UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) |
|
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 201929, 2020
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 |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
|
|
|
7201 West Friendly Avenue | ||
Greensboro, North Carolina | 27410 | |
(Address of principal executive offices) | (Zip Code) |
(336) 294-4410
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.10 per share | UFI | New York Stock Exchange |
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ |
|
|
|
|
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
|
|
|
|
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
|
|
|
As of May 2, 2019,4, 2020, there were 18,423,53818,446,436 shares of the registrant’s common stock, par value $0.10 per share, outstanding.
This Quarterly Report on Form 10-Q contains forward-looking statements“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that relate to our plans, objectives, estimates and goals. Statements expressing expectations regarding our future, or projections or estimates relating to products, sales, revenues, expenditures, costs, strategies, initiatives or earnings, are typical of such statements and are made under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs, assumptions and expectations about our future performance, considering the information currently available to management. The words “believe,” “may,” “could,” “will,” “should,” “would,” “anticipate,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek,” “strive” and words of similar import, or the negative of such words, identify or signal the presence of forward-looking statements. These statements are not statements of historical fact;fact, and they involve risks and uncertainties that may cause our actual results, performance or financial condition to differ materially from the expectations of future results, performance or financial condition that we express or imply in any forward-looking statement. Factors that could contribute to such differences include, but are not limited to:
the competitive nature of the textile industry and the impact of global 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, including economic and political factors over which the Company has no control;
changes in consumer spending, customer preferences, fashion trends and end uses for products;
the financial condition of the Company’s customers;
the loss of a significant customer or brand partner;
natural disasters, industrial accidents, power or water shortages, extreme weather conditions and other disruptions at one of our facilities;
the disruption of operations, global demand, or financial performance as a result of catastrophic or extraordinary events, including epidemics or pandemics such as the recent strain of coronavirus;
the success of the Company’s strategic business initiatives;
the volatility of financial and credit markets;
the ability to service indebtedness and fund capital expenditures and strategic business initiatives;
the availability of and access to credit on reasonable terms;
changes in foreign currency exchange, interest and inflation rates;
fluctuations in production costs;
the ability to protect intellectual property;
the strength and reputation of our brands;
employee relations;
the ability to attract, retain and motivate key employees;
the impact of environmental, health and safety regulations;
the impact of tax laws, the judicial or administrative interpretations of tax laws and/or changes in such laws or interpretations;
the operating performance of joint ventures and other equity method investments;
the accurate financial reporting of information from equity method investees; and
other factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 24, 2018 and30, 2019 or in the Company's Quarterly Report on Form 10-Q forCompany’s other periodic reports and information filed with the quarterly period ended September 30, 2018.Securities and Exchange Commission.
All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to time, and it is not possible for management to predict all such factors or to assess the impact of each such factor on the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made, except as may be required by federal securities law.laws.
In light of all the above considerations, we reiterate that forward-looking statements are not guarantees of future performance, and we caution you not to rely on them as such.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 201929, 2020
TABLE OF CONTENTS
|
|
|
| Page |
|
|
|
|
|
Item 1. |
|
| 1 | |
|
|
|
|
|
|
| Condensed Consolidated Balance Sheets as of March |
| 1 |
|
|
|
|
|
|
|
| 2 | |
|
|
|
|
|
|
| 3 | ||
|
| |||
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
|
|
|
|
|
|
Item 3. |
|
|
| |
|
|
|
|
|
Item 4. |
|
|
| |
| ||||
|
|
|
|
|
Item 1. |
|
|
| |
Item 1A. | 39 | |||
Item 2. | 39 | |||
|
|
|
|
|
Item 6. |
|
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
See accompanying notes to condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||||||
Net sales |
| $ | 179,989 |
|
| $ | 165,867 |
|
| $ | 529,311 |
|
| $ | 497,587 |
|
| $ | 170,994 |
|
| $ | 179,989 |
|
| $ | 520,454 |
|
| $ | 529,311 |
|
Cost of sales |
|
| 166,198 |
|
|
| 149,311 |
|
|
| 481,345 |
|
|
| 435,063 |
|
|
| 155,611 |
|
|
| 166,198 |
|
|
| 471,963 |
|
|
| 481,345 |
|
Gross profit |
|
| 13,791 |
|
|
| 16,556 |
|
|
| 47,966 |
|
|
| 62,524 |
|
|
| 15,383 |
|
|
| 13,791 |
|
|
| 48,491 |
|
|
| 47,966 |
|
Selling, general and administrative expenses |
|
| 11,439 |
|
|
| 13,846 |
|
|
| 40,672 |
|
|
| 41,335 |
|
|
| 11,720 |
|
|
| 11,439 |
|
|
| 35,208 |
|
|
| 40,672 |
|
Provision (benefit) for bad debts |
|
| 218 |
|
|
| 27 |
|
|
| 381 |
|
|
| (104 | ) | ||||||||||||||||
Other operating expense, net |
|
| 1,359 |
|
|
| 1,100 |
|
|
| 1,218 |
|
|
| 1,763 |
| ||||||||||||||||
Provision for bad debts |
|
| 580 |
|
|
| 218 |
|
|
| 331 |
|
|
| 381 |
| ||||||||||||||||
Other operating (income) expense, net |
|
| (62 | ) |
|
| 1,359 |
|
|
| 900 |
|
|
| 1,218 |
| ||||||||||||||||
Operating income |
|
| 775 |
|
|
| 1,583 |
|
|
| 5,695 |
|
|
| 19,530 |
|
|
| 3,145 |
|
|
| 775 |
|
|
| 12,052 |
|
|
| 5,695 |
|
Interest income |
|
| (149 | ) |
|
| (182 | ) |
|
| (448 | ) |
|
| (444 | ) |
|
| (173 | ) |
|
| (149 | ) |
|
| (595 | ) |
|
| (448 | ) |
Interest expense |
|
| 1,256 |
|
|
| 1,187 |
|
|
| 4,078 |
|
|
| 3,562 |
|
|
| 1,231 |
|
|
| 1,256 |
|
|
| 3,589 |
|
|
| 4,078 |
|
Equity in earnings of unconsolidated affiliates |
|
| (3,526 | ) |
|
| (1,873 | ) |
|
| (1,904 | ) |
|
| (3,126 | ) | ||||||||||||||||
Impairment of investment in unconsolidated affiliate |
|
| 45,194 |
|
|
| — |
|
|
| 45,194 |
|
|
| — |
| ||||||||||||||||
Loss on extinguishment of debt |
|
| — |
|
|
| — |
|
|
| 131 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 131 |
|
Equity in earnings of unconsolidated affiliates |
|
| (1,873 | ) |
|
| (544 | ) |
|
| (3,126 | ) |
|
| (3,842 | ) | ||||||||||||||||
Income before income taxes |
|
| 1,541 |
|
|
| 1,122 |
|
|
| 5,060 |
|
|
| 20,254 |
| ||||||||||||||||
Provision (benefit) for income taxes |
|
| 3,070 |
|
|
| 946 |
|
|
| 3,606 |
|
|
| (684 | ) | ||||||||||||||||
(Loss) income before income taxes |
|
| (39,581 | ) |
|
| 1,541 |
|
|
| (34,232 | ) |
|
| 5,060 |
| ||||||||||||||||
Provision for income taxes |
|
| 1,530 |
|
|
| 3,070 |
|
|
| 2,758 |
|
|
| 3,606 |
| ||||||||||||||||
Net (loss) income |
| $ | (1,529 | ) |
| $ | 176 |
|
| $ | 1,454 |
|
| $ | 20,938 |
|
| $ | (41,111 | ) |
| $ | (1,529 | ) |
| $ | (36,990 | ) |
| $ | 1,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share: | Net (loss) income per common share: |
| Net (loss) income per common share: |
| ||||||||||||||||||||||||||||
Basic |
| $ | (0.08 | ) |
| $ | 0.01 |
|
| $ | 0.08 |
|
| $ | 1.15 |
|
| $ | (2.23 | ) |
| $ | (0.08 | ) |
| $ | (2.00 | ) |
| $ | 0.08 |
|
Diluted |
| $ | (0.08 | ) |
| $ | 0.01 |
|
| $ | 0.08 |
|
| $ | 1.12 |
|
| $ | (2.23 | ) |
| $ | (0.08 | ) |
| $ | (2.00 | ) |
| $ | 0.08 |
|
See accompanying notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMECOMPREHENSIVE LOSS
(Unaudited)
(In thousands)
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||||
Net (loss) income |
| $ | (1,529 | ) |
| $ | 176 |
|
| $ | 1,454 |
|
| $ | 20,938 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 55 |
|
|
| 1,047 |
|
|
| (1,454 | ) |
|
| 1,571 |
|
Foreign currency translation adjustments for an unconsolidated affiliate |
|
| 102 |
|
|
| 439 |
|
|
| 144 |
|
|
| (154 | ) |
Changes in interest rate swaps, net of tax of $173, $0, $392 and $0, respectively |
|
| (572 | ) |
|
| 1,142 |
|
|
| (1,297 | ) |
|
| 2,634 |
|
Other comprehensive (loss) income, net |
|
| (415 | ) |
|
| 2,628 |
|
|
| (2,607 | ) |
|
| 4,051 |
|
Comprehensive (loss) income |
| $ | (1,944 | ) |
| $ | 2,804 |
|
| $ | (1,153 | ) |
| $ | 24,989 |
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Net (loss) income |
| $ | (41,111 | ) |
| $ | (1,529 | ) |
| $ | (36,990 | ) |
| $ | 1,454 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| (15,684 | ) |
|
| 55 |
|
|
| (18,900 | ) |
|
| (1,454 | ) |
Foreign currency translation adjustments for an unconsolidated affiliate |
|
| (1,586 | ) |
|
| 102 |
|
|
| (1,450 | ) |
|
| 144 |
|
Changes in interest rate swaps, net of tax of $434, $173, $434 and $392, respectively |
|
| (1,449 | ) |
|
| (572 | ) |
|
| (1,488 | ) |
|
| (1,297 | ) |
Other comprehensive loss, net |
|
| (18,719 | ) |
|
| (415 | ) |
|
| (21,838 | ) |
|
| (2,607 | ) |
Comprehensive loss |
| $ | (59,830 | ) |
| $ | (1,944 | ) |
| $ | (58,828 | ) |
| $ | (1,153 | ) |
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
3(Unaudited)
(In thousands)
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at December 29, 2019 |
|
| 18,505 |
|
| $ | 1,851 |
|
| $ | 61,187 |
|
| $ | 378,789 |
|
| $ | (46,348 | ) |
| $ | 395,479 |
|
Options exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Conversion of restricted stock units |
|
| 42 |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 596 |
|
|
| — |
|
|
| — |
|
|
| 596 |
|
Common stock repurchased and retired under publicly announced program |
|
| (84 | ) |
|
| (8 | ) |
|
| (279 | ) |
|
| (1,707 | ) |
|
| — |
|
|
| (1,994 | ) |
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (17 | ) |
|
| (2 | ) |
|
| (420 | ) |
|
| — |
|
|
| — |
|
|
| (422 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (18,719 | ) |
|
| (18,719 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (41,111 | ) |
|
| — |
|
|
| (41,111 | ) |
Balance at March 29, 2020 |
|
| 18,446 |
|
| $ | 1,845 |
|
| $ | 61,080 |
|
| $ | 335,971 |
|
| $ | (65,067 | ) |
| $ | 333,829 |
|
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at June 30, 2019 |
|
| 18,462 |
|
| $ | 1,846 |
|
| $ | 59,560 |
|
| $ | 374,668 |
|
| $ | (43,229 | ) |
| $ | 392,845 |
|
Options exercised |
|
| 10 |
|
|
| 1 |
|
|
| 28 |
|
|
| — |
|
|
| — |
|
|
| 29 |
|
Conversion of restricted stock units |
|
| 76 |
|
|
| 8 |
|
|
| (8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| 4 |
|
|
| 1 |
|
|
| 2,298 |
|
|
| — |
|
|
| — |
|
|
| 2,299 |
|
Common stock repurchased and retired under publicly announced program |
|
| (84 | ) |
|
| (8 | ) |
|
| (279 | ) |
|
| (1,707 | ) |
|
| — |
|
|
| (1,994 | ) |
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (22 | ) |
|
| (3 | ) |
|
| (519 | ) |
|
| — |
|
|
| — |
|
|
| (522 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,838 | ) |
|
| (21,838 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (36,990 | ) |
|
| — |
|
|
| (36,990 | ) |
Balance at March 29, 2020 |
|
| 18,446 |
|
| $ | 1,845 |
|
| $ | 61,080 |
|
| $ | 335,971 |
|
| $ | (65,067 | ) |
| $ | 333,829 |
|
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at December 30, 2018 |
|
| 18,383 |
|
| $ | 1,838 |
|
| $ | 59,619 |
|
| $ | 375,195 |
|
| $ | (42,725 | ) |
| $ | 393,927 |
|
Options exercised |
|
| 6 |
|
|
| — |
|
|
| 29 |
|
|
| — |
|
|
| — |
|
|
| 29 |
|
Conversion of restricted stock units |
|
| 24 |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| 9 |
|
|
| 1 |
|
|
| (314 | ) |
|
| — |
|
|
| — |
|
|
| (313 | ) |
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (11 | ) |
|
| (1 | ) |
|
| (243 | ) |
|
| — |
|
|
| — |
|
|
| (244 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (415 | ) |
|
| (415 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,529 | ) |
|
| — |
|
|
| (1,529 | ) |
Balance at March 31, 2019 |
|
| 18,411 |
|
| $ | 1,841 |
|
| $ | 59,088 |
|
| $ | 373,666 |
|
| $ | (43,140 | ) |
| $ | 391,455 |
|
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at June 24, 2018 |
|
| 18,353 |
|
| $ | 1,835 |
|
| $ | 56,726 |
|
| $ | 371,753 |
|
| $ | (40,533 | ) |
| $ | 389,781 |
|
Options exercised |
|
| 22 |
|
|
| 2 |
|
|
| 271 |
|
|
| — |
|
|
| — |
|
|
| 273 |
|
Conversion of restricted stock units |
|
| 41 |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| 10 |
|
|
| 1 |
|
|
| 2,471 |
|
|
| — |
|
|
| — |
|
|
| 2,472 |
|
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (15 | ) |
|
| (1 | ) |
|
| (376 | ) |
|
| — |
|
|
| — |
|
|
| (377 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,607 | ) |
|
| (2,607 | ) |
Adoption of the new revenue recognition guidance |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 459 |
|
|
| — |
|
|
| 459 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,454 |
|
|
| — |
|
|
| 1,454 |
|
Balance at March 31, 2019 |
|
| 18,411 |
|
| $ | 1,841 |
|
| $ | 59,088 |
|
| $ | 373,666 |
|
| $ | (43,140 | ) |
| $ | 391,455 |
|
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
|
| For the Nine Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Cash and cash equivalents at beginning of year |
| $ | 44,890 |
|
| $ | 35,425 |
| ||||||||
Cash and cash equivalents at beginning of period |
| $ | 22,228 |
|
| $ | 44,890 |
| ||||||||
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 1,454 |
|
|
| 20,938 |
| ||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net (loss) income |
|
| (36,990 | ) |
|
| 1,454 |
| ||||||||
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
| ||||||||
Equity in earnings of unconsolidated affiliates |
|
| (3,126 | ) |
|
| (3,842 | ) |
|
| (1,904 | ) |
|
| (3,126 | ) |
Distributions received from unconsolidated affiliates |
|
| 1,380 |
|
|
| 11,226 |
|
|
| 10,437 |
|
|
| 1,380 |
|
Depreciation and amortization expense |
|
| 17,242 |
|
|
| 16,844 |
|
|
| 17,685 |
|
|
| 17,242 |
|
Impairment of investment in unconsolidated affiliate |
|
| 45,194 |
|
|
| — |
| ||||||||
Non-cash compensation expense |
|
| 2,758 |
|
|
| 4,878 |
|
|
| 2,510 |
|
|
| 2,758 |
|
Deferred income taxes |
|
| (190 | ) |
|
| (8,441 | ) |
|
| (10,029 | ) |
|
| (190 | ) |
Other, net |
|
| (459 | ) |
|
| (180 | ) |
|
| (171 | ) |
|
| (459 | ) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
| (5,877 | ) |
|
| (6,084 | ) |
|
| (2,295 | ) |
|
| (5,877 | ) |
Inventories |
|
| (13,409 | ) |
|
| (9,424 | ) |
|
| 2,126 |
|
|
| (13,409 | ) |
Other current assets |
|
| (1,338 | ) |
|
| (493 | ) |
|
| (3,020 | ) |
|
| (1,338 | ) |
Income taxes |
|
| 8,849 |
|
|
| 3,388 |
| ||||||||
Accounts payable and accrued expenses |
|
| (4,523 | ) |
|
| (323 | ) |
|
| (488 | ) |
|
| (4,523 | ) |
Income taxes |
|
| 3,388 |
|
|
| (464 | ) | ||||||||
Other, net |
|
| 1,183 |
|
|
| 354 |
|
|
| 201 |
|
|
| 1,183 |
|
Net cash (used in) provided by operating activities |
|
| (1,517 | ) |
|
| 24,989 |
| ||||||||
Net cash provided by (used in) operating activities |
|
| 32,105 |
|
|
| (1,517 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (19,199 | ) |
|
| (17,091 | ) |
|
| (14,971 | ) |
|
| (19,199 | ) |
Other, net |
|
| 9 |
|
|
| — |
|
|
| 35 |
|
|
| 9 |
|
Net cash used in investing activities |
|
| (19,190 | ) |
|
| (17,091 | ) |
|
| (14,936 | ) |
|
| (19,190 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from ABL Revolver |
|
| 93,300 |
|
|
| 80,200 |
|
|
| 79,000 |
|
|
| 93,300 |
|
Payments on ABL Revolver |
|
| (97,400 | ) |
|
| (70,500 | ) |
|
| (67,500 | ) |
|
| (97,400 | ) |
Proceeds from ABL Term Loan |
|
| 20,000 |
|
|
| — |
|
|
| — |
|
|
| 20,000 |
|
Payments on ABL Term Loan |
|
| (5,000 | ) |
|
| (7,500 | ) |
|
| (7,500 | ) |
|
| (5,000 | ) |
Payments on capital lease obligations |
|
| (5,308 | ) |
|
| (5,286 | ) | ||||||||
Payments on finance lease obligations |
|
| (4,606 | ) |
|
| (5,308 | ) | ||||||||
Common stock repurchased and retired under publicly announced program |
|
| (1,994 | ) |
|
| — |
| ||||||||
Proceeds from stock option exercises |
|
| 273 |
|
|
| 219 |
|
|
| 29 |
|
|
| 273 |
|
Payments of debt financing fees |
|
| (720 | ) |
|
| — |
|
|
| — |
|
|
| (720 | ) |
Other |
|
| (1,017 | ) |
|
| (597 | ) |
|
| (521 | ) |
|
| (1,017 | ) |
Net cash provided by (used in) financing activities |
|
| 4,128 |
|
|
| (3,464 | ) | ||||||||
Net cash (used in) provided by financing activities |
|
| (3,092 | ) |
|
| 4,128 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (413 | ) |
|
| 717 |
|
|
| (2,912 | ) |
|
| (413 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (16,992 | ) |
|
| 5,151 |
| ||||||||
Net increase (decrease) in cash and cash equivalents |
|
| 11,165 |
|
|
| (16,992 | ) | ||||||||
Cash and cash equivalents at end of period |
| $ | 27,898 |
|
| $ | 40,576 |
|
| $ | 33,393 |
|
| $ | 27,898 |
|
See accompanying notes to condensed consolidated financial statements.
45
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Background
Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, “UNIFI,” the “Company,” “we,” “us” or “our”), is a multi-national company that manufactures and sells innovative recycled and synthetic products made from polyester and nylon primarily to other yarn manufacturers and knitters and weavers (UNIFI’s direct customers) that produce yarn and/or fabric for the apparel, hosiery, home furnishings, automotive, industrial and other end-use markets (UNIFI’s indirect customers). We refer to these indirect customers as “brand partners.” Polyester filament yarns include partially oriented yarn (“POY”), textured, solution and package dyed, twisted, beamed and draw wound yarns, and each is available in virgin or recycled varieties. Recycled solutions, made from both pre-consumer and post-consumer waste, include plastic bottle flake (“Flake”) and, polyester polymer beads (“Chip”). and staple fiber. Nylon yarns include virgin or recycled textured, solution dyed and spandex covered yarns.
UNIFI maintains one of the textile industry’s most comprehensive product offerings that include a range of specialized, premium value-added (“PVA”) and commodity solutions, with principal geographic markets in the Americas, Asia and Asia.Europe.
UNIFI has direct manufacturing operations in four countries and participates in joint ventures with operations in Israel and the United States the most significant(“U.S.”). As of which isMarch 29, 2020, UNIFI owned a 34% non-controlling partnership interest in Parkdale America, LLC (“PAL”), a significant unconsolidated affiliate that produces cotton and synthetic yarns for sale to the global textile industry and apparel market. As further described in Note 19, “Investments in Unconsolidated Affiliates and Variable Interest Entities,” UNIFI sold the 34% interest on April 29, 2020.
2. Basis of Presentation; Condensed Notes
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United StatesU.S. (“GAAP”) for interim financial information. As contemplated by the instructions of the Securities and Exchange Commission (the “SEC”) to Form 10-Q, the following notes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to UNIFI’s year-end audited consolidated financial statements and related notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended June 24, 201830, 2019 (the “2018“2019 Form 10-K”).
The financial information included in this report has been prepared by UNIFI, without audit. In the opinion of management, all adjustments, which consist of normal, recurring adjustments, considered necessary for a fair statement of the results for interim periods have been included. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures. Actual results may vary from these estimates.
All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted.
The fiscal quarter for each of Unifi, Inc., its primary domestic operating subsidiaries and all of its wholly owned subsidiariessubsidiary in El Salvador ended on March 29, 2020, the Sunday nearest to March 31, 2019. Unifi, Inc.’s remaining material operating subsidiaries’ fiscal quarter ended on March 31, 2019, the last Sunday in March.2020. There were no significant transactions or events that occurred between Unifi, Inc.’s fiscal quarter end and such wholly owned subsidiaries’ subsequent fiscal quarter end. The three-month periods ended March 31, 201929, 2020 and March 25, 201831, 2019 consisted of 13 fiscal weeks. TheFor the primary subsidiaries in the U.S. and Central America, the nine-month periodsperiod ended March 29, 2020 consisted of 39 weeks and the nine-month period ended March 31, 2019 and March 25, 2018 consisted of 40 and 39 fiscal weeks, respectively.
weeks.
3. Recent Accounting Pronouncements
Issued and Pending Adoption
In FebruaryJune 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses. The new guidance requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will begin to use forward-looking information to better inform their credit loss estimates. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and for interim periods therein, thus beginning with UNIFI’s fiscal 2021 and associated first fiscal quarter. UNIFI has not and does not expect to early adopt this standard. UNIFI does not expect this standard will have a material impact on its consolidated financial position, results of operations or cash flows.
Recently Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new lease guidance is effective for UNIFI’s fiscal 2020.
Upon adoption, UNIFI expects to make an accounting policy election to not reflect leases with an initial term of 12 months or lesswas adopted in the Consolidated Balance Sheets, recognizing those respective lease paymentsfirst quarter of fiscal 2020, and adoption is described in the Consolidated Statements of Operations on a straight-line basis over the respective lease term. UNIFI also plans to elect the package of transition practical expedients which would allow UNIFI to carry forward prior conclusions related to: (i) whether any expired or existing contracts are leases or contain leases, (ii) the lease classification for any expired or existing leases and (iii) initial direct costs for existing leases. UNIFI does not expect to elect the hindsight practical expedient.more detail in Note 4, “Leases.”
UNIFI continues to assess the effect the guidance will have on its existing accounting policies and the Consolidated Financial Statements, and upon adoption, expects there will be approximately a 1% increase in total assets on the Consolidated Balance Sheets due to the recognition of right-of-use assets and corresponding lease liabilities.
Under the guidance in the SEC Staff Announcement on July 20, 2017 relatingRelating to the transition to ASU No. 2016-02, due to its status as a significant subsidiary of Unifi, Inc., PAL expects to adopt the new lease guidance in its fiscal 2020.year 2021 ending on January 1, 2022. PAL is currently evaluating the impact of the new lease guidance.
Recently Adopted
In May 2014,fiscal 2019, UNIFI adopted the FASB issuednew revenue recognition guidance prescribed by ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequent ASUs were issued to provide clarity and defer the effective date of the new guidance. The new revenue recognition guidance (the “New Revenue Recognition Guidance”) eliminated the transaction- and industry-specific revenue recognition guidance under previous GAAP and replaced it with a principles-based approach.
5
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Upon adoption in fiscal 2019, UNIFI determined that the impact of the New Revenue Recognition Guidance is immaterial. Accordingly, UNIFI utilized the modified retrospective method of adoption and recorded the impact of open contracts as of June 24, 2018 as an adjustment to the opening balance of fiscal 2019 retained earnings, and prior period balances are not adjusted. Details of the fiscal 2019 adjustment follow. See Note 4,5, “Revenue Recognition,” for further detail regarding adoption and additional disclosures.
Revenue earned in fourth quarter fiscal 2018 related to contracts open at June 24, 2018 |
| $ | 8,593 |
|
Less associated cost of sales |
|
| 7,992 |
|
Less associated income tax |
|
| 142 |
|
Adjustment to retained earnings for contracts open at June 24, 2018 |
| $ | 459 |
|
Under the guidance in the SEC Staff Announcement on July 20, 2017 relating to the transition to ASU No. 2014-09, due to its status as a significant subsidiary of Unifi, Inc., PAL expectsadopted the new revenue recognition guidance on December 30, 2018, with no material impact on its consolidated financial position, results of operations or cash flows in connection with the adoption.
6
Unifi, Inc.
Notes to adopt the New Revenue Recognition Guidance in its fiscal 2019. PAL is currently evaluating the impact of the New Revenue Recognition Guidance.Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Based on UNIFI’s review of ASUs issued since the filing of the 20182019 Form 10-K, there have been no other newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a significant impact on UNIFI’s consolidated financial statements.
4. Revenue RecognitionLeases
In fiscal 2019,February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). UNIFI adopted the Newnew lease guidance utilizing the modified retrospective transition method, applied at the date of adoption, recording existing leases as of the effective date, July 1, 2019. Under this method, no adjustment to comparative prior periods is required and, accordingly, financial statement information and disclosures required under Topic 842 will not be provided for dates and periods prior to July 1, 2019. UNIFI made no adjustment to the July 1, 2019 opening retained earnings balance for fiscal 2020.
UNIFI adopted the following practical expedients and elected the following accounting policies related to this standard update:
carry forward of historical lease classifications and accounting treatment for existing land easements;
not to reassess whether any expired or existing contracts are or contain leases;
not to reassess initial direct costs for any existing leases;
the use of hindsight;
short-term lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term of 12 months or less and to recognize lease payments on a straight-line basis over the lease term and variable payments in the period the obligation is incurred; and
the option not to separate lease and non-lease components for the transportation equipment asset class.
UNIFI routinely leases sales and administrative office space, warehousing and distribution centers, manufacturing space, transportation equipment, manufacturing equipment, and other information technology and office equipment from third parties. The lease terms range from 1 to 15 years with various options for renewal. There are no residual value guarantees, restrictions, covenants or sub-leases related to these leases. Variable lease payments are determined as the amounts included in the lease payment that are based on the change in index or usage. The adoption of this standard resulted in the recognition of operating lease right-of-use assets of $9,802 and corresponding lease liabilities of $10,105 with the difference adjusting prepayments and accruals on the consolidated balance sheet as of July 1, 2019. UNIFI’s accounting for finance leases remained substantially unchanged. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows arising from leases are included below.
The following table sets forth the balance sheet location and values of the Company’s lease assets and lease liabilities at March 29, 2020:
Classification |
| Balance Sheet Location |
| March 29, 2020 |
| |
Lease Assets |
|
|
|
|
|
|
Operating lease assets |
| Operating lease assets |
| $ | 6,084 |
|
Finance lease assets |
| Property, plant & equipment, net |
|
| 23,257 |
|
Total lease assets |
|
|
| $ | 29,341 |
|
|
|
|
|
|
|
|
Lease Liabilities |
|
|
|
|
|
|
Current operating lease liabilities |
| Current operating lease liabilities |
| $ | 1,709 |
|
Current finance lease liabilities |
| Current portion of long-term debt |
|
| 4,112 |
|
Total current lease liabilities |
|
|
| $ | 5,821 |
|
|
|
|
|
|
|
|
Non-current operating lease liabilities |
| Non-current operating lease liabilities |
| $ | 4,481 |
|
Non-current finance lease liabilities |
| Long-term debt |
|
| 8,699 |
|
Total non-current lease liabilities |
|
|
| $ | 13,180 |
|
|
|
|
|
|
|
|
Total lease liabilities |
|
|
| $ | 19,001 |
|
The following table sets forth the components of UNIFI’s total lease cost for the three months and nine months ended March 29, 2020:
|
| For the Three |
|
| For the Nine |
| ||
|
| Months Ended |
|
| Months Ended |
| ||
Lease Cost |
| March 29, 2020 |
|
| March 29, 2020 |
| ||
Operating lease cost |
| $ | 507 |
|
| $ | 2,104 |
|
Variable lease cost |
|
| 158 |
|
|
| 355 |
|
Finance lease cost: |
|
|
|
|
|
|
|
|
Amortization of lease assets |
|
| 669 |
|
|
| 1,874 |
|
Interest on lease liabilities |
|
| 126 |
|
|
| 327 |
|
Short-term lease cost |
|
| 316 |
|
|
| 863 |
|
Total lease cost |
| $ | 1,776 |
|
| $ | 5,523 |
|
7
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents supplemental information related to leases at March 29, 2020:
|
| For the Nine |
| |
|
| Months Ended |
| |
Other Information |
| March 29, 2020 |
| |
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows used by operating leases |
| $ | 2,104 |
|
Financing cash flows used by finance leases |
| $ | 4,606 |
|
Non-cash activities: |
|
|
|
|
Leased assets obtained in exchange for new operating lease liabilities |
| $ | 175 |
|
Leased assets obtained in exchange for new finance lease liabilities |
| $ | 6,301 |
|
UNIFI calculates its operating lease liabilities and finance lease liabilities entered into after the adoption of the new lease standard based upon UNIFI’s incremental borrowing rate (the “IBR”). When determining the IBR, we consider our centralized treasury function and our current credit profile. We then make adjustments to this rate for securitization, the length of the lease term, and leases denominated in foreign currencies. Generally, the IBR for each jurisdiction is the specific risk-free rate for the respective jurisdiction incremented for UNIFI’s corporate credit risk.
