The following is management's discussion and analysis of certain significant factors that have affectedUNIFI's operations, along with material changes in financial condition, during the periods included in the accompanying consolidated financial statements. Management's discussion and analysis should be read in conjunction with the remainder of this Annual Report, with the understanding that forward-looking statements may be present. A reference to a "note" refers to the accompanying notes to consolidated financial statements.
Strategic Priorities
We believeUNIFI's underlying performance during recent fiscal years reflects the strength of our global initiative to deliver differentiated solutions to customers and brand partners throughout the world. Our supply chain has been developed and enhanced in multiple regions around the globe, allowing us to deliver a diverse range of fibers and polymers to key customers in the markets we serve, especially apparel. These textile products are supported by quality assurance, product development, product and fabric certifications, hangtags, co-marketing, and technical and customer service teams acrossUNIFI's operating subsidiaries. We have developed this successful operating platform by improving operational and business processes and deriving value from sustainability-based initiatives, including polyester and nylon recycling. We believe that further commercial expansion will require a continued stream of new technology and innovation that generates products with meaningful consumer benefits. Along with our recycled platform,UNIFI has significant yarn technologies that provide optimal performance characteristics for today's marketplace, including moisture management, temperature moderation, stretch, ultra-violet protection and fire retardation, among others. To achieve further growth,UNIFI remains focused on innovation, bringing to market the next wave of fibers and polymers for tomorrow's applications. As we invest and grow, sustainability remains at our core. We believe that increasing the awareness for recycled solutions in applications across fibers and polymers and furthering sustainability-based initiatives with like-minded brand partners will be key to our future success. We also believe that our manufacturing processes and our technical knowledge and capabilities will allow us to grow market share and develop new textile programs with new and existing customers. Ultimately, combining leading edge innovation with our prominent, high-quality brand and agile regional business model will allow for underlying sales and profitability growth.
Significant Developments and Trends
During the last five fiscal years, several key drivers affected our financial results. During fiscal 2018 and 2019, our operations in theU.S. were unfavorably impacted by (i) rising raw material costs and (ii) a surge of imported polyester textured yarn that depressed our pricing, market share, and fixed cost absorption. During fiscal 2020, our financial results began to improve following more stable import and raw material cost environments. However, the COVID-19 pandemic had a significant unfavorable impact to product demand and our annual profitability suffered accordingly. Near the end of fiscal 2020, we divested a minority interest investment and significantly improved our liquidity position, supporting business preservation and the ability to better capture long-term growth opportunities. Throughout fiscal 2021, our businesses experienced sequential improvement alongside global demand and economic recovery, and we capitalized on profitable opportunities that fueled strong consolidated results. Throughout fiscal 2022, we experienced adverse pressure from rising input costs and a weakening of labor productivity primarily in our domestic operations. Looking ahead, our operations remain well positioned to capture long-term growth opportunities and we are working to mitigate any potential recession impacts. Once global economic pressures subside, we believe incremental revenue for the Americas Segment will be generated from both the polyester textured yarn trade petitions, along with continued demand for innovative and sustainable products. The Asia Segment continues to capture demand for recycled products and serves as a significant component of future growth. The Brazil Segment performed extraordinarily well in fiscal 2021 and 2022, and while pricing and margins normalized from near historical levels, the momentum captured in fiscal 2021 and 2022 could provide a new, elevated level of long-term performance for the segment.
The following positive developments and trends occurred or were occurring in fiscal 2022.
• Demand levels for the majority of our business lines experienced significant recovery since the onset of the COVID-19 pandemic.
• Our REPREVE family of products continued to gain momentum with brands,
retailers, and mill partners who value sustainability and
to produce leading edge products with in-demand technologies.
• Although raw material costs rose throughout fiscal 2022, we have been able
to implement cost-responsive selling price adjustments intended to protect
our gross profit.
• Our Brazil Segment was able to opportunistically capture market share from
competitors and secure favorable pricing levels during the economic recovery inBrazil .
• Our Asia Segment returned to sales growth, driven by demand for REPREVE,
generating continued portfolio expansion.
Raw Material and Foreign Currency
Raw material costs represent a significant portion of
During much of fiscal 2020, the raw material cost environment shifted to be more favorable and reached significantly lower levels during the early weeks of the COVID-19 pandemic. 21
-------------------------------------------------------------------------------- The first half of fiscal 2021 included stable, low levels of raw material costs, while economic recovery, weather events, and supply chain challenges generated raw material cost increases during the second half of fiscal 2021 and the first half of fiscal 2022. For the majority of our portfolio, we were able to implement selling price adjustments throughout fiscal 2021 and 2022. However, recycled inputs in theU.S. experienced continued cost increases during fiscal 2022. Despite the selling price increases, we still experienced meaningful gross profit pressure during fiscal 2022, primarily from theU.S. labor shortage and speed at which input costs increased. The continuing volatility in global crude oil prices is likely to impactUNIFI's polyester and nylon raw material costs. While it is not possible to predict the timing or amount of the impact or whether the recent fluctuations in crude oil prices will stabilize, increase or decrease,UNIFI monitors these dynamic factors closely. In addition,UNIFI attempts to pass on to its customers increases in raw material costs but due to market pressures, this is not always possible. When price increases can be implemented, there is typically a time lag that adversely affectsUNIFI and its margins during one or more quarters. Certain customers are subject to an index-based pricing model in whichUNIFI's prices are adjusted based on the change in the cost of certain raw materials in the prior quarter. Pricing adjustments for other customers must be negotiated independently. In ordinary market conditions in which raw material cost increases have stabilized and sales volumes are consistent with traditional levels,UNIFI has historically been successful in implementing price adjustments within one or two fiscal quarters of the raw material price increase for all of its customers.UNIFI is also impacted by significant fluctuations in the value of the Brazilian Real ("BRL") and the Chinese Renminbi ("RMB"), the local currencies for our operations inBrazil andChina , respectively. Appreciation of the BRL and the RMB improves our net sales and gross profit metrics when the results of our subsidiaries are translated into USDs at comparatively favorable rates. However, such strengthening may cause adverse impacts to the value of USDs held in these foreign jurisdictions.UNIFI expects continued volatility in the value of the BRL and the RMB to impact our key performance metrics and actual financial results, although the magnitude of the impact is dependent upon the significance of the volatility, and it is not possible to predict the timing or amount of the impact.
The BRL to USD weighted average exchange rate was 5.21, 5.38, and 4.29 for fiscal 2022, 2021 and 2020, respectively. The RMB to USD weighted average exchange rate was 6.45, 6.60, and 7.03 for fiscal 2022, 2021 and 2020, respectively.
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
• gross profit and gross margin for
• net income (loss) and earnings per share; • Segment Profit, which equals segment gross profit plus segment depreciation expense;
• unit conversion margin, which represents unit net sales price less unit
raw material costs, for
• working capital, which represents current assets less current liabilities;
• Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"), which represents net income (loss) before net interest
expense, income tax expense and depreciation and amortization expense; • Adjusted EBITDA, which represents EBITDA adjusted to exclude equity in
loss of PAL and, from time to time, certain other adjustments necessary
to understand and compare the underlying results ofUNIFI ; • Adjusted Net Income (Loss), which represents net income (loss) calculated under GAAP, adjusted to exclude certain amounts which management believes do not reflect the ongoing operations and performance ofUNIFI and/or for which exclusion may be necessary to understand and compare the underlying results ofUNIFI ;
• Adjusted EPS, which represents Adjusted Net Income (Loss) divided by
•
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 Income (Loss), 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. 22 --------------------------------------------------------------------------------
We believe that these non-GAAP financial measures better reflect
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. Equity in loss of PAL is excluded from Adjusted EBITDA because such results do not reflect our operating performance. Management uses Adjusted Net Income (Loss) 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
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.
