UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-10542
UNIFI, INC.
(Exact name of registrant as specified in its charter)
New York
11-2165495
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
7201 West Friendly Avenue
Greensboro, North Carolina
27410
(Address of principal executive offices)
(Zip Code)
(336) 294-4410
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10 per share
UFI
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of January 28, 2022, there were 18,498,725 shares of the registrant’s common stock, par value $0.10 per share, outstanding.
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:
•
the competitive nature of the textile industry and the impact of global competition;
changes in the trade regulatory environment and governmental policies and legislation;
the availability, sourcing and pricing of raw materials;
general domestic and international economic and industry conditions in markets where the Company competes, including economic and political factors over which the Company has no control;
changes in consumer spending, customer preferences, fashion trends and end uses for the Company’s products;
the financial condition of the Company’s customers;
the loss of a significant customer or brand partner;
natural disasters, industrial accidents, power or water shortages, extreme weather conditions and other disruptions at one of the Company’s facilities;
the disruption of operations, global demand, or financial performance as a result of catastrophic or extraordinary events, including epidemics or pandemics such as the recent strains of coronavirus (“COVID-19”);
the success of the Company’s strategic business initiatives;
the volatility of financial and credit markets;
the ability to service indebtedness and fund capital expenditures and strategic business initiatives;
the availability of and access to credit on reasonable terms;
changes in foreign currency exchange, interest and inflation rates;
fluctuations in production costs;
the ability to protect intellectual property;
the strength and reputation of the Company’s brands;
employee relations;
the ability to attract, retain and motivate key employees;
the impact of climate change or environmental, health and safety regulations;
the impact of tax laws, the judicial or administrative interpretations of tax laws and/or changes in such laws or interpretations; and
other factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2021 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.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 26, 2021
TABLE OF CONTENTS
PART I—FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
1
Condensed Consolidated Balance Sheets as of December 26, 2021 and June 27, 2021
Condensed Consolidated Statements of Income for the Three Months and Six Months Ended December 26, 2021 and December 27, 2020
2
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months and Six Months Ended December 26, 2021 and December 27, 2020
3
Condensed Consolidated Statements of Shareholders’ Equity for the Three Months and Six Months Ended December 26, 2021 and December 27, 2020
4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 26, 2021 and December 27, 2020
5
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32
Item 4.
Controls and Procedures
34
PART II—OTHER INFORMATION
Legal Proceedings
35
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
36
Signatures
37
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
December 26, 2021
June 27, 2021
ASSETS
Cash and cash equivalents
$
47,620
78,253
Receivables, net
92,175
94,837
Inventories
148,893
141,221
Income taxes receivable
8,162
2,392
Other current assets
15,331
12,364
Total current assets
312,181
329,067
Property, plant and equipment, net
207,461
201,696
Operating lease assets
8,788
8,772
Deferred income taxes
2,448
1,208
Other non-current assets
12,547
14,625
Total assets
543,425
555,368
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable
54,761
54,259
Income taxes payable
7,993
1,625
Current operating lease liabilities
2,150
1,856
Current portion of long-term debt
14,971
16,045
Other current liabilities
18,260
31,638
Total current liabilities
98,135
105,423
Long-term debt
66,257
70,336
Non-current operating lease liabilities
6,736
7,032
4,723
6,686
Other long-term liabilities
6,382
7,472
Total liabilities
182,233
196,949
Commitments and contingencies
Common stock, $0.10 par value (500,000,000 shares authorized; 18,498,725 and 18,490,338
shares issued and outstanding as of December 26, 2021 and June 27, 2021, respectively)
1,850
1,849
Capital in excess of par value
67,006
65,205
Retained earnings
353,393
344,797
Accumulated other comprehensive loss
(61,057
)
(53,432
Total shareholders’ equity
361,192
358,419
Total liabilities and shareholders’ equity
See accompanying notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For the Three Months Ended
For the Six Months Ended
December 27, 2020
Net sales
201,410
162,776
397,402
304,281
Cost of sales
184,520
136,842
354,415
263,786
Gross profit
16,890
25,934
42,987
40,495
Selling, general and administrative expenses
11,966
12,625
24,636
23,989
Benefit for bad debts
(240
(259
(320
(1,146
Other operating expense, net
573
476
829
1,654
Operating income
4,591
13,092
17,842
15,998
Interest income
(194
(187
(452
(312
Interest expense
735
833
1,431
1,704
Equity in earnings of unconsolidated affiliates
(64
(130
(344
(223
Income before income taxes
4,114
12,576
17,207
14,829
Provision for income taxes
3,185
5,112
7,598
3,933
Net income
929
7,464
9,609
10,896
Net income per common share:
Basic
0.05
0.40
0.52
0.59
Diluted
0.51
0.58
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Other comprehensive (loss) income:
Foreign currency translation adjustments
(1,162
5,912
(8,088
5,730
Changes in interest rate swaps, net of tax of
$66, $78, $143 and $156, respectively
207
255
463
509
Other comprehensive (loss) income, net
(955
6,167
(7,625
6,239
Comprehensive (loss) income
(26
13,631
1,984
17,135
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Shares
Common Stock
Capital in Excess of Par Value
Retained Earnings
Accumulated Other Comprehensive Loss
Total Shareholders’ Equity
Balance at September 26, 2021
18,524
1,852
65,770
353,477
(60,102
360,997
Options exercised
—
Conversion of restricted stock units
26
(2
Stock-based compensation
1,524
1,525
Common stock repurchased and retired under
publicly announced program
(52
(5
(186
(1,013
(1,204
Common stock withheld in satisfaction of tax
withholding obligations under net share settle
transactions
(100
Other comprehensive loss, net of tax
Balance at December 26, 2021
18,498
Balance at June 27, 2021
18,490
9
(1
64
(6
2,106
2,107
(18
(112
(114
Balance at September 27, 2020
18,447
1,845
62,810
319,156
(63,734
320,077
(4
1,223
(3
(57
(58
Other comprehensive income, net of tax
Balance at December 27, 2020
18,481
1,848
63,972
326,620
(57,567
334,873
Balance at June 28, 2020
18,446
62,392
315,724
(63,806
316,155
38
1,648
(65
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash and cash equivalents at beginning of period
75,267
Operating activities:
Adjustments to reconcile net income to net cash
(used) provided by operating activities:
Depreciation and amortization expense
12,687
12,187
Non-cash compensation expense
2,261
1,816
(3,197
(1,700
Other, net
(149
(25
Changes in assets and liabilities:
1,358
(28,558
(10,953
311
(3,690
1,862
Income taxes
614
890
Accounts payable and other current liabilities
(11,598
18,830
(548
3,440
Net cash (used) provided by operating activities
(3,950
19,726
Investing activities:
Capital expenditures
(19,172
(6,035
Purchase of intangible asset
(1,088
87
163
Net cash used by investing activities
(19,085
(6,960
Financing activities:
Proceeds from ABL Revolver
18,500
Payments on ABL Revolver
(18,500
Payments on ABL Term Loan
(5,000
Proceeds from construction financing
1,611
Payments on finance lease obligations
(1,877
(1,725
Common stock repurchased and retired under publicly announced program
(324
Net cash used by financing activities
(6,794
(6,789
Effect of exchange rate changes on cash and cash equivalents
(804
2,077
Net (decrease) increase in cash and cash equivalents
(30,633
8,054
Cash and cash equivalents at end of period
83,321
Unifi, Inc.
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, which includes a range of specialized, value-added and commodity solutions, with principal geographic markets in the Americas, Asia and Europe. UNIFI has direct manufacturing operations in four countries and participates in joint ventures with operations in Israel and the United States (“U.S.”).
2. Basis of Presentation; Condensed Notes
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the U.S. (“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 June 27, 2021 (the “2021 Form 10-K”).
The financial information included in this report has been prepared by UNIFI, without audit. In the opinion of management, all adjustments, which consist of normal, recurring adjustments, considered necessary for a fair statement of the results for interim periods have been included. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures. Actual results may vary from these estimates.
All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted.
