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Unifi’s Profits Hit by “Persistent Headwinds” in Fiscal 2019

Hurt by volatility in material costs and low-cost imports, yarn maker Unifi Inc. saw net income plummet and sales soften in its fiscal fourth quarter.

In a Nutshell: Unifi, a manufacturer of recycled and synthetic yarns, achieved sales growth of 6 percent in its fiscal fourth quarter, despite continued pressure from low-cost imports into the U.S.

However, the company, based in Greensboro, N.C., said low-cost import inventories in the U.S. remained elevated during the quarter, “prolonging competitive pressures on the company’s domestic operations, driving lower fixed cost absorption and a weaker sales mix.”

Imports of polyester textured yarn from China and India increased roughly 79 percent from 2013 to 2017 and continued to grow during 2018. This placed considerable pressure on margins in the U.S. during fiscal 2019.

Last year, Unifi petitioned the U.S. Department of Commerce about alleged dumping of the yarns on the U.S. market. In June, Commerce announced affirmative preliminary antidumping duty determinations on imports of polyester textured yarn from China at rates of 65 percent or more, and 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 were applied retroactively on the product imports from China.

Unifi said for fiscal 2020, assuming no significant volatility in raw material costs, it expects high-single-digit percentage growth in sales volume, mid-single-digit percentage growth in net sales, and operating income between $22 million and $27 million, which would be 100 percent growth from fiscal 2019.

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Sales: Net sales for the fourth quarter ended June 30 dipped 1 percent to $179.5 million from $181.3 million for the year-ago period. Excluding the impact of foreign currency translation, Unifi said net sales would have been up 1.3 percent to $2.3 million.

Revenues from premium value-added (PVA) products, such as Repreve, grew 13.4 percent compared to the fourth quarter of fiscal 2018 and represented approximately 51 percent of consolidated net sales. Sales volume grew 6 percent in the quarter, led by (PVA) product sales in Asia.

For the full year, which consisted of 53 weeks for the company’s domestic operations compared to 52 weeks in fiscal 2018, net sales increased 4.4 percent to $708.8 million. Adjusted for unfavorable foreign currency translation, net sales were up 7.6 percent to $51.3 million. Sales volume increased 7 percent, led by PVA product sales in Asia.

Earnings: Net income dropped to $1 million compared to $10.8 million a year earlier. Operating income fell 43 percent to $5.3 million from $9.3 million for the fourth quarter of fiscal 2018, primarily due to a $5.6 million decrease in gross profit and $1.4 million of severance charges. However, operating income benefited from lower sales, general and administrative (SG&A) expenses, primarily due to lower compensation expenses in connection with the company’s reduction in general and administrative positions.

Gross margin in the quarter was trimmed to 10.2 percent compared to 13.2 percent in prior-year period.

For the year, net income was $2.5 million compared to $31.7 million in fiscal 2018. Gross margin came in at 9.4 percent from 12.7 percent in the prior year. Operating income fell to $11 million from to $28.8 million.

CEO’s Take: Tom Caudle, president and chief operating officer of Unifi, said: “Despite the persistent headwinds we faced throughout fiscal 2019, we achieved our fourth quarter volume and profitability expectations, made progress toward revitalizing our position in the Americas and exited fiscal 2019 with momentum. 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.”

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.”