UNIFI, INC. — Form 10-K Summary
Period and context: The filing is for the 52-week fiscal year ended June 26, 2016, with comparisons to fiscal 2015 and 2014. This does not match the request metadata’s “2015 Q4”; the filing also reports quarterly results, including the quarter ended June 26, 2016. Unifi manufactures polyester and nylon yarns, including premium value-added (PVA) and recycled REPREVE products, through Polyester, Nylon and International segments. Dollar figures below are in millions unless noted.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $643.6 | $687.1 |
| Gross profit / margin | $93.6 / 14.5% | $90.7 / 13.2% |
| Operating income / margin | $42.2 / 6.6% | $38.5 / 5.6% |
| Net income attributable to Unifi | $34.4 | $42.2 |
| Basic / diluted EPS | $1.93 / $1.87 | $2.32 / $2.24 |
| Operating cash flow | $56.0 | $38.9 |
| Capital expenditures | $52.3 | $26.0 |
| Cash and total debt at year-end | $16.6 / $123.0 | $10.0 / $104.1 |
| Working capital | $136.6 | $138.2 |
FY2016 operating cash flow less capital expenditures was approximately $3.6 million. The company reported $68.6 million of availability under its ABL revolver and was in compliance with financial covenants; the fixed-charge coverage ratio was 1.93 to 1.0. Nearly all cash was held in subsidiaries outside the U.S. or in Renewables, and may not be immediately available for domestic needs.
Segments and quarterly results
- Polyester: FY2016 sales were $383.2 million, down 3.3%; segment profit was $60.7 million, down 1.0%, mainly reflecting lower volumes.
- Nylon: Sales were $131.7 million, down 12.0%; segment profit was $19.7 million, down 5.1%, reflecting weaker demand, inventory adjustments and Colombian peso translation, partly offset by efficiency gains.
- International: Sales were $122.6 million, down 9.2% after adverse currency translation; segment profit rose 18.5% to $27.8 million as PVA mix and underlying margins improved.
- June 2016 quarter: Sales were $163.9 million, gross profit $27.5 million, net income attributable to Unifi $10.2 million, and basic/diluted EPS $0.57/$0.56. In the June 2015 quarter, sales were $175.0 million, gross profit $25.3 million and net income $15.6 million; the prior-year result included significant tax benefits and a PAL bargain-purchase gain.
Material changes versus prior year
- Sales decreased 6.3%, reflecting a 5.6% decline in consolidated pricing and a 0.7% decline in volume. Pricing pressure came from lower raw-material costs, lower nylon mix and foreign-currency translation; PVA program pricing partly offset this.
- Gross profit rose 3.2% and gross margin improved to 14.5%, led by International segment performance and lower polyester raw-material costs. SG&A declined 4.4% to $47.5 million.
- Net income declined 18.4%. Lower earnings from Parkdale America, LLC (PAL), a less favorable effective tax rate, Brazilian real depreciation and higher bad-debt provision outweighed stronger gross profit and lower SG&A. FY2016 effective tax rate was 31.2%, versus 24.8% in FY2015.
- Equity earnings from unconsolidated affiliates fell to $9.0 million from $19.5 million. PAL contributed $6.1 million in FY2016 versus $17.4 million in FY2015; the prior year included the company’s share of PAL acquisition bargain-purchase gains.
- Adjusted EBITDA under the company’s revised definition increased to $65.4 million from $59.6 million. Unifi changed the calculation in Q4 FY2016, including eliminating the adjustment for non-cash compensation; non-GAAP measures are not substitutes for GAAP results.
Outlook, risks and unusual items
- Management expects domestic market softness experienced in FY2016 to affect the first half of FY2017, but had not identified it as a long-term trend. Management targets PVA sales growth of more than 10% annually; PVA products represented about 35% of FY2016 consolidated sales, versus 30% in FY2015.
- FY2017 capital spending was estimated at approximately $40 million, to complete the next REPREVE Recycling Center production line, modify machinery and support growth in Asia. The bottle-processing plant was expected to begin operating in August 2016; recycling-center capacity was planned to reach approximately 100 million pounds annually.
- Key risks include intense global competition and trade-policy changes, volatile petroleum-based raw-material and energy costs, foreign-exchange exposure (particularly the Brazilian real), soft textile and nylon markets, reliance on limited suppliers, and customer concentration. No consolidated customer represented at least 10% of sales, but one domestic customer accounted for approximately 37% of Nylon segment sales; the top ten customers represented about 33% of consolidated sales.
- PAL is a 34% non-controlling equity-method investment. Unifi depends on PAL’s operating performance, distributions and financial reporting; PAL financial statements were to be filed later by amendment. PAL’s cotton-subsidy program is also a factor in its results.
- Unifi disclosed an unresolved environmental monitoring/remediation uncertainty at a satellite facility associated with the former Kinston site; the company said it could not determine if or when it would have responsibility or the extent of any liability. Routine legal proceedings were not expected to have a material adverse effect. The filing reports $4.5 million of uncertain tax positions and approximately $78.3 million of foreign earnings intended to remain indefinitely reinvested; any U.S. tax on repatriation was not practicably determinable.
- Other notable items include $1.3 million of consulting and transition fees for former executives, a $1.7 million bad-debt provision (including a specific customer balance considered unlikely to be recovered), and $60 million of stated capital investment during FY2016. The company paid no dividends and stated it did not expect to pay cash dividends in the foreseeable future.
Investor facts to verify
- Whether PVA/REPREVE growth, pricing and margins deliver the expected returns on the large recycling and manufacturing investment program.
- Whether operating cash generation and revolver availability remain adequate as capital spending, debt and scheduled repayments increase.
- How much PAL earnings and cash distributions contribute to results, and the implications of PAL’s separate reporting timetable and cotton-subsidy exposure.
- Whether currency movements, raw-material price changes and domestic market softness continue to pressure sales and segment profitability.
- Credit quality of the key Nylon customer and top customers, and the status of the Kinston environmental matter, tax positions and foreign cash accessibility.