UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 28, 2020
OR
For the transition period from _____ to _____
Commission File Number: 1-10542
UNIFI, INC.
(Exact name of registrant as specified in its charter)
New York
(State or other jurisdiction of
incorporation or organization)
11-2165495
(I.R.S. Employer
Identification No.)
7201 West Friendly Avenue
Greensboro, North Carolina 27410
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code: (336) 294-4410
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.10 per share
Trading Symbol(s)
UFI
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☒
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of December 27, 2019, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was approximately $347,803,889. The registrant has no non-voting
stock.
As of August 20, 2020, the number of shares of the registrant’s common stock outstanding was 18,446,554.
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2020 Annual Meeting of Shareholders are incorporated
by reference in Part III of this Form 10-K to the extent described herein.
DOCUMENTS INCORPORATED BY REFERENCE
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that relate to our plans, objectives, estimates and goals. Statements expressing expectations regarding our
future, or projections or estimates relating to products, sales, revenues, expenditures, costs, strategies, initiatives or earnings, are typical of such statements and are
made under the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on management’s beliefs, assumptions and expectations
about our future performance, considering the information currently available to management. The words “believe,” “may,” “could,” “will,” “should,” “would,”
“anticipate,” “plan,” “estimate,” “project,” “expect,” “intend,” “seek,” “strive” and words of similar import, or the negative of such words, identify or signal the presence of
forward-looking statements. These statements are not statements of historical fact; and they involve risks and uncertainties that may cause our actual results,
performance or financial condition to differ materially from the expectations of future results, performance or financial condition that we express or imply in any
forward-looking statement. Factors that could contribute to such differences include, but are not limited to:
•
the competitive nature of the textile industry and the impact of global competition;
• changes in the trade regulatory environment and governmental policies and legislation;
•
the availability, sourcing and pricing of raw materials;
• general domestic and international economic and industry conditions in markets where the Company competes, including economic and political factors
over which the Company has no control;
• changes in consumer spending, customer preferences, fashion trends and end uses for products;
•
•
the financial condition of the Company’s customers;
the loss of a significant customer or brand partner;
• natural disasters, industrial accidents, power or water shortages, extreme weather conditions and other disruptions at one of our facilities;
•
•
•
•
•
the disruption of operations, global demand, or financial performance as a result of catastrophic or extraordinary events, including epidemics or
pandemics such as the recent strain of coronavirus (“COVID-19”);
the success of the Company’s strategic business initiatives;
the volatility of financial and credit markets;
the ability to service indebtedness and fund capital expenditures and strategic business initiatives;
the availability of and access to credit on reasonable terms;
• changes in foreign currency exchange, interest and inflation rates;
•
•
•
fluctuations in production costs;
the ability to protect intellectual property;
the strength and reputation of our brands;
• employee relations;
•
•
•
•
•
the ability to attract, retain and motivate key employees;
the impact of environmental, health and safety regulations;
the impact of tax laws, the judicial or administrative interpretations of tax laws and/or changes in such laws or interpretations;
the operating performance of joint ventures and other equity method investments;
the accurate financial reporting of information from equity method investees; and
• other factors discussed below in “Item 1A. Risk Factors” or in the Company’s other periodic reports and information filed with the Securities and
Exchange Commission (“SEC”).
All such factors are difficult to predict, contain uncertainties that may materially affect actual results and may be beyond our control. New factors emerge from time to
time, and it is not possible for management to predict all such factors or to assess the impact of each such factor on the Company. Any forward-looking statement
speaks only as of the date on which such statement is made, and we do not undertake any obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made, except as may be required by federal securities laws.
In light of all the above considerations, we reiterate that forward-looking statements are not guarantees of future performance, and we caution you not to rely on them
as such.
UNIFI, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 28, 2020
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Information about our Executive Officers
PART I
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Form 10-K Summary
Signatures
Consolidated Financial Statements
Page
2
11
15
16
16
17
17
18
20
21
43
44
44
45
45
46
46
46
46
46
47
51
52
F-i
Fiscal Year
The fiscal year for Unifi, Inc., its domestic subsidiaries and its subsidiary in El Salvador ends on the Sunday in June or July nearest June 30 of each year. During fiscal 2019,
Unifi, Inc. changed its fiscal year end from the last Sunday in June to the Sunday in June or July nearest June 30 of each year.
Unifi, Inc.’s fiscal 2020, 2019 and 2018 ended on June 28, 2020, June 30, 2019 and June 24, 2018, respectively. Unifi, Inc.’s remaining material operating subsidiaries’ fiscal
years end on June 30. There were no significant transactions or events that occurred between Unifi, Inc.’s fiscal year end and such wholly owned subsidiaries’ subsequent fiscal
year ends. Unifi, Inc.’s fiscal 2020 and 2018 each consisted of 52 weeks, while fiscal 2019 consisted of 53 weeks.
Presentation
All amounts, except per share amounts, are presented in thousands (000s), unless otherwise noted.
1
Item 1.
Business
PART I
Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, “UNIFI,” the “Company,” “we,” “us” or “our”), is a multinational company that manufactures and
sells innovative recycled and synthetic products made from polyester and nylon primarily to other yarn manufacturers and knitters and weavers (UNIFI’s direct customers) that
produce yarn and/or fabric for the apparel, hosiery, home furnishings, automotive, industrial and other end-use markets (UNIFI’s indirect customers). We refer to these indirect
customers as “brand partners.” Polyester products include partially oriented yarn (“POY”), textured, solution and package dyed, twisted, beamed and draw wound yarns, and
each is available in virgin or recycled varieties. Recycled solutions, made from both pre-consumer and post-consumer waste, include plastic bottle flake (“Flake”), polyester
polymer beads (“Chip”) and staple fiber. Nylon products include virgin or recycled textured, solution dyed and spandex covered yarns.
UNIFI maintains one of the textile industry’s most comprehensive product offerings that include a range of specialized, value-added and commodity solutions, with principal
geographic markets in the Americas, Asia and Europe. UNIFI has direct manufacturing operations in four countries and participates in joint ventures with operations in Israel and
the United States (“U.S.”).
UNIFI has four reportable segments:
• The Polyester Segment primarily sells polyester-based products to other yarn manufacturers and knitters and weavers that produce yarn and/or fabric for the
apparel, hosiery, home furnishings, automotive, industrial and other end‑use markets. The Polyester Segment consists of sales and manufacturing operations in the
U.S. and El Salvador.
• The Asia Segment primarily sells polyester-based products to knitters and weavers that produce fabric for the apparel, home furnishings, automotive, industrial and
other end-use markets principally in Asia. The Asia Segment includes sales offices in China, Turkey and Hong Kong.
• The Brazil Segment primarily sells polyester-based products to knitters and weavers that produce fabric for the apparel, home furnishings, automotive, industrial and
other end-use markets principally in South America. The Brazil Segment includes a manufacturing location and sales offices in Brazil.
• The Nylon Segment primarily sells nylon-based products to knitters and weavers that produce fabric primarily for the apparel, hosiery and medical markets. The
Nylon Segment consists of sales and manufacturing operations in the U.S. and Colombia.
Other information for UNIFI’s reportable segments is provided in Note 26, “Business Segment Information,” to the accompanying consolidated financial statements. In addition
to UNIFI’s reportable segments, UNIFI conducts certain ancillary operations that primarily include for-hire transportation services, which comprise an All Other category. The
ancillary operations classified within All Other are immaterial to UNIFI’s consolidated financial statements.
In discussion of our operating results in this Annual Report on Form 10-K (this “Annual Report”) and the combined impacts of certain concepts to both our Polyester and Nylon
Segments, we refer to our operations in the “NACA” region, which is the region comprised of the trade zones covered by the Dominican Republic—Central America Free Trade
Agreement (“CAFTA-DR”) and the United States-Mexico-Canada Agreement (“USMCA”). Prior to the establishment of the USMCA, we benefited from a similar, historical
agreement known as the North American Free Trade Agreement (“NAFTA”).
Strategic Overview and Operating Results
We believe UNIFI’s underlying performance during recent fiscal years reflects the strength of our global initiative to deliver differentiated solutions to customers and brand
partners throughout the world. Our supply chain has been developed and enhanced in multiple regions of the globe, allowing us to deliver a diverse range of synthetic fibers and
polymers to key customers in the markets we serve, especially apparel. These polyester and nylon products are supported by quality assurance, product development and other
customer service teams across UNIFI’s operating subsidiaries. We have developed this successful operating platform by improving operational and business processes and
deriving value from sustainability-based initiatives, including polyester and nylon recycling.
This platform has provided growth in our core operations during recent fiscal years and has been augmented by significant capital investments that support the production and
delivery of sustainable and innovative solutions. In order to achieve further growth, UNIFI is committed to investing strategically and synergistically in:
•
•
•
Technology, innovation and sustainability;
High-quality brand and supplier relationships; and
Supply chain expansion and optimization.
We believe that further commercial expansion will require a continued stream of new technology and innovation that generates products with meaningful consumer benefits.
Along with REPREVE®, UNIFI has significant yarn technologies that provide optimal performance characteristics for today’s marketplace, including moisture management,
temperature moderation, stretch, ultra-violet protection and fire retardation. To achieve further growth, UNIFI remains focused on innovation, bringing to market the next wave of
fibers and polymers for tomorrow’s applications. As we invest and grow, sustainability remains at our core. We believe that increasing the awareness for recycled solutions in
applications across fibers and polymers and furthering sustainability-based
2
initiatives with like-minded brand partners will be key to our future success. Growth will also require high-quality partnerships. With a changing retail landscape and a dynamic
consumer, brands are demanding responsive, localized supply chains. In order to capitalize on these shifts, we expect to identify and enter into partnerships and commercial
relationships that expand our global footprint in strategic regions. As the Americas and Asia remain significant components of the global supply chain, UNIFI will be diligent in
exploring partnerships that advance our existing growth platform in these regions.
Our recent efforts to alleviate competitive pressures from imported polyester yarn into the U.S. are intended to complement our strategic initiatives and to stabilize the market
share decline we have experienced in the U.S., while improving facility utilization and cost absorption. These efforts are further discussed below under the heading “Trade
Regulation and Rules of Origin.” Execution on both our strategic and trade initiatives is expected to increase revenue and profitability.
Consistent with our renewed focus on delivering recycled and synthetic fibers around the globe, during fiscal 2020, we executed a strategic divestiture of our 34% minority
ownership interest in Parkdale America, LLC (“PAL”) (the “PAL Investment”), a domestic cotton yarn supplier. The PAL Investment was sold for $60,000 in cash to Parkdale,
Incorporated (“Parkdale”), the existing majority partner. Cash proceeds from the divestiture provide additional flexibility and liquidity for both long-term opportunities and
uncertainty associated with current economic volatility.
Fiscal 2020 Financial Performance
Prior to the COVID-19 pandemic, our operations were achieving incremental sales volume growth from both (i) continued demand for sustainable products with our REPREVE®
platform and (ii) market share recapture from our trade initiatives that were finalized in January 2020. Additionally, fiscal 2020 was characterized by (i) a more favorable
polyester raw material cost environment and (ii) a more favorable underlying effective tax rate compared to recent fiscal years. However, for fiscal 2020, UNIFI reported a net
loss of $57,237, or $3.10 per share. These results primarily reflect (i) a $45,194 impairment charge recorded for the divestiture of the PAL Investment, and (ii) the adverse
impact of the economic downturn caused by the global pandemic during the fourth quarter of fiscal 2020.
Each of our segments experienced full year fiscal 2020 sales volumes and gross profit pressures due to the global pandemic, although Polyester Segment and Asia Segment
sales volumes and profitability prior to the pandemic impact were performing well. Excluding the impact of the COVID-19 pandemic,
•
•
•
•
the Polyester Segment benefited from our recent trade initiatives and a favorable polyester raw material cost environment;
the Asia Segment benefited from continued REPREVE® demand and supply chain and portfolio expansion;
the Brazil Segment experienced pricing pressures from raw material cost fluctuations, but maintained strong manufacturing efficiency; and
the Nylon Segment was pressured by reduced business activity that adversely impacted facility utilization and cost absorption, following the transition of certain
programs to overseas production by two large customers.
Additionally, our selling, general and administrative expenses (“SG&A”) for fiscal 2020 was demonstrably lower than recent fiscal years, resulting from action taken in fiscal
2019.
Leading up to the pandemic, our performance metrics improved consistent with our expectations during the first nine months of fiscal 2020 and we generated significant
operating cash flows. However, the global pandemic adversely impacted UNIFI’s business beginning in April 2020 and significantly reduced product demand across all of our
business segments during our fourth fiscal quarter. Accordingly, fixed cost absorption and facility utilization were significantly impacted and profitability declined. Despite these
significant headwinds, we continued to generate positive operating cash flows in the fourth quarter of fiscal 2020, exhibiting a substantial year-over-year improvement in
operating cash flows from fiscal 2019.
Global COVID-19 Pandemic in Calendar 2020
In March 2020, the World Health Organization declared the current COVID-19 outbreak a global pandemic. Through March 2020, the COVID-19 pandemic had no significant
adverse impact on UNIFI’s business, although sales growth for our Asia Segment was temporarily slowed by the extensive government shutdown in China. During the fourth
quarter of fiscal 2020, as our Asia Segment quickly rebounded, UNIFI’s U.S., Brazilian and El Salvador operations were adversely impacted by the COVID-19 pandemic.
Efforts to contain the spread of COVID-19 intensified during March and April 2020, especially in the U.S. Several states, including North Carolina, where UNIFI’s primary
manufacturing and administrative operations are located, declared states of emergency. A number of national, state, and local governments also enacted temporary business
closures, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. The local and global measures significantly reduced economic
activity and demand, thereby reducing overall demand for UNIFI’s products.
UNIFI’s U.S. manufacturing operations have continued operating as an essential business under applicable governmental guidelines, allowing UNIFI to continue to serve
customers that remain operational. However, UNIFI’s global manufacturing operations have adjusted to the declines in economic activity and global demand by reducing
production from historical levels. UNIFI’s facilities in El Salvador were not operational for approximately three months in connection with government shutdown mandates in that
country that were lifted in late June 2020.
3
In an effort to protect the health and safety of our employees, customers and communities, UNIFI has taken proactive, aggressive actions from the earliest signs of the outbreak
in the U.S. by adopting social distancing and travel restriction policies for all locations.
Global measures taken to reduce the spread of COVID-19 have generated a significant decline in global business activity in the immediate term that may have a lasting impact
on the global economy and consumer demand. The duration of the COVID-19 pandemic and its related impact on our business is currently unknown. UNIFI anticipates that the
global disruption caused by COVID-19 has and will continue to negatively impact overall global demand and business activity, and such negative impacts will continue, including
for textiles in both the Americas and Asia.
Significant restoration of consumer spending and retail activity will be critical to our end-markets and enable an economic rebound. UNIFI anticipates a recovery in global
economic activity when COVID-19 is sufficiently contained. The economic rebound will depend on the pace and effectiveness of the containment efforts deployed by various
national, state, and local governments, along with the speed and effectiveness with which potential treatment and vaccine methods are deployed.
UNIFI will continue to monitor the COVID-19 pandemic, prioritizing the health and safety of our employees, while delivering on customer demand. While we expect the recovery
of our business to levels achieved prior to the COVID-19 pandemic, we continue to expect a moderate to significant adverse impact on our operational and financial results
through at least fiscal 2021, based on present factors and conditions.
REPREVE®
In the early 2000s, by recycling our own production waste into useful polyester fibers, we took the first steps toward building an important supply chain with a focus on
sustainability and responsibility. After more than a decade, our REPREVE® brand has become the quintessential recycled fiber of choice for brand, retail and textile partners
around the globe. REPREVE® is most commonly offered in the following fiber forms: polyester staple fiber, polyester filament, nylon staple fiber and nylon filament, comprising
our REPREVE® Fiber platform; as well as in polyester resin form as REPREVE® Chip. Beyond the high quality, versatility and breadth of application that REPREVE® offers,
UNIFI combines transparency, traceability and certification for REPREVE® products to support our customers’ own sustainability stories.
REPREVE® is our flagship brand and our fastest growing brand. As part of our efforts to expand consumer brand recognition of REPREVE®, UNIFI has developed recycling-
focused sponsorships with various brand partners and other entities that span across sporting, music and outdoor events. The increasing success and awareness of the
REPREVE® brand continues to provide new opportunities for growth, allowing for expansion into new end uses and markets for REPREVE®, as well as continued growth of the
brand with current customers. This has driven traction with global brands and retailers who obtain value and lasting consumer interest from the innovation and sustainability
aspects that REPREVE® provides.
We remain committed to sustainability. During fiscal 2020, we surpassed a significant milestone by transforming more than 20 billion recycled plastic bottles since the inception
of REPREVE®. Our dedication continues with our next goal of reaching the 30 billion recycled plastic bottles mark in 2022. We will continue growing the business for our
REPREVE® products and believe our engagement and research and development work with brands and retailers continues to create new, worldwide sales opportunities.
The primary metric for tracking growth of the REPREVE® brand is REPREVE® Fiber sales. Of our consolidated sales in fiscal 2018, 2019 and 2020, REPREVE® Fiber
comprised 24%, 25% and 31%, respectively.
Capital Investments
In fiscal 2015, we began a significant, three-year capital investment plan to increase our manufacturing capabilities and capacity, expand our technological foundation and
customize our asset base to improve our ability to deliver small-lot and high-value solutions. These investments were made primarily for the Polyester Segment.
Most notably, we made significant investments in the production and supply chain for REPREVE®, including backward integration with a bottle processing plant and additional
production lines in the REPREVE® Recycling Center. Further, UNIFI (i) installed bi-component spinning machinery to produce specialized, high-value yarns and (ii) made
machinery modifications to meet the ever-changing demands of the market, all while (iii) investing in routine capital maintenance to ensure high-quality manufacturing.
Subsequent to the multi-year capital investment plan, our capital investments have ranged from approximately $15,000 to $25,000 each fiscal year, and most recently include (i)
making further improvements in production capabilities and technology enhancements in the Americas, (ii) beginning the purchase and installation of new eAFK Evo texturing
machines, and (iii) annual maintenance capital expenditures.
In fiscal 2021, we expect to invest approximately $22,000 in capital projects, to include (i) making further improvements in production capabilities and technology enhancements
in the Americas, (ii) continuing the purchase and installation of new eAFK Evo texturing machines, and (iii) annual maintenance capital expenditures.
However, the severity and duration of the COVID-19 pandemic could adversely impact the speed at which we invest in capital projects, as we continue to prioritize liquidity,
safety and maintenance.
4
Share Repurchases
In addition to capital investments and debt retirement, UNIFI may utilize excess cash for strategic share repurchases. On October 31, 2018, UNIFI announced that the Board of
Directors (“Board”) approved a share repurchase program (the “2018 SRP”) under which UNIFI is authorized to acquire up to $50,000 of its common stock. Under the 2018 SRP,
purchases may be made from time to time in the open market at prevailing market prices, through private transactions or block trades. The timing and amount of repurchases
will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no expiration date.
As of June 28, 2020, UNIFI had repurchased a total of 84 shares at an average price of $23.72. After this transaction, $48,008 remained available for repurchase under the
2018 SRP. UNIFI will continue to evaluate opportunities to use excess cash flows from operations or existing borrowings to repurchase additional stock, while maintaining
sufficient liquidity to support its operational needs and to fund future strategic growth opportunities.
Developments in Principal Markets
Leading up to fiscal 2017, apparel production experienced multi-year growth in the NACA region, which comprises the principal markets for UNIFI’s Polyester and Nylon
Segments. The share of synthetic apparel production for these regions as a percentage of U.S. retail stabilized at approximately 18%, while retail consumption grew. The
CAFTA-DR region, which continues to be a competitive alternative to Asian supply chains for textile products, maintained its share of synthetic apparel supply to U.S. retailers.
The relative share of synthetic apparel versus cotton apparel as a proportion of the overall apparel market increased and provided growth for the consumption of synthetic yarns
within the CAFTA-DR region.
In fiscal 2018 and 2019, our business was adversely impacted by retailers and brand partners seeking more cost competitive textile supplies in response to rising and higher
raw material costs, while elevated levels of imported polyester textured yarn impacted the domestic textile industry. As consumers demand personalized experiences and omni-
channel outlets, the retail market and its supply chain are expected to change. Transformational requirements for the supply chain are not yet clear but will be an integral part of
UNIFI’s initiatives going forward.
In fiscal 2020, UNIFI experienced several headwinds including the (i) economic impacts from the COVID-19 pandemic, (ii) suppressed demand for certain polyester yarns
across the domestic industrial, automotive and apparel sectors, (iii) Nylon Segment experienced lower revenues and gross margin in connection with two customers shifting
certain programs to overseas garment production during calendar 2019, and (iv) Brazil Segment experienced lower gross margin as market price declines in connection with
declining raw material costs outpaced inventory turnover. However, UNIFI’s underlying sales volume growth and continued demand for REPREVE® combined with a more
favorable polyester raw material cost environment helped provide encouraging results through the first nine months of fiscal 2020.
UNIFI’s Asian operations remain an important part of our strategy, enhancing our ability to service customers with global supply chains. Competition in the Asian region remains
high; however, interest and demand for UNIFI’s products, especially those that are recycled, in Asia have helped support strong sales volumes in recent years. The margin
profile has been impacted primarily by significant growth of lower-margin products, raw material cost fluctuations and competitive pricing pressures. However, we are
encouraged by programs undertaken with key brands and retailers that benefit from the diversification and innovation of our global portfolio.
UNIFI’s Brazilian operations also play a key role in our strategy. This segment is primarily impacted by (i) price pressures from imported fiber, fabric and finished goods (to a
similar extent as our U.S. operations), (ii) the inflation rate in Brazil, and (iii) changes in the value of the Brazilian Real (“BRL”). Competition and economic and political volatility
remain challenging conditions in South America, but UNIFI continues to (i) aggressively pursue mix enrichment by working with customers to develop programs using our
differentiated products and (ii) implement process improvements and manufacturing efficiency plans to help lower per-unit costs.
UNIFI’s operations in Asia and Brazil have been critical to global growth and expansion. Looking ahead, we expect expansion into additional markets in Europe, Africa and the
Middle East utilizing the asset-light supply chain and service model that has been successful for us in Asia.
As we expand our operations outside of the Americas, we will continue to evaluate the level of capital investment required to support the needs of our customers and intend to
allocate our resources accordingly.
Industry Overview
UNIFI operates in the textile industry and, within that broad category, the respective markets for yarns, fabrics, fibers and end-use products, such as apparel and hosiery,
automotive, industrial products and home furnishings. Even though the textile industry is global, there are several distinctive regional or other geographic markets that often
shape the business strategies and operations of participants in the industry. Because of free trade agreements and other trade regulations entered into by the U.S. government,
the U.S. textile industry, which is otherwise a distinctive geographic market on its own, is often considered in conjunction with other geographic markets or regions in North,
South and Central America, such as the NACA region. The Company’s principal markets for its domestic operations are in the NACA region.
5
According to data compiled by PCI WoodMackenzie, a global leader in research and analysis for the polyester and raw material markets, global demand for polyester yarns,
which includes both filament and staple yarns, has grown steadily since 1980, and, in calendar 2003, polyester replaced cotton as the fiber with the largest percentage of
worldwide sales. In calendar 2018, global polyester consumption accounted for an estimated 56% of global fiber consumption, and global demand was projected to increase by
approximately 3.0% to 3.5% annually through calendar 2025. In calendar 2018, global nylon consumption accounted for an estimated 5% of global fiber
consumption. However, the continued decline in the U.S. nylon market during fiscal 2020 had an unfavorable impact on UNIFI’s Nylon Segment. Additionally, due to the higher
cost of nylon, the industry may transition certain products from nylon to polyester. The polyester and nylon fiber sectors together accounted for approximately 61% of North
American textile consumption during calendar 2018. We estimate that these calendar 2018 trends remained similar or identical throughout calendar 2019. COVID-19 adversely
impacted the textile industry during calendar 2020, but we believe the share of polyester and nylon consumption remained unchanged.
According to the National Council of Textile Organizations, the U.S. textile and apparel industry’s total shipments were approximately $75.8 billion for calendar 2019 as the U.S.
textile and apparel industry exported nearly $29.1 billion of textile and apparel products, and the exports have grown by approximately 45% since 2009, an increase of $9.0
billion. The U.S. textile industry remains a large manufacturing employer.
Trade Regulation and Rules of Origin
The duty rate on imports into the U.S. of finished apparel categories that utilize polyester and nylon yarns generally range from 16% to 32%. For many years, imports of fabric
and finished goods into the U.S. have increased significantly from countries that do not participate in free trade agreements or trade preference programs, despite duties
charged on those imports. The primary drivers for that growth were lower overseas operating costs, foreign government subsidization of textile industries, increased overseas
sourcing by U.S. retailers, the entry of China into the World Trade Organization, and the staged elimination of all textile and apparel quotas. Although global apparel imports
represent a significant percentage of the U.S. market, Regional FTAs (as defined below), which follow general “yarn forward” rules of origin, provide duty free advantages for
apparel made from regional fibers, yarns and fabrics, allowing UNIFI opportunities to participate in this growing market.
A significant number of UNIFI’s customers in the apparel market produce finished goods that meet the eligibility requirements for duty-free treatment in the regions covered by
NACA and the Colombia and Peru free trade agreements (collectively, the “Regional FTAs”). These Regional FTAs contain rules of origin requirements in order for covered
products to be eligible for duty-free treatment. In the case of textiles such as fabric, yarn (such as POY), fibers (filament and staple) and certain garments made from them, the
products are generally required to be fully formed within the respective regions. UNIFI is the largest filament yarn manufacturer, and one of the few producers of qualifying
synthetic yarns, in the regions covered by these Regional FTAs.
The U.S. has maintained a positive trade balance in the textile and apparel sector under the NAFTA, and UNIFI anticipates the modifications made in the USMCA in this sector
will not significantly impact textile and apparel trade in the region. The USMCA includes strong rules of origin and closes several loopholes in the NAFTA that allowed non-
originating inputs, such as sewing thread, pocketing and narrow elastic fabrics.
U.S. legislation commonly referred to as the “Berry Amendment” stipulates that certain textile and apparel articles purchased by the U.S. Department of Defense must be
manufactured in the U.S. and must consist of yarns and fibers produced in the U.S. UNIFI is the largest producer of polyester and nylon yarns for Berry Amendment compliant
purchasing programs.
UNIFI refers to fibers sold with specific rules of origin requirements under the Regional FTAs and the Berry Amendment, as “Compliant Yarns.” Approximately two-thirds of
UNIFI’s sales within the Polyester and Nylon Segments are sold as Compliant Yarns under the terms of the Regional FTAs or the Berry Amendment.
UNIFI believes the requirements of the rules of origin and the associated duty-free cost advantages in the Regional FTAs, together with the Berry Amendment and the growing
demand for supplier responsiveness and improved inventory turns, will ensure that a portion of the existing textile industry will remain based in the Americas. UNIFI expects that
the NACA region will continue to maintain its share of apparel production as a percentage of U.S. retail. UNIFI believes the remaining synthetic apparel production within these
NACA region markets is more specialized and defensible, and, in some cases, apparel producers are bringing programs back to the NACA region as part of a balanced sourcing
strategy for some brands and retailers. Because UNIFI is the largest of only a few significant producers of Compliant Yarns under these Regional FTAs, one of UNIFI’s business
strategies is to continue to leverage its eligibility status for duty-free processing to increase its share of business with regional and domestic fabric producers who ship their
products into this region.
Over the longer term, the textile industry in the NACA region is expected to continue to be impacted by Asian supply chains where costs are much lower and regulation is
limited.
Imports of polyester textured yarn from China and India, which increased approximately 79% from calendar 2013 to 2017 and which continued to grow during calendar 2018,
remained elevated during fiscal 2019 and created considerable pressure on our margins and competitiveness in the U.S. Accordingly, in October 2018, UNIFI filed antidumping
and countervailing duty cases with the U.S. Department of Commerce (the “Commerce Department”) and the U.S. International Trade Commission (the “ITC”) alleging that
dumped and subsidized imports of polyester textured yarn from China and India are causing material injury to the domestic polyester textured yarn industry.
6
In response to antidumping and countervailing duty cases filed with the Commerce Department and the ITC in October 2018, the Commerce Department announced on April
29, 2019 affirmative preliminary countervailing duty determinations on unfairly subsidized imports of polyester textured yarn from (i) China at rates of 32% or more and (ii) India
at rates of 7% or more. Subsequently, the Commerce Department and the ITC completed their investigations and began imposing associated final duties on imports. Pursuant to
the conclusion of these investigations, subject imports from China and India are being assessed combined antidumping and countervailing duty rates of 97% and higher and
18% and higher, respectively, in addition to normal course duties in effect. The positive developments in our pursuit of relief from low-cost and subsidized imports are critical
steps in our efforts to compete against imported yarns that have flooded the U.S. market in recent years. UNIFI will continue to monitor whether polyester textured yarn from
China or India is being shipped through third-party countries and then entering the U.S. market to avoid the increased duties.
While the ultimate short-term and long-term impacts of these duties are not yet known, UNIFI expects these countervailing and antidumping duty rates to play a significant role
in helping to normalize the competitive position of UNIFI’s yarns in the U.S. market against the respective imported yarns.
Competition
The industry in which UNIFI operates is global and highly competitive. UNIFI competes not only as a global yarn producer, but also as part of a regional supply chain for certain
textile products. For sales of Compliant Yarns, UNIFI competes with a limited number of foreign and domestic producers of polyester and nylon yarns. For sales of non-
Compliant Yarns, UNIFI competes with a larger number of foreign and domestic producers of polyester and nylon yarns that can meet the required customer specifications of
quality, reliability and timeliness. UNIFI is affected by imported textile, apparel and hosiery products, which adversely impact demand for UNIFI’s polyester and nylon products in
certain of its markets. Several foreign competitors have significant advantages, including lower wages, raw material costs and capital costs and favorable foreign currency
exchange rates against the U.S. Dollar (“USD”), any of which could make UNIFI’s products, or the related supply chains, less competitive. While competitors have traditionally
focused on high-volume commodity products, they are now increasingly focused on specialty products that UNIFI historically has been able to leverage to generate higher
margins.
UNIFI’s major competitors in the NACA region for polyester yarns are Aquafil O'Mara; United Textiles of America S.De R.L. De C.V.; NanYa Plastics Corp. of America (“NanYa”);
AKRA, S.A. de C.V.; and C S Central America S.A. de C.V.
UNIFI’s major competitor in Brazil is Avanti Industria Comercio Importacao e Exportacao Ltda., among other traders of imported yarns and fibers.
UNIFI’s operations in Asia face competition from multiple yarn manufacturers in that region and identification of them is not feasible. However, much of our portfolio in the Asia
region is advantaged by specialty and recycled products and a global sourcing and support model that assists in differentiation.
UNIFI’s major competitors for nylon yarn sales in the U.S. are Sapona Manufacturing Company, Inc. and McMichael Mills, Inc.
Raw Materials, Suppliers and Sourcing
The primary raw material supplier for the Polyester Segment of virgin Chip and POY is NanYa. For the Brazil Segment, Reliance Industries, Ltd. is the primary supplier of
POY. The primary suppliers of raw materials for the Nylon Segment are HN Fibers, Ltd.; U.N.F. Industries Ltd. (“UNF”); UNF America, LLC (“UNFA”); The LYCRA Company and
Nilit America, Inc. (“Nilit”). Each of UNF and UNFA is a 50/50 joint venture between UNIFI and Nilit. Currently, there are multiple domestic and foreign suppliers available to
fulfill UNIFI’s sourcing requirements for its recycled products. The majority of plastic bottles we utilize in the U.S. are obtained in open-market transactions from various entities
throughout the U.S., while our Asian subsidiaries source recycled materials from various countries and entities throughout Asia.
For its operations in the U.S., UNIFI produces and buys certain of its raw material fibers for Compliant Yarns from a variety of sources in both the U.S. and Israel, and UNIFI
produces a portion of its Chip requirements in its REPREVE® Recycling Center and purchases the remainder of such requirements from external suppliers for use in its
domestic spinning facility to produce POY. In addition, UNIFI purchases nylon and polyester products for resale from various suppliers. Although UNIFI does not generally have
difficulty obtaining its raw material requirements, UNIFI has, in the past, experienced interruptions or limitations in the supply of certain raw materials.
UNIFI’s bottle processing facility in Reidsville, North Carolina provides a high-quality source of Flake for the REPREVE® Recycling Center as well as for sale to external parties.
Combined with recent technology advancements in recycling, we believe the Flake produced at the bottle processing facility will enhance our ability to grow REPREVE® into
other markets, such as nonwovens, carpet fiber and packaging.
The prices of the principal raw materials used by UNIFI continuously fluctuate, and it is difficult or impossible to predict trends or upcoming developments. During fiscal 2017
and 2018, UNIFI operated in a predominantly increasing virgin polyester raw material cost environment, which continued into fiscal 2019 and included a temporary but
significant spike in polyester raw material costs in September and October of 2018. During fiscal 2020, UNIFI operated in a predominantly decreasing virgin polyester raw
material cost environment. UNIFI believes that polyester raw material cost fluctuations during most of 2018 were a result of volatility in the crude oil markets, while the cost spike
experienced in fiscal 2019 was primarily driven by supply and demand dynamics for certain
7
polyester feedstock. UNIFI believes that the raw material price decreases during most of fiscal 2020 were the result of a decline in global demand, especially in the second half
of the year. The continuing volatility in global crude oil prices is likely to impact UNIFI’s polyester and nylon raw material costs, but it is not possible to predict the timing or
amount of the impact or whether the movement in crude oil prices will stabilize, increase or decrease. In any event, UNIFI monitors these dynamic factors closely and does not
currently engage in hedges of polyester or nylon raw materials.
Products, Technologies and Related Markets
UNIFI manufactures and sells polyester products in the U.S., El Salvador and Brazil, and nylon products in the U.S. and Colombia, for a wide range of end uses. In Asia, UNIFI
manages a network of vendors and suppliers to contract manufacture products to direct and indirect customers around the globe.
Our virgin and recycled products sold across all geographies range from specialty, value-added to commodity. We provide products to a variety of end-use markets, principally
apparel, industrial, furnishings and automotive. We report our recycled portion of consolidated sales via our REPREVE® Fiber metric, which comprised 24%, 25% and 31% of
consolidated sales for fiscal 2018, 2019 and 2020, respectively.
The domestic apparel market, which includes hosiery, represents approximately 60% of UNIFI’s domestic sales. Apparel retail sales, supply chain inventory levels and the
strength of the regional supply base are vital to this market.
The domestic industrial market represents approximately 15% of UNIFI’s domestic sales. This market includes medical, belting, tapes, filtration, ropes, protective fabrics and
awnings.
The domestic furnishings market, which includes both contract and home furnishings, represents approximately 10% of UNIFI’s domestic sales. Furnishings sales are largely
dependent upon the housing market, which, in turn, is influenced by consumer confidence and credit availability.
The domestic automotive market represents approximately 10% of UNIFI’s domestic sales and has been less susceptible to import penetration because of the exacting
specifications and quality requirements often imposed on manufacturers of automotive fabrics, along with just-in-time delivery requirements. Effective customer service and
prompt response to customer feedback are logistically more difficult for an importer to provide.
UNIFI also adds value to the overall supply chain for textile products and increases consumer demand for UNIFI’s own products, through the development and introduction of
branded yarns and technologies that provide unique sustainability, performance, comfort and aesthetic advantages. UNIFI’s branded portion of its yarn portfolio continues to
provide product differentiation to brand partners, mills and consumers, and is based on two core platforms, REPREVE® (recycled) and PROFIBER™ (virgin):
REPREVE® is a family of sustainable products made from recycled materials, including plastic bottles. REPREVE® recycled fibers may also be customized to provide
leading performance and/or aesthetic properties, enabling a differentiated consumer experience. Additionally, we support the REPREVE® brand via industry leading
transparency, traceability and certification programs.
PROFIBER™ is a family of virgin material-based performance yarn products that are customizable with a broad selection of industry-leading technologies designed to
deliver an array of consumer benefits.
UNIFI’s branded yarns can be found in a variety of products of well-known brands, retailers and department stores, including, Haggar, Polartec, Under Armour, The North Face,
Patagonia, Quiksilver, Roxy, General Motors, Volcom, Pottery Barn, Lane Bryant, adidas, Nike, New Era, MJ Soffe, Abercrombie & Fitch, Levi’s, H&M, TARGET, Express,
Costco Wholesale, REI, Macy’s, Kohl’s, Belk, PVH, PACSUN, Zara, Hard Rock International, Walmart, Bermuda Sands, Lovesac, BUFF and Aeropostale.
In addition to the above brands and products, UNIFI combines its research and development efforts with the demands of customers and markets to develop innovative
technologies that enhance yarn characteristics. Application of these technologies allows for various, separate benefits, including, among other things, water repellency, flame
retardation, soil release, enhanced color-fastness achieved with less water use and protection from ultra-violet rays.
Customers
UNIFI’s Polyester Segment, Asia Segment, Brazil Segment and Nylon Segment have approximately 400, 800, 350 and 120 customers, respectively, all in a variety of
geographic markets. UNIFI’s products are manufactured according to customer specifications and are shipped based upon customer order requirements. Customer payment
terms are generally consistent with prevailing industry practices for the geographies in which we participate.
UNIFI’s consolidated net sales are not materially dependent on a single direct customer and no single direct customer accounts for 10% or more of UNIFI’s consolidated net
sales. UNIFI’s top 10 direct customers accounted for approximately 25% of consolidated net sales for fiscal 2020 and approximately 27% of receivables as of June 28,
2020. However, UNIFI’s consolidated net sales are dependent on demand from a relatively small number of brand partners. UNIFI’s net sales within its Nylon Segment are
materially dependent upon a domestic customer that accounted for approximately 17% of the Nylon Segment’s net sales for fiscal 2020.
8
Sales and Marketing
UNIFI employs an internal sales force of approximately 45 persons operating out of sales offices primarily in the U.S., Brazil, China, El Salvador, Colombia and Turkey. UNIFI
also relies on independent sales agents for sales in several other countries. UNIFI seeks to create strong customer relationships and to build and strengthen those relationships
throughout the supply chain. Through frequent communications with customers, partnering in product development and engaging key downstream brands and retailers, UNIFI
has created significant pull-through sales and brand recognition for its products. For example, UNIFI works with brands and retailers to educate and create demand for its
products, such as recent engagements involving REPREVE® at multiple events and venues in the U.S. UNIFI then works with key fabric mill partners to develop specific fabrics
for those brands and retailers utilizing UNIFI products. In many of these regards, UNIFI draws upon and integrates the resources of its research and development personnel. In
addition, UNIFI is enhancing co-branding activations with integrated point-of-sale and online marketing with popular brands and retailers to further enable consumers to find
REPREVE® and PROFIBER™ products in multiple retail channels. Based on the establishment of many commercial and branded programs, this strategy has been successful
for UNIFI.
Product Customization and Manufacturing Processes
UNIFI uses advanced production processes to manufacture its high-quality products cost-effectively in North America, Central America and South America. UNIFI believes that
its flexibility and know-how in producing specialty polyester and nylon products provide important development and commercialization advantages, in addition to the recent
ability to vertically integrate with post-industrial and post-consumer materials.
UNIFI produces Flake, Chip and POY using recycled materials. In addition to its yarns manufactured from virgin polyester and nylon, UNIFI sells its recycled products externally
or further processes them internally to add value for customers seeking recycled components. The REPREVE® Bottle Processing Center in Reidsville, North Carolina produces
Flake that can be sold externally or further processed internally at our REPREVE® Recycling Center in Yadkinville, North Carolina. Recycled polyester Chip output from the
REPREVE® Recycling Center can be sold externally or further processed internally into polyester POY.
Additional processing of UNIFI’s polyester POY includes texturing, dyeing, twisting, beaming and draw winding. The texturing process, which is common to both polyester and
nylon, involves the use of high-speed machines to draw, heat and false-twist POY to produce yarn with different physical characteristics, depending on its ultimate end
use. Texturing gives the yarn greater bulk, strength, stretch, consistent dye-ability and a softer feel, thereby making it suitable for use in the knitting and weaving of
fabric. Solution dyeing and package dyeing allow for matching of customer-specific color requirements for yarns sold into various markets. Twisting incorporates real twist into
filament yarns, which can be sold for a variety of uses, such as sewing thread, home furnishings and apparel. Beaming places both textured and covered yarns onto beams to
be used by customers in warp knitting and weaving applications. The draw winding process utilizes heat and draws POY to produce mid-tenacity, flat yarns.
