UNIFI, Inc. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 25, 2018 (fiscal 2018 third quarter and year to date), with comparisons to March 26, 2017. This differs from the request metadata’s “2017 Q3.” Amounts are in thousands of dollars except per-share data.
Business context and financial performance
UNIFI manufactures and sells synthetic and recycled polyester and nylon products, including REPREVE-branded recycled products. Its reportable segments are Polyester, Nylon and International. The company highlighted continued growth in PVA products, which represented more than 44% of quarterly sales.
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $165.9 million | $160.9 million | $497.6 million | $476.0 million |
| Gross profit / margin | $16.6 million / 10.0% | $21.1 million / 13.1% | $62.5 million / 12.6% | $66.8 million / 14.0% |
| Operating income | $1.6 million | $9.1 million | $19.5 million | $30.7 million |
| Net income attributable to UNIFI | $0.2 million | $9.2 million | $20.9 million | $23.2 million |
| Diluted EPS | $0.01 | $0.50 | $1.12 | $1.26 |
| Adjusted EBITDA | $7.3 million | $14.4 million | $37.0 million | $46.8 million |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $25.0 million | $29.3 million |
Quarterly sales rose 3.1%, while sales volume increased 9.8% and average selling prices fell 6.5%, reflecting growth in lower-priced products and mix shifts. Year-to-date sales increased 4.5%. Quarterly diluted EPS and operating income fell sharply as costs and expenses outpaced sales growth.
Segments and material changes
- Polyester: Q3 sales declined 1.7% to $88.8 million; gross profit fell 43.6% to $4.8 million. Higher raw-material costs, delayed or insufficient price increases, lower-margin mix and recycling ramp-up costs weighed on results.
- Nylon: Q3 sales declined 10.9% to $24.0 million and gross profit fell 56.5% to $1.0 million, amid lower volumes and weaker demand in hosiery, socks and intimate apparel.
- International: Q3 sales increased 22.8% to $52.0 million, largely on higher Asian volumes, including recycled polyester products. Gross profit rose 4.8% to $10.7 million, but lower-margin product mix constrained gains.
- Consolidated quarterly SG&A increased 6.5% to $13.8 million, primarily due to compensation and talent-acquisition costs. Net other operating expense included foreign-currency losses; the prior-year quarter included currency gains.
- Quarterly equity earnings from unconsolidated affiliates were $0.5 million, versus $1.6 million a year earlier. For the nine-month period, affiliate earnings increased to $3.8 million from $2.1 million, primarily reflecting PAL results.
- Quarterly net income included a high 84.3% effective tax rate. The nine-month tax benefit was $0.7 million, including a roughly $4.5 million deferred-tax remeasurement benefit and a $3.8 million valuation-allowance release, partly offset by a provisional $1.6 million deemed-repatriation tax charge. Management’s adjusted nine-month EPS was $0.92, excluding the valuation-allowance release and prior-year business-sale loss.
Cash, debt and liquidity
- At March 25, 2018, cash was $40.6 million, current assets $267.1 million and current liabilities $76.5 million; working capital was $190.6 million. Cash increased $5.2 million from the fiscal-year start.
- Nine-month operating cash flow was $25.0 million, down from $29.3 million. Capital expenditures were $17.1 million, compared with $27.9 million; net cash used in financing was $3.5 million.
- Total debt obligations were $126.4 million, including $19.0 million drawn on the revolver, $87.5 million on the term loan and $19.9 million in capital leases. The ABL facility matures in March 2020. Approximately $75 million of variable-rate debt was hedged with swaps.
- ABL revolver availability was $59.6 million; the company reported covenant compliance and a 1.20:1.00 fixed-charge coverage ratio. The facility’s minimum is 1.05:1.00 when availability falls below the stated trigger level.
- Nearly all cash was held by foreign subsidiaries: $40.2 million abroad versus $0.4 million domestically. Management cautioned that foreign cash may not be immediately available for domestic needs.
Outlook, risks and unusual items
- No specific earnings or sales guidance was provided. UNIFI expected approximately $10.9 million of additional capital spending in the remainder of fiscal 2018, for an estimated $28.0 million for the year, funded by operating cash and potentially revolver borrowings. Further strategic investment could exceed that estimate.
- Management said rising polyester raw-material costs, delayed price recovery, subdued domestic demand and less-profitable sales mix significantly pressured quarterly profitability; continued cost increases could further pressure gross profit.
- Other cited exposures include currency movements, interest rates, trade policy and tariffs, customer financial condition and demand, and the ability to service debt and fund investment. The company does not hedge petroleum-related raw-material costs.
- UNIFI expected to assume monitoring and reporting responsibilities for a contaminated property in 2018 and may be responsible for future remediation; it could not estimate whether or when remediation would be required or its cost. It also retained potential, presently unquantifiable responsibility relating to its former Kinston site operations.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. It reported no material change in risk factors from its 2017 Form 10-K and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether raw-material cost inflation moderates and UNIFI can implement customer price increases without prolonged margin lag.
- Whether PVA and International-segment growth can offset continued weakness in domestic Polyester and Nylon demand, and whether product mix improves.
- How much of foreign-held cash can be deployed domestically, and whether revolver availability and covenant headroom remain adequate.
- Final tax effects of U.S. tax reform, including provisional repatriation-tax amounts and valuation allowances.
- Actual fiscal 2018 capital spending and the timing and returns of the recycling-line and other strategic investments.
- Potential cost and timing of environmental obligations, and the sustainability of earnings and cash distributions from PAL and other affiliates.