þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
New York (State or other jurisdiction of incorporation or organization) |
11-2165495 (I.R.S. Employer Identification No.) |
|
P.O. Box 19109 7201 West Friendly Avenue Greensboro, NC (Address of principal executive offices) |
27419 (Zip Code) |
2
December 24, | June 25, | |||||||
2006 | 2006 | |||||||
(Unaudited) | ||||||||
(Amounts in thousands) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 35,612 | $ | 35,317 | ||||
Receivables, net |
77,486 | 93,236 | ||||||
Inventories |
115,386 | 116,018 | ||||||
Deferred income taxes |
11,982 | 11,739 | ||||||
Assets held for sale |
15,419 | 15,419 | ||||||
Other current assets |
11,287 | 9,229 | ||||||
Total current assets |
267,172 | 280,958 | ||||||
Property, plant and equipment |
911,953 | 916,337 | ||||||
Less accumulated depreciation |
(692,492 | ) | (676,641 | ) | ||||
219,461 | 239,696 | |||||||
Investments in unconsolidated affiliates |
184,210 | 190,217 | ||||||
Other noncurrent assets |
22,766 | 21,766 | ||||||
Total assets |
$ | 693,609 | $ | 732,637 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 60,518 | $ | 68,916 | ||||
Accrued expenses |
18,569 | 23,869 | ||||||
Income taxes payable |
373 | 2,303 | ||||||
Current maturities of long-term debt and other
current liabilities |
8,056 | 6,330 | ||||||
Total current liabilities |
87,516 | 101,418 | ||||||
Long-term debt and other liabilities |
203,691 | 202,405 | ||||||
Deferred income taxes |
44,159 | 45,861 | ||||||
Commitments and contingencies
Shareholders equity: |
||||||||
Common stock |
5,220 | 5,220 | ||||||
Capital in excess of par value |
2,167 | 929 | ||||||
Retained earnings |
354,487 | 382,082 | ||||||
Accumulated other comprehensive loss |
(3,631 | ) | (5,278 | ) | ||||
358,243 | 382,953 | |||||||
Total liabilities and shareholders equity |
$ | 693,609 | $ | 732,637 | ||||
3
For the Quarters Ended | For the Six-Months Ended | ||||||||||||||||||||
Dec. 24, | Dec. 25, | Dec. 24, | Dec. 25, | ||||||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||||||||
(Amounts in thousands, except per share data) | |||||||||||||||||||||
Net sales |
$ | 156,895 | $ | 191,117 | $ | 326,839 | $ | 374,219 | |||||||||||||
Cost of sales |
154,275 | 181,747 | 315,179 | 356,446 | |||||||||||||||||
Selling, general & administrative expenses |
10,388 | 10,461 | 21,677 | 20,948 | |||||||||||||||||
Provision (recovery) for bad debts |
(1,012 | ) | 604 | 598 | 1,131 | ||||||||||||||||
Interest expense |
6,111 | 4,681 | 12,176 | 9,457 | |||||||||||||||||
Interest income |
(1,066 | ) | (2,189 | ) | (1,510 | ) | (3,470 | ) | |||||||||||||
Other (income) expense, net |
236 | 303 | (243 | ) | (549 | ) | |||||||||||||||
Equity in (earnings) losses of unconsolidated
affiliates |
2,876 | (18 | ) | 4,825 | (1,842 | ) | |||||||||||||||
Write down of long-lived assets |
2,002 | | 3,202 | 1,500 | |||||||||||||||||
Restructuring charges |
| | | 29 | |||||||||||||||||
Loss from continuing operations
before income taxes and extraordinary item |
(16,915 | ) | (4,472 | ) | (29,065 | ) | (9,431 | ) | |||||||||||||
Benefit for income taxes |
(540 | ) | (1,079 | ) | (1,673 | ) | (1,231 | ) | |||||||||||||
Loss from continuing operations before
extraordinary item |
(16,375 | ) | (3,393 | ) | (27,392 | ) | (8,200 | ) | |||||||||||||
Income (loss) from discontinued operations
net of tax |
(167 | ) | (583 | ) | (203 | ) | 1,346 | ||||||||||||||
Extraordinary gain net of taxes of $0 |
| 208 | | | |||||||||||||||||
Net loss |
$ | (16,542 | ) | $ | (3,768 | ) | $ | (27,595 | ) | $ | (6,854 | ) | |||||||||
Earnings (losses) per common share
(basic and diluted): |
|||||||||||||||||||||
Net loss continuing operations |
$ | (.32 | ) | $ | (.06 | ) | $ | (.53 | ) | $ | (.16 | ) | |||||||||
Net income (loss) discontinued
operations |
| (.01 | ) | | .03 | ||||||||||||||||
Extraordinary gain |
| | | | |||||||||||||||||
Net loss basic and diluted |
$ | (.32 | ) | $ | (.07 | ) | $ | (.53 | ) | $ | (.13 | ) | |||||||||
Weighted average outstanding shares of
common stock (basic and diluted) |
52,198 | 52,127 | 52,198 | 52,127 |
4
For the Six-Months Ended | ||||||||
December 24, | December 25, | |||||||
2006 | 2005 | |||||||
Cash and cash equivalents at the beginning of period |
$ | 35,317 | $ | 105,621 | ||||
Operating activities: |
||||||||
Net loss |
(27,595 | ) | (6,854 | ) | ||||
Adjustments to reconcile net loss to net cash provided by |
||||||||
continuing operating activities: |
||||||||
(Income) loss from discontinued operations |
203 | (1,346 | ) | |||||
Net (earnings) losses of unconsolidated equity affiliates, net of
distributions |
4,825 | 288 | ||||||
Depreciation |
21,449 | 24,688 | ||||||
Amortization |
557 | 642 | ||||||
Stock based compensation |
1,238 | 289 | ||||||
Net (gain) loss on asset sales |
241 | (365 | ) | |||||
Non-cash write down of long-lived assets |
3,202 | 1,500 | ||||||
Non-cash portion of restructuring charges |
| 29 | ||||||
Deferred income tax |
(1,945 | ) | (2,533 | ) | ||||
Provision for bad debt |
598 | 1,131 | ||||||
Split dollar life insurance proceeds, net |
| 983 | ||||||
Other |
20 | (1,275 | ) | |||||
Change in assets and liabilities, excluding
effects of acquisitions and foreign currency adjustments |
1,357 | 443 | ||||||
Net cash provided by continuing operating activities |
4,150 | 17,620 | ||||||
Investing activities: |
||||||||
Capital expenditures |
(3,341 | ) | (7,614 | ) | ||||
Acquisition |
(393 | ) | (30,388 | ) | ||||
Investment of foreign restricted assets |
| 158 | ||||||
Collection of notes receivable |
734 | 236 | ||||||
Change in restricted cash |
| 2,766 | ||||||
Proceeds from sale of capital assets |
30 | 2,376 | ||||||
Return of capital from equity affiliates |
229 | | ||||||
Split dollar life insurance premiums |
(166 | ) | | |||||
Other |
(362 | ) | (210 | ) | ||||
Net cash used in investing activities |
(3,269 | ) | (32,676 | ) | ||||
Financing activities: |
||||||||
Payment of long-term debt |
(290 | ) | (24,407 | ) | ||||
Other |
(309 | ) | 40 | |||||
Net cash used in financing activities |
(599 | ) | (24,367 | ) | ||||
Cash flows of discontinued operations: |
||||||||
Operating cash flow |
(50 | ) | (4,640 | ) | ||||
Investing cash flow |
| 23,062 | ||||||
Net cash provided by (used in) discontinued operations |
(50 | ) | 18,422 | |||||
Effect of exchange rate changes on cash and cash equivalents |
63 | 399 | ||||||
Net increase (decrease) in cash and cash equivalents |
295 | (20,602 | ) | |||||
Cash and cash equivalents at end of period |
$ | 35,612 | $ | 85,019 | ||||
5
1. | Basis of Presentation | |
The Condensed Consolidated Balance Sheet at June 25, 2006, 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 (U.S. GAAP) for complete financial statements. Except as noted with respect to the balance sheet at June 25, 2006, 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 24, 2006, and the results of operations and cash flows for the periods ended December 24, 2006 and December 25, 2005. Such adjustments consisted of normal recurring items necessary for fair presentation in conformity with U.S. GAAP. 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 25, 2006. Certain prior year amounts have been reclassified to conform to the current presentation. | ||
The significant accounting policies followed by the Company are presented on pages 57 to 62 of the Companys Annual Report on Form 10-K for the fiscal year ended June 25, 2006. These policies have not changed from the disclosure in that report. | ||
2. | Inventories | |
Inventories were comprised of the following (amounts in thousands): |
December 24, | June 25, | |||||||
2006 | 2006 | |||||||
Raw materials and supplies |
$ | 52,210 | $ | 48,594 | ||||
Work in process |
6,204 | 10,144 | ||||||
Finished goods |
56,972 | 57,280 | ||||||