Additional processing of UNIFI’s nylon yarn products primarily includes covering and texturing. Covering involves the wrapping or air entangling of filament or spun yarn around
a core yarn, primarily spandex. This process enhances a fabric’s ability to stretch, recover its original shape and resist wrinkles, while maintaining a softer feel.
UNIFI’s subsidiaries in Asia offer the same high-quality and innovative products and technologies through contract manufacturing arrangements with local manufacturers. This
asset-light model allows for seamless integration of our products into the global supply chain of our customers. As we expand our Asian operations to meet the needs of our
global customers, we will continue to leverage the asset-light model where the existing infrastructure can accommodate our highly technical processes, while continually
evaluating the need for additional UNIFI assets in response to ever-changing market dynamics.
Research and Development
UNIFI employs approximately 130 persons, primarily in the U.S., who work closely with UNIFI’s customers, brand partners and others to develop a variety of new yarns as well
as improvements to the performance properties of existing yarns and fabrics. Among other things, UNIFI evaluates trends and uses the latest technology to create innovative
yarns that meet the needs of evolving consumer preferences. Most of UNIFI’s branded yarns, including its flagship REPREVE® brand, were derived from its research and
development initiatives.
UNIFI also includes, as part of its research and development initiatives, the use of continuous improvement methodologies to increase its manufacturing and other operational
efficiencies, both to enhance product quality and to derive cost savings.
For fiscal 2020, 2019 and 2018, UNIFI incurred $11,257, $12,359 and $7,792, respectively, in costs for research and development (including salaries and benefits of the
personnel involved in those efforts). During fiscal 2019, in connection with consolidating and advancing our global innovation initiatives, certain employees moved from
production roles to research and development.
Intellectual Property
UNIFI has numerous trademarks registered in the U.S. and in other countries and jurisdictions around the world. Due to its current brand recognition and potential growth
opportunities, UNIFI believes that its portfolio of registered REPREVE® trademarks is its most significant trademark asset. Ownership rights in registered trademarks typically
do not expire if the trademarks are continued in use and properly protected under applicable law.
9
UNIFI licenses certain trademarks, including Dacron® and Softec™, from Invista S.a.r.l. (“INVISTA”).
UNIFI also employs its innovative manufacturing know-how, methods and processes to produce and deliver proprietary solutions to customers and brand partners. UNIFI relies
on the copyright and trade secret laws of the U.S. and other countries, as well as nondisclosure and confidentiality agreements, to protect these rights.
Employees (not presented in thousands)
As of June 28, 2020, UNIFI had approximately 2,560 employees, along with approximately 200 individuals working under temporary labor contracts. The number of employees
in the Polyester Segment, the Asia Segment, the Brazil Segment, the Nylon Segment and the corporate office were approximately 1,500, 60, 440, 450, and 110, respectively, at
June 28, 2020. While employees of UNIFI’s Brazilian operations are unionized, none of the labor forces employed by UNIFI’s domestic or other foreign subsidiaries are
currently covered by a collective bargaining agreement. UNIFI believes that it has a good relationship with its employees.
Geographic Data
Geographic information reported in conformance with U.S. generally accepted accounting principles (“GAAP”) is included in Note 26, “Business Segment Information,” to the
accompanying consolidated financial statements. Information regarding risks attendant to UNIFI’s foreign operations is included in “Item 1A. Risk Factors” in this Annual Report.
Seasonality
UNIFI is not significantly impacted by seasonality; however, UNIFI typically experiences its highest sales volumes in the fourth quarter of its fiscal years. Excluding the effects of
fiscal years with 53 weeks rather than 52 weeks, the most significant effects on UNIFI’s results of operations for particular periods during a year are due to planned
manufacturing shutdowns by either UNIFI or its customers for certain holiday or traditional shutdown periods.
Backlog
UNIFI’s level of unfilled orders is affected by many factors, including the timing of specific orders and the delivery time for specific products, as well as a customer’s ability or
inability to cancel the related order. As such, UNIFI does not consider the amount of unfilled orders, or backlog, to be a meaningful indicator of expected levels of future sales or
to be material to an understanding of UNIFI’s business as a whole.
Working Capital
UNIFI funds its working capital requirements through cash flows generated from operations, along with short-term borrowings, as needed. For more detailed information, see
“Liquidity and Capital Resources” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
Inflation
UNIFI expects costs to continue to rise for certain consumables used to produce and ship its products, as well as for its utilities and labor costs and benefits. While UNIFI
attempts to mitigate the impacts of such rising costs through increased operational efficiencies and increased selling prices, inflation could become a factor that negatively
impacts UNIFI’s profitability.
Environmental Matters
UNIFI is subject to various federal, state and local environmental laws and regulations limiting the use, storage, handling, release, discharge and disposal of a variety of
hazardous substances and wastes used in or resulting from its operations (and to potential remediation obligations thereunder). These laws include the Federal Water Pollution
Control Act, the Clean Air Act, the Resource Conservation and Recovery Act (including provisions relating to underground storage tanks), the Comprehensive Environmental
Response, Compensation, and Liability Act, commonly referred to as “Superfund” or “CERCLA” and various state counterparts to such laws. UNIFI’s operations are also
governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations issued thereunder, which,
among other things, establish exposure standards regarding hazardous materials and noise standards, and regulate the use of hazardous chemicals in the workplace.
UNIFI believes that it has obtained, and is in compliance in all material respects with, all significant permits required to be issued by federal, state or local law in connection with
the operation of its business. UNIFI also believes that the operation of its production facilities and its disposal of waste materials are substantially in compliance with applicable
federal, state and local laws and regulations, and that there are no material ongoing or anticipated capital expenditures associated with environmental control facilities necessary
to remain in compliance with such provisions. UNIFI incurs normal operating costs associated with the discharge of materials into the environment, but does not believe that
these costs are material or inconsistent with those of its domestic competitors.
10
On September 30, 2004, Unifi Kinston, LLC (“UK”), a subsidiary of Unifi, Inc., completed its acquisition of polyester filament manufacturing assets located in Kinston, North
Carolina from INVISTA. The land for the Kinston site was leased pursuant to a 99-year ground lease (the “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 and the North Carolina Department of
Environmental Quality (“DEQ”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The program requires DuPont to identify all potential areas
of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and remediate the AOCs to comply with applicable regulatory standards. Effective
March 20, 2008, UK entered into a lease termination agreement associated with conveyance of certain assets at the Kinston site to DuPont. This agreement terminated the
Ground Lease and relieved UK of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to UK’s period of
operation of the Kinston site, which was from 2004 to 2008. At this time, UNIFI has no basis to determine if or when it will have any responsibility or obligation with respect to
the AOCs or the extent of any potential liability for the same.
UK continues to own property (the “Kentec site”) acquired in the 2004 transaction with INVISTA that has contamination from DuPont’s prior operations and is monitored by
DEQ. The Kentec site has been remediated by DuPont, and DuPont has received authority from DEQ to discontinue further remediation, other than natural attenuation. Prior to
transfer of responsibility to UK, DuPont and UK had a duty to monitor and report the environmental status of the Kentec site to DEQ.
Effective April 10, 2019, UK assumed sole remediator responsibility of the Kentec site pursuant to its contractual obligations with INVISTA and received $180 of net monitoring
and reporting costs due from DuPont. In connection with monitoring, UK expects to sample and report to DEQ annually. UNIFI expects minimal active site remediation may be
required, but has no basis to determine any costs that may be associated with active remediation.
Joint Ventures and Unconsolidated Affiliates
UNIFI participates in two joint ventures that supply raw materials to the Nylon Segment, one located in the U.S. and one in Israel. As of June 28, 2020, UNIFI had $2,171
recorded for these investments in unconsolidated affiliates. Other information regarding UNIFI’s unconsolidated affiliates is provided in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and in Note 23, “Investments in Unconsolidated Affiliates and Variable Interest Entities,” to the accompanying
consolidated financial statements.
During fiscal 2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000. The transaction closed on April 29, 2020 and UNIFI
received $60,000 in cash. Prior to fiscal 2020, PAL was deemed a significant subsidiary. However, for fiscal 2020, the PAL Investment no longer met the significance tests
prescribed by Regulation S-X Rule 3-09.
Available Information
UNIFI’s website is www.unifi.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as proxy statements and other information we
file with, or furnish to, the SEC are available free of charge on our website. We make these documents available as soon as reasonably practicable after we electronically
transmit them to the SEC. Except as otherwise stated in these documents, the information on our website is not a part of this Annual Report and is not incorporated by reference
in this Annual Report or any of our other filings with the SEC. In addition, many of our corporate governance documents are available on our website, including our Audit
Committee Charter, Compensation Committee Charter, Corporate Governance and Nominating Committee Charter, Corporate Governance Guidelines, Code of Business
Conduct and Ethics, Ethical Business Conduct Policy Statement and Code of Ethics for Senior Financial and Executive Officers. Copies of such materials, as well as any of our
SEC reports and all amendments thereto, may also be obtained without charge by writing to Unifi, Inc., 7201 West Friendly Avenue, Greensboro, North Carolina 27410,
Attention: Office of the Secretary.
Item 1A.
Risk Factors
Many of the factors that affect UNIFI’s business and operations involve risk and uncertainty. The factors described below are some of the risks that could materially negatively
affect UNIFI’s business, financial condition, results of operations and cash flows. You should consider all such risks in evaluating UNIFI or making any investment decision
involving UNIFI.
UNIFI faces intense competition from a number of domestic and foreign yarn producers and importers of foreign-sourced fabric, apparel and other textile products.
Because UNIFI and the supply chains in which UNIFI conducts its business do not typically operate on the basis of long-term contracts with textile customers or
brand partners, these competitive factors could cause UNIFI’s customers or brand partners to shift rapidly to other producers.
UNIFI competes not only against domestic and foreign yarn producers, but also against importers of foreign-sourced fabric, apparel and other textile products into the U.S. and
other countries in which UNIFI does business, particularly in Brazil with respect to commodity yarn products. The primary competitive factors in the textile industry include price,
quality, product styling, performance attributes and differentiation, brand reputation, flexibility and location of production and finishing, delivery time and customer service. The
needs of certain customers and brand partners and the characteristics of particular products determine the relative importance of these various factors. A large number of
UNIFI’s foreign competitors have significant competitive advantages that may include lower labor and raw material costs, production facilities in locations outside UNIFI’s
existing supply chain, government subsidies and
11
favorable foreign currency exchange rates against the USD. If any of these advantages increase, if new and/or larger competitors emerge in the future or if UNIFI’s brand
reputation is detrimentally impacted, UNIFI’s products could become less competitive, and its sales and profits may decrease as a result. In particular, devaluation of the
Chinese currency against the USD could result in UNIFI’s products becoming less competitive from a pricing standpoint and/or could result in the NACA region losing market
share to Chinese imports, thereby adversely impacting UNIFI’s sales and profits. While these foreign competitors have traditionally focused on commodity production, they are
now increasingly focused on value-added products. UNIFI may not be able to continue to compete effectively with foreign-made textile and apparel products, which would
materially adversely affect its business, financial condition, results of operations or cash flows. Similarly, to maximize their own supply chain efficiency, customers and brand
partners sometimes request that UNIFI’s products be produced and sourced from specific geographic locations that are in close proximity to the customer’s fabric mills or that
have other desirable attributes from the customer’s perspective. These locations are sometimes situated outside the footprint of UNIFI’s existing global supply chain. If UNIFI is
unable to move production based on customer requests or other shifts in regional demand, we may lose sales and experience an adverse effect on our business, financial
condition, results of operations or cash flows.
A significant portion of our sales is dependent upon demand from a few large brand partners.
UNIFI’s strategy involves the sale of products and solutions to other yarn manufacturers and knitters and weavers (UNIFI’s direct customers) that produce yarn and/or fabric for
brands and retailers in the apparel, hosiery, home furnishings, automotive, industrial and other end-use markets (UNIFI’s indirect customers). We refer to these indirect
customers as “brand partners.” Although we generally do not derive revenue directly from our brand partners, sales volumes to our direct customers are linked with demand
from our brand partners because our direct sales generally form a part of our brand partners’ supply chains. A significant portion of our overall sales is tied to ongoing programs
for a small number of brand partners. Our future operating results depend on both the success of our largest brand partners and on our success in diversifying our products and
our indirect customer base. Because we typically do not operate on the basis of long-term contracts, our customers and brand partners can cease incorporating our products
into their own with little notice to us and with little or no penalty. The loss of a large brand partner, and the failure to add new customers to replace the corresponding lost sales,
would have a material adverse effect on our business, financial condition, results of operations and cash flows.
Significant price volatility of UNIFI’s raw materials and rising energy costs may result in increased production costs. UNIFI attempts to pass such increases in
production costs on to its customers through responsive price increases. However, any such price increases are effective only after a time lag that may span one
or more quarters, during which UNIFI and its margins are negatively affected.
Petroleum-based chemicals and recycled plastic bottles comprise a significant portion of UNIFI’s raw materials. The prices for these products and related energy costs are
volatile and dependent on global supply and demand dynamics, including geo-political risks. While UNIFI enters into raw material supply agreements from time to time, these
agreements typically provide index pricing based on quoted market prices. Therefore, supply agreements provide only limited protection against price volatility. UNIFI attempts to
pass on to its customers increases in raw material costs, but at times it cannot. When it can, there is typically a time lag that adversely affects UNIFI and its margins during one
or more quarters. Certain customers are subject to an index-based pricing model in which UNIFI’s prices are adjusted based on the change in the cost of certain raw materials
in the prior quarter. Pricing adjustments for other customers must be negotiated independently. In ordinary market conditions in which raw material price increases have
stabilized and sales volumes are consistent with traditional levels, UNIFI has historically been successful in implementing price adjustments within one to two fiscal quarters of
the raw material price increase for its index priced customers and within two fiscal quarters of the raw material price increase for its non-index priced customers. UNIFI has lost
in the past (and expects that it may lose in the future) customers to its competitors as a result of price increases. In addition, competitors may be able to obtain raw materials at
a lower cost due to market regulations that favor local producers in certain foreign locations where UNIFI operates, and certain other market regulations that favor UNIFI over
other producers may be amended or repealed. Additionally, inflation can have a long-term impact by increasing the costs of materials, labor and/or energy, any of which costs
may adversely impact UNIFI’s ability to maintain satisfactory margins. If UNIFI is not able to pass on such cost increases to customers in a timely manner (or if it loses a large
number of customers to competitors as a result of price increases), the result could be material and adverse to its business, financial condition, results of operations or cash
flows.
Depending on the price volatility of petroleum-based inputs, recycled bottles and other raw materials, the price gap between virgin raw materials and recycled Flake could make
virgin raw materials more cost-effective than recycled raw materials, which could result in an adverse effect on UNIFI’s ability to sell its REPREVE® brand recycled products
profitably.
UNIFI depends on limited sources for certain of its raw materials, and interruptions in supply could increase its costs of production, cause production inefficiencies
or lead to a halt in production.
UNIFI depends on a limited number of third parties for certain raw material supplies, such as POY, Chip and recycled plastic bottles. Although alternative sources of raw
materials exist, UNIFI may not be able to obtain adequate supplies of such materials on acceptable terms, or at all, from other sources. UNIFI is dependent on USMCA/NAFTA,
CAFTA-DR and Berry Amendment qualified suppliers of raw materials for the production of Compliant Yarns. These suppliers are also at risk with their raw material supply
chains. Any significant disruption or curtailment in the supply of any of its raw materials could cause UNIFI to reduce or cease its production for an extended period, or require
UNIFI to increase its pricing, any of which could have a material adverse effect on its business, financial condition, results of operations or cash flows.
12
A disruption at one of our facilities could harm our business and result in significant losses, lead to a decline in sales and increase our costs and expenses.
Our operations and business could be disrupted by natural disasters, industrial accidents, power or water shortages, extreme weather conditions, pandemics and other man-
made disasters or catastrophic events. We carry commercial property damage and business interruption insurance against various risks, with limits we deem adequate for
reimbursement for damage to our fixed assets and resulting disruption of our operations. However, the occurrence of any of these business disruptions could harm our business
and result in significant losses, lead to a decline in sales and increase our costs and expenses. Any disruptions from these events could require substantial expenditures and
recovery time in order to resume operations and could also have a material adverse effect on our operations and financial results to the extent losses are uninsured or exceed
insurance recoveries and to the extent that such disruptions adversely impact our relationships with our customers.
Catastrophic or extraordinary events, including epidemics or pandemics such as the COVID-19 pandemic, could disrupt global economic activity and/or demand
and negatively impact our financial performance and results of operations.
In March 2020, the World Health Organization declared the current COVID-19 outbreak a global pandemic.
Global measures taken to reduce the spread of COVID-19 have resulted in a significant decline in global business activity in the immediate term that may have a lasting impact
on the global economy and consumer demand. The duration of the COVID-19 pandemic and its related impact on our businesses are currently unknown. The global disruption
caused by COVID-19 has impacted, and is anticipated to continue to impact, overall global demand and business activity negatively, especially for textiles in both the Americas
and Asia.
Significant restoration of consumer spending and retail activity will be critical to both our end-markets and an overall economic rebound. UNIFI anticipates a recovery in global
economic activity when COVID-19 is sufficiently contained. The economic rebound will depend on the pace and effectiveness of the containment efforts deployed by various
national, state, and local governments, along with the speed and effectiveness with which potential testing, treatment and vaccine methods are deployed.
UNIFI will continue to monitor the COVID-19 pandemic by prioritizing health and safety while delivering on customer demand, but we expect an adverse impact at least on our
fiscal 2021, based on present factors and conditions.
UNIFI has significant foreign operations, and its consolidated results of operations and business may be adversely affected by the risks associated with doing
business in foreign locations, including the risk of fluctuations in foreign currency exchange rates.
UNIFI has operations in Brazil, China, Colombia, El Salvador and Turkey and participates in joint ventures located in Israel. In addition, to help service its customers, UNIFI
from time to time engages with third-party independent contractors to provide sales and distribution, manufacturing and other operational and administrative support services in
locations around the world. UNIFI serves customers throughout the Americas and Asia, as well as various countries in Europe. UNIFI’s foreign operations are subject to certain
political, tax, economic and other uncertainties not encountered by its domestic operations that can materially impact UNIFI’s supply chains or other aspects of its foreign
operations. The risks of international operations include trade barriers, duties, exchange controls, national and regional labor strikes, social and political unrest, general
economic risks, compliance with a variety of foreign laws (including tax laws), the difficulty of enforcing agreements and collecting receivables through foreign legal systems,
taxes on distributions or deemed distributions to UNIFI or any of its U.S. subsidiaries, maintenance of minimum capital requirements and import and export controls. UNIFI’s
consolidated results of operations and business could be adversely affected as a result of a significant adverse development with respect to any of these risks.
Through its foreign operations, UNIFI is also exposed to foreign currency exchange rate fluctuations. Fluctuations in foreign currency exchange rates will impact period-to-period
comparisons of UNIFI’s reported results. Additionally, UNIFI operates in countries with foreign exchange controls. These controls may limit UNIFI’s ability to transfer funds from
its international operations and joint ventures or otherwise to convert local currencies into USDs. These limitations could adversely affect UNIFI’s ability to access cash from its
foreign operations.
In addition, due to its foreign operations, a risk exists that UNIFI’s employees, contractors or agents could engage in business practices prohibited by U.S. laws and regulations
applicable to the Company, such as the Foreign Corrupt Practices Act or the laws and regulations of other countries in which we do business. UNIFI maintains policies
prohibiting these practices, but it remains subject to the risk that one or more of its employees, contractors or agents, specifically ones based in or from countries where such
practices are customary, will engage in business practices in violation of these laws and regulations. Any such violations, even if in breach of UNIFI’s policies, could adversely
affect its business or financial performance.
UNIFI’s future success will depend in part on its ability to protect and preserve its intellectual property rights, and UNIFI’s inability to enforce these rights could
cause it to lose sales, reduce any competitive advantage it has developed or otherwise harm its business.
UNIFI’s future success depends in part on its ability to protect and preserve its rights in the trademarks and other intellectual property it owns or licenses, including its proprietary
know-how, methods and processes. UNIFI relies on the trademark, copyright and trade secret laws of the U.S. and other countries, as well as nondisclosure and confidentiality
agreements, to protect its intellectual property rights. However, UNIFI may be unable to prevent third parties, employees or contractors from using its intellectual property without
authorization, breaching nondisclosure or confidentiality agreements, or independently developing technology that is similar to UNIFI’s. The use of UNIFI’s intellectual property
by others without authorization may cause it to lose sales, reduce any competitive advantage UNIFI has developed or otherwise harm its business.
13
The success of UNIFI’s business is tied to the strength and reputation of its brands. If the reputation of one or more of our brands erodes significantly, it could have
a material impact on our financial results.
UNIFI has invested heavily in branding and marketing initiatives, and certain of our brands, particularly our REPREVE® brand, have widespread recognition. Our financial
success is directly dependent on the success of our brands. The success of a brand can suffer if our marketing plans or product initiatives do not have the desired impact on a
brand’s image or its ability to attract consumers. Our financial results could also be negatively impacted if one of our brands suffers substantial harm to its reputation due to a
product recall, product-related litigation, the sale of counterfeit products or other circumstances that tarnish the qualities and values represented by our brands. Part of our
strategy also includes the license of our trademarks to brand partners, customers, independent contractors and other third parties. For example, we license our REPREVE®
trademarks to brand partners that feature this trademark on their marketing materials as part of a co-branded environmental sustainability product narrative. Although we make
concerted efforts to protect our brands through quality control mechanisms and contractual obligations imposed on our licensees, there is a risk that some licensees might not
be in full compliance with those mechanisms and obligations. If the reputation of one or more of our brands is significantly eroded, it could adversely affect our sales, results of
operations, cash flows and financial condition.
UNIFI requires cash to service its indebtedness and to fund capital expenditures and strategic initiatives, and its ability to generate sufficient cash for those
purposes depends on many factors beyond its control.
UNIFI’s principal sources of liquidity are cash flows generated from operations and borrowings under its credit facility. UNIFI’s ability to make payments on its indebtedness and
to fund planned capital expenditures and strategic initiatives will depend on its ability to generate future cash flows from operations. This ability, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and other factors that are beyond UNIFI’s control. The business may not generate sufficient cash flows from
operations, and future borrowings may not be available to UNIFI in amounts sufficient, to enable UNIFI to pay its indebtedness and to fund its other liquidity needs. Any such
development would have a material adverse effect on UNIFI.
A decline or change in general economic conditions, political conditions, and/or levels of consumer spending, could cause a decline in demand for textile products,
including UNIFI’s products.
UNIFI’s products are used in the production of fabric primarily for the apparel, hosiery, home furnishings, automotive, industrial and other end-use markets. Demand for furniture
and other durable goods is often affected significantly by economic conditions that have global or regional industry-wide consequences. Demand for a number of categories of
apparel also tends to be tied to economic cycles and customer preferences that affect the textile industry in general. Demand for textile products, therefore, tends to vary with
the business cycles of the U.S. and other economies, as well as changes in global trade flows, and economic and political conditions. Additionally, prolonged economic
downturns that negatively impact UNIFI’s results of operations and cash flows could result in future material impairment charges to write-down the carrying value of certain
assets, including facilities and equipment, amortizable intangible assets and equity affiliates.
Changes in consumer spending, customer preferences, fashion trends and end uses for UNIFI’s products could weaken UNIFI’s competitive position and cause UNIFI’s
products to become less competitive, and its sales and profits may decrease as a result. Additionally, the end-consumer retail and apparel markets may continue to experience
difficult conditions characterized by reduced retail traffic and growth in online sales channels, which may cause bankruptcies, store closures and other transformations for
traditional retail enterprises, which could have an adverse effect on UNIFI’s business and financial condition.
Historic trends indicate weakening performance in the nylon sector on a global basis. If further declines are significant in any one year or the cumulative decline over a number
of years is significant, the impact could have a material adverse effect on UNIFI’s business, financial condition, results of operations or cash flows.
Unfavorable changes in trade policies and/or violations of existing trade policies could weaken UNIFI’s competitive position significantly and have a material
adverse effect on its business.
A number of markets within the textile industry in which UNIFI sells its products, particularly the apparel, hosiery and home furnishings markets, are subject to intense foreign
competition. Other markets within the textile industry in which UNIFI sells its products may in the future become subject to more intense foreign competition. There are currently
a number of trade regulations and duties in place to protect the U.S. textile industry against competition from low-priced foreign producers, such as those in China, India and
Vietnam. Political and policy-driven influences are subjecting international trade regulations to significant volatility. Future changes in such trade regulations or duties may make
the price of UNIFI’s products less attractive than the goods of its competitors or the finished products of a competitor in the supply chain, which could have a material adverse
effect on UNIFI’s business, financial condition, results of operations or cash flows. Such changes in U.S. import duties might also result in increased indirect costs on items
imported to support UNIFI’s domestic operations and/or countervailing or responsive changes applicable to exports of our products outside the U.S.
According to industry experts and trade associations, there has been a significant amount of illegal transshipments of apparel products into the U.S. and into certain other
countries in the NACA region in which UNIFI competes. Illegal transshipment involves circumventing duties by falsely claiming that textiles and apparel are products of a
particular country of origin (or include yarn of a particular country of origin) to avoid paying higher duties or to receive benefits from regional free trade agreements, such as
USMCA/NAFTA and CAFTA-DR. If illegal transshipments are not monitored, and if enforcement is not effective to limit them, these shipments could have a material adverse
effect on UNIFI’s business, financial condition, results of operations or cash flows.
14
In order to compete effectively, we must attract, retain and motivate key employees, and our failure to do so could harm our business and our results of operations.
In order to compete effectively, we must attract and retain qualified employees. Our future operating results and success depend on keeping key personnel and management
and also expanding our technical, sales and marketing, innovation and administrative support. The competition for qualified personnel is intense, particularly as it relates to
hourly personnel in the domestic communities in which our manufacturing facilities are located. We cannot be sure that we will be able to attract and retain qualified personnel
in the future, which could harm our business and results of operations.
Our business and operations could suffer in the event of cybersecurity breaches.
Attempts to gain unauthorized access to our information technology systems have become increasingly more sophisticated over time. These attempts, which might be related to
industrial or other espionage, include covertly introducing malware to our computers and networks and impersonating authorized users, among others. We seek to detect and
investigate all security incidents and to prevent their recurrence, but in some cases we might be unaware of an incident or its magnitude and effects. We carry data protection
liability insurance against cyber attacks, with limits we deem adequate for the reimbursement for damage to our computers, equipment and networks and resulting disruption of
our operations. Any disruption from a cyber attack could require substantial expenditures and recovery time in order to fully resume operations and could also have a material
adverse effect on our operations and financial results to the extent losses are uninsured or exceed insurance recoveries and to the extent that such disruptions adversely impact
our relationships with our customers. We have been a target of cybersecurity attacks in the past and, while such attacks have not resulted in a material impact on our
operations, business or customer relationships, such attacks could in the future.
The theft, unauthorized use or publication of our intellectual property and/or confidential business information could harm our competitive position, reduce the value of our
investment in research and development and other strategic initiatives or otherwise adversely affect our business. To the extent that any cybersecurity breach results in
inappropriate disclosure of our customers’ or brand partners’ confidential information, we may incur a liability as a result. In addition, the devotion of additional resources to the
security of our information technology systems in the future could significantly increase the cost of doing business or otherwise adversely impact our financial results.
UNIFI may be subject to greater tax liabilities.
UNIFI is subject to income tax and other taxes in the U.S. and in numerous foreign jurisdictions. UNIFI’s domestic and foreign income tax liabilities are dependent on the
jurisdictions in which profits are determined to be earned and taxed. Additionally, the amount of taxes paid is subject to UNIFI’s interpretation of applicable tax laws in the
jurisdictions in which we operate. Changes in tax laws, or in judicial or administrative interpretations of tax laws, could have an adverse effect on UNIFI’s business, financial
condition, operating results and cash flows. Significant judgment, knowledge and experience are required in determining our worldwide provision for income taxes. UNIFI’s
future effective tax rate will be impacted by a number of factors including our interpretation of H.R. 1 (formerly known as the Tax Cuts and Jobs Act) and any pending regulations
and interpretive guidance to be released.
UNIFI anticipates that the U.S. Treasury Department, the U.S. Internal Revenue Service and other standard-setting bodies will continue to issue regulations and interpretive
guidance on how the provisions of H.R. 1 will be applied or otherwise administered, and additional regulations or interpretive guidance may be issued in the future that is
different from UNIFI’s current interpretation. As regulations and guidance evolve with respect to H.R. 1, and as UNIFI gathers more information and performs additional
analysis, UNIFI’s results may differ from previous estimates.
H.R. 1 will significantly impact how U.S. multinational corporations like UNIFI are taxed on foreign earnings, which are now deemed to be repatriated. These changes resulted in
a higher effective tax rate for UNIFI for fiscal 2019. Numerous countries are evaluating their existing tax laws due, in part, to recommendations made by the Organization for
Economic Cooperation & Development’s Base Erosion and Profit Shifting project and in response to the changes in U.S. tax laws. Although UNIFI cannot predict whether, or in
what form, any legislation based on such proposals may be adopted by the countries in which we do business, future tax reform based on such proposals may increase the
amount of taxes UNIFI pays and may also adversely affect our operating results and cash flows.
Item 1B.
None.
Unresolved Staff Comments
15
Item 2.
Properties
The following table contains information about the principal properties owned or leased by UNIFI as of June 28, 2020:
Location
Administrative
Greensboro, North Carolina
Polyester Segment
Domestic
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Yadkinville, North Carolina
Reidsville, North Carolina
Reidsville, North Carolina
Reidsville, North Carolina
Foreign
Ciudad Arce, El Salvador
Ciudad Arce, El Salvador
Asia Segment
Foreign
Suzhou, China
Suzhou, China
Brazil Segment
Foreign
Alfenas, Brazil
Alfenas, Brazil
Sao Paulo, Brazil
Nylon Segment
Domestic
Madison, North Carolina
Madison, North Carolina
Ridgeway, Virginia
Foreign
Bogota, Colombia
Principal Use
Corporate headquarters
Manufacturing facility
Manufacturing facility
Manufacturing facility
Manufacturing facility
Manufacturing facility
Warehouse
Warehouse
Warehouse
Warehouse
Warehouse
Manufacturing facility
Manufacturing facility
Warehouse
Manufacturing facility
Warehouse
Sales office
Warehouse
Manufacturing facility
Warehouse
Corporate office
Manufacturing facility
Warehouse
Warehouse
Manufacturing facility
Approx.
Total Area
(Sq. Ft.)
Owned
or Leased
121,000
Owned
261,000
212,000
812,000
413,000
147,000
400,000
120,000
217,000
61,000
82,000
384,000
160,000
80,000
132,000
25,000
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Leased
Leased
Owned
Owned
Leased
Leased
Leased
11,000
75,000
Leased
Leased
346,000
265,000
8,200
947,000
31,000
12,000
Owned
Owned
Leased
Owned
Owned
Leased
31,000
Owned
Management believes all of UNIFI’s operating properties are well-maintained and in good condition. In fiscal 2020, UNIFI’s manufacturing facilities in the Polyester, Brazil and
Nylon Segments operated below capacity. Management does not perceive any capacity constraints in the foreseeable future.
Item 3.
Legal Proceedings
We are from time to time a party to various lawsuits, claims and other legal proceedings that arise in the ordinary course of business. With respect to all such lawsuits, claims
and proceedings, we record reserves when it is probable a liability has been incurred and the amount of loss can be reasonably estimated. We do not believe that any of these
proceedings, individually or in the aggregate, would be expected to have a material adverse effect on our results of operations, financial position or cash flows. We maintain
liability insurance for certain risks that is subject to certain self-insurance limits.
16
Item 4.
Mine Safety Disclosures
Not applicable.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is a description of the names and ages of the executive officers of the Company, indicating all positions and offices with the Company held by each such person
and each person’s principal occupation or employment during the past five years. Each executive officer of UNIFI is elected by the Board and holds office from the date of
election until thereafter removed by the Board.
Edmund M. Ingle – Age: 55 – Mr. Ingle has served as Chief Executive Officer of UNIFI and a member of UNIFI’s Board since June 2020. From May 2019 to June 2020, he
served as Chief Executive Officer of the Recycling group of Indorama Ventures, a world-class chemicals company and a global integrated leader in PET and fibers serving major
customers in diversified end-use markets. From May 2018 to May 2019, he was Chairperson and Chief Executive Officer of Indorama’s Wellman International division. Prior to
that, Mr. Ingle was with UNIFI for approximately 30 years, during which time he held various key leadership positions, including Vice President of Global Corporate Sustainability,
Vice President of Supply Chain, General Manager of the Company’s Flake and Chip business, Vice President and General Manager of REPREVE® Polymers, General Manager
of the Company’s Nylon business, and Director of Global Procurement.
Thomas H. Caudle, Jr. – Age: 68 – Mr. Caudle has served as President & Chief Operating Officer of UNIFI since August 2017. Previously, he was President of the Company
from April 2016 to August 2017, Vice President of Manufacturing of the Company from October 2006 to April 2016, and Vice President of Global Operations of the Company
from April 2003 to October 2006.
Albert P. Carey – Age: 68 – Mr. Carey has served as Executive Chairman of the Board of UNIFI since April 2019. Mr. Carey previously served as Non-Executive Chairman of
the Board of the Company from January 2019 to March 2019. In March 2019, Mr. Carey retired from PepsiCo, Inc., a consumer products company, after a 38-year career with
the company in which he held a number of senior leadership roles, including Chief Executive Officer of PepsiCo North America from March 2016 to January 2019, Chief
Executive Officer of PepsiCo North America Beverages from July 2015 to March 2016, Chief Executive Officer of PepsiCo Americas Beverages from September 2011 to July
2015, and President and Chief Executive Officer of Frito-Lay North America from June 2006 to September 2011.
Craig A. Creaturo – Age: 50 – Mr. Creaturo has served as Executive Vice President & Chief Financial Officer of UNIFI since September 2019. Mr. Creaturo served as Chief
Financial Officer & Vice President-Administration of Chromalox, Inc., an advanced thermal technologies manufacturing company, from February 2015 to March 2019. Prior to
that, he served as Chief Financial Officer of II-VI Incorporated (“II-VI”), a publicly traded global leader in engineered materials and opto-electronic components, from 2004 to
2014, Treasurer of II-VI from 2000 to 2014, and Corporate Controller of II-VI from 1998 to 2000. From 1992 to 1998, he held a variety of audit roles at Arthur Andersen LLP.
Hongjun Ning – Age: 53 – Mr. Ning has served as an Executive Vice President of UNIFI since July 2020, President of Unifi Textiles (Suzhou) Co. Ltd. (“UTSC”) (UNIFI’s
subsidiary in China) since March 2020 and President of Unifi Asia Pacific since June 2017. Previously, he served as Vice President of UTSC from September 2013 to June
2017, Director of Sales & Marketing of UTSC from August 2008 to September 2013, and General Manager, Sales & Marketing of a former UNIFI joint venture in China from
January 2006 to August 2008.
Lucas de Carvalho Rocha – Age: 63 – Mr. Rocha has served as an Executive Vice President of UNIFI since July 2020 and Vice President of Unifi Latin America and President
of Unifi do Brasil, Ltda. (”UdB”) (UNIFI’s subsidiary in Brazil) since January 2018. Previously, he served as Director of Operations of UdB from April 1999 to January 2018. Prior
to his career with UNIFI, Mr. Rocha also spent time at the following textile entities in Brazil: Fairway Filamentos SA (Rhodia & Hoechst J.V.), Textuval Indústria Têxtil Ltda.,
Rhodia SA (Rhone Poulenc Group), and Polyenka SA (ex-AKZOGroup).
17
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
UNIFI’s common stock is listed for trading on the New York Stock Exchange (the “NYSE”) under the symbol “UFI.”
As of August 18, 2020, there were 127 record holders of UNIFI’s common stock. A significant number of the outstanding shares of common stock that are beneficially owned by
individuals and entities are registered in the name of Cede & Co. Cede & Co. is a nominee of The Depository Trust Company, a securities depository for banks and brokerage
firms. UNIFI estimates that there are approximately 4,200 beneficial owners of its common stock.
No dividends were paid in the past two fiscal years, and UNIFI does not intend to pay cash dividends in the foreseeable future. UNIFI’s current debt obligations contain certain
restricted payment and restricted investment provisions, including a restriction on the payment of dividends and share repurchases under certain circumstances. Information
regarding UNIFI’s debt obligations is provided in Note 13, “Long-Term Debt,” to the accompanying consolidated financial statements.
Purchases of Equity Securities
On October 31, 2018, UNIFI announced that the Board approved the 2018 SRP under which UNIFI is authorized to acquire up to $50,000 of its common stock. Under the 2018
SRP, purchases may be made from time to time in the open market at prevailing market prices, through private transactions or block trades. The timing and amount of
repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no
expiration date.
As of June 28, 2020, UNIFI has repurchased a total of 84 shares at an average price of $23.72. After this transaction, $48,008 remained available for repurchase under the
2018 SRP. UNIFI will continue to evaluate opportunities to use excess cash flows from operations or existing borrowings to repurchase additional stock, while maintaining
sufficient liquidity to support its operational needs and to fund future strategic growth opportunities.
18
PERFORMANCE GRAPH - SHAREHOLDER RETURN ON COMMON STOCK
The below graphic comparison assumes the investment of $100 in each of UNIFI common stock, the S&P SmallCap 600 Index (a benchmark index containing inclusion
characteristics closely associated with UNIFI) and the NYSE Composite Index (a broad equity market index), all at June 26, 2015. The resulting cumulative total return assumes
that dividends, if any, were reinvested. Past performance is not indicative of future performance.
Unifi, Inc.
S&P SmallCap 600
NYSE Composite
$
June 26, 2015
100.00
100.00
100.00
$
June 24, 2016
77.46
95.53
94.65
$
June 23, 2017
85.21
117.64
111.88
$
June 22, 2018
92.87
143.76
123.49
$
June 28, 2019
53.54
131.78
130.90
$
June 26, 2020
34.38
109.72
119.37
19
Item 6.
Selected Financial Data
The following table presents selected historical consolidated financial data. The data should be read in conjunction with UNIFI’s historical consolidated financial statements for
each of the fiscal years presented, as well as “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report.
Number of weeks
Operations Data:
Net sales (1)
Gross profit (1)
Selling, general and administrative expenses
Operating (loss) income (1)
Interest expense
Equity in loss (earnings) of unconsolidated
affiliates (1)
Gain on sale of investment in unconsolidated
affiliate
(Loss) income from continuing operations before
income taxes (1)
Provision (benefit) for income taxes (2)
(Loss) income from continuing operations,
net of tax
Net (loss) income attributable to Unifi, Inc. (3)
Per common share:
Net (loss) income attributable to Unifi, Inc.
Basic
Diluted
Cash Flow Data:
Net cash provided by operating activities
Depreciation and amortization expenses
Capital expenditures
Distributions received from unconsolidated
affiliates
Cash paid for share repurchases
Cash dividends declared per common share
Balance Sheet Data:
Cash and cash equivalents
Property, plant and equipment, net
Total assets
Total debt (4)
Total shareholders’ equity
For the Fiscal Year Ended
June 28, 2020 June 30, 2019 June 24, 2018 June 25, 2017 June 26, 2016
52
52
52
53
52
$
606,509 $
39,040
43,814
(8,821)
4,779
708,804 $
66,308
52,690
10,960
5,414
678,912 $
86,428
56,077
28,799
4,935
647,270 $
94,164
50,829
43,768
3,578
643,637
93,632
47,502
42,198
3,528
477
(3,968)
(5,787)
(4,230)
(8,963)
(2,284)
—
—
—
—
(56,265)
972
(57,237)
(57,237)
(3.10) $
(3.10) $
52,724 $
23,653
18,509
10,437
1,994
— $
75,267 $
204,246
474,162
98,881
316,155
10,011
7,555
2,456
2,456
30,211
(1,491)
31,702
31,702
43,275
10,898
32,377
32,875
0.13 $
0.13 $
1.73 $
1.70 $
1.81 $
1.78 $
7,284 $
23,003
24,871
2,647
—
— $
22,228 $
206,787
592,151
128,018
392,845
37,335 $
22,585
25,029
12,236
—
— $
44,890 $
205,516
601,807
131,207
389,781
46,062 $
20,368
33,190
2,322
—
— $
35,425 $
203,388
571,503
129,468
360,806
48,243
15,073
33,170
34,415
1.93
1.87
55,975
17,528
52,337
4,732
6,211
—
16,646
185,101
525,442
123,012
326,945
$
$
$
$
$
(1)
Fiscal 2020 was adversely impacted by the COVID-19 pandemic, which generated significant pressure on sales volumes, fixed cost absorption and facility utilization for
the majority of UNIFI’s operations for more than three months. Accordingly, profitability metrics were significantly lower than recent prior years.
