UNIFI, INC. — Form 10-Q Summary
Business context and reporting period
Unifi manufactures and sells polyester and nylon yarns, including recycled and premier value-added (PVA) products. This unaudited report covers the 13 weeks ended September 27, 2015 (fiscal 2016 first quarter), compared with the 13 weeks ended September 28, 2014. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Quarter ended Sept. 27, 2015 | Prior-year quarter |
|---|---|---|
| Net sales | $162.2 | $175.6 |
| Gross profit / margin | $21.0 / 12.9% | $20.5 / 11.6% |
| Operating income | $9.7 | $7.6 |
| Net income attributable to Unifi | $8.0 | $7.1 |
| Basic / diluted EPS | $0.45 / $0.43 | $0.39 / $0.37 |
| Operating cash flow | $0.8 | $0.1 |
| Capital expenditures | $15.9 | $7.4 |
- Adjusted EBITDA was $15.4 million, up from $14.0 million; adjusted EPS was $0.45 versus $0.37. Both are non-GAAP measures defined by management.
- Cash was $10.0 million at quarter-end. Total debt obligations were $128.2 million, including $28.0 million drawn on the revolving facility; long-term debt was $113.7 million.
- Working capital was $141.6 million. Revolver availability was $57.1 million; the company reported compliance with financial covenants, a 1.9:1 consolidated leverage ratio and a 2.7:1 fixed charge coverage ratio.
- Net cash decreased $0.1 million during the quarter. Financing activities provided $14.5 million, including $23.0 million of net revolver borrowings; investing activities used $14.1 million.
- Other comprehensive loss was $11.4 million, primarily from foreign-currency translation, reducing shareholders’ equity to $291.1 million from $299.1 million at June 28, 2015.
Material changes versus prior comparable period
- Sales fell 7.6%, while gross profit rose 2.6% and net income attributable to Unifi rose 13.4%. Higher gross margin, lower SG&A and a lower effective tax rate more than offset reduced earnings from unconsolidated affiliates.
- Sales volume declined 1.8% overall and average selling prices fell about 6%. Lower Brazilian sales and currency translation, lower Nylon volumes, lower raw-material-related pricing and some domestic commodity-product declines weighed on revenue. PVA products were about 33% of sales, versus 30% for fiscal 2015.
- Segment results were mixed: Polyester sales were $90.6 million and Segment Profit was $12.1 million, down from $12.7 million; Nylon sales were $40.7 million and Segment Profit rose to $6.7 million from $5.6 million; International sales were $29.4 million and Segment Profit was $5.8 million versus $6.0 million. International revenue was particularly affected by the weaker Brazilian real.
- Interest expense, net rose to $0.8 million from $0.5 million, principally reflecting an unfavorable year-over-year mark-to-market change in the interest-rate swap. Average debt was higher, though its weighted average rate declined.
Outlook, management commentary, risks and unusual items
- Management reiterated its strategy of improving operations, growing higher-margin PVA and compliant yarns, expanding recycling and pursuing growth in Central and South America and China. The filing gives no quantified revenue or earnings guidance.
- Unifi expects to invest approximately $85 million in capital projects over fiscal 2016 and 2017, including about $10 million annually for maintenance. Projects include backward integration into plastic-bottle processing; a new Reidsville, North Carolina processing plant was expected to begin production in mid-calendar 2016. Funding is expected from operations, revolver borrowings and capital leases.
- The company stated that existing cash, operating cash flows and available revolver borrowings should meet foreseeable liquidity needs. It cautioned that additional strategic projects could require more working capital and long-term borrowing.
- Key exposures include further Brazilian real depreciation, textile-market conditions, low-priced imports, customer demand and inventory movements, petroleum-linked raw-material and energy costs, interest rates, and political or trade-policy changes. The company does not hedge its net investment in foreign operations or raw-material and energy costs; it had no outstanding currency forwards at quarter-end.
- Capital spending and new leases increased debt. Separately, Renewables borrowed $4.0 million in October 2015 under a secured facility to fund expansion, processing capacity, land and planting; this was subsequent to quarter-end.
- The company had approximately $12.7 million of unpaid equipment-purchase commitments for the plastic-bottle plant. It reported no material pending legal proceedings beyond routine litigation. Environmental responsibilities relating to a previously operated Kinston site remain uncertain; the filing says the company cannot determine if or when it will have obligations or the extent of any potential liability.
- Unifi repurchased 179,000 shares for $5.4 million at an average $30.36 per share; $28.4 million remained under the repurchase program. Repurchases are subject to credit-agreement restrictions.
Important facts for investors to verify
- Whether PVA growth and the planned bottle-processing investments deliver expected demand, margins, production timing and returns.
- How Brazilian currency weakness, local-market softness and low-priced imports affect sales, margins, cash generation and asset values.
- Whether working-capital needs and the capital program can be funded while preserving revolver availability and covenant compliance; note that a substantial portion of cash was held outside the U.S. and may not be readily available for domestic needs.
- How earnings from Parkdale America and other unconsolidated affiliates develop, including the effects of cotton-support program income and recent expansions.
- Subsequent Renewables borrowing, outstanding plant commitments, potential environmental obligations and the effect of stock repurchases on liquidity and debt.