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 March 24, 2002
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[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-10542
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UNIFI, INC.
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(Exact name of registrant as specified in its charter)
New York 11-2165495
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(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
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(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 May 1, 2002
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Common stock, par value $.10 per share 53,827,030 Shares
Part I. Financial Information
UNIFI, INC.
Condensed Consolidated Balance Sheets
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March 24, June 24,
2002 2001
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(Unaudited) (Note)
(Amounts in Thousands)
ASSETS:
Current assets:
Cash and cash equivalents $ 18,897 $ 6,634
Receivables 144,720 171,744
Inventories:
Raw materials and supplies 51,991 47,374
Work in process 11,478 12,527
Finished goods 55,056 64,533
Other current assets 3,399 6,882
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Total current assets 285,541 309,694
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Property, plant and equipment 1,210,717 1,209,927
Less: accumulated depreciation 696,936 647,614
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513,781 562,313
Equity investments in unconsolidated affiliates 173,879 167,286
Goodwill 59,733 59,733
Other intangible assets, net 1,832 3,406
Other noncurrent assets 35,995 34,887
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Total assets $ 1,070,761 $ 1,137,319
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LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 89,682 $ 100,086
Accrued expenses 38,420 59,866
Income taxes payable 3,239 72
Current maturities of long-term debt and other
current liabilities 9,117 85,962
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Total current liabilities 140,458 245,986
Long-term debt and other liabilities 294,946 259,188
Deferred income taxes 85,267 80,307
Minority interests 12,064 11,295
Shareholders' equity:
Common stock 5,383 5,382
Retained earnings 584,944 589,360
Unearned compensation (828) (1,203)
Accumulated other comprehensive loss (51,473) (52,996)
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Total shareholders' equity 538,026 540,543
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Total liabilities and shareholders' equity $ 1,070,761 $ 1,137,319
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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)
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For the Quarters Ended For the Nine Months Ended
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Mar. 24, Mar. 25, Mar. 24, Mar. 25,
2002 2001 2002 2001
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(Amounts in Thousands Except Per Share Data)
Net sales $ 213,501 $ 255,223 $ 658,182 $ 873,529
Cost of goods sold 198,734 239,248 605,680 791,854
Selling, general & admin. expense 13,993 15,732 37,058 49,654
Interest expense 4,851 7,272 17,185 24,062
Interest income (685) (137) (1,959) (1,949)
Other (income) expense (1,725) 3,136 (965) 10,506
Equity in (earnings) losses of
unconsolidated affiliates 2,851 (2,008) 4,587 (200)
Minority interests -- 152 861 5,634
Asset impairments and write downs -- 20,915 -- 20,915
Employee severance -- 5,494 -- 5,494
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Income (loss) before income taxes (4,518) (34,581) (4,265) (32,441)
Provision (benefit) for income taxes (937) (6,033) 165 (3,348)
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Net loss $ (3,581) $ (28,548) $ (4,430) $ (29,093)
========= ========= ========= =========
Loss per common share - basic $ (0.07) $ (0.53) $ (0.08) $ (.54)
========= ========= ========= =========
Loss per common share - diluted $ (0.07) $ (0.53) $ (0.08) $ (.54)
========= ========= ========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
UNIFI, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For the Nine Months Ended
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March 24, March 25,
2002 2001
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(Amounts in Thousands)
Cash and cash equivalents provided by
operating activities $ 66,343 $ 126,794
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Investing activities:
Capital expenditures (6,196) (36,447)
Acquisitions -- (2,159)
Investments in unconsolidated equity affiliates (11,190) (14,406)
Return of capital from equity affiliates -- 25,743
Investment of foreign restricted cash (2,710) (6,616)
Sale of capital assets 6,459 833
Other (1,039) (854)
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Net investing activities (14,676) (33,906)
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Financing activities:
Borrowing of long-term debt 429,781 295,348
Repayment of long-term debt (466,282) (360,564)
Issuance of Company common stock -- --
Purchase and retirement of Company common stock -- (16,527)
Distributions to minority interest shareholders -- (9,000)
Other (4,681) (3,235)
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Net financing activities (41,182) (93,978)
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Currency translation adjustment 1,778 (1,615)
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Net increase (decrease) in cash and cash
equivalents 12,263 (2,705)
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Cash and cash equivalents - beginning 6,634 18,778
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Cash and cash equivalents - ending $ 18,897 $ 16,073
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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 March 24, 2002, and the results of operations and
cash flows for the periods ended March 24, 2002, and March 25, 2001. 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 $2.6 million for the third quarter of fiscal
2002 and $2.9 million for the year to date compared to $31.8 million and
$40.5 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 September and December quarters included a net unrealized loss on
foreign currency derivative contracts totaling $1.0 million that was
subsequently recognized in the prior year March quarter upon termination of
hedge accounting for the related forward contracts. 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 Nine Months Ended
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March 24, March 25, March 24, March 25,
2002 2001 2002 2001
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Numerator:
Net loss $ (3,581) $ (28,548) $ (4,430) $ (29,093)
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For the Quarters Ended For the Nine Months Ended
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March 24, March 25, March 24, March 25,
2002 2001 2002 2001
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Denominator:
Denominator for basic
earnings per share -
Weighted average
shares 53,735 53,666 53,728 53,925
Effect of dilutive
securities:
Stock options -- -- -- --
Restricted stock awards -- -- -- --
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Dilutive potential common
shares denominator for
diluted earnings per
share-Adjusted weighted
average shares and
assumed conversions 53,735 53,666 53,728 53,925
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(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.