Additionally, in fiscal 2020, UNIFI sold its PAL Investment for $60,000 cash, which generated (i) an associated impairment charge of $45,194 million, (ii) a reduction to
total debt of approximately $33,900, (iii) an increase to cash and cash equivalents of approximately $26,100, and (iv) lower equity in earnings of unconsolidated
affiliates because (a) the divestiture was completed weeks after the onset of the adverse impact of the COVID-19 pandemic and (b) fiscal 2020 contains two fewer
months of PAL results than fiscal 2019.
(2)
Provision for income taxes for fiscal 2019 includes, among other items, (i) tax expense of $1,181 to establish a valuation allowance against certain deferred tax assets
and (ii) tax expense of $1,202 related to enactment date impacts of U.S. tax reform, partially offset by a tax benefit of $2,045 related to the release of a valuation
allowance against prior year credits. Separate from these amounts, the effective tax rate for fiscal 2019 was adversely impacted by significantly lower domestic
earnings.
Benefit for income taxes for fiscal 2018 includes, among other items, benefits from the reversal of (i) an uncertain tax position for $3,380 relating to certain income
applicable to fiscal 2015 and (ii) a valuation allowance on certain historical net operating losses (“NOLs”) for $3,807, in addition to certain tax impacts resulting from
federal tax reform legislation signed into law in December 2017.
Provision for income taxes for fiscal 2017 includes, among other items, a $1,500 benefit for the recognition of research and development credits relating to previously
filed tax returns that were amended in fiscal 2017.
20
(3)
Net (loss) income attributable to Unifi, Inc. (“Net (Loss) Income”):
•
•
•
•
•
for fiscal 2020 includes (i) an impairment of the PAL Investment of $45,194, (ii) the adverse impact of the COVID-19 pandemic to the global economic
environment and (iii) a gain on divestiture of the PAL Investment of $2,284;
for fiscal 2019 includes (i) severance charges in connection with executive officer departures and cost reduction efforts and (ii) the adverse impacts of
both competitive pressures from yarn imports into the U.S. and a significant raw material cost increase in September and October of calendar 2018;
for fiscal 2018 includes the adverse impact of raw material cost increases during the majority of the fiscal year, which were not timely offset by
corresponding selling price increases in a highly-competitive U.S. market;
for fiscal 2017 includes a loss on the divestiture of a non-core business of $1,662, after tax; and
for fiscal 2016 includes key employee transition costs of $1,493, after tax.
(4)
Total debt reflects debt principal outstanding excluding unamortized debt issuance costs.
Item 7.
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 UNIFI’s operations, along with material changes in financial condition,
during the periods included in the accompanying consolidated financial statements. Management’s discussion and analysis should be read in conjunction with the remainder of
this Annual Report, with the understanding that “forward-looking statements” may be present. A reference to a “note” refers to the accompanying notes to consolidated financial
statements.
Overview
UNIFI manufactures and sells polyester-based and nylon-based products primarily to other yarn manufacturers and knitters and weavers (UNIFI’s direct customers) that produce
yarn and/or fabric for the apparel, hosiery, home furnishings, automotive, industrial and other end-use markets (UNIFI’s indirect customers). We refer to these indirect
customers as “brand partners.” Polyester products include POY, textured, solution and package dyed, twisted, beamed and draw wound yarns, and each is available in virgin or
recycled varieties. Recycled solutions, made from both pre-consumer and post-consumer waste, include Flake, Chip and staple fiber. Nylon products include virgin or recycled
textured, solution dyed and spandex covered yarns.
UNIFI maintains one of the textile industry’s most comprehensive product offerings that include a range of specialized, value-added and commodity solutions, with principal
geographic markets in the Americas, Asia and Europe.
UNIFI has direct manufacturing operations in four countries and participates in joint ventures with operations in Israel and the United States (“U.S.”). On April 29, 2020, UNIFI
sold its 34% minority interest in PAL, a domestic cotton yarn producer.
UNIFI has four reportable segments, the Polyester Segment, the Asia Segment, the Brazil Segment and the Nylon Segment, as well as certain ancillary operations that include
for-hire transportation services, which comprise an All Other category. The ancillary operations classified within All Other are insignificant for all periods presented; therefore, our
discussion and analysis of those activities is generally limited to their impact on consolidated results, where appropriate.
Strategic Priorities
Although UNIFI has faced significant headwinds in the past three fiscal years, we believe our recent underlying performance, before the impact of the COVID-19 pandemic,
reflects the strength of our global initiative to deliver differentiated solutions to customers and brand partners throughout the world. We have developed a successful operating
platform by improving operational and business processes and deriving value from sustainability-based initiatives, including polyester and nylon recycling. This platform has
provided growth in our core operations during recent fiscal years, and has been augmented by significant capital investments that support the production and delivery of
sustainable and innovative solutions.
In order to achieve further growth and continue as an industry leader when the COVID-19 pandemic pressures subside, UNIFI is committed to investing strategically and
synergistically in technology, innovation and sustainability; high-quality brand and supplier relationships; and supply chain expansion and optimization. These initiatives
complement UNIFI’s core competencies and are expected to strengthen our relationships with like-minded customers who value a premier supply chain and state-of-the-art
equipment that offers technology-driven solutions backed by innovation and sustainability. As a result, these initiatives are expected to increase net sales, gross margins and
operating income.
Significant Developments and Trends
Leading up to the COVID-19 pandemic, the following positive developments and trends had occurred or were occurring in fiscal 2020:
•
•
Our REPREVE® family of products continued to gain momentum with brands, retailers and mill partners who value sustainability and UNIFI’s ability to produce
leading edge products with in-demand technologies.
Our strategy to restore textured yarn market share in the U.S. was proving successful, with antidumping and countervailing duty measures on imports from China
and India creating a more competitive pricing environment.
21
•
•
•
•
The polyester raw material cost environment had transitioned from unfavorable in fiscal 2019 to favorable in fiscal 2020, aiding our gross profit performance.
Our sales model deployed in Asia continued to aid portfolio expansion, while also proving agile and favorable during the pandemic shut-down experienced in the
Asia region.
Our SG&A was demonstrably lower than recent fiscal years, resulting from action taken in fiscal 2019.
We sold our 34% minority interest in PAL to the majority partner for $60,000 in cash, allowing for a reduction to total debt of approximately $33,900 and an
increase to cash and cash equivalents of approximately $26,100.
Additionally, the following headwinds were present in fiscal 2019 and 2018:
•
•
•
Textured yarn imports from Asia negatively disrupted pricing in the domestic yarn market, causing a sales volume decline in UNIFI’s core textured yarn portfolio
and adversely impacting fixed cost absorption and facility utilization.
Pricing pressures from brands and retailers continued to burden the domestic supply chain and increase off-shoring activity, especially for our nylon products which
carry a higher average selling price.
The polyester raw material cost environment was unfavorable to UNIFI’s operations in fiscal 2019 and 2018, as certain fluctuations adversely impacted profitability
and competitive positioning.
Fiscal 2020 Financial Performance
Prior to the COVID-19 pandemic, our operations were achieving incremental sales volume growth from both (i) continued demand for sustainable products with our REPREVE®
platform and (ii) market share recapture from our trade initiatives that were finalized in January 2020. Additionally, fiscal 2020 was characterized by (i) a more favorable
polyester raw material cost environment and (ii) a more favorable underlying effective tax rate compared to recent fiscal years. However, for fiscal 2020, UNIFI reported a net
loss of $57,237, or $3.10 per share. These results primarily reflect (i) a $45,194 impairment charge recorded for the divestiture of the PAL Investment, and (ii) the adverse
impact of the economic downturn caused by the global pandemic during the fourth quarter of fiscal 2020.
Each of our segments experienced full year fiscal 2020 sales volumes and gross profit pressures due to the global pandemic, although Polyester Segment and Asia Segment
sales volumes and profitability prior to the pandemic impact were performing well. Excluding the impact of the COVID-19 pandemic,
•
•
•
•
the Polyester Segment benefited from our recent trade initiatives and a favorable polyester raw material cost environment;
the Asia Segment benefited from continued REPREVE® demand and supply chain and portfolio expansion;
the Brazil Segment experienced pricing pressures from raw material cost fluctuations, but maintained strong manufacturing efficiency; and
the Nylon Segment was pressured by reduced business activity that adversely impacted facility utilization and cost absorption, following the transition of certain
programs to overseas production by two large customers.
Additionally, our SG&A for fiscal 2020 was demonstrably lower than recent fiscal years, resulting from action taken in fiscal 2019.
Leading up to the pandemic, our performance metrics improved consistent with our expectations during the first nine months of fiscal 2020 and we generated significant
operating cash flows. However, the global pandemic adversely impacted UNIFI’s business beginning in April 2020 and significantly reduced product demand across all of our
business segments during our fourth fiscal quarter. Accordingly, fixed cost absorption and facility utilization were significantly impacted and profitability declined. Despite these
significant headwinds, we continued to generate positive operating cash flows in the fourth quarter of fiscal 2020, exhibiting a substantial year-over-year improvement in
operating cash flows from fiscal 2019.
Global COVID-19 Pandemic in Calendar 2020
In March 2020, the World Health Organization declared the current COVID-19 outbreak a global pandemic. Through March 2020, the COVID-19 pandemic had no significant
adverse impact on UNIFI’s business, although sales growth for our Asia Segment was temporarily slowed by the extensive government shutdown in China. During the fourth
quarter of fiscal 2020, as our Asia Segment quickly rebounded, UNIFI’s U.S., Brazilian and El Salvador operations were adversely impacted by the COVID-19 pandemic.
Efforts to contain the spread of COVID-19 intensified during March and April 2020, especially in the U.S. Several states, including North Carolina, where UNIFI’s primary
manufacturing and administrative operations are located, declared states of emergency. A number of national, state, and local governments also enacted temporary business
closures, issued quarantine orders and took other restrictive measures in response to the COVID-19 pandemic. The local and global measures significantly reduced economic
activity and demand, thereby reducing overall demand for UNIFI’s products.
UNIFI’s U.S. manufacturing operations have continued operating as an essential business under applicable governmental guidelines, allowing UNIFI to continue to serve
customers that remain operational. However, UNIFI’s global manufacturing operations have adjusted to the declines in economic activity and global demand by reducing
production from historical levels. UNIFI’s facilities in El Salvador were not operational for approximately three months in connection with government shutdown mandates in that
country that were lifted in late June 2020.
22
In an effort to protect the health and safety of our employees, customers and communities, UNIFI has taken proactive, aggressive actions from the earliest signs of the outbreak
in the U.S. by adopting social distancing and travel restriction policies for all locations.
Global measures taken to reduce the spread of COVID-19 have generated a significant decline in global business activity in the immediate term that may have a lasting impact
on the global economy and consumer demand. The duration of the COVID-19 pandemic and its related impact on our business is currently unknown. UNIFI anticipates that the
global disruption caused by COVID-19 has and will continue to negatively impact overall global demand and business activity, and such negative impacts will continue, including
for textiles in both the Americas and Asia.
Significant restoration of consumer spending and retail activity will be critical to our end-markets and enable an economic rebound. UNIFI anticipates a recovery in global
economic activity when COVID-19 is sufficiently contained. The economic rebound will depend on the pace and effectiveness of the containment efforts deployed by various
national, state, and local governments, along with the speed and effectiveness with which potential treatment and vaccine methods are deployed.
UNIFI will continue to monitor the COVID-19 pandemic, prioritizing the health and safety of our employees, while delivering on customer demand. While we expect the recovery
of our business to levels achieved prior to the COVID-19 pandemic, we continue to expect a moderate to significant adverse impact on our operational and financial results
through at least fiscal 2021, based on present factors and conditions.
Trade and Import Activity
UNIFI remains committed to pursuing relief from the competitive pressures that have resulted from the elevated levels of low-cost and subsidized polyester textured yarn
entering the U.S. market from countries such as China and India, which increased approximately 79% from calendar 2013 to 2017 and which continued to pressure our
Polyester Segment during fiscal 2020, 2019 and 2018.
During calendar 2019, the United States Department of Commerce and the United States International Trade Commission made rulings regarding the anti-dumping and
countervailing duties petitions we filed in October 2018. These entities reached their final determinations regarding dumping, subsidization and injury in December 2019 and
published final antidumping and countervailing duty rates in January 2020. Accordingly, subject imports from China and India are being assessed combined antidumping and
countervailing duty rates of 97% and higher and 18% and higher, respectively, in addition to normal course duties currently in effect. The duty rates are expected to remain in
place through calendar 2024. The positive developments in our pursuit of relief from low-cost and subsidized imports are critical steps in our efforts to compete against imported
yarns that have flooded the U.S. market in recent years. UNIFI will continue to monitor whether polyester textured yarn from China or India is being shipped through third-party
countries and then entering the U.S. market to avoid the increased duties.
Over the course of filing and supporting the trade petitions, UNIFI incurred approximately $2,000 of external legal fees during fiscal 2019 and 2020. Exclusive of the current
pandemic impacts, UNIFI expects approximately $20,000 of incremental annual sales as a result of these petitions, and an associated improvement to our gross margin profile
from better facility utilization.
Raw Material and Foreign Currency
Raw material costs represent a significant portion of UNIFI’s manufactured product costs. The prices for the principal raw materials used by UNIFI continually fluctuate, and it is
difficult or impossible to predict trends or upcoming developments. During fiscal 2019 and 2018, UNIFI operated in a predominantly increasing raw material cost environment.
UNIFI believes those higher costs were primarily a result of volatility in the crude oil markets, along with periods of supply and demand constraints for certain polyester
feedstock. During much of fiscal 2020, the raw material cost environment shifted to be more favorable and reached significantly lower levels during the early weeks of the
COVID-19 pandemic.
The continuing volatility in global crude oil prices is likely to impact UNIFI’s polyester and nylon raw material costs. While it is not possible to predict the timing or amount of the
impact or whether the recent fluctuations in crude oil prices will stabilize, increase or decrease, UNIFI monitors these dynamic factors closely. In addition, UNIFI attempts to pass
on to its customers increases in raw material costs but due to market pressures, this is not always possible. When price increases can be implemented, there is typically a time
lag that adversely affects UNIFI and its margins during one or more quarters. Certain customers are subject to an index-based pricing model in which UNIFI’s prices are
adjusted based on the change in the cost of certain raw materials in the prior quarter. Pricing adjustments for other customers must be negotiated independently. In ordinary
market conditions in which raw material price increases have stabilized and sales volumes are consistent with traditional levels, UNIFI has historically been successful in
implementing price adjustments within one or two fiscal quarters of the raw material price increase for its index priced customers and within two fiscal quarters of the raw
material price increase for its non-index priced customers.
UNIFI is also impacted by significant fluctuations in the value of the BRL and the Chinese Renminbi (“RMB”), the local currencies for our operations in Brazil and China,
respectively. Appreciation of the BRL and the RMB improves our net sales and gross profit metrics when the results of our subsidiaries are translated into USDs at
comparatively favorable rates. However, such strengthening may cause adverse impacts to the value of USDs held in these foreign jurisdictions. UNIFI expects continued
volatility in the value of the BRL and the RMB to impact our key performance metrics and actual financial results, although the magnitude of the impact is dependent upon the
significance of the volatility, and it is not possible to predict the timing or amount of the impact.
In fiscal 2020, 2019 and 2018, the BRL weakened versus the USD. In fiscal 2020, 2019 and 2018, the value of the RMB fluctuated significantly in certain fiscal quarters, but the
fluctuations were not significant to any fiscal year as a whole.
23
Key Performance Indicators and Non-GAAP Financial Measures
UNIFI continuously reviews performance indicators to measure its success. These performance indicators form the basis of management’s discussion and analysis included
below:
•
•
•
•
•
•
•
•
•
•
•
•
sales volume and revenue for UNIFI and for each reportable segment;
gross profit and gross margin for UNIFI and for each reportable segment;
net (loss) income and earnings per share;
Segment Profit, which equals segment gross profit plus segment depreciation expense;
unit conversion margin, which represents unit net sales price less unit raw material costs, for UNIFI and for each reportable segment;
working capital, which represents current assets less current liabilities;
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which represents net (loss) income before net interest expense, income tax
expense and depreciation and amortization expense;
Adjusted EBITDA, which represents EBITDA adjusted to exclude equity in loss (earnings) of PAL and, from time to time, certain other adjustments necessary
to understand and compare the underlying results of UNIFI;
Adjusted Net (Loss) Income, which represents net (loss) income calculated under GAAP, adjusted to exclude certain amounts which management believes do
not reflect the ongoing operations and performance of UNIFI and/or for which exclusion may be necessary to understand and compare the underlying results
of UNIFI;
Adjusted EPS, which represents Adjusted Net (Loss) Income divided by UNIFI’s weighted average common shares outstanding;
Adjusted Working Capital, which equals receivables plus inventories and other current assets, less accounts payable and accrued expenses; and
Net Debt, which represents debt principal less cash and cash equivalents.
EBITDA, Adjusted EBITDA, Adjusted Net (Loss) Income, Adjusted EPS, Adjusted Working Capital and Net Debt (collectively, the “non-GAAP financial measures”) are not
determined in accordance with GAAP and should not be considered a substitute for performance measures determined in accordance with GAAP. The calculations of the non-
GAAP financial measures are subjective, based on management’s belief as to which items should be included or excluded in order to provide the most reasonable and
comparable view of the underlying operating performance of the business. We may, from time to time, modify the amounts used to determine our non-GAAP financial measures.
When applicable, management’s discussion and analysis includes specific consideration for items that comprise the reconciliations of its non-GAAP financial measures.
We believe that these non-GAAP financial measures better reflect UNIFI’s underlying operations and performance and that their use, as operating performance measures,
provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets, among
otherwise comparable companies.
Management uses Adjusted EBITDA (i) as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it
removes the impact of (a) items directly related to our asset base (primarily depreciation and amortization) and (b) items that we would not expect to occur as a part of our
normal business on a regular basis; (ii) for planning purposes, including the preparation of our annual operating budget; (iii) as a valuation measure for evaluating our operating
performance and our capacity to incur and service debt, fund capital expenditures and expand our business; and (iv) as one measure in determining the value of other
acquisitions and dispositions. Adjusted EBITDA is a key performance metric utilized in the determination of variable compensation. We also believe Adjusted EBITDA is an
appropriate supplemental measure of debt service capacity because it serves as a high-level proxy for cash generated from operations and is relevant to our fixed charge
coverage ratio. Equity in loss (earnings) of PAL is excluded from Adjusted EBITDA because such results do not reflect our operating performance.
Management uses Adjusted Net (Loss) Income and Adjusted EPS (i) as measurements of net operating performance because they assist us in comparing such performance on
a consistent basis, as they remove the impact of (a) items that we would not expect to occur as a part of our normal business on a regular basis and (b) components of the
provision for income taxes that we would not expect to occur as a part of our underlying taxable operations; (ii) for planning purposes, including the preparation of our annual
operating budget; and (iii) as measures in determining the value of other acquisitions and dispositions.
Management uses Adjusted Working Capital as an indicator of UNIFI’s production efficiency and ability to manage inventories and receivables. In fiscal 2019, in connection with
changes to balance sheet presentation required by the adoption of the new revenue recognition guidance, UNIFI updated the definition of Adjusted Working Capital to include
other current assets for current and historical calculations of the non-GAAP financial measure. Other current assets includes amounts capitalized for future conversion into
inventories or receivables (e.g., vendor deposits and contract assets), and management believes that its inclusion in the definition of Adjusted Working Capital improves the
understanding of UNIFI capital that is supporting production and sales activity.
24
Management uses Net Debt as a liquidity and leverage metric to determine how much debt would remain if all cash and cash equivalents were used to pay down debt principal.
See “Non-GAAP Reconciliations” below for reconciliations of non-GAAP metrics to the most directly comparable GAAP metric.
Review of Results of Operations for Fiscal 2020, 2019 and 2018
Fiscal 2020 and 2018 were each comprised of 52 weeks, while fiscal 2019 was comprised of 53 weeks.
Consolidated Overview
The below tables provide:
•
•
•
the components of net (loss) income and the percentage increase or decrease over the prior fiscal year amounts,
a reconciliation from net (loss) income to EBITDA and Adjusted EBITDA, and
a reconciliation from net (loss) income to Adjusted Net (Loss) Income and Adjusted EPS.
Following the tables is a discussion and analysis of the significant components of net (loss) income.
Net (loss) income
Net sales
Cost of sales
Gross profit
SG&A expenses
Provision (benefit) for bad debts
Other operating expense, net
Operating (loss) income
Interest expense, net
Loss (earnings) from unconsolidated affiliates
Gain on sale of investment in unconsolidated
affiliate
Impairment of investment in unconsolidated
affiliate
Loss on extinguishment of debt
(Loss) income before income taxes
Provision (benefit) for income taxes
Net (loss) income
nm – not meaningful
EBITDA and Adjusted EBITDA (Non-GAAP Measures)
Net (loss) income
Interest expense, net
Provision (benefit) for income taxes
Depreciation and amortization expense (1)
EBITDA
Equity in loss (earnings) of PAL
EBITDA excluding PAL
Gain on sale of investment in unconsolidated affiliate (2)
Severance (3)
Impairment of investment in unconsolidated affiliate (4)
Adjusted EBITDA
Fiscal 2020
% Change
Fiscal 2019
% Change
Fiscal 2018
$
$
606,509
567,469
39,040
43,814
1,739
2,308
(8,821)
4,057
477
(14.4) $
(11.7)
(41.1)
(16.8)
nm
(1.8)
(180.5)
(15.2)
(112.0)
708,804
642,496
66,308
52,690
308
2,350
10,960
4,786
(3,968)
4.4 $
8.4
(23.3)
(6.0)
nm
47.8
(61.9)
9.4
(31.4)
(2,284)
nm
—
—
45,194
—
(56,265)
972
(57,237)
nm
nm
nm
(87.1)
nm $
—
131
10,011
7,555
2,456
—
nm
(66.9)
nm
(92.3) $
678,912
592,484
86,428
56,077
(38)
1,590
28,799
4,375
(5,787)
—
—
—
30,211
(1,491)
31,702
Fiscal 2020
Fiscal 2019
Fiscal 2018
$
$
(57,237) $
4,057
972
23,406
(28,802)
960
(27,842)
(2,284)
1,485
45,194
16,553 $
2,456 $
4,786
7,555
22,713
37,510
(2,561)
34,949
—
1,351
—
36,300 $
31,702
4,375
(1,491)
22,218
56,804
(4,533)
52,271
—
—
—
52,271
The reconciliations of the amounts reported under GAAP for Net (Loss) Income to EBITDA and Adjusted EBITDA are as follows:
(1) Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. Within the
accompanying condensed consolidated statements of cash flows, amortization of debt issuance costs is reflected in depreciation and amortization expense.
For fiscal 2020, UNIFI recorded an impairment charge of $45,194 relating to the April 29, 2020 sale of its 34% interest in PAL.
(2)
25
UNIFI’s 34% share of PAL’s loss subsequent to the date of the impairment charge (March 29, 2020) and through the date of transaction closing (April 29, 2020) was
$2,284 and generated a gain on sale.
For fiscal 2020, UNIFI incurred certain severance costs in connection with (i) overall cost reduction efforts in the U.S. and (ii) a wind-down plan for its operations in Sri
Lanka. For fiscal 2019, UNIFI incurred certain severance costs in connection with overall cost reduction efforts in the U.S.
In fiscal 2020, UNIFI recorded an impairment charge of $45,194 related to the sale of its 34% interest in PAL.
(3)
(4)
Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Measures)
The tables below set forth reconciliations of (i) (Loss) Income before income taxes (“Pre-tax (Loss) Income”), (Benefit) provision for income taxes (“Tax Impact”) and Net (Loss)
Income to Adjusted Net (Loss) Income and (ii) Basic EPS to Adjusted EPS.
GAAP results
Impairment of investment in unconsolidated affiliate (1)
Severance (2)
Adjusted results
Weighted average common shares outstanding
GAAP results
Severance (2)
Adjusted results
Weighted average common shares outstanding
GAAP results
Reversal of specific tax valuation allowance (3)
Reversal of specific uncertain tax position (4)
Adjusted results
Weighted average common shares outstanding
$
$
$
$
$
$
Pre-tax Loss
Tax Impact
Net Loss
Basic EPS
For the Fiscal Year Ended June 28, 2020
(56,265) $
45,194
1,485
(9,586) $
(972) $
—
(312)
(1,284) $
(57,237) $
45,194
1,173
(10,870) $
(3.10)
2.45
0.06
(0.59)
18,475
Pre-tax Income
Tax Impact
Net Income
Basic EPS
For the Fiscal Year Ended June 30, 2019
10,011 $
1,351
11,362 $
(7,555) $
(284)
(7,839) $
2,456 $
1,067
3,523 $
0.13
0.06
0.19
18,395
For the Fiscal Year Ended June 24, 2018
Pre-tax
Income
Tax Impact
Net Income
Basic EPS
30,211 $
—
—
30,211 $
1,491 $
(3,807)
(3,380)
(5,696) $
31,702 $
(3,807)
(3,380)
24,515 $
1.73
(0.21)
(0.18)
1.34
18,294
(1)
(2)
(3)
(4)
For fiscal 2020, UNIFI recorded an impairment charge of $45,194 before tax, related to the sale of its 34% interest in PAL.
For fiscal 2020, UNIFI incurred certain severance costs in connection with (i) overall cost reduction efforts in the U.S. and (ii) a wind-down plan for its operations in Sri
Lanka. For fiscal 2019, UNIFI incurred certain severance costs in connection with overall cost reduction efforts in the U.S.
For fiscal 2018, UNIFI reversed a $3,807 valuation allowance on certain historical NOLs in connection with a tax status change unrelated to the federal tax reform
legislation signed into law in December 2017.
For fiscal 2018, UNIFI reversed a $3,380 uncertain tax position relating to certain foreign exchange income applicable to fiscal 2015.
Net Sales
Fiscal 2020 vs. Fiscal 2019
Consolidated net sales for fiscal 2020 decreased by $102,295, or 14.4%, as compared to fiscal 2019.
Consolidated net sales decreased 14.4%, for fiscal 2020 in comparison to fiscal 2019 primarily as the adverse impacts of (i) the global pandemic caused by COVID-19, (ii) one
fewer week of sales in fiscal 2020 for our NACA operations, (iii) lower nylon sales volumes, (iv) lower average selling prices, and (v) unfavorable foreign currency translation
were partially offset by the sales growth of REPREVE® products, especially for the Asia Segment.
Consolidated sales volumes decreased 2.0%, primarily attributable to (i) the adverse impact of COVID-19, (ii) one fewer week of sales in fiscal 2020 for our NACA operations,
and (iii) lower sales in the Nylon Segment, partially offset by continued sales growth of REPREVE®-branded products, primarily Chip and staple fiber in the Asia Segment.
Annual sales growth was achieved by the Asia Segment, despite the adverse impacts from the COVID-19 pandemic, as our REPREVE® portfolio continues to resonate with our
brand partners that are focused on sustainable solutions.
26
Excluding the impacts from COVID-19, we believe the incremental revenue generated in connection with our recently completed trade petitions relating to polyester textured
yarn is helping to offset suppressed demand from certain market sectors. However, our Nylon Segment results reflect (i) two customers shifting certain programs to overseas
garment production during calendar 2019 and (ii) the current global trend of declining demand for nylon socks, ladies’ hosiery and intimate apparel.
Consolidated average sales prices decreased 12.4%, primarily attributable to (i) growth of Chip and staple fiber in the Asia Segment, which have lower average sales prices, (ii)
a decline in higher-priced nylon product sales, (iii) sales price declines associated with polyester raw material cost changes, and (iv) unfavorable foreign currency translation
impacts.
Fiscal 2019 vs. Fiscal 2018
Consolidated net sales for fiscal 2019 increased by $29,892, or 4.4%, as compared to fiscal 2018.
Consolidated sales volumes increased 7.1%, attributable to (i) an additional week in fiscal 2019 for our NACA region operations, (ii) continued growth in sales of Flake and Chip
in the Polyester Segment, and (iii) continued growth in sales of Chip, staple fiber and other products in the Asia Segment. The increase in sales volumes was partially offset by
soft yarn sales in the Polyester, Nylon and Brazil Segments.
Consolidated average sales prices decreased 2.6%, attributable to (i) higher growth rates of lower-priced Flake, Chip and staple fiber among the Polyester and Asia Segments,
(ii) a decline in higher-priced nylon products, and (iii) unfavorable foreign currency translation impacts.
Gross Profit
Fiscal 2020 vs. Fiscal 2019
Gross profit for fiscal 2020 decreased by $27,268, or 41.1%, as compared to fiscal 2019. The global pandemic adversely impacted gross profit for all of UNIFI’s segments during
fiscal 2020 due to the lower sales and production volumes in the fourth quarter.
•
•
•
•
For the Polyester Segment, prior to the pandemic, gross profit benefited from an improved conversion margin in connection with a predominantly declining raw material
cost environment during fiscal 2020.
For the Asia Segment, gross profit increased as net sales increased, but was partially offset by a greater mix of lower-priced product sales.
For the Brazil Segment, gross profit decreased due to (i) market price declines (in connection with declining raw material costs) outpacing inventory turnover and (ii)
unfavorable foreign currency translation effects as the BRL weakened against the USD.
For the Nylon Segment, gross profit decreased due to weaker fixed cost absorption in connection with two customers shifting certain programs to overseas garment
production during calendar 2019.
Fiscal 2019 vs. Fiscal 2018
Gross profit for fiscal 2019 decreased by $20,120, or 23.3%, as compared to fiscal 2018, and was primarily pressured by an unfavorable raw material cost environment in fiscal 2019.
•
•
•
•
For the Polyester Segment, gross profit decreased primarily due to lower conversion margin, in which the first half of fiscal 2019 was unfavorably impacted by higher
raw material costs, unfavorable sales mix towards lower-margin business and weaker fixed cost absorption resulting from lower textured yarn volumes in connection
with significant competitive pressure from imported textured polyester yarns.
For the Asia Segment, gross profit decreased as sales growth was more than offset by (i) margin pressure from higher raw material costs, (ii) a greater mix of lower-
priced product sales, and (iii) unfavorable foreign currency translation effects as the RMB weakened against the USD during fiscal 2019.
For the Brazil Segment, gross profit decreased primarily due to (i) unfavorable foreign currency translation effects as the BRL weakened against the USD during fiscal
2019, (ii) margin pressure from higher raw material costs and competition, and (iii) lower sales volumes.
For the Nylon Segment, gross profit decreased primarily due to a less favorable sales mix and weaker fixed cost absorption, due in part to the loss of a customer
program to overseas production during the fourth quarter of fiscal 2019.
27
SG&A
The changes in SG&A were as follows:
SG&A expenses for fiscal 2018
Decrease in compensation expenses
Decrease due to foreign currency translation
Net increase in professional fees
Increase due to an additional week in fiscal 2019
Other net increases
SG&A expenses for fiscal 2019
SG&A expenses for fiscal 2019
Net decrease in professional fees
Net decrease in marketing expenses
Net decrease in compensation expenses
Decrease in travel and entertainment expenses
Impact of an additional week in fiscal 2019
Decrease due to foreign currency translation
Other net decreases
SG&A expenses for fiscal 2020
Fiscal 2020 vs. Fiscal 2019
$
$
$
$
56,077
(4,639)
(1,051)
1,435
841
27
52,690
52,690
(2,523)
(1,470)
(1,258)
(1,118)
(841)
(807)
(859)
43,814
SG&A decreased from fiscal 2019 to fiscal 2020 primarily as a result of (i) lower professional fees and marketing expenses primarily due to cost reduction efforts undertaken
during the fourth quarter of fiscal 2019 and (ii) lower compensation expenses in connection with (a) fewer executive officers throughout fiscal 2020 as compared to fiscal 2019
and (b) a reduction in annual incentive compensation earned due to the adverse profitability impacts of the COVID-19 pandemic.
Fiscal 2019 vs. Fiscal 2018
SG&A expenses decreased from fiscal 2018 to fiscal 2019 primarily as a result of significant forfeitures of share-based compensation and variable compensation in connection
with executive officer departures that occurred in fiscal 2019, partially offset by (i) an increase in fees paid to professional service providers, primarily for efforts related to
antidumping and countervailing duty petitions and (ii) an additional week in fiscal 2019 for our NACA region operations.
Provision (Benefit) for Bad Debts
Fiscal 2020 vs. Fiscal 2019
Provision for bad debt increased from $308 in fiscal 2019 to $1,739 in fiscal 2020. The increase primarily reflects weaker economic conditions and customer payment delays
during the COVID-19 pandemic.
Fiscal 2019 vs. Fiscal 2018
There was no material bad debt activity in fiscal 2019 or 2018.
Other Operating Expense, Net
Fiscal 2020 vs. Fiscal 2019
Other operating expense, net was $2,350 in fiscal 2019 and $2,308 in fiscal 2020, which primarily reflects severance expenses recorded in both fiscal years, along with foreign
currency transaction gains in fiscal 2019 and foreign currency transaction losses in fiscal 2020.
Fiscal 2019 vs. Fiscal 2018
Other operating expense (income), net changed unfavorably from $1,590 of expense for fiscal 2018 to $2,350 of expense for fiscal 2019, which primarily reflects severance
expenses recorded in fiscal 2019 and unfavorable foreign currency transaction impacts recorded in fiscal 2018.
28
Interest Expense, Net
Interest expense, net reflected the following components:
Interest and fees on the ABL Facility
Other interest
Subtotal of interest on debt obligations
Amortization of debt financing fees
Interest capitalized to property, plant and equipment, net
Subtotal of other components of interest expense
Total interest expense
Interest income
Interest expense, net
Fiscal 2020 vs. Fiscal 2019
Fiscal 2020
Fiscal 2019
Fiscal 2018
$
$
3,922 $
736
4,658
247
(126)
121
4,779
(722)
4,057 $
4,515 $
828
5,343
290
(219)
71
5,414
(628)
4,786 $
3,926
832
4,758
367
(190)
177
4,935
(560)
4,375
Interest expense, net decreased from fiscal 2019 to fiscal 2020 primarily as a result of (i) lower market interest rates on our variable-rate debt, (ii) a more favorable pricing
structure on the ABL Facility in connection with a December 2018 amendment, and (iii) an overall reduction in debt principal during fiscal 2020.
Fiscal 2019 vs. Fiscal 2018
Interest on debt obligations increased from fiscal 2018 to fiscal 2019 primarily due to (i) a higher average debt level throughout fiscal 2019 and (ii) a general increase in market
interest rates on our variable rate debt.
Loss (Earnings) from Unconsolidated Affiliates
The components of loss (earnings) from unconsolidated affiliates are as follows:
Loss (earnings) from PAL
Earnings from nylon joint ventures
Total equity in loss (earnings) of unconsolidated affiliates
Fiscal 2020
Fiscal 2019
Fiscal 2018
$
$
960
(483)
477
$
$
(2,561)
(1,407)
(3,968)
$
$
(4,533)
(1,254)
(5,787)
As a percentage of consolidated (loss) income before income taxes
0.8%
39.6%
19.2%
Fiscal 2020 vs. Fiscal 2019
UNIFI’s 34% share of PAL’s earnings decreased from earnings of $2,561 in fiscal 2019 to a loss of $960 in fiscal 2020. The decrease in earnings from PAL was primarily
attributable to lower operating leverage and comparably higher costs, in addition to the adverse impacts of the COVID-19 pandemic on PAL’s results in UNIFI’s final month of
ownership, April 2020. On April 29, 2020, UNIFI sold its 34% non-controlling partnership interest in PAL. The earnings from the nylon joint ventures experienced a decrease
from fiscal 2019 to fiscal 2020, primarily due to lower sales volumes.
Fiscal 2019 vs. Fiscal 2018
UNIFI’s 34% share of PAL’s earnings decreased from $4,533 in fiscal 2018 to $2,561 in fiscal 2019. The decrease was primarily attributable to higher raw material costs and
reduced operating leverage, most notably in the comparable first fiscal quarters of each fiscal year. The earnings from the nylon joint ventures experienced an increase from
fiscal 2018 to fiscal 2019, primarily due to a period of improved operating leverage preceding a global nylon price increase.
29
Impairment of Investment in Unconsolidated Affiliate and Gain on Divestiture
As of March 29, 2020, UNIFI owned a 34% interest in the PAL Investment and Parkdale owned the majority 66% interest. In April 2020, UNIFI and Parkdale finalized
negotiations to sell the PAL Investment to Parkdale for $60,000 and UNIFI recorded an impairment charge of $45,194 to adjust the PAL Investment to fair value. The transaction
closed on April 29, 2020 and UNIFI received $60,000 in cash.
UNIFI’s 34% share of PAL’s loss subsequent to the date of the impairment charge (March 29, 2020) and through the date of transaction closing (April 29, 2020) was $2,284 and
generated a gain on divestiture.
Provision (Benefit) for Income Taxes
The change in consolidated income taxes is as follows:
(Loss) income before income taxes
Provision (benefit) for income taxes
Effective tax rate
Fiscal 2020
Fiscal 2019
Fiscal 2018
$
$
(56,265)
972
(1.7)%
10,011
7,555
$
75.5%
30,211
(1,491)
(4.9)%
The effective tax rate is subject to variation due to several factors, including variability in pre-tax and taxable income, the mix of income by jurisdiction, changes in deferred tax
valuation allowances, and changes in statutes, regulations and case law. Additionally, the impacts of discrete and other rate impacting items are greater when income before
income taxes is lower.
Fiscal 2020 vs. Fiscal 2019
The decrease in the fiscal 2020 effective tax rate was primarily attributable to (i) lower U.S. tax on Global Intangible Low-Tax Income (“GILTI”) in the current period, (ii) lower
foreign withholding taxes in the current period, and (iii) lower impact of foreign earnings taxed at higher rates. These benefits were partially offset by an increase in the valuation
allowance on a capital loss generated upon the PAL Investment sale.
Fiscal 2019 vs. Fiscal 2018
The increase in the fiscal 2019 effective tax rate was primarily attributable to (i) impacts of GILTI provisions newly effective for UNIFI in fiscal 2019, (ii) foreign withholding taxes,
(iii) establishment of a valuation allowance against certain state deferred tax assets, and (iv) additional tax expense related to the enactment of H.R. 1. These rate detriments
were partially offset by a tax benefit from tax credits related to prior years. The prior year rate of (4.9%) also benefited from the release of a valuation allowance on certain NOLs
outside the U.S. consolidated tax filing group and the release of uncertain tax positions.
Net (Loss) Income
Fiscal 2020 vs. Fiscal 2019
Net loss for fiscal 2020 was $(57,237), or $(3.10) per share, compared to $2,456, or $0.13 per share, for fiscal 2019. The decrease was primarily attributable to the impairment
charge for the PAL Investment sale. In addition to the impairment charge, the decrease was attributable to (i) lower gross profit primarily stemming from the impact of COVID-19
and (ii) lower earnings from unconsolidated affiliates, partially offset by lower SG&A expenses.
Fiscal 2019 vs. Fiscal 2018
Net income for fiscal 2019 was $2,456, or $0.13 per diluted share, compared to $31,702, or $1.70 per diluted share, for fiscal 2018. The decrease was primarily attributable to
(i) lower gross profit stemming from cost and competitive pressures, (ii) lower earnings from PAL, and (iii) a significantly higher effective tax rate, partially offset by lower SG&A
expenses.
30
Adjusted EBITDA
Adjusted EBITDA decreased from $36,300 for fiscal 2019 to $16,553 for fiscal 2020. The decrease was primarily attributable to the economic impacts of the COVID-19
pandemic, partially offset by lower SG&A. Excluding the pandemic, the Polyester Segment and Asia Segment were experiencing fiscal 2020 results consistent with our
expectations, while the Brazil Segment and Nylon Segment were adversely impacted by raw material cost fluctuations and U.S. product demand declines, respectively.
Adjusted EBITDA decreased from $52,271 for fiscal 2018 to $36,300 for fiscal 2019. The decrease was primarily attributable to the unfavorable impact to gross profit from a
generally rising raw material cost environment, along with weaker facility utilization as our domestic textured yarn portfolio was pressured by competitive imports.
Adjusted Net (Loss) Income
Adjusted Net (Loss) Income decreased from $3,523 for fiscal 2019 to $(10,870) for fiscal 2020. The decrease was primarily attributable to the economic impacts of the COVID-
19 pandemic, partially offset by lower SG&A.
