Business context and reporting period
Unifi, Inc. is a multinational manufacturer of polyester and nylon yarns, including recycled and other premier value-added products. This Form 10-Q covers the quarter ended March 24, 2013 (fiscal 2013 third quarter) and the nine months then ended; comparative periods ended March 25, 2012. The request metadata says “2012 Q3,” but the filing reports fiscal 2013 Q3. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Quarter ended Mar. 24, 2013 | Prior-year quarter | Nine months ended Mar. 24, 2013 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $168.2 | $179.0 | $513.2 | $517.2 |
| Gross profit / margin | $12.7 / 7.5% | $13.6 / 7.6% | $47.4 / 9.2% | $36.3 / 7.0% |
| Operating income | $0.7 | $1.9 | $11.4 | $2.3 |
| Net income attributable to Unifi | $1.4 | $7.5 | $6.1 | $0.2 |
| Basic EPS | $0.07 | $0.38 | $0.30 | $0.01 |
| Adjusted EBITDA (non-GAAP) | $8.4 | $10.3 | $34.4 | $25.7 |
Quarterly sales fell 6.0%, with volume down 5.5% and average selling prices down 0.5%. Gross profit declined 6.7%; lower Polyester and International profits more than offset improvement in Nylon. Quarterly net income fell primarily due to lower earnings from unconsolidated affiliates, lower gross profit, debt-extinguishment costs and higher taxes, partly offset by lower interest expense. For the nine months, sales were nearly flat, while gross profit rose 30.5% and net income increased from $0.2 million to $6.1 million, reflecting improved gross profit and lower interest costs, among other items.
Cash flow, debt and liquidity
- Operating cash flow was $44.9 million for the nine months, versus $27.3 million a year earlier. Capital expenditures were $4.5 million; investing cash outflow was $6.0 million and financing cash outflow was $33.8 million.
- Cash was $15.9 million at March 24, 2013, compared with $10.9 million at June 24, 2012. Current assets were $232.3 million and current liabilities $73.7 million; reported working capital was $158.6 million.
- Total debt was $98.4 million, down from $121.6 million at June 24, 2012. The $30 million Term B Loan was repaid in full in January; the company recorded $1.1 million of debt-extinguishment losses year to date. The remaining principal included a $51.3 million ABL revolver, $44.6 million ABL term loan, $1.25 million related-party loan and capital leases.
- ABL revolver availability was $34.2 million; Unifi reported compliance with financial covenants and a fixed-charge coverage ratio of 1.32. The ABL facility is secured by substantially all company assets and includes restrictions on distributions and share repurchases.
- Cash was concentrated outside the U.S.: $15.0 million of $15.9 million total cash was held abroad. Foreign cash was treated as permanently reinvested; the company expects to repatriate approximately $20.9 million of future Brazilian cash flows and recorded an associated deferred tax liability of approximately $7.3 million.
Material changes, outlook and risks
- Debt and capital allocation: Management said the multi-year deleveraging effort was complete, lowering debt and expected annual interest expense. The company launched a new $50 million share repurchase authorization and repurchased 571,000 shares for $9.7 million during the nine months. This included 500,000 shares bought from Dillon Yarn Corporation for $8.5 million ($17 per share), a related-party transaction approved by the board; a director was Dillon’s president and COO.
- Management outlook: For the June 2013 quarter, management expected significant operating-profit improvement in each segment, citing higher anticipated sales and production volumes, recent price increases and expected lower average raw-material costs. The quarter has 14 weeks versus 13 in the reported quarter. Management also expected modest growth in adjusted working capital as sales and production improve.
- Investment plans: Management anticipated about $14 million in annual capital expenditures for each of the next two fiscal years, including approximately $7 million annually for REPREVE capacity and product flexibility. It expected domestic REPREVE demand to exceed current recycling capacity within 12 months and was considering expansion.
- Market and operating risks: Polyester raw-material costs rose about 5% in the March quarter after an approximately 10% rise in the December quarter. The U.S.-Asia polymer price gap was approximately $0.14 per pound and management expected it to remain at or above that level in June, pressuring commodity yarn volumes and margins. Brazil faced import competition, inflation, reduced tax incentives and currency effects; management expected recovery from improvement initiatives, but results depend on execution and market conditions.
- Affiliates and taxes: Equity earnings from unconsolidated affiliates fell to $4.8 million for the quarter from $9.9 million, mainly due to lower Parkdale America (PAL) earnings and timing/reduced value of cotton subsidy benefits. Unifi’s 34% share of PAL’s earnings was $4.3 million versus $9.7 million. The quarter’s effective tax rate was 68.3%; management expected federal NOL carryforwards to be fully used by fiscal year-end, after which cash tax payments could rise significantly.
- Other items: A post-quarter Dillon commissioning agreement allows Unifi to operate Dillon draw-winding equipment and gives Unifi an option to purchase the business under specified terms. Environmental monitoring/remediation responsibility at a contaminated satellite site may transfer to Unifi in the future; the filing says timing and potential liability cannot currently be determined. No material change to previously disclosed risk factors or material pending litigation was reported.
Most important facts for investors to verify
- Whether the anticipated June-quarter improvement in volume, margins and segment operating profit materialized, particularly in Polyester and Brazil.
- Whether PAL earnings and cotton-program benefits remain lower or recover, and how much affiliate cash distributions support Unifi’s reported earnings and operating cash flow.
- Whether raw-material costs, the U.S.-Asia price gap, currency movements and import competition continue to pressure margins.
- How the company balances share repurchases, planned capital expenditures and debt reduction while maintaining ABL availability and meeting covenant conditions.
- The timing and cash impact of increased tax payments as NOLs are utilized, and the accessibility and tax consequences of foreign cash.
- The eventual cost and responsibility, if any, for the Kinston-area environmental site, and the economics of any exercise of the Dillon purchase option.