SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 24, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-10542
UNIFI, INC.
(Exact name of registrant as specified in its charter)
| New York | 11-2165495 | |||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||
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P.O. Box 19109 – 7201 West Friendly Avenue
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27419-9109 | |||
| Greensboro, NC | (Zip Code) | |||
| (Address of principal executive offices) |
Registrant’s telephone number, including area code:
(336) 294-4410
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
As of December 25, 2011, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was $101,476,354. The registrant has no non-voting stock.
As of August 20, 2012, the number of shares of the Registrant’s common stock outstanding was 20,090,094.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the “SEC”) in connection with the solicitation of proxies for the Annual Meeting of Shareholders of Unifi, Inc., to be held on October 24, 2012, are incorporated by reference into Part III. (With the exception of those portions which are specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed or incorporated by reference as part of this report.)
UNIFI, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Part I
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Page
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Item 1.
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Business
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3 | ||
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Item 1A.
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Risk Factors
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9 | ||
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Item 1B.
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Unresolved Staff Comments
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15 | ||
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Item 1C.
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Executive Officers of the Registrant
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15 | ||
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Item 2.
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Properties
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15 | ||
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Item 3.
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Legal Proceedings
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16 | ||
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Item 4.
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Mine Safety Disclosures
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16 | ||
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Part II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
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Purchases of Equity Securities
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16 | |||
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Item 6.
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Selected Financial Data
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18 | ||
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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19 | ||
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Item 7A.
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Quantitative and Qualitative Disclosure About Market Risk
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36 | ||
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Item 8.
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Financial Statements and Supplementary Data
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36 | ||
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
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37 | ||
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Item 9A.
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Controls and Procedures
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37 | ||
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Item 9B.
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Other Information
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37 | ||
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Part III
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Item 10.
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Directors, Executive Officers, and Corporate Governance
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37 | ||
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Item 11.
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Executive Compensation
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38 | ||
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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38 | ||
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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38 | ||
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Item 14.
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Principal Accounting Fees and Services
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38 | ||
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Part IV
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Item 15.
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Exhibits and Financial Statement Schedules
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39 | ||
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Signatures
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43 | |||
2
PART I
Fiscal Years
The Company’s fiscal year ends on the last Sunday in June. However, the Company’s Brazilian, Colombian, and Chinese subsidiaries’ fiscal years end on June 30th. There were no significant transactions or events that have occurred between these dates and the date of the Company’s financial statements.
Presentation
All dollar amounts and share amounts, except per share amounts, are presented in thousands, except as otherwise noted.
Item 1. Business
Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, the “Company” or “Unifi”) is a publicly-traded, multi-national manufacturing company. The Company processes and sells high-volume commodity products, specialized yarns designed to meet certain customer specifications, and premier value-added (“PVA”) yarns with enhanced performance characteristics. The Company sells fibers made from polyester and nylon filament to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishing, automotive upholstery, industrial and other end-use markets. The Company’s polyester yarn products include polyester polymer beads (“Chip”), partially oriented yarn (“POY”), textured, solution and package dyed, twisted and beamed yarns; each available in virgin or recycled varieties. The Company’s nylon products include textured, solution dyed and covered spandex products. The Company maintains one of the industry’s most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”). The Company’s principal markets are located in the U.S., Canada, Mexico, Central America, and South America. In addition, the Company has a wholly-owned subsidiary in the People’s Republic of China (“China”) focused on the sale and promotion of the Company’s specialty and PVA products in the Asian textile market, primarily in China as well as into Europe.
The Company has three operating segments which are also its reportable segments. Each reportable segment derives its revenues as follows:
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The Polyester segment manufactures Chip, POY, textured, dyed, twisted and beamed yarns, virgin and recycled, with sales primarily to other yarn manufacturers, knitters and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive upholstery, home furnishing, industrial and other end-use markets. The Polyester segment consists of manufacturing operations in the U.S. and El Salvador.
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The Nylon segment manufactures textured nylon and covered spandex yarns with sales to knitters and weavers that produce fabric for the apparel, hosiery, sock and other end-use markets. The Nylon segment consists of manufacturing operations in the U.S. and Colombia.
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The International segment’s products primarily include textured polyester and various types of resale yarns. The International segment sells its yarns to knitters and weavers that produce fabric for the apparel, automotive upholstery, home furnishing, industrial and other end-use markets primarily in the South American and Asian regions. This segment includes manufacturing and sales offices in Brazil and a sales office in China.
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Other information for the Company’s reportable segments, including revenues, a measurement of profit or loss, and total assets by segment, is provided in “Footnote 28. Business Segment Information” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Recent Developments and Strategy
Deleveraging Strategy: During the June 2012 quarter, the Company successfully completed its comprehensive debt refinancing. The refinancing allowed the Company to extend the maturity profile of its indebtedness to May 2017 and will generate approximately $9,000 of annual interest expense savings. In addition, the Company believes that this new financing will provide the availability and flexibility needed to execute its strategic objectives.
Raw Materials: Polyester raw material costs for fiscal year 2012 averaged 8 to 9 cents per pound higher than fiscal year 2011. Throughout most of fiscal year 2012, and for the latter half of fiscal year 2011, polyester raw material costs remained at their highest levels in over thirty years. In addition, Asian imported yarns have become more competitive and continued to place pressure on the Company’s commodity business as the U.S.-Asia gap in polymer pricing averaged 11 to 12 cents per pound in fiscal year 2012 versus the 4 to 5 cents average per pound for the prior fiscal year period.
Inventory Destocking: The Company believes inventory in the U.S. apparel supply chain reached elevated levels during the first quarter of the Company’s recently completed fiscal year, and producers and wholesalers reacted to the elevated inventory levels by curtailing purchases from August to December 2011. The Company reacted by adjusting its production below its sales levels in order to reduce its on-hand inventory units. As a result of the Company’s actions, the production volume and per unit manufacturing costs in the Company’s Polyester and Nylon segments were negatively impacted during the first half of fiscal 2012.
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Inflation: For the most recently completed fiscal year and for the foreseeable future, the Company expects rising costs to continue in areas such as employee costs and benefits, consumables and utility costs. The Company attempts to mitigate the impacts of these rising costs through its operational efficiencies and increased selling prices. Inflation may become a factor that begins to negatively impact the Company’s profitability.
Operational Excellence: Over the past year, the Company expanded its efforts in LEAN manufacturing and statistical process control in all of its operations. These efforts have resulted in demonstrated savings as well as greatly improved operational flexibility and are expected to result in continued improvement over the next several years.
PVA: The Company remains committed to growing the business for its value-added products and believes its research and development work with brands and retailers continues to create new, world-wide sales opportunities as the Company raises the visibility of REPREVE® as a consumer brand. The Company’s PVA products represent approximately 18% of its consolidated sales volume and REPREVE® continues to grow at a faster pace than other PVA products. Throughout fiscal year 2012, domestic PVA sales volume increased versus the prior year and held stronger than the remainder of the business. Internationally, PVA sales volume was negatively impacted by weakened demand in Brazil and a temporary delay of orders from a large volume customer for the Company’s Chinese sales office. In comparison to the levels at the end of fiscal year 2010, the Company is on pace to double its domestic PVA sales volumes within three years and its consolidated PVA sales volumes within four years.
Investment in Central America: The Central American Free Trade Agreement (“CAFTA”) region, which continues to be a competitive alternative to Asian supply chains, has in recent years maintained its share of synthetic apparel supply to U.S. retailers and continues to see ongoing investments being made. During the past quarter, the Company has completed the installation of additional texturing capacity at its plant in El Salvador in order to take advantage of the long-term volume opportunities in this region.
Repreve Recycling Center: The recycling facility which opened in May 2011 allows the Company to expand the REPREVE® brand by increasing the amount and types of recyclable material that can be used in the manufacturing process and to develop and commercialize PVA products that meet the sustainability demands for brands and retailers.
Repreve Renewables, LLC: During the December 2011 quarter, the Company acquired an additional 20% membership interest in Repreve Renewables, LLC (“Renewables”) bringing the Company’s current ownership to 60%. The Company’s investment in Renewables, a development stage company that focuses on cultivating and selling bio-mass crops for the bio-fuel and bio-power industries, is anticipated to provide the Company with a unique revenue stream and supports its strategy to grow the REPREVE® brand and other sustainability initiatives.
Industry Overview
Since 1980, global demand for polyester yarns, which includes both filament and staple yarns, has grown steadily, and in calendar year 2003, polyester replaced cotton as the fiber with the largest percentage of worldwide sales. In calendar year 2011, global polyester consumption accounted for an estimated 51% of global fiber consumption and demand is projected to increase by approximately 3% to 4% annually through 2020. In calendar year 2011, global nylon consumption accounted for an estimated 5% of global fiber consumption and demand is projected to increase by approximately 1% annually through 2020. The polyester and nylon fiber sectors together accounted for approximately 56% of U.S. textile consumption during calendar year 2011.
According to the National Council of Textile Organizations, the U.S. textile market’s total shipments were $53.3 billion for calendar year 2011. The industrial and consumer, floor covering, apparel and hosiery, and furnishing markets account for 43%, 34%, 15% and 8% of total production, respectively. During calendar year 2011, the U.S. textile sector exported more than $17 billion of textile products, an increase of 13.4% versus the prior year period, and employed approximately 390,000 people making it one of the largest manufacturing employers in the U.S.
Rules of Origin
A significant number of the Company’s customers, particularly in the apparel market, produce finished goods that meet the eligibility requirements for duty-free treatment in the regions covered by the North American Free Trade Agreement (“NAFTA”), CAFTA, and the Colombia and Peru Free Trade Agreements. The Company is the largest filament yarn manufacturer and one of the few producers of such qualifying yarns in the three regions covered by these agreements (collectively the “Regional FTAs”) which contain rules of origin requirements. In order to be eligible for duty-free treatment, the garment, fabric, yarn (such as POY) and fibers (filament and staple) are generally required to be fully formed within the respective regions, each of which include production from the U.S.
Government legislation referred to as the Berry Amendment stipulates that certain purchases of textile and apparel articles made by the U.S. Department of Defense must be manufactured in the U.S. and consist of yarns and fibers produced in the U.S. Efforts are currently underway to expand this legislation to require other government programs such as the Department of Homeland Security to purchase U.S. origin textile products when available. The Company is the largest producer of such yarns for Berry Amendment compliant programs.
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Collectively, the Company refers to fibers sold with specific rules of origin requirements under the Regional FTAs and fibers sold with rule of origin requirements under the Berry Amendment as "Compliant Yarns".
Trade Regulation
Over the last decade, imports of fabric and finished goods into the U.S. have increased significantly from countries who do not participate in free trade agreements or trade preference programs despite duties charged on those imports. The duty rate on finished apparel categories that utilize polyester and nylon filament yarns are generally 16% to 32%. The primary drivers for that growth were lower overseas operating costs, foreign government subsidizing of textile industries, increased overseas sourcing by U.S. retailers, the entry of China into the World Trade Organization and the staged elimination of all textile and apparel quotas. Although global apparel imports represent a significant percentage of the U.S. market, Regional FTAs, which allow duty free advantages for apparel made from regional fibers, yarns and fabrics, allow the Company opportunities to participate in this growing market.
In calendar year 2000, 56% of the garments purchased in the U.S. were produced in the North and Central American regions. By calendar year 2009, approximately 18% of the garments purchased at U.S. retail were produced in these regions. In the last four years, the garment market share has stabilized in these regions and has begun to grow on a unit basis based on synthetic apparel consumption. This recent trend supports the Company’s view that the remaining synthetic apparel production in the regions is more specialized and defensible, and, in some cases, apparel producers are bringing programs back to the region as a part of a balanced sourcing strategy of some retailers and brands.
NAFTA is a permanent FTA between the U.S., Canada and Mexico that became effective on January 1, 1994. The agreement contains certain rules of origin for textile and apparel products that must be met for these products to receive duty-free benefits under NAFTA. In general, textile and apparel products must be produced from yarns and fabrics made in the NAFTA region, and all subsequent processing must occur in the NAFTA region to receive duty-free treatment.
Implementation of CAFTA began in 2006, between the U.S., the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. CAFTA supersedes the Caribbean Basin Trade Preference Agreement (“CBTPA”) for the CAFTA signatory countries and provides permanent benefits not only for apparel produced in the region, but for all textile products that meet the rules of origin. Qualifying textile and apparel products that are produced in any of the seven signatory countries from fabric, yarn and fibers that are also produced in any of the seven signatory countries may be imported into the U.S. duty free.
In August 2012, legislation was passed to correct a number of technical errors in CAFTA, including a requirement that single ply synthetic sewing thread must originate from one of the signatory countries. This measure, expected to be fully implemented in the fall of 2012, is expected to have a favorable impact on the Company’s twisted yarn business, as the Company will be one of the largest suppliers of twisted yarns eligible to be used in these sewing thread applications.
The U.S.-Peru Trade Promotion Agreement became effective in February 2009, and the U.S.-Colombia Trade Promotion Agreement was implemented on May 15, 2012. These free trade pacts replaced the Andean Trade Promotion and Drug Eradication Act (“ATPDEA”) in these markets and established, primarily, the same yarn forward rules of origin for textile and apparel products as NAFTA.
Additionally, the Company operates under FTA’s with Australia, Bahrain, Chile, Israel, Jordan, Morocco, Oman, Singapore and South Korea. The U.S.-South Korean FTA became effective on March 15, 2012. The Company anticipates limited impact on its business as South Korea is not a low cost provider of textiles in comparison to other Asian countries and South Korea provides little or no export opportunities for the Company or for U.S. textile manufacturers. The Company believes that a potential threat exists due to the agreement’s failure to address the potential damage from the lack of strong customs enforcement language and the exposure of illegal transshipments from China through South Korea.
Although quotas on textiles and apparel imports were eliminated after December 31, 2008, tariffs on certain imported products remain in effect. The Doha Development Round is the current trade-negotiation round of the World Trade Organization which commenced in November 2001 with the objective to further lower trade barriers around the world. Over recent years, negotiations have stalled over a divide on major issues, such as agriculture, industrial tariffs and non-tariff barriers, services, and other trade remedies with the most significant differences between developed nations and emerging countries. There is also considerable contention regarding the maintenance of agricultural subsidies—which can be seen to operate effectively as a trade barrier. No significant progress has been made from the negotiations held in recent years and the future of the Doha Development Round remains uncertain.
During 2012, numerous rounds of negotiations have been held to forge a new TransPacific Partnership Agreement (“TPP”). Countries currently participating in the TPP negotiations include Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam, with Mexico and Canada recently announcing their intentions to join. The U.S. government has presented a yarn forward rule of origin; however, negotiations for market access and rules of origin for textiles and apparel have not been completed.
The Company believes the requirements of the rules of origin and the associated duty-free cost advantages in the regional free trade agreements, such as NAFTA and CAFTA, together with the Berry Amendment and the growing need for quick response and inventory turns, ensures that a portion of the existing textile industry will remain based in the America regions. The Company expects that the NAFTA and CAFTA regions will continue to increase their percentage of the U.S. market. The Company is the largest of only a few significant producers of Compliant Yarn under these trade agreements. As a result, one of the Company’s business strategies is to leverage its eligibility status to increase its share of business with regional and domestic fabric producers who ship their products into these regions for further duty free processing.
