UNIFI, Inc. — Form 10-Q Summary
Period clarification: The filing covers the quarter and nine months ended March 31, 2019 (UNIFI fiscal 2019 third quarter), not 2018 Q3. Comparisons are with the quarter ended March 25, 2018 and the nine months ended March 25, 2018. Financial amounts below are in millions of dollars unless stated otherwise.
Business context and reporting period
UNIFI manufactures and sells polyester and nylon yarns, recycled fibers and related products. It operates Polyester, Nylon and International reportable segments and holds a 34% interest in Parkdale America, LLC (PAL), accounted for under the equity method. The nine-month current period had 40 weeks versus 39 weeks in the prior period; both quarterly periods had 13 weeks. The seasonal shutdown’s timing also gave current-period NACA operations one additional shipping week versus the comparable periods.
Financial performance and liquidity
| Metric | Three months ended March 31, 2019 | Three months ended March 25, 2018 | Nine months ended March 31, 2019 | Nine months ended March 25, 2018 |
|---|---|---|---|---|
| Net sales | $180.0 | $165.9 | $529.3 | $497.6 |
| Gross profit / margin | $13.8 / 7.7% | $16.6 / 10.0% | $48.0 / 9.1% | $62.5 / 12.6% |
| Operating income | $0.8 | $1.6 | $5.7 | $19.5 |
| Net income (loss) | $(1.5) | $0.2 | $1.5 | $20.9 |
| Diluted EPS | $(0.08) | $0.01 | $0.08 | $1.12 |
| Adjusted EBITDA, non-GAAP | $6.8 | $7.3 | $23.6 | $37.0 |
Quarterly sales rose 8.5% (11.7% excluding foreign-currency effects), while nine-month sales rose 6.4% (9.8% excluding currency effects). Nine-month operating income declined 70.8% and net income declined 93.1%. Interest expense, net, was $1.1 million for the quarter and $3.6 million for nine months, up from $1.0 million and $3.1 million, respectively.
At March 31, 2019, cash was $27.9 million, total current assets $280.0 million, and current liabilities $84.8 million; reported working capital was $195.2 million. Total debt obligations were $136.9 million, including $24.0 million drawn on the revolver and a $100.0 million term loan. Long-term debt on the balance sheet was $119.8 million. Cash and cash equivalents were predominantly held by foreign subsidiaries; domestic cash was only $14,000, while domestic revolver availability was $62.7 million.
For the nine months, operating cash flow was negative $1.5 million versus positive $25.0 million a year earlier. Investing cash outflow was $19.2 million, including $19.2 million of capital expenditures; financing activities provided $4.1 million net. Cash declined by $17.0 million from fiscal-year start.
Material changes and segment trends
- Consolidated gross margin fell to 7.7% for the quarter and 9.1% for nine months. Management cited raw-material and competitive pricing pressure, lower fixed-cost absorption, weaker conversion margins, unfavorable product mix and currency translation.
- For the quarter, Polyester sales rose 7.9%, but segment profit fell 16.5%; Nylon sales rose 6.4% and segment profit rose 79.8%; International sales rose 10.9%, but segment profit fell 25.1%. For nine months, segment profit declined across Polyester (29.0%), Nylon (10.9%) and International (11.1%).
- Growth in recycled and other PVA products supported sales, but management cautioned that PVA growth does not necessarily improve margins; lower-priced Flake and Chip growth and lower textured-yarn volumes weighed on mix and absorption.
- SG&A decreased 17.4% in the quarter, mainly due to forfeitures of share-based and variable compensation associated with executive departures, partly offset by higher professional fees.
- Inventory increased to $131.0 million from $126.3 million at June 24, 2018. Management attributed the increase to domestic production exceeding sales and higher raw-material costs. Adjusted working capital, a non-GAAP measure, increased to $178.2 million from $152.4 million.
Outlook, management commentary, risks and unusual items
- Management targeted reducing an approximately $60 million annualized SG&A run-rate by about 15%, with fiscal 2020 SG&A expected to be approximately $50 million. Fiscal 2019 capital expenditures were estimated at $25 million, including $19.2 million spent in the first nine months and approximately $5.8 million expected thereafter.
- UNIFI filed trade petitions concerning polyester textured yarn imports from China and India. Commerce preliminarily granted critical-circumstances treatment for Chinese imports and announced preliminary countervailing duties of at least 32% on Chinese imports and at least 7% on Indian imports. The filing expected preliminary antidumping determinations June 26, 2019 and final determinations by year-end 2019. These were preliminary actions, not final outcomes.
- Management said elevated low-cost imports, subdued demand, raw-material volatility, and difficulty passing cost increases through to customers pressured margins. Other identified risks include foreign-exchange movements, customer and brand-partner concentration, trade-policy changes, debt service, and availability and pricing of raw materials.
- The quarterly effective tax rate was 199.2%; the nine-month rate was 71.3%. Tax expense included $0.9 million related to U.S. tax-reform adjustments in the quarter. Management cited GILTI, foreign withholding taxes, jurisdictional losses without recognized tax benefits, and other tax items as rate drivers.
- The ABL facility was amended in December 2018: maturity extended to December 2023, borrowing margins reduced by 25 basis points, and the term loan reset from $80 million to $100 million, with proceeds used to reduce revolver borrowings. UNIFI reported compliance with covenants and $62.7 million of revolver availability at quarter-end. A fixed-charge coverage covenant applies if availability falls below a $25 million trigger level.
- UNIFI disclosed uncertainty over any potential future environmental responsibility at the Kinston site. On April 10, 2019, a subsidiary assumed sole monitoring/remediation responsibility for the Kentec site and received $180,000 of net monitoring costs; UNIFI expected no active remediation but could not estimate possible future costs. Management stated ordinary-course legal proceedings were not expected to have a material adverse effect.
- Revenue-recognition adoption increased nine-month reported revenue by $0.9 million and gross profit by $0.2 million; it also resulted in $9.5 million of contract assets. The company expected adoption of lease accounting in fiscal 2020 to increase total assets by approximately 1%.
Important facts for investors to verify
- Whether gross margins and cash generation recover as raw-material costs, import competition, product mix and fixed-cost absorption change.
- Final outcomes and timing of the U.S. trade investigations, including whether duties materially improve pricing and domestic competitiveness.
- Progress toward the fiscal 2020 SG&A target and the returns from planned capital expenditures and PVA-related growth.
- Liquidity quality and availability: most cash was outside the United States, domestic cash was minimal, and revolver availability depends on borrowing-base and covenant conditions.
- Inventory levels, customer payment terms, PAL distributions and the sustainability of earnings from unconsolidated affiliates.
- Tax-rate variability, deferred-tax valuation allowances and potential future costs related to environmental obligations.