Adjusted Net Income decreased from $24,515 for fiscal 2018 to $3,523 for fiscal 2019. The decrease was primarily attributable to the unfavorable impact to gross profit from a
generally rising raw material cost environment, along with weaker facility utilization as our domestic textured yarn portfolio was pressured by competitive imports.
Segment Overview
Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for fiscal 2020, 2019 and 2018.
Polyester Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Polyester
Segment are as follows:
Fiscal 2020
% Change
Fiscal 2019
% Change
Fiscal 2018
(16.6) $
(14.4)
(49.3)
5.2
(27.3) $
370,770
346,951
23,819
16,068
39,887
6.4%
10.8%
52.3%
46.3%
Net sales
Cost of sales
Gross profit
Depreciation expense
Segment Profit
Gross margin
Segment margin
Segment net sales as a percentage
of consolidated amount
Segment Profit as a percentage
of consolidated amount
$
$
309,184
297,096
12,088
16,904
28,992
3.9%
9.4%
51.0%
48.6%
The changes in net sales for the Polyester Segment are as follows:
Net sales for fiscal 2018
Net change in average selling price and sales mix
Increase due to an additional week of sales in fiscal 2019
Decrease in underlying sales volumes
Net sales for fiscal 2019
Net sales for fiscal 2019
Decrease in underlying sales volumes
Net change in average selling price and sales mix
Decrease due to an additional week of sales in fiscal 2019
Net sales for fiscal 2020
1.8 $
4.8
(28.2)
1.1
(18.7) $
$
$
$
$
364,169
330,975
33,194
15,893
49,087
9.1%
13.5%
53.6%
46.1%
364,169
14,004
6,622
(14,025)
370,770
370,770
(31,533)
(23,431)
(6,622)
309,184
The decrease in net sales for the Polyester Segment from fiscal 2019 to fiscal 2020 was primarily attributable to (i) the adverse impact of COVID-19 on market demand, (ii)
lower average selling prices associated with lower polyester raw material costs, and (iii) one fewer week of sales in fiscal 2020.
31
The increase in net sales for the Polyester Segment from fiscal 2018 to fiscal 2019 was primarily attributable to (i) higher sales volumes of Flake and Chip, (ii) higher sales
volumes of dyed yarn in connection with a dyed yarn portfolio acquisition that closed in the fourth quarter of fiscal 2018, (iii) higher selling prices in response to several months
of raw material related price increases during calendar 2018, and (iv) an additional week of sales in fiscal 2019. However, these benefits were partially offset by a weaker sales
mix, characterized by lower textured yarn volumes resulting from highly competitive imports.
The changes in Segment Profit for the Polyester Segment are as follows:
Segment Profit for fiscal 2018
Net decrease in underlying margins
Decrease in underlying sales volumes
Increase due to an additional week of sales in fiscal 2019
Segment Profit for fiscal 2019
Segment Profit for fiscal 2019
Net decrease in underlying margins
Decrease in underlying sales volumes
Decrease due to an additional week of sales in fiscal 2019
Segment Profit for fiscal 2020
$
$
$
$
49,087
(7,476)
(1,892)
168
39,887
39,887
(7,202)
(3,525)
(168)
28,992
The decrease in Segment Profit for the Polyester Segment from fiscal 2019 to fiscal 2020 was attributable to the impact of the COVID-19 pandemic on cost absorption and
facility utilization following significantly lower sales volumes. However, prior to the pandemic, the Polyester Segment benefited from an improved conversion margin in
connection with the comparative impact of (i) a declining raw material cost environment during fiscal 2020 and (ii) an unfavorable raw material cost environment in fiscal 2019.
The decrease in Segment Profit for the Polyester Segment from fiscal 2018 to fiscal 2019 was primarily attributable to (i) lower conversion margin, in which the first half of fiscal
2019 was unfavorably impacted by higher raw material costs that were not effectively offset by timely corresponding selling price increases, (ii) the unfavorable sales mix shift
towards lower-margin products discussed above in the net sales analysis, and (iii) weaker fixed cost absorption resulting from lower textured yarn volumes in connection with
significant competitive pressure from imported textured polyester.
Asia Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Asia Segment
are as follows:
$
$
Net sales
Cost of sales
Gross profit
Depreciation expense
Segment Profit
Gross margin
Segment margin
Segment net sales as a percentage
of consolidated amount
Segment Profit as a percentage
of consolidated amount
Fiscal 2020
% Change
Fiscal 2019
% Change
Fiscal 2018
15.2 $
16.4
6.3
—
6.3 $
153,032
136,349
16,683
—
16,683
10.9%
10.9%
25.2%
27.9%
32
132,866
117,166
15,700
—
15,700
11.8%
11.8%
18.7%
18.2%
36.6 $
45.2
(5.5)
—
(5.5) $
97,297
80,677
16,620
—
16,620
17.1%
17.1%
14.3%
15.6%
The changes in net sales for the Asia Segment are as follows:
Net sales for fiscal 2018
Increase in sales volumes of Chip and staple fiber
Increase in sales volumes of certain other products
Unfavorable foreign currency translation effects
Change in average selling price and sales mix
Net sales for fiscal 2019
Net sales for fiscal 2019
Increase in sales volumes of Chip and staple fiber
Net increase in sales volumes of certain other products
Unfavorable foreign currency translation effects
Change in average selling price and sales mix
Net sales for fiscal 2020
$
$
$
$
97,297
24,005
16,209
(5,372)
727
132,866
132,866
20,731
3,917
(4,015)
(467)
153,032
The increase in net sales for the Asia Segment from fiscal 2019 to fiscal 2020 was primarily attributable to higher sales volumes of REPREVE®-branded products, primarily Chip
and staple fiber, partially offset by (i) the impact of lower-priced Chip and staple fiber sales on average selling price and sales mix and (ii) unfavorable foreign currency
translation effects due to the comparable weakening of the RMB, along with a reduction in the overall sales growth rate caused by the COVID-19 pandemic impact on global
demand.
The increase in net sales for the Asia Segment from fiscal 2018 to fiscal 2019 was primarily attributable to higher sales volumes due to growth in our REPREVE® portfolio,
partially offset by unfavorable foreign currency translation effects as the RMB weakened against the USD during fiscal 2019.
The RMB weighted average exchange rate was 7.03 RMB/USD, 6.82 RMB/USD and 6.50 RMB/USD for fiscal 2020, 2019 and 2018, respectively.
The changes in Segment Profit for the Asia Segment are as follows:
Segment Profit for fiscal 2018
Decrease in underlying margins
Unfavorable foreign currency translation effects
Increase in sales volumes
Segment Profit for fiscal 2019
Segment Profit for fiscal 2019
Increase in sales volumes
Change in underlying margins and sales mix
Unfavorable foreign currency translation effects
Segment Profit for fiscal 2020
$
$
$
$
16,620
(3,836)
(964)
3,880
15,700
15,700
831
780
(628)
16,683
The increase in Segment Profit for the Asia Segment from fiscal 2019 to fiscal 2020 was primarily attributable to the increase in sales volumes and related sales mix change
described in the net sales analysis above. The sales growth rate and, accordingly, the growth rate of Segment Profit for the Asia Segment, was partially offset by (i) the impact of
the COVID-19 pandemic on global demand and (ii) unfavorable foreign currency translation effects as the RMB weakened against the USD during fiscal 2020.
The decrease in Segment Profit for the Asia Segment from fiscal 2018 to fiscal 2019 was primarily attributable to (i) margin pressure from higher raw material costs, (ii)
unfavorable foreign currency translation effects as the RMB weakened against the USD during fiscal 2019, and (iii) a greater mix of lower-priced product sales, partially offset by
the increase in sales volumes described in the net sales analysis above.
33
Brazil Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Brazil
Segment are as follows:
Fiscal 2020
% Change
Fiscal 2019
% Change
Fiscal 2018
(28.7) $
(26.3)
(39.7)
(9.9)
(37.5) $
73,339
62,144
11,195
1,385
12,580
15.3%
17.2%
12.1%
21.1%
102,877
84,298
18,579
1,537
20,116
18.1%
19.6%
14.5%
23.3%
$
$
Net sales
Cost of sales
Gross profit
Depreciation expense
Segment Profit
Gross margin
Segment margin
Segment net sales as a percentage
of consolidated amount
Segment Profit as a percentage
of consolidated amount
The changes in net sales for the Brazil Segment are as follows:
Net sales for fiscal 2018
Unfavorable foreign currency translation effects
Decrease in sales volumes
Increase in average selling price and change in sales mix
Net sales for fiscal 2019
Net sales for fiscal 2019
Decrease in sales volumes
Unfavorable foreign currency translation effects
Decrease in average selling price
Net sales for fiscal 2020
(7.0) $
(0.5)
(28.2)
(6.7)
(26.9) $
$
$
$
$
110,587
84,726
25,861
1,648
27,509
23.4%
24.9%
16.3%
25.8%
110,587
(15,700)
(4,684)
12,674
102,877
102,877
(13,501)
(13,128)
(2,909)
73,339
The decrease in net sales for the Brazil Segment from fiscal 2019 to fiscal 2020 was primarily attributable to (i) the COVID-19 pandemic impact on sales volumes, (ii)
unfavorable foreign currency translation effects as the BRL weakened against the USD during fiscal 2020, and (iii) lower selling prices associated with declining raw material
costs and competitive pricing pressures.
The decrease in net sales for the Brazil Segment from fiscal 2018 to fiscal 2019 was primarily attributable to (i) unfavorable foreign currency translation effects as the BRL
weakened against the USD during fiscal 2019 and (ii) lower sales volumes due to increased competition, partially offset by higher pricing on a local currency basis due to
increased raw material costs and a change in sales mix.
The BRL weighted average exchange rate was 4.29 BRL/USD, 3.87 BRL/USD and 3.31 BRL/USD for fiscal 2020, 2019 and 2018, respectively.
The changes in Segment Profit for the Brazil Segment are as follows:
Segment Profit for fiscal 2018
Unfavorable foreign currency translation effects
Decrease in underlying margins
Decrease in sales volumes
Segment Profit for fiscal 2019
Segment Profit for fiscal 2019
Decrease in sales volumes
Decrease in underlying margins
Unfavorable foreign currency translation effects
Segment Profit for fiscal 2020
$
$
$
$
27,509
(3,912)
(2,328)
(1,153)
20,116
20,116
(2,641)
(2,535)
(2,360)
12,580
The decrease in Segment Profit for the Brazil Segment from fiscal 2019 to fiscal 2020 was primarily attributable to (i) the COVID-19 pandemic, (ii) unfavorable foreign currency
translation, and (iii) prior to the pandemic, competitive pricing pressures during a declining raw material cost environment. For the Brazil Segment, declining raw material costs
place immediate downward market pressure on selling prices and, since the Brazil Segment’s supply chain is generally longer, average inventory costs decline slower
34
than selling prices. Additionally, the Brazil Segment accelerated certain raw material purchases in the fourth quarter of fiscal 2019, which exacerbated the above impact.
The decrease in Segment Profit for the Brazil Segment from fiscal 2018 to fiscal 2019 was primarily attributable to (i) unfavorable foreign currency translation effects as the BRL
weakened against the USD, (ii) margin pressure from higher raw material costs and competition, and (iii) lower sales volumes as described above.
Nylon Segment
The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Nylon
Segment are as follows:
Fiscal 2020
% Change
Fiscal 2019
% Change
Fiscal 2018
(31.3) $
(24.2)
(112.4)
(8.0)
(90.6) $
67,381
68,359
(978)
1,917
939
-1.5%
1.4%
11.1%
1.6%
98,127
90,231
7,896
2,083
9,979
8.0%
10.2%
13.8%
11.6%
$
$
Net sales
Cost of sales
Gross (loss) profit
Depreciation expense
Segment Profit
Gross margin
Segment margin
Segment net sales as a percentage
of consolidated amount
Segment Profit as a percentage
of consolidated amount
The changes in net sales for the Nylon Segment are as follows:
Net sales for fiscal 2018
Decrease in underlying sales volumes
Net change in average selling price and sales mix
Increase due to an additional week of sales in fiscal 2019
Net sales for fiscal 2019
Net sales for fiscal 2019
Decrease in underlying sales volumes
Net change in average selling price and sales mix
Decrease due to an additional week of sales in fiscal 2019
Net sales for fiscal 2020
(4.4) $
(2.1)
(24.7)
(5.2)
(21.3) $
$
$
$
$
102,639
92,155
10,484
2,197
12,681
10.2%
12.4%
15.1%
11.9%
102,639
(4,450)
(1,708)
1,646
98,127
98,127
(27,205)
(1,895)
(1,646)
67,381
The decrease in net sales for the Nylon Segment from fiscal 2019 to fiscal 2020 was primarily attributable to (i) the adverse impact of COVID-19, (ii) continued demand declines
in certain nylon product categories, (iii) two customers shifting certain programs to overseas garment production during calendar 2019, and (iv) one fewer week of sales in fiscal
2020.
The decrease in net sales for the Nylon Segment from fiscal 2018 to fiscal 2019 was primarily attributable to (i) continued demand declines in certain nylon product categories
along with a significant customer shifting a portion of its supply chain from the NACA region and (ii) a lower-priced sales mix, partially offset by the additional week of sales in
fiscal 2019.
The changes in Segment Profit for the Nylon Segment are as follows:
Segment Profit for fiscal 2018
Net decrease in underlying margins
Decrease in underlying sales volumes
Increase due to an additional week of sales in fiscal 2019
Segment Profit for fiscal 2019
Segment Profit for fiscal 2019
Net decrease in underlying margins
Decrease in underlying sales volumes
Decrease due to an additional week of sales in fiscal 2019
Segment Profit for fiscal 2020
35
$
$
$
$
12,681
(2,301)
(550)
149
9,979
9,979
(6,119)
(2,772)
(149)
939
The decrease in Segment Profit for the Nylon Segment from fiscal 2018 to fiscal 2019 and to fiscal 2020 was primarily attributable to lower sales and weaker fixed cost
absorption, with fiscal 2020 significantly impacted by demand disruption from COVID-19.
Liquidity and Capital Resources
UNIFI’s primary capital requirements are for working capital, capital expenditures, debt service and share repurchases. UNIFI’s primary sources of capital are cash generated
from operations and borrowings available under the ABL Revolver (as defined below) of its credit facility.
As of June 28, 2020, all of UNIFI’s $98,881 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, and 46% of UNIFI’s cash and cash equivalents
were held by its foreign subsidiaries. Cash and cash equivalents held by foreign subsidiaries may not be presently available to fund UNIFI’s domestic capital requirements,
including its domestic debt obligations. UNIFI employs a variety of strategies to ensure that its worldwide cash is available in the locations where it is needed. The following table
presents a summary of cash and cash equivalents, borrowings available under financing arrangements, liquidity, working capital and total debt obligations as of June 28, 2020
for domestic operations compared to foreign operations:
Cash and cash equivalents
Borrowings available under financing arrangements
Liquidity
Working capital
Total debt obligations
Domestic
Foreign
Total
$
$
$
$
40,878 $
56,392
97,270 $
110,916 $
98,881 $
34,389 $
—
34,389 $
88,583 $
— $
75,267
56,392
131,659
199,499
98,881
For fiscal 2020, cash generated from operations was $52,724 and at June 28, 2020, excess availability under the ABL Revolver was $56,392. Despite the adverse impacts of
the COVID-19 pandemic, UNIFI was able to generate strong operating cash flows for both fiscal 2020 and the associated fourth quarter when the COVID-19 impacts were most
severe, while ensuring borrowing availability and liquidity remained at elevated levels compared to recent fiscal years. Cash generation was achieved by focusing diligently on
the management of working capital, while minimizing travel and discretionary costs.
Looking ahead to fiscal 2021, the impacts of the COVID-19 pandemic will continue to place pressure on our ability to generate cash. A business recovery over the next twelve
months is likely to generate an increase in our receivables and inventory, and when combined with capital expenditures, debt service and routine tax payments, we expect to
use cash in fiscal 2021. However, our liquidity position of $131,659 is higher than recent historical levels and is expected to be more than adequate to allow UNIFI to manage
through the current COVID-19 operating environment and to quickly respond when the economic recovery occurs.
As of June 28, 2020, taxes associated with the repatriation of earnings of foreign subsidiaries were not provided on cumulative total of $31,872 of undistributed earnings for
certain foreign subsidiaries. UNIFI intends to reinvest these earnings indefinitely in such foreign subsidiaries. If these earnings were distributed in the form of dividends or
otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, UNIFI could be subject to additional tax liabilities. The amount of potential
unrecognized deferred income tax liability related to these earnings is approximately $3,732.
COVID-19 Liquidity Considerations
Because global economic activity slowed within a short period of time, the COVID-19 pandemic introduced liquidity risk that was not present prior to calendar 2020. UNIFI
believes that aggressive and prudent actions are necessary to preserve liquidity in the current economic environment, which is pressured by significant global demand declines
that began in calendar 2020 and which are expected to continue for the remainder of calendar 2020 and potentially beyond. Accordingly, to minimize further disruption to
operations, UNIFI has prioritized employee health and safety measures that include suspending travel and group meetings, enforcing social distancing and healthy hygiene
habits, increasing sanitation, disinfection and wellness monitoring and utilizing teleconferencing and telecommuting when appropriate. Additionally, the following aid in reducing
risk and ensuring adequate cash is available to fund ongoing operations and obligations:
•
•
•
•
•
•
•
Participating in the supply chain for personal protective equipment necessary for first responders, healthcare personnel, and military.
Reducing future capital expenditures while prioritizing safety and maintenance.
Capitalizing on raw material pricing, which remains at low levels and aids short-term working capital and liquidity.
Implementing strategic curtailment of manufacturing operations when possible.
Managing working capital and reducing costs.
Lowering discretionary expenses that focus on long-term returns, such as marketing, event and other commercial expenses.
Maintaining significant cash balances across the company to ensure liquidity is available whenever it is needed.
While we currently expect these measures to aid liquidity in the current pandemic environment, should global demand and economic activity remain subdued beyond the short
term, UNIFI maintains the ability to (i) utilize aid and lending programs from governmental entities, (ii) seek additional credit or financing arrangements, extensions or
concessions, and (iii) implement further cost reduction initiatives to preserve cash.
36
The following further describe the current strength of UNIFI’s liquidity position and access to capital resources:
•
•
•
•
•
•
We have not accessed public or private capital markets for recent liquidity needs.
We do not currently expect our cost of or access to existing capital and funding sources to materially change as a result of the COVID-19 pandemic; however, we
expect new capital and funding sources (if any) to carry higher costs than our current structure.
We have not taken advantage of rent, lease or debt deferrals, forbearance periods or other concessions, nor have we modified any material agreements to provide
concessions.
We have not relied on supply chain financing, structured trade payables or vendor financing.
We are not at material risk of not meeting our financial covenants.
We continue to maintain significant borrowing availability on our existing credit facility.
Lastly, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) allowed UNIFI to defer certain employer payroll tax payments to future periods and attain certain
employee retention credits, both of which are not material to our short- and long-term liquidity position. We have not applied for or obtained any other material federal or state
assistance.
Debt Obligations
The following table presents the total balances outstanding for UNIFI’s debt obligations, their scheduled maturity dates and the weighted average interest rates for borrowings as
well as the applicable current portion of long-term debt:
ABL Revolver
ABL Term Loan (1)
Finance lease obligations
Total debt
Current ABL Term Loan
Current portion of finance lease obligations
Unamortized debt issuance costs
Total long-term debt
Scheduled
Maturity Date
December 2023
December 2023
(2)
Weighted Average
Interest Rate as of
June 28, 2020
0.0%
3.2%
3.6%
Principal Amounts as of
June 28, 2020
June 30, 2019
$
$
— $
87,500
11,381
98,881
(10,000)
(3,563)
(711)
84,607 $
19,400
97,500
11,118
128,018
(10,000)
(5,519)
(958)
111,541
(1)
(2)
Includes the effects of interest rate swaps.
Scheduled maturity dates for finance lease obligations range from July 2020 to November 2027, as further outlined in Note 4, “Leases.”
ABL Facility and Amendments
On December 18, 2018, Unifi, Inc. and certain of its subsidiaries entered into a Third Amendment to Amended and Restated Credit Agreement and Second Amendment to
Amended and Restated Guaranty and Security Agreement (the “2018 Amendment”). The 2018 Amendment amended the Amended and Restated Credit Agreement, dated as
of March 26, 2015, by and among Unifi, Inc. and a syndicate of lenders, as previously amended (together with all previous and subsequent amendments, the “Credit
Agreement”). The Credit Agreement provides for a $200,000 senior secured credit facility (the “ABL Facility”), including a $100,000 revolving credit facility (the “ABL Revolver”)
and a term loan that can be reset up to a maximum amount of $100,000, once per fiscal year, if certain conditions are met (the “ABL Term Loan”). The ABL Facility has a
maturity date of December 18, 2023.
The 2018 Amendment made the following changes to the Credit Agreement, among others: (i) extended the maturity date from March 26, 2020 to December 18, 2023 and (ii)
decreased the Applicable Margin (as defined in the Credit Agreement) pricing structure for Base Rate Loans (as defined in the Credit Agreement) and LIBOR Rate Loans (as
defined in the Credit Agreement) by 25 basis points. In addition, in connection with the 2018 Amendment, the principal amount of the ABL Term Loan was reset from $80,000 to
$100,000. Net proceeds from the ABL Term Loan reset were used to pay down the amount outstanding on the ABL Revolver. Additionally, the 2018 Amendment resulted in a
loss on extinguishment of debt of $131 in connection with the write-off of certain unamortized debt issuance costs.
In connection and concurrent with the sale of UNIFI’s 34% interest in PAL on April 29, 2020, UNIFI entered into the Fourth Amendment to Amended and Restated Credit
Agreement (“Fourth Amendment”). The Fourth Amendment among other things: (i) revised the definition of permitted dispositions within the Credit Agreement to include the
sale by Unifi Manufacturing, Inc. of its equity interest in PAL so long as the aggregate net cash proceeds received equaled or exceeded $60,000 and such sale occurred on or
before May 15, 2020; (ii) revised the terms of the Credit Agreement to allow the net cash proceeds from the sale of PAL to be applied to the outstanding principal amount of the
ABL Revolver until paid in full with the remaining net cash proceeds retained by UNIFI, so long as certain conditions are met; and (iii) revised the terms of the Credit Agreement
to allow the lenders to make changes to the benchmark interest rate without further amendment should LIBOR temporarily or permanently cease to exist and a transition to a
new benchmark interest rate such as the Secured Overnight Financing Rate (“SOFR”) be required for future ABL Facility borrowings.
37
UNIFI currently utilizes variable-rate borrowings under the ABL Facility that are made with reference to USD LIBOR Rate Loans and is party to LIBOR-based interest rate
swaps. Management will continue to monitor the potential termination of LIBOR and the potential impact on UNIFI’s operations. However, as a result of the Fourth Amendment,
management does not expect (i) significant efforts are necessary to accommodate a termination of LIBOR or (ii) a significant impact to UNIFI’s operations upon a termination of
LIBOR.
The ABL Facility is secured by a first-priority perfected security interest in substantially all owned property and assets (together with all proceeds and products) of Unifi, Inc.,
Unifi Manufacturing, Inc. and certain subsidiary guarantors (collectively, the “Loan Parties”). It is also secured by a first-priority security interest in all (or 65% in the case of
UNIFI’s first-tier controlled foreign subsidiary, as required by the lenders) of the stock of (or other ownership interests in) each of the Loan Parties (other than Unifi, Inc.) and
certain subsidiaries of the Loan Parties, together with all proceeds and products thereof.
If excess availability under the ABL Revolver falls below the Trigger Level (as defined in the Credit Agreement), a financial covenant requiring the Loan Parties to maintain a
fixed charge coverage ratio on a quarterly basis of at least 1.05 to 1.00 becomes effective. The Trigger Level as of June 28, 2020 was $23,438. In addition, the ABL Facility
contains restrictions on particular payments and investments, including certain restrictions on the payment of dividends and share repurchases. Subject to specific provisions,
the ABL Term Loan may be prepaid at par, in whole or in part, at any time before the maturity date, at UNIFI’s discretion.
ABL Facility borrowings bear interest at LIBOR plus an applicable margin of 1.25% to 1.75%, or the Base Rate (as defined below) plus an applicable margin of 0.25% to 0.75%,
with interest currently being paid on a monthly basis. The applicable margin is based on (i) the excess availability under the ABL Revolver and (ii) the consolidated leverage
ratio, calculated as of the end of each fiscal quarter. The Base Rate means the greater of (i) the prime lending rate as publicly announced from time to time by Wells Fargo Bank,
National Association, (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.5%, and (iii) LIBOR plus 1.0%. UNIFI’s ability to borrow under the ABL Revolver is
limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventories and is subject to certain conditions and limitations. There is also a
monthly unused line fee under the ABL Revolver of 0.25%.
As of June 28, 2020, UNIFI was in compliance with all financial covenants in the Credit Agreement and the excess availability under the ABL Revolver was $56,392. At June 28,
2020, the fixed charge coverage ratio was 0.23 to 1.00 and UNIFI had $0 of standby letters of credit. Management maintains the capability to improve the fixed charge coverage
ratio utilizing existing foreign cash and cash equivalents.
UNIFI currently maintains three interest rate swaps that fix LIBOR at approximately 1.9% on $75,000 of variable-rate debt. Such swaps are scheduled to terminate in May 2022.
Finance Lease Obligations
During fiscal 2020, UNIFI entered into finance lease obligations totaling $6,301 for certain transportation equipment. The maturity date of these obligations range from March
2025 to November 2026 with interest rates ranging from 3.1% to 3.5%. There were no significant finance leases established in fiscal 2019.
Scheduled Debt Maturities
The following table presents the scheduled maturities of UNIFI’s outstanding debt obligations for the following five fiscal years and thereafter:
ABL Revolver
ABL Term Loan
Finance lease obligations
Total
Fiscal 2021
—
$
10,000
3,563
13,563
$
Fiscal 2022
—
$
10,000
3,388
13,388
$
Fiscal 2023
—
$
10,000
1,094
11,094
$
Fiscal 2024
—
$
57,500
1,132
58,632
$
Fiscal 2025
—
$
—
1,028
1,028
$
$
$
Thereafter
—
—
1,176
1,176
Further discussion of the terms and conditions of the Credit Agreement and the Company’s existing indebtedness is outlined in Note 13, “Long-Term Debt,” to the accompanying
consolidated financial statements.
Net Debt (Non-GAAP Financial Measure)
The reconciliations for Net Debt are as follows:
Long-term debt
Current portion of long-term debt
Unamortized debt issuance costs
Debt principal
Less: cash and cash equivalents
Net Debt
June 28, 2020
June 30, 2019
84,607 $
13,563
711
98,881
75,267
23,614 $
111,541
15,519
958
128,018
22,228
105,790
$
$
38
Working Capital and Adjusted Working Capital (Non-GAAP Financial Measures)
The following table presents the components of working capital and the reconciliation from working capital to Adjusted Working Capital:
Cash and cash equivalents
Receivables, net
Inventories
Income taxes receivable
Other current assets
Accounts payable
Accrued expenses
Other current liabilities
Working capital
Less: Cash and cash equivalents
Less: Income taxes receivable
Less: Other current liabilities
Adjusted Working Capital
Fiscal 2020
Fiscal 2019
$
$
$
75,267 $
53,726
109,704
4,033
11,763
(25,610)
(13,689)
(15,695)
199,499 $
(75,267)
(4,033)
15,695
135,894 $
22,228
88,884
133,781
4,373
16,356
(41,796)
(16,849)
(16,088)
190,889
(22,228)
(4,373)
16,088
180,376
Working capital increased from $190,889 as of June 30, 2019 to $199,499 as of June 28, 2020, while Adjusted Working Capital decreased from $180,376 to $135,894. Working
capital and Adjusted Working Capital are within the range of management’s expectations based on the composition of the underlying business and global structure. Adjusted
Working Capital declined significantly from fiscal 2019 to fiscal 2020, most notably due to the COVID-19 pandemic impact on global demand and our overall business activities.
The increase in cash and cash equivalents was driven by (i) generating operating cash flows and (ii) proceeds from the PAL Investment sale. The decrease in receivables, net
and inventories was primarily attributable to the COVID-19 pandemic impact on global demand as sales volumes declined significantly in the fourth quarter of fiscal 2020. The
decrease in income taxes receivable was due to the timing and magnitude of tax impacts recognized in the current period, primarily relating to changes in deferred taxes. The
decrease in other current assets was primarily due to a decrease in contract assets revenue recognition, consistent with the declines in receivables and inventory. The decrease
in accounts payable and accrued expenses was primarily attributable to lower (i) purchase activity, (ii) annual incentive compensation, and (iii) operating accruals in connection
with the COVID-19 pandemic. The decrease in other current liabilities primarily reflects a decrease in (a) income taxes payable due to the timing and magnitude of tax impacts
recognized in fiscal 2020 and (b) the current portion of finance lease obligations, partially offset by an increase in current operating lease liabilities recognized under the new
lease accounting standard.
Capital Projects
In fiscal 2020 and in response to the adverse liquidity impacts of COVID-19, we invested approximately $18,500 in capital projects that included (i) a priority on safety and
maintenance capital expenditures to allow continued efficient production and (ii) making further improvements in production capabilities and technology enhancements in the
Americas. Maintenance capital expenditures are necessary to support UNIFI’s current operations, capacities and capabilities and exclude expenses relating to repairs and costs
that do not extend an asset’s useful life. We also added approximately $6,000 of transportation equipment under new finance leases.
In fiscal 2019, we invested approximately $25,000 in capital projects, which included (i) making further improvements in production capabilities and technology enhancements in
the Americas and (ii) annual maintenance capital expenditures.
In fiscal 2018, we invested approximately $25,000 in capital projects, which included (i) completing the fourth production line in the REPREVE® Recycling Center, (ii) making
further improvements in production capabilities and technology enhancements in the Americas, and (iii) annual maintenance capital expenditures.
In fiscal 2021, UNIFI expects to invest $22,000 in capital projects, which we expect to include (i) making further improvements in production capabilities and technology
enhancements in the Americas, including the purchase and installation of new eAFK EVO texturing machines, and (ii) annual maintenance capital expenditures. UNIFI will seek
to ensure maintenance capital expenditures are sufficient to allow continued production at high efficiencies.
The total amount ultimately invested for fiscal 2021 could be more or less than the currently estimated amount depending on the timing and scale of contemplated initiatives,
and is expected to be funded by cash from operations. UNIFI expects the recent capital projects to provide benefits to future profitability. The additional assets from these capital
projects consist primarily of machinery and equipment and building additions.
39
Share Repurchase Program
On October 31, 2018, UNIFI announced that the Board approved the 2018 SRP under which UNIFI is authorized to acquire up to $50,000 of its common stock. Under the 2018
SRP, purchases will be made from time to time in the open market at prevailing market prices, through private transactions or block trades. The timing and amount of
repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase authorization is discretionary and has no
expiration date.
As of June 28, 2020, UNIFI has repurchased a total of 84 shares at an average price of $23.72, and $48,008 remained available for repurchase under the 2018 SRP. UNIFI will
continue to evaluate opportunities to use excess cash flows from operations or existing borrowings to repurchase additional stock, while maintaining sufficient liquidity to support
its operational needs and to fund future strategic growth opportunities.
Liquidity Summary
UNIFI has met its historical liquidity requirements for working capital, capital expenditures, debt service requirements and other operating needs from its cash flows from operations
and available borrowings. UNIFI believes that its existing cash balances, cash provided by operating activities and borrowings available under the ABL Revolver will enable UNIFI to
comply with the terms of its indebtedness and meet its foreseeable liquidity requirements. Domestically, UNIFI’s cash balances, cash provided by operating activities and borrowings
available under the ABL Revolver continue to be sufficient to fund UNIFI’s domestic operating activities as well as cash commitments for its investing and financing activities. For its
existing foreign operations, UNIFI expects its existing cash balances and cash provided by operating activities will provide the needed liquidity to fund its foreign operating activities
and any foreign investing activities, such as future capital expenditures. However, expansion of our foreign operations may require cash sourced from our domestic subsidiaries.
Cash Provided by Operating Activities
The significant components of net cash provided by operating activities are summarized below. UNIFI analyzes net cash provided by operating activities utilizing the major
components of the statements of cash flows prepared under the indirect method.
Net (loss) income
Depreciation and amortization expense
Equity in loss (earnings) of unconsolidated affiliates
Impairment of investment in unconsolidated affiliate
Gain on sale of investment in unconsolidated affiliate
Non-cash compensation expense
Deferred income taxes
Subtotal
Distributions received from unconsolidated affiliates
Change in inventories
Other changes in assets and liabilities
Net cash provided by operating activities
Fiscal 2020 Compared to Fiscal 2019
$
Fiscal 2020
Fiscal 2019
Fiscal 2018
(57,237) $
23,653
477
45,194
(2,284)
3,999
(4,011)
9,791
10,437
15,792
16,704
52,724
2,456 $
23,003
(3,968)
—
—
3,258
423
25,172
2,647
(15,838)
(4,697)
7,284
31,702
22,585
(5,787)
—
—
5,823
(5,797)
48,526
12,236
(18,198)
(5,229)
37,335
The increase in net cash provided by operating activities from fiscal 2019 to fiscal 2020 was primarily due to (i) $10,437 of distributions received from PAL in fiscal 2020 and (ii)
the favorable impact on working capital of both (a) a more favorable raw material cost environment in fiscal 2020 and (b) lower receivables and inventory levels.
Fiscal 2019 Compared to Fiscal 2018
The decrease in net cash provided by operating activities from fiscal 2018 to fiscal 2019 was primarily due to (i) the significant increase in inventories and other current assets
as shown and discussed above under “Working Capital,” (ii) approximately $9,600 less in dividends from unconsolidated affiliates, and (iii) lower Adjusted EBITDA (a proxy for
cash-based earnings). The decrease was partially offset by approximately $7,100 of net tax refunds received in fiscal 2019.
Cash Provided By (Used in) Investing Activities and (Used In) Provided by Financing Activities
Fiscal 2020
UNIFI generated $41,574 from net investing activities and utilized $37,922 for net financing activities during fiscal 2020. Significant investing activities included the $60,000 sale
of the PAL Investment, partially offset by $18,509 for capital expenditures, which primarily relate to ongoing maintenance capital expenditures, along with production capabilities
and technology enhancements in the Americas. Significant financing activities included $29,400 of net payments against the ABL Facility using approximately half of the PAL
Investment sale proceeds, along with $6,035 of payments on finance lease obligations.
40
Fiscal 2019
UNIFI utilized $24,936 for net investing activities and utilized $4,626 for net financing activities during fiscal 2019. Significant investing activities included $24,871 for capital
expenditures, which primarily relate to ongoing maintenance capital expenditures, along with production capabilities and technology enhancements in the Americas. Significant
financing activities included $3,800 of net borrowings against the ABL Facility to fund capital expenditure activities and $7,019 for payments on finance lease obligations.
Fiscal 2018
UNIFI utilized $26,875 for net investing activities and was provided $1,303 from net financing activities during fiscal 2018. Significant investing activities included $25,029 for
capital expenditures, which primarily relate to the completion of the fourth production line in the REPREVE® Recycling Center, along with other capital expenditures to improve
UNIFI’s manufacturing flexibility and capability to produce value-added products in the Americas. Significant financing activities included $8,800 of net borrowings against the
ABL Facility and $7,060 for payments on finance lease obligations.
Contractual Obligations
As of June 28, 2020, UNIFI’s contractual obligations consisted of the following:
Description of Commitment
ABL Revolver
ABL Term Loan
Finance lease obligations (1)
Operating leases
Interest on long-term debt and other obligations (2)
Capital purchase obligations (3)
Purchase obligations (4)
Other long-term obligations (5)
Total cash payments by period
Cash Payments Due By Period
Total
Less Than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
$
$
— $
87,500
12,108
10,762
8,355
17,821
31,422
5,391
173,359 $
— $
10,000
3,684
2,168
3,300
7,351
11,844
1,124
39,471 $
— $
20,000
4,806
3,216
4,314
10,470
13,647
1,913
58,366 $
— $
57,500
2,443
2,307
700
—
5,547
80
68,577 $
—
—
1,175
3,071
41
—
384
2,274
6,945
(1)
(2)
(3)
(4)
(5)
Finance lease obligations includes $727 in lease commitments expected to commence in fiscal 2021.
Interest payments are calculated for future periods using principal, interest rates and terms in effect at June 28, 2020.
Capital purchase obligations relate to contracts with vendors for the construction or purchase of assets.
Purchase obligations primarily consist of utility, software and other service agreements.
Other long-term obligations does not include an estimate of the timing of potential tax payments related to uncertain tax positions; therefore, $1,113 has been excluded
from the table above. Other long-term obligations includes a post-employment plan liability for which $1,972 of cash payments is reflected beyond five years.
For purposes of the above table, purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms, including fixed or
minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction.
As of June 28, 2020, UNIFI’s open non-capital purchase orders totaled approximately $31,551 and were expected to be settled in fiscal 2021. These open purchase orders are
in the ordinary course of business for the procurement of (i) raw materials used in the production of inventory, (ii) certain consumables and outsourced services used in UNIFI’s
manufacturing processes, and (iii) selected finished goods for resale sourced from third-party suppliers.
As of June 28, 2020, UNIFI had $0 of standby letters of credit.
Recent Accounting Pronouncements
Issued and Pending Adoption
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses. The
new guidance requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions,
and reasonable and supportable forecasts. Financial institutions and other organizations will begin to use forward-looking information to inform their credit loss estimates. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and for interim periods therein, thus beginning with UNIFI’s fiscal 2021 and associated
first fiscal quarter. UNIFI has not early adopted this standard. UNIFI does not expect this standard will have a material impact on its consolidated financial position, results of
operations or cash flows as described in Note 3, “Recent Accounting Pronouncements.”
41
Recently Adopted
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequent ASUs were issued to provide clarity and to defer the
effective date of the new guidance. The new revenue recognition guidance eliminates the transaction- and industry-specific revenue recognition guidance under current GAAP
and replaces it with a principles-based approach. In fiscal 2019, UNIFI adopted the new revenue recognition guidance prescribed by ASU No. 2014-09. See Note 5, “Revenue
Recognition,” for further detail regarding adoption and additional disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance is intended to increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new lease guidance was adopted in fiscal
2020, and adoption is described in more detail in Note 4, “Leases.”
There have been no other newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a significant impact on UNIFI’s consolidated
financial statements.
Off-Balance Sheet Arrangements
UNIFI is not a party to any off-balance sheet arrangements that have had, or are reasonably likely to have, a current or future material effect on UNIFI’s financial condition,
results of operations, liquidity or capital expenditures.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The SEC has defined a company’s most critical accounting policies as those involving accounting estimates that require management to
make assumptions about matters that are highly uncertain at the time and where different reasonable estimates or changes in the accounting estimate from quarter to quarter
could materially impact the presentation of the financial statements. The following discussion provides further information about accounting policies critical to UNIFI and should
be read in conjunction with Note 2, “Summary of Significant Accounting Policies,” to the accompanying consolidated financial statements.
Receivables Reserves
An allowance for losses is provided for known and potential losses arising from quality claims and for amounts owed by customers. Reserves for quality claims are based on
historical claim experience and known pending claims. The collectability of accounts receivable is based on a combination of factors, including the aging of accounts, historical
write off experience, present economic conditions such as customer bankruptcy filings and the financial health of specific customers and market sectors. Since losses depend
to a large degree on future economic conditions and the health of the textile industry, a significant level of judgment is required to determine the allowance for uncollectible
accounts. This allowance is established based on percentages applied to accounts aged for set periods of time, supplemented by reserves for individual customer accounts
where collection is no longer certain. Establishing reserves for claims and uncollectible accounts requires management judgment and estimates. UNIFI does not believe there
is a reasonable likelihood that there will be a material change in the estimates and assumptions it uses to assess the allowance for losses. However, certain unexpected events
such as a customer bankruptcy filing could have a material impact on UNIFI’s results of operations. UNIFI has not made any material changes to the methodology used in
establishing its accounts receivable loss reserves during the past three fiscal years. A plus or minus 10% change in the aged accounts receivable reserve would not have been
material to UNIFI’s consolidated financial statements for the past three fiscal years.
