Unifi Inc: Form 10-Q for the period ended Mar 31, 2024

The following is management’s discussion and analysis of certain significant factors that have affected UNIFI’s operations, along with material changes in financial condition, during the periods included in the accompanying condensed consolidated financial statements. A reference to a “note” in this section refers to the accompanying notes to condensed consolidated financial statements. A reference to the “current period” refers to the three-month period ended March 31, 2024, while a reference to the “prior period” refers to the three-month period ended April 2, 2023. A reference to the “current nine-month period” refers to the nine-month period ended March 31, 2024, while a reference to the “prior nine-month period” refers to the nine-month period ended April 2, 2023. Such references may be accompanied by certain phrases for added clarity. The current period and the prior period each consisted of 13 weeks. The current nine-month period and the prior nine-month period each consisted of 39 weeks.

Our discussions in this Item 2 focus on our results during, or as of, the three months ended March 31, 2024 and April 2, 2023, and, to the extent applicable, any material changes from the information discussed in the 2023 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 2023 Form 10-K for more detailed and background information about our business, operations, and financial condition.

Discussion of foreign currency translation is primarily associated with changes in the Brazilian Real (“BRL”) and changes in the Chinese Renminbi (“RMB”) versus the U.S. Dollar (“USD”). Weighted average exchange rates were as follows:

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

Overview and Significant General Matters

UNIFI focuses on delivering products and solutions to direct customers and brand partners throughout the world, leveraging our internal manufacturing capabilities and an enhanced global supply chain that delivers a diverse range of synthetic and recycled fibers and polymers. Our strategic initiatives include (i) leveraging our competitive advantages to grow market share in each of the major geographies we serve, (ii) expanding our presence in non-apparel markets with additional REPREVE® products, (iii) advancing the development and commercialization of innovative and sustainable solutions, and (iv) increasing brand awareness for REPREVE®. We have increased our focus on sales opportunities beyond traditional apparel customers and continue to drive innovation throughout our portfolio to further diversify the business and enhance gross profit. We believe our strategic initiatives will increase revenue and profitability and generate improved cash flows from operations.

Current Economic Environment

The current economic environment and significant decrease in textile product demand adversely impacted our consolidated sales and profitability in fiscal 2023 and the first nine months of fiscal 2024. In addition to the current unfavorable economic environment and the inventory destocking measures taken by brands and retailers, the following pressures have been present: (i) the impact of inflation on consumer spending, (ii) rising interest rates for consumers and customers, including the impact on the carrying costs of customer inventories, (iii) the Russia-Ukraine conflict, and (iv) the conflict in the Middle East and the potential impacts to petroleum pricing and geopolitics. UNIFI will continue to monitor these and other aspects of the current economic environment and work closely with stakeholders to ensure business continuity and liquidity.

While we recognize the disruption to global markets and supply chains caused by (i) Russia’s invasion of Ukraine and (ii) the conflict in the Middle East, we have not been directly impacted by either conflict. Indirectly, we recognize that additional or prolonged impacts to the petroleum or other global markets could cause further inflationary pressures to our global raw material costs or unforeseen adverse impacts.

During the second quarter of fiscal 2024, we terminated our supply agreement and relationship with our joint venture partner in Israel, which was not due to the current conflicts in that region. The supply levels prior to the termination were insignificant.

Input Costs and Global Production Volatility

Despite lowered input and freight costs and a marginally more stable labor pool during fiscal 2023 and 2024, the global demand volatility and uncertainty that existed in fiscal 2023 continued into fiscal 2024. The threat of recession and global tensions continue to create uncertainty. Such existing challenges and future uncertainty, particularly for rising input costs, labor productivity, and global demand, could worsen and/or continue for prolonged periods, materially impacting our consolidated sales and gross profit. Also, the need for future selling price adjustments in connection with inflationary costs could impact our ability to retain current customer programs and compete successfully for new programs in certain regions.

