ufi-10q_20180325.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 25, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           

Commission File Number: 1-10542

 

UNIFI, INC.

(Exact name of registrant as specified in its charter)

 

 

New York

 

11-2165495

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

7201 West Friendly Avenue

Greensboro, North Carolina  27410

(Address of principal executive offices) (Zip Code)

(336) 294-4410

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

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 Exchange Act).    Yes      No  

As of April 26, 2018, there were 18,335,727 shares of the registrant’s common stock, par value $0.10 per share, outstanding.

 

 

 


FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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 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 economic 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;

 

the success of the Company’s strategic business initiatives;

 

volatility of financial and credit markets;

 

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

 

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;

 

employee relations;

 

the impact of environmental, health and safety regulations;

 

the operating performance of joint ventures and other equity investments;

 

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

 

other factors discussed in “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 25, 2017 or elsewhere in this report.

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 law.

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.

FORM 10-Q

FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 25, 2018

TABLE OF CONTENTS

 

PART I—FINANCIAL INFORMATION

 

 

 

 

Page

 

 

 

 

 

Item 1.

 

Financial Statements

 

1

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 25, 2018 and June 25, 2017

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended March 25, 2018 and March 26, 2017

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended March 25, 2018 and March 26, 2017

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 25, 2018 and March 26, 2017

 

4

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

33

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

34

 

 

 

 

 

Item 1A.

 

Risk Factors

 

34

 

 

 

 

 

Item 6.

 

Exhibits

 

35

 

 

 

 

 

 

 

Signatures

 

36

 

 

 

 

 

 

 

 

 


PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share amounts)

 

 

 

March 25, 2018

 

 

June 25, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

40,576

 

 

$

35,425

 

Receivables, net

 

 

87,427

 

 

 

81,121

 

Inventories

 

 

121,293

 

 

 

111,405

 

Income taxes receivable

 

 

10,645

 

 

 

9,218

 

Other current assets

 

 

7,178

 

 

 

6,468

 

Total current assets

 

 

267,119

 

 

 

243,637

 

Property, plant and equipment, net

 

 

203,713

 

 

 

203,388

 

Deferred income taxes

 

 

4,030

 

 

 

2,194

 

Investments in unconsolidated affiliates

 

 

112,249

 

 

 

119,513

 

Other non-current assets

 

 

3,781

 

 

 

2,771

 

Total assets

 

$

590,892

 

 

$

571,503

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Accounts payable

 

$

41,006

 

 

$

41,499

 

Accrued expenses

 

 

16,039

 

 

 

16,144

 

Income taxes payable

 

 

2,378

 

 

 

1,351

 

Current portion of long-term debt

 

 

17,076

 

 

 

17,060

 

Total current liabilities

 

 

76,499

 

 

 

76,054

 

Long-term debt

 

 

108,558

 

 

 

111,382

 

Other long-term liabilities

 

 

10,904

 

 

 

11,804

 

Deferred income taxes

 

 

4,850

 

 

 

11,457

 

Total liabilities

 

 

200,811

 

 

 

210,697

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $0.10 par value (500,000,000 shares authorized; 18,328,285 and 18,229,777 shares

   issued and outstanding as of March 25, 2018 and June 25, 2017, respectively)

 

 

1,833

 

 

 

1,823

 

Capital in excess of par value

 

 

56,199

 

 

 

51,923

 

Retained earnings

 

 

360,878

 

 

 

339,940

 

Accumulated other comprehensive loss

 

 

(28,829

)

 

 

(32,880

)

Total Unifi, Inc. shareholders’ equity

 

 

390,081

 

 

 

360,806

 

Non-controlling interest

 

 

 

 

 

 

Total shareholders’ equity

 

 

390,081

 

 

 

360,806

 

Total liabilities and shareholders’ equity

 

$

590,892

 

 

$

571,503

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

1


CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share amounts)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

March 25, 2018

 

 

March 26, 2017

 

 

March 25, 2018

 

 

March 26, 2017

 

Net sales

 