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.
6
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. Statement of
Financial Accounting Standards 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 Statement of
Financial Accounting Standards 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 quarter and year-to-date periods ended March 24, 2002,
and March 25, 2001 (amounts in thousands):
7
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Polyester Nylon UTG Total
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Quarter ended March 24, 2002:
Net sales to external customers $ 157,315 $ 56,186 $ -- $ 213,501
Intersegment net sales 6 85 -- 91
Segment operating income 2,516 473 -- 2,989
Depreciation and amortization 12,621 4,702 -- 17,323
Total assets 581,422 278,343 -- 859,785
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Quarter ended March 25, 2001:
Net sales to external customers $ 177,758 $ 70,547 $ 6,161 $ 254,466
Intersegment net sales 15 -- 2,837 2,852
Segment operating income (loss) (835) (790) 2,205 580
Depreciation and amortization 14,178 5,327 249 19,754
Total assets 622,891 335,233 18,618 976,742
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For the Quarters Ended
March 24, 2002 March 25, 2001
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Operating income (loss):
Reportable segments operating income $ 2,989 $ 580
Net standard cost adjustment to LIFO (14) 811
Unallocated operating expense (2,201) (284)
Nonwoven start-up operating loss -- (864)
Asset impairment and employee severance -- (26,409)
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Consolidated operating income (loss) $ 774 $ (26,166)
=================================================
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Polyester Nylon UTG Total
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Nine months ended March 24, 2002:
Net sales to external customers $ 472,640 $ 185,542 $ -- $ 658,182
Intersegment net sales 30 -- -- 30
Segment operating income 10,925 4,948 -- 15,873
Depreciation and amortization 37,879 14,017 -- 51,896
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Nine months ended March 25, 2001:
Net sales to external customers $ 604,857 $ 249,101 $ 18,814 $ 872,772
Intersegment net sales 60 -- 8,564 8,624
Segment operating income (loss) 24,371 9,844 (1,725) 32,490
Depreciation and amortization 43,249 16,547 809 60,605
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For the Nine Months Ended
March 24, 2002 March 25, 2001
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Operating income:
Reportable segments operating income $ 15,873 $ 32,490
Net standard cost adjustment to LIFO 1,823 2,028
Unallocated operating expense (2,252) (418)
Nonwoven start-up operating loss -- (2,079)
Asset impairment and employee severance -- (26,409)
-------------------------------------------------
Consolidated operating income $ 15,444 $ 5,612
=================================================
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For purposes of internal management reporting, segment operating income
(loss) represents net sales less cost of goods sold and allocated selling,
general and administrative expenses. Certain indirect manufacturing and
selling, general and administrative costs are allocated to the 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, certain unallocated manufacturing and
selling, general and administrative expenses 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 $1.7 million and $1.8 million for
the current and prior year quarters, respectively, and $3.5 million and
$4.4 million for the current and prior year nine month periods,
respectively. Segment operating income also excludes certain unallocated
manufacturing and selling general and administrative expenses. 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 previously 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 nine months ended March
24, 2002. 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 $581.4 million at March 24, 2002 due mainly to domestic
assets decreasing by $40.9 million (accounts receivable, inventories and
fixed assets decreased by $13.1 million, $2.3 million and $25.5 million,
respectively). The total assets for the nylon segment decreased from $292.4
million at June 24, 2001 to $278.3 million at March 24, 2002 due mainly to
domestic assets decreasing by $12.8 million (accounts receivable and fixed
assets decreased by $1.9 million and $12.5 million, respectively, offset by
an increase in inventories of $2.1 million). The fixed asset reductions for
polyester and nylon are primarily associated with depreciation. The
elimination of the total assets for the "All Other" segment at March 24,
2002 is attributable to the disposal, in January 2002, of the remaining
operations of UTG.
