UNIFI, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 24, 2018 (52 weeks), with fiscal 2017 ended June 25, 2017 as the main comparison. The request metadata says “2017 Q4,” but this filing is an FY2018 annual report; its fiscal fourth quarter ended June 24, 2018.
Business context
UNIFI manufactures and sells polyester and nylon yarns and recycled materials to yarn manufacturers, knitters and weavers serving apparel, hosiery, home furnishings, automotive and industrial markets. Its reportable segments are Polyester, Nylon and International. Premium value-added (PVA) products, including REPREVE recycled fibers, represented approximately 45% of fiscal 2018 consolidated sales, up from 40% in fiscal 2017.
Key financial metrics
Dollar amounts below are in millions, converted from the filing’s presentation in thousands, unless stated otherwise.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net sales | $678.9 | $647.3 | +4.9% |
| Gross profit / gross margin | $86.4 / 12.7% | $94.2 / 14.5% | Profit down 8.2% |
| Operating income / operating margin | $28.8 / 4.2% | $43.8 / 6.8% | Income down 34.2% |
| Net income attributable to UNIFI | $31.7 | $32.9 | Down 3.6% |
| Diluted EPS | $1.70 | $1.78 | Down $0.08 |
| Cash from operating activities | $37.3 | $46.1 | Down $8.7 |
| Capital expenditures | $25.0 | $33.2 | Down $8.2 |
| Cash and cash equivalents | $44.9 | $35.4 | Up $9.5 |
| Total debt obligations | $131.2 | $129.5 | Up $1.7 |
| Working capital | $189.3 | $167.6 | Up $21.7 |
Cash from operations less capital expenditures was approximately $12.3 million in FY2018 (a simple calculation from reported figures, not a company-defined measure). Gross profit was pressured by rising raw-material costs, delayed selling-price adjustments and product mix. Interest expense, net, rose to $4.4 million from $3.1 million.
Cash was concentrated outside the United States: $44.9 million was held by foreign subsidiaries, versus $11,000 domestically. UNIFI reported $53.2 million of availability under its asset-based revolver and total liquidity of $98.1 million. The ABL Revolver balance was $28.1 million and the ABL Term Loan balance was $85.0 million; both mature in March 2020. Capital lease obligations were $18.1 million.
Material changes and segment performance
- Consolidated sales volume increased 10.7%, while average selling prices declined 5.6%, reflecting growth in lower-priced Flake, recycled polyester Chip and staple fiber, as well as lower nylon sales.
- Polyester: Sales rose 2.4% to $364.2 million, but segment profit fell 13.0% to $47.0 million. Raw-material cost pressure, pricing delays, lower yarn sales, recycling start-up costs and an unfavorable mix weighed on results.
- Nylon: Sales fell 8.9% to $102.6 million and segment profit declined 10.7% to $12.7 million, amid continued weakness in socks, hosiery and intimate apparel.
- International: Sales grew 19.7% to $207.9 million and segment profit increased 5.8% to $46.2 million, driven by PVA volumes, partly offset by lower-margin mix and higher raw-material costs.
- SG&A rose 10.3% to $56.1 million, including increased costs for recruiting, salaries, international commercial expansion and marketing. The increase was partly offset by lower external service-provider fees.
- Tax benefit was $1.5 million, compared with tax expense of $10.9 million in FY2017. The FY2018 effective tax rate was negative 4.9%, primarily reflecting releases of an uncertain tax position and valuation allowance, along with tax-reform effects. These items lifted reported earnings; adjusted net income excluding two specified tax reversals was $24.5 million, or $1.32 per diluted share.
Fiscal fourth-quarter FY2018 sales were $181.3 million and net income was $10.8 million. The prior quarter’s net income was unusually low at $0.2 million, and included the quarter’s raw-material-related gross-profit pressure.
Outlook, commentary and risks
- Management stated a goal of growing global PVA sales by more than 10% annually. This is a company goal, not a quantified earnings or revenue forecast.
- UNIFI expected FY2019 capital spending of approximately $25 million and expected SG&A to exceed FY2018 as the full-year cost of recent hiring and commercial investments took effect. It also expected research and development costs to increase.
- Management said growth initiatives in technology, sustainability, partnerships and supply-chain expansion are intended to support sales, margins and operating income, while also increasing SG&A. It expected GILTI, FDII and BEAT tax provisions to adversely affect the FY2019 effective tax rate.
- Raw-material price volatility and lags in passing cost increases to customers remain major margin risks. The company also cited import competition, changing trade policy, weak domestic textile demand and declining nylon demand.
- At year-end, revolver availability of $53.2 million exceeded the $23.1 million trigger level for the fixed-charge coverage covenant. The reported fixed-charge coverage ratio was 0.93 to 1.00; the company stated it was compliant with its credit covenants and could improve the ratio using existing cash.
- Most cash was held abroad and may not be readily available for domestic requirements. UNIFI intended to reinvest approximately $113.9 million of undistributed foreign earnings indefinitely; repatriation could create state or foreign withholding taxes.
- Environmental obligations at former or contaminated Kinston, North Carolina property remain uncertain. UNIFI had no basis to estimate whether or when it might incur remediation responsibility or the potential cost.
- UNIFI reported no legal proceedings expected to have a material adverse effect and no material off-balance-sheet arrangements. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Whether PVA and REPREVE growth can translate into improved margins, rather than primarily lower-priced volume.
- Whether raw-material costs stabilize and UNIFI can recover cost increases through pricing without losing customers.
- Domestic cash availability, revolver borrowing-base availability, covenant headroom and the March 2020 debt maturity and refinancing plan.
- The sustainability of earnings after excluding FY2018 tax benefits, and the actual FY2019 impact of tax reform provisions.
- Performance and cash distributions from PAL, a significant unconsolidated affiliate, and the status of the Kinston environmental matters.