Unifi Inc 10-Q for FY2023 Q1
Unifi Inc (UFI)
About this 10-Q
Unifi Inc filed this 10-Q on November 9, 2022, covering the quarter ended October 2, 2022 (FY2023 Q1).
Headline figures
Quarter ended October 2, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $179.52M
- down 8.4% from $195.99M a year earlier
- Net loss
- $7.83M
- compared with net income of $8.68M a year earlier
- Diluted EPS
- -$0.44
- compared with $0.46 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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(Mark One) |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of |
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incorporation or organization) |
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Identification No.) |
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(Address of principal executive offices) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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).
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.
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Large accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of November 7, 2022, there were
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “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; 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:
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the competitive nature of the textile industry and the impact of global competition; |
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changes in the trade regulatory environment and governmental policies and legislation; |
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the availability, sourcing and pricing of raw materials; |
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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; |
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changes in consumer spending, customer preferences, fashion trends and end uses for the Company’s products; |
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the financial condition of the Company’s customers; |
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the loss of a significant customer or brand partner; |
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natural disasters, industrial accidents, power or water shortages, extreme weather conditions and other disruptions at one of the Company’s facilities; |
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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 strains of coronavirus (“COVID-19”); |
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the success of the Company’s strategic business initiatives; |
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the volatility of financial and credit markets; |
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the ability to service indebtedness and fund capital expenditures and strategic business initiatives; |
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the availability of and access to credit on reasonable terms; |
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changes in foreign currency exchange, interest and inflation rates; |
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fluctuations in production costs; |
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the ability to protect intellectual property; |
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the strength and reputation of the Company’s brands; |
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employee relations; |
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the ability to attract, retain and motivate key employees; |
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the impact of climate change or environmental, health and safety regulations; |
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the impact of tax laws, the judicial or administrative interpretations of tax laws and/or changes in such laws or interpretations; and |
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other factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2022 or in the Company’s other periodic reports and information filed with the Securities and Exchange Commission (“SEC”). |
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 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.
UNIFI, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED OCTOBER 2, 2022
TABLE OF CONTENTS
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Item 1. |
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Condensed Consolidated Balance Sheets as of October 2, 2022 and July 3, 2022 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 2. |
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Item 6. |
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26 |
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PART I—FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
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October 2, 2022 |
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July 3, 2022 |
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ASSETS |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, net |
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Inventories |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property, plant and equipment, net |
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Operating lease assets |
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Deferred income taxes |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Accounts payable |
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$ |
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$ |
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Income taxes payable |
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Current operating lease liabilities |
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Current portion of long-term debt |
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Other current liabilities |
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Total current liabilities |
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Long-term debt |
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Non-current operating lease liabilities |
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Deferred income taxes |
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Other long-term liabilities |
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Total liabilities |
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Commitments and contingencies |
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Common stock, $ shares issued and outstanding as of October 2, 2022 and July 3, 2022, respectively) |
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Capital in excess of par value |
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Retained earnings |
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Accumulated other comprehensive loss |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
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For the Three Months Ended |
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October 2, 2022 |
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September 26, 2021 |
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Net sales |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Selling, general and administrative expenses |
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Provision (benefit) for bad debts |
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Other operating (income) expense, net |
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Operating (loss) income |
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Interest income |
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Interest expense |
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Equity in earnings of unconsolidated affiliates |
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(Loss) income before income taxes |
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Provision for income taxes |
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Net (loss) income |
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$ |
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$ |
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Net (loss) income per common share: |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
(In thousands)
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For the Three Months Ended |
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October 2, 2022 |
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September 26, 2021 |
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Net (loss) income |
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$ |
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$ |
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Other comprehensive (loss) income: |
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Foreign currency translation adjustments |
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Changes in interest rate swaps, net of tax of nil and $ |
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— |
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Other comprehensive loss, net |
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( |
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( |
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Comprehensive (loss) income |
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$ |
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$ |
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See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands)
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Shares |
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Common Stock |
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Capital in Excess of Par Value |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Total Shareholders’ Equity |
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Balance at July 3, 2022 |
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$ |
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$ |
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$ |
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$ |
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$ |
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Options exercised |
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— |
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— |
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— |
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Conversion of equity units |
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( |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
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( |
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— |
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( |
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— |
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— |
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( |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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( |
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( |
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Net loss |
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— |
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— |
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— |
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( |
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— |
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( |
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Balance at October 2, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Shares |
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Common Stock |
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Capital in Excess of Par Value |
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Retained Earnings |
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Accumulated Other Comprehensive Loss |
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Total Shareholders’ Equity |
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Balance at June 27, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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Options exercised |
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( |
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— |
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— |
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— |
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Conversion of equity units |
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( |
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— |
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— |
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— |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions |
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( |
) |
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( |
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( |
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— |
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— |
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( |
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Other comprehensive loss, net of tax |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Net income |
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— |
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— |
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— |
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— |
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Balance at September 26, 2021 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
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See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
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For the Three Months Ended |
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October 2, 2022 |
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September 26, 2021 |
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Cash and cash equivalents at beginning of period |
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$ |
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$ |
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Operating activities: |
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Net (loss) income |
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( |
) |
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Adjustments to reconcile net (loss) income to net cash used by operating activities: |
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Equity in earnings of unconsolidated affiliates |
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( |
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( |
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Depreciation and amortization expense |
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Non-cash compensation expense |
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Deferred income taxes |
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( |
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( |
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Other, net |
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( |
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Changes in assets and liabilities: |
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Receivables, net |
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( |
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Inventories |
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( |
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Other current assets |
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( |
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Income taxes |
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( |
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Accounts payable and other current liabilities |
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( |
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( |
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Other, net |
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( |
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Net cash used by operating activities |
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( |
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( |
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Investing activities: |
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Capital expenditures |
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( |
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( |
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Other, net |
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( |
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Net cash used by investing activities |
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( |
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( |
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Financing activities: |
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Proceeds from ABL Revolver |
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— |
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Payments on ABL Revolver |
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( |
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— |
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Payments on ABL Term Loan |
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( |
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( |
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Proceeds from construction financing |
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Payments on finance lease obligations |
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( |
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( |
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Other, net |
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— |
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( |
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Net cash provided (used) by financing activities |
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( |
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Effect of exchange rate changes on cash and cash equivalents |
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( |
) |
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( |
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Net decrease in cash and cash equivalents |
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( |
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( |
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Cash and cash equivalents at end of period |
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$ |
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$ |
|
|
See accompanying notes to condensed consolidated financial statements.
5
Unifi, Inc.
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 multinational 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 sometimes refer to these indirect customers as “brand partners.” Polyester products 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”), polyester polymer beads (“Chip”), and staple fiber. Nylon products 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, value-added and commodity solutions, with principal geographic markets in North America, Central America, South America, Asia, and Europe. UNIFI has direct manufacturing operations in
2. Basis of Presentation; Condensed Notes
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. As contemplated by the instructions of 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 July 3, 2022 (the “2022 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.
3. Recent Accounting Pronouncements
Based on UNIFI’s review of Accounting Standards Updates issued since the filing of the 2022 Form 10-K, there have been no newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a material impact on UNIFI’s consolidated financial statements.