See "Non-GAAP Reconciliations" below for reconciliations of non-GAAP metrics to the most directly comparable GAAP metric.
Review of Results of Operations for Fiscal 2022, 2021 and 2020
Fiscal 2022 contained 53 weeks and fiscal 2021 and 2020 were each comprised of 52 weeks. The additional week in fiscal 2022 included approximately$8,700 of net sales, an insignificant impact to gross profit, and approximately$400 of selling, general and administrative expenses.
Consolidated Overview
The below tables provide:
• the components of net income (loss) and the percentage increase or
decrease over the prior fiscal year amounts,
• a reconciliation from net income (loss) to EBITDA and Adjusted EBITDA, and
• a reconciliation from net income (loss) to Adjusted Net Income (Loss) and
Adjusted EPS.
Following the tables is a discussion and analysis of the significant components of net income (loss). Net income (loss) Fiscal 2022 % Change Fiscal 2021 % Change Fiscal 2020 Net sales$ 815,758 22.2$ 667,592 10.1$ 606,509 Cost of sales 735,273 28.1 574,098 1.2 567,469 Gross profit 80,485 (13.9 ) 93,494 139.5 39,040 SG&A expenses 52,489 2.2 51,334 17.2 43,814 (Benefit) provision for bad debts (445 ) (66.2 ) (1,316 ) (175.7 ) 1,739 Other operating (income) expense, net (158 ) (103.2 ) 4,865 110.8 2,308 Operating income (loss) 28,599 (25.9 ) 38,611 nm (8,821 ) Interest expense, net 1,561 (42.6 ) 2,720 (33.0 ) 4,057 (Earnings) loss from unconsolidated affiliates (605 ) (18.1 ) (739 ) nm 477 Recovery of non-income taxes, net 815 (108.4 ) (9,717 ) nm - Gain on sale of investment in unconsolidated affiliate - - - nm (2,284 ) Impairment of investment in unconsolidated affiliate - - - nm 45,194 Income (loss) before income taxes 26,828 (42.1 ) 46,347 (182.4 ) (56,265 ) Provision for income taxes 11,657 (32.5 ) 17,274 nm 972 Net income (loss)$ 15,171 (47.8 )$ 29,073 (150.8 )$ (57,237 ) nm - not meaningful 23
--------------------------------------------------------------------------------
EBITDA and Adjusted EBITDA (Non-GAAP Measures)
Fiscal 2022 Fiscal 2021 Fiscal 2020 Net income (loss)$ 15,171 $ 29,073 $ (57,237 ) Interest expense, net 1,561 2,720 4,057 Provision for income taxes 11,657 17,274 972 Depreciation and amortization expense (1) 25,986 25,293 23,406 EBITDA 54,375 74,360 (28,802 ) Equity in loss of PAL - - 960 EBITDA excluding PAL 54,375 74,360 (27,842 ) Recovery of non-income taxes, net (2) 815 (9,717 ) - Gain on sale of investment in unconsolidated affiliate (3) - - (2,284 ) Impairment of investment in unconsolidated affiliate (3) - - 45,194 Severance (4) - - 1,485 Adjusted EBITDA$ 55,190 $ 64,643 $ 16,553
The reconciliations of the amounts reported under GAAP for Net Income (Loss) to EBITDA and Adjusted EBITDA are as follows.
(1) Within this reconciliation, depreciation and amortization expense excludes
the amortization of debt issuance costs, which are reflected in interest
expense, net. Within the accompanying condensed consolidated statements of
cash flows, amortization of debt issuance costs is reflected in depreciation
and amortization expense.
(2) In fiscal 2021,
related to favorable litigation results for its Brazilian operations,
generating overpayments that resulted from excess social program taxes paid
in prior fiscal years. For fiscal 2022,
based on additional clarity and review of the recovery process during the
months following the decision.
(3) In fiscal 2020,
the
PAL's loss subsequent to the date of the impairment charge (
and through the date of transaction closing (
generated a gain on sale.
(4) In fiscal 2020,
overall cost reduction efforts in the
operations in
Adjusted Net Income (Loss) and Adjusted EPS (Non-GAAP Measures)
The tables below set forth reconciliations of (i) Income (Loss) before income taxes ("Pre-tax Income (Loss)"), Provision for income taxes ("Tax Impact") and Net Income (Loss) to Adjusted Net Income (Loss) and (ii) Diluted EPS to Adjusted EPS. For the Fiscal Year Ended July 3, 2022 Pre-tax Income Tax Impact Net Income Diluted EPS GAAP results $ 26,828$ (11,657 ) $ 15,171 $ 0.80 Recovery of non-income taxes, net (1) 815 (257 ) 558 0.03 Recovery of income taxes, net (2) - (1,446 ) (1,446 ) (0.07 ) Adjusted results $ 27,643$ (13,360 )
Weighted average common shares outstanding 18,868 For the Fiscal Year Ended June 27, 2021 Pre-tax Income Tax Impact Net Income Diluted EPS GAAP results $ 46,347$ (17,274 ) $ 29,073 $ 1.54 Recovery of non-income taxes, net (1) (9,717 ) 3,304 (6,413 ) (0.34 ) Adjusted results $ 36,630$ (13,970 ) $ 22,660 $ 1.20 Weighted average common shares outstanding 18,856 For the Fiscal Year Ended June 28, 2020 Pre-tax Loss Tax Impact Net Loss Diluted EPS GAAP results$ (56,265 ) $ (972 ) $ (57,237 ) $ (3.10 ) Impairment of investment in unconsolidated affiliate (3) 45,194 - 45,194 2.45 Severance (4) 1,485 (312 ) 1,173 0.06 Adjusted results $ (9,586 )$ (1,284 ) $ (10,870 ) $ (0.59 ) Weighted average common shares outstanding 18,475 24
--------------------------------------------------------------------------------
(1) In fiscal 2021,
related to favorable litigation results for its Brazilian operations,
generating overpayments that resulted from excess social program taxes paid
in prior fiscal years. For fiscal 2022,
based on additional clarity and review of the recovery process during the
months following the decision.
(2) In fiscal 2022,
years.
(3) In fiscal 2020,
related to the
(4) In fiscal 2020,
overall cost reduction efforts in the
operations inSri Lanka .Net Sales Fiscal 2022 vs. Fiscal 2021 Consolidated net sales for fiscal 2022 increased by$148,166 , or 22.2%, and consolidated sales volumes increased 2.7%, compared to fiscal 2021. The increases occurred primarily due to (i) higher selling prices in response to increasing raw material costs and (ii) underlying sales growth led by theAsia Segment and REPREVE products.
Consolidated weighted average sales prices increased 19.5%, primarily attributable to higher selling prices in response to increasing raw material costs.
