UNIFI, INC. 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 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 endedSeptember 27, 2020 , while a reference to the "prior period" refers to the three-month period endedSeptember 29, 2019 . Such references may be accompanied by certain phrases for added clarity. The current period and the prior period each consisted of 13 weeks. Our discussions in this Item 2 focus on our results during, or as of, the three months endedSeptember 27, 2020 andSeptember 29, 2019 , and, to the extent applicable, any material changes from the information discussed in the 2020 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 2020 Form 10-K for more detailed and background information about our business, operations and financial condition. Discussion of unfavorable foreign currency translation is primarily associated with the weakening of the Brazilian Real ("BRL") and the Chinese Renminbi ("RMB") against theU.S. Dollar ("USD"). In discussion of its operating results in this report,UNIFI refers to its operations in the "NACA" region, which is the region comprised of the trade zones covered by USMCA,NAFTA and CAFTA-DR.
All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted.
Overview and Significant
UNIFI focuses on delivering products and solutions to direct customers and brand partners throughout the world, leveraging our internal manufacturing capabilities and an enhanced global supply chain that delivers a diverse range of synthetic and recycled fibers and polymers. This strategic and synergistic focus includes three supporting pillars: (1) engaging in strategic relationships with like-minded entities, (2) growing our existing portfolio of technologies and capabilities, and (3) expanding our supply chain to best serve our direct and indirect customers.UNIFI remains committed to this strategy, which we believe will increase profitability and generate improved cash flows from operations.UNIFI has four reportable segments for its operations - the Polyester Segment, the Asia Segment, the Brazil Segment and the Nylon Segment - as well as certain ancillary operations that include for-hire transportation services, which comprise an All Other category. The ancillary operations classified within All Other are insignificant for all periods presented; therefore,UNIFI's discussion and analysis of those activities is generally limited to their impact on consolidated results, where appropriate.
Significant general matters for the current period, which include sales and gross profit pressures from the ongoing COVID-19 pandemic, are summarized below:
• net sales for the current period decreased
compared to
• revenues from REPREVE® Fiber products for the current period represented 35%
of consolidated net sales for the current period compared to 31% for the
prior period;
• gross margin was 10.3% for the current period, compared to 9.7% for the
prior period;
• operating income was
the prior period; and
• diluted EPS was
prior period.
COVID-19 Pandemic in Calendar 2020
InMarch 2020 , theWorld Health Organization declared the current COVID-19 outbreak a global pandemic. Efforts to contain the spread of the COVID-19 pandemic intensified during March andApril 2020 , especially in theU.S. Several states, includingNorth Carolina , whereUNIFI's primary manufacturing and administrative operations are located, declared states of emergency. A number of national, state, and local governments also enacted temporary business closures, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. The local and global measures significantly reduced economic activity and demand, thereby reducing overall demand forUNIFI's products. ThroughMarch 2020 , the COVID-19 pandemic had no significant adverse impact onUNIFI's business, although sales growth for our Asia Segment was temporarily slowed by the extensive government shutdown inChina . Asia Segment overall performance and productivity has been least impacted by the COVID-19 pandemic, while ourU.S. ,Brazil andEl Salvador operations have been more adversely impacted by the COVID-19 pandemic. In an effort to protect the health and safety of our employees, customers and communities,UNIFI has taken proactive, aggressive actions from the earliest signs of the outbreak in theU.S. that include social distancing and travel restriction policies for all locations, along with reducing costs in both manufacturing and selling, general and administrative expenses ("SG&A") without impacting our ability to service customers. Global measures taken to reduce the spread of the COVID-19 pandemic have generated a significant decline in global business activity in the immediate term that may have a lasting impact on the global economy and consumer demand. The duration of the COVID-19 pandemic and its related impact on our business is currently unknown.UNIFI anticipates that the global disruption caused by the COVID-19 pandemic has negatively impacted, and will continue to negatively impact, overall global demand and business activity, including for textiles in both theAmericas andAsia . While our operating results for the current period indicate a moderate recovery of the textile supply chain and increased activity from the considerably low levels of demand and production experienced in theJune 2020 quarter, significant restoration of consumer spending and retail activity will be critical