4. Revenue
The following tables present net sales disaggregated by (i) classification of customer type and (ii) REPREVE® Fiber sales:
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Third-party manufacturer |
|
$ |
|
|
|
$ |
|
|
|
Service |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
REPREVE® Fiber |
|
$ |
|
|
|
$ |
|
|
|
All other products and services |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
|
|
|
$ |
|
|
Third-Party Manufacturer
Third-party 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 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.
6
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
REPREVE Fiber
REPREVE Fiber represents our collection of fiber products on our recycled platform, with or without added technologies.
Variable Consideration
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. Variable consideration has been immaterial to UNIFI’s financial statements for all periods presented.
5. Long-Term Debt
Debt Obligations
The following table and narrative presents the detail of UNIFI’s debt obligations.
|
|
|
|
|
Weighted Average |
|
|
|
||||||||
|
|
|
Scheduled |
|
Interest Rate as of |
|
Principal Amounts as of |
|
||||||||
|
|
|
Maturity Date |
|
October 2, 2022 |
|
October 2, 2022 |
|
|
July 3, 2022 |
|
|||||
|
ABL Revolver |
|
|
|
|
|
% |
|
|
$ |
|
|
|
$ |
|
|
|
ABL Term Loan |
|
|
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
Finance lease obligations |
|
(1) |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
Construction financing |
|
(2) |
|
|
|
% |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current ABL Term Loan |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Current portion of finance lease obligations |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Unamortized debt issuance costs |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
( |
) |
|
Total long-term debt |
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
(1) |
|
|
(2) |
|
ABL Facility
Since the filing of the 2022 Form 10-K, Unifi, Inc. entered into the Sixth Amendment to Amended and Restated Credit Agreement (the “Sixth Amendment”) on September 2, 2022. The Sixth Amendment modified the Trigger Level (as defined in the Prior Credit Agreement and which relates to, among other things, the requirement to maintain a Fixed Charge Coverage Ratio (as defined in the Prior Credit Agreement)) such that it occurs when Excess Availability (as defined in the Prior Credit Agreement) falls below (a) for the period beginning on September 2, 2022 through and including the date that is
On October 28, 2022, Unifi, Inc. and certain of its subsidiaries entered into a Second Amended and Restated Credit Agreement (the “2022 Credit Agreement”) with a syndicate of lenders. The 2022 Credit Agreement provides for a $
Prior to entering the 2022 Credit Agreement, Unifi, Inc. and certain of its subsidiaries maintained a similar credit agreement that established a $
Borrowings under the 2022 ABL Facility bear interest at SOFR plus 0.10% plus an applicable margin of
Construction Financing
In May 2021, UNIFI entered into an agreement with a third party lender that provides for construction-period financing for certain texturing machinery included in our capital allocation plans. UNIFI records project costs to construction in progress and the corresponding liability to construction financing (within long-term debt). The agreement provides for monthly, interest-only payments during the construction period, at a rate of SOFR plus
Each borrowing under the agreement provides for
7
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Scheduled Debt Maturities
The following table presents the scheduled maturities of UNIFI’s outstanding debt obligations:
|
|
|
Fiscal 2023 |
|
|
Fiscal 2024 |
|
|
Fiscal 2025 |
|
|
Fiscal 2026 |
|
|
Fiscal 2027 |
|
|
Thereafter |
|
||||||
|
ABL Revolver |
|
$ |
— |
|
|
$ |
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
ABL Term Loan |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Finance lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (1) |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
(1) |
|
6. Income Taxes
The provision for income taxes and effective tax rate were as follows:
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Provision for income taxes |
|
$ |
|
|
|
$ |
|
|
|
Effective tax rate |
|
|
( |
)% |
|
|
|
% |
Income Tax Expense
UNIFI’s provision for income taxes for the three months ended October 2, 2022 and September 26, 2021 was calculated by applying the estimated annual effective tax rate to year-to-date pre-tax book income and adjusting for discrete items that occurred during the period.
The effective tax rate for the three months ended October 2, 2022 was lower than the U.S. federal statutory rate primarily due to an increase in the valuation allowance for deferred tax assets and current U.S. tax on global intangible low-tax income (“GILTI”).
The effective tax rate for the three months ended September 26, 2021 was higher than the U.S. federal statutory rate primarily due to earnings taxed at higher rates in foreign jurisdictions, deferred tax on unremitted earnings, and foreign withholding taxes.
Unrecognized Tax Benefits
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 net operating losses, which could potentially be revised upon examination.
7. Shareholders’ Equity
On October 31, 2018, UNIFI announced that its Board of Directors (the “Board”) approved a share repurchase program (the “2018 SRP”) under which UNIFI is authorized to acquire up to $
The following table summarizes UNIFI’s repurchases and retirements of its common stock under the 2018 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 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Fiscal 2021 |
|
|
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Fiscal 2022 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
Fiscal 2023 (through October 2, 2022) |
|
|
— |
|
|
$ |
— |
|
|
$ |
|
|
|
Total |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
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.
8
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
8. Stock-Based Compensation
On
The following table provides the number of awards remaining available for future issuance under the 2020 Plan as of October 2, 2022:
|
Authorized under the 2020 Plan |
|
|
|
|
|
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 2020 Plan |
|
|
|
|
On October 27, 2021, UNIFI’s shareholders approved the Unifi, Inc. Employee Stock Purchase Plan (the “ESPP”) as described in Unifi, Inc.’s Definitive Proxy Statement on Schedule 14A filed with the SEC on September 2, 2021. The ESPP reserved
9. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities
Financial Instruments
Grantor Trust
The UNIFI, Inc. Deferred Compensation Plan (the “DCP”), established in fiscal 2022, is an unfunded non-qualified deferred compensation plan in which certain key employees are eligible to participate. The fair value of the investment assets held by the grantor trust established in connection with the DCP were approximately $
Derivative Instruments
UNIFI uses 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 does not enter into derivative contracts for speculative purposes. As of October 2, 2022, there were
For the three months ended October 2, 2022 and September 26, 2021, there were no significant changes to UNIFI’s assets and liabilities measured at fair value, and there were
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 values due to their short-term nature.
10. 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 July 3, 2022 |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
|
Other comprehensive loss |
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Balance at October 2, 2022 |
|
$ |
( |
) |
|
$ |
— |
|
|
$ |
( |
) |
A summary of the after-tax effects of the components of other comprehensive loss, net for the three-month period ended October 2, 2022 and September 26, 2021 is included in the accompanying condensed consolidated statements of comprehensive (loss) income.
9
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
11. Earnings Per Share
The components of the calculation of earnings per share (“EPS”) are as follows:
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
|
Basic weighted average shares |
|
|
|
|
|
|
|
|
|
Net potential common share equivalents |
|
|
— |
|
|
|
|
|
|
Diluted weighted average shares |
|
|
|
|
|
|
|
|
|
Excluded from the calculation of common share equivalents: |
|
|
|
|
|
|
|
|
|
Anti-dilutive common share equivalents |
|
|
|
|
|
|
|
|
|
Excluded from the calculation of diluted shares: |
|
|
|
|
|
|
|
|
|
Unvested stock options that vest upon achievement of certain market conditions |
|
|
|
|
|
|
|
|
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.