The following table sets forth UNIFI's weighted average remaining lease term in years and discount rate percentage used in the calculation of its outstanding lease liabilities as of March 29, 2020:
Weighted Average Remaining Lease Term and Discount Rate | March 29, 2020 | |||
Weighted average remaining lease term (years): | ||||
Operating leases | 4.2 | |||
Finance leases | 4.2 | |||
Weighted average discount rate (percentage): | ||||
Operating leases | 3.8 | % | ||
Finance leases | 3.6 | % |
Lease Maturity Analysis
Future minimum finance lease payments and future minimum payments under non-cancelable operating leases with initial lease terms in excess of one year under Topic 842 as of March 29, 2020 by fiscal year were:
Maturity of Lease Liabilities |
| Finance Leases |
|
| Operating Leases |
| ||
Fiscal 2020 |
| $ | 1,560 |
|
| $ | 495 |
|
Fiscal 2021 |
|
| 3,989 |
|
|
| 1,870 |
|
Fiscal 2022 |
|
| 3,684 |
|
|
| 1,425 |
|
Fiscal 2023 |
|
| 1,260 |
|
|
| 1,231 |
|
Fiscal 2024 |
|
| 1,307 |
|
|
| 1,086 |
|
Fiscal years thereafter |
|
| 2,625 |
|
|
| 628 |
|
Total minimum lease payments |
| $ | 14,425 |
|
| $ | 6,735 |
|
Less estimated executory costs |
|
| (588 | ) |
|
| — |
|
Less imputed interest |
|
| (1,026 | ) |
|
| (545 | ) |
Present value of net minimum lease payments |
|
| 12,811 |
|
|
| 6,190 |
|
Less current portion of lease obligations |
|
| (4,112 | ) |
|
| (1,709 | ) |
Long-term portion of lease obligations |
| $ | 8,699 |
|
| $ | 4,481 |
|
Prior Year Disclosure
As reported in the 2019 Form 10-K under the previous accounting guidance, future minimum capital lease payments and future minimum lease payments under non-cancelable operating leases with initial lease terms in excess of one year as of June 30, 2019 by fiscal year were:
|
| Capital Leases |
|
| Operating Leases |
| ||
Fiscal 2020 |
| $ | 5,917 |
|
| $ | 3,164 |
|
Fiscal 2021 |
|
| 2,870 |
|
|
| 2,731 |
|
Fiscal 2022 |
|
| 2,565 |
|
|
| 1,492 |
|
Fiscal 2023 |
|
| 189 |
|
|
| 878 |
|
Fiscal 2024 |
|
| 189 |
|
|
| 755 |
|
Fiscal years thereafter |
|
| 675 |
|
|
| 309 |
|
Total minimum lease payments |
| $ | 12,405 |
|
| $ | 9,329 |
|
Less estimated executory costs |
|
| (644 | ) |
|
|
|
|
Less interest |
|
| (643 | ) |
|
|
|
|
Present value of net minimum capital lease payments |
|
| 11,118 |
|
|
|
|
|
Less current portion of capital lease obligations |
|
| (5,519 | ) |
|
|
|
|
Long-term portion of capital lease obligations |
| $ | 5,599 |
|
|
|
|
|
8
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Rental expenses incurred under the operating leases and included in operating income consist of the following:
|
| For the Fiscal Year Ended |
| |||||||||
|
| June 30, 2019 |
|
| June 24, 2018 |
|
| June 25, 2017 |
| |||
Rental expenses |
| $ | 4,915 |
|
| $ | 4,835 |
|
| $ | 4,357 |
|
5. Revenue Recognition Guidance. Details surrounding the impact of adoption and the additional disclosures follow.
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, which primarily occurs at a point in time, upon either shipment or delivery to the customer. Revenue is also recognized over time for certain contracts in which the associated inventory produced has no alternative use and for which enforceable right to payment exists, or the associated services are rendered. Revenue is measured as the amount of consideration UNIFI expects to receive in exchange for completing its performance obligations (i.e., transferring goods or providing services), which includes estimates for variable consideration. Variable consideration includes volume-based incentives and product claims, which are offered within certain contracts between UNIFI and its customers. Sales taxes and value added taxes assessed by governmental entities are excluded from the measurement of consideration expected to be received. Shipping and handling costs incurred after a customer has taken possession of our goods are treated as a fulfillment cost and are not considered a separate performance obligation.
The following table presents disaggregated revenues for UNIFI:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||||||
Third-party textile manufacturer |
| $ | 177,977 |
|
| $ | 163,616 |
|
| $ | 522,636 |
|
| $ | 491,143 |
| ||||||||||||||||
Third-party manufacturer |
| $ | 169,033 |
|
| $ | 177,977 |
|
| $ | 514,590 |
|
| $ | 522,636 |
| ||||||||||||||||
Service |
|
| 2,012 |
|
|
| 2,251 |
|
|
| 6,675 |
|
|
| 6,444 |
|
|
| 1,961 |
|
|
| 2,012 |
|
|
| 5,864 |
|
|
| 6,675 |
|
Net sales |
| $ | 179,989 |
|
| $ | 165,867 |
|
| $ | 529,311 |
|
| $ | 497,587 |
|
| $ | 170,994 |
|
| $ | 179,989 |
|
| $ | 520,454 |
|
| $ | 529,311 |
|
Third-Party Textile Manufacturer
Third-party textile manufacturer revenue is primarily generated through sales to direct customers. Such sales represent satisfaction of UNIFI’s performance obligations required by the associated revenue contracts. Each of UNIFI’s reportable segments derives revenue from sales to third-party textile manufacturers.
Service Revenue
Service revenue is primarily generated, as services are rendered, through fulfillment of toll manufacturing of textile products or transportation services governed by written agreements. Such toll manufacturing and transportation services represent satisfaction of UNIFI’s performance obligations required by the associated revenue contracts. The Polyester Segment derives service revenue for toll manufacturing, and the All Other category derives service revenue for transportation services.
Variable Consideration
Volume-based incentives
Volume-based incentives involve rebates or refunds of cash that are redeemable if the customer satisfies certain order volume thresholds during a defined time period. Under these incentive programs, UNIFI estimates the anticipated rebate to be paid and allocates a portion of the estimated cost of the rebate to each underlying sales transaction with the customer.
Product claims
UNIFI generally offers customers claims support or remuneration for defective products. UNIFI estimates the amount of its product sales that may be claimed as defective by its customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized.
For all variable consideration, where appropriate, UNIFI estimates the amount using the expected value method, which takes into consideration historical experience, current contractual requirements, specific known market events and forecasted customer buying and payment patterns. Overall, these reserves reflect UNIFI’s best estimates of the amount of consideration to which the customer is entitled based on the terms of the contracts.
6
6. Receivables, Net
Receivables, net consists of the following:
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||
Customer receivables |
| $ | 87,091 |
|
| $ | 89,495 |
|
Allowance for uncollectible accounts |
|
| (2,397 | ) |
|
| (2,338 | ) |
Reserves for quality claims |
|
| (1,231 | ) |
|
| (961 | ) |
Net customer receivables |
|
| 83,463 |
|
|
| 86,196 |
|
Other receivables |
|
| 2,913 |
|
|
| 2,688 |
|
Total receivables, net |
| $ | 86,376 |
|
| $ | 88,884 |
|
9
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Impact of adoption of New Revenue Recognition Guidance7. Inventories
The following table summarizes the impact of the adoption of the New Revenue Recognition Guidance on UNIFI's applicable financial statement line items for the nine months ended March 31, 2019. Any impact to other financial statement line items is insignificant and excluded from the below.
Financial Statement Line Item |
| Treatment under previous Revenue Recognition Guidance |
|
| Adjustments in connection with New Revenue Recognition Guidance |
|
| As reported under New Revenue Recognition Guidance |
| |||
Revenue |
| $ | 528,414 |
|
| $ | 897 |
|
| $ | 529,311 |
|
Cost of sales |
| $ | 480,680 |
|
| $ | 665 |
|
| $ | 481,345 |
|
Gross profit (loss) |
| $ | 47,734 |
|
| $ | 232 |
|
| $ | 47,966 |
|
Inventory |
| $ | 139,610 |
|
| $ | (8,629 | ) |
| $ | 130,981 |
|
Contract assets |
| $ | — |
|
| $ | 9,454 |
|
| $ | 9,454 |
|
Contract assets represents the estimated revenue attributable to UNIFI in connection with completed performance obligations under contracts with customers for which revenue is recognized over time. The contract assets are classified to receivables when the right to payment becomes unconditional. The $9,454 change in the contract assets balance from June 24, 2018 to March 31, 2019 represents the routine recognition of satisfied performance obligations, in connection with adoption of and treatment under the New Revenue Recognition Guidance.
5. Receivables, Net
Receivables, net consists of the following:
|
| March 31, 2019 |
|
| June 24, 2018 |
| ||
Customer receivables |
| $ | 94,419 |
|
| $ | 87,633 |
|
Allowance for uncollectible accounts |
|
| (2,398 | ) |
|
| (2,059 | ) |
Reserves for yarn quality claims |
|
| (1,052 | ) |
|
| (564 | ) |
Net customer receivables |
|
| 90,969 |
|
|
| 85,010 |
|
Other receivables |
|
| 732 |
|
|
| 1,263 |
|
Total receivables, net |
| $ | 91,701 |
|
| $ | 86,273 |
|
There have been no material changes in UNIFI’s allowance for uncollectible accounts or reserves for yarn quality claims since June 24, 2018.
6. Inventories
Inventories consists of the following:
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||
Raw materials |
| $ | 49,725 |
|
| $ | 45,448 |
|
| $ | 49,100 |
|
| $ | 55,531 |
|
Supplies |
|
| 8,859 |
|
|
| 7,314 |
|
|
| 9,252 |
|
|
| 9,020 |
|
Work in process |
|
| 9,034 |
|
|
| 8,834 |
|
|
| 7,558 |
|
|
| 8,510 |
|
Finished goods |
|
| 65,912 |
|
|
| 66,314 |
|
|
| 61,496 |
|
|
| 63,111 |
|
Gross inventories |
|
| 133,530 |
|
|
| 127,910 |
|
|
| 127,406 |
|
|
| 136,172 |
|
Inventory reserves |
|
| (2,549 | ) |
|
| (1,599 | ) |
|
| (3,260 | ) |
|
| (2,391 | ) |
Total inventories |
| $ | 130,981 |
|
| $ | 126,311 |
|
| $ | 124,146 |
|
| $ | 133,781 |
|
In connection with UNIFI’s utilization of the modified retrospective method of adopting the New Revenue Recognition Guidance, prior period balances were not adjusted to reflect the impact that the New Revenue Recognition Guidance would have had on prior periods. See Note 4, “Revenue Recognition,” for further detail regarding the impact of the New Revenue Recognition Guidance to fiscal 2019.
7.8. Other Current Assets
Other current assets consists of the following:
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||
Contract assets |
| $ | 9,454 |
|
| $ | — |
|
| $ | 9,909 |
|
| $ | 7,794 |
|
Value-added taxes receivable |
|
| 3,437 |
|
|
| 2,519 |
| ||||||||
Vendor deposits |
|
| 3,456 |
|
|
| 3,703 |
|
|
| 3,328 |
|
|
| 4,187 |
|
Prepaid expenses |
|
| 1,847 |
|
|
| 1,802 |
|
|
| 1,803 |
|
|
| 1,856 |
|
Value-added taxes receivable |
|
| 1,608 |
|
|
| 1,024 |
| ||||||||
Total other current assets |
| $ | 16,365 |
|
| $ | 6,529 |
|
| $ | 18,477 |
|
| $ | 16,356 |
|
7
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Vendor deposits primarily relates to down payments made toward the purchase of inventory. Prepaid expenses consists of advance payments for general operating expenses. Value-added taxes receivable relates to recoverable taxes associated with the sales and purchase activities of UNIFI’s foreign operations.
8.9. Property, Plant and Equipment, Net
Property, plant and equipment (“PP&E”), net consists of the following:
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||
Land |
| $ | 2,848 |
|
| $ | 2,860 |
|
| $ | 3,164 |
|
| $ | 3,138 |
|
Land improvements |
|
| 15,201 |
|
|
| 15,118 |
|
|
| 16,333 |
|
|
| 15,249 |
|
Buildings and improvements |
|
| 160,593 |
|
|
| 157,354 |
|
|
| 158,388 |
|
|
| 161,566 |
|
Assets under capital leases |
|
| 31,977 |
|
|
| 34,568 |
| ||||||||
Assets under finance leases |
|
| 30,749 |
|
|
| 31,897 |
| ||||||||
Machinery and equipment |
|
| 599,851 |
|
|
| 589,237 |
|
|
| 602,956 |
|
|
| 603,950 |
|
Computers, software and office equipment |
|
| 22,636 |
|
|
| 19,723 |
|
|
| 22,355 |
|
|
| 23,011 |
|
Transportation equipment |
|
| 5,815 |
|
|
| 5,029 |
|
|
| 6,929 |
|
|
| 5,809 |
|
Construction in progress |
|
| 8,719 |
|
|
| 8,651 |
|
|
| 6,219 |
|
|
| 6,483 |
|
Gross PP&E |
|
| 847,640 |
|
|
| 832,540 |
|
|
| 847,093 |
|
|
| 851,103 |
|
Less: accumulated depreciation |
|
| (632,700 | ) |
|
| (619,654 | ) |
|
| (632,608 | ) |
|
| (636,135 | ) |
Less: accumulated amortization – capital leases |
|
| (7,637 | ) |
|
| (7,370 | ) | ||||||||
Less: accumulated amortization – finance leases |
|
| (7,492 | ) |
|
| (8,181 | ) | ||||||||
Total PP&E, net |
| $ | 207,303 |
|
| $ | 205,516 |
|
| $ | 206,993 |
|
| $ | 206,787 |
|
Depreciation and amortization expense and repair and maintenance expenses were as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||||||
Depreciation expense |
| $ | 5,257 |
|
| $ | 5,387 |
|
| $ | 16,181 |
|
| $ | 15,747 |
| ||||||||||||||||
Depreciation and amortization expense |
| $ | 5,799 |
|
| $ | 5,257 |
|
| $ | 16,858 |
|
| $ | 16,181 |
| ||||||||||||||||
Repair and maintenance expenses |
|
| 5,301 |
|
|
| 5,024 |
|
|
| 16,148 |
|
|
| 14,528 |
|
|
| 5,602 |
|
|
| 5,301 |
|
|
| 14,924 |
|
|
| 16,148 |
|
9.10. Accrued Expenses
Accrued expenses consists of the following:
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||
Payroll and fringe benefits |
| $ | 7,128 |
|
| $ | 10,833 |
|
| $ | 8,861 |
|
| $ | 9,775 |
|
Deferred revenue |
|
| 2,624 |
|
|
| 516 |
| ||||||||
Severance |
|
| 1,764 |
|
|
| 362 |
|
|
| 225 |
|
|
| 2,058 |
|
Other |
|
| 4,184 |
|
|
| 6,525 |
|
|
| 3,637 |
|
|
| 4,500 |
|
Total accrued expenses |
| $ | 13,076 |
|
| $ | 17,720 |
|
| $ | 15,347 |
|
| $ | 16,849 |
|
Other consists primarily of accruals for utilities, property taxes, employee-related claims and payments, interest, marketing expenses, freight expenses, rent, other non-income related taxes and deferred revenue.10
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Debt Obligations
The following table presents the total balances outstanding for UNIFI’s debt obligations, their scheduled maturity dates and the weighted average interest rates for borrowings as well as the applicable current portion of long-term debt:
|
|
|
| Weighted Average |
|
|
|
|
|
|
| Weighted Average |
|
|
|
| ||||||||||||
|
| Scheduled |
| Interest Rate as of |
|
| Principal Amounts as of |
|
| Scheduled |
| Interest Rate as of |
|
| Principal Amounts as of |
| ||||||||||||
|
| Maturity Date |
| March 31, 2019 |
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| Maturity Date |
| March 29, 2020 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||||
ABL Revolver |
| December 2023 |
| 3.7% |
|
| $ | 24,000 |
|
| $ | 28,100 |
|
| December 2023 |
| 2.2% |
|
| $ | 30,900 |
|
| $ | 19,400 |
| ||
ABL Term Loan (1) |
| December 2023 |
| 3.3% |
|
|
| 100,000 |
|
|
| 85,000 |
|
| December 2023 |
| 3.1% |
|
|
| 90,000 |
|
|
| 97,500 |
| ||
Capital lease obligations |
| (2) |
| 3.9% |
|
|
| 12,879 |
|
|
| 18,107 |
| |||||||||||||||
Finance lease obligations |
| (2) |
| 3.6% |
|
|
| 12,811 |
|
|
| 11,118 |
| |||||||||||||||
Total debt |
|
|
|
|
|
|
|
| 136,879 |
|
|
| 131,207 |
|
|
|
|
|
|
|
|
| 133,711 |
|
|
| 128,018 |
|
Current portion of capital lease obligations |
|
|
|
|
|
|
|
| (6,054 | ) |
|
| (6,996 | ) | ||||||||||||||
Current portion of other long-term debt |
|
|
|
|
|
|
|
| (10,000 | ) |
|
| (10,000 | ) | ||||||||||||||
Current ABL Term Loan |
|
|
|
|
|
|
|
| (10,000 | ) |
|
| (10,000 | ) | ||||||||||||||
Current portion of finance lease obligations |
|
|
|
|
|
|
|
| (4,112 | ) |
|
| (5,519 | ) | ||||||||||||||
Unamortized debt issuance costs |
|
|
|
|
|
|
|
| (1,021 | ) |
|
| (658 | ) |
|
|
|
|
|
|
|
| (772 | ) |
|
| (958 | ) |
Total long-term debt |
|
|
|
|
|
|
| $ | 119,804 |
|
| $ | 113,553 |
|
|
|
|
|
|
|
| $ | 118,827 |
|
| $ | 111,541 |
|
(1) | Includes the effects of interest rate swaps. |
(2) | Scheduled maturity dates for |
8
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
On December 18, 2018, Unifi, Inc. and certain of its subsidiaries entered into a Third Amendment to Amended and Restated Credit Agreement and Second Amendment to Amended and Restated Guaranty and Security Agreement (the “2018 Amendment”). The 2018 Amendment amended the Amended and Restated Credit Agreement, dated as of March 26, 2015, by and among Unifi, Inc. and a syndicate of lenders, as previously amended (as further amended by the 2018 Amendment, the “Credit Agreement”). The Credit Agreement provides for a $200,000 senior secured credit facility (the “ABL Facility”), including a $100,000 revolving credit facility (the “ABL Revolver”) and a term loan that can be reset up to a maximum amount of $100,000, once per fiscal year, if certain conditions are met (the “ABL Term Loan”). The ABL Facility has a maturity date of December 18, 2023.
The 2018 Amendment made the following changes to the Credit Agreement, among others: (i) extended the Maturity Datematurity date from March 26, 2020 to December 18, 2023 and (ii) decreased the Applicable Margin (as defined in the Credit Agreement) pricing structure for Base Rate Loans (as defined in the Credit Agreement) and LIBOR Rate Loans (as defined in the Credit Agreement) by 25 basis points. In addition, in connection with the 2018 Amendment, the principal amount of the ABL Term Loan was reset from $80,000 to $100,000. Net proceeds from this ABL Term Loan reset were used to pay down the amount outstanding on the ABL Revolver.
In connection and concurrent with the sale of UNIFI’s 34% interest in PAL on April 29, 2020, UNIFI entered into the Fourth Amendment to Amended and Restated Credit Agreement (“Fourth Amendment”). The Fourth Amendment among other things: (i) revised the definition of permitted dispositions within the Credit Agreement to include the sale by Unifi Manufacturing, Inc. of its equity interest in PAL so long as the aggregate net cash proceeds received equaled or exceeded $60,000 and such sale occurred on or before May 15, 2020; (ii) revised the terms of the Credit Agreement to allow (a) the net cash proceeds from the sale of PAL to be applied to the outstanding principal amount of the ABL Revolver until paid in full and (b) remaining net cash proceeds held by UNIFI, so long as certain conditions are met; and (iii) revised the terms of the Credit Agreement to allow the lenders to make changes to the benchmark interest rate without further amendment should LIBOR temporarily or permanently cease to exist and a transition to a new benchmark interest rate such as the Secured Overnight Financing Rate (“SOFR”) be required for future ABL facility borrowings.
UNIFI currently maintains three interest rate swaps that fix LIBOR at approximately 1.9% on $75,000 of variable-rate debt. Such swaps are scheduled to terminate in May 2022.
Scheduled Debt Maturities
The following table presents the scheduled maturities of UNIFI’s outstanding debt obligations for the remainder of fiscal 2019,2020, the following four fiscal years and thereafter:
|
| Fiscal 2019 |
|
| Fiscal 2020 |
|
| Fiscal 2021 |
|
| Fiscal 2022 |
|
| Fiscal 2023 |
|
| Thereafter |
|
| Fiscal 2020 |
|
| Fiscal 2021 |
|
| Fiscal 2022 |
|
| Fiscal 2023 |
|
| Fiscal 2024 |
|
| Thereafter |
| ||||||||||||
ABL Revolver |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 24,000 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 30,900 |
|
| $ | — |
|
ABL Term Loan |
|
| 2,500 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 57,500 |
|
|
| 2,500 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 57,500 |
|
|
| — |
|
Capital lease obligations |
|
| 1,704 |
|
|
| 5,559 |
|
|
| 2,633 |
|
|
| 2,417 |
|
|
| 90 |
|
|
| 476 |
| ||||||||||||||||||||||||
Finance lease obligations |
|
| 1,429 |
|
|
| 3,563 |
|
|
| 3,388 |
|
|
| 1,094 |
|
|
| 1,132 |
|
|
| 2,205 |
| ||||||||||||||||||||||||
Total |
| $ | 4,204 |
|
| $ | 15,559 |
|
| $ | 12,633 |
|
| $ | 12,417 |
|
| $ | 10,090 |
|
| $ | 81,976 |
|
| $ | 3,929 |
|
| $ | 13,563 |
|
| $ | 13,388 |
|
| $ | 11,094 |
|
| $ | 89,532 |
|
| $ | 2,205 |
|
11. Other Long-Term Liabilities
Other long-term liabilities consists of the following:
|
| March 31, 2019 |
|
| June 24, 2018 |
| ||
Supplemental post-employment plan |
| $ | 2,674 |
|
| $ | 3,045 |
|
Uncertain tax positions |
|
| 1,121 |
|
|
| 131 |
|
Other |
|
| 1,890 |
|
|
| 2,161 |
|
Total other long-term liabilities |
| $ | 5,685 |
|
| $ | 5,337 |
|
Other primarily includes certain retiree and post-employment medical and disability liabilities, deferred revenue and deferred energy incentive credits.
12. Income Taxes
The provision (benefit) for income taxes was as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||||
Provision (benefit) for income taxes |
| $ | 3,070 |
|
| $ | 946 |
|
| $ | 3,606 |
|
| $ | (684 | ) |
Effective tax rate |
|
| 199.2 | % |
|
| 84.3 | % |
|
| 71.3 | % |
|
| (3.4 | )% |
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation H.R. 1, formerly known as the Tax Cuts and Jobs Act. H.R. 1 includes significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, full expensing for investments in new and used qualified property, additional limitations on the deductions for executive compensation and interest expense, and the transition of the U.S. international tax system from a worldwide tax to a territorial tax system. As a fiscal-year taxpayer, certain provisions of H.R. 1 impacted UNIFI in fiscal 2018, including the change in the U.S. federal corporate income tax rate and the one-time transition tax (“toll charge”), while other provisions became effective for UNIFI at the beginning of fiscal 2019. The enactment of H.R. 1 resulted in recording a total provisional tax benefit of $396 for the period ending June 24, 2018. For a full description of the impact of H.R. 1 for the year ended June 24, 2018, refer to Note 14, “Income Taxes,” in the 2018 Form 10-K.
In the second quarter of fiscal 2019, UNIFI recorded an additional tax benefit of $1,734 related to the enactment of H.R. 1. In the third quarter of fiscal 2019, UNIFI recorded tax expense of $880 related to the enactment of H.R. 1, which increased the tax rate for the three-month period by 57.1%, for a total year-to-date benefit of $854. The total tax benefit related to the enactment of H.R. 1 was $1,322, primarily consisting of $3,997 of tax benefit related to the re-measurement of deferred tax balances, and $2,747 of tax expense related to the toll charge, net of foreign tax credits. Although UNIFI no longer considers these amounts to be provisional, the income tax effects of H.R. 1 may change following future legislation or further interpretation of H.R. 1 based on the publication of guidance from the U.S. Internal Revenue Service (the “IRS”) and state tax authorities.
911
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Global Intangible Low-Taxed Income (“GILTI”) provisions included in H.R. 1 require that certain income earned by foreign subsidiaries must be currently included in the gross income
12. Other Long-Term Liabilities
Other long-term liabilities consists of the U.S. shareholder. These provisions arefollowing:
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||
Supplemental post-employment plan |
| $ | 2,843 |
|
| $ | 2,695 |
|
Interest rate swaps |
|
| 2,569 |
|
|
| 647 |
|
Uncertain tax positions |
|
| 1,161 |
|
|
| 1,043 |
|
Other |
|
| 1,456 |
|
|
| 1,800 |
|
Total other long-term liabilities |
| $ | 8,029 |
|
| $ | 6,185 |
|
13. Income Taxes
The provision for income taxes and effective for UNIFI in fiscal 2019. The GILTI provisions are complex and subject to continuing regulatory interpretation by the IRS. UNIFI has elected to recognize GILTItax rate were as a current-period expense. Under this policy, UNIFI has not provided deferred taxes related to temporary differences that, upon their reversal, will affect the amount of income subject to GILTI in the period.follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Provision for income taxes |
| $ | 1,530 |
|
| $ | 3,070 |
|
| $ | 2,758 |
|
| $ | 3,606 |
|
Effective tax rate |
|
| (3.9 | )% |
|
| 199.2 | % |
|
| (8.1 | )% |
|
| 71.3 | % |
Income Tax Expense
UNIFI’s provision for income taxes for the nine months ended March 29, 2020 and March 31, 2019 and March 25, 2018 has beenwas calculated by applying an estimate of the annual effective tax rate for the full fiscal year to year-to-date income.income from ordinary activity. Tax effects of significant and unusual, or infrequently occurring, items are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
The effective tax rate for the three months and nine months ended March 29, 2020 was lower than the U.S. federal statutory rate primarily due to an increase in the valuation allowance for UNIFI’s investment in PAL as a result of the impairment charge, for which UNIFI does not expect to realize a future tax benefit.
The effective tax rate for the three months ended March 31, 2019 was higher than the U.S. federal statutory rate primarily due to the effect of the GILTI provisions enacted in H.R. 1,U.S. tax on Global Intangible Low-Tax Income (“GILTI”), adjustments to enactment date tax reform impacts, losses in tax jurisdictions for which no tax benefit could be recognized, and foreign withholding taxes.
The effective tax rate for the nine months ended March 31, 2019 was higher than the U.S. federal statutory rate primarily due to the effects of theU.S. tax on GILTI, provisions enacted in H.R. 1, losses in tax jurisdictions for which no tax benefit could be recognized, earnings taxed at higher rates in foreign jurisdictions, and foreign withholding taxes. These rate detriments were partially offset by adjustments to enactment date tax reform impacts.
The effective tax rate for the three months ended March 25, 2018 was higher than the U.S. federal statutory rate primarily due to an increase in the valuation allowance for the Company’s investment in PAL, the rate change impact on a U.S. net loss carryforward generated in that three-month period that will be used at a lower tax rate in the future, and additional limitations on the deductibility of compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “IRC”).
The effective tax rate for the nine months ended March 25, 2018 was lower than the U.S. federal statutory rate primarily due to the one-time tax benefit resulting from the revaluation of UNIFI’s domestic deferred tax balances for the lower U.S. statutory tax rate, the release of a valuation allowance on certain historical net operating losses (“NOLs”) and foreign income being taxed at lower rates. These benefits were partially offset by a provisional amount for the toll charge, net of foreign tax credits, and losses in tax jurisdictions for which no tax benefit can currently be recognized.
UNIFI regularly assesses the outcomes of both completed and ongoing examinations to ensure that its provision for income taxes is sufficient. Certain returns that remain open to examination have utilized carryforward tax attributes generated in prior tax years, including NOLs,net operating losses, which could potentially be revised upon examination.
Valuation Allowance
UNIFI regularly assesses whether it is more-likely-than-not that some portion or all of its deferred tax assets will not be realized. UNIFI considers the scheduled reversal of taxable temporary differences, taxable income in carryback years, projected future taxable income and tax planning strategies in making this assessment. Since UNIFI operates in multiple jurisdictions, the assessment is made on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law.
