UNIFI, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter, the three months ended September 27, 2020 (13 weeks), compared with the three months ended September 29, 2019. UNIFI manufactures and sells synthetic and recycled polyester and nylon products. Unless noted otherwise, dollar figures below are in U.S. dollars and rounded to millions.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $141.5m | $179.9m | Down 21.4% |
| Gross profit / margin | $14.6m / 10.3% | $17.4m / 9.7% | Profit down 16.5%; margin up 0.6 percentage points |
| Operating income | $2.9m | $6.3m | Down 54.2% |
| Net income | $3.4m | $3.7m | Down 7.5% |
| Diluted EPS | $0.18 | $0.20 | Down $0.02 |
| Adjusted EBITDA (non-GAAP) | $9.1m | $12.3m | Down from prior period |
| Operating cash flow | $7.9m | $23.8m | Down $15.9m |
Sales volume fell 9.0%; average selling prices fell 12.4%, reflecting lower raw-material-related pricing, product mix, and currency translation. REPREVE fiber represented 35% of sales, versus 31% a year earlier.
Liquidity, debt and cash flow
- Cash and equivalents were $78.1m at quarter-end, versus $75.3m at June 28, 2020.
- Debt principal was $95.4m, down from $98.9m; net debt, a non-GAAP measure, was $17.3m, down from $23.6m. The company had no ABL revolver borrowings.
- ABL revolver availability was $57.6m; UNIFI reported compliance with financial covenants and said it was not at material risk of failing to meet them.
- Working capital was $202.9m. Cash from operations was lower year over year, mainly because the prior-year quarter included $10.4m of distributions from Parkdale America and benefited from working-capital movements.
- Capital expenditures were $1.9m. Management expected approximately $25m of capital spending for fiscal 2021, primarily for production and technology upgrades, new texturing equipment, and maintenance.
- 38% of cash was held by foreign subsidiaries and may not be presently available for domestic obligations.
Material changes and segment results
- COVID-19-related demand and production pressure drove lower sales, particularly in U.S. operations. Management said September-quarter demand exceeded its expectations but remained below pre-pandemic levels in major markets by an estimated 15%–25%.
- Polyester sales declined 22.1%; lower demand reduced fixed-cost absorption. Asia sales declined 17.9%, but segment profit increased 6.9% on cost efficiencies and improved mix.
- Brazil sales declined 6.5% in reported dollars, substantially affected by unfavorable currency translation; sales volume increased and segment profit rose 11.2%.
- Nylon sales fell 45.4%, reflecting pandemic-related weakness, declining demand in certain end markets, and a customer’s shift of programs to overseas garment production.
- Net income benefited from a $4.8m discrete tax benefit related to the retroactive GILTI high-tax exclusion, partly offset by a $2.1m valuation-allowance expense. The effective tax rate was negative 52.3%, versus 16.3% a year earlier.
- UNIFI sold its 34% interest in Parkdale America in April 2020; the current quarter therefore included no PAL results, compared with a prior-year equity-method loss.
Outlook, risks and contingencies
- No specific earnings or revenue guidance was provided. Management expected COVID-19 to continue to adversely affect operating and financial results through at least fiscal 2021; the duration and extent remained uncertain. A significant second infection wave or renewed restrictions could undermine recovery.
- Management cited potential growth drivers after the pandemic: REPREVE demand, Asia growth, U.S. market-share recapture following trade initiatives, product innovation, and expansion into markets and brand partnerships.
- Key risks include textile-industry competition, customer and consumer demand, raw-material and energy-price volatility, currency movements—especially the Brazilian real—trade and regulatory changes, customer concentration, and the ability to service debt and fund investment.
- Interest-rate swaps fixed LIBOR at approximately 1.9% on $75m of variable-rate debt through May 2022. The company estimated a 50-basis-point LIBOR increase would raise annual interest expense by less than $0.1m.
- UNIFI reported environmental monitoring obligations at the Kentec site and possible participation in remediation at the Kinston site, but could not estimate any potential Kinston responsibility or future Kentec active-remediation costs. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Management said it had not used material government assistance, debt or rent deferrals, or supply-chain financing, and believed existing cash, operating cash flows, and revolver availability would meet foreseeable needs.
Important facts for investors to verify
- Whether demand recovery and customer activity persisted beyond September 2020, given management’s warning that the quarter may have benefited from pent-up demand.
- Whether sales volumes, pricing, and margins recovered in Polyester and Nylon, and whether Asia and Brazil maintained stronger segment profitability.
- Whether the planned approximately $25m fiscal 2021 capital program was executed and funded as expected.
- How much of reported net income and the unusually low effective tax rate depended on the one-time GILTI benefit and valuation-allowance changes.
- Whether cash held abroad was available when needed domestically, and whether debt repayments, revolver availability, and covenant compliance remained adequate.
- Any subsequent developments affecting COVID-19 exposure, environmental obligations, or currency and raw-material risks.