12. 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 (“Kinston”) from Invista S.a.r.l. (“INVISTA”). The land for the Kinston site was leased pursuant to a
13. Related Party Transactions
There were
Related party payables for Salem Leasing Corporation consisted of the following:
|
|
|
October 2, 2022 |
|
|
July 3, 2022 |
|
||
|
Accounts payable |
|
$ |
|
|
|
$ |
|
|
|
Operating lease obligations |
|
|
|
|
|
|
|
|
|
Finance lease obligations |
|
|
|
|
|
|
|
|
|
Total related party payables |
|
$ |
|
|
|
$ |
|
|
The following were the Company’s significant related party transactions:
|
|
|
|
|
For the Three Months Ended |
|
|||||
|
Affiliated Entity |
|
Transaction Type |
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Salem Leasing Corporation |
|
Payments for transportation equipment costs and finance lease debt service |
|
$ |
|
|
|
$ |
|
|
10
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
14. 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, who is the chief operating decision maker (the “CODM”), in order to assess performance and allocate resources. Characteristics of UNIFI which were relied upon in making the determination of reportable segments include the nature of the products sold, the internal organizational 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.
In the fourth quarter of fiscal 2022, UNIFI realigned its operating and reportable segments to correspond with changes to its operating model, management structure, and organizational responsibilities, reflecting the manner in which business performance is evaluated, resources are allocated, and financial statement users can best understand the results of operations. Accordingly, UNIFI is now reporting the Americas Segment, Brazil Segment, and Asia Segment. The Americas Segment represents the combination of the previously reported Polyester Segment, Nylon Segment, and All Other category. There are no changes to the composition of the historical Brazil Segment and Asia Segment. Comparative prior period disclosures have been updated to conform to the new presentation.
UNIFI has
|
|
• |
The operations within the Americas Segment exhibit similar long-term economic characteristics and primarily sell into an economic trading zone covered by the USMCA and CAFTA-DR to similar customers utilizing similar methods of distribution. These operations derive revenues primarily from manufacturing synthetic and recycled textile products with sales primarily to yarn manufacturers, knitters, and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive, home furnishings, industrial, medical, and other end-use markets principally in North and Central America. The Americas Segment consists of sales and manufacturing operations in the U.S., El Salvador, and Colombia. |
|
|
• |
The Brazil Segment primarily manufactures and sells polyester-based products to knitters and weavers that produce fabric for the apparel, automotive, home furnishings, industrial, and other end-use markets principally in Brazil. The Brazil Segment includes a manufacturing location and sales offices in Brazil. |
|
|
• |
The operations within the Asia Segment exhibit similar long-term economic characteristics and sell to similar customers utilizing similar methods of distribution primarily in Asia and Europe. The Asia Segment primarily sources synthetic and recycled textile products from third-party suppliers and sells to other yarn manufacturers, knitters, and weavers that produce fabric for the apparel, automotive, home furnishings, industrial, and other end-use markets principally in Asia. The Asia Segment includes sales offices in China, Turkey, and Hong Kong. |
UNIFI evaluates the operating performance of its segments based upon Segment Profit, which represents segment gross profit (loss) plus segment depreciation expense. This measurement of segment profit or loss 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 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 October 2, 2022 |
|
|||||||||||||
|
|
|
Americas |
|
|
Brazil |
|
|
Asia |
|
|
Total |
|
||||
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profit |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation expense |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Segment Profit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
For the Three Months Ended September 26, 2021 |
|
|||||||||||||
|
|
|
Americas |
|
|
Brazil |
|
|
Asia |
|
|
Total |
|
||||
|
Net sales |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment depreciation expense |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
Segment Profit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
11
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The reconciliations of segment gross profit to consolidated (loss) income before income taxes are as follows:
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Americas |
|
$ |
( |
) |
|
$ |
|
|
|
Brazil |
|
|
|
|
|
|
|
|
|
Asia |
|
|
|
|
|
|
|
|
|
Segment gross profit |
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
|
|
|
|
|
|
|
|
Provision (benefit) for bad debts |
|
|
|
|
|
|
( |
) |
|
Other operating (income) expense, net |
|
|
( |
) |
|
|
|
|
|
Operating (loss) income |
|
|
( |
) |
|
|
|
|
|
Interest income |
|
|
( |
) |
|
|
( |
) |
|
Interest expense |
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates |
|
|
( |
) |
|
|
( |
) |
|
(Loss) income before income taxes |
|
$ |
( |
) |
|
$ |
|
|
There have been no material changes in segment assets during fiscal 2023.
15. Investments in Unconsolidated Affiliates
Included within Other non-current assets are UNIFI’s investments in unconsolidated affiliates: U.N.F. Industries, Ltd. (“UNF”); and UNF America LLC (“UNFA”) (collectively “UNFs”).
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 located in Ridgeway, Virginia. UNFA is treated as a partnership for its income tax reporting.
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 typically negotiated every six months, based on market rates. As of October 2, 2022, UNIFI’s open purchase orders related to this supply agreement were $
UNIFI’s raw material purchases under this supply agreement consisted of the following:
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
UNFA |
|
$ |
|
|
|
$ |
|
|
|
UNF |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
As of October 2, 2022 and July 3, 2022, UNIFI had combined accounts payable due to UNF and UNFA of $
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 (i) UNIFI purchases substantially all of the output from the two entities, (ii) the two entities’ balance sheets constitute
12
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Condensed balance sheet and income statement information for UNIFI’s unconsolidated affiliates (including reciprocal balances) are presented in the tables below.
|
|
|
October 2, 2022 |
|
|
July 3, 2022 |
|
||
|
Current assets |
|
$ |
|
|
|
$ |
|
|
|
Non-current assets |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
|
Non-current liabilities |
|
|
— |
|
|
|
— |
|
|
Shareholders’ equity and capital accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UNIFI’s portion of undistributed earnings |
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|||||
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Net sales |
$ |
|
|
|
$ |
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions received |
|
— |
|
|
|
— |
|
16. Supplemental Cash Flow Information
Cash payments for interest and taxes consist of the following:
|
|
|
For the Three Months Ended |
|
||||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
|||
|
Interest, net of capitalized interest of $ |
|
$ |
|
|
|
$ |
|
|
|
|
Income tax payments, net |
|
|
|
|
|
|
|
|
|
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. The three months ended September 26, 2021 includes an income tax payment of $
Non-Cash Investing and Financing Activities
As of October 2, 2022 and July 3, 2022, $
During the three months ended October 2, 2022 and September 26, 2021, UNIFI recorded non-cash activity relating to finance leases of $
13
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
17. Other Financial Data
Select balance sheet information is presented in the following table.
