UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
For the quarterly period ended September 26, 2004
OR
For the transition period from to
Commission File Number: 1-10542
UNIFI, INC.
Registrant’s telephone number, including area code: (336) 294-4410
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
The number of shares outstanding of the issuer’s common stock, par value $.10 per share, as of November 1, 2004 was 52,113,604.
UNIFI, INC.Form 10-Q for the Quarterly Period Ended September 26, 2004
INDEX
2
Part. I Financial Information
Item 1. Financial Statements
Note: The balance sheet at June 27, 2004, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
3
4
5
6
7
8
9
10
On September 27, 2000, Unifi and Nilit Ltd., located in Israel, formed a 50/50 joint venture named U.N.F Industries Ltd (“UNF”). The joint venture produces approximately 16.0 million pounds of nylon partially oriented yarn (“POY”) at Nilit’s manufacturing facility in Migdal Ha — Emek, Israel. Production and shipping of POY from this facility began in March 2001. The nylon POY is utilized in the Company’s nylon texturing and covering operations.
On June 30, 1997, the Company and Parkdale Mills, Inc. entered into a contribution agreement whereby both companies contributed all of the assets of their spun cotton yarn operations utilizing open-end and air jet spinning technologies to create Parkdale America, LLC (“PAL”). In exchange for its contributions, the Company received a 34% ownership interest in the joint venture. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel industries primarily within North America. PAL has 15 manufacturing facilities primarily located in central and western North Carolina. See Footnote 15 “Commitments and Contingencies” for further information regarding this investment.
Condensed balance sheet and income statement information as of September 26, 2004, and for the quarter ended September 26, 2004, of the combined unconsolidated equity affiliates is as follows (amounts in thousands):
11
The table below summarizes changes to the accrued severance and accrued restructuring accounts for the three months ended September 26, 2004 (amounts in thousands):
12
the right but not the obligation to purchase the Company’s domestic POY facility for a price based on a mutually agreed fair market value within a range of $125.0 million to $175.0 million.
Dupont’s subsidiary, Invista, Inc., held Dupont’s textiles and interiors assets and businesses which included the Alliance assets. Such assets and businesses were subsequently sold to subsidiaries of Koch Industries, Inc. (“Koch”). Accordingly, INVISTA S.a.r.l. (“INVISTA”), a subsidiary of Koch, and the Company continued to own and operate their respective sites and employees remained with their respective employers through September 29, 2004.
Effective September 30, 2004, the Company completed the acquisition of the INVISTA polyester filament manufacturing assets, including inventories, for approximately $22.5 million which terminated the Alliance Master Agreement eliminating the Put and Call provisions of that agreement and releasing all claims relating to Alliance disputes among the parties. See Footnote 16 “Subsequent Events” for further information.
During the quarters ended September 26, 2004 and September 28, 2003, the Company recognized, as a reduction of cost of sales, cost savings and other benefits from the Alliance of $8.4 million and $9.6 million, respectively.
13
polyester segment. Results of operations of the Division for the first quarter ended September 26, 2004 and September 28, 2003 were as follows (amounts in thousands):
14
of the Alliance Master Agreement which eliminated the Put and Call provisions of that agreement and released all claims relating to Alliance disputes among the parties.
On October 19, 2004, the Company announced its plans to curtail two production lines and downsize the workforce at its newly acquired manufacturing facility in Kinston, North Carolina. The two production lines are scheduled to be curtailed in December 2004 and March 2005. The cost associated with the terminations is estimated to be within a range of $9 - $11 million, and it is management’s opinion that this cost will be recorded as an opening balance sheet liability.
On October 21, 2004, the Company announced during its quarterly conference call that Unifi and Sinopec Yizheng Chemical Fiber Co., Ltd. (“Sinopec”) have signed a non-binding letter of intent to form a joint venture to manufacture, process and market polyester filament yarn in Sinopec’s facilities in Yizheng, Jiangsu Province, China. Unifi anticipates owning a 50% equity interest in the venture which will require an investment of approximately $30.0 million. Management expects that due diligence will not be completed and the required regulatory approvals will not be granted until the fourth quarter of fiscal year 2005 or the first quarter of fiscal year 2006.
