Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of certain significant factors that have affected UNIFI’s operations, along with material changes in financial condition, during the periods included in the accompanying condensed consolidated financial statements. A reference to a “note” in this section refers to the accompanying notes to condensed consolidated financial statements. A reference to the “current period” refers to the three-month period ended January 1, 2023, while a reference to the “prior period” refers to the three-month period ended December 26, 2021. A reference to the “current six-month period” refers to the six-month period ended January 1, 2023, while a reference to the “prior six-month period” refers to the six-month period ended December 26, 2021. Such references may be accompanied by certain phrases for added clarity. The current period and the prior period each consisted of 13 weeks. 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 January 1, 2023 and December 26, 2021, and, to the extent applicable, any material changes from the information discussed in the 2022 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 2022 Form 10-K for more detailed and background information about our business, operations, and financial condition.
Discussion of foreign currency translation is primarily associated with changes in the Brazilian Real (“BRL”) and changes in the Chinese Renminbi (“RMB”) versus the U.S. Dollar (“USD”). Weighted average exchange rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Six Months Ended |
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
BRL to USD |
|
5.26 |
|
|
|
5.57 |
|
|
|
5.25 |
|
|
|
5.39 |
|
RMB to USD |
|
7.09 |
|
|
|
6.39 |
|
|
|
6.95 |
|
|
|
6.43 |
|
All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted.
Overview and Significant General Matters
UNIFI focuses on delivering products and solutions to direct customers and brand partners throughout the world, leveraging our internal manufacturing capabilities and an enhanced global supply chain that delivers a diverse range of synthetic and recycled fibers and polymers. Our strategic initiatives include (i) leveraging our competitive advantages to grow market share in each of the major geographies we serve, (ii) expanding our presence in non-apparel markets with additional REPREVE® products, (iii) advancing the development and commercialization of innovative and sustainable solutions, and (iv) increasing brand awareness for REPREVE®. We believe our strategic initiatives will increase revenue and profitability and generate improved cash flows from operations.
Current Economic Environment
The current economic environment and significant decrease in textile product demand has adversely impacted our consolidated sales and profitability in fiscal 2023. In addition to the current unfavorable economic environment and the inventory destocking measures taken by brands and retailers, the following pressures have continued from fiscal 2022 into fiscal 2023: (i) the impact of inflation on consumer spending, (ii) rising interest rates, (iii) the Russia-Ukraine conflict, (iv) global input cost volatility, and (v) supply chain disruption. UNIFI will continue to monitor these and other aspects of the current economic environment and work closely with stakeholders to ensure business continuity and liquidity.
Input Costs and Global Production Volatility
In addition to the escalation of input costs in fiscal 2022, UNIFI experienced inefficiencies in the global supply chain in connection with (i) freight costs and logistics slowdowns in foreign markets; (ii) a tighter labor pool in the U.S.; and (iii) suppressed productivity from our business partners resulting from pandemic-related lockdowns in certain regions, particularly Asia. Despite significant improvement in input and freight costs and a more stable labor pool during the current period, the global demand volatility and uncertainty that began in late fiscal 2022 has continued through the second quarter of fiscal 2023, as the threat of recession continues to create uncertainty for calendar 2023. The existing challenges and future uncertainty, particularly for rising input costs, labor productivity, and global demand, could worsen and/or continue for prolonged periods, materially impacting our consolidated sales and gross profit. Also, the need for future selling price adjustments in connection with inflationary costs could impact our ability to retain current customer programs and compete successfully for new programs in certain regions.
Key Performance Indicators and Non-GAAP Financial Measures
UNIFI continuously reviews performance indicators to measure its success. These performance indicators form the basis of management’s discussion and analysis included below:
•sales volume and revenue for UNIFI and for each reportable segment;
•gross (loss) profit and gross margin for UNIFI and for each reportable segment;
•net (loss) income and diluted EPS;
•Segment (Loss) Profit, which equals segment gross (loss) profit plus segment depreciation expense;
•unit conversion margin, which represents unit net sales price less unit raw material costs, for UNIFI and for each reportable segment;
•working capital, which represents current assets less current liabilities;
•Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which represents net (loss) income before net interest expense, income tax expense and depreciation and amortization expense;
•Adjusted EBITDA, which represents EBITDA adjusted to exclude, from time to time, certain other adjustments necessary to understand and
15
compare the underlying results of UNIFI;
•Adjusted Net (Loss) Income, which represents net (loss) income calculated under GAAP, adjusted to exclude certain amounts which management believes do not reflect the ongoing operations and performance of UNIFI and/or for which exclusion may be necessary to understand and compare the underlying results of UNIFI;
•Adjusted EPS, which represents Adjusted Net (Loss) Income divided by UNIFI’s diluted weighted average common shares outstanding;
•Adjusted Working Capital, which equals receivables plus inventories and other current assets, less accounts payable and other current liabilities; and
•Net Debt, which represents debt principal less cash and cash equivalents.
EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, Adjusted EPS, Adjusted Working Capital, and Net Debt (collectively, the “non-GAAP financial measures”) are not determined in accordance with GAAP and should not be considered a substitute for performance measures determined in accordance with GAAP. The calculations of the non-GAAP financial measures are subjective, based on management’s belief as to which items should be included or excluded in order to provide the most reasonable and comparable view of the underlying operating performance of the business. We may, from time to time, modify the amounts used to determine our non-GAAP financial measures. When applicable, management’s discussion and analysis includes specific consideration for items that comprise the reconciliations of its non-GAAP financial measures. We believe that these non-GAAP financial measures better reflect UNIFI’s underlying operations and performance and that their use, as operating performance measures, provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets, among otherwise comparable companies.
Management uses Adjusted EBITDA (i) as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it removes the impact of items (a) directly related to our asset base (primarily depreciation and amortization) and/or (b) that we would not expect to occur as a part of our normal business on a regular basis; (ii) for planning purposes, including the preparation of our annual operating budget; (iii) as a valuation measure for evaluating our operating performance and our capacity to incur and service debt, fund capital expenditures, and expand our business; and (iv) as one measure in determining the value of other acquisitions and dispositions. Adjusted EBITDA is a key performance metric utilized in the determination of variable compensation. We also believe Adjusted EBITDA is an appropriate supplemental measure of debt service capacity because it serves as a high-level proxy for cash generated from operations and is relevant to our fixed charge coverage ratio.
