unifi_10q-122511.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 2011
OR
[ ] 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
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) |
Registrant’s telephone number, including area code: (336) 294-4410
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 [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller Reporting Company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the issuer’s common stock, par value $.10 per share, as of January 30, 2012 was 20,090,094.
UNIFI, INC.
Form 10-Q for the Quarterly Period Ended December 25, 2011
Table of Contents
| |
|
Page |
| |
|
|
| Part I. Financial Information |
| |
|
|
|
Item 1.
|
Financial Statements:
|
|
| |
Condensed Consolidated Balance Sheets as of
|
|
| |
December 25, 2011 and June 26, 2011
|
3
|
| |
|
|
| |
Condensed Consolidated Statements of Operations for the Three Months Ended
|
|
| |
and Six Months Ended December 25, 2011 and December 26, 2010
|
4
|
| |
|
|
| |
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three
|
|
| |
Months and Six Months Ended December 25, 2011 and December 26, 2010
|
5
|
| |
|
|
| |
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Six
|
|
| |
Months Ended December 25, 2011
|
6
|
| |
|
|
| |
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
|
|
| |
December 25, 2011 and December 26, 2010
|
7
|
| |
|
|
| |
Notes to Condensed Consolidated Financial Statements
|
8
|
| |
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition
|
35
|
| |
and Results of Operations
|
|
| |
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
49
|
| |
|
|
|
Item 4.
|
Controls and Procedures
|
49
|
| |
|
|
| |
|
|
| |
|
|
|
Part II. Other Information
|
| |
|
|
|
Item 1.
|
Legal Proceedings
|
50
|
| |
|
|
|
Item 1A.
|
Risk Factors
|
50
|
| |
|
|
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
50
|
| |
|
|
|
Item 3.
|
Defaults Upon Senior Securities
|
50
|
| |
|
|
|
Item 4.
|
Mine Safety Disclosures
|
50
|
| |
|
|
|
Item 5.
|
Other Information
|
50
|
| |
|
|
|
Item 6.
|
Exhibits
|
51
|
Part I. Financial Information
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(amounts in thousands, except share and per share amounts)
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
24,677 |
|
|
$ |
27,490 |
|
|
Receivables, net
|
|
|
84,201 |
|
|
|
100,175 |
|
|
Inventories
|
|
|
114,180 |
|
|
|
134,883 |
|
|
Income taxes receivable
|
|
|
321 |
|
|
|
578 |
|
|
Deferred income taxes
|
|
|
3,941 |
|
|
|
5,712 |
|
|
Other current assets
|
|
|
6,445 |
|
|
|
5,231 |
|
|
Total current assets
|
|
|
233,765 |
|
|
|
274,069 |
|
| |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
137,924 |
|
|
|
151,027 |
|
|
Deferred income taxes
|
|
|
724 |
|
|
|
— |
|
|
Intangible assets, net
|
|
|
10,958 |
|
|
|
11,612 |
|
|
Investments in unconsolidated affiliates
|
|
|
89,220 |
|
|
|
91,258 |
|
|
Other non-current assets
|
|
|
10,017 |
|
|
|
9,410 |
|
|
Total assets
|
|
$ |
482,608 |
|
|
$ |
537,376 |
|
| |
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
28,950 |
|
|
$ |
42,842 |
|
|
Accrued expenses
|
|
|
10,502 |
|
|
|
17,495 |
|
|
Income taxes payable
|
|
|
955 |
|
|
|
421 |
|
|
Current portion of long-term debt
|
|
|
356 |
|
|
|
342 |
|
|
Total current liabilities
|
|
|
40,763 |
|
|
|
61,100 |
|
|
Long-term debt
|
|
|
158,722 |
|
|
|
168,322 |
|
|
Other long-term liabilities
|
|
|
4,009 |
|
|
|
4,007 |
|
|
Deferred income taxes
|
|
|
2,882 |
|
|
|
4,292 |
|
|
Total liabilities
|
|
|
206,376 |
|
|
|
237,721 |
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Common stock, $0.10 par (500,000,000 shares authorized, 20,088,094 and 20,080,253 shares outstanding)
|
|
|
2,009 |
|
|
|
2,008 |
|
|
Capital in excess of par value
|
|
|
33,921 |
|
|
|
32,599 |
|
|
Retained earnings
|
|
|
233,950 |
|
|
|
241,272 |
|
|
Accumulated other comprehensive income
|
|
|
5,441 |
|
|
|
23,776 |
|
|
Total Unifi, Inc. shareholders’ equity
|
|
|
275,321 |
|
|
|
299,655 |
|
|
Non-controlling interest
|
|
|
911 |
|
|
|
— |
|
|
Total shareholders’ equity
|
|
|
276,232 |
|
|
|
299,655 |
|
|
Total liabilities and shareholders’ equity
|
|
$ |
482,608 |
|
|
$ |
537,376 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(amounts in thousands, except per share amounts)
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Net sales
|
|
$ |
167,110 |
|
|
$ |
162,139 |
|
|
$ |
338,123 |
|
|
$ |
337,231 |
|
|
Cost of sales
|
|
|
156,228 |
|
|
|
142,649 |
|
|
|
315,411 |
|
|
|
296,195 |
|
|
Gross profit
|
|
|
10,882 |
|
|
|
19,490 |
|
|
|
22,712 |
|
|
|
41,036 |
|
|
Selling, general and administrative expenses
|
|
|
10,986 |
|
|
|
11,161 |
|
|
|
21,357 |
|
|
|
22,671 |
|
|
Provision for bad debts
|
|
|
357 |
|
|
|
86 |
|
|
|
562 |
|
|
|
45 |
|
|
Restructuring charges
|
|
|
— |
|
|
|
1,183 |
|
|
|
— |
|
|
|
1,546 |
|
|
Other operating expenses, net
|
|
|
490 |
|
|
|
16 |
|
|
|
449 |
|
|
|
259 |
|
|
Operating (loss) income
|
|
|
(951 |
) |
|
|
7,044 |
|
|
|
344 |
|
|
|
16,515 |
|
|
Interest income
|
|
|
(495 |
) |
|
|
(668 |
) |
|
|
(1,142 |
) |
|
|
(1,411 |
) |
|
Interest expense
|
|
|
4,222 |
|
|
|
5,062 |
|
|
|
8,602 |
|
|
|
10,331 |
|
|
Loss on extinguishment of debt
|
|
|
— |
|
|
|
— |
|
|
|
462 |
|
|
|
1,144 |
|
|
Other non-operating (income) expenses
|
|
|
(1,479 |
) |
|
|
450 |
|
|
|
(1,479 |
) |
|
|
450 |
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(844 |
) |
|
|
(5,039 |
) |
|
|
(4,303 |
) |
|
|
(13,990 |
) |
|
Loss on previously held equity interest in Repreve Renewables, LLC
|
|
|
3,656 |
|
|
|
— |
|
|
|
3,656 |
|
|
|
— |
|
|
(Loss) income before income taxes
|
|
|
(6,011 |
) |
|
|
7,239 |
|
|
|
(5,452 |
) |
|
|
19,991 |
|
|
Provision for income taxes
|
|
|
1,806 |
|
|
|
1,854 |
|
|
|
2,079 |
|
|
|
4,371 |
|
|
Net (loss) income including non-controlling interest
|
|
$ |
(7,817 |
) |
|
$ |
5,385 |
|
|
$ |
(7,531 |
) |
|
$ |
15,620 |
|
|
Less: net (loss) attributable to non-controlling interest
|
|
|
(209 |
) |
|
|
— |
|
|
|
(209 |
) |
|
|
— |
|
|
Net (loss) income attributable to Unifi, Inc.
|
|
$ |
(7,608 |
) |
|
$ |
5,385 |
|
|
$ |
(7,322 |
) |
|
$ |
15,620 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.38 |
) |
|
$ |
0.27 |
|
|
$ |
(0.36 |
) |
|
$ |
0.78 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
(0.38 |
) |
|
$ |
0.26 |
|
|
$ |
(0.36 |
) |
|
$ |
0.76 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)
(amounts in thousands)
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Net (loss) income including non-controlling interest
|
|
$ |
(7,817 |
) |
|
$ |
5,385 |
|
|
$ |
(7,531 |
) |
|
$ |
15,620 |
|
|
Other comprehensive (loss) income (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
(1,107 |
) |
|
|
1,446 |
|
|
|
(18,332 |
) |
|
|
8,153 |
|
|
Gain (loss) on cash flow hedges
|
|
|
966 |
|
|
|
6,727 |
|
|
|
(3 |
) |
|
|
6,727 |
|
|
Other comprehensive (loss) income
|
|
|
(141 |
) |
|
|
8,173 |
|
|
|
(18,335 |
) |
|
|
14,880 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income including non-controlling interest
|
|
|
(7,958 |
) |
|
|
13,558 |
|
|
|
(25,866 |
) |
|
|
30,500 |
|
|
Less: comprehensive (loss) attributable to non-controlling interest
|
|
|
(209 |
) |
|
|
— |
|
|
|
(209 |
) |
|
|
— |
|
|
Comprehensive (loss) income attributable to Unifi, Inc.
