unifi, Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 25, 2005
OR
o
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)
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New York
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11-2165495 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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P.O.
Box 19109 7201 West Friendly Avenue
Greensboro, NC |
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27419 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (336) 294-4410
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
þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Yes
þ No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes
o No þ
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange
Act. (Check one):
Large
accelerated filer o Accelerated
filer þ Non-accelerated filer o
The number of shares outstanding of the issuers common stock, par value $.10 per share, as of
January 31, 2006 was 52,195,434.
UNIFI, INC.
Form 10-Q for the Quarterly Period Ended December 25, 2005
INDEX
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Page |
Part I |
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Item 1. Financial Statements: |
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Financial |
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Condensed Consolidated Balance Sheets at December 25, 2005 and June 26, 2005 |
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3 |
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Information |
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Condensed Consolidated Statements of Operations
For the quarters and six-months ended December 25, 2005 And December 26, 2004 |
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4 |
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Condensed Consolidated Statements of Cash Flows
for the six-months ended December 25, 2005 and
December 26, 2004 |
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5 |
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Notes to Condensed Consolidated Financial Statements |
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6 |
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Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |
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21 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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36 |
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Item 4. Controls and Procedures |
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36 |
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Part II |
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Other |
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Item 1. Legal Proceedings |
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37 |
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Information |
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Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds |
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37 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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38 |
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Item 6. Exhibits |
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38 |
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2
Part. I Financial Information
Item 1. Financial Statements
UNIFI, INC.
Condensed Consolidated Balance Sheets
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December 25, |
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June 26, |
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2005 |
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2005 |
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(Unaudited) |
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(Note) |
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(Amounts in thousands) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
85,019 |
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$ |
105,621 |
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Receivables, net |
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94,075 |
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106,437 |
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Inventories |
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109,572 |
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110,827 |
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Deferred income taxes |
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11,711 |
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14,578 |
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Assets held for sale |
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10,694 |
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Restricted cash |
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2,766 |
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Other current assets |
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11,335 |
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15,590 |
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Total current assets |
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311,712 |
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366,513 |
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Property, plant and equipment |
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1,057,672 |
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1,056,563 |
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Less accumulated depreciation |
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(776,764 |
) |
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(754,989 |
) |
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280,908 |
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301,574 |
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Investments in unconsolidated affiliates |
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192,090 |
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160,675 |
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Other noncurrent assets |
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15,731 |
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16,613 |
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Total assets |
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$ |
800,441 |
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$ |
845,375 |
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LIABILITIES AND SHAREHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
63,197 |
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$ |
62,666 |
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Accrued expenses |
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31,103 |
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45,618 |
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Income taxes payable |
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2,054 |
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2,292 |
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Current maturities of long-term debt and other
current liabilities |
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8,929 |
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35,339 |
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Total current liabilities |
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105,283 |
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145,915 |
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Long-term debt and other liabilities |
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260,738 |
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259,790 |
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Deferred income taxes |
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49,539 |
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55,913 |
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Minority interest |
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182 |
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Commitments and contingencies |
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Shareholders equity: |
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Common stock |
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5,213 |
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5,215 |
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Capital in excess of par value |
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374 |
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208 |
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Retained earnings |
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389,594 |
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396,448 |
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Unearned compensation |
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(128 |
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Accumulated other comprehensive loss |
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(10,300 |
) |
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(18,168 |
) |
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384,881 |
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383,575 |
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Total liabilities and shareholders equity |
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$ |
800,441 |
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$ |
845,375 |
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See accompanying notes to condensed consolidated financial statements.
3
UNIFI, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
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For the Quarters Ended |
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For the Six-Months Ended |
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Dec. 25, |
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Dec. 26, |
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Dec. 25, |
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Dec. 26, |
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2005 |
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2004 |
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2005 |
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2004 |
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(Amounts in thousands, except per share data) |
Net sales |
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$ |
192,300 |
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$ |
208,412 |
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$ |
377,741 |
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$ |
388,002 |
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Cost of sales |
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183,207 |
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198,669 |
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361,126 |
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367,523 |
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Selling, general & administrative expenses |
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10,694 |
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10,009 |
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21,675 |
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19,514 |
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Provision for bad debts |
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604 |
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3,828 |
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1,131 |
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4,648 |
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Interest expense |
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4,659 |
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5,293 |
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9,436 |
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9,958 |
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Interest income |
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(1,144 |
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(467 |
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(2,421 |
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(840 |
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Other (income) expense, net |
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(724 |
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(127 |
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(1,575 |
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(401 |
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Equity in earnings of unconsolidated
affiliates |
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(18 |
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(712 |
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(1,842 |
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(1,866 |
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Minority interest income |
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(309 |
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(497 |
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Restructuring charges |
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29 |
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Write down of long-lived assets |
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1,500 |
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Loss from continuing operations
before income taxes and extraordinary item |
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(4,978 |
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(7,772 |
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(11,318 |
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(10,037 |
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Benefit for income taxes |
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(1,272 |
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(2,710 |
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(1,953 |
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(3,815 |
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Loss from continuing operations before
extraordinary item |
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(3,706 |
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(5,062 |
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(9,365 |
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(6,222 |
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Income (loss) from discontinued operations
net of tax |
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(270 |
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(2,684 |
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2,511 |
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(24,079 |
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Extraordinary gain net of taxes of $0 |
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208 |
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Net loss |
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$ |
(3,768 |
) |
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$ |
(7,746 |
) |
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$ |
(6,854 |
) |
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$ |
(30,301 |
) |
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Earnings (losses) per common share
(basic and diluted): |
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Net loss continuing operations |
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$ |
(.07 |
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$ |
(.10 |
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$ |
(.18 |
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$ |
(.12 |
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Net income (loss) discontinued
operations |
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(.05 |
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.05 |
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(.46 |
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Extraordinary gain (loss) |
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Net loss basic and diluted |
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$ |
(.07 |
) |
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$ |
(.15 |
) |
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$ |
(.13 |
) |
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$ |
(.58 |
) |
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Weighted average outstanding shares of
common stock (basic and diluted) |
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52,127 |
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52,095 |
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52,127 |
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52,086 |
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See accompanying notes to condensed consolidated financial statements.
4
UNIFI, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
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For the Six-Months Ended |
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December 25, |
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December 26, |
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2005 |
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2004 |
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(Amounts in thousands) |
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Cash and cash equivalents at the beginning of year |
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$ |
105,621 |
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$ |
65,221 |
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Operating activities: |
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Net loss from continuing operations |
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(9,365 |
) |
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(6,222 |
) |
Adjustments to reconcile net loss to net cash
provided by continuing operating activities: |
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Net income of unconsolidated equity affiliates, net of
distributions |
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288 |
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496 |
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Depreciation |
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24,688 |
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25,118 |
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Amortization |
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642 |
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628 |
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Net gain on asset sales |
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(365 |
) |
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(586 |
) |
Non-cash portion of restructuring charges |
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29 |
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Non-cash writedown of long-lived assets |
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1,500 |
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Deferred income tax |
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(3,255 |
) |
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(8,835 |
) |
Provision for bad debt and quality claims |
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1,131 |
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4,648 |
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Other noncurrent assets |
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4,109 |
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Other |
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(32 |
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(239 |
) |
Change in assets and liabilities, excluding
effects of acquisitions and foreign currency adjustments |
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331 |
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(12,678 |
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Net cash provided by continuing operating activities |
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15,592 |
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6,439 |
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Investing activities: |
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Capital expenditures |
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(7,614 |
) |
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(3,642 |
) |
Investment in equity affiliates |
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(30,388 |
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(444 |
) |
Investment in foreign restricted assets |
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158 |
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(262 |
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Collection of notes receivable |
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236 |
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204 |
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Decrease in restricted cash |
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2,766 |
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Proceeds from sale of capital assets |
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2,376 |
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|
621 |
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Return of capital from equity affiliates |
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|
6,138 |
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Increase in notes receivable |
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(139 |
) |
Other |
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(28 |
) |
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(456 |
) |
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Net cash (used in) provided by investing activities |
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(32,494 |
) |
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|
2,020 |
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Financing activities: |
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Payment of long-term debt |
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(24,407 |
) |
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Common stock issued upon exercise of options |
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|
104 |
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Other |
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40 |
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(70 |
) |
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Net cash (used in) provided by financing activities |
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(24,367 |
) |
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34 |
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Discontinued operations and net changes in assets held for sale |
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20,544 |
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(22,566 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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123 |
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|
1,803 |
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Net decrease in cash and cash equivalents |
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(20,602 |
) |
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(12,270 |
) |
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Cash and cash equivalents at end of period |
|
$ |
85,019 |
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$ |
52,951 |
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|
See accompanying notes to condensed consolidated financial statements.
5
UNIFI, INC.
Notes to Condensed Consolidated Financial Statements
1. |
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Basis of Presentation |
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The balance sheet at June 26, 2005, has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by U.S. generally
accepted accounting principles for complete financial statements. Except as noted with respect
to the balance sheet at June 26, 2005, the information furnished is unaudited and reflects all
adjustments which are, in the opinion of management, necessary to present fairly the financial
position at December 25, 2005, and the results of operations and Condensed Consolidated
Statements of Cash Flows for the periods ended December 25, 2005 and December 26, 2004. Such
adjustments consisted of normal recurring items necessary for fair presentation in conformity
with U.S. generally accepted accounting principles. Preparing financial statements requires
management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from these estimates. Interim
results are not necessarily indicative of results for a full year. The information included in
this Form 10-Q should be read in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and notes thereto
included in the Companys Form 10-K for the fiscal year ended June 26, 2005. Certain prior year
amounts have been reclassified to conform to current year presentation. |
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|
The significant accounting policies followed by the Company are presented on pages 38 to 43 of
the Companys Annual Report on Form 10-K for the fiscal year ended June 26, 2005. These
policies have not materially changed from the disclosure in that report. |
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2. |
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Inventories |
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|
Inventories were comprised of the following (amounts in thousands): |
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|
|
|
|
December 25, |
|
|
June 26, |
|
|
|
2005 |
|
|
2005 |
|
Raw materials and supplies |
|
$ |
46,613 |
|
|
$ |
47,441 |
|
Work in process |
|
|
8,798 |
|
|
|
8,497 |
|
Finished goods |
|
|
54,161 |
|
|
|
54,889 |
|
|
|
|
|
|
|
|
|
|
$ |
109,572 |
|
|
$ |
110,827 |
|
|
|
|
|
|
|
|
3. |
|
Accrued Expenses |
|
|
|
Accrued expenses were comprised of the following (amounts in thousands): |
|
|
|
|
|
|
|
|
|
|
|
December 25, |
|
|
June 26, |
|
|
|
2005 |
|
|
2005 |
|
Payroll and fringe benefits |
|
$ |
8,406 |
|
|
$ |
14,790 |
|
Severance |
|
|
1,343 |
|
|
|
5,252 |
|
Interest |
|
|
6,665 |
|
|
|
7,325 |
|
Pension |
|
|
2,288 |
|
|
|
6,141 |
|
Utilities |
|
|
3,220 |
|
|
|
3,085 |
|
Property taxes |
|
|
3,504 |
|
|
|
2,124 |
|
Other |
|
|
5,677 |
|
|
|
6,901 |
|
|
|
|
|
|
|
|
|
|
$ |
31,103 |
|
|
$ |
45,618 |
|
|
|
|
|
|
|
|
6
4. |
|
Income Taxes |
|
|
|
The Companys income tax benefit from continuing operations for the quarter ended December
25, 2005 equated to an effective tax rate of 25.6% compared to the quarter ended December 26,
2004 which equated to an effective tax rate of 34.9%. The primary differences between the
Companys income tax benefit from continuing operations and the U.S. statutory rate for the
quarter ended December 25, 2005 was due to an increase in the valuation allowance for state tax
credits and income from certain foreign operations being taxed at a lower effective tax rate.
The Companys income tax benefit from continuing operations for the year-to-date period ended
December 25, 2005 equated to an effective tax rate of 17.3% compared to the year-to-date period
ended December 26, 2004 which equated to an effective tax rate of 38.0%. The primary
differences between the Companys income tax benefit from continuing operations and the U.S.
statutory rate for the year-to-date period ended December 25, 2005 was due to an increase in the
valuation allowance for state tax credits, an accrual related to a portion of the second
repatriation plan under the provisions of the American Jobs Act of 2004 (the Tax Act), and an
accrual for foreign income tax on currency related transactions. |
|
|
|
The Tax Act creates a temporary incentive for U.S. multinational corporations to repatriate
accumulated income earned outside the U.S. by providing an 85% dividend received deduction for
certain dividends from controlled foreign corporations. According to the Tax Act, the amount of
eligible repatriation is limited to $500 million or the amount described as permanently
reinvested earnings outside the U.S. in the most recent audited financial statements filed with
the Securities and Exchange Commission (the SEC) on or before June 30, 2003. On September 28,
2005, the Company completed its initial repatriation plan by repatriating $15.0 million from one
of its controlled foreign corporations. On October 19, 2005, Unifis Board of Directors and
Chief Executive Officer approved a second repatriation plan for up to $10.0 million. During the
quarter ended December 25, 2005, the Company repatriated $6.0 million under the second
repatriation plan. The Company has not made any changes to its position on the reinvestment of
other foreign earnings. |
|
|
|
Deferred income taxes have been provided for the temporary differences between financial
statement carrying amounts and the tax basis of existing assets and liabilities. The Company
has established a valuation allowance against its deferred tax assets relating to North Carolina
income tax credits. The valuation allowance increased $0.1 million and $0.2 million in the
quarters ended December 25, 2005 and December 26, 2004, respectively. The valuation allowance
increased $0.4 million and $0.2 million in the year-to-date periods ended December 25, 2005 and
December 26, 2004, respectively. The increases in the valuation allowance are due to lower
estimates of future state taxable income. |
|
|
|
The amount of tax expense included in discontinued operations net of taxes is as follows
(amounts in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended |
|
|
For the Six-Months Ended |
|
|
|
December 25, |
|
|
December 26, |
|
|
December 25, |
|
|
December 26, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Tax expense-discontinued operations |
|
$ |
|
|
|
$ |
13 |
|
|
$ |
|
|
|
$ |
17 |
|
5. |
|
Comprehensive Income (Loss) |
|
|
|
Comprehensive loss amounted to $7.1 million for the second quarter of fiscal 2006 and
comprehensive income was $1.0 million for the year-to-date period, compared to comprehensive
losses of $1.5 million and $19.0 million for the second quarter and year-to-date periods of
fiscal 2005, |
7
respectively. Comprehensive income (loss) is comprised of net losses of $3.8 million and $6.8
million for the second quarter and year-to-date periods of fiscal 2006, respectively; and
foreign translation adjustments of $(3.4) million and $7.9 million for the second quarter and
year-to-date periods of fiscal 2006, respectively. Comparatively, comprehensive losses for the
corresponding periods in the prior year were derived from net losses of $7.7 million and $30.3
million, and foreign translation adjustments of $6.3 million and $11.3 million. The Company
does not provide income taxes on the impact of currency translations as earnings from foreign
subsidiaries are deemed to be permanently invested.
