Summary of UNIFI INC - Yahoo! Finance

Item 2. 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, Inc.'s (the "Company's") operations and material changes in financial condition during the periods included in the accompanying Condensed Consolidated Financial Statements. Business Overview
The Company is a diversified producer and processor of multi-filament polyester and nylon yarns, including specialty yarns with enhanced performance characteristics. The Company adds value to the supply chain and enhances consumer demand for its products through the development and introduction of branded yarns that provide unique performance, comfort and aesthetic advantages. The Company manufactures partially oriented, textured, dyed, twisted and beamed polyester yarns as well as textured nylon and nylon covered spandex products. The Company sells its products to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, furnishings, automotive, industrial and other end-use markets. The Company maintains one of the industry's most comprehensive product offerings and emphasizes quality, style and performance in all of its products.
Polyester Segment. The polyester segment manufactures partially oriented, textured, dyed, twisted and beamed yarns with sales to other yarn manufacturers, knitters and weavers that produce fabrics for the apparel, automotive, hosiery, furnishings, industrial and other end-use markets. The polyester segment primarily manufactures its products in Brazil and the United States ("U.S.") which has the largest operations.
Nylon Segment. The nylon segment manufactures textured nylon and covered spandex products with sales to other yarn manufacturers, knitters and weavers that produce fabrics for the apparel, hosiery, sock and other end-use markets. The nylon segment consists of operations in Colombia and the U.S. which has the largest operations.
Recent Developments and Outlook
The global economic downturn has eroded U.S. consumer confidence and spending which have negatively impacted all textile supply chains and markets in the last two quarters. On a year over year basis, U.S. apparel retail sales are down 5% to 8% and home furnishing retail sales are down 12% to 14%. Prior North American production contractions were primarily due to import competition of finished goods, however the current contraction which began in the second half of calendar year 2008 was primarily driven by decreased demand from all sectors of the Company's downstream markets. These markets include apparel, automotive, and furnishings which have been significantly impacted by the economic and retail downturn.
Regional manufacturers continue to demand North American manufactured yarn and fabrics due to the duty-free advantage, quick response times, readily available production capacity, and specialized products. In addition, North American retailers have expressed the need to have a balanced procurement strategy with both global and regional producers. Industry experts originally projected a decline in the textile markets for calendar year 2008 at a rate of 4% to 5%, however, as a result of the U.S. economic downturn that began in the middle of calendar year 2008, the rate of the polyester industry contraction in North America is now estimated to be approximately 18%. Experts project contractions for the first quarter of calendar year 2009 compared to the prior year first quarter to be approximately 40%. The impact of the decline in retail sales was compounded further by excessive inventories that were built across the supply chains as fabric mills, finished goods producers, and retailers curtailed new orders in an effort to match investments in working capital to levels consistent with lower sales volumes. As a result of this inventory de-stocking, the Company's revenues have declined by 31% and 30% for the second and third fiscal quarters as compared to the prior year quarters, respectively, despite retail sales for the Company's collective markets being off by significantly less. However, as the third quarter progressed, the Company saw sales volume improvements in some of its segments. The Company anticipates continued improvement through the next few quarters as its sales volumes ultimately align with retail market conditions once supply chain inventories return to normalized levels.