|
|
|
October 2, 2022 |
|
|
July 3, 2022 |
|
||
|
Receivables, net: |
|
|
|
|
|
|
|
|
|
Customer receivables |
|
$ |
|
|
|
$ |
|
|
|
Allowance for uncollectible accounts |
|
|
( |
) |
|
|
( |
) |
|
Reserves for quality claims |
|
|
( |
) |
|
|
( |
) |
|
Net customer receivables |
|
|
|
|
|
|
|
|
|
Banker's acceptance notes |
|
|
|
|
|
|
|
|
|
Other receivables |
|
|
|
|
|
|
|
|
|
Total receivables, net |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
|
|
|
$ |
|
|
|
Supplies |
|
|
|
|
|
|
|
|
|
Work in process |
|
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
Gross inventories |
|
|
|
|
|
|
|
|
|
Net realizable value adjustment |
|
|
( |
) |
|
|
( |
) |
|
Total inventories |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets: |
|
|
|
|
|
|
|
|
|
Recovery of non-income taxes, net |
|
$ |
|
|
|
$ |
|
|
|
Vendor deposits |
|
|
|
|
|
|
|
|
|
Prepaid expenses and other |
|
|
|
|
|
|
|
|
|
Value-added taxes receivable |
|
|
|
|
|
|
|
|
|
Contract assets |
|
|
|
|
|
|
|
|
|
Total other current assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
|
Land |
|
$ |
|
|
|
$ |
|
|
|
Land improvements |
|
|
|
|
|
|
|
|
|
Buildings and improvements |
|
|
|
|
|
|
|
|
|
Assets under finance leases |
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
|
|
|
|
|
|
|
|
Computers, software and office equipment |
|
|
|
|
|
|
|
|
|
Transportation equipment |
|
|
|
|
|
|
|
|
|
Construction in progress |
|
|
|
|
|
|
|
|
|
Gross property, plant and equipment |
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
( |
) |
|
|
( |
) |
|
Less: accumulated amortization – finance leases |
|
|
( |
) |
|
|
( |
) |
|
Total property, plant and equipment, net |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current assets: |
|
|
|
|
|
|
|
|
|
Grantor trust |
|
$ |
|
|
|
$ |
|
|
|
Investments in unconsolidated affiliates |
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other non-current assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current liabilities: |
|
|
|
|
|
|
|
|
|
Payroll and fringe benefits |
|
$ |
|
|
|
$ |
|
|
|
Utilities |
|
|
|
|
|
|
|
|
|
Deferred revenue |
|
|
|
|
|
|
|
|
|
Incentive compensation |
|
|
|
|
|
|
|
|
|
Property taxes and other |
|
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities: |
|
|
|
|
|
|
|
|
|
Nonqualified deferred compensation plan obligation |
|
$ |
|
|
|
$ |
|
|
|
Uncertain tax positions |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Total other long-term liabilities |
|
$ |
|
|
|
$ |
|
|
14
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 October 2, 2022, while a reference to the “prior period” refers to the three-month period ended September 26, 2021. Such references may be accompanied by certain phrases for added clarity. The current period and the prior period each consisted of 13 weeks.
Our discussions in this Item 2 focus on our results during, or as of, the three months ended October 2, 2022 and September 26, 2021, and, to the extent applicable, any material changes from the information discussed in the 2022 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 2022 Form 10-K for more detailed and background information about our business, operations, and financial condition. Discussion of foreign currency translation is primarily associated with changes in the Brazilian Real (“BRL”) and changes in the Chinese Renminbi (“RMB”) versus the U.S. Dollar (“USD”). The BRL weighted average exchange rate was 5.25 BRL/USD and 5.24 BRL/USD for the current period and the prior period, respectively. The RMB weighted average exchange rate was 6.85 RMB/USD and 6.47 RMB/USD for the current period and the prior period, respectively.
All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted.
Overview and Significant General Matters
UNIFI 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. Our strategic initiatives include (i) leveraging our competitive advantages to grow market share in each of the major geographies we serve, (ii) expanding our presence in non-apparel markets with additional REPREVE® products, (iii) advancing the development and commercialization of innovative and sustainable solutions, and (iv) increasing brand awareness for REPREVE®. We believe our strategic initiatives will increase revenue and profitability and generate improved cash flows from operations.
COVID-19 Pandemic and the Current Economic Environment
UNIFI was able to navigate the negative effects of the COVID-19 pandemic to minimize the overall impact to UNIFI for fiscal 2022 and the first quarter of fiscal 2023. However, the current economic environment and significant decrease in textile product demand has adversely impacted our consolidated sales and profitability during the current period. In addition to the current unfavorable economic environment and the inventory destocking measures taken by brands and retailers, the following pressures have continued from fiscal 2022 into fiscal 2023: (i) the impact of inflation on consumer spending, (ii) rising interest rates, (iii) the Russia-Ukraine conflict, (iv) global input cost volatility, and (v) supply chain disruption and unpredictability. UNIFI will continue to monitor these and other aspects of the current economic environment, and work closely with stakeholders to ensure business continuity and liquidity.
Input Costs and Global Production Volatility
In addition to the escalation of input costs in fiscal 2022, UNIFI experienced inefficiencies in the global supply chain in connection with (i) freight costs and logistics slowdowns in foreign markets; (ii) a tighter labor pool in the U.S.; and (iii) suppressed productivity from our business partners resulting from pandemic-related lockdowns in certain regions, particularly Asia. Despite significant improvement in input and freight costs and a more stable labor pool during the current period, the global demand volatility and uncertainty that began in late fiscal 2022 has continued into the first quarter of fiscal 2023, as the threat of recession continues to create uncertainty for calendar 2022 and 2023. The existing challenges and future uncertainty, particularly for rising input costs, labor productivity, and global demand, could worsen and/or continue for prolonged periods, materially impacting our consolidated sales and gross profit. Also, the need for future selling price adjustments in connection with inflationary costs could impact our ability to retain current customer programs and compete successfully for new programs in certain regions.
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; |
|
|
• |
net (loss) income and diluted EPS; |
|
|
• |
Segment Profit, which equals 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, from time to time, certain other adjustments necessary to understand and compare the underlying results of UNIFI; |
|
|
• |
Adjusted Net (Loss) Income, 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 for which exclusion may be necessary to understand and compare the underlying results of UNIFI; |
15
|
|
• |
Adjusted EPS, which represents Adjusted Net (Loss) Income divided by UNIFI’s diluted weighted average common shares outstanding; |
|
|
• |
Adjusted Working Capital, which equals receivables plus inventories and other current assets, less accounts payable and other current liabilities; and |
|
|
• |
Net Debt, which represents debt principal less cash and cash equivalents. |
EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, 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 items (a) directly related to our asset base (primarily depreciation and amortization) and/or (b) 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.
Management uses Adjusted Net (Loss) Income 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 inventories and receivables.
Management uses Net Debt as a liquidity and leverage metric to determine how much debt would remain if all cash and cash equivalents were used to pay down debt principal.
16
Review of Results of Operations
Three Months Ended October 2, 2022 Compared to Three Months Ended September 26, 2021
Consolidated Overview
The below tables provide:
|
|
• |
the components of net (loss) income and the percentage increase or decrease over the prior period amounts, and |
|
|
• |
a reconciliation from net (loss) income to EBITDA and Adjusted EBITDA. |
Following the tables is a discussion and analysis of the significant components of net (loss) income.
