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Yarn Maker Unifi Cites Dumped Imports for Bottom Line Hit, Looks to Cut Costs

Unifi Inc. suffered a net loss in its fiscal third quarter, but net sales rose on the strength of its premium yarns, including the Repreve brand.

In a Nutshell: Unifi Inc., a manufacturer of  recycled and synthetic yarns based in Greensboro, N.C., said Tuesday that organizational changes are in motion that are expected to reduce costs and enhance profitability.

The company said imports of polyester textured yarn from China and India, which increased roughly 79 percent from 2013 to 2017 and continued to grow during the first half of 2018, remained elevated during fiscal 2019, “creating considerable pressure on margins and competitiveness in the U.S.”

Unifi noted the affirmative preliminary countervailing duty determinations handed down Monday by the U.S. Commerce Department on unfairly subsidized imports of polyester textured yarn from China and India, as part of the pressure. The determinations followed a petition filed by Unifi and Nan Ya Plastics Corp. in October seeking a review of whether the imports came with foreign government subsidies that ran afoul of international rules and caused harm to U.S. industry.

Unifi issued new guidance for fiscal 2019, including mid-single-digit percentage growth in net sales, operating income between $10 million and $12 million, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) between $33 million and $35 million, capital expenditures of approximately $25 million and an effective tax rate between 70 percent and 80 percent.

Sales: Net sales for the fiscal third quarter ended March 31 increased 8.5 percent to $180 million from $165.9 million for the year-ago period. Revenues from premium value-added (PVA) products, including its Repreve recycled polyester brand, were up grew 13.5 percent prior-year quarter and represented approximately 47 percent of consolidated net sales.

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The company said international revenue growth was led by PVA product sales, partially offset by unfavorable foreign currency translation impacts and softness in Brazil.

Earnings: Unifi suffered a net loss of $1.5 million in the quarter compared to net income of $200,000 in the year-ago period, which the company attributed to a significantly higher effective tax rate.

Adjusted EBITDA fell 6.8 percent to $6.8 million for the quarter. The decrease was mainly the result of lower gross profit, partially offset by lower compensation expenses.

Operating income was down 50 percent to $800,000, compared to $1.6 million for the third quarter of fiscal 2018, adversely impacted by lower gross profit due to competitive pressures and unfavorable foreign currency translation. The decrease was also caused by a $2.8 million decline in gross profit, partially offset by bonus and equity compensation forfeitures triggered by recently announced executive departures.

Last month, Kevin D. Hall resigned as CEO, at which time its board of directors elected Albert P. Carey, currently the company’s non-executive chairman, as its executive chairman. Unifi also appointed Thomas H. Caudle Jr. as principal executive officer, as well as continuing to serve as a director and president and chief operating officer of the company.

Gross margin was 7.7 percent compared to 10 percent for the third quarter of fiscal 2018, also impacted by competitive pressures, especially from low-cost imports into the U.S., as well as a less favorable sales mix and lower conversion margin (selling price minus raw material cost).

CEO’s Take: Tom Caudle, principal executive officer, president and chief operating officer, said: “While we continue to see positive indicators in global revenue and momentum in our sustainable and innovative PVA product portfolios, a number of headwinds and shortfalls have reduced our short-term profitability. These headwinds include unfavorable foreign currency translation impacts, a surge in imports of polyester textured yarn from China following the filing of our October 2018 trade petitions and softness in certain markets.”

“Separate from the recent trade activity, we have transitioned our leadership team to a leaner and more agile structure with deep roots in operational excellence and a balanced focus on profitability,” Caudle continued. “We also launched and are continuing to execute against a cost reduction plan, which includes a considerable step-down in our run-rate of general and administrative expenses. Our global strategy to ‘Partner, Innovate and Build’ is creating opportunities for future growth while we take appropriate action to restore profitability in the Americas businesses. This includes increasing the utilization of our assets, supporting and expanding our sustainable and innovative portfolios, and optimizing the supply chain and cost structure to better deliver efficient and effective solutions to meet the demands of our customers.”