Cash Deposits and Financial Institution Risk

UNIFI currently holds the vast majority of its cash deposits with large foreign banks in our associated operating regions, and management maintains the ability to repatriate cash to the U.S. Accordingly, UNIFI has not modified its mix of financial institutions holding cash deposits, but UNIFI will continue to monitor the environment and current events to ensure any increase in concentration or credit risk is appropriately and timely addressed. If any of our lending counterparties are unable to perform on their commitments, our liquidity could be impacted. We actively monitor all lending counterparties, and none have indicated that they may be unable to perform on their commitments. In addition, we periodically review our lending counterparties, considering the stability of the institutions and other aspects of the relationships. Based on our monitoring activities, we currently believe our lending counterparties will be able to perform their commitments.

Key Performance Indicators and Non-GAAP Financial Measures

UNIFI continuously reviews performance indicators to measure its success. These performance indicators form the basis of management’s discussion and analysis included below:

• sales volume and revenue for UNIFI and for each reportable segment;
• gross (loss) profit and gross margin for UNIFI and for each reportable segment;
• net loss and diluted EPS;
• Segment (Loss) Profit, which equals segment gross (loss) profit plus segment depreciation expense;
• unit conversion margin, which represents unit net sales price less unit raw material costs, for UNIFI and for each reportable segment;
• working capital, which represents current assets less current liabilities;
• Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which represents net loss before net interest expense, income tax expense, and depreciation and amortization expense;
• Adjusted EBITDA, which represents EBITDA adjusted to exclude, from time to time, certain other adjustments necessary to understand and compare the underlying results of UNIFI;
• Adjusted Net Loss, which represents net loss calculated under GAAP, adjusted to exclude certain amounts which management believes do not reflect the ongoing operations and performance of UNIFI and/or for which exclusion may be necessary to understand and compare the underlying results of UNIFI;
• Adjusted EPS, which represents Adjusted Net Loss divided by UNIFI’s diluted weighted average common shares outstanding;
• Adjusted Working Capital, which equals receivables plus inventories and other current assets, less accounts payable and other current liabilities; and
• Net Debt, which represents debt principal less cash and cash equivalents.

EBITDA, Adjusted EBITDA, Adjusted Net Loss, Adjusted EPS, Adjusted Working Capital, and Net Debt (collectively, the “non-GAAP financial measures”) are not determined in accordance with GAAP and should not be considered a substitute for performance measures determined in accordance with GAAP. The calculations of the non-GAAP financial measures are subjective, based on management’s belief as to which items should be included or excluded in order to provide the most reasonable and comparable view of the underlying operating performance of the business. We may, from time to time, modify the amounts used to determine our non-GAAP financial measures. When applicable, management’s discussion and analysis includes specific consideration for items that comprise the reconciliations of its non-GAAP financial measures. We believe that these non-GAAP financial measures better reflect UNIFI’s underlying operations and performance and that their use, as operating performance measures, provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles, and ages of related assets, among otherwise comparable companies.

Management uses Adjusted EBITDA (i) as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it removes the impact of items (a) directly related to our asset base (primarily depreciation and amortization) and/or (b) that we would not expect to occur as a part of our normal business on a regular basis; (ii) for planning purposes, including the preparation of our annual operating budget; (iii) as a valuation measure for evaluating our operating performance and our capacity to incur and service debt, fund capital expenditures, and expand our business; and (iv) as one measure in determining the value of other acquisitions and dispositions. Adjusted EBITDA is a key performance metric utilized in the determination of variable compensation. We also believe Adjusted EBITDA is an appropriate supplemental measure of debt service capacity because it serves as a high-level proxy for cash generated from operations and is relevant to our fixed charge coverage ratio.

