Unifi, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, three months ended September 29, 2013; comparable quarter ended September 23, 2012. The interim financial statements are unaudited. Unless stated otherwise, dollar amounts below are in millions.
Business context and financial performance
Unifi manufactures and sells polyester and nylon yarns, including recycled and premium value-added products, through Polyester, Nylon and International segments. It also holds equity-method investments in unconsolidated affiliates, principally Parkdale America (PAL).
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Net sales | $168.669 | $172.900 |
| Gross profit / margin | $19.985 / 11.8% | $18.020 / 10.4% |
| Operating income / margin | $8.285 / 4.9% | $6.182 / 3.6% |
| Net income attributable to Unifi | $8.870 | $2.294 |
| Basic / diluted EPS | $0.46 / $0.44 | $0.11 / $0.11 |
| Operating cash flow | $9.310 | $4.381 |
Gross margin improved as domestic volumes and conversion margins strengthened and manufacturing and depreciation costs declined. Adjusted EBITDA, a non-GAAP measure, was $14.481 million versus $13.825 million. Equity earnings from unconsolidated affiliates were $6.123 million, up from $0.671 million, largely reflecting PAL results.
Liquidity, debt and capital
- Cash was $10.310 million at quarter-end, up from $8.755 million at June 30, 2013. Working capital was $168.853 million.
- Total debt was $97.339 million, compared with $97.753 million at June 30; $96.023 million was classified as long-term debt. Revolver availability was $38.968 million. The company reported covenant compliance and a fixed-charge coverage ratio of 4.58 to 1.0.
- Operating cash flow of $9.310 million less capital expenditures of $5.691 million gives approximately $3.619 million of cash flow after capital expenditures. Investing activities used $5.341 million; financing activities used $2.495 million, including $5.768 million for share repurchases.
- Quarterly capital expenditures were $5.691 million. Management estimated full-year fiscal 2014 capital expenditures of approximately $17 million, including $6–$8 million for maintenance.
- The company repurchased 249,000 shares during the quarter at an average $23.16 per share. The board program authorized up to $50 million; $24.933 million remained available at quarter-end.
Material changes and management commentary
- Sales declined 2.4%; consolidated sales volume was down 0.5% and weighted-average selling price down 1.9%. Lower International sales, especially in China, were partly offset by volume growth in Polyester and Nylon.
- Polyester sales rose 0.6% and gross profit rose 26.2%; Nylon sales fell 0.7% while gross profit rose 15.3%. International sales fell 11.2% and gross profit fell 14.1%, with weakness in Brazil and China.
- SG&A declined 9.3% to $10.114 million. Other operating expense rose to $1.624 million, including $0.896 million of restructuring charges: severance and equipment relocation/reinstallation.
- Net interest expense fell to $0.038 million from $1.320 million. Management attributed the change to lower average debt and interest rates and $1.084 million of interest income related to settlement of a Brazilian judicial claim.
- PAL’s results included increased benefit from the U.S. cotton EAP subsidy program. Unifi recognized $5.915 million of PAL earnings versus $0.042 million in the prior-year quarter. PAL recognized $9.079 million of EAP earnings in its quarter while receiving $4.054 million in cash; PAL reported $3.766 million of deferred EAP revenue.
- Management said existing cash, operating cash generation and revolver availability should meet foreseeable liquidity needs. No earnings or sales guidance was provided. Management described continued focus on operational improvements, higher-margin PVA products and selected strategic growth investments.
Risks, contingencies and unusual items
- Results are exposed to textile-market conditions, competition, petroleum-based raw-material and energy price volatility, foreign exchange, and political or trade-policy changes. The company does not hedge raw-material and energy costs with financial instruments.
- Most cash held by foreign subsidiaries was considered permanently reinvested. The company planned to repatriate $21.297 million of future Brazilian cash flows and recorded a $7.454 million deferred tax liability; $62.989 million of foreign undistributed earnings was treated as permanently reinvested.
- Environmental responsibility at a former Kinston, North Carolina site may arise in the future; the company said it could not determine whether or when it would have obligations or their extent. Other than routine litigation, no pending material legal proceedings were reported.
- Unifi’s share of PAL’s earnings and related cash distributions may differ substantially in timing and amount. PAL’s five largest customers represented about 82% of PAL revenue, and its largest customer about 38%, according to PAL’s latest audited financial statements.
- After quarter-end, on November 1, 2013, Unifi purchased 150,000 shares from Dillon Yarn Corporation at $23 per share for $3.450 million. Shareholders approved a new 2013 incentive compensation plan on October 23.
Important facts for investors to verify
- How much of the profit increase reflects recurring core operations versus PAL/EAP earnings and the Brazilian judicial-claim interest income.
- PAL’s future profitability, subsidy recognition and cash distributions, including the timing of deferred EAP revenue.
- Whether weaker International-segment demand and Brazil’s lower utilization, inflation, tax-incentive changes and currency effects persist.
- Progress and returns on the planned $17 million capital program, and the impact of restructuring and equipment relocations.
- Foreign cash accessibility and tax consequences, debt covenant headroom, and the pace and funding of share repurchases.