REPREVE Fiber products for fiscal 2022 comprised 36%, or
Fiscal 2021 vs. Fiscal 2020
Consolidated net sales for fiscal 2021 increased by$61,083 , or 10.1%, and consolidated sales volumes increased 13.5%, compared to fiscal 2020. The increases occurred primarily due to (i) a fiscal 2021 rebound in product demand following the adverse impact of the COVID-19 pandemic on sales volumes in late fiscal 2020, (ii) incremental sales growth for the Asia Segment led by REPREVE branded products, and (iii) opportunistically improved market share and pricing levels inBrazil during demand restoration in that region.
Consolidated average sales prices decreased 3.4%, primarily attributable to (i) a decline in higher-priced nylon product sales and (ii) unfavorable foreign currency translation.
Gross Profit Fiscal 2022 vs. Fiscal 2021 Gross profit for fiscal 2022 decreased by$13,009 , or 13.9%, compared to fiscal 2021. Although we experienced a significant increase in net sales, input cost and labor challenges muted ourAmericas gross profit, primarily in the last nine months of fiscal 2022.
• For the Americas Segment, gross profit decreased due to
higher-than-expected input costs primarily for raw material, labor,
packaging, and supplies, along with weaker labor productivity, offsetting
the benefit from the restoration of
impact the COVID-19 pandemic had on fiscal 2021.
• For the Brazil Segment, gross profit decreased primarily due to lower
volumes and a more normalized market environment in fiscal 2022 following
the exceptional performance of the Brazil Segment in fiscal 2021.
• For the Asia Segment, gross profit increased primarily due to higher sales
volumes. Fiscal 2021 vs. Fiscal 2020
Gross profit for fiscal 2021 increased by
• For the Americas Segment, gross profit benefited from the restoration of
U.S. demand following the worst months of the COVID-19 pandemic and a better sales mix.
• For the Asia Segment, gross profit increased from fiscal 2020 primarily
due to (i) higher sales, (ii) supply chain efficiencies driving lower costs for certain products, and (iii) sales mix improvements.
• For the Brazil Segment, gross profit increased from fiscal 2020 primarily
due to higher sales volumes and conversion margin due to temporary market share capture, partially offset by unfavorable foreign currency translation impacts. 25
--------------------------------------------------------------------------------
SG&A
The changes in SG&A were as follows:
SG&A expenses for fiscal 2020$ 43,814
Net increase in incentive and other compensation expenses 8,474 Other net decreases
(954 ) SG&A expenses for fiscal 2021$ 51,334 SG&A expenses for fiscal 2021$ 51,334 Net increase in marketing expenses 2,007 Other net increases 3,319
Net decrease in incentive and other compensation expenses (4,171 ) SG&A expenses for fiscal 2022
$ 52,489
Fiscal 2022 vs. Fiscal 2021
SG&A increased from fiscal 2021, primarily due to higher discretionary expenses, including marketing, advertising, and travel, partially offset by lower incentive compensation for fiscal 2022.
Fiscal 2021 vs. Fiscal 2020
SG&A increased from fiscal 2020, primarily due to higher incentive compensation in fiscal 2021 in connection with consolidated out-performance. The increase was partially offset by lower discretionary expenses in fiscal 2021 due to COVID-19 pandemic related restrictions and cost control.
(Benefit) Provision for Bad Debts
Fiscal 2022 vs. Fiscal 2021
The provision for bad debts decreased from a benefit of$1,316 in fiscal 2021 to a benefit of$445 in fiscal 2022. The provision reflected no material activity in fiscal 2022. Fiscal 2021 reflected lower-than-expected credit losses on outstanding receivables following the adverse effects of the COVID-19 pandemic on customer financial health. Fiscal 2021 vs. Fiscal 2020
The provision for bad debts decreased from a provision of
Other Operating (Income) Expense, Net
Fiscal 2022 vs. Fiscal 2021
Other operating (income) expense, net was expense of$4,865 in fiscal 2021 and income of$158 in fiscal 2022, which primarily reflects (i) foreign currency transaction gains in fiscal 2022 and such transaction losses in fiscal 2021 and (ii) a predominantly non-cash loss on disposal of assets of$2,809 was recorded in fiscal 2021, primarily relating to the removal of existing texturing machinery to allow for the future installation of new eAFK Evo texturing machinery.
Fiscal 2021 vs. Fiscal 2020
Other operating expense, net was$2,308 in fiscal 2020 and$4,865 in fiscal 2021, which primarily reflects severance expenses and foreign currency transaction losses in both fiscal years, plus, in fiscal 2021, a predominantly non-cash loss on disposal of assets of$2,809 was recorded, primarily relating to the removal of existing texturing machinery to allow for the future installation of new eAFK Evo texturing machinery. 26 --------------------------------------------------------------------------------
Interest Expense, Net Fiscal 2022 vs. Fiscal 2021 Interest expense, net decreased from fiscal 2021 to fiscal 2022. The decrease was attributable to greater interest income in fiscal 2022, primarily generated from foreign cash on deposit. Fiscal 2021 vs. Fiscal 2020
Interest expense, net decreased from fiscal 2020 to fiscal 2021 primarily as a result of a lower average debt principal during fiscal 2021.
(Earnings) Loss from Unconsolidated Affiliates
The components of (earnings) loss from unconsolidated affiliates are as follows: Fiscal 2022 Fiscal 2021 Fiscal 2020 Loss from PAL $ - $ - $ 960 Earnings from nylon joint ventures (605 ) (739 ) (483 ) Total equity in (earnings) loss of unconsolidated affiliates$ (605 ) $
(739 ) $ 477
As a percentage of consolidated income (loss) before income taxes 2.3 % 1.6 % 0.8 % Fiscal 2022 vs. Fiscal 2021
There was no material activity for fiscal 2021 or fiscal 2022.
Fiscal 2021 vs. Fiscal 2020
On
Recovery of Non-Income Taxes, Net
Brazilian companies are subject to various taxes on business operations, including turnover taxes used to fund social security and unemployment programs, commonly referred to as PIS/COFINS taxes.UNIFI , along with numerous other companies inBrazil , challenged the constitutionality of certain state taxes historically included in the PIS/COFINS tax base. OnMay 13, 2021 ,Brazil's Supreme Federal Court ("SFC") ruled in favor of taxpayers, and onJuly 7, 2021 , the Brazilian Internal Revenue Service withdrew its existing appeal. Following the SFC decision, the federal government will not issue refunds for these taxes but will instead allow for the overpayments and associated interest to be applied as credits against future PIS/COFINS tax obligations. There are no limitations or restrictions onUNIFI's ability to recover the associated overpayment claims as future income is generated. Thus, during fiscal 2021,UNIFI recorded a$9,717 recovery of non-income taxes comprised of an estimate of prior fiscal year PIS/COFINS overpayments of$6,167 and associated interest of$3,550 .
During fiscal 2022,
Impairment of Investment in Unconsolidated Affiliate and Gain on Divestiture
As ofMarch 29, 2020 ,UNIFI owned a 34% interest in thePAL Investment and Parkdale owned the majority 66% interest. InApril 2020 ,UNIFI and Parkdale finalized negotiations to sell thePAL Investment to Parkdale for$60,000 andUNIFI recorded an impairment charge of$45,194 to adjust thePAL Investment to fair value. The transaction closed onApril 29, 2020 andUNIFI received$60,000 in cash.UNIFI's 34% share of PAL's loss subsequent to the date of the impairment charge (March 29, 2020 ) and through the date of transaction closing (April 29, 2020 ) was$2,284 and generated a gain on divestiture. 27 --------------------------------------------------------------------------------
Provision for Income Taxes
The change in consolidated income taxes is as follows:
Fiscal 2022 Fiscal 2021 Fiscal 2020 Income (loss) before income taxes$ 26,828 $ 46,347 $ (56,265 ) Provision for income taxes 11,657 17,274 972 Effective tax rate 43.5 % 37.3 % (1.7 )%
The effective tax rate is subject to variation due to several factors, including: variability in pre-tax and taxable income; the mix of income by jurisdiction; changes in deferred tax valuation allowances; and changes in statutes, regulations, and case law. Additionally, the impacts of discrete and other rate impacting items are greater when income before income taxes is lower.