Management uses Adjusted Net Loss and Adjusted EPS (i) as measurements of net operating performance because they assist us in comparing such performance on a consistent basis, as they remove the impact of (a) items that we would not expect to occur as a part of our normal business on a regular basis and (b) components of the provision for income taxes that we would not expect to occur as a part of our underlying taxable operations; (ii) for planning purposes, including the preparation of our annual operating budget; and (iii) as measures in determining the value of other acquisitions and dispositions.

Management uses Adjusted Working Capital as an indicator of UNIFI’s production efficiency and ability to manage inventories and receivables.

Management uses Net Debt as a liquidity and leverage metric to determine how much debt would remain if all cash and cash equivalents were used to pay down debt principal.

Review of Results of Operations

Three Months Ended March 31, 2024 Compared to Three Months Ended April 2, 2023

Consolidated Overview

The below tables provide:

• the components of net loss and the percentage increase or decrease over the prior period amounts, and
• a reconciliation from net loss to EBITDA and Adjusted EBITDA, and

following the tables is a discussion and analysis of the significant components of net loss.

Net Loss

nm = not meaningful

EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)

The reconciliations of the amounts reported under GAAP for Net loss to EBITDA and Adjusted EBITDA were as follows:

(1) Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. However, within the accompanying Condensed Consolidated Statements of Cash Flows, amortization of debt issuance costs is reflected in depreciation and amortization expense.

(2) In the third quarter of fiscal 2023, UNIFI amended certain existing contracts related to future purchases of texturing machinery by delaying the scheduled receipt and installation of such equipment in the U.S. and El Salvador for 18 months. UNIFI paid the associated vendor $623 to facilitate the 18-month delay.

Adjusted Net Loss and Adjusted EPS (Non-GAAP Financial Measures)

(1) In the third quarter of fiscal 2023, UNIFI amended certain existing contracts related to future purchases of texturing machinery by delaying the scheduled receipt and installation of such equipment in the U.S. and El Salvador for 18 months. UNIFI paid the associated vendor $623 to facilitate the 18-month delay. The associated tax impact was estimated to be $0 due to (i) a valuation allowance against net operating losses in the U.S. and (ii) UNIFI's effective tax rate in El Salvador.

Net Sales

Consolidated net sales for the current period decreased by $7,742, or 4.9%, while consolidated sales volumes increased 10.7%, compared to the prior period. Weighted average selling prices decreased 15.6% in response to sales mix changes and lower raw material costs, primarily in the Americas Segment. Sales levels continue to remain below historical averages, primarily due to lower global demand in connection with economic and industry factors described above.

REPREVE® Fiber products for the current period comprised 31%, or $46,754, of consolidated net sales, compared to 32%, or $49,619, for the prior period.

Gross Profit

Gross profit for the current period decreased by $4,889, or 50.6%, compared to the prior period. Gross profit declined primarily due to (i) the unfavorable impact of higher manufacturing costs related to the timing and extent of the Company's holiday shutdown periods and (ii) lower conversion margins. These were partially offset by (a) variable cost saving initiatives, (b) improved productivity, and (c) stable raw material costs. However, gross profit continues to be negatively impacted by weak fixed cost absorption in the Americas Segment, where utilization and productivity remain below historical averages due to depressed demand.

• For the Americas Segment, the gross loss was primarily due to (i) higher manufacturing costs related to the timing and extent of the holiday shutdown periods and (ii) lower conversion margins. These were partially offset by (a) variable cost management efforts and (b) a stable raw material cost environment.
• For the Brazil Segment, gross profit increased primarily due to (i) improved underlying unit margins and (ii) higher sales volumes.
• For the Asia Segment, gross profit increased primarily due to (i) improved underlying unit margins and sales mix and (ii) higher sales volumes compared to the prior period despite continued weak global demand.

SG&A

SG&A for the current period decreased compared to the prior period, primarily due to lower amortization, compensation, and discretionary expenses.

Provision (Benefit) for Bad Debts

The current period and the prior period bad debt changes reflect no material activity.