The components of UNIFI’s deferred tax valuation allowance are as follows:
|
| March 31, 2019 |
|
| June 24, 2018 |
| ||
Investment in a former domestic unconsolidated affiliate |
| $ | (3,942 | ) |
| $ | (3,942 | ) |
Equity-method investment in PAL |
|
| (1,443 | ) |
|
| (1,580 | ) |
Certain losses carried forward (1) |
|
| (1,562 | ) |
|
| (1,562 | ) |
State NOLs |
|
| (166 | ) |
|
| (169 | ) |
Other foreign NOLs |
|
| (1,695 | ) |
|
| (2,460 | ) |
Foreign tax credits |
|
| (15,113 | ) |
|
| (5,430 | ) |
Disallowed interest expense |
|
| (382 | ) |
|
| — |
|
Total deferred tax valuation allowance |
| $ | (24,303 | ) |
| $ | (15,143 | ) |
|
|
10
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
For the three-months ended March 31, 2019:
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at December 30, 2018 |
|
| 18,383 |
|
| $ | 1,838 |
|
| $ | 59,619 |
|
| $ | 375,195 |
|
| $ | (42,725 | ) |
| $ | 393,927 |
|
Options exercised |
|
| 6 |
|
|
| — |
|
|
| 29 |
|
|
| — |
|
|
| — |
|
|
| 29 |
|
Conversion of restricted stock units |
|
| 24 |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| 9 |
|
|
| 1 |
|
|
| (314 | ) |
|
| — |
|
|
| — |
|
|
| (313 | ) |
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (11 | ) |
|
| (1 | ) |
|
| (243 | ) |
|
| — |
|
|
| — |
|
|
| (244 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (415 | ) |
|
| (415 | ) |
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,529 | ) |
|
| — |
|
|
| (1,529 | ) |
Balance at March 31, 2019 |
|
| 18,411 |
|
| $ | 1,841 |
|
| $ | 59,088 |
|
| $ | 373,666 |
|
| $ | (43,140 | ) |
| $ | 391,455 |
|
For the nine-months ended March 31, 2019:
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at June 24, 2018 |
|
| 18,353 |
|
| $ | 1,835 |
|
| $ | 56,726 |
|
| $ | 371,753 |
|
| $ | (40,533 | ) |
| $ | 389,781 |
|
Options exercised |
|
| 22 |
|
|
| 2 |
|
|
| 271 |
|
|
| — |
|
|
| — |
|
|
| 273 |
|
Conversion of restricted stock units |
|
| 41 |
|
|
| 4 |
|
|
| (4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Stock-based compensation |
|
| 10 |
|
|
| 1 |
|
|
| 2,471 |
|
|
| — |
|
|
| — |
|
|
| 2,472 |
|
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (15 | ) |
|
| (1 | ) |
|
| (376 | ) |
|
| — |
|
|
| — |
|
|
| (377 | ) |
Other comprehensive loss, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,607 | ) |
|
| (2,607 | ) |
Adoption of the New Revenue Recognition Guidance |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 459 |
|
|
| — |
|
|
| 459 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,454 |
|
|
| — |
|
|
| 1,454 |
|
Balance at March 31, 2019 |
|
| 18,411 |
|
| $ | 1,841 |
|
| $ | 59,088 |
|
| $ | 373,666 |
|
| $ | (43,140 | ) |
| $ | 391,455 |
|
For the three-months ended March 25, 2018:
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at December 24, 2017 |
|
| 18,291 |
|
| $ | 1,829 |
|
| $ | 55,215 |
|
| $ | 360,702 |
|
| $ | (31,457 | ) |
| $ | 386,289 |
|
Options exercised |
|
| 17 |
|
|
| 1 |
|
|
| (1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Conversion of restricted stock units |
|
| 26 |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (6 | ) |
|
| (1 | ) |
|
| (196 | ) |
|
| — |
|
|
| — |
|
|
| (197 | ) |
Stock-based compensation |
|
| — |
|
|
| 1 |
|
|
| 1,184 |
|
|
| — |
|
|
| — |
|
|
| 1,185 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,628 |
|
|
| 2,628 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 176 |
|
|
| — |
|
|
| 176 |
|
Balance at March 25, 2018 |
|
| 18,328 |
|
| $ | 1,833 |
|
| $ | 56,199 |
|
| $ | 360,878 |
|
| $ | (28,829 | ) |
| $ | 390,081 |
|
11
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
For the nine-months ended March 25, 2018:
|
| Shares |
|
| Common Stock |
|
| Capital in Excess of Par Value |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Shareholders’ Equity |
| ||||||
Balance at June 25, 2017 |
|
| 18,230 |
|
| $ | 1,823 |
|
| $ | 51,923 |
|
| $ | 339,940 |
|
| $ | (32,880 | ) |
| $ | 360,806 |
|
Options exercised |
|
| 71 |
|
|
| 7 |
|
|
| 212 |
|
|
| — |
|
|
| — |
|
|
| 219 |
|
Conversion of restricted stock units |
|
| 29 |
|
|
| 3 |
|
|
| (3 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
|
| (6 | ) |
|
| (1 | ) |
|
| (196 | ) |
|
| — |
|
|
| — |
|
|
| (197 | ) |
Stock-based compensation |
|
| 4 |
|
|
| 1 |
|
|
| 4,263 |
|
|
| — |
|
|
| — |
|
|
| 4,264 |
|
Other comprehensive income, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,051 |
|
|
| 4,051 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 20,938 |
|
|
| — |
|
|
| 20,938 |
|
Balance at March 25, 2018 |
|
| 18,328 |
|
| $ | 1,833 |
|
| $ | 56,199 |
|
| $ | 360,878 |
|
| $ | (28,829 | ) |
| $ | 390,081 |
|
No dividends were paid during the nine months ended March 31, 2019 or in the two most recently completed fiscal years.
Stock Repurchase Program
On April 23, 2014, UNIFI announced that its Board of Directors (the “Board”) had approved a stockshare repurchase program (the “2014 SRP”) under which UNIFI was authorized to acquire up to $50,000 of its common stock. UNIFI made no repurchases of its shares of common stock during the nine months ended March 31, 2019. Through October 31, 2018 (the date the 2014 SRP was terminated, as discussednoted below), UNIFI had repurchased a total of 806 shares, at an average price of $27.79 (for a total of $22,409, inclusive of commission costs) pursuant to the 2014 SRP.
On October 31, 2018, UNIFI announced that the Board had terminated the 2014 SRP and approved a new stockshare repurchase program (the “2018 SRP”) under which UNIFI is authorized to acquire up to $50,000 of its common stock. Under the 2018 SRP, purchases will be made from time to time in the open market at prevailing market prices or through private transactions or block trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date.
AsThe following table summarizes UNIFI’s repurchases and retirements of March 31, 2019, $50,000 remained available for repurchaseits common stock under the 2018 SRP.SRP for the fiscal periods noted:
|
| Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs |
|
| Average Price Paid per Share |
|
| Approximate Dollar Value that May Yet Be Repurchased Under Publicly Announced Plans or Programs |
| |||
Fiscal 2019 |
|
| — |
|
| $ | — |
|
|
|
|
|
Fiscal 2020 (through March 29, 2020) |
|
| 84 |
|
| $ | 23.72 |
|
|
|
|
|
Total |
|
| 84 |
|
| $ | 23.72 |
|
| $ | 48,008 |
|
12
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
14.Repurchased shares are retired and have the status of authorized and unissued shares. The cost of the repurchased shares is recorded as a reduction to common stock to the extent of the par value of the shares acquired and the remainder is allocated between capital in excess of par value and retained earnings, on a pro rata basis.
15. Stock-Based Compensation
On October 23, 2013, UNIFI’s shareholders approved the Unifi, Inc. 2013 Incentive Compensation Plan (the “2013 Plan”). The 2013 Plan replaced the 2008 Unifi, Inc. Long-Term Incentive Plan (the “2008 LTIP”). No additional awards can be granted under the 2008 LTIP; however, prior awards outstanding under the 2008 LTIP remain subject to that plan’s provisions. The 2013 Plan authorized the issuance of 1,000 shares of common stock, subject to certain increases in the event outstanding awards under the 2008 LTIP expire, are forfeited or otherwise terminate unexercised.
The 2013 Plan expired in accordance with its terms on October 24, 2018, and the Unifi, Inc. Amended and Restated 2013 Incentive Compensation Plan (the “Amended 2013 Plan”) became effective on that same day, upon approval by shareholders at UNIFI’s annual meeting of shareholders held on October 31, 2018. The Amended 2013 Plan increased the number of shares available for future issuance pursuant to awards granted under the Amended 2013 Plan to 1,250 (subject to certain increases in the event outstanding awards issued under the Amended 2013 Plan terminate unexercised) and removed provisions no longer applicable due to the recent changes to Section 162(m) of the IRC.Internal Revenue Code of 1986, as amended. The material terms and provisions of the Amended 2013 Plan are otherwise similar to those of the 2013 Plan. No additional awards can be granted under the 2013 Plan;Plan or the 2008 LTIP; however, prior awards outstanding under the 2013 Plan remain subject to thateach plan’s respective provisions.
The following table provides information as of March 31, 201929, 2020 with respect to the number of securities remaining available for future issuance under the Amended 2013 Plan:
Authorized under the Amended 2013 Plan |
|
| 1,250 |
|
Plus: Awards expired, forfeited or otherwise terminated unexercised |
|
|
|
|
Less: Awards granted to employees |
|
| ( | ) |
Less: Awards granted to non-employee directors |
|
| ( | ) |
Available for issuance under the Amended 2013 Plan |
|
|
|
|
During the nine months ended March 31, 2019 and March 25, 2018, UNIFIStock-based compensation units granted stock options to purchase 223 and 73 shares of common stock, respectively.or issued was as follows:
During the nine months ended March 31, 2019 and March 25, 2018, UNIFI granted 74 and 116 restricted stock units, respectively.
During the nine months ended March 31, 2019 and March 25, 2018, UNIFI granted 47 and 0 vested share units, respectively.
During the nine months ended March 31, 2019 and March 25, 2018, UNIFI granted 10 and 4 shares of common stock, respectively.
|
| For the Nine Months Ended |
| |||||
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||
Stock options |
|
| 83 |
|
|
| 223 |
|
Restricted stock units |
|
| 77 |
|
|
| 74 |
|
Vested share units |
|
| 24 |
|
|
| 47 |
|
Common stock |
|
| 4 |
|
|
| 10 |
|
12
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
15.16. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities
UNIFI may use derivative financial instruments such as foreign currency forward contracts or interest rate swaps to reduce its ongoing business exposures to fluctuations in foreign currency exchange rates or interest rates. UNIFI currently maintains three interest rate swaps that fix LIBOR at approximately 1.9% on $75,000 of variable-rate debt. UNIFI does not enter into derivative contracts for speculative purposes.
The following table presents details regarding UNIFI’s hedging activities:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||||
Interest expense |
| $ | 1,256 |
|
| $ | 1,187 |
|
| $ | 4,078 |
|
| $ | 3,562 |
|
Decrease (increase) in fair value of interest rate swaps |
|
| 745 |
|
|
| (1,142 | ) |
|
| 1,689 |
|
|
| (2,634 | ) |
Impact of interest rate swaps on interest expense |
|
| (111 | ) |
|
| 65 |
|
|
| (217 | ) |
|
| 319 |
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Interest expense |
| $ | 1,231 |
|
| $ | 1,256 |
|
| $ | 3,589 |
|
| $ | 4,078 |
|
Decrease in fair value of interest rate swaps |
|
| 1,883 |
|
|
| 745 |
|
|
| 1,922 |
|
|
| 1,689 |
|
Impact of interest rate swaps to increase (decrease) interest expense |
|
| 41 |
|
|
| (111 | ) |
|
| (7 | ) |
|
| (217 | ) |
For the nine months ended March 31, 201929, 2020 and March 25, 2018,31, 2019, there were no significant changes to UNIFI’s assets and liabilities measured at fair value, and there were no transfers into or out of the levels of the fair value hierarchy.
UNIFI believes that there have been no significant changes to its credit risk profile or the interest rates available to UNIFI for debt issuances with similar terms and average maturities, and UNIFI estimates that the fair values of its debt obligations approximate the carrying amounts. Other financial instruments include cash and cash equivalents, receivables, accounts payable and accrued expenses. The financial statement carrying amounts of these items approximate the fair valuevalues due to their short-term nature.
16.13
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
17. Accumulated Other Comprehensive Loss
The components of and the changes in accumulated other comprehensive loss, net of tax, as applicable, consist of the following:
|
| Foreign Currency Translation Adjustments |
|
| Changes in Interest Rate Swaps |
|
| Accumulated Other Comprehensive Loss |
| |||
Balance at June 24, 2018 |
| $ | (42,268 | ) |
| $ | 1,735 |
|
| $ | (40,533 | ) |
Other comprehensive loss, net of tax |
|
| (1,310 | ) |
|
| (1,297 | ) |
|
| (2,607 | ) |
Balance at March 31, 2019 |
| $ | (43,578 | ) |
| $ | 438 |
|
| $ | (43,140 | ) |
|
| Foreign Currency Translation Adjustments |
|
| Changes in Interest Rate Swaps |
|
| Accumulated Other Comprehensive Loss |
| |||
Balance at June 30, 2019 |
| $ | (42,729 | ) |
| $ | (500 | ) |
| $ | (43,229 | ) |
Other comprehensive loss |
|
| (20,350 | ) |
|
| (1,488 | ) |
|
| (21,838 | ) |
Balance at March 29, 2020 |
| $ | (63,079 | ) |
| $ | (1,988 | ) |
| $ | (65,067 | ) |
A summary of the after-tax effects of the components of other comprehensive (loss) income,loss, net for the three-month and nine-month periods ended March 31, 201929, 2020 and March 25, 201831, 2019 is included in the accompanying condensed consolidated statements of comprehensive (loss) income.loss.
17.18. Earnings Per Share
The components of the calculation of earnings (loss) per share (“EPS”) are as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||||||
Net (loss) income |
| $ | (1,529 | ) |
| $ | 176 |
|
| $ | 1,454 |
|
| $ | 20,938 |
|
| $ | (41,111 | ) |
| $ | (1,529 | ) |
| $ | (36,990 | ) |
| $ | 1,454 |
|
Basic weighted average shares |
|
| 18,394 |
|
|
| 18,309 |
|
|
| 18,381 |
|
|
| 18,275 |
|
|
| 18,475 |
|
|
| 18,394 |
|
|
| 18,485 |
|
|
| 18,381 |
|
Net potential common share equivalents – stock options and stock units |
|
| — |
|
|
| 392 |
|
|
| 361 |
|
|
| 342 |
| ||||||||||||||||
Net potential common share equivalents |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 361 |
| ||||||||||||||||
Diluted weighted average shares |
|
| 18,394 |
|
|
| 18,701 |
|
|
| 18,742 |
|
|
| 18,617 |
|
|
| 18,475 |
|
|
| 18,394 |
|
|
| 18,485 |
|
|
| 18,742 |
|
Excluded from diluted weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common share equivalents |
|
| 359 |
|
|
| 96 |
|
|
| 388 |
|
|
| 163 |
|
|
| 403 |
|
|
| 359 |
|
|
| 371 |
|
|
| 388 |
|
The calculation of EPS is based on the weighted average number of Unifi, Inc.’s common shares outstanding for the applicable period. The calculation of diluted EPS presents the effect of all potential dilutive common shares that were outstanding during the respective period, unless the effect of doing so is anti-dilutive.
18.19. Investments in Unconsolidated Affiliates and Variable Interest Entities
As of March 29, 2020, UNIFI currently maintainsmaintained investments in three entities classified as unconsolidated affiliates: PAL; U.N.F. Industries, Ltd. (“UNF”); and UNF America LLC (“UNFA”). As of March 31, 2019, UNIFI’s investment in PAL was $112,431$56,641 and UNIFI’s combined investments in UNF and UNFA were $2,316,$2,213, each of which is reflected within investments in unconsolidated affiliates in the accompanying condensed consolidated balance sheets.
13
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
PAL is a limited liability company treated as a partnership for income tax reporting purposes. UNIFI accountshas accounted for itsthis investment in PAL using the equity method of accounting. PAL is subject to price risk related to anticipated fixed-price yarn sales. To protect the gross margin of these sales, PAL may enter into cotton futures to manage changes in raw material prices. The derivative instruments used are listed and traded on an exchange and are valued using quoted prices classified within Level 1 of the fair value hierarchy. As of March 31, 2019,29, 2020, PAL had no futures contracts designated as cash flow hedges.
As of March 29, 2020, UNIFI owned a 34% interest in PAL (the “PAL Investment”) and Parkdale, Incorporated (“Parkdale”) owned the majority 66% interest. During March 2020, UNIFI commenced negotiations to sell the PAL Investment to Parkdale. Such negotiations indicated that the fair value of the PAL Investment was less than UNIFI’s carrying value and UNIFI no longer intended to hold the PAL Investment to allow recovery of the carrying value. UNIFI recorded an other-than-temporary impairment of $45,194 to adjust the PAL Investment to fair value.
In April 2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000. The March 29, 2020 adjusted carrying value, after recording the other-than-temporary impairment of the PAL Investment, was comprised of (i) $56,641 reflected in investments in unconsolidated affiliates and (ii) $3,359 of cumulative translation adjustments reflected in other comprehensive loss, totaling the $60,000 fair value. The transaction closed on April 29, 2020 and UNIFI received $60,000 in cash.
The reconciliation between UNIFI’s share of the underlying equity of PAL and its investment is as follows:
Underlying equity as of March 31, 2019 |
| $ | 130,522 |
| ||||
Underlying equity as of March 29, 2020 |
| $ | 119,926 |
| ||||
Initial excess capital contributions |
|
| 53,363 |
|
|
| 53,363 |
|
Impairment charge recorded by UNIFI in fiscal 2007 |
|
| (74,106 | ) |
|
| (74,106 | ) |
Anti-trust lawsuit against PAL in which UNIFI did not participate |
|
| 2,652 |
|
|
| 2,652 |
|
Investment as of March 31, 2019 |
| $ | 112,431 |
| ||||
Impairment charge recorded by UNIFI in fiscal 2020 |
|
| (45,194 | ) | ||||
Investment as of March 29, 2020 |
| $ | 56,641 |
|
14
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
UNIFI evaluated the events relating to the PAL Investment under the guidance in ASC 205 – Presentation of Financial Statements. Disposition of the PAL Investment (i) did not represent a strategic shift for UNIFI and (ii) did not meet the criteria to be recorded as a discontinued operation. Accordingly, UNIFI continues to record the financial statement impacts of the PAL Investment in continuing operations.
U.N.F. Industries, Ltd.
Raw material and production services for UNF are provided by Nilit Ltd. under separate supply and services agreements. UNF’s fiscal year end is December 31, and it is a registered Israeli private company located in Migdal Ha-Emek, Israel.
UNF America LLC
Raw material and production services for UNFA are provided by Nilit America Inc. under separate supply and services agreements. UNFA’s fiscal year end is December 31, and it is a limited liability company treated as a partnership for income tax reporting purposes located in Ridgeway, Virginia.
In conjunction with the formation of UNFA, UNIFI entered into a supply agreement with UNF and UNFA whereby UNIFI agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNFA. The supply agreement has no stated minimum purchase quantities and pricing is negotiated every six months, based on market rates. As of March 31, 2019,29, 2020, UNIFI’s open purchase orders related to this supply agreement were $4,269.$807.
UNIFI’s raw material purchases under this supply agreement consist of the following:
|
| For the Nine Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
UNF |
| $ | 1,478 |
|
| $ | 1,463 |
|
| $ | 1,343 |
|
| $ | 1,478 |
|
UNFA |
|
| 17,199 |
|
|
| 16,291 |
|
|
| 13,219 |
|
|
| 17,199 |
|
Total |
| $ | 18,677 |
|
| $ | 17,754 |
|
| $ | 14,562 |
|
| $ | 18,677 |
|
As of March 31, 201929, 2020 and June 24, 2018,30, 2019, UNIFI had combined accounts payable due to UNF and UNFA of $1,831$2,724 and $2,301,$1,728, respectively.
UNIFI has determined that UNF and UNFA are variable interest entities and that UNIFI is the primary beneficiary of these entities, based on the terms of the supply agreement discussed above. As a result, these entities should be consolidated with UNIFI’s financial results. As UNIFI purchases substantially all of the output from the two entities, the two entities’ balance sheets constitute 3% or less of UNIFI’s current assets, total assets and total liabilities, and such balances are not expected to comprise a larger portion in the future, UNIFI has not included the accounts of UNF and UNFA in its consolidated financial statements. The financial results of UNF and UNFA are included in UNIFI’s consolidated financial statements with a one-month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with UNIFI’s accounting policy. Other than the supply agreement discussed above, UNIFI does not provide any other commitments or guarantees related to either UNF or UNFA.
Condensed balance sheet and income statement information for UNIFI’s unconsolidated affiliates (including reciprocal balances) is presented in the tables below. PAL iswas defined as significant and its information is separately disclosed. PAL doeshas not meetmet the criteria for segment reporting.
|
| As of March 31, 2019 |
|
| As of June 24, 2018 |
|
| As of March 29, 2020 |
|
| As of June 30, 2019 |
| ||||||||||||||||||||||||||||||||||||
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
| ||||||||||||
Current assets |
| $ | 298,563 |
|
| $ | 6,860 |
|
| $ | 305,423 |
|
| $ | 289,683 |
|
| $ | 7,598 |
|
| $ | 297,281 |
|
| $ | 258,113 |
|
| $ | 6,716 |
|
| $ | 264,829 |
|
| $ | 299,610 |
|
| $ | 7,218 |
|
| $ | 306,828 |
|
Noncurrent assets |
|
| 158,033 |
|
|
| 732 |
|
|
| 158,765 |
|
|
| 162,242 |
|
|
| 875 |
|
|
| 163,117 |
| ||||||||||||||||||||||||
Non-current assets |
|
| 151,720 |
|
|
| 583 |
|
|
| 152,303 |
|
|
| 158,304 |
|
|
| 696 |
|
|
| 159,000 |
| ||||||||||||||||||||||||
Current liabilities |
|
| 69,389 |
|
|
| 2,961 |
|
|
| 72,350 |
|
|
| 71,026 |
|
|
| 3,722 |
|
|
| 74,748 |
|
|
| 54,513 |
|
|
| 2,873 |
|
|
| 57,386 |
|
|
| 70,875 |
|
|
| 4,069 |
|
|
| 74,944 |
|
Noncurrent liabilities |
|
| 3,321 |
|
|
| — |
|
|
| 3,321 |
|
|
| 3,389 |
|
|
| — |
|
|
| 3,389 |
| ||||||||||||||||||||||||
Non-current liabilities |
|
| 2,602 |
|
|
| — |
|
|
| 2,602 |
|
|
| 3,252 |
|
|
| — |
|
|
| 3,252 |
| ||||||||||||||||||||||||
Shareholders’ equity and capital accounts |
|
| 383,886 |
|
|
| 4,631 |
|
|
| 388,517 |
|
|
| 377,510 |
|
|
| 4,751 |
|
|
| 382,261 |
|
|
| 352,718 |
|
|
| 4,426 |
|
|
| 357,144 |
|
|
| 383,787 |
|
|
| 3,845 |
|
|
| 387,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNIFI’s portion of undistributed earnings |
|
| 43,452 |
|
|
| 1,040 |
|
|
| 44,492 |
|
|
| 41,429 |
|
|
| 887 |
|
|
| 42,316 |
|
|
| 34,230 |
|
|
| 1,334 |
|
|
| 35,564 |
|
|
| 43,343 |
|
|
| 821 |
|
|
| 44,164 |
|
14
|
| For the Three Months Ended March 29, 2020 |
|
| For the Three Months Ended March 31, 2019 |
| ||||||||||||||||||
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
| ||||||
Net sales |
| $ | 170,854 |
|
| $ | 4,076 |
|
| $ | 174,930 |
|
| $ | 225,160 |
|
| $ | 6,217 |
|
| $ | 231,377 |
|
Gross profit |
|
| 12,182 |
|
|
| 392 |
|
|
| 12,574 |
|
|
| 8,638 |
|
|
| 1,149 |
|
|
| 9,787 |
|
Income from operations |
|
| 7,747 |
|
|
| 8 |
|
|
| 7,755 |
|
|
| 3,868 |
|
|
| 733 |
|
|
| 4,601 |
|
Net income |
|
| 9,811 |
|
|
| 74 |
|
|
| 9,885 |
|
|
| 4,142 |
|
|
| 740 |
|
|
| 4,882 |
|
Depreciation and amortization |
|
| 8,647 |
|
|
| 23 |
|
|
| 8,670 |
|
|
| 9,285 |
|
|
| 48 |
|
|
| 9,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received by PAL under cotton rebate program |
|
| 3,210 |
|
|
| — |
|
|
| 3,210 |
|
|
| 3,053 |
|
|
| — |
|
|
| 3,053 |
|
Earnings recognized by PAL for cotton rebate program |
|
| 3,215 |
|
|
| — |
|
|
| 3,215 |
|
|
| 3,195 |
|
|
| — |
|
|
| 3,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 750 |
|
|
| 750 |
|
15
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| For the Three Months Ended March 31, 2019 |
|
| For the Three Months Ended March 25, 2018 |
|
| For the Nine Months Ended March 29, 2020 |
|
| For the Nine Months Ended March 31, 2019 |
| ||||||||||||||||||||||||||||||||||||
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
| ||||||||||||
Net sales |
| $ | 225,160 |
|
| $ | 6,217 |
|
| $ | 231,377 |
|
| $ | 199,473 |
|
| $ | 5,764 |
|
| $ | 205,237 |
|
| $ | 531,669 |
|
| $ | 14,212 |
|
| $ | 545,881 |
|
| $ | 626,812 |
|
| $ | 19,256 |
|
| $ | 646,068 |
|
Gross profit |
|
| 8,638 |
|
|
| 1,149 |
|
|
| 9,787 |
|
|
| 6,078 |
|
|
| 1,001 |
|
|
| 7,079 |
|
|
| 13,067 |
|
|
| 1,745 |
|
|
| 14,812 |
|
|
| 18,841 |
|
|
| 3,587 |
|
|
| 22,428 |
|
Income from operations |
|
| 3,868 |
|
|
| 733 |
|
|
| 4,601 |
|
|
| 80 |
|
|
| 601 |
|
|
| 681 |
| ||||||||||||||||||||||||
(Loss) income from operations |
|
| (554 | ) |
|
| 497 |
|
|
| (57 | ) |
|
| 5,663 |
|
|
| 2,284 |
|
|
| 7,947 |
| ||||||||||||||||||||||||
Net income |
|
| 4,142 |
|
|
| 740 |
|
|
| 4,882 |
|
|
| 1,409 |
|
|
| 611 |
|
|
| 2,020 |
|
|
| 3,893 |
|
|
| 581 |
|
|
| 4,474 |
|
|
| 6,334 |
|
|
| 2,381 |
|
|
| 8,715 |
|
Depreciation and amortization |
|
| 9,285 |
|
|
| 48 |
|
|
| 9,333 |
|
|
| 9,081 |
|
|
| 48 |
|
|
| 9,129 |
|
|
| 30,671 |
|
|
| 113 |
|
|
| 30,784 |
|
|
| 30,576 |
|
|
| 143 |
|
|
| 30,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received by PAL under cotton rebate program |
|
| 3,053 |
|
|
| — |
|
|
| 3,053 |
|
|
| 3,220 |
|
|
| — |
|
|
| 3,220 |
|
|
| 10,366 |
|
|
| — |
|
|
| 10,366 |
|
|
| 8,773 |
|
|
| — |
|
|
| 8,773 |
|
Earnings recognized by PAL for cotton rebate program |
|
| 3,195 |
|
|
| — |
|
|
| 3,195 |
|
|
| 3,386 |
|
|
| — |
|
|
| 3,386 |
|
|
| 9,569 |
|
|
| — |
|
|
| 9,569 |
|
|
| 9,444 |
|
|
| — |
|
|
| 9,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received |
|
| — |
|
|
| 750 |
|
|
| 750 |
|
|
| 1,798 |
|
|
| 750 |
|
|
| 2,548 |
|
|
| 10,437 |
|
|
| — |
|
|
| 10,437 |
|
|
| 130 |
|
|
| 1,250 |
|
|
| 1,380 |
|
|
| For the Nine Months Ended March 31, 2019 |
|
| For the Nine Months Ended March 25, 2018 |
| ||||||||||||||||||
|
| PAL |
|
| Other |
|
| Total |
|
| PAL |
|
| Other |
|
| Total |
| ||||||
Net sales |
| $ | 626,812 |
|
| $ | 19,256 |
|
| $ | 646,068 |
|
| $ | 578,841 |
|
| $ | 18,213 |
|
| $ | 597,054 |
|
Gross profit |
|
| 18,841 |
|
|
| 3,587 |
|
|
| 22,428 |
|
|
| 22,167 |
|
|
| 3,583 |
|
|
| 25,750 |
|
Income from operations |
|
| 5,663 |
|
|
| 2,284 |
|
|
| 7,947 |
|
|
| 8,114 |
|
|
| 2,295 |
|
|
| 10,409 |
|
Net income |
|
| 6,334 |
|
|
| 2,381 |
|
|
| 8,715 |
|
|
| 8,357 |
|
|
| 2,327 |
|
|
| 10,684 |
|
Depreciation and amortization |
|
| 30,576 |
|
|
| 143 |
|
|
| 30,719 |
|
|
| 29,566 |
|
|
| 142 |
|
|
| 29,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received by PAL under cotton rebate program |
|
| 8,773 |
|
|
| — |
|
|
| 8,773 |
|
|
| 10,162 |
|
|
| — |
|
|
| 10,162 |
|
Earnings recognized by PAL for cotton rebate program |
|
| 9,444 |
|
|
| — |
|
|
| 9,444 |
|
|
| 9,832 |
|
|
| — |
|
|
| 9,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received |
|
| 130 |
|
|
| 1,250 |
|
|
| 1,380 |
|
|
| 8,976 |
|
|
| 2,250 |
|
|
| 11,226 |
|
19.20. Commitments and Contingencies
Collective Bargaining Agreements
While employees of UNIFI’s Brazilian operations are unionized, none of the labor force employed by UNIFI’s domestic or other foreign subsidiaries is currently covered by a collective bargaining agreement.
Environmental
On September 30, 2004, Unifi Kinston, LLC (“UK”), a subsidiary of Unifi, Inc., completed its acquisition of polyester filament manufacturing assets located in Kinston, North Carolina from Invista S.a.r.l. (“INVISTA”). The land for the Kinston site was leased pursuant to a 99-year ground lease (the “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 and the North Carolina Department of Environmental Quality (“DEQ”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and remediate the AOCs to comply with applicable regulatory standards. Effective March 20, 2008, UK entered into a lease termination agreement associated with conveyance of certain assets at the Kinston site to DuPont. This agreement terminated the Ground Lease and relieved UK of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to UK’s period of operation of the Kinston site, which was from 2004 to 2008. At this time, UNIFI has no basis to determine if or when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
UK continues to own property (referred to as the(the “Kentec site”) acquired in the 2004 transaction with INVISTA that has contamination from DuPont’s prior operations and is monitored by DEQ. The Kentec site has been remediated by DuPont, and DuPont has received authority from DEQ to discontinue further remediation, other than natural attenuation. Prior to transfer of responsibility to UK, DuPont and UK had a duty to monitor and report the environmental status of the Kentec site to DEQ. UK expected to assume that responsibility in the first half of calendar 2019 and was entitled to receive from DuPont seven years of monitoring and reporting costs, less certain adjustments. UK would then assume sole responsibility for any future remediation of the site.