$ | 115,386 | $ | 116,018 | |||||
3. | Accrued Expenses | |
Accrued expenses were comprised of the following (amounts in thousands): |
December 24, | June 25, | |||||||
2006 | 2006 | |||||||
Payroll and fringe benefits |
$ | 6,785 | $ | 11,112 | ||||
Severance |
216 | 576 | ||||||
Interest |
2,608 | 1,984 | ||||||
Property taxes |
48 | 1,722 | ||||||
Accrued utilities |
4,331 | 3,225 | ||||||
Other |
4,581 | 5,250 | ||||||
$ | 18,569 | $ | 23,869 | |||||
6
4. | Income Taxes | |
The Companys income tax benefit for the quarter ended December 24, 2006 resulted in an effective tax rate of 3.0% compared to a 24.1% benefit for the quarter ended December 25, 2005. The Companys income tax benefit for the year-to-date period ended December 24, 2006 resulted in an effective tax rate of 5.8% compared to a 13.0% benefit for the year-to-date period ended December 25, 2005. The primary differences between the Companys income tax benefit and the U.S. statutory rate for the quarter and year-to-date period ended December 24, 2006 were due to losses from certain foreign operations taxed at a lower effective rate and increases in the valuation allowance for North Carolina income tax credit carryforwards and capital losses. | ||
Deferred income taxes have been provided to account 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 deferred tax assets for North Carolina income tax credit carryforwards and capital losses. The valuation allowance had a net increase of $5.1 million for both the quarter and year-to-date period ended December 24, 2006 compared to increases of $0.1 million and $0.4 million for the quarter and year-to-date period ended December 25, 2005, respectively. The increases for the quarter and year-to-date period ended December 24, 2006 resulted from lower estimates of future utilization of North Carolina income tax credit carryforwards as well as a complete offset of deductible temporary differences with respect to certain capital losses. | ||
5. | Comprehensive Income/Loss | |
Comprehensive losses amounted to $15.2 million and $25.9 million for the second quarter and year-to-date periods of fiscal year 2007, respectively, compared to a comprehensive loss of $7.1 million for the second quarter and comprehensive income of $1.0 million for the year-to-date periods of fiscal year 2006. Comprehensive losses were comprised of net losses of $16.5 million and $27.6 million for the current second quarter and year-to-date periods of fiscal year 2007, respectively, and foreign translation gains of $1.3 million and $1.7 million, respectively. Comparatively, comprehensive income and loss for the corresponding periods in the prior year were derived from net losses of $3.7 million and $6.8 million, and foreign translation losses of $3.4 million and gains of $7.8 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 June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48) which is an interpretation of Statement of Financial Accounting Standards (SFAS) No. 109 Accounting for Income Taxes. The pronouncement creates a single model to address accounting for uncertainty in tax positions. FIN 48 prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of the first day of fiscal year 2008 and it has not determined the impact of FIN 48 on its results of operations and financial condition. | ||
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 amends SFAS No. 87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions and SFAS No. 132, Employers Disclosures about Pensions and Other Postretirement Benefits. The amendments retain most of the existing measurement and disclosure guidance and will not change the amounts recognized in the Companys statements of operations. SFAS No. |
7
158 requires companies to recognize a net asset or liability with an offset to equity relating to post retirement obligations. This aspect of SFAS No. 158 is effective for fiscal years ending after December 15, 2006. The Company currently does not expect that SFAS No. 158 will have a material effect on its consolidated balance sheet. | ||
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This new standard provides guidance for measuring the fair value of assets and liabilities and is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards. SFAS No. 157 also expands financial statement disclosure requirements about a companys use of fair value measurements, including the effect of such measures on earnings. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. While the Company is currently evaluating the provisions of SFAS No. 157 it has not determined the impact it will have on its results of operations or financial condition. | ||
7. | Segment Disclosures | |
The following is the Companys selected segment information for the quarters and six-month periods ended December 24, 2006 and December 25, 2005 (amounts in thousands): |
Polyester | Nylon | Total | ||||||||||
Quarter ended December 24, 2006: |
||||||||||||
Net sales to external customers |
$ | 118,507 | $ | 38,388 | $ | 156,895 | ||||||
Intersegment net sales |
1,485 | 1,268 | 2,753 | |||||||||
Write down of long-lived assets |
2,002 | | 2,002 | |||||||||
Segment operating loss |
(8,940 | ) | (830 | ) | (9,770 | ) | ||||||
Total assets |
337,251 | 119,497 | 456,748 | |||||||||
Quarter ended December 25, 2005: |
||||||||||||
Net sales to external customers |
$ | 146,789 | $ | 44,328 | $ | 191,117 | ||||||
Intersegment net sales |
1,076 | 1,227 | 2,303 | |||||||||
Segment operating loss |
(279 | ) | (812 | ) | (1,091 | ) | ||||||
Total assets |
375,716 | 134,900 | 510,616 |
The following table represents reconciliations from segment data to consolidated reporting data (amounts in thousands): |
For the Quarters Ended | ||||||||
December 24, | December 25, | |||||||
2006 | 2005 | |||||||
Reconciliation of segment operating loss
to net loss from continuing operations
before income taxes and extraordinary
item: |
||||||||
Reportable segments operating loss |
$ | (9,770 | ) | $ | (1,091 | ) | ||
Provision (recovery) for bad debts |
(1,012 | ) | 604 | |||||
Interest expense, net |
5,045 | 2,492 | ||||||
Other (income) expense, net |
236 | 303 | ||||||
Equity in (earnings) losses of
unconsolidated affiliates |
2,876 | (18 | ) | |||||
Loss from continuing operations before
income taxes and extraordinary item |
$ | (16,915 | ) | $ | (4,472 | ) | ||
8
Polyester | Nylon | Total | ||||||||||
Six-Months ended December 24, 2006: |
||||||||||||
Net sales to external customers |
$ | 248,978 | $ | 77,861 | $ | 326,839 | ||||||
Intersegment net sales |
3,914 | 3,096 | 7,010 | |||||||||
Write down of long-lived assets |
2,002 | | 2,002 | |||||||||
Segment operating loss |
(10,619 | ) | (1,400 | ) | (12,019 | ) | ||||||
Six-Months ended December 25, 2005: |
||||||||||||
Net sales to external customers |
$ | 280,957 | $ | 93,262 | $ | 374,219 | ||||||
Intersegment net sales |
2,756 | 2,406 | 5,162 | |||||||||
Write down of long-lived assets |
| 1,500 | 1,500 | |||||||||
Restructuring charges (recovery) |
47 | (18 | ) | 29 | ||||||||
Segment operating loss |
(1,475 | ) | (3,229 | ) | (4,704 | ) |
The following table represents reconciliations from segment data to consolidated reporting data (amounts in thousands): |
For the Six-Months Ended | ||||||||
December 24, | December 25, | |||||||
2006 | 2005 | |||||||
Reconciliation of segment operating loss
to net loss from continuing operations
before income taxes and extraordinary
item: |
||||||||
Reportable segments operating loss |
$ | (12,019 | ) | $ | (4,704 | ) | ||
Provision for bad debts |
598 | 1,131 | ||||||
Interest expense, net |
10,666 | 5,987 | ||||||
Other (income) expense, net |
(243 | ) | (549 | ) | ||||
Equity in (earnings) losses of
unconsolidated affiliates |
4,825 | (1,842 | ) | |||||
Write down of long-lived assets |