Inventory Reserves
Inventory reserves are established based on many factors, including historical recovery rates, inventory age, inventory turns, expected net realizable value of specific products,
and current economic conditions. Specific reserves are established based on a determination of the obsolescence of the inventory and whether the inventory value exceeds
amounts to be recovered through expected sales prices less selling costs. Estimating sales prices and evaluating the condition of the inventories require judgment and
estimates, which may impact the ending inventory valuation and gross margins. UNIFI uses current and historical knowledge to record reasonable estimates of its markdown
percentages and expected sales prices. UNIFI believes it is unlikely that differences in actual demand or selling prices from those projected by management would have a
material impact on UNIFI’s financial condition or results of operations. UNIFI has not made any material changes to the methodology used in establishing its inventory reserves
during the past three fiscal years. A plus or minus 10% change in the aged inventory reserves would not have been material to UNIFI’s consolidated financial statements for the
past three fiscal years.
42
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For assets held for
sale, an impairment charge is recognized if the carrying value of the assets exceeds the fair value less costs to sell. Estimates are required to determine the fair value, the
disposal costs and the time period to dispose of the assets. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of
such charge if an impairment loss is deemed to be necessary. For assets held and used, impairment may occur if projected undiscounted cash flows do not exceed the carrying
value of the assets. In such cases, additional analysis is conducted to determine the amount of loss to be recognized, and the impairment loss is determined as the amount the
carrying value of the asset or asset group exceeds the estimated fair value, measured by future discounted cash flows. The analysis requires estimates of the amount and
timing of projected cash flows and, where applicable, judgment associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining
whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. UNIFI’s judgment regarding the existence
of circumstances that indicate the potential impairment of an asset’s carrying value is based on several factors, including, but not limited to, changes in business environment, a
decline in operating cash flows or a decision to close a manufacturing facility. The variability of these factors depends on a number of conditions, including uncertainty about
future events and general economic conditions.
Impairment of Investments in Unconsolidated Affiliates
UNIFI evaluates its investments in unconsolidated affiliates whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. UNIFI
evaluates the ability of an affiliate to generate sufficient earnings and cash flows to justify its carrying value. Reductions in an affiliate’s cash flows, or other triggering events,
that are other than temporary and indicative of a loss of investment value are assessed for impairment purposes.
For fiscal 2020, UNIFI determined there was an other-than-temporary impairment related to the carrying value of its investment in PAL. UNIFI owned a 34% interest in the PAL
Investment and Parkdale owned the majority 66% interest. In April 2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000.
UNIFI recorded an impairment charge of $45,194 to adjust the PAL Investment to fair value. The transaction closed on April 29, 2020 and UNIFI received $60,000 in cash.
Valuation Allowance for Deferred Tax Assets
UNIFI currently has a valuation allowance against certain of its deferred tax assets in the U.S. and foreign subsidiaries due to negative evidence concerning the realization of
those deferred tax assets. The deferred tax valuation allowance at June 28, 2020 was $37,439.
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 of the appropriate character 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. UNIFI reviews its estimates of future taxable income on a quarterly basis to assess if the need for a valuation
allowance exists. UNIFI continually evaluates 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 earnings in the period of release.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
UNIFI is exposed to market risks associated with changes in interest rates, fluctuations in foreign currency exchange rates and raw material and commodity costs, which may
adversely affect its financial position, results of operations or cash flows. UNIFI does not enter into derivative financial instruments for trading purposes, nor is it a party to any
leveraged financial instruments.
Interest Rate Risk
UNIFI is exposed to interest rate risk through its borrowing activities. As of June 28, 2020, UNIFI had borrowings under its ABL Term Loan that totaled $87,500 and contain variable
rates of interest; however, UNIFI hedges a significant portion of such interest rate variability using interest rate swaps. After considering the variable rate debt obligations that have
been hedged and UNIFI’s outstanding debt obligations with fixed rates of interest, UNIFI’s sensitivity analysis indicates that a 50-basis point increase in LIBOR as of June 28, 2020
would result in an increase in annual interest expense of less than $100.
Foreign Currency Exchange Rate Risk
UNIFI conducts its business in various foreign countries and in various foreign currencies. Each of UNIFI’s subsidiaries may enter into transactions (sales, purchases, fixed
purchase commitments, etc.) that are denominated in currencies other than the subsidiary’s functional currency and thereby expose UNIFI to foreign currency exchange rate
risk. UNIFI may enter into foreign currency forward contracts to hedge this exposure. UNIFI may also enter into foreign currency forward contracts to hedge its exposure for
certain equipment or inventory purchase commitments. As of June 28, 2020, UNIFI had no outstanding foreign currency forward contracts.
43
A significant portion of raw materials purchased by UNIFI’s Brazilian subsidiary are denominated in USDs, requiring UNIFI to regularly exchange BRL. A significant portion of
sales and asset balances for our Asian subsidiaries are denominated in USDs. During recent fiscal years, UNIFI was negatively impacted by a devaluation of the BRL. Also, the
RMB experienced fluctuations in value throughout fiscal 2020 and 2019, which generated foreign currency translation losses in certain fiscal quarters. Discussion and analysis
surrounding the impact of fluctuations of the BRL and the RMB on UNIFI’s results of operations are included above in “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
As of June 28, 2020, UNIFI’s subsidiaries outside the U.S., whose functional currency is other than the USD, held approximately 19.6% of UNIFI’s consolidated total assets.
UNIFI does not enter into foreign currency derivatives to hedge its net investment in its foreign operations.
As of June 28, 2020, $28,368, or 37.7%, of UNIFI’s cash and cash equivalents were held outside the U.S., of which $6,018 was held in USDs, $14,166 was held in RMB and
$7,822 was held in BRL. Approximately $5,800 of USD were held inside the U.S. by a foreign subsidiary.
More information regarding UNIFI’s derivative financial instruments as of June 28, 2020 is provided in Note 19, “Fair Value of Financial Instruments and Non-Financial Assets
and Liabilities,” to the accompanying consolidated financial statements.
Raw Material and Commodity Cost Risks
A significant portion of UNIFI’s raw material and energy costs are derived from petroleum-based chemicals. The prices for petroleum and petroleum-related products and
related energy costs are volatile and dependent on global supply and demand dynamics, including certain geo-political risks. A sudden rise in the price of petroleum and
petroleum-based products could have a material impact on UNIFI’s profitability. UNIFI does not use financial instruments to hedge its exposure to changes in these costs. The
costs of the primary raw materials that UNIFI uses throughout all of its operations are generally based on USD pricing, and such materials are purchased at market or at fixed
prices that are established with individual vendors as part of the purchasing process for quantities expected to be consumed in the ordinary course of business. UNIFI manages
fluctuations in the cost of raw materials primarily by making corresponding adjustments to the prices charged to its customers. Certain customers are subject to an index-based
pricing model in which UNIFI’s prices are adjusted based on the change in the cost of raw materials in the prior quarter. Pricing adjustments for other customers must be
negotiated independently. UNIFI attempts to pass on to its customers increases in raw material costs but due to market pressures, this is not always possible. When price
increases can be implemented, there is typically a time lag that adversely affects UNIFI and its margins during one or more quarters. In ordinary market conditions in which raw
material price increases have stabilized and sales volumes are consistent with traditional levels, UNIFI has historically been successful in implementing price adjustments within
one to two fiscal quarters of the raw material price increase for its index priced customers and within two fiscal quarters of the raw material price increase for its non-index priced
customers.
During fiscal 2019 and 2018, UNIFI operated in a predominantly increasing raw material cost environment. UNIFI believes those higher costs were primarily a result of volatility
in the crude oil markets, along with periods of supply and demand constraints for certain polyester feedstock.
During fiscal 2020, UNIFI experienced a favorable, declining raw material cost environment in contrast to a generally elevated raw material cost environment in fiscal 2019 and
2018. However, our raw material costs remain subject to the volatility described above and, should raw material costs spike unexpectedly, UNIFI’s results of operations and cash
flows are likely to be adversely impacted.
Other Risks
UNIFI is also exposed to political risk, including changing laws and regulations governing international trade, such as quotas, tariffs and tax laws. The degree of impact and the
frequency of these events cannot be predicted.
Item 8.
Financial Statements and Supplementary Data
Our consolidated financial statements and the related notes begin on page F-i herein.
Item 9.
None.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
44
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 28, 2020, an evaluation of the effectiveness of UNIFI’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the
Exchange Act) was performed under the supervision and with the participation of UNIFI’s management, including the principal executive officer and principal financial officer.
Based on that evaluation, UNIFI’s principal executive officer and principal financial officer concluded that UNIFI’s disclosure controls and procedures are effective to ensure that
information required to be disclosed by UNIFI in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms, and that information required to be disclosed by UNIFI in the reports UNIFI files or submits under the Exchange Act is
accumulated and communicated to UNIFI’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of UNIFI is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act). UNIFI’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with GAAP. UNIFI’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of UNIFI; (ii)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and
expenditures of UNIFI are being made only in accordance with authorizations of management and directors of UNIFI; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of UNIFI’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management, under the supervision and with the participation of the principal executive officer and principal financial officer, assessed the effectiveness of UNIFI’s internal
control over financial reporting as of June 28, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that assessment, management concluded that, as of June 28, 2020, UNIFI’s internal control over financial reporting was
effective based on the criteria established in Internal Control – Integrated Framework (2013).
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of UNIFI’s internal control over financial reporting as of June 28, 2020 has been audited by KPMG LLP (“KPMG”), an independent registered public
accounting firm. KPMG’s report, which appears in “Item 8. Financial Statements and Supplementary Data,” expresses an unqualified opinion on the effectiveness of UNIFI’s
internal control over financial reporting as of June 28, 2020.
Changes in Internal Control Over Financial Reporting
During UNIFI’s fourth quarter of fiscal 2020, there has been no change in UNIFI’s internal control over financial reporting that has materially affected, or is reasonably likely to
materially affect, UNIFI’s internal control over financial reporting.
Item 9B.
None.
Other Information
45
Item 10.
Directors, Executive Officers and Corporate Governance
PART III
UNIFI will file with the SEC a definitive proxy statement for the Company’s 2020 Annual Meeting of Shareholders (the “Proxy Statement”) no later than 120 days after the close
of fiscal 2020. The information required by this item with respect to our executive officers appears in Part I of this Annual Report under the heading “Information about our
Executive Officers.” The other information required by this item is furnished by incorporation by reference to the information under the headings “Election of Directors,”
“Corporate Governance” and “Delinquent Section 16(a) Reports” in the Proxy Statement.
We have adopted a written Code of Ethics for Senior Financial and Executive Officers (the “Code of Ethics”), which is intended to qualify as a “code of ethics” within the meaning
of Item 406 of Regulation S-K of the Exchange Act. The Code of Ethics applies to our principal executive officer, principal financial officer, principal accounting officer and
persons performing similar functions. The Code of Ethics is available on our website at www.unifi.com. A copy of the Code of Ethics may also be obtained without charge by
any person, upon request, by writing to Unifi, Inc., 7201 West Friendly Avenue, Greensboro, North Carolina 27410, Attention: Office of the Secretary.
We will disclose information pertaining to any amendment to, or waiver from, the provisions of the Code of Ethics that apply to our principal executive officer, principal financial
officer, principal accounting officer or persons performing similar functions and that relate to any element of the Code of Ethics enumerated in the SEC rules and regulations by
posting this information on our website at www.unifi.com. The information on our website is not a part of this Annual Report and is not incorporated by reference in this Annual
Report or any of our other filings with the SEC. Our non-employee directors and their respective principal occupation or employment are as follows: Robert J. Bishop (Managing
Principal, Impala Asset Management LLC, a private investment management firm); Archibald Cox, Jr. (Chairman, Sextant Group, Inc., a financial advisory and private equity
firm); James M. Kilts (Founding Partner, Centerview Capital, a private equity firm); Kenneth G. Langone (President and Chief Executive Officer, Invemed Associates LLC, an
investment banking firm); James D. Mead (President, James Mead & Company, an executive search and management consulting firm); Suzanne M. Present (Principal,
Gladwyne Partners, LLC, a private partnership fund manager); and Eva T. Zlotnicka (Managing Partner, Inclusive Capital Partners, a fund manager focusing on responsible
capitalism and the advancement of economic, social, and environmental inclusion).
Item 11.
Executive Compensation
The information required by this item is furnished by incorporation by reference to the information under the headings “Director Compensation,” “Compensation Discussion and
Analysis,” “Executive Compensation Tables,” “Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report” in the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is furnished by incorporation by reference to the information under the headings “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” in the Proxy Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is furnished by incorporation by reference to the information under the headings “Corporate Governance—Director Independence,”
“Corporate Governance—Policy for Review of Related Person Transactions” and “Corporate Governance—Related Person Transactions” in the Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information required by this item is furnished by incorporation by reference to the information under the heading “Ratification of the Appointment of Independent Registered
Public Accounting Firm” in the Proxy Statement.
46
Item 15.
Exhibits and Financial Statement Schedules
(a) 1. Financial Statements
PART IV
The financial statements and schedules listed in the accompanying Index to Consolidated Financial Statements on page F-i are filed as part of this Annual Report.
2. Financial Statement Schedules
Through April 28, 2020, UNIFI held a 34% equity ownership interest in the PAL Investment and UNIFI sold the PAL Investment on April 29, 2020.
Pursuant to Rule 3-09 of Regulation S-X under the Exchange Act (“Rule 3-09”), UNIFI filed the audited financial statements of PAL for its fiscal years 2019, 2018 and
2017, along with the related notes of PAL, on March 27, 2020 via an amendment to UNIFI’s 2019 Annual Report on Form 10-K for the respective fiscal year.
UNIFI completed the tests prescribed by Rule 3-09 as of and during fiscal 2020 for the PAL Investment and the significant subsidiary tests were not met. Accordingly,
included with this Annual Report on Form 10-K as Exhibit 99.1 are the unaudited financial statements of PAL during the period of ownership in which the PAL
Investment was accounted for by the equity method and not covered by an existing audit, along with the prior two fiscal years’ audited financial statements.
47
3. Exhibits
Exhibit
Number
Description
2.1
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Membership Interest Purchase Agreement, dated as of April 29, 2020, by and between Unifi Manufacturing, Inc. and Parkdale, Incorporated (incorporated by
reference to Exhibit 2.1 to the Current Report on Form 8-K filed April 30, 2020 (File No. 001-10542)).
Restated Certificate of Incorporation of Unifi, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed October 31, 2016 (File No.
001-10542)).
Amended and Restated By-laws of Unifi, Inc., as of October 26, 2016 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed October
31, 2016 (File No. 001-10542)).
Declaration of Amendment to the Amended and Restated By-laws of Unifi, Inc., effective April 30, 2019 (incorporated by reference to Exhibit 3.1 to the Current
Report on Form 8-K filed May 1, 2019 (File No. 001-10542)).
Description of Unifi, Inc. Common Stock (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10‑K for the fiscal year ended June 30, 2019
(File No. 001-10542)).
Registration Rights Agreement, dated as of January 1, 2007, by and between Unifi, Inc. and Dillon Yarn Corporation (incorporated by reference to Exhibit 7.1
to the Schedule 13D filed January 16, 2007 by Dillon Yarn Corporation (File No. 005-30881)).
Amended and Restated Credit Agreement, dated as of March 26, 2015, by and among Unifi, Inc. and certain of its domestic subsidiaries, as borrowers, Wells
Fargo Bank, National Association, as administrative agent, sole lead arranger and sole book runner, and the lenders party thereto (incorporated by reference
to Exhibit 4.1 to the Current Report on Form 8-K filed March 31, 2015 (File No. 001-10542)).
First Amendment to Amended and Restated Credit Agreement, dated as of June 26, 2015, by and among Unifi, Inc. and Unifi Manufacturing, Inc., as
borrowers, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed June 30, 2015 (File No. 001-10542)).
Second Amendment to Amended and Restated Credit Agreement, dated as of November 19, 2015, by and among Unifi, Inc. and Unifi Manufacturing, Inc., as
borrowers, Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto (incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K filed November 23, 2015 (File No. 001-10542)).
Third Amendment to Amended and Restated Credit Agreement and Second Amendment to Amended and Restated Guaranty and Security Agreement, dated
as of December 18, 2018, by and among Unifi, Inc. and Unifi Manufacturing, Inc., as borrowers, Unifi Sales & Distribution, Inc. and See 4 Process
Improvement Solutions, LLC, as guarantors, Wells Fargo Bank, National Association, as agent for the lenders party thereto, and the lenders party thereto
(incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed December 20, 2018 (File No. 001-10542)).
Fourth Amendment to Amended and Restated Credit Agreement, dated as of April 29, 2020, by and among Unifi, Inc. and Unifi Manufacturing, Inc., as
borrowers, Unifi Sales & Distribution, Inc. and See 4 Process Improvement Solutions, LLC, as guarantors, Wells Fargo Bank, National Association, as agent
for the lenders party thereto, and the lenders party thereto (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed April 30, 2020 (File
No. 001-10542)).
Amended and Restated Guaranty and Security Agreement, dated as of March 26, 2015, by and among the grantors from time to time party thereto and Wells
Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed March 31, 2015
(File No. 001-10542)).
First Amendment to Amended and Restated Guaranty and Security Agreement, dated as of June 26, 2015, by and among the grantors from time to time party
thereto and Wells Fargo Bank, National Association, as administrative agent (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed
June 30, 2015 (File No. 001-10542)).
Trademark Security Agreement, dated as of May 24, 2012, by and among the grantors party thereto and Wells Fargo Bank, N.A., as agent (incorporated by
reference to Exhibit 4.3 to the Current Report on Form 8-K filed May 25, 2012 (File No. 001-10542)).
Patent Security Agreement, dated as of May 24, 2012, by and among the grantors party thereto and Wells Fargo Bank, N.A., as agent (incorporated by
reference to Exhibit 4.4 to the Current Report on Form 8-K filed May 25, 2012 (File No. 001-10542)).
48
Exhibit
Number
Description
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
2008 Unifi, Inc. Long-Term Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registration Statement on Form S-8 filed December 12, 2008 (File
No. 333-156090)).
Form of Incentive Stock Option Agreement for Employees for use in connection with the 2008 Unifi, Inc. Long-Term Incentive Plan (incorporated by reference
to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended December 28, 2008 (File No. 001-10542)).
Form of Restricted Stock Unit Agreement for Employees for use in connection with the 2008 Unifi, Inc. Long-Term Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 25, 2011 (File No. 001-10542)).
Form of Restricted Stock Unit Agreement for Non-Employee Directors for use in connection with the 2008 Unifi, Inc. Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended December 26, 2010 (File No. 001-10542)).
Unifi, Inc. 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed October 23, 2013 (File No.
001-10542)).
Form of Restricted Stock Unit Agreement for Non-Employee Directors for use in connection with the Unifi, Inc. 2013 Incentive Compensation Plan (used for
agreements entered into prior to October 25, 2017) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed October 23, 2013 (File
No. 001-10542)).
Form of Restricted Stock Unit Agreement for Non-Employee Directors for use in connection with the Unifi, Inc. 2013 Incentive Compensation Plan (used for
agreements entered into on or after October 25, 2017) (incorporated by reference to Exhibit 10.9 to the Annual Report on Form 10-K for the fiscal year ended
June 24, 2018 (File No. 001-10542)).
Form of Restricted Stock Unit Agreement for Employees for use in connection with the Unifi, Inc. 2013 Incentive Compensation Plan (used for agreements
entered into prior to February 21, 2017) (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended December 29,
2013 (File No. 001-10542)).
Form of Restricted Stock Unit Agreement for Employees for use in connection with the Unifi, Inc. 2013 Incentive Compensation Plan (used for agreements
entered into on or after February 21, 2017) (incorporated by reference to Exhibit 10.11 to the Annual Report on Form 10-K for the fiscal year ended June 24,
2018 (File No. 001-10542)).
Form of Incentive Stock Option Agreement for Employees for use in connection with the Unifi, Inc. 2013 Incentive Compensation Plan (used for agreements
entered into prior to March 26, 2017) (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended December 29,
2013 (File No. 001-10542)).
Form of Incentive Stock Option Agreement for Employees for use in connection with the Unifi, Inc. 2013 Incentive Compensation Plan (used for agreements
entered into on or after March 26, 2017) (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 26, 2017
(File No. 001-10542)).
Unifi, Inc. Amended and Restated 2013 Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
November 1, 2018 (File No. 001-10542)).
Form of Vested Share Unit Agreement for Non-Employee Directors for use in connection with the Unifi, Inc. Amended and Restated 2013 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-
10542)).
Form of Stock Option Agreement for Non-Employee Directors for use in connection with the Unifi, Inc. Amended and Restated 2013 Incentive Compensation
Plan (incorporated by reference to Exhibit 10.5 to the Quarterly Report on Form 10-Q for the quarter ended December 30, 2018 (File No. 001-10542)).
Form of Restricted Stock Unit Agreement for Employees for use in connection with the Unifi, Inc. Amended and Restated 2013 Incentive Compensation Plan
(incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-10542)).
Form of Cash-Settled Restricted Stock Unit Agreement for Employees for use in connection with the Unifi, Inc. Amended and Restated 2013 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended December 30, 2018 (File No. 001-
10542)).
Form of Incentive Stock Option Agreement for Employees for use in connection with the Unifi, Inc. Amended and Restated 2013 Incentive Compensation Plan
(incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 (File No. 001-10542)).
Unifi, Inc. Supplemental Key Employee Retirement Plan (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed July 31, 2006 (File
No. 001-10542)).
49
Exhibit
Number
Description
10.19*
10.20*
10.21*
10.22*
10.23*
10.24*
10.25*
10.26*
10.27*
10.28*
10.29*
10.30*
10.31*
10.32*
10.33*
10.34
10.35
10.36
Amendment to Unifi, Inc. Supplemental Key Employee Retirement Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed
January 6, 2009 (File No. 001-10542)).
Amendment to the Unifi, Inc. Supplemental Key Employee Retirement Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the quarter ended March 25, 2018 (File No. 001-10542)).
Unifi, Inc. Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the quarter ended
December 26, 2010 (File No. 001-10542)).
Unifi, Inc. Director Compensation Policy, effective prior to October 30, 2019 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q
for the quarter ended March 31, 2019 (File No. 001-10542)).
Unifi, Inc. Director Compensation Policy, effective October 30, 2019 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended December 29, 2019 (File No. 001-10542)).
Employment Agreement by and between Unifi, Inc. and Thomas H. Caudle, Jr., effective as of September 5, 2018 (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed September 7, 2018 (File No. 001-10542)).
Employment Agreement by and between Unifi, Inc. and Kevin D. Hall, effective as of May 3, 2017 (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed May 4, 2017 (File No. 001-10542)).
Amendment No. 1 to Employment Agreement by and between Unifi, Inc. and Kevin D. Hall, effective as of May 19, 2017 (incorporated by reference to Exhibit
10.1 to the Current Report on Form 8-K/A filed May 19, 2017 (File No. 001-10542)).
Employment Agreement by and between Unifi, Inc. and John D. Vegas, effective as of July 17, 2017 (incorporated by reference to Exhibit 10.23 to the Annual
Report on Form 10-K for the fiscal year ended June 25, 2017 (File No. 001-10542)).
Employment Agreement by and between Unifi, Inc. and Richard Gerstein, effective as of July 28, 2017 (incorporated by reference to Exhibit 10.24 to the
Annual Report on Form 10-K for the fiscal year ended June 25, 2017 (File No. 001-10542)).
Employment Agreement by and between Unifi, Inc. and Jeffrey C. Ackerman, effective as of September 2, 2017 (incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed September 6, 2017 (File No. 001-10542)).
Letter Agreement by and between Unifi, Inc. and Albert P. Carey, effective as of July 1, 2019 (incorporated by reference to Exhibit 10.33 to the Annual Report
on Form 10-K for the fiscal year ended June 30, 2019 (File No. 001-10542)).
Employment Agreement by and between Unifi, Inc. and Craig A. Creaturo, effective as of August 28, 2019 (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed September 3, 2019 (File No. 001-10542)).
Employment Agreement by and between Unifi, Inc. and Edmund M. Ingle, effective as of April 16, 2020 (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed April 21, 2020 (File No. 001-10542)).
First Amendment to Employment Agreement by and between Unifi, Inc. and Edmund M. Ingle, effective as of June 9, 2020 (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K/A filed June 15, 2020 (File No. 001-10542)).
Sales and Services Agreement, dated as of January 1, 2007, by and between Unifi Manufacturing, Inc. and Dillon Yarn Corporation (incorporated by reference
to Exhibit 99.1 to the Registration Statement on Form S-3 filed February 9, 2007 (File No. 333-140580)).
First Amendment to Sales and Services Agreement, effective as of January 1, 2009, by and between Unifi Manufacturing, Inc. and Dillon Yarn Corporation
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed December 3, 2008 (File No. 001-10542)).
Second Amendment to Sales and Services Agreement, effective as of January 1, 2010, by and between Unifi Manufacturing, Inc. and Dillon Yarn Corporation
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed December 11, 2009 (File No. 001-10542)).
50
Exhibit
Number
Description
10.37
10.38
10.39**
10.40**
10.41
21.1+
23.1+
23.2+
31.1+
31.2+
32.1++
32.2++
99.1+
101+
Third Amendment to Sales and Services Agreement, effective as of January 1, 2011, by and between Unifi Manufacturing, Inc. and Dillon Yarn Corporation
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed December 22, 2010 (File No. 001-10542)).
Fourth Amendment to Sales and Services Agreement, effective as of January 1, 2012, by and between Unifi Manufacturing, Inc. and Dillon Yarn Corporation
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed December 20, 2011 (File No. 001-10542)).
Yarn Purchase Agreement, effective as of September 1, 2014, by and between Unifi Manufacturing, Inc. and Hanesbrands Inc. (incorporated by reference to
Exhibit 10.35 to the Annual Report on Form 10-K for the fiscal year ended June 29, 2014 (File No. 001-10542)).
Addendum and Extension to Yarn Purchase Agreement, effective as of June 30, 2018, by and between Unifi Manufacturing, Inc. and Hanesbrands Inc.
(incorporated by reference to Exhibit 10.33 to the Annual Report on Form 10-K for the fiscal year ended June 24, 2018 (File No. 001-10542)).
Deposit Account Control Agreement, dated as of May 24, 2012, by and among Unifi Manufacturing, Inc., Wells Fargo Bank, N.A. and Bank of America, N.A.
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed May 25, 2012 (File No. 001-10542)).
List of Subsidiaries of Unifi, Inc.
Consent of KPMG LLP.
Consent of PricewaterhouseCoopers LLP, Independent Auditors to Parkdale America, LLC.
Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Financial Statements of Parkdale America, LLC as of April 29, 2020 (Unaudited) and December 28, 2019 and for the period ended April 29, 2020 (Unaudited)
and the two years ended December 28, 2019.
The following financial information from Unifi, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 28, 2020, filed August 26, 2020, formatted in
eXtensible Business Reporting Language: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated
Statements of Comprehensive (Loss) Income, (iv) the Consolidated Statements of Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and
(vi) the Notes to Consolidated Financial Statements.
+
++
*
**
Filed herewith.
Furnished herewith.
Indicates a management contract or compensatory plan or arrangement.
Certain portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the SEC.
Item 16.
None.
Form 10-K Summary
51
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: August 26, 2020
UNIFI, INC.
By:
/s/ EDMUND M. INGLE
Edmund M. Ingle
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Edmund M. Ingle and Craig A. Creaturo, or either of
them, his or her attorney-in-fact, with full power of substitution and resubstitution for such person in any and all capacities, to sign any amendments to this report and to file the
same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said
attorney-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the date indicated:
Signature
/s/ EDMUND M. INGLE
Edmund M. Ingle
/s/ CRAIG A. CREATURO
Craig A. Creaturo
/s/ ROBERT J. BISHOP
Robert J. Bishop
/s/ ALBERT P. CAREY
Albert P. Carey
/s/ THOMAS H. CAUDLE, JR.
Thomas H. Caudle, Jr.
/s/ ARCHIBALD COX, JR.
Archibald Cox, Jr.
/s/ JAMES M. KILTS
James M. Kilts
/s/ KENNETH G. LANGONE
Kenneth G. Langone
/s/ JAMES D. MEAD
James D. Mead
/s/ SUZANNE M. PRESENT
Suzanne M. Present
/s/ EVA T. ZLOTNICKA
Eva T. Zlotnicka
Date: August 26, 2020
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Executive Vice President & Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Executive Chairman
Director
Lead Independent Director
Director
Director
Director
Director
Director
52
UNIFI, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 28, 2020 and June 30, 2019
Consolidated Statements of Operations for the fiscal years ended June 28, 2020, June 30, 2019 and June 24, 2018
Consolidated Statements of Comprehensive (Loss) Income for the fiscal years ended June 28, 2020, June 30, 2019 and June 24, 2018
Consolidated Statements of Shareholders’ Equity for the fiscal years ended June 28, 2020, June 30, 2019 and June 24, 2018
Consolidated Statements of Cash Flows for the fiscal years ended June 28, 2020, June 30, 2019 and June 24, 2018
Notes to Consolidated Financial Statements
F-1
F-3
F-4
F-5
F-6
F-7
F-8
F-i
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Unifi, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Unifi, Inc. and subsidiaries (the Company) as of June 28, 2020 and June 30, 2019, the related consolidated
statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three‑year period ended June 28, 2020, and the related
notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of June 28, 2020 and June 30, 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended June 28, 2020, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over
financial reporting as of June 28, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission, and our report dated August 26, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.
Changes in Accounting Principle
As discussed in Note 3 to the consolidated financial statements, the Company has changed its method of accounting for leases as of July 1, 2019 due to the adoption of
Financial Accounting Standards Codification 842, Leases and revenue as of June 25, 2018 due to the adoption of Financial Accounting Standards Codification 606, Revenue
from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Greensboro, North Carolina
August 26, 2020
F-1
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Unifi, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Unifi, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of June 28, 2020, based on criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of June 28, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the
Company as of June 28, 2020 and June 30, 2019, the related consolidated statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for
each of the years in the three-year period ended June 28, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated August 26, 2020
expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
/s/ KPMG LLP
Greensboro, North Carolina
August 26, 2020
F-2
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
ASSETS
June 28, 2020
June 30, 2019
Cash and cash equivalents
Receivables, net
Inventories
Income taxes receivable
Other current assets
Total current assets
Property, plant and equipment, net
Operating lease assets
Deferred income taxes
Intangible assets, net
Investments in unconsolidated affiliates
Other non-current assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable
Accrued expenses
Income taxes payable
Current operating lease liabilities
Current portion of long-term debt
Total current liabilities
Long-term debt
Non-current operating lease liabilities
Other long-term liabilities
Deferred income taxes
Total liabilities
Commitments and contingencies
Common stock, $0.10 par value (500,000,000 shares authorized; 18,446,436 and
18,462,296 shares issued and outstanding as of June 28, 2020 and June 30, 2019,
respectively)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
$
$
$
75,267 $
53,726
109,704
4,033
11,763
254,493
204,246
8,940
2,352
1,412
2,171
548
474,162 $
25,610 $
13,689
349
1,783
13,563
54,994
84,607
7,251
8,606
2,549
158,007
1,845
62,392
315,724
(63,806)
316,155
474,162 $
22,228
88,884
133,781
4,373
16,356
265,622
206,787
—
2,581
2,170
114,320
671
592,151
41,796
16,849
569
—
15,519
74,733
111,541
—
6,185
6,847
199,306
1,846
59,560
374,668
(43,229)
392,845
592,151
See accompanying notes to consolidated financial statements.
F-3
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Provision (benefit) for bad debts
Other operating expense, net
Operating (loss) income
Interest income
Interest expense
Equity in loss (earnings) of unconsolidated affiliates
Gain on sale of investment in unconsolidated affiliate
Impairment of investment in unconsolidated affiliate
Loss on extinguishment of debt
(Loss) income before income taxes
Provision (benefit) for income taxes
Net (loss) income
Net (loss) income per common share:
Basic
Diluted
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
606,509 $
567,469
39,040
43,814
1,739
2,308
(8,821)
(722)
4,779
477
(2,284)
45,194
—
(56,265)
972
(57,237) $
708,804 $
642,496
66,308
52,690
308
2,350
10,960
(628)
5,414
(3,968)
—
—
131
10,011
7,555
2,456 $
678,912
592,484
86,428
56,077
(38)
1,590
28,799
(560)
4,935
(5,787)
—
—
—
30,211
(1,491)
31,702
(3.10) $
(3.10) $
0.13 $
0.13 $
1.73
1.70
$
$
$
$
See accompanying notes to consolidated financial statements.
F-4
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
Net (loss) income
Other comprehensive loss:
Foreign currency translation adjustments
Foreign currency translation adjustments for an unconsolidated
affiliate
Changes in interest rate swaps, net of tax of $446, $671 and $824,
respectively
Other comprehensive loss, net
Comprehensive (loss) income
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
(57,237) $
2,456 $
(21,027)
1,908
(1,458)
(20,577)
(77,814) $
(681)
220
(2,235)
(2,696)
(240) $
$
31,702
(9,250)
(646)
2,243
(7,653)
24,049
See accompanying notes to consolidated financial statements.
F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Shares
Common
Stock
Capital in
Excess of
Par Value
Retained
Earnings
Accumulated
Other
Comprehensive
Loss
Total
Shareholders’
Equity
Balance at June 25, 2017
18,230 $
1,823 $
51,923 $
339,940 $
(32,880) $
360,806
Options exercised
Stock-based compensation
Conversion of restricted stock units
Common stock withheld in satisfaction of tax
withholding obligations under net share settle
transactions
Other comprehensive loss, net of tax
Adoption of ASU No. 2018-02
Net income
Balance at June 24, 2018
Options exercised
Stock-based compensation
Conversion of restricted stock units
Common stock withheld in satisfaction of tax
withholding obligations under net share settle
transactions
Other comprehensive loss, net of tax
Adoption of the new revenue recognition
guidance
Net income
Balance at June 30, 2019
Options exercised
Stock-based compensation
Conversion of restricted stock units
Common stock repurchased and retired under
publicly announced programs
Common stock withheld in satisfaction of tax
withholding obligations under net share settle
transactions
Other comprehensive loss, net of tax
Net loss
Balance at June 28, 2020
86
4
47
9
—
4
210
5,075
(4)
—
—
—
—
—
—
219
5,075
—
(14)
—
—
—
18,353 $
(1)
—
—
—
1,835 $
61
10
61
(23)
—
6
1
6
(2)
—
(478)
—
—
—
56,726 $
477
2,891
(6)
(528)
—
—
—
111
31,702
371,753 $
—
—
—
—
—
—
(7,653)
—
—
(40,533) $
—
—
—
(479)
(7,653)
111
31,702
389,781
483
2,892
—
—
(2,696)
(530)
(2,696)
—
—
18,462 $
—
—
1,846 $
—
—
59,560 $
459
2,456
374,668 $
—
—
(43,229) $
459
2,456
392,845
10
4
76
1
1
8
28
3,610
(8)
—
—
—
—
—
—
29
3,611
—
(84)
(8)
(279)
(1,707)
—
(1,994)
(22)
—
—
18,446 $
(3)
—
—
1,845 $
(519)
—
—
62,392 $
—
—
(57,237)
315,724 $
—
(20,577)
—
(63,806) $
(522)
(20,577)
(57,237)
316,155
See accompanying notes to consolidated financial statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
Cash and cash equivalents at beginning of year
Operating activities:
Net (loss) income
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Equity in loss (earnings) of unconsolidated affiliates
Distributions received from unconsolidated affiliates
Depreciation and amortization expense
Impairment of investment in unconsolidated affiliate
Gain on sale of investment in unconsolidated affiliate
Loss on extinguishment of debt
Non-cash compensation expense
Deferred income taxes
Other, net
Changes in assets and liabilities:
Receivables, net
Inventories
Other current assets
Income taxes
Accounts payable and accrued expenses
Other non-current assets
Other non-current liabilities
Net cash provided by operating activities
Investing activities:
Capital expenditures
Proceeds from sale of investment in unconsolidated affiliate
Other, net
Net cash provided by (used in) investing activities
Financing activities:
Proceeds from ABL Revolver
Payments on ABL Revolver
Proceeds from ABL Term Loan
Payments on ABL Term Loan
Payments on finance lease obligations
Common stock repurchased and retired under publicly announced program
Common stock withheld in satisfaction of tax withholding obligations under
net share settle transactions
Proceeds from stock option exercises
Payments of debt financing fees
Other
Net cash (used in) provided by financing activities
$
22,228 $
44,890 $
(57,237)
2,456
477
10,437
23,653
45,194
(2,284)
—
3,999
(4,011)
(284)
29,964
15,792
3,625
(113)
(17,328)
46
794
52,724
(18,509)
60,000
83
41,574
122,200
(141,600)
—
(10,000)
(6,035)
(1,994)
(522)
29
—
—
(37,922)
(3,968)
2,647
23,003
—
—
131
3,258
423
(691)
(2,923)
(15,838)
(1,331)
4,754
(5,813)
151
1,025
7,284
(24,871)
—
(65)
(24,936)
108,100
(116,800)
20,000
(7,500)
(7,019)
—
(802)
483
(720)
(368)
(4,626)
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at end of year
(3,337)
53,039
75,267 $
(384)
(22,662)
22,228 $
$
See accompanying notes to consolidated financial statements.
F-7
35,425
31,702
(5,787)
12,236
22,585
—
—
—
5,823
(5,797)
(277)
(7,529)
(18,198)
(382)
(573)
8,674
(229)
(4,913)
37,335
(25,029)
—
(1,846)
(26,875)
120,500
(101,700)
—
(10,000)
(7,060)
—
(206)
219
—
(450)
1,303
(2,298)
9,465
44,890
Unifi, Inc.
Notes to Consolidated Financial Statements
1. Background
Overview
Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, “UNIFI,” the “Company,” “we,” “us” or “our”), is a multinational company that manufactures and
sells innovative recycled and synthetic products made from polyester and nylon primarily to other yarn manufacturers and knitters and weavers (UNIFI’s direct customers) that
produce yarn and/or fabric for the apparel, hosiery, home furnishings, automotive, industrial and other end-use markets (UNIFI’s indirect customers). We refer to these indirect
customers as “brand partners.” Polyester products include partially oriented yarn (“POY”), textured, solution and package dyed, twisted, beamed and draw wound yarns, and
each is available in virgin or recycled varieties. Recycled solutions, made from both pre-consumer and post-consumer waste, include plastic bottle flake (“Flake”), polyester
polymer beads (“Chip”) and staple fiber. Nylon products include virgin or recycled textured, solution dyed and spandex covered yarns.
UNIFI maintains one of the textile industry’s most comprehensive product offerings that include a range of specialized, value-added and commodity solutions, with principal
geographic markets in the Americas, Asia and Europe. UNIFI has direct manufacturing operations in four countries and participates in joint ventures with operations in Israel and
the United States (“U.S.”).
Fiscal Year
The fiscal year for Unifi, Inc., its domestic subsidiaries and its subsidiary in El Salvador ends on the Sunday in June or July nearest June 30 of each year. During fiscal 2019,
Unifi, Inc. changed its fiscal year end from the last Sunday in June to the Sunday in June or July nearest June 30 of each year.
Unifi, Inc.’s fiscal 2020, 2019 and 2018 ended on June 28, 2020, June 30, 2019 and June 24, 2018, respectively. Unifi, Inc.’s remaining material operating subsidiaries’ fiscal
years end on June 30. There have been no significant transactions or events that occurred between Unifi, Inc.’s fiscal year end and such wholly owned subsidiaries’ subsequent
fiscal year ends. Unifi, Inc.’s fiscal 2020 and 2018 each consisted of 52 weeks, while fiscal 2019 consisted of 53 weeks.
Reclassifications
Certain reclassifications of prior fiscal years’ data have been made to conform to the current presentation.
Global COVID-19 Pandemic in Calendar 2020
In March 2020, the World Health Organization declared the current COVID-19 outbreak a global pandemic. Global measures taken to reduce the spread of COVID-19 have
generated a significant decline in global business activity in the immediate term that may have a lasting impact on the global economy and consumer demand. The duration of
the COVID-19 pandemic and its related impact on our business is currently unknown. UNIFI anticipates that the global disruption caused by COVID-19 has and will continue to
negatively impact overall global demand and business activity, including for textiles in both the Americas and Asia.
UNIFI evaluated GAAP requirements for the consideration of forecasted financial information, including, but not limited to, the carrying value of long-lived assets in context with
the information reasonably available to UNIFI and the unknown future impacts of COVID-19 as of June 28, 2020 and through the date of this filing. As a result of these
evaluations, there were no impairments or material changes to asset balances that impacted UNIFI's consolidated financial statements as of and for the period ended June 28,
2020. However, UNIFI's future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the consolidated financial
statements in future reporting periods.
