and that it was “expected to be beneficial and effective moving forward.”

Selling, general and administrative expenses (SG&A) decreased $2.3 million compared to the second quarter of fiscal 2019, demonstrating results from cost reduction efforts. Operating cash flows for the six months ended Dec. 29 improved to $28.6 million, continuing the positive momentum from the first quarter of fiscal 2020.

Unifi revised its fiscal 2020 guidance to reflect a softer-than-expected recovery. The company now expects sales volume to grow between 10 percent and 13 percent from fiscal 2019 levels and net sales between $700 million and $715 million. Operating income was projected to reach $20 million to $23 million.

Sales: Net sales for the second quarter ended Dec. 29 increased 1.1 percent to $169.5 million compared to net sales of $167.7 million for the year-ago quarter. The gain was driven by an 18 percent rise in volume led by Repreve-branded products, primarily in Asia, but partially offset by nylon declines. The overall sales increase in Asia was largely offset by a decline in average selling prices and by nylon volume declines resulting from customer plant closure announcements and soft demand across all markets.

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Revenues from premium value-added products like Repreve represented 57 percent of consolidated net sales.

Earnings: Net income of $400,000 and diluted earnings per share (EPS) of 2 cents were negatively impacted by $1.6 million of lower pre-tax earnings from its Parkdale America joint venture. Comparable amounts from the second quarter of fiscal 2019 were net income of $1.2 million and EPS of 6 cents.

Operating income was $2.6 million, compared to an operating loss of $800,000 in the second quarter of fiscal 2019, and benefited from an expected decrease in SG&A, but was negatively impacted by $800,000 from an unfavorable foreign currency environment and $400,000 of shutdown costs for the company’s subsidiary in Sri Lanka.

Gross profit increased to $15.7 million, from $14.2 million, mainly attributable to a more favorable raw material cost environment in the U.S. This increase was partially offset by competitive pricing pressures—especially in Brazil—and lower nylon sales.

CEO’s Take: Tom Caudle, president and chief operating officer of Unifi, said: “We achieved significant improvement in operating results over the prior-year period. Results were impacted by softer-than-expected U.S. demand in certain categories, along with global market pricing pressures. We are pleased with our ability to generate operating cash flows with a leaner cost structure. We now look forward to growing market share, driving innovation across our product portfolio and leveraging our unmatched supply chain for further global growth.”

“Our international operations have faced some significant pricing pressures in fiscal 2020 and global competition remains aggressive,” Caudle added. “While we are confident in our ability to generate significant improvement over fiscal 2019, including sequential gross profit improvement, recapture market share in the U.S. and drive strong cash flows, our full-year fiscal 2020 guidance has been updated to reflect global competitive pricing pressures and lower revenue expectations for nylon. Nevertheless, our outlook continues to project substantial improvement from fiscal 2019 for operating income, net income and adjusted EBITDA.”