Fiscal 2022 vs. Fiscal 2021 The increase in the effective tax rate from fiscal 2021 to fiscal 2022 is primarily attributable to (i) an increase in the valuation allowance in fiscal 2022 and (ii) a discrete benefit in fiscal 2021 for the retroactive GILTI high-tax exclusion. These increases are partially offset by (i) lowerU.S. tax on GILTI in in fiscal 2022 and (ii) a discrete benefit in fiscal 2022 related to a favorableSupreme Court ruling inBrazil .
Fiscal 2021 vs. Fiscal 2020
The increase in the effective tax rate from fiscal 2020 to fiscal 2021 is primarily attributable to (i) an impairment charge in fiscal 2020 for whichUNIFI does not expect to realize a future benefit, (ii) an increase in foreign earnings taxed at higher rates in fiscal 2021, (iii) a higher rate impact ofU.S. tax on GILTI in fiscal 2021, and (iv) the reversal ofUNIFI's permanent reinvestment assertion in fiscal 2021 with regards to certain unrepatriated foreign earnings. This increase is partially offset by a benefit in fiscal 2021 for the retroactive GILTI high-tax exclusion for prior periods.
Net Income (Loss)
Fiscal 2022 vs. Fiscal 2021
Net income for fiscal 2022 was$15,171 , or$0.80 per diluted share, compared to net income of$29,073 , or$1.54 per diluted share, for fiscal 2021. The decrease in net income was primarily attributable to (i) lower gross profit, (ii) a higher effective tax rate in fiscal 2022, and (iii) the favorable impact of the recovery of non-income taxes in fiscal 2021.
Fiscal 2021 vs. Fiscal 2020
Net income for fiscal 2021 was$29,073 , or$1.54 per diluted share, compared to a net loss of$57,237 , or$3.10 per diluted share, for fiscal 2020. The increase was primarily attributable to the impairment charge for thePAL Investment sale recorded in fiscal 2020. Excluding the impairment charge, the increase was attributable to higher gross profit and a recovery of non-income taxes inBrazil in fiscal 2021, partially offset by the fiscal 2021 impacts of (i) higher SG&A, (ii) a higher effective tax rate, and (iii) the loss on the disposal of assets.
Adjusted EBITDA
Adjusted EBITDA decreased from
Adjusted EBITDA increased from$16,553 for fiscal 2020 to$64,643 for fiscal 2021. The increase was primarily attributable to higher gross profit due to the recovery from the economic impacts of the COVID-19 pandemic, partially offset by the fiscal 2021 impacts of higher SG&A and the loss on the disposal of assets of$2,809 . Adjusted Net Income (Loss)
Adjusted Net Income decreased from
Adjusted Net Income (Loss) increased from
28 --------------------------------------------------------------------------------
Segment Overview
Following is a discussion and analysis of the revenue and profitability
performance of
Americas Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Americas Segment are as follows: Fiscal 2022 % Change Fiscal 2021 % Change Fiscal 2020 Net sales$ 483,085 24.9$ 386,779 1.7$ 380,138 Cost of sales 458,617 30.9 350,373 (5.0 ) 368,976 Gross profit 24,468 (32.8 ) 36,406 226.2 11,162 Depreciation expense 21,153 0.5 21,054 9.2 19,274 Segment Profit$ 45,621 (20.6 )$ 57,460 88.8$ 30,436 Gross margin 5.1 % 9.4 % 2.9 % Segment margin 9.4 % 14.9 % 8.0 % Segment net sales as a percentage of consolidated amount 59.2 % 57.9 % 62.7 % Segment Profit as a percentage of consolidated amount 44.2 % 49.6 % 51.0 %
The changes in net sales for the Americas Segment are as follows:
Net sales for fiscal 2020$ 380,138 Increase in sales volumes 3,333 Net change in average selling price and sales mix 3,308 Net sales for fiscal 2021$ 386,779 Net sales for fiscal 2021$ 386,779 Net change in average selling price and sales mix 80,337
Increase due to an additional week of sales in fiscal 2022 8,703 Increase in sales volumes
7,266 Net sales for fiscal 2022$ 483,085 The increase in net sales for the Americas Segment from fiscal 2021 to fiscal 2022 was primarily attributable to (i) higher average selling prices in response to increasing input costs and (ii) an additional week of sales in fiscal 2022. The increase in net sales for the Americas Segment from fiscal 2020 to fiscal 2021 was primarily attributable to the pandemic recovery that led to a better sales mix and higher sales volumes in fiscal 2021.
The changes in Segment Profit for the Americas Segment are as follows:
Segment Profit for fiscal 2020$ 30,436
Change in underlying margins and sales mix 26,757 Increase in sales volumes
267 Segment Profit for fiscal 2021$ 57,460 Segment Profit for fiscal 2021$ 57,460
Change in underlying margins and sales mix (12,918 ) Increase in sales volumes
1,079 Segment Profit for fiscal 2022$ 45,621
The decrease in Segment Profit for the Americas Segment from fiscal 2021 to fiscal 2022 was primarily attributable to the adverse impacts of higher input costs outpacing selling price adjustments and weaker labor productivity.
The increase in Segment Profit for the Americas Segment from fiscal 2020 to fiscal 2021 was primarily attributable to the pandemic recovery that led to improved manufacturing productivity and conversion margin.
29 --------------------------------------------------------------------------------
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 are as follows: Fiscal 2022 % Change Fiscal 2021 % Change Fiscal 2020 Net sales$ 126,066 31.4$ 95,976 30.9$ 73,339 Cost of sales 98,925 53.9 64,281 3.4 62,144 Gross profit 27,141 (14.4 ) 31,695 183.1 11,195 Depreciation expense 1,500 14.1 1,315 (5.1 ) 1,385 Segment Profit$ 28,641 (13.2 )$ 33,010 162.4$ 12,580 Gross margin 21.5 % 33.0 % 15.3 % Segment margin 22.7 % 34.4 % 17.2 % Segment net sales as a percentage of consolidated amount 15.5 % 14.4 % 12.1 % Segment Profit as a percentage of consolidated amount 27.8 % 28.5 % 21.1 %
The changes in net sales for the Brazil Segment are as follows:
Net sales for fiscal 2020$ 73,339
Increase in average selling price and change in sales mix 20,459 Increase in sales volumes
17,297 Unfavorable foreign currency translation effects (15,119 ) Net sales for fiscal 2021$ 95,976 Net sales for fiscal 2021$ 95,976
Increase in average selling price and change in sales mix 26,343 Favorable foreign currency translation effects
2,757 Increase in sales volumes 990 Net sales for fiscal 2022$ 126,066 The increase in net sales for the Brazil Segment from fiscal 2021 to fiscal 2022 was primarily attributable to higher selling prices associated with higher input costs and favorable foreign currency translation effects. The increase in net sales for the Brazil Segment from fiscal 2020 to fiscal 2021 was primarily attributable to the Brazil Segment's ability to (i) capture market share from competitors duringBrazil's economic recovery following the most severe impacts of the COVID-19 pandemic and (ii) an increase in selling prices, partially offset by unfavorable foreign currency translation effects.
