FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 23, 2001
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-10542
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UNIFI, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 11-2165495
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 19109 - 7201 West Friendly Avenue
Greensboro, NC 27419
- ------------------------------------------ ------------------------------
(Address of principal executive offices) (Zip Code)
(336) 294-4410
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(Registrant's telephone number, including area code)
Same
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Class Outstanding at January 27, 2002
- -------------------------------------- -------------------------------
Common stock, par value $.10 per share 53,825,533 Shares
Part I. Financial Information
UNIFI, INC.
Condensed Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 23, June 24,
2001 2001
----------- -----------
(Unaudited) (Note)
(Amounts in Thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 14,640 $ 6,634
Receivables 140,712 171,744
Inventories:
Raw materials and supplies 52,543 47,374
Work in process 10,959 12,527
Finished goods 56,037 64,533
Other current assets 2,761 6,882
----------- -----------
Total current assets 277,652 309,694
----------- -----------
Property, plant and equipment 1,214,599 1,209,927
Less: accumulated depreciation 684,355 647,614
----------- -----------
530,244 562,313
Investments in unconsolidated affiliates 176,114 167,286
Goodwill 59,733 59,733
Other intangible assets, net 2,357 3,406
Other noncurrent assets 35,107 34,887
----------- -----------
Total assets $ 1,081,207 $ 1,137,319
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 60,388 $ 100,086
Accrued expenses 52,681 59,866
Income taxes payable 9,570 72
Current maturities of long-term debt and other
current liabilities 9,715 85,962
----------- -----------
Total current liabilities 132,354 245,986
Long-term debt and other liabilities 315,958 259,188
Deferred income taxes 80,270 80,307
Minority interests 12,081 11,295
Shareholders' equity:
Common stock 5,383 5,382
Retained earnings 588,526 589,360
Unearned compensation (922) (1,203)
Accumulated other comprehensive loss (52,443) (52,996)
----------- -----------
Total shareholders' equity 540,544 540,543
----------- -----------
Total liabilities and shareholders' equity $ 1,081,207 $ 1,137,319
=========== ===========
- -----------
Note: The balance sheet at June 24, 2001, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
UNIFI, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
- --------------------------------------------------------------------------------
For the For the
Quarters Ended Six Months Ended
-------------------- --------------------
Dec. 23, Dec. 24, Dec. 23, Dec. 24,
2001 2000 2001 2000
-------- -------- -------- --------
(Amounts in Thousands Except Per Share Data)
Net sales $ 221,655 $ 299,143 $ 444,681 $ 618,306
Cost of goods sold 206,158 271,103 406,946 552,606
Selling, general & admin. expense 11,487 17,890 23,065 33,922
Interest expense 6,135 8,483 12,334 16,790
Interest income 509 691 1,274 1,812
Other expense 2,417 2,858 760 7,370
Equity in losses of unconsolidated
affiliates 1,411 377 1,736 1,808
Minority interests 0 2,723 861 5,482
--------- --------- --------- ---------
Income (loss) before income taxes (5,444) (3,600) 253 2,140
Provision (benefit) for income
taxes (1,929) (172) 1,102 2,685
--------- --------- --------- ---------
Net loss $ (3,515) $ (3,428) $ (849) $ (545)
========= ========= ========= =========
Loss per common share - basic $ (0.07) $ (0.06) $ (0.02) $ (0.01)
========= ========= ========= =========
Loss per common share - diluted $ (0.07) $ (0.06) $ (0.02) $ (0.01)
========= ========= ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
UNIFI, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended
------------------------
December 23, December 24,
2001 2000
------------ ------------
(Amounts in Thousands)
Cash and cash equivalents provided by
operating activities $ 41,980 $ 63,978
-------- ---------
Investing activities:
Capital expenditures (4,967) (27,993)
Acquisitions 0 (2,148)
Investments in unconsolidated equity affiliates (10,670) (5,555)
Investment of foreign restricted cash (1,563) (6,245)
Proceeds from sale of capital assets 3,353 804
Other (1,311) (1,648)
-------- ---------
Net investing activities (15,158) (42,785)
-------- ---------
Financing activities:
Borrowing of long-term debt 47,316 284,687
Repayment of long-term debt (63,669) (271,289)
Purchase and retirement of Company
common stock 0 (16,507)
Distributions to minority interest shareholders 0 (6,000)
Other (2,909) (2,383)
-------- ---------
Net financing activities (19,262) (11,492)
-------- ---------
Currency translation adjustment 446 (290)
-------- ---------
Net increase in cash and cash
equivalents 8,006 9,411
-------- ---------
Cash and cash equivalents - beginning 6,634 18,778
-------- ---------
Cash and cash equivalents - ending $ 14,640 $ 28,189
======== =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
UNIFI, INC.
Notes to Condensed Consolidated Financial Statements
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(a) Basis of Presentation
---------------------
The information furnished is unaudited and reflects all adjustments which
are, in the opinion of management, necessary to present fairly the
financial position at December 23, 2001, and the results of operations and
cash flows for the periods ended December 23, 2001, and December 24, 2000.
Such adjustments consisted of normal recurring items. Interim results are
not necessarily indicative of results for a full year. It is suggested that
the condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's latest
annual report on Form 10-K. The Company has reclassified the presentation
of certain prior year information to conform with the current presentation
format.
(b) Income Taxes
------------
Deferred income taxes have been provided for the temporary differences
between financial statement carrying amounts and tax basis of existing
assets and liabilities.
The Company's income tax provision (benefit) for both current and prior
year periods is different from the U.S. statutory rate due to foreign
operations being taxed at lower effective rates and substantially no income
tax benefits have been recognized for the losses incurred by foreign
subsidiaries as the recoverability of such tax benefits through loss
carryforwards or carrybacks is not reasonably assured.
(c) Comprehensive Loss
------------------
Comprehensive loss amounted to $4.7 million for the second quarter of
fiscal 2002 and $0.3 million for the year to date compared to $1.1 million
and $8.7 million for the prior year quarter and year-to-date periods,
respectively. Comprehensive loss was comprised of net loss and foreign
currency translation adjustments for all periods. In addition, the prior
year periods also included unrealized gains and (losses) on foreign
currency derivative contracts totaling $1.6 million and $(1.0) million, for
the quarter and year to date. The Company does not provide income taxes on
the impact of currency translations as earnings from foreign subsidiaries
are deemed to be permanently invested.
(d) Loss per Share
--------------
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted losses per share computations
(amounts in thousands):
For the Quarters Ended For the Six Months Ended
--------------------------- ---------------------------
December 23, December 24, December 23, December 24,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Numerator:
Net loss $ (3,515) $ (3,428) $ (849) $ (545)
============ ============ ============ ============
5
For the Quarters Ended For the Six Months Ended
--------------------------- ---------------------------
December 23, December 24, December 23, December 24,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Denominator:
Denominator for basic
loss per share -
Weighted average shares 53,734 53,641 53,720 54,122
Effect of dilutive securities:
Stock options -- -- -- --
Restricted stock awards -- -- -- --
------------ ------------ ------------ ------------
Dilutive potential common
shares denominator for
diluted loss per share -
Adjusted weighted average
shares and assumed
conversions 53,734 53,641 53,720 54,122
============ ============ ============ ============
(e) Recent Accounting Pronouncements
--------------------------------
In September 2000, the Emerging Issues Task Force (EITF) issued EITF
Abstract 00-10 "Accounting for Shipping and Handling Fees and Costs." EITF
00-10 requires that any amounts billed to a customer for a sales
transaction related to shipping or handling should be classified as
revenues. The Company was required to adopt EITF 00-10 in the fourth
quarter of fiscal year 2001. Before adoption of this Standard, the Company
included revenues earned for shipping and handling in the net sales line
item in the Condensed Consolidated Statements of Operations. Costs to
provide this service were either historically included in net sales, for
shipping costs, or in cost of sales, for handling expenses. Upon the
adoption of EITF 00-10 the Company has reclassified the presentation of
shipping costs from net sales to cost of sales and restated all prior
periods. Adopting EITF 00-10 had no impact on the Company's net results of
operations or financial position.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited after this date. SFAS 141 also
includes guidance on the initial recognition and measurement of goodwill
and other intangible assets acquired in a business combination completed
after June 30, 2001. The Company adopted SFAS 141 on July 1, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). As allowed under the Standard, the Company has adopted
SFAS 142 retroactively to June 25, 2001. SFAS 142 requires goodwill and
intangible assets with indefinite useful lives to no longer be amortized,
but instead be tested for impairment at least annually.
