Unifi, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 30, 2013 (53 weeks), compared with FY2012 ended June 24, 2012 (52 weeks). Dollar amounts below are in millions unless stated otherwise. This is an annual filing, not a standalone Q4 filing; quarterly results for the quarter ended June 30, 2013 are noted separately.
Business context
Unifi manufactures and sells polyester and nylon yarns, including commodity, specialty and premier value-added (PVA) products such as recycled REPREVE. Its three reportable segments are Polyester, Nylon and International. The company’s strategy emphasizes higher-margin PVA products, regional-compliant yarns, operational efficiency and growth in markets including Central America, Brazil and China.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $714.0 | $705.1 |
| Gross profit / gross margin | $73.1 / 10.2% | $54.4 / 7.7% |
| Operating income / operating margin | $22.5 / 3.1% | $8.6 / 1.2% |
| Net income attributable to Unifi | $16.6 | $11.5 |
| Basic / diluted EPS | $0.84 / $0.80 | $0.57 / $0.56 |
| Adjusted EBITDA (non-GAAP) | $52.7 | $39.8 |
| Cash from operating activities | $50.5 | $43.3 |
| Capital expenditures | $8.8 | $6.4 |
| Cash and cash equivalents at year-end | $8.8 | $10.9 |
| Total debt at year-end | $97.8 | $121.6 |
| Working capital | $161.9 | $166.5 |
Sales rose 1.3%; consolidated sales volume increased 4.2%, while average selling price declined 2.9%. Gross profit improved 34.4%, primarily from higher volume, richer PVA mix, improved Polyester conversion margins and lower domestic unit manufacturing costs. SG&A rose 9.0% to $47.4 million, partly reflecting compensation, marketing and professional costs. Net interest expense fell to $3.8 million from $14.2 million as debt and borrowing costs declined. The FY2013 effective tax rate was 46.0%, versus a tax benefit in FY2012.
Equity earnings from unconsolidated affiliates were $11.4 million, down from $19.7 million. PAL contributed $9.5 million of FY2013 earnings; dividends and distributions received from affiliates totaled $14.9 million. These investments remain an important contributor to reported earnings and operating cash flow.
Quarter ended June 30, 2013: Sales were $200.7 million, gross profit $25.7 million and net income attributable to Unifi $10.5 million. The quarter contained 14 weeks, compared with 13 weeks in each of the preceding FY2013 quarters. The filing does not clearly quantify the specific drivers of the quarter’s net income relative to the other quarters.
Material changes versus FY2012
- Operating income increased to $22.5 million from $8.6 million, and net income attributable to Unifi rose 44.8% to $16.6 million.
- Polyester segment gross profit rose to $35.2 million from $19.7 million; the segment returned to positive operating income. Nylon and International gross profit also increased, to $18.1 million and $19.9 million, respectively.
- Operating cash flow increased by $7.2 million. Debt declined by $23.8 million year over year; Unifi repaid its Term B Loan in full in January 2013.
- Affiliate earnings fell by $8.3 million, primarily because PAL earnings declined amid cotton-market pressure and changes in timing and level of federal cotton-support payments.
- FY2013 included a $13.3 million income tax provision, compared with a $2.0 million benefit in FY2012. FY2012’s benefit included a $6.0 million release of deferred-tax valuation allowances.
Liquidity, debt and capital allocation
At June 30, 2013, Unifi had $36.1 million of excess availability under its ABL revolver and reported total liquidity of $44.9 million, including cash. Cash was concentrated outside the U.S.; foreign cash was treated as permanently reinvested. The company reported compliance with all financial covenants, excess revolver availability of $36.1 million and a fixed-charge coverage ratio of 3.75. Its credit facility was amended to extend maturity to May 2018 and revise certain repayment, collateral and restricted-payment terms.
Management completed its multi-year deleveraging effort, reporting an approximately $80 million reduction in debt since June 2010 and an overall weighted-average interest rate of approximately 3.4%, down from 11.5%. The FY2013 debt table reports total debt of $97.8 million. The company repurchased $19.3 million of stock during FY2013 and authorized a $50 million repurchase program; through September 3, 2013, it reported repurchases of 1.208 million shares at an average price of $18.66. No cash dividends were paid, and none were expected in the foreseeable future.
Outlook, risks and unusual items
- Management expected to double global PVA sales in FY2014 from FY2010 levels. PVA products represented approximately 19% of consolidated sales volume in FY2013.
- Unifi planned to expand its North Carolina recycling facility during FY2014, anticipating demand could exceed capacity within 12 months. Annual capital expenditures for each of the next two fiscal years were estimated at approximately $14 million, including $6–8 million of maintenance spending.
- Management expected Brazilian operating results to improve in FY2014 through efficiency improvements, product-mix enrichment and potential government support. Brazil had faced raw-material inflation, imports, higher converting costs and reduced tax incentives.
- China’s operating results improved significantly in FY2013, with management describing demand for PVA products as robust despite soft overall textile-market conditions. El Salvador operations were at or near capacity; the company expected to begin relocating two additional texturing machines there.
- Key risks include intense global competition and low-priced imports; volatile petroleum-based raw-material and energy costs; dependence on a limited number of suppliers; foreign currency, political and trade risks; and potential changes to regional rules of origin or the proposed Trans-Pacific Partnership. Petrosuape in Brazil was expected to reach full commercial production around mid-2014 and could materially increase local competition.
- PAL and other unconsolidated affiliates are significant to earnings and cash generation. PAL’s cotton-support payments depend on a government program that could change or end. The company also disclosed an unresolved potential future monitoring or remediation responsibility at a contaminated satellite site; the timing and potential liability were not determinable.
- Other notable items included $1.1 million of debt-extinguishment loss, $0.8 million of net restructuring charges (primarily severance), and $2.4 million of Repreve Renewables operating expense. Management reported no material off-balance-sheet arrangements. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether PVA/REPREVE growth, the planned recycling expansion and related capital spending deliver the projected volume and margin benefits.
- How sustainable FY2013’s gross-margin recovery is, especially given import pricing, raw-material cost volatility and the extra fiscal week.
- Whether affiliate earnings and cash distributions—particularly PAL’s—remain durable, and how changes to cotton-support payments affect them.
- Liquidity availability and covenant headroom under the ABL facility, including restrictions on stock repurchases and the concentration of cash in foreign subsidiaries.
- Brazilian competition and tax incentives, Petrosuape’s production ramp, and the effect of currency movements on reported results.
- The future tax impact of foreign earnings and deferred-tax valuation allowances; FY2013’s effective tax rate was 46.0% and the valuation allowance was $16.7 million.