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UFI > SEC Filings for UFI > Form 10-Q on 2-Nov-2012All Recent SEC Filings

Show all filings for UNIFI INC

Form 10-Q for UNIFI INC


2-Nov-2012

Quarterly Report


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 the Company's operations and material changes in financial condition during the periods included in the accompanying Condensed Consolidated Financial Statements included in this Form 10-Q.

Forward-Looking Statements

The following discussion contains certain forward-looking statements about the Company's financial condition and results of operations.

Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. They may contain words such as "believe," "anticipate," "expect," "estimate," "intend," "project," "plan," "will," or words or phrases of similar meaning. They may relate to, among other things, the risks described below:

? the competitive nature of the textile industry and the impact of worldwide 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, such as recession and other economic and political factors over which the Company has no control;

? changes in consumer spending, customer preferences, fashion trends and end-uses;

? the ability to reduce production costs;

? changes in currency exchange rates, interest and inflation rates;

? the financial condition of the Company's customers;

? the ability to sell excess assets;

? technological advancements and the continued availability of financial resources to fund capital expenditures;

? the operating performance of joint ventures and other equity investments;

? the accurate financial reporting of information from equity method investees;

? the impact of environmental, health and safety regulations;

? the loss of a material customer(s);

? the ability to protect intellectual property;

? employee relations;

? volatility of financial and credit markets;

? the ability to service indebtedness and fund capital expenditures and strategic initiatives;

? the continuity of the Company's leadership;

? availability of and access to credit on reasonable terms; and

? the success of the Company's strategic business initiatives.

These forward-looking statements reflect the Company's current views with respect to future events and are based on assumptions and subject to risks and uncertainties that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements. These risks and uncertainties may include those discussed above. New risks can emerge from time to time. It is not possible for the Company to predict all of these risks, nor can it assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements.

Business Overview

Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, the "Company" or "Unifi") is a publicly-traded, multi-national manufacturing company. The Company processes and sells high-volume commodity products, specialized yarns designed to meet certain customer specifications, and premier value-added ("PVA") yarns with enhanced performance characteristics. The Company sells fibers made from polyester and nylon filament to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishing, automotive upholstery, industrial and other end-use markets. The Company's polyester products include polyester polymer beads ("Chip"), partially oriented yarn ("POY"), textured, solution and package dyed, twisted and beamed yarns; each available in virgin or recycled varieties. The Company's nylon products include textured, solution dyed and covered spandex products. The Company maintains one of the industry's most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States ("U.S."). The Company's principal markets are located in the U.S., Canada, Mexico, Central America, and South America. In addition, the Company has a wholly-owned subsidiary in the People's Republic of China ("China") focused on the sale and promotion of the Company's specialty and PVA products in the Asian textile market, primarily in China as well as into Europe.

The Company has three operating segments which are also its reportable segments. Each reportable segment derives its revenues as follows:

? The Polyester segment manufactures Chip, POY, textured, dyed, twisted and beamed yarns, virgin and recycled, with sales primarily to other yarn manufacturers, knitters and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive upholstery, home furnishing, industrial and other end-use markets. The Polyester segment consists of manufacturing operations in the U.S. and El Salvador.


? The Nylon segment manufactures textured nylon and covered spandex yarns with sales to knitters and weavers that produce fabric for the apparel, hosiery, sock and other end-use markets. The Nylon segment consists of manufacturing operations in the U.S. and Colombia.

? The International segment's products primarily include textured polyester and various types of resale yarns. The International segment sells its yarns to knitters and weavers that produce fabric for the apparel, automotive upholstery, home furnishing, industrial and other end-use markets primarily in the South American and Asian regions. This segment includes manufacturing and sales offices in Brazil and a sales office in China.

Other information for the Company's reportable segments, including revenues, a measurement of profit or loss, and total assets by segment, is provided in "Footnote 26. Business Segment Information" to the Condensed Consolidated Financial Statements included in this Form 10-Q.

Recent Developments and Strategy

Strategy: While the Company continues to face a challenging operating environment caused by global competition across the supply chain, inflation for its input costs and raw materials, and potential decreased demand caused by continuing weakness of the U.S. and global economies, the Company believes it has the appropriate strategies in place to succeed in such an environment. The Company continues to focus on its key strategies: striving for continuous improvement across all operational and business processes; enriching its product mix by growing its higher margin PVA product portfolio; increasing sales of yarns with regional rules of origin requirements; and continuing its strategic penetration in global growth markets, such as China, Central America and Brazil. Going forward, the Company expects to continue its support of these strategies through investments in selected product and geographic growth opportunities related to its core business. The Company also anticipates utilizing its excess liquidity and operating cash flows to continue its deleveraging strategy, with the goal of reducing leverage, prepaying its higher interest Term B Loan, and developing other strategies to enhance shareholder value.