15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is Management’s discussion and analysis of certain significant factors that have affected the Company’s operations and material changes in financial condition during the periods included in the accompanying Condensed Consolidated Financial Statements.
General Overview
The Company conducts its business through three reporting segments, Polyester, Nylon and Sourcing, each of which operates on a global basis. The polyester segment primarily manufactures its products in Brazil, South America and the United States, which has the largest operations and number of locations. The Nylon segment consists of operations in the United States and Colombia, South America. The Sourcing segment is a new business initiative that operates out of Unifi’s corporate office in Greensboro, North Carolina.
The textile industry in the United States continues to remain challenging primarily due to the importation of garments and fabrics from lower wage-based countries and over capacity throughout the world. These two factors have resulted in a declining market for the Company domestically and overseas, which has resulted in lower gross margins for both the polyester and nylon segments.
The Company’s primary objective is to return to profitability. During fiscal 2004, and as a result of lower volumes, the Company announced restructuring plans in the third quarter. The March restructuring plan included the closure of a dyeing operation in England and an air-jet texturing operation in North Carolina, the consolidation of plants in Ireland, and a reduction in the domestic workforce. During the first quarter of fiscal year 2005, the Company announced its plan to close the polyester manufacturing operation in Ireland and related sales offices located throughout Europe.
Results of Operations
The above table does not include certain items such as LIFO inventory adjustments and unallocated selling, general and administrative expenses.
For the quarter ended September 26, 2004, the Company recognized a $1.0 million operating profit from continuing operations which was a $0.5 million increase from the previous quarter ended
16
June 27, 2004. The improvement in operating profit is primarily attributable to cost savings from consolidation and cost reduction efforts made in the prior fiscal year, strong unit volumes and sales prices, and reporting the European manufacturing results as discontinued operations. These results also reflect the Company’s strategy to eliminate certain non-contributing product lines. During the quarter, raw material prices continued to trend upward and Unifi actively raised prices in an effort to match these increases.
Consolidated net sales increased 10.1% for the quarter from $163.7 million to $180.2 million. Unit volume increased 6.4% for the quarter while average net selling prices, based on product mix, increased 3.3%.
At the segment level, polyester, nylon and sourcing accounted for 68.2%, 31.5 % and 0.3% of net sales for the quarter, respectively.
Polyester
For the first quarter of fiscal year 2005, dollar sales and unit volumes increased 3.6% and 3.7%, respectively over the first quarter of fiscal year 2004. For the current quarter, the Company’s domestic dollar sales decreased 0.7% while unit volumes increased 0.9%, and the foreign polyester volume increased 11.1% as compared to the previous year’s first quarter. The increase in dollar sales and unit volumes are primarily due to strong unit volumes and selling prices in Brazil.
Sales in local currency for the Brazilian operation increased 41.1% for the quarter due to increases in average selling prices of 20.7% and unit volumes of 17.0%. These increases are primarily attributable to the good economic conditions in Brazil. The movement in currency exchange rates from the prior year to the current year negatively impacted the current quarter sales translated to U.S. dollars for the Brazilian operation. As a result of the Brazilian currency decline, U.S. dollar net sales for the current quarter were $0.3 million less than what sales would have been using prior year currency rates.
Gross profit for the polyester segment increased $0.8 million to $9.5 million in the current quarter. Gross profit increased for the quarter primarily due to the increase in dollar sales and unit volumes in Brazil. The INVISTA alliance accounted for a $8.4 million benefit for the first quarter of fiscal year 2005 compared to a $9.6 million benefit for the first quarter of fiscal year 2004.