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Approximately 62% of the Company’s sales are sold as Compliant Yarn under the terms of FTA’s or the Berry Amendment.
Markets
The Company serves diverse market segments. The apparel market, which includes hosiery, represents approximately 65% of the Company’s sales. Apparel retail sales, supply chain inventory levels and strength of the regional supply base are vital to this market segment. Generally, synthetic apparel consumed in the U.S. grows 4% per year and, over the last four years, the Regional FTA share of supply of U.S. synthetic apparel has remained constant at 18%.
The industrial market represents approximately 17% of the Company’s sales. This market includes medical, belting, tapes, filtration, ropes, protective fabrics, awnings, etc.
The furnishing market, which includes both contract and home furnishing, represents approximately 12% of the Company’s sales. Furnishing sales are dependent upon the housing market, which in turn is influenced by consumer confidence and credit availability.
The automotive upholstery market represents approximately 6% of the Company’s sales and has been less susceptible to import penetration because of the exacting specifications and quality requirements often imposed on manufacturers of automotive upholstery and the just-in-time delivery requirements. Effective customer service and prompt response to customer feedback are logistically more difficult for an importer to provide. North American automotive production during calendar year 2011 grew 11% over calendar year 2010 and an additional 22% during the first half of calendar year 2012 compared to the prior year comparable period.
Competition
The industry in which the Company currently operates is global and highly competitive. On a global basis, the Company competes not only as a yarn producer but also as part of a regional supply chain. For Compliant Yarns, the Company competes with a limited number of foreign and domestic producers of polyester and nylon yarns. For non-Compliant Yarns, the Company competes with a certain number of foreign and domestic producers of polyester and nylon yarns, who can meet the required customer specifications of quality, reliability and timeliness. While competitors have traditionally focused on commodity production, they are now increasingly focused on specialty and value-added products where the Company generates higher margins. The Company is affected by the importation of textile, apparel and hosiery products which adversely impacts demand for polyester and nylon yarns in the Company’s markets. Several foreign competitors in the Company’s supply chain have significant competitive advantages, including lower wages, raw material costs, capital costs, and favorable currency exchange rates against the U.S. dollar which could make the Company’s products, or the related supply chains, less competitive.
The major regional competitors for polyester yarns are O’Mara, Inc., and NanYa Plastics Corp. of America (“NanYa”) in the U.S., AKRA, S.A. de C.V. in the NAFTA region, and C S Central America S.A. de C.V. (“CS Central America”) in the CAFTA region. The Company’s major competitors in Brazil are Avanti Industria Comercio Importacao e Exportacao Ltda., Polyenka Ltda., and other imported yarns and fibers. The major regional competitors for nylon yarns are Sapona Manufacturing Company, Inc., and McMichael Mills, Inc. in the U.S. and Worldtex, Inc. in the ATPDEA region.
Products
The Company manufactures polyester related products in the U.S., El Salvador and Brazil and nylon yarns in the U.S. and Colombia for a wide range of end-uses. In addition, the Company purchases certain yarns for resale to its customers. The Company processes and sells POY, as well as high-volume commodity, specialty, and PVA yarns, domestically and internationally, with PVA yarns making up approximately 18%, 17%, and 15% of consolidated sales for fiscal years 2012, 2011 and 2010, respectively.
The Company works closely with its customers to develop yarns using a research and development staff that evaluates trends and uses the latest technology to create innovative specialty and PVA yarns reflecting current consumer preferences. The Company also adds value to the supply chain and increases consumer demand for its products through the development and introduction of branded yarns that provide unique sustainability, performance, comfort and aesthetic advantages. The Company’s branded portion of its yarn portfolio continues to provide product differentiation to brands, retailers and consumers and includes products such as:
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REPREVE®, a family of eco-friendly yarns made from recycled materials. Since its introduction in 2006, REPREVE® has been the Company’s most successful branded product. The Company’s recycled performance fibers are manufactured to provide certain performance and/or functional properties to various types of fabrics and end products. REPREVE® can be found in many well-known brands and retailers including Ford, Haggar, Life Khaki, Polartec, The North Face, Patagonia, REI, Perry Ellis, Home Depot, Sears, Macy’s, Kohl’s, Greg Norman and Belk department stores. Recent REPREVE® press mentions include USA Today, the Wall Street Journal and People Style Watch.
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aio® all-in-one performance yarns combine multiple performance properties into a single yarn. aio® is being used by brands MJ Soffe and New Balance for several U.S. military apparel products.
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Sorbtek®, a permanent moisture management yarn primarily used in performance base layer applications, compression apparel, athletic bras, sports apparel, socks and other non-apparel related items. Sorbtek® can be found in many well-known apparel brands, including Adidas and Asics, and is also used by MJ Soffe and New Balance for the U.S. military.
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A.M.Y. ®, a yarn with permanent antimicrobial properties for odor control. A.M.Y.® is being used by MJ Soffe and New Balance for the U.S. military.
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Reflexx®, a family of stretch yarns that can be found in a wide array of end-use applications from home furnishing to performance wear and from hosiery and socks to work wear and denim. Reflexx® can be found in many products including those used by the U.S. military.
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For fiscal years 2012, 2011 and 2010, the Company incurred $4,764, $4,145, and $3,591 for research and development costs, respectively.
Customers
The Company’s Polyester segment has approximately 420 customers, its Nylon segment has approximately 170 customers, and its International segment has approximately 600 customers in a variety of geographic markets. Yarn is manufactured based upon product specifications and shipped based upon customer order requirements. Customer payment terms are generally consistent across the segments and are based on prevailing industry practices for the sale of yarn domestically or internationally.
The Company’s sales are not materially dependent on a single customer or a small group of customers with no single customer comprising greater than ten percent of consolidated net sales. The Company’s top ten customers accounted for approximately 32% of sales for fiscal year 2012 and 36% of receivables as of June 24, 2012.
Sales and Marketing
The Company employs a sales force of approximately forty persons operating out of sales offices in the U.S., Brazil, China, El Salvador and Colombia. The Company relies on independent sales agents for sales in several other countries. The Company seeks to create strong customer relationships and continually seeks ways to build and strengthen those relationships throughout the supply chain. Through frequent communications with customers, partnering with customers in product development and engaging key downstream brands and retailers, the Company has created significant pull-through sales and brand recognition for its products. For example, the Company works with brands and retailers to educate and create demand for its value-added products. The Company then works with key fabric mill partners to develop specific fabric for those brands and retailers utilizing its PVA products. Based on the results of many commercial and branded programs, this strategy has been successful for the Company.
Suppliers and Sourcing
The primary raw material supplier for the Polyester segment is NanYa for Chip and POY. For the International segment, Reliance Industries, Ltd (“Reliance”) is the main supplier for POY. The primary suppliers of POY to the Nylon segment are HN Fibers, Ltd., U.N.F. Industries Ltd. (“UNF”), UNF America, LLC (“UNF America”), Invista S.a.r.l. (“INVISTA”), Universal Premier Fibers, LLC, and Nilit US (“Nilit”). Currently, there are numerous domestic suppliers available to fulfill the Company’s sourcing requirements for its recycled products. UNF and UNF America are 50/50 joint ventures between the Company and Nilit. The Company produces and buys certain of its compliant raw material fibers from both the U.S. and Israel. The Company produces a portion of its Chip requirements in its recycling center and purchases the remainder of its requirements from external suppliers for use in its spinning facility. In the U.S., Brazil and China, the Company purchases nylon and polyester resale products from various suppliers. Although the Company does not generally have difficulty in obtaining raw nylon POY or raw polyester POY, the Company has in the past experienced interruptions or limitations in the supply of polyester Chip and other raw materials used to manufacture polyester POY.
Manufacturing Processes
The Company uses advanced production processes to manufacture its high quality yarns cost effectively. The Company believes that its flexibility and know-how in producing specialty yarns provides important development and commercialization advantages. The Company produces polyester POY for its commodity, specialty and PVA yarns in its polyester spinning facility located in Yadkinville, North Carolina. The POY yarns can be sold externally or further processed internally. Additional processing of polyester products includes texturing, package dyeing, twisting and beaming. The texturing process, which is common to both polyester and nylon, involves the use of high-speed machines to draw, heat and false-twist the POY to produce yarn having various physical characteristics, depending on its ultimate end-use. Texturing gives the yarn greater bulk, strength, stretch, consistent dye-ability and a softer feel, thereby making it suitable for use in the knitting and weaving of fabric. Package dyeing allows for matching of customer specific color requirements for yarns sold into the automotive, home furnishing and apparel markets. Twisting incorporates real twist into the filament yarns which can be sold for such uses as sewing thread, home furnishing and apparel. Beaming places both textured and covered yarns onto beams to be used by customers in warp knitting and weaving applications. Additional processing of nylon products primarily includes covering which involves the wrapping or air entangling of filament or spun yarn around a core yarn. This process enhances a fabric’s ability to stretch, recover its original shape and resist wrinkles while maintaining a softer feel.
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In 2011, the Company opened a new recycle Chip facility in Yadkinville, North Carolina increasing its investment in the commercialization of recycled PVA products. This facility allows the Company to improve the availability of recycled raw materials and significantly increase product capabilities and competitiveness in the growing market for REPREVE®.
Employees
The Company employs approximately 2,600 employees. The number of employees in the Polyester segment, Nylon segment, International segment and its corporate office are approximately 1,400, 600, 500 and 100, respectively. While employees of the Company’s foreign operations are generally unionized, none of the domestic employees are currently covered by collective bargaining agreements.
Backlog
The level of unfilled orders is affected by many factors including the timing of orders and the delivery time for the specific products, as well as the customer’s ability or inability to cancel the related order. As such, the Company does not consider the amount of unfilled orders, or backlog, to be a meaningful indicator of expected levels of future sales.
Seasonality
Generally, the Company is not significantly impacted by seasonality. Excluding the effects of fiscal years with fifty three operating weeks, the most significant effects on the Company’s results of operations are due to the periods in which either the Company or its customers take planned manufacturing shutdowns during traditional holiday and plant shutdown periods.
Inflation
The Company expects rising costs to continue for the consumables that it uses to produce and ship its products, as well as for its utilities and certain employee and medical costs. While the Company attempts to mitigate these rising costs through its operational efficiencies and/or increased selling prices, inflation may become a factor that begins to negatively impact the Company’s profitability.
Intellectual Property
The Company licenses certain trademarks, including Dacron® and Softec™ from INVISTA. The Company has thirty-four U.S. registered trademarks. Due to its current brand recognition and potential growth opportunities, the Company believes that REPREVE® is its most significant trademark. Ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected. Renewables also has a global, exclusive license to the proprietary biomass variety, FREEDOM® Giant Miscanthus, developed by Mississippi State University.
Environmental Matters
The Company is subject to various federal, state and local environmental laws and regulations limiting the use, storage, handling, release, discharge and disposal of a variety of hazardous substances and wastes used in or resulting from its operations and potential remediation obligations thereunder, particularly the Federal Water Pollution Control Act, the Clean Air Act, the Resource Conservation and Recovery Act (including provisions relating to underground storage tanks) and the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as “Superfund” or “CERCLA” and various state counterparts. The Company believes that it has obtained, and is in compliance in all material respects with, all significant permits required to be issued by federal, state or local law in connection with the operation of its business.
The Company’s operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder which, among other things, establish exposure standards regarding hazardous materials and noise standards, and regulate the use of hazardous chemicals in the workplace.
The Company believes that the operation of its production facilities and the disposal of waste materials are substantially in compliance with applicable federal, state and local laws and regulations and that there are no material ongoing or anticipated capital expenditures associated with environmental control facilities necessary to remain in compliance with such provisions. The Company incurs normal operating costs associated with the discharge of materials into the environment but does not believe that these costs are material or inconsistent with other domestic competitors.
On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located in Kinston, North Carolina from INVISTA. The land for the Kinston site was leased pursuant to a 99 year ground lease (“Ground Lease”) with E.I. DuPont de Nemours (“DuPont”). Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the U.S. Environmental Protection Agency (“EPA”) and the North Carolina Department of Environment and Natural Resources (“DENR”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The Corrective Action program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and clean it up to comply with applicable regulatory standards. Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with conveyance of certain assets at Kinston to DuPont. This agreement terminated the Ground Lease and relieved the Company of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site. However, the Company continues to own a satellite service facility acquired in the INVISTA transaction that has contamination from DuPont’s operations and is monitored by DENR. This site has been remediated by DuPont and DuPont has received authority from DENR to discontinue remediation, other than natural attenuation. DuPont’s duty to monitor and report to DENR will be transferred to the Company in the future, at which time DuPont must pay the Company for seven years of monitoring and reporting costs and the Company will assume responsibility for any future remediation and monitoring of the site. At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
8
Geographic Data
Geographic information for net sales is as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
U.S.
|
$ | 515,522 | $ | 502,255 | $ | 463,222 | ||||||
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Brazil
|
125,737 | 144,669 | 130,663 | |||||||||
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All Other Foreign
|
63,827 | 65,888 | 28,733 | |||||||||
|
Total
|
$ | 705,086 | $ | 712,812 | $ | 622,618 | ||||||
The geographic information for net sales is based on the operating locations from where the items were produced or distributed. Export sales from the Company’s U.S. operations to external customers were $84,558, $82,944 and $94,255 for the fiscal years ended June 24, 2012, June 26, 2011 and June 27, 2010, respectively.
Geographic information for long-lived assets is as follows:
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
U.S.
|
$ | 215,910 | $ | 229,170 | $ | 223,297 | ||||||
|
Brazil
|
19,121 | 27,918 | 22,732 | |||||||||
|
All Other Foreign
|
7,915 | 6,219 | 5,753 | |||||||||
|
Total
|
$ | 242,946 | $ | 263,307 | $ | 251,782 | ||||||
The geographic information for long-lived assets is comprised of property, plant and equipment, net, certain intangible and other non-current assets.
Joint Ventures
The Company participates in joint ventures in the U.S. and in Israel. Two of the joint ventures are suppliers to the Company’s Nylon segment. One is an on-going investment in a domestic cotton and synthetic spun yarn manufacturer. As of June 24, 2012, the Company had $95,763 invested in these unconsolidated affiliates. For fiscal year 2012, $19,740 of the Company’s $8,849 income before income taxes was generated from its investments in these unconsolidated affiliates. Other information regarding the Company’s unconsolidated affiliates is provided within Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 as well as in “Footnote 24. Investments in Unconsolidated Affiliates and Variable Interest Entities” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Available Information
The Company’s Internet address is: www.unifi.com. Copies of the Company’s reports, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, that the Company files with or furnishes to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and beneficial ownership reports on Forms 3, 4, and 5, are available as soon as practicable after such material is electronically filed with or furnished to the SEC and may be obtained without charge by accessing the Company’s web site or by writing Mr. Ronald L. Smith at Unifi, Inc. P.O. Box 19109, Greensboro, North Carolina 27419-9109.
Item 1A. Risk Factors
In the course of conducting operations, the Company is exposed to a variety of risks that are inherent to its business. The following discusses some of the key inherent risk factors that could affect the Company’s business and operations, as well as other risk factors which are particularly relevant to the Company. Other factors besides those discussed below or elsewhere in this report could also adversely affect the Company’s business and operations, and these risk factors should not be considered a complete list of potential risks that may affect the Company. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K for further discussion of forward-looking statements about the Company’s financial condition and results of operations.
9
The Company faces intense competition from a number of domestic and foreign yarn producers and importers of textile and apparel products.
