UNIFI, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 25, 2017 (52 weeks), compared with fiscal year ended June 26, 2016. Although the request metadata says “2016 Q4,” this filing reports FY2017 annual results and also includes quarterly data. Amounts below are in millions of dollars unless stated otherwise.
Business context
UNIFI manufactures and sells polyester and nylon yarns and recycled materials to textile manufacturers and fabric producers. Its three reportable segments are Polyester, Nylon, and International. Premium value-added (PVA) products, including REPREVE recycled fibers, represented approximately 40% of FY2017 sales, up from 35% in FY2016.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $647.3 | $643.6 | +0.6% |
| Gross profit / margin | $94.2 / 14.5% | $93.6 / 14.5% | +0.6% profit |
| Operating income / margin | $43.8 / 6.7% | $42.2 / 6.6% | +3.7% |
| Net income attributable to UNIFI | $32.9 | $34.4 | -4.5% |
| Basic / diluted EPS | $1.81 / $1.78 | $1.93 / $1.87 | Lower |
| Adjusted EBITDA (non-GAAP) | $65.6 | $65.4 | +0.4% |
| Cash from operating activities | $46.1 | $56.0 | -17.7% |
| Capital expenditures | $33.2 | $52.3 | -36.6% |
| Cash and cash equivalents at year-end | $35.4 | $16.6 | Higher |
Sales volume rose 11.3%, while average selling prices fell 10.6%, reflecting product and segment mix. Income before tax was $43.3 million, and the effective tax rate fell to 25.2% from 31.2%, aided by foreign earnings mix and research and development credits. Earnings from unconsolidated affiliates declined to $4.2 million from $9.0 million, principally because of weaker PAL results.
Performance diverged by segment: International sales increased 41.7% to $173.7 million and Segment Profit rose 57.4% to $43.7 million. Polyester sales fell 7.2% to $355.7 million and Segment Profit fell 11.1% to $54.0 million. Nylon sales fell 14.4% to $112.7 million and Segment Profit fell 28.0% to $14.2 million. Segment Profit is a company-defined measure of segment gross profit plus depreciation.
For the fourth quarter of FY2017, sales were $171.3 million, gross profit was $27.4 million, and net income attributable to UNIFI was $9.7 million, or $0.53 basic EPS. In the fourth quarter of FY2016, these were $163.9 million, $27.5 million, and $10.2 million, or $0.57 basic EPS, respectively.
Financial position and liquidity
At June 25, 2017, total assets were $571.5 million, working capital was $167.6 million, and shareholders’ equity was $360.8 million. Principal debt obligations were $129.5 million, compared with $123.0 million a year earlier; the balance-sheet carrying amount, net of debt issuance costs, was $128.4 million. Debt included a $95.0 million ABL term loan, $9.3 million revolver borrowings, and $25.2 million of capital leases. The ABL facility matures in March 2020.
ABL revolver availability was $65.1 million, bringing reported total liquidity to $100.5 million. Nearly all cash was held by foreign subsidiaries, while domestic cash was only $18,000; access to foreign cash may be constrained. The fixed-charge coverage ratio was 0.84 to 1.00, but the related covenant becomes effective only if revolver availability falls below the specified trigger; UNIFI reported compliance with its covenants. Cash dividends were not paid, and the company does not expect to pay them in the foreseeable future.
Changes, outlook, risks, and unusual items
- Management attributed growth primarily to PVA sales, especially in Asia and Brazil. Domestic Polyester and Nylon businesses faced weak retail conditions and cautious customer ordering. Increasing virgin polyester raw-material costs and delayed selling-price adjustments pressured domestic margins.
- FY2017 included a $1.7 million loss on the sale of UNIFI’s 60% interest in Repreve Renewables, sold for $0.5 million cash and release of certain debt obligations. The divestiture removed the business from subsequent operations.
- Management expects FY2018 capital expenditures of approximately $35 million, including Asia expansion, recycling capacity, technology improvements, and maintenance. It expects SG&A to rise as it invests in commercial expansion, innovation, partnerships, and talent. Management’s stated goal is to grow global PVA sales by more than 10% annually; the filing does not provide formal earnings or revenue guidance.
- Management expects the investments and growth initiatives to support future sales, gross margins, and operating income, but outcomes depend on execution and market conditions. A $6.8 million PAL dividend was received after fiscal year-end.
- Key risks include intense import competition; volatile petroleum-based raw-material and energy costs; inability to pass cost increases through promptly; weaker demand and changing retail channels; potential substitution of polyester for nylon; trade-policy changes, including NAFTA renegotiation; foreign-exchange volatility; and reliance on limited sources for certain inputs.
- UNIFI’s 34% PAL investment is not controlled by UNIFI, and PAL earnings and distributions can fluctuate. A domestic customer represented approximately 35% of Nylon Segment sales, although no customer accounted for 10% of consolidated sales. Environmental remediation responsibility at certain North Carolina properties remains uncertain; the filing says potential timing and cost cannot be determined.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective.
Investor facts to verify
- Whether PVA growth and the International Segment can offset continued weakness in domestic Polyester and Nylon demand.
- Whether raw-material cost changes can be passed through without further margin pressure, and whether recycling inputs remain economically competitive.
- Cash conversion and liquidity: operating cash flow declined, inventory increased, and most cash was held outside the United States.
- Debt service and covenant headroom, including the $89.8 million of scheduled debt maturities in FY2020 and the conditional fixed-charge coverage test.
- PAL’s operating performance, distributions, and the outcome and potential cost of the disclosed environmental matters.