Effective April 10, 2019, UK assumed sole remediator responsibility of the Kentec site pursuant to its contractual obligations with INVISTA and received $180 of net monitoring and reporting costs due from DuPont. In connection with monitoring, UK expects to sample and report to DEQ annually. UNIFI expects nominimal active site remediation willmay be required, andbut has no basis to determine any costs that may be associated with active remediation.
Leases
UNIFI routinely leases sales and administrative office space, warehousing and distribution centers, manufacturing space, transportation equipment, manufacturing equipment, and other information technology and office equipment from third parties. 21. Related Party Transactions
15For details regarding the nature of certain related party relationships, see Note 25, “Related Party Transactions,” to the consolidated financial statements in the 2019 Form 10-K.
There were no related party receivables as of March 29, 2020 or June 30, 2019.
Related party payables consists of the following:
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||
Salem Leasing Corporation (included within accounts payable) |
| $ | 403 |
|
| $ | 634 |
|
Salem Leasing Corporation (operating lease obligations) |
|
| 1,578 |
|
|
| — |
|
Salem Leasing Corporation (finance lease obligations) |
|
| 6,765 |
|
|
| 806 |
|
Total related party payables |
| $ | 8,746 |
|
| $ | 1,440 |
|
16
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
UNIFI has assumed various financial obligations and commitments in the normal course of its operating and financing activities. Financial obligations are considered to represent known future cash payments that UNIFI is required to make under existing contractual arrangements, such as debt and lease agreements.
20. Related Party Transactions
For details regarding the nature of certain related party relationships, see Note 24, “Related Party Transactions,” to the consolidated financial statements in the 2018 Form 10-K.
There were no related party receivables as of March 31, 2019 or June 24, 2018.
Related party payables consists of the following:
|
| March 31, 2019 |
|
| June 24, 2018 |
| ||
Salem Leasing Corporation (included within accounts payable) |
| $ | 321 |
|
| $ | 306 |
|
Salem Leasing Corporation (capital lease obligation) |
|
| 831 |
|
|
| 875 |
|
Total related party payables |
| $ | 1,152 |
|
| $ | 1,181 |
|
Related party transactions in excess of $120 for the current or prior two fiscal years consist of the following amounts for the periods presented:include:
|
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
|
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||||||||||||
Affiliated Entity |
| Transaction Type |
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| Transaction Type |
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||||||
Salem Leasing Corporation |
| Transportation equipment costs and capital lease debt service |
| $ | 1,006 |
|
| $ | 1,028 |
|
| $ | 3,046 |
|
| $ | 2,978 |
|
| Transportation equipment costs and finance lease debt service |
| $ | 985 |
|
| $ | 1,006 |
|
| $ | 3,101 |
|
| $ | 3,046 |
|
Salem Global Logistics, Inc. |
| Freight service income |
|
| — |
|
|
| 35 |
|
|
| — |
|
|
| 127 |
|
21.22. Business Segment Information
UNIFI defines operating segments as components of the organization for which discrete financial information is available and operating results are evaluated on a regular basis by UNIFI’s Principal Executive Officer,principal executive officer, who is the chief operating decision maker (the “CODM”), in order to assess performance and allocate resources. Characteristics of the organization which were relied upon in making the determination of reportable segments include the nature of the products sold, the organization’s internal structure, the trade policies in the geographic regions in which UNIFI operates, and the information that is regularly reviewed by the CODM for the purpose of assessing performance and allocating resources.
UNIFI’s operating segments are aggregated into threefour reportable segments (the Polyester Segment, the Nylon Segment, the Brazil Segment and the InternationalAsia Segment) based on similarities between the operating segments’ economic characteristics, nature of products sold, type of customer, methods of distribution and regulatory environment.
The operations within the Polyester Segment exhibit similar long-term economic characteristics and primarily sell into an economic trading zone covered by the North American Free Trade Agreement (“NAFTA”) and the Dominican Republic—Central America Free Trade Agreement (“CAFTA-DR”) (collectively, the regions comprising these economic trading zones are referred to as “NACA”) to similar customers utilizing similar methods of distribution. These operations derive revenues primarily from manufacturing polyester-based products with sales primarily to other yarn manufacturers and knitters and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive, home furnishings, automotive, industrial and other end-use markets. The Polyester Segment consists of sales and manufacturing operations in the United StatesU.S. and El Salvador.
The operations within the Nylon Segment exhibit similar long-term economic characteristics and primarily sell into the NACA region to similar customers utilizing similar methods of distribution. These operations derive revenues primarily from manufacturing nylon-based products with sales to knitters and weavers that produce fabric primarily for the apparel and hosiery markets. The Nylon Segment includes an immaterial operating segment in Colombia that sells similar nylon-based textile products to similar customers in Colombia and Mexico utilizing similar methods of distribution. These operations derive revenues primarily from nylon-based products with sales to knitters and weavers that produce fabric primarily for the apparel and hosiery markets. The Nylon Segment consists of sales and manufacturing operations in the United StatesU.S. and Colombia.
The operations within the InternationalBrazil Segment exhibit similar long-term economic characteristicsprimarily manufactures and sell to similar customers utilizing similar methods of distribution in geographic regions that are outside of NACA. The International Segment primarily sells polyester-based products to knitters and weavers that produce fabric for the apparel, automotive, home furnishings, industrial and other end-use markets primarilyprincipally in the South American and Asian regions.America. The InternationalBrazil Segment includes a manufacturing location in Brazil and sales offices in Brazil, ChinaBrazil.
The operations within the Asia Segment exhibit similar long-term economic characteristics and Sri Lanka.sell to similar customers utilizing similar methods of distribution primarily in Asia and Europe, which are outside of the NACA region. The Asia Segment primarily sources polyester-based products from third-party suppliers and sells to knitters and weavers that produce fabric for the apparel, automotive, home furnishings, automotive, industrial and other end-use markets principally in Asia. The Asia Segment includes sales offices primarily in China.
In addition to UNIFI’s reportable segments, the selected financial information presented below includes an All Other category. All Other consists primarily of for-hire transportation services. For-hire transportation services revenue is derived from performing common carrier services utilizing UNIFI’s fleet of transportation equipment.
The operations within All Other (i) are not subject to review by the CODM at a level consistent with UNIFI’s other operations, (ii) are not regularly evaluated using the same metrics applied to UNIFI’s other operations and (iii) do not qualify for aggregation with an existing reportable segment. Therefore, such operations are excluded from reportable segments.
16
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
UNIFI evaluates the operating performance of its segments based upon Segment Profit, which represents segment gross profit plus segment depreciation expense. This measurement of segment profit best aligns segment reporting with the current assessments and evaluations performed by, and information provided to, the CODM.
The accounting policies for the segments are consistent with UNIFI’s accounting policies. Intersegment sales are omitted from the below financial information,segment disclosures, as they are (i) insignificant to UNIFI’s segments and eliminated from consolidated reporting and (ii) excluded from segment evaluations performed by the CODM.
Selected financial information is presented below:
|
| For the Three Months Ended March 31, 2019 |
| |||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| International |
|
| All Other |
|
| Total |
| |||||
Net sales |
| $ | 95,745 |
|
| $ | 25,563 |
|
| $ | 57,681 |
|
| $ | 1,000 |
|
| $ | 179,989 |
|
Cost of sales |
|
| 92,221 |
|
|
| 23,251 |
|
|
| 49,784 |
|
|
| 942 |
|
|
| 166,198 |
|
Gross profit |
|
| 3,524 |
|
|
| 2,312 |
|
|
| 7,897 |
|
|
| 58 |
|
|
| 13,791 |
|
Segment depreciation expense |
|
| 3,858 |
|
|
| 516 |
|
|
| 420 |
|
|
| 47 |
|
|
| 4,841 |
|
Segment Profit |
| $ | 7,382 |
|
| $ | 2,828 |
|
| $ | 8,317 |
|
| $ | 105 |
|
| $ | 18,632 |
|
|
| For the Three Months Ended March 25, 2018 |
| |||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| International |
|
| All Other |
|
| Total |
| |||||
Net sales |
| $ | 88,763 |
|
| $ | 24,036 |
|
| $ | 51,989 |
|
| $ | 1,079 |
|
| $ | 165,867 |
|
Cost of sales |
|
| 83,948 |
|
|
| 23,023 |
|
|
| 41,317 |
|
|
| 1,023 |
|
|
| 149,311 |
|
Gross profit |
|
| 4,815 |
|
|
| 1,013 |
|
|
| 10,672 |
|
|
| 56 |
|
|
| 16,556 |
|
Segment depreciation expense |
|
| 4,022 |
|
|
| 560 |
|
|
| 436 |
|
|
| 66 |
|
|
| 5,084 |
|
Segment Profit |
| $ | 8,837 |
|
| $ | 1,573 |
|
| $ | 11,108 |
|
| $ | 122 |
|
| $ | 21,640 |
|
|
| For the Nine Months Ended March 31, 2019 |
| |||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| International |
|
| All Other |
|
| Total |
| |||||
Net sales |
| $ | 281,665 |
|
| $ | 76,159 |
|
| $ | 168,271 |
|
| $ | 3,216 |
|
| $ | 529,311 |
|
Cost of sales |
|
| 269,444 |
|
|
| 69,671 |
|
|
| 139,275 |
|
|
| 2,955 |
|
|
| 481,345 |
|
Gross profit |
|
| 12,221 |
|
|
| 6,488 |
|
|
| 28,996 |
|
|
| 261 |
|
|
| 47,966 |
|
Segment depreciation expense |
|
| 12,047 |
|
|
| 1,576 |
|
|
| 1,146 |
|
|
| 190 |
|
|
| 14,959 |
|
Segment Profit |
| $ | 24,268 |
|
| $ | 8,064 |
|
| $ | 30,142 |
|
| $ | 451 |
|
| $ | 62,925 |
|
|
| For the Nine Months Ended March 25, 2018 |
| |||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| International |
|
| All Other |
|
| Total |
| |||||
Net sales |
| $ | 266,817 |
|
| $ | 75,966 |
|
| $ | 151,694 |
|
| $ | 3,110 |
|
| $ | 497,587 |
|
Cost of sales |
|
| 244,513 |
|
|
| 68,563 |
|
|
| 119,050 |
|
|
| 2,937 |
|
|
| 435,063 |
|
Gross profit |
|
| 22,304 |
|
|
| 7,403 |
|
|
| 32,644 |
|
|
| 173 |
|
|
| 62,524 |
|
Segment depreciation expense |
|
| 11,862 |
|
|
| 1,649 |
|
|
| 1,249 |
|
|
| 195 |
|
|
| 14,955 |
|
Segment Profit |
| $ | 34,166 |
|
| $ | 9,052 |
|
| $ | 33,893 |
|
| $ | 368 |
|
| $ | 77,479 |
|
The reconciliations of segment gross profit to consolidated (loss) income before income taxes are as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||||
Polyester |
| $ | 3,524 |
|
| $ | 4,815 |
|
| $ | 12,221 |
|
| $ | 22,304 |
|
Nylon |
|
| 2,312 |
|
|
| 1,013 |
|
|
| 6,488 |
|
|
| 7,403 |
|
International |
|
| 7,897 |
|
|
| 10,672 |
|
|
| 28,996 |
|
|
| 32,644 |
|
All Other |
|
| 58 |
|
|
| 56 |
|
|
| 261 |
|
|
| 173 |
|
Segment gross profit |
|
| 13,791 |
|
|
| 16,556 |
|
|
| 47,966 |
|
|
| 62,524 |
|
Selling, general and administrative expenses |
|
| 11,439 |
|
|
| 13,846 |
|
|
| 40,672 |
|
|
| 41,335 |
|
Provision (benefit) for bad debts |
|
| 218 |
|
|
| 27 |
|
|
| 381 |
|
|
| (104 | ) |
Other operating expense, net |
|
| 1,359 |
|
|
| 1,100 |
|
|
| 1,218 |
|
|
| 1,763 |
|
Operating income |
|
| 775 |
|
|
| 1,583 |
|
|
| 5,695 |
|
|
| 19,530 |
|
Interest income |
|
| (149 | ) |
|
| (182 | ) |
|
| (448 | ) |
|
| (444 | ) |
Interest expense |
|
| 1,256 |
|
|
| 1,187 |
|
|
| 4,078 |
|
|
| 3,562 |
|
Loss on extinguishment of debt |
|
| — |
|
|
| — |
|
|
| 131 |
|
|
| — |
|
Equity in earnings of unconsolidated affiliates |
|
| (1,873 | ) |
|
| (544 | ) |
|
| (3,126 | ) |
|
| (3,842 | ) |
Income before income taxes |
| $ | 1,541 |
|
| $ | 1,122 |
|
| $ | 5,060 |
|
| $ | 20,254 |
|
|
| For the Three Months Ended March 29, 2020 |
| |||||||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| Brazil |
|
| Asia |
|
| All Other |
|
| Total |
| ||||||
Net sales |
| $ | 89,767 |
|
| $ | 20,567 |
|
| $ | 21,060 |
|
| $ | 38,621 |
|
| $ | 979 |
|
| $ | 170,994 |
|
Cost of sales |
|
| 82,735 |
|
|
| 20,234 |
|
|
| 17,644 |
|
|
| 34,038 |
|
|
| 960 |
|
|
| 155,611 |
|
Gross profit |
|
| 7,032 |
|
|
| 333 |
|
|
| 3,416 |
|
|
| 4,583 |
|
|
| 19 |
|
|
| 15,383 |
|
Segment depreciation expense |
|
| 4,301 |
|
|
| 471 |
|
|
| 421 |
|
|
| — |
|
|
| 137 |
|
|
| 5,330 |
|
Segment Profit |
| $ | 11,333 |
|
| $ | 804 |
|
| $ | 3,837 |
|
| $ | 4,583 |
|
| $ | 156 |
|
| $ | 20,713 |
|
17
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
|
| For the Three Months Ended March 31, 2019 |
| |||||||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| Brazil |
|
| Asia |
|
| All Other |
|
| Total |
| ||||||
Net sales |
| $ | 95,745 |
|
| $ | 25,563 |
|
| $ | 25,110 |
|
| $ | 32,571 |
|
| $ | 1,000 |
|
| $ | 179,989 |
|
Cost of sales |
|
| 90,941 |
|
|
| 23,251 |
|
|
| 22,334 |
|
|
| 28,730 |
|
|
| 942 |
|
|
| 166,198 |
|
Gross profit |
|
| 4,804 |
|
|
| 2,312 |
|
|
| 2,776 |
|
|
| 3,841 |
|
|
| 58 |
|
|
| 13,791 |
|
Segment depreciation expense |
|
| 3,858 |
|
|
| 516 |
|
|
| 420 |
|
|
| — |
|
|
| 47 |
|
|
| 4,841 |
|
Segment Profit |
| $ | 8,662 |
|
| $ | 2,828 |
|
| $ | 3,196 |
|
| $ | 3,841 |
|
| $ | 105 |
|
| $ | 18,632 |
|
|
| For the Nine Months Ended March 29, 2020 |
| |||||||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| Brazil |
|
| Asia |
|
| All Other |
|
| Total |
| ||||||
Net sales |
| $ | 261,212 |
|
| $ | 57,853 |
|
| $ | 66,094 |
|
| $ | 132,496 |
|
| $ | 2,799 |
|
| $ | 520,454 |
|
Cost of sales |
|
| 239,725 |
|
|
| 56,296 |
|
|
| 55,089 |
|
|
| 118,114 |
|
|
| 2,739 |
|
|
| 471,963 |
|
Gross profit |
|
| 21,487 |
|
|
| 1,557 |
|
|
| 11,005 |
|
|
| 14,382 |
|
|
| 60 |
|
|
| 48,491 |
|
Segment depreciation expense |
|
| 12,525 |
|
|
| 1,465 |
|
|
| 1,153 |
|
|
| — |
|
|
| 300 |
|
|
| 15,443 |
|
Segment Profit |
| $ | 34,012 |
|
| $ | 3,022 |
|
| $ | 12,158 |
|
| $ | 14,382 |
|
| $ | 360 |
|
| $ | 63,934 |
|
|
| For the Nine Months Ended March 31, 2019 |
| |||||||||||||||||||||
|
| Polyester |
|
| Nylon |
|
| Brazil |
|
| Asia |
|
| All Other |
|
| Total |
| ||||||
Net sales |
| $ | 281,665 |
|
| $ | 76,159 |
|
| $ | 76,257 |
|
| $ | 92,014 |
|
| $ | 3,216 |
|
| $ | 529,311 |
|
Cost of sales |
|
| 265,748 |
|
|
| 69,671 |
|
|
| 62,654 |
|
|
| 80,317 |
|
|
| 2,955 |
|
|
| 481,345 |
|
Gross profit |
|
| 15,917 |
|
|
| 6,488 |
|
|
| 13,603 |
|
|
| 11,697 |
|
|
| 261 |
|
|
| 47,966 |
|
Segment depreciation expense |
|
| 12,047 |
|
|
| 1,576 |
|
|
| 1,146 |
|
|
| — |
|
|
| 190 |
|
|
| 14,959 |
|
Segment Profit |
| $ | 27,964 |
|
| $ | 8,064 |
|
| $ | 14,749 |
|
| $ | 11,697 |
|
| $ | 451 |
|
| $ | 62,925 |
|
The reconciliations of segment gross profit to consolidated income (loss) before income taxes are as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Polyester |
| $ | 7,032 |
|
| $ | 4,804 |
|
| $ | 21,487 |
|
| $ | 15,917 |
|
Nylon |
|
| 333 |
|
|
| 2,312 |
|
|
| 1,557 |
|
|
| 6,488 |
|
Brazil |
|
| 3,416 |
|
|
| 2,776 |
|
|
| 11,005 |
|
|
| 13,603 |
|
Asia |
|
| 4,583 |
|
|
| 3,841 |
|
|
| 14,382 |
|
|
| 11,697 |
|
All Other |
|
| 19 |
|
|
| 58 |
|
|
| 60 |
|
|
| 261 |
|
Segment gross profit |
|
| 15,383 |
|
|
| 13,791 |
|
|
| 48,491 |
|
|
| 47,966 |
|
Selling, general and administrative expenses |
|
| 11,720 |
|
|
| 11,439 |
|
|
| 35,208 |
|
|
| 40,672 |
|
Provision for bad debts |
|
| 580 |
|
|
| 218 |
|
|
| 331 |
|
|
| 381 |
|
Other operating (income) expense, net |
|
| (62 | ) |
|
| 1,359 |
|
|
| 900 |
|
|
| 1,218 |
|
Operating income |
|
| 3,145 |
|
|
| 775 |
|
|
| 12,052 |
|
|
| 5,695 |
|
Interest income |
|
| (173 | ) |
|
| (149 | ) |
|
| (595 | ) |
|
| (448 | ) |
Interest expense |
|
| 1,231 |
|
|
| 1,256 |
|
|
| 3,589 |
|
|
| 4,078 |
|
Equity in earnings of unconsolidated affiliates |
|
| (3,526 | ) |
|
| (1,873 | ) |
|
| (1,904 | ) |
|
| (3,126 | ) |
Impairment of investment in unconsolidated affiliate |
|
| 45,194 |
|
|
| — |
|
|
| 45,194 |
|
|
| — |
|
Loss on extinguishment of debt |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 131 |
|
(Loss) income before income taxes |
| $ | (39,581 | ) |
| $ | 1,541 |
|
| $ | (34,232 | ) |
| $ | 5,060 |
|
The reconciliations of segment total assets to consolidated total assets are as follows:
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||
Polyester |
| $ | 291,625 |
|
| $ | 284,261 |
|
| $ | 295,192 |
|
| $ | 287,608 |
|
Nylon |
|
| 60,904 |
|
|
| 57,378 |
|
|
| 50,905 |
|
|
| 57,055 |
|
International |
|
| 100,411 |
|
|
| 95,006 |
| ||||||||
Brazil |
|
| 54,040 |
|
|
| 67,490 |
| ||||||||
Asia |
|
| 45,530 |
|
|
| 35,219 |
| ||||||||
Segment total assets |
|
| 452,940 |
|
|
| 436,645 |
|
|
| 445,667 |
|
|
| 447,372 |
|
Other current assets |
|
| 19,496 |
|
|
| 30,945 |
|
|
| 7,235 |
|
|
| 10,327 |
|
Other PP&E |
|
| 19,091 |
|
|
| 17,373 |
|
|
| 24,412 |
|
|
| 18,664 |
|
Other non-current operating lease assets |
|
| 1,599 |
|
|
| — |
| ||||||||
Other non-current assets |
|
| 2,516 |
|
|
| 4,205 |
|
|
| 5,275 |
|
|
| 1,468 |
|
Investments in unconsolidated affiliates |
|
| 114,748 |
|
|
| 112,639 |
|
|
| 58,854 |
|
|
| 114,320 |
|
Total assets |
| $ | 608,791 |
|
| $ | 601,807 |
|
| $ | 543,042 |
|
| $ | 592,151 |
|
18
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
22.23. Supplemental Cash Flow Information
Cash payments for interest and taxes consist of the following:
|
| For the Nine Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Interest, net of capitalized interest of $178 and $137, respectively |
| $ | 4,053 |
|
| $ | 3,254 |
| ||||||||
Interest, net of capitalized interest of $86 and $178, respectively |
| $ | 3,535 |
|
| $ | 4,053 |
| ||||||||
Income tax payments, net |
|
| 617 |
|
|
| 7,824 |
|
|
| 4,833 |
|
|
| 617 |
|
Cash payments for taxes shown above consist primarily of income and withholding tax payments made by UNIFI in both U.S. and foreign jurisdictions, net of refunds.
Non-Cash Investing and Financing Activities
As of March 29, 2020 and June 30, 2019, $619 and $1,329, respectively, were included in accounts payable for unpaid capital expenditures. As of March 31, 2019 and June 24, 2018, $2,205 and $3,187, respectively, were included in accounts payable for unpaid capital expenditures. As of March 25, 2018
Non-cash investing and June 25, 2017, $2,308 and $3,234, respectively, were includedfinancing activities related to leases have been disclosed in accounts payable for unpaid capital expenditures. Note 4, “Leases.”
23.
24. Subsequent Events
OnGlobal demand declines and decreased economic activity caused by the COVID-19 pandemic led to a decline in demand for UNIFI products. Accordingly, during the fourth quarter of fiscal 2020, UNIFI’s manufacturing operations have been reduced from recent production levels to adjust for the change in demand. UNIFI’s facilities in El Salvador are currently not operational in connection with temporary government mandates in that country.
As further disclosed in Note 19, “Investment in Unconsolidated Affiliates and Variable Interest Entities,” in April 30, 2019,2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000. The transaction closed on April 29, 2020 and UNIFI received $60,000 in cash.
As further disclosed in Note 11, “Long-Term Debt,” in connection and concurrent with the Board approved an amendmentsale of the PAL Investment, UNIFI entered into the Fourth Amendment to UNIFI’s Amended and Restated By-laws, effective as of that date, to change its fiscal year end from the last Sunday in the month of June to the Sunday in June or July nearest June 30 of each year. Because June 30, 2019 falls on a Sunday, UNIFI’s fiscal year end date for fiscal 2019 will remain June 30, 2019 as previously disclosed, and no transition report will be filed.
Credit Agreement.
Item 2. | Management’s Discussion and |
The following is management’s discussion and analysis of certain significant factors that have affected UNIFI’s operations, along with material changes in financial condition, during the periods included in the accompanying condensed consolidated financial statements. A reference to a “note” in this section refers to the accompanying notes to condensed consolidated financial statements. A reference to the “current period” refers to the three-month period ended March 31, 2019,29, 2020, while a reference to the “prior period” refers to the three-month period ended March 25, 2018.31, 2019. A reference to the “current nine-month period” refers to the nine-month period ended March 31, 2019,29, 2020, while a reference to the “prior nine-month period” refers to the nine-month period ended March 25, 2018.31, 2019. Such references may be accompanied by certain phrases for added clarity. The current period and the prior period each consisted of 13 fiscal weeks.
The current nine-month period consisted of 40 fiscal weeks, whileand the prior nine-month period consisted of 39 fiscal weeks. UNIFI’s seasonal shutdown period for its operations in Northweeks and Central America (which typically occurs around December 25 each year) (the “seasonal shutdown period”) occurred in the second quarter of fiscal 2019 but fell in the third quarter of fiscal 2018. Accordingly, both the current period and the current nine-month period include one additional shipping week compared to both the respective prior period and the prior nine-month period.40 weeks, respectively.
Our discussions in this Item 2 focus on our results during, or as of, the three months and nine months ended March 31, 201929, 2020 and March 25, 2018,31, 2019, and, to the extent applicable, any material changes from the information discussed in the 20182019 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 20182019 Form 10-K for more detailed and background information about our business, operations and financial condition. Discussion of unfavorable foreign currency translation is primarily associated with the weakening of the Brazilian Real (“BRL”) and the Chinese Renminbi (“RMB”) against the U.S. Dollar (“USD”).
All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted.
Overview and Significant General Matters
Underlying Business and Operational Overview for the Nine Months Ending March 29, 2020
UNIFI’s business focuses on delivering products and solutions to direct customers and brand partners throughout the world, leveraging our internal manufacturing capabilities and an enhanced global supply chain that delivers a diverse range of synthetic and recycled fibers and polymers. This strategic and synergistic focus includes three supporting pillars: (1) engaging in strategic relationships with like-minded entities, (2) growing our existing portfolio of technologies and capabilities and (3) expanding our supply chain to best serve our direct and indirect and direct customers. We refer to this three-pillared strategy as our “Partner, Innovate and Grow” strategy. UNIFI remains committed to this strategy, which it believeswe believe will increase profitability and generate improved cash flows from operations.
UNIFI has threefour reportable segments for its operations – the Polyester Segment, the Nylon Segment, the Brazil Segment and the InternationalAsia Segment – as well as certain ancillary operations that include for-hire transportation services, which comprise an All Other category. The ancillary operations classified within All Other are insignificant for all periods presented; therefore, UNIFI’s discussion and analysis of those activities is generally limited to their impact on consolidated results, where appropriate. In discussion of its operating results in this report, UNIFI refers to its operations in the “NACA“NACA” region,” which is the region comprised of the trade zones covered by NAFTA and CAFTA-DR. In previous reports, we have referred to these regions as “the Region,” and we have referred to our operations within this region as our “Regional operations.”
Significant general matters for the current period and the current nine-month period include the following, each of which is addressed in more detail below:
Netnet sales for the current period increased $14,122decreased $8,995, or 8.5%5.0%, to $179,989,$170,994, compared to $165,867$179,989 for the prior period, and increased $19,446, or 11.7%, when excluding the impact of foreign currency translation;period;
Netnet sales for the current nine-month period increased $31,724, or 6.4%,were $520,454, compared to $529,311 compared to $497,587 for the prior nine-month period, and increased $48,966, or 9.8%, when excluding the impact of foreign currency translation;period;
Revenuesrevenues from PVA products for the current period grew 13.5%approximately 5% compared to the prior period (or 17.3% when excluding the impact of foreign currency translation), and represented approximately 47%52% of consolidated net sales;
Gross margin was 7.7%sales for the current period compared to 10.0%47% for the prior period;
gross margin was 9.0% for the current period, compared to 7.7% for the prior period and was 9.1%9.3% for the current nine-month period, compared to 12.6%9.1% for the prior nine-month period;
Operatingoperating income was $775$3,145 for the current period, compared to $1,583$775 for the prior period and was $12,052 for the nine-month period, compared to $5,695 for the prior nine-month period;
UNIFI recorded an impairment charge of $45,194 in the current period in connection with the April 29, 2020 sale of the Company’s 34% interest in PAL; and
basic EPS was $(2.23) for the current period, compared to $(0.08) for the prior period and was $(2.00) for the current nine-month period, compared to $19,530 for the prior nine-month period; and
Diluted EPS was $(0.08) for the current period, compared to $0.01 for the prior period, and was $0.08 for the current nine-month period, compared to $1.12 for the prior nine-month period.
Consistent with the market and financial trends that have affected its business in the last several quarters, UNIFI continued to experience a number of challenges inDuring the current period. External pressures innine-month period, (i) the NACA business included elevated raw material costs andPolyester Segment faced suppressed demand for certain yarns alongacross the industrial, automotive and apparel sectors, (ii) the Nylon Segment experienced lower revenues and gross margin in connection with elevated levels of low-cost imports of polyester yarn from China intotwo customers shifting certain programs to overseas garment production during calendar 2019 and (iii) the U.S. The volatile nature of these external pressures made navigating the NACA environment even more difficult. Internal pressures included the implementation of sellingBrazil Segment experienced lower gross margin as market price increases that left us less competitive, elevated inventory levels, and the result of weaker leverage of our cost structure. The combination of these external and internal pressures caused weaker fixed cost absorption and lower operating margins.
UNIFI experienced risingdeclines in connection with declining raw material costs throughout most of calendar 2018, which peakedoutpaced inventory turnover.
However, UNIFI achieved favorable operating results and overall improvement compared to the prior nine-month period, despite one fewer sales week in October 2018. By December 2018, UNIFI experiencedthe NACA region. The improvement was primarily attributable to (i) a pullback in those costs and expected a slight decline in polyesterdeclining raw material costs to favorably impact the current period. However, during the current period, raw material costs for UNIFI’s global operations had not retreated sufficiently enough to offset the ongoing gross margin pressure created by sustainedcost environment that benefited our Polyester Segment and elevated levels of low-cost yarn imports into the U.S. textile market.
Amid these new and ongoing pressures, UNIFI has and is continuing to take actions to reduce costs. Prior to the current period, UNIFI’s annualized run-rate for(ii) lower selling, general and administrative expenses (“SG&A expenses”&A”) resulting from cost reduction efforts that began in the second half of fiscal 2019.
