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 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
In order to achieve further growth and continue as an industry leader when the COVID-19 pandemic pressures subside,UNIFI is committed to investing strategically and synergistically in technology, innovation and sustainability; high-quality brand and supplier relationships; and supply chain expansion and optimization. These initiatives complementUNIFI's core competencies and are expected to strengthen our relationships with like-minded customers who value a premier supply chain and state-of-the-art equipment that offers technology-driven solutions backed by innovation and sustainability. As a result, these initiatives are expected to increase net sales, gross profit and operating income.
Significant Developments and Trends
During the last four 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. Once the COVID-19 pandemic subsides, we believe incremental revenue for the Polyester Segment will be generated from both the polyester textured yarn trade petition completed in early calendar 2020 and the actions currently pending with theITC andCommerce Department , along with continued demand for innovative and sustainable products in the NACA region. 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, while we expect pricing and margins to normalize near historical levels, the momentum captured in fiscal 2021 may provide a new, elevated level of long-term performance for the segment. The Nylon Segment performance continues to reflect the adverse impacts of (i) customers shifting certain programs to overseas garment production and (ii) the current global trend of declining demand for nylon socks, ladies' hosiery and intimate apparel.
The following positive developments and trends had occurred or were occurring in fiscal 2021:
• 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.
• Our strategy of creating a more competitive pricing environment for the
polyester textured yarn market in the
from
to address imports from
• Although polyester raw material costs began to rise in the fourth quarter,
the polyester raw material cost environment remained favorable for most of
fiscal 2021, and we have been able to implement cost-responsive selling
price adjustments intended to protect our gross profit performance.
• Our Asia Segment returned to sales growth, driven by demand for REPREVE®,
generating continued portfolio expansion.
• Our Brazil Segment was able to opportunistically capture market share from
competitors and secure favorable pricing levels during the economic
recovery in
Raw Material and Foreign Currency
Raw material costs represent a significant portion ofUNIFI's manufactured product costs. The prices for the principal raw materials used byUNIFI continually fluctuate, and it is difficult or impossible to predict trends or upcoming developments. During fiscal 2019 and 2018,UNIFI operated in a predominantly increasing raw material cost environment.UNIFI believes those higher costs were primarily a result of volatility in the crude oil markets, along with periods of supply and demand constraints for certain polyester feedstock. 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. The first half of fiscal 2021 showed stable, low levels of raw material costs, while economic recovery, weather events, and supply constraints generated raw material cost increases during the second half of fiscal 2021. For the majority of our portfolio, we were able to implement selling price adjustments to protect gross margins throughout fiscal 2021. However, recycled inputs in theU.S. experienced continued cost increases during theJune 2021 quarter and associated selling price adjustments will be implemented during theSeptember 2021 quarter. Accordingly, we did not experience meaningful gross profit pressure during fiscal 2021. 21
-------------------------------------------------------------------------------- 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 price 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 its index priced customers and within two fiscal quarters of the raw material price increase for its non-index priced customers.UNIFI is also impacted by significant fluctuations in the value of the 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. In fiscal 2021, 2020 and 2019, the BRL generally weakened versus the USD. In fiscal 2021, 2020 and 2019, the value of the RMB fluctuated in certain fiscal quarters, but the fluctuations were not significant to any fiscal year as a whole.
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 inloss (earnings) of PAL and, from time to time, certain other adjustments
necessary to understand and compare the underlying results of UNIFI ;
• 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 of UNIFI and/or for which exclusion may be necessary to
understand and compare the underlying results of UNIFI ;
• Adjusted EPS, which represents Adjusted Net 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.
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
22
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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
(earnings) 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 2021, 2020 and 2019
Fiscal 2021 and 2020 were each comprised of 52 weeks, while fiscal 2019 was comprised of 53 weeks.
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 2021 % Change Fiscal 2020 % Change Fiscal 2019
Net sales $ 667,592 10.1 $ 606,509 (14.4 ) $ 708,804
Cost of sales 574,098 1.2 567,469 (11.7 ) 642,496
Gross profit 93,494 139.5 39,040 (41.1 ) 66,308
SG&A expenses 51,334 17.2 43,814 (16.8 ) 52,690
(Benefit) provision for bad
debts (1,316 ) (175.7 ) 1,739 nm 308
Other operating expense, net 4,865 110.8 2,308 (1.8 ) 2,350
Operating income (loss) 38,611 nm (8,821 ) (180.5 ) 10,960
Interest expense, net 2,720 (33.0 ) 4,057 (15.2 ) 4,786
(Earnings) loss from
unconsolidated affiliates (739 ) nm 477 (112.0 ) (3,968 )
Recovery of non-income taxes (9,717 ) nm - - -
Gain on sale of investment
in unconsolidated
affiliate - nm (2,284 ) nm -
Impairment of investment in
unconsolidated
affiliate - nm 45,194 nm -
Loss on extinguishment of
debt - - - nm 131
Income (loss) before income
taxes 46,347 (182.4 ) (56,265 ) nm 10,011
Provision for income taxes 17,274 nm 972 (87.1 ) 7,555
Net income (loss) $ 29,073 (150.8 ) $ (57,237 ) nm $ 2,456
nm - not meaningful
23
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EBITDA and Adjusted EBITDA (Non-GAAP Measures)
Fiscal 2021 Fiscal 2020 Fiscal 2019
Net income (loss) $ 29,073 $ (57,237 ) $ 2,456
Interest expense, net 2,720 4,057 4,786
Provision for income taxes 17,274 972 7,555
Depreciation and amortization expense (1) 25,293 23,406 22,713
EBITDA 74,360 (28,802 ) 37,510
Equity in loss (earnings) of PAL - 960 (2,561 ) EBITDA excluding PAL 74,360
(27,842 ) 34,949
Recovery of non-income taxes (2) (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 1,351 Adjusted EBITDA$ 64,643 $ 16,553 $ 36,300
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) For 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.