The fiscal quarter for each of Unifi, Inc., its primary domestic operating subsidiaries and its subsidiary in El Salvador ended on December 26, 2021. Unifi, Inc.’s remaining material operating subsidiaries’ fiscal quarter ended on December 31, 2021. There were no significant transactions or events that occurred between Unifi, Inc.’s fiscal quarter end and such wholly owned subsidiaries’ subsequent fiscal quarter end. The three-month periods ended December 26, 2021 and December 27, 2020 both consisted of 13 weeks. The six-month periods ended December 26, 2021 and December 27, 2020 both consisted of 26 weeks.
3. Recent Accounting Pronouncements
Based on UNIFI’s review of Accounting Standards Updates issued since the filing of the 2021 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 Recognition
The following tables present net sales grouped by (i) classification of sales type and (ii) REPREVE® Fiber sales:
Third-party manufacturer
199,585
160,146
392,882
298,987
Service
1,825
2,630
4,520
5,294
REPREVE® Fiber
81,524
62,531
153,430
114,143
All other products and services
119,886
100,245
243,972
190,138
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.
Notes to Condensed Consolidated Financial Statements (Continued)
Service Revenue
Service revenue is primarily generated as services are rendered, through fulfillment of toll manufacturing of textile products or transportation services governed by written agreements. Such toll manufacturing and transportation services represent satisfaction of UNIFI’s performance obligations required by the associated revenue contracts. The Polyester Segment derives service revenue for toll manufacturing and the All Other category derives service revenue for transportation services.
REPREVE® Fiber represents our collection of fiber products on our recycled platform, with or without added technologies.
Beginning in the fourth quarter of fiscal 2021, as a result of its annual review of products meeting the REPREVE® Fiber definition, UNIFI began including certain product sales in the Asia Segment that were previously excluded from the REPREVE® Fiber sales metric. The prior periods have been adjusted to reflect such sales and the amount reclassed was not material.
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. Receivables, Net
Receivables, net consists of the following:
Customer receivables
84,279
81,921
Allowance for uncollectible accounts
(2,126
(2,525
Reserves for quality claims
(584
(703
Net customer receivables
81,569
78,693
Other receivables
10,606
16,144
Total receivables, net
Other receivables includes $9,770 and $13,391 of banker’s acceptance notes (“BANs”) as of December 26, 2021 and June 27, 2021, respectively, in connection with the settlement of certain customer receivables generated from trade activity in the Asia Segment. The BANs are redeemable upon maturity from the drawing financial institutions, or earlier at a discount.
6. Inventories
Inventories consists of the following:
Raw materials
66,743
54,895
Supplies
11,016
10,692
Work in process
7,508
7,516
Finished goods
68,417
70,525
Gross inventories
153,684
143,628
Net realizable value adjustment
(4,791
(2,407
Total inventories
7. Other Current Assets
Other current assets consist of the following:
Vendor deposits
3,986
3,341
Value-added taxes receivable
3,762
2,484
Prepaid expenses and other
3,692
2,753
Recovery of non-income taxes
3,243
3,456
Contract assets
648
330
Total other current assets
7
Recovery of Non-Income Taxes
Brazilian companies are subject to various taxes on business operations, including turnover taxes used to fund social security and unemployment programs, commonly referred to as PIS/COFINS taxes. UNIFI, along with numerous other companies in Brazil, challenged the constitutionality of certain state taxes historically included in the PIS/COFINS tax base, alleging that such state taxes resulted in over-taxation.
On May 13, 2021, Brazil’s Supreme Federal Court ruled in favor of taxpayers, and on July 7, 2021, the Brazilian Internal Revenue Service withdrew its appeal. Following the supreme court decision, the federal government will not issue refunds for these taxes but instead will allow for the overpayments and associated interest to be applied as credits against future PIS/COFINS tax obligations.
There are no limitations or restrictions on UNIFI’s ability to recover the associated overpayment claims as future income is generated. We expect to recover the entirety of our claims over the 36-month period following December 2021. Thus, UNIFI has reflected current and non-current assets accordingly.
8. Property, Plant and Equipment, Net
Property, plant and equipment (“PP&E”), net consists of the following:
Land
3,143
3,184
Land improvements
16,396
16,372
Buildings and improvements
159,215
160,122
Assets under finance leases
22,882
22,000
Machinery and equipment
615,560
609,414
Computers, software and office equipment
25,033
24,848
Transportation equipment
10,527
10,461
Construction in progress
21,700
17,834
Gross PP&E
874,456
864,235
Less: accumulated depreciation
(660,021
(656,576
Less: accumulated amortization – finance leases
(6,974
(5,963
Total PP&E, net
9. Other Non-Current Assets
Other non-current assets consist of the following:
6,485
8,063
Intangible assets, net
3,234
3,978
Investments in unconsolidated affiliates
2,351
2,159
Vendor deposits and other
477
425
Total other non-current assets
As previously described in Note 7, “Other Current Assets,” UNIFI recorded a recovery of non-income taxes and reflected current and non-current assets accordingly.
Investments in Unconsolidated Affiliates
As of December 26, 2021, UNIFI maintained investments in two entities classified as 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 treated as a partnership for income tax reporting purposes located in Ridgeway, Virginia.
In conjunction with the formation of UNFA, UNIFI entered into a supply agreement with UNF and UNFA whereby UNIFI agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNFA. The supply agreement has no stated minimum purchase quantities and pricing is typically negotiated every six months, based on market rates. As of December 26, 2021, UNIFI’s open purchase orders related to this supply agreement were $2,287.
8
UNIFI’s raw material purchases under this supply agreement consisted of the following:
UNFA
12,582
8,005
UNF
146
Total
12,728
8,212
As of December 26, 2021 and June 27, 2021, UNIFI had combined accounts payable due to UNF and UNFA of $3,912 and $2,955, respectively.
UNIFI has determined that UNF and UNFA are variable interest entities and that UNIFI is the primary beneficiary of these entities, based on the terms of the supply agreement discussed above. As a result, these entities should be consolidated with UNIFI’s financial results. As (i) UNIFI purchases substantially all of the output from the two entities; (ii) the two entities’ balance sheets constitute 3% or less of UNIFI’s current assets, total assets and total liabilities at each of UNIFI’s fiscal year ends; and (iii) such balances are not expected to comprise a larger portion in the future, UNIFI has not included the accounts of UNF and UNFA in its consolidated financial statements. The financial results of UNF and UNFA are included in UNIFI’s consolidated financial statements with a one-month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with UNIFI’s accounting policy. Other than the supply agreement discussed above, UNIFI does not provide any other commitments or guarantees related to either UNF or UNFA.
Condensed balance sheet and income statement information for UNIFI’s unconsolidated affiliates (including reciprocal balances) are presented in the tables below.
Current assets
10,071
7,931
Non-current assets
662
659
Current liabilities
6,363
3,967
Non-current liabilities
Shareholders’ equity and capital accounts
4,370
4,623
UNIFI’s portion of undistributed earnings
2,291
2,100
7,336
4,651
13,486
7,864
28
1,092
572
1,533
(Loss) income from operations
(381
673
(254
719
Net (loss) income
(380
674
(253
723
Depreciation and amortization
31
42
78
Distributions received
10. Other Current Liabilities
Other current liabilities consists of the following:
Payroll and fringe benefits
8,614
10,204
Deferred revenue
3,360
2,691
Incentive compensation
1,638
12,356
Current portion of supplemental post-employment plan
1,100
1,087
Interest rate swaps
652
1,234
Other
2,896
4,066
Total other current liabilities
11. Long-Term Debt
Debt Obligations
The following table presents the total balances outstanding for UNIFI’s debt obligations, their scheduled maturity dates and the weighted average interest rates for borrowings as well as the applicable current portion of long-term debt:
Weighted Average
Scheduled
Interest Rate as of
Principal Amounts as of
Maturity Date
ABL Revolver
December 2023
0.0
%
ABL Term Loan
3.2
(1)
72,500
77,500
Finance lease obligations
(2)
3.5
7,480
8,475
Construction financing
(3)
2.3
882
Total debt
81,591
86,857
Current ABL Term Loan
(12,500
Current portion of finance lease obligations
(2,471
(3,545
Unamortized debt issuance costs
(363
(476
Total long-term debt
Includes the effects of interest rate swaps.