The Company competes not only against domestic and foreign yarn producers, but also against importers of foreign sourced fabric and apparel into the U.S. and other countries in which the Company does business. The Company anticipates that competitor expansions or new competition within these regions may lead to reduced industry utilization rates that could result in reduced gross profit margins for the Company’s products, which may materially adversely affect its business, financial condition, results of operations or cash flows.
The primary competitive factors in the textile industry include price, quality, product styling and differentiation, flexibility of production and finishing, delivery time and customer service. The needs of particular customers and the characteristics of particular products determine the relative importance of these various factors. Because the Company, and the supply chains in which the Company operates, do not typically operate on the basis of long-term contracts with textile and apparel customers, these competitive factors could cause the Company’s customers to rapidly shift to other producers. A large number of the Company’s foreign competitors have significant competitive advantages, including lower labor costs, lower raw materials, government subsidies, and favorable currency exchange rates against the U.S. dollar. If any of these advantages increase, the Company’s products could become less competitive, and its sales and profits may decrease as a result. In addition, while traditionally these foreign competitors have focused on commodity production, they are now increasingly focused on value-added products, where the Company continues to generate higher margins. The Company, and the supply chains in which the Company operates, may not be able to continue to compete effectively with imported foreign-made textile and apparel products, which would materially adversely affect its business, financial condition, results of operations or cash flows.
In Brazil, Petrosuape-Companhia Petroquimica de Pernambuco (“Petrosuape”), a subsidiary of Petrobras Petroleo Brasileiro S.A., a public oil company controlled by the Brazilian government, is constructing a polyester manufacturing complex located in the northeast sector of the country. Petrosuape will produce PTA, polyethylene terephthalate (“PET”) resin, POY and textured polyester. Once fully operational, the textured polyester operations of Petrosuape will most likely be a significant competitor as the textured polyester operations of Petrosuape are expected to have approximately twice the capacity of the Company’s subsidiary Unifi do Brasil. Petrosuape’s textured polyester operation started limited production in July 2010 and is expected to be in full commercial production by late 2014. Such significant capacity expansion may negatively affect the utilization rate of the synthetic textile filament market in Brazil, thereby negatively impacting the operating results of Unifi do Brasil.
An increase of illegal transshipments of textile and apparel goods into the U.S. could have a material adverse effect on the Company’s business.
According to industry experts and trade associations, there has been a significant amount of illegal transshipments of apparel products into the U.S. and such illegal transshipments continue to negatively impact the U.S. textile market. Illegal transshipment involves circumventing duties by falsely claiming that textiles and apparel are a product of a particular country of origin or include yarn of a particular country of origin to avoid paying higher duties or to receive benefits from regional free trade agreements, such as NAFTA and CAFTA. If illegal transshipments are not monitored and enforcement is not effective, these shipments could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
As product demand flow shifts from a region or within a region the Company could lose its cost competitiveness due to the location of its assets.
The Company’s Polyester segment primarily manufactures its products in the U.S. and El Salvador. The Company’s Nylon segment primarily manufactures its products in the U.S. and Colombia. The Company’s International segment primarily manufactures its products in Brazil and has a sales office in China. As product demand flow shifts from specific regions or within the regions in which the Company does business, it could lose its cost competitiveness due to the location of its assets. The Company’s operations may incur higher manufacturing, transportation and/or raw material costs in its present operating locations than it could achieve should its operations be located in these new product demand centers. This could adversely affect the competitiveness of the Company’s operations and have a material adverse effect on its business, financial condition, results of operations or cash flows.
Changes in the trade regulatory environment could weaken the Company’s competitive position dramatically and have a material adverse effect on its business, financial condition, results of operations or cash flows.
A number of sectors of the textile industry in which the Company sells its products, particularly apparel, hosiery and home furnishings, are subject to intense foreign competition. Other sectors of the textile industry in which the Company sells its products may in the future become subject to more intense foreign competition. There are currently a number of trade regulations and duties in place to protect the U.S. textile industry against competition from low-priced foreign producers, such as those in China and Vietnam. Changes in such trade regulations and duties may make the Company’s products less attractive from a price standpoint than the goods of its competitors or the finished apparel products of a competitor in the supply chain, which could have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows. In addition, increased foreign capacity and imports that compete directly with the Company’s products could have a similar effect. Furthermore, one of the Company’s key business strategies is to expand the Company’s business within countries that are parties to free trade agreements with the U.S. Any relaxation of duties or other trade protections with respect to countries that are not parties to those free trade agreements could therefore decrease the importance of the trade agreements and have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
10
During 2012, the U.S. government has engaged in numerous rounds of negotiations to forge a new TransPacific Partnership Agreement (“TPP”). Countries currently participating in the TPP negotiations include Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam, with Mexico and Canada recently announcing their intention to join TPP. Immediate duty-free treatment or the lack of a yarn forward rule of origin in the final TPP could adversely affect the U.S. textile and apparel industries and Western Hemisphere supply chains. In addition, increased transshipments and the lack of strong customs enforcement could further reduce the cost of foreign made products in the U.S. and result in a TPP that could adversely affect the competitiveness of the Company’s products.
The Company will require a significant amount of cash to service its indebtedness, fund capital expenditures and strategic initiatives, and continue to execute its deleveraging strategy, and its ability to generate cash depends on many factors beyond its control.
The Company’s principal sources of liquidity are cash flows generated from operations and borrowings under its $150,000 senior secured credit facility (the “ABL Facility”) and a secured term loan in the initial aggregate principal amount of $30,000 (“Term B Loan”). The ABL Facility consists of a $100,000 revolving credit facility (the “ABL Revolver”) and a $50,000 term loan (“ABL Term Loan”). The Company’s ability to make payments on its indebtedness, to fund planned capital expenditures and its strategic initiatives, as well as to execute its strategy to further reduce its outstanding indebtedness, will depend on its ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control.
The business may not generate cash flows from operations, and future borrowings may not be available to the Company in an amount sufficient to enable the Company to pay its indebtedness and to fund its other liquidity needs. If the Company is not able to generate sufficient cash flow or borrowings, the Company may need to refinance or restructure all or a portion of its indebtedness on or before maturity, reduce or delay strategic initiatives or the planned reduction of its outstanding indebtedness, or seek to raise additional capital. The Company may not be able to implement one or more of these alternatives on terms that are acceptable or at all. The terms of its existing or future debt agreements may restrict the Company from adopting any of these alternatives. The failure to generate sufficient cash flows or to achieve any of these alternatives could adversely affect the Company’s financial condition. For additional information regarding the ABL Facility and Term B Loan, see “Footnote 12. Long-Term Debt” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
The Company’s substantial level of indebtedness could adversely affect its financial condition or restrict its ability to pursue certain business opportunities and take certain action.
The Company currently maintains, and plans to maintain, outstanding balances under its ABL Facility and Term B Loan. The terms of the Company’s outstanding indebtedness impose significant operating and financial restrictions on the Company. These restrictions could limit or prohibit, among other things, its ability to:
|
·
|
incur and guarantee indebtedness or issue preferred stock;
|
|
·
|
repay subordinated indebtedness prior to its stated maturity;
|
|
·
|
pay dividends or make other distributions on or redeem or repurchase the Company’s stock;
|
|
·
|
issue certain capital stock;
|
|
·
|
make certain investments or acquisitions;
|
|
·
|
create liens;
|
|
·
|
sell certain assets or merge with or into other companies;
|
|
·
|
enter into certain transactions with stockholders and affiliates; and
|
|
·
|
restrict dividends, distributions, loans or other payments from its subsidiaries.
|
These restrictions, in turn, could have important consequences to the Company’s operations, including:
|
·
|
the restrictions imposed on the operation of its business may hinder its ability to take advantage of strategic opportunities to grow its business;
|
|
·
|
the Company’s ability to obtain additional debt or equity financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;
|
|
·
|
the Company must use a substantial portion of its cash flow from operations to pay interest on its indebtedness, which will reduce the funds available to the Company for operations and other purposes;
|
|
·
|
the Company’s high level of indebtedness could place the Company at a competitive disadvantage compared to its competitors that may have proportionately less debt;
|
|
·
|
it may be exposed to the risk of increased interest rates as certain of its borrowings, including borrowings under its ABL Facility and Term B Loan, are at variable rates of interest;
|
|
·
|
its cost of borrowing may increase;
|
|
·
|
its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates may be limited; and
|
|
·
|
its high level of indebtedness makes the Company more vulnerable to economic downturns and adverse developments in its business.
|
11
Any of the foregoing could have a material adverse effect on the Company’s business, financial condition, results of operations, prospects and ability to satisfy its obligations under its indebtedness.
The Company’s deleveraging strategy could result in the Company maintaining balances outstanding under its ABL Facility and decrease the Company’s excess borrowing availability, which could adversely affect the Company’s financial condition and prevent it from fulfilling its obligations under its debt agreements.
On an ongoing basis, the Company anticipates utilizing its liquidity to continue to reduce borrowings under its ABL Facility and Term B Loan. The Company expects to maintain a continuous balance outstanding under the ABL Facility and to hedge a substantial amount of the interest rate risk in order to ensure its interest savings as it executes its deleveraging strategy.
The Company’s ABL Facility and Term B Loan require the Company to meet a minimum fixed charge coverage ratio test if excess availability under the ABL Revolver falls below the greater of $10,000 or 15% of maximum availability. The execution of the Company’s May 2012 debt refinancing and the continuation of its deleveraging strategy may result in the Company maintaining reduced levels of excess availability under the ABL Facility, but the Company does not expect that the amount of borrowing will be to an extent that the fixed charge coverage ratio test applies. If the Company’s availability under the ABL Revolver falls below the greater of $10,000 or 15% of maximum availability, it may not be able to maintain the required fixed charge coverage ratio. Additionally, the ABL Facility restricts the Company’s ability to make certain distributions and investments should its borrowing capacity fall below certain thresholds. These restrictions could limit the Company’s ability to plan for or react to market conditions or meet its capital needs. The Company may not be granted waivers or amendments to its ABL Facility (or Term B Loan) if for any reason the Company is unable to meet its requirements.
The breach of any of these covenants or restrictions could result in a default under the ABL Facility and Term B Loan. An event of default under its debt agreements would permit some of its lenders to declare all amounts borrowed from them to be due and payable. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under its ABL Facility or Term B Loan would permit the Company’s lenders to terminate all commitments to extend further credit under the ABL Facility. Furthermore, if the Company was unable to repay the amounts due and payable under its ABL Facility or Term B Loan, those lenders could proceed against the collateral granted to them to secure that indebtedness and force the Company into bankruptcy or liquidation. In the event its lenders accelerate the repayment of its borrowings, the Company and its guarantor subsidiaries may not have sufficient assets to repay that indebtedness. As a result of these restrictions, the Company may be:
|
·
|
limited in how it conducts its business;
|
|
·
|
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
|
|
·
|
unable to compete effectively or to take advantage of new business opportunities.
|
The significant price volatility of many of the Company’s raw materials and rising energy costs may result in increased production costs, which the Company may not be able to pass on to its customers, which could have a material adverse effect on its business, financial condition, results of operations or cash flows.
A significant portion of the Company’s raw materials and energy costs are derived from petroleum-based chemicals. The prices for petroleum and petroleum-related products and energy costs are volatile and dependent on global supply and demand dynamics, including geo-political risks. Additionally, inflation can have a long-term impact as increasing costs of materials, labor and other costs such as utilities and fuel may impact the Company’s ability to maintain satisfactory margins. While the Company enters into raw material supply agreements from time to time, these agreements typically provide index pricing based on quoted feedstock market prices. Therefore, supply agreements provide only limited protection against price volatility. While the Company has at times in the past matched cost increases with corresponding product price increases, the Company has not always been able to immediately raise product prices, and, ultimately, pass on underlying cost increases to its customers. The Company has in the past lost and expects that it may continue to lose, customers to its competitors as a result of price increases. In addition, its competitors may be able to obtain raw materials at a lower cost due to market regulations that favor local producers, and certain other market regulations that favor the Company over other producers may be amended or repealed. Additional raw material and energy cost increases as well as increases due to inflation that the Company is not able to fully pass on to customers or the loss of a large number of customers to competitors as a result of price increases could have a material adverse effect on its business, financial condition, results of operations or cash flows.
The Company depends upon limited sources for raw materials, and interruptions in supply could increase its costs of production and cause its operations to suffer.
The Company depends on a limited number of third parties for certain raw material supplies, such as POY and Chip. Although alternative sources of raw materials exist, the Company may not continue to be able to obtain adequate supplies of such materials on acceptable terms, or at all, from other sources. The Company is dependent on NAFTA and CAFTA qualified suppliers of POY which in the future may experience interruptions or limitations in the supply of its raw materials, which would increase its product costs and could have a material adverse effect on its business, financial condition, results of operations or cash flows. These POY suppliers are also at risk with their raw material supply chains. Any disruption or curtailment in the supply of any of its raw materials could cause the Company to reduce or cease its production in general or require the Company to increase its pricing, which could have a material adverse effect on its business, financial condition, and results of operations or cash flows.
12
The Company is currently implementing various strategic business initiatives, and the success of the Company’s business will depend on its ability to effectively develop and implement these initiatives.
The Company is currently developing and implementing various strategic business initiatives to improve the Company’s competitive advantage and profitability and enhance shareholder value. These initiatives include the Company’s deleveraging strategy, expanding branded PVA yarns and increasing the market penetration of REPREVE® product offerings. The development and implementation of these initiatives requires financial and management commitments outside of day-to-day operations. These commitments could have a significant impact on the Company’s operations and profitability, particularly if the initiatives prove to be unsuccessful. Moreover, if the Company is unable to implement an initiative in a timely manner, or if those initiatives turn out to be ineffective or are executed improperly, the Company’s business, financial condition, results of operations or cash flows could be adversely affected.
Failure to modernize the Company’s facilities and fund capital expenditure requirements could have a material adverse effect on the Company’s competitive position and net sales.
The Company’s operating results depend to a significant extent on its ability to continue to introduce innovative products and applications and to continue to develop its production processes to be a competitive producer. Accordingly, to maintain its competitive position and its revenue base, the Company must continually modernize its manufacturing processes, plants and equipment. To the extent sources of funds are insufficient to meet its ongoing capital improvement requirements, the Company would need to seek alternative sources of financing or curtail or delay capital spending plans. The Company may not be able to obtain the necessary financing when needed or on terms acceptable to the Company. If the Company fails to make future capital improvements necessary to continue the modernization of its manufacturing operations and the reduction of its costs, its competitive position may suffer, and its net sales may decline.
A decline in general economic or political conditions and changes in consumer spending could cause the Company’s sales and profits to decline.
The Company’s products are used in the production of fabric primarily for the apparel, hosiery, home furnishing, automotive, industrial and other similar end-use markets. Demand for furniture and durable goods, such as automobiles, is often affected significantly by economic conditions. Demand for a number of categories of apparel also tends to be tied to economic cycles and customer preference. Domestic demand for textile products therefore tends to vary with the business cycles of the U.S. economy, as well as changes in global trade flows, and economic and political conditions.
The Company has significant foreign operations and its results of operations may be adversely affected by the risks associated with doing business in foreign locations.
