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Unifi Cites Higher Raw Material Costs and Slow US Sales in Profit Slide

Unifi Inc. squeaked out a profit and a moderate sales gain in its most recent quarter, but said challenges remain as it lowered its full-year outlook.

Unifi Inc.

In a Nutshell: Unifi Inc. cited several factors that weighed on profitability in its fiscal third quarter, but said it remains confident in its growth strategy as international revenue momentum continued. The Greensboro, N.C.-based manufacturer of synthetic and recycled yarns said its lower gross margin of 10 percent in the period compared to 13.1% for the third quarter of fiscal 2017 came from elevated raw material costs, and volume and sales mix challenges.

Unifi lowered its fiscal 2018 profitability outlook to account for the third quarter results that were “below expectations,” and the expected continuation into the fourth quarter of raw material cost and domestic yarn demand challenges. Unifi said it continues to expect revenue growth in the low-to-mid single digit percentage range for the year, although many of the challenges remain that impacted third quarter profitability. As a result, the company expects fiscal 2018 operating income and adjusted EBITDA to be “well below” fiscal 2017 results.

Sales: Net sales for the period ended March 25 increased 3.1% to $165.9 million compared to $160.9 million for the third quarter of fiscal 2017, and rose 2.9% when excluding the impact of foreign currency translation. Revenues from premium value-added products, which include its flagship Repreve brand of recycled polyester, grew 17 percent compared to the year-ago quarter and represented about 44 percent of consolidated net sales.

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Earnings: Net income in the quarter was $200,000 compared to $9.2 million for the third quarter of fiscal 2017, as domestic operating results, foreign currency losses, lower earnings from its Parkdale America joint venture and a higher effective tax rate cut into profits. Net income did benefit some from research and development tax credits and foreign currency gains.

Adjusted earnings before interest, taxes, depreciation and amortization fell nearly 50 percent to $7.3 million in the quarter compared to $14.4 million in the comparable three months last year. Unifi blamed the decrease on a combination of rising raw material costs, domestic volume declines and foreign currency losses, which were not offset enough by raising selling prices and cost mitigation measures.

Operating income fell to $1.6 million in the three months from $9.1 million in the year-ago period, which Unifi said was due to a decline in gross profit in the polyester and nylon segments, which accounted for $5 million of the falloff, and was partially offset by higher gross profit in the international segment. Foreign exchange losses in the quarter were $600,000 compared to gains of $900,000 in the prior-year period.

CEO’s Take: Kevin Hall, chairman and CEO, said: “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. 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.”