Price Pressure Punishes Unifi

Don Hogsett, October 30, 2006

Hit by rising raw material costs, which pushed the price of polyester higher and triggered a drop-off in sales, yarn producer Unifi Inc. recorded a widened first fiscal quarter loss of $11.1 million, more than three times the size of the $3.1 million deficit a year ago.

As customers balked at paying higher prices for polyester and instead worked off their stockpiles hoping for lower prices to come, Unifi sales declined by 7.2%, to $169.9 million from $183.1 million during the same period a year ago, a shortfall of more than $13 million.

This didn't stop the company from making a strategic acquisition. Subject to approval, Unifi will acquire the Dillon Yarn Division of Dillon Yarn Corp. for approximately $65 million in cash and Unifi shares. Sales of the division were about $135 million last year, the company said. Unifi expects this addition to its capacity to result in higher sales and lower cost of productivity.

While polyester was under pressure, Unifi's nylon business continued to improve after a sweeping overhaul, and sales were slightly higher than last year, boosting profits in the segment by $800,000, said Brian Parke, chairman and ceo.

Besides hurting sales, higher raw material prices resulted in a $1.5 million inventory accounting charge against earnings, said Bill Lowe, Unifi coo and cfo, who said, "Rising raw material prices above our expectations resulted in a $1.5 million LIFO charge to earnings."

Also, Unifi increased its bad debt reserves by more than $1 million, to $1.5 million, as the company reviewed the rising risk with some struggling customers.

Pricing issues should improve, said Lowe. "Raw material prices are expected to ease during the December quarter. Soft retail sales, especially in home upholstery, continued to have an effect on our volumes as well. Even with these challenges, Unifi posted an improvement in gross margin for the current quarter."

Average gross margin improved by 70 basis points, or seven-tenths of a percentage point, to 5.3% from 4.6% a year ago. Gross margin dollars rose by 7.6%, to $9.0 million from $8.4 million. But any margin improvement was more than offset by rising costs, which climbed by 90 basis points, or nine-tenths of a percentage point, to 6.6% of sales from 5.7% a year ago. Measured in absolute dollars, costs raced ahead by 7.6%, or $802,000, to $11.3 million from $10.5 million. Interest expense shot up by 27.0%, to $6.1 million from $4.8 million. But providing some relief in the future, debt levels were pared by 22.9% in the period, to $204.0 million from $264.6 million.


Qtr. 9/24 (x000) 2006 2005 % change
a. First fiscal quarter results include a $1.6 million provision for bad debts, up from $527,000 during the same period a year ago; $6.1 million in interest expense, up 27.0% from $4.8 million last year; $444,000 in interest income, down 65.3% from $1.3 million a year ago; a $1.9 million form the company's stake in an affiliate company, compared with a prior-year profit of $1.8 million; a $1.2 million charge for the writedown of long-lived assets, compared with a $1.5 million charge a year ago; and a $1.1 million income tax benefit, compared with a prior year tax benefit of $152,000. First quarter results in 2005 included $29,000 in restructuring charges; and a one-time, after-tax charge of $208,000.
Sales $169,944 $183,102 -7.2
Oper. income (EBIT) (2,249) (2,084)
Net income (11,053)a (3,086)a
Per share (diluted) (0.21) (0.06)
Average gross margin 5.3% 4.6%
SG&A expenses 6.6% 5.7%

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