As of June 28, 2020, (i) UNIFI was in compliance with all financial covenants under its credit facility and other outstanding indebtedness, (ii) excess availability under the
revolving credit facility was $56,392, and (iii) UNIFI held $75,267 of cash and cash equivalents. The impacts of the COVID-19 pandemic will continue to place pressure on our
ability to generate cash.
2. Summary of Significant Accounting Policies
UNIFI follows U.S. generally accepted accounting principles (“GAAP”). The significant accounting policies described below, together with the other notes to the accompanying
consolidated financial statements that follow, are an integral part of the consolidated financial statements.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Unifi, Inc. and its subsidiaries in which it maintains a controlling financial interest. All account
balances and transactions between Unifi, Inc. and the subsidiaries which it controls have been eliminated. Investments in entities in which UNIFI is able to exercise significant
influence, but not control, are accounted for using the equity method. For transactions with entities accounted for under the equity method, any intercompany profits on amounts
still remaining are eliminated. Amounts originating from any deferral of intercompany profits are recorded within the account balance to which the transaction specifically relates
(e.g., inventory). Only upon settlement of the intercompany transaction with a third party is the deferral of the intercompany profit recognized by UNIFI.
F-8
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts of assets
and liabilities, certain financial statement disclosures at the date of the financial statements, and the reported amounts of revenues and expenses during the period. UNIFI’s
consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results may vary from these estimates. These
estimates are reviewed periodically to determine if a change is required.
Cash and Cash Equivalents
Cash equivalents are defined as highly liquid, short-term investments having an original maturity of three months or less. Book overdrafts, for which the bank has not advanced
cash, if any, are reclassified to accounts payable and reflected as an offset thereto within the accompanying consolidated statements of cash flows.
Receivables
Receivables are stated at their net realizable value. Allowances are provided for known and potential losses arising from quality claims and for amounts owed by
customers. Reserves for quality claims are based on historical claim experience and known pending claims and are recorded as a reduction of net sales. The allowance for
uncollectible accounts is recorded against operating income and reflects UNIFI’s best estimate of probable losses inherent in its accounts receivable portfolio determined on the
basis of historical write off experience, aging of trade receivables, specific allowances for known troubled accounts and other currently available information. Customer accounts
are written off against the allowance for uncollectible accounts when they are no longer deemed to be collectible.
Inventories
UNIFI’s inventories are valued at the lower of cost or net realizable value, with the cost for the majority of its inventory determined using the first-in, first-out method. Certain
foreign inventories and limited categories of supplies are valued using the average cost method. UNIFI’s estimates for inventory reserves for obsolete, slow-moving or excess
inventories are based upon many factors, including historical recovery rates, inventory age, inventory turnover, the expected net realizable value of specific products, and
current economic conditions.
Debt Issuance Costs
Debt issuance costs are recorded to long-term debt and amortized as additional interest expense following either the effective interest method or the straight-line method. In the
event of any prepayment of its debt obligations, UNIFI accelerates the recognition of a pro-rata amount of issuance costs and records an extinguishment of debt.
Property, Plant and Equipment
Property, plant and equipment (“PP&E”) are stated at historical cost less accumulated depreciation. Plant and equipment under finance leases are stated at the present value of
minimum lease payments less accumulated amortization. Additions or improvements that substantially extend the useful life of a particular asset are capitalized. Depreciation is
calculated primarily utilizing the straight-line method over the following useful lives:
Asset categories
Land improvements
Buildings and improvements
Machinery and equipment
Computer, software and office equipment
Internal software development costs
Transportation equipment
Useful lives in years
5 to 20
15 to 40
2 to 25
3 to 7
3
3 to 15
Leasehold improvements are depreciated over the lesser of their estimated useful lives or the remaining term of the lease.
Assets under finance leases are amortized in a manner consistent with UNIFI’s normal depreciation policy if ownership is transferred by the end of the lease or if there is a
bargain purchase option. If such ownership criteria are not met, amortization occurs over the shorter of the lease term or the asset’s useful life.
UNIFI capitalizes its costs of developing internal software when the software is used as an integral part of its manufacturing or business processes and the technological
feasibility has been established. Internal software costs are amortized over a period of three years and, in accordance with the nature of the project, charged to cost of sales or
selling, general and administrative expenses (“SG&A”).
Fully depreciated assets are retained in cost and accumulated depreciation accounts until they are removed from service. In the case of disposals, asset costs and related
accumulated depreciation amounts are removed from the accounts, and the net amounts,
F-9
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
less proceeds from disposal, are included in the determination of net (loss) income and presented within other operating expense, net.
Repair and maintenance costs related to PP&E, which do not significantly increase the useful life of an existing asset or do not significantly alter, modify or change the
capabilities or production capacity of an existing asset, are expensed as incurred.
Interest is capitalized for capital projects requiring a construction period.
PP&E and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Long-lived
assets to be disposed of by sale within one year are classified as held for sale and are reported at the lower of their carrying amount or fair value less cost to sell. Depreciation
ceases for all assets classified as held for sale. Long-lived assets to be disposed of other than by sale are classified as held for use until they are disposed of and these assets
are reported at the lower of their carrying amount or estimated fair value.
Intangible Assets
Finite-lived intangible assets, such as customer lists, non-compete agreements, licenses, trademarks and patents are amortized over their estimated useful lives. UNIFI
periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized, they are removed from the accounts. These assets (asset
groups) are reviewed for impairment or obsolescence whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If impaired,
intangible assets are written down to fair value based on discounted cash flows or other valuation techniques. UNIFI has no intangibles with indefinite lives.
Investments in Unconsolidated Affiliates
UNIFI evaluates its investments in unconsolidated affiliates for impairment whenever events or changes in circumstances indicate that the carrying amount may not be
recoverable.
During fiscal 2020, UNIFI owned a 34% interest in PAL (the “PAL Investment”) and Parkdale, Incorporated (“Parkdale”) owned the majority 66% interest. During March 2020,
UNIFI commenced negotiations to sell the PAL Investment to Parkdale. Such negotiations indicated that the fair value of the PAL Investment was less than UNIFI’s carrying
value and UNIFI no longer intended to hold the PAL Investment to allow recovery of the carrying value. UNIFI recorded an other-than-temporary impairment of $45,194 to adjust
the PAL Investment to fair value. In April 2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000. The transaction closed on April
29, 2020 and UNIFI received $60,000 in cash.
Derivative Instruments
All derivatives are carried on the balance sheet at fair value and are classified according to their asset or liability position and the expected timing of settlement. On the date the
derivative contract is entered into, UNIFI may designate the derivative into one of the following categories:
•
•
•
Fair value hedge – a hedge of the fair value of a recognized asset or liability or a firm commitment. Changes in the fair value of derivatives designated and
qualifying as fair value hedges, as well as the offsetting gains and losses on the hedged items, are reported in income in the same period.
Cash flow hedge – a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability. The
effective portion of gains and losses on cash flow hedges are recorded in accumulated other comprehensive loss, until the underlying transactions are
recognized in income. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to current period
earnings on the same line item as the underlying transaction.
Net investment hedge – if a derivative is used as a foreign currency hedge of a net investment in a foreign operation, its changes in fair value, to the extent
effective as a hedge, are recorded in foreign currency translation adjustments in accumulated other comprehensive loss.
Derivatives that are not designated for hedge accounting are marked to market at the end of each period with the changes in fair value recognized in current period
earnings. Settlements of any fair value or cash flow derivative contracts are classified as cash flows from operating activities.
Fair Value Measurements
The accounting guidance for fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair
value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal
market, or, if none exists, the most advantageous market, for the specific asset or liability at the measurement date (the exit price). Fair value is based on assumptions that
market participants would use when pricing the asset or liability. The hierarchy gives the highest priority to unadjusted quoted
F-10
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
prices in active markets and the lowest priority to unobservable inputs. UNIFI uses the following to measure fair value for its assets and liabilities:
•
•
•
Level 1 – Observable inputs that reflect quoted prices for identical assets or liabilities in active markets.
Level 2 – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either indirectly or directly.
Level 3 – Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.
The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded to recognize the expected future tax benefits or costs of
events that have been, or will be, reported in different tax years for financial statement purposes than for tax purposes. Deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which these items are expected to
reverse. UNIFI reviews deferred tax assets to determine if it is more-likely-than-not they will be realized. If UNIFI determines it is not more-likely-than-not that a deferred tax
asset will be realized, it records a valuation allowance to reverse the previously recognized benefit. Provision is made for taxes on undistributed earnings of foreign subsidiaries
and related companies to the extent that such earnings are not deemed to be permanently invested.
UNIFI recognizes tax benefits related to uncertain tax positions if it believes it is more-likely-than-not of being sustained. Recognized income tax positions are measured at the
largest amount that is greater than 50% likely of being realized. UNIFI accrues for other tax contingencies when it is probable that a liability to a taxing authority has been
incurred and the amount of the contingency can be reasonably estimated. Penalties and interest related to income tax expense, if incurred, are included in provision for income
taxes.
Stock-Based Compensation
Compensation expense for stock awards is based on the grant date fair value and expensed over the applicable vesting period. UNIFI has a policy of issuing new shares to
satisfy award exercises and conversions. For awards with a service condition and a graded vesting schedule, UNIFI has elected an accounting policy of recognizing
compensation cost on a straight-line basis over the requisite service period for each separate vesting portion of the award as if the award was, in-substance, multiple awards.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries whose functional currency is other than the U.S. Dollar (“USD”) are translated at exchange rates existing at the respective balance
sheet dates. Translation gains and losses are not included in determining net (loss) income but are presented in a separate component of accumulated other comprehensive
loss. UNIFI translates the results of operations of its foreign operations at the average exchange rates during the respective periods. Transaction gains and losses are included
within other operating expense, net.
Revenue Recognition
Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied, which primarily occurs at a point in time, upon either shipment
or delivery to the customer. Revenue is also recognized over time for certain contracts in which the associated inventory produced has no alternative use and for which an
enforceable right to payment exists or the associated services have been rendered. Revenue is measured as the amount of consideration UNIFI expects to receive in exchange
for completing its performance obligations (i.e., transferring goods or providing services), which includes estimates for variable consideration. Variable consideration includes
volume-based incentives and product claims, which are offered within certain contracts between UNIFI and its customers. Sales taxes and value added taxes assessed by
governmental entities are excluded from the measurement of consideration expected to be received. Shipping and handling costs incurred after a customer has taken control of
our goods are treated as a fulfillment cost and are not considered a separate performance obligation.
Cost of Sales
The major components of cost of sales are: (i) materials and supplies, (ii) labor and fringe benefits, (iii) utility and overhead costs associated with manufactured products, (iv)
cost of products purchased for resale, (v) shipping, handling and warehousing costs, (vi) research and development costs, (vii) depreciation expense, and (viii) all other costs
related to production or service activities.
Shipping, Handling and Warehousing Costs
Shipping, handling and warehousing costs include costs to store goods prior to shipment, prepare goods for shipment and physically move goods to customers.
F-11
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Research and Development Costs
Research and development costs include employee costs, production costs related to customer samples, operating supplies, consulting fees and other miscellaneous
costs. The cost of research and development is charged to expense as incurred. Research and development costs were as follows:
Research and development costs
Selling, General and Administrative Expenses
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
11,257 $
12,359 $
7,792
The major components of SG&A expenses are: (i) costs of UNIFI’s sales force, marketing and advertising efforts, and commissions, (ii) costs of maintaining UNIFI’s general and
administrative support functions including executive management, information technology, human resources, legal and finance, (iii) amortization of intangible assets, and (iv) all
other costs required to be classified as SG&A expenses.
Advertising Costs
Advertising costs are expensed as incurred and included in SG&A expenses. UNIFI’s advertising costs include spending for items such as consumer marketing and branding
initiatives, promotional items, trade shows, sponsorships and other programs. Advertising costs were as follows:
Advertising costs
Self-Insurance
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
2,044 $
3,639 $
3,439
UNIFI self-insures certain risks such as employee healthcare claims. Reserves for incurred but not reported healthcare claims are estimated using historical data, the timeliness
of claims processing, medical trends, inflation and any changes, if applicable, in the nature or type of the plan.
Contingencies
At any point in time, UNIFI may be a party to various pending legal proceedings, claims or environmental actions. Accruals for estimated losses are recorded at the time
information becomes available indicating that losses are probable and estimable. Any amounts accrued are not discounted. Legal costs such as outside counsel fees and
expenses are charged to expense as incurred.
3. Recent Accounting Pronouncements
Issued and Pending Adoption
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses. The
new guidance requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions and
reasonable and supportable forecasts. Financial institutions and other organizations will begin to use forward-looking information to inform their credit loss estimates. The
amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and for interim periods therein, thus beginning with UNIFI’s fiscal 2021 and associated
first fiscal quarter. UNIFI has not early adopted this standard. UNIFI does not expect this standard will have a material impact on its consolidated financial position, results of
operations or cash flows.
Recently Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new guidance is intended to increase transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The new lease guidance was adopted in the first
quarter of fiscal 2020, and adoption is described in more detail in Note 4, “Leases.”
F-12
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequent ASUs were issued to provide clarity and to defer the
effective date of the new guidance. The new revenue recognition guidance eliminates the transaction- and industry-specific revenue recognition guidance under current GAAP
and replaces it with a principles-based approach.
Upon adoption in fiscal 2019, UNIFI determined that the impact of the new revenue recognition guidance was immaterial. Accordingly, UNIFI utilized the modified retrospective
method of adoption and recorded the impact of open contracts as of June 24, 2018 as an adjustment to the opening balance of fiscal 2019 retained earnings, and prior period
balances were not adjusted. Details of the fiscal 2019 adjustment follow. See Note 5, “Revenue Recognition,” for further detail regarding adoption and additional disclosures.
Revenue earned in fourth quarter fiscal 2018 related to contracts open at June 24, 2018
Less associated cost of sales
Less associated income tax
Adjustment to retained earnings for contracts open at June 24, 2018
$
$
8,593
7,992
142
459
There have been no other newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a significant impact on UNIFI’s consolidated
financial statements.
4. Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). UNIFI adopted the new lease guidance utilizing the modified retrospective transition method, applied
at the date of adoption, recording existing leases as of the effective date, July 1, 2019. Under this method, no adjustment to comparative prior periods is required and,
accordingly, financial statement information and disclosures required under Topic 842 will not be provided for dates and periods prior to July 1, 2019. UNIFI made no adjustment
to the July 1, 2019 opening retained earnings balance for fiscal 2020.
UNIFI adopted the following practical expedients and elected the following accounting policies related to this standard update:
•
•
•
•
•
•
carry forward of historical lease classifications and accounting treatment for existing land easements;
not to reassess whether any expired or existing contracts are or contain leases;
not to reassess initial direct costs for any existing leases;
the use of hindsight;
short-term lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term of 12 months or less and to
recognize lease payments on a straight-line basis over the lease term and variable payments in the period the obligation is incurred; and
the option not to separate lease and non-lease components for the transportation equipment asset class.
UNIFI routinely leases sales and administrative office space, warehousing and distribution centers, manufacturing space, transportation equipment, manufacturing equipment,
and other information technology and office equipment from third parties. The lease terms range from 1 to 15 years with various options for renewal. There are no residual value
guarantees, restrictions, covenants or sub-leases related to these leases. Variable lease payments are determined as the amounts included in the lease payment that are
based on the change in index or usage. The adoption of this standard resulted in the recognition of operating lease right-of-use assets of $9,802 and corresponding lease
liabilities of $10,105 with the difference adjusting prepayments and accruals on the consolidated balance sheet as of July 1, 2019. UNIFI’s accounting for finance leases
remained substantially unchanged. The standard did not materially impact operating results or liquidity. Disclosures related to the amount, timing and uncertainty of cash flows
arising from leases are included below.
F-13
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
The following table sets forth the balance sheet location and values of the Company’s lease assets and lease liabilities at June 28, 2020:
Classification
Lease Assets
Operating lease assets
Finance lease assets
Total lease assets
Operating lease assets
Property, plant & equipment, net
Balance Sheet Location
Lease Liabilities
Current operating lease liabilities
Current finance lease liabilities
Total current lease liabilities
Non-current operating lease liabilities
Non-current finance lease liabilities
Total non-current lease liabilities
Total lease liabilities
Current operating lease liabilities
Current portion of long-term debt
Non-current operating lease liabilities
Long-term debt
The following table sets forth the components of UNIFI’s total lease cost for fiscal 2020:
Lease Cost
Operating lease cost
Variable lease cost
Finance lease cost:
Amortization of lease assets
Interest on lease liabilities
Short-term lease cost
Total lease cost
June 28, 2020
8,940
22,012
30,952
1,783
3,563
5,346
7,251
7,818
15,069
20,415
For The Fiscal Year
June 28, 2020
2,503
483
2,527
439
1,124
7,076
$
$
$
$
$
$
$
$
$
As of June 28, 2020, UNIFI was committed to leasing certain transportation equipment (i) commencing in the second quarter of fiscal 2021 and (ii) comprising finance leases of
approximately $727.
As of June 28, 2020, Unifi has not received any COVID-19 rent concessions.
The following table presents supplemental information related to leases at June 28, 2020:
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used by operating leases
Financing cash flows used by finance leases
Non-cash activities:
Leased assets obtained in exchange for new operating lease liabilities
Leased assets obtained in exchange for new finance lease liabilities
For The Fiscal Year
June 28, 2020
$
$
$
$
2,503
6,035
5,525
6,301
UNIFI calculates its operating lease liabilities and finance lease liabilities entered into after the adoption of the new lease standard based upon UNIFI’s incremental borrowing
rate (the “IBR”). When determining the IBR, we consider our centralized treasury function and our current credit profile. We then make adjustments to this rate for securitization,
the length of the lease term, and leases denominated in foreign currencies. Generally, the IBR for each jurisdiction is the specific risk-free rate for the respective jurisdiction
incremented for UNIFI’s corporate credit risk.
F-14
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
The following table sets forth UNIFI's weighted average remaining lease term in years and discount rate percentage used in the calculation of its outstanding lease liabilities as
of June 28, 2020:
Weighted Average Remaining Lease Term and Discount Rate
Weighted average remaining lease term (years):
Operating leases
Finance leases
Weighted average discount rate (percentage):
Operating leases
Finance leases
Lease Maturity Analysis
June 28, 2020
6.6
4.2
5.0%
3.6%
Future minimum finance lease payments and future minimum payments under non-cancelable operating leases with initial lease terms in excess of one year under Topic 842 as
of June 28, 2020 by fiscal year were:
Maturity of Lease Liabilities
Fiscal 2021
Fiscal 2022
Fiscal 2023
Fiscal 2024
Fiscal 2025
Fiscal years thereafter
Total minimum lease payments
Less estimated executory costs
Less imputed interest
Present value of net minimum lease payments
Less current portion of lease obligations
Long-term portion of lease obligations
Prior Year Disclosure
Finance Leases
Operating Leases
$
$
$
3,989 $
3,684
1,308
1,309
1,165
1,410
12,865 $
(569)
(915)
11,381
(3,563)
7,818 $
2,168
1,722
1,494
1,223
1,084
3,071
10,762
—
(1,728)
9,034
(1,783)
7,251
As reported in the 2019 Form 10-K under the previous accounting guidance, rental expenses incurred under operating leases and included in operating income consist of the
following:
Rental expenses
5. Revenue Recognition
In fiscal 2019, UNIFI adopted the new revenue recognition guidance.
The following table presents disaggregated revenues for UNIFI:
Third-party manufacturer
Service
Net sales
Third-Party Manufacturer
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
4,915
$
4,835
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
598,510 $
7,999
606,509
$
700,077 $
8,727
708,804
$
670,239
8,673
678,912
Third-party manufacturer revenue is primarily generated through sales to direct customers. Such sales represent satisfaction of UNIFI’s performance obligations required by the
associated revenue contracts. Each of UNIFI’s reportable segments derives revenue from sales to third-party manufacturers.
Service Revenue
Service revenue is primarily generated, as services are rendered, through fulfillment of toll manufacturing of textile products or transportation services governed by written
agreements. Such toll manufacturing and transportation services represent satisfaction of UNIFI’s performance obligations required by the associated revenue contracts. The
Polyester Segment derives service revenue for toll manufacturing, and the All Other category derives service revenue for transportation services.
F-15
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Variable Consideration
Volume-based incentives
Volume-based incentives involve rebates or refunds of cash that are redeemable if the customer satisfies certain order volume thresholds during a defined time period. Under
these incentive programs, UNIFI estimates the anticipated rebate to be paid and allocates a portion of the estimated cost of the rebate to each underlying sales transaction with
the customer.
Product claims
UNIFI generally offers customers claims support or remuneration for defective products. UNIFI estimates the amount of its product sales that may be claimed as defective by its
customers and records this estimate as a reduction of revenue in the period the related product revenue is recognized.
For all variable consideration, where appropriate, UNIFI estimates the amount using the expected value method, which takes into consideration historical experience, current
contractual requirements, specific known market events and forecasted customer buying and payment patterns. Overall, these reserves reflect UNIFI’s best estimates of the
amount of consideration to which the customer is entitled based on the terms of the contracts.
6. Receivables, Net
Receivables, net consists of the following:
Customer receivables
Allowance for uncollectible accounts
Reserves for quality claims
Net customer receivables
Other receivables
Total receivables, net
The changes in UNIFI’s allowance for uncollectible accounts and reserves for quality claims were as follows:
Balance at June 25, 2017
Credited (charged) to costs and expenses
Translation activity
Deductions
Balance at June 24, 2018
Charged to costs and expenses
Translation activity
Deductions
Balance at June 30, 2019
Charged to costs and expenses
Translation activity
Deductions
Balance at June 28, 2020
June 28, 2020
June 30, 2019
54,903 $
(3,796)
(928)
50,179
3,547
53,726 $
89,495
(2,338)
(961)
86,196
2,688
88,884
Allowance for
Uncollectible
Accounts
Reserves for
Quality Claims
(2,222) $
38
125
—
(2,059) $
(308)
(9)
38
(2,338) $
(1,739)
186
95
(3,796) $
(1,278)
(821)
(9)
1,544
(564)
(2,019)
5
1,617
(961)
(1,251)
10
1,274
(928)
$
$
$
$
$
$
Amounts credited (charged) to costs and expenses for the allowance for uncollectible accounts are reflected in the provision (benefit) for bad debts and deductions represent
amounts written off which were deemed to not be collectible, net of any recoveries. Amounts charged to costs and expenses for the reserves for quality claims are primarily
reflected as a reduction of net sales and deductions represent adjustments to either increase or decrease claims based on negotiated amounts or actual versus estimated claim
differences.
F-16
7. Inventories
Inventories consists of the following:
Raw materials
Supplies
Work in process
Finished goods
Gross inventories
Inventory reserves
Total inventories
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
June 28, 2020
June 30, 2019
$
$
42,758 $
9,294
6,267
55,609
113,928
(4,224)
109,704 $
55,531
9,020
8,510
63,111
136,172
(2,391)
133,781
The cost for the majority of UNIFI’s inventories is determined using the first-in, first-out method. Certain foreign inventories and limited categories of supplies of $42,451 and
$45,122 as of June 28, 2020 and June 30, 2019, respectively, were valued under the average cost method.
8. Other Current Assets
Other current assets consists of the following:
Contract assets
Value-added taxes receivable
Vendor deposits
Prepaid expenses
Total other current assets
June 28, 2020
June 30, 2019
$
$
4,953 $
2,604
2,349
1,857
11,763 $
7,794
2,519
4,187
1,856
16,356
Contract assets represents the estimated revenue attributable to UNIFI in connection with completed performance obligations under contracts with customers for which revenue
is recognized over time. The contract assets are classified to receivables when the right to payment becomes unconditional. Value-added taxes receivable relates to recoverable
taxes associated with the sales and purchase activities of UNIFI’s foreign operations. Vendor deposits primarily relates to down payments made toward the purchase of
inventory. Prepaid expenses consists of advance payments for routine operating expenses.
9. Property, Plant and Equipment, Net
PP&E, net consists of the following:
Land
Land improvements
Buildings and improvements
Assets under finance leases
Machinery and equipment
Computers, software and office equipment
Transportation equipment
Construction in progress
Gross PP&E
Less: accumulated depreciation
Less: accumulated amortization – finance leases
Total PP&E, net
Assets under finance leases consists of the following:
Machinery and equipment
Transportation equipment
Building improvements
Gross assets under finance leases
June 28, 2020
June 30, 2019
3,154 $
16,344
158,025
29,857
602,867
22,677
7,806
7,582
848,312
(636,221)
(7,845)
204,246 $
3,138
15,249
161,566
31,897
603,950
23,011
5,809
6,483
851,103
(636,135)
(8,181)
206,787
June 28, 2020
June 30, 2019
15,542 $
10,487
3,828
29,857 $
22,991
5,078
3,828
31,897
$
$
$
$
F-17
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Depreciation and amortization expense and repair and maintenance expenses were as follows:
Depreciation and amortization expense
Repair and maintenance expenses
10. Intangible Assets, Net
Intangible assets, net consists of the following:
Customer lists
Non-compete agreements
Trademarks
Total intangible assets, gross
Accumulated amortization – customer lists
Accumulated amortization – non-compete agreements
Accumulated amortization – trademarks
Total accumulated amortization
Total intangible assets, net
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
22,551 $
18,093
21,602 $
21,226
21,109
19,761
June 28, 2020
June 30, 2019
1,615 $
1,875
455
3,945
(1,493)
(813)
(227)
(2,533)
1,412 $
23,615
1,875
416
25,906
(23,166)
(438)
(132)
(23,736)
2,170
$
$
In fiscal 2007, UNIFI purchased certain texturing operations that are included in the Polyester 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 13 years was determined. The customer list was fully amortized during fiscal 2020 and the customer list
and related accumulated amortization was removed from the Consolidated Balance Sheet in fiscal 2020.
A customer list was recorded in connection with a business combination in fiscal 2014, utilizing similar valuation methods as described in the above fiscal 2007 transaction. The
customer list is amortized over a nine-year estimated useful life based on the expected economic benefit.
In fiscal 2018, UNIFI purchased certain dyeing assets that are included in the Polyester Segment. The associated non-compete agreement was valued at $1,875 and is
amortized using the straight-line method over its five-year term.
UNIFI capitalizes costs incurred to register trademarks primarily for REPREVE® in various countries. UNIFI has determined that these trademarks have varying useful lives of
up to three years and are being amortized using the straight-line method.
Amortization expense for intangible assets consists of the following:
Customer lists
Non-compete agreements
Trademarks
Total amortization expense
The following table presents the expected intangible asset amortization for the next five fiscal years:
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
326 $
375
154
855 $
639 $
379
94
1,112 $
843
205
62
1,110
Expected amortization
11. Other Non-Current Assets
Other non-current assets include certain vendor deposits of a long-term nature.
Fiscal 2021
570
$
Fiscal 2022
505
$
Fiscal 2023
337
$
Fiscal 2024
—
$
Fiscal 2025
—
$
F-18
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
12. Accrued Expenses
Accrued expenses consists of the following:
Payroll and fringe benefits
Utilities
Deferred revenue
Severance
Property taxes
Current portion of supplemental post-employment plan
Other
Total accrued expenses
June 28, 2020
June 30, 2019
$
$
8,036 $
1,565
1,279
1,083
976
5
745
13,689 $
9,775
2,061
516
2,058
999
411
1,029
16,849
Severance consists of payments due to former executives and employees pursuant to corresponding employment and severance agreements. Other consists primarily of
employee-related claims and payments, interest, marketing expenses, freight expenses, rent and other non-income related taxes.
13. Long-Term Debt
Debt Obligations
The following table presents the total balances outstanding for UNIFI’s debt obligations, their scheduled maturity dates and the weighted average interest rates for borrowings as
well as the applicable current portion of long-term debt:
ABL Revolver
ABL Term Loan (1)
Finance lease obligations
Total debt
Current ABL Term Loan
Current portion of finance lease obligations
Unamortized debt issuance costs
Total long-term debt
Scheduled
Maturity Date
December 2023
December 2023
(2)
Weighted Average
Interest Rate as of
June 28, 2020
0.0%
3.2%
3.6%
Principal Amounts as of
June 28, 2020
June 30, 2019
$
$
— $
87,500
11,381
98,881
(10,000)
(3,563)
(711)
84,607 $
19,400
97,500
11,118
128,018
(10,000)
(5,519)
(958)
111,541
(1)
(2)
Includes the effects of interest rate swaps.
Scheduled maturity dates for finance lease obligations range from July 2020 to November 2027, as further outlined in Note 4, “Leases.”
ABL Facility
On December 18, 2018, Unifi, Inc. and certain of its subsidiaries entered into a Third Amendment to Amended and Restated Credit Agreement and Second Amendment to
Amended and Restated Guaranty and Security Agreement (the “2018 Amendment”). The 2018 Amendment amended the Amended and Restated Credit Agreement, dated as
of March 26, 2015, by and among Unifi, Inc. and a syndicate of lenders, as previously amended (together with all previous and subsequent amendments, the “Credit
Agreement”). The Credit Agreement provides for a $200,000 senior secured credit facility (the “ABL Facility”), including a $100,000 revolving credit facility (the “ABL Revolver”)
and a term loan that can be reset up to a maximum amount of $100,000, once per fiscal year, if certain conditions are met (the “ABL Term Loan”). The ABL Facility has a
maturity date of December 18, 2023.
The 2018 Amendment made the following changes to the Credit Agreement, among others: (i) extended the maturity date from March 26, 2020 to December 18, 2023 and (ii)
decreased the Applicable Margin (as defined in the Credit Agreement) pricing structure for Base Rate Loans (as defined in the Credit Agreement) and LIBOR Rate Loans (as
defined in the Credit Agreement) by 25 basis points. In addition, in connection with the 2018 Amendment, the principal amount of the ABL Term Loan was reset from $80,000 to
$100,000. Net proceeds from the ABL Term Loan reset were used to pay down the amount outstanding on the ABL Revolver. Additionally, the 2018 Amendment resulted in a
loss on extinguishment of debt of $131 in connection with the write-off of certain unamortized debt issuance costs.
F-19
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
In connection and concurrent with the sale of UNIFI’s 34% interest in PAL on April 29, 2020, UNIFI entered into the Fourth Amendment to Amended and Restated Credit
Agreement (“Fourth Amendment”). The Fourth Amendment among other things: (i) revised the definition of permitted dispositions within the Credit Agreement to include the
sale by Unifi Manufacturing, Inc. of its equity interest in PAL so long as the aggregate net cash proceeds received equaled or exceeded $60,000 and such sale occurred on or
before May 15, 2020; (ii) revised the terms of the Credit Agreement to allow the net cash proceeds from the sale of PAL to be applied to the outstanding principal amount of the
ABL Revolver until paid in full with the remaining net cash proceeds retained by UNIFI, so long as certain conditions are met; and (iii) revised the terms of the Credit Agreement
to allow the lenders to make changes to the benchmark interest rate without further amendment should LIBOR temporarily or permanently cease to exist and a transition to a
new benchmark interest rate such as the Secured Overnight Financing Rate (“SOFR”) be required for future ABL Facility borrowings. The Fourth Amendment generated no
change in cash flows for the Credit Agreement and, accordingly, followed debt modification accounting.
The ABL Facility is secured by a first-priority perfected security interest in substantially all owned property and assets (together with all proceeds and products) of Unifi, Inc.,
Unifi Manufacturing, Inc. and certain subsidiary guarantors (collectively, the “Loan Parties”). It is also secured by a first-priority security interest in all (or 65% in the case of
UNIFI’s first-tier controlled foreign subsidiary, as required by the lenders) of the stock of (or other ownership interests in) each of the Loan Parties (other than Unifi, Inc.) and
certain subsidiaries of the Loan Parties, together with all proceeds and products thereof.
If excess availability under the ABL Revolver falls below the Trigger Level (as defined in the Credit Agreement), a financial covenant requiring the Loan Parties to maintain a
fixed charge coverage ratio on a quarterly basis of at least 1.05 to 1.00 becomes effective. The Trigger Level as of June 28, 2020 was $23,438. In addition, the ABL Facility
contains restrictions on particular payments and investments, including certain restrictions on the payment of dividends and share repurchases. Subject to specific provisions,
the ABL Term Loan may be prepaid at par, in whole or in part, at any time before the maturity date, at UNIFI’s discretion.
ABL Facility borrowings bear interest at LIBOR plus an applicable margin of 1.25% to 1.75%, or the Base Rate (as defined below) plus an applicable margin of 0.25% to 0.75%,
with interest currently being paid on a monthly basis. The applicable margin is based on (i) the excess availability under the ABL Revolver and (ii) the consolidated leverage
ratio, calculated as of the end of each fiscal quarter. The Base Rate means the greater of (i) the prime lending rate as publicly announced from time to time by Wells Fargo Bank,
National Association, (ii) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.5%, and (iii) LIBOR plus 1.0%. UNIFI’s ability to borrow under the ABL Revolver is
limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventories and is subject to certain conditions and limitations. There is also a
monthly unused line fee under the ABL Revolver of 0.25%.
In 2017, UNIFI entered into three interest rate swaps with Wells Fargo Bank, N.A., with notional amounts of $20,000 (“Swap A”), $30,000 (“Swap B”) and $25,000 (“Swap C”),
respectively. The combined designated hedges fix LIBOR at approximately 1.9% for $75,000 of variable rate borrowings through May 24, 2022.
As of June 28, 2020, UNIFI was in compliance with all financial covenants in the Credit Agreement and the excess availability under the ABL Revolver was $56,392. At June 28,
2020, the fixed charge coverage ratio was 0.23 to 1.00 and UNIFI had $0 of standby letters of credit. Management maintains the capability to improve the fixed charge
coverage ratio utilizing existing foreign cash and cash equivalents.
Finance Lease Obligations
During fiscal 2020, UNIFI entered into finance lease obligations totaling $6,301 for certain transportation equipment. The maturity date of these obligations range from March
2025 to November 2026 with interest rates ranging from 3.1% to 3.5%. There were no significant finance leases established in fiscal 2019.
Scheduled Debt Maturities
The following table presents the scheduled maturities of UNIFI’s outstanding debt obligations for the following five fiscal years and thereafter:
ABL Revolver
ABL Term Loan
Finance lease obligations
Total
Fiscal 2021
—
$
10,000
3,563
13,563
$
Fiscal 2022
—
$
10,000
3,388
13,388
$
Fiscal 2023
—
$
10,000
1,094
11,094
$
Fiscal 2024
—
$
57,500
1,132
58,632
$
Fiscal 2025
—
$
—
1,028
1,028
$
$
$
Thereafter
—
—
1,176
1,176
F-20
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
14. Other Long-Term Liabilities
Other long-term liabilities consists of the following:
Supplemental post-employment plan
Interest rate swaps
Uncertain tax positions
Other
Total other long-term liabilities
June 28, 2020
June 30, 2019
$
$
3,019 $
2,551
1,112
1,924
8,606 $
2,695
647
1,043
1,800
6,185
UNIFI maintains an unfunded supplemental post-employment plan for certain management employees. Each employee’s account is credited annually based upon a percentage
of the participant’s base salary, with each participant’s balance adjusted quarterly to reflect the returns of a money market fund. Amounts are paid to participants six months
after termination of employment.
Other primarily includes certain retiree and post-employment medical and disability liabilities, payroll tax liabilities, deferred revenue and deferred energy incentive credits.
15. Income Taxes
Components of (Loss) Income Before Income Taxes
The components of (loss) income before income taxes consist of the following:
U.S.
Foreign
(Loss) income before income taxes
Components of Provision (Benefit) for Income Taxes
Provision (benefit) for income taxes consists of the following:
Current:
Federal
State
Foreign
Total current tax expense
Deferred:
Federal
State
Foreign
Total deferred tax expense
Provision (benefit) for income taxes
U.S. Tax Reform
$
$
$
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
(74,905) $
18,640
(56,265) $
(13,326) $
23,337
10,011 $
(7,852)
38,063
30,211
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
282 $
(118)
4,819
4,983
(3,783)
116
(344)
(4,011)
(178) $
28
7,282
7,132
(813)
1,097
139
423
7,555 $
(4,918)
(416)
9,639
4,305
(5,315)
(872)
391
(5,796)
(1,491)
$
972 $
On December 22, 2017, the U.S. government enacted comprehensive tax legislation H.R. 1, formerly known as the Tax Cuts and Jobs Act. H.R. 1 included significant changes
to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, additional limitations on the deductions for executive
compensation and interest expense, and the transition of the U.S. international tax system from a worldwide tax to a territorial tax system. As a fiscal-year taxpayer, certain
provisions of H.R. 1 impacted UNIFI in fiscal 2018, including the change in the U.S. federal corporate income tax rate and the one-time transition tax (“toll charge”), while other
provisions became effective for UNIFI at the beginning of fiscal 2019. The enactment of H.R. 1 resulted in recording a total provisional tax benefit of $396 for fiscal 2018. For a
full description of the impact of H.R. 1 for fiscal 2018, refer to Note 14, “Income Taxes,” in UNIFI’s Annual Report on Form 10-K for fiscal 2018.
In fiscal 2019, UNIFI recorded an additional tax benefit of $843 related to the enactment of H.R. 1, which decreased the effective tax rate for the period by 8.4%. The total tax
benefit related to the enactment of H.R. 1 was $1,239, primarily consisting of $3,986 of tax benefit related to the re-measurement of deferred tax balances, and $2,747 of tax
expense related to the toll charge, net of foreign tax credits. Although UNIFI no longer considers these amounts provisional, the income tax effects of H.R. 1 may change
following future legislation or further interpretation of H.R. 1 based on the publication of guidance from the U.S. Internal Revenue Service (the “IRS”) and state tax authorities.
F-21
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
The Global Intangible Low-Taxed Income (“GILTI”) provisions included in H.R. 1 require that certain income earned by foreign subsidiaries must be currently included in the
gross income of the U.S. shareholder. These provisions were effective for UNIFI in fiscal 2019. UNIFI has elected to recognize GILTI as a current-period expense. Under this
policy, UNIFI has not provided deferred taxes related to temporary differences that, upon their reversal, will affect the amount of income subject to GILTI in the period.
The GILTI provisions are complex and subject to continuing regulatory interpretation by the IRS. On July 20, 2020, the U.S. Treasury and the IRS issued final regulations under
Internal Revenue Code Section 951A relating to the treatment under the GILTI regime of foreign income that is subject to a high rate of tax. The regulations are effective for
fiscal 2021, but UNIFI can elect to apply them to fiscal 2019 and 2020. UNIFI is in the process of reviewing and estimating the impact of the regulations, but there is a
reasonable possibility that application of the regulations could have a material effect on UNIFI’s future income tax expense.
Utilization of Net Operating Loss Carryforwards
Domestic deferred tax expense includes the utilization of federal net operating loss (“NOL”) carryforwards of $89 and $3,122 for fiscal 2020 and 2019, respectively. Foreign
deferred tax expense includes the utilization of NOL carryforwards of $702, $655 and $773 for fiscal 2020, 2019 and 2018, respectively. State deferred tax expense includes the
utilization of NOL carryforwards of $20, $106 and $116 for fiscal 2020, 2019 and 2018, respectively.
Effective Tax Rate
Reconciliation from the federal statutory tax rate to the effective tax rate is as follows:
Federal statutory tax rate
Foreign income taxed at different rates
Repatriation of foreign earnings and withholding taxes
U.S. tax on GILTI
Change in valuation allowance
Foreign tax credits
Domestic production activities deduction
Research and other business credits
State income taxes, net of federal tax benefit
Change in uncertain tax positions
Nondeductible compensation
Nontaxable income
Valuation allowance related to loss on sale of investment in PAL
Tax expense on unremitted foreign earnings
Toll charge
Revaluation of U.S. deferred balances due to U.S. tax reform
Nondeductible expenses and other
Effective tax rate
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
21.0%
(1.2)
(2.0)
(5.0)
0.6
0.9
—
2.0
2.6
(0.3)
(0.8)
1.1
(19.3)
(0.9)
—
—
(0.4)
(1.7)%
21.0%
16.1
20.3
32.5
(1.5)
(11.9)
(5.6)
(7.7)
(0.6)
8.2
5.1
(4.2)
—
—
0.7
3.1
—
75.5%
28.3%
(2.4)
1.8
—
(12.9)
(11.0)
0.5
(1.8)
(3.9)
(15.1)
1.6
—
—
—
23.9
(14.2)
0.3
(4.9)%
Deferred Income Taxes
The significant components of UNIFI’s deferred tax assets and liabilities consist of the following:
Deferred tax assets:
Investments, including unconsolidated affiliates
Tax credits
Capital loss carryforwards
NOL carryforwards
Research and development costs
Other items
Total gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
PP&E
Other
Total deferred tax liabilities
Net deferred tax liabilities
June 28, 2020
June 30, 2019
$
3,995 $
19,457
13,791
3,907
6,073
8,429
55,652
(37,439)
18,213
(17,733)
(677)
(18,410)
$
(197) $
F-22
5,680
17,237
1,105
4,381
4,081
7,890
40,374
(26,020)
14,354
(18,325)
(295)
(18,620)
(4,266)
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Deferred Income Taxes – Valuation Allowance
In assessing its ability to realize deferred tax assets, UNIFI considers whether it is more-likely-than-not that some portion or all of the deferred tax assets will not 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
become deductible. UNIFI considers the scheduled reversal of taxable temporary differences, taxable income in carryback years, projected future taxable income and tax
planning strategies in making this assessment. Since UNIFI operates in multiple jurisdictions, the assessment is made on a jurisdiction-by-jurisdiction basis, taking into account
the effects of local tax law.