PVA: The Company remains committed to growing the business for its value-added products and the belief that its research and development work with brands and retailers continues to create new, world-wide sales opportunities as the Company raises the visibility of REPREVEŽ as a consumer brand. For the current quarter, the Company's PVA products represented approximately 20% of its consolidated net sales and REPREVEŽ continues to grow at a faster pace than other PVA products. The Company believes that it can continue to increase its PVA sales as a percentage of its overall sales volume and grow its global PVA sales 15% to 20% annually to create overall mix enrichment and margin gains.

Investment in Central America: The Central American Free Trade Agreement ("CAFTA") region, which continues to be a competitive alternative to Asian supply chains, has in recent years maintained its share of synthetic apparel supply to U.S. retailers and continues to see ongoing investments being made. The recently completed installation of additional texturing capacity at the Company's plant in El Salvador is running at or near capacity and will enable the Company to take advantage of the long-term volume opportunities in this region. In addition, legislation was passed in the U.S. Congress on August 3, 2012 that provides a technical correction to the sewing thread provision in the CAFTA. The amended CAFTA, which took effect on October 13, 2012, closed a loophole that allowed for the use of non-originating sewing thread in the assembly of textiles and apparel under the trade agreement. The technical modification clarifies that certain single ply synthetic sewing thread is required to be produced in the United States or CAFTA region in order for goods to qualify for preferential tariff treatment. All other sewing threads already enjoyed the benefits of yarn forward rules of origin under the free trade agreement. The passage of this amendment is important to the Company and its operations in Central America, and is expected to result in improvements for the Company's twisted and sewing thread business.

Brazil: The strengthening of the Brazilian Real during the first half of fiscal year 2012 negatively impacted the competitiveness of the local apparel supply chain by making imports of competing fibers, garments and apparel more competitively priced. Although the Company still faces stiff competition from imported fibers, fabrics and finished garments, the return of the Real to more normalized levels since the second half of the 2012 fiscal year and the initiatives taken by the Brazilian government to help support the domestic manufacturers have helped shift demand back to the domestic Brazilian textile producers such as the Company's Brazilian subsidiary. The Company expects that its mix enrichment efforts and manufacturing efficiencies gained through its process improvement programs will allow it to remain competitive with the imports of commodity textured yarns.

China: Sales volumes for the September 2012 quarter were lower than expected as demand from a significant customer was negatively impacted by high inventory levels throughout that customer's supply chain. This decline in volume was partially offset by several new development programs realized during the quarter, however, these programs were at lower than average margins. The Company remains optimistic about its business in China as the high levels of supply chain inventory for a significant customer become depleted and the projected growth in the region for the Company's PVA products is expected to continue.


Raw Materials: During the September 2012 quarter, polyester raw material pricing continued to moderate from prior year levels, decreasing from their highest levels in more than thirty years during the nine months ended June 2012. The decrease in raw material costs allowed the Company to recover lost margin during the current quarter and realize an improvement in its Polyester segment's gross profit versus the prior year quarter. However, polyester raw material prices began to increase during August, September and October 2012 and will negatively impact the Company's future margins as the timing of these raw material cost increases will limit the recovery of margin during this rising raw material environment. In addition, the polymer pricing gap between the U.S. and Asia ended September 2012 at approximately $0.12 per pound and will place additional pressures on the Company's sales volume and margins within the lower end of the Company's business that typically competes with imported yarns.

Company Outlook: Based on uncertainties of the upcoming holiday season and recent increases in raw material prices, the Company believes that its gross profit and Adjusted EBITDA for the December 2012 fiscal quarter will be less than the amounts reported for the September 2012 quarter. The Company continues to expect operating profit improvements for the full fiscal year 2013 when compared to fiscal year 2012 due to anticipated higher sales volumes (from the lessening effect of the inventory destocking and signs of improvement in the Company's key markets) and gross margin improvements.

