UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2005
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 1-10542
UNIFI, INC.
P.O. Box 19109 — 7201 West Friendly Avenue Greensboro, NC 27419(Address of principal executive offices) (Zip Code)
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.
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 May 4, 2005 was 52,145,434 .
UNIFI, INC.Form 10-Q for the Quarterly Period Ended March 27, 2005
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Part. I Financial Information
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 U.S. generally accepted accounting principles for complete financial statements.
See accompanying notes to condensed consolidated financial statements.
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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 is a New York corporation formed in 1969. It is a diversified producer and processor of multi-filament polyester and nylon textured yarns and related raw materials. Unifi adds value to the supply chain and enhances consumer demand for its products through the development and introduction of branded yarns that provide unique performance, comfort and aesthetic advantages. Unifi’s yarns and brands are readily found in home furnishings, apparel, legwear and sewing thread, as well as industrial, automotive, military and medical applications.
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. During the second quarter of fiscal 2005 the polyester segment completed its acquisition of certain domestic manufacturing assets located in Kinston, North Carolina from INVISTA S.a.r.l. (“INVISTA”). The Nylon segment consists of operations in the United States and Colombia, South America. The Sourcing segment is a 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 tough market conditions overseas, which has resulted in lower gross margins for both the polyester and nylon segments. Because of these general industry trends, the Company’s net sales, gross profits and net income have been trending downward for the past few years. These challenges continue to impact the Company and we expect that they will continue to impact the Company for the foreseeable future. The Company is attempting to take steps to address these difficult market conditions.
The Company’s primary objective is to return to profitability. During fiscal 2004 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. In the second quarter of fiscal year 2005, the Company announced the curtailment of two production lines and the downsizing of the recently acquired facility in Kinston, North Carolina. The shut down of these two production lines was completed during the third quarter of fiscal year 2005.
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Results of Continuing Operations
For the quarter ended March 27, 2005, the Company recognized a $2.6 million operating loss from continuing operations which was a $39.0 million improvement from the prior year quarter ended March 28, 2004. Year-to-date the Company recognized a $1.9 million operating loss from continuing operations which represents a $47.5 million improvement from the prior year-to-date period ended March 28, 2004. These improvements in operating income were primarily attributable to $38.7 million in charges for asset write downs and goodwill impairments included in the prior year quarter and year-to-date periods. In addition, the improvement in operating profit was attributable to cost savings from consolidation and cost reduction efforts made in the prior fiscal year, increases in selling price and the elimination of certain non-contributing product lines. During the quarter, raw material prices declined slightly while selling prices continued to increase in an effort to increase gross margin. The effects of the cost reduction efforts on the current quarter and year-to-date periods were affected by a decrease in LIFO reserves of $0.8 million and an increase of $3.2 million, respectively. The LIFO
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reserves increased by $1.4 million and decreased by $30 thousand for the prior year quarter and year-to-date periods respectively. The primary drivers to the current year-to-date LIFO adjustments were increases in nylon raw material prices and higher values due to product mix for the nylon inventories whereas in the prior year both polyester and nylon raw material pricing remained comparable.
The Company recognized a loss from discontinued operations — net of taxes of $1.4 million and $16.4 million for the current quarter and prior year quarter, respectively. The net loss from discontinued operations — net of taxes for the year-to-date fiscal 2005 was $25.8 million compared to $20.5 million for the prior year-to-date period. This increased net loss is a direct result of the decision to close the entire European operations at the beginning of fiscal 2005. The two major cost components included in the $25.8 million loss for the current year-to-date period are pension and severance charges of $9.3 million and $5.4 million, respectively.
Consolidated net sales from continuing operations increased from $172.5 million to $208.3 million, or 20.7%, for the quarter and from $502.6 million to $596.9 million or 18.8% for the year-to-date period. Included in the current quarter and year-to-date net sales amounts are $39.4 million and $79.3 million, respectively, related to the newly acquired partially oriented yarn (“POY”) business in Kinston, NC. Unit volume from continuing operations increased 19.9% for the quarter and 20.7% for the year-to-date period, while average net selling prices increased by 0.7% and decreased by 1.6% for the quarter and year-to-date periods, respectively. The primary driver of the increases in revenue and unit volumes is the acquisition of the Kinston manufacturing facility from INVISTA. See the Polyester discussion below for further analysis including the effects of the Kinston facility on the current quarter and year-to-date results.