Management uses Adjusted Net (Loss) Income and Adjusted EPS (i) as measurements of net operating performance because they assist us in comparing such performance on a consistent basis, as they remove the impact of (a) items that we would not expect to occur as a part of our normal business on a regular basis and (b) components of the provision for income taxes that we would not expect to occur as a part of our underlying taxable operations; (ii) for planning purposes, including the preparation of our annual operating budget; and (iii) as measures in determining the value of other acquisitions and dispositions.
Management uses Adjusted Working Capital as an indicator of UNIFI’s production efficiency and ability to manage inventories and receivables.
Management uses Net Debt as a liquidity and leverage metric to determine how much debt would remain if all cash and cash equivalents were used to pay down debt principal.
16
Review of Results of Operations
Three Months Ended January 1, 2023 Compared to Three Months Ended December 26, 2021
Consolidated Overview
The below tables provide:
•the components of net (loss) income and the percentage increase or decrease over the prior period amounts,
•a reconciliation from net (loss) income to EBITDA and Adjusted EBITDA, and
•a reconciliation from net (loss) income to Adjusted Net (Loss) Income and Adjusted EPS.
Following the tables is a discussion and analysis of the significant components of net (loss) income.
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
136,212 |
|
|
|
100.0 |
|
|
$ |
201,410 |
|
|
|
100.0 |
|
|
|
(32.4 |
) |
Cost of sales |
|
|
144,212 |
|
|
|
105.9 |
|
|
|
184,520 |
|
|
|
91.6 |
|
|
|
(21.8 |
) |
Gross (loss) profit |
|
|
(8,000 |
) |
|
|
(5.9 |
) |
|
|
16,890 |
|
|
|
8.4 |
|
|
|
(147.4 |
) |
SG&A |
|
|
11,748 |
|
|
|
8.6 |
|
|
|
11,966 |
|
|
|
5.9 |
|
|
|
(1.8 |
) |
Benefit for bad debts |
|
|
(156 |
) |
|
|
(0.1 |
) |
|
|
(240 |
) |
|
|
(0.1 |
) |
|
|
(35.0 |
) |
Other operating expense, net |
|
|
226 |
|
|
|
0.2 |
|
|
|
573 |
|
|
|
0.3 |
|
|
|
(60.6 |
) |
Operating (loss) income |
|
|
(19,818 |
) |
|
|
(14.6 |
) |
|
|
4,591 |
|
|
|
2.3 |
|
|
nm |
|
Interest expense, net |
|
|
1,375 |
|
|
|
1.0 |
|
|
|
541 |
|
|
|
0.3 |
|
|
|
154.2 |
|
Equity in earnings of unconsolidated affiliates |
|
|
(86 |
) |
|
|
(0.1 |
) |
|
|
(64 |
) |
|
|
— |
|
|
|
34.4 |
|
(Loss) income before income taxes |
|
|
(21,107 |
) |
|
|
(15.5 |
) |
|
|
4,114 |
|
|
|
2.0 |
|
|
nm |
|
(Benefit) provision for income taxes |
|
|
(3,070 |
) |
|
|
(2.3 |
) |
|
|
3,185 |
|
|
|
1.5 |
|
|
|
(196.4 |
) |
Net (loss) income |
|
$ |
(18,037 |
) |
|
|
(13.2 |
) |
|
$ |
929 |
|
|
|
0.5 |
|
|
nm |
|
nm = not meaningful
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The reconciliations of the amounts reported under GAAP for Net (loss) income to EBITDA and Adjusted EBITDA were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
Net (loss) income |
|
$ |
(18,037 |
) |
|
$ |
929 |
|
Interest expense, net |
|
|
1,375 |
|
|
|
541 |
|
(Benefit) provision for income taxes |
|
|
(3,070 |
) |
|
|
3,185 |
|
Depreciation and amortization expense (1) |
|
|
6,693 |
|
|
|
6,266 |
|
EBITDA |
|
|
(13,039 |
) |
|
|
10,921 |
|
|
|
|
|
|
|
|
Other adjustments (2) |
|
|
— |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
(13,039 |
) |
|
$ |
10,921 |
|
(1)Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. Within the accompanying condensed consolidated statements of cash flows, amortization of debt issuance costs is reflected in depreciation and amortization expense. In the second quarter of fiscal 2023, interest expense, net reflects $273 of loss on debt extinguishment.
(2)For the periods presented, there were no other adjustments necessary to reconcile Net (loss) income to Adjusted EBITDA.
Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures)
The tables below set forth reconciliations of (i) (Loss) income before income taxes (“Pre-tax (Loss) Income”), (Benefit) provision for income taxes (“Tax Impact”), and Net (Loss) Income to Adjusted Net (Loss) Income and (ii) Diluted EPS to Adjusted EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended January 1, 2023 |
|
|
For the Three Months Ended December 26, 2021 |
|
|
|
Pre-tax Loss |
|
|
Tax Impact |
|
|
Net Loss |
|
|
Diluted EPS |
|
|
Pre-tax Income |
|
|
Tax Impact |
|
|
Net Income |
|
|
Diluted EPS |
|
GAAP results |
|
$ |
(21,107 |
) |
|
$ |
3,070 |
|
|
$ |
(18,037 |
) |
|
$ |
(1.00 |
) |
|
$ |
4,114 |
|
|
$ |
(3,185 |
) |
|
$ |
929 |
|
|
$ |
0.05 |
|
Recovery of income taxes (1) |
|
|
— |
|
|
|
(3,799 |
) |
|
|
(3,799 |
) |
|
|
(0.21 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adjusted results |
|
$ |
(21,107 |
) |
|
$ |
(729 |
) |
|
$ |
(21,836 |
) |
|
$ |
(1.21 |
) |
|
$ |
4,114 |
|
|
$ |
(3,185 |
) |
|
$ |
929 |
|
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
18,034 |
|
|
|
|
|
|
|
|
|
|
|
|
19,004 |
|
(1)In the second quarter of fiscal 2023, UNIFI recorded a recovery of income taxes in connection with filing amended tax returns in Brazil relating to certain income taxes paid in prior fiscal years.