1,200 | | ||||||
Loss from continuing operations before
income taxes and extraordinary item |
$ | (29,065 | ) | $ | (9,431 | ) | ||
For purposes of internal management reporting, segment operating 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. Intersegment sales of the Companys polyester partially orientated yarn (POY) business are recorded at market value whereas all other intersegment sales are recorded at cost. | ||
The primary differences between the segmented financial information of the operating segment 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, an d 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 loss excluded the recovery for bad debts of $1.0 million and a provision of $0.6 million for the current and prior year second quarter periods, respectively, and a provision of $0.6 million and $1.1 million for the current and prior year-to-date periods, respectively. |
9
The total assets for the polyester segment decreased from $359.2 million at June 25, 2006 to $337.3 million at December 24, 2006 due primarily to decreases in accounts receivable, fixed assets, inventory, and deferred taxes of $11.5 million, $10.2 million, $2.3 million, and $0.1 million, respectively. These decreases were offset by increases in other current assets, other assets, and cash of $1.2 million, $0.9 million, and $0.1 million, respectively. The total assets for the nylon segment decreased from $128.2 million at June 25, 2006 to $119.5 million at December 24, 2006 due primarily to decreases in fixed assets and accounts receivable of $6.9 million and $3.9 million, respectively. These decreases were offset by increases in inventory, cash, deferred income taxes, and other current assets of $1.5 million, $0.2 million, $0.2 million, and $0.2 million, respectively. |
8. | Stock-Based Compensation | |
During the fourth quarter of fiscal year 2006, the Board authorized the issuance of one hundred fifty thousand stock options from the 1999 Long-Term Incentive Plan. During the first half of fiscal year 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 granted in fiscal years 2006 and 2005 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. | ||
During the first quarter of fiscal year 2007, the Board authorized the issuance of approximately 1.1 million stock options from the 1999 Long-Term Incentive Plan to certain key employees. With the exception of the immediate vesting of three hundred thousand stock options granted to the CEO, the remaining stock options vests 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. As a result of these grants, the Company incurred $0.2 million in the second quarter and $1.2 million for the year-to-date period in stock-based compensation charges which were recorded as selling, general and administrative expense with the offset to additional paid-in-capital. | ||
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, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings. The Company does not enter into derivative financial instruments for trading purposes nor is it a party to any leveraged financial instruments. | ||
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, 50% 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 |
10
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% of the asset cost is covered by forward contracts although 100% of the asset cost may be covered by contracts in certain instances. 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 February 2007. | ||
The dollar equivalent of these forward currency contracts and their related fair values are detailed below (amounts in thousands): |
December 24, | June 25, | |||||||
2006 | 2006 | |||||||
Foreign currency purchase contracts: |
||||||||
Notional amount |
$ | 916 | $ | 526 | ||||
Fair value |
925 | 535 | ||||||
Net (gain) loss |
$ | (9 | ) | $ | (9 | ) | ||
Foreign currency sales contracts: |
||||||||
Notional amount |
$ | 611 | $ | 833 | ||||
Fair value |
423 | 878 | ||||||
Net (gain) loss |
$ | (188 | ) | $ | 45 | |||
For the quarters ended December 24, 2006 and December 25, 2005, 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, resulted in a pre-tax income of $0.1 million and $0.0, respectively. For the year-to-date periods ended December 24, 2006 and December 25, 2005, the total impact of foreign currency related items was pre-tax income of $0.1 million and pre-tax loss of $0.1 million, respectively. | ||
10. | Investments in Unconsolidated Affiliates | |
On June 10, 2005, Unifi and Sinopec Yizheng Chemical Fiber Co., Ltd. (YCFC) entered into an Equity Joint Venture Contract (the JV Contract), to form Yihua Unifi Fibre Company Limited (YUFI) to manufacture, process and market polyester filament yarn in YCFCs facilities in Yizheng, Jiangsu Province, Peoples Republic of China. Under the terms of the JV Contract, each company owns a 50% equity interest in the joint venture. The joint venture transaction closed on August 3, 2005, and accordingly, the Company contributed to YUFI its initial capital contribution of $15.0 million in cash on August 4, 2005. On October 12, 2005, the Company transferred an additional $15.0 million to YUFI to complete the capitalization of the joint venture. For the quarter and year-to-date periods ended December 24, 2006, the Company recognized net equity losses relating to YUFI of $2.1 million and $3.6 million, respectively, compared to a net equity loss of $1.0 million for the quarter ended December 25, 2005. Since YUFI reports its financial results on a one month lag, and given the date of the joint venture transaction, the December 25, 2005 year-to-date net equity loss of $1.1 million is not comparable. The Company also records revenues from the joint venture under a licensing agreement for certain proprietary information including technical knowledge, manufacturing processes, trade secrets, commercial information and other information relating to the design, manufacture, application testing, maintenance and sale of products. For the quarter and year-to-date periods ended December 24, 2006, the Company recorded $0.4 million and $0.8 million, respectively, in revenues from the licensing agreement. In addition, the Company recognized $1.0 million and $2.1 million in operating expenses for the second quarter and year-to-date periods of fiscal year 2007, which were primarily reflected on the Cost of |
11
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. | ||
In June 1997, the Company and Parkdale Mills, Inc. entered into a contribution agreement whereby both companies contributed all of the assets of their spun cotton yarn operations utilizing open-end and air jet spinning technologies to create Parkdale America, LLC (PAL). In exchange for its contributions, the Company received a 34% ownership interest in the joint venture. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel industries primarily within North America. PAL has 11 manufacturing facilities primarily located in central and western North Carolina. During the second quarter and year-to-date periods ended December 24, 2006, the Company had equity losses relating to PAL of $0.6 million and $0.9 million, respectively, compared to earnings of $1.2 million and $3.3 million for the corresponding periods in the prior year. PAL has paid the Company $0.2 million in accumulated distributions during fiscal year 2007. | ||