At the segment level, polyester accounted for 75.8% and 73.2% of dollar net sales for the quarter and year-to-date periods, respectively compared to 73.2% and 72.7% for the corresponding prior year periods. Nylon accounted for 23.8% and 26.3% of dollar net sales for the quarter and year-to-date periods, respectively compared to 26.4% and 27.2% for both corresponding prior year periods. Sourcing accounted for 0.3% and 0.5% of dollar net sales for the current quarter and year-to-date periods, respectively.
Gross profit from continuing operations increased $38.2 million to $9.1 million, for the quarter and increased $42.0 million to $29.3 million for the year-to-date period. These improvements in gross profit were primarily attributable to $38.7 million in charges for asset write downs and goodwill impairments included in the prior year quarter and year-to-date periods. The overall increases in gross profit for the 2005 year-to-date period are also due to realized savings on consolidation and cost reductions efforts, the acquisition of the Kinston manufacturing plant and discontinuation of unprofitable products.
Selling, general, and administrative expenses decreased by 6.3% or $0.8 million to $11.7 million for the quarter and decreased by 14.9% or $5.5 million to $31.3 million for the year-to-date period. The decrease in selling, general, and administrative expenses is due to downsizing of corporate departments and their related costs. During the current quarter the Company incurred $0.4 million in consulting charges associated with its effort in becoming compliant with the Sarbanes-Oxley Act of 2002.
Polyester
On September 30, 2004, the Company acquired from INVISTA assets, including inventories, located in Kinston, North Carolina for $24.4 million which was financed by the seller. The assets acquired were associated with the manufacturing alliance between the Company and INVISTA. In addition to acquiring inventories, the Company acquired the plant and four production lines of which one was curtailed at the end of December 2004 and another line was curtailed during March 2005.
Sales and volume data for the polyester segment is not comparable with prior year periods due to the acquisition of the Kinston facility. Total sales for the polyester segment for the fiscal 2005 third quarter and nine month
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period ended March 27, 2005 were $158.0 million and $437.2 million, respectively, compared to $126.4 million and $365.1 million for the comparable prior year periods. Included in the sales for the polyester segment for the fiscal 2005 third quarter and nine month period were external sales of $39.4 million and $79.3 million, respectively, from the Kinston facility which was acquired effective September 30, 2004 and produces POY. The percentage related to the dollar sales under the column “consolidated without the Kinston Acquisition” below is a non-GAAP financial measure used by management in operating the business which management believes provides investors with a more accurate picture of the trends relating to price and volume of the processed polyester yarn manufactured and sold by the Company. The Kinston POY sales represent sales of a relatively high volume and lower priced commodity used in the production of processed polyester yarn. The table below displays a percentage comparison of the polyester segment sales and volume data to the corresponding prior year periods.
The increase in average selling prices without contributions from the Kinston facility is primarily due to transitioning raw material increases to customers. Conversely, the decline in volumes are partially due to reduction in sales of non-contributing product lines.
Sales in local currency for our Brazilian operation decreased 1.1% while unit volume decreased 3.9% for the quarter. For the nine month period, sales in local currency for the Brazilian operation increased 11.7% primarily due to a 14.0% increase in net selling price. Current year-to-date unit volumes declined 2.0% as compared to the prior year period. The increase in selling prices for the quarter is primarily due to increased raw material pricing being passed on to customers. The movement in currency exchange rates from the prior year to the current year positively benefited the current quarter and year-to-date sales translated to U.S. dollars for the Brazilian operation. The Brazilian operation, which is part of the Company’s polyester reporting segment, is the most significant foreign subsidiary whereby changes in translation rates would be expected to effect the segment reporting. U.S. dollar net sales were $1.8 million and $2.2 million higher than what sales would have been reported using prior year translation rates for the quarter and year-to-date, respectively, with this effect attributable to the change in the exchange rate between the U.S. dollar and the Brazilian Real. Other than the Brazilian operation, the Company does not have any other significant foreign operations where movements in currency exchange rates are material.
