UNIFI, Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended January 1, 2023. The quarter comprised 13 weeks and the six-month period 26 weeks. Unless stated otherwise, financial amounts below are in millions of dollars. Comparatives are the corresponding periods ended December 26, 2021.
Business context
UNIFI manufactures and sells synthetic and recycled polyester and nylon products to yarn manufacturers, knitters, and weavers serving apparel, automotive, home furnishings, industrial, and other markets. Its reportable segments are Americas, Brazil, and Asia. REPREVE fiber is its recycled-product platform.
Financial performance and liquidity
| Metric | Three months ended Jan. 1, 2023 | Six months ended Jan. 1, 2023 |
|---|---|---|
| Net sales | $136.2; down 32.4% | $315.7; down 20.6% |
| Gross profit (loss) and margin | $(8.0); (5.9)% | $(1.4); (0.5)% |
| Operating income (loss) | $(19.8) | $(24.5) |
| Net income (loss) | $(18.0), or $(1.00) per diluted share | $(25.9), or $(1.44) per diluted share |
| Adjusted EBITDA, non-GAAP | $(13.0) | $(10.7) |
| Operating cash flow | Not separately reported for the quarter | $7.3, versus cash used of $4.0 |
For comparison, prior-year-quarter sales were $201.4 million, gross profit was $16.9 million (8.4% margin), and net income was $0.9 million. For the prior six months, sales were $397.4 million, gross profit was $43.0 million (10.8% margin), and net income was $9.6 million.
- Six-month capital expenditures were $24.0 million, primarily for texturing machinery and manufacturing improvements.
- At January 1, cash was $50.8 million; current assets were $278.2 million and current liabilities $58.8 million. Reported working capital was $219.3 million.
- Total debt principal was $130.4 million, compared with $114.3 million at July 3, 2022. Cash-adjusted net debt, a non-GAAP measure, was $79.6 million, up from $61.0 million.
- Excess availability under the ABL revolver was $64.7 million. The company reported compliance with applicable credit-facility covenants.
- Approximately 99% of cash was held by foreign subsidiaries, while all debt obligations were domestic. Management cautioned that foreign-held cash may not be immediately available for domestic requirements.
Material changes and management commentary
- Demand weakness and inventory destocking by brands and retailers, along with pandemic-related lockdowns in Asia, drove consolidated sales volumes down 35.6% in the quarter and 28.6% for six months. Higher average selling prices partly offset lower volumes.
- Gross profitability deteriorated sharply, chiefly from reduced production and poor fixed-cost absorption in the Americas, where the segment recorded a $13.1 million quarterly gross loss. Brazil faced lower selling prices amid import competition and elevated-cost inventory; Asia’s sales fell substantially with weaker demand and lockdowns.
- REPREVE fiber represented 31% of quarterly sales and 29% of six-month sales, versus 40% and 39%, respectively, in the comparative periods; lower Asia volumes were a major factor.
- Interest expense rose with higher debt and interest rates. The quarter included a $0.3 million loss on extinguishment associated with refinancing.
- UNIFI entered a new $230 million senior secured credit facility in October 2022, maturing in October 2027, replacing its prior facility due in December 2023. The new facility includes a $115 million revolver and a term loan; quarterly term-loan payments of $2.3 million were scheduled to begin February 2023.
- Cash from operations benefited from reductions in receivables and inventories as activity declined, partly offset by weaker earnings and lower payables. The company said the working-capital release was primarily related to lower business activity.
Outlook, risks, and unusual items
Management gave no numerical earnings or revenue guidance. It said demand for the remainder of calendar 2023 was uncertain, but did not then anticipate an adverse event would critically pressure liquidity. Management expected most remaining fiscal 2023 capital deployment to support machinery upgrades in the U.S., El Salvador, and Brazil, and working capital as demand and sales recover. It said further demand deterioration could require reduced capital spending or discretionary outflows, additional credit, or renewed cost reductions.
Management expected recent selling-price adjustments to help margins in the remainder of fiscal 2023, but warned that weak textile demand, volatile input costs, labor productivity, supply-chain disruption, inflation, rising rates, and competition could weigh on results. Other disclosed risks include customer or brand-partner loss, foreign-exchange movements, trade policy, and facility disruption.
- A $3.8 million recovery of Brazilian income taxes paid in prior years reduced the reported tax provision. Excluding this discrete benefit, management reported adjusted net losses of $21.8 million for the quarter and $29.7 million for six months; these are non-GAAP measures.
- The effective tax rate was affected by the tax recovery and valuation allowances for deferred tax assets. Management noted that some losses may not produce a future tax benefit.
- The company disclosed potential environmental responsibilities relating to historical operations at Kinston, North Carolina, but could not determine whether or when it would incur related obligations. It did not expect active remediation costs at the Kentec site, if required, to be material.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether demand, customer destocking, and Asia market conditions improved after January 1, 2023, and how production utilization affects Americas margins.
- Whether the new credit facility remains covenant-compliant and how much revolver availability and debt principal remain, particularly given higher interest rates.
- How much of foreign-held cash can be accessed for domestic needs, and whether future repatriations or financing are needed.
- Whether capital spending and machinery upgrades deliver the expected productivity and profitability benefits while cash generation is weak.
- The sustainability of Brazil pricing and margins amid lower-cost imports, and the recovery in REPREVE sales and Asia volumes.
- The tax recovery’s nonrecurring nature, the valuation allowance, and any developments in environmental or other contingencies.