6. |
|
Recent Accounting Pronouncements |
|
|
|
In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4 (SFAS No. 151) which clarifies, that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted materials (spoilage) are required to
be recognized as current period charges. The provisions of SFAS No. 151 are effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. In the first
quarter fiscal 2006, the Company completed its evaluation of the provisions of SFAS No. 151 and
determined that its adoption did not have a material impact on the Companys consolidated
financial position or results of operations. |
|
|
|
In December 2004, the FASB finalized SFAS No. 123(R) Shared-Based Payment (SFAS No.
123R) which, after the SEC amended the compliance dates on April 15, 2005, is effective for the
Companys current fiscal year. The new standard requires the Company to record compensation
expense for stock options using a fair value method. On March 29, 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB No. 107), which provides the Staffs views regarding
interactions between SFAS No. 123R and certain SEC rules and regulations and provides
interpretation of the valuation of share-based payments for public companies. See Note 8
Stock-Based Compensation for further discussion of the impact of SFAS No. 123R on the Company. |
|
7. |
|
Segment Disclosures |
|
|
|
The following is the Companys selected segment information for the quarter and six-month
periods ended December 25, 2005 and December 26, 2004 (amounts in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
|
Nylon |
|
|
Sourcing |
|
|
Total |
|
Quarter ended December 25, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
146,789 |
|
|
$ |
44,328 |
|
|
$ |
1,183 |
|
|
$ |
192,300 |
|
Intersegment net sales |
|
|
1,076 |
|
|
|
1,227 |
|
|
|
|
|
|
|
2,303 |
|
Segment operating loss |
|
|
(280 |
) |
|
|
(812 |
) |
|
|
(509 |
) |
|
|
(1,601 |
) |
Depreciation and amortization |
|
|
7,625 |
|
|
|
3,723 |
|
|
|
|
|
|
|
11,348 |
|
Total assets |
|
|
377,751 |
|
|
|
134,900 |
|
|
|
1,975 |
|
|
|
514,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended December 26, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
156,291 |
|
|
$ |
50,396 |
|
|
$ |
1,725 |
|
|
$ |
208,412 |
|
Intersegment net sales |
|
|
1,933 |
|
|
|
1,418 |
|
|
|
|
|
|
|
3,351 |
|
Segment operating income (loss) |
|
|
4,811 |
|
|
|
(4,871 |
) |
|
|
(206 |
) |
|
|
(266 |
) |
Depreciation and amortization |
|
|
7,701 |
|
|
|
3,730 |
|
|
|
|
|
|
|
11,431 |
|
Total assets |
|
|
478,134 |
|
|
|
177,741 |
|
|
|
2,150 |
|
|
|
658,025 |
|
8
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended |
|
|
|
December 25, |
|
|
December 26, |
|
|
|
2005 |
|
|
2004 |
|
Reconciliation of segment operating loss
to net loss from continuing
operations before
income taxes and extraordinary item: |
|
|
|
|
|
|
|
|
Reportable segments operating loss |
|
$ |
(1,601 |
) |
|
$ |
(266 |
) |
Provision for bad debts |
|
|
604 |
|
|
|
3,828 |
|
Interest expense, net |
|
|
3,515 |
|
|
|
4,826 |
|
Other (income) expense, net |
|
|
(724 |
) |
|
|
(127 |
) |
Equity in earnings of
unconsolidated affiliates |
|
|
(18 |
) |
|
|
(712 |
) |
Minority interest income |
|
|
|
|
|
|
(309 |
) |
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes and extraordinary item |
|
$ |
(4,978 |
) |
|
$ |
(7,772 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
|
Nylon |
|
|
Sourcing |
|
|
Total |
|
Six-Months ended December 25, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
280,957 |
|
|
$ |
93,262 |
|
|
$ |
3,522 |
|
|
$ |
377,741 |
|
Intersegment net sales |
|
|
2,756 |
|
|
|
2,406 |
|
|
|
|
|
|
|
5,162 |
|
Segment operating loss |
|
|
(1,475 |
) |
|
|
(3,229 |
) |
|
|
(1,885 |
) |
|
|
(6,589 |
) |
Depreciation and amortization |
|
|
15,349 |
|
|
|
7,427 |
|
|
|
|
|
|
|
22,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Months ended December 26, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers |
|
$ |
278,521 |
|
|
$ |
107,159 |
|
|
$ |
2,322 |
|
|
$ |
388,002 |
|
Intersegment net sales |
|
|
2,843 |
|
|
|
2,858 |
|
|
|
|
|
|
|
5,701 |
|
Segment operating income (loss) |
|
|
6,830 |
|
|
|
(5,361 |
) |
|
|
(504 |
) |
|
|
965 |
|
Depreciation and amortization |
|
|
15,676 |
|
|
|
7,445 |
|
|
|
|
|
|
|
23,121 |
|
|
|
|
|
|
|
|
|
|
|
|
For the Six-Months Ended |
|
|
|
December 25, |
|
|
December 26, |
|
|
|
2005 |
|
|
2004 |
|
Reconciliation of segment operating income
(loss) to net loss from continuing operations
before income taxes and extraordinary item: |
|
|
|
|
|
|
|
|
Reportable segments operating income (loss) |
|
$ |
(6,589 |
) |
|
$ |
965 |
|
Provision for bad debts |
|
|
1,131 |
|
|
|
4,648 |
|
Interest expense, net |
|
|
7,015 |
|
|
|
9,118 |
|
Other (income) expense, net |
|
|
(1,575 |
) |
|
|
(401 |
) |
Equity in earnings of
unconsolidated affiliates |
|
|
(1,842 |
) |
|
|
(1,866 |
) |
Minority interest income |
|
|
|
|
|
|
(497 |
) |
|
|
|
|
|
|
|
Loss from continuing operations before
income taxes and extraordinary item |
|
$ |
(11,318 |
) |
|
$ |
(10,037 |
) |
|
|
|
|
|
|
|
9
|
|
For purposes of internal management reporting, segment operating income (loss) represents net
sales less cost of sales and allocated selling, general and administrative expenses. Certain
indirect manufacturing and selling, general and administrative costs are allocated to the
operating segments based on activity drivers relevant to the respective costs. |
|
|
|
On July 28, 2005, the Company announced that management had decided to discontinue the
operations of the Companys external sourcing business, Unimatrix Americas. Managements exit
plan is currently in place and is expected to be complete by the end of the third quarter fiscal
2006. There were no restructuring charges incurred related to this liquidation. |
|
|
|
The primary differences between the segmented financial information of the operating segments,
as reported to management and the Companys consolidated reporting relate to intersegment sales
of yarn and the associated fiber costs, the provision for bad debts, and certain unallocated
selling, general and administrative expenses. |
|
|
|
Fiber costs of the Companys domestic operating divisions are valued on a standard cost basis,
which approximates first-in, first-out accounting. For those components of inventory valued
utilizing the last-in, first-out (LIFO) method, an adjustment is made at the segment level to
record the difference between standard cost and LIFO. Segment operating income (loss) excluded
the provision for bad debts of $0.6 million and $3.8 million for the current and prior year
second quarters, compared to $1.1 million and $4.6 million for the fiscal 2006 and 2005
year-to-date periods, respectively. |
|
|
|
The total assets for the polyester segment decreased from $431.5 million at June 26, 2005 to
$377.8 million at December 25, 2005 due primarily to decreases in cash, accounts receivable,
assets held for sale, fixed assets, other current assets and deferred taxes of $30.2 million,
$11.3 million, $10.7 million, $9.7 million, $1.3 million and $0.8 million, respectively. These
decreases were offset by increases in inventories and other long-term assets of $7.8 million and
$2.5 million, respectively. The total assets for the nylon segment decreased from $157.4
million at June 26, 2005 to $134.9 million at December 25, 2005 due primarily to decreases in
fixed assets, inventories, accounts receivable, cash, and other long-term assets of $9.6
million, $7.8 million, $5.4 million, $1.3 million and $0.1 million, respectively. These
decreases were offset by increases in deferred income taxes and other current assets of $1.6
million and $0.1 million, respectively. |
|
8. |
|
Stock-Based Compensation |
|
|
|
In December 2004, the FASB issued SFAS No. 123R as a replacement to SFAS No. 123 Accounting for
Stock-Based Compensation. SFAS No. 123R supersedes APB No. 25 which allowed companies to use
the intrinsic method of valuing share-based payment transactions. SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options, to be recognized
in the financial statements based on the fair-value method as defined in SFAS No. 123. On March
29, 2005, the SEC issued SAB No. 107 to provide guidance regarding the adoption of SFAS No. 123R
and disclosures in Managements Discussion and Analysis. The effective date of SFAS No. 123R
was modified by SAB No. 107 to begin with the first annual reporting period of the registrants
first fiscal year beginning on or after June 15, 2005. Accordingly, the Company implemented
SFAS No. 123R effective June 27, 2005. |
|
|
|
Previously the Company measured compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock
Issued to Employees as permitted by SFAS No. 123 and SFAS No. 148 Accounting for Stock-Based
Compensation Transition and Disclosure. Had the fair value-based method under SFAS No. 123
been applied, compensation expense would have been recorded for the options outstanding based on
their respective vesting schedules. |
10
The Company currently has only one share-based compensation plan which had unvested stock
options as of December 25, 2005. The compensation cost that was charged against income for this
plan was $0.1 million and $0 for the quarters ended December 25, 2005 and December 26, 2004,
respectively and $0.3 million and $0 for the six-month periods ended December 25, 2005 and
December 26, 2004, respectively. The total income tax benefit recognized for share-based
compensation in the Condensed Consolidated Statements of Operations was not material for the
second quarter or year-to-date periods ended December 25, 2005 and December 26, 2004.
During the first half of fiscal 2005, the Board authorized the issuance of approximately 2.1
million stock options from the 1999 Long-Term Incentive Plan to certain key employees. The
stock options vest in three equal installments the first one-third at the time of grant, the
next one-third on the first anniversary of the grant and the final one-third on the second
anniversary of the grant.
On April 20, 2005, the Board of Directors approved a resolution to vest all stock options, in
which the exercise price exceeds the closing price of the stock on April 20, 2005, granted prior
to June 26, 2005. The Board decided to fully vest these specific underwater options, as there
is no perceived value in these options to the employee, little retention ramifications, and to
minimize the expense to the Companys consolidated financial statements upon adoption of SFAS
No. 123R. No other modifications were made to the stock option plan except for the accelerated
vesting. This acceleration of the original vesting schedules affected 0.3 million unvested
stock options.
Net income (loss) on a pro forma basis assuming the fair value recognition provisions of SFAS
No. 123 had been applied to periods ending prior to June 27, 2005 would have been as follows
(amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
For Six-Months Ended |
|
|
|
December 26, 2004 |
|
|
December 26, 2004 |
|
Net loss as reported |
|
$ |
(7,746 |
) |
|
$ |
(30,301 |
) |
Add: Total
stock-based employee compensation expense included in
reported net income, net of related tax effects |
|
|
|
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects |
|
|
(419 |
) |
|
|
(1,780 |
) |
|
|
|
|
|
|
|
Pro forma net loss |
|
$ |
(8,165 |
) |
|
$ |
(32,081 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (losses) per share: |
|
|
|
|
|
|
|
|
Basic and diluted as reported |
|
$ |
(.15 |
) |
|
$ |
(.58 |
) |
Basic and diluted pro forma |
|
|
(.16 |
) |
|
|
(.62 |
) |
SFAS No. 123R requires the Company to record compensation expense for stock options using the
fair value method. The Company decided to adopt SFAS No. 123R using the Modified Prospective
Transition Method in which compensation cost is recognized for share-based payments based on the
grant date fair value from the beginning of the fiscal period in which the recognition
provisions are first applied. The effect of the change from applying the intrinsic method of
accounting for stock options under APB 25, previously permitted by SFAS No. 123 as an
alternative to the fair value recognition method, to the fair value recognition provisions of
SFAS No. 123 on income from continuing operations before income taxes, income from continuing
operations and net income for the year-to-date period ended December 25, 2005 was $0.3 million,
$0.3 million and $0.3 million, respectively. There
11
was no change from applying the original
provisions of SFAS No. 123 on cash flow from continuing operations, cash flow from financing
activities, and basic and diluted earnings per share.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
model.