On July 28, 2004, the Company announced its decision to close its European manufacturing operations and associated sales offices (the “Division”). The overall effect of translation rates on losses from discontinued operations was $0.5 million higher due to the strengthening of the Euro against the U.S. dollar.
Gross profit for our polyester segment increased $36.4 million to $6.5 million in the current quarter and increased $43.6 million to $26.9 million for the current nine month period. The increase in gross profit for our polyester segment was primarily attributable to $38.7 million in charges for asset writedowns and goodwill impairment included in the prior year quarter and year-to-date period. The increase in gross profit for the current quarter was offset by the loss of the INVISTA alliance benefits. See Footnote 15 “Alliance”. The
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increase in gross profit for the current nine month period is also attributable to increased selling prices, and cost reductions realized during the fiscal 2005 nine month periods. The INVISTA alliance, which was terminated effective September 30, 2004 with the Company’s purchase of the Kinston facility, accounted for benefits of $0 and $10.4 million for the current and prior year quarters, respectively, and accounted for year-to-date benefits of $8.4 million and $26.9 million for the current and prior year-to-date periods.
Selling, general and administrative expenses allocated, based on various cost components, to the polyester segment decreased from 7.4% of net sales in the prior year March quarter to 5.2% of net sales in the current quarter, and from 7.6% of net sales in the prior year nine month period to 5.0% of net sales in the current nine month period. On a dollar basis, selling, general and administrative expenses decreased $1.2 million to $8.2 million for the current quarter and decreased $5.8 million to $21.9 million for the current nine month period compared with the prior year periods. The decline over the prior year quarter and year-to-date periods is due to the prior year cost saving measures being realized.
Nylon
Dollar sales for our nylon segment for the current year quarter and year-to-date periods increased 9.3% and 14.7%, respectively, compared with prior year periods. Nylon unit volume for the March quarter and year-to-date periods increased 1.2% and 10.6%, respectively, compared to the prior year periods. Average selling prices increased 9.3% for the quarter and 14.7% for the nine month period. The increase in dollar sales is primarily attributable to increased unit volumes resulting from the supply agreement with Sara Lee Branded Apparel which started in July 2004.
Gross profit for our nylon segment increased $2.1 million to $2.8 million for the current quarter and decreased $1.2 million to $2.9 million for the current nine month period. The primary reasons for the increase in gross profit for the quarter are changes in product mix and lower sales of export volumes. Selling, general and administrative expenses allocated to the nylon segment decreased from 6.6% of net sales in the prior year’s March quarter to 6.5% in the current quarter, and from 6.4% in the prior year’s nine month period to 5.5% in the current nine month period. On a dollar basis, selling, general and administrative expenses increased $0.2 million to $3.2 million for the March quarter and decreased $0.1 million to $8.7 million for the year-to-date period. The increase over the prior year third quarter is attributable to higher allocation drivers primarily based on an increase in budgeted external sales pounds and dollars.
Sourcing
Net sales for the quarter and year-to-date periods ended March 27, 2005 were $0.6 million and $2.9 million, respectively. For the current quarter and year-to-date periods, the gross margin was negative $0.3 million and $0.4 million, respectively. 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. This segment’s main objective is to source Unifi yarns into their full-package garments.
Corporate
Interest expense increased $0.5 million to $5.3 million in the current quarter and $0.9 million to $15.2 million for the current year-to-date period. The increase in interest expense for the quarter and nine month period is primarily attributable to the $24.4 million note associated with the Kinston facility acquisition. The weighted average interest rate on outstanding debt at March 27, 2005, was 7.0% compared to 6.5% at March 28, 2004.
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Other expense was $0.3 million in the current year third quarter compared to other income of $2.6 million in the prior year third quarter. For the current year-to-date period, other expense was $3.5 million compared to other income was $1.6 million for the comparable prior year period. Other expense for the current and prior year quarters includes the provision for bad debts of $0.7 million and $0.9 million, respectively. For the current year-to-date period, the provision for bad debts was $5.3 million compared to $1.9 million for the prior year-to-date period.