In September 2000, the Company and SANS Fibres of South Africa formed a 50/50 joint venture (UNIFI-SANS Technical Fibers, LLC or USTF) to produce low-shrinkage high tenacity nylon 6.6 light denier industrial (LDI) yarns in North Carolina. The business is operated in a plant in Stoneville, North Carolina which is owned by the Company. The Company receives annual rental income of $0.3 million from USTF for the use of the facility. 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. The Company has a put right under the USTF operating agreement to sell its entire interest in the joint venture at fair market value and the related Stoneville, North Carolina manufacturing facility for $3.0 million in cash to SANS Fibres. Per the agreement, after December 31, 2006, the Company must give one years prior written notice of its election to exercise the put option. SANS Fibres has a call right upon the same terms as the Companys put right. See Footnote 18, Subsequent Events for further discussions of USTF. | ||
In September 2000, Unifi and Nilit Ltd., located in Israel, formed 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. The nylon segment has a supply agreement with UNF which expires in April 2008. | ||
Condensed balance sheet information as of December 24, 2006, and income statement information for the quarter and year-to-date periods ended December 24, 2006, of the combined unconsolidated equity affiliates was as follows (amounts in thousands): |
As of | ||||
December 24, 2006 | ||||
Current assets |
$ | 153,142 | ||
Noncurrent assets |
201,233 | |||
Current liabilities |
45,839 | |||
Noncurrent liabilities |
12,212 | |||
Shareholders equity and capital accounts |
296,324 |
12
For the Quarter Ended | For the Six-Months Ended | |||||||
December 24, 2006 | December 24, 2006 | |||||||
Net sales |
$ | 138,170 | $ | 295,357 | ||||
Gross profit |
559 | 2,018 | ||||||
Loss from operations |
(5,058 | ) | (8,956 | ) | ||||
Net loss |
(6,363 | ) | (10,759 | ) |
11. | Severance and Restructuring Charges | |
On April 20, 2006, the Company re-organized its domestic business operations, and as a result, recorded a restructuring charge for severance of approximately $0.8 million in the fourth quarter of fiscal year 2006. Approximately 45 management level salaried employees were affected by this reorganization. | ||
Accrued restructuring relates to lease costs associated with the closure of a facility in Altamahaw, North Carolina. The lease payments are due on a quarterly basis with a final balloon payment due May 2008. | ||
The table below summarizes changes to the accrued severance and accrued restructuring accounts for the year-to-date period ended December 24, 2006 (amounts in thousands): |
Balance at | Balance at | |||||||||||||||||||
June 25, 2006 | Charges | Adjustments | Amounts Used | December 24, 2006 | ||||||||||||||||
Accrued severance |
$ | 576 | $ | | $ | 138 | $ | (497 | ) | $ | 217 | |||||||||
Accrued
restructuring |
$ | 3,550 | $ | | $ | 116 | $ | (498 | ) | $ | 3,168 |
12. | Impairment Charges | |
In November 2006, the Companys Brazilian operation decided to modernize its facilities by replacing ten of its older machines with newer machines purchased from the domestic polyester division. These machine purchases will allow the Brazilian facility to produce tailor made products at higher speeds resulting in lower costs and increased competitiveness. In connection with the preparation of the financial statements included in this report, the Company concluded that it was required to recognize a $2.0 million impairment charge on the older machines in the second quarter ended December 24, 2006. The impairment charge is related to the book value of the machines and the related dismantling and removal costs. | ||
On October 26, 2006 the Company announced its intent to sell a manufacturing facility that the Company had leased to a tenant since 1999. The lease expired in October 2006 and the Company decided to sell the property upon expiration of the lease. Pursuant to this determination, the Company received appraisals relating to the property and performed an impairment review in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). The Company evaluated the recoverability of the long-lived asset and determined that the carrying amount of the property exceeded its fair value. Accordingly, the Company recorded a non-cash impairment charge of $1.2 million during the first quarter of fiscal year 2007, which included $0.1 million in estimated selling costs that will be paid from the proceeds of the sale when it occurs. |
13
During the quarter ended September 25, 2005 management decided to consolidate its domestic nylon operations to improve overall operating efficiencies. This initiative included closing Plant 1 in Mayodan, North Carolina and moving its operations and offices to Plant 3 in Madison, North Carolina which is the Nylon divisions largest facility with over one million square feet of production space. As a part of the consolidation plan, three nylon facilities were vacated and classified as held for sale later in fiscal year 2006. The Company received appraisals on the three properties, and after reviewing the reports, determined that one of the facilitys 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 year 2006 which included $0.2 million of estimated selling costs. | ||
13. | Assets Held for Sale | |
The Company announced in the quarter ended September 25, 2005 that the nylon division decided to consolidate its operating facilities in Mayodan and Madison, North Carolina. As a result, Plant 1, Plant 5, Plant 7, and the central distribution center (the CDC) were completely vacated as of March 2006 and listed for sale. In addition, unrelated to the nylon restructuring plan, the Company decided to market other properties in Yadkinville, North Carolina and Staunton, Virginia as well as related idle machinery and equipment. The listing contract for real property was signed in December 2005 and was extended to expire in June 2007. The sale of the CDC and the Staunton, Virginia properties closed in the fourth quarter of fiscal year 2006. | ||
The following table summarizes by category assets held for sale (amounts in thousands): |
December 24, | June 25, | |||||||
2006 | 2006 | |||||||
Land |
$ | 612 | $ | 612 | ||||
Building |
10,052 | 10,052 | ||||||
Machinery and equipment |
4,238 | 4,238 | ||||||
Leasehold improvements |
517 | 517 | ||||||
$ | 15,419 | $ | 15,419 | |||||
14. | Retirement Plan | |
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. During the first quarter of fiscal year 2005, the Company announced plans to close its operations in Europe (the European Division), and as a result, recognized a previously unrecognized net actuarial loss of $9.4 million. As of June 26, 2005, the subsidiary had terminated substantially all of its employees. During fiscal year 2006, the Companys Irish subsidiary made its final contribution of $6.1 million to the DB Plan and the remaining accumulated benefit obligation of $32.5 million was paid in full through the purchase of annuity contracts for all of the European Division participants in the DB Plan. See Note 16 Discontinued Operations for further discussion of the closure. |
14
The net periodic pension expense recognized in the second quarter and six-month period of fiscal years 2007 and 2006 is as follows (amounts in thousands): |
For the Quarters Ended | For the Six-Months Ended | |||||||||||||||
December 24, | December 25, | December 24, | December 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Pension expense: |
||||||||||||||||
Service cost |
$ | | $ | | $ | | $ | | ||||||||
Interest costs |
| 596 | | 1,208 | ||||||||||||
Expected return on plan assets |
| (596 | ) | | (1,208 | ) | ||||||||||
Plan curtailment |
| | | | ||||||||||||
Net periodic pension
expense |
$ | | $ | | $ | | $ | | ||||||||
15. | Long-Term Debt | |
