UNIFI, Inc. — Fiscal 2018 Second-Quarter 10-Q
Reporting period: Three and six months ended December 24, 2017; comparisons are to the periods ended December 25, 2016. Amounts below are in millions of dollars unless stated otherwise. UNIFI manufactures and sells polyester, recycled and nylon products, including value-added yarns, to textile and other end markets.
Financial performance
- Quarter revenue: $167.5, up 7.9%; sales volume grew 14.5%, while average selling prices fell 6.3%, mainly from a shift toward lower-priced products. PVA products exceeded 45% of sales and grew more than 20% year over year.
- Quarter profitability: Gross profit was $22.7 and gross margin was 13.5%, versus 14.3%. Operating income fell to $7.8 from $9.0; operating margin was 4.6% versus 5.9%. GAAP net income was $11.8 ($0.63 diluted EPS), compared with $4.6 ($0.25).
- Six-month results: Revenue was $331.7, up 5.3%; gross profit was $46.0 and margin was 13.9%, versus 14.5%. Operating income was $17.9 versus $21.6. Net income was $20.8 ($1.12 diluted EPS), versus $14.0 ($0.76).
- Adjusted measures: Adjusted EBITDA was $13.9 for the quarter versus $14.5, and $29.7 for six months versus $32.4. Adjusted diluted EPS was $0.43 for the quarter versus $0.34, and $0.91 for six months versus $0.85. These are non-GAAP measures.
- Cash flow and investment: Six-month operating cash flow was $20.4, versus $17.3; capital expenditures were $11.4, versus $19.3. Cash rose to $48.6 from $35.4. Operating cash flow benefited from $8.7 of distributions from unconsolidated affiliates, including $7.2 from PAL.
- Liquidity and debt: Working capital was $195.8 and adjusted working capital $148.7. Total debt obligations were $133.5, including $21.6 of capital leases; ABL borrowings totaled $111.9. ABL availability was $54.4. Nearly all cash was held by foreign subsidiaries, including $45.0 outside the U.S., which may not be readily available for domestic needs.
- Balance sheet: Total assets were $587.5 and shareholders’ equity was $386.3 at December 24, 2017. No dividends were paid and no shares were repurchased during the six-month period.
Changes versus prior period
- Growth came primarily from higher volumes of recycled polyester products, plastic-bottle flake, staple fiber and other PVA products, especially in the International Segment. Favorable currency translation also supported sales.
- Segment trends diverged: quarterly International sales rose 31.3% and Polyester sales rose 4.2%, while Nylon sales declined 11.3%. Polyester gross profit weakened amid lower-margin mix and raw-material cost pressure; Nylon segment profit improved through mix and cost management.
- Quarterly SG&A rose 13.7%, chiefly from compensation costs, including talent acquisition and incentive compensation. Net interest expense increased as a result of higher borrowing costs and other interest-related factors.
- Net income rose sharply despite lower operating income, primarily because of a substantially lower tax provision and the absence of the prior-year $1.7 loss on the Renewables sale. The current-period tax benefit included significant tax-related items.
Outlook, risks and unusual items
- Management gave no specific revenue or earnings guidance. It expects fiscal 2018 capital expenditures of approximately $30.0, with $18.6 remaining after the first six months, funded through operating cash flow and potentially ABL borrowings. The spending includes maintenance, technology improvements and recycling capacity; management expects projects to benefit future profitability.
- Management’s strategy emphasizes PVA and recycled products, commercial expansion, partnerships and investment in production capabilities. It expects successful mix enrichment to support higher-margin sales, while noting that additional strategic opportunities could require further capital and borrowing.
- The Tax Cuts and Jobs Act resulted in an approximately $4.5 tax benefit from revaluing domestic deferred tax balances. A separate $3.807 valuation-allowance release also benefited results. UNIFI recorded a provisional $1.7 charge for the deemed repatriation tax, net of foreign tax credits; estimates may change as tax guidance and underlying information are finalized.
- ABL availability was above the $23.75 trigger level at period-end; the reported fixed-charge coverage ratio was 1.11 to 1.00, and the company stated it complied with its covenants. If availability falls below the trigger, a minimum 1.05-to-1.00 coverage covenant applies.
- Key exposures include competition and trade policy, raw-material and energy price volatility, textile demand and customer conditions, foreign exchange, interest rates, debt service and access to credit. UNIFI does not hedge raw-material costs; it had no outstanding foreign-currency forward contracts at quarter-end.
- Environmental matters at a formerly DuPont-operated site remain uncertain: UNIFI expects to assume monitoring responsibility in fiscal 2018 and may have future remediation obligations, but cannot estimate whether or when further remediation will be needed or its cost. The company said ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- How much of reported earnings growth is recurring after separating the tax benefits and prior-year asset-sale loss; compare GAAP and adjusted results.
- Whether PVA and recycled-product volume growth can offset lower selling prices, weaker margins and continued softness in nylon end markets.
- Cash accessibility by location, future working-capital needs, planned capital spending and the trajectory of debt and interest expense.
- ABL availability and covenant headroom, including the 1.11 fixed-charge coverage ratio and the $23.75 availability trigger.
- Final tax-reform and repatriation-tax amounts, and any future environmental monitoring or remediation costs.