to our end-markets to enable a full and meaningful economic rebound.UNIFI anticipates a recovery in global economic activity when the COVID-19 pandemic is sufficiently contained. The economic rebound will depend on the pace and effectiveness of the containment efforts deployed by various national, state, and local governments, along with the speed and effectiveness with which potential treatment and vaccine methods are deployed. However, the anticipated economic rebound would be jeopardized by a significant second wave of infections or shelter-in-place orders in theU.S. 17 -------------------------------------------------------------------------------- Textile demand and business activity levels in theSeptember 2020 quarter exceeded our expectations set when we began the fiscal year, but there is no certainty that such levels will continue or increase beyondSeptember 2020 . Additionally, there is no clear indication that the demand and activity levels experienced in theSeptember 2020 quarter were the result of economic restoration, and those levels could have been favorably impacted by pent up demand.UNIFI will continue to monitor the COVID-19 pandemic, prioritizing the health and safety of our employees, while delivering on customer demand. While we expect the recovery of our business to levels achieved prior to the COVID-19 pandemic, we continue to expect a moderate to significant adverse impact on our operational and financial results through at least fiscal 2021, based on present factors and conditions. Current Period Performance Prior to the COVID-19 pandemic, our operations were achieving incremental sales volume growth from both (i) continued demand for sustainable products with our REPREVE® platform and (ii) U.S. market share recapture from our trade initiatives that were finalized inJanuary 2020 . Additionally, we have recently benefited from a more favorable polyester raw material cost environment. In the current period, our Polyester and Nylon Segments were adversely impacted by the COVID-19 pandemic effects, as manufacturing activity in theU.S. has recovered less rapidly than inAsia andBrazil , while production activity inCentral America has surged following theJune 2020 quarter. InAsia , although productivity remains pressured by lower global demand, our Asia Segment continues to perform well with new and existing customer programs. TheBrazil Segment was able to navigate its domestic recovery more favorably than competitive importers, resulting in sales volume and market share growth compared to recent quarters. Accordingly, we were able to achieve better-than-expected operating results in the current period. While sales and gross profit pressures from the COVID-19 pandemic have weighed on our financial results, we have remained diligent in managing our operations as efficiently and effectively as possible while delivering on customer demand. Accordingly, we generated operating cash flows in the current period and continued to reduce our debt principal. Our performance in the current period further strengthened our balance sheet and solidified the foundation for further growth subsequent to the negative impacts of COVID-19 pandemic. We believe that several facets of our business will remain drivers for growth once the COVID-19 pandemic subsides, including: (i) continued sales and portfolio growth for our Asia Segment, (ii) U.S. market share recapture from our recent trade initiatives, (iii) continued commitments in sustainability leading to further demand for our REPREVE® platform, (iv) leading-edge innovation and commercialization efforts that deliver meaningful consumer products, and (v) continued expansion of our portfolio with additional markets, applications, and brand partners.
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 and diluted EPS;
• Segment Profit, which equals segment gross profit plus segment depreciation
expense;
• unit conversion margin, which represents unit net sales price less unit raw
material costs, for
• working capital, which represents current assets less current liabilities;
• Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"),
which represents Net income before net interest expense, income tax expense
and depreciation and amortization expense;
• Adjusted EBITDA, which represents EBITDA adjusted to exclude equity in loss
of PAL, and, from time to time, certain other adjustments necessary to
understand and compare the underlying results of UNIFI ;
•
other current assets, less accounts payable and accrued expenses; and
• Net Debt, which represents debt principal less cash and cash equivalents.
EBITDA, Adjusted EBITDA,Adjusted Working Capital and Net Debt (collectively, the "non-GAAP financial measures") are not determined in accordance with GAAP and should not be considered a substitute for performance measures determined in accordance with GAAP. The calculations of the non-GAAP financial measures are subjective, based on management's belief as to which items should be included or excluded in order to provide the most reasonable and comparable view of the underlying operating performance of the business. We may, from time to time, modify the amounts used to determine our non-GAAP financial measures. When applicable, management's discussion and analysis includes specific consideration for items that comprise the reconciliations of its non-GAAP financial measures.