6
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, no adjustments
were made to the amortization period or residual values of other intangible
assets.
In accordance with the transition provisions of SFAS 142, we have completed
the first step of the transitional goodwill impairment test for all the
reporting units of the Company. The results of that test have indicated
that goodwill, with a net carrying value of $46.3 million, associated with
our nylon business may be impaired and an impairment loss may have to be
recognized. The amount of that loss has not been estimated, and the
measurement of that loss is expected to be completed prior to the end of
the fourth quarter of 2002. Any resulting impairment loss will be
recognized as the cumulative effect of a change in accounting principle and
reflected in the first quarter of 2002. See Note (k) for further disclosure
in connection with SFAS 142.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143 "Accounting for Asset Retirement
Obligations" (SFAS 143). This standard applies to all entities and
addresses legal obligations associated with the retirement of tangible
long-lived assets that result from the acquisition, construction,
development or normal operation of a long-lived asset. SFAS 143 requires
that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. Additionally, any associated asset retirement
costs are to be capitalized as part of the carrying amount of the
long-lived asset and expensed over the life of the asset. SFAS 143 is
effective for financial statements issued for fiscal years beginning after
June 15, 2002. The Company has not yet assessed the financial impact that
adopting SFAS 143 will have on the consolidated financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" (SFAS 121). The provisions of this statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. The Company has not yet assessed the financial impact
that adopting SFAS 144 will have on the consolidated financial statements.
(f) Segment Disclosures
-------------------
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," (SFAS 131) established
standards for public companies for the reporting of financial information
from operating segments in annual and interim financial statements as well
as related disclosures about products and services, geographic areas and
major customers. Operating segments are defined in SFAS 131 as components
of an enterprise about which separate financial information is available to
the chief operating decision-maker for purposes of assessing performance
and allocating resources. Following is the Company's selected segment
information for the quarters and year-to-date periods ended December 23,
2001, and December 24, 2000 (amounts in thousands):
7
Polyester Nylon UTG Total
---------------------------------------------------------------------------------------------------------
Quarter ended December 23, 2001:
Net sales to external customers $ 159,170 $ 62,485 $ - $ 221,655
Intersegment net sales 16 (85) - (69)
Segment operating income 1,922 1,354 - 3,276
Depreciation and amortization 12,471 4,642 - 17,113
Total assets 564,109 287,429 4,908 856,446
---------------------------------------------------------------------------------------------------------
Quarter ended December 24, 2000:
Net sales to external customers $ 206,804 $ 85,600 $ 6,739 $ 299,143
Intersegment net sales 4 - 2,762 2,766
Segment operating income (loss) 7,714 4,373 (2,313) 9,774
Depreciation and amortization 14,157 5,579 286 20,022
Total assets 646,419 356,444 19,576 1,022,439
---------------------------------------------------------------------------------------------------------
For the Quarters Ended
December 23, 2001 December 24, 2000
--------------------------------------------------------------------------------------------------
Operating income:
Reportable segments operating income $ 3,276 $ 9,774
Net standard cost adjustment to LIFO 757 1,215
Unallocated operating expense (23) (839)
--------------------------------------------
Consolidated operating income $ 4,010 $ 10,150
============================================
---------------------------------------------------------------------------------------------------------
Polyester Nylon UTG Total
---------------------------------------------------------------------------------------------------------
Six months ended December 23, 2001:
Net sales to external customers $ 315,325 $ 129,356 $ - $ 444,681
Intersegment net sales 24 (85) - (61)
Segment operating income 8,291 4,593 - 12,884
Depreciation and amortization 25,258 9,315 - 34,573
---------------------------------------------------------------------------------------------------------
Six months ended December 24, 2000:
Net sales to external customers $ 427,090 $ 178,554 $ 12,662 $ 618,306
Intersegment net sales 45 - 5,719 5,764
Segment operating income (loss) 25,206 10,634 (3,930) 31,910
Depreciation and amortization 29,071 11,220 560 40,851
---------------------------------------------------------------------------------------------------------
For the Six Months Ended
-------------------------------------------
December 23, 2001 December 24, 2000
---------------------------------------------------------------------------------------------------------
Operating income:
Reportable segments operating income $ 12,884 $ 31,910
Net standard cost adjustment to LIFO 1,837 1,217
Unallocated operating expense (51) (1,349)
--------------------------------------------
Consolidated operating income $ 14,670 $ 31,778
=============================================
For purposes of internal management reporting, segment operating income
(loss) represents net sales less cost of goods sold and selling, general
and administrative expenses. Certain indirect manufacturing and selling,
general and administrative costs are allocated to the
8
operating segments based on activity drivers relevant to the respective
costs.
The primary differences between the segmented financial information of the
operating segments, as reported to management, and the Company's
consolidated reporting relates to intersegment transfers of yarn, fiber
costing, the provision for bad debts and capitalization of property, plant
and equipment costs.
Domestic operating divisions' fiber costs are valued on a standard cost
basis, which approximates first-in, first-out accounting. For those
components of inventory valued utilizing the last-in, first-out (LIFO)
method, an adjustment is made at the corporate level to record the
difference between standard cost and LIFO. Segment operating income
excludes the provision for bad debts of $0.8 million and $0.6 million for
the current and prior year quarters, respectively, and $1.8 million and
$2.6 million for the current and prior year six month periods,
respectively. For significant capital projects, capitalization is delayed
for management segment reporting until the facility is substantially
complete. However, for consolidated management financial reporting, assets
are capitalized into construction in progress as costs are incurred or
carried as unallocated corporate fixed assets if they have been placed in
service but have not as yet been moved for management segment reporting.
"UTG" is the Company's majority-owned information services subsidiary,
Unifi Technology Group, Inc. Since March 2001, UTG has been accounted for
as an asset held for sale and, as a result, UTG did not have any sales and
operating income for the quarter and six months ended December 23, 2001.
The remaining component of this entity was sold in January 2002.
The total assets for the polyester segment decreased from $608.6 million at
June 24, 2001 to $564.1 million at December 23, 2001 due mainly to domestic
assets decreasing by $39.4 million (accounts receivable, inventories and
fixed assets decreased by $19.1 million, $4.2 million and $16.1 million,
respectively). The total assets for the nylon segment decreased from $292.4
million at June 24, 2001 to $287.4 million at December 23, 2001 due mainly
to domestic assets decreasing by $3.7 million (accounts receivable and
fixed assets decreased by $1.6 million and $8.5 million, respectively,
offset by an increase in inventories of $6.4 million). The fixed asset
reductions for polyester and nylon are primarily associated with
depreciation. The total assets for the "All Other" segment of $4.9 million
at December 23, 2001 is comparable with the amount at June 24, 2001 of $5.1
million.
(g) Derivative Financial Instruments
--------------------------------
Effective June 26, 2000, the Company began accounting for derivative
contracts and hedging activities under Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which requires all derivatives to be recorded on the balance
sheet at fair value. There was no cumulative effect adjustment of adopting
this accounting standard in fiscal 2001. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The Company does not
enter into derivative financial instruments for trading purposes.