Additionally, UNIFI’s operating cash flows improved significantly during the current nine-month period primarily as a result of (i) comparatively less cash invested in inventories, which was approaching $60,000. In connection with recentinfluenced by lower raw material costs and ongoing cost(ii) $9,057 of increased distributions from equity affiliates.
reduction efforts, UNIFI is targeting a decrease of approximately 15% to that $60,000 annualized run-rate, such that fiscal 2020 SG&A expenses are expected to be approximately $50,000.
In addition, UNIFI remains committed to pursuing relief from the competitive pressures that have resulted from the elevated levels of low-cost and subsidized polyester textured yarn entering the U.S. market from countries such as China and India, which increased approximately 79% from 2013 to 2017 and which continued to grow duringIndia. In connection with the first half of 2018. Based on import data obtained prior to and subsequent to UNIFI’s filing of anti-dumping and countervailing duties petitions we filed in October 2018, an increase of approximately 27% in polyester textured yarn imports from China into the U.S. placed even more pressure on UNIFI’s U.S. margins and competitiveness than had been anticipated in recent months. UNIFI believes this surge in imports was due to efforts to stockpile imported yarn before preliminary duties are imposed. Accordingly, we filed a “critical circumstances” allegation on April 2, 2019, asking the U.S. Department of Commerce (“Commerce”) to apply any countervailing and antidumping duties applicable to Chinese imports on a retroactive basis. Commerce preliminarily granted this request on April 19, 2019,the U.S. International Trade Commission completed their investigations and on April 29, 2019 announced preliminary countervailingbegan imposing associated final duties on imports, of polyester textured yarnsubsequent to preliminary duties that were in effect from (i)April 2019 to December 2019. Accordingly, subject imports from China atand India are being assessed combined antidumping and countervailing duty rates of 32% or more97% and (ii) India at rateshigher and 18% and higher, respectively, in addition to normal course duties in effect. The positive developments in our pursuit of 7% or more. For Chineserelief from low-cost and subsidized imports these duties will apply retroactively dating 90 days prior to the date that the duties go into effect. Preliminary antidumping duty determinations are expected on June 26, 2019, and these duties will also apply retroactively for Chinese imports dating 90 days prior to the date that the duties go into effect. Final determinations of dumping, subsidization and injury are expected by the end of calendar 2019. These positive announcements are critical steps in UNIFI’sour efforts to better compete against imported yarns that have flooded the U.S. market in recent years. UNIFI will continue to monitor whether polyester textured yarn from China or India is being shipped through third-party countries and then entering the U.S. market to avoid the increased duties.
Discussion of the Global Coronavirus Pandemic in Calendar 2020
In March 2020, the World Health Organization declared the current coronavirus disease (“COVID-19”) outbreak a global pandemic. Through the current period and current nine-month period, the COVID-19 pandemic had no significant adverse impact on UNIFI’s business, although sales growth for our Asia Segment was temporarily slowed by the extensive government shutdown in China during the current period.
Efforts to contain the spread of COVID-19 intensified during March and April 2020, especially in the U.S. Several states, including North Carolina, where UNIFI’s primary manufacturing and administrative operations are located, have declared states of emergency. A number of national, state, and local governments also enacted temporary business closures, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. The local and global measures have significantly reduced economic activity and demand, thereby reducing overall demand for UNIFI’s products.
UNIFI’s U.S. manufacturing has continued operating as an essential business, allowing UNIFI to continue to serve customers that remain operational. However, UNIFI’s global manufacturing operations have adjusted to the declines in economic activity and global demand by reducing production from recent levels. UNIFI’s facilities in El Salvador are currently not operational in connection with temporary government mandates in that country. In an effort to protect the health and safety of our employees, customers and communities, UNIFI has taken proactive, aggressive action from the earliest signs of the outbreak in the U.S. by adopting social distancing and travel restriction policies for all locations.
Global measures taken to reduce the spread of COVID-19 have generated a significant decline in global business activity in the immediate term that may have a lasting impact on the global economy and consumer demand. The duration of the COVID-19 pandemic and its related impact on our businesses are currently unknown. UNIFI anticipates that the global disruption caused by COVID-19 has and will continue to negatively impact overall global demand and business activity, including for textiles in both the Americas and Asia.
Significant restoration of consumer spending and retail activity levels will be critical to both our end-markets and an economic rebound. UNIFI anticipates a rebound in global economic activity when COVID-19 is demonstrably contained. The business impact of such a rebound will depend on the pace and effectiveness of the containment efforts deployed by various national, state, and local governments, along with the speed and effectiveness with which potential treatment and vaccine methods are deployed.
UNIFI will continue to monitor the COVID-19 pandemic, prioritizing the health and safety of employees, while delivering on customer demand, but we expect an adverse impact to the remainder of our fiscal 2020 and at least the first half of our fiscal 2021, based on the present factors and conditions.
Key Performance Indicators and Non-GAAP Financial Measures
UNIFI continuously reviews performance indicators to measure its success. These performance indicators form the basis of management’s discussion and analysis included below:
sales volume and revenue for UNIFI and for each reportable segment;
gross profit and gross margin for UNIFI and for each reportable segment;
Netnet income (loss) income and diluted EPS;
Segment Profit, which representsequals segment gross profit plus segment depreciation expense;
unit conversion margin, which represents unit net sales price less unit raw material costs, for UNIFI and for each reportable segment;
working capital, which represents current assets less current liabilities;
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which represents Net (loss) income before net interest expense, income tax expense and depreciation and amortization expense;
Adjusted EBITDA, which represents EBITDA adjusted to exclude equity in earnings of PAL, and, from time to time, certain other adjustments necessary to understand and compare the underlying results of UNIFI;
Adjusted Net Income (Loss), which represents Net (loss) income calculated under GAAP, adjusted to exclude certain amounts which management believes do not reflect the ongoing operations and performance of UNIFI and/or which are necessary to understand and compare the underlying results of UNIFI;
Adjusted EPS, which represents Adjusted Net Income (Loss) divided by UNIFI’s weighted average common shares outstanding;
Adjusted Working Capital, (receivableswhich equals receivables plus inventoryinventories and other current assets, less accounts payable and accrued expenses).expenses; and
Net Debt, which represents debt principal less cash and cash equivalents.
EBITDA, Adjusted EBITDA, andAdjusted Net Income (Loss), Adjusted EPS, Adjusted Working Capital and Net Debt (collectively, the “non-GAAP financial measures”) are not determined in accordance with GAAP and should not be considered a substitute for performance measures determined in accordance with GAAP. The calculations of the non-GAAP financial measures are subjective, based on management’s belief as to which items should be included or excluded in order to provide the most reasonable and comparable view of the underlying operating performance of the business. We may, from time to time, modify the amounts used to determine our non-GAAP financial measures. When applicable, management’s discussion and analysis includes specific consideration for items that comprise the reconciliations of its non-GAAP financial measures.
We believe that these non-GAAP financial measures better reflect UNIFI’s underlying operations and performance and that their use, as operating performance measures, provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets, among otherwise comparable companies.
Management uses Adjusted EBITDA (i) as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it removes the impact of (a) items directly related to our asset base (primarily depreciation and amortization) and (b) items that we would not expect to occur as a part of our normal business on a regular basis; (ii) for planning purposes, including the preparation of our annual operating budget; (iii) as a valuation measure for evaluating our operating performance and our capacity to incur and service debt, fund capital expenditures and expand our business; and (iv) as one measure in determining the value of other acquisitions and dispositions. Adjusted EBITDA is a key performance metric utilized in the determination of variable compensation. We also believe Adjusted EBITDA is an appropriate supplemental measure of debt service capacity, because it serves as a high-level proxy for cash generated from operations and is relevant to our fixed charge coverage ratio.operations. Equity in earnings of PAL is excluded from Adjusted EBITDA because such results do not reflect our operating performance.
Management uses Adjusted Net Income (Loss) and Adjusted EPS (i) as measurements of net operating performance because they assist us in comparing such performance on a consistent basis, as they remove the impact of (a) items that we would not expect to occur as a part of our normal business on a regular basis and (b) components of the provision for income taxes that we would not expect to occur as a part of our underlying taxable operations; (ii) for planning purposes, including the preparation of our annual operating budget; and (iii) as measures in determining the value of other acquisitions and dispositions.
Management uses Adjusted Working Capital as an indicator of UNIFI’s production efficiency and ability to manage inventoryinventories and receivables. In the first quarter of fiscal 2019, in connection with changes
Management uses Net Debt as a liquidity and leverage metric to balance sheet presentation required by the adoption of the New Revenue Recognition Guidance, UNIFI updated the definition of Adjusted Working Capitaldetermine how much debt would remain if all cash and cash equivalents were used to include other current assets for current and historical calculations of the non-GAAP financial measure. Other current assets includes amounts capitalized for future conversion into inventory or receivables (e.g., vendor deposits and contract assets), and management believes that its inclusion in the definition of Adjusted Working Capital improves the understanding of UNIFI capital that is supporting production and sales activity.pay down debt principal.
EBITDA and Adjusted EBITDA
The reconciliations of the amounts reported under GAAP for Net (loss) income to EBITDA and Adjusted EBITDA are as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 31, 2019 |
|
| March 25, 2018 |
| |||||
Net (loss) income |
| $ | (1,529 | ) |
| $ | 176 |
|
| $ | 1,454 |
|
| $ | 20,938 |
|
Interest expense, net |
|
| 1,107 |
|
|
| 1,005 |
|
|
| 3,630 |
|
|
| 3,118 |
|
Provision (benefit) for income taxes |
|
| 3,070 |
|
|
| 946 |
|
|
| 3,606 |
|
|
| (684 | ) |
Depreciation and amortization expense |
|
| 5,535 |
|
|
| 5,617 |
|
|
| 17,015 |
|
|
| 16,566 |
|
EBITDA |
|
| 8,183 |
|
|
| 7,744 |
|
|
| 25,705 |
|
|
| 39,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of PAL |
|
| (1,409 | ) |
|
| (479 | ) |
|
| (2,154 | ) |
|
| (2,957 | ) |
EBITDA excluding PAL |
|
| 6,774 |
|
|
| 7,265 |
|
|
| 23,551 |
|
|
| 36,981 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments (1) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Adjusted EBITDA |
| $ | 6,774 |
|
| $ | 7,265 |
|
| $ | 23,551 |
|
| $ | 36,981 |
|
|
|
Amounts presented in the reconciliations above may not be consistent with amounts included in the accompanying condensed consolidated financial statements. Any such inconsistencies are insignificant and are integral to the reconciliations.
Working Capital and Adjusted Working Capital
See the discussion under the heading “Working Capital” within “Liquidity and Capital Resources” below.
Review of Results of Operations
Three Months Ended March 31, 201929, 2020 Compared to Three Months Ended March 25, 201831, 2019
Consolidated Overview
The components of Net (loss) income,loss, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts, are as follows:
|
| For the Three Months Ended |
|
|
|
|
|
| For the Three Months Ended |
|
|
|
|
| ||||||||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| ||||||
Net sales |
| $ | 179,989 |
|
|
| 100.0 |
|
| $ | 165,867 |
|
|
| 100.0 |
|
|
| 8.5 |
|
| $ | 170,994 |
|
|
| 100.0 |
|
| $ | 179,989 |
|
|
| 100.0 |
|
|
| (5.0 | ) |
Cost of sales |
|
| 166,198 |
|
|
| 92.3 |
|
|
| 149,311 |
|
|
| 90.0 |
|
|
| 11.3 |
|
|
| 155,611 |
|
|
| 91.0 |
|
|
| 166,198 |
|
|
| 92.3 |
|
|
| (6.4 | ) |
Gross profit |
|
| 13,791 |
|
|
| 7.7 |
|
|
| 16,556 |
|
|
| 10.0 |
|
|
| (16.7 | ) |
|
| 15,383 |
|
|
| 9.0 |
|
|
| 13,791 |
|
|
| 7.7 |
|
|
| 11.5 |
|
Selling, general and administrative expenses |
|
| 11,439 |
|
|
| 6.4 |
|
|
| 13,846 |
|
|
| 8.3 |
|
|
| (17.4 | ) | ||||||||||||||||||||
SG&A |
|
| 11,720 |
|
|
| 6.9 |
|
|
| 11,439 |
|
|
| 6.4 |
|
|
| 2.5 |
| ||||||||||||||||||||
Provision for bad debts |
|
| 218 |
|
|
| 0.1 |
|
|
| 27 |
|
|
| — |
|
| nm |
|
|
| 580 |
|
|
| 0.3 |
|
|
| 218 |
|
|
| 0.1 |
|
|
| 166.1 |
| |
Other operating expense, net |
|
| 1,359 |
|
|
| 0.8 |
|
|
| 1,100 |
|
|
| 0.7 |
|
|
| 23.5 |
| ||||||||||||||||||||
Other operating (income) expense, net |
|
| (62 | ) |
|
| — |
|
|
| 1,359 |
|
|
| 0.8 |
|
|
| (104.6 | ) | ||||||||||||||||||||
Operating income |
|
| 775 |
|
|
| 0.4 |
|
|
| 1,583 |
|
|
| 1.0 |
|
|
| (51.0 | ) |
|
| 3,145 |
|
|
| 1.8 |
|
|
| 775 |
|
|
| 0.4 |
|
| nm |
| |
Interest expense, net |
|
| 1,107 |
|
|
| 0.6 |
|
|
| 1,005 |
|
|
| 0.6 |
|
|
| 10.1 |
|
|
| 1,058 |
|
|
| 0.6 |
|
|
| 1,107 |
|
|
| 0.6 |
|
|
| (4.4 | ) |
Equity in earnings of unconsolidated affiliates |
|
| (1,873 | ) |
|
| (1.1 | ) |
|
| (544 | ) |
|
| (0.3 | ) |
| nm |
|
|
| (3,526 | ) |
|
| (2.1 | ) |
|
| (1,873 | ) |
|
| (1.1 | ) |
|
| 88.3 |
| |
Income before income taxes |
|
| 1,541 |
|
|
| 0.9 |
|
|
| 1,122 |
|
|
| 0.7 |
|
|
| 37.3 |
| ||||||||||||||||||||
Impairment of investment in unconsolidated affiliate |
|
| 45,194 |
|
|
| 26.4 |
|
|
| — |
|
|
| — |
|
| nm |
| |||||||||||||||||||||
(Loss) income before income taxes |
|
| (39,581 | ) |
|
| (23.1 | ) |
|
| 1,541 |
|
|
| 0.9 |
|
| nm |
| |||||||||||||||||||||
Provision for income taxes |
|
| 3,070 |
|
|
| 1.7 |
|
|
| 946 |
|
|
| 0.6 |
|
| nm |
|
|
| 1,530 |
|
|
| 0.9 |
|
|
| 3,070 |
|
|
| 1.7 |
|
|
| (50.2 | ) | |
Net (loss) income |
| $ | (1,529 | ) |
|
| (0.8 | ) |
| $ | 176 |
|
|
| 0.1 |
|
| nm |
| |||||||||||||||||||||
Net loss |
| $ | (41,111 | ) |
|
| (24.0 | ) |
| $ | (1,529 | ) |
|
| (0.8 | ) |
| nm |
|
nm – Not meaningful
Consolidated Net Sales
Consolidated net sales for the current period increaseddecreased by $14,122,$8,995, or 8.5%5.0%, as compared to the prior period, primarily due to (i) an additional shipping weeklower demand for our nylon products in the NACA operations, caused by the timing of UNIFI’s seasonal shutdown period,region, (ii) sales growth of PVAlower average selling prices for our polyester products in connection with lower polyester raw material costs and (iii) increased sales pricing driven by higher raw material costs. This increase in net sales was partially offset by unfavorable foreign currency translationtranslation. However, PVA product sales growth remained strong for the Asia Segment, despite the adverse impact of approximately $5,300.COVID-19 on that region’s production and distribution abilities.
Consolidated sales volumes were 10.4% higher as comparedincreased 6.5%, primarily attributable to the prior period. The increase in netcontinued sales volumes was driven primarily by (i) the additional shipping week, (ii) continued growth in sales of FlakeREPREVE®-branded products, principally Chip and Chipstaple fiber in the Polyester Segment and (iii) growth in sales of Chip and other PVA products in the InternationalAsia Segment, partially offset by competitive pressureslower yarn sales in the U.S. and Brazil.Nylon Segment. Sales continuein the Asia Segment continued to expand in the International Segment as our PVAREPREVE® portfolio resonates with our brand partners that are focused on sustainable solutions.
We believe the softnessincremental revenue generated in the domestic environment and competitionconnection with our recently completed trade petitions relating to polyester textured yarn is helping to offset suppressed demand from imports continue to be challenges for the domestic textile supply chain. Ourcertain market sectors. However, our Nylon Segment results are also unfavorably impacted byreflect (i) two customers shifting certain programs to overseas garment production during calendar 2019 and (ii) the ongoingcurrent global trend of declining demand for nylon socks, ladies’ hosiery and intimate apparel.
Consolidated average sales prices decreased 1.8%11.5%, as price increases made in calendar 2018 in responseprimarily attributable to rising costs were more than offset by (i) unfavorable foreign currency translation and (ii) the disproportionatesignificant sales growth of lower-priced FlakeChip and Chip.staple fiber in the Asia Segment, which have lower average selling prices, (ii) a decline in higher-priced nylon product sales and (iii) sales price declines associated with polyester raw material cost changes and global pricing pressures.
PVA products at the end of the current period comprised approximately 47%52% of consolidated net sales, up from 45%47% for fiscal 2019 and from 47% at the end of fiscal 2018, and higher than the 44% ratio for the prior period. WithinEven with the relative growth in the proportion of PVA product category, oursales as a percentage of overall sales, customers canmay choose between various solutions,PVA products, some of which carry higher margins than others. Accordingly, growth in PVA sales does not necessarily translate into higher margins or increased profitability on a consolidated basis.
Unfavorable foreign currency translation is primarily associated with the weakening of the Brazilian Real (“BRL”) and the Chinese Renminbi (“RMB”).
Consolidated Gross Profit
Gross profit for the current period decreasedincreased by $2,765,$1,592, or 16.7%11.5%, as compared to the prior period. The
For the Polyester Segment, gross profit decline isimproved, primarily attributabledue to (i)a more favorable sales mix and raw material cost environment during the current period. For the Asia Segment, gross profit increased as net sales increased but was partially offset by a greater mix of lower-priced product sales and the adverse impact of COVID-19 on that region’s production and distribution abilities.
For the Brazil Segment, gross profit increased primarily due to higher conversion margin from an improved sales mix and stabilized market pricing, partially offset by unfavorable foreign currency translation effects as the BRL weakened against the USD during the current period. For the Nylon Segment, gross profit decreased primarily due to lower revenues and weaker fixed cost absorption in the Polyester Segment dueconnection with two customers shifting certain programs to lower textured yarn volumes, (ii) lower conversion margin in the International Segment, (iii) unfavorable foreign currency translation of approximately $1,100 and (iv) disproportionate growth of lower margin products.overseas garment production during calendar 2019.
Consolidated Selling, General and Administrative ExpensesSG&A
The change in SG&A expenses is as follows:
SG&A expenses for the prior period |
| $ | 13,846 |
|
Decrease in compensation expenses |
|
| (2,672 | ) |
Decrease due to foreign currency translation |
|
| (261 | ) |
Other net decreases |
|
| (200 | ) |
Increase in professional fees |
|
| 726 |
|
SG&A expenses for the current period |
| $ | 11,439 |
|
Total SG&A expenses were lower forchanged insignificantly from the prior period to the current period, compared to theprimarily as prior period primarily as a result of significantSG&A benefited from compensation forfeitures of share-based compensation and variable compensation in connection withdue to executive officer departures that occurred in fiscal 2019. The decrease was partially offset by higher fees paid to professional service providers, primarily for legal and audit services.
Consolidated Provision for Bad Debts
There iswas no significant activity reflected in the current period or the prior period for bad debts.
Consolidated Other Operating (Income) Expense, Net
Other operating expense, net primarily reflects severance expense recordedThere was no significant activity reflected in the current period for other operating (income) expense, net. The prior period primarily reflects executive officer severance charges and foreign currency transaction losses recorded in the prior period.losses.
Consolidated Interest Expense, Net
There iswas no significant change forin interest expense, net from the prior period to the current period. The components of consolidated interest expense, net arewere as follows:
|
| For the Three Months Ended |
|
| For the Three Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Interest and fees on the ABL Facility |
| $ | 1,073 |
|
| $ | 952 |
|
| $ | 977 |
|
| $ | 1,073 |
|
Other interest |
|
| 183 |
|
|
| 196 |
|
|
| 223 |
|
|
| 183 |
|
Subtotal of interest on debt obligations |
|
| 1,256 |
|
|
| 1,148 |
|
|
| 1,200 |
|
|
| 1,256 |
|
Other components of interest expense |
|
| — |
|
|
| 39 |
|
|
| 31 |
|
|
| — |
|
Total interest expense |
|
| 1,256 |
|
|
| 1,187 |
|
|
| 1,231 |
|
|
| 1,256 |
|
Interest income |
|
| (149 | ) |
|
| (182 | ) |
|
| (173 | ) |
|
| (149 | ) |
Interest expense, net |
| $ | 1,107 |
|
| $ | 1,005 |
|
| $ | 1,058 |
|
| $ | 1,107 |
|
Impairment of Investment in Unconsolidated Affiliate
ConsolidatedAs of March 29, 2020, UNIFI owned a 34% interest in PAL (the “PAL Investment”) and Parkdale, Incorporated (“Parkdale”) owned the majority 66% interest. During March 2020, UNIFI commenced negotiations to sell the PAL Investment to Parkdale. Such negotiations indicated that the fair value of the PAL Investment was less than UNIFI’s carrying value and UNIFI no longer intended to hold the PAL Investment to allow recovery of the carrying value. UNIFI recorded an other-than-temporary impairment of $45,194 to adjust the PAL Investment to fair value.
In April 2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000. The March 29, 2020 adjusted carrying value, after recording the other-than-temporary impairment of the PAL Investment, was comprised of (i) $56,641 reflected in investments in unconsolidated affiliates and (ii) $3,359 of cumulative translation adjustments reflected in other comprehensive loss, totaling the $60,000 fair value. The transaction closed on April 29, 2020 and UNIFI received $60,000 in cash.
Equity in Earnings fromof Unconsolidated Affiliates
The components of equity in earnings of unconsolidated affiliates were as follows:
|
| For the Three Months Ended |
| |||||
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||
Earnings from PAL |
| $ | (3,336 | ) |
| $ | (1,409 | ) |
Earnings from nylon joint ventures |
|
| (190 | ) |
|
| (464 | ) |
Total equity in earnings of unconsolidated affiliates |
| $ | (3,526 | ) |
| $ | (1,873 | ) |
|
|
|
|
|
|
|
|
|
As a percentage of consolidated (loss) income before income taxes |
|
| 8.9 | % |
|
| 121.5 | % |
The comparative increase in earnings from unconsolidated affiliates arePAL primarily reflects lower input costs and fixed costs. The comparative decrease in earnings from nylon joint ventures primarily reflects lower utilization in connection with lower sales volumes for the Nylon Segment.
Income Taxes
Provision for income taxes and the effective tax rate were as follows:
|
| For the Three Months Ended |
| |||||
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||
Earnings from PAL |
| $ | (1,409 | ) |
| $ | (479 | ) |
Earnings from nylon joint ventures |
|
| (464 | ) |
|
| (65 | ) |
Total equity in earnings of unconsolidated affiliates |
| $ | (1,873 | ) |
| $ | (544 | ) |
|
|
|
|
|
|
|
|
|
As a percentage of consolidated income before income taxes |
|
| 121.5 | % |
|
| 48.5 | % |
The increase in equity earnings of unconsolidated affiliates was primarily attributable to improved operating leverage and, particularly for PAL, an improved raw material cost environment.
Consolidated Income Taxes
Consolidated income taxes is as follows:
|
| For the Three Months Ended |
|
| For the Three Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Provision for income taxes |
| $ | 3,070 |
|
| $ | 946 |
|
| $ | 1,530 |
|
| $ | 3,070 |
|
Effective tax rate |
|
| 199.2 | % |
|
| 84.3 | % |
|
| (3.9 | )% |
|
| 199.2 | % |
The effective tax rate is subject to variation due to numerous factors, including variability in the amount of pre-tax and taxable income before income taxes, the mix of income by jurisdiction, changes in deferred tax valuation allowances and changes in statutes, regulations and case law. Additionally, the impacts of discrete and other rate impacting items non-deductible expenses, and the tax on global intangible low taxed income isare greater when pre-tax income before income taxes is lower.
The significant change in the effective tax rate from the prior period to the current period is primarily attributable to (i) an impairment charge in the current period for which UNIFI does not expect to realize a future tax benefit, (ii) lower U.S. tax on GILTI in the current period and (iii) adjustments to enactment date tax reform impacts negatively impacting the prior period.
Net Loss
Net loss for the current period was higher than the U.S. federal statutory rate primarily due to the effect of the GILTI provisions enacted in H.R. 1, losses in tax jurisdictions for which no tax benefit could be recognized, and foreign withholding taxes. Tax expense for the current period also included $880 of expense related to the enactment of H.R. 1, which increased the effective tax rate by 57.1%.
The effective tax rate for the prior period was higher than the U.S. statutory tax rate primarily due to an increase in the valuation allowance for the Company’s investment in PAL, the rate change impact on a U.S. net loss carryforward generated in the prior period that would have been used at a lower tax rate in the future, and additional limitations on the deductibility of compensation under IRC Section 162(m).
Consolidated Net (Loss) Income
Net (loss) income for the current period was $(1,529),$41,111, or $(0.08)$2.23 per share, compared to $176,a net loss of $1,529 or $0.01$0.08 per share, for the prior period. The decrease was primarily attributable to loweran impairment charge for the PAL Investment. Excluding the impairment charge, UNIFI achieved comparably higher gross profit and a highermore favorable effective tax rate partially offset byin the current period, while the prior period included executive officer severance charges and foreign currency transaction losses.
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The reconciliations of the amounts reported under GAAP for Net loss to EBITDA and Adjusted EBITDA were as follows:
|
| For the Three Months Ended |
| |||||
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||
Net loss |
| $ | (41,111 | ) |
| $ | (1,529 | ) |
Interest expense, net |
|
| 1,058 |
|
|
| 1,107 |
|
Provision for income taxes |
|
| 1,530 |
|
|
| 3,070 |
|
Depreciation and amortization expense (1) |
|
| 6,014 |
|
|
| 5,535 |
|
EBITDA |
|
| (32,509 | ) |
|
| 8,183 |
|
|
|
|
|
|
|
|
|
|
Equity in earnings of PAL |
|
| (3,336 | ) |
|
| (1,409 | ) |
EBITDA excluding PAL |
|
| (35,845 | ) |
|
| 6,774 |
|
|
|
|
|
|
|
|
|
|
Impairment of investment in unconsolidated affiliate (2) |
|
| 45,194 |
|
|
| — |
|
Adjusted EBITDA |
| $ | 9,349 |
|
| $ | 6,774 |
|
(1) | Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. Within the accompanying condensed consolidated statements of cash flows, amortization of debt issuance costs is reflected in depreciation and amortization expense. |
(2) | In the third quarter of fiscal 2020, UNIFI recorded an impairment charge of $45,194 related to the sale of its 34% interest in PAL. |
Adjusted EBITDA increased from the prior period to the current period, primarily as a result of (i) higher gross profit in the current period and (ii) executive officer severance charges and foreign currency transaction losses in the prior period.
Adjusted Net Income (Loss) and Adjusted EPS
The tables below set forth reconciliations of (i) Income before income taxes (“Pre-tax Income”), Provision for income taxes (“Tax Impact”) and Net (Loss) Income to Adjusted Net Income (Loss) and (ii) Basic EPS to Adjusted EPS.
|
| For the Three Months Ended March 29, 2020 |
|
| For the Three Months Ended March 31, 2019 |
| ||||||||||||||||||||||||||
|
| Pre-tax (Loss) Income |
|
| Tax Impact |
|
| Net (Loss) Income |
|
| Basic EPS |
|
| Pre-tax Income |
|
| Tax Impact |
|
| Net Loss |
|
| Basic EPS |
| ||||||||
GAAP results |
| $ | (39,581 | ) |
| $ | (1,530 | ) |
| $ | (41,111 | ) |
| $ | (2.23 | ) |
| $ | 1,541 |
|
| $ | (3,070 | ) |
| $ | (1,529 | ) |
| $ | (0.08 | ) |
Impairment of investment in unconsolidated affiliate (1) |
|
| 45,194 |
|
|
| — |
|
|
| 45,194 |
|
|
| 2.45 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Adjusted results |
| $ | 5,613 |
|
| $ | (1,530 | ) |
| $ | 4,083 |
|
| $ | 0.22 |
|
| $ | 1,541 |
|
| $ | (3,070 | ) |
| $ | (1,529 | ) |
| $ | (0.08 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
| 18,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18,394 |
|
(1) | For the three months ended March 29, 2020, UNIFI recorded an impairment charge of $45,194 before tax, related to the sale of its 34% interest in PAL. |
Adjusted Net Income (Loss) and Adjusted EPS improved from the prior period to the current period, primarily as a result of (i) higher gross profit in the current period, (ii) executive officer severance charges and foreign currency transaction losses in the prior period, (iii) higher earnings from PAL (ii) lower SG&A expenses and (iii) one additional shipping week in the current period for our NACA operations.and (iv) a more favorable effective tax rate in the current period.
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current period.
As noted in the 2019 Form 10-K, segment gross profit includes the effect of certain technology-related expenses charged by the Polyester Segment to the Asia Segment. Such amounts are recorded as a benefit to cost of sales for the Polyester Segment and a charge to cost of sales for the Asia Segment, thereby impacting gross profit for each segment. The prior period segment results have been revised to reflect comparability for this change.