We believe that these non-GAAP financial measures better reflect
Management uses Adjusted EBITDA (i) as a measurement of operating performance
because it assists us in comparing our operating performance on a consistent
basis, as it removes the impact of (a) items directly related to our asset base
(primarily depreciation and amortization) and (b) items that we would not expect
to occur as a part of our normal business on a regular basis; (ii) for planning
purposes, including the preparation of our annual operating budget; (iii) as a
valuation measure for evaluating our operating performance and our capacity to
incur and service debt, fund capital expenditures and expand our business; and
(iv) as one measure in determining the value of other 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
18
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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
Management uses Net Debt as a liquidity and leverage metric to determine how much debt would remain if all cash and cash equivalents were used to pay down debt principal.
Review of Results of Operations
Three Months Ended
Consolidated Overview The below tables provide:
• the components of net income and the percentage increase or decrease over
the prior fiscal year amounts, and
• a reconciliation from net income to EBITDA and Adjusted EBITDA.
Following the tables is a discussion and analysis of the significant components
of net income.
Net income
For the Three Months Ended
September 27, 2020 September 29, 2019
% of % of %
Net Sales Net Sales Change
Net sales $ 141,505 100.0 $ 179,949 100.0 (21.4 )
Cost of sales 126,944 89.7 162,506 90.3 (21.9 )
Gross profit 14,561 10.3 17,443 9.7 (16.5 )
SG&A 11,364 8.0 10,980 6.1 3.5
(Benefit) provision for bad
debts (887 ) (0.6 ) 9 - nm
Other operating expense, net 1,178 0.8 108 0.1 nm
Operating income 2,906 2.1 6,346 3.5 (54.2 )
Interest expense, net 746 0.5 1,047 0.6 (28.7 )
Equity in (earnings) loss of
unconsolidated affiliates (93 ) - 866 0.4 (110.7 )
Income before income taxes 2,253 1.6 4,433 2.5 (49.2 )
(Benefit) provision for
income taxes (1,179 ) (0.8 ) 721 0.4 nm
Net income $ 3,432 2.4 $ 3,712 2.1 (7.5 )
nm - Not meaningful
EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)
The reconciliations of the amounts reported under GAAP for Net income to EBITDA and Adjusted EBITDA were as follows:
For the Three Months Ended
September 27, 2020 September 29, 2019
Net income $ 3,432 $ 3,712
Interest expense, net 746 1,047
(Benefit) provision for income taxes (1,179 ) 721
Depreciation and amortization expense (1) 6,052 5,622
EBITDA 9,051 11,102
Equity in loss of PAL - 1,175
EBITDA excluding PAL 9,051 12,277
Other adjustments (2) - -
Adjusted EBITDA $ 9,051 $ 12,277
(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) For the periods presented, there were no other adjustments necessary to
reconcile Net income to Adjusted EBITDA. However, such adjustments may be
presented in future periods when applicable.
19
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Consolidated net sales decreased$38,444 , or 21.4%, for the current period in comparison to the prior period primarily attributable to (i) the COVID-19 pandemic, (ii) lower nylon sales volumes, (iii) lower average selling prices, and (iv) unfavorable foreign currency translation. Consolidated sales volumes decreased 9.0%, primarily attributable to (i) the adverse impact of the COVID-19 pandemic onU.S. product demand and (ii) lower sales in the Nylon Segment. However, the overall volume decrease was partially offset by the Brazil Segment, which was agile and responsive to COVID-19 pandemic-related demand fluctuations in the current period generating volume growth by capturing market share from competitors.
For the current period, we believe our sales performance in our primary end
markets was lower than pre-COVID-19 pandemic levels by approximately 15% to 25%,
indicating some recovery in our major end markets and consistent with the
sequential monthly sales increases we have experienced since
Once the COVID-19 pandemic subsides, we believe incremental revenue for the Polyester Segment will be generated from our trade petitions completed earlier this calendar year relating to polyester textured yarn. However, our Nylon Segment results reflect (i) a customer shifting certain programs to overseas garment production during fiscal 2020 and (ii) the current global trend of declining demand for nylon socks, ladies' hosiery and intimate apparel.
Consolidated average sales prices decreased 12.4%, primarily attributable to (i) a decline in higher-priced nylon product sales, (ii) sales price declines associated with polyester raw material cost changes, and (iii) unfavorable foreign currency translation.
REPREVE® Fiber products for the current period comprised 35% of consolidated net sales, up from 31% for the prior period and fiscal 2020.