(3) For 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) For fiscal 2020,
(i) overall cost reduction efforts in the
its operations in
severance costs in connection with overall cost reduction efforts in the
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 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 (1) (9,717 ) 3,304 (6,413 ) (0.34 )
Adjusted results $ 36,630 $ (13,970 )
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 (2) 45,194 - 45,194 2.45
Severance (3) 1,485 (312 ) 1,173 0.06
Adjusted results $ (9,586 ) $ (1,284 ) $ (10,870 ) $ (0.59 )
Weighted average common shares outstanding 18,475
For the Fiscal Year Ended June 30, 2019
Pre-tax Income Tax Impact Net Income Diluted EPS
GAAP results $ 10,011 $ (7,555 ) $ 2,456 $ 0.13
Severance (3) 1,351 (284 ) 1,067 0.06
Adjusted results $ 11,362 $ (7,839 ) $ 3,523 $ 0.19
Weighted average common shares outstanding 18,695
(1) For 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.
24
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(2) For fiscal 2020,
related to the
(3) For fiscal 2020,
(i) overall cost reduction efforts in the
its operations in
severance costs in connection with overall cost reduction efforts in the
Net Sales 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.
REPREVE® Fiber products for fiscal 2021 comprised 37% of consolidated net sales, up from 31% for fiscal 2020.
Fiscal 2020 vs. Fiscal 2019 Consolidated net sales for fiscal 2020 decreased by$102,295 , or 14.4%, compared to fiscal 2019. The decrease occurred primarily as the adverse impacts of (i) the global pandemic caused by COVID-19, (ii) one fewer week of sales in fiscal 2020 for our NACA operations, (iii) lower nylon sales volumes, (iv) lower average selling prices, and (v) unfavorable foreign currency translation were partially offset by the sales growth of REPREVE® products, especially for the Asia Segment. Consolidated sales volumes for fiscal 2020 decreased 2.0%, primarily attributable to (i) the adverse impact of COVID-19, (ii) one fewer week of sales in fiscal 2020 for our NACA operations, and (iii) lower sales in the Nylon Segment, partially offset by continued sales growth of REPREVE®-branded products, primarily Chip and staple fiber in the Asia Segment. Annual sales growth over fiscal 2019 was achieved by the Asia Segment, despite the adverse impacts from the COVID-19 pandemic, as our REPREVE® portfolio continues to resonate with our brand partners that are focused on sustainable solutions. Consolidated average sales prices decreased 12.4%, primarily attributable to (i) growth of Chip and staple fiber in the Asia Segment, which have lower average sales prices, (ii) a decline in higher-priced nylon product sales, and (iii) sales price declines associated with polyester raw material cost changes.
Gross Profit
Fiscal 2021 vs. Fiscal 2020
Gross profit for fiscal 2021 increased by
• For the Polyester 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.
• For the Nylon Segment, gross profit increased primarily due to better
fixed cost absorption on a stable sales mix following demand restoration.
Fiscal 2020 vs. Fiscal 2019
Gross profit for fiscal 2020 decreased by$27,268 , or 41.1%, compared to fiscal 2019. The global pandemic adversely impacted gross profit for all ofUNIFI's segments during fiscal 2020 due to the lower sales and production volumes in the fourth quarter.
• For the Polyester Segment, prior to the pandemic, gross profit benefited
from an improved conversion margin in connection with a predominantly
declining raw material cost environment during fiscal 2020.
• For the Asia Segment, gross profit increased as net sales increased but
was partially offset by a greater mix of lower-priced product sales.
• For the Brazil Segment, gross profit decreased due to (i) market pricedeclines (in connection with declining raw material costs) outpacing
inventory turnover and (ii) unfavorable foreign currency translation
effects as the BRL weakened against the USD.
• For the Nylon Segment, gross profit decreased due to weaker fixed cost
absorption in connection with two customers shifting certain programs to
overseas garment production during calendar 2019.