|
|
$ |
(7,749 |
) |
|
$ |
13,558 |
|
|
$ |
(25,657 |
) |
|
$ |
30,500 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Six Months Ended December 25, 2011
(amounts in thousands)
| |
|
Common Stock
|
|
|
Capital in Excess of Par Value
|
|
|
Retained Earnings
|
|
|
Accumulated Other Comprehensive
Income
|
|
|
Total
Unifi, Inc. Shareholders’ Equity
|
|
|
Non-controlling Interest
|
|
|
Total Shareholders’ Equity
|
|
|
Balance June 26, 2011
|
|
$ |
2,008 |
|
|
$ |
32,599 |
|
|
$ |
241,272 |
|
|
$ |
23,776 |
|
|
$ |
299,655 |
|
|
$ |
— |
|
|
$ |
299,655 |
|
|
Options exercised
|
|
|
1 |
|
|
|
48 |
|
|
|
— |
|
|
|
— |
|
|
|
49 |
|
|
|
— |
|
|
|
49 |
|
|
Stock-based compensation
|
|
|
— |
|
|
|
368 |
|
|
|
— |
|
|
|
— |
|
|
|
368 |
|
|
|
— |
|
|
|
368 |
|
|
Other comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(18,194 |
) |
|
|
(18,194 |
) |
|
|
— |
|
|
|
(18,194 |
) |
|
Net income
|
|
|
— |
|
|
|
— |
|
|
|
286 |
|
|
|
— |
|
|
|
286 |
|
|
|
— |
|
|
|
286 |
|
|
Balance September 25, 2011
|
|
|
2,009 |
|
|
|
33,015 |
|
|
|
241,558 |
|
|
|
5,582 |
|
|
|
282,164 |
|
|
|
— |
|
|
|
282,164 |
|
|
Options exercised
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
|
Stock-based compensation
|
|
|
— |
|
|
|
895 |
|
|
|
— |
|
|
|
— |
|
|
|
895 |
|
|
|
— |
|
|
|
895 |
|
|
Other comprehensive loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(141 |
) |
|
|
(141 |
) |
|
|
— |
|
|
|
(141 |
) |
|
Acquisition of controlling interest in Repreve Renewables, LLC
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
1,000 |
|
|
Contributions from non-controlling interest
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
120 |
|
|
|
120 |
|
|
Net (loss)
|
|
|
— |
|
|
|
— |
|
|
|
(7,608 |
) |
|
|
— |
|
|
|
(7,608 |
) |
|
|
(209 |
) |
|
|
(7,817 |
) |
|
Balance December 25, 2011
|
|
$ |
2,009 |
|
|
$ |
33,921 |
|
|
$ |
233,950 |
|
|
$ |
5,441 |
|
|
$ |
275,321 |
|
|
$ |
911 |
|
|
$ |
276,232 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(amounts in thousands)
| |
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Cash and cash equivalents at beginning of year
|
|
$ |
27,490 |
|
|
$ |
42,691 |
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
Net (loss) income including non-controlling interest
|
|
|
(7,531 |
) |
|
|
15,620 |
|
|
Adjustments to reconcile net (loss) income including non-controlling interest to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
(4,303 |
) |
|
|
(13,990 |
) |
|
Dividends received from unconsolidated affiliates
|
|
|
2,005 |
|
|
|
2,532 |
|
|
Depreciation and amortization expense
|
|
|
13,468 |
|
|
|
13,466 |
|
|
Net loss on sale of assets
|
|
|
63 |
|
|
|
53 |
|
|
Loss on extinguishment of debt
|
|
|
462 |
|
|
|
1,144 |
|
|
Non-cash compensation expense
|
|
|
1,395 |
|
|
|
737 |
|
|
Loss on previously held equity interest in Repreve Renewables, LLC
|
|
|
3,656 |
|
|
|
— |
|
|
Deferred income taxes
|
|
|
(575 |
) |
|
|
234 |
|
|
Other
|
|
|
(8 |
) |
|
|
(20 |
) |
|
Changes in assets and liabilities, excluding effects of foreign currency adjustments:
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
|
12,130 |
|
|
|
10,729 |
|
|
Inventories
|
|
|
14,381 |
|
|
|
(9,953 |
) |
|
Other current assets and income taxes receivable
|
|
|
(1,561 |
) |
|
|
540 |
|
|
Accounts payable and accrued expenses
|
|
|
(19,830 |
) |
|
|
(7,618 |
) |
|
Income taxes payable
|
|
|
550 |
|
|
|
1,047 |
|
|
Net cash provided by operating activities
|
|
|
14,302 |
|
|
|
14,521 |
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(3,259 |
) |
|
|
(13,324 |
) |
|
Investments in unconsolidated affiliates
|
|
|
(360 |
) |
|
|
143 |
|
|
Acquisition of controlling interest in Repreve Renewables, LLC, net of cash acquired
|
|
|
(356 |
) |
|
|
— |
|
|
Proceeds from sale of assets
|
|
|
181 |
|
|
|
185 |
|
|
Proceeds from return of split dollar life insurance premiums
|
|
|
14 |
|
|
|
3,241 |
|
|
Net cash used in investing activities
|
|
|
(3,780 |
) |
|
|
(9,755 |
) |
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
Payments of notes payable
|
|
|
(10,288 |
) |
|
|
(15,862 |
) |
|
Payments on revolving credit facility
|
|
|
(92,400 |
) |
|
|
(77,225 |
) |
|
Proceeds from borrowings on revolving credit facility
|
|
|
92,800 |
|
|
|
77,225 |
|
|
Proceeds from stock option exercises
|
|
|
60 |
|
|
|
68 |
|
|
Purchase and retirement of Company stock
|
|
|
— |
|
|
|
(2 |
) |
|
Debt financing fees
|
|
|
— |
|
|
|
(825 |
) |
|
Contributions from non-controlling interest
|
|
|
120 |
|
|
|
— |
|
|
Net cash used in financing activities
|
|
|
(9,708 |
) |
|
|
(16,621 |
) |
| |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(3,627 |
) |
|
|
2,349 |
|
|
Net decrease in cash and cash equivalents
|
|
|
(2,813 |
) |
|
|
(9,506 |
) |
|
Cash and cash equivalents at end of period
|
|
$ |
24,677 |
|
|
$ |
33,185 |
|
See accompanying notes to Condensed Consolidated Financial Statements.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
1. Background
Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, the “Company” or “Unifi”) is a publicly-traded, multi-national manufacturing company. The Company processes and sells high-volume commodity yarns, specialized yarns designed to meet certain customer specifications and premier value-added (“PVA”) yarns with enhanced performance characteristics and higher expected gross margin percentages. The Company sells its polyester and nylon products to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishings, automotive upholstery, industrial and other end-use markets. The Company’s polyester products include recycled polyester polymer beads (“Chip”), partially oriented yarn (“POY”), textured, solution and package dyed, twisted and beamed yarns. The Company’s nylon products include textured, solution dyed and covered spandex yarns. The Company maintains one of the industry’s most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”). In addition, the Company has a wholly-owned subsidiary in the People’s Republic of China (“China”) focused on the sale and promotion of the Company’s specialty and PVA products in the Asian textile market, primarily in China.
2. Basis of Presentation
The Company’s current fiscal quarter ended on Sunday, December 25, 2011. However, the Company’s Brazilian, Colombian, and Chinese subsidiaries’ fiscal quarter ended on December 31, 2011. No significant transactions or events have occurred between these dates and the date of the Company’s financial statements. The three months ended December 25, 2011 and the three months ended December 26, 2010 each consist of thirteen week periods. The six months ended December 25, 2011 and the six months ended December 26, 2010 each consist of twenty-six week periods.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included. The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures. Actual results may vary from these estimates.
These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K. There were no changes in the nature of the Company’s significant accounting policies or the application of its accounting policies from those reported in its most recent Annual Report on Form 10-K. Certain prior period information has been reclassified to conform to the current period presentation.
The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.
All amounts and share amounts, except per share amounts, are presented in thousands, except as otherwise noted.
3. Accounting Pronouncements
Recently Adopted Accounting Pronouncements
There were no new accounting pronouncements adopted during the period.
Recently Issued Accounting Pronouncements
There have been no newly issued or newly applicable accounting pronouncements that have or are expected to have a significant impact on the Company's financial statements.
4. Acquisition of Controlling Interest in Repreve Renewables, LLC
In April 2010, the Company entered into an agreement with two other unaffiliated entities to form Repreve Renewables, LLC (“Renewables”) and received a 40% ownership interest for its four million dollar contribution. Renewables is a development stage enterprise formed to cultivate, grow and sell biomass crops, including crop feedstock intended for use as a fuel in the production of energy as well as to provide value added processes for cultivating, harvesting or using biomass crops. Renewables has the exclusive license to commercialize FREEDOM™ Giant Miscanthus (“FGM”). FGM is a miscanthus grass strain used to convert sunlight to biomass energy. Renewables’ success will depend in part on its ability to license individual growers to produce FGM and to sell feedstock to those growers. The Company’s investment in Renewables is anticipated to provide a unique revenue stream and support its strategy to grow the REPREVE® brand and product portfolio.
