UNIFI, INC. — Form 10-Q Summary
Period: Fiscal third quarter and first nine months ended March 30, 2014, compared with periods ended March 24, 2013. The request metadata says “2013 Q3,” but the filing is for fiscal 2014 Q3. Unless noted otherwise, financial statement amounts below are in thousands of dollars.
Business context
Unifi manufactures and sells polyester and nylon yarns, including recycled and higher-value performance (“PVA”) products. Its reportable segments are Polyester, Nylon and International. It also holds equity-method investments in unconsolidated affiliates, notably Parkdale America (PAL).
Financial performance
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Net sales | $176,864 | $168,249 | $506,150 | $513,220 |
| Gross profit | $19,759 | $12,681 | $58,241 | $47,392 |
| Gross margin | 11.2% | 7.5% | 11.5% | 9.2% |
| Operating income | $6,093 | $729 | $20,152 | $11,417 |
| Net income attributable to Unifi | $4,743 | $1,399 | $20,056 | $6,119 |
| Diluted EPS | $0.24 | $0.07 | $1.01 | $0.30 |
| Adjusted EBITDA | $12,590 | $8,370 | $39,638 | $34,351 |
Q3 sales rose 5.1%; volume increased 7.9%, while pricing declined 2.8%. For the nine-month period, sales fell 1.4%, reflecting lower International sales and currency translation, partly offset by improved margins. Management attributed stronger gross profit mainly to PVA mix, lower raw-material costs and lower depreciation. Q3 operating income also reflects higher SG&A and other operating costs. Adjusted EBITDA is a non-GAAP measure.
For the first nine months, operating cash flow was $42,437, versus $44,926 a year earlier. Capital expenditures were $13,390; investing cash outflow was $10,964 and financing cash outflow was $26,993. Cash increased by $4,404 to $13,159. The company repurchased $30,715 of shares during the period.
Balance sheet, debt and liquidity
At March 30, 2014, cash was $13,159; current assets were $228,667 and current liabilities $76,203. Total assets were $460,639 and shareholders’ equity $281,220. Total debt obligations were $98,511, including $4,905 current; reported long-term debt was $93,606. Cash and total debt imply approximate net debt of $85,352.
The ABL Revolver had $25,400 outstanding and the ABL Term Loan $68,000. Revolver excess availability was $62,740; the company reported covenant compliance and a 7.64-to-1 fixed-charge coverage ratio. The March 2014 credit amendment increased the term loan by $18,000, extended facility maturity to March 28, 2019, and starts fixed quarterly term-loan payments of $2,125 in October 2014. Cash held abroad may not be available for domestic needs without potential tax costs: 89.9% of cash was outside the U.S., and foreign cash was deemed permanently reinvested.
Changes, outlook and notable items
- Q3 Polyester gross profit increased to $11,013 from $5,034, and Nylon gross profit to $5,040 from $3,681. International gross profit declined to $3,706 from $3,966 amid Brazilian currency weakness, low-priced imports and Chinese pricing pressure.
- Nine-month equity earnings from unconsolidated affiliates rose to $14,830 from $6,712, primarily reflecting PAL results and cotton-program benefits. Affiliate earnings were a material contributor to pretax income.
- Management estimated FY2014 capital expenditures at approximately $17 million and FY2015 at approximately $27 million, including growth investment in PVA/REPREVE, manufacturing capability and recycling capacity. These are estimates, not earnings guidance.
- The prior $50 million repurchase authorization was completed. On April 23, 2014, the board approved a new authorization for up to $50 million, potentially funded by operating cash and revolver borrowings, subject to credit-agreement restrictions.
- A December 2013 draw-winding acquisition cost $2,934 and included $2,500 of contingent consideration, payable based partly on the acquired business’s operating profit. The filing records a $2,587 liability at quarter-end.
- Nine-month other operating expense included $1,296 of restructuring charges, mainly severance and equipment relocation. The company also recorded $155 of impairment in Q3 on a Colombian investment fund being liquidated.
- Key risks include textile-market conditions, competition and pricing, Brazilian-real currency exposure, volatile raw-material and energy costs, foreign cash repatriation taxes, and the high effective tax rate (42.3% year to date). A 50-basis-point LIBOR increase was estimated to add $117 to annual cash interest expense.
- The filing reports no material change to previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, and no material change in internal control over financial reporting. Management stated disclosure controls were effective.
Important facts for investors to verify
- Confirm the requested period: this filing covers fiscal Q3 2014, not 2013 Q3.
- Assess the durability of margin gains, particularly the contribution from PVA product mix, lower input costs and reduced depreciation.
- Review PAL and other affiliate earnings, including the timing and sustainability of cotton-program benefits; affiliate earnings materially affect reported pretax income.
- Track International segment performance and Brazilian currency/import competition, as well as Chinese market pricing and demand.
- Verify liquidity after planned capex, the new share-repurchase authorization and required term-loan amortization; consider the location and repatriation limits on cash.
- Monitor contingent acquisition payments, restructuring-related costs, tax exposures and the elevated effective tax rate.