The Company has operations in Brazil, China, Colombia and El Salvador and participates in a joint venture in Israel. The Company serves customers in Canada, Mexico, Israel and various countries in Europe, Central America, South America, Africa, and Asia. The Company’s foreign operations are subject to certain political, tax, economic and other uncertainties not encountered by its domestic operations that can materially impact the Company’s supply chains, or other aspects of its foreign operations. The risks of international operations include trade barriers, duties, exchange controls, national and regional labor strikes, social and political unrest, general economic risks, required compliance with a variety of foreign laws, including tax laws, the difficulty of enforcing agreements and collecting receivables through foreign legal systems, taxes on distributions or deemed distributions to the Company or any of its U.S. subsidiaries, maintenance of minimum capital requirements and import and export controls. If the Company is unable to react favorably to any of these changing conditions, the Company’s results of operations and business could be adversely affected.
Through its foreign operations, the Company is also exposed to currency fluctuations and exchange rate risks. Fluctuations in foreign exchange rates will impact period-to-period comparisons of its reported results. Additionally, the Company operates in countries with foreign exchange controls. These controls may limit its ability to repatriate funds from its international operations and joint ventures or otherwise convert local currencies into U.S. dollars. These limitations could adversely affect the Company’s ability to access cash from these operations.
As a result of recent legislation in Brazil, Unifi do Brasil is expected to lose some or all economic incentives related to the purchase of imported yarn. If Unifi do Brasil is unable to make up for the loss of these incentives through increases in its local manufacturing business, price increases and/or efficiency gains, this could have a material adverse effect on Unifi do Brasil’s and/or the Company’s business, financial condition, results of operations or cash flows.
The success of the Company depends on the ability of its senior management team, as well as the Company’s ability to attract and retain key personnel.
The Company’s success is highly dependent on the abilities of its management team. The management team must be able to effectively work together to successfully conduct the Company’s current operations, as well as implement the Company’s strategies. The Company currently does not have any employment agreements with its corporate officers and cannot assure investors that any of these individuals will remain with the Company. The Company currently does not have life insurance policies on any of the members of the senior management team. The failure to retain current key managers or key members of the design, product development, manufacturing, merchandising or marketing staff, or to hire additional qualified personnel for its operations could be detrimental to the Company’s operations and ability to execute its strategic business initiatives.
13
Unforeseen or recurring operational problems at any of the Company’s facilities may cause significant lost production, which could have a material adverse effect on its business, financial condition, results of operations or cash flows.
The Company’s manufacturing processes could be affected by operational problems that could impair its production capability. Disruptions at any of its facilities could be caused by maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any of its equipment; the effect of noncompliance with material environmental requirements or permits; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, earthquakes or other catastrophic disasters; labor difficulties; or other operational problems. Any prolonged disruption in operations at any of its facilities could cause significant lost production, which would have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
The Economic Adjustment Assistance to Users of Upland Cotton may be discontinued, which could adversely affect the Parkdale America LLC joint venture and thereby the Company’s investment income and cash flows.
One of the Company’s joint ventures, Parkdale America, LLC (“PAL”), receives economic adjustment payments (“EAP”) from the Commodity Credit Corporation under the Economic Assistance program to Users of Upland Cotton, Subpart C of the 2008 Farm Bill. The economic assistance received under this program must be used to acquire, construct, install, modernize, develop, convert or expand land, plant, buildings, equipment, or machinery directly attributable to the purpose of manufacturing upland cotton into eligible cotton products in the U.S. Should PAL no longer meet the criteria to receive economic assistance under the program or should the program be discontinued, PAL’s business could be significantly impacted.
The Company relies on accurate financial reporting information from PAL, an entity that it does not control. Errors in PAL’s financial reporting could be material to the Company and cause it to have to restate past financial statements.
The Company has ownership interests in PAL, which is an equity method investee that it does not control. The Company relies on accurate financial reporting information from PAL for preparation of its quarterly and annual financial statements. Errors in the financial reporting information received by the Company from PAL could be material to the Company and require it to have to restate past financial statements filed with the Securities and Exchange Commission (the “SEC”). Such restatements, if they occur could have a material adverse effect on the Company or the market price of its securities.
The Company’s future success will depend in part on its ability to protect its intellectual property rights, and the Company’s inability to enforce these rights could cause it to lose sales and any competitive advantage it has.
The Company’s success depends in part upon its ability to protect and preserve its rights in the trademarks and other intellectual property it owns or licenses, including its proprietary know-how, methods and processes and intellectual property related to its REPREVE® brand. The Company relies on the trademark, copyright and trade secret laws of the U.S. and other countries, as well as nondisclosure and confidentiality agreements, to protect its intellectual property rights.
However, the Company may be unable to prevent third parties, employees or contractors from using its intellectual property without authorization, breaching any nondisclosure or confidentiality agreements with it, or independently developing technology that is similar to the Company’s property. The use of the Company’s intellectual property by others without authorization may reduce any competitive advantage that it has developed, cause it to lose sales or otherwise harm its business.
The Company has made and may continue to make investments in entities that it does not control.
The Company has established joint ventures and made minority interest investments designed, among other things, to increase its vertical integration, increase efficiencies in its raw material procurement, manufacturing processes, marketing and distribution in the U.S. and other markets. The Company’s inability to control entities in which it invests may affect its ability to receive distributions from those entities or to fully implement its business plan. The incurrence of debt or entry into other agreements by an entity not under its control may result in restrictions or prohibitions on that entity’s ability to pay dividends or make other distributions. Even where these entities are not restricted by contract or by law from making distributions, the Company may not be able to influence the occurrence or timing of such distributions. In addition, if any of the other investors in these entities fails to observe its commitments, that entity may not be able to operate according to its business plan or the Company may be required to increase its level of commitment. If any of these events were to occur, its business, results of operations, financial condition or cash flows could be adversely affected. Because the Company does not own a majority or maintain voting control of these entities, the Company does not have the ability to control their policies, management or affairs. The interests of persons who control these entities or partners may differ from the Company’s, and they may cause such entities to take actions which are not in the Company’s best interest. If the Company is unable to maintain its relationships with its partners in these entities, the Company could lose its ability to operate in these areas which could have a material adverse effect on its business, financial condition, results of operations or cash flows.
14
Item 1B. Unresolved Staff Comments
None.
Item 1C. Executive Officers of the Registrant
The following is a description of the name, age, position and offices held, and the period served in such position or offices for each of the executive officers of the Company.
Chairman of the Board and Chief Executive Officer
WILLIAM L. JASPER — Age: 59 – Mr. Jasper was appointed Chairman of the Board in February 2011 and has served as the Company’s Chief Executive Officer since September 2007. Mr. Jasper joined the Company in September 2004, was later appointed as the General Manager of the Polyester Division, and in April 2006 was promoted to Vice President of Sales. From September 2007 to February 2011, he was also President of the Company. Prior to joining the Company, he was the Director of INVISTA’s Dacron® polyester filament business. Before working at INVISTA, Mr. Jasper held various management positions in operations, technology, sales and business for DuPont since 1980. He has been a member of the Company’s Board of Directors (the “Board”) since September 2007 and is Chairman of the Board’s Executive Committee.
President and Chief Operating Officer
R. ROGER BERRIER — Age: 43 – Mr. Berrier was appointed President and Chief Operating Officer in February 2011. Mr. Berrier had been the Executive Vice President of Sales, Marketing and Asian Operations of the Company since September 2007. Mr. Berrier had been the Vice President of Commercial Operations since April 2006 and the Commercial Operations Manager responsible for corporate product development, marketing and brand sales management from April 2004 to April 2006. Mr. Berrier joined the Company in 1991 and has held various management positions within operations, including international operations, machinery technology, research and development and quality control. He has been a member of the Board since September 2007 and is a member of the Board’s Executive Committee.
Vice Presidents
RONALD L. SMITH — Age: 44 – Mr. Smith has been Vice President and Chief Financial Officer of the Company since October 2007. He was appointed Vice President of Finance and Treasurer in September 2007. Mr. Smith held the position of Treasurer and had additional responsibility for Investor Relations from May 2005 to October 2007 and was the Vice President of Finance, Unifi Kinston, LLC from September 2004 to April 2005. Mr. Smith joined the Company in 1994 and has held positions as Controller, Chief Accounting Officer and Director of Business Development and Corporate Strategy.
THOMAS H. CAUDLE, JR. — Age: 60 – Mr. Caudle has been the Vice President of Manufacturing since October 2006. He was the Vice President of Global Operations of the Company from April 2003 until October 2006. Mr. Caudle had been Senior Vice President in charge of manufacturing for the Company since July 2000 and Vice President of Manufacturing Services of the Company since January 1999. Mr. Caudle has been an employee of the Company since 1982.
CHARLES F. MCCOY— Age: 48 – Mr. McCoy has been the Vice President, Secretary and General Counsel of the Company since October 2000, the Corporate Compliance Officer since 2002, the Corporate Governance Officer of the Company since 2004, and Chief Risk Officer since July 2009. Mr. McCoy has been an employee of the Company since January 2000, when he joined the Company as Corporate Secretary and General Counsel.
Each of the executive officers was elected by the Company’s Board at the Annual Meeting of the Board held on October 26, 2011. Each executive officer was elected to serve until the next Annual Meeting of the Board or until his successor was elected and qualified. No executive officer has a family relationship as close as first cousin with any other executive officer or director.
Item 2. Properties
The following table consists of a summary of principal properties owned or leased by the Company as of June 24, 2012:
|
Location
|
Description
|
|
|
Polyester Segment Properties
|
||
|
Domestic
|
||
|
Yadkinville, NC
|
Five plants and three warehouses (1)
|
|
|
Reidsville, NC
|
One plant (1)
|
|
|
Mayodan, NC
|
One warehouse (2)
|
|
|
Cooleemee, NC
|
One warehouse (2)
|
|
|
Foreign
|
||
|
Ciudad Arce, El Salvador
|
One plant and two warehouses (2)
|
15
| Location | Description | |
|
Nylon Segment Properties
|
||
|
Domestic
|
||
|
Madison, NC
|
One plant and one warehouse (1)
|
|
|
Fort Payne, AL
|
One central distribution center (3)
|
|
|
Foreign
|
||
|
Bogota, Colombia
|
One plant (1)
|
|
|
International Segment Properties
|
||
|
Foreign
|
||
|
Alfenas, Brazil
|
One plant and one warehouse (1)
|
|
|
Sao Paulo, Brazil
|
One corporate office (2) and two sales offices (2)
|
|
|
Suzhou, China
|
One sales office (2)
|
|
|
(1) Owned in simple fee
|
||
|
(2) Leased facilities
|
||
|
(3) Owned in simple a fee and held for sale as of June 24, 2012
|
In addition to the above properties, the Company owns a property located at 7201 West Friendly Avenue in Greensboro, North Carolina, which serves as the Company’s corporate administrative office for all its segments. Such property consists of a building containing approximately 100 square feet located on a tract of land containing approximately nine acres.
As of June 24, 2012, the Company owned approximately 4,400 square feet of manufacturing, warehouse and office space.
Management believes all of its operating properties are well maintained and in good condition. In fiscal year 2012, the Company’s manufacturing plants in the Polyester, Nylon and International segments operated below capacity. Management does not perceive any capacity constraints in the foreseeable future.
Item 3. Legal Proceedings
There are no pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which any of its property is the subject.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is listed for trading on the New York Stock Exchange (“NYSE”) under the symbol “UFI.” The following table consists of the high and low sales prices of the Company’s common stock for the Company’s two most recent fiscal years.
On October 27, 2010, the shareholders of the Company approved a reverse stock split of the Company’s common stock (the “reverse stock split”) at a ratio of 1-for-3. The reverse stock split became effective November 3, 2010. All per share prices, share amounts and computations using such amounts have been retroactively adjusted to reflect the reverse stock split.
|
High
|
Low
|
|||||||
|
Fiscal year 2012:
|
||||||||
|
First quarter ended September 25, 2011
|
$ | 14.74 | $ | 8.32 | ||||
|
Second quarter ended December 25, 2011
|
9.41 | 7.01 | ||||||
|
Third quarter ended March 25, 2012
|
10.00 | 7.14 | ||||||
|
Fourth quarter ended June 24, 2012
|
12.27 | 8.95 | ||||||
|
Fiscal year 2011:
|
||||||||
|
First quarter ended September 26, 2010
|
$ | 13.95 | $ | 10.92 | ||||
|
Second quarter ended December 26, 2010
|
17.21 | 12.69 | ||||||
|
Third quarter ended March 27, 2011
|
19.87 | 14.85 | ||||||
|
Fourth quarter ended June 26, 2011
|
17.93 | 11.60 |
16
As of August 20, 2012 there were 322 record holders of the Company’s common stock. A significant number of the outstanding shares of common stock which are beneficially owned by individuals and entities are registered in the name of Cede & Co. Cede & Co. is a nominee of the Depository Trust Company, a securities depository for banks and brokerage firms. The Company estimates that there are approximately 3,800 beneficial owners of its common stock.
No dividends were paid in the past two fiscal years and the Company does not intend to pay cash dividends in the foreseeable future. The Company’s current debt obligations contain certain restricted payment and restricted investment provisions, including a restriction on the payment of dividends and share repurchases should its borrowing capacity fall below certain thresholds. Information regarding the Company’s debt obligations is provided in “Footnote 12. Long-Term Debt” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Purchases of Equity Securities
Effective July 26, 2000, the Board authorized the repurchase of up to 3,333 shares of its common stock of which approximately 1,064 shares were subsequently repurchased. The repurchase program was suspended in November 2003. There is remaining authority for the Company to repurchase approximately 2,269 shares of its common stock under the repurchase plan. The repurchase plan has no stated expiration or termination date.
PERFORMANCE GRAPH - SHAREHOLDER RETURN ON COMMON STOCK
Set forth below is a line graph comparing the cumulative total shareholder return on the Company’s common stock with (i) the New York Stock Exchange Composite Index, a broad equity market index, and (ii) a peer group selected by the Company in good faith (the “Peer Group”), assuming in each case, the investment of $100 on June 24, 2007 and reinvestment of dividends. Including the Company, the Peer Group consists of twelve publicly traded textile companies, including Albany International Corp., Culp, Inc., Decorator Industries, Inc., Dixie Group, Inc., The Hallwood Group, Inc., Hampshire Group, Limited, Interface, Inc., Joe’s Jeans Inc., JPS Industries, Inc., Lydall, Inc., and Mohawk Industries, Inc.
