UNIFI, INC. — Form 10-Q Summary
Business context and reporting period
Unifi manufactures and sells polyester and nylon yarns, including recycled and premium value-added products, to textile producers and other customers. This unaudited filing covers the three and six months ended December 25, 2016, the second quarter and first half of fiscal 2017; comparisons are to periods ended December 27, 2015. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $155.2, down 0.8% | $315.1, down 1.1% |
| Gross profit / gross margin | $22.1 / 14.3% (prior: 14.0%) | $45.7 / 14.5% (prior: 13.4%) |
| Operating income | $9.0, up from $8.6 | $21.6, up from $18.3 |
| Net income attributable to Unifi | $4.6; diluted EPS $0.25 | $14.0; diluted EPS $0.76 |
| Adjusted EBITDA (non-GAAP) | $14.5 (prior: $14.4) | $32.4 (prior: $29.4) |
| Operating cash flow | $17.3, compared with $15.4 in the prior-year first half |
Cash and equivalents were $28.5 at quarter-end, against total debt obligations of $135.2 (June 26, 2016: $123.0). Unifi reported $66.8 of ABL Revolver availability and total liquidity of $95.3. Working capital was $164.1, up from $136.6 at fiscal year-end. First-half capital expenditures were $19.3; operating cash flow less capital expenditures was approximately negative $2.0. Nearly all cash was held at foreign subsidiaries and may not be readily available for domestic needs.
Material changes versus prior comparable periods
- Quarterly sales volume rose 12.9%, while average selling prices fell 13.7%, reflecting product mix, lower raw-material-related pricing, and a shift of certain programs to International. First-half volume rose approximately 12% and pricing fell 13.0%.
- International Segment sales increased 56.7% for the quarter and 55.4% year to date, with Segment Profit more than doubling in both comparisons. Growth reflected PVA demand, Brazilian market gains, and favorable currency translation.
- Polyester and Nylon weakened. Quarterly Nylon sales fell 20.9% and Segment Profit fell 44.5%; first-half declines were 21.6% and 43.5%, respectively. Domestic softness, lower capacity utilization, and transfer of higher-margin PVA programs affected results. Polyester Segment Profit also declined.
- Quarterly net income attributable to Unifi declined 29.0%; first-half net income declined 3.4%. The $1.662 loss on the Renewables sale and lower equity earnings from PAL and nylon joint ventures weighed on earnings. First-half equity earnings from affiliates were $0.5, versus $3.2 in the prior year.
- Debt rose in part after the ABL Term Loan was reset to $100.0 in November 2016. First-half net borrowings under the ABL Facility were $13.35.
Outlook, commentary, and risks
- Management expects fiscal 2017 capital expenditures of approximately $40.0, including about $15.0 for the remainder of the year, for recycling capacity, specialized-fiber production, machinery, and international growth. Funding is expected from operating cash flow, borrowings, leases, and construction financing; actual spending may vary.
- Management said PVA products represented 35% of net sales at fiscal 2016 year-end and targeted 10%–15% additional PVA sales growth in fiscal 2017. It expects recent capital projects to benefit future profitability, contingent on successful execution and demand.
- The company sold its 60% interest in Repreve Renewables for $0.5 cash on December 23, 2016, recognized a $1.662 loss, and reported no continuing involvement. The disposal was not treated as discontinued operations.
- ABL availability was above the $25.0 trigger for the fixed-charge coverage covenant; Unifi reported compliance with covenants and a 1.30:1.0 fixed-charge coverage ratio. A 50-basis-point LIBOR increase was estimated to raise annual interest expense by $0.299.
- Key risks include weak domestic apparel and retail demand, competition, raw-material and energy cost volatility, foreign-exchange movements, customer and supplier risks, and the performance of equity-method investees. Most cash was held outside the U.S.; the company noted that foreign cash may not be readily available domestically. Environmental monitoring/remediation responsibility at a legacy site could arise, but timing and potential liability were unclear.
- Commitments included an approximately $11.7 increase in future Brazilian electricity purchase obligations and approximately $4.7 of construction-related equipment and contractor commitments. Management reported no material changes to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether international PVA growth and margins can offset continuing weakness in the Polyester and Nylon businesses.
- Whether the Reidsville bottle-processing center and Yadkinville recycling expansion achieve expected utilization, costs, and returns, and whether planned capital spending remains near $40.0.
- How PAL and the nylon joint ventures perform, given their reduced contribution to current-period earnings.
- The availability and practical usability of foreign-held cash, ABL capacity, covenant headroom, and the effect of variable-rate debt and currency exposure.
- The outlook for domestic demand, raw-material pricing, and the uncertain potential costs associated with the legacy environmental site.