Polyester Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Polyester Segment, arewere as follows:
|
| For the Three Months Ended |
|
|
|
|
|
| For the Three Months Ended |
|
|
|
|
| ||||||||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| ||||||
Net sales |
| $ | 95,745 |
|
|
| 100.0 |
|
| $ | 88,763 |
|
|
| 100.0 |
|
|
| 7.9 |
|
| $ | 89,767 |
|
|
| 100.0 |
|
| $ | 95,745 |
|
|
| 100.0 |
|
|
| (6.2 | ) |
Cost of sales |
|
| 92,221 |
|
|
| 96.3 |
|
|
| 83,948 |
|
|
| 94.6 |
|
|
| 9.9 |
|
|
| 82,735 |
|
|
| 92.2 |
|
|
| 90,941 |
|
|
| 95.0 |
|
|
| (9.0 | ) |
Gross profit |
|
| 3,524 |
|
|
| 3.7 |
|
|
| 4,815 |
|
|
| 5.4 |
|
|
| (26.8 | ) |
|
| 7,032 |
|
|
| 7.8 |
|
|
| 4,804 |
|
|
| 5.0 |
|
|
| 46.4 |
|
Depreciation expense |
|
| 3,858 |
|
|
| 4.0 |
|
|
| 4,022 |
|
|
| 4.6 |
|
|
| (4.1 | ) |
|
| 4,301 |
|
|
| 4.8 |
|
|
| 3,858 |
|
|
| 4.0 |
|
|
| 11.5 |
|
Segment Profit |
| $ | 7,382 |
|
|
| 7.7 |
|
| $ | 8,837 |
|
|
| 10.0 |
|
|
| (16.5 | ) |
| $ | 11,333 |
|
|
| 12.6 |
|
| $ | 8,662 |
|
|
| 9.0 |
|
|
| 30.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 53.2 | % |
|
|
|
|
|
| 53.5 | % |
|
|
|
|
|
|
|
|
|
| 52.5 | % |
|
|
|
|
|
| 53.2 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 39.6 | % |
|
|
|
|
|
| 40.8 | % |
|
|
|
|
|
|
|
|
|
| 54.7 | % |
|
|
|
|
|
| 46.5 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Polyester Segment iswas as follows:
Net sales for the prior period |
| $ | 88,763 |
|
| $ | 95,745 |
|
Increase due to an additional shipping week in the current period |
|
| 6,032 |
| ||||
Net change in average selling price and sales mix |
|
| 1,633 |
|
|
| (3,743 | ) |
Decrease in underlying sales volumes |
|
| (683 | ) |
|
| (2,235 | ) |
Net sales for the current period |
| $ | 95,745 |
|
| $ | 89,767 |
|
The increasedecrease in net sales for the Polyester Segment from the prior period to the current period was primarily attributable to (i) one additional shipping week in the current period due to the timing of the seasonal shutdown period for our NACA operations, (ii) higherlower average selling prices in response to several months ofconnection with lower raw material related pricecosts and moderate competitive pricing pressures. Textured yarn volume increases during calendar 2018are recapturing market share from our recent trade actions, but such volume increases were offset by (i) weaker demand from certain customers in the industrial, automotive and (iii) higherapparel sectors and (ii) lower sales of dyedpartially oriented yarn in connection with the dyed yarn portfolio acquisition that closed in the fourth quarter of fiscal 2018, partially offset by (a) a weaker sales mix and (b) lower volumes of higher-priceddue to greater internal consumption for conversion to textured yarn products.yarn.
The change in Segment Profit for the Polyester Segment iswas as follows:
Segment Profit for the prior period |
| $ | 8,837 |
|
| $ | 8,662 |
|
Net decrease in underlying margins |
|
| (2,135 | ) | ||||
Net increase in underlying margins |
|
| 2,874 |
| ||||
Decrease in underlying sales volumes |
|
| (66 | ) |
|
| (203 | ) |
Increase due to an additional shipping week in the current period |
|
| 746 |
| ||||
Segment Profit for the current period |
| $ | 7,382 |
|
| $ | 11,333 |
|
The decreaseincrease in Segment Profit for the Polyester Segment from the prior period to the current period was primarily attributable to (i) an unfavorablea more favorable sales mix characterized by higher volumes of lower-margin products like Flake, Chip and certain dyed yarns and lower volumes of higher-margin products like textured yarn and (ii) weaker fixedraw material cost absorption due to lower textured yarn volumes. These decreases were partially offset by the additional shipping week in our NACA operations in the current period due to the timing of the seasonal shutdown period.environment.
Nylon Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Nylon Segment are as follows:
|
| For the Three Months Ended |
|
|
|
|
| |||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 25,563 |
|
|
| 100.0 |
|
| $ | 24,036 |
|
|
| 100.0 |
|
|
| 6.4 |
|
Cost of sales |
|
| 23,251 |
|
|
| 91.0 |
|
|
| 23,023 |
|
|
| 95.8 |
|
|
| 1.0 |
|
Gross profit |
|
| 2,312 |
|
|
| 9.0 |
|
|
| 1,013 |
|
|
| 4.2 |
|
|
| 128.2 |
|
Depreciation expense |
|
| 516 |
|
|
| 2.1 |
|
|
| 560 |
|
|
| 2.3 |
|
|
| (7.9 | ) |
Segment Profit |
| $ | 2,828 |
|
|
| 11.1 |
|
| $ | 1,573 |
|
|
| 6.5 |
|
|
| 79.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 14.2 | % |
|
|
|
|
|
| 14.5 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 15.2 | % |
|
|
|
|
|
| 7.3 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Nylon Segment is as follows:
Net sales for the prior period |
| $ | 24,036 |
|
Increase due to an additional shipping week in the current period |
|
| 1,295 |
|
Net change in average selling price and sales mix |
|
| 705 |
|
Decrease in underlying sales volumes |
|
| (473 | ) |
Net sales for the current period |
| $ | 25,563 |
|
The increase in net sales for the Nylon Segment from the prior period to the current period was primarily attributable to one additional shipping week in our NACA operations in the current period due to the timing of the seasonal shutdown period and raw material related price increases in the current period.
The change in Segment Profit for the Nylon Segment is as follows:
Segment Profit for the prior period |
| $ | 1,573 |
|
Net increase in underlying margins |
|
| 1,255 |
|
Segment Profit for the current period |
| $ | 2,828 |
|
The increase in Segment Profit for the Nylon Segment from the prior period to the current period was primarily attributable to improved conversion margin based on the timing of raw material purchases and related price increases. Sales volumes impacts were insignificant to this comparison.
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the International Segment are as follows:
|
| For the Three Months Ended |
|
|
|
|
| |||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 57,681 |
|
|
| 100.0 |
|
| $ | 51,989 |
|
|
| 100.0 |
|
|
| 10.9 |
|
Cost of sales |
|
| 49,784 |
|
|
| 86.3 |
|
|
| 41,317 |
|
|
| 79.5 |
|
|
| 20.5 |
|
Gross profit |
|
| 7,897 |
|
|
| 13.7 |
|
|
| 10,672 |
|
|
| 20.5 |
|
|
| (26.0 | ) |
Depreciation expense |
|
| 420 |
|
|
| 0.7 |
|
|
| 436 |
|
|
| 0.9 |
|
|
| (3.7 | ) |
Segment Profit |
| $ | 8,317 |
|
|
| 14.4 |
|
| $ | 11,108 |
|
|
| 21.4 |
|
|
| (25.1 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 32.0 | % |
|
|
|
|
|
| 31.3 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 44.6 | % |
|
|
|
|
|
| 51.3 | % |
|
|
|
|
|
|
|
|
The change in net sales for the International Segment is as follows:
Net sales for the prior period |
| $ | 51,989 |
|
Increase in sales volumes |
|
| 7,852 |
|
Net change in average selling price and sales mix |
|
| 3,060 |
|
Unfavorable foreign currency translation effects (primarily RMB and BRL) |
|
| (5,220 | ) |
Net sales for the current period |
| $ | 57,681 |
|
The increase in net sales for the International Segment from the prior period to the current period was primarily attributable to (i) higher sales volumes for our Asian subsidiaries due to growth in our REPREVE® portfolios and (ii) higher pricing due to increased raw material costs, partially offset by unfavorable foreign currency translation primarily due to the weakening of the BRL and the RMB against the U.S. Dollar (“USD”) during the current period.
The RMB average exchange rate was 6.75 RMB/USD and 6.36 RMB/USD for the current period and the prior period, respectively. The BRL weighted average exchange rate was 3.77 BRL/USD and 3.25 BRL/USD for the current period and the prior period, respectively.
The change in Segment Profit for the International Segment is as follows:
Segment Profit for the prior period |
| $ | 11,108 |
|
Net decrease in underlying margins |
|
| (3,294 | ) |
Unfavorable foreign currency translation effects (primarily RMB and BRL) |
|
| (1,158 | ) |
Increase in sales volumes |
|
| 1,661 |
|
Segment Profit for the current period |
| $ | 8,317 |
|
The decrease in Segment Profit for the International Segment was primarily attributable to lower conversion margin due to pressures from increased raw material costs and competition, along with unfavorable foreign currency translation effects as the BRL and the RMB were comparably weaker during the current period, partially offset by margins associated with overall higher sales volumes.
Review of Results of Operations
Nine Months Ended March 31, 2019 Compared to Nine Months Ended March 25, 2018
Consolidated Overview
The components of Net income, each component as a percentage of net sales and the percentage increase or decrease over the prior nine-month period amounts, are as follows:
|
| For the Nine Months Ended |
|
|
|
|
| |||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 529,311 |
|
|
| 100.0 |
|
| $ | 497,587 |
|
|
| 100.0 |
|
|
| 6.4 |
|
Cost of sales |
|
| 481,345 |
|
|
| 90.9 |
|
|
| 435,063 |
|
|
| 87.4 |
|
|
| 10.6 |
|
Gross profit |
|
| 47,966 |
|
|
| 9.1 |
|
|
| 62,524 |
|
|
| 12.6 |
|
|
| (23.3 | ) |
Selling, general and administrative expenses |
|
| 40,672 |
|
|
| 7.7 |
|
|
| 41,335 |
|
|
| 8.3 |
|
|
| (1.6 | ) |
Provision (benefit) for bad debts |
|
| 381 |
|
|
| 0.1 |
|
|
| (104 | ) |
|
| — |
|
| nm |
| |
Other operating expense, net |
|
| 1,218 |
|
|
| 0.2 |
|
|
| 1,763 |
|
|
| 0.4 |
|
|
| (30.9 | ) |
Operating income |
|
| 5,695 |
|
|
| 1.1 |
|
|
| 19,530 |
|
|
| 3.9 |
|
|
| (70.8 | ) |
Interest expense, net |
|
| 3,630 |
|
|
| 0.7 |
|
|
| 3,118 |
|
|
| 0.6 |
|
|
| 16.4 |
|
Loss on extinguishment of debt |
|
| 131 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Equity in earnings of unconsolidated affiliates |
|
| (3,126 | ) |
|
| (0.6 | ) |
|
| (3,842 | ) |
|
| (0.8 | ) |
|
| (18.6 | ) |
Income before income taxes |
|
| 5,060 |
|
|
| 1.0 |
|
|
| 20,254 |
|
|
| 4.1 |
|
|
| (75.0 | ) |
Provision (benefit) for income taxes |
|
| 3,606 |
|
|
| 0.7 |
|
|
| (684 | ) |
|
| (0.1 | ) |
| nm |
| |
Net income |
| $ | 1,454 |
|
|
| 0.3 |
|
| $ | 20,938 |
|
|
| 4.2 |
|
|
| (93.1 | ) |
nm – Not meaningful
Consolidated Net Sales
Consolidated net sales for the current nine-month period increased by $31,724, or 6.4%, as compared to the prior nine-month period. For our NACA operations, the current nine-month period consisted of 40 fiscal weeks, while the prior nine-month period consisted of 39 fiscal weeks. Net sales were adversely impacted by unfavorable foreign currency translation of approximately $17,200.
Consolidated sales volumes increased 7.6%, attributable to continued growth in sales of Flake and Chip, along with higher sales of dyed yarn in connection with the dyed yarn portfolio acquisition that closed in the fourth quarter of fiscal 2018, in the Polyester Segment and growth in sales of REPREVE® staple fiber and other PVA products in the International Segment. Sales continue to expand in the International Segment as our PVA portfolio resonates with our brand partners that are focused on sustainable solutions. We believe the softness in the domestic environment and competition from imports continue to be challenges for the domestic textile supply chain. Our Nylon Segment results are adversely impacted by the ongoing global trend of declining demand for nylon socks, ladies’ hosiery and intimate apparel.
Consolidated average sales prices decreased 1.1%, as price increases made in response to rising raw material costs during calendar 2018 were more than offset by (i) unfavorable foreign currency translation and (ii) the disproportionate growth of lower-priced Flake and Chip in the current nine-month period.
PVA products at the end of the current nine-month period comprised approximately 45% of consolidated net sales, equal to the 45% ratio at the end of fiscal 2018, and slightly higher than the 44% ratio for the prior nine-month period. Within the PVA product category, our customers can choose between various solutions, some of which carry higher margins than others. Accordingly, growth in PVA sales does not necessarily translate into higher margins or increased profitability on a consolidated basis.
Unfavorable foreign currency translation is primarily associated with the weakening of the BRL and RMB.
Consolidated Gross Profit
Gross profit for the current nine-month period decreased by $14,558, or 23.3%, as compared to the prior nine-month period. The gross profit decline is primarily attributable to (i) lower conversion margin in the Polyester and International Segments, in which the current nine-month period was unfavorably impacted by increasing raw material costs, (ii) unfavorable foreign currency translation of approximately $3,800, (iii) disproportionate growth of lower margin products and (iv) weaker fixed cost absorption.
Consolidated Selling, General and Administrative Expenses
The change in SG&A expenses is as follows:
SG&A expenses for the prior nine-month period | $ | 41,335 |
|
Decrease in compensation expenses |
| (2,805 | ) |
Decrease due to foreign currency translation |
| (831 | ) |
Increase in professional fees |
| 1,423 |
|
Increase due to an additional week in fiscal 2019 |
| 841 |
|
Other net increases |
| 709 |
|
SG&A expenses for the current nine-month period | $ | 40,672 |
|
Total SG&A expenses were lower for the current nine-month period compared to the prior nine-month period, primarily as a result of significant forfeitures of share-based compensation and variable compensation in connection with executive officer departures that occurred in fiscal 2019, partially offset by (i) an increase in fees paid to professional service providers for legal and audit services and (ii) an additional week in fiscal 2019.
Consolidated Provision (Benefit) for Bad Debts
There was no significant activity reflected in the current nine-month period or the prior nine-month period for bad debts.
Consolidated Other Operating Expense, Net
Other operating expense, net primarily reflects severance expense recorded in the current nine-month period and foreign currency transaction losses recorded in the prior nine-month period.
Consolidated Interest Expense, Net
Interest on debt obligations increased from the prior nine-month period to the current nine-month period primarily due to a general increase in market interest rates and principal on the variable rate portion of our debt. The components of consolidated interest expense, net are as follows:
|
| For the Nine Months Ended |
| |||||
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||
Interest and fees on the ABL Facility |
| $ | 3,467 |
|
| $ | 2,789 |
|
Other interest |
|
| 563 |
|
|
| 633 |
|
Subtotal of interest on debt obligations |
|
| 4,030 |
|
|
| 3,422 |
|
Other components of interest expense |
|
| 48 |
|
|
| 140 |
|
Total interest expense |
|
| 4,078 |
|
|
| 3,562 |
|
Interest income |
|
| (448 | ) |
|
| (444 | ) |
Interest expense, net |
| $ | 3,630 |
|
| $ | 3,118 |
|
Consolidated Earnings from Unconsolidated Affiliates
The components of earnings from unconsolidated affiliates are as follows:
|
| For the Nine Months Ended |
| |||||
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||
Earnings from PAL |
| $ | (2,154 | ) |
| $ | (2,957 | ) |
Earnings from nylon joint ventures |
|
| (972 | ) |
|
| (885 | ) |
Total equity in earnings of unconsolidated affiliates |
| $ | (3,126 | ) |
| $ | (3,842 | ) |
|
|
|
|
|
|
|
|
|
As a percentage of consolidated income before income taxes |
|
| 61.8 | % |
|
| 19.0 | % |
UNIFI’s 34% share of PAL’s earnings decreased from $2,957 in the prior nine-month period to $2,154 in the current nine-month period. The decrease was primarily attributable to higher raw material costs and reduced operating leverage, most notably in the comparable first fiscal quarters of the current nine-month period and the prior nine-month period.
Consolidated Income Taxes
Consolidated income taxes is as follows:
|
| For the Nine Months Ended |
| |||||
|
| March 31, 2019 |
|
| March 25, 2018 |
| ||
Provision (benefit) for income taxes |
| $ | 3,606 |
|
| $ | (684 | ) |
Effective tax rate |
|
| 71.3 | % |
|
| (3.4 | )% |
The effective tax rate is subject to variation due to numerous factors, including variability in the amount of pre-tax and taxable income, the mix of income by jurisdiction, changes in deferred tax valuation allowances, and changes in statutes, regulations and case law. Additionally, the impacts of discrete items, non-deductible expenses, and the tax on global intangible low taxed income is greater when pre-tax income is lower.
The effective tax rate for the current nine-month period was higher than the U.S. federal statutory rate primarily due to the effects of the GILTI provisions enacted in H.R. 1, losses in tax jurisdictions for which no tax benefit could be recognized, earnings taxed at higher rates in foreign jurisdictions, and foreign withholding taxes. Tax expense for the current period also included $880 of expense related to the enactment of H.R. 1. These rate detriments were partially offset by benefits of approximately $2,045 for tax credits related to prior years.
The effective tax rate for the prior nine-month period is lower than the U.S. statutory tax rate primarily due to the $4,500 tax benefit resulting from the revaluation of UNIFI’s domestic deferred tax balances for the lower U.S. statutory tax rate, the release of a $3,807 valuation allowance and foreign income being taxed at lower rates. These benefits were partially offset by a $1,600 provisional charge for the deemed mandatory repatriation of foreign earnings and profits, net of foreign tax credits, and by losses in tax jurisdictions for which no tax benefit could be recognized.
Consolidated Net Income
Net income for the current nine-month period was $1,454, or $0.08 per share, compared to $20,938, or $1.12 per diluted share, for the prior nine-month period. The decrease was primarily attributable to (i) lower gross profit primarily relating to higher polyester raw material costs and competitive pressures contributing to weaker fixed cost absorption and a weaker sales mix and (ii) a higher effective tax rate.
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current nine-month period.
Polyester Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior nine-month period amounts for the Polyester Segment, are as follows:
|
| For the Nine Months Ended |
|
|
|
|
| |||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 281,665 |
|
|
| 100.0 |
|
| $ | 266,817 |
|
|
| 100.0 |
|
|
| 5.6 |
|
Cost of sales |
|
| 269,444 |
|
|
| 95.7 |
|
|
| 244,513 |
|
|
| 91.6 |
|
|
| 10.2 |
|
Gross profit |
|
| 12,221 |
|
|
| 4.3 |
|
|
| 22,304 |
|
|
| 8.4 |
|
|
| (45.2 | ) |
Depreciation expense |
|
| 12,047 |
|
|
| 4.3 |
|
|
| 11,862 |
|
|
| 4.4 |
|
|
| 1.6 |
|
Segment Profit |
| $ | 24,268 |
|
|
| 8.6 |
|
| $ | 34,166 |
|
|
| 12.8 |
|
|
| (29.0 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 53.2 | % |
|
|
|
|
|
| 53.6 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 38.6 | % |
|
|
|
|
|
| 44.1 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Polyester Segment is as follows:
Net sales for the prior nine-month period |
| $ | 266,817 |
|
Net change in average selling price and sales mix |
|
| 9,135 |
|
Increase due to an additional week of sales in fiscal 2019 |
|
| 6,622 |
|
Decrease in underlying sales volumes |
|
| (909 | ) |
Net sales for the current nine-month period |
| $ | 281,665 |
|
The increase in net sales for the Polyester Segment from the prior nine-month period to the current nine-month period was primarily attributable to (i) an additional week in the current nine-month period, (ii) higher sales volumes of Flake and Chip, (iii) higher sales volumes of dyed yarn in connection with the dyed yarn portfolio acquisition that closed in the fourth quarter of fiscal 2018 and (iv) higher selling prices in response to several months of raw material related price increases during calendar 2018. However, this favorability was partially offset by a weaker sales mix, characterized by lower textured yarn volumes.
The change in Segment Profit for the Polyester Segment is as follows:
Segment Profit for the prior nine-month period |
| $ | 34,166 |
|
Net decrease in underlying margins |
|
| (9,950 | ) |
Net impact of additional fiscal week and underlying sales volumes decline |
|
| 52 |
|
Segment Profit for the current nine-month period |
| $ | 24,268 |
|
The decrease in Segment Profit for the Polyester Segment from the prior nine-month period to the current nine-month period was primarily attributable to (i) lower conversion margin, in which the current nine-month period was unfavorably impacted by higher raw material costs, (ii) the unfavorable sales mix shift towards lower-margin products discussed above in the net sales analysis and (iii) weaker fixed cost absorption.
Nylon Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Nylon Segment were as follows:
|
| For the Three Months Ended |
|
|
|
|
| |||||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 20,567 |
|
|
| 100.0 |
|
| $ | 25,563 |
|
|
| 100.0 |
|
|
| (19.5 | ) |
Cost of sales |
|
| 20,234 |
|
|
| 98.4 |
|
|
| 23,251 |
|
|
| 91.0 |
|
|
| (13.0 | ) |
Gross profit |
|
| 333 |
|
|
| 1.6 |
|
|
| 2,312 |
|
|
| 9.0 |
|
|
| (85.6 | ) |
Depreciation expense |
|
| 471 |
|
|
| 2.3 |
|
|
| 516 |
|
|
| 2.1 |
|
|
| (8.7 | ) |
Segment Profit |
| $ | 804 |
|
|
| 3.9 |
|
| $ | 2,828 |
|
|
| 11.1 |
|
|
| (71.6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 12.0 | % |
|
|
|
|
|
| 14.2 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 3.9 | % |
|
|
|
|
|
| 15.2 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Nylon Segment was as follows:
Net sales for the prior period |
| $ | 25,563 |
|
Decrease in underlying sales volumes |
|
| (4,093 | ) |
Net change in average selling price and sales mix |
|
| (903 | ) |
Net sales for the current period |
| $ | 20,567 |
|
The decrease in net sales for the Nylon Segment from the prior period to the current period was primarily attributable to (i) two customers shifting certain programs to overseas garment production during calendar 2019 and (ii) continued demand declines in certain nylon product categories.
The change in Segment Profit for the Nylon Segment was as follows:
Segment Profit for the prior period |
| $ | 2,828 |
|
Net decrease in underlying margins |
|
| (1,571 | ) |
Decrease in underlying sales volumes |
|
| (453 | ) |
Segment Profit for the current period |
| $ | 804 |
|
The decrease in Segment Profit for the Nylon Segment from the prior period to the current period was primarily attributable to lower sales and weaker fixed cost absorption, as described in the net sales analysis above.
Brazil Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Brazil Segment were as follows:
|
| For the Three Months Ended |
|
|
|
|
| |||||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 21,060 |
|
|
| 100.0 |
|
| $ | 25,110 |
|
|
| 100.0 |
|
|
| (16.1 | ) |
Cost of sales |
|
| 17,644 |
|
|
| 83.8 |
|
|
| 22,334 |
|
|
| 88.9 |
|
|
| (21.0 | ) |
Gross profit |
|
| 3,416 |
|
|
| 16.2 |
|
|
| 2,776 |
|
|
| 11.1 |
|
|
| 23.1 |
|
Depreciation expense |
|
| 421 |
|
|
| 2.0 |
|
|
| 420 |
|
|
| 1.6 |
|
|
| 0.2 |
|
Segment Profit |
| $ | 3,837 |
|
|
| 18.2 |
|
| $ | 3,196 |
|
|
| 12.7 |
|
|
| 20.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 12.3 | % |
|
|
|
|
|
| 14.0 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 18.5 | % |
|
|
|
|
|
| 17.2 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Brazil Segment was as follows:
Net sales for the prior period |
| $ | 25,110 |
|
Unfavorable foreign currency translation effects |
|
| (3,887 | ) |
Decrease in average selling price |
|
| (1,379 | ) |
Increase in sales volumes |
|
| 1,216 |
|
Net sales for the current period |
| $ | 21,060 |
|
The decrease in net sales for the Brazil Segment from the prior period to the current period was primarily attributable to unfavorable foreign currency translation effects and lower selling prices due to lower raw material costs.
The BRL weighted average exchange rate was 4.44 BRL/USD and 3.77 BRL/USD for the current period and the prior period, respectively.
The change in Segment Profit for the Brazil Segment was as follows:
Segment Profit for the prior period |
| $ | 3,196 |
|
Increase in underlying margins |
|
| 979 |
|
Increase in sales volumes |
|
| 150 |
|
Unfavorable foreign currency translation effects |
|
| (488 | ) |
Segment Profit for the current period |
| $ | 3,837 |
|
The increase in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to higher conversion margin from an improved sales mix and stabilized market pricing, partially offset by unfavorable foreign currency translation effects as the BRL weakened significantly against the USD during the current period.
Asia Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Asia Segment were as follows:
|
| For the Three Months Ended |
|
|
|
|
| |||||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 38,621 |
|
|
| 100.0 |
|
| $ | 32,571 |
|
|
| 100.0 |
|
|
| 18.6 |
|
Cost of sales |
|
| 34,038 |
|
|
| 88.1 |
|
|
| 28,730 |
|
|
| 88.2 |
|
|
| 18.5 |
|
Gross profit |
|
| 4,583 |
|
|
| 11.9 |
|
|
| 3,841 |
|
|
| 11.8 |
|
|
| 19.3 |
|
Depreciation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Segment Profit |
| $ | 4,583 |
|
|
| 11.9 |
|
| $ | 3,841 |
|
|
| 11.8 |
|
|
| 19.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 22.6 | % |
|
|
|
|
|
| 18.1 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 22.1 | % |
|
|
|
|
|
| 20.6 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Asia Segment was as follows:
Net sales for the prior period |
| $ | 32,571 |
|
Increase in sales volumes of Chip and staple fiber |
|
| 6,315 |
|
Change in average selling price and sales mix |
|
| 1,161 |
|
Unfavorable foreign currency translation effects |
|
| (1,044 | ) |
Change in sales volumes of other PVA products |
|
| (382 | ) |
Net sales for the current period |
| $ | 38,621 |
|
The increase in net sales for the Asia Segment from the prior period to the current period was primarily attributable to higher sales volumes of REPREVE®-branded products, primarily Chip and staple fiber.
The RMB weighted average exchange rate was 6.98 RMB/USD and 6.75 RMB/USD for the current period and the prior period, respectively.
The change in Segment Profit for the Asia Segment was as follows:
Segment Profit for the prior period |
| $ | 3,841 |
|
Increase in underlying margins and sales mix |
|
| 815 |
|
Increase in sales volumes of Chip and staple fiber |
|
| 448 |
|
Change in sales volumes of other PVA products |
|
| (354 | ) |
Unfavorable foreign currency translation effects |
|
| (167 | ) |
Segment Profit for the current period |
| $ | 4,583 |
|
The increase in Segment Profit for the Asia Segment from the prior period to the current period was primarily attributable to the increase in sales volumes described in the net sales analysis above.
Review of Results of Operations
Nine Months Ended March 29, 2020 Compared to Nine Months Ended March 31, 2019
Consolidated Overview
The components of Net (loss) income, each component as a percentage of net sales and the percentage increase or decrease over the prior nine-month period amounts, are as follows:
|
| For the Nine Months Ended |
|
|
|
|
| |||||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 520,454 |
|
|
| 100.0 |
|
| $ | 529,311 |
|
|
| 100.0 |
|
|
| (1.7 | ) |
Cost of sales |
|
| 471,963 |
|
|
| 90.7 |
|
|
| 481,345 |
|
|
| 90.9 |
|
|
| (1.9 | ) |
Gross profit |
|
| 48,491 |
|
|
| 9.3 |
|
|
| 47,966 |
|
|
| 9.1 |
|
|
| 1.1 |
|
SG&A |
|
| 35,208 |
|
|
| 6.8 |
|
|
| 40,672 |
|
|
| 7.7 |
|
|
| (13.4 | ) |
Provision for bad debts |
|
| 331 |
|
|
| — |
|
|
| 381 |
|
|
| 0.1 |
|
|
| (13.1 | ) |
Other operating expense, net |
|
| 900 |
|
|
| 0.2 |
|
|
| 1,218 |
|
|
| 0.2 |
|
|
| (26.1 | ) |
Operating income |
|
| 12,052 |
|
|
| 2.3 |
|
|
| 5,695 |
|
|
| 1.1 |
|
|
| 111.6 |
|
Interest expense, net |
|
| 2,994 |
|
|
| 0.6 |
|
|
| 3,630 |
|
|
| 0.7 |
|
|
| (17.5 | ) |
Equity in earnings of unconsolidated affiliates |
|
| (1,904 | ) |
|
| (0.4 | ) |
|
| (3,126 | ) |
|
| (0.6 | ) |
|
| (39.1 | ) |
Impairment of investment in unconsolidated affiliate |
|
| 45,194 |
|
|
| 8.7 |
|
|
| — |
|
|
| — |
|
| nm |
| |
Loss on extinguishment of debt |
|
| — |
|
|
| — |
|
|
| 131 |
|
|
| — |
|
|
| (100.0 | ) |
(Loss) income before income taxes |
|
| (34,232 | ) |
|
| (6.6 | ) |
|
| 5,060 |
|
|
| 1.0 |
|
| nm |
| |
Provision for income taxes |
|
| 2,758 |
|
|
| 0.5 |
|
|
| 3,606 |
|
|
| 0.7 |
|
|
| (23.5 | ) |
Net (loss) income |
| $ | (36,990 | ) |
|
| (7.1 | ) |
| $ | 1,454 |
|
|
| 0.3 |
|
| nm |
|
nm – Not meaningful
Net Sales
Consolidated net sales for the current nine-month period were slightly lower in comparison to the prior nine-month period, as the impacts of (i) one fewer week of sales in the current nine-month period for our NACA operations, (ii) lower nylon sales volumes, (iii) lower average selling prices and (iv) unfavorable foreign currency translation were offset by the sales growth of PVA products and the Asia Segment.