$

165,867

 

 

$

160,896

 

 

$

497,587

 

 

$

476,020

 

Cost of sales

 

 

149,311

 

 

 

139,766

 

 

 

435,063

 

 

 

409,213

 

Gross profit

 

 

16,556

 

 

 

21,130

 

 

 

62,524

 

 

 

66,807

 

Selling, general and administrative expenses

 

 

13,846

 

 

 

13,000

 

 

 

41,335

 

 

 

37,278

 

Provision (benefit) for bad debts

 

 

27

 

 

 

(92

)

 

 

(104

)

 

 

(554

)

Other operating expense (income), net

 

 

1,100

 

 

 

(885

)

 

 

1,763

 

 

 

(636

)

Operating income

 

 

1,583

 

 

 

9,107

 

 

 

19,530

 

 

 

30,719

 

Interest income

 

 

(182

)

 

 

(126

)

 

 

(444

)

 

 

(455

)

Interest expense

 

 

1,187

 

 

 

825

 

 

 

3,562

 

 

 

2,431

 

Loss on sale of business

 

 

 

 

 

 

 

 

 

 

 

1,662

 

Equity in earnings of unconsolidated affiliates

 

 

(544

)

 

 

(1,600

)

 

 

(3,842

)

 

 

(2,073

)

Income before income taxes

 

 

1,122

 

 

 

10,008

 

 

 

20,254

 

 

 

29,154

 

Provision (benefit) for income taxes

 

 

946

 

 

 

831

 

 

 

(684

)

 

 

6,481

 

Net income including non-controlling interest

 

 

176

 

 

 

9,177

 

 

 

20,938

 

 

 

22,673

 

Less: net loss attributable to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

(498

)

Net income attributable to Unifi, Inc.

 

$

176

 

 

$

9,177

 

 

$

20,938

 

 

$

23,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Unifi, Inc. per common share:

 

Basic

 

$

0.01

 

 

$

0.50

 

 

$

1.15

 

 

$

1.28

 

Diluted

 

$

0.01

 

 

$

0.50

 

 

$

1.12

 

 

$

1.26

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

March 25, 2018

 

 

March 26, 2017

 

 

March 25, 2018

 

 

March 26, 2017

 

Net income including non-controlling interest

 

$

176

 

 

$

9,177

 

 

$

20,938

 

 

$

22,673

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

1,047

 

 

 

1,370

 

 

 

1,571

 

 

 

11

 

Foreign currency translation adjustments for an unconsolidated affiliate

 

 

439

 

 

 

485

 

 

 

(154

)

 

 

(38

)

Changes in interest rate swaps

 

 

1,142

 

 

 

15

 

 

 

2,634

 

 

 

53

 

Other comprehensive income, net

 

 

2,628

 

 

 

1,870

 

 

 

4,051

 

 

 

26

 

Comprehensive income including non-controlling interest

 

 

2,804

 

 

 

11,047

 

 

 

24,989

 

 

 

22,699

 

Less: comprehensive loss attributable to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

(498

)

Comprehensive income attributable to Unifi, Inc.

 

$

2,804

 

 

$

11,047

 

 

$

24,989

 

 

$

23,197

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

For the Nine Months Ended

 

 

 

March 25, 2018

 

 

March 26, 2017

 

Cash and cash equivalents at beginning of year

 

$

35,425

 

 

$

16,646

 

Operating activities:

 

 

 

 

 

 

 

 

Net income including non-controlling interest

 

 

20,938

 

 

 

22,673

 

Adjustments to reconcile net income including non-controlling interest to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

 

(3,842

)

 

 

(2,073

)

Distributions received from unconsolidated affiliates

 

 

11,226

 

 

 

1,500

 

Depreciation and amortization expense

 

 

16,844

 

 

 

14,887

 

Non-cash compensation expense

 

 

4,878

 

 

 

2,473

 

Loss on sale of business

 

 

 

 

 

1,662

 

Excess tax benefit on stock-based compensation plans

 

 

 