Other Operating Expense, Net

The current period and the prior period include foreign currency transaction (gains) losses of ($35) and $174, respectively, with no other meaningful activity. The prior period also includes $623 paid to a vendor to facilitate an 18-month delay for contracted equipment purchases.

Interest Expense, Net

Interest expense, net increased in connection with higher borrowings on the revolving credit facility and higher average interest rates.

Equity in Loss (Earnings) of Unconsolidated Affiliates

The current period reflects net losses shared with our unconsolidated affiliate whereas the prior period benefited from more favorable results.

Income Taxes

Provision for income taxes and the effective tax rate were as follows:

The effective tax rate is subject to variation due to a number of factors, including: variability in pre-tax book income; the mix of income by jurisdiction; changes in deferred tax valuation allowances; and changes in statutes, regulations, and case law. Additionally, the impacts of discrete and other rate impacting items are more pronounced when loss before income taxes is lower.

The increase in the effective tax rate from the prior period to the current period was primarily attributable to lower book income for foreign subsidiaries, in combination with lower deferred tax expense on unremitted foreign earnings in the current period.

Net Loss

The increase in net loss was primarily attributable to lower gross margin and lower earnings from an unconsolidated affiliate, partially offset by lower SG&A expenses and lower income tax expense.

Adjusted EBITDA and Adjusted EPS (Non-GAAP Financial Measures)

Adjusted EBITDA and Adjusted EPS decreased primarily due to lower gross profit and lower earnings from an unconsolidated affiliate, partially offset by lower SG&A expenses.

Segment Overview

Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current period.

Americas Segment

The components of Segment Profit, each component as a percentage of net sales, and the percentage increase or decrease over the prior period amounts for the Americas Segment, were as follows:

nm = not meaningful

The change in net sales for the Americas Segment was as follows:

The decrease in net sales for the Americas Segment from the prior period to the current period was primarily attributable to the net change in average selling price and sales mix that includes lower raw material input costs, partially offset by an increase in sales volumes in connection with recent commercial efforts. Both periods were unfavorably impacted by the continued weak global textile demand environment.

The change in Segment Profit for the Americas Segment was as follows:

The decrease in Segment Profit for the Americas Segment from the prior period to the current period was primarily attributable to (i) higher manufacturing costs related to the timing and extent of the holiday shutdown periods and (ii) lower conversion margins. Segment Profit for the Americas Segment continues to be negatively impacted by weak fixed cost absorption as fiber production remains below historical averages. As fiber products carry a higher selling price and allocation of production costs versus Flake and Chip, lower fiber production drives weaker fixed cost absorption and adversely impacts gross profit and gross margin.

Brazil Segment

The components of Segment Profit, each component as a percentage of net sales, and the percentage increase or decrease over the prior period amounts for the Brazil Segment, were as follows:

The change in net sales for the Brazil Segment was as follows:

The increase in net sales for the Brazil Segment from the prior period to the current period was primarily attributable to (i) higher sales volumes resulting from gains in market share and (ii) favorable foreign currency translation effects from the strengthening of the BRL versus the USD, partially offset by lower average selling prices associated with lower raw material input costs.

The change in Segment Profit for the Brazil Segment was as follows:

The increase in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to (i) an overall increase in conversion margins and (ii) improved sales volumes with recent market share gains. We continue to prioritize innovation and differentiation to improve our portfolio and competitive position in Brazil.

Asia Segment

The components of Segment Profit, each component as a percentage of net sales, and the percentage increase or decrease over the prior period amounts for the Asia Segment, were as follows:

The change in net sales for the Asia Segment was as follows:

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The increase in net sales for the Asia Segment from the prior period to the current period was primarily attributable to an increase in sales volumes compared to the prior period, despite continued weak global demand during the current period, partially offset by (i) lower average selling prices compared to the prior period and (ii) unfavorable foreign currency translation effects due to the weakening of the RMB versus the USD.