No options were granted in the six-month period ended December 25, 2005. The Company uses
historical data to estimate the expected life, volatility, and estimated forfeitures of an
option. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the
time of grant.
On October 21, 1999, the shareholders of the Company approved the 1999 Unifi, Inc. Long-Term
Incentive Plan (1999 Long-Term Incentive Plan). The plan authorized the issuance of up to
6,000,000 shares of Common Stock pursuant to the grant or exercise of stock options, including
Incentive Stock Options (ISO), Non-Qualified Stock Options (NQSO) and restricted stock, but
not more than 3,000,000 shares may be issued as restricted stock. Option awards are granted with
an exercise price equal to the market price of the Companys stock at the date of grant.
Stock options granted under the plan have vesting periods of three to five years based on
continuous service by the employee. All stock options have a 10 year contractual term. In the
six-month period ended December 25, 2005, no incentive stock options were granted under the 1999
Long-Term Incentive Plan. In addition to the 3,757,209 common shares reserved for the options
that remain outstanding under grants from the 1999 Long-Term Incentive Plan, the Company has
previous ISO plans with 72,500 common shares reserved and previous NQSO plans with 296,667
common shares reserved at December 25, 2005. No additional options will be issued under any
previous ISO or NQSO plan. The stock option activity for the six-month period ended December 25,
2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISO |
|
|
NQSO |
|
|
|
Options |
|
|
Weighted |
|
|
Options |
|
|
Weighted |
|
|
|
Outstanding |
|
|
Avg.$/Share |
|
|
Outstanding |
|
|
Avg. $/Share |
|
Year-to-date Fiscal 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option beginning of year |
|
|
4,273,003 |
|
|
$ |
6.41 |
|
|
|
341,667 |
|
|
$ |
23.72 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(401,631 |
) |
|
|
9.74 |
|
|
|
(45,000 |
) |
|
|
29.13 |
|
Forfeited |
|
|
(41,663 |
) |
|
|
2.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares under option December 25, 2005 |
|
|
3,829,709 |
|
|
|
6.10 |
|
|
|
296,667 |
|
|
|
22.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the exercise prices, the number of options outstanding and
exercisable and the remaining contractual lives of the Companys stock options as of December
25, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted |
|
|
Contractual Life |
|
|
Number of |
|
|
Weighted |
|
|
|
Options |
|
|
Average |
|
|
Remaining |
|
|
Options |
|
|
Average |
|
Exercise price |
|
Outstanding |
|
|
Exercise Price |
|
|
(Years) |
|
|
Exercisable |
|
|
Exercise Price |
|
$2.76 $3.78 |
|
|
1,880,002 |
|
|
$ |
2.78 |
|
|
|
8.1 |
|
|
|
1,290,060 |
|
|
$ |
2.79 |
|
5.29
7.64 |
|
|
1,039,949 |
|
|
|
7.29 |
|
|
|
5.7 |
|
|
|
1,039,949 |
|
|
|
7.29 |
|
8.10 11.99 |
|
|
634,632 |
|
|
|
10.56 |
|
|
|
4.3 |
|
|
|
634,632 |
|
|
|
10.56 |
|
12.53 16.31 |
|
|
357,626 |
|
|
|
14.21 |
|
|
|
3.3 |
|
|
|
357,626 |
|
|
|
14.21 |
|
18.75 31.00 |
|
|
214,167 |
|
|
|
25.97 |
|
|
|
1.3 |
|
|
|
214,167 |
|
|
|
25.97 |
|
12
The following table sets forth certain required stock option information for the ISO and NQSO
plans as of December 25, 2005:
|
|
|
|
|
|
|
|
|
|
|
ISO |
|
|
NQSO |
|
Exercisable shares under option end of quarter |
|
|
3,239,767 |
|
|
|
296,667 |
|
Option price range |
|
$ |
2.76 $25.38 |
|
|
$ |
16.31 - $31.00 |
|
Weighted average exercise price for options exercisable |
|
$ |
6.71 |
|
|
$ |
22.90 |
|
Weighted average remaining life of shares under option |
|
|
6.5 |
|
|
|
1.8 |
|
Weighted average fair value of options granted |
|
|
N/A |
|
|
|
N/A |
|
Aggregate intrinsic value |
|
$ |
418,602 |
|
|
$ |
|
|
Number of shares under option expected to vest |
|
|
3,810,735 |
|
|
|
296,667 |
|
|
|
|
|
|
|
|
|
|
Weighted average price of shares under option
expected to vest |
|
$ |
6.12 |
|
|
$ |
22.90 |
|
Weighted average remaining life of shares under option
expected to vest |
|
|
6.4 |
|
|
|
1.8 |
|
Intrinsic value of shares under option expected to vest |
|
$ |
402,736 |
|
|
$ |
|
|
The Company has a policy of issuing new shares to satisfy share option exercises. The Company
has elected an accounting policy of accelerated attribution for graded vesting.
As of December 25, 2005, unrecognized compensation costs related to unvested share based
compensation arrangements granted under the 1999 Long-Term Incentive Plan was $0.3 million. The
costs are estimated to be recognized over a period of 1.1 years.
A summary of the status of the Companys unvested restricted stock as of December 25, 2005, and
changes during the six-month period ended December 25, 2005 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Shares |
|
|
Grant-Date Fair Value |
|
Year-to-date Fiscal 2006: |
|
|
|
|
|
|
|
|
Unvested shares as of June 26, 2005 |
|
|
19,300 |
|
|
$ |
7.15 |
|
Granted |
|
|
|
|
|
|
|
|
Vested |
|
|
(1,200 |
) |
|
|
10.68 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested shares as of December 25, 2005 |
|
|
18,100 |
|
|
|
6.48 |
|
|
|
|
|
|
|
|
|
9. |
|
Derivative Financial Instruments |
The Company accounts for derivative contracts and hedging activities under Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133) which requires all derivatives to be recorded on the balance sheet
at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The ineffective portion
of a derivatives change in fair value will be immediately recognized in earnings. The Company
does not enter into derivative financial instruments for trading purposes.
13
The Company conducts its business in various foreign currencies. As a result, it is subject to
the transaction exposure that arises from foreign exchange rate movements between the dates that
foreign currency transactions are recorded (export sales and purchase commitments) and the dates
they are settled (cash receipts and cash disbursements in foreign currencies). The Company
utilizes some natural hedging to mitigate these transaction exposures. The Company also enters
into foreign currency forward contracts for the purchase and sale of European, Canadian,
Brazilian and other currencies to hedge balance sheet and income statement currency exposures.
These contracts are principally entered into for the purchase of inventory and equipment and the
sale of Company products into export markets. Counterparties for these instruments are major
financial institutions.
Currency forward contracts are entered into to hedge exposure for sales in foreign currencies
based on specific sales orders with customers or for anticipated sales activity for a future
time period. Generally, 60-80% of the sales value of these orders is covered by forward
contracts. Maturity dates of the forward contracts attempt to match anticipated receivable
collections. The Company marks the outstanding accounts receivable and forward contracts to
market at month end and any realized and unrealized gains or losses are recorded as other income
and expense. The Company also enters currency forward contracts for committed or anticipated
equipment and inventory purchases. Generally, 50-75% of the asset cost is covered by forward
contracts although 100% of the asset cost may be covered by contracts in certain instances. On
February 22, 2005, the Company entered into a forward exchange contract for 15.0 million Euros
related to a contract to sell its European facility in Ireland. The Company was required by the
financial institution to deposit $2.8 million in an interest bearing collateral account to
secure its exposure to credit risk on the hedge contract. On July 1, 2005 the sale of the
European facility was completed and as a result the foreign exchange contract was closed on July
15, 2005 resulting in a realized currency gain of $1.7 million and the release of the $2.8
million security deposit. Forward contracts are matched with the anticipated date of delivery of
the assets and gains and losses are recorded as a component of the asset cost for purchase
transactions when the Company is firmly committed. The latest maturity date for all outstanding
purchase and sales foreign currency forward contracts is January 2006 and June 2006,
respectively.
The dollar equivalent of these forward currency contracts and their related fair values are
detailed below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 25, |
|
|
June 26, |
|
|
|
2005 |
|
|
2005 |
|
Foreign currency purchase contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
94 |
|
|
$ |
168 |
|
Fair value |
|
|
91 |
|
|
|
159 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
3 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
1,175 |
|
|
$ |
24,414 |
|
Fair value |
|
|
1,186 |
|
|
|
22,687 |
|
|
|
|
|
|
|
|
Net loss (gain) |
|
$ |
11 |
|
|
$ |
(1,727 |
) |
|
|
|
|
|
|
|
For the quarters ended December 25, 2005 and December 26, 2004, the total impact of foreign
currency related items on the Condensed Consolidated Statements of Operations, including
transactions that were hedged and those that were not hedged, was a pre-tax loss of $0.2 million
and $0.3 million, respectively. For the year-to-date periods ended December 25, 2005 and
December 26, 2004, the total impact of foreign currency related items was a pre-tax loss of $0.3
million for both periods.
14
10. |
|
Investments in Unconsolidated Affiliates |
On October 21, 2004, the Company announced that Unifi and Sinopec Yizheng Chemical Fiber Co.,
Ltd. (YCFC) signed a non-binding letter of intent to form a joint venture to manufacture,
process and market polyester filament yarn in YCFCs facilities in Yizheng, Jiangsu Province,
Peoples Republic of China. The plant, property and equipment that YCFC agreed to contribute to
the joint venture was operating throughout 2005. On June 10, 2005, Unifi and YCFC entered into
an Equity Joint Venture Contract (the JV Contract), to form Yihua Unifi Fibre Company Limited
(YUFI). Under the terms of the JV Contract, each company owns a 50% equity interest in the
joint venture. On August 3, 2005, the joint venture transaction closed and on August 4, 2005,
the Company contributed to YUFI its initial capital contribution of $15.0 million in cash. On
October 12, 2005, the Company transferred an additional $15.0 million to YUFI to complete the
capitalization of the joint venture. During the second quarter and year-to-date periods ended
December 25, 2005, the Company recognized equity losses relating to YUFI of $1.0 million and
$1.1 million, respectively and is currently reporting on a one month lag. In addition, the
Company recognized an additional $0.7 million and $1.2 million in operating expenses for the
second quarter and year-to-date periods of fiscal 2006, respectively, which were primarily
reflected on the Cost of sales line item in the Condensed Consolidated Statements of
Operations. These expenses are directly related to providing technological support in
accordance with the JV Contract.
The Company holds a 34% ownership interest in a joint venture named Parkdale America, LLC
(PAL). The joint venture partner is Parkdale Mills, Inc. located in Gastonia, North Carolina.
PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel industries
primarily within North America. PAL has 15 manufacturing facilities primarily located in
central and western North Carolina. During the quarter and year-to-date periods ended December
25, 2005, the Company had equity in earnings relating to PAL of $1.2 million and $3.3 million,
respectively, compared to earnings of $0.4 million and $1.2 million for the corresponding
periods in the prior year. See Note 16 Commitments and Contingencies for further discussion.
The Company and SANS Fibres of South Africa are partners in a 50/50 joint venture named
UNIFI-SANS Technical Fibers, LLC (USTF) which produces low-shrinkage high tenacity nylon 6.6
light denier industrial (LDI) yarns in North Carolina. Unifi manages the day-to-day
production and shipping of the LDI produced in North Carolina and SANS Fibres handles technical
support and sales. Sales from this entity are primarily to customers in the Americas.
Unifi and Nilit Ltd., located in Israel, are partners in a 50/50 joint venture named U.N.F
Industries Ltd (UNF). The joint venture produces nylon partially oriented yarn (POY) at
Nilits manufacturing facility in Migdal Ha Emek, Israel. The nylon POY is utilized in the
Companys nylon texturing and covering operations. UNF paid the Company a $1.0 million dividend
distribution from accumulated profits during the second quarter of fiscal 2006.
15
Condensed balance sheet information as of December 25, 2005, and income statement
information for the quarter and year-to-date periods ended December 25, 2005, of the combined
unconsolidated equity affiliates is as follows (amounts in thousands):
|
|
|
|
|
|
|
As of |
|
|
|
December 25, 2005 |
|
Current assets |
|
$ |
140,980 |
|
Noncurrent assets |
|
|
237,928 |
|
Current liabilities |
|
|
41,527 |
|
Shareholders equity and capital accounts |
|
|
283,000 |
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
For the Six-Months Ended |
|
|
|
December 25, 2005 |
|
|
December 25, 2005 |
|
Net sales |
|
$ |
135,030 |
|
|
$ |
262,020 |
|
Gross profit |
|
|
6,110 |
|
|
|
19,288 |
|
Income (loss) from operations |
|
|
(582 |
) |
|
|
7,006 |
|
Net income |
|
|
1,234 |
|
|
|
6,646 |
|
11. |
|
Consolidation and Cost Reduction Efforts |
In fiscal year 2003, the Company recorded charges of $16.9 million for severance and employee
related costs that were associated with the U.S. and European operations. Approximately 680
management and production level employees worldwide were affected by the reorganization. The
final severance payments were completed as of the end of the first quarter of fiscal 2006.
In fiscal 2004, the Company recorded restructuring charges of $27.7 million, which consisted of
$12.1 million of fixed asset write-downs associated with the closure of a dye facility in
Manchester, England and the consolidation of the Companys polyester operations in Ireland, $7.8
million of employee severance for approximately 280 management and production level employees,
$5.7 million in lease related costs associated with the closure of the facility in Altamahaw, NC
and other restructuring costs of $2.1 million primarily related to the various plant closures.
