UNIFI, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2020, ended December 29, 2019; comparable periods ended December 30, 2018. UNIFI manufactures and sells synthetic and recycled polyester and nylon products, including REPREVE-branded materials. Unless noted otherwise, financial amounts below are in U.S. dollars and millions.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $169.5 | $167.7 | $349.5 | $349.3 |
| Gross profit / margin | $15.7 / 9.2% | $14.2 / 8.4% | $33.1 / 9.5% | $34.2 / 9.8% |
| Operating income (loss) | $2.6 | $(0.8) | $8.9 | $4.9 |
| Net income | $0.4 | $1.2 | $4.1 | $3.0 |
| Diluted EPS | $0.02 | $0.06 | $0.22 | $0.16 |
| Adjusted EBITDA (non-GAAP) | $8.9 | $4.9 | $21.2 | $16.8 |
- Quarterly sales rose 1.1%, while six-month sales were essentially flat. Consolidated sales volume increased 18.2% in Q2 and 17.1% year to date, offset by lower average selling prices, product mix and currency effects. PVA products were 57% of Q2 sales, versus 47% in the year-earlier quarter.
- Quarterly gross profit improved, led by Polyester and Asia. For the six-month period, gross profit and margin declined modestly. SG&A fell 15.6% in Q2 and 19.7% year to date, reflecting cost reductions and lower compensation expense.
- Six-month net income improved despite lower gross profit, primarily because of reduced SG&A. Q2 net income declined as weaker results from unconsolidated affiliates and a less favorable tax rate more than offset improved gross profit and lower SG&A. Q2’s effective tax rate was 55.3%; the filing attributes the year-over-year tax comparison partly to a $2.045 million tax credit in the prior-year quarter.
- Segment trends were mixed: Q2 Asia sales increased 40.9% and segment profit rose 27.6%; Polyester segment profit increased 49.6% despite lower sales. Nylon segment sales fell 24.6% and segment profit fell 78.3%; Brazil sales fell 13.9% and segment profit fell 20.7%.
Cash flow, liquidity and debt
- Cash from operating activities was $28.6 million for the first six months, compared with cash used of $4.0 million a year earlier. The change was driven in part by $10.4 million of distributions from unconsolidated affiliates versus $0.6 million, and more favorable inventory-related cash use.
- Capital expenditures were $8.3 million; investing cash outflow was $8.3 million and financing cash outflow was $5.1 million. Cash increased to $37.2 million from $22.2 million at June 30, 2019.
- Debt principal was $129.3 million and net debt, a non-GAAP measure, was $92.1 million, down from $105.8 million at fiscal year-end. Working capital was $203.2 million; adjusted working capital was $178.5 million, down from $180.4 million.
- ABL Revolver availability was $50.7 million. UNIFI reported compliance with credit-facility covenants; availability exceeded the $24.1 million threshold at which the fixed-charge coverage covenant becomes effective. The reported fixed-charge coverage ratio was 0.94 to 1.00. Nearly all cash was held by foreign subsidiaries, while domestic operations had only $18,000 of cash; domestic liquidity included revolver availability.
- The ABL Facility matures in December 2023. Three interest-rate swaps fixed LIBOR at approximately 1.9% on $75 million of variable-rate debt through May 2022.
Outlook, commentary and risks
- Management provided no specific earnings or revenue guidance. It estimated fiscal 2020 capital expenditures of $23 million, with $14.7 million expected in the second half, funded by operating cash flow and/or ABL borrowings. Management stated that available cash, operating cash flow and revolver capacity should meet foreseeable liquidity needs.
- Management’s strategy emphasizes strategic relationships, expanding technology and capabilities, and growing recycled and other PVA products. It expects recent capital projects to benefit future profitability, while noting that additional growth initiatives could require more capital.
- UNIFI reported final U.S. trade duties on polyester textured yarn imports from China at combined antidumping and countervailing rates of 97% and higher, and from India at 18% and higher. It plans to monitor potential routing through third countries.
- In Q2, UNIFI began winding down its Sri Lankan operations; Q2 adjusted EBITDA included $0.383 million of facility shutdown costs, primarily accrued severance and exit costs.
- Key operating pressures included weak demand in some industrial, automotive and apparel markets; two customers shifting nylon programs to overseas garment production; competition and price pressure in Brazil; raw-material cost volatility; and weaker operating results at PAL, UNIFI’s significant unconsolidated affiliate. The six-month comparisons also reflect one fewer sales week in the current period for NACA operations.
- Other risks include foreign-exchange movements, customer concentration or loss, trade-policy changes, raw-material and energy costs, interest rates, and the ability to service debt and fund investment. The company disclosed an environmental monitoring obligation at its Kentec site; it expects no active remediation but cannot estimate potential costs if remediation becomes necessary. Management said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether REPREVE and other PVA volume growth can sustain margins, given lower average selling prices and the filing’s caution that PVA products have differing margins.
- Whether Nylon and Brazil segment weakness, customer program shifts and PAL’s losses persist or improve.
- Whether operating cash generation is repeatable, particularly given the significant affiliate distributions and the concentration of cash outside the United States.
- Whether revolver availability remains above the $24.1 million covenant trigger and how the 0.94 fixed-charge coverage ratio evolves.
- Whether the planned $23 million fiscal 2020 capital expenditure program, Sri Lanka wind-down, trade duties and environmental monitoring create costs or outcomes different from management’s expectations.