(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" (SFAS 133) 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
9
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 purchase 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 nine-month period, the Company recorded
approximately $2.2 million and $4.3 million, respectively, of losses on
hedge contracts associated with the anticipated purchase of machinery, of
which $1.0 million in losses had previously been accounted for as a cash
flow hedge but was subsequently expensed when the machinery order did not
materialize. 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 July, 2002 and March, 2003, respectively.
The dollar equivalent of these forward currency contracts and their related
fair values are detailed below (amounts in thousands):
Mar. 24, 2002 June 24, 2001
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Foreign currency purchase contracts:
Notional amount $ 3,438 $ 14,400
Fair value 3,391 12,439
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Net loss $ 47 $ 1,961
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10
Mar. 24, 2002 June 24, 2001
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Foreign currency sales contracts:
Notional amount $ 14,683 $ 28,820
Fair value 14,788 29,369
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Net loss $ 105 $ 549
============= =============
For the quarter and year-to-date periods ended March 24, 2002 and March
25, 2001, 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
$0.1 million and $0.6 million and $2.8 million and $7.2 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. UNIFI-SANS incorporated the two-stage light denier
industrial nylon yarn business of Solutia, Inc. (Solutia) which was
purchased when the venture was formulated. Solutia exited 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 and has operated in a start-up
mode through the March quarter. It is anticipated that the facility will be
substantially on line by the end of the June quarter. 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. Sales from this
entity are expected to be primarily to customers in the NAFTA and CBI
markets. 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 March 24,
2002, and for the quarter and year-to-date periods ended March 24, 2002, of
the combined unconsolidated equity affiliates is as follows (amounts in
thousands):
March 24,
2002
-----------
Current assets $ 192,444
Noncurrent assets 208,775
Current liabilities 36,584
Shareholders' equity 290,408
11
For the Nine
Quarter Ended Months Ended
Mar. 24, 2002 Mar. 24, 2002
------------- -------------
Net sales $ 115,247 $ 336,075
Gross profit 3,111 15,818
Income (loss) from operations (1,196) (681)
Net loss (6,626) (11,095)
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 $6.0 million and $23.7 million, respectively, compared to
$8.1 million and $9.9 for the corresponding prior year quarter and
year-to-date periods, respectively.
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 current quarter, the Company reduced its
obligations by approximately $0.5 million. The estimated remaining
liability at March 24, 2002 is $8.1 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
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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.
As previously disclosed in the December 2001 Form 10-Q, 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 that could amount to
approximately $15.0 million, injunctive relief and, absent a satisfactory
cure by Unifi, a declaratory judgment terminating the agreement allowing it
to sell its interest in the alliance to the Company. The Company on April
1, 2002 filed an answer and counterclaim to DuPont's allegations denying
their assertions and seeking damages for various actions and inactions on
behalf of DuPont. As the arbitration process is in its early stages, the
outcome of this matter cannot be predicted at this time.
(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 March 24, 2002, the Company had outstanding
borrowings of $37.1 million and availability of $83.5 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 March 24, 2002, the
interest rate was 4.37%. 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 March 24, 2002, 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
13
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.
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 nine months ended March 24, 2002:
Fiscal
Balance at 2002 Cash Balance at
(Amounts in thousands) June 24, 2001 Charge Payments Mar. 24, 2002
---------------------------------------------------------------------------
Accrued Severance Liability $2,338 $632 $(2,052) $918
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
14
medical and dental benefits associated with the consolidation and cost
reduction charges were non-cash.
(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 nine
months ended March 25, 2001 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 Nine Months
Ended Ended
--------- -----------
Reported net loss $ (28,548) $ (29,093)
Add back: goodwill amortization (net of tax) 601 2,124
--------- -----------
Adjusted net income (loss) $ (27,947) $ (26,969)
--------- -----------
Basic net income (loss) per share:
Reported net loss $ (.53) $ (.54)
Adjusted net income (loss) $ (.52) $ (.50)
Diluted net income (loss) per share:
Reported net loss $ (.53) $ (.54)
Adjusted net income (loss) $ (.52) $ (.50)
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
nine months ended March 24, 2002. Goodwill by segment as of March 24, 2002
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 $1.8 million (net of accumulated amortization of $8.7 million)
and $3.4 million (net of accumulated amortization of $7.2 million) at March
24, 2002 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.