17
Net Sales
Consolidated net sales for the current period decreased by $65,198, or 32.4%, and consolidated sales volumes decreased 35.6%, compared to the prior period. The decreases occurred primarily due to lower volumes in the Americas and Asia Segments as a result of lower global demand in connection with the inventory de-stocking efforts of major brands and retailers, in addition to pandemic-related lockdowns in Asia, partially offset by higher selling prices in response to increasing raw material and input costs.
Consolidated weighted average sales prices increased 3.2%, primarily attributable to higher selling prices in response to higher raw material costs.
REPREVE® Fiber products for the current period comprised 31%, or $42,866, of consolidated net sales, down from 40%, or $81,524, for the prior period. The lower volumes and net sales in the Asia Segment, which has the highest portion of REPREVE® Fiber sales as a percentage of segment net sales, was the main driver for the lower REPREVE® Fiber sales.
Gross (Loss) Profit
Gross profit for the current period decreased by $24,890, or 147.4%, compared to the prior period. Gross profit decreased as a result of the decline in net sales, combined with weak fixed cost absorption for the Americas Segment, where utilization and productivity are materially impactful to gross profit. Although raw material costs for the Americas Segment have decreased meaningfully in fiscal 2023, the associated benefit was muted by low production levels, weak demand, and higher priced raw material inventory purchased in the fourth fiscal quarter of 2022.
•For the Americas Segment, gross profit decreased due to weaker global demand and weak fixed cost absorption in connection with lower production, along with the impact of higher priced raw material inventory purchased in the fourth fiscal quarter of 2022.
•For the Brazil Segment, gross profit decreased primarily due to the combination of high priced raw material inventory purchased in the fourth fiscal quarter of 2022 and decreasing market prices in Brazil due to lower cost import competition.
•For the Asia Segment, gross profit decreased primarily due to lower sales volumes in connection with weaker global demand and pandemic-related lockdowns in Asia.
SG&A
SG&A was generally flat as the prior period included a reduction in incentive compensation expense while the current period included lower discretionary spending.
Benefit for Bad Debts
The current period and prior period bad debt changes reflect no material activity.
Other Operating Expense, Net
The current period and prior period include foreign currency transaction (gains) losses of $(78) and $297, respectively in addition to $298 of severance costs recorded in the prior period.
Interest Expense, Net
Interest expense, net increased in connection with higher debt principal following continued capital investments and higher interest rates. Interest expense, net for the current period includes $273 of loss on debt extinguishment.
Equity in Earnings of Unconsolidated Affiliates
There was no material activity for the current period or the prior period.
Income Taxes
(Benefit) provision for income taxes and the effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
(Benefit) provision for income taxes |
|
$ |
(3,070 |
) |
|
$ |
3,185 |
|
Effective tax rate |
|
|
14.5 |
% |
|
|
77.4 |
% |
The effective tax rate is subject to variation due to a number of factors, including: variability in pre-tax book income; the mix of income by jurisdiction; changes in deferred tax valuation allowances; and changes in statutes, regulations, and case law. Additionally, the impacts of discrete and other rate impacting items are more pronounced when income (loss) before income taxes is lower.
The decrease in the effective tax rate from the prior period to the current period is primarily attributable to a discrete tax benefit related to the recovery of certain Brazilian income taxes paid in prior years, partially offset by an increase in the valuation allowance for deferred tax assets in the current period.
18
Net (Loss) Income
The decrease in net (loss) income was primarily attributable to the decrease in gross profit and the associated adverse impact of lower U.S. earnings on the effective tax rate.
Adjusted EBITDA (Non-GAAP Financial Measure)
Adjusted EBITDA decreased primarily in connection with lower gross profit.
Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures)
Adjusted Net (Loss) Income and Adjusted EPS decreased from the prior period to the current period, commensurate with the decrease in net (loss) income.
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current period.
Americas Segment
The components of Segment (Loss) Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Americas Segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
85,242 |
|
|
|
100.0 |
|
|
$ |
114,697 |
|
|
|
100.0 |
|
|
|
(25.7 |
) |
Cost of sales |
|
|
98,326 |
|
|
|
115.3 |
|
|
|
113,844 |
|
|
|
99.3 |
|
|
|
(13.6 |
) |
Gross (loss) profit |
|
|
(13,084 |
) |
|
|
(15.3 |
) |
|
|
853 |
|
|
|
0.7 |
|
|
nm |
|
Depreciation expense |
|
|
5,542 |
|
|
6.5 |
|
|
|
5,145 |
|
|
|
4.5 |
|
|
|
7.7 |
|
Segment (Loss) Profit |
|
$ |
(7,542 |
) |
|
|
(8.8 |
) |
|
$ |
5,998 |
|
|
|
5.2 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
62.6 |
% |
|
|
|
|
|
56.9 |
% |
|
|
|
|
|
|
Segment (Loss) Profit as a percentage of consolidated amounts |
|
nm |
|
|
|
|
|
|
26.9 |
% |
|
|
|
|
|
|
The change in net sales for the Americas Segment was as follows:
|
|
|
|
|
Net sales for the prior period |
|
$ |
114,697 |
|
Decrease in sales volumes |
|
|
(31,532 |
) |
Net change in average selling price and sales mix |
|
|
2,077 |
|
Net sales for the current period |
|
$ |
85,242 |
|
The change in net sales for the Americas Segment from the prior period to the current period was primarily attributable to lower sales volumes following weaker global textile demand, partially offset by higher average selling prices in response to higher input costs.
The change in Segment (Loss) Profit for the Americas Segment was as follows:
|
|
|
|
|
Segment Profit for the prior period |
|
$ |
5,998 |
|
Net decrease in underlying margins from excess capacity |
|
|
(11,826 |
) |
Decrease in sales volumes |
|
|
(1,714 |
) |
Segment Loss for the current period |
|
$ |
(7,542 |
) |
The decrease in Segment (Loss) Profit for the Americas Segment from the prior period to the current period was primarily attributable to lower production volumes driving weaker fixed cost absorption in connection with lower sales volumes.