25
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SG&A
The changes in SG&A were as follows:
SG&A expenses for fiscal 2019$ 52,690 Net decrease in professional fees (2,523 ) Net decrease in marketing expenses (1,470 ) Net decrease in compensation expenses (1,258 )
Decrease in travel and entertainment expenses (1,118 ) Impact of an additional week in fiscal 2019 (841 ) Decrease due to foreign currency translation (807 ) Other net decreases
(859 )
SG&A expenses for fiscal 2020 $ 43,814
SG&A expenses for fiscal 2020 $ 43,814 Increase in incentive compensation expenses 7,628 Net increase in other compensation expenses 846 Net increase in marketing expenses
793
Net increase in professional fees 230
Decrease in travel and entertainment expenses (706 )
Decrease due to foreign currency translation (369 )
Other net decreases (902 )
SG&A expenses for fiscal 2021 $ 51,334
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.
Fiscal 2020 vs. Fiscal 2019
SG&A decreased from fiscal 2019 to fiscal 2020 primarily as a result of (i) lower professional fees and marketing expenses primarily due to cost reduction efforts undertaken during the fourth quarter of fiscal 2019 and (ii) lower compensation expenses in connection with (a) fewer executive officers throughout fiscal 2020 compared to fiscal 2019 and (b) a reduction in annual incentive compensation earned due to the adverse profitability impacts of the COVID-19 pandemic.
(Benefit) Provision for Bad Debts
Fiscal 2021 vs. Fiscal 2020
Bad debt decreased from a provision of$1,739 in fiscal 2020 to a benefit of$1,316 in fiscal 2021. The decrease primarily reflects general improvement in customer payment frequency following the adverse effects of the COVID-19 pandemic on customer health.
Fiscal 2020 vs. Fiscal 2019
Provision for bad debt increased from$308 in fiscal 2019 to$1,739 in fiscal 2020. The increase primarily reflects weaker economic conditions and customer payment delays during the COVID-19 pandemic.
Other Operating Expense, Net
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.
Fiscal 2020 vs. Fiscal 2019
Other operating expense, net was
26
--------------------------------------------------------------------------------Interest Expense, Net 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.
Fiscal 2020 vs. Fiscal 2019
Interest expense, net decreased from fiscal 2019 to fiscal 2020 primarily as a result of (i) lower market interest rates on our variable-rate debt, (ii) a more favorable pricing structure on the ABL Facility in connection with aDecember 2018 amendment, and (iii) an overall reduction in debt principal during fiscal 2020.
(Earnings) Loss from Unconsolidated Affiliates
The components of (earnings) loss from unconsolidated affiliates are as follows:
Fiscal 2021 Fiscal 2020 Fiscal 2019
Loss (earnings) from PAL $ - $ 960 $ (2,561 )
Earnings from nylon joint ventures (739 ) (483 ) (1,407 )
Total equity in (earnings) loss of
unconsolidated affiliates $ (739 ) $
477
As a percentage of consolidated income (loss) before income taxes 1.6 % 0.8 % 39.6 % Fiscal 2021 vs. Fiscal 2020
On
Fiscal 2020 vs. Fiscal 2019
UNIFI's 34% share of PAL's earnings decreased from earnings of$2,561 in fiscal 2019 to a loss of$960 in fiscal 2020. The decrease in earnings from PAL was primarily attributable to lower operating leverage and comparably higher costs, in addition to the adverse impacts of the COVID-19 pandemic on PAL's results inUNIFI's final month of ownership,April 2020 . The earnings from the nylon joint ventures experienced a decrease from fiscal 2019 to fiscal 2020, primarily due to lower sales volumes. Recovery of Non-Income Taxes 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, resulting in over-taxation. OnMay 13, 2021 ,Brazil's supreme court ruled in favor of taxpayers and onJuly 7, 2021 , the Brazilian Internal Revenue Service withdrew its appeal. Following the supreme court decision, the federal government will not issue refunds for these taxes and instead will 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 . We expect to recover the taxes and interest over the 40-month period followingJune 2021 and have recorded current and non-current assets accordingly.
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 2021 Fiscal 2020 Fiscal 2019
Income (loss) before income taxes $ 46,347 $ (56,265 ) $ 10,011
Provision for income taxes 17,274 972 7,555
Effective tax rate 37.3 % (1.7 )% 75.5 %
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 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.
Fiscal 2020 vs. Fiscal 2019
The decrease in the fiscal 2020 effective tax rate was primarily attributable to (i) lowerU.S. tax on GILTI in fiscal 2020, (ii) lower foreign withholding taxes in fiscal 2020, and (iii) lower impact of foreign earnings taxed at higher rates. These benefits were partially offset by an increase in the valuation allowance on a capital loss generated upon thePAL Investment sale.
Net Income (Loss)
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$(3.10) per diluted share, for fiscal 2020. The increase was primarily attributable to the impairment charge for thePAL Investment sale recorded in fiscal 2020. Excluding the impairment charge, the increase was attributable to higher gross profit and a recovery of non-income taxes inBrazil in fiscal 2021, partially offset by the fiscal 2021 impacts of (i) higher SG&A, (ii) a higher effective tax rate, and (iii) the loss on the disposal of assets.