The changes in Segment Profit for the Brazil Segment are as follows:
Segment Profit for fiscal 2020$ 12,580 Increase in underlying margins 20,318 Increase in sales volumes 2,908
Unfavorable foreign currency translation effects (2,796 ) Segment Profit for fiscal 2021
$ 33,010 Segment Profit for fiscal 2021$ 33,010 Decrease in underlying margins (5,773 )
Favorable foreign currency translation effects 1,063 Increase in sales volumes
341 Segment Profit for fiscal 2022$ 28,641 The decrease in Segment Profit for the Brazil Segment from fiscal 2021 to fiscal 2022 was primarily attributable to an overall decrease in gross margin following the normalization of the competitive environment inBrazil , which was exceptionally favorable for the Brazil Segment during the fiscal 2021 economic recovery. The increase in Segment Profit for the Brazil Segment from fiscal 2020 to fiscal 2021 was primarily attributable to an improved sales mix and conversion margin combined with higher sales volumes stemming from a temporarily improved competitive position inBrazil , partially offset by unfavorable foreign currency translation effects. 30
--------------------------------------------------------------------------------
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 are as follows: Fiscal 2022 % Change Fiscal 2021 % Change Fiscal 2020 Net sales$ 206,607 11.8$ 184,837 20.8$ 153,032 Cost of sales 177,731 11.5 159,444 16.9 136,349 Gross profit 28,876 13.7 25,393 52.2 16,683 Depreciation expense - - - - - Segment Profit$ 28,876 13.7$ 25,393 52.2$ 16,683 Gross margin 14.0 % 13.7 % 10.9 % Segment margin 14.0 % 13.7 % 10.9 % Segment net sales as a percentage of consolidated amount 25.3 % 27.7 % 25.2 % Segment Profit as a percentage of consolidated amount 28.0 % 21.9 % 27.9 %
The changes in net sales for the Asia Segment are as follows:
Net sales for fiscal 2020$ 153,032
Change in average selling price and sales mix (16,074 ) Net increase in sales volumes
39,320
Favorable foreign currency translation effects 8,559 Net sales for fiscal 2021
$ 184,837 Net sales for fiscal 2021$ 184,837
Change in average selling price and sales mix 9,686 Net increase in sales volumes
8,298
Favorable foreign currency translation effects 3,786 Net sales for fiscal 2022
$ 206,607 The increase in net sales for the Asia Segment from fiscal 2021 to fiscal 2022 was primarily attributable to the continued momentum of REPREVE-branded products contributing to underlying sales growth, partially offset by supply chain and shipping challenges inAsia in connection with pandemic-related lockdowns during the fourth quarter of fiscal 2022. The increase in net sales for the Asia Segment from fiscal 2020 to fiscal 2021 was primarily attributable to the continued momentum of REPREVE-branded products contributing to underlying sales growth, partially offset by (i) overall lower sales volumes during the first half of fiscal 2021, driven by the adverse impacts of the COVID-19 pandemic on global demand and (ii) a lower-priced sales mix.
The changes in Segment Profit for the Asia Segment are as follows:
Segment Profit for fiscal 2020$ 16,683
Change in underlying margins and sales mix 4,584 Increase in sales volumes
3,156
Favorable foreign currency translation effects 970 Segment Profit for fiscal 2021
$ 25,393 Segment Profit for fiscal 2021$ 25,393
Change in underlying margins and sales mix 1,824 Increase in sales volumes
1,140
Favorable foreign currency translation effects 519 Segment Profit for fiscal 2022
$ 28,876 The increase in Segment Profit for the Asia Segment from fiscal 2021 to fiscal 2022 was primarily attributable to higher sales volumes with a stronger sales mix in fiscal 2022.
The increase in Segment Profit for the Asia Segment from fiscal 2020 to fiscal 2021 was primarily attributable to raw material cost benefits achieved on certain product lines, an improved sales mix, and higher sales volumes.
31 --------------------------------------------------------------------------------
Liquidity and Capital Resources
UNIFI's primary capital requirements are for working capital, capital expenditures, debt service and share repurchases.UNIFI's primary sources of capital are cash generated from operations and borrowings available under the ABL Revolver (as defined below) of its credit facility. As ofJuly 3, 2022 , all ofUNIFI's $114,290 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, and 99% ofUNIFI's cash and cash equivalents were held by its foreign subsidiaries. Cash and cash equivalents held by foreign subsidiaries may not be presently available to fundUNIFI's domestic capital requirements, including its domestic debt obligations.UNIFI employs a variety of strategies to ensure that its worldwide cash is available in the locations where it is needed. The following table presents a summary of cash and cash equivalents, borrowings available under financing arrangements, liquidity, working capital and total debt obligations as ofJuly 3, 2022 for domestic operations compared to foreign operations: Domestic Foreign Total Cash and cash equivalents$ 527 $ 52,763 $ 53,290 Borrowings available under financing arrangements 51,409 - 51,409 Liquidity$ 51,936 $ 52,763 $ 104,699 Working capital$ 90,963 $ 152,511 $ 243,474 Total debt obligations$ 114,290 $ -$ 114,290 For fiscal 2022, cash generated from operations was$380 and atJuly 3, 2022 , excess availability under the ABL Revolver was$51,409 . In fiscal 2022, demand recovery and inflation generated an increase in our working capital, and when combined with capital expenditures, debt service and routine tax payments, we had a net use of cash in fiscal 2022. However, our liquidity position (calculated in the table above) remains elevated and is expected to be adequate to allowUNIFI to manage through the current macro-economic environment and to quickly respond to demand recovery.UNIFI considers$26,253 of its unremitted foreign earnings to be permanently reinvested to fund working capital requirements and operations abroad, and has therefore not recognized a deferred tax liability for the estimated future taxes that would be incurred upon repatriation. If these earnings were distributed in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred,UNIFI could be subject to additional tax liabilities of approximately$6,046 .
Liquidity Considerations
Operationally,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 inApril 2020 . Following the COVID-19 pandemic, global demand recovery allowed for strong results and cash generation in fiscal 2021. However, inflationary pressures and demand uncertainty throughout fiscal 2022 and entering into fiscal 2023 have created new risks to liquidity. Currently,UNIFI's cash and liquidity positions are sufficient to sustain its operations and meet its long-term financial targets. However, further degradation in the macro-economic environment could introduce additional liquidity risk and requireUNIFI to limit cash outflows for capital expenditures and discretionary activities, while also utilizing available and additional forms of credit. Thus far we:
• have not accessed public or private capital markets for recent liquidity
needs;
• do not currently expect our cost of or access to existing capital and
funding sources to change materially; however, new capital and funding
sources (if any) may carry higher costs than our current structure;
• have not taken advantage of rent, lease or debt deferrals, forbearance
periods, or other concessions, nor have we modified any material agreements to provide concessions; and
• have not relied on supply chain financing, structured trade payables, or
vendor financing.
