UNIFI, Inc. — Q1 Fiscal 2020 Form 10-Q
Business context and reporting period. UNIFI manufactures and sells synthetic and recycled polyester and nylon products, including REPREVE-branded products, to textile manufacturers and brand partners. This filing covers the three months ended September 29, 2019. The comparable prior-year quarter included 14 weeks for primary U.S. and Central American subsidiaries, versus 13 weeks this quarter; this limits direct comparisons.
Key financial metrics
| Metric | Q1 FY2020 | Prior-year quarter |
|---|---|---|
| Net sales | $179.9 million | $181.6 million |
| Gross profit / gross margin | $17.4 million / 9.7% | $20.0 million / 11.0% |
| Operating income / margin | $6.3 million / 3.5% | $5.7 million / 3.1% |
| Net income / diluted EPS | $3.7 million / $0.20 | $1.8 million / $0.10 |
| Operating cash flow | $23.8 million | $(5.0) million |
| Capital expenditures | $4.6 million | $6.4 million |
| Adjusted EBITDA (non-GAAP) | $12.3 million | $11.9 million |
Unless stated otherwise, financial amounts are rounded and reported in U.S. dollars. Cash and cash equivalents were $34.1 million at quarter-end, up from $22.2 million at June 30, 2019. Debt principal was $122.4 million, down from $128.0 million; net debt, a non-GAAP measure, was $88.3 million versus $105.8 million. Working capital was $193.7 million and adjusted working capital was $174.2 million.
Operating cash flow included $10.4 million of distributions from unconsolidated affiliates, principally PAL, and reflected improved receivables and inventory management. The company used $6.5 million in financing activities, including net repayments on its ABL borrowings and finance leases. Nearly all cash was held by foreign subsidiaries: $34.1 million abroad and only $9,000 domestically. ABL revolver availability was $62.8 million.
Material changes and operating performance
- Sales declined 0.9%; consolidated sales volume increased 16.1%, while average selling prices declined 17.0%. Growth in lower-priced Chip and staple fiber in Asia contributed to the volume and price mix.
- Revenue from PVA products grew approximately 26% and represented 54% of sales, up from 43%. Management cautioned that PVA growth does not necessarily increase margins because product margins vary.
- Gross profit fell 12.9% and gross margin declined 1.3 percentage points. Management attributed pressure to Brazil’s selling prices falling faster than inventory costs, weaker Nylon sales and mix, and lower fixed-cost absorption in parts of the business.
- Operating income increased 11.0%, mainly because SG&A fell 23.8% to $11.0 million. Management cited lower compensation expense, fewer executive officers, and cost-reduction actions begun in the second half of fiscal 2019.
- Net income increased despite lower gross profit, reflecting reduced SG&A and a lower effective tax rate (16.3% versus 60.9%). The company also recorded $866,000 of equity-method losses, compared with $239,000 of earnings in the prior-year quarter; PAL accounted for $1.2 million of the current-period loss.
- By segment, Asia sales rose 80.6% to $46.0 million, led by REPREVE-branded Chip and staple fiber, and segment profit rose 21.2%. Polyester sales fell 11.4%, Nylon sales fell 27.7%, and Brazil sales fell 10.2%; segment profit declined in all three.
Liquidity, outlook, risks and unusual items
- Management said existing cash, operating cash flows and ABL availability should meet foreseeable liquidity needs. The ABL facility matures in December 2023. UNIFI reported compliance with financial covenants; the fixed-charge coverage ratio was 1.90 to 1.00, compared with a 1.05 minimum if availability falls below the defined trigger level.
- Management expected fiscal 2020 capital expenditures of approximately $25 million, including production-capability and technology improvements in the Americas and routine maintenance. The remaining planned spend was $20.4 million; actual spending could differ and may be funded with operating cash and ABL borrowings.
- No specific earnings or revenue guidance was provided. Management remained committed to its “Partner, Innovate and Build” strategy and expects strategic investments and PVA growth to support future profitability and cash generation, subject to execution and market conditions.
- UNIFI cited suppressed demand for certain NACA yarns, imports of low-cost and subsidized polyester textured yarn, competitive pricing, customer and product-mix changes, raw-material volatility, and weakness in nylon end markets. It filed U.S. anti-dumping and countervailing-duty petitions in October 2018; preliminary duties had been imposed, with final determinations expected at the end of calendar 2019. Management said these measures could improve market position, but the outcome is uncertain.
- Foreign-exchange movements, especially the Brazilian real and Chinese renminbi, affected results and comprehensive income. The company had no outstanding foreign-currency forward contracts. A 50-basis-point increase in LIBOR was estimated to raise annual interest expense by less than $300,000.
- UNIFI adopted lease accounting on July 1, 2019, recognizing $9.8 million of operating lease right-of-use assets and $10.1 million of related liabilities at adoption. Management said adoption did not materially affect operating results or liquidity. The company also expected approximately $5.4 million of new finance leases for transportation equipment, partly replacing operating leases.
- Environmental exposure remains uncertain at the Kinston and Kentec sites in North Carolina. UNIFI said it cannot determine whether or when it may have responsibility for certain Kinston areas of concern or quantify potential liability; it expects no active remediation at Kentec but cannot estimate costs if remediation becomes necessary. Management did not believe ordinary-course legal proceedings would materially affect the company.
Most important facts for investors to verify
- Whether final U.S. trade-duty determinations occur as expected and materially improve NACA sales, market share, and margins.
- Whether rapid Asia growth and higher PVA mix translate into durable gross-profit improvement, given lower average prices and varied product margins.
- Whether PAL’s operating results and distributions remain sufficient to support cash flow; this quarter’s distribution occurred alongside a reported PAL loss.
- Whether operating cash flow and net-debt improvement are repeatable without relying on affiliate distributions, and whether foreign-held cash is accessible for domestic obligations.
- Whether planned fiscal 2020 capital spending, scheduled debt payments, and lease commitments remain manageable while preserving covenant headroom.
- Potential developments in environmental obligations and the company’s exposure to raw-material, foreign-exchange, customer, and import competition risks.