Gross Profit
Gross profit for the current period decreased by$2,882 , or 16.5%, as compared to the prior period. The COVID-19 pandemic adversely impacted sales and production volumes in our Polyester and Nylon Segments, driving lower profitability in theU.S. , while our foreign operations were favorably impacted by quicker-than-expected economic recovery inAsia andBrazil .
• For the Polyester Segment, gross profit benefited from a stable conversion
margin, but was adversely impacted by lower fixed cost absorption due to
lower demand.
• For the Asia Segment, gross profit increased from the prior year, as lower
demand levels driven by the COVID-19 pandemic were more than offset by
supply chain efficiencies driving lower costs for certain products and sales
mix improvements.
• For the Brazil Segment, gross profit increased from the prior year, as
unfavorable foreign currency translation impacts were more than offset by
26% higher sales volumes due to market share capture.
• For the Nylon Segment, gross profit decreased primarily due to lower sales
volumes.
SG&A
SG&A increased from the prior period, primarily due to higher accrued incentive compensation, partially offset by lower professional fees and travel and entertainment expenses in the current period.
(Benefit) Provision for Bad Debts
The current period benefit for bad debts reflects general improvement in customer payment frequency following the adverse effects of the COVID-19 pandemic on customer health.
Other Operating Expense, Net
The current period and the prior period both reflect severance charges, along
with foreign currency transaction losses of
Interest Expense, Net
Interest expense, net decreased from the prior period to the current period,
primarily attributable to a lower average debt principal and lower variable
interest rates in the current period. The components of consolidated interest
expense, net were as follows:
For the Three Months Ended
September 27, 2020 September 29, 2019
Interest and fees on the ABL Facility $ 754 $ 1,112
Other interest 102 113
Subtotal of interest on debt obligations 856 1,225
Other components of interest expense 15 32
Total interest expense 871 1,257
Interest income (125 ) (210 )
Interest expense, net $ 746 $ 1,047
20
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Equity in (Earnings) Loss of Unconsolidated Affiliates
The components of equity in (earnings) loss of unconsolidated affiliates were as
follows:
For the Three Months Ended
September 27, 2020 September 29, 2019
Loss from PAL $ - $ 1,175
Earnings from nylon joint ventures (93 ) (309 )
Total equity in (earnings) loss of unconsolidated
affiliates $ (93 ) $ 866
As a percentage of consolidated income before income taxes
4.1 % (19.5 )%
On April 29, 2020 , UNIFI sold its 34% non-controlling partnership interest in
PAL. The comparative decrease in loss from PAL reflects a loss recorded in the
prior period with no results recorded in the current period. The comparative
decrease in earnings from nylon joint ventures primarily reflects lower
utilization in connection with lower sales volumes for the Nylon Segment.
Income Taxes
(Benefit) provision for income taxes and the effective tax rate were as follows:
For the Three Months Ended
September 27,
2020 September 29, 2019
(Benefit) provision for income taxes $ (1,179 ) $ 721
Effective tax rate (52.3 )% 16.3 %
The effective tax rate is subject to variation due to numerous factors,
including variability in the amount of income before income taxes, the mix of
income by jurisdiction, changes in deferred tax valuation allowances and changes
in statutes, regulations and case law. Additionally, the impacts of discrete
and other rate impacting items are greater when income before income taxes is
lower.
The decrease in the effective tax rate from the prior period to the current
period is primarily attributable to a discrete benefit in the current period for
the retroactive GILTI high-tax exclusion for prior periods. This decrease was
partially offset by (i) an expense recorded in the current period to increase
the valuation allowance for deferred tax assets and (ii) a higher rate impact of
U.S. tax on GILTI in the current period compared to the prior period.
Net Income
Net income for the current period was$3,432 , or$0.18 per share, compared to net income of$3,712 or$0.20 per share, for the prior period. Current period net income was unfavorably impacted by (i) lowerU.S. gross profit in connection with lower product demand and (ii) unfavorable foreign currency impacts, partially offset by (a) the discrete tax benefit described above and (b) a loss from PAL in the prior period.