Selling, general and administrative expenses were allocated, based on various cost drivers, to the polyester segment for the first quarter of fiscal year 2005 in the amount of $6.5 million compared to the prior year amount of $9.3 million and, as a percentage of net sales, represented 5.3% and 7.8% for the first quarters of fiscal years 2005 and 2004, respectively. The decline over the prior year quarter is due to the prior year cost saving measures being realized.
Nylon
Dollar sales for the nylon segment increased 25.5% for the quarter compared with the previous year’s quarter. Nylon segment volumes increased 27.7% for the September quarter compared to the prior year September quarter. Average selling prices decreased 2.1% for the current year quarter relative to the prior year quarter. The increase in dollar sales is primarily attributable to increased unit volumes resulting from the supply agreement with Sara Lee Branded Apparel.
Gross profit for the nylon segment increased $1.8 million to $2.8 million in the quarter. The increase in gross profit is attributable to an improved product mix which is primarily due to the supply agreement with Sara Lee Branded Apparel.
17
Selling, general and administrative expenses allocated to the nylon segment for the first quarter of fiscal year 2005 decreased to $2.8 million from $3.0 million for the first quarter of fiscal year 2004. As a percentage of net sales, selling, general and administrative expenses represented 4.9% and 6.7% for the first quarters of fiscal years 2005 and 2004, respectively. The decline over the prior year first quarter is attributable to prior year cost saving measures being realized.
Sourcing
Net sales for the quarter ended September 26, 2004 were $0.6 million which after direct expenses resulted in a negative gross margin of ($0.1) million. Selling, general and administrative expenses are all directly related to the segment and are not derived from any Company allocated expenses. This segment continues to operate in a start-up mode, as the sourcing initiative was started in January 2004.
Corporate
Interest expense declined $0.1 million to $4.6 million in the current quarter. The decrease in interest expense for the quarter reflects lower average debt outstanding. The weighted average interest rate on outstanding debt was 6.5% at September 26, 2004 and September 28, 2003.
Other income and expense for the current and prior year quarters includes charges of $0.8 million and $0.5 million, respectively, for the provision for bad debts. Other income and expense was positively affected during the current year due to net gains on the sale of fixed assets, which was partially offset by an increase in the provision for bad debts.
Equity in the net earnings of our unconsolidated affiliates, Parkdale America, LLC (“PAL”), Unifi-Sans Technical Fibers, LLC and U.N.F. Industries Ltd amounted to $1.1 million in the first quarter of fiscal year 2005 compared with net earnings of $0.3 million for the corresponding prior year quarter. Additional details regarding the Company’s investments in unconsolidated equity affiliates follows.
On September 13, 2000, the Company and SANS Fibres of South Africa formed a 50/50 joint venture named Unifi-Sans Technical Fibers (“USTF”), to produce low-shrinkage high tenacity nylon 6.6 light denier industrial (“LDI”) yarns in North Carolina. Unifi manages the day-to-day production and shipping of the LDI produced in North Carolina and SANS Fibres handles technical support and sales. Sales from this entity are primarily to customers in the North American Free Trade Agreement and Caribbean Basin Initiative markets.
During the first quarter of fiscal 2005, a test of the recoverability of USTF’s long lived assets was completed, and it was determined that the carrying value of such assets was recoverable through expected future cash flows. The joint venture will continue to be monitored for the recoverability of its long lived assets as business conditions change.
On September 27, 2000, Unifi and Nilit Ltd., located in Israel, formed a 50/50 joint venture named U.N.F Industries Ltd (“UNF”). The joint venture produces approximately 16.0 million pounds of nylon partially oriented yarn (“POY”) at Nilit’s manufacturing facility in Migdal Ha – Emek, Israel. The nylon POY is utilized in the Company’s nylon texturing and covering operations.
On June 30, 1997, the Company and Parkdale Mills, Inc. entered into a contribution agreement whereby both companies contributed all of the assets of their spun cotton yarn operations utilizing open-end and air jet spinning technologies to create Parkdale America, LLC (“PAL”). In exchange for its contributions, the Company received a 34% ownership interest in the joint venture. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel industries primarily within North America.
