UNIFI, Inc. (NYSE: UFI) — Q2 FY2022 Form 10-Q
Reporting period: The quarter and six-month period ended December 26, 2021 (13 and 26 weeks, respectively). Amounts below are in millions of U.S. dollars unless noted. Comparisons are with the corresponding periods ended December 27, 2020, except balance-sheet comparisons, which are with June 27, 2021.
Business context
UNIFI manufactures and sells recycled and synthetic polyester and nylon products to textile manufacturers and other customers. Its reportable segments are Polyester, Asia, Brazil and Nylon. REPREVE-branded recycled fiber represented 40% of quarterly sales and 39% of six-month sales.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $201.4 | $162.8 | $397.4 | $304.3 |
| Gross profit | $16.9 | $25.9 | $43.0 | $40.5 |
| Gross margin | 8.4% | 15.9% | 10.8% | 13.3% |
| Operating income | $4.6 | $13.1 | $17.8 | $16.0 |
| Net income | $0.9 | $7.5 | $9.6 | $10.9 |
| Diluted EPS | $0.05 | $0.40 | $0.51 | $0.58 |
| Adjusted EBITDA | $10.9 | $19.2 | $30.8 | $28.3 |
Quarterly sales rose 23.7%, reflecting 8.3% higher volume and 15.4% higher average selling prices. Six-month sales increased 30.6%, on 10.5% higher volume and 20.1% higher average selling prices. Price increases largely reflected higher raw-material costs.
Quarterly gross profit fell 34.9% as input-cost inflation and labor availability, productivity and training challenges—particularly in Polyester—more than offset demand recovery. Six-month gross profit increased 6.2%, but margin contracted year over year. Quarterly operating margin was 2.3% versus 8.0%; six-month operating margin was 4.5% versus 5.3%. The quarterly effective tax rate rose to 77.4% from 40.6%; the six-month rate was 44.2% versus 26.5%, with prior-year results benefiting from a discrete GILTI tax benefit.
Segment trends: In Q2, Polyester sales increased 20.5%, but Segment Profit fell to $5.0 million from $15.4 million as costs and weaker labor productivity compressed margins. Asia sales rose 32.3% and Segment Profit increased to $8.5 million, mainly on volume. Brazil sales rose 13.8%, while Segment Profit edged down to $7.8 million as unusually strong prior-year performance normalized. Nylon sales rose 31.3%, but Segment Profit declined to $0.6 million amid lower underlying margins and mix.
Cash flow and balance sheet: Six-month operating cash flow was negative $4.0 million, compared with positive $19.7 million a year earlier; the filing attributes the change mainly to working-capital demands, including higher inventories and payment of prior-year incentive compensation. Capital expenditures were $19.2 million, and investing cash flow was negative $19.1 million. Cash fell to $47.6 million from $78.3 million at fiscal year-end.
Total debt principal was $81.6 million, down from $86.9 million; net debt was $34.0 million, up from $8.6 million, primarily reflecting lower cash. The ABL term loan was $72.5 million, with no revolver borrowings. Current liabilities were $98.1 million and current assets $312.2 million. Reported working capital was $214.0 million; management’s adjusted working capital measure was $183.4 million.
Outlook, risks and notable items
- Management expects the effects of recent selling-price adjustments, including adjustments made in January 2022, to support improved NACA profitability in future periods. It also cited workforce training and retention efforts. These are expectations, not quantified earnings guidance.
- Management expects FY2022 capital expenditures of $40–$44 million, with up to an additional $24.8 million planned for the remainder of the fiscal year, primarily for texturing machinery, Americas production enhancements and maintenance.
- Management stated it expects available cash, operating cash flows and borrowing availability to support foreseeable liquidity needs and does not anticipate critical liquidity pressure in FY2022. The company reported $69.3 million of ABL availability and compliance with financial covenants. However, 99% of cash was held by foreign subsidiaries and may not be presently available for domestic needs.
- Input-cost inflation, labor constraints and productivity, supply-chain delays and freight costs remain risks. Management said price pass-throughs typically take time and margins can be pressured during the lag; raw-material costs remain volatile.
- UNIFI reported final U.S. antidumping duty orders in December 2021 on polyester textured yarn imports from Indonesia, Malaysia, Thailand and Vietnam, following an ITC injury determination. Management expects the trade actions to support fairer pricing and incremental Polyester revenue.
- Other considerations include COVID-19-related demand or operating disruption, foreign-exchange movements, trade-policy changes, climate and weather events, and dependence on customer and brand-partner demand. Management said no material legal proceeding was expected to adversely affect results, financial position or cash flows.
- Quarterly cash flow and earnings were pressured by working-capital investment and cost inflation. The company repurchased 52,000 shares for $1.2 million during the six months. A $20 million interest-rate swap was de-designated from hedge accounting; the reported impact was not material.
Most important facts for investors to verify
- Whether price increases catch up with raw-material, labor and logistics costs, and whether Polyester margins recover.
- Whether operating cash flow turns positive as inventory and other working-capital demands evolve.
- How much of the $47.6 million cash balance is accessible for domestic obligations, given that most cash is held abroad.
- Execution, timing and funding of the planned $40–$44 million FY2022 capital program, alongside debt maturities and investment needs.
- Whether demand recovery, REPREVE growth and the new import-duty orders translate into sustainable segment profitability.