Although short-term global demand appears somewhat uncertain, we do not currently anticipate that any adverse events or circumstances will place critical pressure on (i) our liquidity position; (ii) our ability to fund our operations, capital expenditures, and expected business growth; or (iii) the financial targets we have set for fiscal 2025. Should global demand, economic activity, or input availability decline considerably for a prolonged period of time (for example, in connection with theRussia -Ukraine conflict or the macro-economic factors leading to inflation and a potential recession),UNIFI maintains the ability to (i) seek additional credit or financing arrangements or extensions of existing arrangements and/or (ii) re-implement cost reduction initiatives to preserve cash and secure the longevity of the business and operations. Additionally,UNIFI considers opportunities to deploy existing cash to preserve or enhance liquidity. InAugust 2022 , we repatriated approximately$14,000 from our operations inAsia to theU.S. via an existing intercompany note and, after remitting the appropriate withholding taxes, utilized the cash to reduce our outstanding revolver borrowings, thereby increasing the availability. During fiscal 2023, we expect the majority of our capital will be deployed to (i) upgrade the machinery in ourU.S. ,El Salvador andBrazil manufacturing facilities via capital expenditures and (ii) support further working capital needs associated with increased sales. Nonetheless, we understand the current global economic risks and we are prepared to act swiftly and diligently to ensure the vitality of the business. 32 --------------------------------------------------------------------------------
Debt Obligations
The following table presents the total balances outstanding forUNIFI's debt obligations, their scheduled maturity dates and the weighted average interest rates for borrowings as well as the applicable current portion of long-term debt: Weighted Average Scheduled Interest Rate as of Principal Amounts as of Maturity Date July 3, 2022 July 3, 2022 June 27, 2021 ABL Revolver December 2023 3.2%$ 41,300 $ - ABL Term Loan December 2023 3.2% 65,000 77,500 Finance lease obligations (1) 3.6% 7,261 8,475 Construction financing (2) 1.9% 729 882 Total debt 114,290 86,857 Current ABL Term Loan (10,000 ) (12,500 ) Current portion of finance lease obligations (1,726 ) (3,545 ) Unamortized debt issuance costs (255 ) (476 ) Total long-term debt$ 102,309 $ 70,336
(1) Scheduled maturity dates for finance lease obligations range from
to
(2) Refer to the discussion below under the subheading "Construction Financing"
for further information. ABL Facility and Amendments OnDecember 18, 2018 ,Unifi, Inc. and certain of its subsidiaries entered into a Third Amendment to Amended and Restated Credit Agreement and Second Amendment to Amended and Restated Guaranty and Security Agreement (the "2018 Amendment"). The 2018 Amendment amended the Amended and Restated Credit Agreement, dated as ofMarch 26, 2015 , by and amongUnifi, Inc. and a syndicate of lenders, as previously amended (together with all previous and subsequent amendments, the "Credit Agreement"). The Credit Agreement provides for a$200,000 senior secured credit facility (the "ABL Facility"), including a$100,000 revolving credit facility (the "ABL Revolver") and a term loan that can be reset up to a maximum amount of$100,000 , once per fiscal year, if certain conditions are met (the "ABL Term Loan"). The ABL Facility has a maturity date ofDecember 18, 2023 . The 2018 Amendment made the following changes to the Credit Agreement, among others: (i) extended the maturity date fromMarch 26, 2020 toDecember 18, 2023 and (ii) decreased the Applicable Margin (as defined in the Credit Agreement) pricing structure for Base Rate Loans (as defined in the Credit Agreement) and LIBOR Rate Loans (as defined in the Credit Agreement) by 25 basis points. In connection and concurrent with the sale ofUNIFI's 34% interest in PAL onApril 29, 2020 ,UNIFI entered into the Fourth Amendment to Amended and Restated Credit Agreement (the "Fourth Amendment"). The Fourth Amendment, among other things, revised the: (i) definition of permitted dispositions within the Credit Agreement to include the sale byUnifi Manufacturing, Inc. of its equity interest in PAL so long as the aggregate net cash proceeds received equaled or exceeded$60,000 and such sale occurred on or beforeMay 15, 2020 ; (ii) terms of the Credit Agreement to allow the net cash proceeds from the sale of PAL to be applied to the outstanding principal amount of the ABL Revolver until paid in full with the remaining net cash proceeds retained byUNIFI , so long as certain conditions were met; and (iii) terms of the Credit Agreement to allow the lenders to make changes to the benchmark interest rate without further amendment should LIBOR temporarily or permanently cease to exist and a transition to a new benchmark interest rate such as the Secured Overnight Financing Rate ("SOFR") be required for future ABL Facility borrowings. OnFebruary 5, 2021 ,UNIFI entered into the Fifth Amendment to Amended and Restated Credit Agreement (the "Fifth Amendment"). The Fifth Amendment generally allowed for share repurchases up to$5,000 to be conducted from cash on-hand throughJune 30, 2021 . The ABL Facility is secured by a first-priority perfected security interest in substantially all owned property and assets (together with all proceeds and products) ofUnifi, Inc. ,Unifi Manufacturing, Inc. , and a certain subsidiary guarantor (collectively, the "Loan Parties"). It is also secured by a first-priority security interest in all (or 65% in the case ofUNIFI's first-tier controlled foreign subsidiary, as required by the lenders) of the stock of (or other ownership interests in) each of the Loan Parties (other thanUnifi, Inc. ) and certain subsidiaries of the Loan Parties, together with all proceeds and products thereof. If excess availability under the ABL Revolver falls below the Trigger Level (as defined in the Credit Agreement), a financial covenant requiring the Loan Parties to maintain a fixed charge coverage ratio on a quarterly basis of at least 1.05 to 1.00 becomes effective. The Trigger Level as ofJuly 3, 2022 was$20,625 . In addition, the ABL Facility contains restrictions on particular payments and investments, including certain restrictions on the payment of dividends and share repurchases. Subject to specific provisions, the ABL Term Loan may be prepaid at par, in whole or in part, at any time before the maturity date, atUNIFI's discretion. 33
-------------------------------------------------------------------------------- ABL Facility borrowings bear interest at LIBOR plus an applicable margin of 1.25% to 1.75%, or the Base Rate (as defined below) plus an applicable margin of 0.25% to 0.75%, with interest currently being paid on a monthly basis. The applicable margin is based on (i) the excess availability under the ABL Revolver and (ii) the consolidated leverage ratio, calculated as of the end of each fiscal quarter. The Base Rate means the greater of (i) the prime lending rate as publicly announced from time to time byWells Fargo Bank, National Association , (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.5%, and (iii) LIBOR plus 1.0%.UNIFI's ability to borrow under the ABL Revolver is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventories and is subject to certain conditions and limitations. There is also a monthly unused line fee under the ABL Revolver of 0.25%. As ofJuly 3, 2022 :UNIFI was in compliance with all financial covenants in the Credit Agreement; excess availability under the ABL Revolver was$51,409 ;UNIFI had$0 of standby letters of credit; and the fixed charge coverage ratio was (0.24) to 1.00. Management maintains the capability to improve the fixed charge coverage ratio utilizing existing foreign cash and cash equivalents.