Fiscal 2020 vs. Fiscal 2019
Net loss for fiscal 2020 was$(57,237) , or$(3.10) per share, compared to$2,456 , or$0.13 per share, for fiscal 2019. The decrease was primarily attributable to the impairment charge for thePAL Investment sale. Excluding the impairment charge, the decrease was attributable to (i) lower gross profit primarily stemming from the impact of the COVID-19 pandemic and (ii) lower earnings from unconsolidated affiliates, partially offset by lower SG&A expenses and a lower effective tax rate.
Adjusted EBITDA
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 EBITDA decreased from$36,300 for fiscal 2019 to$16,553 for fiscal 2020. The decrease was primarily attributable to the economic impacts of the COVID-19 pandemic, partially offset by lower SG&A.
Adjusted Net Income (Loss)
Adjusted Net Income (Loss) increased from
Adjusted Net (Loss) Income decreased from
28
--------------------------------------------------------------------------------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 are as follows:
Fiscal 2021 % Change Fiscal 2020 % Change Fiscal 2019
Net sales $ 316,235 2.3 $ 309,184 (16.6 ) $ 370,770
Cost of sales 282,791 (4.8 ) 297,096 (14.4 ) 346,951
Gross profit 33,444 176.7 12,088 (49.3 ) 23,819
Depreciation expense 18,637 10.3 16,904 5.2 16,068
Segment Profit $ 52,081 79.6 $ 28,992 (27.3 ) $ 39,887
Gross margin 10.6 % 3.9 % 6.4 %
Segment margin 16.5 % 9.4 % 10.8 %
Segment net sales as a
percentage
of consolidated
amount 47.4 % 51.0 % 52.3 %
Segment Profit as a
percentage
of consolidated
amount 45.0 % 48.6 % 46.3 %
The changes in net sales for the Polyester Segment are as follows:
Net sales for fiscal 2019$ 370,770 Decrease in underlying sales volumes (31,533 ) Net change in average selling price and sales mix (23,431 )
Decrease due to an additional week of sales in fiscal 2019 (6,622 ) Net sales for fiscal 2020
$ 309,184 Net sales for fiscal 2020$ 309,184 Net change in average selling price and sales mix 5,733 Increase in sales volumes 1,318 Net sales for fiscal 2021$ 316,235 The increase in net sales for the Polyester Segment from fiscal 2020 to fiscal 2021 was primarily attributable to a better sales mix in fiscal 2021. Because both fiscal years included significant demand pressures from the COVID-19 pandemic during calendar 2020, there was no meaningful change in sales volumes. The decrease in net sales for the Polyester Segment from fiscal 2019 to fiscal 2020 was primarily attributable to (i) the adverse impact of COVID-19 on market demand, (ii) lower average selling prices associated with lower polyester raw material costs, and (iii) one fewer week of sales in fiscal 2020.
The changes in Segment Profit for the Polyester Segment are as follows:
Segment Profit for fiscal 2019$ 39,887 Net decrease in underlying margins (7,202 ) Decrease in underlying sales volumes (3,525 )
Decrease due to an additional week of sales in fiscal 2019 (168 ) Segment Profit for fiscal 2020
$ 28,992 Segment Profit for fiscal 2020$ 28,992 Change in underlying margins and sales mix 22,964 Increase in sales volumes 124 Segment Profit for fiscal 2021$ 52,080 The increase in Segment Profit for the Polyester Segment from fiscal 2020 to fiscal 2021 was primarily attributable to (i) the impact of the COVID-19 pandemic on cost absorption and facility utilization following significantly lower sales volumes during the fourth quarter of 2020, (ii) a better sales and production mix in fiscal 2021 and (iii) improved unit conversion margin. 29 -------------------------------------------------------------------------------- The decrease in Segment Profit for the Polyester Segment from fiscal 2019 to fiscal 2020 was attributable to the impact of the COVID-19 pandemic on cost absorption and facility utilization following significantly lower sales volumes. However, prior to the pandemic, the Polyester Segment benefited from an improved conversion margin in connection with the comparative impact of (i) a declining raw material cost environment during fiscal 2020 and (ii) an unfavorable raw material cost environment in fiscal 2019.
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 2021 % Change Fiscal 2020 % Change Fiscal 2019
Net sales $ 184,837 20.8 $ 153,032 15.2 $ 132,866
Cost of sales 159,444 16.9 136,349 16.4 117,166
Gross profit 25,393 52.2 16,683 6.3 15,700
Depreciation expense - - - - -
Segment Profit $ 25,393 52.2 $ 16,683 6.3 $ 15,700
Gross margin 13.7 % 10.9 % 11.8 %
Segment margin 13.7 % 10.9 % 11.8 %
Segment net sales as a
percentage
of consolidated
amount 27.7 % 25.2 % 18.7 %
Segment Profit as a
percentage
of consolidated
amount 21.9 % 27.9 % 18.2 %
The changes in net sales for the Asia Segment are as follows:
Net sales for fiscal 2019$ 132,866 Net increase in sales volumes 24,648
Unfavorable foreign currency translation effects (4,015 ) Change in average selling price and sales mix
(467 )
Net sales for fiscal 2020 $ 153,032
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 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 increase in net sales for the Asia Segment from fiscal 2019 to fiscal 2020 was primarily attributable to higher sales volumes of REPREVE®-branded products, primarily Chip and staple fiber, partially offset by (i) the impact of lower-priced Chip and staple fiber sales on average selling price and sales mix and (ii) unfavorable foreign currency translation effects due to the comparable weakening of the RMB, along with a reduction in the overall sales growth rate caused by the impact of the COVID-19 pandemic on global demand.
