UNIFI, INC. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 27, 2015; the six-month period also ended December 27, 2015. Comparisons are with the quarter and six months ended December 28, 2014. Financial statement amounts below are in millions of dollars unless noted.
Business context and reporting period
Unifi manufactures and sells polyester and nylon yarns, including recycled and higher-value specialty products. Its three reportable segments are Polyester, Nylon and International. The company highlighted growth in premier value-added (PVA) products, which represented approximately 33% of sales in the quarter and six-month period, compared with approximately 30% at fiscal year-end 2015.
Key financial metrics
| Metric | Quarter ended Dec. 27, 2015 | Prior-year quarter | Six months ended Dec. 27, 2015 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $156.3 | $164.4 | $318.5 | $340.0 |
| Gross profit / margin | $21.8 / 14.0% | $22.9 / 13.9% | $42.8 / 13.4% | $43.4 / 12.8% |
| Operating income | $8.6 | $9.9 | $18.3 | $17.6 |
| Net income attributable to Unifi | $6.5 | $9.4 | $14.5 | $16.5 |
| Diluted EPS | $0.35 | $0.50 | $0.78 | $0.88 |
| Adjusted EBITDA, company-defined non-GAAP | $15.6 | $16.0 | $30.9 | $30.1 |
For the quarter, sales fell 4.9%, operating income fell 13.1%, and attributable net income fell 31.4%. Adjusted EBITDA was approximately 10.0% of sales, versus 9.7% a year earlier. For the six months, sales declined 6.3% and attributable net income declined 12.2%.
Six-month operating cash flow was $15.4, up from $9.6. Investing activities used $26.0, including $27.4 of capital expenditures; financing activities provided $21.2. Cash increased to $19.4 from $10.0 at fiscal year-end. Working capital was $150.9, including $139.6 of company-defined Adjusted Working Capital.
Total debt was $136.9, up from $104.1 at June 28, 2015, including $111.2 outstanding under the ABL revolver and term loan. Cash plus ABL revolver availability totaled $84.5, including $65.1 of revolver availability. The company reported compliance with financial covenants; the fixed-charge coverage ratio was 2.8-to-1.0. It reported $210,000 of undrawn standby letters of credit.
Material changes and drivers
- Quarterly sales volume fell 2.4% and pricing fell approximately 2.6%. The Brazilian real’s devaluation reduced reported sales; management attributed approximately $9.0 of the quarter’s sales decline to unfavorable currency translation. Weaker Brazilian demand also reduced International Segment volumes.
- Quarterly Polyester gross profit declined amid low-priced import competition in commodity yarns, partly offset by PVA mix and stronger textured and beamed yarn volumes. Nylon gross profit increased with demand for textured nylon and covered yarns. International profit declined due to Brazil, partly offset by China PVA growth.
- Equity earnings from unconsolidated affiliates fell substantially year over year: Unifi recorded $0.3 of equity earnings in the quarter versus $3.3 a year earlier. Parkdale America (PAL) reported a quarterly loss, citing lower volumes, start-up and depreciation costs, price pressure and lower cotton-rebate earnings; the prior-year comparison included a bargain-purchase gain.
- Quarterly bad-debt provision rose to $0.6 from $0.1, reflecting a specifically identified customer balance. Six-month provision rose to $1.2 from $0.6, including identified Brazilian customer balances and a regional polyester customer.
- Capital spending increased: six-month capital expenditures were $27.4 versus $13.4 a year earlier. PP&E, net, rose to $159.2 from $136.2, with construction in progress increasing to $25.5 from $6.7.
Outlook, commentary, risks and unusual items
- Management expected to invest approximately $100 million in capital projects over fiscal 2016 and 2017, including about $10 million of maintenance spending annually. Funding is expected from operating cash flow, ABL borrowings and capital leases. Projects include backward integration into plastic-bottle processing and increased REPREVE recycling capacity. The new Reidsville, North Carolina bottle-processing plant was expected to begin production in fall 2016.
- The company stated that existing cash, operating cash flow and available ABL borrowings should meet foreseeable liquidity needs. However, nearly all cash was held outside the U.S. or in Renewables; such funds may not be readily available for domestic obligations. The company reported $62.6 of foreign earnings as permanently reinvested.
- Material exposures include Brazilian-real fluctuations, textile-market conditions, competition from low-priced imports, petroleum-based raw-material and energy costs, variable interest rates, and changes in international trade rules. A 50-basis-point LIBOR increase was estimated to raise annual interest expense by $0.326 after hedging and fixed-rate debt. No foreign-currency forward contracts were outstanding at period-end; the company does not hedge its foreign net investments or raw-material costs.
- Commitments included approximately $7.2 for equipment not yet received for the bottle-processing plant and $6.6 for equipment and contractor commitments on a third-party contract-manufacturing project. The company also entered into construction financing; $2.4 was recorded as debt at period-end. The ABL facility is secured by substantially all assets of the loan parties and restricts certain dividends and repurchases.
- An environmental matter at a former Kinston site remains uncertain: the company said it could not determine if or when it would have responsibility for future monitoring or remediation at a satellite facility. The filing reported no material change to previously disclosed risk factors and no pending material legal proceedings beyond ordinary routine litigation.
- Management’s stated priorities include improving operations, expanding higher-margin PVA products and generating cash to fund capital projects, strategic opportunities and potential repurchases. No specific earnings or sales guidance was provided. The interim statements are unaudited; management cautioned that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether PVA growth and planned capacity investments can offset pressure on commodity yarns, and whether the expected plant start-up and approximately $100 million capital program remain on schedule and within budget.
- How continued Brazilian currency weakness and weak local demand affect International Segment sales, margins, cash and recoverability of customer receivables.
- PAL’s operating performance and the sustainability and accounting of cotton-rebate earnings; the filing notes that PAL’s acquisition accounting for facilities purchased in February 2015 remained incomplete.
- Debt and liquidity trends as capital spending proceeds, including covenant headroom, availability under the ABL revolver, and the practical accessibility of cash held outside the U.S.
- Whether bad-debt provisions, low-priced imports, raw-material costs and interest-rate changes materially alter margins and cash generation.