UNIFI currently utilizes variable-rate borrowings under the ABL Facility that are made with reference to USD LIBOR Rate Loans. Management will continue to monitor the potential termination of LIBOR and the potential impact onUNIFI's operations. However, as a result of the Fourth Amendment, management does not expect (i) significant efforts are necessary to accommodate a termination of LIBOR or (ii) a significant impact toUNIFI's operations upon a termination of LIBOR. Finance Lease Obligations During fiscal 2022,UNIFI entered into finance lease obligations totaling$2,493 for eAFK Evo texturing machines. The maturity dates of these obligations occur during fiscal 2027 with interest rates between 3.0% and 4.4%. During fiscal 2021,UNIFI entered into finance lease obligations totaling$740 for certain transportation equipment. The maturity date of these obligations isJune 2025 with an interest rate of 3.8%.
Construction Financing
In
Each borrowing under the agreement provides for 60 monthly payments, which will commence upon the completion of the construction period with an interest rate at fiscal year-end of approximately 4.4%. In connection with this construction financing arrangement,UNIFI has borrowed a total of$3,222 and transitioned$2,493 of completed asset costs to finance lease obligations as ofJuly 3, 2022 .
Scheduled Debt Maturities
The following table presents the scheduled maturities of
Fiscal 2023 Fiscal 2024 Fiscal 2025 Fiscal 2026 Fiscal 2027 Thereafter ABL Revolver $ -$ 41,300 $ - $ - $ - $ - ABL Term Loan 10,000 55,000 - - - - Finance lease obligations 1,726 1,787 1,699 1,255 732 62 Total (1)$ 11,726 $ 98,087 $ 1,699 $ 1,255 $ 732 $ 62
(1) Total reported excludes
Further discussion of the terms and conditions of the Credit Agreement and the Company's existing indebtedness is outlined in Note 12, "Long-Term Debt," to the accompanying consolidated financial statements. 34 --------------------------------------------------------------------------------
Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
July 3, 2022 June 27, 2021 Long-term debt$ 102,309 $ 70,336 Current portion of long-term debt 11,726 16,045 Unamortized debt issuance costs 255 476 Debt principal 114,290 86,857 Less: cash and cash equivalents 53,290 78,253 Net Debt$ 61,000 $ 8,604
Working Capital and
The following table presents the components of working capital and the
reconciliation from working capital to
Fiscal 2022 Fiscal 2021 Cash and cash equivalents$ 53,290 $ 78,253 Receivables, net 106,565 94,837 Inventories 173,295 141,221 Income taxes receivable 160 2,392 Other current assets 18,956 12,364 Accounts payable (73,544 ) (54,259 ) Other current liabilities (19,806 ) (31,638 ) Income taxes payable (1,526 ) (1,625 ) Current operating lease liabilities (2,190 ) (1,856 ) Current portion of long-term debt (11,726 ) (16,045 ) Working capital$ 243,474 $ 223,644 Less: Cash and cash equivalents (53,290 ) (78,253 ) Less: Income taxes receivable (160 ) (2,392 ) Less: Income taxes payable 1,526 1,625 Less: Current operating lease liabilities 2,190 1,856 Less: Current portion of long-term debt 11,726 16,045 Adjusted Working Capital$ 205,466 $ 162,525 Working capital increased from$223,644 as ofJune 27, 2021 to$243,474 as ofJuly 3, 2022 , whileAdjusted Working Capital increased from$162,525 to$205,466 , both primarily in connection with business recovery and higher input costs. Working capital andAdjusted Working Capital are within the range of management's expectations based on the composition of the underlying business and global structure. The decrease in cash and cash equivalents was primarily driven by capital expenditures and scheduled debt service. The increase in receivables, net was due primarily to an increase in selling prices as a result of higher raw material costs in fiscal 2022, partially offset by a decrease in banker's acceptance notes held by our Asia Segment. The increase in inventories was primarily attributable to higher raw material costs in fiscal 2022. The increase in other current assets was primarily due to the reclassification ofBrazil's recovery of non-income taxes from long-term to current based on an accelerated recovery timeline. The increase in accounts payable was consistent with higher raw material costs in fiscal 2022. The decrease in other current liabilities was primarily attributable to less incentive compensation earned in fiscal 2022. Income taxes receivable and income taxes payable are immaterial to working capital andAdjusted Working Capital . The change in current operating lease liabilities was insignificant. The change in current portion of long-term debt primarily reflects the five quarterly principal payments occurring within the 53-week fiscal 2022 year reflected as current at the end of fiscal 2021.
Capital Projects
In fiscal 2022,UNIFI invested$39,631 in capital projects, primarily relating to (i) eAFK Evo texturing machinery, (ii) further improvements in production capabilities and technology enhancements in theAmericas , and (iii) routine annual maintenance capital expenditures. Maintenance capital expenditures are necessary to supportUNIFI's current operations, capacities, and capabilities and exclude expenses relating to repairs and costs that do not extend an asset's useful life. In fiscal 2021,UNIFI invested$21,178 in capital projects, primarily relating to (i) further improvements in production capabilities and technology enhancements in theAmericas , (ii) eAFK Evo texturing machines, and (iii) routine annual maintenance capital expenditures. Maintenance capital expenditures are necessary to supportUNIFI's current operations, capacities, and capabilities and exclude expenses relating to repairs and costs that do not extend an asset's useful life. 35 -------------------------------------------------------------------------------- In fiscal 2020 and in response to the adverse liquidity impacts of COVID-19, we invested approximately$18,500 in capital projects that included (i) a priority on safety and maintenance capital expenditures to allow continued efficient production and (ii) making further improvements in production capabilities and technology enhancements in theAmericas . We also added approximately$6,000 of transportation equipment under new finance leases. In fiscal 2023,UNIFI expects to invest between$35,000 and$40,000 in capital projects, to include (i) making further improvements in production capabilities and technology enhancements in theAmericas , including the continued purchase and installation of new eAFK Evo texturing machines, and (ii) annual maintenance capital expenditures.UNIFI will seek to ensure maintenance capital expenditures are sufficient to allow continued production at high efficiencies. The total amount ultimately invested for fiscal 2023 could be more or less than the currently estimated amount depending on the timing and scale of contemplated initiatives and is expected to be funded primarily by cash provided by operating activities and other borrowings.UNIFI expects recent and future capital projects to provide benefits to future profitability. The additional assets from these capital projects consist primarily of machinery and equipment.
Share Repurchase Program
OnOctober 31, 2018 ,UNIFI announced that the Board approved the 2018 SRP under whichUNIFI is authorized to acquire up to$50,000 of its common stock. Under the 2018 SRP, purchases will be made from time to time in the open market at prevailing market prices, through private transactions, or via block trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date. As ofJuly 3, 2022 ,UNIFI repurchased 701 shares at an average price of$15.90 , leaving$38,859 available for repurchase under the 2018 SRP.UNIFI will continue to evaluate opportunities to use excess cash flows from operations or existing borrowings to repurchase additional stock, while maintaining sufficient liquidity to support its operational needs and to fund future strategic growth opportunities. Liquidity SummaryUNIFI has met its historical liquidity requirements for working capital, capital expenditures, debt service requirements, and other operating needs from its cash flows from operations and available borrowings.UNIFI believes that its existing cash balances, cash provided by operating activities, and credit facility will enableUNIFI to meet its foreseeable liquidity requirements. Domestically,UNIFI's cash balances, cash provided by operating activities and borrowings available under the ABL Revolver continue to be sufficient to fundUNIFI's domestic operating activities as well as cash commitments for its investing and financing activities. For its foreign operations,UNIFI expects its existing cash balances, cash provided by operating activities and available foreign financing arrangements will provide the needed liquidity to fund the associated operating activities and investing activities, such as future capital expenditures.UNIFI's foreign operations inAsia andBrazil are in a position to obtain local country financing arrangements due to the strong operating results of each subsidiary.
