UFI

Business Context and Reporting Period

Company: Unifi, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: June 29, 2008 (53 weeks)
Industry: Textile and Apparel (Producer of polyester and nylon yarns)

Unifi, Inc. is a diversified North American producer and processor of multi-filament polyester and nylon yarns, including specialty and premier value-added (PVA) yarns. The Company operates manufacturing facilities in the U.S., Brazil, and Colombia, and maintains joint ventures in China and Israel. During the fiscal year, the Company faced a difficult operating environment characterized by a faltering economy and unprecedented increases in raw material, energy, and freight costs.

Key Financial Metrics

Note: Fiscal Year 2008 included 53 weeks, while Fiscal Year 2007 included 52 weeks.

Material Changes vs. Prior Period

• Profitability Improvement: The Company reported a net loss of $16.2 million, a significant improvement of $99.6 million compared to the $115.8 million loss in the prior year. This improvement was primarily driven by a reduction in asset impairment charges ($87.7 million decrease) and increased gross profits in both polyester and nylon segments.
• Revenue Growth: Net sales increased 3.3% to $713.3 million. This was driven by a 10.1% increase in weighted-average selling prices, which offset a 6.7% decrease in unit volume.
• Segment Performance:
  • Polyester: Sales remained flat ($530.6 million) with a slight volume decline offset by price increases. Gross margin improved to 6.9% from 5.8%.
  • Nylon: Sales increased 14.1% to $182.8 million due to higher volumes in hosiery and shape-wear. Gross margin improved to 7.8% from 4.7%.
• Impairment Charges: The Company recorded $13.8 million in write-downs of long-lived assets and equity affiliates in 2008, compared to $101.5 million in 2007. Notable 2008 charges included $6.4 million for the YUFI joint venture and $4.5 million for the USTF joint venture.

Guidance, Outlook, and Management Commentary

• Strategic Shift in China: Management concluded that the Yihua Unifi Fibre Industry Company Limited (YUFI) joint venture was not viable for commodity sales. The Company plans to exit the joint venture by selling its 50% interest to its partner, Sinopec Yizheng Chemical Fiber Co., Ltd., for an estimated $10.0 million. Concurrently, Unifi plans to form a new entity, Unifi Textiles (Suzhou) Company, Ltd. (UTSC), to focus on high-value PVA products in Asia, with an estimated startup investment of $3.0 million to $5.0 million in fiscal 2009.
• Asset Sales: The Company is actively selling excess assets to improve liquidity. A proposed sale of the Kinston, North Carolina facility to Reliance Industries was terminated in August 2008. The Company retains rights to sell these assets for two years; otherwise, ownership transfers to DuPont for no value.
• Outlook: Management expects cash from operations to improve in fiscal 2009. While sales are expected to remain flat, gross margins should improve due to reduced manufacturing costs and growth in PVA products. Interest expense is expected to decrease as borrowings under the revolving credit facility are reduced.
• Risks: Key risks include intense competition from foreign producers, volatility in raw material prices (petrochemicals), the financial condition of major customers (notably Hanesbrands, Inc., representing 11% of sales), and the potential loss of trade agreement benefits (NAFTA, CAFTA).

Investor Verification Checklist

• YUFI Transaction Status: Verify the closing status and final terms of the proposed $10.0 million sale of the 50% interest in the YUFI joint venture to Sinopec.
• Kinston Asset Disposition: Monitor the status of the Kinston facility assets, which must be sold within two years of March 20, 2008, or transferred to DuPont for no value.
• Hanesbrands Contract Renewal: Confirm the renewal status of the supply agreement with Hanesbrands, Inc., which expires in April 2009 and accounts for approximately 11% of consolidated revenues.
• Debt Covenants: Review compliance with debt covenants, specifically the fixed charge coverage ratio and borrowing base limitations under the amended revolving credit facility.
• Raw Material Costs: Assess the Company's ability to pass through continued increases in polyester and nylon polymer costs to customers without losing market share.