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 16.3% for the quarter from $255.2 million to
$213.5 million and 24.7% for the year-to-date from $873.5 million to $658.2
million. Unit volume for the quarter decreased 9.2% while average unit sales
prices, based on product mix, declined 7.9%. For the year-to-date, unit volume
declined 17.9%, while unit prices, based on product mix, decreased 8.3%.
At the segment level, polyester accounted for 74% and 72% of dollar sales and
nylon accounted for 26% and 28% of dollar sales for the current quarter and nine
months, respectively.
Polyester
Polyester sales, while down 11.5% and 21.9% for the quarter and year-to-date
periods over the corresponding periods of the prior year, experienced improved
volumes as the quarter progressed. Sales volume, on a comparable 4-week basis,
improved 11.7% in March over the fiscal month of January. Sales price per pound
for the polyester segment, based on product mix, also improved in March compared
to January.
Our domestic polyester unit volume decreased 10.7% and 20.4% for the March
quarter and year-to-date compared to the prior year March quarter and
year-to-date. Sales in local currency for our Brazilian operation increased
24.6% for the quarter due to both increases in average selling prices (5.3%) and
in volumes (18.3%). For the nine months, sales in local currency for the
Brazilian operation improved modestly due to improved sales prices offsetting
slightly lower volumes. Sales in local currency of our Irish operation for the
quarter and nine months decreased 9.5% and 14.2%, respectively, due to
reductions in unit volumes of 10.3% and 16.8%, 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 $3.4 million and $14.5
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 Reals
exchange rate.
Gross profit for our polyester segment increased $2.6 million to $11.8 million
in the quarter and decreased $15.4 million to $38.2 million for the nine months.
Gross profit improved for the quarter despite a decrease in sales of 11.5% and
reduced benefits of $2.1 million from the DuPont manufacturing alliance. This
was achieved through lower manufacturing costs. For the nine months, reduced
sales of 21.9% and higher manufacturing costs were the primary reasons for the
reduced gross profit. The decline in gross profit for the nine months was
mitigated by the cost savings and other benefits from the DuPont alliance, which
increased gross profit by $13.8 million over the prior year-to-date.
16
Nylon
Sales for our nylon segment declined 20.2% and 25.5% for the quarter and
year-to-date period compared with the previous year's respective periods. Nylon
unit volumes declined 6.2% and 13.5% for the March quarter and year-to-date
compared to the prior year March quarter and year-to-date. Average sales prices
were down approximately 15.1% for the current year quarter and 14.0% for the
year-to-date relative to the prior year periods. Consistent with our polyester
segment, sales volume for our nylon segment, on a comparable 4-week basis,
improved 7.2% in March over the fiscal month of January.
Gross profit for our nylon segment decreased $0.2 million to $3.0 million in the
quarter and decreased $8.8 million to $12.5 million for the nine months.
Improvements in manufacturing unit costs substantially offset declines in
conversion on sales for the quarter (sales less raw materials), resulting in a
substantially unchanged gross profit for the current quarter compared to the
prior year quarter. For the nine months, the reduced per unit manufacturing
costs in the current year were not able to compensate for the lower conversion,
accounting for the significant decline year-over-year.
Selling, general and administrative expenses which were allocated to the
polyester and nylon segments, based on various cost drivers, decreased from 5.6%
of net sales in last year's quarter to 5.5% this quarter and increased from 4.8%
in last year's year-to-date to 5.3% for the current year-to-date period.
Selling, general and administrative expenses, which were not allocated to the
segments, for the current quarter and year-to-date periods includes a charge
related to the forgiveness of a of $1.2 million loan to the CEO which was due
and payable on May 1, 2002 plus an adjustment to cover the personal tax
consequences of this debt forgiveness. The loan was originally made in 1999 to
assist the CEO and his family in relocating to the United States from Ireland
and in purchasing a home. The loan forgiveness was made by the unanimous
decision of the Company's Board of Directors. On a dollar basis, allocated
polyester and nylon selling, general and administrative expense decreased $2.2
million from $14.0 million to $11.8 million for the current quarter. These lower
costs are primarily due from the savings achieved from the cost reduction
efforts initiated in March 2001. Polyester and nylon selling, general and
administrative costs for the year-to-date, on a dollar basis, decreased $5.9
million from $40.8 million to $34.9 million. 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 $4.9 million in the current quarter
and $6.9 million to $17.2 million for the year-to-date. The decrease in interest
expense for the quarter and nine months reflects lower average debt outstanding
and lower average interest rates. The weighted average interest rate on
outstanding debt at March 24, 2001, was 6.30% compared to 6.33% at March 25,
2001.