Scheduled maturity dates for finance lease obligations range from May 2022 to November 2027.
Refer to the discussion below under the subheading “─Construction Financing” for further information.
ABL Facility
On December 18, 2018, Unifi, Inc. and certain of its subsidiaries entered into a Third Amendment to Amended and Restated Credit Agreement and Second Amendment to Amended and Restated Guaranty and Security Agreement (the “2018 Amendment”). The 2018 Amendment amended the Amended and Restated Credit Agreement, dated as of March 26, 2015, by and among Unifi, Inc. and a syndicate of lenders, as previously amended (together with all previous and subsequent amendments, the “Credit Agreement”). The Credit Agreement provides for a $200,000 senior secured credit facility (the “ABL Facility”), including a $100,000 revolving credit facility (the “ABL Revolver”) and a term loan that can be reset up to a maximum amount of $100,000, once per fiscal year, if certain conditions are met (the “ABL Term Loan”). The ABL Facility has a maturity date of December 18, 2023.
ABL Facility borrowings bear interest at LIBOR plus an applicable margin of 1.25% to 1.75%, or the Base Rate (as defined in the Credit Agreement) plus an applicable margin of 0.25% to 0.75%, with interest currently being paid on a monthly basis. As of December 26, 2021 and June 27, 2021, ABL Facility borrowings carried interest at LIBOR plus 1.25%.
UNIFI currently maintains three interest rate swaps as cash flow hedges intended to fix LIBOR at approximately 1.9% on $75,000 of variable-rate debt. Such swaps are scheduled to terminate in May 2022. During the quarter ended December 26, 2021, UNIFI’s outstanding variable-rate debt fell below the combined $75,000 notional amount. Accordingly, the $20,000 notional interest rate swap was de-designated from hedge accounting treatment. The impact of de-designation was not material.
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 1.25%, and contains terms customary for a financing of this type.
Each borrowing under the agreement provides for 60 monthly payments, which will commence in the form of a finance lease obligation upon the completion of the construction period with an interest rate of approximately 3.0%. In connection with this construction financing arrangement, UNIFI has borrowed a total of $2,493 and transitioned $882 of completed asset costs to finance lease obligations as of December 26, 2021.
Scheduled Debt Maturities
The following table presents the scheduled maturities of UNIFI’s outstanding debt obligations for the remainder of fiscal 2022, the following four fiscal years and thereafter:
Fiscal 2022
Fiscal 2023
Fiscal 2024
Fiscal 2025
Fiscal 2026
Thereafter
7,500
10,000
55,000
1,765
1,426
1,475
1,374
918
522
Total (1)
9,265
11,426
56,475
Total reported excludes $1,611 of construction financing, described above.
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12. Other Long-Term Liabilities
Other long-term liabilities consists of the following:
Uncertain tax positions
3,326
3,045
Supplemental post-employment plan
2,244
2,090
812
2,337
Total other long-term liabilities
13. Income Taxes
The provision for income taxes and effective tax rate were as follows:
Effective tax rate
77.4
40.6
44.2
26.5
U.S. Tax Law Change
On July 20, 2020, the U.S. Treasury issued and enacted final regulations related to global intangible low-tax income (“GILTI”) that allow certain U.S. taxpayers to elect to exclude foreign income that is subject to a high effective tax rate from their GILTI inclusions. The GILTI high-tax exclusion is an annual election and is retroactively available for tax years beginning after December 31, 2017. The three-month and six-month periods ended December 27, 2020 includes a discrete tax benefit of $359 and $5,148, respectively, related to the retroactive election.
Valuation Allowance
UNIFI regularly assesses whether it is more-likely-than-not that some portion or all of its deferred tax assets will not be realized. UNIFI considers the scheduled reversal of taxable temporary differences, taxable income in carryback years, projected future taxable income and tax planning strategies in making this assessment. Since UNIFI operates in multiple jurisdictions, the assessment is made on a jurisdiction-by-jurisdiction basis, taking into consideration the effects of local tax law. The three-month and six-month period ended December 27, 2020 includes discrete tax expense of $26 and $2,153, respectively, for a change in valuation allowance related to the GILTI regulations enacted during that period.
Income Tax Expense
UNIFI’s provision for income taxes for the six months ended December 26, 2021 and December 27, 2020 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 December 26, 2021 was higher than the U.S. federal statutory rate primarily due to an increase in the valuation allowance for deferred tax assets, earnings taxed at higher rates in foreign jurisdictions, and deferred tax on unremitted earnings. The effective tax rate for the six months ended December 26, 2021 was higher than the U.S. federal statutory rate primarily due to an increase in the valuation allowance for deferred tax assets, earnings taxed at higher rates in foreign jurisdictions, and deferred tax on unremitted earnings.
The effective tax rate for the three months ended December 27, 2020 was higher than the U.S. federal statutory rate primarily due to current U.S. tax on GILTI. The effective tax rate for the six months ended December 27, 2020 was higher than the U.S. federal statutory rate primarily due to current U.S. tax on GILTI, the change in valuation allowance for deferred tax assets, and earnings taxed at higher rates in foreign jurisdictions. These rate impacts were partially offset by the retroactive GILTI high-tax exclusion for prior periods.
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.
14. 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 $50,000 of its common stock. Under the 2018 SRP, purchases may be made from time to time in the open market at prevailing market prices, through private transactions or block trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date. Repurchases, if any, are expected to be financed through cash generated from operations and borrowings under the ABL Revolver, and are subject to applicable limitations and restrictions as set forth in the ABL Facility. UNIFI may discontinue repurchases at any time that management determines additional purchases are not beneficial or advisable.
11
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
Fiscal 2019
50,000
Fiscal 2020
84
23.72
48,008
Fiscal 2021
Fiscal 2022 (through December 26, 2021)
52
23.36
46,805
136
23.58
Repurchased shares are retired and have the status of authorized and unissued shares. The cost of the repurchased shares is recorded as a reduction to common stock to the extent of the par value of the shares acquired and the remainder is allocated between capital in excess of par value and retained earnings, on a pro rata basis.
15. Stock-Based Compensation
On October 29, 2020, UNIFI’s shareholders approved the Unifi, Inc. Second Amended and Restated 2013 Incentive Compensation Plan (the “2020 Plan”). The 2020 Plan set the number of shares available for future issuance pursuant to awards granted under the 2020 Plan to 850. No additional awards can be granted under prior plans; however, awards outstanding under a respective prior plan remain subject to that plan’s provisions.
The following table provides the number of awards remaining available for future issuance under the 2020 Plan as of December 26, 2021:
Authorized under the 2020 Plan
850
Plus: Awards expired, forfeited or otherwise terminated unexercised
Less: Awards granted to employees
(209
Less: Awards granted to non-employee directors
(41
Available for issuance under the 2020 Plan
600
Stock-based compensation units granted or issued were as follows:
Stock options
155
Restricted stock units
81
110
Performance share units
53
Vested share units
Common stock
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 100 Company shares, is intended to be a qualified plan under applicable tax law, and allows eligible employees to purchase Company shares at a 15% discount from market value.
16. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities
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.
The following table presents details regarding UNIFI’s hedging activities:
Increase in fair value of interest rate swaps
(249
(333
(582
(665
Impact of interest rate swaps to increase interest expense
346
335
693
664
For the six months ended December 26, 2021 and December 27, 2020, there were no significant changes to UNIFI’s assets and liabilities measured at fair value, and there were no transfers into or out of the levels of the fair value hierarchy.
As described in Note 11. “Long Term Debt,” UNIFI de-designated a $20,000 interest rate swap from hedge accounting treatment during the quarter ended December 26, 2021. The impact of de-designation was not material.
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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.