9
The Company conducts its business in various foreign currencies. As a
result, it is subject to the transaction exposure that arises from foreign
exchange rate movements between the dates that foreign currency
transactions are recorded (export sales and purchases commitments) and the
dates they are consummated (cash receipts and cash disbursements in foreign
currencies). The Company utilizes some natural hedging to mitigate these
transaction exposures. The Company also enters into foreign currency
forward contracts for the purchase and sale of European, Canadian,
Brazilian and other currencies to hedge balance sheet and income statement
currency exposures. These contracts are principally entered into for the
purchase of inventory and equipment and the sale of Company products into
export markets. Counterparties for these instruments are major financial
institutions.
Currency forward contracts are entered to hedge exposure for sales in
foreign currencies based on specific sales orders with customers or for
anticipated sales activity for a future time period. Generally, 60-80% of
the sales value of these orders are covered by forward contracts. Maturity
dates of the forward contracts attempt to match anticipated receivable
collections. The Company marks the outstanding accounts receivable and
forward contracts to market at month end and any realized and unrealized
gains or losses are recorded as other income and expense. The Company also
enters currency forward contracts for committed or anticipated equipment
and inventory purchases. Generally, 50-75% of the asset cost is covered by
forward contracts although 100% of the asset cost may be covered by
contracts in certain instances. Forward contracts are matched with the
anticipated date of delivery of the assets and gains and losses are
recorded as a component of the asset cost for purchase transactions the
Company is firmly committed. For anticipated purchase transactions, gains
or losses on hedge contracts are accumulated in Other Comprehensive Income
(Loss) and periodically evaluated to assess hedge effectiveness. In the
prior year quarter and six-month period, the Company recorded and
subsequently wrote off approximately $0.5 million and $2.1 million,
respectively, of accumulated losses on hedge contracts associated with the
anticipated purchase of machinery that was later canceled. The contracts
outstanding for anticipated purchase commitments that were subsequently
canceled were unwound by entering into sales contracts with identical
remaining maturities and contract values. These contracts were marked to
market with offsetting gains and losses until they matured. The latest
maturity for all outstanding purchase and sales foreign currency forward
contracts are January 17, 2002 and December 1, 2002, respectively.
The dollar equivalent of these forward currency contracts and their related
fair values are detailed below (amounts in thousands):
Dec. 23, 2001 June 24, 2001
------------- -------------
Foreign currency purchase contracts:
Notional amount $ 1,888 $ 14,400
Fair value 1,677 12,439
----- ------
Net loss $ 211 $ 1,961
------ -------
Foreign currency sales contracts:
Notional amount $ 14,250 $ 28,820
Fair value 14,335 29,369
------ ------
Net loss $ 85 $ 549
------ ------
10
For the quarters ended December 23, 2001 and December 24, 2000, the total
impact of foreign currency related items on the Condensed Consolidated
Statements of Operations, including transactions that were hedged and those
that were not hedged, was a pre-tax loss of $0.3 million and $2.3 million,
respectively.
(h) Joint Ventures and Alliances
----------------------------
On September 13, 2000, the Company and SANS Fibres of South Africa formed a
50/50 joint venture (UNIFI - SANS Technical Fibers, LLC or UNIFI-SANS) to
produce low-shrinkage high tenacity nylon 6.6 light denier industrial (LDI)
yarns in North Carolina. Sales from this entity are expected to be
primarily to customers in the NAFTA and CBI markets. UNIFI-SANS will also
incorporate the two-stage light denier industrial nylon yarn business of
Solutia, Inc. (Solutia) which was purchased by SANS Fibres. Solutia will
exit the two-stage light denier industrial yarn business transitioning
production from its Greenwood, South Carolina site to the UNIFI-SANS
Stoneville, North Carolina facility, a former Unifi manufacturing location.
The UNIFI-SANS facility started initial production in January 2002. Unifi
will manage the day-to-day production and shipping of the LDI produced in
North Carolina and SANS Fibres will handle technical support and sales.
Annual LDI production capacity from the joint venture is estimated to be
approximately 9.6 million pounds.
On September 27, 2000, Unifi and Nilit Ltd., located in Israel, formed a
50/50 joint venture named U.N.F. Industries Ltd. The joint venture produces
approximately 25.0 million pounds of nylon POY at Nilit's manufacturing
facility in Migdal Ha - Emek, Israel. Production and shipping of POY from
this facility began in March 2001. The nylon POY is utilized in the
Company's nylon texturing and covering operations.
In addition, the Company continues to maintain a 34% interest in Parkdale
America, LLC and a 32.71% interest in Micell Technologies, Inc.
Condensed balance sheet and income statement information as of December 23,
2001, and for the quarter and year-to-date periods ended December 23, 2001,
of the combined unconsolidated equity affiliates is as follows (amounts in
thousands):
December 23,
2001
------------
Current assets $ 189,660
Noncurrent assets 213,572
Current liabilities 33,588
Shareholders' equity 296,478
Quarter Ended For the Six Months Ended
Dec. 23, 2001 Dec. 23, 2001
------------- ------------------------
Net sales $ 101,525 $ 220,829
Gross profit 4,720 12,798
Income (loss) from operations (1,232) 959
Net loss (4,172) (4,025)
11
Effective June 1, 2000, the Company and E.I. DuPont De Nemours and Company
(DuPont) initiated a manufacturing alliance. The intent of the alliance is
to optimize the Company's and DuPont's partially oriented yarn (POY)
manufacturing facilities by increasing manufacturing efficiency and
improving product quality. Under its terms, DuPont and the Company
cooperatively run their polyester filament manufacturing facilities as a
single operating unit. This consolidation involved the closing of the
DuPont Cape Fear, North Carolina plant and transition of the commodity
yarns from the Company's Yadkinville, North Carolina facility to DuPont's
Kinston, North Carolina plant, and high-end specialty production from
Kinston and Cape Fear to Yadkinville. The companies split equally the costs
to complete the necessary plant consolidation and the benefits gained
through asset optimization. Additionally, the companies collectively
attempt to increase profitability through the development of new products
and related technologies. Likewise, the costs incurred and benefits derived
from the product innovations are split equally. DuPont and the Company
continue to own and operate their respective sites and employees remained
with their respective employers. DuPont continues to provide POY to the
marketplace using DuPont technology to expand the specialty product range
at each company's sites and the Company continues to provide textured yarn
to the marketplace.
During the current quarter and year-to-date, the Company recognized as a
reduction of cost of goods sold the cost savings and other benefits from
the alliance of $7.4 million and $17.7 million, respectively, compared to
$1.8 million for the corresponding prior year quarter and year-to-date
periods.
In the fourth quarter of fiscal 2001, the Company recorded its share of the
anticipated costs of closing DuPont's Cape Fear, North Carolina facility.
The charge totaled $15.0 million and represented 50% of the expected
severance and dismantlement costs of closing this plant. Payments for this
obligation are expected to be made over the eighteen-month period ending
December 2002. During the second quarter ended December 23, 2001, the
Company made payments totaling approximately $6.4 million. As a result, the
estimated remaining liability at December 23, 2001 is $8.6 million.
At termination of the alliance or at any time after June 1, 2005, the
Company has the right but not the obligation to purchase from DuPont and
DuPont has the right but not the obligation to sell to the Company,
DuPont's U.S. polyester filament business, with a rated production capacity
of approximately 412 million pounds annually, for a price based on a
mutually agreed fair market value within a range of $300 million to $600
million, subject to certain conditions, including the ability of the
Company to obtain a reasonable amount of financing on commercially
reasonable terms. In the event that the Company does not purchase the
DuPont U.S. polyester filament business, DuPont would have the right but
not the obligation to purchase the Company's POY facilities, with a rated
production capacity of approximately 185 million pounds annually, for a
price based on a mutually agreed fair market value within a range of $125
million to $175 million.