The balances and activity for UNIFI’s deferred tax valuation allowance are as follows:
Balance at beginning of year
(Increase) decrease in valuation allowance
Balance at end of year
Components of UNIFI’s deferred tax valuation allowance are as follows:
Investments, including unconsolidated affiliates
NOL carryforwards
Capital loss carryforwards
Tax credits
Total deferred tax valuation allowance
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
(26,020) $
(11,419)
(37,439) $
(15,143) $
(10,877)
(26,020) $
(17,957)
2,814
(15,143)
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
(3,995) $
(2,542)
(13,791)
(17,111)
(37,439) $
(5,696) $
(2,943)
(1,105)
(16,276)
(26,020) $
(5,522)
(3,086)
(1,105)
(5,430)
(15,143)
$
$
$
$
During fiscal 2020, UNIFI’s valuation allowance increased by $11,419. The increase was primarily driven by an increase in the valuation allowance on a capital loss generated
by the sale of UNIFI’s interest in PAL.
During fiscal 2019, UNIFI’s valuation allowance increased by $10,877. The increase was primarily driven by an increase in the valuation allowance on foreign tax credits and
certain state NOLs and credit carryforwards.
During fiscal 2018, UNIFI’s valuation allowance decreased by $2,814. The decrease was primarily driven by the release of a valuation allowance on NOLs outside the U.S.
consolidated tax filing group that are now able to be utilized, and a decrease related to U.S. deferred tax assets to reflect the lower federal ending deferred tax rate. The
decrease was partially offset by an increase related to foreign tax credit carryforwards for which no benefit can be realized.
Unrecognized Tax Benefits
A reconciliation of beginning and ending gross amounts of unrecognized tax benefits is as follows:
Balance at beginning of year
Gross increases related to current period tax positions
Gross increases (decreases) related to tax positions in prior periods
Gross decreases related to settlements with tax authorities
Gross decreases related to lapse of applicable statute of limitations
Balance at end of year
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
1,083 $
98
37
—
—
1,218 $
166 $
26
980
—
(89)
1,083 $
4,463
26
(119)
(4,204)
—
166
Unrecognized tax benefits would generate a favorable impact of $1,112 on UNIFI’s effective tax rate when recognized. UNIFI does not expect material changes in uncertain tax
positions within the next 12 months. Expense (benefit) for interest and penalties recognized by UNIFI within the provision for income taxes was $69, $22 and $(1,030) for fiscal
2020, 2019 and 2018, respectively. UNIFI had $132, $63 and $41 accrued for interest and/or penalties related to uncertain tax positions as of June 28, 2020, June 30, 2019 and
June 24, 2018, respectively.
Expiration of Net Operating Loss Carryforwards and Foreign Tax Credits
As of June 28, 2020, UNIFI had U.S. federal capital loss carryforwards of $54,164, U.S. state NOL carryforwards of $57,809 and foreign NOL carryforwards of $6,666, offset by
a full valuation allowance. The NOL carryforwards begin expiring in varying amounts in fiscal 2022. As of June 28, 2020, UNIFI had the following carryforward attributes held
outside of the U.S. consolidated tax filing group: U.S. federal NOL carryforwards of $4,383, U.S. federal capital loss carryforwards of $4,489, and U.S. state NOL carryforwards
of $16,653. The U.S. federal capital loss carryforwards are offset with a full valuation allowance and the U.S. state
F-23
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
NOL carryforwards are partially offset by a valuation allowance. The NOL carryforwards held outside of the U.S. consolidated tax filing group begin expiring in fiscal 2021. As
of June 28, 2020, UNIFI had U.S. federal foreign tax credit carryforwards of $13,485 and foreign tax credit carryforwards in foreign jurisdictions of $3,265, offset with a full
valuation allowance. The foreign tax credit carryforwards begin expiring in varying amounts in fiscal 2021.
Tax Years Subject to Examination
Unifi, Inc. and its domestic subsidiaries file a consolidated federal income tax return, as well as income tax returns in multiple state and foreign jurisdictions. The tax years
subject to examination vary by jurisdiction. UNIFI regularly assesses the outcomes of both completed and ongoing examinations to ensure that UNIFI’s provision for income
taxes is sufficient.
In fiscal 2020, the IRS initiated an audit for fiscal year 2018 and in fiscal 2019 initiated an audit for fiscal years 2015, 2016 and 2017. The audit was not concluded at the end of
fiscal 2020. No material assessment is anticipated. In fiscal 2018, the IRS examined UNIFI’s federal income tax returns for fiscal 2014 and 2015 and re-examined the federal
income tax return for fiscal 2013. The examination closed with no proposed adjustments. In fiscal 2016, the North Carolina Department of Revenue initiated an audit for fiscal
years 2012 through 2015 related to amended returns the Company filed. The audit was concluded during fiscal 2020 and resulted in taxes and interest of $568 being
refunded.
UNIFI is currently under appeal in Colombia for tax years 2006 and 2007. UNIFI believes it is more-likely-than-not to conclude the appeal with no material assessment.
Statutes related to material foreign jurisdictions are open from January 1, 2014 and material state jurisdictions from June 29, 2015. Certain carryforward tax attributes generated
in years prior remain subject to examination and could change in subsequent tax years.
Indefinite Reinvestment Assertion
As of June 28, 2020, taxes associated with the repatriation of earnings of foreign subsidiaries were not provided for on a cumulative total of $31,872 of undistributed earnings for
certain foreign subsidiaries. UNIFI intends to reinvest these earnings indefinitely in such foreign subsidiaries. If these earnings were distributed in the form of dividends or
otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, UNIFI could be subject to additional tax liabilities. The amount of potential
unrecognized deferred income tax liability related to these earnings is approximately $3,732.
16. Shareholders’ Equity
On October 31, 2018, UNIFI announced that the Board approved a new share repurchase program (the “2018 SRP”) under which UNIFI is authorized to acquire up to $50,000
of its common stock. Under the 2018 SRP, purchases may be made from time to time in the open market at prevailing market prices, through private transactions or block
trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements and other factors. The share repurchase
authorization is discretionary and has no expiration date. Repurchases, if any, are expected to be financed through cash generated from operations and borrowings under the
ABL Revolver, and are subject to applicable limitations and restrictions as set forth in the ABL Facility. UNIFI may discontinue repurchases at any time that management
determines additional purchases are not beneficial or advisable.
The following table summarizes UNIFI’s repurchases and retirements of its common stock under the 2018 SRP for the fiscal periods noted:
Fiscal 2019
Fiscal 2020
Total
Total Number
of Shares
Repurchased
as Part of Publicly
Announced Plans
or Programs
Average Price
Paid per Share
Approximate
Dollar Value that
May Yet Be
Repurchased
Under Publicly Announced Plans or
Programs
—
84
84
$
$
$
—
23.72
23.72
$
$
$
50,000
48,008
48,008
As of June 28, 2020, $48,008 remained available for repurchase under the 2018 SRP.
Repurchased shares are retired and have the status of authorized and unissued shares. The cost of the repurchased shares is recorded as a reduction to common stock to the
extent of the par value of the shares acquired and the remainder is allocated between capital in excess of par value and retained earnings, on a pro rata basis.
F-24
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
No dividends were paid in the three most recent fiscal years.
17. Stock-Based Compensation
On October 23, 2013, UNIFI’s shareholders approved the Unifi, Inc. 2013 Incentive Compensation Plan (the “2013 Plan”). The 2013 Plan replaced the 2008 Unifi, Inc. Long-
Term Incentive Plan (the “2008 LTIP”). No additional awards can be granted under the 2008 LTIP; however, prior awards outstanding under the 2008 LTIP remain subject to that
plan’s provisions. The 2013 Plan authorized the issuance of 1,000 shares of common stock, subject to certain increases in the event outstanding awards under the 2008 LTIP
expired, were forfeited or otherwise terminated unexercised.
The 2013 Plan expired in accordance with its terms on October 24, 2018, and the Unifi, Inc. Amended and Restated 2013 Incentive Compensation Plan (the “Amended 2013
Plan”) became effective on that same day, upon approval by shareholders at UNIFI’s annual meeting of shareholders held on October 31, 2018. The Amended 2013 Plan
increased the number of shares available for future issuance pursuant to awards granted under the Amended 2013 Plan to 1,250 and removed provisions no longer applicable
due to the recent changes to Section 162(m) of the Internal Revenue Code of 1986, as amended. The material terms and provisions of the Amended 2013 Plan are otherwise
similar to those of the 2013 Plan. No additional awards can be granted under the 2013 Plan; however, prior awards outstanding under the 2013 Plan remain subject to that
plan’s provisions.
The following table provides information as of June 28, 2020 with respect to the number of securities remaining available for future issuance under the Amended 2013 Plan:
Authorized under the Amended 2013 Plan
Plus: Awards expired, forfeited or otherwise terminated unexercised
Less: Awards granted to employees
Less: Awards granted to non-employee directors
Available for issuance under the Amended 2013 Plan
Stock Options
1,250
158
(1,069)
(117)
222
On May 1, 2020, UNIFI granted stock options to purchase 533 shares of its common stock to a key employee with an exercise price of $11.74 and 10-year contractual terms, as
follows:
•
•
•
100 vested immediately and had a grant date fair value of $4.83 using the Black-Scholes model;
100 cliff-vest after three years of service and had a grant date fair value of $4.83 using the Black-Scholes model;
100 vest following a common stock price attainment of $40 for ten consecutive trading days and four years of service or a common stock price attainment of $50
for ten consecutive trading days after four years of service and before five years of service and had a grant date fair value of $2.70 under a Monte Carlo simulation;
and
233 vest following a common stock price attainment of $50 for ten consecutive trading days and five years of service and had a grant date fair value of $2.33 under
a Monte Carlo simulation.
•
In addition to the above fiscal 2020 grant, a summary of UNIFI’s stock options granted to key employees and valued under the Black-Scholes model is as follows:
Quantity
Service Period (years)
Weighted Average Exercise Price
Weighted Average Grant Date Fair Value
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
143
3.0
19.95
7.33
$
$
190
3.0
23.73
8.42
$
$
73
3.0
32.61
11.14
$
$
Of the 676 stock options granted during fiscal 2020, 343 used the Black-Scholes model. For each of fiscal 2020, 2019 and 2018, the Black-Scholes model used the following
weighted average assumptions:
Expected term (years)
Risk-free interest rate
Volatility
Dividend yield
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
5.5
0.7%
43.2%
—
5.5
2.9%
32.6%
—
5.2
2.0%
34.3%
—
UNIFI uses historical data to estimate the expected term and volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for
periods corresponding with the expected term of the stock options.
F-25
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
A summary of stock option activity for fiscal 2020 is as follows:
Outstanding at June 30, 2019
Granted
Exercised
Cancelled or forfeited
Expired
Outstanding at June 28, 2020
Vested and expected to vest as of June 28, 2020
Exercisable at June 28, 2020
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual Life
(Years)
Aggregate
Intrinsic
Value
Stock Options
377 $
676 $
(12) $
(33) $
(5) $
1,003 $
1,003 $
374 $
24.88
13.48
5.73
27.45
32.56
17.29
17.29
18.89
8.5 $
8.5 $
6.1 $
—
—
—
At June 28, 2020, the remaining unrecognized compensation cost related to the unvested stock options was $1,946, which is expected to be recognized over a weighted
average period of 3.2 years.
For fiscal 2020, 2019 and 2018, the total intrinsic value of stock options exercised was $147, $971 and $2,703, respectively. The amount of cash received from the exercise of
stock options was $29, $483 and $219 for fiscal 2020, 2019 and 2018, respectively. The tax benefit realized from stock options exercised was $20, $61 and $398 for fiscal
2020, 2019 and 2018, respectively.
Restricted Stock Units and Vested Share Units
During fiscal 2020, 2019 and 2018, UNIFI granted 127, 75 and 86 restricted stock units (“RSUs”), respectively, to certain key employees. The employee RSUs are subject to a
vesting restriction and convey no rights of ownership in shares of Company common stock until such employee RSUs have vested and been distributed to the grantee in the
form of Company common stock. The employee RSUs vest over a three-year period, and will be converted into an equivalent number of shares of Company common stock (for
distribution to the grantee) on each vesting date, unless the grantee has elected to defer the receipt of the shares of stock until separation from service. UNIFI estimated the
weighted average fair value of each employee RSU granted during fiscal 2020, 2019 and 2018 to be $19.74, $23.58 and $32.16 respectively.
During fiscal 2020 and 2019, UNIFI granted 24 and 47 vested share units (“VSUs”), respectively, to UNIFI’s non-employee directors. The director VSUs became fully vested on
the grant date, but convey no rights of ownership in shares of Company common stock until such director VSUs have been distributed to the grantee in the form of Company
common stock. The director VSUs will be converted into an equivalent number of shares of Company common stock and distributed to the grantee following the grantee’s
termination of service as a member of the Board. UNIFI estimated the fair value of each director VSU granted during fiscal 2020 and fiscal 2019 to be $27.15 and $23.27,
respectively.
During fiscal 2018, UNIFI granted 30 RSUs to UNIFI’s non-employee directors. The director RSUs became fully vested on the grant date. The director RSUs convey no rights
of ownership in shares of Company common stock until such director RSUs have been distributed to the grantee in the form of Company common stock. The vested director
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 service as a
member of the Board. UNIFI estimated the fair value of each director RSU granted during fiscal 2018 to be $35.83.
UNIFI estimates the fair value of RSUs and VSUs based on the market price of UNIFI’s common stock at the award grant date.
A summary of RSU and VSU activity for fiscal 2020 is as follows:
Outstanding at June 30, 2019
Granted
Vested
Converted
Cancelled or forfeited
Outstanding at June 28, 2020
Weighted
Average
Grant Date
Fair Value
Non-vested
Vested
Total
113 $
151 $
(104) $
— $
(18) $
142 $
27.50
20.91
27.61
—
28.31
20.31
192
—
104
(77)
—
219
Weighted
Average
Grant Date
Fair Value
305 $
151 $
— $
(77) $
(18) $
361 $
25.61
20.91
27.61
27.68
28.31
23.08
At June 28, 2020, the number of RSUs and VSUs vested and expected to vest was 361, with an aggregate intrinsic value of $4,223. The aggregate intrinsic value of the 219
vested RSUs and VSUs at June 28, 2020 was $2,562.
F-26
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
The unrecognized compensation cost related to the unvested RSUs at June 28, 2020 was $1,728, which is expected to be recognized over a weighted average period of 1.8
years.
For fiscal 2020, 2019 and 2018, the total intrinsic value of RSUs and VSUs converted was $1,708, $1,427 and $1,620, respectively. The tax benefit realized from the conversion
of RSUs was $206, $164 and $247 for fiscal 2020, 2019 and 2018, respectively.
Summary
The total cost charged against income related to all stock-based compensation arrangements was as follows:
Stock options
RSUs and VSUs
Total compensation cost
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
1,265 $
2,245
3,510 $
671 $
1,977
2,648 $
884
4,042
4,926
In fiscal 2020, UNIFI issued 4 shares of common stock for $100 of expense in connection with Board compensation.
The total income tax benefit recognized for stock-based compensation was $178, $325 and $442 for fiscal 2020, 2019 and 2018, respectively.
As of June 28, 2020, total unrecognized compensation costs related to all unvested stock-based compensation arrangements were $3,674. The weighted average period over
which these costs are expected to be recognized is 2.5 years.
18. Defined Contribution Plan
UNIFI matches employee contributions made to the Unifi, Inc. Retirement Savings Plan (the “401(k) Plan”), a 401(k) defined contribution plan, which covers eligible domestic
salary and hourly employees. Under the terms of the 401(k) Plan, UNIFI matches 100% of the first 3% of eligible employee contributions and 50% of the next 2% of eligible
contributions.
The following table presents the employer matching contribution expense related to the 401(k) Plan:
Matching contribution expense
19. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities
Financial Instruments
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
2,491 $
2,836 $
2,643
UNIFI may use derivative financial instruments such as foreign currency forward contracts or interest rate swaps to reduce its ongoing business exposures to fluctuations in
foreign currency exchange rates or interest rates. UNIFI does not enter into derivative contracts for speculative purposes.
Foreign Currency Forward Contracts
UNIFI 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. Foreign currency forward contracts are not designated as hedges by UNIFI and are marked to market each
period and offset by the foreign exchange (gains) losses included in other operating expense (income), net resulting from the underlying exposures of the foreign currency
denominated assets and liabilities. As of June 28, 2020 and June 30, 2019, there were no outstanding foreign currency forward contracts.
Interest Rate Swaps
UNIFI’s primary debt obligations utilize variable-rate LIBOR, exposing the Company to variability in interest payments due to changes in interest rates. Management enters into
LIBOR-based interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark LIBOR. Under the terms of the interest rate swaps,
UNIFI effectively receives LIBOR-based variable interest rate payments and makes fixed interest rate payments, thereby fixing the variable rate cash flows on the notional
amount of debt obligations.
In 2017, UNIFI entered into Swaps A, B and C. The combined designated hedges fix LIBOR at approximately 1.9% for $75,000 of variable rate borrowings through May 24,
2022. In accordance with hedge accounting, each swap is reflected on the accompanying
F-27
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
consolidated balance sheets at fair value with a corresponding balance in accumulated other comprehensive loss, and impacts earnings commensurate with the forecasted
transaction.
UNIFI’s financial assets and liabilities accounted for at fair value on a recurring basis and the level within the fair value hierarchy used to measure these items are as follows:
As of June 28, 2020
Swap A
Swap B
Swap C
As of June 30, 2019
Swap A
Swap B
Swap C
Notional Amount
$
$
$
USD
USD
USD
20,000 Other long-term liabilities
30,000 Other long-term liabilities
25,000 Other long-term liabilities
Balance Sheet Location
Notional Amount
$
$
$
USD
USD
USD
20,000 Other long-term liabilities
30,000 Other long-term liabilities
25,000 Other long-term liabilities
Balance Sheet Location
Fair Value Hierarchy
Level 2
Level 2
Level 2
$
$
$
Fair Value Hierarchy
Level 2
Level 2
Level 2
$
$
$
Fair Value
690
1,034
827
Fair Value
186
279
182
Estimates for the fair value of UNIFI’s derivative contracts are obtained from month-end market quotes for contracts with similar terms.
Swaps A, B and C, designated hedges, increased interest expense for fiscal 2020 by $270, decreased interest expense for fiscal 2019 by $320 and increased interest expense
for fiscal 2018 by $319.
By entering into derivative contracts, UNIFI exposes itself to counterparty credit risk. UNIFI attempts to minimize this risk by selecting counterparties with investment grade
credit ratings and regularly monitoring those ratings. UNIFI’s derivative instruments do not contain any credit-risk-related contingent features.
UNIFI believes that there have been no significant changes to its credit risk profile or the interest rates available to UNIFI for debt issuances with similar terms and average
maturities, and UNIFI estimates that the fair values of its debt obligations approximate the carrying amounts. Other financial instruments include cash and cash equivalents,
receivables, accounts payable and accrued expenses. The financial statement carrying amounts of these items approximate the fair values due to their short-term nature.
There were no transfers into or out of the levels of the fair value hierarchy for fiscal 2020, 2019 and 2018.
Non-Financial Assets and Liabilities
UNIFI did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring or non-recurring basis.
20. Accumulated Other Comprehensive Loss
The components of and the changes in accumulated other comprehensive loss, net of tax, as applicable, consist of the following:
Balance at June 25, 2017
Other comprehensive (loss) income, net of tax
Balance at June 24, 2018
Other comprehensive loss, net of tax
Balance at June 30, 2019
Other comprehensive loss, net of tax
Balance at June 28, 2020
Foreign
Currency
Translation
Adjustments
Changes in
Interest
Rate
Swaps
Accumulated
Other
Comprehensive
Loss
$
$
$
$
(32,372) $
(9,896)
(42,268) $
(461)
(42,729) $
(19,119)
(61,848) $
(508) $
2,243
1,735 $
(2,235)
(500) $
(1,458)
(1,958) $
(32,880)
(7,653)
(40,533)
(2,696)
(43,229)
(20,577)
(63,806)
F-28
A summary of other comprehensive (loss) income for fiscal 2020, 2019 and 2018 is provided as follows:
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Pre-tax
After-tax Pre-tax
After-tax Pre-tax
Fiscal 2020
Tax
Fiscal 2019
Tax
Fiscal 2018
Tax
After-tax
Other comprehensive (loss) income:
Foreign currency translation
adjustments
Foreign currency translation
adjustments for an unconsolidated
affiliate
Changes in interest rate swaps, net of
reclassification adjustments
Other comprehensive loss, net
$ (21,027) $
— $ (21,027) $
(681) $
— $
(681) $ (9,250) $
— $
(9,250)
1,908
—
1,908
220
—
220
(646)
—
(646)
(1,904)
$ (21,023) $
(2,906)
446
446 $ (20,577) $ (3,367) $
(1,458)
3,067
671
671 $ (2,696) $ (6,829) $
(2,235)
(824)
(824) $
2,243
(7,653)
21. Computation of Earnings Per Share
The computation of basic and diluted earnings per share (“EPS”) is as follows:
Basic EPS
Net (loss) income
Weighted average common shares outstanding
Basic EPS
Diluted EPS
Net (loss) income
Weighted average common shares outstanding
Net potential common share equivalents
Adjusted weighted average common shares outstanding
Diluted EPS
Excluded from the calculation of common share equivalents:
Anti-dilutive common share equivalents
Excluded from the calculation of diluted shares:
Unvested stock options that vest upon achievement of certain
market conditions
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
$
$
(57,237) $
18,475
(3.10) $
(57,237) $
18,475
—
18,475
(3.10) $
401
333
2,456 $
18,395
0.13 $
2,456 $
18,395
300
18,695
0.13 $
314
—
31,702
18,294
1.73
31,702
18,294
343
18,637
1.70
118
—
The calculation of earnings per common share is based on the weighted average number of UNIFI’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.
22. Other Operating Expense, Net
Other operating expense, net primarily consists of gains and losses on foreign currency transactions and sale or disposal of assets, along with severance expenses related to
former employees.
23. Investments in Unconsolidated Affiliates and Variable Interest Entities
Parkdale America, LLC
In June 1997, UNIFI 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 PAL, a producer of cotton and synthetic yarns for sale to the global textile
industry and apparel market. In exchange for its contribution, UNIFI received a 34% equity ownership interest in the PAL Investment, accounted for using the equity method of
accounting. Effective January 1, 2012, Mills’ interest in PAL was assigned to Parkdale.
During March 2020, UNIFI commenced negotiations to sell the PAL Investment to Parkdale. Such negotiations indicated that the fair value of the PAL Investment was less than
UNIFI’s carrying value, and UNIFI no longer intended to hold the PAL Investment to allow recovery of the carrying value. UNIFI recorded an other-than-temporary impairment of
$45,194 to adjust the PAL Investment to fair value. In April 2020, UNIFI and Parkdale finalized negotiations to sell UNIFI’s PAL Investment to Parkdale for $60,000. The
transaction closed on April 29, 2020, and UNIFI received $60,000 in cash.
During UNIFI’s period of ownership, PAL was a limited liability company treated as a partnership for income tax reporting purposes. Per PAL’s fiscal 2019 audited financial
statements, PAL had 11 manufacturing facilities located primarily in the southeast region of
F-29
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
the U.S. and in Mexico, and PAL’s five largest customers accounted for approximately 75% of total revenues and 79% of total gross accounts receivable outstanding.
The U.S. federal government maintains a program providing economic adjustment assistance to domestic users of upland cotton (the “cotton rebate program”). The cotton
rebate program offers a subsidy for cotton consumed in domestic production, and the subsidy is paid the month after the eligible cotton is consumed. To be completely earned,
the subsidy must be used within 18 months after the marketing year in which it is 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 up to three cents per pound. In December 2018, the U.S. federal government
extended the program at the same rate through July 31, 2021, and for subsequent years, subject to funding available through annual appropriations. PAL recognizes its share
of 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.
PAL has been subject to price risk related to anticipated fixed-price yarn sales. To protect the gross margin of these sales, PAL may have entered into cotton futures to manage
changes in raw material prices in order to protect the gross margin of fixed-priced yarn sales. The derivative instruments used were listed and traded on an exchange and were
thus valued using quoted prices classified within Level 1 of the fair value hierarchy.
U.N.F. Industries, Ltd.
In September 2000, UNIFI 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. Raw material and production services for UNF are provided by Nilit under separate supply and services agreements. UNF’s fiscal year end is December 31 and it is
a registered Israeli private company located in Migdal Ha-Emek, Israel.
UNF America, LLC
In October 2009, UNIFI and Nilit America Inc. (“Nilit America”) formed a 50/50 joint venture, UNF America LLC (“UNFA”), for the purpose of operating a nylon extrusion facility
which manufactures nylon POY. Raw material and production services for UNFA are provided by Nilit America under separate supply and services agreements. UNFA’s fiscal
year end is December 31 and it is a limited liability company treated as a partnership for income tax reporting purposes located in Ridgeway, Virginia.
In conjunction with the formation of UNFA, UNIFI entered into a supply agreement with UNF and UNFA whereby UNIFI agreed to purchase all of its first quality nylon POY
requirements for texturing (subject to certain exceptions) from either UNF or UNFA. The agreement has no stated minimum purchase quantities, and pricing is negotiated every
six months based on market rates. As of June 28, 2020, UNIFI’s open purchase orders related to this agreement were $2,259.
UNIFI’s raw material purchases under this supply agreement consist of the following:
UNF
UNFA
Total
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
1,450 $
14,583
16,033 $
1,735 $
23,089
24,824 $
1,800
21,731
23,531
As of June 28, 2020 and June 30, 2019, UNIFI had combined accounts payable due to UNF and UNFA of $1,166 and $1,728, respectively.
UNIFI has determined that UNF and UNFA are variable interest entities and has also determined that UNIFI is the primary beneficiary of these entities, based on the terms of
the supply agreement. As a result, these entities should be consolidated with UNIFI’s financial results. As UNIFI purchases substantially all of the output from the two entities,
the two entities’ balance sheets constitute 3% or less of UNIFI’s current assets, total assets and total liabilities, and such balances are not expected to comprise a larger portion
in the future, UNIFI has not included the accounts of UNF and UNFA in its consolidated financial statements. As of June 28 2020, UNIFI’s combined investments in UNF and
UNFA were $2,171 and are shown within investments in unconsolidated affiliates in the accompanying consolidated balance sheets. The financial results of UNF and UNFA are
included in UNIFI’s consolidated financial statements with a one-month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with
UNIFI’s accounting policy. Other than the supply agreement discussed above, UNIFI does not provide any other commitments or guarantees related to either UNF or UNFA.
F-30
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Condensed balance sheet and income statement information for UNIFI’s unconsolidated affiliates (including reciprocal balances) is presented in the following tables. PAL is
separately disclosed due to its status as a significant subsidiary for fiscal 2019 and 2018. PAL has not met the criteria for segment reporting. Below, (i) no PAL Investment
amounts are reported for June 28, 2020 due to the associated divestiture on April 29, 2020, and (ii) fiscal 2020 PAL Investment income statement activity is reported for the ten
months of fiscal 2020 ownership ending April 29, 2020.
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Shareholders’ equity and capital accounts
UNIFI’s portion of undistributed earnings
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Shareholders’ equity and capital accounts
Net sales
Gross profit
(Loss) income from operations
Net (loss) income
Depreciation and amortization
Cash received by PAL under cotton rebate program
Earnings recognized by PAL for cotton rebate program
Distributions received
Net sales
Gross profit
Income from operations
Net income
Depreciation and amortization
Cash received by PAL under cotton rebate program
Earnings recognized by PAL for cotton rebate program
Distributions received
Net sales
Gross profit
Income from operations
Net income
Depreciation and amortization
Cash received by PAL under cotton rebate program
Earnings recognized by PAL for cotton rebate program
Distributions received
PAL
$
As of June 28, 2020
Other
Total
— $
—
—
—
—
—
5,190 $
561
1,415
—
4,336
1,424
5,190
561
1,415
—
4,336
1,424
$
$
$
$
PAL
As of June 30, 2019
Other
Total
299,610 $
158,304
70,875
3,252
383,787
7,218 $
696
4,069
—
3,845
306,828
159,000
74,944
3,252
387,632
For the Fiscal Year Ended June 28, 2020
Other
Total
PAL
544,006 $
7,592
(7,484)
(2,823)
33,455
11,186
9,697
10,437
17,068 $
2,056
410
497
135
—
—
—
561,074
9,648
(7,074)
(2,326)
33,590
11,186
9,697
10,437
For the Fiscal Year Ended June 30, 2019
Other
Total
PAL
836,675 $
24,455
6,575
7,534
40,679
13,367
12,896
25,621 $
4,713
2,988
3,093
190
—
—
647
2,000
862,296
29,168
9,563
10,627
40,869
13,367
12,896
2,647
For the Fiscal Year Ended June 24, 2018
Other
Total
PAL
796,010 $
31,112
12,032
12,990
39,404
13,797
13,334
9,236
24,097 $
4,646
2,917
2,961
190
—
—
3,000
820,107
35,758
14,949
15,951
39,594
13,797
13,334
12,236
F-31
24. Commitments and Contingencies
Collective Bargaining Agreements
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
While employees of UNIFI’s Brazilian operations are unionized, none of the labor force employed by UNIFI’s domestic or other foreign subsidiaries is currently covered by a
collective bargaining agreement.
Environmental
On September 30, 2004, Unifi Kinston, LLC (“UK”), a subsidiary of Unifi, Inc., completed its acquisition of 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 (the “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 and the North
Carolina Department of Environmental Quality (“DEQ”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The program requires DuPont to
identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and remediate the AOCs to comply with applicable
regulatory standards. Effective March 20, 2008, UK entered into a lease termination agreement associated with conveyance of certain assets at the Kinston site to
DuPont. This agreement terminated the Ground Lease and relieved UK of any future responsibility for environmental remediation, other than participation with DuPont, if so
called upon, with regard to UK’s period of operation of the Kinston site, which was from 2004 to 2008. At this time, UNIFI has no basis to determine if or when it will have any
responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
UK continues to own property (the “Kentec site”) acquired in the 2004 transaction with INVISTA that has contamination from DuPont’s prior operations and is monitored by
DEQ. The Kentec site has been remediated by DuPont, and DuPont has received authority from DEQ to discontinue further remediation, other than natural attenuation. Prior to
transfer of responsibility to UK, DuPont and UK had a duty to monitor and report the environmental status of the Kentec site to DEQ.
Effective April 10, 2019, UK assumed sole remediator responsibility of the Kentec site pursuant to its contractual obligations with INVISTA and received $180 of net monitoring
and reporting costs due from DuPont. In connection with monitoring, UK expects to sample and report to DEQ annually. UNIFI expects minimal active site remediation may be
required, but has no basis to determine any costs that may be associated with active remediation.
Unconditional Obligations
UNIFI is a party to unconditional obligations for certain utility and other purchase or service commitments. These commitments are non-cancelable, have remaining terms in
excess of one year and qualify as normal purchases.
On a fiscal year basis, the minimum payments expected to be made as part of such commitments are as follows:
Unconditional purchase obligations
Unconditional service obligations
Total unconditional obligations
$
$
6,621 $
4,357
10,978 $
5,130 $
2,839
7,969 $
5,109 $
570
5,679 $
3,350 $
258
3,608 $
1,680 $
258
1,938 $
7
377
384
Fiscal 2021
Fiscal 2022
Fiscal 2023
Fiscal 2024
Fiscal 2025
Thereafter
For fiscal 2020, 2019 and 2018, total costs incurred under these commitments consisted of the following:
Costs for unconditional purchase obligations
Costs for unconditional service obligations
Total
25. Related Party Transactions
There were no related party receivables as of June 28, 2020 and June 30, 2019.
Related party payables for Salem Leasing Corporation consist of the following:
Accounts payable
Operating lease obligations
Finance lease obligations
Total related party payables
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
21,483 $
2,082
23,565 $
23,542 $
5,169
28,711 $
24,777
2,454
27,231
June 28, 2020
June 30, 2019
$
$
616 $
1,481
6,509
8,606 $
634
—
806
1,440
F-32
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Related party transactions in excess of $120 for the current or prior two fiscal years consist of the matters in the table below and the following paragraphs:
Affiliated Entity
Salem Leasing Corporation
Transaction Type
Transportation equipment costs and
finance lease debt service
Salem Global Logistics, Inc.
Freight service income
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
3,798 $
—
4,102 $
—
3,979
147
Mr. Kenneth G. Langone, a member of the Board, is a director, shareholder and non-executive Chairman of the Board of Salem Holding Company. UNIFI leases tractors and
trailers from Salem Leasing Corporation, a wholly owned subsidiary of Salem Holding Company. In addition to the monthly lease payments, UNIFI also incurs expenses for
routine repair and maintenance, fuel and other expenses. These leases do not contain renewal options, purchase options or escalation clauses with respect to the minimum
lease charges.
Salem Global Logistics, Inc. is also a wholly owned subsidiary of Salem Holding Company. During fiscal 2018, UNIFI earned income by providing for-hire freight services for
Salem Global Logistics, Inc.
26. Business Segment Information
UNIFI defines operating segments as components of the organization for which discrete financial information is available and operating results are evaluated on a regular basis
by UNIFI’s principal executive officer, who is the chief operating decision maker (the “CODM”), in order to assess performance and allocate resources. Characteristics of UNIFI
which were relied upon in making the determination of reportable segments include the nature of the products sold, the internal organizational structure, the trade policies in the
geographic regions in which UNIFI operates and the information that is regularly reviewed by the CODM for the purpose of assessing performance and allocating resources.
UNIFI has four reportable segments.
•
•
•
•
The operations within the Polyester Segment exhibit similar long-term economic characteristics and primarily sell into an economic trading zone covered by
the USMCA, NAFTA and CAFTA (collectively, the regions comprising these economic trading zones are referred to as “NACA”) to similar customers utilizing
similar methods of distribution. These operations derive revenues primarily from manufacturing polyester-based products with sales primarily to other yarn
manufacturers and knitters and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive, home furnishings, automotive, industrial and
other end-use markets. The Polyester Segment consists of sales and manufacturing operations in the U.S. and El Salvador.
The operations within the Asia Segment exhibit similar long-term economic characteristics and sell to similar customers utilizing similar methods of distribution
primarily in Asia and Europe, which are outside of the NACA region. The Asia Segment primarily sources polyester-based products from third-party suppliers
and sells to knitters and weavers that produce fabric for the apparel, automotive, home furnishings, automotive, industrial and other end-use markets
principally in Asia. The Asia Segment includes sales offices in China.
The Brazil Segment primarily manufactures and sells polyester-based products to knitters and weavers that produce fabric for the apparel, automotive, home
furnishings, industrial and other end-use markets principally in South America. The Brazil Segment includes a manufacturing location and sales offices in
Brazil.
The operations within the Nylon Segment exhibit similar long-term economic characteristics and primarily sell into the NACA region to similar customers
utilizing similar methods of distribution. These operations derive revenues primarily from manufacturing nylon-based products with sales to knitters and
weavers that produce fabric primarily for the apparel, hosiery and medical markets. The Nylon Segment includes an immaterial operating segment in
Colombia that sells similar nylon-based textile products to similar customers in Colombia and Mexico utilizing similar methods of distribution. The Nylon
Segment consists of sales and manufacturing operations in the U.S. and Colombia.
In addition to UNIFI’s reportable segments, an All Other category is included in the tables below. All Other consists primarily of for-hire transportation services. For-hire
transportation services revenue is derived from performing common carrier services utilizing UNIFI’s fleet of transportation equipment.
The operations within All Other (i) are not subject to review by the CODM at a level consistent with UNIFI’s other operations, (ii) are not regularly evaluated using the same
metrics applied to UNIFI’s other operations, and (iii) do not qualify for aggregation with an existing reportable segment. Therefore, such operations are excluded from reportable
segments.
UNIFI evaluates the operating performance of its segments based upon Segment Profit, which represents segment gross profit (loss) plus segment depreciation expense. This
measurement of segment profit or loss best aligns segment reporting with the current assessments and evaluations performed by, and information provided to, the CODM.
The accounting policies for the segments are consistent with UNIFI’s accounting policies. Intersegment sales are omitted from segment disclosures, as they are (i) insignificant
to UNIFI’s segments and eliminated from consolidated reporting and (ii) excluded
F-33
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
from segment evaluations performed by the CODM. However, an intersegment technologies expense charged from the Polyester Segment to the Asia Segment is not
eliminated from segment results. The technologies expense (i) reflects the sharing of certain manufacturing know-how, processes and product technical information and design
and (ii) is included in the segment evaluations performed by the CODM.
Selected financial information is presented below:
Net sales
Cost of sales
Gross profit (loss)
Segment depreciation expense
Segment Profit
Net sales
Cost of sales
Gross profit
Segment depreciation expense
Segment Profit
Net sales
Cost of sales
Gross profit
Segment depreciation expense
Segment Profit
Polyester
$
309,184 $
297,096
12,088
16,904
28,992 $
Polyester
$
370,770 $
346,951
23,819
16,068
39,887 $
Polyester
$
364,169 $
330,975
33,194
15,893
49,087 $
$
$
$
For the Fiscal Year Ended June 28, 2020
Asia
153,032 $
136,349
16,683
—
16,683 $
Brazil
Nylon
All Other
Total
73,339 $
62,144
11,195
1,385
12,580 $
67,381 $
68,359
(978)
1,917
939 $
3,573 $
3,521
52
453
505 $
606,509
567,469
39,040
20,659
59,699
For the Fiscal Year Ended June 30, 2019
Asia
132,866 $
117,166
15,700
—
15,700 $
Brazil
Nylon
All Other
Total
102,877 $
84,298
18,579
1,537
20,116 $
98,127 $
90,231
7,896
2,083
9,979 $
4,164 $
3,850
314
229
543 $
708,804
642,496
66,308
19,917
86,225
For the Fiscal Year Ended June 24, 2018
Asia
Brazil
Nylon
All Other
Total
97,297 $
80,677
16,620
—
16,620 $
110,587 $
84,726
25,861
1,648
27,509 $
102,639 $
92,155
10,484
2,197
12,681 $
4,220 $
3,951
269
256
525 $
678,912
592,484
86,428
19,994
106,422
The reconciliations of segment gross profit to consolidated (loss) income before income taxes are as follows:
Polyester
Asia
Brazil
Nylon
All Other
Segment gross profit
SG&A expenses
Provision (benefit) for bad debts
Other operating expense, net
Operating (loss) income
Interest income
Interest expense
Equity in loss (earnings) of unconsolidated affiliates
Gain on sale of investment in unconsolidated affiliate
Impairment of investment in unconsolidated affiliate
Loss on extinguishment of debt
(Loss) income before income taxes
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
12,088 $
16,683
11,195
(978)
52
39,040
43,814
1,739
2,308
(8,821)
(722)
4,779
477
(2,284)
45,194
—
$
(56,265) $
F-34
23,819 $
15,700
18,579
7,896
314
66,308
52,690
308
2,350
10,960
(628)
5,414
(3,968)
—
—
131
10,011 $
33,194
16,620
25,861
10,484
269
86,428
56,077
(38)
1,590
28,799
(560)
4,935
(5,787)
—
—
—
30,211
The reconciliations of segment depreciation and amortization expense to consolidated depreciation and amortization expense are as follows:
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Polyester
Asia
Brazil
Nylon
All Other
Segment depreciation expense
Other depreciation and amortization expense
Depreciation and amortization expense
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
16,904 $
—
1,385
1,917
453
20,659
2,994
23,653 $
16,068 $
—
1,537
2,083
229
19,917
3,086
23,003 $
15,893
—
1,648
2,197
256
19,994
2,591
22,585
The reconciliations of segment capital expenditures to consolidated capital expenditures are as follows:
Polyester
Asia
Brazil
Nylon
Segment capital expenditures
Other capital expenditures
Capital expenditures
The reconciliations of segment total assets to consolidated total assets are as follows:
Polyester
Asia
Brazil
Nylon
Segment total assets
Other current assets
Other PP&E
Other operating lease assets
Other non-current assets
Investments in unconsolidated affiliates
Total assets
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
13,714 $
60
2,332
249
16,355
2,154
18,509 $
17,291 $
32
2,574
624
20,521
4,350
24,871 $
16,605
36
3,063
1,366
21,070
3,959
25,029
June 28, 2020
June 30, 2019
$
$
263,496 $
41,452
49,967
42,020
396,935
48,600
23,676
1,503
1,277
2,171
474,162 $
287,608
35,219
67,490
57,055
447,372
10,327
18,664
—
1,468
114,320
592,151
Product sales (excluding the All Other category) are as follows, based on categorization into REPREVE® Fiber sales and non-REPREVE® Fiber sales.