 

 

(1,168

)

Deferred income taxes

 

 

(8,441

)

 

 

6,305

 

Other, net

 

 

(180

)

 

 

(980

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(6,084

)

 

 

(3,581

)

Inventories

 

 

(9,424

)

 

 

(5,720

)

Other current assets

 

 

(493

)

 

 

1,221

 

Income taxes

 

 

(464

)

 

 

(8,787

)

Accounts payable and accrued expenses

 

 

(323

)

 

 

1,246

 

Other, net

 

 

354

 

 

 

(372

)

Net cash provided by operating activities

 

 

24,989

 

 

 

29,286

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(17,091

)

 

 

(27,875

)

Other, net

 

 

 

 

 

(179

)

Net cash used in investing activities

 

 

(17,091

)

 

 

(28,054

)

 

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from ABL Revolver

 

 

80,200

 

 

 

93,000

 

Payments on ABL Revolver

 

 

(70,500

)

 

 

(88,100

)

Proceeds from ABL Term Loan

 

 

 

 

 

14,500

 

Payments on ABL Term Loan

 

 

(7,500

)

 

 

(7,250

)

Payments on capital lease obligations

 

 

(5,286

)

 

 

(3,218

)

Proceeds from stock option exercises

 

 

219

 

 

 

2,617

 

Excess tax benefit on stock-based compensation plans

 

 

 

 

 

1,168

 

Other

 

 

(597

)

 

 

(429

)

Net cash (used in) provided by financing activities

 

 

(3,464

)

 

 

12,288

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

717

 

 

 

65

 

Net increase in cash and cash equivalents

 

 

5,151

 

 

 

13,585

 

Cash and cash equivalents at end of period

 

$

40,576

 

 

$

30,231

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

4


Unifi, Inc.

Notes to Condensed Consolidated Financial Statements

 

 

1.  Background

Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, “UNIFI,” the “Company,” “we,” “us” or “our”), is a multi-national company that manufactures and sells innovative synthetic and recycled products made from polyester and nylon primarily to other yarn manufacturers and knitters and weavers that produce fabric for the apparel, hosiery, home furnishings, automotive, industrial and other end-use markets. Polyester yarns 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 and polyester polymer beads (“Chip”).  Nylon products include textured, solution dyed and spandex covered yarns.

UNIFI maintains one of the textile industry’s most comprehensive yarn product offerings that include specialized yarns, premium value-added (“PVA”) yarns and commodity yarns, with principal geographic markets in the Americas and Asia.  

UNIFI has manufacturing operations in four countries and participates in joint ventures in Israel and the United States, the most significant of which is a 34% non-controlling partnership interest in Parkdale America, LLC (“PAL”), a producer of cotton and synthetic yarns for sale to the global textile industry and apparel market.     

 

 

2.  Basis of Presentation; Condensed Notes

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. As contemplated by the instructions of the Securities and Exchange Commission (the “SEC”) to Form 10-Q, the following notes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements.  Reference should be made to UNIFI’s year-end audited consolidated financial statements and related notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended June 25, 2017 (the “2017 Form 10-K”).

The financial information included in this report has been prepared by UNIFI, without audit.  In the opinion of management, all adjustments, which consist of normal, recurring adjustments, considered necessary for a fair statement of the results for interim periods have been included.  Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year.  The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures.  Actual results may vary from these estimates.

All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted.

The fiscal quarter for Unifi, Inc. and its subsidiary in El Salvador ended on March 25, 2018, the last Sunday in March. The fiscal quarter for Unifi, Inc.’s Brazilian, Chinese, Colombian and Sri Lankan subsidiaries ended on March 31, 2018.  There were no significant transactions or events that occurred between Unifi, Inc.’s fiscal quarter end and such wholly owned subsidiaries’ subsequent fiscal quarter end.  The three-month and nine-month periods ended March 25, 2018 and March 26, 2017 each consisted of 13 and 39 fiscal weeks, respectively.

Reclassifications

Certain reclassifications of prior years’ data have been made to conform to the current year presentation.

