UNIFI, INC. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 25, 2011; the quarter and first half each comprised 13 and 26 weeks, respectively. Financial amounts below are in millions unless stated otherwise. Unifi manufactures and sells polyester and nylon yarns, including specialty and premium value-added products, through three segments: Polyester, Nylon, and International.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $167.1 | $162.1 | $338.1 | $337.2 |
| Gross profit | $10.9 | $19.5 | $22.7 | $41.0 |
| Gross margin | 6.5% | 12.0% | 6.7% | 12.2% |
| Operating income (loss) | $(1.0) | $7.0 | $0.3 | $16.5 |
| Net income (loss) attributable to Unifi | $(7.6) | $5.4 | $(7.3) | $15.6 |
| Basic EPS | $(0.38) | $0.27 | $(0.36) | $0.78 |
| Operating cash flow | — | — | $14.3 | $14.5 |
Q2 sales rose 3.1% even as sales volume fell 9.3%; higher selling prices and product mix lifted the average selling price 12.4%. First-half sales were nearly flat, with volume down 10.2% and average selling prices up 10.5%. Cost of sales rose faster than revenue, compressing gross margin sharply.
- Segments, Q2: Polyester sales were $95.1 million and gross profit $2.3 million, versus $7.8 million gross profit a year earlier. Nylon sales were $38.8 million and gross profit $4.5 million, versus $4.7 million. International sales fell 16.3% to $33.2 million and gross profit fell to $4.1 million from $7.0 million.
- Cash and liquidity: Cash was $24.7 million at quarter-end, down $2.8 million from fiscal year-end. Current assets were $233.8 million and current liabilities $40.8 million; reported working capital was $193.0 million, down from $213.0 million at June 26, 2011. Six-month capital expenditures were $3.3 million, compared with $13.3 million a year earlier.
- Debt: Total debt was $159.1 million, down from $168.7 million at June 26, 2011. It included $123.7 million of 11.5% senior secured notes due 2014 and $35.0 million drawn on a $100 million asset-based revolving facility. Revolver availability was $44.3 million. The company reported compliance with credit covenants.
Material changes and unusual items
- Gross profit declined 44.2% in Q2 and 44.7% in the first half. Management attributed the deterioration to record-high raw-material costs, lower sales and production volumes, weaker plant utilization, and reduced conversion margins. Polyester raw-material costs averaged approximately 24% higher year over year in Q2 and 36% higher in the first half.
- Unifi recorded a $3.7 million loss when it remeasured its previously held Renewables equity interest after acquiring an additional 20% and increasing its ownership to 60%. Renewables had no revenue and incurred $1.0 million of operating expenses in the first half; its results are consolidated following the acquisition.
- Equity-method earnings fell to $0.8 million in Q2 from $5.0 million and to $4.3 million in the first half from $14.0 million, principally reflecting lower affiliate results and timing of cotton-subsidy recognition at Parkdale America.
- A $1.5 million Brazilian non-income-tax refund and related interest was recorded as a non-operating gain in Q2. The quarter also included $0.4 million of bad-debt provision, versus $0.1 million in the prior-year quarter. No restructuring charges were recorded, compared with $1.2 million in Q2 FY2011.
- First-half foreign-currency translation adjustments reduced other comprehensive income by $18.3 million. Management attributed the decline in working capital partly to currency effects, including weakening of the Brazilian Real.
Outlook, risks, and contingencies
Management expects profitability to improve in the second half of FY2012, citing improved sales volumes after the holiday shutdown, easing raw-material prices, signs of improvement in Brazil, and moderation in apparel-supply-chain inventory destocking. This outlook is conditional: polyester improvement assumes raw-material costs remain stable, destocking ends, and North American suppliers maintain share against Asia; nylon volume is expected to recover but profitability to remain flat; and International results depend on Brazilian currency conditions and higher China sales volumes. These are expectations, not formal earnings guidance.
Management expects FY2012 capital expenditures of approximately $6 million to $8 million, mainly for additional texturing capacity in El Salvador and routine asset spending. It plans to continue deleveraging and said another note redemption was likely in May 2012. It also expects approximately $2.2 million less net interest expense in FY2012 than FY2011. The company anticipated repatriating approximately $6 million from Brazil before fiscal year-end.
- Key operating risks include apparel-chain destocking, raw-material price and availability volatility, inflation in labor and utility costs, lower production utilization, competition from Asian imports, and currency movements. The company does not hedge raw-material costs with financial instruments.
- Unifi said it had no basis to determine if or when it may assume monitoring or remediation responsibilities for a contaminated satellite facility in North Carolina, or the extent of any potential liability. DuPont has performed remediation and is expected to fund seven years of monitoring costs when responsibility transfers.
- The company reversed its accrual for military-garment-related claims involving alleged non-compliant nylon yarn, stating that it did not expect further claims or liability. It reported no pending material legal proceedings beyond routine litigation.
- A full valuation allowance remains against net deferred tax assets in the U.S. and certain foreign subsidiaries; the timing of any release is uncertain. Tax expense was recorded despite pre-tax losses, partly because certain jurisdictional losses generated no recognized tax benefit.
Important facts for investors to verify
- Whether sales volumes recover and inventory destocking ends, and whether the stated second-half profitability outlook is being achieved.
- Whether raw-material costs, conversion margins, and factory utilization improve, especially in Polyester and Brazil.
- Whether operating cash generation and revolver availability support further note redemptions while maintaining liquidity; note the substantial concentration of debt in the 2014 notes.
- How quickly affiliate earnings recover and whether Renewables can develop revenue to offset its operating costs.
- Potential effects of currency movements, tax repatriation and valuation allowances, and the unresolved scope and timing of environmental responsibilities.