The RMB weighted average exchange rate was
30
--------------------------------------------------------------------------------The changes in Segment Profit for the Asia Segment are as follows:
Segment Profit for fiscal 2019$ 15,700 Increase in sales volumes 831 Change in underlying margins and sales mix 780
Unfavorable foreign currency translation effects (628 ) Segment Profit for fiscal 2020
$ 16,683 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
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.
The increase in Segment Profit for the Asia Segment from fiscal 2019 to fiscal 2020 was primarily attributable to the increase in sales volumes and related sales mix change described in the net sales analysis above. The sales growth rate and, accordingly, the growth rate of Segment Profit for the Asia Segment, was partially offset by (i) the impact of the COVID-19 pandemic on global demand and (ii) unfavorable foreign currency translation effects as the RMB weakened against the USD during fiscal 2020.
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 2021 % Change Fiscal 2020 % Change Fiscal 2019
Net sales $ 95,976 30.9 $ 73,339 (28.7 ) $ 102,877
Cost of sales 64,281 3.4 62,144 (26.3 ) 84,298
Gross profit 31,695 183.1 11,195 (39.7 ) 18,579
Depreciation expense 1,315 (5.1 ) 1,385 (9.9 ) 1,537
Segment Profit $ 33,010 162.4 $ 12,580 (37.5 ) $ 20,116
Gross margin 33.0 % 15.3 % 18.1 %
Segment margin 34.4 % 17.2 % 19.6 %
Segment net sales as a
percentage
of consolidated
amount 14.4 % 12.1 % 14.5 %
Segment Profit as a
percentage
of consolidated
amount 28.5 % 21.1 % 23.3 %
The changes in net sales for the Brazil Segment are as follows:
Net sales for fiscal 2019$ 102,877 Decrease in sales volumes (13,501 ) Unfavorable foreign currency translation effects (13,128 ) Decrease in average selling price (2,909 ) Net sales for fiscal 2020$ 73,339 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
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 during Brazil's economic recovery following the most
severe impacts of the COVID-19 pandemic and (ii) increase selling prices,
partially offset by unfavorable foreign currency translation effects.
The decrease in net sales for the Brazil Segment from fiscal 2019 to fiscal 2020
was primarily attributable to (i) the COVID-19 pandemic impact on sales volumes,
(ii) unfavorable foreign currency translation effects as the BRL weakened
against the USD during fiscal 2020, and (iii) lower selling prices associated
with declining raw material costs and competitive pricing pressures.
31
--------------------------------------------------------------------------------
The BRL weighted average exchange rate was
The changes in Segment Profit for the Brazil Segment are as follows:
Segment Profit for fiscal 2019$ 20,116 Decrease in sales volumes (2,641 ) Decrease in underlying margins (2,535 )
Unfavorable foreign currency translation effects (2,360 ) Segment Profit for fiscal 2020
$ 12,580 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 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. The decrease in Segment Profit for the Brazil Segment from fiscal 2019 to fiscal 2020 was primarily attributable to (i) the COVID-19 pandemic, (ii) unfavorable foreign currency translation, and (iii) prior to the pandemic, competitive pricing pressures during a declining raw material cost environment. For the Brazil Segment, declining raw material costs place immediate downward market pressure on selling prices and, since the Brazil Segment's supply chain is generally longer, average inventory costs decline slower than selling prices. Additionally, the Brazil Segment accelerated certain raw material purchases in the fourth quarter of fiscal 2019, which exacerbated the above impact.
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 are as follows:
Fiscal 2021 % Change Fiscal 2020 % Change Fiscal 2019
Net sales $ 65,869 (2.2 ) $ 67,381 (31.3 ) $ 98,127
Cost of sales 63,502 (7.1 ) 68,359 (24.2 ) 90,231
Gross profit (loss) 2,367 (342.0 ) (978 ) (112.4 ) 7,896
Depreciation expense 1,769 (7.7 ) 1,917 (8.0 ) 2,083
Segment Profit $ 4,136 340.5 $ 939 (90.6 ) $ 9,979
Gross margin 3.6 % -1.5 % 8.0 %
Segment margin 6.3 % 1.4 % 10.2 %
Segment net sales as a
percentage
of consolidated
amount 9.9 % 11.1 % 13.8 %
Segment Profit as a
percentage
of consolidated
amount 3.6 % 1.6 % 11.6 %
The changes in net sales for the Nylon Segment are as follows:
Net sales for fiscal 2019$ 98,127 Decrease in underlying sales volumes (27,205 ) Net change in average selling price and sales mix (1,895 )
Decrease due to an additional week of sales in fiscal 2019 (1,646 ) Net sales for fiscal 2020
$ 67,381 Net sales for fiscal 2020$ 67,381 Net change in average selling price and sales mix (6,435 ) Increase in sales volumes 4,923 Net sales for fiscal 2021$ 65,869
The decrease in net sales for the Nylon Segment from fiscal 2020 to fiscal 2021 was primarily attributable to an increase in sales volumes for lower-priced product, adversely impacting average selling price.