In May 2006, the Company amended its asset-based revolving credit facility with a senior secured asset-based revolving credit facility (the Amended Credit Agreement) to provide a $100 million revolving borrowing base (with an option to increase borrowing capacity up to $150 million), to extend its maturity from 2006 to 2011, and to revise some of its other terms and covenants. The Amended Credit Agreement is secured by first-priority liens on the Companys and its subsidiary guarantors inventory, accounts receivable, general intangibles (other than uncertificated capital stock of subsidiaries and other persons), investment property (other than capital stock of subsidiaries and other persons), chattel paper, documents, instruments, supporting obligations, letter of credit rights, deposit accounts and other related personal property and all proceeds relating to any of the above, and by second-priority liens, subject to permitted liens, on the Companys and its subsidiary guarantors assets securing its 11.5% senior secured notes and guarantees on a first-priority basis, in each case other than certain excluded assets. The Companys ability to borrow under the Companys Amended Credit Agreement is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to other conditions and limitations. | ||
As of December 24, 2006, the Company had no outstanding borrowings and had availability of approximately $82.8 million under the terms of the Amended Credit Agreement. Borrowings under the amended Credit Agreement bear interest at rates selected periodically by the Company of LIBOR plus 1.50% to 2.25% and/or prime plus 0.00% to 0.50%. The interest rate matrix is based on the Companys excess availability under the Amended Credit Agreement. The interest rate in effect at December 24, 2006, was 6.6%. Under the Amended Credit Agreement, the Company pays an unused line fee ranging from 0.25% to 0.35% per annum of the borrowing base. | ||
The Amended Credit Agreement contains affirmative and negative customary covenants for asset based loans that restrict future borrowings and capital spending. Such covenants include, without limitation, restrictions and limitations on (i) sales of assets, consolidation, merger, dissolution and the issuance of our capital stock, each subsidiary guarantor and any domestic subsidiary thereof, (ii) permitted encumbrances on our property, each subsidiary guarantor and any domestic subsidiary thereof, (iii) the incurrence of indebtedness by the Company, any subsidiary guarantor or any domestic subsidiary thereof, (iv) the making of loans or investments by the Company, any subsidiary guarantor or any domestic subsidiary thereof, (v) the declaration of dividends and redemptions by the Company or any subsidiary guarantor and (vi) transactions with affiliates by the Company or any subsidiary guarantor. As of December 24, 2006, the Company was in compliance with the loan covenants. |
15
On May 26, 2006, the Company issued $190 million of 11.5% senior secured notes (2014 notes) which mature on May 15, 2014. These notes were issued to substantially replace $250 million of senior, unsecured debt securities that were due February 2008. The 2014 notes and guarantees are secured by first-priority liens, subject to permitted liens, on substantially all of the Companys and the Companys subsidiary guarantors assets (other than the assets securing the Companys obligations under the Companys Amended Credit Agreement on a first-priority basis, which consist primarily of accounts receivable and inventory), including, but not limited to, property, plant and equipment, the capital stock of the Companys domestic subsidiaries and certain of the Companys joint ventures and up to 65% of the voting stock of the Companys first-tier foreign subsidiaries, whether now owned or hereafter acquired, except for certain excluded assets. The 2014 notes are unconditionally guaranteed on a senior, secured basis by each of the Companys existing and future restricted domestic subsidiaries. The 2014 notes and guarantees are secured by second-priority liens, subject to permitted liens, on the Company and its subsidiary guarantors assets that will secure the notes and guarantees on a first-priority basis. The Company may redeem some or all of the 2014 notes on or after May 15, 2010. In addition, prior to May 15, 2009, the Company may redeem up to 35% of the principal amount of the 2014 notes with the proceeds of certain equity offering. The estimated fair value of the 2014 notes, based on quoted market prices, at December 24, 2006 and June 25, 2006, was approximately $172.0 million and $182.4 million, respectively. The Company makes semi-annual interest payments of $10.9 million on the fifteenth business day of November and May. | ||
16. | Discontinued Operations | |
On July 28, 2005, the Company announced that it would discontinue the operations of the Companys external sourcing business, Unimatrix Americas. As of March 26, 2006, managements plan to exit the business was successfully completed resulting in the reclassification of the segments losses as discontinued operations for all periods presented. | ||
On July 28, 2004, the Company announced its decision to close its European Division. The manufacturing facilities in Ireland ceased operations on October 31, 2004. The Company is in the process of settling its final obligations at this time. | ||
Results of operations for the sourcing segment and European Division for the second quarter and year-to-date periods of fiscal years 2007 and 2006 are as follows (amounts in thousands): |
For the Quarters Ended | For the Six-Months Ended | |||||||||||||||
December 24, | December 25, | December 24, | December 25, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
Net sales |
$ | | $ | | $ | | $ | | ||||||||
Income (loss) from discontinued
operations before income taxes |
(167 | ) | (583 | ) | (203 | ) | 1,346 | |||||||||
Income tax expense |
| | | | ||||||||||||
Net income (loss) from discontinued
operations, net of tax |
$ | (167 | ) | $ | (583 | ) | $ | (203 | ) | $ | 1,346 | |||||
17. | Commitments and Contingencies | |
On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located in Kinston, North Carolina from INVISTA S.a.r.l. (INVISTA). The land for the Kinston site is leased pursuant to a 99 year ground lease (Ground Lease) with E.I. DuPont de Nemours (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 |
16
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 comply with 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. | ||
18. | Subsequent Events | |
Effective January 1, 2007, Unifi Manufacturing, Inc. (UMI), one of the Companys wholly owned subsidiaries, completed its acquisition of certain assets and assumed certain liabilities from Dillon Yarn Corporation (Dillon), related to or used in Dillons textured nylon and polyester yarn businesses. The aggregate consideration paid in connection with the Dillon acquisition was $62.6 million; consisting of a combination of $42.1 million in cash, and 8.3 million shares of the Companys common stock valued at $20.5 million. | ||
On January 2, 2007, the Company borrowed $43.0 million under the Amended Credit Agreement to finance the purchase of the Dillon assets located in Dillon, South Carolina. The borrowings were derived from two separate LIBOR rate revolving loans; a $15.0 million, 6.576%, thirty day loan and a $28.0 million, 6.596%, 60 day loan. The Company intends to renew the loans as they come due reducing the outstanding borrowings as cash generated from operations becomes available. | ||
On January 2, 2007, the Company notified SANS Fibres that it was exercising its put right to sell its interest in the joint venture. Negotiations to determine an agreeable price for the Companys interest in the joint venture will begin during the Companys third quarter of fiscal year 2007 with an anticipated transaction completion date in the third quarter of fiscal year 2008. The Company does not expect to report a material gain or loss on the transaction. | ||
19. | Condensed Consolidated Guarantor and Non-Guarantor Financial Statements | |