19
Brazil Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Brazil Segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
25,687 |
|
|
|
100.0 |
|
|
$ |
27,601 |
|
|
|
100.0 |
|
|
|
(6.9 |
) |
Cost of sales |
|
|
24,357 |
|
|
|
94.8 |
|
|
|
20,075 |
|
|
|
72.7 |
|
|
|
21.3 |
|
Gross profit |
|
|
1,330 |
|
|
|
5.2 |
|
|
|
7,526 |
|
|
|
27.3 |
|
|
|
(82.3 |
) |
Depreciation expense |
|
|
391 |
|
|
|
1.5 |
|
|
|
277 |
|
|
|
1.0 |
|
|
|
41.2 |
|
Segment Profit |
|
$ |
1,721 |
|
|
|
6.7 |
|
|
$ |
7,803 |
|
|
|
28.3 |
|
|
|
(77.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
18.9 |
% |
|
|
|
|
|
13.7 |
% |
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
|
-83.3 |
% |
|
|
|
|
|
35.0 |
% |
|
|
|
|
|
|
The change in net sales for the Brazil Segment was as follows:
|
|
|
|
|
Net sales for the prior period |
|
$ |
27,601 |
|
Decrease in average selling price |
|
|
(5,802 |
) |
Increase in sales volumes |
|
|
2,240 |
|
Favorable foreign currency translation effects |
|
|
1,648 |
|
Net sales for the current period |
|
$ |
25,687 |
|
The decrease in net sales for the Brazil Segment from the prior period to the current period was primarily attributable to pricing pressure due to import competition, partially offset by higher sales volumes.
The change in Segment Profit for the Brazil Segment was as follows:
|
|
|
|
|
Segment Profit for the prior period |
|
$ |
7,803 |
|
Decrease in underlying unit margins |
|
|
(7,165 |
) |
Increase in sales volumes |
|
|
632 |
|
Favorable foreign currency translation effects |
|
|
451 |
|
Segment Profit for the current period |
|
$ |
1,721 |
|
The decrease in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to an overall decrease in gross margin mainly due to pressure on selling prices from low-priced import competition and higher raw material costs.
Asia Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Asia Segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
25,283 |
|
|
|
100.0 |
|
|
$ |
59,112 |
|
|
|
100.0 |
|
|
|
(57.2 |
) |
Cost of sales |
|
|
21,529 |
|
|
|
85.2 |
|
|
|
50,601 |
|
|
|
85.6 |
|
|
|
(57.5 |
) |
Gross profit |
|
|
3,754 |
|
|
|
14.8 |
|
|
|
8,511 |
|
|
|
14.4 |
|
|
|
(55.9 |
) |
Depreciation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Segment Profit |
|
$ |
3,754 |
|
|
|
14.8 |
|
|
$ |
8,511 |
|
|
|
14.4 |
|
|
|
(55.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
18.6 |
% |
|
|
|
|
|
29.3 |
% |
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
|
-181.6 |
% |
|
|
|
|
|
38.1 |
% |
|
|
|
|
|
|
The change in net sales for the Asia Segment was as follows:
|
|
|
|
|
Net sales for the prior period |
|
$ |
59,112 |
|
Net decrease in sales volumes |
|
|
(31,562 |
) |
Unfavorable foreign currency translation effects |
|
|
(5,370 |
) |
Change in average selling price and sales mix |
|
|
3,103 |
|
Net sales for the current period |
|
$ |
25,283 |
|
The decrease in net sales for the Asia Segment from the prior period to the current period was primarily attributable to weaker global demand and pandemic-related lockdowns driving lower sales volumes, partially offset by a strong sales mix.
20
The change in Segment Profit for the Asia Segment was as follows:
|
|
|
|
|
Segment Profit for the prior period |
|
$ |
8,511 |
|
Decrease in sales volumes |
|
|
(4,524 |
) |
Unfavorable foreign currency translation effects |
|
|
(808 |
) |
Change in underlying margins and sales mix |
|
|
575 |
|
Segment Profit for the current period |
|
$ |
3,754 |
|
The decrease in Segment Profit for the Asia Segment from the prior period to the current period follows the decline in net sales and sales volumes discussed above, as the comparable gross margin rate for the Asia Segment improved with a strong sales mix.
Six Months Ended January 1, 2023 Compared to Six Months Ended December 26, 2021
Consolidated Overview
The below tables provide:
•the components of net (loss) income and the percentage increase or decrease over the prior six-month period amounts,
•a reconciliation from net (loss) income to EBITDA and Adjusted EBITDA, and
•a reconciliation from net (loss) income to Adjusted Net (Loss) Income and Adjusted EPS.
Following the tables is a discussion and analysis of the significant components of net (loss) income.
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
315,731 |
|
|
|
100.0 |
|
|
$ |
397,402 |
|
|
|
100.0 |
|
|
|
(20.6 |
) |
Cost of sales |
|
|
317,168 |
|
|
|
100.5 |
|
|
|
354,415 |
|
|
|
89.2 |
|
|
|
(10.5 |
) |
Gross (loss) profit |
|
|
(1,437 |
) |
|
|
(0.5 |
) |
|
|
42,987 |
|
|
|
10.8 |
|
|
|
(103.3 |
) |
SG&A |
|
|
23,521 |
|
|
|
7.4 |
|
|
|
24,636 |
|
|
|
6.2 |
|
|
|
(4.5 |
) |
Provision (benefit) for bad debts |
|
|
18 |
|
|
|
— |
|
|
|
(320 |
) |
|
|
(0.1 |
) |
|
|
(105.6 |
) |
Other operating (income) expense, net |
|
|
(463 |
) |
|
|
(0.1 |
) |
|
|
829 |
|
|
|
0.2 |
|
|
|
(155.9 |
) |
Operating (loss) income |
|
|
(24,513 |
) |
|
|
(7.8 |
) |
|
|
17,842 |
|
|
|
4.5 |
|
|
nm |
|
Interest expense, net |
|
|
2,075 |
|
|
|
0.6 |
|
|
|
979 |
|
|
|
0.3 |
|
|
|
112.0 |
|
Equity in earnings of unconsolidated affiliates |
|
|
(381 |
) |
|
|
(0.1 |
) |
|
|
(344 |
) |
|
|
(0.1 |
) |
|
|
10.8 |
|
(Loss) income before income taxes |
|
|
(26,207 |
) |
|
|
(8.3 |
) |
|
|
17,207 |
|
|
|
4.3 |
|
|
nm |
|
(Benefit) provision for income taxes |
|
|
(336 |
) |
|
|
(0.1 |
) |
|
|
7,598 |
|
|
|
1.9 |
|
|
|
(104.4 |
) |
Net (loss) income |
|
$ |
(25,871 |
) |
|
|
(8.2 |
) |
|
$ |
9,609 |
|
|
|
2.4 |
|
|
nm |
|
nm = not meaningful
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The reconciliations of the amounts reported under GAAP for Net (loss) income to EBITDA and Adjusted EBITDA were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
Net (loss) income |
|
$ |
(25,871 |
) |
|
$ |
9,609 |
|
Interest expense, net |
|
|
2,075 |
|
|
|
979 |
|
(Benefit) provision for income taxes |
|
|
(336 |
) |
|
|
7,598 |
|
Depreciation and amortization expense (1) |
|
|
13,390 |
|
|
|
12,574 |
|
EBITDA |
|
|
(10,742 |
) |
|
|
30,760 |
|
|
|
|
|
|
|
|
Other adjustments (2) |
|
|
— |
|
|
|
— |
|
Adjusted EBITDA |
|
$ |
(10,742 |
) |
|
$ |
30,760 |
|
(1)Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. Within the accompanying condensed consolidated statements of cash flows, amortization of debt issuance costs is reflected in depreciation and amortization expense. In the second quarter of fiscal 2023, interest expense, net reflects $273 of loss on debt extinguishment.