32
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The decrease in net sales for the Nylon Segment from fiscal 2019 to fiscal 2020
was primarily attributable to (i) the adverse impact of COVID-19, (ii) continued
demand declines in certain nylon product categories, (iii) two customers
shifting certain programs to overseas garment production during calendar 2019,
and (iv) one fewer week of sales in fiscal 2020.
The changes in Segment Profit for the Nylon Segment are as follows:
Segment Profit for fiscal 2019$ 9,979 Net decrease in underlying margins (6,119 ) Decrease in underlying sales volumes (2,772 )
Decrease due to an additional week of sales in fiscal 2019 (149 ) Segment Profit for fiscal 2020
$ 939 Segment Profit for fiscal 2020$ 939 Net increase in underlying margins 3,129 Increase in sales volumes 68 Segment Profit for fiscal 2021$ 4,136 The increase in Segment Profit for the Nylon Segment from fiscal 2020 to fiscal 2021 was primarily attributable to (i) higher unit conversion margin and (ii) improved cost absorption on a stable sales mix. The decrease in Segment Profit for the Nylon Segment from fiscal 2019 to fiscal 2020 was primarily attributable to lower sales and weaker fixed cost absorption, with fiscal 2020 significantly impacted by demand disruption from COVID-19.
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 ofJune 27, 2021 , all ofUNIFI's $86,857 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, and 52% ofUNIFI's cash and cash equivalents were held by its foreign subsidiaries. Cash and cash equivalents held by foreign subsidiaries may not be presently available to fundUNIFI's domestic capital requirements, including its domestic debt obligations.UNIFI employs a variety of strategies to ensure that its worldwide cash is available in the locations where it is needed. The following table presents a summary of cash and cash equivalents, borrowings available under financing arrangements, liquidity, working capital and total debt obligations as ofJune 27, 2021 for domestic operations compared to foreign operations: Domestic Foreign Total Cash and cash equivalents$ 37,782 $ 40,471 $ 78,253 Borrowings available under financing arrangements 65,891 - 65,891 Liquidity$ 103,673 $ 40,471 $ 144,144 Working capital$ 88,836 $ 134,808 $ 223,644 Total debt obligations$ 86,857 $ -$ 86,857
For fiscal 2021, cash generated from operations was
Due toUNIFI's financial performance in fiscal 2021, other current liabilities atJune 27, 2021 includes approximately$12,350 of annual incentive compensation that was paid inAugust 2021 . Such payment offsets the underlying cash generation that management expects in the first quarter of fiscal 2022. Beyond this use of cash and considering the expected business activity for fiscal 2022, further demand recovery over the next twelve months is likely to generate an increase in our working capital, and when combined with capital expenditures, debt service and routine tax payments, we expect to use cash in fiscal 2022. However, our liquidity position (calculated in the table above) is higher than recent historical levels and is expected to be more than adequate to allowUNIFI to manage through the current COVID-19 operating environment and to quickly respond to further economic recovery.UNIFI considers$21,776 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$4,524 . 33 --------------------------------------------------------------------------------
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 implemented aggressive and prudent actions that were necessary to preserve liquidity in the COVID-19 pandemic environment, which was characterized by global demand declines and/or uncertainty that began inMarch 2020 . Accordingly, to minimize the disruption to operations that could result from outbreaks amongUNIFI employees,UNIFI prioritized health and safety measures that included restricting travel and group meetings, enforcing social distancing and healthy habits, increased sanitization, and increased wellness monitoring.
Throughout the COVID-19 pandemic,
• 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, new capital and funding sources (if any) may 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,
extend utilization of 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.
Now that global demand pressures are less severe and the textile supply chain
appears to be recovering, we expect our significant cash balances and available
borrowings to continue to provide adequate liquidity during the lingering
pressures of the COVID-19 pandemic. Accordingly, and because of global demand
recovery that has occurred thus far, we do not currently anticipate any adverse
events or circumstances will place critical pressure on our liquidity position
and ability to fund our operations, capital expenditures, and expected business
growth during fiscal 2022. Should global demand and economic activity decline
again beyond the short-term, 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.
As we anticipate further business recovery to occur throughout fiscal 2022, we
expect the majority of our capital will be deployed to upgrading the machinery
in our Americas manufacturing facilities via capital expenditures.
