UNIFI INC quarterly report, Q3 FY2017

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UNIFI, INC. — Form 10-Q Summary

Reporting period: Fiscal third quarter and first nine months ended March 26, 2017; comparative periods ended March 27, 2016. The filing is for fiscal 2017 Q3, despite the request metadata referring to 2016 Q3. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.

Business context

Unifi manufactures and sells synthetic and recycled polyester and nylon yarns, serving apparel, hosiery, home furnishings, automotive and industrial markets. It reports Polyester, Nylon and International segments and holds a significant 34% interest in Parkdale America, LLC (PAL), accounted for under the equity method.

Financial performance and liquidity

  • Quarter: Revenue was $160.9, down 0.2% year over year. Sales volume rose 8.4%, while average selling prices fell 8.4%, largely reflecting product mix. Gross profit was $21.1, down 9.6%; gross margin declined to 13.1% from 14.5%. Operating income was $9.1, compared with $10.0. Net income attributable to Unifi was $9.2, versus $9.7; basic and diluted EPS were $0.50 each, compared with $0.54 and $0.53.
  • Nine months: Revenue was $476.0, down 0.8%; volume increased 10.7%, while sales pricing declined 11.4%. Gross profit was $66.8, up 1.0%, and gross margin improved to 14.0% from 13.8%. Operating income rose 8.5% to $30.7. Net income attributable to Unifi was $23.2, down 4.2%; basic EPS was $1.28 versus $1.35, and diluted EPS was $1.26 versus $1.31.
  • Segment trends: For the quarter, International sales increased 36.2% and segment profit increased 52.5%; Polyester sales fell 8.8% and segment profit fell 23.9%; Nylon sales fell 8.6% and segment profit fell 29.0%. For the nine months, International segment profit rose 89.3%, while Polyester and Nylon segment profit declined 13.7% and 39.8%, respectively.
  • Cash flow and investment: Nine-month operating cash flow was $29.3, down from $38.2, primarily due to higher working capital and timing of tax payments. Cash used in investing was $28.1, including $27.9 of capital expenditures; financing provided $12.3. Cash ended at $30.2, compared with $16.6 at fiscal year-end.
  • Debt and liquidity: Debt obligations totaled $134.4 principal, including $108.6 borrowed under the ABL facility; balance-sheet current debt was $16.8 and long-term debt was $116.5. Net debt was $104.2, versus $106.4 at June 26, 2016. ABL revolver availability was $67.0, and reported total liquidity was $97.2. Working capital was $166.9, up from $136.6.
  • Margins, tax and affiliate earnings: The nine-month effective tax rate was 22.2%, compared with 30.5%. Equity earnings from unconsolidated affiliates declined to $2.1 from $7.3, primarily reflecting lower PAL earnings; management cited lower volumes and margins at PAL amid a challenging domestic cotton market.

Material changes and unusual items

  • Unifi sold its 60% interest in Repreve Renewables for $0.5 in cash and recorded a $1.662 loss. The business was deconsolidated, and the filing says the sale did not represent a strategic shift or have a major effect on consolidated operations.
  • During Q3, the company recorded a $0.749 out-of-period foreign-currency gain in other operating income. Management considered it immaterial to current and prior financial statements and earnings trends.
  • The company reported strong International growth, particularly in Brazil and China, offset by weak domestic retail conditions, cautious customer ordering and unfavorable product mix in Polyester and Nylon.
  • The REPREVE Bottle Processing Center received an FDA Letter of No Objection to sell recycled bottle flake for food-grade packaging. The company described this as an opportunity to expand potential revenue streams, not as a quantified revenue commitment.

Outlook, management commentary and risks

  • Management said it was on pace for 10%–15% PVA product sales growth in fiscal 2017. This is a product-growth objective, not a full-year revenue or earnings forecast.
  • After approximately $34.5 invested in capital projects during the first nine months, the company expected about $5.5 of additional fiscal 2017 investment, for an anticipated full-year total of approximately $40.0. Projects include REPREVE recycling capacity, specialized-fiber production and machinery modifications. Spending could differ and may be funded with operating cash, revolver borrowings or capital leases.
  • Management believed cash, operating cash flow and revolver availability would meet foreseeable liquidity needs. However, nearly all cash was held by foreign subsidiaries and may not be readily available for domestic requirements.
  • Raw-material cost increases can compress margins when selling-price adjustments lag. Other disclosed exposures include weak apparel and retail demand, customer concentration or loss, global competition, foreign-exchange movements—particularly the Brazilian real—commodity and energy costs, trade-policy changes, and execution of strategic investments.
  • The ABL fixed-charge coverage covenant applies if revolver availability falls below a $24.688 trigger; availability was $66.970. The reported fixed-charge coverage ratio was 0.72:1.0, and management stated the company was in compliance because the covenant was not triggered.
  • The company disclosed approximately $10.860 of increased future Brazilian electricity purchase obligations, approximately $1.0 of commitments for recycling-center expansion equipment and contractors, and approximately $7.0 of future minimum operating lease payments. It also described a Kinston, North Carolina environmental site for which potential future responsibility and liability could not be determined. Management did not expect ordinary-course legal proceedings to have a material adverse effect.

Important facts for investors to verify

  • Whether International PVA growth and planned 10%–15% fiscal-year PVA growth offset continued softness and unfavorable product mix in domestic Polyester and Nylon markets.
  • Whether rising raw-material costs can be passed through to customers without further gross-margin pressure, and whether the REPREVE facilities reach planned production and profitability.
  • Whether PAL earnings recover from the reported decline and how much reported earnings continue to depend on this equity-method investment.
  • Domestic access to cash held abroad, revolver availability, debt amortization and the conditions that could activate the fixed-charge coverage covenant.
  • The timing and return on approximately $40 million of expected fiscal 2017 capital investment, and the ultimate scale of related borrowing or lease financing.
  • The treatment and significance of the Renewables sale loss and the out-of-period foreign-currency gain when assessing recurring performance.