Unifi, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 29, 2014 (52 weeks), compared with the 53-week fiscal year ended June 30, 2013. Dollar amounts below are in thousands unless stated otherwise. The filing also reports fourth-quarter FY2014 results.
Business context
Unifi manufactures and sells polyester and nylon yarns, including commodity, specialty and premier value-added (PVA) products, for apparel, industrial, furnishings and automotive markets. Its reportable segments are Polyester, Nylon and International. PVA products were approximately 27% of consolidated sales; about 50% of sales were compliant with regional trade-agreement or Berry Amendment rules of origin.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $687,902 | $713,962 | Down 3.7% |
| Gross profit / margin | $83,262 / 12.1% | $73,104 / 10.2% | Up 13.9% |
| Operating income / margin | $31,483 / 4.6% | $22,463 / 3.1% | Up 40.2% |
| Net income attributable to Unifi | $28,823 | $16,635 | Up 73.3% |
| Basic / diluted EPS | $1.52 / $1.47 | $0.84 / $0.80 | Higher |
| Adjusted EBITDA | $57,596 | $52,650 | Up $4,946 |
| Net cash from operating activities | $56,357 | $50,509 | Up $5,848 |
| Capital expenditures | $19,091 | $8,809 | Up $10,282 |
FY2014 gross-profit growth reflected improved Polyester and Nylon margins, lower average polyester raw-material costs and lower domestic depreciation. The prior year’s extra week also affected comparisons. The effective tax rate was 42.1%, versus 46.0%.
Fourth-quarter FY2014 sales were $181,752, gross profit was $25,021 and net income attributable to Unifi was $8,767 ($0.48 basic EPS). In the preceding quarter, sales were $176,864, gross profit $19,759 and net income attributable to Unifi $4,743.
Segments and material changes
- Polyester: Sales of $389,172, down 2.4%; gross profit rose 33.0% to $46,779. Improved product mix, lower raw-material costs and reduced depreciation supported profitability; volume fell amid the shift away from lower-margin commodity yarns and the shorter fiscal year.
- Nylon: Sales of $163,824, approximately flat; gross profit rose 11.8% to $20,175, supported by PVA programs and lower depreciation.
- International: Sales fell 10.8% to $134,906; gross profit fell 18.0% to $16,308. Brazil faced low-priced imports, currency devaluation and reduced tax incentives; China was affected by soft market conditions and lower volumes.
- Equity-method affiliate earnings rose to $19,063 from $11,444, including $17,846 from Parkdale America (PAL), principally reflecting improved operating income and higher earnings recognized under the cotton-support program.
Liquidity, debt and capital allocation
At June 29, 2014, cash was $15,907, working capital $150,925 and total debt $99,488. ABL Revolver availability was $61,103, giving reported total liquidity of $77,010. The company reported compliance with financial covenants and a fixed-charge coverage ratio of 10.3 to 1.0. Cash and cash equivalents were largely held abroad; repatriation may create additional taxes.
Operating cash flow of $56,357 funded investment and capital returns. FY2014 share repurchases were $36,551. The company completed its prior $50,000 repurchase authorization and approved a new authorization of up to $50,000; no cash dividends were paid. On August 25, 2014, after year-end, a credit amendment increased the ABL Term Loan from $68,000 to $90,000, raised its interest-rate margin and quarterly payments, and added a fixed-charge coverage condition for restricted payments.
Outlook, management commentary and risks
- Management expected global PVA sales to grow approximately 10–12% annually and PVA’s share of sales to increase, with anticipated margin benefits. This is a stated expectation, not a formal earnings forecast.
- FY2015 capital expenditures were expected to double from FY2014, including added texturing capacity, manufacturing flexibility and recycling capability. Bottle-washing integration was under consideration.
- Key risks include intense import competition, volatile petroleum-based input and energy costs, limited sourcing for some raw materials, foreign-exchange and political exposure, and potential trade-policy changes, including the proposed Trans-Pacific Partnership.
- Brazilian subsidiary performance may face further pressure from imports and the planned ramp-up of competitor Petrosuape, expected to reach full commercial production around mid-2015. China’s soft market and low capacity utilization were also cited.
- PAL’s earnings and distributions are exposed to the continuation and terms of the U.S. cotton economic-adjustment program. Affiliate results are material to pretax income and depend on investee reporting and distributions.
- Environmental matters include a contaminated satellite facility near Kinston, North Carolina. The company said future monitoring and remediation responsibility could transfer to it, but it could not determine the timing or potential liability.
Important facts for investors to verify
- Whether PVA growth and the planned capacity investments deliver the expected sales mix and margin gains, and whether FY2015 capital spending is approximately double FY2014.
- How much reported profit and cash generation depend on PAL and other equity-method affiliates, including cotton-program earnings and cash distributions.
- The post-year-end ABL amendment’s effect on debt cost, scheduled payments, covenant headroom and capacity for repurchases or investment.
- Whether currency weakness, imports and market softness continue to weigh on Brazil and China, and the competitive effect of Petrosuape’s ramp-up.
- The availability and cost of raw materials, and any material change in repatriation taxes, environmental obligations or other contingencies.