 

3.  Recent Accounting Pronouncements

Issued and Pending Adoption

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequent ASUs have been issued to provide clarity and defer the effective date of the new guidance. The new revenue recognition standard eliminates the transaction- and industry-specific revenue recognition guidance under current GAAP and replaces it with a principles-based approach. While UNIFI has not yet determined the effect of the new guidance on its ongoing financial reporting, UNIFI notes the following considerations: (i) UNIFI is primarily engaged in the business of manufacturing and delivering tangible products utilizing relatively straightforward contract terms without multiple performance obligations and (ii) transaction prices for UNIFI’s primary and material revenue activities are determinable and lack significant timing considerations. UNIFI is currently performing the following activities regarding implementation of the new guidance: (a) reviewing material contracts and (b) assessing accounting policy elections and disclosures under the new guidance. In addition, implementation matters remaining include (x) evaluating the systems and processes to support revenue recognition and (y) selecting the method of adoption. The new revenue recognition guidance is effective for UNIFI’s fiscal 2019.

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. While UNIFI has not yet determined the full effect of the new guidance on its ongoing financial reporting, as of June 25, 2017, UNIFI had approximately $6,400 of future minimum lease payments under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and did not enter into any new material operating lease agreements during the nine months ended March 25, 2018. The new lease guidance is effective for UNIFI’s fiscal 2020, and early adoption is permitted.

In connection with the SEC Staff Announcement on July 20, 2017 relating to the transition to ASU No. 2014-09 and ASU No. 2016-02, due to its status as a significant subsidiary of Unifi, Inc., PAL expects to adopt (i) the new revenue recognition guidance in its fiscal 2019 and (ii) the new lease guidance in its fiscal 2020.

5


Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

 

Recently Adopted

In August 2017, the FASB issued ASU No. 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. UNIFI early adopted ASU No. 2017-12 in the three months ended December 24, 2017. Early adoption will allow UNIFI to (i) eliminate consideration for hedge ineffectiveness, (ii) utilize a qualitative effectiveness assessment prospectively and (iii) contemplate hedge accounting for additional risk management activities allowed by the simplified guidance. Due to a lack of complexity in UNIFI’s recent risk management activities, there are no applicable cumulative adjustments to UNIFI’s financial statements in connection with adoption of the ASU.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU is intended to clarify the definition of a business and reduce the complexity of evaluating transactions that are more akin to asset acquisitions. UNIFI early adopted ASU No. 2017-01 in the three months ended March 25, 2018. There are no current period or historical adjustments to UNIFI’s financial statements required in connection with adoption of the ASU. Any transaction that is required to be evaluated under the ASU is accounted for prospectively.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including the accounting and classification of the respective income tax impacts, forfeitures and statutory withholding requirements. UNIFI adopted the ASU in the three months ended September 24, 2017, on a prospective basis. The adoption resulted in a $214 decrease to the provision for income taxes for excess tax benefits and an immaterial increase in potential dilutive weighted average shares for the nine months ended March 25, 2018. In connection with the adoption of the ASU, UNIFI has elected to recognize forfeitures as they occur, and there is no corresponding retrospective adjustment to retained earnings. Additionally, UNIFI is presenting the change in classification of excess tax benefits in the condensed consolidated statements of cash flows on a prospective basis.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which modifies the subsequent measurement of inventories recorded under a first-in, first-out or average cost method. Under the new standard, such inventories are required to be measured at the lower of cost and net realizable value. UNIFI adopted the ASU in the three months ended September 24, 2017, with prospective application. UNIFI’s historical principles for inventory measurement had utilized net realizable value, and, therefore, adoption of the ASU had no material impact on UNIFI’s consolidated financial statements.

