UNIFI, Inc. — Form 10-Q Summary
Business context and reporting period
UNIFI manufactures and sells recycled and synthetic polyester and nylon products, including specialty and commodity yarns and recycled materials. Its operations are reported in Polyester, Nylon and International segments. This unaudited filing covers the quarter and six months ended December 30, 2018; comparable periods ended December 24, 2017. Quarterly periods each comprised 13 weeks. The six-month current period comprised 27 weeks versus 26 weeks in the prior year, although shipping weeks were approximately equal.
Key financial metrics
| Metric | Quarter ended Dec. 30, 2018 | Prior-year quarter | Six months ended Dec. 30, 2018 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $167.7 million | $167.5 million | $349.3 million | $331.7 million |
| Gross profit / margin | $14.2 million / 8.4% | $22.7 million / 13.5% | $34.2 million / 9.8% | $46.0 million / 13.9% |
| Operating income (loss) | ($0.8) million | $7.8 million | $4.9 million | $17.9 million |
| Net income | $1.2 million | $11.8 million | $3.0 million | $20.8 million |
| Diluted EPS | $0.06 | $0.63 | $0.16 | $1.12 |
| Operating cash flow | Not presented by quarter | ($4.0) million | $20.4 million |
At December 30, 2018, cash was $26.7 million, total debt obligations were $131.1 million, and working capital was $196.2 million. ABL Revolver availability was $64.1 million. Nearly all cash was held by foreign subsidiaries and may not be presently available for domestic needs. Six-month capital expenditures were $12.3 million. The current ratio was approximately 3.7x, based on current assets of $268.0 million and current liabilities of $71.8 million.
Material changes versus prior comparable periods
- Quarterly sales were nearly flat, but cost of sales rose 6.0%; gross profit fell 37.6% and the company moved from operating income to an operating loss. Six-month sales rose 5.3%, while gross profit declined 25.7% and net income fell 85.6%.
- Management attributed margin pressure to elevated raw-material costs, lower conversion margins, weaker fixed-cost absorption, unfavorable product mix and foreign-currency translation. Quarterly sales volumes were flat; six-month volumes increased 6.1%. Foreign-currency translation reduced sales by approximately $5.3 million in the quarter and $11.9 million for six months.
- Polyester quarterly Segment Profit decreased 52.9% to $5.9 million; Nylon decreased 30.2% to $2.5 million; International decreased 8.2% to $10.4 million. International sales grew, aided by Asian demand for REPREVE and other products, while currency effects and margin pressure weighed on profit.
- Cash used in operations was driven in part by a $17.1 million increase in inventory and lower distributions from unconsolidated affiliates. Cash decreased $18.2 million from fiscal year-end.
Outlook, management commentary, risks and unusual items
- Management expected the third quarter of fiscal 2019 to show moderate gross-margin recapture as raw-material costs declined in November and December 2018, with improved volumes from normal second-half seasonality and an additional shipping week. This is an expectation, not a quantified earnings forecast.
- Management estimated fiscal 2019 capital expenditures of approximately $25 million, including $12.7 million planned for the remainder of the year, funded by operating cash and/or ABL borrowings. Further spending could be required for strategic growth and recycled-product capacity.
- On December 18, 2018, the company amended its $200 million secured ABL facility, extending maturity to December 2023 and reducing applicable margins by 25 basis points. The term loan was reset from $80 million to $100 million, with proceeds used to pay down the revolver. The company reported covenant compliance and a fixed-charge coverage ratio of 1.16x; the covenant trigger level was $25 million of revolver availability.
- Quarterly income-tax benefit was $2.3 million despite a pretax loss, primarily reflecting prior-year tax credits. A final tax-reform measurement adjustment reduced the toll-charge liability by $1.7 million in the quarter. Prior-year results included significant tax benefits, complicating comparisons.
- Adoption of the new revenue-recognition standard increased six-month reported revenue by $2.0 million and reduced gross profit by $0.02 million versus the previous method; it also resulted in $10.5 million of contract assets. Management said the overall adoption impact was immaterial.
- Key risks include textile-industry competition and import pressure; weak demand for certain yarns; raw-material and energy-price volatility and delays in passing costs to customers; foreign-exchange movements; customer and brand-partner concentration; trade-policy changes; and the ability to service debt and fund investment. The company described possible future environmental responsibility at a Kinston, North Carolina site but said timing and potential remediation cost could not be determined. It said ordinary-course legal matters were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether the anticipated raw-material cost relief and seasonal volume improvement actually restore gross margins.
- Inventory levels and working-capital conversion, given the operating cash outflow and inventory build.
- Liquidity accessibility: most cash is held abroad, while domestic operations rely substantially on revolver availability.
- Debt covenant headroom, variable-rate exposure and the effect of the amended credit facility; the filing estimates a 50-basis-point LIBOR increase would add less than $0.3 million to annual interest expense.
- Segment-level recovery, especially Polyester margins, and the sustainability and profitability of growth in recycled and other PVA products.
- Potential environmental obligations at the Kinston site and the timing and cost of any future remediation.