UNIFI INC quarterly report, Q2 FY2013

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Business context and reporting period

Unifi, Inc. manufactures and sells polyester and nylon yarns, including recycled and premium value-added products. Its reportable segments are Polyester, Nylon and International. This Form 10-Q covers the 13 weeks ended December 23, 2012 (fiscal 2013 second quarter) and the 26-week year-to-date period. Financial amounts below are in millions of dollars unless stated otherwise.

Financial performance and condition

  • Quarter: Net sales were $172.1 million, up 3.0% year over year. Sales volume rose 9.0%, partly offset by a 6.0% decline in average selling price. Gross profit was $16.7 million versus $10.9 million; gross margin improved to 9.7% from 6.5%. Operating income was $4.5 million versus an operating loss of $1.0 million. Net income attributable to Unifi was $2.4 million, or $0.12 per diluted share, compared with a $7.6 million loss, or $0.38 per share.
  • Six months: Sales were $345.0 million, up 2.0%; gross profit was $34.7 million versus $22.7 million, with gross margin of 10.1% versus 6.7%. Operating income was $10.7 million versus $0.3 million. Net income attributable to Unifi was $4.7 million, or $0.23 per diluted share, versus a $7.3 million loss, or $0.36 per share.
  • Cash flow: Six-month operating cash flow was $24.7 million, up from $14.3 million. Investing used $4.5 million, including $2.9 million of capital expenditures; financing used $15.9 million. Cash increased $4.4 million to $15.2 million.
  • Balance sheet and liquidity: At December 23, cash was $15.2 million, current assets $224.5 million and current liabilities $58.5 million; working capital was $166.0 million. Total debt was $106.7 million, down from $121.6 million at June 24, and shareholders’ equity was $297.0 million. ABL revolver availability was $35.4 million, for reported total liquidity of $50.7 million.
  • Taxes: The six-month income tax provision was $5.4 million, an effective rate of 56.0%; management attributed the elevated rate to foreign dividends, book-tax timing differences and losses in jurisdictions where no tax benefit was recognized.

Changes versus the prior comparable period

  • Profitability improved mainly through higher gross profit, particularly in Polyester, and substantially lower net interest expense. Quarterly net interest expense fell to $1.2 million from $3.7 million; the weighted average debt rate fell to 4.1% from 10.2% for the quarter.
  • Polyester quarterly gross profit increased to $8.4 million from $2.3 million, reflecting stronger volume, improved conversion margins, product mix and manufacturing efficiencies. Nylon gross profit declined to $4.0 million from $4.5 million as lower-margin mix pressured conversion margin. International gross profit rose modestly to $4.2 million from $4.1 million.
  • Quarterly SG&A increased to $11.5 million from $11.0 million, while six-month earnings from unconsolidated affiliates declined to $1.9 million from $4.3 million, mainly due to lower PAL earnings and changes in cotton-program benefits.
  • The prior-year comparisons included a $3.7 million loss on remeasuring the previously held Renewables interest and a $1.5 million Brazilian tax refund gain; neither recurred in the current six-month period.

Outlook, commentary and risks

  • Management expected March 2013-quarter gross profit and Adjusted EBITDA to be slightly below December-quarter levels, citing a shortened shipping quarter, higher raw-material costs, challenging Brazilian conditions and X Games sponsorship marketing expense. It expected operating profit to improve in the June quarter, primarily on higher volume and margins. No full-year numerical earnings guidance is provided.
  • Polyester raw-material prices averaged about 10% higher in the December quarter than in the September quarter and were expected to rise slightly in March; management warned that delayed price recovery and lower-priced imports could pressure margins. PVA products represented approximately 19% of quarterly sales; management expects continued mix enrichment, though results are not assured.
  • Brazil faces import competition and inflation-related conversion-cost pressure. China’s sales to a major customer were affected by elevated supply-chain inventories; management anticipated continued near-term weakness and possible improvement in the June quarter.
  • On January 8, 2013, Unifi repaid the remaining $11.25 million Term B Loan after a PAL distribution and other available funds. The repayment eliminated that loan and management expected the weighted average rate on remaining debt to be about 3.3%; additional early-extinguishment charges were expected. A January 22 board authorization permits up to $50 million of share repurchases, potentially funded with operating cash or revolver borrowings; none had been made under the new program.
  • Foreign cash was largely treated as permanently reinvested; repatriation could trigger tax. Management identified approximately $20.7 million of planned future Brazil cash-flow repatriations and a related $7.3 million deferred tax liability. A Colombian subsidiary had $1.62 million in a fund being liquidated, with access delayed; management considered the amounts collectible.
  • Risks include volatile petroleum-based raw-material and energy costs, foreign exchange, competition and trade policy, customer demand and concentration, joint-venture performance, access to credit and debt service. An environmental monitoring/remediation matter at a satellite facility remains unquantified; the filing says the company cannot determine if or when it may have responsibility. No material change to previously disclosed risk factors was reported. Management stated disclosure controls were effective.

Most important facts for investors to verify

  1. Whether the improvement in gross margin and Polyester profitability is sustainable as input costs rise and selling prices adjust.
  2. Whether China demand recovers and Brazilian volume, pricing and margins improve as management expects.
  3. Cash generation, working-capital needs and revolver availability after the Term B repayment and any share repurchases.
  4. The effects of the high effective tax rate, expected NOL utilization and planned foreign-cash repatriations on future cash taxes.
  5. Actual repurchases under the $50 million authorization, related borrowing, and compliance with credit-facility restrictions and covenants.
  6. Future PAL and other affiliate earnings/distributions, and any developments affecting the unquantified environmental exposure.