UNIFI, Inc. — Form 10-Q Summary
Reporting period: Quarter ended December 29, 2013; the quarter and six-month comparison periods each comprised 13 and 26 weeks, respectively. Dollar amounts below are in thousands unless stated otherwise. Unifi manufactures and sells polyester and nylon yarns, including specialty and recycled products, through Polyester, Nylon and International segments.
Financial performance
| Metric | Three months ended Dec. 29, 2013 | Prior-year quarter | Six months ended Dec. 29, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $160,617 | $172,071 | $329,286 | $344,971 |
| Gross profit / margin | $18,497 / 11.5% | $16,691 / 9.7% | $38,482 / 11.7% | $34,711 / 10.1% |
| Operating income | $5,774 | $4,506 | $14,059 | $10,688 |
| Net income attributable to Unifi | $6,443 | $2,426 | $15,313 | $4,720 |
| Diluted EPS | $0.32 | $0.12 | $0.76 | $0.23 |
| Operating cash flow | Not separately provided | Not separately provided | $24,230 | $24,739 |
- Quarterly sales declined 6.7%; management attributed this to a 9.8% volume decline, partly offset by 3.1% higher consolidated pricing. The six-month sales decline was 4.5%, with volume down 5.2%.
- Gross margin improved as lower depreciation and a richer mix of higher-margin PVA products offset volume pressure. Quarterly operating margin was 3.6%, versus 2.6% a year earlier.
- Equity earnings from unconsolidated affiliates were $5,122 for the quarter and $11,245 for the six months, compared with $1,258 and $1,929, respectively. PAL was the principal driver; the six-month increase included higher EAP cotton-rebate benefits and improved operating margins.
- Quarterly Adjusted EBITDA, a company-defined non-GAAP measure, was $12,567 versus $12,156. Six-month Adjusted EBITDA was $27,048 versus $25,981.
Financial position, debt and liquidity
- At December 29, 2013, cash was $15,522; total debt was $102,824, including $1,316 current and $101,508 long-term. Total debt was $97,753 at June 30, 2013.
- Current assets were $212,399 and current liabilities $49,990. Reported working capital was $162,409, compared with $161,885 at June 30.
- Six-month capital expenditures were $9,431. Management estimated approximately $17,000 for the full fiscal year, principally for manufacturing flexibility, PVA capacity, texturing efficiency and recycling capacity.
- Unifi reported $28,083 of ABL revolver availability, $43,605 of total liquidity across its U.S. and foreign operations, and compliance with financial covenants. The fixed-charge coverage ratio was 5.52:1.0; the covenant threshold is triggered only if revolver availability falls below specified levels.
- Most debt matures in May 2018. A $1,250 loan from an unconsolidated affiliate matures in August 2014. The ABL facility was amended January 16, 2014 to permit specified equipment sale-leasebacks and asset dispositions up to $4,000 per fiscal year.
- Foreign subsidiaries held $14,309 of cash, and foreign cash was deemed permanently reinvested. The company planned to repatriate $21,476 of future Brazilian cash flows and recorded a $7,517 deferred tax liability; $63,997 of other foreign undistributed earnings was treated as permanently reinvested.
Material changes and management commentary
- Profit rose despite lower sales, reflecting stronger Polyester and Nylon gross profit, lower net interest expense, and higher affiliate earnings. International-segment results weakened.
- Management said holiday-shutdown timing and the exit from certain low- or negative-margin business reduced volumes; new PVA programs partly offset the declines. In Brazil, currency weakness, low-priced imports, weak conditions, unfavorable product mix and higher unit costs pressured results. China was affected by soft demand.
- Six-month net interest expense fell to $799 from $2,537. Management cited lower average debt and interest rates, and $1,084 of interest income related to settlement of a Brazilian judicial claim.
- The company repurchased $18,687 of stock during the six months. Since the program began, it had repurchased 1,839 shares for $37,982 at an average $20.66 per share, leaving $12,018 authorized. Repurchases are subject to ABL restrictions.
- Unifi acquired draw-winding assets and a related business from American Drawtech/Dillon on December 2 for $2,934. A board member is Dillon’s president and COO. Consideration includes estimated $2,500 contingent payments over five years, based on half the business’s operating profit; the estimate is a Level 3 fair value measurement and subject to quarterly reassessment.
Outlook, risks and contingencies
- No specific revenue, earnings or margin guidance was provided. Management stated it expects to continue its core strategies, including PVA mix improvement, operational efficiency, growth-market penetration and selective strategic investment.
- Management identified textile-market conditions, raw-material and energy-price volatility, foreign exchange, international trade and tax changes as risks. The company does not financially hedge raw-material or commodity costs. A 50-basis-point LIBOR increase was estimated to raise annual cash interest expense by $127 after hedging.
- The interest-rate swap covers a significant portion of variable-rate exposure; Unifi also uses foreign-currency contracts for certain transactions. Foreign subsidiaries’ currency translation reduced reported results and comprehensive income.
- Restructuring charges were $1,118 for the six months, comprising severance and equipment relocation costs; the equipment moves were completed in the second quarter. Other operating expense also includes continuing Renewables costs and asset disposal losses.
- PAL’s five largest customers represented approximately 82% of its revenue and 77% of receivables; its largest customer represented approximately 38% and 35%, respectively, based on PAL’s latest audited statements. Unifi’s share of PAL earnings, including EAP-related recognition, materially affects reported results.
- Environmental obligations at a former Kinston site may arise in the future, but Unifi said it could not determine whether or when it would have responsibility or the potential amount. The filing reported no pending material legal proceedings beyond routine litigation.
Key facts for investors to verify
- How much of the profit improvement is repeatable versus attributable to PAL’s EAP rebate recognition and timing, and how PAL’s concentrated customer exposure evolves.
- Whether PVA mix gains and lower depreciation can offset continued volume weakness, particularly in International operations and Brazil.
- Actual fiscal-year capital spending compared with the approximately $17,000 estimate, and the returns from capacity and recycling investments.
- ABL availability, covenant headroom, debt balances and the August 2014 affiliate-loan repayment; also confirm the effect of the January 2014 facility amendment.
- The contingent-consideration estimate and related-party terms for the Dillon acquisition, and the remaining authorization and cash impact of stock repurchases.
- Foreign-cash accessibility, planned Brazilian repatriations and related tax assumptions, as well as any developments in the Kinston environmental matter.