Net (loss) income
|
|
|
For the Three Months Ended |
|
|
|
|
|
|||||||||||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
|||
|
Net sales |
|
$ |
179,519 |
|
|
|
100.0 |
|
|
$ |
195,992 |
|
|
|
100.0 |
|
|
|
(8.4 |
) |
|
Cost of sales |
|
|
172,956 |
|
|
|
96.3 |
|
|
|
169,895 |
|
|
|
86.7 |
|
|
|
1.8 |
|
|
Gross profit |
|
|
6,563 |
|
|
|
3.7 |
|
|
|
26,097 |
|
|
|
13.3 |
|
|
|
(74.9 |
) |
|
SG&A |
|
|
11,773 |
|
|
|
6.6 |
|
|
|
12,670 |
|
|
|
6.4 |
|
|
|
(7.1 |
) |
|
Provision (benefit) for bad debts |
|
|
174 |
|
|
|
0.1 |
|
|
|
(80 |
) |
|
|
— |
|
|
nm |
|
|
|
Other operating (income) expense, net |
|
|
(689 |
) |
|
|
(0.4 |
) |
|
|
256 |
|
|
|
0.1 |
|
|
nm |
|
|
|
Operating (loss) income |
|
|
(4,695 |
) |
|
|
(2.6 |
) |
|
|
13,251 |
|
|
|
6.8 |
|
|
|
(135.4 |
) |
|
Interest expense, net |
|
|
700 |
|
|
|
0.4 |
|
|
|
438 |
|
|
|
0.2 |
|
|
|
59.8 |
|
|
Equity in earnings of unconsolidated affiliates |
|
|
(295 |
) |
|
|
(0.2 |
) |
|
|
(280 |
) |
|
|
(0.1 |
) |
|
|
5.4 |
|
|
(Loss) income before income taxes |
|
|
(5,100 |
) |
|
|
(2.8 |
) |
|
|
13,093 |
|
|
|
6.7 |
|
|
|
(139.0 |
) |
|
Provision for income taxes |
|
|
2,734 |
|
|
|
1.6 |
|
|
|
4,413 |
|
|
|
2.3 |
|
|
|
(38.0 |
) |
|
Net (loss) income |
|
$ |
(7,834 |
) |
|
|
(4.4 |
) |
|
$ |
8,680 |
|
|
|
4.4 |
|
|
|
(190.3 |
) |
nm = not meaningful
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The reconciliations of the amounts reported under GAAP for Net (loss) income to EBITDA and Adjusted EBITDA were as follows:
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Net (loss) income |
|
$ |
(7,834 |
) |
|
$ |
8,680 |
|
|
Interest expense, net |
|
|
700 |
|
|
|
438 |
|
|
Provision for income taxes |
|
|
2,734 |
|
|
|
4,413 |
|
|
Depreciation and amortization expense (1) |
|
|
6,697 |
|
|
|
6,308 |
|
|
EBITDA |
|
|
2,297 |
|
|
|
19,839 |
|
|
|
|
|
|
|
|
|
|
|
|
Other adjustments (2) |
|
|
— |
|
|
|
— |
|
|
Adjusted EBITDA |
|
$ |
2,297 |
|
|
$ |
19,839 |
|
|
(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) |
For the periods presented, there were no other adjustments necessary to reconcile Net (loss) income to Adjusted EBITDA. |
Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures)
For the current and the prior period, there were no adjustments necessary to reconcile Net (loss) income to Adjusted Net (Loss) Income or Adjusted EPS.
Net Sales
Consolidated net sales for the current period decreased by $16,473, or 8.4%, and consolidated sales volumes decreased 21.6%, compared to the prior period. The decreases occurred primarily due to lower volumes in the Americas and Asia Segments as a result of lower global demand, in addition to pandemic-related lockdowns in Asia, partially offset by higher selling prices in response to increasing raw material and input costs.
Consolidated weighted average sales prices increased 13.2%, primarily attributable to higher selling prices in response to higher raw material costs.
REPREVE® Fiber products for the current period comprised 27%, or $49,179, of consolidated net sales, down from 37%, or $71,906, for the prior period. The lower volumes and net sales in the Asia Segment, which has the highest portion of REPREVE® Fiber sales as a percentage of segment net sales, was the main driver for the lower REPREVE® Fiber sales.
17
Gross Profit
Gross profit for the current period decreased by $19,534, or 74.9%, compared to the prior period. Gross profit decreased as a result of the decline in net sales, combined with weak fixed cost absorption for the Americas Segment, where utilization and productivity are materially impactful to gross profit. Although raw material costs for the Americas Segment decreased meaningfully in the current period, the associated benefit was muted by low production levels, weak demand, and higher priced raw material inventory purchased in the fourth quarter of 2022.
|
|
• |
For the Americas Segment, gross profit decreased due to weaker global demand and weak fixed cost absorption in connection with lower production. |
|
|
• |
For the Brazil Segment, gross profit decreased primarily due to the overall decrease in gross margin following the expected normalization of the competitive environment in Brazil, which was highly favorable during fiscal 2022. |
|
|
• |
For the Asia Segment, gross profit decreased primarily due to lower sales volumes in connection with weaker global demand and pandemic-related lockdowns in Asia. |
SG&A
SG&A for the current period decreased compared to the prior period, primarily due to (i) lower incentive compensation for the current period and (ii) lower discretionary expenses, including marketing and advertising.
Provision (Benefit) for Bad Debts
The current period and prior period bad debt changes reflect no material activity.
Other Operating (Income) Expense, Net
The current period and prior period include foreign currency transaction (gains) losses of $(725) and $233, respectively.
Interest Expense, Net
Interest expense, net increased in connection with higher debt principal following continued capital investments and higher interest rates.
Equity in Earnings of Unconsolidated Affiliates
There was no material activity for the current period or the prior period.
Income Taxes
Provision for income taxes and the effective tax rate were as follows:
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Provision for income taxes |
|
$ |
2,734 |
|
|
$ |
4,413 |
|
|
Effective tax rate |
|
|
(53.6 |
)% |
|
|
33.7 |
% |
The effective tax rate is subject to variation due to a number of factors, including: variability in pre-tax book 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 and other rate impacting items are more pronounced when income (loss) before income taxes is lower.
The decrease in the effective tax rate from the prior period to the current period is primarily attributable to an increase in the valuation allowance for deferred tax assets in the current period and increased U.S. tax on GILTI in the current period.
Net (Loss) Income
The decrease in net (loss) income was primarily attributable to the decrease in Americas gross profit and the associated adverse impact of lower U.S. earnings on the effective tax rate.
Adjusted EBITDA (Non-GAAP Financial Measure)
Adjusted EBITDA decreased primarily in connection with lower gross profit.
Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures)
Adjusted Net (Loss) Income and Adjusted EPS decreased from the prior period to the current period, commensurate with the decrease in net (loss) income.
18
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current period.