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Like many other companies, the Company also aggressively reduced inventories by $25.5 million during the third quarter of fiscal year 2009 which significantly improved its cash position. The operating loss was negatively impacted by higher priced raw materials and under absorbed converting costs from reduced production volumes included in the Company's costs of sales. Now that this higher priced inventory has been depleted, the Company expects to see the benefit of lower priced raw materials going forward.
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. The challenges in the economy have also impacted the Company's PVA volumes, which have declined, although at a lower rate than its commodity business. Downstream development activities using the Company's PVA products continue to be very strong; however, brands and retailers have "green-lighted" more basic programs in this economy to hit value-oriented price points. The adoption cycle for PVA programs is also being tempered by the economy, but the Company remains encouraged by the ongoing development activities, particularly those using Repreve®recycled products. The Company will continue to invest in and fund research and development efforts, and customers can continue to expect the Company to bring new and innovative products to the market. Customer response to the Company's recently introduced staple Repreve® has been very positive, and the Company believes Repreve® FR, the first recycled fiber with inherent flame retardant technology, will be a popular product offering in the market.
The Company is committed and dedicated to identifying strategic opportunities to participate in the Asian textile market, specifically China. During the fourth quarter of fiscal year 2009, the Company sold its interest in Yihua Unifi Fibre Company Limited ("YUFI") to Sinopec Yizheng Chemical Fiber Co., Ltd, ("YCFC"). In order to maintain a market presence in the Asian textile market, the Company formed Unifi Textiles (Suzhou) Company, Ltd. ("UTSC"), a wholly owned Chinese subsidiary. UTSC obtained its business license in the second quarter of fiscal year 2009 and was operational during the third quarter of fiscal year 2009. UTSC was capitalized during the third quarter with $3.3 million and the Company expects to invest up to an additional $1.6 million for working capital requirements in the future. UTSC will continue to expand the sales and promotion of the Company's specialty and PVA products, including the introduction of the next generation Sorbtek®moisture management technology. Additionally, UTSC will continue to develop sustainable textiles under the Repreve® brand and will begin localizing the Company's recycling efforts in China. The Company is very encouraged by the number of development projects it has in progress, including Repreve® filament and staple, Sorbtek® and Reflexx®. Similar to the U.S., the adoption timetable for some of these programs may be linked to improvements in the economy, but the Company projects that UTSC will operate at or near breakeven which will be a substantial improvement over the results of YUFI. In addition to China, the United States-Dominican Republic-Central American Free Trade Agreement ("CAFTA") region continues to be a very important part of the Company's global sourcing strategy. The CAFTA region's share of synthetic apparel imports ranges from 12% to 13% and is expected to grow over the next few years, making the region a critical component in the apparel supply chain. To better service customers in the CAFTA region, the Company is exploring options for placing manufacturing capabilities in Central America. At this point, all options are being explored, including joint venture opportunities as well as green-field scenarios and the total investment in the initial stages is expected to be $10 million or less.
The Company's Brazilian operation had especially strong results in the first quarter of fiscal year 2009, but those results deteriorated through the second and third quarters due to softness in the Brazilian economy and the volatility related to raw material costs. However, through efficiency improvements, mix enrichment, and gains in market share, the Company anticipates improved results in the fourth quarter of fiscal year 2009 and subsequent quarters.

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On March 13, 2009, the Company amended the Unifi, Inc. Retirement Savings Plan (the "401(k) plan") to eliminate the safe harbor matching contribution by the Company with respect to employee compensation deferrals. The Company expects to save approximately $1.7 million per year related to this amendment. 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;

• adjusted EBITDA, which the Company defines as pre-tax income before interest expense, depreciation and amortization expense and loss or income from discontinued operations, adjusted to exclude equity in earnings and losses of unconsolidated affiliates, write down of long-lived assets and unconsolidated affiliate, non-cash compensation expense, gains and losses on sales of property, plant and equipment, hedging gains and losses, asset consolidation and optimization expense, goodwill impairment, restructuring charges and Kinston shutdown costs, as revised from time to time, which the Company believes is a supplemental measure of its performance and ability to service 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. 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.
On May 14, 2008, the Company announced the closure of its polyester facility located in Staunton, Virginia 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 40 salaried and wage employees were affected by this reorganization.

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In the third quarter of fiscal year 2009, the Company reorganized, reducing its workforce due to the economic downturn. Approximately 200 salaried and wage employees were affected by this reorganization related to the Company's efforts to reduce costs. As a result, the Company recorded $0.3 million in severance charges related to certain salaried corporate and manufacturing support staff. Restructuring
In the first quarter of fiscal year 2008, the Company recorded $1.5 million for restructuring charges related to unfavorable Kinston contracts for obligations which extended beyond the date of the facility's closing. These charges were reduced by $0.5 million in the fourth quarter of fiscal year 2008 as a result of favorable contract negotiations and settlements. See the "Severance" discussion above for further details related to Kinston.
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 Yarn Corporation ("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 year-to-date period ended March 29, 2009 (amounts in thousands):

                                         Balance at                                                                        Balance at
                                        June 29, 2008          Charges         Adjustments         Amounts Used          March 29, 2009
Accrued severance                       $      3,668              371                   5               (1,886 )         $       2,158

Accrued restructuring                   $      1,414                -                 245               (1,040 )         $         619