All payments, excluding the lease related costs which continue until May 2008, were completed as
of the end of the first quarter of fiscal 2006.
On October 19, 2004, the Company announced that it planned to curtail two production lines and
downsize its facility in Kinston, North Carolina, which had been acquired immediately prior to
such time. During the second quarter of fiscal year 2005, the Company recorded a severance
reserve of $10.7 million for approximately 500 production level employees and a restructuring
reserve of $0.4 million for the cancellation of certain warehouse leases. The entire $10.9
million restructuring reserve was recorded as assumed liabilities in purchase accounting. As a
result, there was no restructuring expense recorded in the Consolidated Statements of
Operations. During the third quarter of fiscal year 2005, management completed the curtailment
of both production lines as scheduled which resulted in an actual reduction of 388 production
level employees and a reduction to the initial restructuring reserve. During the first quarter
of fiscal 2006, management determined that there were additional costs relating to the
termination of two warehouse leases which resulted in a $0.2 million extraordinary loss. During
the second quarter of fiscal 2006, management negotiated a favorable settlement on the two
warehouse leases that resulted in a reduction to the reserve and the recognition of an
extraordinary gain of $0.2 million.
16
The table below summarizes changes to the accrued severance and accrued restructuring accounts
for the six-months ended December 25, 2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Fiscal 2006 |
|
|
Fiscal 2006 |
|
|
Fiscal 2006 |
|
|
Balance at |
|
|
|
June 26, 2005 |
|
|
Charge |
|
|
Adjustments |
|
|
Amount Used |
|
|
December 25, 2005 |
|
Accrued severance |
|
$ |
5,252 |
|
|
$ |
58 |
|
|
$ |
|
|
|
$ |
(3,968 |
) |
|
$ |
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
restructuring |
|
|
5,053 |
|
|
|
83 |
|
|
|
100 |
|
|
|
(886 |
) |
|
|
4,350 |
|
On August 29, 2005, the Company announced an initiative to improve the efficiency of its nylon
business unit which included the closing of Plant one in Mayodan, North Carolina and moving its
operations and offices to Plant three in nearby Madison, North Carolina which is the Nylon
divisions largest facility with over one million square feet of production space. In
connection with this initiative, the Company determined to offer for sale a plant, a warehouse
and a central distribution center, all of which are located in Mayodan, North Carolina. Based
on appraisals received in September 2005, the Company determined that one of the properties was
impaired and recorded an impairment charge of $1.5 million, which included $0.2 million in
estimated selling costs that will be paid from the proceeds of the sale when it occurs.
The Companys subsidiary in Ireland had a defined benefit plan (the DB Plan) that covered
substantially all of its employees and was funded by both employer and employee contributions.
The DB Plan provided defined retirement benefits based on years of service and the highest three
year average of earnings over the ten year period preceding retirement.
On July 28, 2004, the Company announced the closure of its European manufacturing operations,
and as a result, recorded a plan curtailment charge in fiscal 2005. The Company expects no
further charges as a result of the closure. See Note 15 Discontinued Operations for further
discussion of the closure.
The net periodic pension expense recognized in the second quarter and year-to-date period of
fiscal 2006 is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
|
For the Six-Month Ended |
|
|
|
December 25, 2005 |
|
|
December 25, 2005 |
|
Pension expense: |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
|
|
|
$ |
|
|
Interest costs |
|
|
596 |
|
|
|
1,208 |
|
Expected return on plan assets |
|
|
596 |
|
|
|
(1,208 |
) |
Plan curtailment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension expense |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
17
The Company has a $100.0 million asset based revolving credit agreement (the Credit Agreement)
that terminates on December 7, 2006. The Credit Agreement is secured by substantially all U.S.
assets excluding manufacturing facilities and manufacturing equipment. Borrowing availability
is based on eligible domestic accounts receivable and inventory.
As of December 25, 2005, the Company had no outstanding borrowings and had availability of
approximately $67.0 million under the terms of the Credit Agreement. Borrowings under the
Credit Agreement bear interest at rates selected periodically by the Company of LIBOR plus 1.75%
to 3.00% and/or prime plus 0.25% to 1.50%. The interest rate matrix is based on the Companys
leverage ratio of funded debt to EBITDA, as defined by the Credit Agreement. The interest rate
in effect at December 25, 2005, was 7.4%. Under the Credit Agreement, the Company pays an
unused line fee ranging from 0.25% to 0.50% per annum on the unused portion of the commitment.
The Credit Agreement contains customary covenants for asset based loans which restrict future
borrowings and capital spending and, if availability is less than $25.0 million at any time
during the quarter, include a required minimum fixed charge coverage ratio of 1.1 to 1.0 and a
required maximum leverage ratio of 5.0 to 1.0. At December 25, 2005, the Company was in
compliance with all covenants under the Credit Agreement as it had availability in excess of
$25.0 million.
On February 5, 1998, the Company issued $250 million of senior, unsecured debt securities which
bear a coupon rate of 6.5% and mature on February 1, 2008. The estimated fair value of the
notes, based on quoted market prices, at December 25, 2005 and June 26, 2005, was approximately
$207.5 million and $210.0 million, respectively. The Company makes semi-annual interest
payments of $8.1 million on the first business day of February and August.
As part of the acquisition of the Kinston facility from INVISTA and upon finalizing the
quantities and value of the acquired inventory, Unifi Kinston, LLC, a subsidiary of the Company,
entered into a $24.4 million five-year Loan Agreement. The loan, called for interest only
payments for the first two years, bore interest at 10% per annum and was payable in arrears each
quarter commencing December 31, 2004 until paid in full. On July 25, 2005 the Company paid off
the $24.4 million note payable, including accrued interest, associated with the acquisition of
the Kinston POY manufacturing facility.
15. |
|
Discontinued Operations |
On July 28, 2004, the Company announced its decision to close its European manufacturing
operations and associated sales offices throughout Europe (the European Division). The
manufacturing facilities in Ireland ceased operations on October 31, 2004. On February 24,
2005, the Company announced that it had entered into three separate contracts to sell the
property, plant and equipment of the European Division for approximately $38.0 million. Through
June 26, 2005, the Company received aggregate proceeds of $9.9 million from the sales contracts.
The Company received the remaining proceeds of $28.1 million during the first quarter of fiscal
year 2006, which resulted in a net gain of approximately $4.6 million. The European Divisions
assets held for sale were separately stated in the June 26, 2005 Consolidated Balance Sheet, and
the discontinued operations operating results are separately stated in the Consolidated
Statements of Operations for all periods presented. The assets held for sale were reported in
the Companys polyester segment.
18
The Companys dyed facility in Manchester, England was closed in June 2004 and any remaining
physical assets were abandoned in June 2005. In accordance with SFAS No. 144, the complete
abandonment of the business which occurred in June 2005 required the Company to reclassify the
operating results for this facility as discontinued operations for all periods presented.
Accordingly, prior period results have been restated to reflect the abandonment.
Results of operations of the European Division and the dyed facility in England for the
second quarter of fiscal 2006 and fiscal 2005 and for the year-to-date periods ended December
25, 2005 and December 26, 2004 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended |
|
|
For the Six-Months Ended |
|
|
|
December 25, |
|
|
December 26, |
|
|
December 25, |
|
|
December 26, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Net sales |
|
$ |
|
|
|
$ |
11,010 |
|
|
$ |
|
|
|
$ |
22,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before
income taxes |
|
$ |
(270 |
) |
|
$ |
(4,762 |
) |
|
$ |
2,511 |
|
|
$ |
(7,348 |
) |
Restructuring (charges) recoveries |
|
|
|
|
|
|
2,098 |
|
|
|
|
|
|
|
(16,697 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
before income taxes |
|
|
(270 |
) |
|
|
(2,664 |
) |
|
|
2,511 |
|
|
|
(24,045 |
) |
Income tax expense |
|
|
|
|
|
|
(20 |
) |
|
|
|
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued
operations, net of tax |
|
$ |
(270 |
) |
|
$ |
(2,684 |
) |
|
$ |
2,511 |
|
|
$ |
(24,079 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
16. |
|
Commitments and Contingencies |
The Company maintains a 34% interest in PAL, a private company, which manufactures and sells
open-end and air jet spun cotton. The Company accounts for its investment in PAL on the equity
method of accounting. As of December 25, 2005, the carrying value of the Companys investment
in PAL (including goodwill value) was $141.0 million. During the quarter and year-to-date
periods ended December 25, 2005, the Company had equity in earnings relating to PAL of $1.2
million and $3.3 million, respectively compared to earnings of $0.4 million and $1.2 million for
the corresponding periods in the prior year.
The Company was informed by PAL of its participation in activities with competitors in the
markets for open-end and air jet spun cotton and polycotton yarns used in the manufacture of
hosiery and other garments that may have resulted in violations of US antitrust laws (the PAL
Activities). The Company believes that it had no involvement whatsoever in the activities at
issue and believes it has no liability arising out of them.
PAL informed the Company that it voluntarily disclosed the activities to the U.S. Department of
Justice Antitrust Division (the DOJ), and that the DOJ has launched an investigation of the
activities. PAL informed the Company that it is cooperating fully with the DOJ. If PAL
violated U.S. antitrust laws, PAL could face civil liability including treble damages. It
should be noted that the Antitrust Criminal Penalty Enhancement and Reform Act of 2004 (the
Act) provides in part that an antitrust leniency applicant is not liable for treble damages.
The Company has not yet determined if the provisions of the Act will be applicable to PAL.
19
The Company has been named in various federal class action lawsuits and a demand for relief
under Massachusetts law related to the PAL Activities. The Company has denied all the
allegations against it in these claims and intends to vigorously defend itself. The
aforementioned federal class action lawsuits have been consolidated into one action in the
United States District Court for the Middle District of North Carolina, Greensboro Division (the
Court) under the caption In Re Cotton Yarn Antitrust Litigation (the Consolidated Action).
On January 14, 2005 with the consent of the plaintiffs, the Judge in the case signed a Notice
and Order of Dismissal Without Prejudice and Stipulation for Tolling of Statute of Limitations
and Tolling Agreement (the Dismissal). The Dismissal provides, among other things, that the
claims against the Company in the litigation are dismissed without prejudice; that the
applicable statute of limitations with respect to the claims of the plaintiffs shall be tolled
during the pendency of the litigation; that if the plaintiffs counsel elect to rename the
Company as a defendant in the litigation, for purposes of the statute of limitations, the
refiling shall relate back to the date of the filing of the initial complaint in the litigation;
and that the Company agrees to provide discovery in the litigation as though it was a party to
the litigation, including responding to interrogatories, requests for production of documents,
and notices of deposition.
Effective August 16, 2005, Parkdale Mills, Inc. and PAL signed a Settlement Agreement with the
Class Representatives and Class Members (hereinafter collectively referred to as the
Settlement Class) in the Consolidated Action agreeing to settle this litigation. Under the
terms of the Settlement Agreement, Parkdale Mills, Inc., PAL and their joint venture partners
(with particular reference to Unifi, Inc.) are released upon final Court approval of the
settlement. This settlement must be approved by the Court before it is effective. On November
1, 2005, the Court preliminarily approved the agreement and has set a hearing for February 14,
2006 for purposes of determining if the proposed settlement shall be approved by the Court and
final judgment entered thereon. Until the Settlement Agreement is finally approved by the
Court, the Company remains unable to determine the level of damages for which PAL may be liable
or the impact of such liability on the Company, which impact could be material.
On September 7, 2005, the Company and Parkdale Mills, Inc. signed an Amendment to the PAL
Operating Agreement that provides that the burden of any portion of the settlement amount
contemplated in the Settlement Agreement that is to be borne by PAL will be allocated to and
borne by Parkdale Mills, Inc. as a Member of PAL.
The Company and Dupont entered into a manufacturing Alliance (the Alliance) in June 2000 to
produce partially oriented polyester filament yarn. One of Duponts manufacturing facilities in
the Alliance was located in Kinston, North Carolina (the Kinston Site) and was purchased by
the Company on September 30, 2004. The land with the Kinston Site is leased pursuant to a 99
year ground lease (Ground Lease) with Dupont. Since 1993, Dupont has been investigating and
cleaning up the Kinston Site under the supervision of the United States Environmental Protection
Agency (EPA) and the North Carolina Department of Environment and Natural Resources pursuant
to the Resource Conservation and Recovery Act Corrective Action program. The Corrective Action
Program requires Dupont to identify all potential areas of environmental concern (AOCs),
assess the extent of contamination at the identified AOCs and clean them up to applicable
regulatory standards. Under the terms of the Ground Lease, upon completion by Dupont of required
remedial action, ownership of the Kinston Site will pass to the Company. Thereafter, the Company
will have responsibility for future remediation requirements, if any, at the AOCs previously
addressed by Dupont. At this time the Company has no basis to determine if and when it will
have any responsibility or obligation with respect to the AOCs or the extent of any potential
liability for the same.
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following is Managements discussion and analysis of certain significant factors that have
affected the Companys operations and material changes in financial condition during the periods
included in the accompanying Condensed Consolidated Financial Statements.
General Overview
The Company is a New York corporation formed in 1969. It is a diversified producer and processor
of multi-filament polyester and nylon textured yarns and related raw materials. Unifi 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.
Unifis yarns and brands are readily found in home furnishings, apparel, legwear and sewing thread,
as well as industrial, automotive, military and medical applications.
The Company conducts its business through three reporting segments, Polyester, Nylon and Sourcing,
each of which operates on a global basis. The polyester segment primarily manufactures its
products in Brazil, South America and the United States, which has the largest operations and
number of locations. The Nylon segment consists of operations in the United States and Colombia,
South America. The Sourcing segment operates out of Unifis corporate office in Greensboro, North
Carolina and is in the process of being closed.