On October 6, 2011, the Company and one other existing Renewables shareholder each acquired an additional 20% ownership interest for $500 from the third Renewables shareholder. The additional ownership interest purchased by the Company was financed with available cash. Using the amounts paid per membership unit in the October 6th transaction as a basis, the Company determined that the acquisition date fair value of Renewables was $2,500. This resulted in the Company’s previously held 40% equity interest being valued at $1,000. As a result of remeasuring its existing 40% interest to this estimated fair value, the Company recorded a loss of $3,656 during the three months ended December 25, 2011.
|
Fair value of consideration transferred
|
|
$ |
500 |
|
|
Fair value of the previously held equity interest
|
|
|
1,000 |
|
| |
|
|
1,500 |
|
|
Fair value of the non-controlling interest
|
|
|
1,000 |
|
|
Total fair value of Renewables
|
|
$ |
2,500 |
|
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
|
Fair value of previously held equity interest
|
|
$ |
1,000 |
|
|
Less: investment in Renewables
|
|
|
4,656 |
|
|
Loss on previously held equity interest in Renewables
|
|
$ |
(3,656 |
) |
The total fair value of Renewables has been allocated to the tangible assets, liabilities and intangible assets acquired as follows:
|
Cash
|
|
$ |
144 |
|
|
Inventory
|
|
|
45 |
|
|
Other current assets
|
|
|
197 |
|
|
Biomass foundation and feedstock
|
|
|
1,611 |
|
|
PP&E
|
|
|
114 |
|
|
Intangible assets
|
|
|
536 |
|
|
Total assets
|
|
|
2,647 |
|
|
Current liabilities
|
|
|
(147 |
) |
|
Total net assets acquired
|
|
$ |
2,500 |
|
The intangible assets acquired, and their respective estimated average remaining useful lives, over which each asset will be amortized on a straight line basis, are as follows:
| |
Amortization
Period
|
|
Estimated Value
|
|
|
Non-compete agreements
|
5 years
|
|
$ |
243 |
|
|
License to grow FGM
|
8 years
|
|
|
261 |
|
|
Sub-licenses
|
4 years
|
|
|
32 |
|
|
Total
|
|
|
$ |
536 |
|
Renewables' revenues were nil for the three months ended December 25, 2011 and the six months ended December 25, 2011. For the three months ended December 25, 2011 and the six months ended December 25, 2011, Renewables' operating expenses were $512 and $1,020, respectively. Renewables’ operating losses are funded through contributions from its members.
The acquisition of the additional 20% ownership interest has given the Company a 60% ownership interest in Renewables. The Company’s consolidated financial statements include the financial position and results of operations of Renewables. As Renewables is a development stage enterprise, has no revenues and limited operating activities, the results of Renewables’ operations are shown within Other Operating Expenses, net in the Condensed Consolidated Statement of Operations.
5. Receivables, net
Receivables, net consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Customer receivables
|
|
$ |
85,207 |
|
|
$ |
100,893 |
|
|
Allowance for uncollectible accounts
|
|
|
(1,550 |
) |
|
|
(1,147 |
) |
|
Reserves for yarn quality claims
|
|
|
(812 |
) |
|
|
(1,101 |
) |
|
Net customer receivables
|
|
|
82,845 |
|
|
|
98,645 |
|
|
Related party receivables
|
|
|
309 |
|
|
|
512 |
|
|
Other receivables
|
|
|
1,047 |
|
|
|
1,018 |
|
|
Total receivables, net
|
|
$ |
84,201 |
|
|
$ |
100,175 |
|
Other receivables consist primarily of receivables for duty drawback, interest and refunds due to the Company for value added taxes.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
The changes in the Company’s allowance for uncollectible accounts and reserves for yarn quality claims were as follows:
| |
|
Allowance for Uncollectible Accounts
|
|
|
Reserves for Yarn Quality Claims
|
|
|
Balance at June 26, 2011
|
|
$ |
(1,147 |
) |
|
$ |
(1,101 |
) |
|
Charged to costs and expenses
|
|
|
(562 |
) |
|
|
(377 |
) |
|
Charged to other accounts
|
|
|
86 |
|
|
|
19 |
|
|
Deductions
|
|
|
73 |
|
|
|
647 |
|
|
Balance at December 25, 2011
|
|
$ |
(1,550 |
) |
|
$ |
(812 |
) |
Amounts charged to costs and expenses for the allowance for uncollectible accounts are reflected in the Provision for bad debts and amounts charged to costs and expenses for the reserves for yarn quality claims are primarily reflected as a reduction in the Net sales line of the Condensed Consolidated Statements of Operations. Amounts charged to other accounts primarily include the impact of translating the activity of the Company’s foreign affiliates from their respective local currencies to the U.S. dollar. For the allowance for uncollectible accounts, deductions represent amounts written off which were deemed to not be collectible, net of any recoveries. For the reserve for yarn quality claims, deductions represent adjustments to either increase or decrease claims based on negotiated amounts or actual versus estimated claim differences.
6. Inventories
Inventories consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Raw materials
|
|
$ |
44,665 |
|
|
$ |
52,387 |
|
|
Supplies
|
|
|
5,267 |
|
|
|
6,016 |
|
|
Work in process
|
|
|
4,960 |
|
|
|
7,000 |
|
|
Finished goods
|
|
|
62,588 |
|
|
|
74,399 |
|
|
Gross inventories
|
|
|
117,480 |
|
|
|
139,802 |
|
|
Inventory reserves
|
|
|
(3,300 |
) |
|
|
(4,919 |
) |
|
Total inventories
|
|
$ |
114,180 |
|
|
$ |
134,883 |
|
Certain foreign inventories of $31,322 and $43,734 as of December 25, 2011 and June 26, 2011, respectively, were valued under the average cost method. The change in these foreign inventories from the beginning of the year was due to declining prices, lower quantities on-hand at the Company’s Brazilian operations as well as the weakening of the Brazilian Real versus the U.S. dollar that occurred beginning in September 2011. Included in the Company’s finished goods is $117 and $164 of consigned goods located in El Salvador.
7. Other Current Assets
Other current assets consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Value added taxes receivable
|
|
$ |
1,769 |
|
|
$ |
2,971 |
|
|
Prepaid expenses
|
|
|
1,725 |
|
|
|
1,282 |
|
|
Vendor deposits
|
|
|
1,800 |
|
|
|
921 |
|
|
Brazilian non-income related tax refund receivable
|
|
|
999 |
|
|
|
— |
|
|
Other
|
|
|
152 |
|
|
|
57 |
|
|
Total other current assets
|
|
$ |
6,445 |
|
|
$ |
5,231 |
|
Prepaid expenses consist of advance payments for insurance, public exchange and rating services, professional fees, membership dues, subscriptions and information technology services. Other includes non-income related tax payments and employee advances.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
8. Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Land
|
|
$ |
3,263 |
|
|
$ |
3,454 |
|
|
Land improvements
|
|
|
11,687 |
|
|
|
11,400 |
|
|
Buildings and improvements
|
|
|
146,798 |
|
|
|
151,484 |
|
|
Assets under capital lease
|
|
|
9,520 |
|
|
|
9,520 |
|
|
Machinery and equipment
|
|
|
540,004 |
|
|
|
545,279 |
|
|
Computers, software and office equipment
|
|
|
17,838 |
|
|
|
19,585 |
|
|
Construction in progress
|
|
|
3,809 |
|
|
|
4,583 |
|
|
Transportation equipment
|
|
|
4,808 |
|
|
|
5,162 |
|
|
Gross property, plant and equipment
|
|
|
737,727 |
|
|
|
750,467 |
|
|
Less: accumulated depreciation
|
|
|
(590,921 |
) |
|
|
(590,878 |
) |
|
Less: accumulated amortization – capital lease
|
|
|
(8,882 |
) |
|
|
(8,562 |
) |
|
Property, plant and equipment, net
|
|
$ |
137,924 |
|
|
$ |
151,027 |
|
Depreciation expense, internal software development costs amortization, repair and maintenance expenses and capitalized interest were as follows:
| |
|
For the Three Months Ended |
|
For the Six Months Ended |
| |
|
December 25, 2011
|
|
December 26, 2010
|
|
December 25, 2011
|
|
December 26, 2010
|
|
Depreciation expense
|
|
$
|
5,794
|
|
$
|
5,745
|
|
$
|
11,699
|
|
$
|
11,496
|
|
|
Internal software development costs amortization
|
|
|
63
|
|
|
93
|
|
|
134
|
|
|
192
|
|
|
Repair and maintenance expenses
|
|
|
3,661
|
|
|
4,636
|
|
|
7,989
|
|
|
9,068
|
|
|
Capitalized interest
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Internal software development costs classified within property, plant and equipment (“PP&E”) consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Internal software development costs
|
|
$ |
1,900 |
|
|
$ |
1,900 |
|
|
Accumulated amortization
|
|
|
(1,702 |
) |
|
|
(1,568 |
) |
|
Net internal software development costs
|
|
$ |
198 |
|
|
$ |
332 |
|
9. Intangible Assets, Net
Intangible assets, net consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Customer list
|
|
$ |
22,000 |
|
|
$ |
22,000 |
|
|
Non-compete agreements
|
|
|
4,243 |
|
|
|
4,000 |
|
|
Licenses
|
|
|
293 |
|
|
|
— |
|
|
Total intangible assets, gross
|
|
|
26,536 |
|
|
|
26,000 |
|
| |
|
|
|
|
|
|
|
|
|
Accumulated amortization - customer list
|
|
|
(13,145 |
) |
|
|
(12,134 |
) |
|
Accumulated amortization - non-compete agreements
|
|
|
(2,424 |
) |
|
|
(2,254 |
) |
|
Accumulated amortization - licenses
|
|
|
(9 |
) |
|
|
— |
|
|
Total accumulated amortization
|
|
|
(15,578 |
) |
|
|
(14,388 |
) |
|
Intangible assets, net
|
|
$ |
10,958 |
|
|
$ |
11,612 |
|
In fiscal year 2007, the Company purchased the texturing operations of Dillon Yarn Corporation (“Dillon”) which are included in the Company's polyester reportable segment. The valuation of the customer list acquired was determined by estimating the discounted net earnings attributable to the customer relationships that were purchased after considering items such as possible customer attrition. Based on the length and trend of the projected cash flows, an estimated useful life of thirteen years was determined. The customer list is being amortized in a manner which reflects the expected economic benefit that will be received over its thirteen year life. The non-compete agreements are amortized using the straight line method over the periods covered by the covenants not to compete. The amortization expense is included within the polyester segment's depreciation and amortization expense.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
During the second quarter of fiscal year 2012, the Company acquired a controlling interest in Renewables. The non-compete agreement acquired is being amortized using the straight line method over a five year period. The licenses acquired are being amortized using the straight line method over the estimated useful lives of four to eight years.