As of March 29, 2009, the Company classified $0.6 million of accrued executive severance as long term.
Joint Ventures and Other Equity Investments The following table represents the Company's investments in unconsolidated affiliates:

                                                      Date                                               Percent
               Affiliate Name                       Acquired                 Location                   Ownership
Yihua Unifi Fibre Company Ltd ("YUFI") (A)           Aug-05         Yizheng, Jiangsu Province,                50 %
                                                                    People's Republic of China

Parkdale America, LLC ("PAL")                        Jun-97          North and South Carolina                 34 %

Unifi-SANS Technical Fibers, LLC ("USTF") (B)        Sep-00         Stoneville, North Carolina                50 %

U.N.F. Industries, LLC ("UNF")                       Sep-00        Migdal Ha - Emek, Israel                   50 %

(A) The Company
completed
the sale of
YUFI during
the fourth
quarter of
fiscal year
2009.

(B) The Company
completed
the sale of
USTF during
the second
quarter of
fiscal year
2008.

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Condensed income statement information for the quarters and nine-months ended March 29, 2009 and March 23, 2008, of the combined unconsolidated equity affiliates are as follows (amounts in thousands):

                                              For the Quarter Ended March 29, 2009
                                       YUFI (1)          PAL           UNF        Total
      Net sales                                      $   89,998     $ 3,638     $ 93,636
      Gross profit (loss)                                13,439        (581 )     12,858
      Depreciation and amortization                       4,573         474        5,047
      Income (loss) from operations                      11,955        (682 )     11,273
      Net income (loss)                                   3,949        (624 )      3,325



                                            For the Nine-Months Ended March 29, 2009
                                       YUFI            PAL            UNF          Total
     Net sales                                    $   309,276      $ 16,073     $ 325,349
     Gross profit (loss)                               25,510        (2,247 )      23,263
     Depreciation and amortization                     14,477         1,422        15,899
     Income (loss) from operations                     17,979        (3,306 )      14,673
     Net income (loss)                                 15,889        (3,036 )      12,853



                                              For the Quarter Ended March 23, 2008
                                          YUFI          PAL          UNF         Total
       Net sales                       $ 30,618     $ 116,258     $ 6,747     $ 153,623
       Gross profit (loss)               (1,800 )       6,251        (473 )       3,978
       Depreciation and amortization      1,085         3,850         474         5,409
       Income (loss) from operations     (3,275 )       3,242        (643 )        (676 )
       Net income (loss)                 (3,912 )       7,578        (562 )       3,104



                                             For the Nine-Months Ended March 23, 2008
                                  USTF (2)       YUFI           PAL          UNF          Total
 Net sales                        $ 6,455     $ 103,738     $ 331,797     $ 18,577     $ 460,567
 Gross profit (loss)                  571        (2,334 )      16,700         (318 )      14,619
 Depreciation and amortization        578         3,703        13,520        1,264        19,065
 Income (loss) from operations        188        (6,903 )       6,832         (785 )        (668 )
 Net income (loss)                    148        (8,757 )      12,144         (649 )       2,886

(1) The Company completed the sale of its investment in YUFI during the fourth quarter of fiscal year 2009 and as a result its financial statements were unavailable to the Company for the quarter ended March 29, 2009. See below and Footnote 12-"Impairment Charges" and Footnote 19- "Subsequent Events" for further discussion.

(2) Sold in the second quarter of fiscal year 2008 .

On June 10, 2005, the Company and Sinopec Yizheng Chemical Fiber Co., Ltd, ("YCFC") entered into an Equity Joint Venture Contract (the "JV Contract"), to form YUFI to manufacture, process and market polyester filament yarn in YCFC's facilities in China. Under the terms of the JV Contract, each company owned a 50% equity interest in YUFI. The joint venture transaction closed on August 3, 2005, and accordingly, the Company contributed to YUFI its initial capital contribution of $15.0 million in cash on August 4, 2005. On October 12, 2005, the Company transferred an additional $15.0 million to YUFI to complete the capitalization of the joint venture.
In July 2008, the Company reached an agreement in principal with YCFC to sell its 50% ownership interest in YUFI to YCFC for $10.0 million, pending final negotiation and execution of definitive agreements. The internal YCFC and external governmental approval process was expected to take approximately two to three months. In the interim, the partners agreed that YCFC would immediately take over operating control of YUFI. As a result, the Company lost its ability to influence the operations of YUFI and therefore the Company ceased recording its share of losses commencing in the first quarter of fiscal year 2009 in accordance with the authoritative guidance provided by Accounting Principles Board Opinion 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB 18").