17. Accumulated Other Comprehensive Loss
The components of and the changes in accumulated other comprehensive loss, net of tax, as applicable, consist of the following:
Foreign
Currency
Translation
Adjustments
Changes in Interest
Rate Swaps
Accumulated
Comprehensive
Loss
(52,480
(952
Other comprehensive (loss) income
(60,568
(489
A summary of the after-tax effects of the components of other comprehensive (loss) income, net for the three-month and six-month periods ended December 26, 2021 and December 27, 2020 is included in the accompanying condensed consolidated statements of comprehensive (loss) income.
18. Earnings Per Share
The components of the calculation of earnings per share (“EPS”) are as follows:
Basic weighted average shares
18,511
18,465
18,513
18,456
Net potential common share equivalents
493
267
486
273
Diluted weighted average shares
19,004
18,732
18,999
18,729
Excluded from the calculation of common share equivalents:
Anti-dilutive common share equivalents
324
706
747
Excluded from the calculation of diluted shares:
Unvested stock options that vest upon achievement of certain market conditions
333
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.
19. 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 99-year ground lease (the “Ground Lease”) with E.I. DuPont de Nemours (“DuPont”). Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the U.S. Environmental Protection Agency and the North Carolina Department of Environmental Quality (“DEQ”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and remediate the AOCs to comply with applicable regulatory standards. Effective March 20, 2008, UK entered into a lease termination agreement associated with conveyance of certain assets at the Kinston site to DuPont. This agreement terminated the Ground Lease and relieved UK of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to UK’s period of operation of the Kinston site, which was from 2004 to 2008. At this time, UNIFI has no basis to determine if or when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same. UK continues to own property (the “Kentec site”) acquired in the 2004 transaction with INVISTA that has contamination from DuPont’s prior operations and is monitored by DEQ. The Kentec site has been remediated by DuPont, and DuPont has received authority from DEQ to discontinue further remediation, other than natural attenuation. Prior to transfer of responsibility to UK, DuPont and UK had a duty to monitor and report the environmental status of the Kentec site to DEQ. Effective April 10, 2019, UK assumed sole remediator responsibility of the Kentec site pursuant to its contractual obligations with INVISTA and received $180 of net monitoring and reporting costs due from DuPont. In connection with monitoring, UK expects to sample and report to
13
DEQ annually. At this time, UNIFI does not expect any active site remediation will be required but expects that any costs associated with active site remediation, if ever required, would likely be immaterial.
20. Related Party Transactions
There were no related party receivables as of December 26, 2021 or June 27, 2021.
Related party payables for Salem Leasing Corporation consisted of the following:
455
469
Operating lease obligations
968
1,133
5,547
6,149
Total related party payables
6,970
7,751
The following are the Company’s significant related party transactions:
Affiliated Entity
Transaction Type
Salem Leasing Corporation
Payments for transportation equipment costs and finance lease debt service
1,059
924
2,087
1,863
21. 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.
UNIFI has four reportable segments.
The operations within the Polyester Segment exhibit similar long-term economic characteristics and primarily sell into an economic trading zone covered by the USMCA, NAFTA and CAFTA (collectively, the regions comprising these economic trading zones are referred to as “NACA”) to similar customers utilizing similar methods of distribution. These operations derive revenues primarily from manufacturing polyester-based products with sales primarily to other yarn manufacturers and knitters and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive, home furnishings, industrial and other end-use markets. The Polyester Segment consists of sales and manufacturing operations in the U.S. and El Salvador.
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, which are outside of the NACA region. The Asia Segment primarily sources polyester-based 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.
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 South America. The Brazil Segment includes a manufacturing location and sales offices in Brazil.
The operations within the Nylon Segment exhibit similar long-term economic characteristics and primarily sell into the NACA region to similar customers utilizing similar methods of distribution. These operations derive revenues primarily from manufacturing nylon-based products with sales to knitters and weavers that produce fabric primarily for the apparel, hosiery and medical markets. The Nylon Segment includes an immaterial operating segment in Colombia that sells similar nylon-based textile products to similar customers in Colombia and Mexico utilizing similar methods of distribution. The Nylon Segment consists of sales and manufacturing operations in the U.S. and Colombia.
In addition to UNIFI’s reportable segments, an All Other category is included in the tables below. All Other consists primarily of for-hire transportation services. For-hire transportation services revenue is derived from performing common carrier services utilizing UNIFI’s fleet of transportation equipment.
The operations within All Other (i) are not subject to review by the CODM at a level consistent with UNIFI’s other operations, (ii) are not regularly evaluated using the same metrics applied to UNIFI’s other operations, and (iii) do not qualify for aggregation with an existing reportable segment. Therefore, such operations are excluded from reportable segments.
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.
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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 December 26, 2021
Polyester
Asia
Brazil
Nylon
All Other
92,418
59,112
27,601
21,015
1,264
91,978
50,601
20,075
20,829
1,037
440
8,511
7,526
186
227
Segment depreciation expense
4,544
277
444
157
5,422
Segment Profit
4,984
7,803
630
384
22,312
For the Three Months Ended December 27, 2020
76,696
44,692
24,253
16,008
1,127
65,801
38,164
16,276
15,613
988
10,895
6,528
7,977
395
139
4,470
321
438
164
5,393
15,365
8,298
303
31,327
For the Six Months Ended December 26, 2021
181,885
110,540
61,339
41,174
2,464
173,151
95,058
43,873
40,262
2,071
8,734
15,482
17,466
912
393
9,026
660
879
315
10,880
17,760
18,126
1,791
708
53,867
For the Six Months Ended December 27, 2020
145,772
82,415
46,859
27,037
2,198
130,245
71,309
34,269
25,977
1,986
15,527
11,106
12,590
1,060
212
8,873
751
880
328
10,832
24,400
13,341
1,940
540
51,327
The reconciliations of segment gross profit to consolidated income before income taxes are as follows:
Segment gross profit
There have been no material changes in segment assets during fiscal 2022.
15
22. Supplemental Cash Flow Information
Cash payments for interest and taxes consist of the following:
Interest, net of capitalized interest of $221 and $92, respectively
1,280
1,610
Income tax payments, net
9,520
3,923
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 six months ended December 26, 2021 includes an income tax payment of $3,749 related to the recovery of non-income taxes described in Note 7, “Other Current Assets.”
Non-Cash Investing and Financing Activities
As of December 26, 2021 and June 27, 2021, $1,992 and $2,080, respectively, were included in accounts payable for unpaid capital expenditures. As of December 27, 2020 and June 28, 2020, $697 and $630, respectively, were included in accounts payable for unpaid capital expenditures.
During the six months ended December 26, 2021 and December 27, 2020, UNIFI recorded non-cash activity relating to finance leases of $882 and $740, respectively.
16
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 December 26, 2021, while a reference to the “prior period” refers to the three-month period ended December 27, 2020. A reference to the “current six-month period” refers to the six-month period ended December 26, 2021, while a reference to the “prior six-month period” refers to the six-month period ended December 27, 2020. Such references may be accompanied by certain phrases for added clarity. The current period and the prior period each consisted of 13 weeks. The current six-month period and the prior six-month period each consisted of 26 weeks.
Our discussions in this Item 2 focus on our results during, or as of, the three months and six months ended December 26, 2021 and December 27, 2020, and, to the extent applicable, any material changes from the information discussed in the 2021 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 2021 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 the weakening of the Brazilian Real (“BRL”) and changes in the Chinese Renminbi (“RMB”) versus the U.S. Dollar (“USD”). In discussion of operating results in this report, we refer to our operations in the “NACA” region, which is the region comprised of the trade zones covered by USMCA, NAFTA and CAFTA-DR.
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. This strategic and synergistic focus includes three supporting pillars: (1) engaging in strategic relationships with like-minded entities, (2) growing our existing portfolio of technologies and capabilities, and (3) expanding our supply chain to best serve our direct and indirect customers. UNIFI remains committed to this strategy, which we believe will increase profitability and generate improved cash flows from operations.
UNIFI has four reportable segments for its operations – the Polyester Segment, the Asia Segment, the Brazil Segment and the Nylon Segment – as well as certain ancillary operations that include for-hire transportation services, which comprise an All Other category. The ancillary operations classified within All Other are insignificant for all periods presented; therefore, UNIFI’s discussion and analysis of those activities is generally limited to their impact on consolidated results, where appropriate.
