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 (PVA) products, and operates in North America, Central America, South America and Asia. This unaudited report covers the 13 weeks ended September 25, 2016 (first quarter of fiscal 2017); comparisons are with the 13 weeks ended September 27, 2015. Unless noted, amounts below are in millions of dollars.
Key financial metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $159.97 | $162.17 | Down 1.4% |
| Gross profit / gross margin | $23.55 / 14.7% | $20.98 / 12.9% | Profit up 12.2%; margin up 1.8 percentage points |
| Operating income / margin | $12.57 / 7.8% | $9.69 / 6.0% | Operating income up 29.8% |
| Net income attributable to Unifi | $9.40 | $8.03 | Up 17.2% |
| Basic / diluted EPS | $0.52 / $0.51 | $0.45 / $0.43 | Higher |
| Adjusted EBITDA (non-GAAP) | $17.91 | $15.06 | Up 18.9% |
| Cash provided by operating activities | $8.15 | $0.79 | Up $7.36 |
| Capital expenditures | $10.14 | $15.88 | Down $5.74 |
Sales volume increased 11%, while average selling prices declined 12%, mainly reflecting lower raw-material costs and mix changes. Consolidated gross-margin improvement was driven by International Segment growth, stronger PVA sales and improved Brazilian unit costs.
Segments and material changes
- International: Sales rose 54.4% to $45.34 million; segment profit increased 115.3% to $12.52 million. Higher volumes, PVA growth, improved margins and favorable Brazilian currency translation contributed.
- Polyester: Sales fell 10.5% to $84.69 million and segment profit fell 7.2% to $11.56 million. Lower volumes, pricing/mix and start-up costs at the new recycling center weighed on results.
- Nylon: Sales fell 22.2% to $28.50 million and segment profit fell 42.6% to $3.65 million. Retail softness, customer inventory adjustments, lower production and the transfer of PVA programs to International were cited.
- Equity earnings from unconsolidated affiliates declined to $0.84 million from $2.86 million, primarily because of lower Parkdale America (PAL) earnings. This partially offset improved operating results.
Financial position, liquidity and debt
- At September 25, 2016, cash and cash equivalents were $20.92 million; current assets were $225.78 million and current liabilities were $77.19 million. Working capital was $148.59 million; adjusted working capital, a non-GAAP measure, was $131.49 million.
- Total debt obligations were $130.87 million, up from $123.01 million at June 26, 2016. Debt included $14.70 million drawn on the ABL Revolver, $87.88 million on the ABL Term Loan, $9.46 million of construction financing and lease and other obligations. The balance-sheet carrying value of long-term debt was $115.82 million; current debt was $13.73 million.
- ABL Revolver availability was $59.90 million; the company reported $80.82 million in total liquidity, including cash. It was in compliance with financial covenants. The fixed-charge coverage ratio was 1.53 to 1.0; the covenant is triggered if revolver availability falls below $23.48 million.
- Operating cash flow increased substantially, reflecting higher earnings, less cash used in working capital and higher deferred taxes, partly offset by lower distributions from affiliates. Investing activities used $10.18 million; financing activities provided $6.36 million, including $8.50 million of net ABL Revolver borrowing.
- Approximately 74% of cash was held outside the United States, and the filing cautions that foreign cash may not be presently available for domestic needs. Management said existing cash, operating cash flow and ABL availability should support foreseeable liquidity requirements.
Outlook, risks and unusual items
- Management reiterated a fiscal 2017 target of 10%–15% growth in PVA products. It expects approximately $40 million of fiscal-year capital investment, including about $27 million for the remainder of the year, funded through operating cash, revolver borrowings, leases and construction financing. Spending may vary with project timing and scale.
- The new REPREVE Bottle Processing Center opened in Reidsville, North Carolina, with expected annual capacity of 75 million pounds of plastic bottle flake. Start-up costs and higher inventory during ramp-up affected the quarter.
- Management’s strategy centers on process improvements, higher-margin PVA mix and recycling. These initiatives are intended to improve profitability and operating cash flow; outcomes depend on execution and market conditions.
- Key risks include textile-industry competition, customer and retail demand, raw-material and energy price volatility, foreign-exchange movements, trade-policy changes, customer financial health, and the ability to service debt and fund investment. A 50-basis-point increase in LIBOR was estimated to raise annual interest expense by $0.28 million. The company had no outstanding foreign-currency forward contracts.
- Environmental matters remain associated with a former Kinston, North Carolina site; the company said the timing and extent of any future responsibility are not determinable. It reported no legal proceedings expected to have a material adverse effect and no material change in previously disclosed risk factors.
- The effective tax rate was 29.0%, versus 33.6% a year earlier. The filing attributes the lower rates principally to lower-tax foreign income and a reduced valuation allowance on the PAL investment. Adjusted EBITDA is non-GAAP; no adjustments beyond excluding PAL earnings were made for the periods presented.
Most important facts for investors to verify
- Whether International/PVA growth can persist and offset continued weakness in Polyester and Nylon markets.
- Whether the REPREVE center and planned recycling expansion achieve expected utilization, product economics and the stated 75-million-pound annual capacity.
- How much of reported earnings and cash generation is repeatable, particularly given lower PAL earnings, deferred-tax effects and working-capital movements.
- Debt and liquidity trends, including revolver availability, covenant headroom, construction financing and the concentration of cash outside the United States.
- Whether management meets its 10%–15% PVA growth objective and approximately $40 million fiscal 2017 capital-investment plan.