Amortization expense for intangible assets was as follows:
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Customer list amortization expense
|
|
$ |
505 |
|
|
$ |
544 |
|
|
$ |
1,011 |
|
|
$ |
1,087 |
|
|
Non-compete amortization expense
|
|
|
91 |
|
|
|
95 |
|
|
|
170 |
|
|
|
190 |
|
|
Licenses amortization expense
|
|
|
9 |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
Total amortization expense
|
|
$ |
605 |
|
|
$ |
639 |
|
|
$ |
1,190 |
|
|
$ |
1,277 |
|
The following table presents the expected intangible asset amortization for the next five fiscal years:
| |
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Customer list
|
|
$ |
2,022 |
|
|
$ |
1,837 |
|
|
$ |
1,481 |
|
|
$ |
1,215 |
|
|
$ |
969 |
|
|
Non-compete agreements
|
|
|
328 |
|
|
|
313 |
|
|
|
313 |
|
|
|
313 |
|
|
|
313 |
|
|
License agreements
|
|
|
28 |
|
|
|
38 |
|
|
|
38 |
|
|
|
38 |
|
|
|
34 |
|
|
Total intangible amortization
|
|
$ |
2,378 |
|
|
$ |
2,188 |
|
|
$ |
1,832 |
|
|
$ |
1,566 |
|
|
$ |
1,316 |
|
10. Other Non-Current Assets
Other non-current assets consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Long-term deposits
|
|
$ |
5,338 |
|
|
$ |
5,709 |
|
|
Debt financing fees
|
|
|
2,626 |
|
|
|
3,245 |
|
|
Biomass foundation and feedstock
|
|
|
1,619 |
|
|
|
— |
|
|
Other
|
|
|
434 |
|
|
|
456 |
|
|
Total other non-current assets
|
|
$ |
10,017 |
|
|
$ |
9,410 |
|
Long-term deposits consist primarily of deposits with utility companies and value added tax deposits. Biomass foundation and feedstock represents bioenergy foundation and feedstock currently being propagated by Renewables. Other non-current assets primarily consists of premiums on a split dollar life insurance policy which represents the value of the Company’s right of return on premiums paid for a retiree owned insurance contract.
11. Accrued Expenses
Accrued expenses consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Payroll and fringe benefit costs
|
|
$ |
5,691 |
|
|
$ |
11,119 |
|
|
Utilities
|
|
|
1,782 |
|
|
|
2,237 |
|
|
Interest
|
|
|
1,693 |
|
|
|
1,900 |
|
|
Property taxes
|
|
|
168 |
|
|
|
885 |
|
|
Retiree medical liability
|
|
|
173 |
|
|
|
202 |
|
|
Other
|
|
|
995 |
|
|
|
1,152 |
|
|
Total accrued expenses
|
|
$ |
10,502 |
|
|
$ |
17,495 |
|
Other accruals consist primarily of sales taxes, marketing expenses, freight expenses, rent and other non-income related taxes. The decreased accrual for payroll and fringe benefit costs is primarily due to the timing associated with payment of awards previously earned and the amounts expected to be earned under variable compensation programs.
12. Defined Contribution Plan
The Company matches employee contributions made to the Unifi, Inc. Retirement Savings Plan (the “DC Plan”), an existing 401(k) defined contribution plan, which covers eligible domestic salary and hourly employees. Under the terms of the DC Plan, the Company matches 100% of the first three percent of eligible employee contributions and 50% of the next two percent of eligible contributions.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
The contribution expenses were as follows:
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Matching contribution expenses
|
|
$ |
490 |
|
|
$ |
490 |
|
|
$ |
1,092 |
|
|
$ |
1,108 |
|
13. Long-Term Debt
Long-term debt consists of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Notes payable
|
|
$ |
123,722 |
|
|
$ |
133,722 |
|
|
Revolving credit facility
|
|
|
35,000 |
|
|
|
34,600 |
|
|
Capital lease obligation
|
|
|
356 |
|
|
|
342 |
|
|
Total debt
|
|
|
159,078 |
|
|
|
168,664 |
|
|
Current portion of long-term debt
|
|
|
(356 |
) |
|
|
(342 |
) |
|
Total long-term debt
|
|
$ |
158,722 |
|
|
$ |
168,322 |
|
Notes Payable
On May 26, 2006, the Company issued $190,000 of 11.5% senior secured notes (“2014 notes”) due May 15, 2014 with interest payable on May 15 and November 15 of each year. The 2014 notes are guaranteed on a senior, secured basis by each of the Company’s existing and future restricted domestic subsidiaries. The 2014 notes and guarantees are secured by first-priority liens, subject to permitted liens, on substantially all of the Company’s PP&E, domestic capital stock and some foreign capital stock. Domestic capital stock includes the capital stock of the Company’s domestic subsidiaries and certain of its joint ventures. Foreign capital stock includes up to 65% of the voting stock of the Company’s first-tier foreign subsidiaries. The terms of the 2014 notes do not contain financial maintenance covenants.
The Company can currently elect to redeem some or all of the 2014 notes at redemption prices equal to or in excess of par depending on the year the optional redemption occurs. Beginning in May 2012, the redemption price of the 2014 notes is equal to par. The Company may also purchase its 2014 notes in open market purchases or in privately negotiated transactions and then retire them or it may refinance all or a portion of the 2014 notes with a new debt offering.
The following table presents the components of the Company’s partial redemptions of its 2014 notes and the charges for the extinguishment of debt:
| Date |
|
|
Principal
Amount
|
|
|
|
Redemption Price
|
|
|
|
Premium
(Discount)
|
|
|
|
Costs and
Other Fees
|
|
|
|
Loss / (Gain)
|
|
|
August 5, 2011
|
|
$ |
10,000 |
|
|
|
102.875 |
% |
|
$ |
288 |
|
|
$ |
174 |
|
|
$ |
462 |
|
|
Total – FY 2012
|
|
$ |
10,000 |
|
|
|
|
|
|
$ |
288 |
|
|
$ |
174 |
|
|
$ |
462 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
$ |
15,000 |
|
|
|
105.750 |
% |
|
$ |
862 |
|
|
$ |
282 |
|
|
$ |
1,144 |
|
|
February 16, 2011
|
|
|
30,000 |
|
|
|
105.750 |
% |
|
|
1,725 |
|
|
|
468 |
|
|
|
2,193 |
|
|
Total – FY 2011
|
|
$ |
45,000 |
|
|
|
|
|
|
$ |
2,587 |
|
|
$ |
750 |
|
|
$ |
3,337 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 15, 2009
|
|
$ |
500 |
|
|
|
86.750 |
% |
|
$ |
(66 |
) |
|
$ |
12 |
|
|
$ |
(54 |
) |
|
Total – FY 2010
|
|
$ |
500 |
|
|
|
|
|
|
$ |
(66 |
) |
|
$ |
12 |
|
|
$ |
(54 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2009
|
|
$ |
8,778 |
|
|
|
100.000 |
% |
|
$ |
— |
|
|
$ |
226 |
|
|
$ |
226 |
|
|
June 3, 2009
|
|
|
2,000 |
|
|
|
73.750 |
% |
|
|
(525 |
) |
|
|
48 |
|
|
|
(477 |
) |
|
Total – FY 2009
|
|
$ |
10,778 |
|
|
|
|
|
|
$ |
(525 |
) |
|
$ |
274 |
|
|
$ |
(251 |
) |
Revolving Credit Facility
Concurrent with the issuance of the 2014 notes, the Company amended its senior secured asset-based revolving credit facility (“Amended Credit Agreement”) which, along with revising certain terms and covenants, extended its maturity date to May 15, 2011. On September 9, 2010, the Company and the Subsidiary Guarantors (as co-borrowers) entered into the First Amendment to the Amended and Restated Credit Agreement ("First Amended Credit Agreement”) with Bank of America, N.A. (as both Administrative Agent and Lender). The First Amended Credit Agreement provides for a revolving credit facility of $100,000 that matures on September 9, 2015. However, if the 2014 notes have not been paid in full on or before February 15, 2014, the maturity date of the Company’s revolving credit facility will be automatically adjusted to February 15, 2014.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
The First Amended Credit Agreement contains customary affirmative and negative covenants for asset-based loans that restrict future borrowings and certain transactions. The covenants include restrictions and limitations on (i) sales of assets, consolidation, merger, dissolution and the issuance of capital stock, (ii) permitted encumbrances on property, (iii) the incurrence of indebtedness, (iv) the making of loans or investments, (v) the declaration of dividends and redemptions and (vi) transactions with affiliates. As long as pro forma excess availability is at least 27.5% of the total credit facility or, if applicable, other specific conditions are met, the Company can make certain distributions and investments including (i) the payment or making of any dividend, (ii) the redemption or other acquisition of any of the Company’s capital stock, (iii) cash investments in joint ventures, (iv) acquisition of the property and assets or capital stock or a business unit of another entity and (v) loans or other investments to a non-borrower subsidiary. The First Amended Credit Agreement requires the Company to maintain a trailing twelve month fixed charge coverage ratio of at least 1.0 to 1.0 should borrowing availability decrease below 15% of the total credit facility. There are no capital expenditure limitations under the First Amended Credit Agreement. The Company was in compliance with all such covenants at December 25, 2011.