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 $4.4 million in the third quarter of fiscal 2005 compared with losses of $6.7 million for the corresponding prior year quarter. For the year-to-date period, equity in net earnings of these affiliates totaled $6.2 million compared to net losses of $6.6 million in the prior year. The increase in net income primarily relates to our investment in PAL. The Company’s share of PAL’s net income for the third quarter of fiscal 2005 was $4.5 million compared to a net loss of $6.6 million for the same period in fiscal 2004. PAL’s earnings from operations increased primarily due to increased volume, higher conversion margins, lower manufacturing costs and reductions of losses on futures contracts to purchase cotton. Additional details regarding the Company’s investments in unconsolidated equity affiliates and alliance follows:
The Company and SANS Fibres of South Africa are partners in a 50/50 joint venture named Unifi-Sans Technical Fibers (“USTF”), which produces 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 Americas.
During the third 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.
Unifi and Nilit Ltd., located in Israel, are partners in a 50/50 joint venture named U.N.F Industries, Ltd. (“UNF”). The joint venture produces approximately 16 million pounds of nylon 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.
The Company holds a 34% ownership interest in a joint venture named Parkdale America, LLC (“PAL”). The joint venture partner is Parkdale Mills, Inc. located in Gastonia, North Carolina. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel industries primarily within North America. PAL has 14 manufacturing facilities primarily located in central and western North Carolina. See Footnote 19 “Commitments and Contingencies” for further information regarding this investment.
Condensed balance sheet and income statement information as of March 27, 2005, and for the quarter ended March 27, 2005, of the combined unconsolidated equity affiliates is as follows (amounts in thousands):
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Minority interest expense was $0.1 million in the current year third quarter compared to income of $4.8 million in the prior year third quarter. For the current year-to-date period, minority interest income was $0.5 million compared to $6.8 million for the comparable prior year period. The minority interest recorded in the consolidated financial statements 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 third quarter primarily due to increased selling prices and reduced volumes associated with non-contributing products .
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. Employee severance of $0.8 million was charged to expense in the third quarter of fiscal 2004 and is included above in the $7.8 million of severance for all of fiscal 2004.
On October 19, 2004, the Company announced that it planned to curtail two production lines and downsize its recently acquired facility in Kinston, NC. During the December 2004 quarter, the Company recorded a severance reserve of $10.6 million for approximately 500 production level employees and a restructuring reserve of $0.3 million for the cancellation of certain warehouse leases. The entire $10.9 million restructuring reserve was recorded as assumed liabilities in purchase accounting; and accordingly, the $10.9 million was not recorded as a restructuring expense in the Condensed Consolidated Statements of Operations. During the current quarter, management completed the curtailment of both production lines as scheduled which resulted in an actual reduction of 388 production level employees and a reduction to the initial restructuring reserve. Since no long-term assets or intangible assets were recorded in purchase accounting, the net reduction of $1.3 million was recorded as an extraordinary gain in the accompanying Condensed Consolidated Statements of Operations.
The table below summarizes changes to the accrued severance and accrued restructuring accounts for the nine months ended March 27, 2005 (amounts in thousands):
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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 manufacturing operations ceased October 31, 2004. On February 24, 2005 the Company announced that it had entered into three separate contracts to sell the property, plant and equipment of the Division for approximately $37.0 million. To date the company has received approximately $6.1 million in proceeds from the sales contracts and under terms of the contracts expects to receive the remaining proceeds at various intervals with the final payment due at the end of September, 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” 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. Effective February 14, 2005, the Company entered into a contract to sell the European facility in Ireland and received a $2.8 million non-refundable deposit from the purchaser. In addition to the deposit, the contract calls for a partial payment of 16.0 million Euros on June 30, 2005 and a final payment of 2.1 million Euros on September 30, 2005. On February 22, 2005, the Company entered into a forward exchange contract for 15.0 million Euros. The Company was required by the financial institution to deposit $2.8 million in an interest bearing collateral account to secure the financial institution’s maximum exposure on the hedge contract. This cash deposit has been reclassified as “Restricted cash” and is included in current assets on the balance sheet. 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 June 2005 and November 2005, respectively.