Americas 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 Americas Segment, were as follows:
|
|
|
For the Three Months Ended |
|
|
|
|
|
|||||||||||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
|||
|
Net sales |
|
$ |
107,644 |
|
|
|
100.0 |
|
|
$ |
110,826 |
|
|
|
100.0 |
|
|
|
(2.9 |
) |
|
Cost of sales |
|
|
112,513 |
|
|
|
104.5 |
|
|
|
101,640 |
|
|
|
91.7 |
|
|
|
10.7 |
|
|
Gross (loss) profit |
|
|
(4,869 |
) |
|
|
(4.5 |
) |
|
|
9,186 |
|
|
|
8.3 |
|
|
|
(153.0 |
) |
|
Depreciation expense |
|
|
5,480 |
|
|
5.1 |
|
|
|
5,075 |
|
|
|
4.6 |
|
|
|
8.0 |
|
|
|
Segment Profit |
|
$ |
611 |
|
|
|
0.6 |
|
|
$ |
14,261 |
|
|
|
12.9 |
|
|
|
(95.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
60.0 |
% |
|
|
|
|
|
|
56.5 |
% |
|
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
|
4.9 |
% |
|
|
|
|
|
|
45.2 |
% |
|
|
|
|
|
|
|
|
The change in net sales for the Americas Segment was as follows:
|
Net sales for the prior period |
|
$ |
110,826 |
|
|
Decrease in sales volumes |
|
|
(22,989 |
) |
|
Net change in average selling price and sales mix |
|
|
19,807 |
|
|
Net sales for the current period |
|
$ |
107,644 |
|
The change in net sales for the Americas Segment from the prior period to the current period was primarily attributable to lower sales volumes following weaker global textile demand, and the change was partially offset by higher average selling prices in response to higher input costs.
The change in Segment Profit for the Americas Segment was as follows:
|
Segment Profit for the prior period |
|
$ |
14,261 |
|
|
Change in underlying margins and sales mix |
|
|
(10,692 |
) |
|
Decrease in sales volumes |
|
|
(2,958 |
) |
|
Segment Profit for the current period |
|
$ |
611 |
|
The decrease in Segment Profit for the Americas Segment from the prior period to the current period was primarily attributable to lower production volumes driving weaker fixed cost absorption along with lower sales volumes.
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 |
|
|
|
|
|
|||||||||||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
|||
|
Net sales |
|
$ |
38,879 |
|
|
|
100.0 |
|
|
$ |
33,738 |
|
|
|
100.0 |
|
|
|
15.2 |
|
|
Cost of sales |
|
|
32,092 |
|
|
|
82.5 |
|
|
|
23,798 |
|
|
|
70.5 |
|
|
|
34.9 |
|
|
Gross profit |
|
|
6,787 |
|
|
|
17.5 |
|
|
|
9,940 |
|
|
|
29.5 |
|
|
|
(31.7 |
) |
|
Depreciation expense |
|
|
470 |
|
|
1.2 |
|
|
|
383 |
|
|
|
1.1 |
|
|
|
22.7 |
|
|
|
Segment Profit |
|
$ |
7,257 |
|
|
|
18.7 |
|
|
$ |
10,323 |
|
|
|
30.6 |
|
|
|
(29.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
21.7 |
% |
|
|
|
|
|
|
17.2 |
% |
|
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
|
58.0 |
% |
|
|
|
|
|
|
32.7 |
% |
|
|
|
|
|
|
|
|
19
The change in net sales for the Brazil Segment was as follows:
|
Net sales for the prior period |
|
$ |
33,738 |
|
|
Increase in sales volumes |
|
|
5,604 |
|
|
Decrease in average selling price and change in sales mix |
|
|
(463 |
) |
|
Net sales for the current period |
|
$ |
38,879 |
|
The increase in net sales for the Brazil Segment from the prior period to the current period was primarily attributable to higher sales volumes during strong market conditions in Brazil.
The change in Segment Profit for the Brazil Segment was as follows:
|
Segment Profit for the prior period |
|
$ |
10,323 |
|
|
Decrease in underlying margins |
|
|
(4,782 |
) |
|
Increase in sales volumes |
|
|
1,716 |
|
|
Segment Profit for the current period |
|
$ |
7,257 |
|
The decrease in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to an overall decrease in gross margin following the expected normalization of the competitive environment in Brazil, which was highly favorable for the Brazil Segment during fiscal 2022.
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 |
|
|
|
|
|
|||||||||||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
|
|
|
|
||||||||||
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
|||
|
Net sales |
|
$ |
32,996 |
|
|
|
100.0 |
|
|
$ |
51,428 |
|
|
|
100.0 |
|
|
|
(35.8 |
) |
|
Cost of sales |
|
|
28,351 |
|
|
|
85.9 |
|
|
|
44,457 |
|
|
|
86.4 |
|
|
|
(36.2 |
) |
|
Gross profit |
|
|
4,645 |
|
|
|
14.1 |
|
|
|
6,971 |
|
|
|
13.6 |
|
|
|
(33.4 |
) |
|
Depreciation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Segment Profit |
|
$ |
4,645 |
|
|
|
14.1 |
|
|
$ |
6,971 |
|
|
|
13.6 |
|
|
|
(33.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
18.4 |
% |
|
|
|
|
|
|
26.2 |
% |
|
|
|
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
|
37.1 |
% |
|
|
|
|
|
|
22.1 |
% |
|
|
|
|
|
|
|
|
The change in net sales for the Asia Segment was as follows:
|
Net sales for the prior period |
|
$ |
51,428 |
|
|
Net decrease in sales volumes |
|
|
(20,379 |
) |
|
Unfavorable foreign currency translation effects |
|
|
(2,576 |
) |
|
Change in average selling price and sales mix |
|
|
4,523 |
|
|
Net sales for the current period |
|
$ |
32,996 |
|
The decrease in net sales for the Asia Segment from the prior period to the current period was primarily attributable to weaker global demand and pandemic-related lockdowns driving lower sales volumes, and such decrease was partially offset by a strong sales mix.
The change in Segment Profit for the Asia Segment was as follows:
|
Segment Profit for the prior period |
|
$ |
6,971 |
|
|
Decrease in sales volumes |
|
|
(2,754 |
) |
|
Unfavorable foreign currency translation effects |
|
|
(369 |
) |
|
Change in underlying margins and sales mix |
|
|
797 |
|
|
Segment Profit for the current period |
|
$ |
4,645 |
|
The decrease in Segment Profit for the Asia Segment from the prior period to the current period follows the decline in net sales and sales volumes discussed above, as the comparable gross margin rate for the Asia Segment improved with a strong sales mix.
20
Liquidity and Capital Resources
Note 5, “Long-Term Debt” to the condensed consolidated financial statements includes the detail of UNIFI’s debt obligations and terms and conditions thereof along with scheduled debt maturities. Further discussion and analysis of liquidity and capital resources follow.
UNIFI’s primary capital requirements are for working capital, capital expenditures, debt service and share repurchases. UNIFI’s primary sources of capital are cash generated from operations and borrowings available under the ABL Revolver of its credit facility. For the current period, cash used by operations was $5,892, and, at October 2, 2022, excess availability under the ABL Revolver was $26,243.
