UFI

Business Context and Reporting Period

Company: UNIFI, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 29, 2002 (First Quarter of Fiscal 2003)
Business Overview: Unifi operates in the textile industry, primarily through Polyester and Nylon segments. The company is engaged in a manufacturing alliance with E.I. DuPont De Nemours and Company (DuPont) regarding polyester filament production.

Key Financial Metrics

Note: Prior year Net Loss included a $37.9 million cumulative effect of an accounting change (SFAS 142 goodwill write-off).

Material Changes vs. Prior Period

• Revenue: Net sales decreased 0.7% to $221.5 million. While unit volume increased 7.0%, average sales prices declined 7.7% due to product mix and market conditions.
• Profitability: Net income improved significantly to $4.3 million from a loss of $35.2 million. The prior year loss was heavily impacted by a one-time $37.9 million goodwill impairment charge. Excluding this, income before the accounting change increased from $2.7 million to $4.3 million.
• Cash Flow: Operating cash flow surged to $42.5 million from $2.5 million, driven by net income, decreases in accounts receivable ($5.3 million), income tax recoveries ($15.1 million), and increased accounts payable.
• Segment Performance:
  • Polyester: Sales increased 1.3% and volumes 9.1%. Gross profit improved $2.6 million due to lower manufacturing costs and fiber costs. The DuPont alliance provided a $9.9 million benefit.
  • Nylon: Sales declined 3.0% despite a 1.0% volume increase, as prices dropped 3.8%. Gross profit decreased $1.8 million.
• Debt: The company reduced net borrowings by $24.6 million during the quarter. As of September 29, 2002, there were no outstanding borrowings under the $150 million credit facility, with $114.2 million available.

Guidance, Outlook, Risks, and Contingencies

• Legal Proceedings (DuPont Alliance): A significant contingency exists regarding the manufacturing alliance with DuPont. DuPont has filed for arbitration seeking approximately $85 million in damages, alleging Unifi breached the agreement by not purchasing all external POY needs from DuPont. DuPont also seeks a declaratory judgment of "substantial breach," which could force Unifi to purchase DuPont's U.S. polyester business for $300–$600 million. Unifi denies these allegations and has filed counterclaims.
• Joint Venture Impairment: The UNIFI-SANS joint venture (nylon production) has incurred substantial losses due to start-up difficulties. The venture is evaluating whether its $27 million in long-lived assets are impaired; testing is expected to conclude in the December 2002 quarter.
• Market Conditions: Management notes a challenging business climate due to import pressures, excess capacity, and currency imbalances. No significant sustainable improvements are assured.
• Capital Expenditures: Anticipated capital expenditures for fiscal 2003 are approximately $26 million.
• Debt Covenants: The company is in compliance with all covenants under its Credit Agreement, including leverage and fixed charge coverage ratios.

Investor Verification Checklist

• Arbitration Outcome: Monitor the status of the DuPont arbitration hearings (scheduled for November 2002) and the potential financial impact of the $85 million claim or the forced "Put" option ($300–$600 million).
• Asset Impairment: Verify the results of the UNIFI-SANS joint venture asset recoverability test expected in Q2 2003.
• Price vs. Volume: Assess the sustainability of the 7.7% decline in average sales prices against the 7.0% volume increase in the current quarter.
• Currency Exposure: Review the impact of Brazilian currency devaluation, which reduced U.S. dollar sales by $4.6 million in the quarter.
• Debt Facility Reduction: Confirm the permanent reduction of the credit facility from $150 million to $100 million effective January 1, 2003, and its impact on future liquidity.