REPREVE® Fiber
Non-REPREVE® Fiber
Total
Geographic Data
Net Sales
U.S.
China
Brazil
Remaining Foreign Countries
Total
Export sales from UNIFI’s U.S. operations to external customers
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
$
186,141 $
416,795
602,936
$
180,254 $
524,386
704,640
$
160,366
514,326
674,692
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
342,350 $
148,923
73,339
41,897
606,509 $
426,725 $
125,667
102,877
53,535
708,804 $
420,920
90,998
110,587
56,407
678,912
64,305 $
84,707 $
94,205
$
$
$
The net sales amounts are based on the operating locations from where the items were produced or distributed.
F-35
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
Long-Lived Assets
U.S.
Brazil
China
Remaining Foreign Countries
Total
June 28, 2020
June 30, 2019
June 24, 2018
$
$
195,874 $
10,805
779
9,859
217,317 $
305,483 $
13,218
78
5,169
323,948 $
305,229
12,679
92
6,225
324,225
Long-lived assets are comprised of PP&E, net; operating lease assets; intangible assets, net; investments in unconsolidated affiliates; and other non-current assets.
Total Assets
U.S.
Brazil
China
Remaining Foreign Countries
Total
27. Quarterly Results (Unaudited)
Quarterly financial data and selected highlights are as follows:
Net sales (1)
Gross profit (loss) (2)
Net income (loss) (3)
Net income (loss) per common share:
Basic (4)
Diluted (4)
Net sales (5)
Gross profit (6)
Net income (loss) (7)
Net income (loss) per common share:
Basic (4)
Diluted (4)
June 28, 2020
June 30, 2019
June 24, 2018
$
$
352,869 $
49,967
39,238
32,088
474,162 $
457,571 $
67,490
30,982
36,108
592,151 $
455,963
59,657
32,703
53,484
601,807
September 29,
2019
December 29,
2019
March 29, 2020
For the Fiscal Quarter Ended
179,949 $
17,443
3,712
0.20 $
0.20 $
169,511 $
15,665
409
0.02 $
0.02 $
170,994 $
15,383
(41,111)
(2.23) $
(2.23) $
September 30,
2018
December 30,
2018
March 31, 2019
For the Fiscal Quarter Ended
181,611 $
20,019
1,812
0.10 $
0.10 $
167,711 $
14,156
1,171
0.06 $
0.06 $
179,989 $
13,791
(1,529)
(0.08) $
(0.08) $
$
$
$
$
$
$
June 28, 2020
86,055
(9,451)
(20,247)
(1.10)
(1.10)
June 30, 2019
179,493
18,342
1,002
0.05
0.05
(1)
(2)
(3)
(4)
(5)
(6)
Net sales for the fiscal quarter ended June 28, 2020, includes the impact of global demand declines and decreased economic activity caused by the COVID-19 pandemic.
Gross loss for the fiscal quarter ended June 28, 2020 includes the adverse impact of lower fixed cost absorption in connection with the COVID-19 pandemic.
Net loss for the fiscal quarter March 29, 2020 includes the impairment charge for PAL of $45,194. Net loss for the fiscal quarter ended June 28, 2020 includes the
adverse impact of the COVID-19 pandemic and severance charges for involuntary terminations.
(Loss) income per share is computed independently for each of the periods presented. The sum of the (loss) income per share amounts for the fiscal quarters may not
equal the total for the fiscal year.
The fiscal quarter ended September 30, 2018 was comprised of fourteen weeks.
Gross profit for the fiscal quarter ended December 30, 2018 includes the adverse impact of a raw material cost spike that could not be effectively offset with timely
corresponding selling price increases. Gross profit for the fiscal quarters ended December 30, 2018 and March 31, 2019 includes the adverse impact of significant
competitive pressure caused by elevated levels of polyester textured yarn imports.
(7)
Net income for the fiscal quarter ended June 30, 2019 includes severance charges for involuntary terminations.
F-36
Unifi, Inc.
Notes to Consolidated Financial Statements – (Continued)
28. Supplemental Cash Flow Information
Cash payments for interest and taxes consist of the following:
Interest, net of capitalized interest of $126, $219 and $190, respectively
Income taxes, net of refunds
Non-Cash Investing and Financing Activities
June 28, 2020
For the Fiscal Year Ended
June 30, 2019
June 24, 2018
$
4,682
6,131
$
$
5,342
2,623
4,459
9,962
As of June 28, 2020, June 30, 2019 and June 24, 2018, $630, $1,329 and $3,187, respectively, were included in accounts payable for unpaid capital expenditures.
F-37
Exhibit 21.1
UNIFI, INC.
SUBSIDIARIES
State or Other
Jurisdiction of
Incorporation
or Organization
Hong Kong
Vietnam
Switzerland
Netherlands
Netherlands
Barbados
Brazil
North Carolina
North Carolina
North Carolina
North Carolina
North Carolina
North Carolina
Colombia
North Carolina
P.R. China
El Salvador
Sri Lanka
Netherlands
Hong Kong
Name
Unifi Asia Pacific (Hong Kong) Company, Limited
(“UAP”)
Unifi Vietnam Company Limited
Unifi Switzerland GmbH (“USG”)
Unifi Holding 1, BV (“UH1”)
Unifi Holding 2, BV (“UH2”)
Unifi Textiles Holding, SRL (“UTH”)
Unifi do Brasil, Ltda.
Unifi Manufacturing, Inc. (“UMI”)
Unifi Textured Polyester, LLC
Unifi Kinston, LLC
Unifi Sales & Distribution, Inc.
Unimatrix Americas, LLC
Unifi Administrative Services, LLC
Unifi Latin America, S.A.S.
See4 Process Improvement Solutions, LLC
Unifi Textiles (Suzhou) Co. Ltd.
Unifi Central America, Ltda. de CV
Unifi Textiles Colombo (Private) Limited
Unifi Holding Asia, B.V. (“UHA”)
Unifi Asia Pacific (Hong Kong) Company, Limited
(“UAP”)
Unifi Vietnam Company Limited
Vietnam
Unifi Turkey Textile Commerce Joint Stock Company
Turkey
Unifi Percentage
of Voting
Securities Owned
100% - UHA
100% - UAP
100% - UHA
100% - USG
100% - UH1
100% - UAP
99.99% - UH1
.01% - UMI
100% - Unifi, Inc.
100% - UMI
100% - UMI
100% - Unifi, Inc.
100% - UMI
100% - UMI
100% - USG
100% - UMI
100% - UTH
99.99% - UH1
.01% - UH2
100% - USG
100% - Unifi, Inc.
100% - UHA
100% - UAP
100% - UAP
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
The Shareholders and Board of Directors
Unifi, Inc.:
We consent to the incorporation by reference in the registration statement No. 33-23201, No. 33-53799, No. 333-35001, No. 333-43158, No.
333-156090, No. 333-191870 and No. 333-229533 on Form S-8 and No. 333-140580 on Form S-3 of Unifi, Inc. of our reports dated August
26, 2020, with respect to the consolidated balance sheets of Unifi, Inc. as of June 28, 2020 and June 30, 2019, and the related consolidated
statements of operations, comprehensive (loss) income, shareholders’ equity, and cash flows for each of the years in the three-year period
ended June 28, 2020, and the related notes (collectively, the consolidated financial statements), and the effectiveness of internal control over
financial reporting as of June 28, 2020, which reports appear in the June 28, 2020 Annual Report on Form 10‑K of Unifi, Inc.
/s/ KPMG LLP
Greensboro, North Carolina
August 26, 2020
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-140580) and Form S-8 (No. 33-
23201, No. 033-53799, No. 333-35001, No. 333-43158, No. 333-156090, No. 333-191870, and No.333-229533) of Unifi, Inc. of our report
dated March 27, 2020 relating to the financial statements of Parkdale America, LLC, which appears in Unifi, Inc.’s Form 10-K.
Exhibit 23.2
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
August 26, 2020
Exhibit 31.1
I, Edmund M. Ingle, certify that:
1. I have reviewed this Annual Report on Form 10-K of Unifi, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date:
August 26, 2020
/s/ EDMUND M. INGLE
Edmund M. Ingle
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Craig A. Creaturo, certify that:
1. I have reviewed this Annual Report on Form 10-K of Unifi, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-
15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report
based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date:
August 26, 2020
/s/ CRAIG A. CREATURO
Craig A. Creaturo
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K of Unifi, Inc. (the “Company”) for the fiscal year ended June 28, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Edmund M. Ingle, Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date:
August 26, 2020
/s/ EDMUND M. INGLE
Edmund M. Ingle
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report on Form 10-K of Unifi, Inc. (the “Company”) for the fiscal year ended June 28, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Craig A. Creaturo, Executive Vice President & Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date:
August 26, 2020
/s/ CRAIG A. CREATURO
Craig A. Creaturo
Executive Vice President & Chief Financial Officer
(Principal Financial Officer)
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Consolidated Financial Statements
As of April 29, 2020 (Unaudited) and December 28, 2019 and for the period ended April 29, 2020 (Unaudited) and the two years ended December 28, 2019
Exhibit 99.1
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Index
Report of Independent Auditors
Consolidated Financial Statements
Balance Sheets
Statements of Operations
Statements of Comprehensive (Loss) Income
Statements of Members’ Equity
Statements of Cash Flows
Notes to Consolidated Financial Statements
Page(s)
3
4
5
6
7
8
9 – 18
2
Report of Independent Auditors
To the Management and the Board of Managers of
Parkdale America, LLC
We have audited the accompanying consolidated financial statements of Parkdale America, LLC and its subsidiaries, which comprise the consolidated balance sheet as of
December 28, 2019 and the related consolidated statements of operations, comprehensive (loss) income, members’ equity, and cash flows for each of the two years in the
period ended December 28, 2019.
Management's Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the
United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend
on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we
express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Parkdale America, LLC and its subsidiaries
as of December 28, 2019, and the results of their operations and their cash flows for each of the two years in the period ended December 28, 2019 in accordance with
accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 27, 2020
3
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Consolidated Balance Sheets
April 29, 2020 (unaudited) and December 28, 2019
Assets
Current assets
Cash and cash equivalents
Trade accounts receivable (less allowance of
$2,067,000 and $2,041,000 in 2020 and 2019)
Other receivables
Due from affiliates
Inventories, net
Prepaid expenses and other assets
Due from broker
Derivative assets
Total current assets
Property, plant and equipment, net
Assets held for sale
Deferred financing costs, net
Other noncurrent assets
Total assets
Liabilities and Members' Equity
Current liabilities
Trade accounts payable
Accrued expenses
Due to affiliates
Derivative liabilities
Total current liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
Accumulated other comprehensive loss
Members' equity
Total members' equity
Unaudited
April 29,
2020
December 28,
2019
$ 57,550,000
$ 46,159,000
79,918,000
680,000
15,000
84,575,000
4,854,000
2,605,000
700,000
230,897,000
145,803,000
2,531,000
272,000
322,000
100,320,000
1,022,000
91,000
112,375,000
3,320,000
96,000
1,469,000
264,852,000
155,007,000
1,480,000
319,000
451,000
$ 379,825,000
$ 422,109,000
$ 19,361,000
$ 55,069,000
7,787,000
3,076,000
1,790,000
32,014,000
2,542,000
34,556,000
(10,612,000)
355,881,000
345,269,000
8,895,000
5,354,000
1,262,000
70,580,000
3,097,000
73,677,000
(5,209,000)
353,641,000
348,432,000
Total liabilities and members' equity
$ 379,825,000
$ 422,109,000
The accompanying notes are an integral part of these consolidated financial statements.
4
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Consolidated Statements of Operations
Period Ended April 29, 2020 (unaudited) and Years Ended December 28, 2019 and December 29, 2018
Net sales
Cost of goods sold
Gross profit
General and administrative expenses
Loss (gain) on disposals of property, plant
and equipment, net
Impairment and realignment costs
Income (loss) from operations
Interest expense
Interest income
Foreign exchange (gain) loss
Other income, net
Income before provision for income taxes
Provision for income taxes
Net income
Unaudited
Period from December 29, 2019 to
April 29, 2020
Fiscal Year
2019
Fiscal Year
2018
$ 183,278,000
176,636,000
$ 795,540,000
779,490,000
$ 817,271,000
792,360,000
6,642,000
16,050,000
24,911,000
6,418,000
17,363,000
17,788,000
8,000
2,000
214,000
47,000
(185,000)
(2,627,000)
(44,000)
3,023,000
783,000
(56,000)
651,000
(212,000)
482,000
(1,908,000)
6,853,000
139,000
(1,184,000)
673,000
(3,509,000)
1,973,000
880,000
136,000
(791,000)
(91,000)
(310,000)
7,909,000
509,000
$ 2,240,000
$ 1,093,000
$ 7,400,000
The accompanying notes are an integral part of these consolidated financial statements.
5
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Consolidated Statements of Comprehensive (Loss) Income
Period Ended April 29, 2020 (unaudited) and Years Ended December 28, 2019 and December 29, 2018
Net income
Other comprehensive (loss) income
Foreign currency translation
Other comprehensive (loss) income
Comprehensive (loss) income
Unaudited
Period from
December 29, 2019 to
Fiscal Year
April 29, 2020
2019
Fiscal Year
2018
$ 2,240,000
$ 1,093,000
$ 7,400,000
(5,403,000)
(5,403,000)
928,000
928,000
(43,000)
(43,000)
$ (3,163,000)
$ 2,021,000
$ 7,357,000
The accompanying notes are an integral part of these consolidated financial statements.
6
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Consolidated Statements of Members’ Equity
Period Ended April 29, 2020 (unaudited) and Years Ended December 28, 2019 and December 29, 2018
Balance at December 30, 2017
Net income
Foreign currency translation
Dividends paid
Balance at December 29, 2018
Net income
Foreign currency translation
Dividends paid
Balance at December 28, 2019
Net income (unaudited)
Foreign currency translation (unaudited)
Balance at April 29, 2020 (unaudited)
Accumulated
Other
Comprehensive
(Loss)
Members'
Equity
Total
Members'
Equity
$ (6,094,000)
$ 383,800,000
$ 377,706,000
-
(43,000)
-
(6,137,000)
-
928,000
-
(5,209,000)
-
(5,403,000)
7,400,000
-
(6,435,000)
384,765,000
1,093,000
-
(32,217,000)
353,641,000
2,240,000
-
7,400,000
(43,000)
(6,435,000)
378,628,000
1,093,000
928,000
(32,217,000)
348,432,000
2,240,000
(5,403,000)
$ (10,612,000)
$ 355,881,000
$ 345,269,000
The accompanying notes are an integral part of these consolidated financial statements.
7
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Consolidated Statements of Cash Flows
Period Ended April 29, 2020 (unaudited) and Years Ended December 28, 2019 and December 29, 2018
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization
Loss on impairment
Loss (gain) on disposals of property, plant
and equipment
Amortization of deferred financing costs
Deferred income taxes
Net change in derivative instruments
Changes in operating assets and liabilities
Trade accounts receivable, net
Other receivables
Due to/from affiliates, net
Inventories
Prepaid expenses and other assets
Other noncurrent assets
Trade accounts payable
Accrued expenses and other liabilities
Other noncurrent liabilities
Net cash provided by operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Proceeds from disposal of property,
plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Net cash used in financing activities
Effect of exchange rate on cash and
cash equivalents
Net increase (decrease) in cash and
cash equivalents
Cash and cash equivalents
Beginning of period
End of period
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest
Taxes
Accrued purchases of property, plant and equipment
Unaudited
Period from December 29,
2019 to
April 29, 2020
Fiscal Year
2019
Fiscal Year
2018
$ 2,240,000
$ 1,093,000
$ 7,400,000
11,063,000
-
8,000
47,000
4,000
(1,212,000)
19,210,000
729,000
(3,892,000)
27,758,000
(1,611,000)
42,000
(35,270,000)
(1,780,000)
(332,000)
17,004,000
40,584,000
406,000
(56,000)
135,000
(143,000)
320,000
25,532,000
2,003,000
(1,043,000)
5,228,000
1,721,000
210,000
812,000
(649,000)
(216,000)
75,937,000
39,447,000
99,000
(212,000)
136,000
(197,000)
886,000
(20,006,000)
(1,526,000)
701,000
(12,098,000)
(1,821,000)
197,000
17,017,000
(15,000)
81,000
30,089,000
(5,345,000)
(43,112,000)
(27,329,000)
53,000
(5,292,000)
-
-
448,000
(42,664,000)
(32,217,000)
(32,217,000)
1,143,000
(26,186,000)
(6,435,000)
(6,435,000)
(321,000)
64,000
(4,000)
11,391,000
1,120,000
(2,536,000)
46,159,000
45,039,000
47,575,000
$ 57,550,000
$ 46,159,000
$ 45,039,000
$ -
247,000
1,101,000
$ -
927,000
1,317,000
$ -
938,000
2,592,000
The accompanying notes are an integral part of these consolidated financial statements.
8
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
1.
Summary of Significant Accounting Policies
Nature of Business
On June 30, 1997, Parkdale Mills, Inc. (“Mills”) and Unifi, Inc. (“Unifi”) entered into a Contribution Agreement (the “Agreement”) that sets 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 (the “Company”). In exchange for their respective contributions, Mills and Unifi received a 66% and 34% ownership interest in the Company,
respectively.
On January 1, 2012, Mills contributed its interest in the Company to its newly formed parent company, Parkdale, Incorporated (“Parkdale, Inc.” or the “Parent”).
On April 29, 2020, Unifi sold its 34% ownership interest in the Company to Parent for $60,000,000.
Principles of Consolidation
The accompanying consolidated financial statements include the consolidated accounts of the Company and its wholly-owned subsidiaries Summit Yarn, LLC
(“Summit Yarn”) and Summit Yarn Holding I, Inc. (“Summit Holding”) and its subsidiary Grupo Burlpark, S.A. de C.V. (“Grupo”), a Mexican company. Summit Yarn
and Summit Holding are collectively referred to as the “Summit Entities.”
All intercompany transactions and accounts have been eliminated in consolidation.
Fiscal Year and Short Period (Unaudited) Financial Statements
The Company’s fiscal year end is the Saturday nearest to December 31. The Company’s fiscal years 2019 and 2018 ended on December 28, 2019 and
December 29, 2018, respectively. Such fiscal years contained 52 weeks.
Due to the sale of Unifi’s 34% ownership interest in the Company on April 29, 2020, the associated short-period financial statements are prepared to provide the
relevant financial amounts and disclosures for Unifi’s period of ownership. References to “2020” refer to April 29, 2020 or the period of Unifi’s minority ownership
ending on April 29, 2020.
In the opinion of the Company, the accompanying unaudited financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary
for a fair statement of its financial position as of April 29, 2020, and its results of operations, and cash flows for the four months ended April 29, 2020.
Operations
The Company is a producer of cotton and synthetic yarns for sale to the textile and apparel industries, both foreign and domestic. As of April 29, 2020, the
Company had 10 manufacturing facilities located in North America. The Company incurred $2,000, $245,000 and $383,000 during 2020 and fiscal years 2019 and
2018, respectively, in facility costs concurrent with realigning and consolidating manufacturing facilities. The costs relate primarily to relocation of manufacturing
equipment and are recorded as a component of impairment and realignment costs.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company’s primary performance obligation is the distribution and sale of its cotton and synthetic yarns. Revenue is recognized when performance
obligations under the terms of the contract with the customer are satisfied and are recognized at a point in time, which occurs when control of a good promised in
a contract is transferred to a customer. Control is obtained when the customer has the ability to direct the use of and obtain substantially all of the remaining
9
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
benefits from that good, which generally occurs either on shipment or delivery based on the contractual terms. See Note 2 to the consolidated financial
statements for additional information regarding the Company’s revenue recognition policy.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of these cash
equivalents approximates their fair values. The Company maintains cash deposits with major banks that may exceed federally insured limits. The Company
periodically assesses the financial condition of the institutions and believes the risk of loss to be remote.
Concentration of Credit Risk
Substantially all of the Company’s accounts receivable is due from companies in the textile and apparel markets located primarily throughout North America. The
Company generally does not require collateral for its accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition and
establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
Allowances provided for doubtful accounts were $2,067,000 and $2,041,000 as of April 29, 2020 and December 28, 2019, respectively.
Sales to five customers accounted for approximately 69%, 75% and 74%, of total sales during 2020 and fiscal years 2019 and 2018, respectively. As of April 29,
2020 and December 28, 2019, accounts receivable from five customers comprised 68% and 79%, respectively, of total gross accounts receivable outstanding.
Fair Value Measurements
The Company follows the guidance in Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, to account for fair value measurements. The
guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be
determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in
fair value measurements, the guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair values as follows:
Level 1 – Observable inputs, such as quoted prices in active markets
Level 2 – Inputs, other than quoted prices in active markets, that are observable either directly or indirectly
Level 3 – Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions
The Company’s derivative instruments represent the only balances which are measured at fair value on a recurring basis. The fair value of derivative instruments is
based on quoted prices in active markets (Level 1 for cotton futures contracts). See Note 8 for separate disclosure of derivatives measured at fair value.
The carrying amount of cash equivalents, receivables, and accounts payable approximate fair value because of the short-term maturity of such instruments.
Self-Insurance
The Company is self-insured for certain losses relating to workers’ compensation, medical and dental claims. The Company has stop-loss coverage to limit the
exposure arising from these claims. Self-insurance claims filed and claims incurred but not reported are accrued based upon management’s estimates of the
ultimate cost for self-insured claims incurred using actuarial assumptions followed in the insurance industry and historical experience. Accruals for workers’
compensation are reported on a discounted basis.
Basis of Foreign Currency Translation
The functional currency for Grupo is the Mexican peso. The reporting currency is U.S. dollars. Grupo’s financial statements are translated into U.S. dollars for
consolidation purposes. Investment and equity accounts are translated at historical
10
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
values. All other asset and liability accounts are translated at quoted year end rates. Revenue and expenses are translated on a monthly basis at the average
rates of exchange in effect during the periods. Gains and losses on translation are recorded in accumulated other comprehensive loss as a component of members’
equity on the accompanying consolidated balance sheets.
Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost. Repairs and maintenance that do not extend the life of the applicable assets are expensed. Provisions for
depreciation are determined principally by an accelerated method over the estimated useful lives of the assets.
Assets Held for Sale
Assets held for sale represent those assets that are not in use and management is actively marketing for sale. Depreciation of such assets has ceased. The
Company assesses the criteria for classification for assets held for sale in accordance with ASC 360, Property, Plant, and Equipment. At April 29, 2020, such
assets consisted of two manufacturing buildings held for sale. At December 28, 2019, such assets consisted primarily of one manufacturing building that was
also previously held for sale in the prior year.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets to determine impairment whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net
cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets. In 2020 and fiscal years 2019 and 2018, loss on impairment was $0, $406,000 and
$99,000, respectively.
Economic Assistance Program
During August 2008, a federal government program commenced providing economic adjustment assistance to domestic users of upland cotton. A cotton subsidy is
paid to manufacturers for cotton consumed in domestic production. The subsidy must be used within 18 months after the marketing year earned to purchase
qualifying capital expenditures in the United States for production of goods from upland cotton. The marketing year is from August 1 to July 31. Effective August 1,
2012, the value of the assistance is three cents per pound of consumed cotton.
The Company recognizes income for the cotton subsidy when the cotton has been consumed and the qualifying assets have been acquired. The Company
recognized income of $3,343,000, $13,000,000 and $13,138,000, for the cotton consumption portion of the subsidy earned during 2020 and fiscal years 2019 and
2018, respectively, as a reduction to cost of goods sold in the accompanying consolidated statements of operations.
The Company records the portion of the cotton subsidy deemed to be associated with the qualifying capital expenditures as a reduction of the cost of the
equipment purchased. The portion of the subsidy earned associated with the qualifying capital expenditures for 2020, 2019 and 2018 was $134,000, $445,000 and
$426,000, respectively. These amounts are amortized over the nine year useful life of the corresponding assets on a double declining methodology.
The Company had receivables totaling $134,000 and $855,000 related to the subsidy program as of April 29, 2020 and December 28, 2019, respectively, which is
included as a component of other receivables on the accompanying consolidated balance sheets.
Shipping Costs
The costs to ship products to customers of approximately $5,679,000, $22,306,000 and $25,583,000 during 2020 and fiscal years 2019 and 2018, respectively, are
included as a component of cost of goods sold in the accompanying consolidated statements of operations.
11
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
Other Income, Net
In 2019, the Company received a credit relating to previously overstated utility billings, of which $2,800,000 was recorded in other income relating to prior years'
operations.
Adoption of New Accounting Pronouncements
In May 2014, the FASB issued Revenue From Contracts With Customers (ASU 2014-09) (“Topic 606”), that outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. Topic 606 is based on the principle that
an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled in exchange for those goods or services. As amended by Revenue From Contracts With Customers: Deferral of the Effective Date (ASU 2015-14), Topic
606 is effective for fiscal years beginning after December 15, 2018. The Company adopted Topic 606 on December 30, 2018, using the modified retrospective
approach and applied this approach to contracts not completed as of that date. The adoption of Topic 606 did not result in an adjustment to the Company’s opening
balance of retained earnings. The adoption of Topic 606 did not have a material impact to the Company’s consolidated financial statements. Refer to Note 2 for
additional information regarding the Company’s adoption of Topic 606.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU is
intended to improve and simplify the rules around hedge accounting, reduce complexity for certain hedging concepts and better align financial reporting with an
entity’s risk management activities. The Company adopted Topic 815 on December 30, 2018. The adoption of Topic 815 did not have a material impact to the
Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that
eliminates the probable initial recognition threshold in current U.S. GAAP and, instead, reflects an entity's current estimate of all expected credit losses. The
pronouncement is effective for fiscal years beginning after December 31, 2019. The Company adopted Topic 326 on December 29, 2019. The adoption of Topic 326
did not have a material impact to the Company’s consolidated financial statements.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases, requiring companies to recognize lease assets and lease liabilities by lessees for all operating leases. In
June 2020, the FASB issued Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities to defer the effective
date for non-public companies by one additional year. The pronouncement is effective for fiscal years beginning after December 15, 2021. The Company is currently
evaluating the impact this new guidance will have on its consolidated financial statements.
COVID-19
In December 2019, a novel strain of coronavirus ("COVID-19") was reported in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a
global pandemic and recommended containment and mitigation measures worldwide. As a result of this pandemic, many of our manufacturing facilities were
impacted and continue to be impacted by temporary closures due to reduced customer demand and borders being closed for shipments. The Company has
experienced a decline in sales, a furloughed workforce, and reductions in variable costs (such as materials, utilities, and repairs and maintenance). While the
disruption is expected to be temporary, there is considerable uncertainty around the duration and severity of the impact. Therefore, while the Company expects this
matter to negatively impact its operating results, the related financial impact and duration cannot be reasonably estimated at this time.
The Company assessed certain accounting matters that require consideration of forecasted financial information, including, but not limited to, its allowance for credit
losses and the carrying value of the Company's long-lived assets in context with the information reasonably available to the Company and the unknown future
impacts of COVID-19 as of April 29, 2020 and through the date of this report. As a result of these assessments, there were no impairments or material increases in
credit allowances that impacted the Company's consolidated financial statements as of and for the period ended April 29, 2020. However, the Company's future
assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the consolidated financial statements in future
reporting periods.
12
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
2.
Revenue Recognition
The Company adopted ASC 606 Revenue from Contracts with Customers on December 30, 2018, using the modified retrospective approach for all contracts not
completed at the date of initial adoption. Upon adoption of this guidance, there was no material impact to the Company’s consolidated financial statements.
The Company recognizes revenue when performance obligations under the terms of the contract with the customer are satisfied. The Company’s contracts are
derived from manufacturing supply agreements and customer orders. Performance obligations associated with manufacturing supply agreements are tied to orders
submitted by customers. All orders have a duration of less than one year, performance obligations are related to orders submitted at a point in time, and payment
terms are generally 30-90 days. Performance obligations are satisfied when control of a good promised in a contract is transferred to a customer. Control is obtained
when the customer has the ability to direct the use of and obtain substantially all of the remaining benefits from that good. The Company measures revenue as the
amount of consideration for which it expects to be entitled in exchange for transferring goods at a point in time as control is transferred at a distinct point per the terms
of a contract. This transfer occurs upon shipment or delivery based on the contract terms. In some cases, the Company must apply judgment, including contractual
rates and historical payment trends, when estimating variable consideration. Certain customers may receive cash and or noncash incentives such as prompt pay
discounts, which are accounted for as variable consideration. Revenue is recognized net of variable consideration when the performance obligation has been
satisfied. When incentives are paid in arrears, the Company accrues the estimated amount to be paid based on the program’s contractual terms.
3.
Inventories, Net
Inventories are stated at the lower of cost or net realizable value. Cost is determined using the specific identification method for raw materials, yarn-in-process, and
finished yarn inventories. The Company performs periodic assessments to determine the existence of obsolete and slow-moving inventories and records necessary
provisions to reduce such inventories to net realizable value, if needed. Inventories, net as of April 29, 2020 and December 28, 2019, consist of the following:
Cotton and synthetics
Yarn in process
Finished yarn
Supplies
Less: Inventory reserves
Unaudited
2020
2019
$ 38,914,000
$ 54,196,000
6,350,000
39,287,000
1,699,000
86,250,000
(1,675,000)
8,615,000
49,227,000
1,766,000
113,804,000
(1,429,000)
$ 84,575,000
$ 112,375,000
13
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
4.
Property, Plant and Equipment, Net
A summary of property, plant and equipment, net as of April 29, 2020 and December 28, 2019, is as follows:
Land and land improvements
Buildings
Machinery and equipment
Office furniture and fixtures
Less: accumulated depreciation
Construction in progress
Property, plant and equipment, net
Useful
Lives in
Years
15
15 - 39
5 - 9
3 - 7
Unaudited
2020
2019
$ 9,892,000
$ 10,032,000
122,297,000
592,757,000
10,279,000
735,225,000
(594,386,000)
4,964,000
125,518,000
592,607,000
12,102,000
740,259,000
(589,992,000)
4,740,000
$ 145,803,000
$ 155,007,000
Depreciation expense for 2020 and fiscal years 2019 and 2018, was $11,063,000, $40,584,000 and $39,447,000, respectively.
5.
Income Taxes
The Company is a limited liability company treated as a partnership for federal and state income tax reporting purposes. As a result, the Company’s results of
operations are included in the income tax returns of its individual members. Accordingly, income taxes are accounted for at the individual member level. Therefore,
the Company has not recorded a separate provision for income taxes.
The Company, through Grupo, computes deferred taxes based on the after tax effects of temporary differences between the basis of assets and liabilities for
financial reporting purposes and the basis for income tax reporting purposes, using the applicable statutory tax rates.
The provision for income taxes for 2020 and fiscal years 2019 and 2018, is comprised of the following:
Unaudited
2020
2019
2018
Current income tax
Deferred income tax
Total income tax
$ 779,000
4,000
$ 1,023,000
(143,000)
$ 706,000
(197,000)
$ 783,000
$ 880,000
$ 509,000
Summit Holding maintains that the undistributed earnings of Grupo will be indefinitely reinvested in foreign jurisdictions; therefore, no deferred tax liability has been
recorded with respect to this subsidiary’s earnings. The Company continues to believe that these earnings are indefinitely reinvested; however, the Company may
change this assertion in a future period.
In December 2017, H.R.1, formerly known as the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act included a number of changes to
existing U.S. tax laws. The 2017 Tax Act eliminated the deferral of U.S. income tax on the historical unrepatriated earnings by imposing the Transition Toll Tax,
which was a one-time mandatory deemed repatriation tax on undistributed foreign earnings. The Transition Toll Tax was assessed on a U.S. shareholder's share of
14
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
foreign corporation's accumulated foreign earnings that had not previously been taxed in the U.S. Earnings in the form of cash and cash equivalents were taxed at a
rate of 15.5% and all other earnings were taxed at a rate of 8.0%.
As of April 29, 2020 and December 28, 2019, the remaining tax liability is recorded in accrued expenses and other long-term liabilities, in the amounts of $51,000 and
$488,000, respectively.
The most significant temporary difference that gives rise to deferred tax liabilities is fixed assets. Grupo has recorded a deferred tax liability related to deferred tax
basis differences which is included in other long-term liabilities. As of April 29, 2020 and December 28, 2019, the liability was $531,000 and $720,000,
respectively. For Grupo, the effective tax rate differs from the statutory rates primarily due to inflationary adjustments under the Mexican tax regime and non-
deductible expenses.
The Company does not believe that it has taken any uncertain tax positions that would require recognition of a contingent liability. The tax returns of Summit
Holding for tax years 2016 and forward remain subject to examination by U.S. tax authorities, while the tax years 2005 through 2015 remain subject to examination
by U.S. tax authorities to the extent of net operating loss carryforwards, which are not significant. Grupo’s tax returns remain subject to examination by Mexican tax
authorities for tax years 2014 and forward.
6.
Deferred Financing Costs, Net
The Company capitalized financing costs of $520,000 in 2017 related to a new revolving credit facility. There were $158,000 in unamortized deferred financing
costs from the prior facility that continue to be associated with the new credit facility. These costs are being amortized over the term of the debt agreement, which
matures on April 26, 2022. Amortization of these costs totaled $47,000, $135,000 and $136,000 for 2020 and fiscal years 2019 and 2018, respectively, and is
included as a component of interest expense in the accompanying consolidated statements of operations. Estimated future amortization expense of deferred
financing costs is summarized as follows:
Fiscal Year
Remainder of Calendar 2020
2021
2022 and thereafter
7.
Long-Term Debt – Related Party
Amount
$ 91,000
136,000
45,000
The Company has a $175,000,000 related party revolving credit facility with its Parent. At the Company’s option, borrowings under the facility may be maintained
as (1) “Prime Rate” loans or (2) “LIBOR” loans, plus applicable margins ranging from 0.25% to 2.25%. The agreement includes customary covenants that require
the borrower to maintain a minimum interest coverage ratio and restrict its leverage ratio. The Company evaluates compliance with these covenants on a
quarterly basis. There were no outstanding borrowings on the credit facility as of April 29, 2020 and December 28, 2019. The facility matures April 26, 2022.
8.
Derivative Instruments
All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. Derivatives held by the Company
at April 29, 2020 and December 28, 2019 are considered non-designated. Changes in the fair value of the derivatives are recognized in earnings as they occur.
The Company is subject to price risk related to raw materials pricing. In the normal course of business, under procedures established by the Company’s financial
risk management framework, the Company may enter into cotton futures contracts to manage changes in raw material prices in order to protect the gross margin
of fixed-price yarn sales. The changes in fair
15
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
value related to these cotton futures are reflected as an operating activity in the accompanying consolidated statements of cash flows. As of April 29, 2020 and
December 28, 2019, the Company has recorded these instruments at their net fair value of $1,515,000 and $303,000, respectively, in the accompanying
consolidated balance sheets, as follows:
Balance Sheet
Location
Unaudited
Fair Value
April 29, 2020
Fair Value
December 28, 2019
Derivative assets, commodity contracts
Nonhedges
Derivative assets
$ 700,000
$ 1,469,000
Derivative liabilities, commodity contracts
Nonhedges
Due from broker
Net derivative asset
Derivative liabilities
(1,790,000)
2,605,000
(1,262,000)
96,000
$ 1,515,000
$ 303,000
The Company’s derivative instruments are listed and traded on an exchange and are thus valued using quoted prices classified within Level 1 of the fair value
hierarchy. The fair value of the derivative instruments are classified as current assets and liabilities as of April 29, 2020 and December 28, 2019. The Company
did not have any assets or liabilities classified as Level 2 or Level 3 at April 29, 2020 and December 28, 2019.
The Company enters 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 and normal sales” exemption in ASC 815, “Derivatives and Hedging”. Therefore, the hedge accounting requirements
are not applicable to these contracts.
The Company recorded net gains on forward contracts and cotton purchase agreements designated as derivatives of $2,060,000, $2,041,000 and $2,140,000
for 2020 and years ended December 28, 2019 and December 29, 2018, respectively. These gains are included in cost of goods sold in the accompanying
consolidated statements of operations.
Collateral is settled daily on these contracts and is shown on the balance sheet as “Due to broker” or “Due from broker”.
9.
Defined Contribution Plan
The Company maintains a defined contribution retirement plan available to substantially all employees. The Company’s contributions are based on a formula for
matching employee contributions. The Company incurred costs for this plan of $260,000, $1,015,000 and $987,000, during 2020 and fiscal years 2019 and
2018, respectively.
10.
Related-Party Transactions
Shared Expenses Allocation
The Company and Mills share certain warehousing, distribution and manufacturing expenses that are allocated based on the usages of these services. Amounts
charged to the Company for these services were $2,170,000, $6,903,000 and $7,321,000 for 2020 and fiscal years 2019 and 2018, respectively, and are recorded
as a component of cost of goods sold.
Parkdale, Inc. incurs certain accounting and administrative expenses that are allocated to the Company and Mills based upon a weighted average of certain key
indicators, including, but not limited to, pounds of yarn sold and net sales. Amounts charged to the Company by Parkdale, Inc. were $4,336,000, $12,155,000 and
$11,842,000 for 2020 and fiscal years 2019 and 2018, respectively, and are recorded as a component of general and administrative expenses.
16
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
Due to and from Affiliates
Due to and from affiliates as of April 29, 2020 and December 28, 2019, consists of the following:
Unaudited
2020
2019
Due from U.S. Cotton, LLC
$ 15,000
$ 91,000
Due from affiliates
$ 15,000
$ 91,000
Due to Mills and subsidiary
884,000
3,148,000
Due to Alliance
Due to Parkdale Mills de Honduras
Due to D'sky DSC S.R.L.
Due to Parkdale Mills de El Salvador
Due to Parkdale Inc.
Due to Intrinsic Advanced Materials
16,000
7,000
37,000
4,000
2,127,000
1,000
-
19,000
154,000
78,000
1,955,000
-
Due to affiliates
$ 3,076,000
$ 5,354,000
Amounts due to and from affiliates result from intercompany charges related to inventory purchases, accounts receivable collections, payroll tax payments, and the
administrative expense allocation.
Other
The Company has a revolving credit facility with its parent company. See also Note 7.
11.
Commitments and Contingencies
Operating Leases
Rent expense for 2020 and fiscal years 2019 and 2018, was $232,000, $547,000 and $444,000, respectively.
Purchase and Sales Commitments
At April 29, 2020 and December 28, 2019, the Company had unfulfilled cotton purchase commitments, at varying prices, for approximately 465,142,000 and
441,805,000 pounds of cotton, respectively, to be used in the production process. These contracts are generally effective for approximately one year. At April 29,
2020 and December 28, 2019, the Company had unfulfilled yarn sales contracts, at varying prices, with various customers that are not expected to result in any loss
to the Company.
Contingencies
The Company is involved in various legal actions and claims arising in the normal course of business. Management believes that the resolution of such matters will
not have a material effect on the financial condition, results of operations, or cash flows of the Company.
12.
Members’ Equity
The annual net income of Grupo is subject to the Mexican legal requirement that 5% thereof be transferred to a legal reserve each year until the reserve equals
20% of capital stock. This reserve may not be distributed to the members during the existence of Grupo, except in the form of stock dividends. The legal reserve
for Grupo has not been met as of April 29, 2020.
17
Parkdale America, LLC and Subsidiaries
(A Limited Liability Company)
Notes to Consolidated Financial Statements
13.
Subsequent Events
The Company evaluated transactions occurring after April 29, 2020 in accordance with ASC Topic 855, Subsequent Events, through August 26, 2020, which is the
date the accompanying consolidated financial statements were available for issuance.
18