Based on UNIFI’s review of ASUs issued since the filing of the 2017 Form 10-K, 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.  Receivables, Net

Receivables, net consists of the following:

 

 

 

March 25, 2018

 

 

June 25, 2017

 

Customer receivables

 

$

89,422

 

 

$

83,291

 

Allowance for uncollectible accounts

 

 

(2,122

)

 

 

(2,222

)

Reserves for yarn quality claims

 

 

(743

)

 

 

(1,278

)

Net customer receivables

 

 

86,557

 

 

 

79,791

 

Other receivables

 

 

870

 

 

 

1,330

 

Total receivables, net

 

$

87,427

 

 

$

81,121

 

 

There have been no material changes in UNIFI’s allowance for uncollectible accounts since June 25, 2017. 

 

The changes in UNIFI’s reserves for yarn quality claims were as follows:

 

 

 

Reserves for

Yarn

Quality Claims

 

Balance at June 25, 2017

 

$

(1,278

)

Charged to costs and expenses

 

 

(843

)

Translation activity

 

 

(19

)

Deductions

 

 

1,397

 

Balance at March 25, 2018

 

$

(743

)

6


Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

 

 

 

5.  Inventories

Inventories consists of the following:

 

 

 

March 25, 2018

 

 

June 25, 2017

 

Raw materials

 

$

45,210

 

 

$

36,748

 

Supplies

 

 

7,192

 

 

 

6,104

 

Work in process

 

 

8,012

 

 

 

7,399

 

Finished goods

 

 

63,049

 

 

 

63,121

 

Gross inventories

 

 

123,463

 

 

 

113,372

 

Inventory reserves

 

 

(2,170

)

 

 

(1,967

)

Total inventories

 

$

121,293

 

 

$

111,405

 

 

 

6.  Property, Plant and Equipment, Net

Property, plant and equipment, net (“PP&E”) consists of the following:

 

 

 

March 25, 2018

 

 

June 25, 2017

 

Land

 

$

2,938

 

 

$

2,931

 

Land improvements

 

 

15,118

 

 

 

15,066

 

Buildings and improvements

 

 

158,590

 

 

 

157,115

 

Assets under capital leases

 

 

34,568

 

 

 

34,568

 

Machinery and equipment

 

 

590,952

 

 

 

579,211

 

Computers, software and office equipment

 

 

19,282

 

 

 

19,360

 

Transportation equipment

 

 

4,988

 

 

 

4,798

 

Construction in progress

 

 

7,214

 

 

 

7,371

 

Gross property, plant and equipment

 

 

833,650

 

 

 

820,420

 

Less: accumulated depreciation

 

 

(623,240

)

 

 

(612,355

)

Less: accumulated amortization – capital leases

 

 

(6,697

)

 

 

(4,677

)

Total PP&E

 

$

203,713

 

 

$

203,388

 

 

 

 

 

 

 

 

 

 

Depreciation expense and repair and maintenance expenses were as follows:

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

March 25, 2018

 

 

March 26, 2017

 

 

March 25, 2018

 

 

March 26, 2017

 

Depreciation expense

 

$

5,387

 

 

$

4,733

 

 

$

15,747

 

 

$

13,433

 

Repair and maintenance expenses

 

 

5,024

 

 

 

4,770

 

 

 

14,528

 

 

 

13,524

 

 

 

7.  Accrued Expenses

Accrued expenses consists of the following:

 

 

 

March 25, 2018

 

 

June 25, 2017

 

Payroll and fringe benefits

 

$

11,010

 

 

$

10,469

 

Other

 

 

5,029

 

 

 

5,675

 

Total accrued expenses

 

$

16,039

 

 

$

16,144

 

 

Other consists primarily of accruals for utilities, property taxes, employee-related claims and payments, interest, marketing expenses, freight expenses, rent, other non-income related taxes and deferred revenue.

