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| UFI > SEC Filings for UFI > Form 10-Q on 6-Feb-2009 | All Recent SEC Filings |
6-Feb-2009
Quarterly Report
During the last fiscal year, the Company faced an extremely difficult operating
environment, driven by a faltering economy, and unprecedented increases in the
cost of raw materials, energy and freight. However, the Company has reacted
decisively in dealing with these conditions. A combination of sales price
increases, cost containment, operational efficiencies and customer service,
coupled with an aggressive raw material sourcing strategy, has partially offset
the negative impact of the economic downturn on the Company.
The Company believes that its success going forward is primarily based on its
ability to improve the mix of its product offerings by shifting to more premier
value-added ("PVA") products, aggressively negotiating favorable raw material
supply agreements, implementing cost saving strategies which will improve its
operating efficiencies, and leveraging the free-trade agreements to which the
U.S. is a party. The continued viability of the U.S. domestic textile and
apparel industry is dependent, to a large extent, on the international trade
regulatory environment.
In addition to the difficult economic conditions in the U.S. markets, the
Company was negatively impacted by the continued rising cost of raw materials
and other petrochemical driven costs during the first quarter of fiscal year
2009. The impact of the surge in crude oil prices since the beginning of fiscal
year 2008 created a spike in polyester and nylon raw material prices. As raw
material prices peaked in July 2008, the Company was not able to pass all of
these raw material increases along to its customers in the first quarter of
fiscal year 2009 which resulted in lower conversion margins. Operating results
for the second quarter of fiscal year 2009 were also adversely impacted as these
higher priced products continued to work through the Company's inventory
systems. However, crude oil prices declined substantially during the second
quarter and therefore the cost of polyester ingredients declined as well.
Polyester raw yarn imports have declined by approximately 17% in calendar year
2008 while global imports of synthetic apparel were down approximately 3% during
the first eleven months of calendar year 2008. However, imports from the
U.S.-Dominican Republic-Central American Free Trade Agreement ("CAFTA") region
were up approximately 13% during the same period as U.S. brands and retailers
continue to take advantage of the shorter lead times and the competitiveness of
the region. The trend toward regional production is expected to continue and is
significant because over half of the U.S. production goes into programs that
require regional fiber in order for the garment to qualify for duty free
treatment.
The recent global economic downturn negatively impacted the Company's sales
volume beginning in mid-September 2008 in the apparel, home furnishings, and
automotive segments. The Company's sales volume declined 32% during the second
quarter of fiscal year 2009 compared to the same quarter in the prior year as a
result of sharp declines in retail apparel sales of 7%, home furnishing sales of
15%, and automotive sales of 18%. Industry experts expect the decline in apparel
retail sales to further deteriorate to a run rate of negative 10% to 12% over
the next six months. Based on these volumes and the extraordinarily high
inventory levels across the supply chain, the Company expects its sales volumes
to remain significantly lower than retail sales over the next two quarters.
Other economic recessionary trends such as low consumer confidence and job
losses could further adversely impact the Company's sales during the second half
of fiscal year 2009.
Key Performance Indicators
The Company continuously reviews performance indicators to measure its success.
The following are the indicators management uses to assess performance of the
Company's business:
• sales volume, which is an indicator of demand;
• margins, which are indicators of product mix and profitability;
• net income or loss before interest, taxes, depreciation and amortization, and income or loss from discontinued operations ("EBITDA"), which are indicators of the Company's ability to pay debt; and
• working capital of each business unit as a percentage of sales, which is an indicator of the Company's production efficiency and ability to manage its inventory and receivables.
Corporate Restructuring
Severance
In the first quarter of fiscal year 2008, the Company announced the closure of
its polyester facility in Kinston, North Carolina. The Kinston facility produced
partially oriented yarn ("POY") for internal consumption and third party sales.
The Company now purchases its commodity POY needs from external suppliers for
conversion in its texturing operations. The Company continues to produce POY in
its Yadkinville, North Carolina facility for specialty and premier valued-added
("PVA") yarns and certain other commodity yarns. During the first quarter of
fiscal year 2008, the Company recorded $0.8 million for severance related to its
Kinston consolidation which was reflected on the "Cost of sales" line item in
the Consolidated Statements of Operations. Approximately 231 employees, which
included 31 salaried positions and 200 wage positions, were affected as a result
of the reorganization.
In the second quarter of fiscal year 2008, the Company recorded an additional
$0.4 million in severance costs related to Kinston employees who were associated
with providing site services.