17
|
June 24, 2007
|
June 29, 2008
|
June 28, 2009
|
June 27, 2010
|
June 26, 2011
|
June 24, 2012
|
|||||||||||||||||||
|
Unifi, Inc.
|
100.00 | 90.68 | 50.54 | 144.09 | 144.92 | 143.25 | ||||||||||||||||||
|
NYSE Composite
|
100.00 | 100.00 | 70.60 | 82.72 | 99.73 | 97.78 | ||||||||||||||||||
|
Peer Group
|
100.00 | 67.50 | 34.43 | 53.81 | 65.90 | 63.28 | ||||||||||||||||||
Item 6. Selected Financial Data
The following table presents selected historical consolidated financial data. The data should be read in conjunction with the Company’s historical consolidated financial statements for each of the periods presented as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
June 28, 2009
|
June 29, 2008
|
||||||||||||||||
|
Summary of Operations:
|
||||||||||||||||||||
|
Net sales
|
$ | 705,086 | $ | 712,812 | $ | 622,618 | $ | 558,415 | $ | 719,545 | ||||||||||
|
Gross profit
|
$ | 54,396 | $ | 74,652 | $ | 73,251 | $ | 29,693 | $ | 51,739 | ||||||||||
|
Selling, general and administrative expenses
|
$ | 43,482 | $ | 44,659 | $ | 47,934 | $ | 40,309 | $ | 48,729 | ||||||||||
|
Operating income (loss) (3)
|
$ | 8,632 | $ | 28,692 | $ | 25,388 | $ | (26,560 | ) | $ | 2,416 | |||||||||
|
Interest expense
|
$ | 16,073 | $ | 19,190 | $ | 21,889 | $ | 23,152 | $ | 26,056 | ||||||||||
|
Equity in earnings of unconsolidated affiliates
|
$ | (19,740 | ) | $ | (24,352 | ) | $ | (11,693 | ) | $ | (3,251 | ) | $ | (1,402 | ) | |||||
|
Income (loss) from continuing operations before income taxes
|
$ | 8,849 | $ | 32,422 | $ | 18,371 | $ | (44,760 | ) | $ | (30,326 | ) | ||||||||
|
(Benefit) provision for income taxes
|
$ | (1,979 | ) | $ | 7,333 | $ | 7,686 | $ | 4,301 | $ | (10,949 | ) | ||||||||
|
Income (loss) from continuing operations, net of tax
|
$ | 10,828 | $ | 25,089 | $ | 10,685 | $ | (49,061 | ) | $ | (19,377 | ) | ||||||||
|
Net income (loss) attributable to Unifi, Inc. (1)
|
$ | 11,491 | $ | 25,089 | $ | 10,685 | $ | (48,996 | ) | $ | (16,151 | ) | ||||||||
|
Per common share:
|
||||||||||||||||||||
|
Net income (loss) from continuing operations attributable to Unifi, Inc.
|
||||||||||||||||||||
|
Basic (2)
|
$ | 0.57 | $ | 1.25 | $ | 0.53 | $ | (2.38 | ) | $ | (0.96 | ) | ||||||||
|
Diluted (2)
|
$ | 0.56 | $ | 1.22 | $ | 0.52 | $ | (2.38 | ) | $ | (0.96 | ) | ||||||||
|
Cash Flow Data:
|
||||||||||||||||||||
|
Net cash provided by continuing operations
|
$ | 43,309 | $ | 11,880 | $ | 20,581 | $ | 16,960 | $ | 13,673 | ||||||||||
|
Depreciation and amortization expenses
|
$ | 27,135 | $ | 25,977 | $ | 27,416 | $ | 32,473 | $ | 41,574 | ||||||||||
|
Capital expenditures
|
$ | 6,354 | $ | 20,539 | $ | 13,112 | $ | 15,259 | $ | 12,809 | ||||||||||
|
Dividends received from unconsolidated affiliates
|
$ | 10,616 | $ | 5,900 | $ | 3,265 | $ | 3,688 | $ | 4,462 | ||||||||||
|
Cash dividends declared per common share
|
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
June 28, 2009
|
June 29, 2008
|
||||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 10,886 | $ | 27,490 | $ | 42,691 | $ | 42,659 | $ | 20,248 | ||||||||||
|
Property, plant and equipment, net
|
127,090 | 151,027 | 151,499 | 160,643 | 177,299 | |||||||||||||||
|
Total assets
|
482,233 | 537,376 | 504,512 | 476,932 | 591,531 | |||||||||||||||
|
Total debt
|
121,552 | 168,664 | 179,390 | 180,259 | 194,341 | |||||||||||||||
|
Shareholders’ equity
|
290,780 | 299,655 | 259,896 | 244,969 | 305,669 | |||||||||||||||
|
Working capital
|
166,485 | 212,969 | 174,464 | 175,808 | 186,817 | |||||||||||||||
|
(1)
|
Amounts are net of discontinued operations and non-controlling interest for the years presented.
|
|
(2)
|
All amounts per share have been retroactively adjusted to reflect the November 3, 2010 1-for-3 reverse stock split.
|
| (3) | Operating income (loss) for FY 2009 is inclusive of impairment charges of $18,930 primarily related to goodwill impairment charges caused by difficult market conditions and a decline in the Company’s market capitalization. |
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The following discussion contains certain forward-looking statements about the Company’s financial condition and results of operations.
Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will,” or words or phrases of similar meaning. They may relate to, among other things, the risks described below:
|
·
|
the competitive nature of the textile industry and the impact of worldwide competition;
|
|
·
|
changes in the trade regulatory environment and governmental policies and legislation;
|
|
·
|
the availability, sourcing and pricing of raw materials;
|
|
·
|
general domestic and international economic and industry conditions in markets where the Company competes, such as recession and other economic and political factors over which the Company has no control;
|
|
·
|
changes in consumer spending, customer preferences, fashion trends and end-uses;
|
|
·
|
the ability to reduce production costs;
|
|
·
|
changes in currency exchange rates, interest and inflation rates;
|
|
·
|
the financial condition of the Company’s customers;
|
|
·
|
the ability to sell excess assets;
|
|
·
|
technological advancements and the continued availability of financial resources to fund capital expenditures;
|
|
·
|
the operating performance of joint ventures and other equity investments;
|
|
·
|
the accurate financial reporting of information from equity method investees;
|
|
·
|
the impact of environmental, health and safety regulations;
|
|
·
|
the loss of a material customer(s);
|
|
·
|
the ability to protect intellectual property;
|
|
·
|
employee relations;
|
|
·
|
volatility of financial and credit markets;
|
|
·
|
the ability to service indebtedness and fund capital expenditures and strategic initiatives;
|
|
·
|
the continuity of the Company’s leadership;
|
|
·
|
availability of and access to credit on reasonable terms; and
|
|
·
|
the success of the Company’s strategic business initiatives.
|
These forward-looking statements reflect the Company’s current views with respect to future events and are based on assumptions and subject to risks and uncertainties that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. These risks and uncertainties may include those discussed above or in “Item 1A—Risk Factors.” New risks can emerge from time to time. It is not possible for the Company to predict all of these risks, nor can it assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements.
Business Overview
The Company sells its polyester and nylon products to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishing, automotive upholstery, industrial and other end-use markets. The Company maintains one of the industry’s most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”). The Company’s principal markets are located in the U.S., Canada, Mexico, Central America, and South America. In addition, the Company has a wholly-owned subsidiary in the People’s Republic of China (“China”) focused on the sale and promotion of the Company’s specialty and PVA products in the Asian textile market, primarily in China as well as into Europe. The Company has three operating segments which are also its reportable segments: the Polyester segment, the Nylon segment and the International segment. For further information regarding our business, see “Item 1. Business” included in this Annual Report on 10-K and for further information regarding segments, see “Footnote 28. Business Segment Information” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Deleveraging Strategy: During the June 2012 quarter, the Company successfully completed its comprehensive debt refinancing. The refinancing allowed the Company to extend the maturity profile of its indebtedness to May 2017 and will generate approximately $9,000 of annual interest expense savings. In addition, the Company believes that this new financing will provide the availability and flexibility needed to execute its strategic objectives.
Raw Materials: Polyester raw material costs for fiscal year 2012 averaged 8 to 9 cents per pound higher than fiscal year 2011. Throughout most of fiscal year 2012, and for the latter half of fiscal year 2011, polyester raw material costs remained at their highest levels in over thirty years. In addition, Asian imported yarns have become more competitive and continued to place pressure on the Company’s commodity business as the U.S.-Asia gap in polymer pricing averaged 11 to 12 cents per pound in fiscal year 2012 versus the 4 to 5 cents average per pound for the prior fiscal year period.
19
Inventory Destocking: The Company believes inventory in the U.S. apparel supply chain reached elevated levels during the first quarter of the Company’s recently completed fiscal year, and producers and wholesalers reacted to the elevated inventory levels by curtailing purchases from August to December 2011. The Company reacted by adjusting its production below its sales levels in order to reduce its on-hand inventory units. As a result of the Company’s actions, the production volume and per unit manufacturing costs in the Company’s Polyester and Nylon segments were negatively impacted during the first half of fiscal 2012.
Brazil: The strengthening of the Brazilian Real during the first half of fiscal year 2012 began to negatively impact the competitiveness of the local apparel supply chain by making imports of competing fibers, garments and apparel more competitively priced. The return of the Real to more normalized levels during the second half of the fiscal year and the initiatives taken by the Brazilian government to help support the domestic manufacturers have helped shift demand back to the domestic Brazilian textile producers. Due to the long supply chain for the procurement of its raw materials, the Company’s Brazilian business was negatively impacted by the cost of higher priced inventory flowing through the operation in the current fiscal year. Lower sales and production volume also caused unfavorable increases in production costs due to lower utilization rates as well as higher spending due to inflationary increases for employee costs and power.
Strategy:While the Company continues to face a challenging operating environment caused by global competition across the supply chain, inflation in input costs and raw materials, and potential decreased demand caused by continuing weakness of the U.S. and global economies, the Company believes it has the appropriate strategies to succeed in such an environment. The Company continues to focus on its key strategies: striving for continuous improvement across all operational and business processes; enriching its product mix by growing its higher margin PVA product portfolio; increasing sales of yarns with regional rules of origin requirements; and continuing its strategic penetration in global growth markets, such as China, Central America and Brazil. Going forward, the Company expects to continue its support of these strategies through investments in product and geographic growth opportunities and utilizing excess liquidity to continue its deleveraging strategy, with the goal of reducing leverage, prepaying its Term B Loan, and developing other strategies to enhance shareholder value.
Company Outlook: The Company expects operating profit improvements for fiscal year 2013 when compared to fiscal year 2012 due to anticipated higher sales volume (from the lessening effect of the inventory destocking and signs of improvement in the Company’s key markets) and gross margin improvement.
Key Performance Indicators and Non-GAAP Financial Measures
The Company continuously reviews performance indicators to measure its success. The following are the indicators management uses to assess performance of the Company’s business:
|
·
|
sales volume for the Company and for each of its reportable segments;
|
|
·
|
gross profits and gross margin for the Company and for each of its reportable segments;
|
|
·
|
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) represents net income or loss attributable to Unifi, Inc. before net interest expense, income tax expense and depreciation and amortization expense (excluding interest portion of amortization);
|
|
·
|
Adjusted EBITDA Including Equity Affiliates represents EBITDA adjusted to exclude gains or losses on extinguishment of debt, loss on previously held equity interest, non-cash compensation expense net of distributions, and certain other adjustments. Other adjustments include items such as gains or losses on sales or disposals of property, plant, or equipment, currency and derivative gains or losses, employee severance, restructuring charges, startup costs, and certain other non-operating income or expense items;
|
|
·
|
Adjusted EBITDA represents Adjusted EBITDA Including Equity Affiliates excluding the earnings of unconsolidated affiliates. The Company may, from time to time, change the items included within Adjusted EBITDA;
|
|
·
|
Segment Adjusted Profit equals segment gross profit plus segment depreciation and amortization less segment selling, general, and administrative expenses (“SG&A”), net of segment other adjustments;
|
|
·
|
Adjusted Working Capital (receivables plus inventory less accounts payable and certain accrued expenses) is an indicator of the Company’s production efficiency and ability to manage its inventory and receivables; and
|
|
·
|
Working Capital represents current assets less current liabilities.
|
EBITDA, Adjusted EBITDA Including Equity Affiliates, Adjusted EBITDA, Segment Adjusted Profit and Adjusted Working Capital are financial measurements that management uses to facilitate its analysis and understanding of the Company’s business operations. Management believes they are useful to investors because they provide a supplemental way to understand the underlying operating performance and debt service capacity of the Company. The calculation of EBITDA, Adjusted EBITDA Including Equity Affiliates, Adjusted EBITDA, Segment Adjusted Profit and Adjusted Working Capital are subjective measures based on management’s belief as to which items should be included or excluded, in order to provide the most reasonable view of the underlying operating performance of the business. EBITDA, Adjusted EBITDA Including Equity Affiliates, Adjusted EBITDA, Segment Adjusted Profit and Adjusted Working Capital are not considered to be in accordance with generally accepted accounting principles (“non-GAAP measurements”) and should not be considered a substitute for performance measures calculated in accordance with GAAP.
20
Results of Operations
The following table presents a summary of Net income attributable to Unifi, Inc.:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Net sales
|
$ | 705,086 | $ | 712,812 | $ | 622,618 | ||||||
|
Cost of sales
|
650,690 | 638,160 | 549,367 | |||||||||
|
Gross profit
|
54,396 | 74,652 | 73,251 | |||||||||
|
Selling, general and administrative expenses
|
43,482 | 44,659 | 47,934 | |||||||||
|
Provision (benefit) for bad debts
|
211 | (304 | ) | 123 | ||||||||
|
Other operating expense (income), net
|
2,071 | 1,605 | (194 | ) | ||||||||
|
Operating income
|
8,632 | 28,692 | 25,388 | |||||||||
|
Interest expense, net
|
14,152 | 16,679 | 18,764 | |||||||||
| Equity in earnings of unconsolidated affiliates | (19,740 | ) | (24,352 | ) | (11,693 | ) | ||||||
|
Other non-operating expense (income), net
|
5,371 | 3,943 | (54 | ) | ||||||||
|
Income before income taxes
|
8,849 | 32,422 | 18,371 | |||||||||
|
(Benefit) provision for income taxes
|
(1,979 | ) | 7,333 | 7,686 | ||||||||
|
Net income including non-controlling interest
|
10,828 | 25,089 | 10,685 | |||||||||
|
Less: net (loss) attributable to non-controlling interest
|
(663 | ) | — | — | ||||||||
|
Net income attributable to Unifi, Inc.
|
$ | 11,491 | $ | 25,089 | $ | 10,685 |
The reconciliations of Net income attributable to Unifi, Inc. to EBITDA, Adjusted EBITDA Including Equity Affiliates and Adjusted EBITDA are as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Net income attributable to Unifi, Inc.