The First Amended Credit Agreement is secured by first-priority liens on the Company’s and its subsidiary guarantors’ inventory, accounts receivable, general intangibles, investment property and certain other property. The Company’s ability to borrow under the First Amended Credit Agreement is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to other conditions and limitations. Borrowings under the First Amended Credit Agreement bear interest at rates of LIBOR plus 2.00% to 2.75% and/or prime plus 0.75% to 1.50% depending on the Company’s level of excess availability. The unused line fee under the First Amended Credit Agreement is 0.375% to 0.50% of the unused line amount.
The weighted average interest rate for the revolving credit facility borrowings for the six months ended December 25, 2011 including the effects of all interest rate swaps was 3.7%. The Company has $2,695 of standby letters of credit at December 25, 2011, none of which have been drawn upon. As of December 25, 2011 and June 26, 2011, the Company had $44,318 and $51,734 of borrowing availability under the revolving credit facility, respectively.
The following table presents the scheduled maturities of the Company’s long-term debt on a fiscal year basis:
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
Thereafter
|
|
|
Total
|
|
| $ |
356 |
|
|
$ |
— |
|
|
$ |
123,722 |
|
|
$ |
— |
|
|
$ |
35,000 |
|
|
$ |
— |
|
|
$ |
159,078 |
|
Amortization charged to interest expense related to debt financing was as follows:
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Interest expense
|
|
$ |
224 |
|
|
$ |
247 |
|
|
$ |
445 |
|
|
$ |
501 |
|
14. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Supplemental post-employment plan
|
|
$ |
1,998 |
|
|
$ |
1,866 |
|
|
Retiree medical liability
|
|
|
696 |
|
|
|
696 |
|
|
Derivative instruments
|
|
|
342 |
|
|
|
408 |
|
|
Long-term portion of foreign taxes payable
|
|
|
820 |
|
|
|
868 |
|
|
Other non-income related taxes
|
|
|
153 |
|
|
|
169 |
|
|
Total other long-term liabilities
|
|
$ |
4,009 |
|
|
$ |
4,007 |
|
The Company maintains an unfunded supplemental post-employment plan for a select group of management employees. Each participant’s account is credited annually based upon a percentage of their base salary with each participant’s balance adjusted quarterly to reflect returns based upon a stock market index. The amounts of net expense recorded for this plan within Selling, general and administrative (“SG&A”) expenses for the three months ended December 25, 2011 and December 26, 2010 were $257 and $199, respectively and for the six months ended December 25, 2011 and December 26, 2010 were $132 and $354, respectively. Amounts are paid to participants only after termination of their employment. The retiree medical liability relates to a frozen plan that consists of the discounted future claims the Company expects to pay for certain retiree benefits based on claims history and the terms of the benefit agreements.
15. Income Taxes
The Company’s income tax provision for the quarter ended December 25, 2011 resulted in tax expense of $1,806 at an effective rate of (30.0%). The Company’s income tax provision for the year-to-date period ended December 25, 2011 resulted in tax expense of $2,079 at an effective rate of (38.1%). The income tax rate for the quarter and year-to-date period ended December 25, 2011 is different from the U.S. statutory rate due to losses in tax jurisdictions for which no tax benefit could be recognized, foreign dividends taxed in the U.S. and abroad, and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rate. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from U.S. operations and foreign sources versus annual projections and changes in foreign currencies in relation to the U.S. dollar. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis.
The Company’s income tax provision for the quarter ended December 26, 2010 resulted in tax expense of $1,854 at an effective tax rate of 25.6%. The Company’s income tax provision for the year-to-date period ended December 26, 2010 resulted in tax expense of $4,371 at an effective rate of 21.9%. The income tax rate for the quarter and year-to-date period ended December 26, 2010 is different from the U.S. statutory rate due to losses in tax jurisdictions for which no tax benefit could be recognized, foreign dividends taxed in the U.S. and abroad, and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rate.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
Deferred income taxes have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences reverse. Management considers the scheduled reversal of taxable temporary differences, taxable income in carryback periods, projected future taxable income, and tax planning strategies in making this assessment. The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries due to negative evidence concerning the realization of those deferred tax assets in recent years. The Company continues to evaluate both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released. A release of the valuation allowance could have a material effect on net earnings in the period of release.
During the fiscal year ended June 26, 2011, the Company changed its indefinite reinvestment assertion related to approximately $26,630 of the earnings and profits held by Unifi do Brazil, Ltda. (“UDB”). During the first quarter of fiscal year 2012, the Company repatriated $7,400 and updated its indefinite reinvestment assertion by an additional $13,415. During the second quarter of fiscal year 2012, the Company updated its indefinite reinvestment assertion by an additional $205. The Company plans on repatriating approximately $6,000 prior to the end of the current fiscal year end. The Company incorporated these changes and adjusted the deferred tax liability, net of estimated foreign tax credits to $4,938 to reflect the additional income tax that would be due as a result of the current plan to repatriate in future periods. All remaining undistributed earnings are deemed to be indefinitely reinvested and accordingly, no provision for U.S. federal and state income taxes is required to be provided thereon.
The Company is subject to income tax examinations for U.S. federal income taxes for fiscal years 2005 through 2011, for non-U.S. income taxes for tax years 2001 through 2011, and for state and local income taxes for fiscal years 2001 through 2011.
There have been no significant changes in the Company’s liability for uncertain tax positions since June 26, 2011. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. Management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire.
16. Shareholders’ Equity
No dividends have been paid during the last two fiscal years. The Indenture governing the 2014 notes and the First Amended Credit Agreement restricts the Company’s ability to pay dividends or make distributions on its common stock.
Effective July 26, 2000, the Company’s Board of Directors (“Board”) authorized the repurchase of up to 3,333 shares of its common stock of which approximately 1,064 shares were subsequently repurchased. The repurchase program was suspended in November 2003. There is remaining authority for the Company to repurchase approximately 2,269 shares of its common stock under the repurchase plan. The repurchase plan has no stated expiration or termination date.
17. Stock Based Compensation
During the second quarter of fiscal year 2012, the Board authorized and the Company issued an aggregate of 49 restricted stock units to the Company’s non-employee directors (“RSUs”) under the 2008 Unifi, Inc. Long-Term Incentive Plan (“2008 LTIP”), a plan approved by the Company’s shareholder’s in 2008. The RSUs became fully vested on the grant date. The RSUs convey no rights of ownership in shares of Company stock until such RSUs have been distributed to the grantee in the form of Company stock. The vested RSUs will be converted into an equivalent number of shares of Company common stock and distributed to the grantee following the grantee’s termination of services as a member of the Board. The grantee may elect to defer receipt of the shares of stock in accordance with the deferral options provided under the Unifi, Inc. Director Deferred Compensation Plan. The Company estimated the fair value of the award to be $9.10 per RSU based on the fair value of the Company’s common stock at the award grant date.
During the first quarter of fiscal year 2012, the Compensation Committee of the Board authorized and the Company issued 127 stock options to certain key employees from the 2008 LTIP. The stock options have a service condition, vest ratably over a three year period and have ten year contractual terms. The exercise price of the options is $12.47 per share. The Company used the Black-Scholes model to estimate the weighted average grant date fair value of $7.88 per share.
During the first quarter of fiscal year 2012, the Compensation Committee of the Board authorized and the Company issued 64 RSUs from the 2008 LTIP to certain key employees. The RSUs are subject to a vesting restriction and convey no rights of ownership in shares of Company stock until such RSUs have vested and been distributed to the grantee in the form of Company stock. The RSUs vest ratably over a three year period. The RSUs will be converted into an equivalent number of shares of stock on each vesting date and distributed to the grantee, or the grantee may elect to defer the receipt of the shares of stock until separation from service. If after July 27, 2012 and prior to the final vesting date the grantee has a separation from service without cause, the remaining unvested RSUs will become fully vested and will be converted to an equivalent number of shares of stock and issued to the grantee. The Company estimated the grant-date fair value of the award to be $12.47 per RSU based on the fair value of the Company’s stock at the award grant date.
The Company incurred $895 and $191 in stock based compensation expense in the second quarter of fiscal years 2012 and 2011, respectively, and $1,263 and $383 in the respective year to date periods which was recorded in SG&A expenses with the offset to capital in excess of par value.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
The Company issued 2 shares and 9 shares of common stock during the second quarter of fiscal years 2012 and 2011, respectively, as a result of the exercise of stock options. The Company issued 8 shares and 9 shares of common stock during the year to date periods of fiscal years 2012 and 2011, respectively, as a result of the exercise of stock options.
18. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Foreign currency translation adjustments
|
|
$ |
4,943 |
|
|
$ |
26,621 |
|
|
Loss on effective portion of derivative instruments
|
|
|
(1,057 |
) |
|
|
(1,054 |
) |
| Foreign currency gain (loss) on intercompany loan |
|
|
1,555 |
|
|
|
(1,791 |
) |
|
Accumulated other comprehensive income
|
|
$ |
5,441 |
|
|
$ |
23,776 |
|
Loss on effective portion of derivative instruments includes $715 and $646 of other comprehensive loss related to one of the Company’s unconsolidated affiliates at December 25, 2011 and June 26, 2011, respectively.
19. Computation of Earnings Per Share
The computation of basic and diluted earnings per share (“EPS”) was as follows:
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Unifi, Inc.
|
|
$ |
(7,608 |
) |
|
$ |
5,385 |
|
|
$ |
(7,322 |
) |
|
$ |
15,620 |
|
|
Weighted average common shares outstanding
|
|
|
20,088 |
|
|
|
20,059 |
|
|
|
20,087 |
|
|
|
20,058 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$ |
(0.38 |
) |
|
$ |
0.27 |
|
|
$ |
(0.36 |
) |
|
$ |
0.78 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Unifi, Inc.
|
|
$ |
(7,608 |
) |
|
$ |
5,385 |
|
|
$ |
(7,322 |
) |
|
$ |
15,620 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
20,088 |
|
|
|
20,059 |
|
|
|
20,087 |
|
|
|
20,058 |
|
|
Net potential common share equivalents – stock options and RSU’s
|
|
|
— |
|
|
|
407 |
|
|
|
— |
|
|
|
368 |
|
|
Weighted average common shares outstanding
|
|
|
20,088 |
|
|
|
20,466 |
|
|
|
20,087 |
|
|
|
20,426 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$ |
(0.38 |
) |
|
$ |
0.26 |
|
|
$ |
(0.36 |
) |
|
$ |
0.76 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from the calculation of common share equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive common share equivalents
|
|
|
1,251 |
|
|
|
221 |
|
|
|
1,251 |
|
|
|
221 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from the calculation of diluted shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested options that vest upon achievement of certain market conditions
|
|
|
567 |
|
|
|
583 |
|
|
|
567 |
|
|
|
583 |
|
The calculation of earnings per common share is based on the weighted average number of the Company’s common shares outstanding for the applicable period. The calculation of diluted earnings per common share presents the effect of all potential dilutive common shares that were outstanding during the respective period, unless the effect of doing so is anti-dilutive.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
20. Derivative Instruments and Hedging Activities
The Company may use derivative financial instruments such as foreign currency forward contracts or interest rate swaps for purposes of reducing its ongoing business exposures to fluctuations in foreign currency exchange rates or interest rates. The Company does not enter into derivative contracts for speculative purposes.
Interest rate swaps:
On February 15, 2011, the Company entered into a twenty-seven month, $25,000 interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on the first $25,000 of LIBOR-based variable rate borrowings under the Company’s revolving credit facility. The interest rate swap allows the Company to fix the LIBOR rate at 1.39%. On August 5, 2011, the Company entered into a twenty-one month, $10,000 interest rate swap to provide a hedge against the variability of cash flows related to additional variable rate borrowings under the revolving credit facility. This interest rate swap allows the Company to fix the LIBOR rate at 0.75%.
The Company has designated these swaps as cash flow hedges and determined that the hedges have been and still are highly effective. At December 25, 2011, the amount of loss recognized in accumulated other comprehensive income for the Company’s cash flow hedge derivative instruments was $342. For the year-to-date period ended December 25, 2011, the Company did not reclassify any gains (losses) from accumulated other comprehensive income to net income and does not expect to do so during the next twelve months.
Foreign currency forward contracts:
The Company or its subsidiaries may enter into foreign currency forward contracts as economic hedges for exposures related to certain sales, inventory purchases and equipment purchases which are denominated in currencies that are not its functional currency. As of December 25, 2011, the latest maturity date for all outstanding foreign currency forward contracts is during February 2012. These items are not designated as hedges by the Company and are marked to market each period and offset by the foreign exchange gains (losses) resulting from the underlying exposures of the foreign currency denominated assets and liabilities.
The fair values of derivative financial instruments were as follows:
|
As of December 25, 2011:
|
|
|
Notional Amount
|
|
|
USD Equivalent
|
|
Balance Sheet Location
|
|
Fair value
|
|
|
Foreign exchange contracts
|
MXN
|
|
|
5,500 |
|
|
$ |
406 |
|
Other current assets
|
|
$ |
9 |
|
|
Interest rate swaps
|
USD
|
|
$ |
35,000 |
|
|
$ |
35,000 |
|
Other long-term liabilities
|
|
$ |
(342 |
) |
| As of June 26, 2011: |
|
|
|
Notional Amount
|
|
|
|
USD Equivalent
|
|
Balance Sheet Location |
|
|
Fair value
|
|
| Foreign exchange contracts |
MXN |
|
|
9,200
|
|
|
$ |
770
|
|
Accrued expenses |
|
$ |
(2
|
) |
| Interest rate swaps |
USD |
|
$ |
25,000
|
|
|
$ |
25,000
|
|
Other long-term liabilities |
|
$ |
(408
|
) |
(MXN represents the Mexican Peso)
The fair values of the Company’s foreign exchange contracts and interest rate swaps are estimated by obtaining month-end market quotes for contracts with similar terms.
The effect of marked to market hedging derivative instruments was as follows:
| |
|
|
For the Three Months Ended
|
|
| |
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Derivatives not designated as hedges:
|
Classification
|
|
|
|
|
|
|
|
Foreign exchange contracts – MXN/USD
|
Other operating (income) expense
|
|
$ |
(11 |
) |
|
$ |
29 |
|
|
Foreign exchange contracts – USD/$R
|
Other operating (income) expense
|
|
|
(2 |
) |
|
|
12 |
|
|
Foreign exchange contracts – EU/USD
|
Other operating (income) expense
|
|
|
— |
|
|
|
(14 |
) |
|
Total (gain) loss recognized in income
|
|
|
$ |
(13 |
) |
|
$ |
27 |
|
| |
|
|
For the Six Months Ended
|
|
| |
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Derivatives not designated as hedges:
|
Classification
|
|
|
|
|
|
|
|
Foreign exchange contracts – MXN/USD
|
Other operating (income) expense
|
|
$ |
(40 |
) |
|
$ |
47 |
|
|
Foreign exchange contracts – USD/$R
|
Other operating (income) expense
|
|
|
(2 |
) |
|
|
27 |
|
|
Foreign exchange contracts – EU/USD
|
Other operating (income) expense
|
|
|
— |
|
|
|
(252 |
) |
|
Total (gain) loss recognized in income
|
|
|
$ |
(42 |
) |
|
$ |
(178 |
) |
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
(EU represents the Euro; $R represents the Brazilian Real)
By entering into derivative instrument contracts, the Company exposes itself to counterparty credit risk. The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings, limiting the amount of exposure to any single counterparty and regularly monitoring its market position with each counterparty. The Company’s derivative instruments do not contain any credit-risk related contingent features.
21. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities
As of December 25, 2011, the Company did not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis. The following tables present the level within the fair value hierarchy used to measure certain financial assets and liabilities accounted for at fair value on a recurring basis:
|
As of December 25, 2011:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets at fair value:
|
|
|
|
|
|
|
|
|
|
|
Derivatives related to foreign exchange contracts
|
|
$ |
— |
|
|
$ |
9 |
|
|
$ |
— |
|
|
Total assets at fair value
|
|
$ |
— |
|
|
$ |
9 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives related to interest rate swaps
|
|
|
— |
|
|
|
(342 |
) |
|
|
— |
|
|
Total liabilities at fair value
|
|
$ |
— |
|
|
$ |
(342 |
) |
|
$ |
— |
|
|
As of June 26, 2011:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Liabilities at fair value:
|
|
|
|
|
|
|
|
|
|
|
Derivatives related to foreign exchange contracts
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
Derivatives related to interest rate swaps
|
|
|
— |
|
|
|
(408 |
) |
|
|
— |
|
|
Total liabilities at fair value
|
|
$ |
— |
|
|
$ |
(410 |
) |
|
$ |
— |
|
There were no financial instruments measured at fair value that were in an asset position at June 26, 2011.
The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximated fair value as of December 25, 2011 and June 26, 2011 because of their short-term nature. The carrying amount of the revolving credit facility approximated fair value as of December 25, 2011 and June 26, 2011 because the facility has a floating interest rate. The fair value of the Company’s 2014 notes is based on the last traded price within the period and is considered a Level 2 measurement. The estimated fair values and carrying amounts outstanding, including any current portions, are presented as follows:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
2014 notes – estimated fair value
|
|
$ |
126,815 |
|
|
$ |
138,402 |
|
|
2014 notes – carrying amount
|
|
|
123,722 |
|
|
|
133,722 |
|
22. Restructuring Charges
On January 11, 2010, the Company announced the creation of Unifi Central America, Ltda. de C.V. (“UCA”). With a base of operations established in El Salvador, UCA serves customers primarily in the Central American region. The Company began dismantling and relocating certain polyester equipment from its Yadkinville, North Carolina facility to the region during the third quarter of fiscal year 2010 and completed the startup of the UCA manufacturing facility in the second quarter of fiscal year 2011. The costs incurred for equipment relocation costs to UCA and reinstalling previously idled texturing equipment to replace the manufacturing capacity at the Company’s Yadkinville, North Carolina facility were charged to restructuring expense as incurred.