Key Performance Indicators and Non-GAAP Financial Measures

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 for the Company and for each of its reportable segments;

? gross profits and gross margin for the Company and for each of its reportable segments;

? Earnings Before Interest, Taxes, Depreciation, and Amortization ("EBITDA") represents net income or loss attributable to Unifi, Inc. before net interest expense, income tax expense and depreciation and amortization expense (excluding interest portion of amortization);

? Adjusted EBITDA Including Equity Affiliates represents EBITDA adjusted to exclude gains or losses on extinguishment of debt, loss on previously held equity interest, non-cash compensation expense net of distributions, and certain other adjustments. Other adjustments may include items such as gains or losses on sales or disposals of property, plant, or equipment, currency and derivative gains or losses, restructuring charges, startup costs, and certain other operating or non-operating income or expense items;

? Adjusted EBITDA represents Adjusted EBITDA Including Equity Affiliates excluding the earnings of unconsolidated affiliates. The Company may, from time to time, change the items included within Adjusted EBITDA;

? Segment Adjusted Profit equals segment gross profit plus segment depreciation and amortization less segment selling, general, and administrative expenses ("SG&A"), net of segment other adjustments;

? Adjusted Working Capital (receivables plus inventory less accounts payable and certain accrued expenses) is an indicator of the Company's production efficiency and ability to manage its inventory and receivables; and

? Working Capital represents current assets less current liabilities.

EBITDA, Adjusted EBITDA Including Equity Affiliates, Adjusted EBITDA, Segment Adjusted Profit and Adjusted Working Capital are financial measurements that management uses to facilitate its analysis and understanding of the Company's business operations. Management believes they are useful to investors because they provide a supplemental way to understand the underlying operating performance and debt service capacity of the Company. The calculation of EBITDA, Adjusted EBITDA Including Equity Affiliates, Adjusted EBITDA, Segment Adjusted Profit and Adjusted Working Capital are subjective measures based on management's belief as to which items should be included or excluded, in order to provide the most reasonable view of the underlying operating performance of the business. EBITDA, Adjusted EBITDA Including Equity Affiliates, Adjusted EBITDA, Segment Adjusted Profit and Adjusted Working Capital are not considered to be in accordance with generally accepted accounting principles ("non-GAAP measurements") and should not be considered a substitute for performance measures calculated in accordance with GAAP.


Results of Operations

The reconciliations of Net income attributable to Unifi, Inc. to EBITDA,
Adjusted EBITDA Including Equity Affiliates and Adjusted EBITDA are as follows:


                                                              For the Three Months Ended
                                                           September 23,       September 25,
                                                               2012                2011
Net income attributable to Unifi, Inc.                     $       2,294       $         286
Provision for income taxes                                         3,233                 273
Interest expense, net                                              1,320               3,733
Depreciation and amortization expense                              6,333               6,561
EBITDA                                                            13,180              10,853

Loss on extinguishment of debt                                       242                 462
Non-cash compensation expense, net                                   621                 243
Other                                                                453                  43
Adjusted EBITDA Including Equity Affiliates                       14,496              11,601

Equity in earnings of unconsolidated affiliates                     (671 )            (3,459 )
Adjusted EBITDA                                            $      13,825       $       8,142

The reconciliations of Adjusted EBITDA to Segment Adjusted Profit are as follows:

                                                               For the Three Months Ended
                                                           September 23,       September 25,
                                                               2012                 2011
Adjusted EBITDA                                            $      13,825       $        8,142
Depreciation included in other operating expense
(income), net                                                          -                   (6 )
Non-cash compensation expense, net                                  (621 )               (243 )
Provision for bad debts                                              110                  205
Other, net                                                           (42 )                (84 )
Segment Adjusted Profit                                    $      13,272       $        8,014

Segment Adjusted Profit for each of the reportable segments is presented below:

                                        For the Three Months Ended
                           September 23, 2012                 September 25, 2011
Polyester                 $              6,231                $             2,426
Nylon                                    2,492                              3,024
International                            4,549                              2,564
Segment Adjusted Profit   $             13,272                $             8,014

Selected financial information for the Polyester, Nylon and International segments is presented below:

                                                      For the Three Months Ended September 23, 2012
                                                Polyester         Nylon        International        Total
Net sales                                      $     93,036     $  40,014     $        39,850     $ 172,900
Cost of sales                                        84,829        35,944              34,107       154,880
Gross profit                                          8,207         4,070               5,743        18,020
Selling, general and administrative expenses          6,751         2,336               2,060        11,147
Segment operating profit                       $      1,456     $   1,734     $         3,683     $   6,873




                                                         For the Three Months Ended September 25, 2011
                                                Polyester            Nylon          International        Total
Net sales                                      $     92,528       $     40,961     $        37,524     $ 171,013
Cost of sales                                        88,838             36,610              33,735       159,183
Gross profit                                          3,690              4,351               3,789        11,830
Selling, general and administrative expenses          6,063              2,110               2,198        10,371
Segment operating (loss) profit                $     (2,373 )     $      2,241     $         1,591     $   1,459