|
$ | 11,491 | $ | 25,089 | $ | 10,685 | ||||||
|
(Benefit) provision for income taxes
|
(1,979 | ) | 7,333 | 7,686 | ||||||||
|
Interest expense, net
|
14,152 | 16,679 | 18,764 | |||||||||
|
Depreciation and amortization expense
|
26,225 | 25,562 | 26,312 | |||||||||
|
EBITDA
|
$ | 49,889 | $ | 74,663 | $ | 63,447 | ||||||
|
Loss (gain) on extinguishment of debt
|
3,203 | 3,337 | (54 | ) | ||||||||
|
Loss of previously held equity affiliate
|
3,656 | — | — | |||||||||
|
Non-cash compensation expense, net of distributions
|
2,382 | 1,361 | 2,555 | |||||||||
|
Other
|
410 | 5,451 | 1,001 | |||||||||
|
Adjusted EBITDA Including Equity Affiliates
|
$ | 59,540 | $ | 84,812 | $ | 66,949 | ||||||
|
Equity in earnings of unconsolidated affiliates
|
(19,740 | ) | (24,352 | ) | (11,693 | ) | ||||||
|
Adjusted EBITDA
|
$ | 39,800 | $ | 60,460 | $ | 55,256 | ||||||
The reconciliations of Adjusted EBITDA to Segment Adjusted Profit are as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Adjusted EBITDA
|
$ | 39,800 | $ | 60,460 | $ | 55,256 | ||||||
|
Depreciation included in other operating expense (income), net
|
(21 | ) | (20 | ) | (111 | ) | ||||||
|
Non-cash compensation expense, net of distributions
|
(2,382 | ) | (1,361 | ) | (2,555 | ) | ||||||
|
Provision (benefit) for bad debts
|
211 | (304 | ) | 123 | ||||||||
|
Other, net
|
(271 | ) | (228 | ) | (168 | ) | ||||||
|
Segment Adjusted Profit
|
$ | 37,337 | $ | 58,547 | $ | 52,545 | ||||||
21
Segment Adjusted Profit by reportable segment is as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Polyester
|
$ | 12,913 | $ | 20,660 | $ | 13,784 | ||||||
|
Nylon
|
11,227 | 14,055 | 14,302 | |||||||||
|
International
|
13,197 | 23,832 | 24,459 | |||||||||
|
Total Segment Adjusted Profit
|
$ | 37,337 | $ | 58,547 | $ | 52,545 | ||||||
Segment Net Sales by reportable segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Polyester
|
$ | 393,981 | $ | 375,605 | $ | 308,691 | ||||||
|
Nylon
|
163,103 | 163,354 | 165,098 | |||||||||
|
International
|
148,002 | 173,853 | 148,829 | |||||||||
|
Consolidated net sales
|
$ | 705,086 | $ | 712,812 | $ | 622,618 | ||||||
Segment Gross Profit by reportable segment is as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Polyester
|
$ | 19,673 | $ | 24,746 | $ | 21,795 | ||||||
|
Nylon
|
16,956 | 19,763 | 20,779 | |||||||||
|
International
|
17,767 | 30,143 | 30,677 | |||||||||
|
Consolidated gross profit
|
$ | 54,396 | $ | 74,652 | $ | 73,251 | ||||||
Segment SG&A Expenses by reportable segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Polyester
|
$ | 25,668 | $ | 25,717 | $ | 28,717 | ||||||
|
Nylon
|
8,851 | 8,845 | 9,954 | |||||||||
|
International
|
8,963 | 10,097 | 9,263 | |||||||||
|
Consolidated SG&A expenses
|
$ | 43,482 | $ | 44,659 | $ | 47,934 | ||||||
The reconciliations of Segment Depreciation and Amortization Expense to Consolidated Depreciation and Amortization Expense are as follows:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Polyester
|
$ | 19,046 | $ | 18,470 | $ | 19,679 | ||||||
|
Nylon
|
3,089 | 3,287 | 3,477 | |||||||||
|
International
|
4,011 | 3,786 | 3,045 | |||||||||
|
Subtotal segment depreciation and amortization expense
|
$ | 26,146 | $ | 25,543 | $ | 26,201 | ||||||
|
Depreciation and amortization included in other operating (income) expense, net
|
119 | 19 | 111 | |||||||||
|
Amortization included in interest expense
|
870 | 415 | 1,104 | |||||||||
|
Consolidated depreciation and amortization expense
|
$ | 27,135 | $ | 25,977 | $ | 27,416 | ||||||
Segment Other Adjustments consists of the following:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Polyester
|
$ | (138 | ) | $ | 3,161 | $ | 1,027 | |||||
|
Nylon
|
33 | (150 | ) | — | ||||||||
|
International
|
382 | — | — | |||||||||
|
Segment other adjustments
|
$ | 277 | $ | 3,011 | $ | 1,027 | ||||||
22
Review of Fiscal Year 2012 Results of Operations Compared to Fiscal Year 2011
Consolidated Overview
The components of Net income attributable to Unifi, Inc., each component as a percentage of net sales and the percentage increase or decrease over the prior year amounts are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 24, 2012
|
June 26, 2011
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 705,086 | 100.0 | $ | 712,812 | 100.0 | (1.1 | ) | ||||||||||||
|
Cost of sales
|
650,690 | 92.3 | 638,160 | 89.5 | 2.0 | |||||||||||||||
|
Gross profit
|
54,396 | 7.7 | 74,652 | 10.5 | (27.1 | ) | ||||||||||||||
|
Selling, general and administrative expenses
|
43,482 | 6.2 | 44,659 | 6.3 | (2.6 | ) | ||||||||||||||
|
Provision (benefit) for bad debts
|
211 | ― | (304 | ) | ― | (169.4 | ) | |||||||||||||
|
Other operating expense, net
|
2,071 | 0.3 | 1,605 | 0.2 | 29.0 | |||||||||||||||
|
Operating income
|
8,632 | 1.2 | 28,692 | 4.0 | (69.9 | ) | ||||||||||||||
|
Interest expense, net
|
14,152 | 2.0 | 16,679 | 2.3 | (15.1 | ) | ||||||||||||||
|
Earnings from unconsolidated affiliates
|
(19,740 | ) | (2.8 | ) | (24,352 | ) | (3.4 | ) | (18.9 | ) | ||||||||||
|
Other non-operating expense, net
|
5,371 | 0.8 | 3,943 | 0.6 | 36.2 | |||||||||||||||
|
Income before income taxes
|
8,849 | 1.2 | 32,422 | 4.5 | (72.7 | ) | ||||||||||||||
|
(Benefit) provision for income taxes
|
(1,979 | ) | (0.3 | ) | 7,333 | 1.0 | (127.0 | ) | ||||||||||||
|
Net income including non-controlling interest
|
10,828 | 1.5 | 25,089 | 3.5 | (56.8 | ) | ||||||||||||||
|
Less: net (loss) attributable to non-controlling interest
|
(663 | ) | (0.1 | ) | ― | ― | ― | |||||||||||||
|
Net income attributable to Unifi, Inc.
|
$ | 11,491 | 1.6 | $ | 25,089 | 3.5 | (54.2 | ) | ||||||||||||
Consolidated Net Sales
Net sales for the fiscal year ended June 24, 2012 decreased by $7,726, or 1.1%, as compared to the prior fiscal year. Overall, sales volume decreased by 5.9%, with sales volume decreases in each of the Company’s reportable segments, primarily due to softness caused by inventory destocking across the U.S. apparel supply chain and reduced demand in Brazil as a result of increased imports of competing yarn, fabric and garments becoming more competitive alternatives. The decrease in volume was partially offset by an increase in the weighted average selling price of 4.8% due to raw material inflation and mix enrichment.
Consolidated Gross Profit
Gross profit for the fiscal year ended June 24, 2012 decreased by $20,256, or 27.1%, as compared to the prior fiscal year. Gross profit declines were experienced in each of the Company’s reportable segments due to record-high raw material prices and lower sales volumes as demand decreased for most of the Company’s products due to inventory destocking within the U.S. apparel supply chain. In order to reduce inventory levels, the Company reduced production volumes below sales levels, which resulted in lower capacity utilization in its manufacturing facilities. The lower production volumes resulted in higher per unit costs. In addition, the Company’s operation in Brazil was negatively impacted by less expensive imports which created a challenging competitive environment for local production, higher average raw material costs and higher manufacturing costs due to lower utilization rates and inflationary spending increases.
Polyester Segment Gross Profit
The components of segment gross profit, each component as a percentage of net sales and the percentage increase or decrease over the prior year amounts for the Polyester segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 24, 2012
|
June 26, 2011
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 393,981 | 100.0 | $ | 375,605 | 100.0 | 4.9 | |||||||||||||
|
Cost of sales
|
374,308 | 95.0 | 350,859 | 93.4 | 6.7 | |||||||||||||||
|
Gross profit
|
$ | 19,673 | 5.0 | $ | 24,746 | 6.6 | (20.5 | ) | ||||||||||||
23
The decline in gross profit of $5,073 was primarily due to lower sales volume, higher manufacturing costs and lower conversion margins (net sales less raw material costs) for certain products. The sales volume declines from the prior year period of approximately 3% were driven by weak demand due to increased inventory in the U.S. apparel supply chain, a widened U.S.-Asia raw material price gap and the decision of the Company to exit certain commodity business. In an effort to reduce on-hand inventory levels, the segment adjusted down its production rate during the period to levels lower than the sales rate. The lower utilization and production levels for the current period created an unfavorable impact on the segment’s manufacturing costs per unit sold which negatively impacted gross profit. The rise in polyester raw material costs, (an increase in the average cost per pound of approximately 12% versus the prior year period), negatively impacted the segment’s conversion margins during the year as not all cost increases could be passed along to customers.
The Polyester segment net sales and gross profit as a percentage of total consolidated amounts were 55.9% and 36.2% for fiscal year 2012, compared to 52.7% and 33.1% for fiscal year 2011, respectively.
Outlook for 2013
The Company anticipates volume and profitability improvements in fiscal year 2013 for the Polyester segment versus fiscal year 2012 due to signs of recovery in key markets, the Company’s belief of an end to the inventory destocking in the U.S. apparel supply chain, the region’s ability to maintain its market share against imports and the expectation for a higher average conversion margin related to lower raw material costs and mix enrichment.
Nylon Segment Gross Profit
The components of segment gross profit, each component as a percentage of net sales and the percentage increase or decrease over the prior year amounts for the Nylon segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 24, 2012
|
June 26, 2011
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 163,103 | 100.0 | $ | 163,354 | 100.0 | (0.2 | ) | ||||||||||||
|
Cost of sales
|
146,147 | 89.6 | 143,591 | 87.9 | 1.8 | |||||||||||||||
|
Gross profit
|
$ | 16,956 | 10.4 | $ | 19,763 | 12.1 | (14.2 | ) | ||||||||||||
The decline in gross profit of $2,807 was due to lower sales volume and higher unit manufacturing costs. The sales volume decline from the prior year period of approximately 10% was a result of lower shipments into the sock, hosiery and knit apparel applications resulting from inventory destocking in the U.S. apparel supply chain. The lower production and plant utilization for the period created an unfavorable change in the segment’s manufacturing costs of approximately 4% but allowed for a reduction of on-hand inventory units.
The Nylon segment net sales and gross profit, as a percentage of total consolidated amounts, were 23.1% and 31.2% for fiscal year 2012, compared to 22.9% and 26.5% for fiscal year 2011, respectively.
Outlook for 2013
Due to the belief that the inventory destocking within the U.S. apparel supply chain was completed in the first half of fiscal 2012, the Company anticipates volume and profitability improvements for the Nylon segment in fiscal year 2013.
International Segment Gross Profit
The components of segment gross profit, each component as a percentage of net sales and the percentage increase or decrease over the prior year amounts for the International segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 24, 2012
|
June 26, 2011
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 148,002 | 100.0 | $ | 173,853 | 100.0 | (14.9 | ) | ||||||||||||
|
Cost of sales
|
130,235 | 88.0 | 143,710 | 82.7 | (9.4 | ) | ||||||||||||||
|
Gross profit
|
$ | 17,767 | 12.0 | $ | 30,143 | 17.3 | (41.1 | ) | ||||||||||||
For the International segment, gross profit decreased by $12,376. This decline was primarily due to lower sales volume, lower conversion margins and higher unit manufacturing costs in Brazil as well as lower sales volume and margins in the Company’s Chinese operation. Sales volume declines of approximately 9% and decreases in unit conversion margins in Brazil were due to increased imports of competing yarn, fabric and garments as imports became more competitive alternatives as a result of the appreciation of the local currency from January to August 2011 and a higher average cost of raw materials. The approximately 10% higher unit manufacturing costs in Brazil were due to lower capacity utilization as a result of lower production volume along with higher manufacturing costs due to inflation, salary increases and higher power costs. Gross profit declines for the Company’s Chinese subsidiary were due to the 17% decline in sales volume that was caused by a reduction in orders from the operation’s largest customer as well as lower average selling margins as sales volume was weighted more heavily toward commodity goods.
24
The international segment net sales and gross profit as a percentage of total consolidated amounts were 21.0% and 32.6% for fiscal year 2012, compared to 24.4% and 40.4% for fiscal year 2011, respectively.
Outlook for 2013
Based on the trend of improving sales volumes for the most recently completed fiscal quarter, the Company expects that the International segment will generate increased gross profits for fiscal year 2013 versus those generated in fiscal year 2012.
Consolidated Selling General & Administrative Expenses
SG&A expenses decreased in total and as a percentage of net sales for the current fiscal year when compared to the prior period. The decrease of $1,177, or 2.6%, was primarily a result of decreases in fringe benefit and other employee related costs as well as administrative costs. The reduction in fringe benefit costs was mainly related to reductions in expenses for certain variable compensation programs of approximately $1,600. These declines were partially offset by higher non-cash deferred compensation costs as well as increased salary costs and branding initiatives.
Outlook for 2013
Excluding the potential effects of any currency fluctuations and the amounts to be expensed under any variable compensation programs, the Company expects the costs to be incurred for SG&A expenses for its fiscal year 2013 to approximate the levels for fiscal year 2012.
Consolidated Provision (Benefit) for Bad Debts
The provision for bad debt expense was $211 for the fiscal year ended June 24, 2012, as compared to a benefit of $304 recorded for the fiscal year ended June 26, 2011. The change in the provision versus the prior year period is a result of unfavorable changes in the aging of customer receivables and a higher provision for certain risk accounts.
Consolidated Other Operating Expense (Income), Net
The components of other operating expense (income), net consist of the following:
|
For the Fiscal Years Ended
|
||||||||
|
June 24, 2012
|
June 26, 2011
|
|||||||
|
Operating expenses for Renewables
|
$ | 1,633 | $ | — | ||||
|
Net loss on sale or disposal of assets
|
369 | 368 | ||||||
|
Foreign currency transaction (gains) losses
|
270 | (19 | ) | |||||
|
Restructuring charges, net
|
71 | 1,484 | ||||||
|
Other, net
|
(272 | ) | (228 | ) | ||||
|
Total other operating expense (income), net
|
$ | 2,071 | $ | 1,605 | ||||
Consolidated Interest Expense, Net
Net interest expense decreased from $16,679 for the prior fiscal year to $14,152 for the current fiscal year ended June 24, 2012. This favorable decline in interest expense was due to both a lower average outstanding debt balance and a lower weighted average interest rate. The decreased debt balances were caused by the Company’s prepayments throughout the current year, the completion of the debt refinancing in May 2012 and the additional prepayments of its Term B Loan obligations subsequent to the fourth quarter refinancing. The weighted average interest rate of the Company’s debt for the current year period was 9.8% versus 11.0% for the prior year period and was favorably impacted by lower average interest rates which resulted from the debt refinancing.
Outlook for 2013:
As a result of the Company’s recently completed debt refinancing and the continued repayments of existing debt obligations as operating cash flows allow, the Company’s expectation is for interest expense, net to be approximately $9,000 to $10,000 lower for its fiscal year 2013 than the amounts incurred during the current fiscal year.
Consolidated Other Non-Operating Expense, net
For the fiscal year ended June 24, 2012, Other non-operating expense consists of $3,203 in losses on extinguishment of debt due to the refinancing and the redemption of outstanding debt obligations, the $3,656 write-down of previously held equity interest partially offset by a gain of $1,488 from the Company’s Brazilian operation related to a refund of non-income related taxes plus interest. For the fiscal year ended June 26, 2011, Other non-operating expense consists primarily of $3,337 in losses from extinguishment of debt and $528 for costs associated with an unsuccessful debt refinancing.