18
PAL has 15 manufacturing facilities primarily located in central and western North Carolina. See Footnote 15 “Commitments and Contingencies” for further information regarding this investment. Condensed balance sheet and income statement information as of September 26, 2004, and for the quarter ended September 26, 2004, of the combined unconsolidated equity affiliates is as follows (amounts in thousands):
Minority interest income was $0.2 million in the current year fiscal quarter compared to $1.0 million in the prior year first quarter. The minority interest income recorded in the Condensed Consolidated Statements of Operations primarily relates to the minority owner’s share of the earnings of Unifi Textured Polyester, LLC (“UTP”). UTP realized a reduced loss in the current year fiscal quarter compared to the prior year first quarter primarily due to higher unit volumes and average selling prices in its export business.
In fiscal year 2003, the Company recorded charges of $16.9 million for severance and employee related costs that were associated with the U.S. and European operations. Approximately 680 management and production level employees worldwide were affected by the reorganization. Severance payments are being made in accordance with various plan terms and the expected completion date is June 2005.
In fiscal 2004, the Company recorded a restructuring charge of $27.7 million which consisted of $7.8 million of employee severance costs for approximately 280 management and production level employees, $12.1 million of fixed asset write-offs associated with the closure of a dye facility in Manchester, England and the consolidation of the Company’s polyester operations in Ireland, $5.7 million in lease related costs associated with the closure of the facility in Altamahaw, North Carolina and other consolidation related costs of $2.1 million which primarily relate to various plant closures. Severance payments are being made in accordance with various plan terms and the expected completion date is July 2005.
19
The Company’s income tax benefit from continuing operations for both current and prior year periods is different from the U.S. statutory rate primarily due to income from certain foreign operations being taxed at lower effective rates.
On July 28, 2004, the Company announced its decision to close its European manufacturing operations and associated sales offices (the “Division”). The discontinued operations loss for the quarter included, in addition to an operating loss, a $9.3 million pension charge, $5.4 million severance charge and other closure related costs of $4.1 million. The manufacturing operations ceased October 31, 2004. Management expects that the proceeds from the sale of the plant, property and equipment will exceed the carrying value of $13.2 million as of September 26, 2004. Management has engaged a firm to actively market the facility, and accordingly, expects to sell the property by the end of fiscal year 2005. In accordance with SFAS No. 144, the assets held for sale are segregated in the Condensed Consolidated Balance Sheets, and the discontinued operations are segregated in the Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Operations for all periods presented in this report. The assets held for sale have been reported in the Company’s polyester segment.
The Company accounts for derivative contracts and hedging activities under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133) which requires all derivatives to be recorded on the balance sheet at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings. The Company does not enter into derivative financial instruments for trading purposes.
The Company conducts its business in various foreign currencies. As a result, it is subject to the transaction exposure that arises from foreign exchange rate movements between the dates that foreign currency transactions are recorded (export sales and purchase commitments) and the dates they are consummated (cash receipts and cash disbursements in foreign currencies). The Company utilizes some natural hedging to mitigate these transaction exposures. The Company also enters into foreign currency forward contracts for the purchase and sale of European, Canadian, Brazilian and other currencies to hedge balance sheet and income statement currency exposures. These contracts are principally entered into for the purchase of inventory and equipment and the sale of Company products into export markets. Counterparties for these instruments are major financial institutions.
Currency forward contracts are entered into to hedge exposure for sales in foreign currencies based on specific sales orders with customers or for anticipated sales activity for a future time period. Generally, 60-80% of the sales value of these orders is covered by forward contracts. Maturity dates of the forward contracts attempt to match anticipated receivable collections. The Company marks the outstanding accounts receivable and forward contracts to market at month end and any realized and unrealized gains or losses are recorded as other income and expense. The Company also enters currency forward contracts for committed or anticipated equipment and inventory purchases. Generally, 50-75% of the asset cost is covered by forward contracts although 100% of the asset cost may be covered by contracts in certain instances. Forward contracts are matched with the anticipated date of delivery of the assets and gains and losses are recorded as a component of the asset cost for purchase transactions when the Company is firmly committed. The latest maturity for all outstanding purchase and sales foreign currency forward contracts are January 2005 and June 2005, respectively.