The components of restructuring charges were as follows:
| |
|
For the Three Months Ended |
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Equipment relocation costs
|
|
$ |
— |
|
|
$ |
555 |
|
|
$ |
— |
|
|
$ |
918 |
|
|
Reinstallation costs
|
|
|
— |
|
|
|
628 |
|
|
|
— |
|
|
|
628 |
|
|
Restructuring charges
|
|
$ |
— |
|
|
$ |
1,183 |
|
|
$ |
— |
|
|
$ |
1,546 |
|
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
23. Other Operating Expenses, Net
The components of other operating expenses, net were as follows:
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
|
Net (gain) loss on sale of assets
|
|
$ |
(2 |
) |
|
$ |
118 |
|
|
$ |
63 |
|
|
$ |
53 |
|
|
Foreign currency transaction losses (gains)
|
|
|
78 |
|
|
|
(54 |
) |
|
|
57 |
|
|
|
310 |
|
|
Operating expenses for Repreve Renewables, LLC
|
|
|
512 |
|
|
|
— |
|
|
|
512 |
|
|
|
— |
|
|
Other, net
|
|
|
(98 |
) |
|
|
(48 |
) |
|
|
(183 |
) |
|
|
(104 |
) |
|
Other operating expenses, net
|
|
$ |
490 |
|
|
$ |
16 |
|
|
$ |
449 |
|
|
$ |
259 |
|
24. Other Non-Operating (Income) Expense, Net
The components of other non-operating (income) expense, net were as follows:
| |
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
Refund of Brazilian non-income related tax
|
|
$ |
(1,479 |
) |
|
$ |
— |
|
|
$ |
(1,479 |
) |
|
$ |
— |
|
|
Unsuccessful bond refinancing
|
|
|
— |
|
|
|
450 |
|
|
|
— |
|
|
|
450 |
|
|
Other non-operating (income) expense, net
|
|
$ |
(1,479 |
) |
|
$ |
450 |
|
|
$ |
(1,479 |
) |
|
$ |
450 |
|
In the second quarter of fiscal year 2012, the Company’s Brazilian operation recorded a gain of $1,479 from a refund of non-income related taxes plus interest. In Brazil, indirect taxes applicable to the manufacturing industry are levied at the federal and state government levels. These indirect taxes levied include PIS/COFINS which is a federal tax levied on an entity’s gross revenues. During the 2000-2004 tax years, this tax was incorrectly levied on the interest income of manufacturing companies and was subsequently challenged in the Brazilian courts. In the December quarter, the Company was informed that the taxes charged would be refunded with interest. As of the end of the second quarter of fiscal year 2012, the Company has recorded a current asset of $999 for the remaining refunds due under this settlement.
In the second quarter of fiscal year 2011, the Company recorded $450 for costs associated with an unsuccessful bond refinancing.
25. Investments in Unconsolidated Affiliates and Variable Interest Entities
Parkdale America, LLC
In June 1997, the Company and Parkdale Mills, Inc. (“Mills”) entered into a Contribution Agreement that set forth the terms and conditions by which the two companies contributed all of the assets of their spun cotton yarn operations utilizing open-end and air-jet spinning technologies to create Parkdale America, LLC (“PAL”). In exchange for its contribution, the Company received a 34% ownership interest in PAL which is accounted for using the equity method of accounting. PAL’s fiscal year end is the Saturday nearest to December 31 and is a limited liability company treated as a partnership for income tax reporting purposes. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel markets located throughout North and South America. PAL has 13 manufacturing facilities located primarily in North Carolina. According to its most recently issued audited financial statements, PAL’s five largest customers accounted for approximately 80% of total gross sales and 75% of total gross accounts receivable outstanding.
In August 2008, a federal government program commenced providing economic adjustment assistance to domestic users of upland cotton. The program offers a subsidy for cotton consumed in domestic production and the subsidy is paid the month after the eligible cotton is consumed. The subsidy must be used within eighteen months after the marketing year earned to purchase qualifying capital expenditures in the U.S. for production of goods from upland cotton. The marketing year is from August 1 to July 31. The program provides a subsidy of four cents per pound through July 31, 2012 and three cents per pound thereafter. The Company recognizes its share of PAL’s income for the cotton subsidy when the cotton has been consumed and the qualifying assets have been acquired with an appropriate allocation methodology considering the dual criteria of the subsidy.
On October 28, 2009, PAL acquired certain real property and machinery and equipment, as well as entered into lease agreements for certain real property, machinery and equipment, which constitute most of the yarn manufacturing operations of Hanesbrands Inc. (“HBI”). PAL also entered into a yarn supply agreement with HBI to supply at least 95% of the yarn used in the manufacturing of its apparel products at any of its locations in North America, Central America or the Caribbean Basin for a six-year period with an option for HBI to extend the agreement for two additional three-year periods.
On March 30, 2011, PAL amended its revolving credit facility to increase the maximum borrowing capacity from one hundred million to two hundred million dollars and extend the maturity date from October 28, 2012 to July 31, 2014. PAL’s revolving credit facility charges a variable interest rate based on either the prime rate or LIBOR rate plus an applicable percentage. PAL’s revolving credit facility also has covenants in place such as an annual limit on capital expenditures, a minimum fixed-charge coverage ratio and a minimum leverage ratio. PAL informed the Company that as of December 2011, PAL’s outstanding borrowings on the revolving credit facility were one hundred million dollars and PAL was in compliance with all debt covenants.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
PAL is subject to price risk related to fixed-price yarn sales. To protect the gross margin of these sales, PAL may enter into cotton futures to manage changes in raw material costs. The derivative instruments used are listed and traded on an exchange and are thus valued using quoted prices classified within Level 1 of the fair value hierarchy. PAL may also designate certain futures contracts as cash flow hedges with the effective portion of gains and losses recorded in accumulated other comprehensive income until the underlying transactions are recognized in income. As of December 2011, PAL’s accumulated other comprehensive income was comprised of losses related to futures contracts totaling $2,104. All of PAL’s other derivatives not designated as hedges or the ineffective portion of any designated hedges are marked to market each period with the changes in fair value recognized in current period earnings. In addition, PAL may enter into forward contracts for certain cotton purchases, which qualify as derivative instruments. However, these contracts meet the applicable criteria to qualify for the “normal purchases or normal sales” exemption.
As of December 25, 2011, the Company’s investment in PAL was $85,374 and is shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets. The reconciliation between the Company’s share of the underlying equity of PAL and its investment is as follows:
|
Underlying equity at December 2011
|
|
$ |
104,285 |
|
|
Initial excess capital contributions
|
|
|
53,363 |
|
|
Impairment charge recorded in fiscal year 2007
|
|
|
(74,106 |
) |
|
Anti-trust lawsuit against PAL in which the Company did not participate
|
|
|
2,652 |
|
|
EAP adjustments
|
|
|
(820 |
) |
|
Investment at December 2011
|
|
$ |
85,374 |
|
U.N.F. Industries, Ltd.
In September 2000, the Company and Nilit Ltd. (“Nilit”) formed a 50/50 joint venture, U.N.F. Industries Ltd. (“UNF”), for the purpose of operating nylon extrusion assets to manufacture nylon POY. UNF’s eight extruders are located at Nilit’s production facilities in Migdal Ha-Emek, Israel. All raw material and production services for UNF are provided by Nilit under separate supply and services agreements. All first quality production is sold to the Company. UNF’s fiscal year end is December 31st and it is a registered Israeli private company.
UNF America, LLC
In October 2009, the Company and Nilit America Inc. (“Nilit America”) formed a 50/50 joint venture, UNF America LLC (“UNF America”), for the purpose of operating a nylon extrusion facility which manufactures nylon POY. UNF America’s four extruders are located in Ridgeway, Virginia and are operated by Nilit America. All raw material and production services for UNF America are provided by Nilit America under separate supply and services agreements. All first quality production is sold to the Company. UNF America’s fiscal year end is December 31st and it is a limited liability company treated as a partnership for income tax reporting purposes.
In conjunction with the formation of UNF America, the Company entered into a supply agreement with UNF and UNF America whereby the Company agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNF America. The agreement has no stated minimum purchase quantities. Pricing under this supply agreement is negotiated every six months, based on market rates. As of December 25, 2011, the Company’s open purchase orders related to this agreement were $2,212.
The Company’s raw material purchases under this supply agreement consist of the following:
| |
|
For the Six Months Ended
|
|
| |
|
December 25, 2011
|
|
|
December 26, 2010
|
|
|
UNF
|
|
$ |
7,862 |
|
|
$ |
11,292 |
|
|
UNF America
|
|
|
7,069 |
|
|
|
9,862 |
|
|
Total
|
|
$ |
14,931 |
|
|
$ |
21,154 |
|
As of December 25, 2011 and June 26, 2011, the Company had combined outstanding accounts payable due to UNF and UNF America of $1,974 and $4,124, respectively.
