Business context and reporting period
Unifi, Inc. manufactures and sells polyester and nylon yarns, including value-added and recycled products, through its Polyester, Nylon and International segments. This unaudited Form 10-Q covers the second quarter and first six months of fiscal 2015, ended December 28, 2014; comparable periods ended December 29, 2013. Amounts below are in USD millions unless stated otherwise.
Financial performance and position
| Metric | Quarter ended Dec. 28, 2014 | Prior-year quarter | Six months ended Dec. 28, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $163.1 | $160.6 | $337.3 | $329.3 |
| Gross profit / margin | $23.3 / 14.3% | $18.5 / 11.5% | $44.2 / 13.1% | $38.5 / 11.7% |
| Operating income / margin | $9.9 / 6.1% | $5.8 / 3.6% | $17.6 / 5.2% | $14.1 / 4.3% |
| Income before taxes | $12.3 | $10.1 | $23.2 | $24.5 |
| Net income attributable to Unifi | $9.4 | $6.4 | $16.5 | $15.3 |
| Diluted EPS | $0.50 | $0.32 | $0.88 | $0.76 |
| Adjusted EBITDA (non-GAAP) | $16.2 | $12.6 | $30.4 | $27.0 |
Quarterly sales increased 1.6% as volume rose 6.8%, offset by lower pricing and unfavorable Brazilian-real translation. Gross profit improved on higher volumes, better product mix, lower polyester raw-material costs and lower Brazilian utility costs. Segment gross profit increased in Polyester, Nylon and International. SG&A rose 9.5% for the quarter, including higher marketing, professional fees and stock compensation.
For the six-month period, sales increased 2.4% and operating income rose 24.8%, but pretax income declined 5.5% as equity earnings from unconsolidated affiliates fell from $11.2 million to $7.0 million. Net income nonetheless increased, helped by higher gross profit and a lower effective tax rate.
Cash from operations was $9.6 million for the six months, down from $24.2 million. Capital expenditures were $13.4 million, versus $9.4 million; operating cash flow was therefore below capital spending by about $3.9 million. Cash ended at $17.9 million. Total debt was $111.3 million, up from $99.5 million at June 29, 2014; current debt was $13.4 million. Working capital was $154.7 million. ABL revolver availability was $60.9 million, and the company reported covenant compliance and a 4.5:1 fixed-charge coverage ratio.
Material changes, outlook and risks
- Drivers and segment trends: Quarterly volume growth included 20.1% in International, 6.6% in Nylon and 1.2% in Polyester. PVA programs supported Polyester mix and margins; new programs helped China sales. Brazilian-real depreciation reduced reported sales and earnings translation.
- Affiliate earnings and unusual items: PAL earnings fell year over year, mainly because of lower Farm Bill economic-assistance earnings and slightly lower operating margins. For the six months, PAL also recorded a provisional after-tax gain of approximately $4.6 million from acquiring a Mexican yarn manufacturer; Unifi recognized its share through equity earnings. Brazilian utility-cost benefits are not expected to continue beyond fiscal Q3 2015.
- Capital and financing: Management estimated fiscal 2015 capital spending of approximately $50 million, including about $10 million of maintenance spending, mainly for PVA and REPREVE-related capacity and recycling initiatives. A credit amendment increased the ABL term loan by $22 million, raised scheduled quarterly principal payments and increased its interest margin. The company repurchased $4.2 million of shares during the six months; repurchases are subject to credit-agreement limits.
- Liquidity and risk: About 70.8% of cash was held outside the U.S.; foreign cash may not be available for domestic needs without tax costs. Management planned to repatriate $22.2 million of future Brazilian cash flows and recorded a $7.8 million deferred tax liability. Key exposures include currency movements, volatile petroleum-based raw-material and energy costs, and textile-industry conditions. A 50-basis-point LIBOR increase was estimated to raise annual cash interest by $0.3 million.
- Other matters: The filing gives no specific earnings or sales guidance. Management said it expects existing cash, operating cash flow and revolver availability to meet foreseeable needs. The company reported no material changes to risk factors, no material off-balance-sheet arrangements, and no pending material legal proceedings beyond routine litigation. It disclosed unresolved potential future monitoring or remediation responsibilities at a site formerly operated by DuPont, with the extent and timing not determinable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether quarterly gross-margin gains and PVA mix improvements persist as raw-material prices, sales mix and demand change.
- The sustainability of PAL and other affiliate earnings, including the effect of Farm Bill assistance and the provisional Mexican-acquisition gain.
- Whether operating cash generation can support the approximately $50 million fiscal-year capital-spending plan, debt service and any further share repurchases.
- Debt balances, revolver availability and compliance with covenant and restricted-payment conditions after the term-loan amendment.
- The effects of Brazilian currency movements, foreign-cash repatriation taxes, and petroleum-based input and energy costs.
- Any updates on the DuPont-site environmental obligations and the timing or cost of potential future responsibilities.