UNIFI, INC. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended September 28, 2014; comparable period ended September 29, 2013. Amounts are in thousands of dollars, except per-share data. Unifi manufactures and sells polyester and nylon yarns, including specialty and recycled products, and operates through Polyester, Nylon and International segments.
Financial results and liquidity
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $174,182 | $168,669 |
| Gross profit / margin | $20,955 / 12.0% | $19,985 / 11.8% |
| Operating income / margin | $7,617 / 4.4% | $8,285 / 4.9% |
| Net income attributable to Unifi | $7,077 | $8,870 |
| Diluted EPS | $0.37 | $0.44 |
| Adjusted EBITDA | $14,187 | $14,481 |
| Cash provided by operating activities | $102 | $9,310 |
- Sales increased 3.3%, while attributable net income declined 20.2%. Gross margin improved 20 basis points, but operating margin fell 50 basis points.
- Cash and cash equivalents were $15,792 at quarter-end. Working capital was $151,328, compared with $150,925 at June 29, 2014. Operating cash flow was nearly flat, while capital expenditures were $7,383.
- Total debt was $111,580, including $13,347 classified as current; debt was $99,488 at June 29, 2014. The ABL Revolver balance was $16,300 and ABL Term Loan balance was $90,000.
- Revolver availability was $72,475; the company reported an 8.3-to-1.0 fixed-charge coverage ratio and compliance with financial covenants. Cash held outside the U.S. was $11,693, and foreign balances may not be available for U.S. needs without potential tax costs.
Material changes and segment performance
- Higher sales volumes in Nylon and International and improved Polyester pricing/mix drove revenue growth; consolidated volume was essentially unchanged. Gross profit rose across all three segments, partly offset by Polyester manufacturing variances tied to the summer shutdown schedule.
- Polyester sales were $92,978, down 0.6%; gross profit was $10,455, up 0.9%. Mix enrichment and higher value-added product sales supported margins, offset by lower volume, shutdown-related variances and increased depreciation.
- Nylon sales were $44,710, up 12.6%, mainly on stronger covered-yarn volumes; gross profit rose 10.5% to $5,187. Lower operating margins from product mix partly offset volume gains.
- International sales were $36,494, up 3.1%, and gross profit increased 7.7% to $5,313. Higher China and Brazil volumes and improved Brazil costs and tax incentives contributed; competitive pricing pressure on commodity yarns remained.
- Equity earnings from unconsolidated affiliates declined to $3,721 from $6,123, mainly due to lower Parkdale America earnings, including reduced Farm Bill assistance-program earnings, lower revenue and margins. A bargain purchase gain at Parkdale partly offset the decline.
- SG&A rose 11.6% to $11,286, including increased marketing, professional fees and stock-based compensation. A $591 bad-debt provision replaced a $38 benefit in the prior year, primarily due to a Brazilian customer receivable considered unlikely to be recovered.
Outlook, commentary and risks
- Management emphasized operational improvement, growth in value-added and compliant yarns, recycling, expansion in selected markets, and maintaining joint-venture relationships. It expects continued China gross-profit improvement over the next twelve months as REPREVE and Sorbtek programs grow. No consolidated earnings or revenue guidance is provided.
- Fiscal 2015 capital expenditures were estimated at approximately $50,000, including about $10,000 of maintenance spending, principally for Polyester and REPREVE-related growth. Actual spending could be lower or additional investment may be needed for new opportunities.
- The August 2014 credit amendment increased the ABL Term Loan by $22,000 to $90,000, raised quarterly principal payments and increased the loan’s interest-rate margin. It also modified covenant calculations and restricted-payment conditions.
- Unifi repurchased 149,000 shares for approximately $4.16 million at an average $28.00 per share; approximately $40.0 million remained authorized under the repurchase program. Repurchases are subject to credit-facility restrictions.
- A new Hanesbrands yarn supply agreement is effective through June 30, 2018; some terms are confidential. Management also cited a five-year warehouse lease with monthly payments of $55,000.
- Key exposures include volatile petroleum-based raw-material and energy costs, foreign exchange and political/trade risks. A 50-basis-point increase in LIBOR was estimated to raise annual cash interest expense by $232. Foreign currency translation reduced other comprehensive income by $7,041 during the quarter.
- Environmental monitoring or remediation obligations at a former Kinston site could arise in the future, but the company said it could not determine whether or when it would have responsibility or quantify potential liability. The filing reports no material change to previously disclosed risk factors and no material pending legal proceedings beyond routine litigation.
Most important facts for investors to verify
- Whether the near-zero operating cash flow is timing-related or reflects persistent working-capital pressure, and how it compares with planned capital spending.
- Whether growth and improved margins in Nylon and International can offset Polyester volume declines, shutdown variances and commodity-price competition.
- Whether Parkdale America earnings and Farm Bill assistance-program contributions remain lower, and how the Mexican acquisition affects future results.
- The implications of higher debt and amortization, covenant and share-repurchase restrictions, and the geographic availability and tax treatment of cash.
- Progress on the approximately $50 million capital-expenditure plan, REPREVE growth initiatives and the Hanesbrands supply agreement, including terms not disclosed publicly.