12
(i) Debt Refinancing
----------------
On December 7, 2001, the Company refinanced its $150 million revolving bank
credit facility and its $100 million accounts receivable securitization,
with a new five year $150 million asset based revolving credit agreement
(the "Credit Agreement"). The Credit Agreement is secured by substantially
all U.S. assets excluding manufacturing facilities and manufacturing
equipment. Borrowing availability is based on eligible domestic accounts
receivable and inventory. As of December 23, 2001, the Company had
outstanding borrowings of $58.4 million and availability of $66.4 million
under the terms of the Credit Agreement.
Borrowings under the Credit Agreement bear interest at LIBOR plus 2.50%
and/or prime plus 1.00%, at the Company's option, through February 28,
2003. Effective March 1, 2003, borrowings under the Credit Agreement bear
interest at rates selected periodically by the Company of LIBOR plus 1.75%
to 3.00% and/or prime plus 0.25% to 1.50%. The interest rate matrix is
based on the Company's leverage ratio of funded debt to EBITDA, as defined
by the Credit Agreement. On borrowings outstanding at December 23, 2001,
the interest rate was 4.61%. Under the Credit Agreement, the Company pays
an unused line fee ranging from 0.25% to 0.50% per annum on the unused
portion of the commitment. In connection with the refinancing, the Company
incurred fees and expenses aggregating $1.9 million which will be amortized
over the term of the Credit Agreement. In addition, $0.5 million of
unamortized fees related to the refinancing of the $150 million revolving
bank credit facility and the $100 million accounts receivable
securitization were charged to operations in the quarter ended December 23,
2001.
The Credit Agreement contains customary covenants for asset based loans
which restrict future borrowings and capital spending and, if available
borrowings are less than $25 million at any time during the quarter,
include a required minimum fixed charge coverage ratio of 1.1 to 1.0 and a
required maximum leverage ratio of 5.0 to 1.0. At December 23, 2001, the
Company was in compliance with all covenants under the Credit Agreement.
(j) Consolidation and Cost Reduction Efforts
----------------------------------------
In fiscal 2001, the Company recorded charges of $7.6 million for severance
and employee termination related costs and $24.5 million for asset
impairments and write-downs. The majority of these charges related to U.S.
and European operations and included plant closings and consolidations, the
reorganization of administrative functions and the write down of assets for
certain operations determined to be impaired as well as certain non-core
businesses that were held for sale. The plant closing and consolidations of
the manufacturing and distribution systems were aimed at improving the
overall efficiency and effectiveness of the Company's operations and
reducing the fixed cost structure in response to decreased sales volumes.
The severance and other employee related costs provided for the termination
of approximately 750 people who were terminated as a result of these
worldwide initiatives and included management, production workers and
administrative support located in Ireland, England and in the United
States. Notification of the termination was made to all employees prior to
March 24, 2001 and substantially all affected personnel were terminated by
the end of April 2001. Severance payments have been made in accordance with
various plan terms,
13
which varied from lump sum to a payout over a maximum of 21 months ending
December 2002. Additionally, this charge included costs associated with
medical and dental benefits for former employees no longer providing
services to the Company and provisions for certain consultant agreements
for which no future benefit was anticipated.
The charge for impairment and write down of assets included $18.6 million
for the write down of duplicate or less efficient property, plant and
equipment to their fair value less disposal cost and the write down of
certain non-core assets which were held for sale to estimated net
realizable value. All of the non-core assets and businesses held for sale
included in this charge were disposed of by January 2002. Additionally, an
impairment charge of $5.9 million was recorded for the write down to fair
value of assets, primarily goodwill, associated with the European polyester
dyed yarn operation and Colombian nylon covering operation as the
undiscounted cash flows of the business were not sufficient to cover the
carrying value of these assets. These reviews were prompted by ongoing
excess manufacturing capacity issues. Run-out expenses related to the
consolidation and closing of the affected operations, including equipment
relocation and other costs associated with necessary ongoing plant
maintenance expenses, were charged to operations as incurred and were
completed by the end of fiscal 2001.
During the second quarter of fiscal 2002, the Company recorded a $0.6
million charge for severance costs associated with the further
consolidation and reduction of selling, general and administrative
expenses.
The table below summarizes changes to the accrued liability for the
employee severance portion of the consolidation and cost reduction charge
for the six months ended December 23, 2001:
Balance at
Balance at Fiscal 2002 Cash Dec. 23,
(Amounts in thousands) June 24, 2001 Charge Payments 2001
---------------------------------------------------------------------------
Accrued Severance Liability $2,338 $632 $(1,387) $1,583
This accrued liability excludes the additional $1.7 million charge recorded
in the prior year for the change in estimate associated with the expected
payout of medical and dental benefits for former employees who retired and
terminated in fiscal year 1999. Substantially all costs other than
severance and the change in estimate associated with the expected payout of
medical and dental benefits associated with the consolidation and cost
reduction charges were non cash.
14
(k) Goodwill and Other Intangible Assets
------------------------------------
As described in Note (e), the Company adopted SFAS 142 on June 25, 2001.
The following table reconciles net income (loss) for the quarter and six
months ended December 24, 2000 to its pro forma balance adjusted to exclude
goodwill amortization expense which is no longer recorded under the
provisions of SFAS 142 (amounts in thousands).
Quarter Six Months
Ended Ended
------- --------
Reported net loss $(3,428) $ (545)
Add back: goodwill amortization
(net of tax) 707 1,523
------- --------
Adjusted net income (loss) $(2,721) $ 978
------- --------
Basic net income (loss) per share:
Reported net loss $ (.06) $ (.01)
Adjusted net income (loss) $ (.05) $ .02
Diluted net income (loss) per share:
Reported net loss $ (.06) $ (.01)
Adjusted net income (loss) $ (.05) $ .02
There were no changes in the net carrying amount ($59.7 million - net of
accumulated amortization of $18.1 million) of goodwill for the quarter and
six months ended December 23, 2001. Goodwill by segment as of December 23,
2001 and June 24, 2001 is as follows: nylon - $46.3 million and polyester -
$13.4 million. Intangible assets subject to amortization under SFAS 142
amounted to $2.4 million (net of accumulated amortization of $8.2 million)
and $3.4 million (net of accumulated amortization of $7.2 million) at
December 23, 2001 and June 24, 2001, respectively. These intangible assets
consist of non-compete agreements entered into in connection with business
combinations and are amortized over the term of the agreements, principally
five years. There are no expected residual values related to these
intangible assets. Estimated fiscal year amortization expense is as
follows: 2002 - $2.1 million; 2003 - $1.1 million; and 2004 - $0.2 million.
(l) Subsequent Event
----------------
As described above in Note (h) the Company and DuPont entered into a
manufacturing alliance in June 2000 to produce partially oriented polyester
filament yarn. DuPont and the Company have had discussions regarding their
alliance and each party alleged that the other was in breach of material
terms of their agreement. On February 5, 2002, the Company received a
Demand For And Notice Of Arbitration from DuPont, alleging, among other
things, breach of contract and unjust enrichment. DuPont is seeking
damages, injunctive relief and a declaratory judgment terminating the
agreement and allowing it to sell its interest in the alliance to the
Company. The Company denies DuPont's allegations and intends to vigorously
defend the arbitration and assert various counterclaims against DuPont.
The ultimate outcome of this matter cannot be predicted at this time.
15
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
The following is Management's discussion and analysis of certain significant
factors that have affected the Company's operations and material changes in
financial condition during the periods included in the accompanying Condensed
Consolidated Financial Statements.
Results of Operations
- ---------------------
Consolidated net sales decreased 25.9% for the quarter from $299.1 million to
$221.7 million and 28.1% for the year-to-date. Unit volume for the quarter
decreased 18.6% while average unit sales prices, based on product mix, declined
7.3%. For the year-to-date, unit volume declined 21.6%, while unit prices, based
on product mix, decreased 6.5%.
