UNIFI, INC. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 27, 2016; the comparative quarter ended March 29, 2015. The filing describes nine-month results through March 27, 2016. Although the request metadata says “2015 Q3,” the filing itself reports fiscal 2016 Q3. Dollar amounts below are in millions unless otherwise noted.
Business context
Unifi manufactures and sells polyester and nylon yarns, including premier value-added (PVA) products, to textile manufacturers and fabric producers. Its reportable segments are Polyester, Nylon and International. The company also has ancillary businesses and equity-method investments, notably a 34% interest in Parkdale America (PAL).
Financial results and liquidity
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $161.3 | $172.2 | $479.8 | $512.2 |
| Gross profit / margin | $23.4 / 14.5% | $22.0 / 12.8% | $66.2 / 13.8% | $65.4 / 12.8% |
| Operating income / margin | $10.0 / 6.2% | $9.0 / 5.3% | $28.3 / 5.9% | $26.6 / 5.2% |
| Net income attributable to Unifi | $9.7 | $10.0 | $24.2 | $26.5 |
| Diluted EPS | $0.53 | $0.53 | $1.31 | $1.41 |
| Net interest expense | $0.7 | $1.0 | $2.2 | $2.4 |
| Operating cash flow | Not presented by quarter | $38.2 | $19.7 |
Q3 sales declined 6.3% year over year, while gross profit rose 6.2% and operating income rose 10.6%. For the nine-month period, sales fell 6.3%, gross profit increased 1.2%, operating income increased 6.5%, and Unifi-attributable net income declined 8.8%. The Q3 tax provision was $4.2 million (31.0% effective rate), versus $2.7 million (21.9%) a year earlier; the nine-month effective rate was 30.5% versus 28.3%.
For the nine months, investing activities used $36.7 million, including $36.8 million of capital expenditures. Financing activities provided $4.4 million net. Cash was $15.3 million at March 27, 2016, compared with $10.0 million at June 28, 2015. Working capital was $136.9 million. Total debt obligations were $121.8 million, versus $104.1 million at fiscal year-end; long-term debt, net of current maturities, was $106.7 million. The ABL Revolver had $78.0 million of excess availability. The company reported compliance with financial covenants and a 2.8-to-1.0 fixed-charge coverage ratio.
Cash location is relevant to liquidity: nearly all cash was held outside the U.S. or in Renewables, and management cautioned that those balances may not be presently available for domestic requirements. Approximately $10.5 million, or 68.7% of cash, was held outside the U.S.; $67.6 million of foreign earnings and profits were treated as permanently reinvested.
Material changes and operating drivers
- Sales volume fell 0.5% in Q3 and 1.5% year to date. Management cited exiting selected lower-margin business, holiday timing, customer inventory adjustments and lower average yarn denier; PVA demand and growth in China and Brazil partly offset these factors.
- Q3 sales pricing declined 5.9%, including approximately $6.7 million of unfavorable foreign currency translation and lower prices associated with reduced raw-material costs. Year-to-date pricing declined 4.9%, including approximately $27.4 million of currency translation impact. PVA products represented about 35% of sales, compared with about 30% at fiscal 2015 year-end.
- Q3 International Segment gross profit improved substantially, with Segment Profit up 28.3% to $6.9 million. Nylon sales fell 16.9% and Segment Profit declined 2.3%; Polyester sales fell 4.2% while Segment Profit was nearly flat.
- Bad-debt provision was $0.4 million in Q3 and $1.6 million year to date, reflecting a specifically identified polyester customer balance considered unlikely to be recovered. The allowance for uncollectible accounts rose to $2.8 million from $1.6 million at June 28, 2015.
- Equity earnings from unconsolidated affiliates were lower year to date, at $7.3 million versus $12.5 million. Management attributed the decline principally to PAL operating pressures and a prior-year bargain-purchase gain; nylon joint-venture results improved.
- Debt increased alongside investment: the ABL Term Loan was reset to $95.0 million in November 2015 and had a $92.6 million balance at quarter-end. Unifi also recorded a $4.0 million Renewables term loan and construction financing related to projects.
Outlook, risks and unusual items
- Management gave no specific earnings or sales guidance. It said it expected approximately $100 million of capital projects over fiscal 2016 and 2017, including about $10 million of annual maintenance spending. Approximately $44 million had been invested through March 27, 2016, including capital leases and construction financing.
- Key projects include a plastic-bottle processing plant in Reidsville, North Carolina, expected to begin production in summer 2016, and expansion of the REPREVE Recycling Center. Management expects these projects to support future profitability and PVA growth; the final investment could be higher or lower and may require additional borrowing.
- Management said current cash, operating cash flow and ABL availability should meet foreseeable liquidity needs. This outlook is subject to execution, operating cash generation, borrowing availability and the location of cash.
- Principal disclosed exposures include foreign exchange (particularly the Brazilian Real), volatile petroleum-based raw-material and energy costs, textile-industry conditions, and political or trade-law changes. The company had no outstanding foreign-currency forward contracts; it does not hedge its net investment in foreign operations or raw-material exposure. A 50-basis-point LIBOR increase was estimated to raise annual interest expense by $0.25 million after hedging and fixed-rate debt effects.
- Other items include $0.8 million of Q3 severance charges, $1.0 million of prior-year debt-extinguishment loss, stock repurchases of $6.2 million year to date, and no dividends. The company disclosed significant project and vendor commitments, including about $7.3 million for bottle-processing assets, $6.3 million for third-party contract-manufacturing construction, $4.1 million for recycling-center expansion and a $2.6 million minimum waste-removal commitment.
- An environmental site-monitoring and remediation obligation at a satellite facility may arise in the future; the company said it could not determine whether or when it would have responsibility or the extent of potential liability. No material change to previously disclosed risk factors was reported, and there were no material pending legal proceedings beyond routine litigation.
Important facts for investors to verify
- Whether the Reidsville plant and recycling-center projects start on schedule, stay within expected cost, and generate the anticipated returns.
- Whether PVA mix and operating efficiencies can sustain margin improvement as sales volumes and reported revenue remain pressured.
- Customer-balance collectibility and any further increase in bad-debt expense or allowance.
- PAL earnings trends and the effect of competitive pricing, expansion costs and cotton-rebate income on Unifi’s equity-method earnings.
- Debt, covenant headroom and practical access to cash held by foreign subsidiaries and Renewables, including the effect of currency movements.
- The timing and potential cost of environmental responsibilities, as well as the funding of disclosed capital and contractual commitments.