COVID-19 Pandemic
The COVID-19 pandemic adversely impacted our operating results for the prior six-month period as a result of global demand declines that weighed on our sales and profitability performance. Despite the lingering effects and uncertainty of the COVID-19 pandemic, our foreign operating results have improved significantly from the prior six-month period to the current six-month period, primarily due to the restoration of global demand levels and consumer spending. However, rising input costs and a tighter labor pool in the U.S. placed meaningful pressure on our domestic gross profit performance during the current period. Accordingly, the comparative benefit of restored global demand amid the ongoing COVID-19 pandemic in the current period has been substantially offset by the recent labor and input cost challenges for our NACA operations. In order to address these headwinds, we have (i) instituted responsive selling price adjustments, including most recently in January 2022, and (ii) prioritized training and retention initiatives with our manufacturing workforce. We expect both actions to improve our NACA profitability in future periods.
Recent Trade Initiatives
UNIFI remains committed to pursuing relief from the elevated levels of low-cost and subsidized polyester textured yarn (“Subject Imports”) entering the U.S. market from foreign countries. Trade petition efforts to slow Subject Imports from China and India were successful during calendar 2019.
Due to the continued pressure from Subject Imports on our Polyester Segment revenues and gross margins in the U.S. market, UNIFI petitioned the United States Department of Commerce (“Commerce Department”) and the United States International Trade Commission (“ITC”) relating to Subject Imports from Indonesia, Malaysia, Thailand, and Vietnam (the “Subject Countries”). In November 2021, the ITC determined that the U.S. textile industry was materially injured by reason of imports of polyester textured yarn from Subject Countries, and in December 2021, the Commerce Department issued unanimous final antidumping duty orders on such imports.
We believe both trade petitions on Subject Imports are necessary to normalize the U.S. polyester market for fair pricing and competition and will aid in generating incremental revenue for the Polyester Segment.
Adverse Impacts of Elevated Input Costs and Global Production Volatility
The prior six-month period benefited from stable, low raw material costs and some restoration of global demand levels. As fiscal 2021 concluded, global economic recovery, domestic weather events, supply constraints and general inflationary pressures have led to higher input costs in fiscal 2022. For the majority of our portfolio, we have been able to implement selling price adjustments to protect gross margins in the current six-month period, the positive effects of which we expect to see starting in the third quarter of fiscal 2022. We have navigated the higher cost environment better than in recent prior years. However, elevated levels of input costs and the weakening of labor productivity in our manufacturing operations remain headwinds to our underlying domestic performance.
In addition to the recent escalation of input costs, UNIFI is experiencing 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 resulting from pandemic-related lockdowns in certain regions of the world. While our businesses are not currently materially impacted by these adverse events and circumstances, the existing challenges, particularly for input costs and labor productivity, could worsen and/or occur for prolonged periods and materially impact our Polyester Segment.
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 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 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 Income, which represents net 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;
Adjusted EPS, which represents Adjusted Net 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 Working Capital and Net Debt (collectively, the “non-GAAP financial measures”) are not determined in accordance with GAAP and should not be considered a substitute for performance measures determined in accordance with GAAP. The calculations of the non-GAAP financial measures are subjective, based on management’s belief as to which items should be included or excluded in order to provide the most reasonable and comparable view of the underlying operating performance of the business. We may, from time to time, modify the amounts used to determine our non-GAAP financial measures. When applicable, management’s discussion and analysis includes specific consideration for items that comprise the reconciliations of its non-GAAP financial measures. We believe that these non-GAAP financial measures better reflect UNIFI’s underlying operations and performance and that their use, as operating performance measures, provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets, among otherwise comparable companies.
Management uses Adjusted EBITDA (i) as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it removes the impact of (a) items directly related to our asset base (primarily depreciation and amortization) and (b) items that we would not expect to occur as a part of our normal business on a regular basis; (ii) for planning purposes, including the preparation of our annual operating budget; (iii) as a valuation measure for evaluating our operating performance and our capacity to incur and service debt, fund capital expenditures and expand our business; and (iv) as one measure in determining the value of other prospective 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 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 prospective acquisitions and dispositions.
Management uses Adjusted Working Capital as an indicator of UNIFI’s production efficiency and ability to manage inventories and receivables. Adjusted Working Capital is a metric used in the determination of variable compensation.
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.
Review of Results of Operations
Three Months Ended December 26, 2021 Compared to Three Months Ended December 27, 2020
Consolidated Overview
The below tables provide:
the components of net income and the percentage increase or decrease over the prior period amounts, and
a reconciliation from net income to EBITDA and Adjusted EBITDA.
Following the tables is a discussion and analysis of the significant components of net income.
18
% of
Net Sales
Change
100.0
23.7
91.6
84.1
34.8
8.4
15.9
(34.9
SG&A
5.9
7.8
(5.2
(0.1
(0.2
(7.3
0.3
20.4
8.0
(64.9
Interest expense, net
541
646
0.4
(16.3
(50.8
2.0
7.7
(67.3
1.5
3.1
(37.7
0.5
4.6
(87.6
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The reconciliations of the amounts reported under GAAP for Net income to EBITDA and Adjusted EBITDA were as follows:
Depreciation and amortization expense (1)
6,266
6,016
EBITDA
10,921
19,238
Other adjustments (2)
Adjusted EBITDA
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.
For the periods presented, there were no other adjustments necessary to reconcile Net income to Adjusted EBITDA.
Adjusted Net Income and Adjusted EPS (Non-GAAP Financial Measures)
For the current period and the prior period, there were no adjustments necessary to reconcile Net income to Adjusted Net Income or Adjusted EPS.
Consolidated net sales for the current period increased by $38,634, or 23.7%, consolidated sales volumes increased 8.3%, and consolidated weighted average sales prices increased 15.4%, compared to the prior period. The increases occurred primarily due to (i) higher selling prices associated with higher input costs and (ii) a rebound in product demand following the adverse impact of the COVID-19 pandemic on sales volumes in the prior period.
REPREVE® Fiber products for the current period comprised 40% of consolidated net sales, compared to 38% for the prior period.
Gross Profit
Gross profit for the current period decreased by $9,044, or 34.9%, compared to the prior period. Gross profit performance was lower than anticipated as a result of labor and input cost challenges, primarily for our Polyester and Nylon Segments.
For the Polyester Segment, gross profit decreased due to higher-than-expected input costs, primarily for labor, packaging, supplies, and polyester raw material. Labor challenges, including the average skill and experience of our workforce and the reduced availability of labor, also contributed to lower productivity and efficiency.
For the Asia Segment, gross profit increased from the prior period primarily due to higher sales volumes.
For the Brazil Segment, gross profit decreased from the prior period primarily due to normalization from the exceptional performance achieved in the prior period, which was characterized by a significant but temporary improvement in competitive position and market share following the pandemic-related rebound in product demand in Brazil.
For the Nylon Segment, gross profit exhibited no relevant change.
19
SG&A decreased from the prior period, primarily due to lower incentive compensation in the current period, partially offset by higher amortization from customer list assets acquired in fiscal 2021 and higher discretionary expenses in the current period, following COVID-19 pandemic-related restrictions and cost control measures implemented in the prior period.
Benefit for Bad Debts
There was no material activity for the current period or the prior period.
Other Operating Expense, Net
The current period and prior period primarily reflect foreign currency transaction losses of $297 and $324, respectively, in addition to $298 of severance costs recorded in the current period.
Interest Expense, Net
Interest expense, net decreased from the prior period to the current period, primarily attributable to a lower average debt principal.
Equity in Earnings of Unconsolidated Affiliates
Income Taxes
Provision for income taxes and the effective tax rate were as follows:
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 greater when income before income taxes is lower.
The increase 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.
Net Income
Net income for the current period was $929, or $0.05 per diluted share, compared to net income of $7,464 or $0.40 per diluted share, for the prior period. The decrease in net income was primarily attributable to lower gross profit and the associated increase in the effective tax rate in the current period.
