UFI

Business Context and Reporting Period

Unifi, Inc. is a diversified producer and processor of multi-filament polyester and nylon yarns, including specialty and premier value-added (PVA) products. The company operates manufacturing facilities in the Americas and maintains sales operations in China. This Form 10-K covers the fiscal year ended June 28, 2009.

Key Financial Metrics

Segment Performance: Polyester segment sales were $403.1 million (72.8% of total), and Nylon segment sales were $150.5 million (27.2% of total). The Polyester segment reported an operating loss of $33.2 million, while the Nylon segment reported an operating profit of $3.4 million.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 22.4% year-over-year, driven by a 22.9% decline in unit sales volumes due to the global economic downturn and supply chain de-stocking.
• Increased Losses: The net loss increased significantly from $16.2 million to $49.0 million. This was primarily due to decreased sales volumes and a non-cash goodwill impairment charge of $18.6 million recorded in the third quarter.
• Asset Impairments: The company recorded $18.6 million in goodwill impairment related to the domestic polyester reporting unit and $1.5 million in impairment charges related to its investment in Yihua Unifi Fibre Company Limited (YUFI).
• Working Capital Reduction: Management aggressively reduced working capital, decreasing net customer receivables by $25.5 million and inventories by $33.2 million compared to the prior year.

Guidance, Outlook, and Management Commentary

• Economic Outlook: Management expects the U.S. economic downturn to continue impacting consumer spending. However, sales volumes improved in the fourth quarter of fiscal 2009 as de-stocking effects subsided.
• Strategic Shifts: The company completed the sale of its 50% interest in YUFI for $9.0 million and formed a wholly-owned Chinese subsidiary, Unifi Textiles (Suzhou) Company, Ltd. (UTSC), to focus on PVA yarn sales in Asia. UTSC is projected to operate profitably in fiscal 2010.
• Cost Reduction: The company reduced the volume level required to operate profitably by more than 10% through operational efficiencies, headcount reductions, and asset consolidations.
• Liquidity Constraints: As of June 28, 2009, the company's fixed charge coverage ratio was less than 1.0 to 1.0, subjecting it to restrictions on capital expenditures and investments under its Amended Credit Agreement until financial performance improves.
• Risks: Key risks include intense competition from foreign producers, volatility in raw material prices, customer financial instability, and the potential for further asset impairments.

Important Facts for Investor Verification

• Debt Covenants: Verify the company's ability to maintain the fixed charge coverage ratio required by its Amended Credit Agreement to avoid further restrictions on capital spending.
• Customer Concentration: Sales to Hanesbrands, Inc. (HBI) represented approximately 11% of consolidated revenues. The supply agreement with HBI expired in April 2009, and a new long-term contract was anticipated but not finalized at the time of filing.
• Goodwill Impairment: Confirm the valuation assumptions used for the $18.6 million goodwill impairment charge and monitor for potential future impairments given the economic environment.
• Joint Venture Exit: Verify the integration and profitability timeline of the new Chinese subsidiary (UTSC) replacing the exited YUFI joint venture.
• Environmental Liabilities: Monitor the status of the Kinston, North Carolina site, where the company retains potential future monitoring and remediation responsibilities despite a lease termination agreement with DuPont.