UNIFI, INC. — Form 10-Q Summary
Business context and reporting period
Unifi manufactures and sells polyester and nylon yarns, including commodity, specialty and value-added products, to textile and other end markets. Its reportable segments are Polyester, Nylon and International. This filing covers the 13 weeks ended September 23, 2012, the first quarter of fiscal 2013; comparisons are with the 13 weeks ended September 25, 2011. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q1 FY2013 | Comparable period |
|---|---|---|
| Net sales | $172.9 | $171.0 |
| Gross profit / margin | $18.0 / 10.4% | $11.8 / 6.9% |
| Operating income / margin | $6.2 / 3.6% | $1.3 / 0.8% |
| Net income attributable to Unifi | $2.3; $0.11 per diluted share | $0.3; $0.01 per diluted share |
| Adjusted EBITDA | $13.8 | $8.1 |
| Operating cash flow | $4.4 | $1.8 |
- Sales rose 1.1%; volume increased 6.7%, partly offset by a 5.6% decline in average selling price, reflecting product mix and Brazilian currency translation.
- Gross profit improved 52.3%, chiefly from higher volumes and better conversion margins as polyester raw-material costs eased early in the quarter.
- Cash and cash equivalents were $12.6 at September 23, compared with $10.9 at June 24, 2012. Working capital was $174.9, up from $166.5 at June 24; adjusted working capital was $156.9.
- Total debt was $120.0, down from $121.6 at June 24. The company had $30.2 of excess availability under its ABL revolver and reported compliance with covenants, including a 1.40 fixed-charge coverage ratio.
- Capital expenditures were $1.1. Investing activities used $1.1; financing activities used $1.6, including term-loan repayments, partly offset by net revolver borrowing and a related-party loan.
Material changes versus the prior comparable period
- Polyester gross profit more than doubled to $8.2 from $3.7, supported by lower raw-material costs, improved product mix and manufacturing efficiencies.
- International gross profit rose to $5.7 from $3.8, with stronger Brazilian and Chinese volumes. Nylon gross profit decreased to $4.1 from $4.4 amid lower volume and a less favorable mix.
- Net interest expense declined to $1.3 from $3.7; management attributed the reduction to lower average debt and lower borrowing rates following the May 2012 refinancing. The weighted average rate on debt declined to 4.2% from 9.2%.
- Equity earnings from unconsolidated affiliates fell to $0.7 from $3.5, primarily because Parkdale America (PAL) faced weaker cotton-apparel demand, customer destocking and lower recognized cotton-subsidy benefits.
- The effective tax rate was 61.1%, versus 48.8%, reflecting foreign dividends taxed in the U.S., differences between taxable and book income related to an affiliate, and losses in jurisdictions where no tax benefit was recognized.
Outlook, risks and unusual items
- Management expected December-quarter gross profit and Adjusted EBITDA to be below September-quarter levels, citing holiday-season uncertainty and rising raw-material prices. It also anticipated lower Polyester volume and conversion margins, Nylon results at or slightly below Q1, and lower International gross profit in Q2, with gradual improvement expected in the second half of FY2013.
- For full FY2013, management expected operating profit to improve versus FY2012, based on anticipated higher volumes as customer destocking eases and improved gross margins. It targeted annual PVA sales growth of 15%–20%; PVA products represented about 20% of Q1 consolidated sales.
- Management estimated FY2013 capital expenditures of $8–$10, including approximately $6 of maintenance spending. It planned to continue deleveraging and prioritize prepayment of the higher-interest Term B Loan.
- Rising polyester input costs, a U.S.-Asia polymer price gap, global competition, demand uncertainty, currency movements, customer financial health and the performance of equity affiliates are key risks. The company does not hedge raw-material cost exposure with financial instruments.
- Foreign subsidiaries held $9.3 of cash; foreign cash was considered permanently reinvested. Unifi planned to repatriate about $20 of future Brazilian cash flows and had recorded an approximately $7 deferred tax liability for that plan.
- Debt refinancing and repayments were significant: Unifi refinanced in May 2012 with facilities maturing in May 2017 and made a $4.5 optional Term B prepayment in July. The quarter included a $0.2 debt-extinguishment loss. A further $2.2 prepayment was completed October 17, after quarter-end, with a $0.1 charge expected in the December quarter.
- An environmental matter remains at a satellite facility near Kinston, North Carolina. Unifi said the timing and extent of any future monitoring or remediation responsibility could not be determined. The filing reported no material change to previously disclosed risk factors and no material pending litigation beyond routine matters.
Important facts for investors to verify
- Whether raw-material price increases and the polymer price gap pressure margins and volumes as management forecast.
- Whether customer destocking reverses, particularly in China and cotton-apparel markets affecting PAL, and whether PAL’s deferred subsidy benefits are subsequently recognized.
- Actual cash generation, revolver availability and covenant headroom as working-capital needs and debt repayments evolve.
- The sustainability of improved Polyester and International profitability, and progress in Nylon and PVA sales growth.
- The use and tax consequences of planned Brazilian cash repatriation, as well as any developments in the Kinston environmental matter.