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The dollar equivalent of these forward currency contracts and their related fair values are detailed below (amounts in thousands):
For the quarters ended March 27, 2005 and March 28, 2004, 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 $0.3 million, respectively. For the year-to-date periods ended March 27, 2005 and March 28, 2004, the total impact for both periods of foreign currency related items was a pre-tax loss of $0.4 million.
The Company has established a valuation allowance against its deferred tax assets relating to state income tax credits and a long term capital loss carry-forward. The valuation allowance increased $0.1 million and $0.3 million in the third quarter and year-to-date periods in fiscal year 2005 compared to an increase of $0.5 million and $1.0 million for the corresponding periods in fiscal year 2004 due to lower estimates of future state taxable income.
Liquidity and Capital Resources
Cash provided by continuing operations was $4.0 million for the nine months ended March 27, 2005, compared to cash provided by continuing operations of $12.7 million for the corresponding period of the prior year. Cash provided by continuing operations is derived by adjusting the net loss from continuing operations for the effects of non-cash charges to income as well as changes in working capital. The principle adjustments made to the net loss from continuing operations that positively effect cash from continuing operations were depreciation and amortization aggregating $38.6 million, other non-current assets of $4.1 million, inventories of $1.2 million and income taxes of $0.7 million. Offsetting these positive adjustments were decreases in accounts payable and accruals of $14.2 million, deferred taxes of $10.2 million, earnings of equity affiliates of $2.9 million, other assets of $2.9 million and accounts receivable of $2.6 million. All working capital changes have been adjusted to exclude currency translation effects. The Company expects to continue to generate cash from continuing operations and does not anticipate any liquidity issues in the foreseeable future.
The Company ended the current quarter with working capital of $244.3 million, which included cash and cash equivalents of $55.4 million as compared to working capital of $200.5 million, which included cash and cash equivalents of $59.7 million at March 28, 2004. The current ratio improved from 2.51 at March 28, 2004 to 3.07 at March 27, 2005.
The Company utilized $0.3 million cash from net investing activities and $0.3 million in net financing activities during the current year-to-date period. The sources from cash investing activities include $6.7 million in return of capital distributions from equity affiliates, $1.2 million from sales of property, plant and equipment and other investing activities of net $1.1 million. The primary cash expenditures during this period included $5.7 million
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for capital expenditures, $2.8 million restricted cash deposits, and $0.8 million for strategic investment expenses.
As of March 27, 2005 the Company is not committed for any significant capital expenditures, but expects to spend approximately $9.0 million for capital expenditures during fiscal year 2005. Throughout the next three months, management intends 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.
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.
On October 21, 2004, the Company announced during its second 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 currently estimates that the transaction will close in the first quarter of fiscal year 2006, at the earliest.
Although the results from operations continue to show improvement as compared to the third quarter and year-to-date period 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.
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 March 27, 2005, the Company had no outstanding borrowings and had availability of approximately $69.9 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 March 27, 2005, was 5.85%. 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 March 27, 2005, the Company was in compliance with all covenants under the Credit Agreement as it had availability in excess of $25.0 million.
On February 5, 1998, the Company issued $250 million of senior, unsecured debt securities (the “Notes”) which bear a coupon rate of 6.5% and mature in February 2008. The estimated fair value of the Notes, based on quoted market prices, at March 27, 2005, and June 27, 2004, was approximately $217.5 million and $190.0 million,
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respectively. The Company makes semi-annual interest payments of approximately $8.1 million in the months of February and August.
Effective September 30, 2004, the Company completed the acquisition of the INVISTA polyester POY manufacturing assets, including inventories, for approximately $24.4 million.
As part of the acquisition of the Kinston facility from INVISTA and upon finalizing the quantities and value of the acquired inventory, Unifi Kinston, LLC, a subsidiary of the Company, entered into a $24.4 million five-year Loan Agreement. The loan, which calls for interest only payments for the first two years, bears interest at 10% per annum and is payable in arrears each quarter commencing December 31, 2004 until paid in full. Quarterly principal payments of approximately $2.0 million are due beginning December 31, 2006 with the final payment due September 30, 2009. The Loan Agreement contains customary covenants for asset based loans including a required minimum collateral value ratio of 1.0 to 1.0 and a pre-defined maximum leverage ratio. The loan is secured by all of the business assets held by Unifi Kinston, LLC.
