UNIFI, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019 (53 weeks), compared with fiscal 2018 ended June 24, 2018 (52 weeks). The request metadata says “2018 Q4,” but this filing is an annual report for fiscal 2019; the filing separately reports fourth-quarter results. Unless noted, dollar amounts below are in thousands.
Business context and financial performance
UNIFI manufactures and sells polyester and nylon yarns and recycled materials, including REPREVE products, to textile manufacturers and other customers. Its reportable segments are Polyester, Nylon, Brazil and Asia. Premium value-added (PVA) products represented approximately 47% of fiscal 2019 sales and grew 10% year over year.
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $708,804 | $678,912 |
| Gross profit / margin | $66,308 / 9.4% | $86,428 / 12.7% |
| Operating income / margin | $10,960 / 1.5% | $28,799 / 4.2% |
| Net income | $2,456 | $31,702 |
| Diluted EPS | $0.13 | $1.70 |
| Adjusted EBITDA (non-GAAP) | $36,300 | $52,271 |
| Cash from operating activities | $7,284 | $37,335 |
| Capital expenditures | $24,871 | $25,029 |
| Cash and cash equivalents at year-end | $22,228 | $44,890 |
| Total debt principal | $128,018 | $131,207 |
Operating cash flow less capital expenditures was approximately negative $17,587 in FY2019, versus positive $12,306 in FY2018. Working capital was $190,889, including $133,781 of inventories. The company had $61,501 of excess availability under its ABL revolver; most cash was held by foreign subsidiaries, and may not be presently available for domestic needs. The ABL facility matures in December 2023. UNIFI reported compliance with its debt covenants and a 1.22:1 fixed-charge coverage ratio at year-end.
Material changes and segment trends
- Sales rose 4.4%, with reported volume up 7.1%; the extra fiscal week, growth in recycled materials and Asia PVA products contributed. Average selling prices declined 2.6%, in part from a shift toward lower-priced products and foreign exchange.
- Gross profit fell 23.3% and net income fell 92.3%. The principal pressures were imported textured polyester yarn, raw-material cost volatility and delayed or difficult price increases, lower textured-yarn volumes and fixed-cost absorption, weaker foreign currencies, lower PAL earnings and a higher tax rate.
- Polyester segment sales were $370,770 and segment profit was $39,887, down from $49,087. Nylon sales were $98,127 and segment profit $9,979, both lower; management cited demand declines and a customer program moving production overseas. Brazil sales were $102,877 and segment profit $20,116, reflecting currency, competition and input-cost pressures. Asia sales grew 36.6% to $132,866, while segment profit edged down to $15,700 as growth was offset by mix, costs and currency.
- PAL contributed $2,561 of UNIFI’s equity-method earnings, down from $4,533 in FY2018. Equity-method earnings totaled $3,968, or 39.6% of pretax income.
Outlook, commentary and risks
- Management expects approximately $25,000 of FY2020 capital expenditures, including maintenance, Americas production and technology enhancements, and new texturing equipment. The filing also indicates expected FY2021 capital spending of approximately $30,000.
- Management’s stated strategic objectives include annual PVA sales growth above 10%, expanding innovation and sustainability initiatives, developing strategic partnerships, and optimizing the supply chain. These are objectives, not earnings guidance.
- UNIFI reduced its annualized SG&A run rate from nearly $60,000 to approximately $51,000 through cost actions substantially completed in FY2019. FY2019 included $1,351 of severance costs in adjusted EBITDA and $2,058 of accrued severance at year-end.
- The company filed U.S. antidumping and countervailing duty petitions in October 2018 concerning polyester textured yarn imports from China and India. Preliminary duties were announced in 2019; final determinations were expected by year-end 2019, so the ultimate market and company impact was uncertain at filing.
- Raw-material prices, imported competition, customer and brand-partner concentration, textile demand, foreign exchange, trade policy, and access to liquidity are key risks. A domestic Nylon Segment customer represented approximately 28% of that segment’s sales. The filing also describes potential environmental obligations related to former Kinston operations, but states that timing and potential liability cannot be determined; no material adverse effect was expected from ordinary-course legal proceedings.
- The effective tax rate was 75.5%, compared with a 4.9% benefit in FY2018. FY2019 included GILTI, withholding taxes and valuation-allowance effects; the company reported a $26,020 deferred-tax valuation allowance.
Fourth-quarter results and unusual items
For the quarter ended June 30, 2019, net sales were $179,493, gross profit was $18,342, net income was $1,002, and diluted EPS was $0.05. The third quarter had a net loss of $1,529. The filing attributes pressure in several FY2019 quarters to elevated textured-yarn imports and cites a raw-material cost spike in the quarter ended December 30, 2018. FY2019 also included a $131 loss on extinguishment of debt related to the credit amendment. The company adopted new revenue-recognition guidance in FY2019 and reported its impact as immaterial; it expected adoption of the new lease standard to increase total assets by approximately 2%.
Important facts for investors to verify
- Whether final U.S. trade-duty determinations occurred as expected and how they affected import volumes, pricing and domestic textured-yarn margins.
- Whether inventory levels and operating cash flow improved after domestic production outpaced sales and inventories increased to $133,781.
- Whether PVA and REPREVE growth translates into better margins, given the reported expansion of lower-priced product mix.
- Whether FY2020 capital spending, cost reductions and equipment investments deliver the expected operating benefits while preserving liquidity and covenant headroom.
- The sustainability of earnings and cash distributions from PAL and other affiliates, and the effect of tax matters, foreign-cash accessibility and the $26,020 valuation allowance.