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 June 27, 2021 June 27, 2021 June 28, 2020 ABL Revolver December 2023 0.0% $ - $ - ABL Term Loan December 2023 3.1% (1) 77,500 87,500 Finance lease obligations (2) 3.6% 8,475 11,381 Construction financing (3) 2.3% 882 - Total debt 86,857 98,881 Current ABL Term Loan (4) (12,500 ) (10,000 ) Current portion of finance lease obligations (3,545 ) (3,563 ) Unamortized debt issuance costs (476 ) (711 ) Total long-term debt$ 70,336 $ 84,607
(1) Includes the effects of interest rate swaps.
(2) Scheduled maturity dates for finance lease obligations range from
to
(3) Refer to the discussion below under the subheading "-Construction Financing"
for further information.
(4) Because fiscal 2022 is a 53-week fiscal year, five regularly scheduled ABL
Term Loan principal payments are disclosed in the current portion of
long-term debt to reflect the amount due within the operating cycle and
fiscal year ending July 3, 2022 .
34
--------------------------------------------------------------------------------
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 addition, in connection with the 2018 Amendment, the principal amount of the ABL Term Loan was reset from$80,000 to$100,000 . Net proceeds from the ABL Term Loan reset were used to pay down the amount outstanding on the ABL Revolver. Additionally, the 2018 Amendment resulted in a loss on extinguishment of debt of$131 in connection with the write-off of certain unamortized debt issuance costs. 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: (i) revised the 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) revised the 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) revised the 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, Inc. and certain of its subsidiaries 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 ofJune 27, 2021 was$22,188 . 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. 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 ofJune 27, 2021 :UNIFI was in compliance with all financial covenants in the Credit Agreement; excess availability under the ABL Revolver was$65,891 ;UNIFI had$0 of standby letters of credit; and the fixed charge coverage ratio was 0.60 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 and is party to LIBOR-based interest rate swaps. 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. 35 --------------------------------------------------------------------------------
Finance Lease Obligations
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%. During fiscal 2020,UNIFI entered into finance lease obligations totaling$6,301 for certain transportation equipment. The maturity date of these obligations range fromMarch 2025 toNovember 2026 with interest rates ranging from 3.1% to 3.5%. Construction Financing InMay 2021 ,UNIFI entered into an agreement with a third party lender that provides for construction-period financing for certain build-to-suit assets.UNIFI will record project costs to construction in progress and the corresponding liability to construction financing (within long-term debt). The agreement provides for monthly, interest-only payments during the construction period, at a rate of LIBOR plus 2.2%, and contains terms customary for a financing of this type. The agreement provides for 60 monthly payments, which will commence upon the completion of the construction period with an interest rate of approximately 2.8%. In connection with this construction financing arrangement,UNIFI recorded long-term debt of$882 . Scheduled Debt Maturities The following table presents the scheduled maturities ofUNIFI's outstanding debt obligations for the following five fiscal years and thereafter. Because fiscal 2022 is a 53-week fiscal year, five regularly scheduled ABL Term Loan principal payments are disclosed in the table below and the current portion of long-term debt to reflect the amount due within the operating cycle and fiscal year endingJuly 3, 2022 : Fiscal 2022 Fiscal 2023 Fiscal 2024 Fiscal 2025 Fiscal 2026 Thereafter ABL Revolver $ - $ - $ - $ - $ - $ - ABL Term Loan 12,500 10,000 55,000 - - - Finance lease obligations 3,545 1,257 1,301 1,195 733 444 Total (1)$ 16,045 $ 11,257 $ 56,301 $ 1,195 $ 733$ 444
(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.
Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
June 27, 2021 June 28, 2020
Long-term debt $ 70,336 $ 84,607
Current portion of long-term debt 16,045 13,563
Unamortized debt issuance costs 476 711
Debt principal 86,857 98,881
Less: cash and cash equivalents 78,253 75,267
Net Debt $ 8,604 $ 23,614
36
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Working Capital and
The following table presents the components of working capital and the
reconciliation from working capital to
Fiscal 2021 Fiscal 2020
Cash and cash equivalents $ 78,253 $ 75,267
Receivables, net 94,837 53,726
Inventories 141,221 109,704
Income taxes receivable 2,392 4,033
Other current assets 12,364 11,763
Accounts payable (54,259 ) (25,610 )
Other current liabilities (31,638 ) (13,689 )
Income taxes payable (1,625 ) (349 )Current operating lease liabilities (1,856 ) (1,783 ) Current portion of long-term debt
(16,045 ) (13,563 )
Working capital $ 223,644 $ 199,499
Less: Cash and cash equivalents (78,253 ) (75,267 )
Less: Income taxes receivable (2,392 ) (4,033 )
Less: Certain current liabilities 19,526 15,695
Adjusted Working Capital $ 162,525 $ 135,894
Working capital increased from $199,499 as of June 28, 2020 to $223,644 as of
June 27, 2021 , while Adjusted Working Capital increased from $135,894 to
$162,525 , both primarily in connection with the contrast of (i) lower working
capital at June 28, 2020 due to the significant demand pressures caused by the
COVID-19 pandemic and (ii) higher working capital at June 27, 2021 due to
substantial business recovery and higher raw material costs. Working capital and
Adjusted Working Capital are within the range of management's expectations based
on the composition of the underlying business and global structure.
