UNIFI INC quarterly report, Q3 FY2012

UNIFI, INC. — Form 10-Q summary

Business context and period. Unifi manufactures and sells polyester, nylon and value-added yarns through Polyester, Nylon and International segments. This fiscal third-quarter report covers the 13 weeks ended March 25, 2012; year-to-date comparisons cover 39 weeks. Unless noted, amounts below are in millions of dollars.

Financial performance and liquidity

MetricQ3 FY2012Q3 FY2011Nine months FY2012Nine months FY2011
Net sales$179.0$179.4$517.2$516.6
Gross profit / margin$13.6 / 7.6%$15.6 / 8.7%$36.3 / 7.0%$56.6 / 11.0%
Operating income / margin$1.9 / 1.1%$4.6 / 2.6%$2.3 / 0.4%$21.1 / 4.1%
Net income (loss) attributable to Unifi$7.5$(4.0)$0.2$11.6
Diluted EPS$0.37$(0.20)$0.01$0.57
Adjusted EBITDA$10.3$12.3$25.7$46.4

Cash, debt and liquidity. Nine-month operating cash flow was $27.3, versus cash used of $1.4 a year earlier; capital expenditures were $5.3 versus $17.3. Cash was $35.8 at quarter-end. Total debt was $158.8, down from $168.7 at June 26, 2011, comprising $123.7 of 11.5% notes and $35.0 drawn on a $100 million revolving facility. Revolver excess availability was $53.0; reported total liquidity, including cash, was $88.8. Working capital was $200.2, down from $213.0.

Changes versus comparable periods

  • Quarterly sales were nearly flat, but gross profit fell 12.9%. Sales volume declined 3.4%, while average selling price rose 3.2%; the gross margin contracted by 1.1 percentage points.
  • Nine-month sales were also nearly flat, but gross profit declined 35.9% and operating income fell 89.3%. Management attributed the deterioration to weak volumes, elevated raw-material costs, lower production utilization and reduced conversion margins.
  • Quarterly earnings improved from a loss to income, principally because equity-affiliate results swung to $9.9 million of earnings from $2.1 million of losses, and net interest expense declined. Affiliate income included a sharp improvement at Parkdale America (PAL); Unifi cautioned that PAL benefited from a temporary lag between lower cotton costs and selling prices.
  • Year-to-date net income fell to $0.2 million from $11.6 million. Lower gross profit and a $3.7 million loss on remeasuring Unifi’s previously held Renewables interest were important factors. Unifi acquired a controlling 60% interest in Renewables and began consolidating it in Q2.

Segment trends. Q3 Polyester sales rose 5.8% and gross profit rose 56.7%; Nylon sales fell 2.1% and gross profit fell 6.7%; International sales fell 11.8% and gross profit fell 47.3%. International weakness reflected lower China volume and Brazilian competitive, utilization and cost pressures. For the nine months, gross profit declined in all three segments.

Outlook, commentary and risks

  • Management expected Q4 FY2012 operating profit to improve, citing higher volumes as apparel supply-chain destocking eased, signs of Brazilian market recovery, lower raw-material costs and lower converting costs. This was an expectation, not a reported result.
  • Unifi expected FY2012 capital expenditures of approximately $7–8 million, primarily for added texturing capacity in El Salvador and routine asset spending. It expected adjusted working capital to be a source of cash for FY2012.
  • On April 24, 2012, after quarter-end, Unifi announced committed financing intended to refinance existing debt and redeem the remaining $123.7 million of 2014 notes. The proposed package comprised a $100 million revolver, a $50 million term loan and a $30 million Term B loan, with maturities in May 2017. The company estimated about $9 million in annual interest savings for FY2013. Closing and redemption were expected May 24, 2012, subject to lender conditions; failure to close was identified as a material risk.
  • Operating risks include volatile petroleum-based raw-material costs, a 7–14 cent-per-pound U.S.-Asia polymer price gap cited for the year to date, inflation, currency movements, international trade rules, customer concentration and affiliate performance. PVA products were about 18% of consolidated sales volume; a large customer’s delayed China orders affected international PVA sales.
  • Unifi had a full valuation allowance against net deferred tax assets in the U.S. and certain foreign subsidiaries. It disclosed environmental monitoring/remediation uncertainty at a contaminated satellite facility, but said it could not determine the timing or extent of potential responsibility. No material litigation beyond routine matters was reported.

Important facts for investors to verify

  • Whether the refinancing and note redemption closed on the planned terms and date, and the resulting debt, interest expense, covenants and available liquidity.
  • Whether expected Q4 volume and margin recovery materialized, particularly in Brazil, China and the Polyester and Nylon segments.
  • How much affiliate earnings—especially PAL’s temporarily favorable cotton-cost and selling-price timing—contributed to reported earnings and cash distributions.
  • Whether raw-material costs, import competition, production utilization and working-capital trends improved as management expected.
  • The filing’s liquidity disclosures distinguish cash and revolver availability; it also says a portion of cash is held outside the U.S. Confirm accessibility and restrictions when assessing debt-service capacity.