UNIFI, INC. — Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2015 (52 weeks); the filing also reports the fourth quarter ended June 28, 2015. Dollar figures below are in millions unless stated otherwise.
Business context
Unifi manufactures and sells polyester and nylon yarns, including commodity products, specialty yarns and higher-margin premier value-added (PVA) products. Its three reportable segments are Polyester, Nylon and International. PVA products represented approximately 30% of consolidated sales, up from 27% in fiscal 2014.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $687.1 | $687.9 |
| Gross profit / margin | $90.7 / 13.2% | $83.3 / 12.1% |
| Operating income / margin | $38.5 / 5.6% | $31.5 / 4.6% |
| Net income attributable to Unifi | $42.2 | $28.8 |
| Basic / diluted EPS | $2.32 / $2.24 | $1.52 / $1.47 |
| Adjusted EBITDA (non-GAAP) | $63.7 | $57.6 |
| Cash from operating activities | $38.9 | $56.4 |
| Capital expenditures | $26.0 | $19.1 |
Fiscal 2015 net margin attributable to Unifi was 6.1%. Approximate operating cash flow less capital expenditures was $12.9 million. Cash and cash equivalents were $10.0 million; total debt was $104.1 million, including $15.7 million in capital leases. Working capital was $140.6 million, down from $150.9 million.
The $200 million asset-based credit facility matures in March 2020. At year-end, revolver availability was $75.9 million, total liquidity including cash was $85.9 million, and the Company reported compliance with covenants. Consolidated leverage was 1.6x and fixed-charge coverage was 3.0x. Most cash was held outside the U.S.; reported U.S. cash was only $12,000.
Changes versus the prior year
- Sales were essentially flat, while consolidated volume rose 2.2% and average selling prices fell 2.3%, reflecting lower raw-material costs, mix and currency effects.
- Gross profit increased 8.9%; management cited stronger PVA demand, lower polyester input costs and segment improvements. Polyester raw-material pricing averaged approximately 14% lower than in FY2014.
- Net income rose 46.2%, aided by improved gross profit and a lower effective tax rate (24.8%, versus 42.1%). SG&A increased 7.5% to $49.7 million.
- Operating cash flow declined by $17.5 million, in part because affiliate distributions fell to $3.7 million from $13.2 million. Cash was also affected by capital spending, share repurchases and foreign-exchange movements.
- International sales were nearly flat in reported dollars despite 9.2% volume growth, as Brazilian-real depreciation reduced translated sales. International gross profit increased 31.4% to $21.4 million.
Outlook, risks and unusual items
- Management expects to invest approximately $85 million in capital projects during FY2016 and FY2017, including a Reidsville bottle-processing facility and expansion of the REPREVE Recycling Center. Funding is expected from operations, revolver borrowings and capital leases; actual spending may vary.
- Management believes PVA sales can grow by more than 10% annually and expects PVA demand to support International-segment growth, but these are expectations, not formal earnings guidance. The filing provides no clear consolidated revenue or EPS forecast.
- Key risks include intense global competition and imports; volatile petroleum-based raw-material and energy costs; inability to pass cost changes through promptly; dependence on certain raw-material suppliers; foreign currency exposure (the Brazilian real declined approximately 40% against the U.S. dollar during FY2015); and uncertain trade-policy outcomes, including the proposed TPP.
- FY2015 results included $4.7 million of Unifi’s share of PAL bargain-purchase gains. The tax provision also reflected a $7.6 million change associated with the indefinite-reinvestment assertion and a $3.0 million tax impact from settlement of prior-year intercompany foreign-currency transactions, among other items. Management says several of these effects are unlikely to recur at similar magnitude.
- Unifi recorded a $1.0 million loss on extinguishment of debt following its credit-facility amendment. Renewables disposed of biomass assets, recording a $1.3 million loss before non-controlling interest. No material pending legal proceedings were reported; a legacy contaminated satellite site may create future monitoring or remediation responsibilities, with timing and exposure unclear.
- PAL generated $19.5 million of Unifi’s $53.8 million pretax income, including the bargain-purchase gains. PAL distributions to Unifi were limited in FY2015 amid PAL’s investment and acquisition activity, and PAL’s cotton-subsidy program remains relevant to its earnings.
Fourth-quarter highlights
For the quarter ended June 28, 2015, sales were $175.0 million, gross profit was $25.3 million and net income attributable to Unifi was $15.6 million, or $0.86 basic EPS. Quarterly earnings included tax and PAL acquisition-accounting items described in the filing.
Important facts for investors to verify
- How much FY2015 earnings growth came from recurring operations versus PAL bargain-purchase gains and tax-related items; compare GAAP results with management’s non-GAAP adjusted net income of $34.3 million and adjusted EPS of $1.88.
- Whether the planned $85 million of FY2016–FY2017 capital projects are completed on budget and produce the expected PVA growth, margins and cash returns.
- Whether operating cash flow, affiliate distributions and revolver availability can support capital spending, debt service and any further share repurchases; the credit agreement restricts certain payments.
- How currency movements, especially in Brazil, and changes in raw-material costs affect reported sales, margins and cash held abroad.
- Whether PAL’s results, subsidy-related earnings, distributions and financial reporting remain reliable; its audited statements were to be filed later by amendment.
- The extent of any eventual responsibility for the contaminated satellite site and the potential effect of trade-policy changes, including TPP provisions.