Consolidated sales volumes increased 13.4%, primarily attributable to continued sales growth of REPREVE®-branded products, principally Chip and staple fiber in the Asia Segment, partially offset by (i) one fewer week of sales in the current nine-month period for our NACA operations and (ii) lower yarn sales in the Nylon Segment. Sales in the Asia Segment continued to expand, despite the adverse impacts from COVID-19, as our REPREVE® portfolio resonates with our brand partners that are focused on sustainable solutions.
We believe the incremental revenue generated in connection with our recently completed trade petitions relating to polyester textured yarn is helping to offset suppressed demand from certain market sectors. However, our Nylon Segment results reflect (i) two customers shifting certain programs to overseas garment production during calendar 2019 and (ii) the current global trend of declining demand for nylon socks, ladies’ hosiery and intimate apparel.
Consolidated average sales prices decreased 15.1%, primarily attributable to (i) growth of Chip and staple fiber in the Asia Segment, which have lower average sales prices, (ii) a decline in higher-priced nylon product sales and (iii) sales price declines associated with lower polyester raw material costs.
PVA products at the end of the current nine-month period comprised 54% of consolidated net sales, up from 47% for fiscal 2019 and from 45% at the end of the prior nine-month period. Even with the relative growth in the proportion of PVA sales as a percentage of overall sales, customers may choose between various PVA products, some of which carry higher margins than others. Accordingly, growth in PVA sales does not necessarily translate into higher margins or increased profitability on a consolidated basis.
Gross Profit
Gross profit for the current nine-month period increased by $525, or 1.1%, as compared to the prior nine-month period.
For the Polyester Segment, gross profit improved, primarily due to an improved conversion margin in connection with the comparative impact of (i) a declining raw material cost environment during the current nine-month period and (ii) an unfavorable raw material cost environment in the prior nine-month period. For the Asia Segment, gross profit increased as net sales increased, but was partially offset by a greater mix of lower-priced product sales.
For the Brazil Segment, gross profit decreased primarily due to (i) market price declines (in connection with declining raw material costs) outpacing inventory turnover and (ii) unfavorable foreign currency translation effects as the BRL weakened against the USD. For the Nylon Segment, gross profit decreased primarily due to weaker fixed cost absorption in connection with two customers shifting certain programs to overseas garment production during calendar 2019.
The changes in SG&A were as follows:
SG&A for the prior nine-month period | $ | 40,672 |
|
Decrease in professional fees and marketing expenses |
| (2,699 | ) |
Decrease in salaries and fringe expenses |
| (2,159 | ) |
Impact of an additional week in fiscal 2019 |
| (841 | ) |
Change in cash-based incentive compensation expense |
| 1,932 |
|
Other net decreases |
| (1,697 | ) |
SG&A for the current nine-month period | $ | 35,208 |
|
SG&A decreased from the prior nine-month period to the current nine-month period primarily as a result of (i) lower professional fees and marketing expenses primarily due to cost reduction efforts undertaken during the fourth quarter of fiscal 2019 and (ii) lower compensation expenses in connection with fewer executive officers in the current nine-month period as compared to the prior nine-month period.
Provision for Bad Debts
There was no significant activity reflected in the current nine-month period or the prior nine-month period for bad debts.
Other Operating Expense, Net
Other operating expense, net primarily reflects severance expenses recorded in both the current nine-month period and the prior nine-month period.
Interest Expense, Net
The components of consolidated interest expense, net were as follows:
|
| For the Nine Months Ended |
| |||||
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||
Interest and fees on the ABL Facility |
| $ | 3,026 |
|
| $ | 3,467 |
|
Other interest |
|
| 463 |
|
|
| 563 |
|
Subtotal of interest on debt obligations |
|
| 3,489 |
|
|
| 4,030 |
|
Other components of interest expense |
|
| 100 |
|
|
| 48 |
|
Total interest expense |
|
| 3,589 |
|
|
| 4,078 |
|
Interest income |
|
| (595 | ) |
|
| (448 | ) |
Interest expense, net |
| $ | 2,994 |
|
| $ | 3,630 |
|
Interest expense, net decreased from the prior nine-month period to the current nine-month period, primarily as a result of lower market interest rates on our variable-rate debt and a more favorable pricing structure on the ABL Facility in connection with the 2018 Amendment.
Impairment of Investment in Unconsolidated Affiliate
As of March 29, 2020, UNIFI owned a 34% interest in PAL (the “PAL Investment”) and Parkdale, Incorporated (“Parkdale”) owned the majority 66% interest. In April 2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000. UNIFI recorded an impairment charge of $45,194 to adjust the PAL Investment to fair value. The transaction closed on April 29, 2020 and UNIFI received $60,000 in cash.
Equity in Earnings of Unconsolidated Affiliates
The components of equity in earnings of unconsolidated affiliates were as follows:
|
| For the Nine Months Ended |
| |||||
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||
Earnings from PAL |
| $ | (1,324 | ) |
| $ | (2,154 | ) |
Earnings from nylon joint ventures |
|
| (580 | ) |
|
| (972 | ) |
Total equity in earnings of unconsolidated affiliates |
| $ | (1,904 | ) |
| $ | (3,126 | ) |
|
|
|
|
|
|
|
|
|
As a percentage of consolidated (loss) income before income taxes |
|
| 5.6 | % |
|
| 61.8 | % |
The performance decline for unconsolidated affiliates was primarily attributable to lower operating leverage and, particularly for PAL, comparably higher costs.
Provision for income taxes and the effective tax rate were as follows:
|
| For the Nine Months Ended |
| |||||
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||
Provision for income taxes |
| $ | 2,758 |
|
| $ | 3,606 |
|
Effective tax rate |
|
| (8.1 | )% |
|
| 71.3 | % |
The effective tax rate is subject to variation due to numerous factors, including variability in the amount of income before income taxes, the mix of income by jurisdiction, changes in deferred tax valuation allowances, and changes in statutes, regulations and case law. Additionally, the impacts of discrete and other rate impacting items are greater when income before income taxes is lower.
The significant change in the effective tax rate from the prior period to the current period is primarily attributable to (i) an impairment charge in the current period for which UNIFI does not expect to realize a future tax benefit, (ii) lower U.S. tax on GILTI in the current period and (iii) adjustments to enactment date tax reform impacts negatively impacting the prior period.
Net (Loss) Income
Net loss for the current nine-month period was $(36,990), or $(2.00) per share, compared to net income of $1,454, or $0.08 per share, for the prior nine-month period. The decrease was primarily attributable to the impairment charge for the PAL Investment. Excluding the impairment charge, net income improved over the prior nine-month period primarily due to lower SG&A.
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The reconciliations of the amounts reported under GAAP for Net income to EBITDA and Adjusted EBITDA were as follows:
|
| For the Nine Months Ended |
| |||||
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||
Net (loss) income |
| $ | (36,990 | ) |
| $ | 1,454 |
|
Interest expense, net |
|
| 2,994 |
|
|
| 3,630 |
|
Provision for income taxes |
|
| 2,758 |
|
|
| 3,606 |
|
Depreciation and amortization expense (1) |
|
| 17,499 |
|
|
| 17,015 |
|
EBITDA |
|
| (13,739 | ) |
|
| 25,705 |
|
|
|
|
|
|
|
|
|
|
Equity in earnings of PAL |
|
| (1,324 | ) |
|
| (2,154 | ) |
EBITDA excluding PAL |
|
| (15,063 | ) |
|
| 23,551 |
|
|
|
|
|
|
|
|
|
|
Impairment of investment in unconsolidated affiliate (2) |
|
| 45,194 |
|
|
| — |
|
Facility shutdown costs (3) |
|
| 383 |
|
|
| — |
|
Adjusted EBITDA |
| $ | 30,514 |
|
| $ | 23,551 |
|
(1) | Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. Within the accompanying condensed consolidated statements of cash flows, amortization of debt issuance costs is reflected in depreciation and amortization expense. |
(2) | In the third quarter of fiscal 2020, UNIFI recorded an impairment charge for the PAL Investment. |
(3) | In the second quarter of fiscal 2020, UNIFI commenced a wind-down plan for its operations in Sri Lanka. The adjustment primarily reflects accrued severance and exit costs. |
Adjusted EBITDA increased from the prior nine-month period to the current nine-month period, primarily as a result of lower SG&A.
Adjusted Net Income and Adjusted EPS
The tables below set forth reconciliations of (i) Income before income taxes (“Pre-tax Income”), Provision for income taxes (“Tax Impact”) and Net (Loss) Income to Adjusted Net Income and (ii) Basic EPS to Adjusted EPS.
|
| For the Nine Months Ended March 29, 2020 |
|
| For the Nine Months Ended March 31, 2019 |
| ||||||||||||||||||||||||||
|
| Pre-tax (Loss) Income |
|
| Tax Impact |
|
| Net (Loss) Income |
|
| Basic EPS |
|
| Pre-tax Income |
|
| Tax Impact |
|
| Net Income |
|
| Basic EPS |
| ||||||||
GAAP results |
| $ | (34,232 | ) |
| $ | (2,758 | ) |
| $ | (36,990 | ) |
| $ | (2.00 | ) |
| $ | 5,060 |
|
| $ | (3,606 | ) |
| $ | 1,454 |
|
| $ | 0.08 |
|
Impairment of investment in unconsolidated affiliate (1) |
|
| 45,194 |
|
|
| — |
|
|
| 45,194 |
|
|
| 2.44 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Adjusted results |
| $ | 10,962 |
|
| $ | (2,758 | ) |
| $ | 8,204 |
|
| $ | 0.44 |
|
| $ | 5,060 |
|
| $ | (3,606 | ) |
| $ | 1,454 |
|
| $ | 0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
| 18,485 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 18,381 |
|
(1) | For the nine months ended March 29, 2020, UNIFI recorded an impairment charge of $45,194 before tax, related to the sale of its 34% interest in PAL. |
Adjusted Net Income and Adjusted EPS increased from the prior period to the current period, primarily as a result of (i) lower SG&A and (ii) a more favorable effective tax rate in the current nine-month period.
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current nine-month period. As noted in the 2019 Form 10-K, segment gross profit includes the effect of certain technology-related expenses charged by the Polyester Segment to the Asia Segment. Such amounts are recorded as a benefit to cost of sales for the Polyester Segment and a charge to cost of sales for the Asia Segment, thereby impacting gross profit for each segment. The prior nine-month period segment results have been revised to reflect comparability for this change.
Polyester Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior nine-month period amounts for the Polyester Segment, were as follows:
|
| For the Nine Months Ended |
|
|
|
|
| |||||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 261,212 |
|
|
| 100.0 |
|
| $ | 281,665 |
|
|
| 100.0 |
|
|
| (7.3 | ) |
Cost of sales |
|
| 239,725 |
|
|
| 91.8 |
|
|
| 265,748 |
|
|
| 94.3 |
|
|
| (9.8 | ) |
Gross profit |
|
| 21,487 |
|
|
| 8.2 |
|
|
| 15,917 |
|
|
| 5.7 |
|
|
| 35.0 |
|
Depreciation expense |
|
| 12,525 |
|
|
| 4.8 |
|
|
| 12,047 |
|
|
| 4.2 |
|
|
| 4.0 |
|
Segment Profit |
| $ | 34,012 |
|
|
| 13.0 |
|
| $ | 27,964 |
|
|
| 9.9 |
|
|
| 21.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 50.2 | % |
|
|
|
|
|
| 53.2 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 53.2 | % |
|
|
|
|
|
| 44.4 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Polyester Segment was as follows:
Net sales for the prior nine-month period |
| $ | 281,665 |
|
Net change in average selling price and sales mix |
|
| (9,311 | ) |
Decrease due to an additional week of sales in fiscal 2019 |
|
| (6,868 | ) |
Decrease in underlying sales volumes |
|
| (4,274 | ) |
Net sales for the current nine-month period |
| $ | 261,212 |
|
The decrease in net sales for the Polyester Segment from the prior nine-month period to the current nine-month period was primarily attributable to (i) lower average selling prices associated with polyester raw material cost changes, (ii) one fewer week of sales in the current nine-month period and (iii) lower sales of Flake due to increased internal consumption.
The change in Segment Profit for the Polyester Segment was as follows:
Segment Profit for the prior nine-month period |
| $ | 27,964 |
|
Net increase in underlying margins |
|
| 6,767 |
|
Decrease in underlying sales volumes |
|
| (431 | ) |
Decrease due to an additional week of sales in fiscal 2019 |
|
| (288 | ) |
Segment Profit for the current nine-month period |
| $ | 34,012 |
|
The increase in Segment Profit for the Polyester Segment from the prior nine-month period to the current nine-month period was primarily attributable to an improved conversion margin in connection with the comparative impact of (i) a declining raw material cost environment during the current nine-month period and (ii) an unfavorable raw material cost environment in the prior nine-month period.
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior nine-month period amounts for the Nylon Segment arewere as follows:
|
| For the Nine Months Ended |
|
|
|
|
|
| For the Nine Months Ended |
|
|
|
|
| ||||||||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| ||||||
Net sales |
| $ | 76,159 |
|
|
| 100.0 |
|
| $ | 75,966 |
|
|
| 100.0 |
|
|
| 0.3 |
|
| $ | 57,853 |
|
|
| 100.0 |
|
| $ | 76,159 |
|
|
| 100.0 |
|
|
| (24.0 | ) |
Cost of sales |
|
| 69,671 |
|
|
| 91.5 |
|
|
| 68,563 |
|
|
| 90.3 |
|
|
| 1.6 |
|
|
| 56,296 |
|
|
| 97.3 |
|
|
| 69,671 |
|
|
| 91.5 |
|
|
| (19.2 | ) |
Gross profit |
|
| 6,488 |
|
|
| 8.5 |
|
|
| 7,403 |
|
|
| 9.7 |
|
|
| (12.4 | ) |
|
| 1,557 |
|
|
| 2.7 |
|
|
| 6,488 |
|
|
| 8.5 |
|
|
| (76.0 | ) |
Depreciation expense |
|
| 1,576 |
|
|
| 2.1 |
|
|
| 1,649 |
|
|
| 2.2 |
|
|
| (4.4 | ) |
|
| 1,465 |
|
|
| 2.5 |
|
|
| 1,576 |
|
|
| 2.1 |
|
|
| (7.0 | ) |
Segment Profit |
| $ | 8,064 |
|
|
| 10.6 |
|
| $ | 9,052 |
|
|
| 11.9 |
|
|
| (10.9 | ) |
| $ | 3,022 |
|
|
| 5.2 |
|
| $ | 8,064 |
|
|
| 10.6 |
|
|
| (62.5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 14.4 | % |
|
|
|
|
|
| 15.3 | % |
|
|
|
|
|
|
|
|
|
| 11.1 | % |
|
|
|
|
|
| 14.4 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 12.8 | % |
|
|
|
|
|
| 11.7 | % |
|
|
|
|
|
|
|
|
|
| 4.7 | % |
|
|
|
|
|
| 12.8 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Nylon Segment iswas as follows:
Net sales for the prior nine-month period |
| $ | 75,966 |
|
| $ | 76,159 |
|
Increase due to an additional week of sales in fiscal 2019 |
|
| 1,646 |
| ||||
Decrease in underlying sales volumes |
|
| (15,407 | ) | ||||
Decrease due to an additional week of sales in fiscal 2019 |
|
| (2,114 | ) | ||||
Net change in average selling price and sales mix |
|
| (839 | ) |
|
| (785 | ) |
Decrease in underlying sales volumes |
|
| (614 | ) | ||||
Net sales for the current nine-month period |
| $ | 76,159 |
|
| $ | 57,853 |
|
The increasedecrease in net sales for the Nylon Segment from the prior nine-month period to the current nine-month period was primarily attributable to the(i) continued demand declines in certain nylon product categories, (ii) two customers shifting certain programs to overseas garment production during calendar 2019 and (iii) an additional week of sales in fiscal 2019, partially offset by a lower-priced sales mix and global demand declines in certain nylon products.the prior nine-month period.
The change in Segment Profit for the Nylon Segment iswas as follows:
Segment Profit for the prior nine-month period |
| $ | 9,052 |
|
| $ | 8,064 |
|
Net decrease in underlying margins |
|
| (1,064 | ) |
|
| (3,208 | ) |
Net impact of additional fiscal week and underlying sales volumes decline |
|
| 76 |
| ||||
Decrease in underlying sales volumes |
|
| (1,637 | ) | ||||
Decrease due to an additional week of sales in fiscal 2019 |
|
| (197 | ) | ||||
Segment Profit for the current nine-month period |
| $ | 8,064 |
|
| $ | 3,022 |
|
The decrease in Segment Profit for the Nylon Segment from the prior nine-month period to the current nine-month period was primarily attributable to a less profitablelower sales mix and weaker fixed cost absorption.absorption, as described in the net sales analysis above.
InternationalBrazil Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior nine-month period amounts for the InternationalBrazil Segment arewere as follows:
|
| For the Nine Months Ended |
|
|
|
|
|
| For the Nine Months Ended |
|
|
|
|
| ||||||||||||||||||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
|
|
|
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| ||||||
Net sales |
| $ | 168,271 |
|
|
| 100.0 |
|
| $ | 151,694 |
|
|
| 100.0 |
|
|
| 10.9 |
|
| $ | 66,094 |
|
|
| 100.0 |
|
| $ | 76,257 |
|
|
| 100.0 |
|
|
| (13.3 | ) |
Cost of sales |
|
| 139,275 |
|
|
| 82.8 |
|
|
| 119,050 |
|
|
| 78.5 |
|
|
| 17.0 |
|
|
| 55,089 |
|
|
| 83.3 |
|
|
| 62,654 |
|
|
| 82.2 |
|
|
| (12.1 | ) |
Gross profit |
|
| 28,996 |
|
|
| 17.2 |
|
|
| 32,644 |
|
|
| 21.5 |
|
|
| (11.2 | ) |
|
| 11,005 |
|
|
| 16.7 |
|
|
| 13,603 |
|
|
| 17.8 |
|
|
| (19.1 | ) |
Depreciation expense |
|
| 1,146 |
|
|
| 0.7 |
|
|
| 1,249 |
|
|
| 0.8 |
|
|
| (8.2 | ) |
|
| 1,153 |
|
|
| 1.7 |
|
|
| 1,146 |
|
|
| 1.5 |
|
|
| 0.6 |
|
Segment Profit |
| $ | 30,142 |
|
|
| 17.9 |
|
| $ | 33,893 |
|
|
| 22.3 |
|
|
| (11.1 | ) |
| $ | 12,158 |
|
|
| 18.4 |
|
| $ | 14,749 |
|
|
| 19.3 |
|
|
| (17.6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 31.8 | % |
|
|
|
|
|
| 30.5 | % |
|
|
|
|
|
|
|
|
|
| 12.7 | % |
|
|
|
|
|
| 14.4 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 47.9 | % |
|
|
|
|
|
| 43.7 | % |
|
|
|
|
|
|
|
|
|
| 19.0 | % |
|
|
|
|
|
| 23.4 | % |
|
|
|
|
|
|
|
|
The change in net sales for the InternationalBrazil Segment iswas as follows:
Net sales for the prior nine-month period |
| $ | 151,694 |
|
Net increase in sales volumes |
|
| 20,675 |
|
Net change in average selling price and sales mix |
|
| 12,981 |
|
Unfavorable foreign currency translation effects (primarily RMB and BRL) |
|
| (17,079 | ) |
Net sales for the current nine-month period |
| $ | 168,271 |
|
Net sales for the prior nine-month period |
| $ | 76,257 |
|
Unfavorable foreign currency translation effects |
|
| (5,892 | ) |
Decrease in average selling price |
|
| (5,386 | ) |
Increase in sales volumes |
|
| 1,115 |
|
Net sales for the current nine-month period |
| $ | 66,094 |
|
The increasedecrease in net sales for the InternationalBrazil Segment from the prior nine-month period to the current nine-month period was primarily attributable to (i) higher sales volumes for our Asian subsidiaries due to growth in our REPREVE® portfolios and (ii) higher pricing on a local currency basis due to increased raw material costs, partially offset by (a) lower sales volumes in Brazil due to a softer economic environment and (b) unfavorable foreign currency translation primarily attributable to the weakening of the BRLeffects, along with lower selling prices associated with declining raw material costs and the RMB against the USD during the current nine-month period.competitive pricing pressures.
The RMB average exchange rate was 6.82 RMB/USD and 6.55 RMB/USD for the current nine-month period and the prior nine-month period, respectively. The BRL weighted average exchange rate was 3.854.17 BRL/USD and 3.213.85 BRL/USD for the current nine-month period and the prior nine-month period, respectively.
The change in Segment Profit for the InternationalBrazil Segment iswas as follows:
Segment Profit for the prior nine-month period |
| $ | 33,893 |
|
| $ | 14,749 |
|
Net decrease in underlying margins |
|
| (4,303 | ) | ||||
Unfavorable foreign currency translation effects (primarily RMB and BRL) |
|
| (4,007 | ) | ||||
Decrease in underlying margins |
|
| (1,909 | ) | ||||
Unfavorable foreign currency translation effects |
|
| (899 | ) | ||||
Increase in sales volumes |
|
| 4,559 |
|
|
| 217 |
|
Segment Profit for the current nine-month period |
| $ | 30,142 |
|
| $ | 12,158 |
|
The decrease in Segment Profit for the InternationalBrazil Segment from the prior nine-month period to the current nine-month period was primarily attributable to (i) margin pressure from highercompetitive pricing pressures during a declining raw material cost environment and unfavorable foreign currency translation. For the Brazil Segment, declining raw material costs place immediate downward market pressure on selling prices and, since the Brazil Segment’s supply chain is generally longer, average inventory costs decline slower than selling prices. Additionally, the Brazil Segment accelerated certain raw material purchases in the fourth quarter of fiscal 2019, which exacerbated the above impact.
Asia Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior nine-month period amounts for the Asia Segment were as follows:
|
| For the Nine Months Ended |
|
|
|
|
| |||||||||||||
|
| March 29, 2020 |
|
| March 31, 2019 |
|
|
|
|
| ||||||||||
|
|
|
|
|
| % of Net Sales |
|
|
|
|
|
| % of Net Sales |
|
| % Change |
| |||
Net sales |
| $ | 132,496 |
|
|
| 100.0 |
|
| $ | 92,014 |
|
|
| 100.0 |
|
|
| 44.0 |
|
Cost of sales |
|
| 118,114 |
|
|
| 89.1 |
|
|
| 80,317 |
|
|
| 87.3 |
|
|
| 47.1 |
|
Gross profit |
|
| 14,382 |
|
|
| 10.9 |
|
|
| 11,697 |
|
|
| 12.7 |
|
|
| 23.0 |
|
Depreciation expense |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Segment Profit |
| $ | 14,382 |
|
|
| 10.9 |
|
| $ | 11,697 |
|
|
| 12.7 |
|
|
| 23.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
| 25.5 | % |
|
|
|
|
|
| 17.4 | % |
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
| 22.5 | % |
|
|
|
|
|
| 18.6 | % |
|
|
|
|
|
|
|
|
The change in net sales for the Asia Segment was as follows:
Net sales for the prior nine-month period |
| $ | 92,014 |
|
Increase in sales volumes of Chip and staple fiber |
|
| 34,530 |
|
Net increase in sales volumes of other PVA products |
|
| 8,419 |
|
Change in average selling price and sales mix |
|
| 41 |
|
Unfavorable foreign currency translation effects |
|
| (2,508 | ) |
Net sales for the current nine-month period |
| $ | 132,496 |
|
The increase in net sales for the Asia Segment from the prior nine-month period to the current nine-month period was primarily attributable to higher sales volumes of REPREVE®-branded products, primarily Chip and staple fiber, partially offset by (i) the impact of lower-priced Chip and staple fiber sales on average selling price and sales mix and (ii) unfavorable foreign currency translation effects asdue to the BRLcomparable weakening of the RMB.
The RMB weighted average exchange rate was 7.02 RMB/USD and the RMB weakened against the 6.82 RMB/USD duringfor the current nine-month period and (iii) a less profitable sales mixthe prior nine-month period, respectively.
The change in Segment Profit for the Asia partially offset bySegment was as follows:
Segment Profit for the prior nine-month period |
| $ | 11,697 |
|
Increase in sales volumes of Chip and staple fiber |
|
| 3,084 |
|
Net increase in sales volumes of other PVA products |
|
| 169 |
|
Unfavorable foreign currency translation effects |
|
| (421 | ) |
Decrease in underlying margins and sales mix |
|
| (147 | ) |
Segment Profit for the current nine-month period |
| $ | 14,382 |
|
The increase in Segment Profit for the Asia Segment from the prior nine-month period to the current nine-month period was primarily attributable to the increase in sales volumes and related sales mix change described in the net sales analysis above.
Liquidity and Capital Resources
UNIFI’s primary capital requirements are for working capital, capital expenditures, debt service and stockshare repurchases. UNIFI’s primary sources of capital are cash generated from operations and borrowings available under the ABL Revolver.Revolver of its credit facility. For the current nine-month period, cash used ingenerated from operations was $1,517,$32,105, and, at March 31, 2019,29, 2020, excess availability under the ABL Revolver was $62,735. As further described under “Cash (Used in) Provided by Operating Activities” below, the cash used in operating activities for the current nine-month period is attributable to several factors, including an increase in inventories due to domestic production rates that outpaced domestic sales during the current nine-month period, along with weaker cash-based earnings.$47,793.
As of March 31, 2019,29, 2020, all of UNIFI’s $136,879$133,711 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, while nearly all of UNIFI’s cash and cash equivalents were held by its foreign subsidiaries. Cash and cash equivalents held by such foreign subsidiaries may not be presently available to fund UNIFI’s domestic capital requirements, including its domestic debt obligations. UNIFI employs a variety of tax planning and financing strategies to ensure that its worldwide cash is available in the locations where it is needed. The following table presents a summary of cash and cash equivalents, borrowings available under financing arrangements, liquidity, working capital and total debt obligations as of March 31, 201929, 2020 for domestic andoperations compared to foreign operations:
|
| Domestic |
|
| Foreign |
|
| Total |
|
| Domestic |
|
| Foreign |
|
| Total |
| ||||||
Cash and cash equivalents |
| $ | 14 |
|
| $ | 27,884 |
|
| $ | 27,898 |
|
| $ | 347 |
|
| $ | 33,046 |
|
| $ | 33,393 |
|
Borrowings available under financing arrangements |
|
| 62,735 |
|
|
| — |
|
|
| 62,735 |
|
|
| 47,793 |
|
|
| — |
|
|
| 47,793 |
|
Liquidity |
| $ | 62,749 |
|
| $ | 27,884 |
|
| $ | 90,633 |
|
| $ | 48,140 |
|
| $ | 33,046 |
|
| $ | 81,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
| $ | 97,692 |
|
| $ | 97,537 |
|
| $ | 195,229 |
|
| $ | 87,262 |
|
| $ | 97,848 |
|
| $ | 185,110 |
|
Total debt obligations |
| $ | 136,879 |
|
| $ | — |
|
| $ | 136,879 |
|
| $ | 133,711 |
|
| $ | — |
|
| $ | 133,711 |
|
COVID-19 Impact on Liquidity
Because global economic activity slowed within a short period of time, the COVID-19 pandemic has introduced liquidity risk that was not present prior to calendar 2020. UNIFI believes that aggressive and prudent actions are necessary to preserve liquidity in the current economic environment, which is pressured by significant global demand declines that began in the current period and which are expected to continue for the remainder of calendar 2020 and potentially beyond. Accordingly, to minimize further disruption to operations, UNIFI has prioritized health and safety measures that include suspending travel and group meetings, enforcing social distancing and healthy habits, increased sanitation and disinfection and increased wellness monitoring. Additionally, the following aid in reducing risk and ensuring adequate cash is available to fund ongoing operations and obligations:
Participating in the supply chain for personal protective equipment necessary for our first responders, healthcare personnel, and military.
Reducing future capital expenditures while prioritizing safety and maintenance.
Capitalizing on raw material pricing, which remains at low levels and aids short-term working capital and liquidity.
Implementing a strategic reduction in manufacturing operations to support critical businesses and manage working capital.
Lowering discretionary expenses that focus on long-term returns, such as marketing, event and other commercial expenses.
Maintaining significant cash reserves from the proceeds from the PAL Investment sale.
While we currently expect these measures to provide adequate liquidity under the currently anticipated pressures of the pandemic, should global demand and economic activity remain subdued beyond the short term, UNIFI maintains the ability to (i) utilize aid and lending programs from governmental entities, (ii) seek additional credit or financing arrangements or extensions and (iii) explore further cost reduction initiatives to preserve cash and secure the longevity of the business and operations. Further, we do not currently expect our cost of or access to capital and funding sources to materially change as a result of the COVID-19 pandemic.
Debt Obligations
ABL Facility
On December 18, 2018, Unifi, Inc. and certain of its subsidiaries entered into the 2018 Amendment, which amended the Credit Agreement. The Credit Agreement provides for the ABL Facility, which is a $200,000 senior secured credit facility that includes the $100,000 ABL Revolver and the ABL Term Loan, which can be reset up to a maximum amount of $100,000, once per fiscal year, if certain conditions are met. The ABL Facility has a maturity date of December 18, 2023.
The 2018 Amendment made the following changes to the Credit Agreement, among others: (i) extended the Maturity Datematurity date from March 26, 2020 to December 18, 2023 and (ii) decreased the Applicable Margin pricing structure for Base Rate Loans and LIBOR Rate Loans by 25 basis points. In addition, in connection with the 2018 Amendment, the principal amount of the ABL Term Loan was reset from $80,000 to $100,000. Net proceeds from this ABL Term Loan reset were used to pay down the amount outstanding on the ABL Revolver.