The textile industry in the United States continues to remain challenging primarily due to the
importation of garments and fabrics from lower wage-based countries and over capacity throughout
the world. These two factors have resulted in a declining market for the Company domestically and
tough market conditions overseas, which has resulted in lower gross margins for both the polyester
and nylon segments. Because of these general industry trends, the Companys net sales, gross
profits and net income have been trending downward for the past few years. These challenges
continue to impact the Company and we expect that they will continue to impact the Company for the
foreseeable future. The Companys success going forward continues to be primarily based on its
ability to pass along raw material price increases to its customers and to improve the mix of
product offerings to more premium and value-added products, and to implement cost saving strategies
which will improve our operating efficiencies.
Hurricane Katrina hit the Louisiana coast in late August 2005. The impact to the oil refineries in
the area created shortages of the supply of gasoline and as a result a shortage of paraxlyene
because producers diverted production to xlyene to increase the supply of gasoline. As a result,
while supplies were tight, paraxlyene continued to be available at a much higher price. During
September 2005 the Company received notices from several raw material suppliers declaring force
majure under the Companys contracts and that the Companys price would increase effective
September 1. As a result of this increase, along with other energy related cost increases, the
Company imposed a 14 cents per pound surcharge in an effort to maintain its margins. Throughout
the second quarter of fiscal 2006 the surcharge stayed in effect at different levels as raw
material prices declined. In other operations in the Company that have a high usage of natural
gas, sales prices were increased effective November 1 to compensate for the increase in utility
costs.
Hurricane Rita impacted the gulf coast around the third week of September 2005. Hurricane Rita
shut down five of the six refineries in Texas that produce Monoethylene Glycol (MEG). The
supplier to the Companys Kinston operation was one of these refineries. Power was not restored to
the suppliers facility until October 6, 2005. With five of the six facilities closed, the supply
of MEG in the
21
marketplace not only became tight, but unavailable at historical prices. At the time of Hurricane
Rita, the Company had approximately 22 days of inventory of MEG. The Company started purchasing
MEG on the spot market and trucking the MEG to Kinston versus the Companys more economical method
of transportation by railroad.
The Company successfully managed through the transportation and access issues associated with the
supply of raw materials to meet the Companys delivery commitments. As of the close of the second
quarter of fiscal 2006, the availability of these raw materials had returned to normal levels, but
pricing had not returned to pre-hurricane levels. Effective January 1, 2006, the Company removed
the surcharge and instituted a price increase to maintain its margins. The Company will continue
to monitor its raw material and other energy costs, and as in the past, the Company will continue
to increase its prices to protect its margin.
22
Results of Operations
Consolidated
The following tables set forth the loss from continuing operations components for each of the
Companys business segments for the fiscal quarters and year-to-date periods ended December 25,
2005 and December 26, 2004, respectively. The tables also set forth each of the segments net
sales as a percent to total net sales, the net income components as a percent to total net sales
and the percentage increase or decrease of such components over the prior periods (amounts in
thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended |
|
|
|
|
|
|
December 25, 2005 |
|
|
December 26, 2004 |
|
|
|
|
|
|
|
|
|
|
% to Total |
|
|
|
|
|
|
% to Total |
|
|
% Change |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
$ |
146,789 |
|
|
|
76.3 |
|
|
$ |
156,291 |
|
|
|
75.0 |
|
|
|
(6.1 |
) |
Nylon |
|
|
44,328 |
|
|
|
23.1 |
|
|
|
50,396 |
|
|
|
24.2 |
|
|
|
(12.0 |
) |
Sourcing |
|
|
1,183 |
|
|
|
0.6 |
|
|
|
1,725 |
|
|
|
0.8 |
|
|
|
(31.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
192,300 |
|
|
|
100.0 |
|
|
$ |
208,412 |
|
|
|
100.0 |
|
|
|
(7.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% to Sales |
|
|
|
|
|
% to Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
$ |
8,019 |
|
|
|
4.2 |
|
|
$ |
12,008 |
|
|
|
5.8 |
|
|
|
(33.2 |
) |
Nylon |
|
|
1,350 |
|
|
|
0.7 |
|
|
|
(2,191 |
) |
|
|
(1.1 |
) |
|
|
|
|
Sourcing |
|
|
(276 |
) |
|
|
(0.1 |
) |
|
|
(74 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
9,093 |
|
|
|
4.8 |
|
|
|
9,743 |
|
|
|
4.7 |
|
|
|
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
|
8,299 |
|
|
|
4.3 |
|
|
|
7,197 |
|
|
|
3.4 |
|
|
|
15.3 |
|
Nylon |
|
|
2,162 |
|
|
|
1.2 |
|
|
|
2,680 |
|
|
|
1.3 |
|
|
|
(19.4 |
) |
Sourcing |
|
|
233 |
|
|
|
0.1 |
|
|
|
132 |
|
|
|
0.1 |
|
|
|
76.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
10,694 |
|
|
|
5.6 |
|
|
|
10,009 |
|
|
|
4.8 |
|
|
|
6.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
|
3,377 |
|
|
|
1.8 |
|
|
|
7,506 |
|
|
|
3.6 |
|
|
|
(55.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes |
|
|
(4,978 |
) |
|
|
(2.6 |
) |
|
|
(7,772 |
) |
|
|
(3.7 |
) |
|
|
(35.9 |
) |
Benefit for income taxes |
|
|
(1,272 |
) |
|
|
(0.7 |
) |
|
|
(2,710 |
) |
|
|
(1.3 |
) |
|
|
(53.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(3,706 |
) |
|
|
(1.9 |
) |
|
|
(5,062 |
) |
|
|
(2.4 |
) |
|
|
(26.8 |
) |
Loss from discontinued
operations, net of tax |
|
|
(270 |
) |
|
|
(0.1 |
) |
|
|
(2,684 |
) |
|
|
(1.3 |
) |
|
|
(89.9 |
) |
Extraordinary gain
net of tax of $0 |
|
|
208 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(3,768 |
) |
|
|
(1.9 |
) |
|
$ |
(7,746 |
) |
|
|
(3.7 |
) |
|
|
(51.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six-Months Ended |
|
|
|
|
|
|
December 25, 2005 |
|
|
December 26, 2004 |
|
|
|
|
|
|
|
|
|
|
% to Total |
|
|
|
|
|
|
% to Total |
|
|
% Change |
|
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
$ |
280,957 |
|
|
|
74.4 |
|
|
$ |
278,521 |
|
|
|
71.8 |
|
|
|
0.9 |
|
Nylon |
|
|
93,262 |
|
|
|
24.7 |
|
|
|
107,159 |
|
|
|
27.6 |
|
|
|
(13.0 |
) |
Sourcing |
|
|
3,522 |
|
|
|
0.9 |
|
|
|
2,322 |
|
|
|
0.6 |
|
|
|
51.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
377,741 |
|
|
|
100.0 |
|
|
$ |
388,002 |
|
|
|
100.0 |
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% to Sales
|
|
|
|
|
|
% to Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
$ |
15,147 |
|
|
|
4.0 |
|
|
$ |
20,566 |
|
|
|
5.3 |
|
|
|
(26.3 |
) |
Nylon |
|
|
2,626 |
|
|
|
0.7 |
|
|
|
91 |
|
|
|
0.0 |
|
|
|
2,785.7 |
|
Sourcing |
|
|
(1,158 |
) |
|
|
(0.3 |
) |
|
|
(178 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
16,615 |
|
|
|
4.4 |
|
|
|
20,479 |
|
|
|
5.3 |
|
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
|
16,575 |
|
|
|
4.4 |
|
|
|
13,736 |
|
|
|
3.5 |
|
|
|
20.7 |
|
Nylon |
|
|
4,373 |
|
|
|
1.1 |
|
|
|
5,452 |
|
|
|
1.4 |
|
|
|
(19.8 |
) |
Sourcing |
|
|
727 |
|
|
|
0.2 |
|
|
|
326 |
|
|
|
0.1 |
|
|
|
123.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
21,675 |
|
|
|
5.7 |
|
|
|
19,514 |
|
|
|
5.0 |
|
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges (recovery) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
|
47 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nylon |
|
|
(18 |
) |
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
29 |
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write down of long-lived assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Polyester |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nylon |
|
|
1,500 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,500 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense, net |
|
|
4,729 |
|
|
|
1.3 |
|
|
|
11,002 |
|
|
|
2.9 |
|
|
|
(57.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
before income taxes |
|
|
(11,318 |
) |
|
|
(3.0 |
) |
|
|
(10,037 |
) |
|
|
(2.6 |
) |
|
|
12.8 |
|
Benefit for income taxes |
|
|
(1,953 |
) |
|
|
(0.5 |
) |
|
|
(3,815 |
) |
|
|
(1.0 |
) |
|
|
(48.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
|
(9,365 |
) |
|
|
(2.5 |
) |
|
|
(6,222 |
) |
|
|
(1.6 |
) |
|
|
50.5 |
|
Income (loss) from discontinued
operations, net of tax |
|
|
2,511 |
|
|
|
0.7 |
|
|
|
(24,079 |
) |
|
|
(6.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,854 |
) |
|
|
(1.8 |
) |
|
$ |
(30,301 |
) |
|
|
(7.8 |
) |
|
|
(77.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reflected in the tables above, the decrease in consolidated net sales was attributable to both
the polyester and nylon segments for the second quarter of fiscal 2006 and nylon for the
year-to-date period of fiscal 2006. Consolidated unit volume decreased 20.8% and 10.1% for the
second quarter and year-to-date periods of fiscal 2006, respectively, while average net selling
prices increased 13.1% and 7.4% for the same respective periods. Refer to the discussion of
segment operations under the captions Polyester Segment, Nylon Segment and Sourcing Segment for a
further analysis of the segments loss from continuing operating results.
Consolidated gross profit from continuing operations was $9.1 million and $16.6 million for the
quarter and year-to-date periods ended December 25, 2005, respectively, compared to $9.7 million
and
24
$20.5 million for the quarter and year-to-date periods ended December 26, 2004, respectively.
As a percentage of net sales, gross profit remained respectively flat for the quarters ended
December 25, 2005 and December 26, 2004, and decreased 0.9% for the current versus prior six-month
periods. Although volumes in the second quarter of fiscal 2006 were down 20.8% compared to the
prior year second quarter, gross profit on a per-pound basis improved slightly. The decrease in
gross profit on a year-to-date basis was primarily due to higher converting costs which included
new charges associated with the China joint venture of $1.2 million.
Consolidated selling, general and administrative expenses (SG&A) increased $0.7 million or 6.8%
and $2.2 million or 11.1% for the second quarter and year-to-date periods of fiscal 2006 as
compared to the prior year second quarter and year-to-date periods. As a percentage of net sales,
SG&A increased 0.8% and 0.7% for the second quarter and year-to-date periods of fiscal 2006,
compared to the corresponding periods in the prior year. Domestically, the increase in SG&A of
$0.7 million and $2.1 million for the quarter and six-month period of fiscal 2006, respectively,
was primarily a result of increased legal and audit related professional fees, consulting fees, and
travel expenses relating to the China joint venture. SG&A related to our foreign operations
increased primarily due to the devaluation of the US dollar in Brazil which increased our Brazilian
subsidiarys SG&A by approximately $0.3 million and $0.5 million for the quarter and year-to-date
periods ended December 25, 2005.
As a result of managements decision to consolidate the Nylon segments operations, the Company was
required to record an impairment charge of $1.5 million in the first quarter of fiscal 2006.
Other (income) expense, net includes equity in earnings of unconsolidated affiliates, interest
expense, interest income, bad debt expense and minority interest income. The reduced expenses in
the second quarter and year-to-date periods of fiscal 2006 were primarily attributable to decreased
bad debt expense of $3.2 million and $3.5 million, decreased interest expense of $0.6 million and
$0.5 million and increased interest income of $0.7 million and $1.6 million from the prior year
quarter and year-to-date periods, respectively.
The loss from continuing operations before income taxes was lower in the second quarter of fiscal
2006 as compared to the prior year quarter primarily due to the changes in other (income) expense
items discussed above. The loss from continuing operations before income taxes for the fiscal
2006 year-to-date period was $1.3 million higher than the prior year-to-date period due to
decreased gross profit of $3.9 million, increased SG&A of $2.2 million and the $1.5 million
impairment charge recorded in the first quarter of fiscal 2006, offset by decreased other (income)
expense, net discussed above of $6.3 million.
The Companys income tax benefit from continuing operations for the second fiscal quarter ended
December 25, 2005 equated to an effective tax rate of 25.6% compared to the second fiscal quarter
ended December 26, 2004 which equated to an effective tax rate of 34.9%. The primary differences
between the Companys income tax benefit from continuing operations and the U.S. statutory rate for
the fiscal quarter ended December 25, 2005 was due to an increase in the valuation allowance for
North Carolina income tax credits and income from certain foreign operations being taxed at a lower
effective tax rate. The Companys income tax benefit from continuing operations for the
year-to-date period ended December 25, 2005 equated to an effective tax rate of 17.3% compared to
the year-to-date period ended December 26, 2004 which equated to an effective tax rate of 38.0%.
The primary differences between the Companys income tax benefit from continuing operations and the
U.S. statutory rate for the year-to-date period ended December 25, 2005 was due to an increase in
the
valuation allowance for North Carolina income tax credits, an accrual related to a portion of the
second
25
repatriation plan under the provisions of the American Jobs Act of 2004 (the Tax Act), and
an accrual for foreign income tax on currency related transactions.