20
The dollar equivalent of these forward currency contracts and their related fair values are detailed below (amounts in thousands):
For the quarters ended September 26, 2004 and September 28, 2003, the total impact of foreign currency related items on the Condensed Consolidated Statements of Operations, including transactions that were hedged and those that were not hedged, was a pre-tax loss of $0.1 million and $0.2 million, respectively.
Liquidity and Capital Resources
Cash provided by continuing operations was $1.2 million for the three months ended September 26, 2004, compared to cash provided by continuing operations of $8.1 million for the corresponding period of the prior year. The primary sources of cash from continuing operations were derived from depreciation and amortization aggregating $13.0 million, other non-current assets of $4.1 million, income taxes of $1.8 million, and inventories of $1.5 million. Offsetting these sources of cash from continuing operations, was the net loss of $1.3 million, decreases in accounts payable and accruals of $5.7 million and prepaid expenses of $1.3 million. All working capital changes have been adjusted to exclude currency translation effects.
The Company ended the current quarter with working capital of $203.7 million, which included cash and cash equivalents of $45.7 million as compared to working capital of $208.7 million, which included cash and cash equivalents of $72.3 million at September 28, 2003. The current ratio decreased slightly from 2.65 as of June 27, 2004 to 2.61 as of September 26, 2004.
The Company utilized $3.6 million for net investing activities and provided $0.9 million in net financing activities during the current year-to-date period. The primary cash expenditures during this period included $1.5 million for capital expenditures, $1.1 million for strategic investment expenses primarily relating to our joint venture efforts in China, and $1.3 million in foreign restricted assets which relate to our Brazilian operations.
As of September 26, 2004 the Company is not committed for any significant capital expenditures, but expects to spend approximately $12.0 million for capital expenditures during fiscal year 2005. Throughout the next six months, management plans to further reduce its accounts receivable and inventory balances which should improve cash provided by continuing operations. Management is not able to estimate an expected working capital reduction at this time. Since the INVISTA asset acquisition has closed, management may elect to incur additional capital expenditures in the range of $10.0-$12.0 million for certain machine modifications or additions. See Footnote 16 “Subsequent Events”.
21
Management does not expect the closure of the European operations to negatively impact cash flows. Working capital is expected to be converted into cash in a timely manner to meet severance obligations and other liabilities.
Although the results from operations improved during the first three months of this fiscal year as compared to the fourth quarter of fiscal year 2004, management is continuing to review all domestic and foreign operations in an effort to reduce costs. These efforts may result in future charges including plant closures, employee severance charges, and other consolidation costs.
The Company periodically evaluates the carrying value of its polyester and nylon operations long-lived assets, including property, plant and equipment and intangibles, to determine if such assets are impaired whenever events or changes in circumstances indicate that a potential impairment has occurred. The importation of fiber, fabric and apparel has continued to adversely impact sales volumes and margins for these operations and has negatively impacted the U.S. textile and apparel industry in general. See Note 10 to the Condensed Consolidated Financial Statements.
The Company has a $100.0 million asset based revolving credit agreement (the “Credit Agreement”) that terminates on December 7, 2006. The Credit Agreement is secured by substantially all U.S. assets excluding manufacturing facilities and manufacturing equipment. Borrowing availability is based on eligible domestic accounts receivable and inventory. Effective September 30, 2004, the Credit Agreement was amended in order to close the INVISTA asset acquisition which was seller financed.
As of September 26, 2004, the Company had no outstanding borrowings and had availability of $71.7 million under the terms of the Credit Agreement. Borrowings under the Credit Agreement bear interest at rates selected periodically by the Company of LIBOR plus 1.75% to 3.00% and/or prime plus 0.25% to 1.50%. The interest rate matrix is based on the Company’s leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. The interest rate in effect at September 26, 2004, was 4.84%. Under the Credit Agreement, the Company pays an unused line fee ranging from 0.25% to 0.50% per annum on the unused portion of the commitment.