Adjusted EBITDA (Non-GAAP Financial Measure)
Adjusted EBITDA declined from the prior period to the current period, primarily attributable to lowerU.S. gross profit in connection with lower product demand amid the COVID-19 pandemic. Segment Overview
Following is a discussion and analysis of the revenue and profitability
performance of
Polyester Segment
The components of Segment Profit, each component as a percentage of net sales
and the percentage increase or decrease over the prior period amounts for the
Polyester Segment, were as follows:
For the Three Months Ended
September 27, 2020 September 29, 2019
% of % of %
Net Sales Net Sales Change
Net sales $ 69,076 100.0 $ 88,695 100.0 (22.1 )
Cost of sales 64,444 93.3 80,900 91.2 (20.3 )
Gross profit 4,632 6.7 7,795 8.8 (40.6 )
Depreciation expense 4,403 6.4 4,041 4.5 9.0
Segment Profit $ 9,035 13.1 $ 11,836 13.3 (23.7 )
Segment net sales as a
percentage of
consolidated amounts 48.8 % 49.3 %
Segment Profit as a
percentage of
consolidated amounts 45.2 % 52.9 %
21
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The change in net sales for the Polyester Segment was as follows:
Net sales for the prior period$ 88,695 Decrease in sales volumes (11,311 )
Net change in average selling price and sales mix (8,308 ) Net sales for the current period
$ 69,076 The decrease in net sales for the Polyester Segment from the prior period to the current period was primarily attributable to (i) the adverse impact of COVID-19 pandemic on market demand, (ii) lower average selling prices associated with lower polyester raw material costs, and (iii) a higher proportion of Flake sales, which carry lower sales prices than other products.
The change in Segment Profit for the Polyester Segment was as follows:
Segment Profit for the prior period$ 11,836 Decrease in sales volumes (1,509 )
Net decrease in underlying margins (1,292 )
Segment Profit for the current period
The decrease in Segment Profit for the Polyester Segment from the prior period
to the current period was primarily attributable to the impact of the COVID-19
pandemic on cost absorption and facility utilization in connection with lower
sales volumes.
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
September 27, 2020 September 29, 2019
% of % of %
Net Sales Net Sales Change
Net sales $ 37,723 100.0 $ 45,957 100.0 (17.9 )
Cost of sales 33,145 87.9 41,675 90.7 (20.5 )
Gross profit 4,578 12.1 4,282 9.3 6.9
Depreciation expense - - - - -
Segment Profit $ 4,578 12.1 $ 4,282 9.3 6.9
Segment net sales as a
percentage of
consolidated amounts 26.7 % 25.5 %
Segment Profit as a
percentage of
consolidated amounts 22.9 % 19.1 %
The change in net sales for the Asia Segment was as follows:
Net sales for the prior period$ 45,957
Decrease in sales volumes of Chip and staple fiber (7,203 ) Change in average selling price and sales mix
(2,803 )
Net increase in sales volumes of certain other products 1,093 Favorable foreign currency translation effects
679
Net sales for the current period $ 37,723 The decrease in net sales for the Asia Segment from the prior period to the current period was primarily attributable to overall lower sales volumes driven by the adverse impacts of the COVID-19 pandemic, partially offset by the continued momentum of REPREVE®-branded products.
The RMB weighted average exchange rate was
The change in Segment Profit for the Asia Segment was as follows:
Segment Profit for the prior period$ 4,282 Change in underlying margins and sales mix 666
Favorable foreign currency translation effects 64 Decrease in sales volumes
(434 )
Segment Profit for the current period $ 4,578
The increase in Segment Profit for the Asia Segment from the prior period to the
current period was primarily attributable to raw material cost benefits achieved
on certain product lines and sales mix improvements, partially offset by the
decrease in sales volumes described in the net sales analysis above.
22
--------------------------------------------------------------------------------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
September 27, 2020 September 29, 2019
% of % of %
Net Sales Net Sales Change
Net sales $ 22,606 100.0 $ 24,172 100.0 (6.5 )
Cost of sales 17,993 79.6 20,013 82.8 (10.1 )
Gross profit 4,613 20.4 4,159 17.2 10.9
Depreciation expense 430 1.9 375 1.6 14.7
Segment Profit $ 5,043 22.3 $ 4,534 18.8 11.2
Segment net sales as a percentage of consolidated amounts 16.0 % 13.4 % Segment Profit as a percentage of consolidated amounts 25.2 % 20.3 %
The change in net sales for the Brazil Segment was as follows:
Net sales for the prior period$ 24,172
Unfavorable foreign currency translation effects (6,290 ) Increase in sales volumes
4,724
Net sales for the current period $ 22,606
The decrease in net sales for the Brazil Segment from the prior period to the
current period was primarily attributable to unfavorable foreign currency
translation effects, partially offset by an improvement in sales volumes due to
the Brazil Segment's agility and responsiveness to COVID-19 pandemic-related
demand fluctuations in the current period.