Other income and expense was positively impacted during the current quarter and
for the nine-month period by gains on the sale of non-operating assets of $2.8
million and $5.7 million, respectively. However, for the current year-to-date
period, other income and expense was negatively impacted 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
17
expense included a charge of $2.2 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 $2.1 million charged in the first two quarters of that year. Other
income and expense for the current and prior year quarters also includes $1.7
million and $1.8 million, respectively, for the provision for bad debts. For the
current year-to-date period, the bad debt provision was $3.5 million compared to
$4.4 million for the prior year-to-date.
Equity in the net losses, to the extent recognized, of our unconsolidated
affiliates, Parkdale America, LLC, Micell Technologies, Inc., Unifi-Sans
Technical Fibers, LLC and U.N.F. Industries Ltd amounted to $2.9 million in the
third quarter of fiscal 2002 compared with earnings of $2.0 million for the
corresponding prior year quarter. For the year-to-date, our share of the losses
in these entities totaled $4.6 million for the current year compared to income
of $0.2 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. UNIFI-SANS incorporated the two-stage light denier
industrial nylon yarn business of Solutia, Inc. (Solutia) which was purchased
when the venture was formulated. Solutia exited 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 and has operated in a start-up mode through the March quarter.
It is anticipated that the facility will be substantially on line by the end of
the June quarter. 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. Sales from this entity are expected to be primarily to customers in
the NAFTA and CBI markets. 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 March 24, 2002,
and for the quarter and year-to-date periods ended March 24, 2002, of the
combined unconsolidated equity affiliates is as follows (amounts in thousands):
18
March 24,
2002
---------
Current assets $ 192,444
Noncurrent assets 208,775
Current liabilities 36,584
Shareholders' equity 290,408
For the Nine
Quarter Ended Months Ended
Mar. 24, 2002 Mar. 24, 2002
------------- -------------
Net sales $ 115,247 $ 336,075
Gross profit 3,111 15,818
Income (loss) from operations (1,196) (681)
Net loss (6,626) (11,095)
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 $6.0 million and $23.7 million, respectively, compared to $8.1
million and $9.9 for the corresponding prior year quarter and year-to-date
periods, respectively.
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 current quarter, the Company reduced its obligations by approximately $0.5
million. The estimated remaining liability at March 24, 2002 is $8.1 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
19
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 $152 thousand in the prior year quarter and $0.9 million for the year to date
compared to $5.6 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.
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.
20
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 nine
months ended March 24, 2002:
Fiscal
Balance at 2002 Cash Balance at
(Amounts in thousands) June 24, 2001 Charge Payments Mar. 24, 2002
---------------------------------------------------------------------------
Accrued Severance Liability $2,338 $632 $(2,052) $918
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.
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 $3.6 million, or a loss per share of $.07, compared to a net loss of
$28.5 million, or $.53 loss per share, for the corresponding quarter of the
prior year, and a net loss of $4.0 million or $.08 per share compared to a net
loss of $29.1 million or $.54 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.
21
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 nine months ended March
25, 2001 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 Nine Months
Ended Ended
--------- -----------
Reported net loss $ (28,548) $ (29,093)
Add back: goodwill amortization (net of tax) 601 2,124
--------- -----------
Adjusted net income (loss) $ (27,947) $ (26,969)
--------- -----------
Basic net income (loss) per share:
Reported net loss $ (.53) $ (.54)
Adjusted net income (loss) $ (.52) $ (.50)
Diluted net income (loss) per share:
Reported net loss $ (.53) $ (.54)
Adjusted net income (loss) $ (.52) $ (.50)
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 nine
months ended March 24, 2002. Goodwill by segment as of March 24, 2002 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 $1.8
million (net of accumulated amortization of $8.7 million) and $3.4 million (net
of accumulated amortization of $7.2 million) at March 24, 2002 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" (SFAS 133)
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
22
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 purchase 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
nine-month period, the Company recorded approximately $2.2 million and $4.3
million, respectively, of losses on hedge contracts associated with the
anticipated purchase of machinery, of which $1.0 million in losses had
previously been accounted for as a cash flow hedge but was subsequently expensed
when the machinery order did not materialize. 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 July, 2002 and March, 2003, respectively.