Income (loss) from discontinued operations, net of tax improved significantly on a year-to-date
basis due to the sale of the real property in Ireland and the resulting net gain of approximately
$4.6 million. The prior year-to-date loss included significant restructuring charges which were a
direct result of managements decision to close the European Division operations during the first
quarter of fiscal 2005.
Extraordinary gain net of taxes is the result of a favorable settlement during the second quarter
of fiscal 2006 related to the termination of two warehouse leases in Kinston, North Carolina that
were previously reserved at full value. The gain recorded in the second quarter was offset by the
loss recorded in the first quarter.
Polyester Segment
For the second quarter of fiscal 2006, net sales and unit volumes decreased 6.1% and 20.9%,
respectively, compared to the second quarter of fiscal 2005. For the second quarter of fiscal
2006, the Companys domestic net polyester sales decreased 9.2% and unit volumes decreased 25.3%.
Offsetting these decreases, foreign polyester unit volumes increased 2.3% as compared to the
previous years second quarter. Net sales increased slightly while unit volumes decreased 8.7%
comparing the year-to-date periods ended December 25, 2005 and December 26, 2004. Average selling
prices increased 14.8% and 9.6% for the second quarter and year-to-date periods, respectively,
relative to the prior year periods, primarily due to a $0.14 surcharge added during the first
quarter of fiscal 2006 and a greater percentage of higher priced products being sold in the current
fiscal year. The decrease in net sales for the second quarter of fiscal 2006 as compare
to the prior year period was primarily due to lower volumes in the dye house operations and in the
Brazilian manufacturing operations, managements decision to exit unprofitable business, the
disruption caused by the hurricanes and general decline caused by imports.
Sales in local currency for the Brazilian operation decreased 12.3% for the second quarter of
fiscal 2006 compared to the prior year quarter due to a decrease in average selling prices of 14.2%
offset by an increase in unit volumes of 2.3%. For the six-month period of fiscal 2006, sales in
local currency for the Brazilian operation decreased 22.9% compared to the same prior year period.
This decrease is the result of reductions of 14.5% in net selling prices and 9.9% in unit volumes.
These decreases are primarily attributable to the soft market conditions in Brazil. The movement
in currency exchange rates from the prior year to the current year positively impacted the second
quarter of fiscal 2006 sales translated to U.S. dollars for the Brazilian operation. As a result
of the increase in the Brazilian currency exchange rate, U.S. dollar net sales for the quarter and
year-to-date periods were higher by $4.5 million and $9.3 million, respectively, than what sales
would have been using prior year currency rates.
Gross profit for the polyester segment decreased from the prior year periods by $4.0 million to
$8.0 million in the second quarter and by $5.4 million to $15.1 million for the year-to-date
period. Gross profit decreased for the quarter and year-to-date periods due to the decrease in net
sales and unit volumes domestically.
SG&A expenses were allocated, based on various cost drivers, to the polyester segment for the
second quarter of fiscal 2006 in the amount of $8.3 million compared to the prior year amount of
$7.2 million and, represented 5.7% and 4.6% of polyester net sales for the second quarters of
fiscal years 2006 and
26
2005, respectively. Year-to-date fiscal 2006 SG&A increased to $16.5 million compared to $13.7
million for the prior year-to-date period and represented 5.9% and 4.9% of polyester net sales,
respectively. SG&A increased over the prior year periods primarily due to an increase in the
allocation percentage used to allocate SG&A to the different business units which was a result of
the addition of the Kinston manufacturing operations to the Polyester Segment.
Nylon Segment
Net sales for the nylon segment for the second quarter and year-to-date periods of fiscal 2006
decreased 12.0% and 13.0%, respectively, when compared with the same periods in the prior year.
Nylon segment volumes for the second quarter and year-to-date periods of fiscal 2006 decreased
20.1% and 20.9%, respectively, when compared to the corresponding prior year periods. Average
selling prices increased 8.1% and 7.9% for the second quarter and year-to-date periods of fiscal
2006, respectively, relative to prior year, primarily due to a greater percentage of higher priced
products being sold in fiscal 2006.
Gross profit for the nylon segment increased $3.5 million to $1.4 million in the second quarter of
fiscal 2006 compared to the prior year second quarter and increased $2.5 million to $2.6 million
for the six-month period compared to the corresponding prior year period. The increase in gross
profit is attributable primarily to increased sales of higher priced products.
SG&A expenses allocated to the nylon segment decreased $0.5 million to $2.2 million for the second
quarter of fiscal 2006 and decreased $1.1 million to $4.4 million for the six-month period when
compared to the prior year periods. SG&A expenses, as a percentage of nylon net sales, were 4.9%
and 4.7% for the second quarter and year-to-date periods of fiscal 2006, respectively, compared to
5.3% and 5.1% for the prior year comparable periods. The decline compared to the prior year
periods was primarily attributable to a reduced allocation percentage of SG&A expense to the nylon
segment due to additional polyester business from the Kinston manufacturing operation.
During the first quarter of fiscal 2006 management decided to consolidate the domestic nylon
operations to improve overall operating efficiencies. This initiative included closing Plant one
in Mayodan, North Carolina and moving its operations and offices to Plant three in Madison, North
Carolina, which is the Nylon divisions largest facility with approximately one million square feet
of production space. As a part of the consolidation plan, three nylon facilities will be vacated
and held for sale later in fiscal 2006. The Company received appraisals on the three properties,
and after reviewing the reports, determined that one of the facilities carrying value exceeded its
appraised value. As a result of this determination, the Company recorded a non-cash impairment
charge of $1.5 million in the first quarter of fiscal 2006, which included $0.2 million of
estimated selling costs that will be paid from the proceeds of the sale of such impaired property.
On January 19, 2006, the Company announced that it had decided to close one additional nylon plant
in Rockingham County, North Carolina which management expects will be vacated by the end of March
2006 and held for sale. At the conclusion of these consolidation efforts, the domestic nylon
division will have its entire manufacturing operations in Plant three located in Madison, North
Carolina.
Sourcing Segment
The sourcing segment continued to wind down its operations during the second quarter of fiscal 2006
and management expects that it will qualify as a discontinued operation for accounting purpose
during the third quarter of fiscal 2006. Net sales for the quarter ended December 25, 2005 were
$1.2 million, which after direct expenses resulted in a negative gross margin of $0.3 million
compared to net sales of $1.7 resulting in a negative gross margin of $0.1 for the quarter ended
December 26, 2004. SG&A
27
expenses increased year-to-date $0.4 million over the prior year due to increased consulting fees.
SG&A expenses are all directly related to the sourcing segment and are not derived from any Company
allocated expenses. The decision to exit the sourcing business resulted in a charge of
approximately $0.3 million during the second quarter of fiscal 2006 and $1.4 million for the
six-month period ended December 25, 2005.
Corporate
Interest expense decreased $0.6 million to $4.7 million in the second quarter of fiscal 2006 and
decreased $0.5 million to $9.4 million for the year-to-date period. The weighted average interest
rate on outstanding debt was 6.3% as of December 25, 2005 and 7.1% as of December 26, 2004.
Equity in the net earnings of our unconsolidated affiliates, Parkdale America, LLC (PAL),
Unifi-Sans Technical Fibers, LLC, Yihua Unifi Fibre Company Limited (YUFI) and U.N.F. Industries
Ltd amounted to $18 thousand in the second quarter of fiscal year 2006 compared to net earnings of
$0.7 million for the corresponding prior year quarter. For the year-to-date period of fiscal 2006,
equity in net earnings of these affiliates was $1.8 million compared to net earnings of $1.9
million in the prior year-to-date period. Additional details regarding the Companys investment in
unconsolidated equity affiliates follows.
On October 21, 2004, the Company announced that Unifi and Sinopec Yizheng Chemical Fiber Co., Ltd.
(YCFC) signed a non-binding letter of intent to form a joint venture to manufacture, process and
market polyester filament yarn in YCFCs facilities in Yizheng, Jiangsu Province, Peoples Republic
of China. The plant, property and equipment that YCFC agreed to contribute to the joint venture
was operating throughout 2005. On June 10, 2005, Unifi and YCFC entered into an Equity Joint
Venture Contract (the JV Contract), to form YUFI. Under the terms of the JV Contract, each
company owns a 50% equity interest in the joint venture. On August 3, 2005, the joint venture
transaction closed and on August 4, 2005, the Company contributed to YUFI its initial capital
contribution of $15.0 million in cash. On October 12, 2005, the Company transferred an additional
$15.0 million to YUFI to complete the capitalization of the joint venture. During the second
quarter and year-to-date periods ended December 25, 2005, the Company recognized equity losses
relating to YUFI of $1.0 million and $1.1 million, respectively and is currently reporting on a one
month lag. In addition, the Company recognized an additional $0.7 million and $1.2 million in
operating expenses for the second quarter and year-to-date periods fiscal 2006, which were
primarily reflected on the Cost of sales line item in the Condensed Consolidated Statements of
Operations, directly related to providing technological support in accordance with the JV Contract.
The Company holds a 34% ownership interest in a joint venture named Parkdale America, LLC (PAL).
The joint venture partner is Parkdale Mills, Inc. located in Gastonia, North Carolina. PAL is a
producer of cotton and synthetic yarns for sale to the textile and apparel industries primarily
within North America. PAL has 15 manufacturing facilities primarily located in central and western
North Carolina. The Companys share of PALs net income for the second quarter of fiscal 2006 was
$1.2 million compared to net income of $0.4 million for the same period in fiscal 2005. The
Companys share of PALs net income for the six-month period of fiscal 2006 was $3.3 million
compared to net income of $1.2 million for the year-to-date period of fiscal 2005. PALs earnings
from operations increased primarily due to lower converting costs and lower SG&A expenses. See
Note 16 Commitments and Contingencies for further information regarding this investment.
The Company and SANS Fibres of South Africa are partners in a 50/50 joint venture named Unifi-Sans
Technical Fibers (USTF), which produces low-shrinkage high tenacity nylon 6.6 light denier
industrial
28
(LDI) yarns in North Carolina. Unifi manages the day-to-day production and shipping of the LDI
produced in North Carolina and SANS Fibres handles technical support and sales. Sales from this
entity are primarily to customers in the Americas.
Unifi and Nilit Ltd., located in Israel, are partners in a 50/50 joint venture named U.N.F
Industries Ltd (UNF). The joint venture produces nylon partially oriented yarn (POY) at
Nilits manufacturing facility in Migdal Ha Emek, Israel. The nylon POY is utilized in the
Companys nylon texturing and covering operations. UNF paid the Company a $1.0 million dividend
distribution from accumulated profits during the second quarter of fiscal 2006.
Condensed balance sheet information as of December 25, 2005, and income statement information for
the quarter and year-to-date periods ended December 25, 2005, of the combined unconsolidated equity
affiliates is as follows (amounts in thousands):
|
|
|
|
|
|
|
As of |
|
|
December 25, 2005 |
Current assets |
|
$ |
140,980 |
|
Noncurrent assets |
|
|
237,928 |
|
Current liabilities |
|
|
41,527 |
|
Shareholders equity and capital accounts |
|
|
283,000 |
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarter Ended |
|
For the Six-Months Ended |
|
|
December 25, 2005 |
|
December 25, 2005 |
Net sales |
|
$ |
135,030 |
|
|
$ |
262,020 |
|
Gross profit |
|
|
6,110 |
|
|
|
19,288 |
|
Income (loss) from operations |
|
|
(582 |
) |
|
|
7,006 |
|
Net income |
|
|
1,234 |
|
|
|
6,646 |
|
Minority interest income was $0 in the second quarter of fiscal 2006 compared to $0.3 million in
the prior year second quarter. The minority interest income recorded in the Condensed Consolidated
Statements of Operations for the second quarter of fiscal 2005 primarily relates to the minority
owners share (14.6%) of the earnings of Unifi Textured Polyester, LLC (UTP). In April 2005, the
Company acquired Burlington Industries, LLCs, a wholly-owned subsidiary of International Textile
Group, LLC, entire ownership interest in UTP for $0.9 million in cash.
The Company has undertaken various consolidation and cost reduction efforts. In fiscal year 2003,
the Company recorded charges of $16.9 million for severance and employee related costs that were
associated with the U.S. and European operations. Approximately 680 management and production
level employees worldwide were affected by the reorganization. Final severance payments were
completed as of the end of the first quarter of fiscal 2006.
In fiscal 2004, the Company recorded a restructuring charge of $27.7 million which consisted of
$7.8 million of employee severance costs for approximately 280 employees, $12.1 million of fixed
asset write-offs associated with the closure of a dye facility in Manchester, England and the
consolidation of the Companys polyester operations in Ireland, $5.7 million in lease related costs
associated with the closure of the facility in Altamahaw, North Carolina and $2.1 million of other
consolidation related costs. All payments, excluding the lease related payments which continue
until May 2008, were completed as of the end of the first quarter of fiscal 2006.
29
On October 19, 2004, the Company announced that it planned to curtail two production lines and
downsize its facility in Kinston, North Carolina, which had been acquired immediately prior to such
time. During the second quarter of fiscal year 2005, the Company recorded a severance reserve of
$10.7 million for approximately 500 production level employees and a restructuring reserve of $0.4
million for the cancellation of certain warehouse leases. The entire $10.9 million restructuring
reserve was recorded as assumed liabilities in purchase accounting; and accordingly, the $10.9
million was not recorded as a restructuring expense in the Consolidated Statements of Operations.
During the third quarter of fiscal year 2005, management completed the curtailment of both
production lines as scheduled which resulted in an actual reduction of 388 production level
employees and a reduction to the initial restructuring reserve. During the first quarter of fiscal
2006, management determined that there were additional costs relating to the termination of two
warehouse leases which resulted in a $0.2 million extraordinary loss. During the second quarter of
fiscal 2006, management negotiated a favorable settlement on the two warehouse leases that resulted
in a reduction to the reserve and the recognition of an extraordinary gain of $0.2 million.