The reconciliations of Segment Operating Profit to Consolidated Income Before Income Taxes are as follows:

                                                               For the Three Months Ended
                                                           September 23,        September 25,
                                                                2012                2011
Polyester                                                  $        1,456       $      (2,373 )
Nylon                                                               1,734               2,241
International                                                       3,683               1,591
Segment operating profit                                            6,873               1,459
Provision for bad debts                                               110                 205
Other operating expense (income), net                                 581                 (41 )
Consolidated operating income                                       6,182               1,295
Interest income                                                      (124 )              (647 )
Interest expense                                                    1,444               4,380
Loss on extinguishment of debt                                        242                 462
Equity in earnings of unconsolidated affiliates                      (671 )            (3,459 )
Consolidated income before income taxes                    $        5,291       $         559

The reconciliations of Segment Depreciation and Amortization Expense to Consolidated Depreciation and Amortization Expense are as follows:

                                                             For the Three Months Ended
                                                           September 23,     September 25,
                                                               2012              2011
Polyester                                                  $       4,681     $       4,799
Nylon                                                                758               783
International                                                        866               973
Segment depreciation and amortization expense                      6,305             6,555
Depreciation and amortization included in other
operating expense (income), net                                       46                 6
Amortization included in interest expense                            166               221
Consolidated depreciation and amortization expense         $       6,517     $       6,782

Depreciation and amortization included in other operating expense (income), net includes $18 allocated to net loss attributable to non-controlling interest for the quarter ended September 23, 2012.

Results of Operations

Review of First Quarter of Fiscal Year 2013 Compared to First Quarter of Fiscal
Year 2012

Consolidated Overview

The components of Net income attributable to Unifi, Inc., each component as a
percentage of net sales and the percentage increase or decrease over the prior
year period amounts are as follows:



                                                       For the Three Months Ended
                                         September 23, 2012                   September 25, 2011
                                                   % to Net Sales                       % to Net Sales       % Change
Net sales                         $   172,900                100.0     $   171,013                100.0            1.1
Cost of sales                         154,880                 89.6         159,183                 93.1           (2.7 )
Gross profit                           18,020                 10.4          11,830                  6.9           52.3
Selling, general and
administrative expenses                11,147                  6.4          10,371                  6.0            7.5
Provision for bad debts                   110                  0.1             205                  0.1          (46.3 )
Other operating expense
(income), net                             581                  0.3             (41 )                  -              -
Operating income                        6,182                  3.6           1,295                  0.8          377.4
Interest expense, net                   1,320                  0.8           3,733                  2.2          (64.6 )
Earnings from unconsolidated
affiliates                               (671 )               (0.4 )        (3,459 )               (2.0 )        (80.6 )
Loss on extinguishment of debt            242                  0.1             462                  0.3          (47.6 )
Income before income taxes              5,291                  3.1             559                  0.3          846.5
Provision for income taxes              3,233                  1.9             273                  0.1              -
Net income including
non-controlling interest                2,058                  1.2             286                  0.2          619.6
Less: net (loss) attributable
to non-controlling interest              (236 )               (0.1 )             -                    -              -
Net income attributable to
Unifi, Inc.                       $     2,294                  1.3     $       286                  0.2          702.1


Consolidated Net Sales

Net sales for the September 2012 quarter increased by $1,887, or 1.1%, as compared to the prior year September quarter. Overall, sales volume increased by 6.7% primarily due to recovery in the Company's International segment while the sales volumes in the Polyester and Nylon segments were relatively unchanged from the prior year quarter. The increase in sales volume was partially offset by a decrease in the overall weighted average selling price of 5.6% due to a lower priced sales mix in China, as well as the currency translation effect on Brazil's revenues attributable to the weakening of the Brazilian Real against the U.S. dollar. The weighted average selling prices in the Polyester and Nylon segments were comparable against the prior year quarter.

Consolidated Gross Profit

Gross profit for the September 2012 quarter increased by $6,190, or 52.3%, as compared to the prior year September quarter. Gross profit improvements were primarily due to increased sales volumes and improved unit conversion margins and were concentrated within the Company's Polyester and International segments. Polyester gross profit increases were caused by margin improvements as polyester raw material prices declined at the beginning of the current quarter and were approximately 13% below the raw material pricing experienced in the prior year quarter which allowed the Company to recover previously lost conversion margin (net sales less raw material costs). In addition, the Company's operation in Brazil experienced higher gross profit as sales and production volumes increased as a result of improved demand for local production. Finally, higher sales volumes contributed to improved gross profit for the Company's Chinese subsidiary.

. . .

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