7


Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

 

8.  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:

 

 

 

 

 

Weighted Average

 

 

 

 

 

 

Scheduled

 

Interest Rate as of

 

 

Principal Amounts as of

 

 

 

Maturity Date

 

March 25, 2018

 

 

March 25, 2018

 

 

June 25, 2017

 

ABL Revolver

 

March 2020

 

3.1%

 

 

$

19,000

 

 

$

9,300

 

ABL Term Loan (1)

 

March 2020

 

3.4%

 

 

 

87,500

 

 

 

95,000

 

Capital lease obligations

 

(2)

 

3.7%

 

 

 

19,882

 

 

 

25,168

 

Total debt

 

 

 

 

 

 

 

 

126,382

 

 

 

129,468

 

Current portion of capital lease obligations

 

 

 

 

 

 

 

 

(7,076

)

 

 

(7,060

)

Current portion of other long-term debt

 

 

 

 

 

 

 

 

(10,000

)

 

 

(10,000

)

Unamortized debt issuance costs

 

 

 

 

 

 

 

 

(748

)

 

 

(1,026

)

Total long-term debt

 

 

 

 

 

 

 

$

108,558

 

 

$

111,382

 

 

(1)

Includes the effects of interest rate swaps.

(2)

Scheduled maturity dates for capital lease obligations range from July 2018 to November 2027.

ABL Facility

On March 26, 2015, Unifi, Inc. and its subsidiary, Unifi Manufacturing, Inc., entered into an Amended and Restated Credit Agreement for a $200,000 senior secured credit facility (the “ABL Facility”) with a syndicate of lenders.  The ABL Facility consists of 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 March 26, 2020.

Scheduled Debt Maturities

The following table presents the scheduled maturities of UNIFI’s outstanding debt obligations for the remainder of fiscal 2018 and the fiscal years thereafter:

 

 

 

Fiscal 2018

 

 

Fiscal 2019

 

 

Fiscal 2020

 

 

Fiscal 2021

 

 

Fiscal 2022

 

 

Thereafter

 

ABL Revolver

 

$

 

 

$

 

 

$

19,000

 

 

$

 

 

$

 

 

$

 

ABL Term Loan

 

 

2,500

 

 

 

10,000

 

 

 

75,000

 

 

 

 

 

 

 

 

 

 

Capital lease obligations

 

 

1,774

 

 

 

6,996

 

 

 

5,519

 

 

 

2,624

 

 

 

2,417

 

 

 

552

 

Total

 

$

4,274

 

 

$

16,996

 

 

$

99,519

 

 

$

2,624

 

 

$

2,417

 

 

$

552

 

  

 

9.  Other Long-Term Liabilities

Other long-term liabilities consists of the following:

 

 

 

March 25, 2018

 

 

June 25, 2017

 

Uncertain tax positions

 

$

5,409

 

 

$

5,077

 

Other

 

 

5,495

 

 

 

6,727

 

Total other long-term liabilities

 

$

10,904

 

 

$

11,804

 

 

Other primarily includes UNIFI’s unfunded supplemental key employee post-employment plan, certain retiree and post-employment medical and disability liabilities, deferred revenue and deferred energy incentive credits.

 

10.  Income Taxes

The provision (benefit) for income taxes was as follows:

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

March 25, 2018

 

 

March 26, 2017

 

 

March 25, 2018

 

 

March 26, 2017

 

Provision (benefit) for income taxes

 

$

946

 

 

$

831

 

 

$

(684

)

 

$

6,481

 

Effective tax rate

 

 

84.3

%

 

 

8.3

%

 

 

(3.4

)%

 

 

22.2

%

 

 

H.R. 1, formerly known as the Tax Cuts and Jobs Act, was enacted on December 22, 2017.  H.R. 1 includes significant changes to existing tax law, including a permanent reduction to the U.S. federal corporate income tax rate from 35% to 21%, a one-time mandatory deemed repatriation of foreign earning and profits (the “toll charge”), deductions, credits and business-related exclusions.

 

8


Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

 

The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% was effective January 1, 2018. When a U.S. federal tax rate change occurs during a fiscal year, taxpayers are required to compute a weighted daily average rate for the fiscal year of enactment. As a result of H.R. 1, UNIFI has calculated a U.S. federal corporate income tax rate of 28.27% for its fiscal 2018 tax year.

