UNIFI, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended March 28, 2021 (13-week and 39-week periods, respectively), compared with periods ended March 29, 2020. Although the request metadata says “2020 Q3,” the filing covers fiscal Q3 2021. Unless noted, amounts below are in millions of dollars.
Financial performance
- Quarter revenue: $178.9, up 4.6% year over year; sales volume rose 8.3%, while average selling price fell 3.7%. REPREVE Fiber represented 33% of sales, versus 29% a year earlier.
- Quarter profitability: Gross profit was $25.6, up 66.4%; gross margin was 14.3%, versus 9.0%. Operating income was $8.6, versus $3.1. Net income was $4.8, or $0.25 diluted EPS, compared with a net loss of $41.1, or $2.23 per share.
- Nine-month results: Revenue was $483.1, down 7.2%; gross profit was $66.1, up 36.3%, and gross margin was 13.7%, versus 9.3%. Operating income was $24.6, versus $12.1; net income was $15.7, or $0.83 diluted EPS, versus a net loss of $37.0, or $2.00 per share.
- Cash flow: Nine-month operating cash flow was $25.7, down from $32.1, primarily because the prior-year period included $10.4 of distributions from PAL. Capital expenditures were $12.1; investing cash outflow was $15.5, including $3.6 for bolt-on intangible-asset acquisitions. Ending cash was $75.6.
- Liquidity and debt: Current assets were $312.7 and current liabilities $100.6; working capital was $212.0. Total debt obligations were $89.4, down from $98.9 at June 28, 2020. Management’s non-GAAP net debt was $13.8, versus $23.6. ABL Revolver availability was $63.3; the company reported compliance with all financial covenants.
- Other metrics: SG&A was $14.6 for the quarter and $38.6 for nine months. Nine-month Adjusted EBITDA, a non-GAAP measure, was $44.2, versus $30.5. The filing reports income tax expense of $7.6 for nine months and an effective tax rate of 32.7%.
Material changes and drivers
- Quarter sales growth reflected Asia momentum, including REPREVE products, and higher Brazil selling prices. Quarter gross profit improved with better mix and manufacturing efficiencies in Polyester, growth and cost/mix benefits in Asia, and unusually strong pricing and margins in Brazil.
- For the nine months, lower sales reflected COVID-19 demand effects, reduced nylon volumes, lower average prices and unfavorable currency translation. Brazil’s sales and Segment Profit rose, while Nylon sales fell 17.4% and Segment Profit fell 6.8%. Polyester nine-month sales declined 12.5%, though Segment Profit increased 7.8%; Asia sales were nearly flat while Segment Profit rose 27.0%.
- The prior-year comparison was materially affected by a $45.2 impairment of the PAL investment. UNIFI sold its 34% PAL interest for $60.0 cash on April 29, 2020; no PAL earnings were recorded in the current period.
- Quarter other operating expense included a predominantly non-cash $2.6 loss on disposal of machinery related to planned installation of new texturing equipment. Nine-month other operating expense also included $0.8 severance charges and $0.6 foreign-currency transaction losses.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance is provided. Management said demand and activity had recovered more strongly than expected year to date, but recovery may reflect pent-up demand and continued improvement is uncertain. Some core-market volumes had not fully recovered.
- Higher petroleum prices and Texas weather-related supply disruption increased polyester input costs. Because customer price adjustments typically lag raw-material changes by about 90 days, management expected gross-margin pressure in the June 2021 quarter.
- Brazil COVID-related lockdowns in late March and April 2021 disrupted segment revenue; management said a significant subsequent sales-volume recovery would be needed to sustain quarterly Brazil sales above $20 million. Brazil’s exceptional margins and temporary competitive advantage may normalize.
- UNIFI joined trade petitions concerning polyester textured-yarn imports from Indonesia, Malaysia, Thailand and Vietnam. Preliminary U.S. Department of Commerce determinations were expected in the June 2021 quarter, with final determinations likely by year-end 2021.
- Management expected fiscal 2021 capital investment of up to $24.0, funded primarily with existing cash, for production improvements, eAFK Evo texturing machinery and maintenance. Other risks include pandemic-related demand uncertainty, raw-material volatility and inability to pass cost increases through promptly, competition and trade-policy changes, foreign-exchange exposure, and customer or facility disruptions.
- The filing discusses environmental monitoring obligations at the Kentec site; UNIFI did not expect active remediation, and any such costs were expected to be immaterial. Management did not believe ordinary-course legal proceedings would have a material adverse effect.
Important facts for investors to verify
- Whether demand recovery persists and whether the forecast June-quarter raw-material cost lag compresses margins.
- Whether Brazil’s unusually high pricing, utilization and profitability are sustainable, particularly given lockdown disruption and management’s normalization warning.
- Progress and final outcomes of the U.S. trade investigations, and any resulting effect on Polyester volumes and pricing.
- Working-capital and cash conversion: receivables and inventory increased materially from June 2020, while nine-month operating cash flow declined year over year.
- Debt repayment, ABL availability and covenant compliance; also assess the timing and funding of planned capital spending.
- Tax-rate volatility, including GILTI-related effects and deferred-tax valuation allowances, and the significance of the $2.9 of unrecognized tax benefits.