In conjunction with the acquisition of the Kinston facility, the Company and Unifi Manufacturing, Inc., a subsidiary of Unifi, Inc., are both guarantors on the INVISTA note. The term of the guarantee is the life of the note, or five years, and the guarantee unconditionally requires both guarantors to ensure punctual payment and performance when due whether at scheduled maturity or otherwise. The maximum potential amount of future payments is the principal amount of $24.4 million plus accrued interest and any other related costs.
The land associated with this site (the “Kinston Site”) is leased pursuant to a 99 year ground lease (“Ground Lease”) with E.I. Dupont de Nemours and Company (“Dupont”). Since 1993, Dupont has been investigating and cleaning up the Kinston Site under the supervision of the United States Environmental Protection Agency (“EPA”) and the North Carolina Department of Environment and Natural Resources (“DENR”) pursuant to the Resource Conservation and Recovery Act (“RCRA”) Corrective Action program. The Corrective Action Program requires Dupont to identify all potential areas of environmental concern (“AOCs”), assess the extent of contamination at the identified AOCs and clean them up to applicable regulatory standards. Under the terms of the Ground Lease, upon completion by Dupont of required remedial action, ownership of the Kinston Site will pass to the Company. Thereafter, the Company will have responsibility for future remediation requirements, if any, at the AOCs previously addressed by Dupont. At this time the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
The Company maintains a 34% interest in PAL, a private company, which produces cotton and synthetic yarns for sale to the textile and apparel industries primarily within North America. 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 March 27, 2005, the Company’s carrying investment in PAL (including goodwill value) was $139.2 million. The Company
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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 denied all the allegations against it in these claims and intends to vigorously defend itself. The aforementioned federal class action lawsuits have been consolidated into one action in the United States District Court for the Middle District of North Carolina Greensboro Division under the caption “In Re Cotton Yarn Antitrust Litigation”. On January 14, 2005 with the consent of the plaintiffs, the Judge in the case signed a “Notice and Order of Dismissal Without Prejudice and Stipulation for Tolling of Statute of Limitations and Tolling Agreement” (the “Dismissal”). The Dismissal provides, among other things, that the claims against the Company in the litigation are dismissed without prejudice; that the applicable statute of limitations with respect to the claims of the plaintiffs shall be tolled during the pendency of the litigation; that if the plaintiffs’ counsel elect to rename the Company as a defendant in the litigation, for purposes of the statute of limitations, the refiling shall relate back to the date of the filing of the initial complaint in the litigation; and that the Company agrees to provide discovery in the litigation as though it was a party to the litigation, including responding to interrogatories, requests for production of documents, and notices of deposition. The Company does not believe it has any responsibility or liability for PAL’s actions.
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 raw material price increases to its customers and to change the mix of product offerings to more premium and value-added products, and to implement cost saving strategies which will improve our operating efficiencies. 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.
The World Trade Organization, as part of a staged quota removal, eliminated all remaining textile and apparel quotas effective January 1, 2005. This event could impact the Company’s unit volumes on certain products prospectively; however, it is too early to accurately project any such impact due to the possible increase in the importation of finished products.
The Company is progressing according to plan regarding its anticipated joint venture with Sinopec in China. At this time, Unifi’s best projection is that the joint venture will commence during the first quarter of fiscal 2006, at the earliest.
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
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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.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 26 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 reports 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 such 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 March 27, 2005.
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 reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
Reference is made to the Company’s quarterly report on Form 10-Q for the quarter ended September 26, 2004, reporting the company’s September 30, 2004, completion of the acquisition of the INVISTA polyester POY manufacturing assets, which effectively terminated the dispute relating to a manufacturing alliance involving such assets.
The information set forth in Footnote 19 “Commitments and Contingencies” to the Company’s Condensed Consolidated Financial Statements relating to the U.S. Department of Justice Antitrust division’s investigation of Parkdale America, LLC is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)
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, no shares were repurchased by the Company during the quarter ended March 27, 2005 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.
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Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
Item 6. Exhibits
(a) Exhibits Index
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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.