The dollar equivalent of these forward currency contracts and their related fair
values are detailed below (amounts in thousands):
Mar. 24, 2002 June 24, 2001
------------- -------------
Foreign currency purchase contracts:
Notional amount $ 3,438 $ 14,400
Fair value 3,391 12,439
------------- -------------
Net loss $ 47 $ 1,961
============= =============
23
Mar. 24, 2002 June 24, 2001
------------- -------------
Foreign currency sales contracts:
Notional amount $ 14,683 $ 28,820
Fair value 14,788 29,369
------------- -------------
Net loss $ 105 $ 549
============= =============
For the quarter and year-to-date periods ended March 24, 2002 and March 25,
2001, 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 $0.1 million and $0.6
million and $2.8 million and $7.2 million, respectively.
Liquidity and Capital Resources
Cash generated from operations was $66.3 million for the year-to-date period
ended March 24, 2002, compared to $126.8 million for the prior year
corresponding period. The primary sources of cash from operations and other
non-cash adjustments to the net loss of $4.4 million for the first nine months
of fiscal 2002 were decreases in accounts receivable of $27.5 million and
inventories of $2.7 million, income tax recoveries of $12.3 million,
depreciation and amortization aggregating $58.3 million, non-cash losses of
unconsolidated equity affiliates of $4.6 million and a non-cash compensation
charge of $1.2 million. Offsetting these sources of cash from operations was a
reduction in accounts payable and accrued liabilities of $28.6 million and net
gains from the sale of assets of $4.3 million. All working capital changes have
been adjusted to exclude currency translation effects.
The Company ended the current quarter with working capital of $145.1 million,
which included cash and cash equivalents of $18.9 million.
The Company utilized $14.7 million for net investing activities and $41.2
million from net financing activities during the current year-to-date period.
Significant cash expenditures during this period included $6.2 million for
capital expenditures and $11.2 million for investments in unconsolidated equity
affiliates. Also, the Company repaid $36.5 million in net borrowings during this
period and invested, on a long-term basis, $2.7 million of restricted cash from
the Brazilian government. The Company also received cash proceeds from the sale
of capital assets of $6.5 million.
At March 24, 2002 the Company was not committed for the purchase of any
significant capital expenditures. The Company anticipates that capital
expenditures for fiscal 2002 will approximate $12.0 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.
24
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 March 24, 2002, the Company had outstanding borrowings of $37.1 million and
availability of $83.5 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 March 24, 2002, the interest rate was 4.37%. 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 March 24, 2002, 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 nine 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 (h) 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 that could amount to approximately $15.0 million, injunctive
relief and, absent a satisfactory cure by Unifi, a declaratory judgment
terminating the agreement allowing it to sell its interest in the alliance to
the Company. The Company on April 1, 2002 filed an answer and counterclaim to
DuPont's allegations denying their assertions and seeking damages for various
actions and inactions on behalf of DuPont. As
25
the arbitration process is in its early stages, the 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, while
indicating some signs of improvement in the current quarter, is still difficult
and significant sustainable improvements cannot be assured presently. 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 further 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 year - see discussion above) are sufficient to meet working
capital and long-term investment needs and pursue strategic business
opportunities.
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
26
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 performance of joint ventures, alliances and other equity investments,
technological advancements, employee relations, changes in construction
spending, capital expenditures and long-term investments (including those
related to unforeseen acquisition opportunities), continued availability of
financial resources through financing arrangements and operations, outcomes of
pending or threatened legal proceedings, negotiation of new or modifications of
existing contracts for asset management and for property and equipment
construction and acquisition, regulations governing tax laws, other governmental
and authoritative bodies' policies and legislation, 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
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.
27
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 that could amount to
approximately $15.0 million, injunctive relief and, absent a satisfactory cure
by Unifi, a declaratory judgment terminating the agreement allowing it to sell
its interest in the alliance to the Company. The Company on April 1, 2002 filed
an answer and counterclaim to DuPont's allegations denying their assertions and
seeking damages for various actions and inactions on behalf of DuPont. As the
arbitration process is in its early stages, the outcome of this matter cannot be
predicted at this time.
Item 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K have been filed during the quarter ended
March 24, 2002.
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: May 8, 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: May 8, 2002 /s/ Edward A. Imbrogno
------------------------- ----------------------------------------
Edward A. Imbrogno
Chief Accounting Officer
29