The guarantor subsidiaries presented below represent the Companys subsidiaries that are subject to the terms and conditions outlined in the indenture governing the Companys issuance of 2014 notes and the guarantees, jointly and severally, on a senior secured basis. The non-guarantor subsidiaries presented below represent the foreign subsidiaries which do not guarantee the notes. Each subsidiary guarantor is 100% owned, directly or indirectly, by Unifi, Inc. and all guarantees are full and unconditional. | ||
Supplemental financial information for the Company and its guarantor subsidiaries and non-guarantor subsidiaries of the 2014 notes is presented below. |
17
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 22,141 | $ | 2,252 | $ | 11,219 | $ | | $ | 35,612 | ||||||||||
Receivables, net |
| 60,458 | 17,028 | | 77,486 | |||||||||||||||
Inventories |
| 84,646 | 30,740 | | 115,386 | |||||||||||||||
Deferred income taxes |
| 10,043 | 1,939 | | 11,982 | |||||||||||||||
Assets held for sale |
| 15,419 | | | 15,419 | |||||||||||||||
Other current assets |
| 3,204 | 8,083 | | 11,287 | |||||||||||||||
Total current assets |
22,141 | 176,022 | 69,009 | | 267,172 | |||||||||||||||
Property, plant and equipment |
11,806 | 843,803 | 56,344 | | 911,953 | |||||||||||||||
Less accumulated depreciation |
(1,697 | ) | (652,274 | ) | (38,521 | ) | | (692,492 | ) | |||||||||||
10,109 | 191,529 | 17,823 | | 219,461 | ||||||||||||||||
Investments in unconsolidated affiliates |
| 156,182 | 28,028 | | 184,210 | |||||||||||||||
Investments in consolidated subsidiaries |
428,486 | | | (428,486 | ) | | ||||||||||||||
Other noncurrent assets |
64,679 | 4,331 | 8,991 | (55,235 | ) | 22,766 | ||||||||||||||
$ | 525,415 | $ | 528,064 | $ | 123,851 | $ | (483,721 | ) | $ | 693,609 | ||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and other |
$ | 759 | $ | 51,977 | $ | 7,782 | $ | | $ | 60,518 | ||||||||||
Accrued expenses |
2,753 | 12,674 | 3,142 | | 18,569 | |||||||||||||||
Income taxes payable (receivable) |
(11,423 | ) | 10,571 | 1,225 | | 373 | ||||||||||||||
Current maturities of long-term debt and other current
liabilities |
| 292 | 7,764 | | 8,056 | |||||||||||||||
Total current liabilities |
(7,911 | ) | 75,514 | 19,913 | | 87,516 | ||||||||||||||
Long-term debt and other liabilities |
191,273 | 54,619 | 13,034 | (55,235 | ) | 203,691 | ||||||||||||||
Deferred income taxes |
(16,190 | ) | 59,130 | 1,219 | | 44,159 | ||||||||||||||
Shareholders/ invested equity |
358,243 | 338,801 | 89,685 | (428,486 | ) | 358,243 | ||||||||||||||
$ | 525,415 | $ | 528,064 | $ | 123,851 | $ | (483,721 | ) | $ | 693,609 | ||||||||||
18
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
ASSETS |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 22,992 | $ | 1,392 | $ | 10,933 | $ | | $ | 35,317 | ||||||||||
Receivables, net |
1 | 72,332 | 20,903 | | 93,236 | |||||||||||||||
Inventories |
| 91,840 | 24,178 | | 116,018 | |||||||||||||||
Deferred income taxes |
| 10,473 | 1,266 | | 11,739 | |||||||||||||||
Assets held for sale |
| 15,419 | | | 15,419 | |||||||||||||||
Other current assets |
| 2,558 | 6,671 | | 9,229 | |||||||||||||||
Total current assets |
22,993 | 194,014 | 63,951 | | 280,958 | |||||||||||||||
Property, plant and equipment |
11,806 | 848,068 | 56,463 | | 916,337 | |||||||||||||||
Less accumulated depreciation |
(1,553 | ) | (637,487 | ) | (37,601 | ) | | (676,641 | ) | |||||||||||
10,253 | 210,581 | 18,862 | | 239,696 | ||||||||||||||||
Investments in unconsolidated affiliates |
| 157,741 | 32,476 | | 190,217 | |||||||||||||||
Investments in consolidated subsidiaries |
450,655 | | | (450,655 | ) | | ||||||||||||||
Other noncurrent assets |
65,713 | 8,116 | 8,223 | (60,286 | ) | 21,766 | ||||||||||||||
$ | 549,614 | $ | 570,452 | $ | 123,512 | $ | (510,941 | ) | $ | 732,637 | ||||||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Accounts payable and other |
$ | 1,698 | $ | 57,315 | $ | 9,903 | $ | | $ | 68,916 | ||||||||||
Accrued expenses |
2,202 | 18,011 | 3,656 | | 23,869 | |||||||||||||||
Income taxes payable (receivable) |
(10,046 | ) | 11,004 | 1,345 | | 2,303 | ||||||||||||||
Current maturities of long-term debt and other current
liabilities |
| 290 | 6,040 | | 6,330 | |||||||||||||||
Total current liabilities |
(6,146 | ) | 86,620 | 20,944 | | 101,418 | ||||||||||||||
Long-term debt and other liabilities |
191,273 | 57,557 | 13,861 | (60,286 | ) | 202,405 | ||||||||||||||
Deferred income taxes |
(18,466 | ) | 63,380 | 947 | | 45,861 | ||||||||||||||
Shareholders/ invested equity |
382,953 | 362,895 | 87,760 | (450,655 | ) | 382,953 | ||||||||||||||
$ | 549,614 | $ | 570,452 | $ | 123,512 | $ | (510,941 | ) | $ | 732,637 | ||||||||||
19
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Summary of Operations: |
||||||||||||||||||||
Net sales |
$ | | $ | 129,432 | $ | 27,922 | $ | (459 | ) | $ | 156,895 | |||||||||
Cost of sales |
| 130,361 | 24,546 | (632 | ) | 154,275 | ||||||||||||||
Selling, general and administrative expenses |
| 8,685 | 1,631 | 72 | 10,388 | |||||||||||||||
Provision (recovery) for bad debts |
| (545 | ) | (467 | ) | | (1,012 | ) | ||||||||||||
Interest expense |
5,938 | 172 | 1 | | 6,111 | |||||||||||||||
Interest income |
(168 | ) | | (898 | ) | | (1,066 | ) | ||||||||||||
Other (income) expense, net |
(4,335 | ) | 3,769 | 302 | 500 | 236 | ||||||||||||||
Equity in (earnings) losses of unconsolidated affiliates |
| 395 | 2,581 | (100 | ) | 2,876 | ||||||||||||||
Equity in subsidiaries |
16,707 | | | (16,707 | ) | | ||||||||||||||
Write down of long-lived assets |
| | 2,002 | | 2,002 | |||||||||||||||
Income (loss) from continuing operations before income
taxes |
(18,142 | ) | (13,405 | ) | (1,776 | ) | 16,408 | (16,915 | ) | |||||||||||
Provision (benefit) for income taxes |
(1,600 | ) | 821 | 239 | | (540 | ) | |||||||||||||
Income (loss) from continuing operations |
(16,542 | ) | (14,226 | ) | (2,015 | ) | 16,408 | (16,375 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax |
| | (167 | ) | | (167 | ) | |||||||||||||
Net income (loss) |
$ | (16,542 | ) | $ | (14,226 | ) | $ | (2,182 | ) | $ | 16,408 | $ | (16,542 | ) | ||||||
20
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Summary of Operations: |
||||||||||||||||||||
Net sales |
$ | | $ | 166,089 | $ | 25,977 | $ | (949 | ) | $ | 191,117 | |||||||||
Cost of sales |
| 158,953 | 23,584 | (790 | ) | 181,747 | ||||||||||||||
Selling, general and administrative expenses |
71 | 8,977 | 1,627 | (214 | ) | 10,461 | ||||||||||||||
Provision for bad debts |
| 571 | 33 | | 604 | |||||||||||||||
Interest expense |
4,564 | 97 | 20 | | 4,681 | |||||||||||||||
Interest income |
(524 | ) | (27 | ) | (1,638 | ) | | (2,189 | ) | |||||||||||
Other (income) expense, net |
(4,896 | ) | 4,179 | 969 | 51 | 303 | ||||||||||||||
Equity in (earnings) losses of unconsolidated affiliates |
| (1,306 | ) | 1,288 | | (18 | ) | |||||||||||||
Equity in subsidiaries |
4,172 | | | (4,172 | ) | | ||||||||||||||
Income (loss) from continuing operations before income
taxes |
(3,387 | ) | (5,355 | ) | 94 | 4,176 | (4,472 | ) | ||||||||||||
Provision (benefit) for income taxes |
381 | (2,005 | ) | 545 | | (1,079 | ) | |||||||||||||
Income (loss) from continuing operations |
(3,768 | ) | (3,350 | ) | (451 | ) | 4,176 | (3,393 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax |
| (313 | ) | (270 | ) | | (583 | ) | ||||||||||||
Extraordinary gain (loss) net of taxes of $0 |
| 208 | | | 208 | |||||||||||||||
Net income (loss) |
$ | (3,768 | ) | $ | (3,455 | ) | $ | (721 | ) | $ | 4,176 | $ | (3,768 | ) | ||||||
21
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Summary of Operations: |
||||||||||||||||||||
Net sales |
$ | | $ | 268,957 | $ | 59,263 | $ | (1,381 | ) | $ | 326,839 | |||||||||
Cost of sales |