25
Consolidated Earnings from Unconsolidated Affiliates
For the fiscal year ended June 24, 2012, the Company generated $8,849 of income before income taxes of which $19,740 was generated from its investments in unconsolidated affiliates. For the twelve months ended June 24, 2012, earnings from the Company’s unconsolidated equity affiliates were $19,740 compared to $24,352 for the twelve months ended June 26, 2011. During these periods, the Company’s 34% share of PAL’s earnings decreased from $22,655 to $19,360 primarily due to lower sales volumes caused by the inventory destocking within the apparel supply chain. The remaining decrease in the earnings of unconsolidated affiliates relates primarily to the lower operating results of UNF and UNF America which was primarily driven by decreased sales volume and lower capacity utilization.
Consolidated Income Taxes
The components of income before income taxes consist of the following:
|
For the Fiscal Years Ended
|
||||||||
|
June 24, 2012
|
June 26, 2011
|
|||||||
|
United States
|
$ | 3,010 | $ | 14,737 | ||||
|
Foreign
|
5,839 | 17,685 | ||||||
| $ | 8,849 | $ | 32,422 | |||||
The components of the (benefit) provision for income taxes consist of the following:
|
For the Fiscal Years Ended
|
||||||||
|
June 24, 2012
|
June 26, 2011
|
|||||||
|
Federal
|
$ | (2,276 | ) | $ | 3 | |||
|
State
|
(3,216 | ) | — | |||||
|
Foreign
|
3,513 | 7,330 | ||||||
|
Income tax provision
|
$ | (1,979 | ) | $ | 7,333 | |||
The Company’s income tax provision for fiscal year 2012 resulted in an income tax benefit at an effective tax rate of (22.4%) compared to the 22.6% effective tax rate for fiscal year 2011. The differences between the Company’s effective tax rate and the U.S. statutory rate for the current year period were primarily due to the benefits of the reversal of a portion of the Company’s previously recorded valuation allowance against certain of its domestic deferred tax assets and the utilization of federal and state net operating loss carryforwards during the year, which were partially offset by the current year repatriation of foreign earnings and the tax effect of changes in future repatriation plans.
Outlook for 2013:
Based on current forecasts and assumptions, the Company expects to fully utilize its federal net operating loss carryforwards by the end of fiscal year 2013. Once utilized, the Company expects that its provision for income taxes will more closely approximate the federal statutory rate and its cash payments for taxes will increase versus the amounts paid during the current fiscal year.
Consolidated Net Income
Net income attributable to Unifi, Inc. for fiscal year 2012 was $11,491 or $0.57 per basic share compared to net income attributable to Unifi, Inc. of $25,089, or $1.25 per basic share, for the prior fiscal year. The Company’s decreased profitability was primarily due to lower gross profits, lower earnings from unconsolidated affiliates and the loss on the previously held equity interest in Renewables which were partially offset by lower SG&A expenses, lower interest costs and income tax benefits related to the release of valuation allowance against certain domestic deferred tax assets.
Consolidated Adjusted EBITDA
Adjusted EBITDA for the fiscal year ended June 24, 2012 decreased $20,660 versus the prior fiscal year. As discussed above, the $20,256 reduction in gross profit is the primary reason for the year over year decline in Adjusted EBITDA.
26
Review of Fiscal Year 2011 Results of Operations Compared to Fiscal Year 2010
Consolidated Overview
The components of net income, each component as a percentage of total net sales and the percentage increase or decrease over the prior year amounts are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 26, 2011
|
June 27, 2010
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 712,812 | 100.0 | $ | 622,618 | 100.0 | 14.5 | |||||||||||||
|
Cost of sales
|
638,160 | 89.5 | 549,367 | 88.2 | 16.2 | |||||||||||||||
|
Gross profit
|
74,652 | 10.5 | 73,251 | 11.8 | 1.9 | |||||||||||||||
|
Selling, general and administrative expenses
|
44,659 | 6.3 | 47,934 | 7.7 | (6.8 | ) | ||||||||||||||
|
(Benefit) provision for bad debts
|
(304 | ) | ― | 123 | ― | (347.2 | ) | |||||||||||||
|
Other operating expense (income), net
|
1,605 | 0.2 | (194 | ) | ― | ― | ||||||||||||||
|
Operating income
|
28,692 | 4.0 | 25,388 | 4.1 | 13.0 | |||||||||||||||
|
Interest expense, net
|
16,679 | 2.3 | 18,764 | 3.0 | (11.1 | ) | ||||||||||||||
|
Earnings from unconsolidated affiliates
|
(24,352 | ) | (3.4 | ) | (11,693 | ) | (1.9 | ) | 108.3 | |||||||||||
|
Other non-operating expense (income), net
|
3,943 | 0.6 | (54 | ) | ― | ― | ||||||||||||||
|
Income before income taxes
|
32,422 | 4.5 | 18,371 | 3.0 | 76.5 | |||||||||||||||
|
Provision for income taxes
|
7,333 | 1.0 | 7,686 | 1.3 | (4.6 | ) | ||||||||||||||
|
Net income
|
$ | 25,089 | 3.5 | $ | 10,685 | 1.7 | 134.8 | |||||||||||||
Consolidated Net Sales
Consolidated net sales increased by $90,194, or 14.5%, for fiscal year 2011 compared to the prior year as a result of improved sales volumes of 5.9% related to capacity expansion in El Salvador and the ongoing recovery in the global economy. On a consolidated basis, the weighted-average selling price per pound increased by 8.6% compared to the prior fiscal year driven by mix enrichment and the Company’s ability to pass along increasing raw material prices experienced throughout most of the year which peaked in the fourth quarter of fiscal year 2011.
Consolidated Gross Profit
Consolidated gross profit increased by $1,401 to $74,652 for fiscal year 2011 as compared to fiscal year 2010. This increase in gross profit was primarily attributable to higher sales volumes and improved conversion margins, partially offset by increased manufacturing costs. Conversion margin on a per unit basis improved 0.4% as the Company improved its mix through increased PVA sales. Total manufacturing costs increased $13,029 as a result of the higher volumes and, on a unit basis, increased 1.5% which primarily reflected lower capacity utilization rates within the Nylon segment and certain inflationary costs.
Polyester Segment Gross Profit
The components of segment gross profit, each component as a percentage of net sales and the percentage increase or decrease over the prior year amounts for the Polyester segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 26, 2011
|
June 27, 2010
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 375,605 | 100.0 | $ | 308,691 | 100.0 | 21.7 | |||||||||||||
|
Cost of sales
|
350,859 | 93.4 | 286,896 | 93.0 | 22.3 | |||||||||||||||
|
Gross profit
|
$ | 24,746 | 6.6 | $ | 21,795 | 7.0 | 13.5 | |||||||||||||
In fiscal year 2011, net sales increased by 21.7% compared to fiscal year 2010. The Company’s Polyester segment sales volumes increased 11.8% and the weighted-average selling price increased 9.9%. Increased volumes were primarily a result of increased demand for the segment’s products due to improvements in retail sales of apparel and increased production levels from the CAFTA region at the expense of Asian supply chains. The Polyester segment’s new manufacturing facility in El Salvador allowed the Company to participate in additional volume opportunities as global sourcing continued to move to the CAFTA region from Asia. The increase in the weighted-average selling price primarily reflected increases to recover lost conversion margin as raw material prices increased throughout most of the fiscal year.
Gross profit for the Polyester segment increased 13.5% over fiscal year 2010. On a unit basis, gross profit improved 1.8% as compared to the prior year. The increase in gross profit was mainly attributable to increased volumes and mix enrichment from higher PVA sales. Polyester conversion on a per unit basis remained flat against fiscal year 2010 despite higher levels of PVA sales as increases in sales prices lagged increases in raw material costs.
27
Total manufacturing costs increased 11.0% for fiscal year 2011 as compared to the prior year and decreased 0.7% on a per unit basis. Manufacturing costs were primarily unfavorably impacted by higher wage and fringe benefit costs of $3,149, packaging supplies of $2,596, utilities of $1,859, depreciation expenses of $1,228 and other fixed costs of $1,854. The increases for employee related costs were driven primarily by an increase in the total cost per employee (due to wage increases and rising medical costs) and an increase in the number of employees at the new locations in El Salvador and the Company’s recycling center. The increases in packaging and utilities were due to increased consumption from higher capacity utilization, as well as inflation negatively impacting these input costs. The other fixed costs primarily related to certain start-up costs and losses incurred during the period in which the assets at the Company’s new operating facility in El Salvador became available for use but prior to the achievement of a reasonable level of production. The segment’s variable manufacturing costs decreased by approximately 2.7% on a per unit basis due to a higher capacity utilization offsetting the spending increases. The segment’s fixed manufacturing costs per unit increased approximately 7.0% due to the negative effects of the start-up costs and higher depreciation expenses.
The Polyester segment net sales and gross profit, as a percentage of total consolidated amounts, were 52.7% and 33.1% for fiscal year 2011, compared to 49.6% and 29.8% for fiscal year 2010, respectively.
Nylon Segment Gross Profit
The components of segment gross profit, each component as a percentage of net sales and the percentage increase or decrease over the prior year amounts for the Nylon segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 26, 2011
|
June 27, 2010
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 163,354 | 100.0 | $ | 165,098 | 100.0 | (1.1 | ) | ||||||||||||
|
Cost of sales
|
143,591 | 87.9 | 144,319 | 87.4 | (0.5 | ) | ||||||||||||||
|
Gross profit
|
$ | 19,763 | 12.1 | $ | 20,779 | 12.6 | (4.9 | ) | ||||||||||||
Fiscal year 2011 Nylon segment net sales decreased 1.1% compared to fiscal year 2010. Nylon segment sales volumes decreased by 2.2% while the weighted average selling price increased by 1.1%. The decline in nylon sales volume was due to softening demand primarily in the hosiery and sock end-use markets during the second half of fiscal year 2011. The increase in the average selling price was primarily a result of increases in raw material pricing partially offset by a shift in the mix of products sold.
Gross profit for the Nylon segment decreased 4.9% in fiscal year 2011 as compared to fiscal year 2010. Total conversion dollars decreased $562 or 0.8% primarily as a result of lower sales volumes and the shift in mix. Manufacturing costs increased 3.7% on a per unit basis. During fiscal year 2011, the segment experienced a slightly lower capacity utilization rate. The lower utilization rate coupled with higher packaging, warehousing and certain allocated manufacturing costs caused the increase in per unit cost. Efforts to decrease spending for utilities and wages were unable to offset these increases.
The Nylon segment net sales and gross profit, as a percentage of total consolidated amounts, were 22.9% and 26.5% for fiscal year 2011, compared to 26.5% and 28.3% for fiscal year 2010, respectively.
International Segment Gross Profit
The components of segment gross profit, each component as a percentage of net sales and the percentage increase or decrease over the prior year amounts for the International segment are as follows:
|
For the Fiscal Years Ended
|
||||||||||||||||||||
|
June 26, 2011
|
June 27, 2010
|
|||||||||||||||||||
|
% to Net Sales
|
% to Net Sales
|
% Change
|
||||||||||||||||||
|
Net sales
|
$ | 173,853 | 100.0 | $ | 148,829 | 100.0 | 16.8 | |||||||||||||
|
Cost of sales
|
143,710 | 82.7 | 118,152 | 79.4 | 21.6 | |||||||||||||||
|
Gross profit
|
$ | 30,143 | 17.3 | $ | 30,677 | 20.6 | (1.7 | ) | ||||||||||||
International segment net sales for fiscal year 2011 increased 16.8% as compared to fiscal year 2010. International segment sales volumes decreased 2.7% and the weighted-average selling price increased 19.5% as compared to the prior year. Gross profit for the International segment decreased compared to the prior year and was comprised of a decline in gross profit in Brazil partially offset by an increase in gross profit for the Company’s Chinese subsidiary.
28
During fiscal year 2011, on a local currency basis, the Company’s Brazilian operation experienced a 7.8% decline in its gross profits on a per unit basis. Sales volumes decreased 9.6% over the prior fiscal year due to increased competition from imported yarn, fabric and garments from Asia. This increased market penetration was due to the strengthening of the Brazilian Real against the U.S. dollar and changes in Asian polyester prices over the last half of the fiscal year. Variable manufacturing costs increased by 18.6% on a per unit basis, primarily as a result of increases in packing materials and utilities. Fixed manufacturing costs increased 19.0% on a per unit basis, mainly due to higher depreciation expense and increased salaries and fringe benefit costs. The increases in per unit manufacturing costs also reflect a lower capacity utilization rate resulting from lower volumes. On a U.S. dollar basis, net sales increased 10.7% in fiscal year 2011 compared to the prior year which included a $9,863 positive currency exchange impact. Gross profit on a U.S. dollar basis decreased 10.3%.
The Company’s Chinese subsidiary increased its polyester net sales by approximately 60% and its sales volumes by approximately 40% in fiscal year 2011 as compared to 2010, as the Company continued to improve its development, sourcing, resale and servicing of PVA products in the Asian region.
The international segment net sales and gross profit, as a percentage of total consolidated amounts, were 24.4% and 40.4% for fiscal year 2011, compared to 23.9% and 41.9% for fiscal year 2010, respectively.
Consolidated Selling General & Administrative Expenses
Consolidated SG&A expenses decreased in total and as a percentage of net sales for fiscal year 2011 as compared to the prior year. The 6.8% decrease in SG&A costs of $3,275 for fiscal year 2011 was primarily a result of a decrease of $1,213 in fringe benefit costs, a decrease of $1,160 in non-cash deferred compensation costs, and a reduction in depreciation and amortization expenses of $1,264. The reduction in fringe benefit costs is mainly related to reductions in certain variable compensation programs.
Consolidated (Benefit) Provision for Bad Debts
Due to improved economic conditions, the overall health of the Company’s accounts receivable and certain risk accounts continued to improve during fiscal year 2011. As a result, the Company recorded a $304 benefit as compared to an expense of $123 recorded in the prior fiscal year.
Consolidated Other Operating Expense (Income), Net
The components of Other operating expense (income), net consist of the following:
|
For the Fiscal Years Ended
|
||||||||
|
June 26, 2011
|
June 27, 2010
|
|||||||
|
Net loss on sale or disposal of assets
|
$ | 368 | $ | 680 | ||||
|
Foreign currency transaction (gains)
|
(19 | ) | (145 | ) | ||||
|
Restructuring charges, net
|
1,484 | 739 | ||||||
|
Impairment of long-lived assets
|
― | 100 | ||||||
|
Gain from sale of nitrogen credits
|
― | (1,400 | ) | |||||
|
Other, net
|
(228 | ) | (168 | ) | ||||
|
Other operating expense (income), net
|
$ | 1,605 | $ | (194 | ) | |||
Consolidated Interest Expense, Net
Interest expense decreased from $21,889 in fiscal year 2010 to $19,190 in fiscal year 2011 primarily due to a lower average amount of outstanding debt related to the Company’s 2014 notes. During fiscal year 2011, the Company used excess operating cash and lower rate borrowings under its prior revolving credit facility to redeem $45,000 of its 2014 notes. The weighted average interest rate of Company debt for fiscal years 2011 and 2010 was 11.0% and 11.9%, respectively. Interest income was $2,511 in fiscal year 2011 and $3,125 in fiscal year 2010.
Consolidated Other Non-Operating Expense (Income), net
Other non-operating expense (income), net consists of losses from extinguishment of debt of $3,337 in fiscal year 2011 and gains on extinguishments of debt of $54 in fiscal year 2010. In addition, the Company incurred charges of $606 in fiscal year 2011 primarily for fees associated with an unsuccessful debt refinancing.