 

The effective tax rate for the three months ended March 25, 2018 is higher than the U.S. statutory tax rate primarily due to an increase in the valuation allowance for the Company’s investment in PAL, the rate change impact on a U.S. net loss carryforward generated in the current period that will be used at a lower tax rate in the future, and additional limitations on the deductibility of compensation under Section 162(m) of the Internal Revenue Code of 1986 as amended (the “IRC”).

 

The effective tax rate for the nine months ended March 25, 2018 is lower than the U.S. statutory tax rate primarily due to the one-time tax benefit resulting from the revaluation of UNIFI’s domestic deferred tax balances for the lower U.S. statutory tax rate, the release of a valuation allowance on certain historical net operating losses (“NOLs”) and foreign income being taxed at lower rates. These benefits were partially offset by a provisional amount for the toll charge, net of foreign tax credits, and losses in tax jurisdictions for which no tax benefit can currently be recognized.

 

The effective tax rates for the three and nine months ended March 26, 2017 are lower than the U.S. statutory tax rate primarily due to foreign income being taxed at lower rates and a decrease in the valuation allowance for the Company’s investment in PAL, partially offset by losses in tax jurisdictions for which no tax benefit could be recognized and state and local income taxes net of federal benefits. Additionally, the effective tax rates for the three months and nine months ended March 26, 2017 include the benefit of increased research and development credits, partially offset by a corresponding reduction in the domestic production activities deduction.

                

UNIFI revalued its measurable deferred tax balances based upon the new tax rate at which the temporary differences and carryforwards are expected to reverse. UNIFI recorded a tax benefit of approximately $4,500 as a result of the net change in deferred tax balances. UNIFI determined that the impact of the U.S. federal corporate income tax rate change on the U.S. deferred tax assets and liabilities is provisional because the number cannot be calculated until the underlying timing differences are known rather than estimated.

 

Specific to the toll charge, UNIFI has recorded a $1,600 provisional charge, net of foreign tax credits, based on the following estimates: (i) earnings and profits of foreign jurisdictions that will not be complete until the end of fiscal 2018, (ii) the aggregate cash position at June 24, 2018 and (iii) finalization of taxes paid in foreign jurisdictions. Additionally, the estimates have been made based on UNIFI’s interpretation of H.R. 1. The U.S. Treasury has indicated in Notice 2018-07 and Notice 2018-26 that it expects to issue further guidance to clarify certain technical aspects of H.R. 1, which could impact UNIFI’s computations and provisional amounts recorded.  

 

During the three months ended March 25, 2018, UNIFI recorded a $100 decrease to the provisional amount of the toll charge, net of foreign tax credits and valuation allowance, which created an effective rate benefit of less than one percent. The measurement period adjustments are primarily due to refined estimates based on guidance issued by the U.S. Internal Revenue Service and the U.S. Treasury during the quarter.

 

Within the calculation of the annual effective tax rate, UNIFI has used assumptions and estimates that may change as a result of future guidance, interpretation, and rulemaking from the Internal Revenue Service, the SEC, the FASB and/or various other taxing authorities. For example, UNIFI anticipates that state taxing authorities will continue to determine and announce their conformity to H.R. 1 which could have an impact on UNIFI’s annual effective tax rate.

 

UNIFI continues to review the anticipated impacts of the global intangible low-taxed income (“GILTI”) and base erosion anti-abuse tax (“BEAT”), which are not effective until fiscal 2019. UNIFI has not recorded any impact associated with either GILTI or BEAT.

 

UNIFI has recorded all known and estimable impacts of H.R. 1 that are effective for fiscal 2018. Future adjustments to the provisional numbers will be recorded as discrete adjustments to income tax expense in the period in which those adjustments become estimable and/or are finalized.

UNIFI regularly assesses the outcomes of both completed and ongoing examinations to ensure that UNIFI’s provision for income taxes is sufficient. Certain returns that remain open to examination have utilized carryforward tax attributes generated in prior tax years, including NOLs, which could potentially be revised upon examination.  

