Unifi, Inc. — Form 10-K Summary
Period: Fiscal year ended June 24, 2012, compared primarily with the fiscal year ended June 26, 2011. Although the request metadata says “2011 Q4,” this filing is an annual report for fiscal 2012; it also reports fourth-quarter results.
Business: Unifi manufactures and sells polyester and nylon yarns, including commodity, specialized and premier value-added (PVA) products, across apparel, industrial, furnishings and automotive markets. It reports Polyester, Nylon and International segments and operates in the U.S. and several foreign markets.
Financial performance
Amounts below are in thousands of dollars, except per-share data and percentages.
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $705,086 | $712,812 |
| Gross profit / gross margin | $54,396 / 7.7% | $74,652 / 10.5% |
| Operating income / operating margin | $8,632 / 1.2% | $28,692 / 4.0% |
| Net income attributable to Unifi | $11,491 | $25,089 |
| Basic / diluted EPS | $0.57 / $0.56 | $1.25 / $1.22 |
| Net cash from operating activities | $43,309 | $11,880 |
| Capital expenditures | $6,354 | $20,539 |
| Cash and cash equivalents at year-end | $10,886 | $27,490 |
| Total debt at year-end | $121,552 | $168,664 |
| Working capital at year-end | $166,485 | $212,969 |
Net interest expense was $14,152, down from $16,679. Adjusted EBITDA, a company-defined non-GAAP measure, was $39,800 versus $60,460. The filing reports no dividend payments and says cash dividends are not expected in the foreseeable future.
Material changes versus prior year
- Sales declined 1.1%; consolidated sales volume fell 5.9%, partly offset by a 4.8% increase in weighted-average selling price.
- Gross profit fell 27.1%, with margin down 2.8 percentage points. Management attributed the decline to lower volume, elevated raw-material costs, reduced factory utilization from inventory reduction efforts, and pressure on conversion margins.
- Segment adjusted profit fell to $12,913 in Polyester from $20,660; $11,227 in Nylon from $14,055; and $13,197 in International from $23,832.
- Operating cash flow increased to $43,309, helped by lower inventory and working-capital actions; inventory declined to $112,750 from $134,883. Cash balances fell, in part as the company repaid debt.
- Total debt declined by $47,112. In May 2012, Unifi refinanced its prior borrowings with a $100,000 ABL revolver, a $50,000 ABL term loan and a $30,000 Term B Loan, all maturing May 2017. Year-end borrowings were $51,000 on the revolver, $50,000 on the ABL term loan and $20,515 on the Term B Loan.
Liquidity, outlook and key risks
- At year-end, Unifi reported $37,122 of excess availability under the ABL revolver and total liquidity of $48,008, including cash. It reported compliance with debt covenants and a 1.43 fixed-charge coverage ratio; a minimum 1.05 ratio applies if revolver availability falls below specified thresholds.
- Management expected the refinancing to extend maturities to 2017 and produce approximately $9,000 of annual interest savings. For FY2013, it forecast operating-profit improvement on expected higher volume and improved gross margins, and interest expense approximately $9,000–$10,000 below FY2012. It estimated FY2013 capital expenditures of $10,000–$12,000.
- Management cited inventory destocking in the U.S. apparel supply chain, record-high polyester raw-material costs, stronger competition from Asian imports and weakened Brazilian demand. Polyester raw-material costs averaged 8–9 cents per pound higher than FY2011; the U.S.-Asia polymer-price gap widened to 11–12 cents per pound from 4–5 cents.
- Key risks include intense global competition, inability to pass through input-cost inflation, limited or disrupted raw-material supply, economic and currency volatility, trade-rule changes or illegal transshipments, and debt-service, borrowing-availability and covenant risks. A major new polyester competitor in Brazil was expected to reach full commercial production by late 2014.
- Unifi held a 34% interest in Parkdale America (PAL); equity-method affiliate earnings contributed $19,740 to FY2012 results, versus $24,352 in FY2011. PAL’s cotton-related government assistance program and Unifi’s reliance on PAL’s financial reporting are notable exposures.
- FY2012 included a $3,656 write-down of Unifi’s previously held Renewables interest after it acquired an additional 20% and began consolidating the development-stage company at 60% ownership. Debt-refinancing and prepayment charges and a $6,017 deferred-tax benefit from a valuation-allowance release also affected results.
- An environmental matter remains at a satellite facility associated with the former Kinston site. DuPont performed remediation, but Unifi may assume future monitoring and remediation responsibilities; the filing says the timing and extent of any obligation cannot be determined.
Important facts for investors to verify
- Whether FY2013 volume and margin recovery occurred as forecast, particularly after inventory destocking and in the International segment.
- Actual interest savings, subsequent Term B Loan prepayments, revolver availability, and covenant headroom under the new debt facilities.
- The sustainability and cash conversion of affiliate earnings, including PAL’s results and cotton-program support, and the reliability of investee reporting.
- Whether raw-material inflation, competitive imports, Brazilian market conditions and the expected Brazilian capacity expansion affected profitability as anticipated.
- The assumptions supporting the deferred-tax-asset valuation-allowance release and forecast use of tax-loss carryforwards.
- Any developments in the Kinston environmental matter and the eventual cost or responsibility for monitoring and remediation.