Cash Provided by Operating Activities
The significant components of net cash provided by operating activities are
summarized below.
Fiscal 2022 Fiscal 2021 Fiscal 2020 Net income (loss)$ 15,171 $ 29,073 $ (57,237 ) Depreciation and amortization expense 26,207 25,528 23,653 Equity in (earnings) loss of unconsolidated affiliates (605 ) (739 ) 477 Recovery of non-income taxes, net 815 (9,717 ) - Impairment of investment in unconsolidated affiliate - - 45,194 Gain on sale of investment in unconsolidated affiliate - - (2,284 ) Non-cash compensation expense 3,555 3,462 3,999 Deferred income taxes (3,119 ) 5,087 (4,011 ) Subtotal 42,024 52,694 9,791 Distributions received from unconsolidated affiliates 750 750 10,437 Change in inventories (34,749 ) (28,069 ) 15,792 Other changes in assets and liabilities (7,645 ) 11,306 16,704
Net cash provided by operating activities $ 380
Fiscal 2022 Compared to Fiscal 2021
The decrease in net cash provided by operating activities from fiscal 2021 to fiscal 2022 was primarily due to an increase in working capital associated with (i) higher raw material costs and consolidated sales activity driving higher inventory and accounts receivable balances and (ii) lower other current liabilities resulting from the payment of incentive compensation earned in fiscal 2021. 36
--------------------------------------------------------------------------------
Fiscal 2021 Compared to Fiscal 2020
The decrease in net cash provided by operating activities from fiscal 2020 to fiscal 2021 was primarily due to (i) the impact on working capital created by the contrast in business activity at the end of each fiscal year and (ii) the$10,437 of distributions received from PAL in fiscal 2020. The decrease was partially offset by a significant increase in Adjusted EBITDA from fiscal 2020 to fiscal 2021.
Cash (Used) Provided by Investing Activities and Financing Activities
Fiscal 2022
UNIFI used$41,734 for investing activities and provided$17,965 for financing activities during fiscal 2022. Significant investing activities included$39,631 for capital expenditures, which primarily relate to ongoing maintenance capital expenditures along with production capabilities and technology enhancements in theAmericas . Significant financing activities included$28,800 of net borrowings against the ABL Facility, along with$3,707 of payments on finance lease obligations and$9,151 for share repurchases during fiscal 2022.
Fiscal 2021
UNIFI used$24,621 for investing activities and used$12,875 for financing activities during fiscal 2021. Significant investing activities included (i) approximately$21,000 for capital expenditures that primarily relate to ongoing maintenance capital expenditures along with production capabilities and technology enhancements in theAmericas and (ii) approximately$3,600 for intangible asset purchases in connection with two bolt-on asset acquisitions in an effort to expand our customer portfolios in theU.S. Significant financing activities included$10,000 of net payments against the ABL Facility, along with$3,646 of payments on finance lease obligations.
Fiscal 2020
UNIFI generated$41,574 from net investing activities and utilized$37,922 for net financing activities during fiscal 2020. Significant investing activities included the$60,000 sale of thePAL Investment , partially offset by$18,509 for capital expenditures, which primarily relate to ongoing maintenance capital expenditures, along with production capabilities and technology enhancements in theAmericas . Significant financing activities included$29,400 of net payments against the ABL Facility using approximately half of thePAL Investment sale proceeds, along with$6,035 of payments on finance lease obligations.
Contractual Obligations
In addition to management's discussion and analysis surrounding our liquidity and capital resources, long-term debt, finance leases, operating leases, and the associated principal and interest components thereof, as ofJuly 3, 2022 ,UNIFI's contractual obligations consisted of the following additional concepts and considerations. 1. Capital purchase obligations relate to contracts with vendors for the construction or purchase of assets, primarily for the normal course operations in our manufacturing facilities. Such obligations are approximately$32,000 and$12,000 for fiscal years 2023 and 2024, respectively.
2. Purchase obligations are agreements that are enforceable and legally
binding and that specify all significant terms, including fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions;
and the approximate timing of the transaction. Such obligations, predominantly related to ongoing operations and service contracts in support of normal course business, range from approximately$5,000 to$10,000 per annum and vary based on the renewal timing of specific commitments and the range of services received. 3. Non-capital purchase orders totaled approximately$75,000 at the end of fiscal 2022 and are expected to be settled in fiscal 2023. Such open
purchase orders are in the ordinary course of business for the procurement
of (i) raw materials used in the production of inventory, (ii) certain
consumables and outsourced services used inUNIFI's manufacturing processes, and (iii) selected finished goods for resale sourced from third-party suppliers. 4. Other balance sheet items are detailed within the notes to the
consolidated financial statements, including but not limited to annual
incentive compensation, severance agreements, post-employment plan
liabilities, unpaid invoice and contract amounts, interest rate swaps, and
other balances and charges that primarily relate to normal course operations.
Recent Accounting Pronouncements
Issued and Pending Adoption
Upon review of each Accounting Standards Update ("ASU") issued by theFinancial Accounting Standards Board (the "FASB") through the date of this report,UNIFI identified no newly applicable accounting pronouncements that are expected to have a significant impact onUNIFI's consolidated financial statements. 37 --------------------------------------------------------------------------------
Recently Adopted
InJune 2016 , the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses, with an effective date consistent withUNIFI's fiscal 2021. The new guidance requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. Financial institutions and other organizations have begun to use forward-looking information to inform their credit loss estimates.UNIFI adopted the ASU in fiscal 2021 using the modified retrospective approach and the adoption did not have a material impact toUNIFI's financial position or results of operations.
There have been no other newly issued or newly applicable accounting
pronouncements that have had, or are expected to have, a significant impact on
Off-Balance Sheet Arrangements
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. TheSEC has defined a company's most critical accounting policies as those involving accounting estimates that require management to make assumptions about matters that are highly uncertain at the time and where different reasonable estimates or changes in the accounting estimate from quarter to quarter could materially impact the presentation of the financial statements. The following discussion provides further information about accounting policies critical toUNIFI and should be read in conjunction with Note 2, "Summary of Significant Accounting Policies," to the accompanying consolidated financial statements.
Inventory Net Realizable Value Adjustment
The inventory net realizable value adjustment is established based on many factors, including: historical recovery rates, inventory age, expected net realizable value of specific products, and current economic conditions. Specific reserves are established based on a determination of the obsolescence of the inventory and whether the inventory cost exceeds net realizable value. Anticipating selling prices and evaluating the condition of the inventories require judgment and estimation, which may impact the resulting inventory valuation and gross margins.UNIFI uses current and historical knowledge to record reasonable estimates of its markdown percentages and expected sales prices.UNIFI believes it is unlikely that differences in actual demand or selling prices from those forecasted by management would have a material impact onUNIFI's financial condition or results of operations.UNIFI has not made any material changes to the methodology used in establishing its inventory net realizable value adjustment during the past three fiscal years. A plus or minus 10% change in the inventory net realizable value adjustment would not have been material toUNIFI's consolidated financial statements for the past three fiscal years. July 3, 2022 June 27, 2021 June 28, 2020 Net realizable value adjustment$ (3,487 ) $ (2,407 ) $
(4,224 )
© Edgar Online, source