The Company recorded severance of $2.4 million for its former President and
Chief Executive Officer during the first quarter of fiscal year 2008 and
$1.7 million for severance related to its former Chief Financial Officer during
the second quarter of fiscal year 2008 which were reflected on the "Selling,
general, & administrative expense" line item in the Consolidated Statements of
Operations.
On May 14, 2008, the Company announced the closing of its Staunton, Virginia
facility and the transfer of all its production to its facility in Yadkinville,
North Carolina which was completed in November 2008. During the first quarter of
fiscal year 2009, the Company recorded $0.1 million for severance related to its
Staunton consolidation. Approximately 6 salaried employees and 35 wage employees
were affected by this reorganization. The expenses were reflected on the "Cost
of sales" line item in the Consolidated Statements of Operations.
Restructuring
In the first quarter of fiscal year 2008, the Company recorded $1.5 million for
restructuring charges related to unfavorable Kinston contracts for continued
services after the closing of the facility.
In fiscal year 2007, the Company recorded a $2.9 million unfavorable contract
reserve related to a portion of the sales and service contract which it entered
into with Dillon for continued support of the Dillon business through
December 2008. A portion of the sales and service contract was deemed to be
unfavorable, after the Company announced its plan to consolidate the Dillon
capacity into its other facilities.
The table below summarizes changes to the accrued severance and accrued restructuring accounts for the period ended December 28, 2008 (amounts in thousands):
Balance at Balance at
June 29, 2008 Charges Adjustments Amounts Used December 28, 2008
Accrued severance $ 3,668 146 5 (1,280 ) $ 2,539 (1)
Accrued restructuring $ 1,414 - 245 (1,040 ) $ 619
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(1) As of December 28, 2008, the Company classified $1.0 million of accrued executive severance as long term.
Joint Ventures and Other Equity Investments Condensed income statement information for the quarters ended and year-to-date periods December 28, 2008 and December 23, 2007, of the combined unconsolidated equity affiliates, Yihua Unifi Fibre Company Limited ("YUFI"), UNIFI-SANS Technical Fibers, LLC ("USTF"), Parkdale America, LLC ("PAL"), and U.N.F. Industries Ltd ("UNF") are as follows (amounts in thousands):
For the Quarter Ended December 28, 2008
YUFI PAL UNF Total
Net sales $ 30,950 $ 97,194 $ 6,543 $ 134,687
Gross profit (loss) (1,528 ) 5,825 (877 ) 3,420
Depreciation and amortization 1,325 5,447 474 7,246
Income (loss) from operations (2,783 ) 2,546 (1,374 ) (1,611 )
Net income (loss) (2,949 ) 1,794 (1,268 ) (2,423 )
For the Six-Months Ended December 28, 2008
YUFI PAL UNF Total
Net sales $ 70,830 $ 219,278 $ 12,435 $ 302,543
Gross profit (loss) (3,575 ) 12,072 (1,667 ) 6,830
Depreciation and amortization 2,720 9,904 948 13,572
Income (loss) from operations (6,939 ) 6,024 (2,625 ) (3,540 )
Net income (loss) (7,566 ) 11,940 (2,411 ) 1,963
For the Quarter Ended December 23, 2007
YUFI PAL UNF Total
Net sales $ 36,051 $ 104,944 $ 4,467 $ 145,462
Gross profit (loss) (227 ) 5,827 (163 ) 5,437
Depreciation and amortization 1,294 4,760 316 6,370
Income (loss) from operations (1,856 ) 2,532 (277 ) 399
Net income (loss) (2,431 ) 3,213 (231 ) 551
For the Six-Months Ended December 23, 2007
USTF (1) YUFI PAL UNF Total
Net sales $ 6,455 $ 73,120 $ 215,539 $ 11,830 $ 306,944
Gross profit (loss) 571 (534 ) 10,449 155 10,641
Depreciation and amortization 578 2,618 9,670 790 13,656
Income (loss) from operations 188 (3,628 ) 3,590 (142 ) 8
Net income (loss) 148 (4,845 ) 4,566 (88 ) (219 )
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(1) Sold in the second quarter of fiscal year 2008
In August 2005, the Company formed YUFI, a 50/50 joint venture with Sinopec
Yizheng Chemical Fiber Co., Ltd, ("YCFC"), a publicly traded (listed in Shanghai
and Hong Kong) enterprise, to manufacture, process, and market commodity and
specialty polyester filament yarn in YCFC's facilities in China. The Company
granted YUFI an exclusive, non-transferable license to certain of its branded
product technology (including Mynx®, Sorbtek®, Reflexx®, and dye springs) in
China for a license fee of $6.0 million over a four year period.