UNIFI also regularly assesses whether it is more-likely-than-not that some portion or all of its deferred tax assets will not be realized.  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.  Due to new facts and circumstances in the second quarter of fiscal 2018, UNIFI has determined it can utilize certain NOLs to offset future taxable income and has reduced the corresponding valuation allowance by $3,807.  There was also a reduction to valuation allowances on U.S. deferred tax assets in the prior quarter as a result of the lower U.S. statutory tax rate under H.R. 1. UNIFI has increased the valuation allowance for foreign tax credits generated by the toll charge that cannot be claimed in the year of the mandatory repatriation.

The components of UNIFI’s deferred tax valuation allowance are as follows: 

 

 

 

March 25, 2018

 

 

June 25, 2017

 

Investment in a former domestic unconsolidated affiliate

 

$

(3,958

)

 

$

(6,269

)

Equity-method investment in PAL

 

 

(1,248

)

 

 

(1,520

)

Certain losses carried forward (1)

 

 

(1,548

)

 

 

(5,924

)

State NOLs

 

 

(108

)

 

 

(108

)

Other foreign NOLs (2)

 

 

(2,836

)

 

 

(3,347

)

Foreign tax credits

 

 

(1,836

)

 

 

(789

)

Total deferred tax valuation allowance

 

$

(11,534

)

 

$

(17,957

)

9


Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued)

 

 

(1)

Certain U.S. NOLs and capital losses outside the U.S. consolidated tax filing group. 

(2)

Presented net of certain NOL carryforward deferred tax assets.

 

 

11.  Shareholders’ Equity

 

 

 

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

 

 

71

 

 

 

7

 

 

 

212

 

 

 

 

 

 

 

 

 

219

 

Conversion of restricted stock units

 

 

29

 

 

 

3

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Common stock withheld in satisfaction of tax

   withholding obligations under net share settle

   transactions

 

 

(6

)

 

 

(1

)

 

 

(196

)

 

 

 

 

 

 

 

 

(197

)

Stock-based compensation

 

 

4

 

 

 

1

 

 

 

4,263

 

 

 

 

 

 

 

 

 

4,264

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,051

 

 

 

4,051

 

Net income

 

 

 

 

 

 

 

 

 

 

 

20,938

 

 

 

 

 

 

20,938

 

Balance at March 25, 2018

 

 

18,328

 

 

$

1,833

 

 

$

56,199

 

 

$

360,878

 

 

$

(28,829

)

 

$

390,081

 

 

No dividends were paid during the nine months ended March 25, 2018 or in the two most recently completed fiscal years.

 

12.  Stock-Based Compensation

The following table provides information as of March 25, 2018 with respect to the number of securities remaining available for future issuance under the Unifi, Inc. 2013 Incentive Compensation Plan (the “2013 Plan”):

 

Authorized under the 2013 Plan

 

 

1,000

 

Plus: Certain awards expired, forfeited or otherwise terminated unexercised

 

 

343

 

Less: Awards granted to employees

 

 

(720

)

Less: Awards granted to non-employee directors

 

 

(136

)

Available for issuance under the 2013 Plan

 

 

487

 

 

During the nine months ended March 25, 2018 and March 26, 2017, UNIFI granted stock options to purchase 73 and 128 shares of common stock, respectively.

During the nine months ended March 25, 2018 and March 26, 2017, UNIFI granted 116 and 31 restricted stock units (“RSUs”), respectively.

 

 

13.  Fair Value of Financial Instruments and Non-Financial Assets and Liabilities

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. The following table presents details regarding UNIFI’s hedging activities:

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

March 25, 2018

 

 

March 26, 2017

 

 

March 25, 2018

 

 

March 26, 2017

 

Interest expense

 

$

1,187

 

 

$

825

 

 

$

3,562

 

 

$

2,431

 

Increase in fair value of interest rate swaps

 

 

(1,142

)

 

 

(67

)

 

 

(2,634

)

 

 

(254

)

Impact of interest rate swaps on interest expense

 

 

65

 

 

 

36

 

 

 

319