Adjusted EBITDA (Non-GAAP Financial Measure)
Adjusted EBITDA decreased from the prior period to the current period, primarily due to lower gross profit.
20
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current period.
Polyester Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Polyester Segment, were as follows:
20.5
99.5
85.8
39.8
14.2
(96.0
Depreciation expense
4.9
5.8
1.7
5.4
20.0
(67.6
Segment net sales as a percentage of
consolidated amounts
45.9
47.1
Segment Profit as a percentage of
22.3
49.0
The change in net sales for the Polyester Segment was as follows:
Net sales for the prior period
Net change in average selling price and sales mix
13,689
Increase in sales volumes
2,033
Net sales for the current period
The increase in net sales for the Polyester Segment from the prior period to the current period was primarily attributable to higher average selling prices associated with higher input costs.
The change in Segment Profit for the Polyester Segment was as follows:
Segment Profit for the prior period
Net decrease in underlying margins
(10,788
407
Segment Profit for the current period
The decrease in Segment Profit for the Polyester Segment from the prior period to the current period was primarily attributable to higher-than-expected input costs, primarily in labor, packaging, supplies and polyester raw material in the current period due to inflationary pressures and weaker labor productivity.
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:
32.3
85.6
85.4
32.6
14.4
14.6
30.4
29.3
27.5
38.1
20.8
21
The change in net sales for the Asia Segment was as follows:
Net increase in sales volumes
12,799
Favorable foreign currency translation effects
1,491
Change in average selling price and sales mix
130
The increase in net sales for the Asia Segment from the prior period to the current period was primarily attributable to the continued momentum of REPREVE®-branded products contributing to underlying sales growth, in addition to the recovery from the adverse impacts of the COVID-19 pandemic on global demand in the prior period.
The RMB weighted average exchange rate was 6.39 RMB/USD and 6.62 RMB/USD for the current period and the prior period, respectively.
The change in Segment Profit for the Asia Segment was as follows:
1,871
222
Change in underlying margins and sales mix
(110
The increase in Segment Profit for the Asia Segment from the prior period to the current period was primarily attributable to higher sales volumes in the current period.
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:
13.8
72.7
67.1
23.3
27.3
32.9
(5.7
1.0
1.3
(13.7
28.3
34.2
(6.0
13.7
14.9
35.0
The change in net sales for the Brazil Segment was as follows:
Increase in average selling price
8,081
Decrease in sales volumes
(4,000
Unfavorable foreign currency translation effects
(733
The increase in net sales for the Brazil Segment from the prior period to the current period was primarily attributable to higher selling prices associated with higher input costs. The benefit of higher selling prices was partially offset by lower sales volumes in connection with a more normalized market share position following the pandemic-related rebound in product demand that benefited our market share in the prior period.
The BRL weighted average exchange rate was 5.57 BRL/USD and 5.41 BRL/USD for the current period and the prior period, respectively.
The change in Segment Profit for the Brazil Segment was as follows:
(1,364
(277
Increase in underlying unit margins
1,146
22
The decrease in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to the unmatched, exceptional sales and production volume levels achieved in the prior period following the pandemic-related rebound in product demand in Brazil. The current period includes a more normalized performance for the Brazil Segment due to comparatively weaker fixed cost absorption and lower production volumes.
Nylon Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Nylon Segment, were as follows:
31.3
99.1
97.5
33.4
0.9
2.5
(52.9
2.1
2.7
1.4
3.0
5.2
(24.4
10.4
9.8
2.8
The change in net sales for the Nylon Segment was as follows:
2,763
The increase in net sales for the Nylon Segment from the prior period to the current period was primarily attributable to higher sales volumes following customer acquisitions completed in fiscal 2021 and higher selling prices in connection with higher raw material costs.
The change in Segment Profit for the Nylon Segment was as follows:
(342
Nylon Segment Profit was relatively unchanged due to the impacts of a less favorable sales and production mix, partially offset by higher volumes.
Six Months Ended December 26, 2021 Compared to Six Months Ended December 27, 2020
the components of net income and the percentage increase or decrease over the prior six-month period amounts, and
23
30.6
89.2
86.7
34.4
10.8
13.3
6.2
7.9
(0.4
(72.1
0.2
(49.9
4.5
5.3
11.5
979
1,392
(29.7
54.3
4.3
16.0
1.9
93.2
2.4
3.6
(11.8
12,574
12,068
30,760
28,289
For the current six-month period and the prior six-month period, there were no adjustments necessary to reconcile Net income to Adjusted Net Income or Adjusted EPS.
Consolidated net sales for the current six-month period increased by $93,121, or 30.6%, and consolidated sales volumes increased 10.5%, compared to the prior six-month period. The increases occurred primarily due to (i) a rebound in product demand following the adverse impact of the COVID-19 pandemic on sales volumes in the prior six-month period and (ii) higher selling prices associated with higher raw material costs.
Consolidated weighted average sales prices increased 20.1%, primarily attributable to higher selling prices associated with higher raw material costs.
REPREVE® Fiber products for the current six-month period comprised 39% of consolidated net sales, up from 38% for the prior six-month period.
Gross profit for the current six-month period increased by $2,492, or 6.2%, compared to the prior six-month period. Although we experienced a significant increase in net sales, input cost and labor challenges muted our domestic gross profit in the quarter ended December 26, 2021.
For the Polyester Segment, gross profit decreased due to higher-than-expected input costs primarily for labor, packaging, supplies and raw material, along with weaker labor productivity, offsetting the benefit from the restoration of U.S. demand following the negative impact COVID-19 pandemic had on the prior period.
For the Asia Segment, gross profit increased from the prior six-month period primarily due to higher sales volumes.
For the Brazil Segment, gross profit increased from the prior six-month period primarily due to the comparably weak first quarter of the prior period when the COVID-19 pandemic was a more significant headwind.
24
SG&A increased from the prior six-month period, primarily due to higher amortization from customer list assets acquired in fiscal 2021 and higher discretionary expenses in the current six-month period, following COVID-19 pandemic-related restrictions and cost control measures implemented in the prior six-month period, partially offset by lower incentive compensation for the current six-month period.
The current six-month period benefit for bad debts reflects no material activity. The prior six-month period reflects a benefit for general improvement in customer payment frequency following the adverse effects of the COVID-19 pandemic on customer financial health.
The current six-month period and prior six-month period primarily reflect foreign currency transaction losses of $530 and $606, respectively, in addition to $314 and $837 of severance costs, respectively.
Interest expense, net decreased from the prior six-month period to the current six-month period, primarily attributable to a lower average debt principal.
There was no material activity for the current six-month period or the prior six-month period.
The increase in the effective tax rate from the prior six-month period to the current six-month period is primarily attributable to a discrete benefit in the prior six-month period for the retroactive GILTI high-tax exclusion.
Net income for the current six-month period was $9,609, or $0.51 per diluted share, compared to net income of $10,896 or $0.58 per diluted share, for the prior six-month period. The decrease in net income was primarily attributable to the increase in the effective tax rate in the current six-month period, partially offset by higher gross profit.
25
Adjusted EBITDA increased from the prior six-month period to the current six-month period, primarily due to higher gross profit.
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current six-month period.
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Polyester Segment, were as follows:
24.8
95.2
89.4
4.8
10.6
(43.7
5.0
6.1
16.7
(27.2
45.8
47.9
33.0
47.5
Net sales for the prior six-month period
29,519
6,594
Net sales for the current six-month period
The increase in net sales for the Polyester Segment from the prior six-month period to the current six-month period was primarily attributable to (i) higher average selling prices associated with higher polyester raw material costs and (ii) higher sales volumes in connection with demand restoration following the adverse effects of the COVID-19 pandemic on the prior six-month period.
Segment Profit for the prior six-month period
(7,744
1,104
Segment Profit for the current six-month period
The decrease in Segment Profit for the Polyester Segment from the prior six-month period to the current six-month period was primarily attributable to the adverse impacts of higher input costs and weaker labor productivity during the quarter ending December 26, 2021.