In July 2008, the Company announced a proposed agreement to sell its 50%
ownership interest in YUFI to its partner, YCFC, for $10.0 million. In
connection with a review of the fair value of YUFI during negotiations related
to the sale, the Company initiated a review of the carrying value of its
investment in YUFI in accordance with Accounting Principles Board Opinion 18,
"The Equity Method of Accounting for Investments in Common Stock" ("APB 18"). As
a result of this review, the Company determined that the carrying value of its
investment in YUFI exceeded its fair value. Accordingly, the Company recorded a
non-cash impairment charge of $6.4 million in the fourth quarter of fiscal year
2008. During the second quarter of fiscal year 2009, the Company and YCFC
renegotiated the proposed agreement to sell the Company's interest in YUFI to
YCFC for $9.0 million, pending final negotiation and execution of definitive
agreements and the receipt of Chinese regulatory approvals. As a result, the
Company recorded an additional impairment charge of $1.5 million due to the
decline in the value of its investment and other related assets. However, there
can be no assurances that this transaction will occur upon these terms.
For the quarter and year-to-date periods ended December 23, 2007, the Company
recognized equity losses net of technology and license fee income of
$1.0 million and $1.7 million, respectively. In addition, the Company recognized
$0.5 million and $1.3 million in operating expenses for the quarter and
year-to-date periods ended December 23, 2007, respectively, which was primarily
reflected on the "Cost of sales" line item in the Consolidated Statements of
Operations, directly related to providing technological support in accordance
with the Company's joint venture contract. The Company did not record its share
of equity losses in YUFI for the year-to-date period ended December 28, 2008,
since the carrying value of its investment reflects the lower fair value of $9.0
million as a result of the impairment charge described above.
In June 1997, the Company and Parkdale Mills, Inc. entered into a contribution
agreement whereby both companies contributed all of the assets of their spun
cotton yarn operations utilizing open-end and air jet spinning technologies to
create PAL. In exchange for its contributions, the Company received a 34%
ownership interest in the joint venture. PAL is a producer of cotton and
synthetic yarns for sale to the textile and apparel industries primarily within
North America. PAL has 12 manufacturing facilities primarily located in central
and western North Carolina and in South Carolina. For the quarter and
year-to-date periods ended December 28, 2008, the Company recognized net equity
earnings of $0.6 million and $4.1 million, respectively, compared to equity
earnings of $1.1 million and $1.6 million for the respective corresponding
periods in the prior year. The Company received accumulated distributions from
PAL of $2.1 million and $0.7 million for the year-to-date periods of fiscal
years 2009 and 2008, respectively.
In September 2000, the Company and SANS Fibres of South Africa ("SANS Fibres")
formed USTF, a 50/50 joint venture created to produce low-shrinkage high
tenacity nylon 6.6 light denier industrial yarns in North Carolina. The business
was operated in a plant in Stoneville, North Carolina. In the second quarter of
fiscal year 2008, the Company completed the sale of its interest in USTF.
In September 2000, the Company and Nilit Ltd ("Nilit") formed UNF; a 50/50 joint
venture to produce nylon POY at Nilit's manufacturing facility in Migdal
Ha-Emek, Israel which is the Company's primary source of nylon POY for its
texturing operations. For the quarter and year-to-date periods ended
December 28, 2008, the Company recognized net equity losses of $0.4 million and
$0.4 million, respectively, compared to net equity losses of $0.1 million and
net equity earnings of $0.3 million for the respective corresponding periods in
the prior year.
The Company accounts for its goodwill and other intangibles under the provisions
of Statements of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). SFAS 142 requires that these assets be
reviewed for impairment annually, unless specific circumstances indicate that a
more timely review is warranted. This impairment test involves estimates and
judgments that 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. As a result of the significant decline in the Company's market
capitalization during the second quarter, the Company determined that it was
appropriate to perform an interim impairment analysis. Accordingly, the Company
conducted an impairment test of its goodwill during the second quarter of fiscal
year 2009 and concluded that no impairment was necessary. However, given the
current market conditions and fluctuations in the Company's market
capitalization the results of the test could change going forward. Therefore,
the Company will continue to evaluate the need to perform interim impairment
tests on a quarter-by-quarter basis until market conditions stabilize. Future
events impacting cash flows for existing assets could render a write-down
necessary that previously required no such write-down.