At the segment level, polyester accounted for 72% and 71% of dollar sales and
nylon accounted for 28% and 29% of dollar sales for the quarter and six months,
respectively.
Polyester
- ---------
The polyester business in the U.S and Europe continues to be negatively impacted
by the importation of fabric and apparel that has eroded the business of our
customers, primarily in the commodity areas. Additionally, the current quarter
and year-to-date period were adversely affected by customers reducing purchases
in an effort to reduce excess inventory levels in response to slow downs at
retail and the economy in general. These effects were experienced across
substantially all end-use markets including apparel, automotive, and home
furnishings. As a result, sales for our polyester segment declined 23.0% and
26.2% for the quarter and year-to-date period compared with the previous year's
respective periods.
Our domestic polyester unit volume decreased 21.0% and 24.7% for the December
quarter and year-to-date compared to the prior year December quarter and
year-to-date. Domestic polyester pricing on sales of first quality goods
remained stable compared to the prior year quarter and year-to-date period.
Sales in local currency for our Brazilian operation increased 7.8% for the
quarter primarily due to an increase in average selling prices of 11.1%. For the
six months, sales in local currency for the Brazilian operation decreased 6.3%
primarily due to a 9.9% reduction in unit volume. Sales in local currency of our
Irish operation for the quarter and six months decreased 17.8% and 16.4%,
respectively, primarily due to reductions in unit volumes of 19.9% and 19.8%,
respectively. The movement in currency exchange rates from the prior year to the
current year adversely affected current quarter and year-to-date sales
translated to U.S. dollars for the Brazilian operation. U.S. dollar net sales
were $6.4 million and $11.0 million less than what sales would have been
reported using prior year translation rates for the quarter and year-to-date,
respectively, with this effect attributable to the change in the U.S. dollar and
Brazilian Reais exchange rate.
Gross profit for our polyester segment decreased $6.1 million to $10.9 million
in the quarter and decreased $17.3 million to $26.5 million for the six months.
The decrease in gross profit for the quarter and six months is primarily due to
the decrease in sales of 23.0% and 26.2%, respectively. The decline in gross
profit due to volume declines was mitigated by the cost savings and other
benefits from the DuPont alliance which increased gross profit by $5.6
16
million and $15.9 million for the quarter and year-to-date, respectively, as
compared with the prior year periods.
Nylon
- -----
The nylon business continues to be negatively impacted by the decline in the
ladies hosiery business as well as the slow down of seamless apparel sales.
Consistent with the polyester business, the current quarter and six months were
adversely affected by inventory corrections in response to economic and retail
slow downs. As a result, sales for our nylon segment declined 27.0% and 27.6%
for the quarter and year-to-date period compared with the previous year's
respective periods. Our domestic nylon unit volume, which represents
substantially all of consolidated nylon sales volume, declined 17.9% and 17.8%
for the December quarter and year-to-date compared to the prior year December
quarter and year-to-date. Average sales prices were down approximately 10% for
the current year quarter and year-to-date relative to the prior year periods.
Gross profit for our nylon segment decreased $4.5 million to $3.8 million in the
quarter and decreased $9.3 million to $9.5 million for the six months. The
decrease in gross profit for the quarter and six months is primarily due to the
decrease in sales.
Selling, general and administrative expenses, which are allocated to the
polyester and nylon segments based on various cost drivers, decreased from 6.0%
of net sales in last year's quarter to 5.2% this quarter and from 5.5% in last
year's year-to-date to 5.2% for the current year-to-date period. On a dollar
basis, selling, general and administrative expense decreased $10.9 million to
$23.1 million for the year to date period. These lower costs are primarily due
to the sale of the consulting arm of Unifi Technology Group and from savings
achieved from the cost reduction efforts initiated in March 2001. During the
second quarter of fiscal 2002, the Company recorded a $0.6 million charge for
severance costs associated with the further consolidation and reduction of
selling, general and administrative expenses.
Corporate
- ---------
Interest expense decreased $2.4 million to $6.1 million in the current quarter
and $4.5 million to $12.3 million for the year-to-date. The decrease in interest
expense for the quarter and six months reflects lower average debt outstanding
and lower average interest rates. The weighted average interest rate on
outstanding debt at December 23, 2001, was 5.9% compared to 6.8% at December 24,
2000.
Other income and expense was positively impacted during the current six months
by a gain on sale of non-operating assets of $2.9 million. However, other income
and expense was negatively impacted during the current quarter by a non-cash
loss of $1.3 million stemming from the sale of the remaining assets of Unifi
Technology Group. In the prior year quarter, other income and expense included a
charge of $0.5 million in currency losses associated with the unwinding of
certain Euro-based hedges originally secured to purchase machinery, which were
subsequently determined to be no longer necessary. This is in addition to a $1.6
million charge recorded in the prior year first quarter. Other income and
expense for the current and prior year quarters also includes $0.8 million and
$0.6 million, respectively, for the provision for bad debts. For the current
year-to-date period, the bad debt provision was $1.8 million compared to $2.6
million for the prior year-to-date.
17
Equity in the losses of our unconsolidated affiliates, Parkdale America, LLC,
Micell Technologies, Inc., Unifi-Sans Technical Fibers, LLC and U.N.F.
Industries Ltd amounted to $1.4 million in the second quarter of fiscal 2002
compared with $0.4 million for the corresponding prior year quarter. For the
year to date, our share of the losses in these entities totaled $1.7 million
compared to $1.8 million in the prior year. Additional details regarding the
Company's investments in unconsolidated equity affiliates and alliances follows:
On September 13, 2000, the Company and SANS Fibres of South Africa formed a
50/50 joint venture (UNIFI - SANS Technical Fibers, LLC or UNIFI-SANS) to
produce low-shrinkage high tenacity nylon 6.6 light denier industrial (LDI)
yarns in North Carolina. Sales from this entity are expected to be primarily to
customers in the NAFTA and CBI markets. UNIFI-SANS will also incorporate the
two-stage light denier industrial nylon yarn business of Solutia, Inc. (Solutia)
which was purchased by SANS Fibres. Solutia will exit the two-stage light denier
industrial yarn business transitioning production from its Greenwood, South
Carolina site to the UNIFI-SANS Stoneville, North Carolina facility, a former
Unifi manufacturing location. The UNIFI-SANS facility started initial production
in January 2002. Unifi will manage the day-to-day production and shipping of the
LDI produced in North Carolina and SANS Fibres will handle technical support and
sales. Annual LDI production capacity from the joint venture is estimated to be
approximately 9.6 million pounds.
On September 27, 2000, Unifi and Nilit Ltd., located in Israel, formed a 50/50
joint venture named U.N.F. Industries Ltd. The joint venture produces
approximately 25.0 million pounds of nylon POY at Nilit's manufacturing facility
in Migdal Ha - Emek, Israel. Production and shipping of POY from this facility
began in March 2001. The nylon POY is utilized in the Company's nylon texturing
and covering operations.
In addition, the Company continues to maintain a 34% interest in Parkdale
America, LLC and a 32.71% interest in Micell Technologies, Inc.
Condensed balance sheet and income statement information as of December 23,
2001, and for the quarter and year-to-date periods ended December 23, 2001, of
the combined unconsolidated equity affiliates is as follows (amounts in
thousands):
December 23,
2001
-------------
Current assets $ 189,660
Noncurrent assets 213,572
Current liabilities 33,588
Shareholders' equity 296,478
Quarter Ended For the Six Months Ended
Dec. 23, 2001 Dec. 23, 2001
------------- ------------------------
Net sales $ 101,525 $ 220,829
Gross profit 4,720 12,798
Income (loss) from operations (1,232) 959
Net loss (4,172) (4,025)
18
Effective June 1, 2000, the Company and E.I. DuPont De Nemours and Company
(DuPont) initiated a manufacturing alliance. The intent of the alliance is to
optimize the Company's and DuPont's partially oriented yarn (POY) manufacturing
facilities by increasing manufacturing efficiency and improving product quality.
