UNIFI, Inc. — Form 10-Q summary
Reporting period: First quarter of fiscal 2018, the three months ended September 24, 2017; comparable period ended September 25, 2016. Dollar figures below are in millions unless otherwise noted.
Business context
UNIFI manufactures and sells synthetic and recycled polyester and nylon products, including REPREVE-branded recycled products, to textile and other end-use markets. Its reportable segments are Polyester, Nylon and International. UNIFI also holds a 34% equity-method interest in Parkdale America, LLC (PAL).
Financial results and liquidity
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $164.2 | $160.0 |
| Gross profit / margin | $23.3 / 14.2% | $23.5 / 14.7% |
| Operating income / margin | $10.2 / 6.2% | $12.6 / 7.8% |
| Net income attributable to UNIFI | $9.0 | $9.4 |
| Diluted EPS | $0.48 | $0.51 |
| Adjusted EBITDA | $15.8 | $17.9 |
| Cash provided by operations | $15.8 | $8.1 |
| Capital expenditures | $5.1 | $10.1 |
Sales rose 2.7% (2.2% excluding foreign-currency translation), while consolidated sales volume increased 7.5% and average selling prices declined 4.5%, reflecting product mix. PVA products were 43% of sales, compared with 40% of full-year FY2017 sales. Operating costs included $12.9 of SG&A, up 12.7%, mainly from compensation and marketing/branding expenses. Net interest expense increased to $1.1 from $0.5, partly due to higher LIBOR and less capitalized interest. The effective tax rate fell to 26.3% from 29.0%.
Segment sales and Segment Profit (gross profit plus segment depreciation) were: Polyester $87.7 and $12.8, versus $84.7 and $11.6; Nylon $26.8 and $3.9, versus $28.5 and $3.6; International $48.7 and $11.4, versus $45.3 and $12.5. Polyester benefited from Eastman conversion services and recycled-product growth; Nylon profit improved through cost management despite weaker demand; International profit fell on lower-priced sales mix and raw-material cost pressure.
Operating cash flow improved year over year, primarily due to $7.2 of distributions from unconsolidated affiliates, including PAL, and a smaller working-capital build. Cash was $42.4 at quarter-end; working capital was $181.6 and adjusted working capital $141.2. Total debt obligations were $125.5, including $9.6 on the ABL revolver, $92.5 on the term loan and $23.4 of capital leases. Debt declined from $129.5 at June 25, 2017. ABL availability was $67.4; the company reported covenant compliance and a 1.2:1 fixed-charge coverage ratio.
Material changes, outlook and risks
- Revenue growth reflected higher sales volumes, especially recycled polyester and International PVA products, partly offset by weaker North American retail demand and lower average selling prices. Gross margin and operating income declined year over year.
- Equity in earnings of unconsolidated affiliates increased to $3.1 from $0.8, primarily reflecting PAL earnings of $2.9 versus $0.3. PAL reported $3.3 of cotton-rebate-program earnings and $2.2 of related cash receipts in the quarter; these are relevant to assessing the period’s contribution from affiliates.
- Management expects approximately $30 million of additional capital investment during the remainder of FY2018, for Asian expansion, Americas production and technology improvements, and maintenance. Funding is expected from operating cash flow and ABL borrowings. No consolidated earnings or revenue guidance was provided.
- Management’s strategy emphasizes PVA products, recycling capacity, commercial expansion, partnerships and investment in personnel, with the stated aim of improving profitability and operating cash flow. The fourth REPREVE Recycling Center production line was completed and started up during the quarter.
- Nearly all cash was held by foreign subsidiaries: $42.4 million abroad versus $17,000 domestically. Foreign cash may not be readily available for domestic obligations. Other identified exposures include raw-material and energy-price volatility, foreign-exchange movements, trade policy, customer and market conditions, and interest rates; a 50-basis-point LIBOR increase was estimated to raise annual interest expense by less than $0.2 million.
- Environmental obligations at certain North Carolina sites remain uncertain and unquantified; UNIFI stated it could not determine whether or when further remediation would be required or its potential cost. The company said ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether sales growth and PVA/recycled-product expansion can offset pricing pressure, weaker North American retail demand and Nylon-market declines.
- The sustainability of PAL’s earnings and distributions, including the effect of cotton-rebate-program accounting and cash receipts.
- Execution, timing, funding and expected returns for the planned $30 million of remaining FY2018 capital expenditures.
- Domestic liquidity access given the concentration of cash overseas, and compliance with ABL availability and covenant thresholds.
- Potential future environmental remediation obligations and the related costs, which the filing does not quantify.