In fiscal year 2007, the Company purchased the polyester and nylon texturing
operations of Dillon (the "Transaction"). In connection with the Transaction,
the Company and Dillon entered into a Sales and Services Agreement for a term of
two years from January 1, 2007, pursuant to which the Company agreed to pay
Dillon an aggregate amount of $6.0 million in exchange for certain sales and
transitional services to be provided by Dillon's sales staff and executive
management, of which $0.8 million was paid during the first and second quarters
of both fiscal year 2009 and fiscal year 2008. On December 1, 2008, the Company
entered into an agreement to extend the Sales and Service agreement for a term
of one year effective January 1, 2009 pursuant to which the Company will pay
Dillon an aggregate amount of $1.7 million. Mr. Stephen Wener is the President
and Chief Executive Officer of Dillon and is a director of the Company.
Review of Second Quarter Fiscal Year 2009 compared to Second Quarter Fiscal Year
2008
The following table sets forth the loss from continuing operations components
for each of the Company's business segments for the fiscal quarters ended
December 28, 2008 and December 23, 2007, respectively. The table also sets forth
each of the segments' net sales as a percent to total net sales, the net income
(loss) components as a percent to total net sales and the percentage increase or
decrease of such components over the comparable prior year period (amounts in
thousands, except percentages):
For the Quarters Ended
December 28, 2008 December 23, 2007
% to Total % to Total % Change
Net sales
Polyester $ 93,984 74.8 $ 135,119 73.7 (30.4 )
Nylon 31,743 25.2 48,250 26.3 (34.2 )
Total $ 125,727 100.0 $ 183,369 100.0 (31.4 )
% to Sales % to Sales
Gross profit
Polyester $ 559 0.4 $ 5,850 3.2 (90.4 )
Nylon 1,753 1.4 2,470 1.3 (29.0 )
Total 2,312 1.8 8,320 4.5 (72.2 )
Selling, general and
administrative expenses
Polyester 7,294 5.8 10,243 5.6 (28.8 )
Nylon 2,010 1.6 1,765 0.9 13.9
Total 9,304 7.4 12,008 6.5 (22.5 )
Write down of long-lived assets
and investment in
unconsolidated affiliate
Polyester - - 2,247 1.2 -
Nylon - - - - -
Corporate 1,483 1.1 - - -
Total 1,483 1.1 2,247 1.2 (34.0 )
Restructuring charges
Polyester - - 4,205 2.3 -
Nylon - - - - -
Total - - 4,205 2.3 -
Other (income) expense, net 195 0.2 3,472 1.9 (94.4 )
Loss from continuing operations
before income taxes (8,670 ) (6.9 ) (13,612 ) (7.4 ) (36.3 )
Provision (benefit) for income
taxes 614 0.5 (5,757 ) (3.1 ) (110.7 )
Loss from continuing operations (9,284 ) (7.4 ) (7,855 ) (4.3 ) 18.2
Income from discontinued
operations, net of tax 216 (0.2 ) 109 0.1 98.2
Net loss $ (9,068 ) (7.2 ) $ (7,746 ) (4.2 ) 17.1
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As reflected in the tables above, consolidated net sales from continuing
operations decreased from $183.4 million to $125.7 million which was primarily
attributable to decreased sales in the apparel, automotive and furnishing market
segments. Consolidated unit volumes decreased by 32.4% for the second quarter of
fiscal year 2009, while average net selling prices increased 1.0% for the same
period.
Refer to the discussion of segment operations under the captions "Polyester
Operations" and "Nylon Operations" for a further discussion of each segment's
operating results.
Consolidated gross profit from continuing operations decreased by $6.0 million
to $2.3 million for the quarter ended December 28, 2008 as compared to the prior
year second quarter. This decrease was primarily attributable to lower
conversion margins and increases in fixed converting costs due to lower
utilization rates.
Consolidated selling, general and administrative ("SG&A") expenses decreased by
$2.7 million or 22.5% during the second quarter of fiscal year 2009 as compared
to the prior year second quarter. The decrease in SG&A for the second quarter
was primarily a result of decreases of $1.7 million in executive severance
costs, $0.5 million in the Company's Brazilian operation, $0.3 million in
salaries and fringe expenses which includes a $0.5 million savings related to
management bonuses, $0.2 million in depreciation expenses, $0.1 million in
insurance expenses, and $0.1 million in amortization of intangibles offset by an
increase of $0.2 million in start up costs related to the Company's Unifi
Textiles (Suzhou) Company, Ltd. ("UTSC") operation. SG&A expenses related to the
Company's Brazilian operation decreased $0.5 million compared to the prior year
period due to a decrease of $0.4 million related to the strengthening of the
. . .
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