Under its terms, DuPont and the Company cooperatively run their polyester
filament manufacturing facilities as a single operating unit. This consolidation
involved the closing of the DuPont Cape Fear, North Carolina plant and
transition of the commodity yarns from the Company's Yadkinville, North Carolina
facility to DuPont's Kinston, North Carolina plant, and high-end specialty
production from Kinston and Cape Fear to Yadkinville. The companies split
equally the costs to complete the necessary plant consolidation and the benefits
gained through asset optimization. Additionally, the companies collectively
attempt to increase profitability through the development of new products and
related technologies. Likewise, the costs incurred and benefits derived from the
product innovations are split equally. DuPont and the Company continue to own
and operate their respective sites and employees remained with their respective
employers. DuPont continues to provide POY to the marketplace using DuPont
technology to expand the specialty product range at each company's sites and the
Company continues to provide textured yarn to the marketplace.
During the current quarter and year-to-date, the Company recognized as a
reduction of cost of goods sold the cost savings and other benefits from the
alliance of $7.4 million and $17.7 million, respectively, compared to $1.8
million for the corresponding prior year quarter and year-to-date periods.
In the fourth quarter of fiscal 2001, the Company recorded its share of the
anticipated costs of closing DuPont's Cape Fear, North Carolina facility. The
charge totaled $15.0 million and represented 50% of the expected severance and
dismantlement costs of closing this plant. Payments for this obligation are
expected to be made over the eighteen-month period ending December 2002. During
the second quarter ended December 23, 2001, the Company made payments totaling
approximately $6.4 million. As a result, the estimated remaining liability at
December 23, 2001 is $8.6 million.
At termination of the alliance or at any time after June 1, 2005, the Company
has the right but not the obligation to purchase from DuPont and DuPont has the
right but not the obligation to sell to the Company, DuPont's U.S. polyester
filament business, with a rated production capacity of approximately 412 million
pounds annually, for a price based on a mutually agreed fair market value within
a range of $300 million to $600 million, subject to certain conditions,
including the ability of the Company to obtain a reasonable amount of financing
on commercially reasonable terms. In the event that the Company does not
purchase the DuPont U.S. polyester filament business, DuPont would have the
right but not the obligation to purchase the Company's POY facilities, with a
rated production capacity of approximately 185 million pounds annually, for a
price based on a mutually agreed fair market value within a range of $125
million to $175 million.
The minority interest charge was $0 in the current year fiscal quarter compared
to $2.7 million in the prior year quarter and $0.9 million for the year to date
compared to $5.5 million in the prior year. The decrease in minority interest
expense in the current quarter and year to date is due to lower operating
results and cash flows generated by our domestic natural textured polyester
business venture with Burlington Industries, which has historically represented
substantially all of the minority interest charge.
19
In fiscal 2001, the Company recorded charges of $7.6 million for severance and
employee termination related costs and $24.5 million for asset impairments and
write-downs. The majority of these charges related to U.S. and European
operations and included plant closings and consolidations, the reorganization of
administrative functions and the write down of assets for certain operations
determined to be impaired as well as certain non-core businesses that were held
for sale. The plant closing and consolidations of the manufacturing and
distribution systems were aimed at improving the overall efficiency and
effectiveness of the Company's operations and reducing the fixed cost structure
in response to decreased sales volumes.
The severance and other employee related costs provided for the termination of
approximately 750 people who were terminated as a result of these worldwide
initiatives and included management, production workers and administrative
support located in Ireland, England and in the United States. Notification of
the termination was made to all employees prior to March 24, 2001 and
substantially all affected personnel were terminated by the end of April 2001.
Severance payments have been made in accordance with various plan terms, which
varied from lump sum to a payout over a maximum of 21 months ending December
2002. Additionally, this charge included costs associated with medical and
dental benefits for former employees no longer providing services to the Company
and provisions for certain consultant agreements for which no future benefit was
anticipated.
The charge for impairment and write down of assets included $18.6 million for
the write down of duplicate or less efficient property, plant and equipment to
their fair value less disposal cost and the write down of certain non-core
assets which were held for sale to estimated net realizable value. All of the
non-core assets and businesses held for sale included in this charge were
disposed of by January 2002. Additionally, an impairment charge of $5.9 million
was recorded for the write down to fair value of assets, primarily goodwill,
associated with the European polyester dyed yarn operation and Colombian nylon
covering operation as the undiscounted cash flows of the business were not
sufficient to cover the carrying value of these assets. These reviews were
prompted by ongoing excess manufacturing capacity issues. Run-out expenses
related to the consolidation and closing of the affected operations, including
equipment relocation and other costs associated with necessary ongoing plant
maintenance expenses, were charged to operations as incurred and were completed
by the end of fiscal 2001.
As mentioned above, during the second quarter of fiscal 2002 the Company
recorded a $0.6 million charge for severance costs associated with the further
consolidation and reduction of selling, general and administrative expenses.
The table below summarizes changes to the accrued liability for the employee
severance portion of the consolidation and cost reduction charge for the six
months ended December 23, 2001:
Balance at Fiscal 2002 Cash Balance at
(Amounts in thousands) June 24, 2001 Charge Payments Dec. 23, 2001
------------------------------------------------------------------------------
Accrued Severance Liability $2,338 $632 $(1,387) $1,583
20
The Company's income tax provision (benefit) for both current and prior year
periods is different from the U.S. statutory rate due to foreign operations
being taxed at lower effective rates and substantially no income tax benefits
have been recognized for the losses incurred by foreign subsidiaries as the
recoverability of such tax benefits through loss carryforwards or carrybacks is
not reasonably assured.
As a result of the above, the Company realized during the current quarter a net
loss of $3.5 million, or a loss per share of $.07, compared to a net loss of
$3.4 million, or $.06 loss per share, for the corresponding quarter of the prior
year, and a net loss of $0.8 million or $.02 per share compared to a net loss of
$0.5 million or $.01 per share for the respective year-to-date periods.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141). SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method is prohibited after this date. SFAS 141 also includes guidance on the
initial recognition and measurement of goodwill and other intangible assets
acquired in a business combination completed after June 30, 2001. The Company
adopted SFAS 141 on July 1, 2001.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). As allowed under the Standard, the Company has adopted SFAS 142
retroactively to June 25, 2001. SFAS 142 requires goodwill and intangible assets
with indefinite useful lives to no longer be amortized, but instead be tested
for impairment at least annually.
With the adoption of SFAS 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, no adjustments were
made to the amortization period or residual values of other intangible assets.
In accordance with the transition provisions of SFAS 142, we have completed the
first step of the transitional goodwill impairment test for all the reporting
units of the Company. The results of that test have indicated that goodwill,
with a net carrying value of $46.3 million, associated with our nylon business
may be impaired and an impairment loss may have to be recognized. The amount of
that loss has not been estimated, and the measurement of that loss is expected
to be completed prior to the end of the fourth quarter of 2002. Any resulting
impairment loss will be recognized as the cumulative effect of a change in
accounting principle and reflected in the first quarter of 2002.
As described above, the Company adopted SFAS 142 on June 25, 2001. The following
table reconciles net income (loss) for the quarter and six months ended December
24, 2000 to its pro forma balance adjusted to exclude goodwill amortization
expense which is no longer recorded under the provisions of SFAS 142 (amounts in
thousands).