The BRL weighted average exchange rate was
The change in Segment Profit for the Brazil Segment was as follows:
Segment Profit for the prior period$ 4,534 Increase in sales volumes 866 Increase in underlying margins 816
Unfavorable foreign currency translation effects (1,173 ) Segment Profit for the current period
$ 5,043 The increase in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to the increase in sales volumes and lower raw material costs described above, which improved margins by maximizing facility utilization, partially offset by unfavorable foreign currency translation effects as the BRL weakened against the USD during the current period.
Nylon Segment
The components of Segment Profit, each component as a percentage of net sales
and the percentage increase or decrease over the prior period amounts for the
Nylon Segment, were as follows:
For the Three Months Ended
September 27, 2020 September 29, 2019
% of % of %
Net Sales Net Sales Change
Net sales $ 11,029 100.0 $ 20,202 100.0 (45.4 )
Cost of sales 10,364 94.0 19,024 94.2 (45.5 )
Gross profit 665 6.0 1,178 5.8 (43.5 )
Depreciation expense 442 4.0 491 2.5 (10.0 )
Segment Profit $ 1,107 10.0 $ 1,669 8.3 (33.7 )
Segment net sales as a
percentage of
consolidated amounts 7.8 % 11.2 %
Segment Profit as a
percentage of
consolidated amounts 5.5 % 7.5 %
23
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The change in net sales for the Nylon Segment was as follows:
Net sales for the prior period$ 20,202 Decrease in sales volumes (8,090 )
Net change in average selling price and sales mix (1,083 ) Net sales for the current period
$ 11,029 The decrease in net sales for the Nylon Segment from the prior period to the current period was primarily attributable to (i) demand declines in connection with the COVID-19 pandemic and (ii) a customer shifting certain programs to overseas garment production subsequent to the prior period.
The change in Segment Profit for the Nylon Segment was as follows:
Segment Profit for the prior period$ 1,669 Decrease in sales volumes (669 ) Net increase in underlying margins 107 Segment Profit for the current period$ 1,107 The decrease in Segment Profit for the Nylon Segment from the prior period to the current period was primarily attributable to lower sales, as described in the net sales analysis above.
Liquidity and Capital Resources
UNIFI's primary capital requirements are for working capital, capital expenditures, debt service and share repurchases.UNIFI's primary sources of capital are cash generated from operations and borrowings available under the ABL Revolver of its credit facility. For the current period, cash generated from operations was$7,922 , and, atSeptember 27, 2020 , excess availability under the ABL Revolver was$57,626 . As ofSeptember 27, 2020 , all ofUNIFI's $95,436 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, while 38% ofUNIFI's cash and cash equivalents were held by its foreign subsidiaries. Cash and cash equivalents held by foreign subsidiaries may not be presently available to fundUNIFI's domestic capital requirements, including its domestic debt obligations.UNIFI employs a variety of strategies to ensure that its worldwide cash is available in the locations where it is needed. The following table presents a summary of cash and cash equivalents, borrowings available under financing arrangements, liquidity, working capital and total debt obligations as ofSeptember 27, 2020 for domestic operations compared to foreign operations: Domestic Foreign Total Cash and cash equivalents$ 48,172 $ 29,923 $ 78,095 Borrowings available under financing arrangements 57,626 - 57,626 Liquidity$ 105,798 $ 29,923 $ 135,721 Working capital$ 105,831 $ 97,118 $ 202,949 Total debt obligations$ 95,436 $ -$ 95,436
COVID-19 Pandemic Liquidity Considerations
Because global economic activity slowed within a short period of time, the COVID-19 pandemic introduced liquidity risk that was not present prior to calendar 2020.UNIFI believes that aggressive and prudent actions are necessary to preserve liquidity in the current economic environment, which is pressured by significant global demand declines that began inMarch 2020 and are expected to continue for the remainder of calendar 2020 and potentially beyond. Accordingly, to minimize further disruption to operations,UNIFI has prioritized health and safety measures that include restricting travel and group meetings, enforcing social distancing and healthy habits, increased sanitation and disinfection and increased wellness monitoring. Additionally, the following aid in reducing risk and ensuring adequate cash is available to fund ongoing operations and obligations:
• Participating in the supply chain for personal protective equipment
necessary for our first responders, healthcare personnel, and military.
