UNIFI, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended December 27, 2020; comparative periods ended December 29, 2019. Amounts below are in millions of dollars unless noted. UNIFI manufactures and sells polyester and nylon products, including recycled REPREVE-branded fibers.
Financial performance and position
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $162.8 | $169.5 | $304.3 | $349.5 |
| Gross profit / margin | $25.9 / 15.9% | $15.7 / 9.2% | $40.5 / 13.3% | $33.1 / 9.5% |
| Operating income / margin | $13.1 / 8.0% | $2.6 / 1.5% | $16.0 / 5.3% | $8.9 / 2.6% |
| Net income | $7.5 | $0.4 | $10.9 | $4.1 |
| Diluted EPS | $0.40 | $0.02 | $0.58 | $0.22 |
| Adjusted EBITDA (non-GAAP) | $19.2 | $8.9 | $28.3 | $21.2 |
- Revenue and mix: Sales fell 4.0% in Q2 and 12.9% year to date. Q2 volume rose 1.0%, but average selling prices fell 5.0%; six-month volume declined 4.1% and average selling prices declined 8.8%. REPREVE products represented 37% of Q2 sales and 36% of six-month sales, versus 34% and 32%, respectively, in the comparable periods.
- Profitability: Gross profit rose despite lower sales, supported by improved conversion margins, product mix, manufacturing efficiencies and lower raw-material costs. Q2 Brazil Segment Profit rose to $8.3 million from $3.8 million, benefiting from market-share gains and favorable local pricing; management characterized the competitive advantage as temporary. Six-month Nylon sales fell 27.5%, amid COVID-19 effects, weaker hosiery demand and a customer’s shift of programs overseas.
- Cash flow: Six-month operating cash flow was $19.7 million, compared with $28.6 million. The prior period included $10.4 million of distributions from the sold PAL investment; current-period cash flow also reflected increased receivables as business activity recovered. Investing cash flow was negative $7.0 million, including $6.0 million of capital expenditures and a $1.1 million intangible-asset purchase. Financing cash flow was negative $6.8 million, including $5.0 million of term-loan repayments.
- Liquidity and debt at December 27, 2020: Cash was $83.3 million; debt principal was $92.9 million, producing reported non-GAAP net debt of $9.6 million. ABL revolver availability was $56.0 million, and total liquidity including cash was $139.4 million. Working capital was $216.5 million. UNIFI reported compliance with financial covenants and no material risk of failing to meet them. About 40% of cash was held by foreign subsidiaries and may not be immediately available for domestic needs.
- Other balance-sheet figures: Total assets were $513.0 million and shareholders’ equity was $334.9 million. Current liabilities were $81.0 million. The ABL term loan balance was $82.5 million, with a 3.3% weighted-average rate; $75.0 million of variable-rate debt was hedged by swaps.
Material changes and management commentary
- The earnings improvement was driven primarily by higher gross profit and the absence of prior-year losses from Parkdale America (PAL), an investment sold in April 2020. Q2 also benefited from improved results at unconsolidated nylon affiliates.
- Management said textile activity in the second half of calendar 2020 exceeded expectations following the sharp downturn in the June 2020 quarter, but demand and underlying sales volumes in some core markets had not fully recovered. The company could not determine whether the rebound reflected lasting recovery or pent-up demand.
- Management expects pandemic-related uncertainty to continue to affect demand and results through at least fiscal 2021. It identified sustained consumer spending and retail activity, pandemic containment and vaccine deployment as important to recovery; renewed restrictions, virus mutations or healthcare-system strain could undermine a rebound.
- UNIFI is pursuing U.S. antidumping investigations involving polyester textured yarn imports from Indonesia, Malaysia, Thailand and Vietnam. The USITC made affirmative preliminary determinations in December 2020; final determinations were expected likely by year-end 2021. Management sees potential future benefit from trade actions but provided no quantified forecast.
- Management expected approximately $24 million of FY2021 capital expenditures, including about $18 million in the second half, primarily for Americas production and technology improvements, new texturing machinery and maintenance. The estimate may change with project timing and scope.
Risks, contingencies and unusual items
- Key risks include COVID-19 effects on demand and operations; intense textile-industry competition and trade-policy changes; raw-material and energy-price volatility; foreign-exchange fluctuations, particularly the Brazilian real; customer concentration or financial distress; and the ability to service debt and fund investment. Raw-material costs had been favorable during fiscal 2020 and the first half of FY2021, but management warned that unexpected increases could pressure margins.
- Q2 and year-to-date tax results included discrete benefits of $0.4 million and $5.1 million, respectively, from a retroactive GILTI high-tax exclusion, partly offset by valuation-allowance expense of $0.03 million and $2.2 million. Effective tax rates were 40.6% for Q2 and 26.5% for the first half.
- Environmental matters at the Kinston and Kentec sites remain disclosed. UNIFI said it cannot determine whether it will have responsibility or the amount of any potential Kinston-site liability; it expects minimal active remediation at Kentec but cannot estimate possible costs.
- UNIFI reported no material adverse effect expected from ordinary-course legal proceedings, no material off-balance-sheet arrangements, and no material change in internal control over financial reporting. Disclosure controls were reported effective.
Investor verification points
- Track whether the sales and volume recovery persists after the pandemic rebound, especially in Polyester, Asia and Nylon markets, and whether REPREVE’s share of sales continues to grow.
- Assess sustainability of improved margins, particularly Brazil’s temporary competitive advantage, raw-material cost changes and the company’s ability to pass cost changes through to customers.
- Monitor operating cash conversion, receivables and inventory as volumes recover; compare actual capital spending with the approximately $24 million FY2021 plan.
- Verify debt reduction, revolver availability, covenant compliance and the availability of foreign-held cash for domestic obligations.
- Follow final outcomes of the four-country polyester textured-yarn trade investigations and developments in the disclosed environmental matters.