21
Quarter Six Months
Ended Ended
------- --------
Reported net loss $(3,428) $ (545)
Add back: goodwill amortization
(net of tax) 707 1,523
------- --------
Adjusted net income (loss) $(2,721) $ 978
------- --------
Basic net income (loss) per share:
Reported net loss $ (.06) $ (.01)
Adjusted net income (loss) $ (.05) $ .02
Diluted net income (loss) per share:
Reported net loss $ (.06) $ (.01)
Adjusted net income (loss) $ (.05) $ .02
There were no changes in the net carrying amount ($59.7 million - net of
accumulated amortization of $18.1 million) of goodwill for the quarter and six
months ended December 23, 2001. Goodwill by segment as of December 23, 2001 and
June 24, 2001 is as follows: nylon - $46.3 million and polyester - $13.4
million. Intangible assets subject to amortization under SFAS 142 amounted to
$2.4 million (net of accumulated amortization of $8.2 million) and $3.4 million
(net of accumulated amortization of $7.2 million) at December 23, 2001 and June
24, 2001, respectively. These intangible assets consist of non-compete
agreements entered into in connection with business combinations and are
amortized over the term of the agreements, principally five years. There are no
expected residual values related to these intangible assets. Estimated fiscal
year amortization expense is as follows: 2002 - $2.1 million; 2003 - $1.1
million; and 2004 - $0.2 million.
Effective June 26, 2000, the Company began accounting for derivative contracts
and hedging activities under Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" which
requires all derivatives to be recorded on the balance sheet at fair value.
There was no cumulative effect adjustment of adopting this accounting standard
in fiscal 2001. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company does not
enter into derivative financial instruments for trading purposes.
The Company conducts its business in various foreign currencies. As a result, it
is subject to the transaction exposure that arises from foreign exchange rate
movements between the dates that foreign currency transactions are recorded
(export sales and purchases commitments) and the dates they are consummated
(cash receipts and cash disbursements in foreign currencies). The Company
utilizes some natural hedging to mitigate these transaction exposures. The
Company also enters into foreign currency forward contracts for the purchase and
sale of European, Canadian, Brazilian and other currencies to hedge balance
sheet and income statement currency exposures. These contracts are principally
entered into for the purchase of inventory and equipment and the sale of Company
products into export markets. Counterparties for these instruments are major
financial institutions.
22
Currency forward contracts are entered to hedge exposure for sales in foreign
currencies based on specific sales orders with customers or for anticipated
sales activity for a future time period. Generally, 60-80% of the sales value of
these orders are covered by forward contracts. Maturity dates of the forward
contracts attempt to match anticipated receivable collections. The Company marks
the outstanding accounts receivable and forward contracts to market at month end
and any realized and unrealized gains or losses are recorded as other income and
expense. The Company also enters currency forward contracts for committed or
anticipated equipment and inventory purchases. Generally, 50-75% of the asset
cost is covered by forward contracts although 100% of the asset cost may be
covered by contracts in certain instances. Forward contracts are matched with
the anticipated date of delivery of the assets and gains and losses are recorded
as a component of the asset cost for purchase transactions the Company is firmly
committed. For anticipated purchase transactions, gains or losses on hedge
contracts are accumulated in Other Comprehensive Income (Loss) and periodically
evaluated to assess hedge effectiveness. In the prior year quarter and six-month
period, the Company recorded and subsequently wrote off approximately $0.5
million and $2.1 million, respectively, of accumulated losses on hedge contracts
associated with the anticipated purchase of machinery that was later canceled.
The contracts outstanding for anticipated purchase commitments that were
subsequently canceled were unwound by entering into sales contracts with
identical remaining maturities and contract values. These contracts were marked
to market with offsetting gains and losses until they matured. The latest
maturity for all outstanding purchase and sales foreign currency forward
contracts are January 17, 2002 and December 1, 2002, respectively.
The dollar equivalent of these forward currency contracts and their related fair
values are detailed below (amounts in thousands):
Dec. 23, 2001 June 24, 2001
------------- -------------
Foreign currency purchase contracts:
Notional amount $ 1,888 $ 14,400
Fair value 1,677 12,439
------ ------
Net loss $ 211 $ 1,961
------ ------
Foreign currency sales contracts:
Notional amount $ 14,250 $ 28,820
Fair value 14,335 29,369
------ ------
Net loss $ 85 $ 549
------ ------
For the quarters ended December 23, 2001 and December 24, 2000, the total impact
of foreign currency related items on the Condensed Consolidated Statements of
Operations, including transactions that were hedged and those that were not
hedged, was a pre-tax loss of $0.3 million and $2.3 million, respectively.
23
Liquidity and Capital Resources
- -------------------------------
Cash generated from operations was $42.0 million for the year-to-date period
ended December 23, 2001, compared to $64.0 million for the prior year
corresponding period. The primary sources of cash from operations were decreases
in accounts receivable of $32.3 million and inventories of $4.0 million, net
income tax recoveries of $12.2 million, and depreciation and amortization
aggregating $39.4 million. Offsetting these sources of cash was a reduction in
accounts payable and accrued liabilities of $45.3 million. All working capital
changes have been adjusted to exclude currency translation effects.
The Company ended the current quarter with working capital of $145.3 million,
which included cash and cash equivalents of $14.6 million.
The Company utilized $15.2 million for net investing activities and $19.3
million from net financing activities during the current year-to-date period.
Significant cash expenditures during this period included $5.0 million for
capital expenditures and $10.7 for investments in unconsolidated equity
affiliates. Also, the Company repaid $16.4 million in net borrowings during this
period and invested, on a long-term basis, $1.6 million of restricted cash from
the Brazilian government. The Company also received cash proceeds from the sale
of capital assets of $3.4 million.
At December 23, 2001, the Company was not committed for the purchase of any
significant capital expenditures. The Company anticipates that capital
expenditures for fiscal 2002 will approximate $15.0 million.
The Company periodically evaluates the carrying value of long-lived assets,
including property, plant and equipment and finite lived intangibles to
determine if impairment exists. If the sum of expected future undiscounted cash
flows is less than the carrying amount of the asset, additional analysis is
performed to determine the amount of loss to be recognized. The Company
continues to evaluate for impairment the carrying value of its polyester natural
textured operations and its nylon texturing and covering operations as the
importation of fiber, fabric and apparel continues to impair sales volumes and
margins for these operations and has negatively impacted the U.S. textile and
apparel industry in general.
Additionally, the Company will perform an annual goodwill impairment test for
all reporting units (nylon and polyester) in accordance with the provisions of
SFAS 142 and continues to monitor the carrying value of its investments in
unconsolidated equity affiliates.
On December 7, 2001, the Company refinanced its $150 million revolving bank
credit facility and its $100 million accounts receivable securitization, with a
new five year $150 million asset based revolving credit agreement (the "Credit
Agreement"). The Credit Agreement is secured by substantially all U.S. assets
excluding manufacturing facilities and manufacturing equipment. Borrowing
availability is based on eligible domestic accounts receivable and inventory. As
of December 23, 2001, the Company had outstanding borrowings of $58.4 million
and availability of $66.4 million under the terms of the Credit Agreement.
Borrowings under the Credit Agreement bear interest at LIBOR plus 2.50% and/or
prime plus 1.00%, at the Company's option, through February 28, 2003. Effective
March 1, 2003, borrowings under the Credit Agreement bear interest at rates
selected periodically by the
24
Company of LIBOR plus 1.75% to 3.00% and/or prime plus 0.25% to 1.50%. The
interest rate matrix is based on the Company's leverage ratio of funded debt to
EBITDA, as defined by the Credit Agreement. On borrowings outstanding at
December 23, 2001, the interest rate was 4.61%. Under the Credit Agreement, the
Company pays an unused line fee ranging from 0.25% to 0.50% per annum on the
unused portion of the commitment. In connection with the refinancing, the
Company incurred fees and expenses aggregating $1.9 million which will be
amortized over the term of the Credit Agreement. In addition, $0.5 million of
unamortized fees related to the refinancing of the $150 million revolving bank
credit facility and the $100 million accounts receivable securitization were
charged to operations in the quarter ended December 23, 2001.