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In December 2008, the Company renegotiated the proposed agreement to sell its interest in YUFI to YCFC for $9.0 million, pending final approval by the appropriate authorities and execution of definitive agreements and recorded an additional impairment charge of $1.5 million. See Footnote 12-"Impairment Charges".
For the quarter and year-to-date period ended March 23, 2008, the Company recognized equity losses net of technology and license fee income of $2.0 million and $3.7 million, respectively. In addition, the Company recognized $0.3 million and $1.6 million in operating expenses for the quarter and year-to-date periods ended March 23, 2008, respectively, which was directly related to providing technological support in accordance with the Company's joint venture contract.
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 March 29, 2009, the Company recognized net equity earnings of $1.3 million and $5.4 million, respectively, compared to equity earnings of $3.0 million and $4.5 million for the respective corresponding periods in the prior year. The Company received accumulated distributions from PAL of $2.9 million and $1.2 million for the year-to-date periods of fiscal years 2009 and 2008, respectively. As of April 4, 2009, PAL had $33.0 million cash-on-hand and no outstanding debt.
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 March 29, 2009, the Company recognized net equity losses of $0.5 million and $0.9 million, respectively, compared to net equity losses of $0.2 million and net equity earnings of $0.1 million for the respective corresponding periods in the prior year.

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Review of Third Quarter Fiscal Year 2009 compared to Third Quarter Fiscal Year 2008
The following table sets forth the income (loss) from continuing operations components for each of the Company's business segments for the fiscal quarters ended March 29, 2009 and March 23, 2008, 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
                         March 29, 2009                 March 23, 2008
                                  % to Total                     % to Total       % Change
       Net sales
       Polyester   $  85,480             71.8     $ 126,247             74.3          (32.3 )
       Nylon          33,614             28.2        43,589             25.7          (22.9 )

       Total       $ 119,094            100.0     $ 169,836            100.0          (29.9 )




                                                       % to Sales                         % to Sales
Gross profit (loss)
Polyester                            $    (430 )              (0.4 )      $  9,508                5.6          (104.5 )
Nylon                                      802                 0.7           3,924                2.3           (79.6 )

Total                                      372                 0.3          13,432                7.9           (97.2 )

Restructuring charges
(recoveries)
Polyester                                  220                 0.2          (2,199 )             (1.3 )        (110.0 )
Nylon                                       73                   -               -                  -               -

Total                                      293                 0.2          (2,199 )             (1.3 )        (113.3 )

Goodwill Impairment
Polyester                               18,580                15.6               -                  -               -
Nylon                                        -                   -               -                  -               -

Total                                   18,580                15.6               -                  -               -

Selling, general and
administrative expenses
Polyester                                7,593                 6.4           8,635                5.1           (12.1 )
Nylon                                    1,914                 1.6           1,445                0.8            32.5

Total                                    9,507                 8.0          10,080                5.9            (5.7 )

Provision for bad debts                    735                 0.6              87                  -           744.8
Other operating
(income) expense, net                      (89 )                 -            (897 )             (0.5 )         (90.1 )
Non-operating (income) expense,
net                                      4,398                 3.7           4,900                2.9           (10.2 )

Income (loss) from continuing
operations before income taxes         (33,052 )             (27.8 )         1,461                0.9               -
Provision (benefit) for income
taxes                                     (101 )              (0.1 )         1,394                0.9          (107.2 )

Income (loss) from continuing
operations                             (32,951 )             (27.7 )            67                  -               -
Loss from discontinued
operations, net of tax                     (45 )                 -             (55 )                -               -

Net income (loss)                    $ (32,996 )             (27.7 )      $     12                  -               -

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As reflected in the tables above, consolidated net sales from continuing operations decreased from $169.8 million to $119.1 million which was primarily attributable to decreased sales in the apparel, automotive and furnishing market segments. Consolidated unit volumes decreased by 27.1% for the third quarter of fiscal year 2009, while average net selling prices decreased by 2.8% for the same period. . . .