As of October 2, 2022, all of UNIFI’s $127,004 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, while approximately 93% of UNIFI’s cash and cash equivalents were held by its foreign subsidiaries. Cash and cash equivalents held by foreign subsidiaries may not be presently available to fund UNIFI’s domestic capital requirements, including its domestic debt obligations. UNIFI employs a variety of 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 October 2, 2022 for domestic operations compared to foreign operations:
|
|
|
Domestic |
|
|
Foreign |
|
|
Total |
|
|||
|
Cash and cash equivalents |
|
$ |
3,342 |
|
|
$ |
43,858 |
|
|
$ |
47,200 |
|
|
Borrowings available under financing arrangements |
|
|
26,243 |
|
|
|
— |
|
|
|
26,243 |
|
|
Liquidity |
|
$ |
29,585 |
|
|
$ |
43,858 |
|
|
$ |
73,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
104,197 |
|
|
$ |
135,865 |
|
|
$ |
240,062 |
|
|
Total debt obligations |
|
$ |
127,004 |
|
|
$ |
— |
|
|
$ |
127,004 |
|
UNIFI’s primary cash requirements, in addition to normal course operating activities (e.g. working capital and payroll), primarily include (i) capital expenditures that generally have commitments of up to 12 months, (ii) contractual obligations that support normal course ongoing operations and production, (iii) operating leases and finance leases, (iv) debt service, and (v) share repurchases.
Liquidity Considerations
UNIFI navigated the impact on liquidity of the COVID-19 pandemic by diligently managing the balance sheet and operational spending, in addition to utilizing cash received from a minority interest divestiture in April 2020. Following the COVID-19 pandemic, global demand recovery allowed for strong results and cash generation in fiscal 2021. However, inflation and demand uncertainty in fiscal 2022 and during the current period have introduced new pressures to liquidity.
Currently, and following the establishment of the 2022 Credit Agreement, UNIFI’s cash and liquidity positions are sufficient to sustain its operations and meet its long-term financial targets. However, further degradation in the macroeconomic environment could introduce additional liquidity risk and require UNIFI to limit cash outflows for capital expenditures and discretionary activities while further utilizing available and additional forms of credit. Since the onset of the COVID-19 pandemic and the date of this report, we have not:
|
|
• |
taken advantage of rent, lease or debt deferrals, forbearance periods, or other concessions; or |
|
|
• |
relied on supply chain financing, structured trade payables, or vendor financing. |
Although short-term global demand appears uncertain, we do not currently anticipate that any adverse events or circumstances will place critical pressure on our liquidity position or our ability to fund our operations, capital expenditures, and expected business growth. Should global demand, economic activity, or input availability decline considerably for a prolonged period of time, UNIFI maintains the ability to (i) seek additional credit or financing arrangements and/or (ii) re-implement cost reduction initiatives to preserve cash and secure the longevity of the business and operations.
Additionally, UNIFI considers opportunities to deploy existing cash to preserve or enhance liquidity. In August 2022, we repatriated approximately $14,000 from our operations in Asia to the U.S. via an existing intercompany note and, after remitting the appropriate withholding taxes, utilized the cash to reduce our outstanding revolver borrowings, thereby increasing the availability.
For the remainder of fiscal 2023, we expect the majority of our capital will be deployed to (i) upgrade the machinery in our U.S., El Salvador, and Brazil manufacturing facilities via capital expenditures and (ii) support working capital needs associated with recovering demand and product sales. Nonetheless, we understand the current global economic risks and we are prepared to act swiftly and diligently to ensure the vitality of the business.
The following outlines the attributes relating to our credit facility as of October 2, 2022 (the fiscal quarter end date while the Prior Credit Agreement remained effective) and October 28, 2022 (the day after the 2022 Credit Agreement was established):
|
|
• |
UNIFI was in compliance with all financial covenants on both such dates; |
|
|
• |
excess availability under the ABL Revolver was $26,243 on October 2, 2022 and $80,362 on October 28, 2022; |
|
|
• |
the Trigger Level (as defined in each credit agreement or applicable amendment) was $16,500 on October 2, 2022 and $23,000 on October 28, 2022; and |
|
|
• |
$0 of standby letters of credit were outstanding on October 2, 2022 and October 28, 2022. |
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.
21
Liquidity Summary
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 provided by operating activities, and credit facility will enable UNIFI to meet its foreseeable liquidity requirements. Domestically, UNIFI’s 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 foreign operations, UNIFI expects its existing cash balances, cash provided by operating activities and available foreign financing arrangements will provide the needed liquidity to fund the associated operating activities and investing activities, such as future capital expenditures. UNIFI’s foreign operations in Asia and Brazil are in a position to obtain local country financing arrangements due to the strong operating results of each subsidiary.
Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
|
|
|
October 2, 2022 |
|
|
July 3, 2022 |
|
||
|
Long-term debt |
|
$ |
114,919 |
|
|
$ |
102,309 |
|
|
Current portion of long-term debt |
|
|
11,875 |
|
|
|
11,726 |
|
|
Unamortized debt issuance costs |
|
|
210 |
|
|
|
255 |
|
|
Debt principal |
|
|
127,004 |
|
|
|
114,290 |
|
|
Less: cash and cash equivalents |
|
|
47,200 |
|
|
|
53,290 |
|
|
Net Debt |
|
$ |
79,804 |
|
|
$ |
61,000 |
|
There was no significant change in Net Debt in connection with the establishment of the 2022 Credit Agreement.
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:
|
|
|
October 2, 2022 |
|
|
July 3, 2022 |
|
||
|
Cash and cash equivalents |
|
$ |
47,200 |
|
|
$ |
53,290 |
|
|
Receivables, net |
|
|
90,755 |
|
|
|
106,565 |
|
|
Inventories |
|
|
165,063 |
|
|
|
173,295 |
|
|
Income taxes receivable |
|
|
1,432 |
|
|
|
160 |
|
|
Other current assets |
|
|
14,336 |
|
|
|
18,956 |
|
|
Accounts payable |
|
|
(44,428 |
) |
|
|
(73,544 |
) |
|
Other current liabilities |
|
|
(18,421 |
) |
|
|
(19,806 |
) |
|
Income taxes payable |
|
|
(1,925 |
) |
|
|
(1,526 |
) |
|
Current operating lease liabilities |
|
|
(2,075 |
) |
|
|
(2,190 |
) |
|
Current portion of long-term debt |
|
|
(11,875 |
) |
|
|
(11,726 |
) |
|
Working capital |
|
$ |
240,062 |
|
|
$ |
243,474 |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Cash and cash equivalents |
|
|
(47,200 |
) |
|
|
(53,290 |
) |
|
Less: Income taxes receivable |
|
|
(1,432 |
) |
|
|
(160 |
) |
|
Less: Income taxes payable |
|
|
1,925 |
|
|
|
1,526 |
|
|
Less: Current operating lease liabilities |
|
|
2,075 |
|
|
|
2,190 |
|
|
Less: Current portion of long-term debt |
|
|
11,875 |
|
|
|
11,726 |
|
|
Adjusted Working Capital |
|
$ |
207,305 |
|
|
$ |
205,466 |
|
When comparing from July 3, 2022 to October 2, 2022, working capital decreased while Adjusted Working Capital increased.
The decrease in receivables, net was primarily due to (i) a decrease in sales following lower global demand and (ii) a decrease in banker’s acceptance notes held by our Asia Segment. The decrease in inventories was primarily attributable to a decline in raw material purchases and costs in the current period. The decrease in other current assets was primarily due to utilization of Brazil’s recovery of non-income taxes and lower vendor deposits. The decrease in accounts payable followed a decline in days payables outstanding, along with the decrease in sales and production activity in the current period. The changes in other current liabilities, current operating lease liabilities, current portion of long-term debt, income taxes receivable, and income taxes payable were insignificant.