The table below summarizes changes to the accrued severance and accrued restructuring accounts for
the six-months ended December 25, 2005 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Fiscal 2006 |
|
|
Fiscal 2006 |
|
|
Fiscal 2006 |
|
|
Balance at |
|
|
|
June 26, 2005 |
|
|
Charge |
|
|
Adjustments |
|
|
Amount Used |
|
|
December 25, 2005 |
|
|
Accrued severance |
|
$ |
5,252 |
|
|
$ |
58 |
|
|
$ |
|
|
|
$ |
(3,968 |
) |
|
$ |
1,342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
restructuring |
|
|
5,053 |
|
|
|
83 |
|
|
|
100 |
|
|
|
(886 |
) |
|
|
4,350 |
|
The Company implemented statement of SFAS No. 123R, Share Based Payment (SFAS No. 123R)
effective June 27, 2005. SFAS No. 123R supersedes APB No. 25 which allowed companies to use the
intrinsic method of valuing share-based payment transactions. The Company used the Modified
Prospective Transition Method in which compensation cost is recognized for share-based payments
based on the grant date fair value from the beginning of the fiscal period in which the recognition
provisions are first applied. The effect of the change from applying the original provisions of
SFAS No. 123 on income from continuing operations before income taxes, income from continuing
operations and net income for the six-month period ended December 25, 2005 was $0.3 million, $0.3
million and $0.3 million, respectively. There was no change from applying the original provisions
of SFAS No. 123 on cash flow from continuing operations, cash flow from financing activities, and
basic and diluted earnings per share. On April 20, 2005, the Unifi, Inc. Compensation Committee
vested 287,950 stock options granted prior to June 26, 2005 with an exercise price above $2.89, the
fair market value of Unifi, Inc. common stock on April 20, 2005. The options were vested to
minimize reporting requirements and cost associated with the implementation of SFAS No. 123R. The
Company used the same valuation methodologies and assumptions to implement SFAS No. 123R compared
to SFAS No. 123. As of December 25, 2005 total unrecognized compensation cost related to unvested
share based compensation arrangements granted under the 1999 Long-Term Incentive Plan was $0.3
million. The cost will be recognized over an estimated period of 1.1 years.
The Companys income tax benefit from continuing operations for the quarter ended December 25, 2005
equated to an effective tax rate of 25.6% compared to the quarter ended December 26, 2004 which
equated to an effective tax rate of 34.9%. The primary differences between the Companys income
tax benefit from continuing operations and the U.S. statutory rate for the current quarter ended
December 25, 2005 was due to an increase in the valuation allowance for North Carolina income tax
30
credits and income from certain foreign operations being taxed at a lower effective tax rate.
The Companys income tax benefit from continuing operations for the year-to-date period ended
December 25, 2005 equated to an effective tax rate of 17.3% compared to the year-to-date period
ended December 26, 2004 which equated to an effective tax rate of 38.0%. The primary differences
between the Companys income tax benefit from continuing operations and the U.S. statutory rate for
the year-to-date period ended December 25, 2005 was due to an increase in the valuation allowance
for North Carolina income tax credits, an accrual related to a portion of the second repatriation
plan under the provisions of the Tax Act and an accrual for foreign income tax on currency related
transactions. During the fourth quarter of fiscal 2006, the Company expects to be in a position to
repatriate an additional $2.0 million from a controlled foreign corporation which will complete the
Companys second repatriation plan under the provisions of the Tax Act.
On July 28, 2004, the Company announced its decision to close its European manufacturing operations
and associated sales offices throughout Europe (the European Division). The manufacturing
facilities in Ireland ceased operations on October 31, 2004. On February 24, 2005, the Company
announced that it had entered into three separate contracts to sell the property, plant and
equipment of the European Division for approximately $38.0 million. Through June 26, 2005, the
Company received aggregate proceeds of $9.9 million from the sales. The Company received the
remaining proceeds of $28.1 million during the first quarter of fiscal year 2006 that resulted in a
net gain on the sale of the real property of approximately $4.6 million. The European Divisions
assets held for sale were separately stated in the June 26, 2005 Consolidated Balance Sheet, and
the discontinued operations operating results are separately stated in the Consolidated Statements
of Operations for all periods presented. The assets held for sale were reported in the Companys
polyester segment.
The Company accounts for derivative contracts and hedging activities under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS
133) which requires all derivatives to be recorded on the balance sheet at fair value. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a derivatives change in
fair value will be immediately recognized in earnings. The Company does not enter into derivative
financial instruments for trading purposes.
The Company conducts its business in various foreign currencies. As a result, it is subject to the
transaction exposure that arises from foreign exchange rate movements between the dates that
foreign currency transactions are recorded (export sales and purchase commitments) and the dates
they are settled (cash receipts and cash disbursements in foreign currencies). The Company
utilizes some natural hedging to mitigate these transaction exposures. The Company also enters
into foreign currency forward contracts for the purchase and sale of European, Canadian, Brazilian
and other currencies to hedge balance sheet and income statement currency exposures. These
contracts are principally entered into for the purchase of inventory and equipment and the sale of
Company products into export markets. Counterparties for these instruments are major financial
institutions.
Currency forward contracts are entered into to hedge exposure for sales in foreign currencies based
on specific sales orders with customers or for anticipated sales activity for a future time period.
Generally, 60-80% of the sales value of these orders is covered by forward contracts. Maturity
dates of the forward contracts attempt to match anticipated receivable collections. The Company
marks the outstanding accounts receivable and forward contracts to market at month end and any
realized and unrealized gains or losses are recorded as other income and expense. The Company also
enters currency forward contracts for committed or anticipated equipment and inventory purchases.
Generally, 50-75% of the asset cost is
31
covered by forward contracts although 100% of the asset cost
may be covered by contracts in certain instances. On February 22, 2005, the Company entered into a
forward exchange contract for 15.0 million Euros related to a contract to sell its European
facility in Ireland. The Company was required by the financial institution to deposit $2.8 million
in an interest bearing collateral account to secure its exposure to credit risk on the hedge
contract. On July 1, 2005 the sale of the European facility was completed and as a result the
foreign exchange contract was closed on July 15, 2005 resulting in a realized currency gain of $1.7
million and the release of the $2.8 million security deposit. Forward contracts are matched with
the anticipated date of delivery of the assets and gains and losses are recorded as a component of
the asset cost for purchase transactions when the Company is firmly committed. The latest maturity
date for all outstanding purchase and sales foreign currency forward contracts is January 2006 and
June 2006, respectively.
The dollar equivalent of these forward currency contracts and their related fair values are
detailed below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 25, |
|
|
June 26, |
|
|
|
2005 |
|
|
2005 |
|
Foreign currency purchase contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
94 |
|
|
$ |
168 |
|
Fair value |
|
|
91 |
|
|
|
159 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
3 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency sales contracts: |
|
|
|
|
|
|
|
|
Notional amount |
|
$ |
1,175 |
|
|
$ |
24,414 |
|
Fair value |
|
|
1,186 |
|
|
|
22,687 |
|
|
|
|
|
|
|
|
Net loss (gain) |
|
$ |
11 |
|
|
$ |
(1,727 |
) |
|
|
|
|
|
|
|
For the quarters ended December 25, 2005 and December 26, 2004, the total impact of foreign
currency related items on the Condensed Consolidated Statements of Operations, including
transactions that were hedged and those that were not hedged, was a pre-tax loss of $0.2 million
and $0.3 million, respectively. For the year-to-date periods ended December 25, 2005 and December
26, 2004, the total impact of foreign currency related items was a pre-tax loss of $0.3 million for
both periods.
Liquidity and Capital Resources
Cash provided by continuing operations was $15.6 million for the six-months ended December 25,
2005, compared to cash provided by continuing operations of $6.4 million for the corresponding
period of the prior year. The primary sources of cash from continuing operations were derived from
non-cash charges of depreciation and amortization aggregating $25.3 million, accounts receivable of
$14.1 million, inventories of $1.5 million, impairment charges of $1.5 million, prepaid expenses of
$0.8 million, and earnings of equity affiliates, net of distributions, of $0.3 million. Offsetting
these sources of cash from continuing operations were accounts payable and accruals of $14.7
million, a net loss of $9.4 million, deferred income taxes of $3.3 million, and gain on sales of
property and equipment of $0.3 million, and income taxes of $0.2 million. All working capital
changes have been adjusted to exclude currency translation effects.
32
The Company ended the second quarter of fiscal 2006 with working capital of $206.4 million,
which included cash and cash equivalents of $85.0 million as compared to prior year working capital
of $242.9 million, which included cash and cash equivalents of $53.0 million at December 26, 2004.
The current ratio increased from 2.8 as of December 26, 2004 to 3.0 as of December 25, 2005.
The Company utilized $32.5 million for net investing activities and $24.4 million in net financing
activities during the current year-to-date period. The primary cash expenditures during this
period included $30.4 million in investment in YUFI, $24.4 million for payment of long-term debt,
and $7.6 million for capital expenditures offset by decreased restricted cash of $2.8 million,
proceeds from the sale of capital assets of $2.4 million and other investing activities of $0.3
million.
As of December 25, 2005 the Company is not committed for any significant capital expenditures, but
expects to spend approximately $10.0 to $15.0 million for capital expenditures during fiscal 2006.
The Company believes that cash generated by operations, together with access to a line of credit as
described above, will be sufficient to meet all operating and capital needs in the foreseeable
future.
The Company periodically evaluates the carrying value of its polyester and nylon operations
long-lived assets, including property, plant and equipment and intangibles, to determine if such
assets are impaired whenever events or changes in circumstances indicate that a potential
impairment has occurred. The importation of fiber, fabric and apparel has continued to adversely
impact sales volumes and margins for these operations and has negatively impacted the U.S. textile
and apparel industry in general. In addition, as a result of the recent increases in price and
availability of certain raw materials, the Company determined that it was appropriate to evaluate
the domestic polyester division, domestic nylon division and foreign polyester division to
determine if the carrying value of the assets may not be recoverable. The test results were
finalized during the first quarter of fiscal 2006 and it was determined that the carrying value of
such assets were recoverable through expected future cash flows. The impairment charge of $1.5
million that was recorded during the first quarter of fiscal 2006 did not relate to the Companys
ongoing operations, but was attributable to a plant that will be held for sale.
The Company has a $100.0 million asset based revolving credit agreement (the Credit Agreement)
that terminates on December 7, 2006. The Credit Agreement is secured by substantially all U.S.
assets excluding manufacturing facilities and manufacturing equipment. Borrowing availability is
based on eligible domestic accounts receivable and inventory.
As of December 25, 2005, the Company had no outstanding borrowings and had availability of
approximately $67.0 million under the terms of the Credit Agreement. Borrowings under the Credit
Agreement bear interest at rates selected periodically by the Company of LIBOR plus 1.75% to 3.00%
and/or prime plus 0.25% to 1.50%. The interest rate matrix is based on the Companys leverage
ratio of funded debt to EBITDA, as defined by the Credit Agreement. The interest rate in effect at
December 25, 2005, was 7.4%. Under the Credit Agreement, the Company pays an unused line fee
ranging from 0.25% to 0.50% per annum on the unused portion of the commitment.
The Credit Agreement contains customary covenants for asset based loans which restrict future
borrowings and capital spending and, if availability is less than $25.0 million at any time during
the quarter, include a required minimum fixed charge coverage ratio of 1.1 to 1.0 and a required
maximum leverage ratio of 5.0 to 1.0. At December 25, 2005, the Company was in compliance with all
covenants under the Credit Agreement as it had availability in excess of $25.0 million.
On February 5, 1998, the Company issued $250 million of senior, unsecured debt securities which
bear a coupon rate of 6.5% and mature on February 1, 2008. The estimated fair value of the notes,
based on quoted market prices, at December 25, 2005, and June 26, 2005, was approximately $207.5
million and
33
$210.0 million, respectively. The Company makes semi-annual interest payments of $8.1
million on the first business day of February and August.
As part of the acquisition of the Kinston facility from INVISTA and upon finalizing the quantities
and value of the acquired inventory, Unifi Kinston, LLC, a subsidiary of the Company, entered into
a $24.4 million five-year Loan Agreement. The loan, called for interest only payments for the
first two years, bore interest at 10% per annum and was payable in arrears each quarter commencing
December 31, 2004 until paid in full. On July 25, 2005 the Company paid off the $24.4 million note
payable to INVISTA including accrued interest associated with the acquisition of the Kinston POY
manufacturing facility.
The Company and Dupont entered into a manufacturing Alliance (the Alliance) in June 2000 to
produce partially oriented polyester filament yarn. One of Duponts manufacturing facilities in
the Alliance was located in Kinston, North Carolina (the Kinston Site) and was purchased by the
Company on September 30, 2004. The land associated with this site (the Kinston Site) is leased
pursuant to a 99 year ground lease (Ground Lease) with Dupont. Since 1993, Dupont has been
investigating and cleaning up the Kinston Site under the supervision of the United States
Environmental Protection Agency (EPA) and the North Carolina Department of Environment and
Natural Resources pursuant to the Resource Conservation and Recovery Act Corrective Action program.
The Corrective Action Program requires Dupont to identify all potential areas of environmental
concern (AOCs), assess the extent of contamination at the identified AOCs and clean them up to
applicable regulatory standards. Under the terms of the Ground Lease, upon completion by Dupont of
required remedial action, ownership of the Kinston Site will pass to the Company. Thereafter, the
Company will have responsibility for future remediation requirements, if any, at the AOCs
previously addressed by Dupont. At this time the Company has no basis to determine if and when it
will have any responsibility or obligation with respect to the AOCs or the extent of any potential
liability for the same.