| 264,848 | 51,693 | (1,362 | ) | 315,179 | ||||||||||||||
Selling, general and administrative expenses |
| 18,607 | 3,152 | (82 | ) | 21,677 | ||||||||||||||
Provision (recovery) for bad debts |
| 543 | 55 | | 598 | |||||||||||||||
Interest expense |
11,867 | 308 | 1 | | 12,176 | |||||||||||||||
Interest income |
(272 | ) | | (1,238 | ) | | (1,510 | ) | ||||||||||||
Other (income) expense, net |
(8,723 | ) | 7,839 | (106 | ) | 747 | (243 | ) | ||||||||||||
Equity in (earnings) losses of unconsolidated affiliates |
| 506 | 4,563 | (244 | ) | 4,825 | ||||||||||||||
Equity in subsidiaries |
23,816 | | | (23,816 | ) | | ||||||||||||||
Write down of long-lived assets |
| 1,200 | 2,002 | | 3,202 | |||||||||||||||
Income (loss) from continuing operations before income
taxes |
(26,688 | ) | (24,894 | ) | (859 | ) | 23,376 | (29,065 | ) | |||||||||||
Provision (benefit) for income taxes |
907 | (3,819 | ) | 1,239 | | (1,673 | ) | |||||||||||||
Income (loss) from continuing operations |
(27,595 | ) | (21,075 | ) | (2,098 | ) | 23,376 | (27,392 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax |
| | (203 | ) | | (203 | ) | |||||||||||||
Net income (loss) |
$ | (27,595 | ) | $ | (21,075 | ) | $ | (2,301 | ) | $ | 23,376 | $ | (27,595 | ) | ||||||
22
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Summary of Operations: |
||||||||||||||||||||
Net sales |
$ | | $ | 325,048 | $ | 51,025 | $ | (1,854 | ) | $ | 374,219 | |||||||||
Cost of sales |
| 309,674 | 48,348 | (1,576 | ) | 356,446 | ||||||||||||||
Selling, general and administrative expenses |
153 | 18,028 | 3,138 | (371 | ) | 20,948 | ||||||||||||||
Provision for bad debts |
| 1,098 | 33 | | 1,131 | |||||||||||||||
Interest expense |
9,074 | 364 | 19 | | 9,457 | |||||||||||||||
Interest income |
(823 | ) | (92 | ) | (2,555 | ) | | (3,470 | ) | |||||||||||
Other (income) expense, net |
(9,246 | ) | 8,074 | 623 | | (549 | ) | |||||||||||||
Equity in (earnings) losses of unconsolidated affiliates |
| (3,508 | ) | 1,746 | (80 | ) | (1,842 | ) | ||||||||||||
Equity in subsidiaries |
7,059 | | | (7,059 | ) | | ||||||||||||||
Write down of long-lived assets |
| 1,500 | | | 1,500 | |||||||||||||||
Restructuring charges (recovery) |
| (53 | ) | 82 | | 29 | ||||||||||||||
Income (loss) from continuing operations before income
taxes |
(6,217 | ) | (10,037 | ) | (409 | ) | 7,232 | (9,431 | ) | |||||||||||
Provision (benefit) for income taxes |
637 | (3,252 | ) | 1,384 | | (1,231 | ) | |||||||||||||
Income (loss) from continuing operations |
(6,854 | ) | (6,785 | ) | (1,793 | ) | 7,232 | (8,200 | ) | |||||||||||
Income (loss) from discontinued operations, net of tax |
| (1,165 | ) | 2,511 | | 1,346 | ||||||||||||||
Net income (loss) |
$ | (6,854 | ) | $ | (7,950 | ) | $ | 718 | $ | 7,232 | $ | (6,854 | ) | |||||||
23
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net cash provided by (used in) continuing operating |
$ | (610 | ) | $ | 5,254 | $ | (426 | ) | $ | (68 | ) | $ | 4,150 | |||||||
Investing activities: |
||||||||||||||||||||
Capital expenditures |
| (1,672 | ) | (1,669 | ) | | (3,341 | ) | ||||||||||||
Acquisition |
| (393 | ) | | | (393 | ) | |||||||||||||
Collection of notes receivable |
234 | 1,112 | (706 | ) | 94 | 734 | ||||||||||||||
Proceeds from the sale of capital assets |
| | 30 | | 30 | |||||||||||||||
Return of capital in equity affiliates |
| 229 | | | 229 | |||||||||||||||
Split dollar life insurance premiums |
(166 | ) | | | | (166 | ) | |||||||||||||
Other |
| (3,380 | ) | 3,021 | (3 | ) | (362 | ) | ||||||||||||
Net cash provided by (used in) investing
activities |
68 | (4,104 | ) | 676 | 91 | (3,269 | ) | |||||||||||||
Financing activities: |
||||||||||||||||||||
Payment of long-term debt |
| (290 | ) | | | (290 | ) | |||||||||||||
Other |
(309 | ) | | | | (309 | ) | |||||||||||||
Net cash used in financing activities |
(309 | ) | (290 | ) | | | (599 | ) | ||||||||||||
Cash flows of discontinued operations: |
||||||||||||||||||||
Operating cash flow |
| | (50 | ) | | (50 | ) | |||||||||||||
Net cash used in discontinued operations |
| | (50 | ) | | (50 | ) | |||||||||||||
Effect of exchange rate changes on cash and cash
equivalents |
| | 86 | (23 | ) | 63 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents |
(851 | ) | 860 | 286 | | 295 | ||||||||||||||
Cash and cash equivalents at beginning of period |
22,992 | 1,392 | 10,933 | | 35,317 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 22,141 | $ | 2,252 | $ | 11,219 | $ | | $ | 35,612 | ||||||||||
24
Guarantor | Non-Guarantor | |||||||||||||||||||
Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Operating activities: |
||||||||||||||||||||
Net cash provided by (used in) continuing operating |
$ | 27,066 | $ | (11,490 | ) | $ | 2,044 | $ | | $ | 17,620 | |||||||||
Investing activities: |
||||||||||||||||||||
Capital expenditures |
| (6,962 | ) | (652 | ) | | (7,614 | ) | ||||||||||||
Investment in equity affiliates |
| (388 | ) | (30,000 | ) | | (30,388 | ) | ||||||||||||
Investment of foreign restricted assets |
| | 158 | | 158 | |||||||||||||||
Collection of notes receivable |
248 | (5 | ) | (7 | ) | | 236 | |||||||||||||
Proceeds from sale of capital assets |
| 2,359 | 17 | | 2,376 | |||||||||||||||
Change in restricted cash |
| | 2,766 | | 2,766 | |||||||||||||||
Other |
| 33 | (253 | ) | 10 | (210 | ) | |||||||||||||
Net cash provided by (used in) investing activities |
248 | (4,963 | ) | (27,971 | ) | 10 | (32,676 | ) | ||||||||||||
Financing activities: |
||||||||||||||||||||
Payment of long term debt |
| (24,407 | ) | | | (24,407 | ) | |||||||||||||
Other |
| 21,030 | (20,980 | ) | (10 | ) | 40 | |||||||||||||
Net cash used in financing activities |
| (3,377 | ) | (20,980 | ) | (10 | ) | (24,367 | ) | |||||||||||
Cash flows of discontinued operations: |
||||||||||||||||||||
Operating cash flow |
| 721 | (5,361 | ) | | (4,640 | ) | |||||||||||||
Investing cash flow |
| | 23,062 | | 23,062 | |||||||||||||||
Net cash provided by discontinued operations |
| 721 | 17,701 | | 18,422 | |||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
| 1 | 398 | | 399 | |||||||||||||||
Net increase (decrease) in cash and cash equivalents |
27,314 | (19,108 | ) | (28,808 | ) | | (20,602 | ) | ||||||||||||
Cash and cash equivalents at beginning of period |
35,867 | 25,272 | 44,482 | | 105,621 | |||||||||||||||
Cash and cash equivalents at end of period |
$ | 63,181 | $ | 6,164 | $ | 15,674 | $ | | $ | 85,019 | ||||||||||
25
26
| sales volume, which is an indicator of demand; | ||
| margins, which are indicators of product mix and profitability; | ||
| net income or loss before interest, taxes, depreciation and amortization (EBITDA) and income or loss from discontinued operations, which are indicators of the Companys ability to pay debt; and | ||
| working capital of each business unit as a percentage of sales, which is an indicator of the Companys production efficiency and ability to manage its inventory and receivables. |
27
Balance at | Balance at | |||||||||||||||||||
June 25, 2006 | Charges | Adjustments | Amounts Used | December 24, 2006 | ||||||||||||||||
Accrued severance |
$ | 576 | $ | | $ | 138 | $ | (497 | ) | $ | 217 | |||||||||
Accrued
restructuring |
$ | 3,550 | $ | | $ | 116 | $ | (498 | ) | $ | 3,168 |
28
29
As of | ||||
December 24, 2006 | ||||
Current assets |
$ | 153,142 | ||
Noncurrent assets |
201,233 | |||
Current liabilities |
45,839 | |||
Noncurrent liabilities |
12,212 | |||
Shareholders equity and capital accounts |
296,324 |
For the Quarter Ended | For the Six-Months Ended | |||||||
December 24, 2006 | December 24, 2006 | |||||||
Net sales |
$ | 138,170 | $ | 295,357 | ||||
Gross profit |
559 | 2,018 | ||||||
Loss from operations |
(5,058 | ) | (8,956 | ) | ||||
Net loss |
(6,363 | ) | (10,759 | ) |
30
For the Quarters Ended | ||||||||||||||||||||