The Credit Agreement contains customary covenants for asset based loans which
restrict future borrowings and capital spending and, if available borrowings are
less than $25 million at any time during the quarter, include a required minimum
fixed charge coverage ratio of 1.1 to 1.0 and a required maximum leverage ratio
of 5.0 to 1.0. At December 23, 2001, the Company was in compliance with all
covenants under the Credit Agreement.
The Board of Directors, effective July 26, 2000, increased the remaining
authorization to repurchase up to 10.0 million shares of Unifi's common stock of
which an authorization to purchase 8.6 million shares remains. The Company will
continue to operate its stock buy-back program from time to time as it deems
appropriate and financially prudent. However, the Company did not repurchase any
shares during the first six months of fiscal 2002 and presently does not
anticipate any significant share repurchases during the remainder of fiscal 2002
or until such time as debt is reduced to a level acceptable to management based
on operating conditions and cash flows existing at such time.
As further described in Note (l) of the Notes to Condensed Consolidated
Financial Statements and Item 1 of Part II to this 10-Q filing, on February 5,
2002, the Company received a Demand For And Notice Of Arbitration from DuPont,
alleging, among other things, breach of contract and unjust enrichment. DuPont
is seeking damages, injunctive relief and a declaratory judgment terminating the
agreement and allowing it to sell its interest in the alliance to the Company.
The Company denies DuPont's allegations and intends to vigorously defend the
arbitration and assert various counterclaims against DuPont. The ultimate
outcome of this matter cannot be predicted at this time.
The current business climate for U.S. based textile manufacturers remains very
challenging due to pressures from the importation of fabric and apparel, excess
capacity, currency imbalances and weaknesses at retail. This situation does not
appear that it will significantly improve in the foreseeable future. This highly
competitive environment has impacted the markets in which the Company competes,
both domestically and abroad. Consequently, management took certain
consolidation and cost reduction actions during fiscal year 2001 to align our
capacity with current market demands. Should business conditions worsen the
Company is prepared to take such actions as deemed necessary to align our
capacity and cost structure with market demands. Management believes the current
financial position of the Company in connection with its operations and its
access to debt and equity markets (as evidenced by the Company refinancing its
existing revolving credit facility and accounts receivable securitization during
the current quarter - see discussion above) are sufficient to meet working
capital and long-term investment needs and pursue strategic business
opportunities.
25
Euro Conversion
- ---------------
The Company conducts business in multiple currencies, including the currencies
of various European countries in the European Union which began participating in
the single European currency by adopting the Euro as their common currency as of
January 1, 1999. Additionally, the functional currency of our Irish operation
and several sales office locations changed on December 31, 2001, from their
historical currencies to the Euro. During the transition period that ended
December 31, 2001, the existing currencies of the member countries remained
legal tender and customers and vendors of the Company continued to use these
currencies when conducting business. Currency rates during this period, however,
were not computed from one legacy currency to another but instead were first
converted into the Euro. On January 1, 2002, Euro denominated bills and coins
were issued and began circulating. Most participating countries plan to withdraw
legacy currencies from circulation by February 28, 2002. The Company continues
to evaluate the Euro conversion and the impact on its business, both
strategically and operationally. At this time, the conversion to the Euro has
not had, nor is expected to have, a material adverse effect on the financial
condition or results of operations of the Company.
Forward Looking Statements
- --------------------------
Certain statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and other sections of this quarterly report
contain forward-looking statements within the meaning of federal security laws
about the Company's financial condition and results of operations that are based
on management's current expectations, estimates and projections about the
markets in which the Company operates, management's beliefs and assumptions made
by management. Words such as "expects," "anticipates," "believes," "estimates,"
variations of such words and other similar expressions are intended to identify
such forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions, which are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in, or implied by, such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's judgment only as of
the date hereof. The Company undertakes no obligation to update publicly any of
these forward-looking statements to reflect new information, future events or
otherwise.
Factors that may cause actual outcome and results to differ materially from
those expressed in, or implied by, these forward-looking statements include, but
are not necessarily limited to, availability, sourcing and pricing of raw
materials, pressures on sales prices and volumes due to competition and economic
conditions, reliance on and financial viability of significant customers,
operating results of our equity affiliates and alliances, technological
advancements, employee relations, changes in capital expenditures and long-term
investments (including those related to unforeseen acquisition opportunities),
continued availability of financial resources through financing arrangements and
operations, negotiations of new or modifications of existing contracts for asset
management, regulations governing tax laws, other governmental and authoritative
bodies' policies and legislation, the outcome of legal proceedings, the
continuation and magnitude of the Company's common stock repurchase program and
proceeds received from the sale of assets held for disposal. In addition to
these representative factors, forward-looking statements could be impacted by
general domestic and
26
international economic and industry conditions in the markets where the Company
competes, such as changes in currency exchange rates, interest and inflation
rates, recession and other economic and political factors over which the Company
has no control. Other risks and uncertainties may be described from time to time
in the Company's other reports and filings with the Securities and Exchange
Commission.
Part II. Other Information
Item 1. Legal Proceedings
-----------------
As described above under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" the Company and DuPont entered into a
manufacturing alliance in June 2000 to produce partially oriented polyester
filament yarn. DuPont and the Company have had discussions regarding their
alliance and each party alleged that the other was in breach of material terms
of their agreement. On February 5, 2002, the Company received a Demand For And
Notice Of Arbitration from DuPont, alleging, among other things, breach of
contract and unjust enrichment. DuPont is seeking damages, injunctive relief and
a declaratory judgment terminating the agreement and allowing it to sell its
interest in the alliance to the Company. The Company denies DuPont's allegations
and intends to vigorously defend the arbitration and assert various
counterclaims against DuPont. The ultimate outcome of this matter cannot be
predicted at this time.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Shareholders of the Company at their Annual Meeting held on the 25th day of
October 2001, considered and voted upon the election of three (3) Class 1
Directors, one (1) Class 2 Director and one (1) Class 3 Director of the Company.
The Shareholders elected the Board of Directors' nominees for the three (3)
Class 1 Directors, one (1) Class 2 Director and one (1) Class 3 Director of the
Company to serve until the Annual Meeting of the Shareholders in 2004, 2002 and
2003, respectively, or until their successors are elected and qualified, as
follows:
Votes Votes Votes
Name of Director (Class) in Favor Against Abstaining
------------------------ ---------- ------- ----------
Donald F. Orr (1) 46,454,297 0 1,007,693
Robert A. Ward (1) 46,441,443 0 1,020,547
G. Alfred Webster (1) 46,405,147 0 1,056,843
William J. Armfield, IV (2) 46,302,398 0 1,159,592
Sue W. Cole (3) 46,439,097 0 1,022,893
The following persons will continue to serve on the Company's Board of Directors
until the Annual Meeting of Shareholders in 2002 for Class 2 and 2003 for Class
3:
Class 2 Class 3
- ------- -------
Charles R. Carter Brian R. Parke
Kenneth G. Langone J. B. Davis
R. Wiley Bourne, Jr.
The information set forth under the headings "Election of Directors", "Nominees
for Election as Directors", "Directors Remaining in Office", and "Security
Holding of Directors, Nominees and Executive Officers" on Pages 2-6 of the
Definitive Proxy Statement filed with the Commission since the close of the
registrant's fiscal year ending June 24, 2001 is incorporated herein by
reference.
27
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(b) No reports on Form 8-K have been filed during the quarter ended
December 23, 2001
28
UNIFI, INC.
- --------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIFI, INC.
-----------------------------------
Date: February 6, 2002 /s/ Willis C. Moore, III
------------------------- -----------------------------------
Willis C. Moore, III
Executive Vice President and Chief
Financial Officer (Mr. Moore is the
Principal Financial Officer and has
been duly authorized to sign on
behalf of the Registrant.)
Date: February 6, 2002 /s/ Edward A. Imbrogno
------------------------- -----------------------------------
Edward A. Imbrogno
Chief Accounting Officer
29