(2)For the periods presented, there were no other adjustments necessary to reconcile Net (loss) income to Adjusted EBITDA.
21
Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures)
The tables below set forth reconciliations of (i) (Loss) income before income taxes (“Pre-tax (Loss) Income”), (Benefit) provision for income taxes (“Tax Impact”), and Net (Loss) Income to Adjusted Net (Loss) Income and (ii) Diluted EPS to Adjusted EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended January 1, 2023 |
|
|
For the Six Months Ended December 26, 2021 |
|
|
|
Pre-tax Loss |
|
|
Tax Impact |
|
|
Net Loss |
|
|
Diluted EPS |
|
|
Pre-tax Income |
|
|
Tax Impact |
|
|
Net Income |
|
|
Diluted EPS |
|
GAAP results |
|
$ |
(26,207 |
) |
|
$ |
336 |
|
|
$ |
(25,871 |
) |
|
$ |
(1.44 |
) |
|
$ |
17,207 |
|
|
$ |
(7,598 |
) |
|
$ |
9,609 |
|
|
$ |
0.51 |
|
Recovery of income taxes (1) |
|
|
— |
|
|
|
(3,799 |
) |
|
|
(3,799 |
) |
|
|
(0.21 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Adjusted results |
|
$ |
(26,207 |
) |
|
$ |
(3,463 |
) |
|
$ |
(29,670 |
) |
|
$ |
(1.65 |
) |
|
$ |
17,207 |
|
|
$ |
(7,598 |
) |
|
$ |
9,609 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
18,017 |
|
|
|
|
|
|
|
|
|
|
|
|
18,999 |
|
(1)In the second quarter of fiscal 2023, UNIFI recorded a recovery of income taxes in connection with filing amended tax returns in Brazil relating to certain income taxes paid in prior fiscal years.
Net Sales
Consolidated net sales for the current six-month period decreased by $81,671, or 20.6%, and consolidated sales volumes decreased 28.6%, compared to the prior six-month period. The decreases occurred primarily due to lower volumes in the Americas and Asia Segments as a result of lower global demand in connection with the inventory de-stocking efforts of major brands and retailers, in addition to pandemic-related lockdowns in Asia, partially offset by higher selling prices in response to increasing raw material and input costs.
Consolidated weighted average sales prices increased 8.0%, primarily attributable to higher selling prices in response to higher raw material costs.
REPREVE® Fiber products for the current six-month period comprised 29%, or $92,045, of consolidated net sales, down from 39%, or $153,430, for the prior six-month period. The lower volumes and net sales in the Asia Segment, which has the highest portion of REPREVE® Fiber sales as a percentage of segment net sales, was the main driver for the lower REPREVE® Fiber sales.
Gross (Loss) Profit
Gross (loss) profit for the current six-month period decreased by $44,424, or 103.3%, compared to the prior six-month period. Gross profit decreased as a result of the decline in net sales, combined with weak fixed cost absorption for the Americas Segment, where utilization and productivity are materially impactful to gross profit. Although raw material costs for the Americas Segment decreased meaningfully in the current six-month period, the associated benefit was muted by low production levels, weak demand, and higher priced raw material inventory purchased in the fourth fiscal quarter of 2022.
•For the Americas Segment, gross profit decreased due to weaker global demand and weak fixed cost absorption in connection with lower production.
•For the Brazil Segment, gross profit decreased primarily due to the combination of high priced raw material inventory purchased in the fourth fiscal quarter of 2022 and decreasing market prices in Brazil due to lower cost import competition.
•For the Asia Segment, gross profit decreased primarily due to lower sales volumes in connection with weaker global demand and pandemic-related lockdowns in Asia.
SG&A
SG&A for the current six-month period decreased compared to the prior six-month period, primarily due to (i) lower incentive compensation for the current six-month period and (ii) lower discretionary expenses, including marketing and advertising.
Provision (Benefit) for Bad Debts
The current six-month period and prior six-month period bad debt changes reflect no material activity.
Other Operating (Income) Expense, Net
The current six-month period and prior six-month period include foreign currency transaction (gains) losses of $(803) and $530, respectively, in addition to $314 of severance costs in the prior six-month period.
Interest Expense, Net
Interest expense, net increased in connection with higher debt principal following continued capital investments and higher interest rates. Interest expense, net for the current six-month period includes $273 of loss on debt extinguishment.
22
Equity in Earnings of Unconsolidated Affiliates
There was no material activity for the current six-month period or the prior six-month period.
Income Taxes
(Benefit) provision for income taxes and the effective tax rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
(Benefit) provision for income taxes |
|
$ |
(336 |
) |
|
$ |
7,598 |
|
Effective tax rate |
|
|
1.3 |
% |
|
|
44.2 |
% |
The effective tax rate is subject to variation due to a number of factors, including: variability in pre-tax book income; the mix of income by jurisdiction; changes in deferred tax valuation allowances; and changes in statutes, regulations, and case law. Additionally, the impacts of discrete and other rate impacting items are more pronounced when income (loss) before income taxes is lower.