In connection and concurrent with the sale of UNIFI’s 34% interest in PAL on April 29, 2020, UNIFI entered into the Fourth Amendment to Amended and Restated Credit Agreement (“Fourth Amendment”). The Fourth Amendment among other things: (i) revised the definition of permitted dispositions within the Credit Agreement to include the sale by Unifi Manufacturing, Inc. of its equity interest in PAL so long as the aggregate net cash proceeds received equaled or exceeded $60,000 and such sale occurred on or before May 15, 2020; (ii) revised the terms of the Credit Agreement to allow (a) the net cash proceeds from the sale of PAL to be applied to the outstanding principal amount of the ABL Revolver until paid in full and (b) remaining net cash proceeds held by UNIFI, so long as certain conditions are met; and (iii) revised the terms of the Credit Agreement to allow the lenders to make changes to the benchmark interest rate without further amendment should LIBOR temporarily or permanently cease to exist and a transition to a new benchmark interest rate such as the Secured Overnight Financing Rate (“SOFR”) be required for future ABL facility borrowings.
UNIFI currently utilizes variable-rate borrowings under the ABL Facility that are made with reference to USD LIBOR Rate Loans and is party to LIBOR-based interest rate swaps. Management recognizes the potential challenges posed by the previously announced termination of LIBOR. The Credit Agreement, as amended, includes fallback language to allow for a conversion of LIBOR Rate Loans to a mutually agreed upon alternative rate of interest, such as the Secured Overnight Financing Rate. Management will continue to monitor the potential termination of LIBOR and the potential impact on UNIFI’s operations. However, management does not expect (i) significant efforts are necessary to accommodate a termination of LIBOR or (ii) a significant impact to UNIFI’s operations upon a termination of LIBOR.
The ABL Facility is secured by a first-priority perfected security interest in substantially all owned property and assets (together with all proceeds and products) of Unifi, Inc., Unifi Manufacturing, Inc. and certain subsidiary guarantors (collectively, the “Loan Parties”). It is also secured by a first-priority security interest in all (or 65% in the case of UNIFI’s first-tier controlled foreign subsidiary, as required by the lenders) of the stock of (or other ownership interests in) each of the Loan Parties (other than Unifi, Inc.) and certain subsidiaries of the Loan Parties, together with all proceeds and products thereof.
If excess availability under the ABL Revolver falls below the defined Trigger Level (as defined in the Credit Agreement), a financial covenant requiring the Loan Parties to maintain a fixed charge coverage ratioFixed Charge Coverage Ratio on a quarterly basis of at least 1.05 to 1.00 becomes effective. The Trigger Level as of March 31, 201929, 2020 was $25,000.$23,750. In addition, the ABL Facility contains restrictions on particular payments and investments, including certain restrictions on share repurchases and the payment of dividends and share repurchases.dividends. Subject to specific provisions, the ABL Term Loan may be prepaid at par, in whole or in part, at any time before the maturity date, at UNIFI’s discretion.
ABL Facility borrowings bear interest at the London Interbank Offer Rate (“LIBOR”)LIBOR plus an applicable marginApplicable Margin of 1.25% to 1.75%, or the Base Rate (as defined below) plus an applicable marginApplicable Margin of 0.25% to 0.75%, with interest currently being paid on a monthly basis. The applicable marginApplicable Margin is based on (i) the excess availability under the ABL Revolver and (ii) the consolidated leverage ratio, calculated as of the end of each fiscal quarter. The Base Rate means the greater of (a) the prime lending rate as publicly announced from time to time by Wells Fargo Bank, National Association, (b) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.5% and (c) LIBOR plus 1.0%. UNIFI’s ability to borrow under the ABL Revolver is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventoryinventories and is subject to certain conditions and limitations. There is also a monthly unused line fee under the ABL Revolver of 0.25%.
As of March 31, 2019,29, 2020, UNIFI was in compliance with all financial covenants in the Credit Agreement and the excess availability under the ABL Revolver was $62,735.$47,793. At March 31, 2019,29, 2020, the fixed charge coverage ratioFixed Charge Coverage Ratio was 1.000.94 to 1.00 and UNIFI had $400$200 of standby letters of credit, none of which havehad been drawn upon. Management maintains the capability to quickly and easily improve the Fixed Charge Coverage Ratio utilizing existing cash and cash equivalents.
UNIFI currently maintains three interest rate swaps that fix LIBOR at approximately 1.9% on $75,000 of variable-rate debt. Such swaps are scheduled to terminate in May 2022.
Summary of Debt Obligations
The following table presents the total balances outstanding for UNIFI’s debt obligations, their scheduled maturity dates and the weighted average interest rates for borrowings as well as the applicable current portion of long-term debt:
|
|
|
| Weighted Average |
|
|
|
|
|
|
| Weighted Average |
|
|
|
| ||||||||||||
|
| Scheduled |
| Interest Rate as of |
|
| Principal Amounts as of |
|
| Scheduled |
| Interest Rate as of |
|
| Principal Amounts as of |
| ||||||||||||
|
| Maturity Date |
| March 31, 2019 |
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| Maturity Date |
| March 29, 2020 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||||
ABL Revolver |
| December 2023 |
| 3.7% |
|
| $ | 24,000 |
|
| $ | 28,100 |
|
| December 2023 |
| 2.2% |
|
| $ | 30,900 |
|
| $ | 19,400 |
| ||
ABL Term Loan (1) |
| December 2023 |
| 3.3% |
|
|
| 100,000 |
|
|
| 85,000 |
|
| December 2023 |
| 3.1% |
|
|
| 90,000 |
|
|
| 97,500 |
| ||
Capital lease obligations |
| (2) |
| 3.9% |
|
|
| 12,879 |
|
|
| 18,107 |
| |||||||||||||||
Finance lease obligations |
| (2) |
| 3.6% |
|
|
| 12,811 |
|
|
| 11,118 |
| |||||||||||||||
Total debt |
|
|
|
|
|
|
|
| 136,879 |
|
|
| 131,207 |
|
|
|
|
|
|
|
|
| 133,711 |
|
|
| 128,018 |
|
Current portion of capital lease obligations |
|
|
|
|
|
|
|
| (6,054 | ) |
|
| (6,996 | ) | ||||||||||||||
Current portion of other long-term debt |
|
|
|
|
|
|
|
| (10,000 | ) |
|
| (10,000 | ) | ||||||||||||||
Current ABL Term Loan |
|
|
|
|
|
|
|
| (10,000 | ) |
|
| (10,000 | ) | ||||||||||||||
Current portion of finance lease obligations |
|
|
|
|
|
|
|
| (4,112 | ) |
|
| (5,519 | ) | ||||||||||||||
Unamortized debt issuance costs |
|
|
|
|
|
|
|
| (1,021 | ) |
|
| (658 | ) |
|
|
|
|
|
|
|
| (772 | ) |
|
| (958 | ) |
Total long-term debt |
|
|
|
|
|
|
| $ | 119,804 |
|
| $ | 113,553 |
|
|
|
|
|
|
|
| $ | 118,827 |
|
| $ | 111,541 |
|
(1) Includes the effects of interest rate swaps.
(2) Scheduled maturity dates for capitalfinance lease obligations range from August 2019June 2020 to November 2027.2027, as further outlined in Note 4, “Leases.”
In addition to making payments in accordance with the scheduled maturities of debt required under its existing debt obligations, UNIFI may, from time to time, elect to repay additional amounts borrowed under the ABL Facility. Funds to make such repayments may come from the operating cash flows of the business or other sources and will depend upon UNIFI’s strategy, prevailing market conditions, liquidity requirements, contractual restrictions and other factors.
Scheduled Debt Maturities
The following table presents the scheduled maturities of UNIFI’s outstanding debt obligations for the remainder of fiscal 2019,2020, the following four fiscal years and thereafter:
|
| Fiscal 2019 |
|
| Fiscal 2020 |
|
| Fiscal 2021 |
|
| Fiscal 2022 |
|
| Fiscal 2023 |
|
| Thereafter |
|
| Fiscal 2020 |
|
| Fiscal 2021 |
|
| Fiscal 2022 |
|
| Fiscal 2023 |
|
| Fiscal 2024 |
|
| Thereafter |
| ||||||||||||
ABL Revolver |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 24,000 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 30,900 |
|
| $ | — |
|
ABL Term Loan |
|
| 2,500 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 57,500 |
|
|
| 2,500 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 10,000 |
|
|
| 57,500 |
|
|
| — |
|
Capital lease obligations |
|
| 1,704 |
|
|
| 5,559 |
|
|
| 2,633 |
|
|
| 2,417 |
|
|
| 90 |
|
|
| 476 |
| ||||||||||||||||||||||||
Finance lease obligations |
|
| 1,429 |
|
|
| 3,563 |
|
|
| 3,388 |
|
|
| 1,094 |
|
|
| 1,132 |
|
|
| 2,205 |
| ||||||||||||||||||||||||
Total |
| $ | 4,204 |
|
| $ | 15,559 |
|
| $ | 12,633 |
|
| $ | 12,417 |
|
| $ | 10,090 |
|
| $ | 81,976 |
|
| $ | 3,929 |
|
| $ | 13,563 |
|
| $ | 13,388 |
|
| $ | 11,094 |
|
| $ | 89,532 |
|
| $ | 2,205 |
|
Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||
Long-term debt |
| $ | 118,827 |
|
| $ | 111,541 |
|
Current portion of long-term debt |
|
| 14,112 |
|
|
| 15,519 |
|
Unamortized debt issuance costs |
|
| 772 |
|
|
| 958 |
|
Debt principal |
|
| 133,711 |
|
|
| 128,018 |
|
Less: cash and cash equivalents |
|
| 33,393 |
|
|
| 22,228 |
|
Net Debt |
| $ | 100,318 |
|
| $ | 105,790 |
|
Working Capital and Adjusted Working Capital (Non-GAAP Financial Measures)
The following table presents the components of working capital and the reconciliation of working capital to Adjusted Working Capital:
|
| March 31, 2019 |
|
| June 24, 2018 |
|
| March 29, 2020 |
|
| June 30, 2019 |
| ||||
Cash and cash equivalents |
| $ | 27,898 |
|
| $ | 44,890 |
|
| $ | 33,393 |
|
| $ | 22,228 |
|
Receivables, net |
|
| 91,701 |
|
|
| 86,273 |
|
|
| 86,376 |
|
|
| 88,884 |
|
Inventories |
|
| 130,981 |
|
|
| 126,311 |
|
|
| 124,146 |
|
|
| 133,781 |
|
Income tax receivable |
|
| 13,039 |
|
|
| 10,291 |
| ||||||||
Income taxes receivable |
|
| 589 |
|
|
| 4,373 |
| ||||||||
Other current assets |
|
| 16,365 |
|
|
| 6,529 |
|
|
| 18,477 |
|
|
| 16,356 |
|
Accounts payable |
|
| (47,726 | ) |
|
| (48,970 | ) |
|
| (40,862 | ) |
|
| (41,796 | ) |
Accrued expenses |
|
| (13,076 | ) |
|
| (17,720 | ) |
|
| (15,347 | ) |
|
| (16,849 | ) |
Other current liabilities |
|
| (23,953 | ) |
|
| (18,313 | ) |
|
| (21,662 | ) |
|
| (16,088 | ) |
Working capital |
| $ | 195,229 |
|
| $ | 189,291 |
|
| $ | 185,110 |
|
| $ | 190,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Cash and cash equivalents |
|
| (27,898 | ) |
|
| (44,890 | ) |
|
| (33,393 | ) |
|
| (22,228 | ) |
Less: Income tax receivable |
|
| (13,039 | ) |
|
| (10,291 | ) | ||||||||
Less: Income taxes receivable |
|
| (589 | ) |
|
| (4,373 | ) | ||||||||
Less: Other current liabilities |
|
| 23,953 |
|
|
| 18,313 |
|
|
| 21,662 |
|
|
| 16,088 |
|
Adjusted Working Capital |
| $ | 178,245 |
|
| $ | 152,423 |
|
| $ | 172,790 |
|
| $ | 180,376 |
|
Working capital increaseddecreased from $189,291$190,889 as of June 24, 201830, 2019 to $195,229$185,110 as of March 31, 2019,29, 2020, while Adjusted Working Capital increaseddecreased from $152,423$180,376 to $178,245.$172,790.
The decreaseincrease in cash and cash equivalents was driven by the utilization ofoperating cash to retire ABL Revolver debt in advance of UNIFI’s entering into the 2018 Amendment as described above.flows generated by our foreign operations. The increasedecrease in receivables, net was primarily attributable to the timing of cash receipts. The decrease in inventories was primarily attributable to the impact of lower raw material costs, partially offset by an increase in days sales outstandinginventory units. The decrease in income taxes receivable was due to a general increase in customer payment terms. The increase in inventories was attributable to domestic finished goods production outpacing domestic sales and higher raw material costs. The increase in income tax receivable reflects the timing and magnitude of tax payments and refunds.impacts recognized in the current period, primarily relating to changes in deferred taxes. The increase in other current assets reflectswas primarily due to the additiontiming of contract assets that relate to products on hand that have been reflected in revenue but not yet shipped to the associated customer (in connection with the adoption of the New Revenue Recognition Guidance).recognition. The decrease in accounts payable was primarily reflects weaker seasonal demand inattributable to the current period, partially offset by more favorable vendortiming of purchase and payment terms.activity. The decrease in accrued expenses was primarily attributable to (i) the fiscal 2019 paymenttiming of payroll and variable compensation earnedaccruals and payments and (ii) severance payments made during fiscal 2020, partially offset by an increase in fiscal 2018 and comparatively lower accrued variable compensationdeferred revenue for fiscal 2019.increased sales activity in the Asia Segment. The changeincrease in other current liabilities primarily reflects an increase in income taxes payable due to the timing and magnitude of tax payments.impacts recognized in the current period.
Capital Projects
During the current nine-month period, UNIFI invested approximately $19,200$14,971 in capital projects, primarily relating to (i) further improvements in production capabilities and technology enhancements in the Americas and (ii) routine annual maintenance capital expenditures. UNIFI will seek to ensure that maintenanceMaintenance capital expenditures are sufficientnecessary to allow continued production at high efficiencies.support UNIFI’s current operations, capacities and capabilities and exclude expenses relating to repairs and costs that do not extend an asset’s useful life.
ThroughFor the remainder of fiscal 2019, UNIFI expects2020 and in response to the adverse liquidity impacts of COVID-19, we have reduced our expected capital project outlay for fiscal 2020. We now expect to invest an additional $5,800approximately $4,000 in capital projects (forduring the fourth quarter of fiscal 2020 for an aggregate fiscal 2019annual estimate of $25,000), which include (i) making further improvements in production capabilitiesapproximately $19,000, with a priority on safety and technology enhancements in the Americas and (ii) routine annual maintenance capital expenditures to allow continued efficient production.
The total amount ultimately invested infor fiscal 20192020 could be more or less than the anticipatedcurrently estimated amount depending on the timing and scale of contemplated initiatives and other factors, and is expected to be funded by a combination of cash flows from operations and borrowings under the ABL Revolver. UNIFI expects the recent and future capital projects to provide benefits to future profitability. The additional assets from these capital projects consist primarily of machinery and equipment.
As a result of our continued focus on REPREVE® and other PVA products as part of our mix enrichment strategy, we may incur additional expenditures for capital projects beyond the currently estimated amount, as we pursue new, currently unanticipated opportunities in order to expand our manufacturing capabilities for these products, for other strategic growth initiatives or to further streamline our manufacturing process, in which case we may be required to increase the amount of our working capital and long-term borrowings. If our strategy is successful, we would expect higher gross profit as a result of the combination of higher sales volumes and an improved mix from higher-margin products.
StockShare Repurchase Program
On April 23, 2014, UNIFI announced that the Board had approved the 2014 SRP under which UNIFI was authorized to acquire up to $50,000 of its common stock. UNIFI made no repurchases of its shares of common stock during the current nine-month period. Through October 31, 2018 (the date the 2014 SRP was terminated, as discussed below), UNIFI repurchased a total of 806 shares, at an average price of $27.79 (for a total of $22,409, inclusive of commission costs) pursuant to the 2014 SRP.
On October 31, 2018, UNIFI announced that the Board had terminated the 2014 SRP and approved the 2018 SRP under which UNIFI is authorized to acquire up to $50,000 of its common stock. Under the 2018 SRP, purchases will be made from time to time in the open market at prevailing market prices or through private transactions or block trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date.
As of March 31, 2019, $50,00029, 2020, UNIFI repurchased a total of 84 shares, at an average price of $23.72 (for a total of $1,994 inclusive of commission costs) pursuant to
the 2018 SRP. $48,008 remains available for repurchase under the 2018 SRP.SRP as of March 29, 2020.
UNIFI has met its historical liquidity requirements for working capital, capital expenditures, debt service requirements and other operating needs from its cash flows from operations and available borrowings. UNIFI believes that its existing cash balances, cash flows from operationsprovided by operating activities, and borrowings available under the ABL Revolver will enable UNIFI to comply with the terms of its indebtedness and to meet its foreseeable liquidity requirements. Domestically, UNIFI’s existing cash balances, cash provided by operating activities, and borrowings available under the ABL Revolver continue to be sufficient to fund UNIFI’s domestic operating activities as well as cash commitments for its investing and financing activities. For its existing foreign operations, UNIFI expects its existing cash balances and cash provided by operating activities will provide the needed liquidity to fund its foreign operating activities and any foreign investing activities, such as future capital expenditures. However, any significant expansion of our foreign operations may require cash sourced from our domestic subsidiaries.
Cash Provided by (Used in) Provided by Operating Activities
The significant components of net cash provided by (used in) provided by operating activities are summarized below. UNIFI analyzes net cash provided by (used in) provided by operating activities utilizing the major components of the statements of cash flows prepared under the indirect method.
|
| For the Nine Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| March 31, 2019 |
|
| March 25, 2018 |
|
| March 29, 2020 |
|
| March 31, 2019 |
| ||||
Net income |
| $ | 1,454 |
|
| $ | 20,938 |
| ||||||||
Net (loss) income |
| $ | (36,990 | ) |
| $ | 1,454 |
| ||||||||
Equity in earnings of unconsolidated affiliates |
|
| (3,126 | ) |
|
| (3,842 | ) |
|
| (1,904 | ) |
|
| (3,126 | ) |
Depreciation and amortization expense |
|
| 17,242 |
|
|
| 16,844 |
|
|
| 17,685 |
|
|
| 17,242 |
|
Impairment of investment in unconsolidated affiliate |
|
| 45,194 |
|
|
| — |
| ||||||||
Non-cash compensation expense |
|
| 2,758 |
|
|
| 4,878 |
|
|
| 2,510 |
|
|
| 2,758 |
|
Deferred income taxes |
|
| (190 | ) |
|
| (8,441 | ) |
|
| (10,029 | ) |
|
| (190 | ) |
Subtotal |
|
| 18,138 |
|
|
| 30,377 |
|
|
| 16,466 |
|
|
| 18,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received from unconsolidated affiliates |
|
| 1,380 |
|
|
| 11,226 |
|
|
| 10,437 |
|
|
| 1,380 |
|
Change in inventories |
|
| (13,409 | ) |
|
| (9,424 | ) |
|
| 2,126 |
|
|
| (13,409 | ) |
Other changes in assets and liabilities |
|
| (7,626 | ) |
|
| (7,190 | ) |
|
| 3,076 |
|
|
| (7,626 | ) |
Net cash (used in) provided by operating activities |
| $ | (1,517 | ) |
| $ | 24,989 |
| ||||||||
Net cash provided by (used in) operating activities |
| $ | 32,105 |
|
| $ | (1,517 | ) |
The decreaseincrease in net cash provided by (used in) provided by operating activities from the prior nine-month period to the current nine-month period was primarily due to (i) the significant increase in inventories and other current assets as shown and discussed above under “Working Capital,” (ii) approximately $9,800 less in dividends$10,437 of distributions received from unconsolidated affiliates and (iii) lower Adjusted EBITDA. The decrease was partially offset by approximately $8,900 of tax refunds receivedPAL in the current nine-month period.period and (ii) the impact on working capital of a more favorable raw material cost environment.
Cash Used in Investing Activities and (Used in) Provided by Financing Activities
UNIFI utilized $19,190$14,936 for investing activities and was provided $4,128 (net) fromutilized $3,092 for financing activities during the current nine-month period.
Investing activities include $19,199$14,971 for capital expenditures, which primarily relatingrelate to ongoing maintenance capital expenditures andalong with production capabilities and technology enhancements in the Americas.
Significant financingFinancing activities include borrowingsnet payments against the ABL Facility primarily to fund capital expenditure activities.and finance leases during fiscal 2020 and $1,994 for share repurchases.
Contractual Obligations
UNIFI has incurred various financial obligations and commitments in its normal course of business. Financial obligations are considered to represent known future cash payments that UNIFI is required to make under existing contractual arrangements, such as debt and lease agreements.
Except for the finance leases that commenced during fiscal 2020, as effected by the 2018 Amendment to the Credit Agreement described under “Debt Obligations” above,disclosed in Note 4. “Leases,” there have been no further material changes in the scheduled maturities of UNIFI’s contractual obligations as disclosed in the table under the heading “Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 20182019 Form 10-K.
Off-Balance Sheet Arrangements
UNIFI is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on UNIFI’s financial condition, results of operations, liquidity or capital expenditures.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The SEC has defined a company’s most critical accounting policies as those involving accounting estimates that require management to make assumptions about matters that are highly uncertain at the time and where different reasonable estimates or changes in the accounting estimatesestimate from quarter to quarter could materially impact the presentation of the financial statements. UNIFI’s critical accounting policies are discussed in the 20182019 Form 10-K. There were no material changes to these policies during the current nine-month period.
UNIFI is exposed to market risks associated with changes in interest rates, fluctuations in foreign currency exchange rates, and raw material and commodity costs, which may adversely affect its financial position, results of operations or cash flows. UNIFI does not enter into derivative financial instruments for trading purposes, nor is it a party to any leveraged financial instruments.
Interest Rate Risk
UNIFI is exposed to interest rate risk through its borrowing activities. As of March 31, 2019,29, 2020, UNIFI had borrowings under its ABL Revolver and ABL Term Loan that totaled $124,000$120,900 and contain variable rates of interest; however, UNIFI hedges a significant portion of such interest rate variability using interest rate swaps. After considering the variable rate debt obligations that have been hedged and UNIFI’s outstanding debt obligations with fixed rates of interest, UNIFI’s sensitivity analysis indicates that a 50-basis point increase in LIBOR as of March 31, 201929, 2020 would result in an increase in annual interest expense of less than $300.
Foreign Currency Exchange Rate Risk
UNIFI conducts its business in various foreign countries and in various foreign currencies. Each of UNIFI’s subsidiaries may enter into transactions (sales, purchases, fixed purchase commitments, etc.) that are denominated in currencies other than the subsidiary’s functional currency and thereby expose UNIFI to foreign currency exchange rate risk. UNIFI may enter into foreign currency forward contracts to hedge this exposure. UNIFI may also enter into foreign currency forward contracts to hedge its exposure for certain equipment or inventory purchase commitments. As of March 31, 2019, 29, 2020, UNIFI had no outstanding foreign currency forward contracts.
A significant portion of raw materials purchased by UNIFI’s Brazilian subsidiary are denominated in USDs, requiring UNIFI to regularly exchange BRL. A significant portion of sales and asset balances for our Asian subsidiaries are denominated in USDs. During recent fiscal years, UNIFI was negatively impacted by a devaluation of the BRL. Also, the RMB experienced fluctuations in the value of the RMB haveat times during fiscal 2020 and 2019, which generated foreign currency transaction impactstranslation losses in certain fiscal quarters. Discussion and analysis surrounding the impact of fluctuationsthe devaluation of the BRL and fluctuations in the value of the RMB on UNIFI’s results of operations are included above in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
As of March 31, 2019,29, 2020, UNIFI’s foreign subsidiaries, outside the United States, whose functional currency is other than the USD, held approximately 16.7%18.5% of UNIFI’s consolidated total assets. UNIFI does not enter into foreign currency derivatives to hedge its net investment in its foreign operations.
As of March 31, 2019, $24,361,29, 2020, $27,398, or 87.3%82.0%, of UNIFI’s cash and cash equivalents was held outside the United States,U.S., of which $16,688$9,742 was held in USDs, $1,152USD, $6,318 was held in RMBsRMB and $6,301$11,150 was held in BRLs.BRL. Approximately $5,400 of USD were held inside the U.S. by a foreign subsidiary.
Raw Material and Commodity Risks
A significant portion of UNIFI’s raw material 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 certain geo-political risks. A sudden rise in the price of petroleum and petroleum-based products could have a material impact on UNIFI’s profitability. UNIFI does not use financial instruments to hedge its exposure to changes in these costs. The costs of the primary raw materials that UNIFI uses throughout all of its operations are generally based on USD pricing, and such materials are purchased at market or at fixed prices that are established with individual vendors as part of the purchasing process for quantities expected to be consumed in the ordinary course of business. UNIFI manages fluctuations in the cost of raw materials primarily by making corresponding adjustments to the prices charged to its customers. Certain customers are subject to an index-based pricing model in which UNIFI’s prices are adjusted based on the change in the cost of raw materials in the prior fiscal quarter. Pricing adjustments for other customers must be negotiated independently. At times, UNIFI is unableattempts to pass on to its customers risesincreases in raw material costs, and, when itbut due to market pressures, this is not always possible. When price increases can be implemented, there is typically is a time lag that adversely affects UNIFI and its margins during one or more periods.quarters. In ordinary market conditions in which raw material price increases have stabilized and sales volumes are consistent with traditional levels, UNIFI has historically been successful in implementing price adjustments within one to two fiscal quarters of the raw material price increase for its index priced customers and within two fiscal quarters of the raw material price increase for its non-index priced customers.
During the first nine months of fiscal 2018,2020, UNIFI experienced a favorable, declining raw material cost environment, in contrast to a generally elevated polyesterraw material cost environment in fiscal 2019 and 2018. However, our raw material costs in connection with heightened petroleum prices,remain subject to the volatility described above and, these costs continued to increase during the first four months of fiscal 2019 due to a tighter global supply of polyester and increased demand for polyester feedstock. In combination with a difficult operating environment characterized by lower textured yarn volumes in the domestic market, where sufficient corresponding price increases were difficult to achieve, these higher costs drove a decline in gross profit for the first six months of fiscal 2019. Further, UNIFI had expectedshould raw material costs spike unexpectedly, UNIFI’s results of operations and cash flows are likely to decline during the third quarter of fiscal 2019. However, those costs remained elevated, and UNIFI was unable to realize a more favorable raw material cost and selling price relationship during the third quarter of fiscal 2019.be adversely impacted.
Other Risks
UNIFI is also exposed to political risk, including changing laws and regulations governing international trade, such as quotas, tariffs and tax laws. The degree of impact and the frequency of these events cannot be predicted.
As of March 31, 2019,29, 2020, an evaluation of the effectiveness of UNIFI’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of UNIFI’s management, including the principal executive officer and the principal financial officer. Based on that evaluation, UNIFI’s principal executive officer and principal financial officer concluded that UNIFI’s disclosure controls and procedures are effective to ensure that information required to be disclosed by UNIFI in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that information required to be disclosed by UNIFI in the reports UNIFI files or submits under the Exchange Act is accumulated and communicated to UNIFI’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in UNIFI’s internal control over financial reporting during the three months ended March 31, 201929, 2020 that have materially affected, or are reasonably likely to materially affect, UNIFI’s internal control over financial reporting.
PART PART II—OTHER INFORMATION
We are from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these proceedings, individually or in the aggregate, would be expected to have a material adverse effect on our results of operations, financial position or cash flows. We maintain liability insurance for certain risks that is subject to certain self-insurance limits.
In addition to the risk factors previously disclosed in the 2019 Form 10-K, the following risk factor was identified:
Catastrophic or extraordinary events, including epidemics or pandemics such as the recent coronavirus disease (“COVID-19”), could disrupt global economic activity and/or demand and negatively impact our financial performance and results of operations.
In March 2020, the World Health Organization declared the current coronavirus disease (“COVID-19”) outbreak a global pandemic.
Global measures taken to reduce the spread of COVID-19 have generated a significant decline in global business activity in the immediate term that may have a lasting impact on the global economy and consumer demand. The duration of the COVID-19 pandemic and its related impact on our businesses are currently unknown. UNIFI anticipates that the global disruption caused by COVID-19 has impacted and will continue to impact overall global demand and business activity negatively, especially for textiles in both the Americas and Asia.
Significant restoration of consumer spending and retail activity levels will be critical to both our end-markets and an economic rebound. UNIFI anticipates a rebound in global economic activity when COVID-19 is demonstrably contained. The business impact of such a rebound will depend on the pace and effectiveness of the containment efforts deployed by various national, state, and local governments, along with the speed and effectiveness with which potential treatment and vaccine methods are deployed.
UNIFI will continue to monitor the COVID-19 pandemic by prioritizing health and safety while delivering on customer demand, but we expect an adverse impact to the remainder of our fiscal 2020 and the first half of our fiscal 2021 based on the present factors and conditions.
Items 2(a) and (b) are not applicable.
(c) The following table summarizes UNIFI’s purchases of its common stock during the fiscal quarter ended March 29, 2020, all of which purchases were made under the 2018 SRP approved by the Board on October 31, 2018, under which UNIFI is authorized to acquire up to $50,000 of common stock. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date.
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
| ||||
12/30/19 – 1/29/20 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 50,000 |
|
1/30/20 – 2/29/20 |
|
| 84 |
|
| $ | 23.72 |
|
|
| 84 |
|
|
| 48,008 |
|
3/1/20 – 3/29/20 |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| 48,008 |
|
Total |
|
| 84 |
|
| $ | 23.72 |
|
|
| 84 |
|
|
|
|
|
Repurchases are subject to applicable limitations and requirements set forth in the ABL Facility. For additional information, including information regarding limitations on payment of dividends and share repurchases, see Note 13, “Long-Term Debt” contained in UNIFI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019.
Exhibit No. |
| Description |
|
|
|
3.1 |
| |
|
|
|
3.2 |
| |
|
|
|
3.3 |
| |
|
| |
|
|
|
31.1+ |
|
|
31.2+ |
| |
|
|
|
32.1++ |
| |
|
|
|
32.2++ |
| |
|
|
|
101+ |
| The following financial information (unaudited) from Unifi, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March |
+ | Filed herewith. |
++ | Furnished herewith. |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| UNIFI, INC. | |
|
| (Registrant) | |
|
|
|
|
Date: May |
| By: | /s/ |
|
|
|
|
|
|
| Executive Vice President |
|
|
| (Principal Financial Officer and Principal Accounting Officer) |
3741