The increase in cash and cash equivalents was driven by the operating cash flows
generated by our global operations, partially offset by scheduled debt service
payments. The increase in receivables, net and inventories was primarily
attributable to increased sales in fiscal 2021 following low sales activity in
the June 2020 quarter due to significantly suppressed demand levels caused by
the COVID-19 pandemic. The change in income taxes receivable was insignificant.
The increase in other current assets was primarily due to the current portion of
non-income tax recovery in Brazil , partially offset by a decline in contract
assets. The increase in accounts payable was consistent with the increase in
sales and production activity following business recovery during fiscal 2021.
The increase in other current liabilities was primarily attributable to higher
incentive compensation accruals in fiscal 2021 and an increase in deferred
revenue associated with increased sales activity in the Asia Segment. Included
within certain current liabilities, the changes in income taxes payable and
current portion of operating lease liabilities were insignificant and the change
in current portion of long-term debt reflects an additional term loan principal
payment scheduled in the 53-week fiscal 2022, as discussed above within
Scheduled Debt Maturities.
Capital Projects
In fiscal 2021, UNIFI invested $21,178 in capital projects, primarily relating
to (i) further improvements in production capabilities and technology
enhancements in the Americas , (ii) eAFK EVO texturing machinery, and (iii)
routine annual maintenance capital expenditures. Maintenance capital
expenditures are necessary to support UNIFI's current operations, capacities and
capabilities and exclude expenses relating to repairs and costs that do not
extend an asset's useful life.
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 the Americas . Maintenance capital expenditures are
necessary to support UNIFI's current operations, capacities and capabilities and
exclude expenses relating to repairs and costs that do not extend an asset's
useful life. We also added approximately $6,000 of transportation equipment
under new finance leases.
In fiscal 2019, we invested approximately
In fiscal 2022,UNIFI expects to invest between$40,000 and$45,000 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 2022 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. 37 --------------------------------------------------------------------------------
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 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 ofJune 27, 2021 ,UNIFI repurchased a total of 84 shares at an average price of$23.72 , leaving$48,008 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 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.
Cash Provided by Operating Activities
The significant components of net cash provided by operating activities are
summarized below.
Fiscal 2021 Fiscal 2020 Fiscal 2019
Net income (loss) $ 29,073 $ (57,237 ) $ 2,456
Depreciation and amortization expense 25,528 23,653 23,003
Equity in (earnings) loss of unconsolidated
affiliates (739 ) 477 (3,968 )
Recovery of non-income taxes (9,717 ) - -
Impairment of investment in unconsolidated
affiliate - 45,194 -
Gain on sale of investment in unconsolidated
affiliate - (2,284 ) -
Non-cash compensation expense 3,462 3,999 3,258
Deferred income taxes 5,087 (4,011 ) 423
Subtotal 52,694 9,791 25,172
Distributions received from unconsolidated
affiliates 750 10,437 2,647
Change in inventories (28,069 ) 15,792 (15,838 )
Other changes in assets and liabilities 11,306 16,704 (4,697 )
Net cash provided by operating activities
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, as further described within the working capital discussion above, 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.
Fiscal 2020 Compared to Fiscal 2019
The increase in net cash provided by operating activities from fiscal 2019 to fiscal 2020 was primarily due to (i)$10,437 of distributions received from PAL in fiscal 2020 and (ii) the favorable impact on working capital of both (a) a more favorable raw material cost environment in fiscal 2020 and (b) lower receivables and inventory levels driven by the demand pressures of the COVID-19 pandemic. 38
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Cash (Used) Provided by Investing Activities and Financing Activities
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, which 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.
Fiscal 2019
UNIFI utilized$24,936 for net investing activities and utilized$4,626 for net financing activities during fiscal 2019. Significant investing activities included$24,871 for capital expenditures, which primarily relate to ongoing maintenance capital expenditures, along with production capabilities and technology enhancements in theAmericas . Significant financing activities included$3,800 of net borrowings against the ABL Facility to fund capital expenditure activities and$7,019 for 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 ofJune 27, 2021 ,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
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 $55,000 at the end of
fiscal 2021 and are expected to be settled in fiscal 2022. Such openpurchase 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 in UNIFI'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.
UNIFI does not engage in off-balance sheet arrangements and only enters into
material contracts relating to normal course business or to hedge the associated
risks (e.g. interest rate swaps).
Recent Accounting Pronouncements
Issued and Pending Adoption
Upon review of each Accounting Standards Update ("ASU") issued by the Financial
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 on UNIFI's consolidated financial statements.
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. 39
-------------------------------------------------------------------------------- InFebruary 2016 , the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new lease guidance was adopted in the first quarter of fiscal 2020, and adoption is described in more detail in Note 4, "Leases." InMay 2014 , the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequent ASUs were issued to provide clarity and to defer the effective date of the new guidance. The new revenue recognition guidance eliminates the transaction- and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach.
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, inventory turns, 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. June 27, 2021 June 28, 2020 June 30, 2019 Net realizable value adjustment$ (2,407 ) $ (4,224 ) $
(2,391 )
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