The decrease in the effective tax rate from the prior six-month period to the current six-month period is primarily attributable to a discrete tax benefit related to the recovery of certain Brazilian income taxes paid in prior years, partially offset by an increase in the valuation allowance for deferred tax assets in the current six-month period.
Net (Loss) Income
The decrease in net (loss) income was primarily attributable to the decrease in Americas gross profit and the associated adverse impact of lower U.S. earnings on the effective tax rate.
Adjusted EBITDA (Non-GAAP Financial Measure)
Adjusted EBITDA decreased primarily in connection with lower gross profit.
Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures)
Adjusted Net (Loss) Income and Adjusted EPS decreased from the prior six-month period to the current period, commensurate with the decrease in net (loss) income.
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current six-month period.
Americas Segment
The components of Segment (Loss) Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Americas Segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
192,886 |
|
|
|
100.0 |
|
|
$ |
225,523 |
|
|
|
100.0 |
|
|
|
(14.5 |
) |
Cost of sales |
|
|
210,839 |
|
|
|
109.3 |
|
|
|
215,484 |
|
|
|
95.5 |
|
|
|
(2.2 |
) |
Gross (loss) profit |
|
|
(17,953 |
) |
|
|
(9.3 |
) |
|
|
10,039 |
|
|
|
4.5 |
|
|
nm |
|
Depreciation expense |
|
|
11,022 |
|
|
5.7 |
|
|
|
10,220 |
|
|
|
4.5 |
|
|
|
7.8 |
|
Segment (Loss) Profit |
|
$ |
(6,931 |
) |
|
|
(3.6 |
) |
|
$ |
20,259 |
|
|
|
9.0 |
|
|
|
(134.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
61.1 |
% |
|
|
|
|
|
56.7 |
% |
|
|
|
|
|
|
Segment (Loss) Profit as a percentage of consolidated amounts |
|
|
-66.4 |
% |
|
|
|
|
|
37.6 |
% |
|
|
|
|
|
|
The change in net sales for the Americas Segment was as follows:
|
|
|
|
|
Net sales for the prior six-month period |
|
$ |
225,523 |
|
Decrease in sales volumes |
|
|
(54,418 |
) |
Net change in average selling price and sales mix |
|
|
21,781 |
|
Net sales for the current six-month period |
|
$ |
192,886 |
|
The change in net sales for the Americas Segment from the prior six-month period to the current six-month period was primarily attributable to lower sales volumes following weaker global textile demand, partially offset by higher average selling prices in response to higher input costs.
23
The change in Segment (Loss) Profit for the Americas Segment was as follows:
|
|
|
|
|
Segment Profit for the prior six-month period |
|
$ |
20,259 |
|
Change in underlying margins and sales mix from excess capacity |
|
|
(22,196 |
) |
Decrease in sales volumes |
|
|
(4,994 |
) |
Segment Loss for the current six-month period |
|
$ |
(6,931 |
) |
The decrease in Segment (Loss) Profit for the Americas Segment from the prior six-month period to the current six-month period was primarily attributable to lower production volumes driving weaker fixed cost absorption along with lower sales volumes.
Brazil Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Brazil Segment, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
64,566 |
|
|
|
100.0 |
|
|
$ |
61,339 |
|
|
|
100.0 |
|
|
|
5.3 |
|
Cost of sales |
|
|
56,449 |
|
|
|
87.4 |
|
|
|
43,873 |
|
|
|
71.5 |
|
|
|
28.7 |
|
Gross profit |
|
|
8,117 |
|
|
|
12.6 |
|
|
|
17,466 |
|
|
|
28.5 |
|
|
|
(53.5 |
) |
Depreciation expense |
|
|
861 |
|
|
|
1.3 |
|
|
|
660 |
|
|
|
1.1 |
|
|
|
30.5 |
|
Segment Profit |
|
$ |
8,978 |
|
|
|
13.9 |
|
|
$ |
18,126 |
|
|
|
29.6 |
|
|
|
(50.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
20.4 |
% |
|
|
|
|
|
15.4 |
% |
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
|
85.9 |
% |
|
|
|
|
|
33.6 |
% |
|
|
|
|
|
|
The change in net sales for the Brazil Segment was as follows:
|
|
|
|
|
Net sales for the prior six-month period |
|
$ |
61,339 |
|
Increase in sales volumes |
|
|
7,948 |
|
Favorable foreign currency translation effects |
|
|
1,573 |
|
Decrease in average selling price and change in sales mix |
|
|
(6,294 |
) |
Net sales for the current six-month period |
|
$ |
64,566 |
|
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 sales volumes during strong market conditions in Brazil.
The change in Segment Profit for the Brazil Segment was as follows:
|
|
|
|
|
Segment Profit for the prior six-month period |
|
$ |
18,126 |
|
Decrease in underlying margins |
|
|
(11,929 |
) |
Increase in sales volumes |
|
|
2,345 |
|
Favorable foreign currency translation effects |
|
|
436 |
|
Segment Profit for the current six-month period |
|
$ |
8,978 |
|
The decrease 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 decrease in gross margin mainly due to pressure on selling prices from low-priced import competition and higher raw material costs.
Asia Segment
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
|
|
|
|
|
|
|
|
% of Net Sales |
|
|
|
|
|
% of Net Sales |
|
|
% Change |
|
Net sales |
|
$ |
58,279 |
|
|
|
100.0 |
|
|
$ |
110,540 |
|
|
|
100.0 |
|
|
|
(47.3 |
) |
Cost of sales |
|
|
49,880 |
|
|
|
85.6 |
|
|
|
95,058 |
|
|
|
86.0 |
|
|
|
(47.5 |
) |
Gross profit |
|
|
8,399 |
|
|
|
14.4 |
|
|
|
15,482 |
|
|
|
14.0 |
|
|
|
(45.7 |
) |
Depreciation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Segment Profit |
|
$ |
8,399 |
|
|
|
14.4 |
|
|
$ |
15,482 |
|
|
|
14.0 |
|
|
|
(45.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment net sales as a percentage of consolidated amounts |
|
|
18.5 |
% |
|
|
|
|
|
27.8 |
% |
|
|
|
|
|
|
Segment Profit as a percentage of consolidated amounts |
|
|
80.4 |
% |
|
|
|
|
|
28.7 |
% |
|
|
|
|
|
|
24
The change in net sales for the Asia Segment was as follows:
|
|
|
|
|
Net sales for the prior six-month period |
|
$ |
110,540 |
|
Net decrease in sales volumes |
|
|
(52,068 |
) |
Unfavorable foreign currency translation effects |
|
|
(7,947 |
) |
Change in average selling price and sales mix |
|
|
7,754 |
|
Net sales for the current six-month period |
|
$ |
58,279 |
|
The decrease in net sales for the Asia Segment from the prior six-month period to the current six-month period was primarily attributable to weaker global demand and pandemic-related lockdowns driving lower sales volumes, partially offset by a strong sales mix.