As of December 2011, the Company’s combined investments in UNF and UNF America were $3,846 and are shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets. The financial results of UNF and UNF America are included in the Company’s financial statements with a one month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with the Company’s accounting policy. The Company has determined that UNF and UNF America are variable interest entities (“VIEs”), the Company is the primary beneficiary and, under U.S. GAAP, the Company should consolidate the two entities. As the Company purchases substantially all of the output from the two entities, and, as the two entities’ balance sheets constitute less than 2.0% of the Company’s current assets, total assets and total liabilities, the Company has not included the accounts of UNF and UNF America in its consolidated financial statements. Other than the supply agreement discussed above, the Company does not provide any other commitments or guarantees related to either UNF or UNF America.
Unaudited, condensed balance sheet and income statement information for the Company’s unconsolidated affiliates is as follows. As PAL is defined as significant, its information is separately disclosed. The operating results of Renewables are included through the end of the Company’s first quarter of fiscal year 2012, thereafter Renewables’ results have been consolidated.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
| |
|
As of December 25, 2011
|
|
| |
|
PAL
|
|
|
Other
|
|
|
Total
|
|
|
Current assets
|
|
$ |
317,644 |
|
|
$ |
10,384 |
|
|
$ |
328,028 |
|
|
Noncurrent assets
|
|
|
140,647 |
|
|
|
809 |
|
|
|
141,456 |
|
|
Current liabilities
|
|
|
42,529 |
|
|
|
3,872 |
|
|
|
46,401 |
|
|
Noncurrent liabilities
|
|
|
109,041 |
|
|
|
— |
|
|
|
109,041 |
|
|
Shareholders’ equity and capital accounts
|
|
|
306,721 |
|
|
|
7,321 |
|
|
|
314,042 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s portion of undistributed earnings
|
|
|
16,146 |
|
|
|
1,003 |
|
|
|
17,149 |
|
| |
|
As of June 26, 2011
|
|
| |
|
PAL
|
|
|
Other
|
|
|
Total
|
|
|
Current assets
|
|
$ |
398,338 |
|
|
$ |
13,405 |
|
|
$ |
411,743 |
|
|
Noncurrent assets
|
|
|
155,505 |
|
|
|
9,588 |
|
|
|
165,093 |
|
|
Current liabilities
|
|
|
100,284 |
|
|
|
5,588 |
|
|
|
105,872 |
|
|
Noncurrent liabilities
|
|
|
154,054 |
|
|
|
— |
|
|
|
154,054 |
|
|
Shareholders’ equity and capital accounts
|
|
|
299,505 |
|
|
|
17,405 |
|
|
|
316,910 |
|
| |
|
For the Three Months Ended December 25, 2011
|
|
| |
|
PAL
|
|
|
Other
|
|
|
Total
|
|
|
Net sales
|
|
$ |
270,810 |
|
|
$ |
6,590 |
|
|
$ |
277,400 |
|
|
Gross profit
|
|
|
10,549 |
|
|
|
339 |
|
|
|
10,888 |
|
|
Income (loss) from operations
|
|
|
3,093 |
|
|
|
(86 |
) |
|
|
3,007 |
|
|
Net income (loss)
|
|
|
1,980 |
|
|
|
(75 |
) |
|
|
1,905 |
|
|
Depreciation and amortization expense
|
|
|
8,942 |
|
|
|
25 |
|
|
|
8,967 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received by PAL under EAP program
|
|
|
5,144 |
|
|
|
— |
|
|
|
5,144 |
|
|
Earnings recognized by PAL for EAP program
|
|
|
4,964 |
|
|
|
— |
|
|
|
4,964 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and cash distributions received
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
For the Three Months Ended December 26, 2010
|
|
| |
|
PAL
|
|
|
Other
|
|
|
Total
|
|
|
Net sales
|
|
$ |
212,357 |
|
|
$ |
10,575 |
|
|
$ |
222,932 |
|
|
Gross profit
|
|
|
16,871 |
|
|
|
2,007 |
|
|
|
18,878 |
|
|
Income from operations
|
|
|
13,342 |
|
|
|
1,223 |
|
|
|
14,565 |
|
|
Net income
|
|
|
13,011 |
|
|
|
879 |
|
|
|
13,890 |
|
|
Depreciation and amortization expense
|
|
|
8,331 |
|
|
|
341 |
|
|
|
8,672 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received by PAL under EAP program
|
|
|
7,387 |
|
|
|
— |
|
|
|
7,387 |
|
|
Earnings recognized by PAL for EAP program
|
|
|
8,001 |
|
|
|
— |
|
|
|
8,001 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and cash distributions received
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
| |
|
For the Six Months Ended December 25, 2011
|
|
| |
|
PAL
|
|
|
Other
|
|
|
Total
|
|
|
Net sales
|
|
$ |
616,885 |
|
|
$ |
16,857 |
|
|
$ |
633,742 |
|
|
Gross profit
|
|
|
23,626 |
|
|
|
1,002 |
|
|
|
24,628 |
|
|
Income (loss) from operations
|
|
|
14,209 |
|
|
|
(287 |
) |
|
|
13,922 |
|
|
Net income (loss)
|
|
|
13,305 |
|
|
|
(319 |
) |
|
|
12,986 |
|
|
Depreciation and amortization expense
|
|
|
18,237 |
|
|
|
81 |
|
|
|
18,318 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received by PAL under EAP program
|
|
|
11,316 |
|
|
|
— |
|
|
|
11,316 |
|
|
Earnings recognized by PAL for EAP program
|
|
|
10,920 |
|
|
|
— |
|
|
|
10,920 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and cash distributions received
|
|
|
2,005 |
|
|
|
— |
|
|
|
2,005 |
|
| |
|
For the Six Months Ended December 26, 2010
|
|
| |
|
PAL
|
|
|
Other
|
|
|
Total
|
|
|
Net sales
|
|
$ |
422,158 |
|
|
$ |
22,151 |
|
|
$ |
444,309 |
|
|
Gross profit
|
|
|
43,963 |
|
|
|
4,015 |
|
|
|
47,978 |
|
|
Income from operations
|
|
|
37,252 |
|
|
|
2,485 |
|
|
|
39,737 |
|
|
Net income
|
|
|
38,403 |
|
|
|
1,866 |
|
|
|
40,269 |
|
|
Depreciation and amortization expense
|
|
|
14,875 |
|
|
|
683 |
|
|
|
15,558 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received by PAL under EAP program
|
|
|
14,511 |
|
|
|
— |
|
|
|
14,511 |
|
|
Earnings recognized by PAL for EAP program
|
|
|
26,377 |
|
|
|
— |
|
|
|
26,377 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and cash distributions received
|
|
|
2,532 |
|
|
|
— |
|
|
|
2,532 |
|
26. Commitments and Contingencies
Environmental
On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located in Kinston, North Carolina from INVISTA S.a.r.l. (“INVISTA”). The land for the Kinston site was leased pursuant to a 99 year ground lease (“Ground Lease”) with E.I. DuPont de Nemours (“DuPont”). Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the U.S. Environmental Protection Agency (“EPA”) and the North Carolina Department of Environment and Natural Resources (“DENR”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The Corrective Action program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of contamination at the identified AOCs and clean it up to comply with applicable regulatory standards. Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with conveyance of certain assets at Kinston to DuPont. This agreement terminated the Ground Lease and relieved the Company of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site. However, the Company continues to own a satellite service facility acquired in the INVISTA transaction that has contamination from DuPont’s operations and is monitored by DENR. This site has been remediated by DuPont and DuPont has received authority from DENR to discontinue remediation, other than natural attenuation. DuPont’s duty to monitor and report to DENR will be transferred to the Company in the future, at which time DuPont must pay the Company for seven years of monitoring and reporting costs and the Company will assume responsibility for any future remediation and monitoring of the site. At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
Litigation
Certain claims were made against the Company for its alleged use of non-compliant “Berry Amendment” nylon POY in yarns that it sold to a customer that purportedly were used to manufacture certain U.S. military garments (the “Military Claims”). The Company understands that the military garments manufactured from the Company’s yarns have been accepted by the relevant branches of the U.S. Military pursuant to the terms of a domestic non-availability determination (a “DNAD”). The Company does not believe that it will incur any additional claims or liability in relation to the Military Claims and, accordingly, it has reversed its accrual for this contingency.
27. Related Party Transactions
During fiscal year 2012, the Company has had sales to Cupron Medical, Inc. (“Cupron”). Mr. William J. Armfield, IV, is a member of the Company’s Board and is a current shareholder of Cupron. On December 19, 2011, the Company and Dillon entered into an amendment of an existing sales and service agreement. The amendment provides for a one year term and consideration of $106 paid quarterly. Mr. Mitchel Weinberger is a member of the Company’s Board and the President and Chief Operating Officer of Dillon. For a discussion of the nature of all other related party relationships see “Footnote 27. Related Party Transactions” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 26, 2011.
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
Related party receivables and payables consist of the following:
| |
|
December 25, 2011
|
|
|
June 26, 2011
|
|
|
Related Party Receivables:
|
|
|
|
|
|
|
|
Dillon Yarn Corporation
|
|
$ |
9 |
|
|
$ |
6 |
|
|
Cupron Medical, Inc.
|
|
|
(2 |
) |
|
|
— |
|
|
American Drawtech Company, Inc.
|
|
|
302 |
|
|
|
506 |
|
|
Total related party receivables (included within receivables, net)
|
|
$ |
|