UNIFI, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019. The quarter had 14 fiscal weeks, compared with 13 weeks in the prior-year quarter ended September 24, 2017. Financial statements are unaudited; amounts below are in millions of U.S. dollars unless stated otherwise.
Key financial results
| Metric | Q1 FY2019 | Prior-year quarter | Change / context |
|---|---|---|---|
| Net sales | $181.6 | $164.2 | Up 10.6%; up 14.6% excluding currency translation. The extra week contributed about $8.3. |
| Gross profit / margin | $20.0 / 11.0% | $23.3 / 14.2% | Profit down 14.1%; margin down 3.2 percentage points. |
| Operating income | $5.7 | $10.2 | Down 43.8%. |
| Net income | $1.8 | $9.0 | Down 79.8%. |
| Diluted EPS | $0.10 | $0.48 | Down from $0.48; basic EPS was $0.10 versus $0.49. |
| Adjusted EBITDA | $11.9 | $15.8 | Non-GAAP; no other adjustments were made in either period. |
| Operating cash flow | $(5.0) | $15.8 | Cash use reflected inventory growth, lower PAL distributions and lower Adjusted EBITDA, partly offset by tax refunds. |
| Capital expenditures | $6.4 | $5.1 | Fiscal 2019 estimate: approximately $25.0 total. |
Financial position and liquidity
- At September 30, cash was $42.2, current assets were $282.4, and current liabilities were $80.3. Working capital was $202.1; Adjusted Working Capital, a non-GAAP measure, was $174.3.
- Total debt obligations were $141.0, up from $131.2 at June 24, 2018. This included $42.2 on the ABL Revolver, $82.5 on the ABL Term Loan and $16.3 of capital lease obligations. The ABL Facility matures in March 2020; scheduled fiscal 2020 debt maturities total $122.7.
- ABL Revolver availability was $46.5, above the $22.8 trigger level for the fixed-charge coverage covenant. UNIFI reported compliance with its covenants. The reported fixed-charge coverage ratio was 0.43 to 1.00; management said it could improve the ratio using existing cash.
- Nearly all cash was held by foreign subsidiaries: $42.2 of the $42.195 total, while domestic cash was only $18 thousand. Foreign cash may not be presently available for domestic requirements. The company said domestic liquidity also includes Revolver availability.
- Three interest-rate swaps fixed LIBOR at approximately 1.9% on $75.0 of variable-rate debt. Management estimated a 50-basis-point LIBOR increase would raise annual interest expense by less than $0.3.
Material changes and operating drivers
- Sales growth included the extra fiscal week, higher volumes, and increased sales of recycled polyester products; unfavorable currency translation was approximately $6.7. Average selling prices declined 1.9%, partly because lower-priced Flake and recycled polyester Chip grew disproportionately.
- Management attributed margin pressure to rising raw-material costs and delays in passing through price increases, weaker product mix in Polyester and Nylon, unfavorable currency translation, and higher-than-expected integration costs from the dyed-business acquisition.
- Polyester sales rose 14.1% to $100.1, but gross profit fell 24.5% to $6.7 and Segment Profit fell 14.1% to $11.0. Nylon sales rose 4.2% to $27.9, while gross profit fell 35.3% to $2.1 and Segment Profit fell 29.8% to $2.7. International sales rose 7.6% to $52.4; Segment Profit was nearly flat at $11.4.
- UNIFI’s 34% share of PAL shifted from $2.9 of earnings to a $17 thousand loss, primarily due to higher raw-material costs and reduced operating leverage. PAL reported a $49 thousand net loss for the quarter.
- The effective tax rate rose to 60.9% from 26.3%. UNIFI cited foreign tax rates, losses where no tax benefit could be recognized, GILTI tax provisions and non-deductible executive compensation.
- Comprehensive loss was $1.1, including $2.9 of other comprehensive loss, mainly foreign-currency translation.
Outlook, risks and unusual items
- Management expected Q2 FY2019 gross profit to remain pressured by recent raw-material cost increases and lower polyester textured-yarn production volumes. It expected dyed-business integration costs to subside in Q2.
- Management planned approximately $18.6 of additional fiscal 2019 capital projects after the $6.4 spent in Q1, with funding expected from operating cash flow and ABL borrowings. It said projects may exceed the estimate if strategic growth opportunities arise.
- Key risks include volatile petroleum-based raw-material and energy costs, inability or delay in passing costs through to customers, foreign-exchange movements, textile-market competition and demand, customer concentration or loss, trade and tax-law changes, and access to financing.
- UNIFI had no outstanding foreign-currency forward contracts and does not hedge its net investment in foreign operations. It reported no material expected adverse effect from ordinary-course legal proceedings.
- Environmental obligations at a former Kinston, North Carolina site remain uncertain. UNIFI expected to assume monitoring and reporting responsibility by the end of 2018 and may have future remediation responsibility, but stated it could not estimate whether further remediation would be required or its cost.
- UNIFI adopted the new revenue-recognition standard in fiscal 2019 using the modified retrospective method. It reported an immaterial overall adoption impact, including a $0.459 increase to opening retained earnings; Q1 reported revenue included $1.797 of adoption-related adjustment and $10.337 of contract assets.
- After quarter-end, on October 31, 2018, the Board authorized a new discretionary stock-repurchase program of up to $50.0 and terminated the prior program. No shares were repurchased during Q1.
Most important facts for investors to verify
- Whether price increases catch up with raw-material inflation and margins recover, particularly in Polyester and Nylon.
- Whether inventory growth and negative operating cash flow reverse, and how much of reported cash is practically accessible to domestic operations.
- Progress toward refinancing or repaying the ABL debt ahead of its March 2020 maturity, including covenant headroom and Revolver availability.
- Whether PAL profitability and distributions recover, and how the dyed-business integration affects costs and results.
- Subsequent developments in Kinston environmental responsibilities and any resulting remediation exposure.
- Effects of GILTI and evolving tax guidance on the effective tax rate and cash taxes.