The change in Segment Profit for the Asia Segment was as follows:
|
|
|
|
|
Segment Profit for the prior six-month period |
|
$ |
15,482 |
|
Decrease in sales volumes |
|
|
(7,260 |
) |
Unfavorable foreign currency translation effects |
|
|
(1,177 |
) |
Change in underlying margins and sales mix |
|
|
1,354 |
|
Segment Profit for the current six-month period |
|
$ |
8,399 |
|
The decrease in Segment Profit for the Asia Segment from the prior six-month period to the current six-month period follows the decline in net sales and sales volumes discussed above, as the comparable gross margin rate for the Asia Segment improved with a stronger sales mix.
Liquidity and Capital Resources
Note 5, “Long-Term Debt” to the condensed consolidated financial statements includes the detail of UNIFI’s debt obligations and terms and conditions thereof. Further discussion and analysis of liquidity and capital resources follow.
UNIFI’s primary capital requirements are for working capital, capital expenditures, debt service, and share repurchases. UNIFI’s primary sources of capital are cash generated from operations and borrowings available under the ABL Revolver of its credit facility. For the current six-month period, cash provided by operations was $7,272, and, at January 1, 2023, excess availability under the ABL Revolver was $64,694.
As of January 1, 2023, all of UNIFI’s $130,391 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, while approximately 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 January 1, 2023 for domestic operations compared to foreign operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
Foreign |
|
|
Total |
|
Cash and cash equivalents |
|
$ |
19 |
|
|
$ |
50,762 |
|
|
$ |
50,781 |
|
Borrowings available under financing arrangements |
|
|
64,694 |
|
|
|
— |
|
|
|
64,694 |
|
Liquidity |
|
$ |
64,713 |
|
|
$ |
50,762 |
|
|
$ |
115,475 |
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
88,370 |
|
|
$ |
130,975 |
|
|
$ |
219,345 |
|
Total debt obligations |
|
$ |
130,391 |
|
|
$ |
— |
|
|
$ |
130,391 |
|
UNIFI’s primary cash requirements, in addition to normal course operating activities (e.g. working capital and payroll), primarily include (i) capital expenditures that generally have commitments of up to 12 months, (ii) contractual obligations that support normal course ongoing operations and production, (iii) operating leases and finance leases, (iv) debt service, and (v) share repurchases.
Liquidity Considerations
UNIFI navigated the impact on liquidity of the COVID-19 pandemic by diligently managing the balance sheet and operational spending, in addition to utilizing cash received from a minority interest divestiture in April 2020. Following the COVID-19 pandemic, global demand recovery allowed for strong results and cash generation in fiscal 2021. However, inflation and demand uncertainty in fiscal 2022 and during the current six-month period have introduced new pressures to liquidity.
Following the establishment of the 2022 Credit Agreement, UNIFI’s cash and liquidity positions are sufficient to sustain its operations and meet its growth needs. However, further degradation in the macroeconomic environment could introduce additional liquidity risk and require UNIFI to limit cash outflows for capital expenditures and discretionary activities while further utilizing available and additional forms of credit. Since the onset of the COVID-19 pandemic and the date of this report, we have not:
•taken advantage of rent, lease or debt deferrals, forbearance periods, or other concessions or
•relied on supply chain financing, structured trade payables, or vendor financing.
25
Although global demand for the remainder of calendar 2023 is uncertain, we do not currently anticipate that any adverse events or circumstances will place critical pressure on our liquidity position or our ability to fund our operations, capital expenditures, and expected business growth. Should global demand, economic activity, or input availability decline considerably for a prolonged period of time, UNIFI maintains the ability to (i) seek additional credit or financing arrangements and/or (ii) re-implement cost reduction initiatives to preserve cash and secure the longevity of the business and operations.
Additionally, UNIFI considers opportunities to deploy existing cash to preserve or enhance liquidity. In August 2022, we repatriated approximately $14,000 from our operations in Asia to the U.S. via an existing intercompany note and, after remitting the appropriate withholding taxes, utilized the cash to reduce our outstanding revolver borrowings, thereby increasing the availability. Management regularly evaluates such repatriations and maintains the ability to take additional, similar actions from time to time, as circumstances warrant.
For the remainder of fiscal 2023, we expect the majority of our capital will be deployed to (i) upgrade the machinery in our U.S., El Salvador, and Brazil manufacturing facilities via capital expenditures and (ii) support working capital needs associated with recovering demand and product sales. Nonetheless, we understand the current global economic risks and we are prepared to act swiftly and diligently to ensure the vitality of the business.
The following outlines the attributes relating to our credit facility as of January 1, 2023:
•UNIFI was in compliance with all applicable financial covenants in the 2022 Credit Agreement;
•excess availability under the ABL Revolver was $64,694;
•the Trigger Level (as defined in the 2022 Credit Agreement) was $23,000; and
•$0 of standby letters of credit were outstanding.
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.
Liquidity Summary
UNIFI has met its historical liquidity requirements for working capital, capital expenditures, debt service requirements, and other operating needs from its cash flows from operations and available borrowings. UNIFI believes that its existing cash balances, cash provided by operating activities, and credit facility will enable UNIFI to meet its foreseeable liquidity requirements. Domestically, UNIFI’s cash balances, cash provided by operating activities, and borrowings available under the ABL Revolver continue to be sufficient to fund UNIFI’s domestic operating activities as well as cash commitments for its investing and financing activities. For its foreign operations, UNIFI expects its existing cash balances, cash provided by operating activities, and available foreign financing arrangements will provide the needed liquidity to fund the associated operating activities and investing activities, such as future capital expenditures. UNIFI’s foreign operations in Asia and Brazil are in a position to obtain local country financing arrangements due to the operating results of each subsidiary.
Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2023 |
|
|
July 3, 2022 |
|
Long-term debt |
|
$ |
118,980 |
|
|
$ |
102,309 |
|
Current portion of long-term debt |
|
|
11,092 |
|
|
|
11,726 |
|
Unamortized debt issuance costs |
|
|
319 |
|
|
|
255 |
|
Debt principal |
|
|
130,391 |
|
|
|
114,290 |
|
Less: cash and cash equivalents |
|
|
50,781 |
|
|
|
53,290 |
|
Net Debt |
|
$ |
79,610 |
|
|
$ |
61,000 |
|
There was no significant change in Net Debt in connection with the establishment of the 2022 Credit Agreement in the second quarter of fiscal 2023. Further, Net Debt remained relatively unchanged from October 2, 2022 to January 1, 2023.
26
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:
|
|
|
|
|
|
|
|
|
|
|
January 1, 2023 |
|
|
July 3, 2022 |
|
Cash and cash equivalents |
|
$ |
50,781 |
|
|
$ |
53,290 |
|
Receivables, net |
|
|
64,980 |
|
|
|
106,565 |
|
Inventories |
|
|
147,253 |
|
|
|
173,295 |
|
Income taxes receivable |
|
|
1,938 |
|
|
|
160 |
|
Other current assets |
|
|
13,203 |
|
|
|
18,956 |
|
Accounts payable |
|
|
(33,784 |
) |
|
|
(73,544 |
) |
Other current liabilities |
|
|
(11,345 |
) |
|
|
(19,806 |
) |
Income taxes payable |
|
|
(587 |
) |
|
|
(1,526 |
) |
Current operating lease liabilities |
|
|
(2,002 |
) |
|
|
(2,190 |
) |
Current portion of long-term debt |
|
|
(11,092 |
) |
|
|
(11,726 |
) |
Working capital |
|
$ |
219,345 |
|
|
$ |
243,474 |
|
|
|
|
|
|
|
|
Less: Cash and cash equivalents |
|
|
(50,781 |
) |
|
|
(53,290 |
) |
Less: Income taxes receivable |
|
|
(1,938 |
) |
|
|
(160 |
) |
Less: Income taxes payable |
|
|
587 |
|
|
|
1,526 |
|
Less: Current operating lease liabilities |
|
|
2,002 |
|
|
|
2,190 |
|
Less: Current portion of long-term debt |
|
|
11,092 |
|
|
|
11,726 |
|
Adjusted Working Capital |
|
$ |
180,307 |
|
|
$ |
205,466 |
|
When comparing from July 3, 2022 to January 1, 2023, working capital and Adjusted Working Capital decreased.
The decrease in receivables, net was primarily due to (i) a decrease in sales following lower global demand and (ii) a decrease in banker’s acceptance notes held by our Asia Segment. The decrease in inventories was primarily attributable to a decline in raw material purchases and costs in the current six-month period. The decrease in other current assets was primarily due to utilization of the fiscal 2021 recovery of non-income taxes in Brazil and lower vendor deposits. The decrease in accounts payable followed the decrease in inventories and production activity in the current six-month period. The decrease in other current liabilities primarily reflects the routine timing differences for payroll and other operating expenses. The changes in current operating lease liabilities, current portion of long-term debt, income taxes receivable, and income taxes payable were insignificant.
Operating Cash Flows
The significant components of net cash provided (used) by operating activities are summarized below.
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended |
|
|
|
January 1, 2023 |
|
|
December 26, 2021 |
|
Net (loss) income |
|
$ |
(25,871 |
) |
|
$ |
9,609 |
|
Equity in earnings of unconsolidated affiliates |
|
|
(381 |
) |
|
|
(344 |
) |
Depreciation and amortization expense |
|
|
13,478 |
|
|
|
12,687 |
|
Recovery of income taxes |
|
|
(3,799 |
) |
|
|
— |
|
Non-cash compensation expense |
|
|
1,976 |
|
|
|
2,261 |
|
Deferred income taxes |
|
|
(304 |
) |
|
|
(3,197 |
) |
Subtotal |
|
|
(14,901 |
) |
|
|
21,016 |
|
|
|
|
|
|
|
|
Receivables, net |
|
|
40,552 |
|
|
|
1,358 |
|
Inventories |
|
|
25,422 |
|
|
|
(10,953 |
) |
Accounts payable and other current liabilities |
|
|
(47,599 |
) |
|
|
(11,598 |
) |
Other changes |
|
|
3,798 |
|
|
|
(3,773 |
) |
Net cash provided (used) by operating activities |
|
$ |
7,272 |
|
|
$ |
(3,950 |
) |
The increase in operating cash flows was primarily due to reducing working capital associated with a decline in overall business activity in the current six-month period, which was primarily offset by significantly weaker earnings.
Investing Cash Flows
Investing activities primarily includes $23,950 for capital expenditures.
During the current six-month period, UNIFI invested $23,950 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.
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.
27
Financing Cash Flows
Financing activities primarily include (i) scheduled payments against the ABL Term Loan and finance leases, (ii) proceeds and payments on the ABL Revolver, and (iii) proceeds from construction financing during the current six-month period.
Share Repurchase Program
As described in Note 7, “Shareholders’ Equity,” no share repurchases have been completed in fiscal 2023.
Contractual Obligations
UNIFI incurs various financial obligations and commitments in the ordinary course of business. Financial obligations are considered to represent known future cash payments that UNIFI is required to make under existing contractual arrangements, such as debt and lease agreements.
After considering the changes generated by the 2022 Credit Agreement, there have been no further material changes in the scheduled maturities of UNIFI’s contractual obligations as disclosed under the heading “Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2022 Form 10-K.
Off-Balance Sheet Arrangements
UNIFI is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on UNIFI’s financial condition, results of operations, liquidity, or capital expenditures.
Critical Accounting Policies
UNIFI’s critical accounting policies are discussed in the 2022 Form 10-K. There have been no changes to UNIFI’s critical accounting policies in fiscal 2023.