The Credit Agreement contains customary covenants for asset based loans which restrict future borrowings and capital spending and, if availability is less than $25.0 million at any time during the quarter, include a required minimum fixed charge coverage ratio of 1.1 to 1.0 and a required maximum leverage ratio of 5.0 to 1.0. At September 26, 2004, the Company was in compliance with all covenants under the Credit Agreement as it had availability in excess of $25.0 million.
Effective September 30, 2004, the Company completed the acquisition of the INVISTA polyester filament manufacturing assets, including inventories, for approximately $22.5 million which terminated the Alliance Master Agreement eliminating the Put and Call provisions of that agreement and releasing all claims relating to Alliance disputes among the parties. See Footnote 16 “Subsequent Events” for further information regarding this investment.
22
In connection with the INVISTA asset acquisition, on September 30, 2004 the company entered into a loan agreement with INVISTA. The terms of the loan call for quarterly interest payments commencing December 31, 2004 with the last payment due September 30, 2009. Principal payments are also due quarterly commencing December 31, 2006 with the final principal payment due September 30, 2009.
The Company maintains a 34% interest in PAL, a private company, which manufactures and sells open-end and air jet spun cotton. The Company was informed by PAL of its participation in activities with competitors in the markets for open-end and air jet spun cotton and polycotton yarns used in the manufacture of hosiery and other garments that may have resulted in violations of US antitrust laws (the “PAL Activities”). The Company believes that it had no involvement whatsoever in the activities at issue and believes it has no liability arising out of them.
PAL informed the Company that it voluntarily disclosed the activities to the U.S. Department of Justice Antitrust Division (the “DOJ”), and that the DOJ has launched an investigation of the activities. PAL informed the Company that it is cooperating fully with the DOJ. If PAL violated U.S. antitrust laws, PAL could face civil liability including treble damages. It should be noted that the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (the “Act”) provides in part that an “antitrust leniency applicant” is not liable for treble damages. The Company has not yet determined if the provisions of the Act will be applicable to PAL.
The Company accounts for its investment in PAL on the equity method of accounting and as of September 26, 2004, the Company’s carrying investment in PAL (including goodwill value) was $142.8 million. During the three months ended September 26, 2004, the Company had equity in earnings relating to PAL of $0.8 million. The Company remains unable at this time to determine the level of damages for which PAL may be liable or the impact of such liability on the Company, which impact could be material.
The Company has been named in various federal class action lawsuits and a demand for relief under Massachusetts law related to the PAL Activities. The Company has or will deny all the allegations against it in these claims and intends to vigorously defend itself. The Company does not believe it has any responsibility or liability for PAL’s actions; however, as in any litigation, the outcomes of these claims are uncertain at this time and the Company is not making any assurances as to the outcome thereof.
Outlook
The Company is continuing to implement the strategies it developed during the second half of fiscal year 2004 to return the Company to profitability. Facing raw material price increases and shrinking margins, the Company implemented a plan to identify all unprofitable product lines and to raise sales prices to a level which would return these products to profitability. The Company’s success going forward continues to be primarily based on its ability to pass along price increases to its customers. The Company expects that it will lose a certain percentage of this business to the competition, however loss of this unprofitable business would be expected to improve operating results. The anticipated loss of volume associated with these actions may require additional plant consolidations in the future.
23
Forward Looking Statements
Certain statements included herein contain forward-looking statements within the meaning of federal security laws about Unifi, Inc.’s (the “Company”) financial condition and results of operations that are based on management’s current expectations, estimates and projections about the markets in which the Company operates, management’s beliefs and assumptions made by management. Words such as “expects,” “anticipates,” “believes,” “estimates,” variations of such words and other similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in, or implied by, such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s judgment only as of the date hereof. The Company undertakes no obligation to update publicly any of these forward-looking statements to reflect new information, future events or otherwise.