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Asia Segment, were as follows:
34.1
86.0
86.5
33.3
14.0
13.5
39.4
27.8
27.1
28.7
21.6
23,991
3,912
The increase in net sales for the Asia Segment from the prior six-month period to the current six-month period was primarily attributable to the continued momentum of REPREVE®-branded products contributing to underlying sales growth, in addition to the adverse impacts of the COVID-19 pandemic on global demand in the prior six-month period.
The RMB weighted average exchange rate was 6.43 RMB/USD and 6.75 RMB/USD for the current six-month period and the prior six-month period, respectively.
3,230
631
515
The increase in Segment Profit for the Asia Segment from the prior six-month period to the current six-month period was primarily attributable to higher sales volumes with a stronger sales mix in the current six-month period.
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Brazil Segment, were as follows:
30.9
71.5
73.1
28.0
28.5
26.9
38.7
1.1
1.6
(12.1
29.6
35.9
15.4
33.6
26.0
Increase in average selling price and change in sales mix
19,355
(4,762
(113
The increase in net sales for the Brazil Segment from the prior six-month period to the current six-month period was primarily attributable to higher selling prices associated with higher input costs, partially offset by lower sales volumes due to a more normalized market share position following a significant but temporary improvement in market share and competitive position in the prior year.
The BRL weighted average exchange rate was 5.39 BRL/USD and 5.40 BRL/USD for the current six-month period and the prior six-month period, respectively.
27
Increase in underlying margins
6,272
(1,345
(142
The increase in Segment Profit for the Brazil Segment from the prior six-month period to the current six-month period was primarily attributable to an overall improved sales mix and conversion margin amid rising market prices following the pandemic-related rebound in product demand.
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Nylon Segment, were as follows:
52.3
97.8
96.1
55.0
2.2
3.9
(14.0
3.3
7.2
(7.7
8.9
3.8
10,767
3,370
The increase in net sales for the Nylon Segment from the prior six-month period to the current six-month period was primarily attributable to an increase in sales volumes in the current six-month period following the adverse effects of the COVID-19 pandemic on sales volumes in the prior six-month period and customer lists acquired in fiscal 2021, in addition to higher selling prices in connection with higher raw material costs.
(913
764
Nylon Segment Profit was essentially unchanged due to the offsetting impacts of higher volumes of a less favorable sales and production mix.
Liquidity and Capital Resources
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 six-month period, cash used by operations was $3,950, and, at December 26, 2021, excess availability under the ABL Revolver was $69,302.
As of December 26, 2021, all of UNIFI’s $81,591 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, while 99% 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 December 26, 2021 for domestic operations compared to foreign operations:
Domestic
383
47,237
Borrowings available under financing arrangements
69,302
Liquidity
69,685
116,922
Working capital
73,720
140,326
214,046
Total debt obligations
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, and (iv) debt service.
COVID-19 Pandemic Liquidity Considerations
Throughout the COVID-19 pandemic, UNIFI has not experienced any (i) substantial, prolonged issues relating to liquidity, (ii) outbreaks of COVID-19 among employees that significantly affected the Company’s operations, nor (iii) other extensive disruptions to ongoing operations. The following are a reflection of UNIFI’s strong liquidity position and access to capital resources during the COVID-19 pandemic:
We have not accessed public or private capital markets for recent liquidity needs.
We do not currently expect our cost of or access to existing capital and funding sources to change materially as a result of the COVID-19 pandemic; however, new capital and funding sources (if any) may carry higher costs than our current structure.
We have not taken advantage of rent, lease or debt deferrals, forbearance periods or other concessions, nor have we modified any material agreements to provide concessions.
We have not relied on supply chain financing, structured trade payables or vendor financing.
We are not at material risk of not meeting our financial covenants.
We continue to maintain significant borrowing availability on our existing credit facility.
Now that global demand pressures are less severe and the textile supply chain appears to be recovering, we expect our significant cash balances and available borrowings to continue to provide adequate liquidity as lingering uncertainty of the COVID-19 pandemic continue. Accordingly, and because of the global demand recovery that has occurred thus far, we do not currently anticipate any adverse events or circumstances will place critical pressure on our liquidity position and/or ability to fund our operations, capital expenditures, and expected business growth during fiscal 2022. Should global demand and economic activity decline beyond the short-term, UNIFI maintains the ability to (i) seek additional credit or financing arrangements or extensions of existing arrangements and/or (ii) re-implement cost reduction initiatives to preserve cash and secure the longevity of the business and operations.
As we anticipate further business recovery to occur throughout fiscal 2022, we expect the majority of our capital will be deployed to upgrade the machinery in our Americas manufacturing facilities via capital expenditures.
29
As of December 26, 2021:
UNIFI was in compliance with all financial covenants in the Credit Agreement,
excess availability under the ABL Revolver was $69,302,
the Trigger Level (as defined in the Credit Agreement) was $21,562, and
$0 of standby letters of credit were outstanding.
Management will continue to monitor the expected termination of LIBOR and its impact on UNIFI’s operations. However, the Credit Agreement currently includes fallback language that allows for a seamless transition to a secured overnight financing rate and management does not expect (i) significant efforts to accommodate a termination of LIBOR or (ii) a significant impact to UNIFI’s operations upon a termination of LIBOR.
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.
Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
363
Debt principal
Less: cash and cash equivalents
Net Debt
33,971
8,604
30
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:
(54,761
(54,259
(18,260
(31,638
(7,993
(1,625
(2,150
(1,856
(14,971
(16,045
223,644
Less: Cash and cash equivalents
(47,620
(78,253
Less: Income taxes receivable
(8,162
(2,392
Less: Income taxes payable
Less: Current operating lease liabilities
Less: Current portion of long-term debt
Adjusted Working Capital
183,378
162,525
Working capital decreased from $223,644 as of June 27, 2021 to $214,046 as of December 26, 2021, while Adjusted Working Capital increased from $162,525 to $183,378.
The decrease in cash and cash equivalents was primarily driven by the increase in inventories, the routine payment of incentive compensation earned in fiscal 2021, capital expenditures and scheduled debt service. The decrease in receivables, net was due primarily to a decrease in banker’s acceptance notes held by our Asia Segment. The increase in inventories was primarily attributable to the impact of higher raw material costs in the current six-month period. The changes in other current assets and accounts payable were insignificant. The decrease in other current liabilities was primarily attributable to the payment of incentive compensation earned in fiscal 2021. The increase in income taxes receivable and income taxes payable primarily reflects the impact of the interim tax provision. The changes in current operating lease liabilities and current portion of long-term debt were insignificant.
Capital Projects
During the current six-month period, UNIFI invested $19,172 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 remainder of fiscal 2022, we expect to invest up to an additional $24,800 in capital projects for an aggregate annual estimate of $40,000 to $44,000, 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 2022 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 other 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.
Share Repurchase Program
On October 31, 2018, the Board approved the 2018 SRP under which UNIFI is authorized to acquire up to $50,000 of its common stock. Under the 2018 SRP, purchases will be made from time to time in the open market at prevailing market prices or through private transactions or block trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date.
As of December 26, 2021, UNIFI repurchased a total of 136 shares since October 2018, at an average price of $23.58 (for a total of $3,198 inclusive of commission costs) pursuant to the 2018 SRP, leaving $46,805 available for repurchase under the 2018 SRP.
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 borrowings available under the ABL Revolver will enable UNIFI to comply with the terms of its indebtedness and 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.
Operating Cash Flows
The significant components of net cash (used) provided by operating activities are summarized below.
Subtotal
21,016
22,976
Other changes
(3,773
The decrease in net cash (used) provided by operating activities from the prior six-month period to the current six-month period was primarily due to an increase in working capital associated with (i) higher raw material costs and consolidated sales activity driving higher inventory and accounts receivable balances and (ii) lower other current liabilities resulting from the payment of incentive compensation earned in fiscal 2021.
Investing Cash Flows
Investing activities include $19,172 for capital expenditures, as previously described in Capital Projects above.
Financing Cash Flows
Financing activities include (i) scheduled payments against the ABL Term Loan and finance leases, (ii) proceeds and payments on the ABL Revolver, (iii) proceeds from construction financing, and (iv) $1,204 for share repurchases during the current six-month period.