Consolidated Equity in Earnings of Unconsolidated Affiliates
Earnings from the Company’s unconsolidated equity affiliates were $24,352 in fiscal year 2011 compared to $11,693 in fiscal year 2010. The Company’s 34% share of PAL’s earnings increased from $11,605 in fiscal year 2010 to $22,655 in fiscal year 2011 primarily due to improved economic conditions, increased sales volumes, and the timing of the recognition of income related to the economic assistance benefits. The remaining increase relates to the improved performance of UNF and UNF America which was primarily driven by increased volumes and capacity utilization.
29
Consolidated Income Taxes
The components of income (loss) before income taxes consist of the following:
|
For the Fiscal Years Ended
|
||||||||
|
June 26, 2011
|
June 27, 2010
|
|||||||
|
United States
|
$ | 14,737 | $ | (4,399 | ) | |||
|
Foreign
|
17,685 | 22,770 | ||||||
| $ | 32,422 | $ | 18,371 | |||||
The components of the (benefit) provision for income taxes consist of the following:
|
For the Fiscal Years Ended
|
||||||||
|
June 26, 2011
|
June 27, 2010
|
|||||||
|
Federal
|
$ | 3 | $ | (48 | ) | |||
|
Foreign
|
7,330 | 7,734 | ||||||
|
Income tax provision
|
$ | 7,333 | $ | 7,686 | ||||
The Company recognized income tax expense at an effective tax rate of 22.6% and 41.8% for fiscal years 2011 and 2010, respectively. The lower effective tax rate for 2011 compared to the statutory rate of 35% is due to the reduction in the Company’s valuation allowance in fiscal year 2011, partially offset by taxes against repatriated foreign earnings. During fiscal year 2011, the Company changed its indefinite reinvestment assertion related to the future repatriation of UDB earnings and profits by $26,630.
The Company had a valuation allowance of $30,164 and $39,988 as of June 26, 2011 and June 27, 2010, respectively. The $9,824 net decrease in fiscal year 2011 resulted primarily from a decrease in temporary tax differences, the effects of the change in the indefinite reinvestment assertion, and a utilization of state and federal net operating loss carryforwards.
Consolidated Net Income
Net income for fiscal year 2011 was $25,089, or $1.25 per basic share, compared to net income of $10,685, or $0.53 per basic share, for the prior fiscal year. The Company’s increased profitability was due primarily to higher sales volumes over the prior fiscal year, improved operational efficiencies, decreased SG&A expenses, and increased earnings from the Company’s unconsolidated affiliates.
Consolidated Adjusted EBITDA
Adjusted EBITDA for fiscal year 2011 increased $5,203 versus fiscal year 2010. As discussed above, consolidated gross profit increased $1,401 while SG&A decreased $3,275. The differences between the aforementioned changes in gross profit and SG&A expenses and the Company’s key performance Adjusted EBITDA metric are primarily related to start-up costs, non-cash compensation charges, provision (benefit) for bad debt, other operating (income) expense items and depreciation.
Liquidity and Capital Resources
The Company’s primary capital requirements are for service of indebtedness, debt repayment, working capital and capital expenditures. The Company’s primary sources of capital are cash generated from operations and amounts available under its ABL Revolver. For the fiscal year ended June 24, 2012, cash generated from operations was $43,309 and as of June 24, 2012, excess availability under the ABL Revolver was $37,122.
As of June 24, 2012, all of the Company’s long-term debt obligations were guaranteed by domestic subsidiaries while a substantial portion of the Company’s cash and cash equivalents are attributable to foreign subsidiaries. The following table presents a summary of the Company’s cash, liquidity, working capital and debt obligations for the U.S., Brazil and other foreign operations as of June 24, 2012:
|
U.S.
|
Brazil
|
All Others
|
Total
|
|||||||||||||
|
Cash and cash equivalents
|
$ | 1,078 | $ | 2,466 | $ | 7,342 | $ | 10,886 | ||||||||
|
Borrowings available under ABL Revolver
|
37,122 | — | — | 37,122 | ||||||||||||
|
Liquidity
|
$ | 38,200 | $ | 2,466 | $ | 7,342 | $ | 48,008 | ||||||||
|
Working capital
|
$ | 94,390 | $ | 49,609 | $ | 22,486 | $ | 166,485 | ||||||||
|
Long-term debt, including current portion
|
$ | 121,552 | $ | ― | $ | — | $ | 121,552 | ||||||||
As of June 24, 2012, all the cash and cash equivalents on-hand at the Company’s foreign operations were deemed to be permanently reinvested. As of the end of fiscal year 2012, the Company has plans to repatriate approximately $20,000 of future cash flows generated from its operations in Brazil and has established a deferred tax liability of approximately $7,000 to reflect the additional income tax that would be due as a result of these current plans. As of June 24, 2012, the $74,783 of undistributed earnings of the Company’s foreign subsidiaries was deemed to be permanently reinvested and any applicable U.S. federal income taxes and foreign withholding taxes have not been provided on these earnings.
30
Debt Obligations
As of June 24, 2012, the Company’s debt obligations consisted of the following:
|
June 24, 2012
|
June 26, 2011
|
|||||||
|
Notes payable
|
$ | — | $ | 133,722 | ||||
|
First Amended Credit Agreement revolving credit facility
|
— | 34,600 | ||||||
|
ABL Revolver
|
51,000 | — | ||||||
|
ABL Term Loan
|
50,000 | — | ||||||
|
Term B Loan
|
20,515 | — | ||||||
|
Capital lease obligation
|
37 | 342 | ||||||
|
Total debt
|
$ | 121,552 | $ | 168,664 | ||||
On May 26, 2006, the Company issued $190,000 of 11.5% senior secured notes (“2014 notes”) due May 15, 2014. Concurrent with the issuance of the 2014 notes, the Company amended its then existing senior secured asset-based revolving credit facility which provided for a revolving credit facility of $100,000 that was scheduled to mature on September 9, 2015.
On May 24, 2012, the Company entered into the ABL Facility with Wells Fargo Bank, N.A. (“Wells Fargo”) and Bank of America, N.A. The ABL Facility consists of the $100,000 ABL Revolver and the $50,000 ABL Term Loan. In addition, the Company entered into the $30,000 Term B Loan. The purpose of the new ABL Facility and the Term B Loan was to refinance the Company’s existing indebtedness including the redemption of the 2014 notes and to repay and terminate the existing revolver. The ABL Facility and the Term B Loan each have a maturity date of May 24, 2017. The Company has the ability to request that the borrowing capacity of the ABL Revolver be increased to as much as $150,000.
The ABL Facility is secured by substantially all assets of the Company. The ABL Facility is further secured by a second-priority lien on the Company’s membership interest in Parkdale America, LLC (“PAL”). The ABL Facility includes representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for financings of this type. Should excess availability under the ABL Revolver fall below the greater of $10,000 or 15% of maximum availability, a financial covenant requires the Company to maintain a fixed charge coverage ratio on a monthly basis of at least 1.05 to 1.0. In addition, the ABL Facility contains provisions restricting certain payments and investments, including a restriction on the payment of dividends and share repurchases. As of June 24, 2012, the Company had a fixed charge coverage ratio of 1.43 to 1.0 and was in compliance with all financial covenants.
The Company’s ability to borrow under the ABL Revolver is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to certain conditions and limitations. ABL Revolver borrowings bear interest at the London Interbank Offer Rate (the “LIBOR Rate”) plus an applicable margin with interest currently being paid on a monthly basis.
Under the terms of the ABL Facility, the Company is required to hedge at least $50,000 of variable interest rate exposure so long as the outstanding principal of all indebtedness having variable interest rates exceeds $75,000. The weighted average interest rate for the ABL Revolver as of June 24, 2012, including the effects of all interest rate swaps, was 3.4%.
The ABL Term Loan bears interest at LIBOR plus an applicable margin with interest currently being paid on a monthly basis. The weighted average interest rate for the ABL Term Loan as of June 24, 2012, including the effects of all interest rate swaps, was 3.3%. The ABL Term Loan will be repaid in quarterly scheduled principal installments of $1,800 commencing on September 1, 2012 and a balloon payment of $14,000 in May 2017. Subject to certain conditions, the ABL Term Loan may be prepaid at par, in whole or in part, at any time before the maturity date.
The Term B Loan is secured by a first-priority lien on the Company’s membership interest in PAL and a second-priority lien on substantially all assets of the Company. The Term B Loan also contains representations and warranties, affirmative and negative covenants and events of default comparable to those included in the ABL Facility. The Term B Loan bears interest at LIBOR plus 7.50% (with a LIBOR floor of 1.25%) with interest payable monthly. The Term B Loan does not amortize and prepayments are only required in certain circumstances. Subject to certain conditions, the Company may prepay the Term B Loan at any time, in whole or in part, with a call premium of 3% during the first year, 2% during the second year, 1% during the third year and at par thereafter.
On June 8, 2012, the Company made a $6,000 optional prepayment of the Term B Loan and on June 13, 2012, the Company made a $3,485 mandatory prepayment of the Term B Loan due to the receipt of a PAL after-tax distribution.
31
The following table presents the scheduled maturities of the Company’s ABL Facility and Term B Loan on a fiscal year basis:
|
Expected Maturity Date on a Fiscal Year Basis
|
||||||||||||||||||||
|
2013
|
2014
|
2015
|
2016
|
2017
|
||||||||||||||||
|
ABL Revolver
|
$ | — | $ | — | $ | — | $ | — | $ | 51,000 | ||||||||||
|
ABL Term Loan
|
$ | 7,200 | $ | 7,200 | $ | 7,200 | $ | 7,200 | $ | 21,200 | ||||||||||
|
Term B Loan
|
$ | — | $ | — | $ | — | $ | — | $ | 20,515 | ||||||||||
The table above does not take into consideration any optional or mandatory prepayments with respect to distributions from the Company’s equity affiliates.
On June 25, 2012, the Company provided notice that it would make a $4,515 optional prepayment of the Term B Loan. This prepayment was subsequently completed on July 2, 2012.
Further discussion of the terms and conditions of the Company’s existing indebtedness is outlined in “Footnote 12. Long-Term Debt” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
Working Capital
The following table presents a summary of the components of the Company’s Adjusted Working Capital and the reconciliation from Adjusted Working Capital to Working Capital:
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Receivables, net
|
$ | 99,236 | $ | 99,815 | $ | 91,053 | ||||||
|
Inventories
|
112,750 | 134,883 | 111,007 | |||||||||
|
Accounts payable
|
(48,541 | ) | (42,842 | ) | (40,662 | ) | ||||||
|
Accrued expenses (1)
|
(14,004 | ) | (15,595 | ) | (19,343 | ) | ||||||
|
Adjusted Working Capital
|
149,441 | 176,261 | 142,055 | |||||||||
|
Cash
|
10,886 | 27,490 | 42,691 | |||||||||
|
Other current assets
|
15,125 | 11,881 | 7,979 | |||||||||
|
Accrued interest
|
(398 | ) | (1,900 | ) | (2,429 | ) | ||||||
|
Other current liabilities
|
(8,569 | ) | (763 | ) | (15,832 | ) | ||||||
|
Working Capital
|
$ | 166,485 | $ | 212,969 | $ | 174,464 | ||||||
|
(1)
|
Excludes accrued interest
|
Working capital decreased from $212,969 as of June 26, 2011 to $166,485 as of June 24, 2012. This decrease includes a $17,896 currency effect related to the weakening of the Brazilian Real to the U.S. dollar, of which $4,172 relates to the effect of currency rate changes on cash and cash equivalents. The decrease in Adjusted Working Capital was primarily attributable to decreased inventories and increased accounts payable. The reductions in inventories were predominantly driven by the 7% decline for on-hand units and increased inventory turnover. The change in accounts payable is attributable to the success of the Company’s working capital management programs. The change in receivables consists primarily of decreases in the Company’s foreign affiliate receivables due to lower sales volumes and currency translation losses.
Outlook for 2013:
Before considering fluctuations in raw material cost or currency fluctuations, the Company expects no significant changes to Adjusted Working Capital.
Capital Expenditures
In addition to its normal working capital requirements, the Company requires cash to fund capital expenditures. During fiscal year 2012, the Company spent $6,354 on capital expenditures compared to $20,539 in the prior year which included a large capital project related to the vertical integration of the Company’s Repreve supply chain. The Company estimates its fiscal year 2013 capital expenditures will be approximately $10,000 to $12,000, which is inclusive of approximately $8,000 of maintenance capital expenditures, with the remainder representing capital expenditures focused primarily on improving the Company’s flexibility and capabilities to produce PVA products. The Company may incur additional capital expenditures as it pursues new opportunities to expand its production capabilities or to further streamline its manufacturing processes.
Repayments of Debt Obligations
Other than the scheduled maturities and mandatory prepayments of debt required under its existing debt obligations, the Company may, from time to time, elect to repay additional amounts borrowed under the ABL Facility or Term B Loan. Such repayment of debt may come from the operating cash flows of the business or other sources and will depend upon the Company’s strategy, prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material. The Company expects to maintain a balance outstanding under its ABL Facility and hedge a substantial amount of the interest rate risk in order to ensure the predictability of cash payments for interest. As a result of the Company’s completion of its debt refinancing in May 2012 and the ongoing execution of its deleveraging strategy, the Company expects to continue to reduce the annual fixed carrying cost of its debt.
32
Liquidity Summary
Historically, the Company has met its working capital, capital expenditures and service of indebtedness requirements from its cash flows from operations. For fiscal year 2012, cash generated from operations was sufficient to cover the Company’s working capital needs, capital expenditures and service of indebtedness. For each of the previous three years, before considering the earnings from the Company’s unconsolidated equity affiliates, the Company has reported losses in the U.S. from continuing operations while reporting income for its foreign subsidiaries. The Company currently believes that its existing cash balances, cash generated by operations, together with its available credit capacity, will enable the Company to comply with the terms of its indebtedness and meet the foreseeable liquidity requirements. Domestically, the Company’s cash balances, cash generated by operations and borrowings available under the ABL Revolver continue to be sufficient to fund its domestic operating activities and cash commitments for its investing and financing activities. For its foreign operations, the Company’s existing cash balances and cash generated by operations should provide the needed liquidity to fund its foreign operating activities and any foreign investing activities, such as future capital expenditures.
Cash Provided by Operating Activities
Net cash provided by operating activities consists of the following:
|
For the Fiscal Years Ended
|
||||||||||||
|
June 24, 2012
|
June 26, 2011
|
June 27, 2010
|
||||||||||
|
Cash receipts:
|
||||||||||||
|
Receipts from customers
|
$ | 700,379 | $ | 701,487 | $ | 605,143 | ||||||
|
Dividends from unconsolidated affiliates
|
10,616 | 5,900 | 3,265 | |||||||||
|
Other receipts
|
3,733 | 3,939 | 4,591 | |||||||||
|
Cash payments:
|
||||||||||||
|
Payments to suppliers and other operating cost
|
541,298 | 556,519 | 460,131 | |||||||||
|
Payments for salaries, wages, and benefits
|
109,444 | 114,364 | 101,218 | |||||||||
|
Payments for restructuring and severance
|
— | 1,785 | 1,823 | |||||||||
|
Payments for interest
|
16,689 | 19,292 | ||||||||||