On October 21, 2004, the Company announced that Unifi and Sinopec Yizheng Chemical Fiber Co., Ltd.
(YCFC) have signed a non-binding letter of intent to form a joint venture to manufacture, process
and market polyester filament yarn in YCFCs facilities in Yizheng, Jiangsu Province, Peoples
Republic of China. On or about June 10, 2005, Unifi and YCFC entered into an Equity Joint Venture
Contract (the JV Contract), which provided several closing conditions, including Governmental and
Regulatory approval of the transaction. Under the terms of the JV Contract, each company owns a
50% equity interest in the joint venture. On August 3, 2005 the joint venture transaction closed
and on August 4, 2005, the Company contributed to YUFI its initial capital contribution of $15.0
million in cash. On October 12, 2005, the Company transferred an additional $15.0 million to YUFI
to complete the capitalization of the joint venture.
Outlook
The textile industry in the United States continues to remain challenging primarily due to the
importation of garments and fabrics from lower wage-based countries and over capacity throughout
the world. These two factors have resulted in a declining market for the Company domestically and
overseas, which has resulted in lower net sales, gross profits and net income for both the
polyester and nylon segments. In addition, the domestic demand for sheer hosiery products
continues to decline which also unfavorably impacts the nylon segment. Because of these general
industry trends, the Companys net sales, gross profits and net income have been trending downward
for the past several years. These challenges continue to impact the Company and we expect that
they will continue to impact the Company for the foreseeable future. The Companys success going
forward continues to be primarily based on its ability to pass along raw material price increases
to its customers and to improve
34
the mix of product offerings to more premium and value-added
products, and to implement cost saving strategies which will improve our operating efficiencies.
The Company is also highly committed and dedicated to identifying growth opportunities through our
joint venture in China, where the growth rate is much higher than within the U.S. market.
The World Trade Organization, as part of a staged quota removal, eliminated all remaining textile
and apparel quotas effective January 1, 2005 and the U.S. and the European Union subsequently
called for
safe-guard provisions against China which would cause uncertainty in the Companys global markets.
Recent media coverage regarding the growth of imports from China has impaired the outlook for the
textile industries in the U.S. The Company, through strategic initiatives, plans to participate in
the growing China markets through its investment in YUFI. In addition, the Company will focus on
marketing and sales opportunities to increase its share of business in the Caribbean Basin
Initiative and Andean regions which are continuing to be steady in their supply to the U.S.
On October 20, 2005 the Company announced that its Board of Directors has directed management to
explore strategic alternatives to improve shareholder value. The Board instructed management to
study a broad array of alternatives that include growing the business by expanding within the
textile industry, including into low-cost locations around the world, expanding in non-textile
related businesses, the potential merger or sale of the Company, and the restructuring of the
Companys outstanding indebtedness, all in an effort to take advantage of the further consolidation
and integration of the textile industry.
The Company announced on November 22, 2005, that it had engaged Lehman Brothers to provide
financial advisory services to assist the Company with its previously announced initiative to
explore strategic alternatives. Lehman Brothers was specifically engaged to evaluate the Companys
current business model and identify and evaluate the strategic and financial alternatives for the
Company.
Forward-Looking Statements
Certain statements included herein contain forward-looking statements within the meaning of federal
security laws about the Companys financial condition and results of operations that are based on
managements current expectations, estimates and projections about the markets in which the Company
operates, managements beliefs and assumptions made by management. Words such as expects,
anticipates, believes, estimates, variations of such words and other similar expressions are
intended to identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions, which are difficult to
predict. Therefore, actual outcomes and results may differ materially from what is expressed or
forecasted in, or implied by, such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect managements judgment only as of
the date hereof. The Company undertakes no obligation to update publicly any of these
forward-looking statements to reflect new information, future events or otherwise.
Factors that may cause actual outcome and results to differ materially from those expressed in, or
implied by, these forward-looking statements include, but are not necessarily limited to,
availability, sourcing and pricing of raw materials, pressures on sales prices and volumes due to
competition, economic conditions and natural disasters, reliance on and financial viability of
significant customers, operating performance of joint ventures, alliances and other equity
investments, technological advancements, employee relations, changes in construction spending,
capital expenditures and long-term investments (including those related to unforeseen acquisition
opportunities), continued availability of financial resources through financing arrangements and
operations, outcomes of pending or threatened legal proceedings or governmental investigations or
proceedings (including environmental related claims), negotiation of new or modifications of
existing contracts for asset
35
management and for property and equipment construction and
acquisition, regulations governing tax laws, other governmental and authoritative bodies policies
and legislation, the continuation and magnitude of the Companys common stock repurchase program
and proceeds received from the sale of assets held for disposal. In addition to these
representative factors, forward-looking statements could be impacted by general domestic and
international economic and industry conditions in the markets where the Company competes, such as
changes in currency exchange rates, interest and inflation rates, recession and other economic and
political factors over which the Company has no control. Other risks and uncertainties may be
described from time to time in the Companys other reports and filings with the Securities and
Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Managements Discussion and Analysis of Financial Condition and Results of Operations for
quantitative and qualitative discussion about market risk relating to the Companys forward
currency contracts and currency exchange rate risk.
The Company is exposed to market risks associated with changes in interest rates and currency
fluctuation rates, which may adversely affect its financial position, results of operations and
Condensed Consolidated Statements of Cash Flows. In addition, the Company is also exposed to other
risks in the operation of its business.
Interest Rate Risk: The Company is exposed to interest rate risk through its various
borrowing activities. Substantially all of the Companys borrowings are in long-term fixed rate
bonds. Therefore, the market rate risk associated with a 100 basis point change in interest rates
would not be material to the Company at the present time.
Inflation and Other Risks: The inflation rate in most countries the Company conducts business
has been low in recent years and the impact on the Companys cost structure has not been
significant. The Company is also exposed to political risk, including changing laws and
regulations governing international trade such as quotas and tariffs and tax laws. The degree of
impact and the frequency of these events cannot be predicted.
Item 4. Controls and Procedures
The Company maintains controls and procedures that are designed to ensure that information
required to be disclosed in the Companys financial statements filed pursuant to the Securities
Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized and
reported in a timely manner, and that such information is accumulated and communicated to the
Companys management, specifically including its Chief Executive Officer and Chief Financial
Officer, to allow timely decisions regarding required disclosure.
The Company carries out a variety of on-going procedures, under the supervision and with the
participation of the Companys management, including the Chief Executive Officer and Chief
Financial Officer to evaluate the effectiveness of the design and operation of the Companys
disclosure controls and procedures. Based on the foregoing, the Companys Chief Executive Officer
and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective as of December 25, 2005.
There has been no change in the Companys internal controls over financial reporting during
the Companys most recent fiscal quarter that has materially affected, or is reasonable likely to
materially affect, the Companys internal controls over financial reporting.
36
Part II. Other Information
Item 1. Legal Proceedings
See Note 16 Commitments and Contingencies to the Condensed Consolidated Financial Statements, for
a discussion of material developments during the second quarter of fiscal 2006 related to the
Companys legal proceeding involving PAL.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
of Shares that May |
|
|
|
Total Number of |
|
|
Average Price Paid |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
Shares |
|
|
per |
|
|
Announced Plans |
|
|
Under the Plans or |
|
Period |
|
Purchased |
|
|
Share |
|
|
or Programs |
|
|
Programs |
|
09/26/05 10/25/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,807,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/26/05 11/25/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,807,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11/26/05 12/25/05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,807,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On April 25, 2003, the Company announced that its Board of Directors had reinstituted the
Companys previously authorized stock repurchase plan at its meeting on April 24, 2003. The plan
was originally announced by the Company on July 26, 2000 and authorized the Company to repurchase
of up to 10.0 million shares of its common stock. During fiscal years 2004 and 2003, the Company
repurchased approximately 1.3 million and 0.5 million shares, respectively. The repurchase program
was suspended in November 2003 and the Company has no immediate plans to reinstitute the program.
Consequently, only 600 shares were repurchased by the Company during the quarter ended September
26, 2004 under the repurchase program, and there is remaining authority for the Company to
repurchase approximately 6.8 million shares of its common stock under the repurchase plan. The
repurchase plan has no stated expiration or termination date.
37
Item 4. Submission of Matters to a Vote of Security Holders.
The Shareholders of the Company at their Annual Meeting on the 19th day of October 2005,
elected the following directors to serve until the Annual Meeting of the Shareholders in 2006 or
until their successors are elected and qualified.
|
|
|
|
|
|
|
|
|
|
|
Votes |
|
|
Votes |
|
Name of Director |
|
in Favor |
|
|
Withheld |
|
William J. Armfield, IV |
|
|
47,766,131 |
|
|
|
1,986,386 |
|
R. Wiley Bourne, Jr. |
|
|
48,469,736 |
|
|
|
1,282,781 |
|
Charles R. Carter |
|
|
47,866,452 |
|
|
|
1,866,065 |
|
Sue W. Cole |
|
|
48,716,838 |
|
|
|
1,035,679 |
|
J. B. Davis |
|
|
49,317,422 |
|
|
|
435,095 |
|
Kenneth G. Langone |
|
|
48,820,053 |
|
|
|
932,464 |
|
Donald F. Orr |
|
|
43,507,674 |
|
|
|
6,244,843 |
|
Brian R. Parke |
|
|
48,007,243 |
|
|
|
1,745,274 |
|
Item 6. Exhibits
|
|
|
(10a)
|
|
Change of Control Agreement between Unifi, Inc. and Thomas H. Caudle,
Jr., effective November 1, 2005, filed as Exhibit 10.1 to the Companys Form 8-K
dated November 1, 2005 and incorporated herein by reference. |
|
|
|
(10b)
|
|
Change of Control Agreement between Unifi, Inc. and Benny Holder,
effective November 1, 2005, filed as Exhibit 10.2 to the Companys Form 8-K dated
November 1, 2005 and incorporated herein by reference. |
|
|
|
(10c)
|
|
Change of Control Agreement between Unifi, Inc. and William M. Lowe,
Jr., effective November 1, 2005, filed as Exhibit 10.3 to the Companys Form 8-K
dated November 1, 2005 and incorporated herein by reference. |
|
|
|
(10d)
|
|
Change of Control Agreement between Unifi, Inc. and Charles F, McCoy,
effective November 1, 2005, filed as Exhibit 10.4 to the Companys Form 8-K dated
November 1, 2005 and incorporated herein by reference. |
|
|
|
(10e)
|
|
Fifth Amendment executed on December 20, 2005, between Unifi, Inc. and
certain of its Subsidiaries, the Lenders, and Bank of America, N.A., as Agent for
the Lenders, filed as Exhibit 10.1 to the Companys Form 8-K dated December 20, 2005
and incorporated herein by reference. |
|
|
|
(31a)
|
|
Chief Executive Officers certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
(31b)
|
|
Chief Financial Officers certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
(32a)
|
|
Chief Executive Officers certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
|
|
|
(32b)
|
|
Chief Financial Officers certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, filed herewith. |
38
UNIFI, INC.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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|
|
UNIFI, INC. |
|
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|
Date: February 3, 2006
|
|
/s/ WILLIAM M. LOWE, JR. |
|
|
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|
|
|
|
|
|
William M. Lowe, Jr. |
|
|
|
|
|
|
Vice President, Chief Operating Officer and Chief Financial |
|
|
|
|
|
|
Officer (Mr. Lowe is the Principal Financial |
|
|
|
|
|
|
Officer and has been duly authorized to sign on behalf
of the Registrant.) |
|
|
Ex-(31a)
EXHIBIT (31a)
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Brian R. Parke, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unifi, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors and
the audit committee of the registrants board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over financial
reporting.
Date: February 3, 2006
|
|
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|
|
/s/ BRIAN R. PARKE |
|
|
|
|
|
|
|
|
Brian R. Parke
Chairman of the Board,
President and Chief Executive Officer
|
Ex-(31b)
EXHIBIT (31b)
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, William M. Lowe, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Unifi, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such evaluation;
and
d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control over
financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors and
the audit committee of the registrants board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal control over financial
reporting.
Date: February 3, 2006
|
|
|
|
|
/s/ WILLIAM M. LOWE, JR. |
|
|
|
|
|
|
|
|
William M. Lowe, Jr.
Vice President, Chief Operating Officer and Chief Financial Officer |
Ex-(32a)
EXHIBIT (32a)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Unifi, Inc. (the Company) Quarterly Report on Form 10-Q for the period
ended December 25, 2005 as filed with the Securities and Exchange Commission on the date hereof
quarterly (the Report), I, Brian R. Parke, Chairman of the Board, President and Chief Executive
Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that:
|
(1) |
|
The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and |
|
|
(2) |
|
The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Date: |
|
February 3, 2006 |
|
|
|
By: |
|
/s/ BRIAN R. PARKE |
|
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|
|
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|
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|
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|
|
|
|
|
|
Brian R. Parke |
|
|
|
|
|
|
|
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|
|
|
|
Chairman of the Board, |
|
|
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|
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President and Chief Executive Officer
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Ex-(32b)
EXHIBIT (32b)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Unifi, Inc. (the Company) Quarterly Report on Form 10-Q for the period
ended December 25, 2005 as filed with the Securities and Exchange Commission on the date hereof
quarterly (the Report), I, William M. Lowe, Jr., Vice President, Chief Operating Officer and
Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and |
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(2) |
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The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company. |
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Date: February 3, 2006
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By:
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/s/ WILLIAM M. LOWE, JR
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William M. Lowe, Jr. |
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Vice President, Chief Operating Officer and |
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Chief Financial Officer |
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