UNIFI, INC. — Form 10-Q Summary
Reporting period: Quarter ended March 29, 2015 (third quarter of fiscal 2015; the filing metadata’s “2014 Q3” does not match the filing period). Unless stated otherwise, amounts below are in U.S. dollars, millions.
Business context
Unifi manufactures and sells polyester and nylon yarns, including recycled and value-added products, through Polyester, Nylon and International segments. It also earns equity-method income from unconsolidated affiliates, principally Parkdale America (PAL). The three- and nine-month periods each comprised 13 and 39 weeks, respectively.
Financial performance
| Metric | Quarter ended Mar. 29, 2015 | Prior-year quarter | Nine months ended Mar. 29, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $170.5 | $176.9 | $507.9 | $506.2 |
| Gross profit / margin | $22.3 / 13.1% | $19.8 / 11.2% | $66.5 / 13.1% | $58.2 / 11.5% |
| Operating income / margin | $9.0 / 5.3% | $6.1 / 3.4% | $26.6 / 5.2% | $20.2 / 4.0% |
| Net income attributable to Unifi | $10.0 | $4.7 | $26.5 | $20.1 |
| Diluted EPS | $0.53 | $0.24 | $1.41 | $1.01 |
| Adjusted EBITDA (non-GAAP) | $14.9 | $12.6 | $45.2 | $39.6 |
| Adjusted EPS (non-GAAP, basic) | $0.49 | $0.29 | $1.30 | $1.14 |
Cash flow: Nine-month operating cash flow was $19.7, down from $42.4; capital expenditures were $19.4 versus $13.4, leaving approximately $0.3 of operating cash flow after capex. Cash declined $1.2 to $14.8, including a $4.0 adverse exchange-rate effect.
Balance sheet and liquidity at March 29, 2015: Current assets were $219.1 and current liabilities $73.5 (working capital $145.6). Total debt was $112.3, including $12.4 current, compared with $99.5 at June 29, 2014; cash was $14.8. The ABL revolver had $17.1 outstanding and $67.8 excess availability. Total shareholders’ equity was $288.0.
Material changes and drivers
- Quarterly sales declined 3.6%, despite consolidated volume growth of 0.5%; lower pricing and the weaker Brazilian real reduced reported sales. Gross profit rose 12.7% and operating income 48.2%, driven by stronger Polyester and International margins and improved product mix.
- Quarterly segment performance was mixed: Polyester sales fell 5.0% while gross profit rose 18.3%; Nylon sales grew 3.9% but gross profit fell 16.2%, reflecting higher converting costs, lower yields and mix; International sales fell 8.0% due mainly to currency translation while gross profit rose 35.3%.
- For nine months, sales were nearly flat (+0.3%) while gross profit rose 14.2% and operating income 31.9%. Segment Adjusted Profit increased to $43.3 from $37.6. Sales volume rose 2.2%; reported pricing declined 1.9%.
- Quarterly equity earnings from affiliates increased to $5.5 from $3.6, including higher PAL earnings. Year-to-date affiliate earnings fell to $12.5 from $14.8, chiefly because PAL recognized less income under the federal cotton assistance program and had lower margins; this was partly offset by PAL’s acquisition gain and stronger nylon joint-venture results.
- Quarterly income included a $1.0 loss on extinguishment of debt from writing off prior facility financing fees. Nine-month bad-debt provision was $0.7, primarily a write-off of a Brazilian customer receivable. The effective tax rate was 21.9% for the quarter and 28.3% year to date, below the respective prior-year rates of 50.1% and 42.3%.
- Other comprehensive loss was $23.5 for nine months, principally currency translation, contributing to accumulated other comprehensive loss of $28.1.
Outlook, financing and risks
- Management emphasized operational improvement, growing value-added and compliant yarn sales, recycling, and expansion in growth markets. It expects fiscal 2015 capital expenditures of $40–$45 million, including about $10 million of maintenance spending, and approximately $115 million of capital projects over fiscal 2015–2017. Spending is intended in part to expand recycled-yarn and other value-added capacity; actual amounts may vary.
- On March 26, 2015, Unifi amended and restated its secured credit facility: $200 million total capacity, including a $100 million revolver and an $84.4 million term loan, with maturity extended to March 2020. Management cited lower applicable rates and potential annual term-loan capacity increases. The company was covenant-compliant; fixed-charge coverage was 3.0:1.0. If revolver availability falls below the trigger, a minimum 1.05:1.0 fixed-charge coverage covenant applies.
- Management believed cash, operating cash generation and revolver availability would meet foreseeable liquidity needs. However, $10.7 million of cash was held outside the U.S.; foreign cash was generally considered permanently reinvested. The company planned to repatriate $22.4 million of future Brazilian cash flows and recorded $7.8 million of related deferred tax liability. Other foreign balances could entail additional taxes if repatriated.
- Key exposures include Brazilian-real fluctuations, volatile petroleum-based raw-material and energy costs, interest-rate movements, and trade or political changes. No foreign-exchange forward contracts were outstanding. A 50-basis-point LIBOR increase was estimated to raise annual cash interest by $0.3 million.
- The filing reports no material change to previously disclosed risk factors and no pending material legal proceedings beyond routine litigation. Environmental monitoring/remediation responsibilities at a former Kinston site may arise in the future; the company said the timing and potential liability could not be determined. No material off-balance-sheet arrangements were reported.
Investor verification priorities
- Confirm that margin improvement and value-added product growth are sustainable, particularly given lower overall sales and weaker Nylon profitability in the quarter.
- Track Brazilian currency exposure, local-market competitiveness, and the effect of lower raw-material prices on sales pricing and margins.
- Assess cash conversion: nine-month operating cash flow fell substantially, capex increased, and planned investment is significant relative to current cash generation.
- Review debt-facility terms, covenant headroom, refinancing-related costs, and the availability of cash held by foreign subsidiaries.
- Monitor affiliate earnings and distributions, including PAL’s cotton-assistance income, acquisition accounting and cash needs; affiliate earnings are material to reported results.
- Verify the expected timing and returns on the $40–$45 million fiscal 2015 capex plan and the broader $115 million fiscal 2015–2017 program.
- Follow up on the Brazilian customer receivable write-off and the unquantified potential environmental obligations at the former Kinston site.