22
Operating Cash Flows
The significant components of net cash used by operating activities are summarized below.
|
|
|
For the Three Months Ended |
|
|||||
|
|
|
October 2, 2022 |
|
|
September 26, 2021 |
|
||
|
Net (loss) income |
|
$ |
(7,834 |
) |
|
$ |
8,680 |
|
|
Equity in earnings of unconsolidated affiliates |
|
|
(295 |
) |
|
|
(280 |
) |
|
Depreciation and amortization expense |
|
|
6,740 |
|
|
|
6,365 |
|
|
Non-cash compensation expense |
|
|
633 |
|
|
|
660 |
|
|
Deferred income taxes |
|
|
(373 |
) |
|
|
(3,463 |
) |
|
Subtotal |
|
|
(1,129 |
) |
|
|
11,962 |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
|
13,800 |
|
|
|
(9,462 |
) |
|
Inventories |
|
|
6,475 |
|
|
|
(12,190 |
) |
|
Accounts payable and other current liabilities |
|
|
(28,615 |
) |
|
|
(7,393 |
) |
|
Other changes |
|
|
3,577 |
|
|
|
1,275 |
|
|
Net cash used by operating activities |
|
$ |
(5,892 |
) |
|
$ |
(15,808 |
) |
The improvement in net cash used by operating activities was primarily due to changes in working capital associated with fluctuations in raw material costs and a decline in overall business activity in the current period.
Investing Cash Flows
Investing activities primarily includes $11,198 for capital expenditures.
During the current period, UNIFI invested $11,198 in capital projects, primarily relating to (i) eAFK Evo texturing machinery, (ii) further improvements in production capabilities and technology enhancements in the Americas, and (iii) routine annual maintenance capital expenditures. Maintenance capital expenditures are necessary to 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.
For the second quarter of fiscal 2023, we expect to invest $10,000 to $12,000 in capital projects, to include (i) continuing the purchase and installation of new eAFK Evo texturing machines, (ii) making further improvements in production capabilities and technology enhancements in the Americas, and (iii) annual maintenance capital expenditures.
The total amount ultimately invested for fiscal 2023 could be more or less than the currently estimated amount depending on the timing and scale of contemplated initiatives and is expected to be funded primarily by cash provided by operating activities and available borrowings. UNIFI expects recent and future capital projects to provide benefits to future profitability. The additional assets from these capital projects consist primarily of machinery and equipment.
Financing Cash Flows
Financing activities primarily include (i) scheduled payments against the ABL Term Loan and finance leases, (ii) proceeds and payments on the ABL Revolver, and (iii) proceeds from construction financing during the period.
Share Repurchase Program
As described in Note 7, “Shareholders’ Equity,” no share repurchases have been completed in fiscal 2023.
Contractual Obligations
UNIFI incurs various financial obligations and commitments in the ordinary 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.
After considering the changes generated by the 2022 Credit Agreement, there have been no further material changes in the scheduled maturities of UNIFI’s contractual obligations as disclosed under the heading “Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 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
UNIFI’s critical accounting policies are discussed in the 2022 Form 10-K. There have been no changes to UNIFI’s critical accounting policies in fiscal 2023.
23
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
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 October 2, 2022, UNIFI had borrowings under its ABL Facility that totaled $117,000. UNIFI’s sensitivity analysis indicates that a 50-basis point interest rate increase as of October 2, 2022 would result in an increase in annual interest expense of approximately $600.
Foreign Currency Exchange Rate Risk
A complete discussion of foreign currency exchange rate risk is included in the 2022 Form 10-K and is supplemented by the following disclosures.
As of October 2, 2022, UNIFI had no outstanding foreign currency forward contracts.
As of October 2, 2022, foreign currency exchange rate risk concepts included the following:
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Approximate Amount or Percentage |
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Percentage of total consolidated assets held by UNIFI's subsidiaries outside the U.S. whose functional currency is not the USD |
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28.1 |
% |
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Cash and cash equivalents held outside the U.S.: |
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Denominated in USD |
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$ |
10,107 |
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Denominated in RMB |
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21,335 |
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Denominated in BRL |
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10,247 |
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Denominated in other foreign currencies |
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324 |
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Total cash and cash equivalents held outside the U.S. |
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$ |
42,013 |
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Percentage of total cash and cash equivalents held outside the U.S. |
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89.0 |
% |
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Cash and cash equivalents held inside the U.S. in USD by foreign subsidiaries |
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$ |
1,845 |
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Raw Material and Commodity Cost Risks
A complete discussion of raw material and commodity cost risks is included in the 2022 Form 10-K and is supplemented by the following disclosures.
As fiscal 2022 concluded, UNIFI experienced cost increases for raw materials related to inflationary pressures and competing alternatives to U.S. polyester production. Following the recent global demand deterioration, raw material costs have declined in fiscal 2023. We have been able to implement responsive selling price adjustments for the majority of our portfolio throughout fiscal 2022 and 2023. While our underlying gross margin is predominantly pressured by lower textile demand, we expect the impact of recent selling price adjustments to aid margin improvement throughout the remainder of fiscal 2023. Nonetheless, input costs remain subject to volatility, and, should inputs costs increase unexpectedly, UNIFI’s results of operations and cash flows are likely to 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.
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Item 4. |
Controls and Procedures |
As of October 2, 2022, 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 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 October 2, 2022 that have materially affected, or are reasonably likely to materially affect, UNIFI’s internal control over financial reporting.
24
PART II—OTHER INFORMATION
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Item 1. |
Legal Proceedings |
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.
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
Not applicable.
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Item 6. |
Exhibits |
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Exhibit No. |
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Description |
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3.1 |
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3.2 |
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3.3 |
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4.1 |
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4.2 |
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31.1+ |
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31.2+ |
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32++ |
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101.INS |
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Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
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Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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+ |
Filed herewith. |
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++ |
Furnished herewith. |
25
SIGNATURES
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.
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UNIFI, INC. |
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(Registrant) |
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Date: November 9, 2022 |
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By: |
/s/ CRAIG A. CREATURO |
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Craig A. Creaturo |
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Executive Vice President & Chief Financial Officer |
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(Principal Financial Officer and Principal Accounting Officer) |
26
Exhibit 31.1
CERTIFICATION
I, Edmund M. Ingle, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Unifi, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: |
November 9, 2022 |
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/s/ EDMUND M. INGLE |
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Edmund M. Ingle |
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Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Craig A. Creaturo, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Unifi, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: |
November 9, 2022 |
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/s/ CRAIG A. CREATURO |
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Craig A. Creaturo |
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Executive Vice President & Chief Financial Officer |
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(Principal Financial Officer) |
Exhibit 32
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Executive Vice President & Chief Financial Officer of Unifi, Inc. (the “Company”), do hereby certify that:
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(1) |
the Quarterly Report on Form 10-Q of the Company for the fiscal period ended October 2, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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(2) |
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: |
November 9, 2022 |
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/s/ EDMUND M. INGLE |
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Edmund M. Ingle |
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Chief Executive Officer |
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(Principal Executive Officer) |
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/s/ CRAIG A. CREATURO |
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Craig A. Creaturo |
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Executive Vice President & Chief Financial Officer |
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(Principal Financial Officer) |