Factors that may cause actual outcome and results to differ materially from those expressed in, or implied by, these forward-looking statements include, but are not necessarily limited to, availability, sourcing and pricing of raw materials, pressures on sales prices and volumes due to competition and economic conditions, reliance on and financial viability of significant customers, operating performance of joint ventures, alliances and other equity investments, technological advancements, employee relations, changes in construction spending, capital expenditures and long-term investments (including those related to unforeseen acquisition opportunities), continued availability of financial resources through financing arrangements and operations, outcomes of pending or threatened legal proceedings, negotiation of new or modifications of existing contracts for asset management and for property and equipment construction and acquisition, regulations governing tax laws, other governmental and authoritative bodies’ policies and legislation, the continuation and magnitude of the Company’s common stock repurchase program and proceeds received from the sale of assets held for disposal. In addition to these representative factors, forward-looking statements could be impacted by general domestic and international economic and industry conditions in the markets where the Company competes, such as changes in currency exchange rates, interest and inflation rates, recession and other economic and political factors over which the Company has no control. Other risks and uncertainties may be described from time to time in the Company’s other reports and filings with the Securities and Exchange Commission.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 20 for quantitative and qualitative discussion about market risk relating to the Company’s forward currency contracts.
The Company is exposed to market risks associated with changes in interest rates and currency fluctuation rates, which may adversely affect its financial position, results of operations and Condensed Consolidated Statements of Cash Flows. In addition, the Company is also exposed to other risks in the operation of its business.
Interest Rate Risk: The Company is exposed to interest rate risk through its various borrowing activities. Substantially all of the Company’s borrowings are in long-term fixed rate bonds. Therefore, the market rate risk associated with a 100 basis point change in interest rates would not be material to the Company at the present time.
Inflation and Other Risks: The inflation rate in most countries the Company conducts business has been low in recent years and the impact on the Company’s cost structure has not been significant. The Company is also exposed to political risk, including changing laws and regulations governing international trade such as quotas and tariffs and tax laws. The degree of impact and the frequency of these events cannot be predicted.
Item 4. Controls and Procedures
The Company maintains controls and procedures that are designed to ensure that information required to be disclosed in the Company’s financial statements filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported in a timely manner, and that such information is accumulated and communicated to the Company’s management, specifically including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
The Company carries out a variety of on-going procedures, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer to evaluate the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 26, 2004.
There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonable likely to materially affect, the Company’s internal controls over financial reporting.
25
Part II. Other Information
Item 1. Legal Proceedings
Effective September 30, 2004, Unifi completed the acquisition of the INVISTA polyester filament manufacturing assets. As a result of this acquisition, the Alliance Master Agreement was terminated which eliminated the Put and Call provisions of that agreement and released all claims relating to Alliance disputes among the parties.
See Footnote 15 “Commitments and Contingencies” in the Company’s Condensed Consolidated Financial Statements relating to the U.S. Department of Justice Antitrust division’s investigation of Parkdale America, LLC.
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(e)
The Company repurchased 600 shares from a former employee.
On April 25, 2003, the Company announced that its Board of Directors had reinstituted the Company’s previously authorized stock repurchase plan at its meeting on April 24, 2003. The plan was originally announced by the Company on July 26, 2000 and authorized the Company to repurchase of up to 10.0 million shares of its common stock. During fiscal years 2004 and 2003, the Company repurchased approximately 1.3 million and 0.5 million shares, respectively. The repurchase program was suspended in November 2003 and the Company has no immediate plans to reinstitute the program. Consequently, only 600 shares were repurchased by the Company during the quarter ended September 26, 2004 under the repurchase program, and there is remaining authority for the Company to repurchase approximately 6.8 million shares of its common stock under the repurchase plan. The repurchase plan has no stated expiration or termination date.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
27
Item 6. Exhibits and Reports on Form 8-K
28
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.
29