Contractual Obligations
UNIFI has incurred various financial obligations and commitments in its normal course of business. Financial obligations are considered to represent known future cash payments that UNIFI is required to make under existing contractual arrangements, such as debt and lease agreements.
There have been no 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 2021 Form 10-K.
Off-Balance Sheet Arrangements
UNIFI is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on UNIFI’s financial condition, results of operations, liquidity or capital expenditures.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The SEC has defined a company’s most critical accounting policies as those involving accounting estimates that require management to make assumptions about matters that are highly uncertain at the time and where different reasonable estimates or changes in the accounting estimate from quarter to quarter could materially impact the presentation of the financial statements. UNIFI’s critical accounting policies are discussed in the 2021 Form 10-K. There were no material changes to these policies during the current six-month period.
UNIFI is exposed to market risks associated with changes in interest rates, fluctuations in foreign currency exchange rates, and raw material and commodity costs, which may adversely affect its financial position, results of operations or cash flows. UNIFI does not enter into derivative financial instruments for trading purposes, nor is it a party to any leveraged financial instruments.
Interest Rate Risk
UNIFI is exposed to interest rate risk through its borrowing activities. As of December 26, 2021, UNIFI had borrowings under its ABL Facility that totaled $72,500, for which all of the interest is currently hedged via interest rate swaps. After considering the variable rate debt obligations that have been hedged
and UNIFI’s outstanding debt obligations with fixed rates of interest, UNIFI’s sensitivity analysis indicates that a 50-basis point increase in LIBOR as of December 26, 2021 would result in an increase in annual interest expense of less than $100.
Foreign Currency Exchange Rate Risk
UNIFI conducts its business in various foreign countries and in various foreign currencies. Each of UNIFI’s subsidiaries may enter into transactions (sales, purchases, fixed purchase commitments, etc.) that are denominated in currencies other than the subsidiary’s functional currency and thereby expose UNIFI to foreign currency exchange rate risk. UNIFI may enter into foreign currency forward contracts to hedge this exposure. UNIFI may also enter into foreign currency forward contracts to hedge its exposure for certain equipment or inventory purchase commitments. As of December 26, 2021, UNIFI had no outstanding foreign currency forward contracts.
A significant portion of raw materials purchased by the Brazil Segment are denominated in USDs, requiring UNIFI to regularly exchange BRL. A significant portion of sales and asset balances for the Asia Segment are denominated in USDs. During recent fiscal years, UNIFI has been negatively impacted by fluctuations of the BRL and the RMB. Discussion and analysis surrounding the impact of fluctuations of the BRL and the RMB on UNIFI’s results of operations are included above in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” UNIFI does not enter into foreign currency derivatives to hedge its net investment in its foreign operations.
As of December 26, 2021, foreign currency exchange rate risk concepts included the following:
Approximate
Amount or
Percentage
Percentage of total consolidated assets held by UNIFI's subsidiaries outside the U.S. whose functional currency
is not the USD
30.1
Cash and cash equivalents held outside the U.S.:
Denominated in USD
11,024
Denominated in RMB
27,174
Denominated in BRL
5,202
Denominated in other foreign currencies
229
Total cash and cash equivalents held outside the U.S.
43,629
Percentage of total cash and cash equivalents held outside the U.S.
Cash and cash equivalents held inside the U.S. in USD by foreign subsidiaries
3,608
Raw Material and Commodity Risks
A significant portion of UNIFI’s raw material and energy costs are derived from petroleum-based chemicals. The prices for petroleum and petroleum-related products and related energy costs are volatile and dependent on global supply and demand dynamics, including certain geo-political risks. A sudden rise in the price of petroleum and petroleum-based products could have a material impact on UNIFI’s profitability. UNIFI does not use financial instruments to hedge its exposure to changes in these costs as management has concluded that the overall cost of hedging petroleum exceeds the potential risk mitigation. The costs of the primary raw materials that UNIFI uses throughout all of its operations are generally based on USD pricing, and such materials are purchased at market or at fixed prices that are established with individual vendors as part of the purchasing process for quantities expected to be consumed in the ordinary course of business. UNIFI manages fluctuations in the cost of raw materials primarily by making corresponding adjustments to the prices charged to its customers. Certain customers are subject to an index-based pricing model in which UNIFI’s prices are adjusted based on the change in the cost of raw materials in the prior quarter. Pricing adjustments for other customers must be negotiated independently. UNIFI attempts to quickly pass on to its customers increases in raw material costs, but due to market conditions, this is not always possible. When price increases can be implemented, there is typically a time lag that adversely affects UNIFI’s margins during one or more quarters. In ordinary market conditions in which raw material price increases have stabilized and sales volumes are consistent with traditional levels, UNIFI has historically been successful in implementing price adjustments within one to two fiscal quarters of the raw material price increase for its index-priced customers and within two fiscal quarters of the raw material price increase for its non-index-priced customers.
As fiscal 2021 concluded, UNIFI experienced cost increases for raw materials, primarily related to (i) increases in petroleum prices and (ii) supply chain disruptions that occurred in Texas during February 2021 due to abnormally cold weather. Our raw material costs remain elevated in fiscal 2022. However, we have been able to implement responsive selling price adjustments for the majority of our portfolio. While our underlying gross margin has been pressured somewhat during fiscal 2022, we expect the impact of recent selling price adjustments to improve margins in the second half of the fiscal year. Nonetheless, such costs remain subject to the volatility described above and, should raw material 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.
The risks associated with climate change, localized energy management initiatives, and other environmental impacts could negatively affect UNIFI’s business and operations.
UNIFI’s business is susceptible to risks associated with climate change, including, but not limited to, disruptions to our supply chain, which could potentially impact the production and distribution of our products and availability and pricing of raw materials. Increased frequency and intensity of weather events due to climate change could lead to supply chain disruption, energy and resource rationing, or an adverse event at one of our manufacturing facilities. For example, the February 2021 winter storm in Texas impacted our U.S. supply chain and led to non-routine fees and surcharges applied to routine business activities and products. Further, the recent energy management initiatives in China temporarily constrained global supply chains and reduced supplier and customer activity. UNIFI remains focused on diversifying our product portfolio and manufacturing footprint while
33
utilizing fewer resources to help address the risks associated with climate change. Nonetheless, the associated risks could adversely impact our results of operations and cash flows.
As of December 26, 2021, 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 December 26, 2021 that have materially affected, or are reasonably likely to materially affect, UNIFI’s internal control over financial reporting.
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.
Items 2(a) and (b) are not applicable.
(c) The following table summarizes UNIFI’s purchases of its common stock during the fiscal quarter ended December 26, 2021, all of which purchases were made under the 2018 SRP approved by the Board on October 31, 2018, under which UNIFI is authorized to acquire up to $50,000 of common stock. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date.
Period
Total Number of
Shares Purchased
as Part of Publicly
Maximum
Dollar Value of
Shares that May
Yet Be Purchased
Under the Plans
9/27/21 – 10/26/21
10/27/21 – 11/26/21
43
23.94
46,978
11/27/21 – 12/26/21
20.39
Repurchases are subject to applicable limitations and requirements set forth in the ABL Facility. For additional information, including information regarding limitations on payment of dividends and share repurchases, see Note 12, “Long-Term Debt” contained in UNIFI’s Annual Report on Form 10-K for the fiscal year ended June 27, 2021.
Exhibit No.
Description
Restated Certificate of Incorporation of Unifi, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed October 31, 2016 (File No. 001-10542)).
Amended and Restated By-laws of Unifi, Inc., as of October 26, 2016 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed October 31, 2016 (File No. 001-10542)).
Declaration of Amendment to the Amended and Restated By-laws of Unifi, Inc. effective April 30, 2019 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed May 1, 2019 (File No. 001-10542)).
31.1+
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1++
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2++
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
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.
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
+
Filed herewith.
++
Furnished herewith.
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.
(Registrant)
Date: February 2, 2022
By:
/s/ CRAIG A. CREATURO
Craig A. Creaturo
Executive Vice President & Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)