Business Context and Reporting Period
Company: UNIFI, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 27, 2009 (Second Quarter of Fiscal Year 2010)
Business Overview: Unifi is a diversified producer and processor of multi-filament polyester and nylon yarns, including specialty yarns. Operations are primarily located in the U.S., Brazil, Colombia, and China. The company serves apparel, hosiery, furnishings, automotive, and industrial markets.
Key Financial Metrics
| Metric (in thousands) | Q2 2010 (Ended Dec 27, 2009) | Q2 2009 (Ended Dec 28, 2008) | YTD 2010 (6 Months) | YTD 2009 (6 Months) |
|---|---|---|---|---|
| Net Sales | $142,255 | $125,727 | $285,106 | $294,736 |
| Gross Profit | $17,336 | $2,312 | $36,742 | $15,737 |
| Gross Margin % | 12.2% | 1.8% | 12.9% | 5.3% |
| Net Income (Loss) | $1,953 | $(9,068) | $4,442 | $(9,744) |
| Diluted EPS | $0.03 | $(0.15) | $0.07 | $(0.16) |
| Operating Cash Flow (YTD) | $18,741 (vs. $(7,952) YTD 2009) | |||
| Cash and Equivalents | $54,442 (as of Dec 27, 2009) | |||
| Long-Term Debt | $178,722 (Notes Payable) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company returned to profitability in Q2 2010, reporting net income of $1.95 million compared to a net loss of $9.07 million in the prior year quarter. This was driven by a significant increase in gross profit ($15.0 million increase) due to improved conversion margins and lower manufacturing costs.
- Revenue Growth: Q2 net sales increased 13.1% year-over-year, driven by a 17.2% increase in unit sales volumes, partially offset by a 4.1% decrease in weighted-average selling prices.
- Segment Performance:
- Polyester: Sales increased 11.0% and gross profit surged 2,135.8% due to volume recovery and lower raw material costs.
- Nylon: Sales increased 19.6% and gross profit increased 176.0%, driven by demand recovery and a shift to higher-value product mixes.
- One-Time Items: The prior year period included a $1.48 million write-down of an investment in an unconsolidated affiliate (YUFI) and a $5.2 million gain on the sale of fixed assets, which are not present in the current period.
Guidance, Outlook, and Risks
- Market Outlook: Management notes signs of strength in retail sales for apparel and home furnishings but expects sales to remain 4% to 8% below pre-recession levels. The Brazilian operations showed significant recovery with a 59% increase in local currency profit.
- Strategic Initiatives:
- Establishment of a wholly-owned operation in Central America (Unifi Central America, Ltda.) to improve supply chain flexibility.
- Joint venture (PAL) acquisition of Hanesbrands' spun cotton yarn operations, expected to improve financial performance.
- Liquidity and Debt:
- The company has $62.9 million in borrowing availability under its Amended Credit Agreement.
- Covenant Restriction: As of December 27, 2009, the fixed charge coverage ratio was less than 1.0 to 1.0, restricting the company's ability to invest in certain assets until performance improves.
- Risks and Contingencies:
- USDA Appeal: A joint venture (PAL) is appealing a USDA decision that disqualified $8.0 million of capital expenditures for cotton subsidy benefits. A hearing is scheduled for Q3 2010.
- Environmental: Potential future liability for environmental remediation at a satellite service facility in Kinston, NC, though DuPont currently covers monitoring costs.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the fixed charge coverage ratio and any waivers or amendments to the credit agreement restrictions.
- USDA Subsidy Appeal: Monitor the outcome of the PAL joint venture's appeal regarding the $8.0 million disqualified cotton subsidy expenditures.
- Working Capital Trends: Review the increase in inventory ($13.3 million YTD) to ensure it aligns with sales demand and does not indicate obsolescence.
- Debt Service: Assess the ability to service the $178.7 million in 11.5% senior secured notes maturing in 2014 given the current coverage ratio constraints.
- Foreign Currency Impact: Evaluate the sustainability of the Brazilian real's strength, which contributed significantly to the Q2 gross profit improvement.