• Capitalizing on raw material pricing, which remains at low levels and aids
short-term working capital and liquidity.
• Lowering discretionary expenses that focus on long-term returns, such as
marketing, event and other commercial expenses.
• Maintaining significant cash reserves from the proceeds from the PAL
Investment sale in
While we currently expect these measures to provide adequate liquidity under the currently anticipated pressures of the COVID-19 pandemic, should global demand and economic activity remain subdued beyond the short-term,UNIFI maintains the ability to (i) pursue aid and lending programs from governmental entities, (ii) seek additional credit or financing arrangements or extensions, and (iii) implement further cost reduction initiatives to preserve cash and secure the longevity of the business and operations. 24 --------------------------------------------------------------------------------
The following further describe the current strength of
• We have not accessed public or private capital markets for recent liquidity
needs.
• We do not currently expect our cost of or access to existing capital and
funding sources to materially change as a result of the COVID-19 pandemic;
however, we expect new capital and funding sources (if any) to carry higher
costs than our current structure.
• We have not taken advantage of rent, lease or debt deferrals, forbearance
periods or other concessions, nor have we modified any material agreements
to provide concessions.
• We have not relied on supply chain financing, structured trade payables or
vendor financing.
• We are not at material risk of not meeting our financial covenants.
• We continue to maintain significant borrowing availability on our existing
credit facility.
Lastly, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act")
allowed UNIFI to defer certain employer payroll tax payments to future periods,
generate a net operating loss carryback, and attain certain employee retention
credits, all of which are not material to our short- and long-term liquidity
position. We have not applied for or obtained any other material federal or
state assistance.
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 September 27, 2020 September 27, 2020 June 28, 2020 ABL Revolver December 2023 0.0% $ - $ - ABL Term Loan (1) December 2023 3.2% 85,000 87,500 Finance lease obligations (2) 3.6% 10,436 11,381 Total debt 95,436 98,881 Current ABL Term Loan (10,000 ) (10,000 ) Current portion of finance lease obligations (3,506 ) (3,563 ) Unamortized debt issuance costs (651 ) (711 ) Total long-term debt $ 81,279$ 84,607
(1) Includes the effects of interest rate swaps.
(2) Scheduled maturity dates for finance lease obligations range from
As ofSeptember 27, 2020 :
•
• excess availability under the ABL Revolver was$57,626 ,
• the Trigger Level (as defined in the Credit Agreement) was
•
UNIFI currently maintains three interest rate swaps that fix LIBOR at approximately 1.9% on$75,000 of variable-rate debt. Such swaps are scheduled to terminate inMay 2022 . Management will continue to monitor the potential termination of LIBOR and the potential impact onUNIFI's operations. However, 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. 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 uponUNIFI's strategy, prevailing market conditions, liquidity requirements, contractual restrictions and other factors.
Scheduled Debt Maturities
The following table presents the scheduled maturities ofUNIFI's outstanding debt obligations for the remainder of fiscal 2021, the following four fiscal years and thereafter: Fiscal 2021 Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 Thereafter ABL Revolver $ - $ - $ - $ - $ - $ - ABL Term Loan 7,500 10,000 10,000 57,500 - - Finance lease obligations 2,617 3,388 1,094 1,132 1,028 1,177 Total$ 10,117 $ 13,388 $ 11,094 $ 58,632 $ 1,028 $ 1,177 25
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Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
September 27, 2020 June 28, 2020
Long-term debt $ 81,279 $ 84,607
Current portion of long-term debt 13,506
13,563
Unamortized debt issuance costs 651
711
Debt principal 95,436
98,881
Less: cash and cash equivalents 78,095 75,267 Net Debt $ 17,341$ 23,614
Working Capital and
The following table presents the components of working capital and the
reconciliation of working capital to
September 27, 2020 June 28, 2020
Cash and cash equivalents $ 78,095 $ 75,267
Receivables, net 77,228 53,726
Inventories 104,780 109,704
Income taxes receivable 7,387 4,033
Other current assets 9,760 11,763
Accounts payable (38,468 ) (25,610 )
Accrued expenses (16,618 ) (13,689 )
Other current liabilities (19,215 ) (15,695 )
Working capital $ 202,949 $ 199,499
Less: Cash and cash equivalents (78,095 ) (75,267 )
Less: Income taxes receivable (7,387 ) (4,033 )
Less: Other current liabilities 19,215 15,695
Adjusted Working Capital $ 136,682 $ 135,894
Working capital increased from $199,499 as of June 28, 2020 to $202,949 as of
September 27, 2020 , while Adjusted Working Capital increased from $135,894 to
$136,682 .