December 24, 2006 | December 25, 2005 | |||||||||||||||||||
% to Total | % to Total | % Change | ||||||||||||||||||
Net sales |
||||||||||||||||||||
Polyester |
$ | 118,507 | 75.5 | $ | 146,789 | 76.8 | (19.3 | ) | ||||||||||||
Nylon |
38,388 | 24.5 | 44,328 | 23.2 | (13.4 | ) | ||||||||||||||
Total |
$ | 156,895 | 100.0 | $ | 191,117 | 100.0 | (17.9 | ) | ||||||||||||
% to Sales | % to Sales | |||||||||||||||||||
Gross profit |
||||||||||||||||||||
Polyester |
$ | 1,199 | 0.8 | $ | 8,020 | 4.2 | (85.1 | ) | ||||||||||||
Nylon |
1,421 | 0.9 | 1,350 | 0.7 | 5.3 | |||||||||||||||
Total |
2,620 | 1.7 | 9,370 | 4.9 | (72.0 | ) | ||||||||||||||
Selling, general and administrative
expenses |
||||||||||||||||||||
Polyester |
8,137 | 5.2 | 8,299 | 4.4 | (2.0 | ) | ||||||||||||||
Nylon |
2,251 | 1.4 | 2,162 | 1.1 | 4.1 | |||||||||||||||
Total |
10,388 | 6.6 | 10,461 | 5.5 | (0.7 | ) | ||||||||||||||
Write down of long-lived assets |
||||||||||||||||||||
Polyester |
2,002 | 1.3 | | | | |||||||||||||||
Nylon |
| | | | | |||||||||||||||
Corporate |
| | | | | |||||||||||||||
Total |
2,002 | 1.3 | | | | |||||||||||||||
Other (income) expense, net |
7,145 | 4.5 | 3,381 | 1.8 | 111.3 | |||||||||||||||
Loss from continuing operations
before income taxes and
extraordinary item |
(16,915 | ) | (10.7 | ) | (4,472 | ) | (2.4 | ) | 278.2 | |||||||||||
Benefit for income taxes |
(540 | ) | (0.3 | ) | (1,079 | ) | (0.6 | ) | (50.0 | ) | ||||||||||
Loss from continuing operations
before extraordinary item |
(16,375 | ) | (10.4 | ) | (3,393 | ) | (1.8 | ) | 382.6 | |||||||||||
Loss from discontinued
operations, net of tax |
(167 | ) | (0.1 | ) | (583 | ) | (0.3 | ) | (71.4 | ) | ||||||||||
Extraordinary gain net of tax of $0 |
| | 208 | 0.1 | | |||||||||||||||
Net loss |
$ | (16,542 | ) | (10.5 | ) | $ | (3,768 | ) | (2.0 | ) | 339.1 | |||||||||
31
32
33
For the Six-Months Ended | ||||||||||||||||||||
December 24, 2006 | December 25, 2005 | |||||||||||||||||||
% to Total | % to Total | % Change | ||||||||||||||||||
Net sales |
||||||||||||||||||||
Polyester |
$ | 248,978 | 76.2 | $ | 280,957 | 75.1 | (11.4 | ) | ||||||||||||
Nylon |
77,861 | 23.8 | 93,262 | 24.9 | (16.5 | ) | ||||||||||||||
Total |
$ | 326,839 | 100.0 | $ | 374,219 | 100.0 | (12.7 | ) | ||||||||||||
% to Sales | % to Sales | |||||||||||||||||||
Gross profit |
||||||||||||||||||||
Polyester
|
$ | 8,340 | 2.6 | $ | 15,147 | 4.0 | (44.9 | ) | ||||||||||||
Nylon |
3,320 | 1.0 | 2,626 | 0.7 | 26.4 | |||||||||||||||
Total |
11,660 | 3.6 | 17,773 | 4.7 | (34.4 | ) | ||||||||||||||
Selling, general and administrative
expenses |
||||||||||||||||||||
Polyester |
16,957 | 5.2 | 16,575 | 4.4 | 2.3 | |||||||||||||||
Nylon |
4,720 | 1.4 | 4,373 | 1.2 | 7.9 | |||||||||||||||
Total |
21,677 | 6.6 | 20,948 | 5.6 | 3.5 | |||||||||||||||
Write down of long-lived assets
|
||||||||||||||||||||
Polyester |
2,002 | 0.6 | | | | |||||||||||||||
Nylon |
| | 1,500 | 0.4 | | |||||||||||||||
Corporate |
1,200 | 0.4 | | | | |||||||||||||||
Total |
3,202 | 1.0 | 1,500 | 0.4 | 113.5 | |||||||||||||||
Restructuring charges (recovery)
|
||||||||||||||||||||
Polyester |
| | 47 | | | |||||||||||||||
Nylon |
| | (18 | ) | | | ||||||||||||||
Total |
| | 29 | | | |||||||||||||||
Other (income) expense, net |
15,846 | 4.8 | 4,727 | 1.3 | 235.2 | |||||||||||||||
Loss from continuing operations
before income taxes and
extraordinary item |
(29,065 | ) | (8.8 | ) | (9,431 | ) | (2.6 | ) | 208.2 | |||||||||||
Benefit for income taxes |
(1,673 | ) | (0.5 | ) | (1,231 | ) | (0.3 | ) | 35.9 | |||||||||||
Loss from continuing operations
before extraordinary item |
(27,392 | ) | (8.4 | ) | (8,200 | ) | (2.3 | ) | 234.0 | |||||||||||
Income (loss) from discontinued
operations, net of tax |
(203 | ) | | 1,346 | 0.4 | (115.1 | ) | |||||||||||||
Net loss |
$ | (27,595 | ) | (8.4 | ) | $ | (6,854 | ) | (1.9 | ) | 302.6 | |||||||||
34
35
36
37
38
| the competitive nature of the textile industry and the impact of worldwide competition; | ||
| changes in the trade regulatory environment and governmental policies and legislation; | ||
| the availability, sourcing and pricing of raw materials; | ||
| general domestic and international economic and industry conditions in markets where the Company competes, such as recession and other economic and political factors over which the Company has no control; | ||
| changes in consumer spending, customer preferences, fashion trends and end-uses; | ||
| its ability to reduce production costs; | ||
| its ability to invest in new acquisitions and long-lived assets; |
39
| changes in currency exchange rates, interest and inflation rates; | ||
| the financial condition of its customers; | ||
| technological advancements and the continued availability of financial resources to fund capital expenditures; | ||
| the operating performance of joint ventures, alliances and other equity investments; | ||
| the impact of environmental, health and safety regulations; and | ||
| employee relations. |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
40
December 24, | June 25, | |||||||
2006 | 2006 | |||||||
Foreign currency purchase contracts: |
||||||||
Notional amount |
$ | 916 | $ | 526 | ||||
Fair value |
925 | 535 | ||||||
Net (gain) loss |
$ | (9 | ) | $ | (9 | ) | ||
Foreign currency sales contracts: |
||||||||
Notional amount |
$ | 611 | $ | 833 | ||||
Fair value |
423 | 878 | ||||||
Net (gain) loss |
$ | (188 | ) | $ | 45 | |||
Item 4. | Controls and Procedures |
41
42
Item 1. | Legal Proceedings |
Item 1A. | Risk Factors |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Total Number of | Maximum Number | |||||||||||||||
Total Number | Shares Purchased as | of Shares that May | ||||||||||||||
of | Part of Publicly | Yet Be Purchased | ||||||||||||||
Shares | Average Price Paid | Announced Plans | Under the Plans or | |||||||||||||
Period | Purchased | per Share | or Programs | Programs | ||||||||||||
09/25/06 10/24/06 |
| | | 6,807,241 | ||||||||||||
10/25/06 11/24/06 |
| | | 6,807,241 | ||||||||||||
11/25/06 12/24/06 |
| | | 6,807,241 | ||||||||||||
Total |
| | | |||||||||||||
43
Item 4. | Submission of Matters to a Vote of Security Holders |
Votes | Votes | |||||||
Name of Director | in Favor | Withheld | ||||||
William J. Armfield, IV |
43,183,354 | 4,197,030 | ||||||
R. Wiley Bourne, Jr. |
43,596,281 | 3,784,103 | ||||||
Charles R. Carter |
44,054,250 | 3,326,134 | ||||||
Sue W. Cole |
44,056,844 | 3,323,540 | ||||||
J. B. Davis |
34,538,900 | 12,841,484 | ||||||
Kenneth G. Langone |
46,060,369 | 1,320,015 | ||||||
Donald F. Orr |
38,124,215 | 9,256,169 | ||||||
Brian R. Parke |
43,996,750 | 3,383,634 |
Item 5. | Other Information |
2.1 | Asset Purchase Agreement between Unifi Manufacturing, Inc. and Dillon Yarn Corporation, dated as of October 25, 2006 (incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K dated October 25, 2006). | |
2.2 | Amendment to Asset Purchase Agreement between Unifi Manufacturing, Inc. and Dillon Yarn Corporation, dated as of January 1, 2007 (incorporated by reference from Exhibit 10.2 to the Companys Current Report on Form 8-K dated January 1, 2007). | |
4.1 | Registration Rights Agreement between Unifi, Inc. and Dillon Yarn Corporation, dated as of January 1, 2007 (incorporated by reference from Exhibit 7.1 to the Companys Schedule 13D dated January 2, 2007). | |
31.1 | Chief Executive Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Chief Financial Officers certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Chief Executive Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Chief Financial Officers certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
44
UNIFI, INC. |
||||
Date: February 2, 2007 | /s/ WILLIAM M. LOWE, JR. | |||
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.) | ||||
45