Business Context and Reporting Period
Company: UNIFI, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 30, 2003 (Fiscal Year 2003, Third Quarter)
Business Overview: Unifi operates in the polyester and nylon fiber markets. The company maintains a manufacturing alliance with E.I. DuPont De Nemours and Company (DuPont) to optimize polyester filament production. The company also holds significant interests in unconsolidated affiliates, including UNIFI-SANS Technical Fibers, LLC and U.N.F. Industries Ltd.
Key Financial Metrics
| Metric (in thousands) | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Net Sales | $219,633 | $213,501 | $643,022 | $658,182 |
| Net Income (Loss) | $1,144 | $(3,581) | $3,301 | $(42,281) |
| Diluted EPS | $0.02 | $(0.07) | $0.06 | $(0.79) |
| Operating Cash Flow (9 Mo) | $87,873 (vs. $66,343 prior year) | |||
| Cash and Equivalents | $66,478 | (Prior period: $19,105) | ||
| Total Debt (Current + Long-term) | $264,425 | (Prior period: $288,549) | ||
| Working Capital | $195,179 | (Prior period: $167,468) |
Note: The prior year nine-month net loss included a $37.9 million cumulative effect of an accounting change (SFAS 142) related to goodwill impairment.
Material Changes vs. Prior Period
- Revenue: Net sales increased 2.9% quarter-over-quarter to $219.6 million, driven by an 8.2% increase in unit volume, partially offset by a 5.3% decrease in average selling prices. Year-to-date sales decreased 2.3%.
- Profitability: The company returned to profitability with net income of $1.1 million for the quarter, compared to a loss of $3.6 million in the prior year quarter. This improvement is largely due to the absence of the prior year's goodwill impairment charge and improved operating performance in the polyester segment.
- Segment Performance:
- Polyester: Sales increased 5.9% for the quarter. Gross profit increased $4.4 million to $16.4 million, aided by a $7.3 million benefit from the DuPont alliance and lower manufacturing costs.
- Nylon: Sales declined 5.5% for the quarter. Gross profit decreased $0.8 million to $2.0 million due to price declines.
- Equity in Affiliates: Equity in earnings of unconsolidated affiliates turned positive, contributing $3.2 million to income in the current quarter compared to a $2.9 million loss in the prior year.
- Liquidity: Cash and cash equivalents increased significantly to $66.5 million from $19.1 million at the end of the prior fiscal year, supported by strong operating cash flows of $87.9 million for the nine-month period.
Guidance, Outlook, Risks, and Unusual Items
Unusual Items and Contingencies
- DuPont Arbitration: A significant legal proceeding exists regarding the DuPont manufacturing alliance. DuPont claimed approximately $85.0 million in damages. An initial arbitration order (March 26, 2003) ruled that Unifi did not commit a "substantial breach," preventing DuPont from terminating the alliance or exercising a "Put" option to sell its business to Unifi. However, the panel ruled Unifi violated certain provisions. Unifi has recorded a $2.0 million provision for damages, estimating the final liability to be between $2.0 million and $17.0 million. A final award is expected by the end of May 2003.
- Alliance Plant Closure: The company recognized a $3.5 million reduction in previously recorded costs related to the DuPont Cape Fear plant closure, as actual costs were lower than estimated.
- Arbitration Costs: The company incurred $2.5 million in arbitration costs and expenses for the quarter.
Subsequent Events and Restructuring
- U.S. Restructuring: In April 2003, Unifi completed a restructuring of U.S. operations eliminating 600 positions (15% of the U.S. workforce). A charge of approximately $11.0 million is expected in the June quarter.
- European Restructuring: Restructuring of European operations is underway, expected to eliminate 250 positions. The associated charge is not yet determinable but is expected to be material.
- Stock Repurchase: The Board reinstituted the stock repurchase plan with authority to repurchase approximately 8.6 million shares.
Risks and Outlook
Management notes a challenging business climate due to import pressures, excess capacity, and currency imbalances. While the company believes its financial position is sufficient to meet needs and pursue opportunities, significant sustainable improvements cannot be assured. The company is prepared to take further capacity alignment actions if conditions worsen.
Investor Verification Checklist
- Arbitration Final Award: Verify the final damages amount from the DuPont arbitration expected by May 2003, as the current $2.0 million provision could increase up to $17.0 million.
- Restructuring Charges: Monitor the upcoming June quarter for the anticipated $11.0 million U.S. restructuring charge and the material European restructuring charge.
- Nylon Segment Margins: Assess the sustainability of the nylon segment's profitability given the continued decline in selling prices and unit volumes.
- Joint Venture Performance: Review the operational progress of the UNIFI-SANS joint venture, which has historically incurred substantial losses due to start-up difficulties.
- Debt Covenants: Confirm continued compliance with the Credit Agreement covenants, specifically the fixed charge coverage ratio and leverage ratio, as the company reduces its credit facility size.