The increase in cash and cash equivalents was driven by the operating cash flows
generated by our global operations. The increase in receivables, net was
primarily attributable to increased sales in the current period following low
sales activity in the June 2020 quarter due to significantly suppressed demand
levels caused by the COVID-19 pandemic. The decrease in inventories was
primarily attributable to targeted inventory reduction and efficiency
initiatives, driving lower units on hand. The decrease in other current assets
was primarily due to the amount and timing of contract assets revenue
recognition. The increase in accounts payable was consistent with the increase
in sales and production activity. The increase in accrued expenses was primarily
attributable to an increase in deferred revenue for increased sales activity in
the Asia Segment and higher incentive compensation accruals in the current
period.
Capital Projects
During the current period,UNIFI invested$1,864 in capital projects, primarily relating to (i) further improvements in production capabilities and technology enhancements in theAmericas and (ii) 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. For the remainder of fiscal 2021, we expect to invest approximately$23,000 in capital projects for an aggregate annual estimate of approximately$25,000 , to include (i) making further improvements in production capabilities and technology enhancements in theAmericas , (ii) continuing the purchase and installation of new eAFK Evo texturing machines, and (iii) annual maintenance capital expenditures. The total amount ultimately invested for fiscal 2021 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 existing cash and cash equivalents.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 , 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 or through private transactions or block trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date. As ofSeptember 27, 2020 ,UNIFI repurchased a total of 84 shares, at an average price of$23.72 (for a total of$1,994 inclusive of commission costs) pursuant to the 2018 SRP.$48,008 remains available under the 2018 SRP as ofSeptember 27, 2020 . 26
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Liquidity Summary
UNIFI has met its historical liquidity requirements for working capital, capital expenditures, debt service requirements and other operating needs from its cash flows from operations and available borrowings.UNIFI believes that its existing cash balances, cash provided by operating activities and borrowings available under the ABL Revolver will enableUNIFI to comply with the terms of its indebtedness and meet its foreseeable liquidity requirements. Domestically,UNIFI's cash balances, cash provided by operating activities and borrowings available under the ABL Revolver continue to be sufficient to 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 and cash provided by operating activities will provide the needed liquidity to fund its foreign operating activities and any foreign investing activities, such as future capital expenditures. However, expansion of our foreign operations may require cash sourced from our domestic subsidiaries.
Operating Cash Flows
The significant components of net cash provided by operating activities are
summarized below.
For the Three Months Ended
September 27, 2020 September 29, 2019
Net income $ 3,432 $ 3,712
Equity in (earnings) loss of unconsolidated affiliates (93 ) 866
Depreciation and amortization expense 6,112 5,685
Non-cash compensation expense 509 187
Deferred income taxes (2,072 ) (760 )
Subtotal 7,888 9,690
Distributions received from unconsolidated affiliates - 10,437
Other changes 34 3,695
Net cash provided by operating activities $ 7,922 $ 23,822
The decrease in net cash provided by operating activities from the prior period
was primarily due to (i) $10,437 of distributions received from PAL in September
2019 and (ii) cash generated from working capital in the prior period.
Investing Cash Flows
Investing activities include
Financing Cash Flows
Financing activities include payments against the ABL Term Loan and finance leases during fiscal 2021.
Contractual Obligations
UNIFI has incurred various financial obligations and commitments in its normal course of business. Financial obligations are considered to represent known future cash payments thatUNIFI is required to make under existing contractual arrangements, such as debt and lease agreements.
There have been no material changes in the scheduled maturities of
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.UNIFI's critical accounting policies are discussed in the 2020 Form 10-K. There were no material changes to these policies during the current period. 27
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