The change in Segment Profit for the Asia Segment was as follows:

The increase in Segment Profit for the Asia Segment from the prior period to the current period was primarily attributable to the increase in sales volumes discussed above, partially offset by unfavorable foreign currency translation effects due to the weakening of the RMB versus the USD.

Nine Months Ended March 31, 2024 Compared to Nine Months Ended April 2, 2023

Consolidated Overview

The below tables provide:

• the components of net loss and the percentage increase or decrease over the prior nine-month period amounts, and
• a reconciliation from net loss to EBITDA and Adjusted EBITDA, and

following the tables is a discussion and analysis of the significant components of net loss.

Net Loss

nm = not meaningful

EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures)

The reconciliations of the amounts reported under GAAP for Net loss to EBITDA and Adjusted EBITDA were as follows:

(1) Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. However, within the accompanying Condensed Consolidated Statements of Cash Flows, amortization of debt issuance costs is reflected in depreciation and amortization expense.

(2) In the second quarter of fiscal 2024, UNIFI recorded a loss of $2,750 related to the dissolution of UNF.

(3) In the second quarter of fiscal 2024, UNIFI incurred severance costs in connection with overall cost reduction efforts in the U.S.

(4) In the third quarter of fiscal 2023, UNIFI amended certain existing contracts related to future purchases of texturing machinery by delaying the scheduled receipt and installation of such equipment in the U.S. and El Salvador for 18 months. UNIFI paid the associated vendor $623 to facilitate the 18-month delay.

Adjusted Net Loss and Adjusted EPS (Non-GAAP Financial Measures)

(1) In the second quarter of fiscal 2024, UNIFI recorded a loss of $2,750 related to the dissolution of UNF.

(2) In the second quarter of fiscal 2024, UNIFI incurred severance costs in connection with overall cost reduction efforts in the U.S.

(3) In the third quarter of fiscal 2023, UNIFI amended certain existing contracts related to future purchases of texturing machinery by delaying the scheduled receipt and installation of such equipment in the U.S. and El Salvador for 18 months. UNIFI paid the associated vendor $623 to facilitate the 18-month delay. The associated tax impact was estimated to be $0 due to (i) a valuation allowance against net operating losses in the U.S. and (ii) UNIFI's effective tax rate in El Salvador.

(4) In the second quarter of fiscal 2023, UNIFI recorded a recovery of income taxes in connection with filing amended tax returns in Brazil relating to certain income taxes paid in prior fiscal years.

Net Sales

Consolidated net sales for the current nine-month period decreased by $47,712, or 10.1%, while consolidated sales volumes increased 5.7%, compared to the prior nine-month period. Despite modest sales volume improvements in each of the reportable segments, volumes remain depressed, particularly in the Americas and Asia Segments as a result of low global demand in connection with the apparel market.

Consolidated weighted average sales prices decreased 15.8% which drove the decrease in net sales. The decrease in sales price was primarily attributable to (a) lower selling prices in response to lower raw material input costs and (b) a greater mix of Chip and Flake product sales, both particularly in the Americas Segment, together with (c) competitive pricing pressures in Brazil.

REPREVE® Fiber products for the current nine-month period comprised 32%, or $134,940, of consolidated net sales, compared to 30%, or $141,664, for the prior nine-month period.

Gross Profit

Gross profit for the current nine-month period decreased by $2,391, or 29.1%, compared to the prior nine-month period. Gross profit declined primarily due to (i) higher manufacturing costs and (ii) lower conversion margins. These were partially offset by (a) increased sales volumes, (b) variable cost saving initiatives, (c) improved productivity, and (d) more stable raw material costs. However, gross profit continues to be unfavorably impacted by weak fixed cost absorption in the Americas Segment, where utilization and productivity remain below historical averages due to depressed demand.

• For the Americas Segment, gross profit declined primarily due to (i) higher manufacturing costs and (ii) lower conversion margins. These were partially offset by (a) higher sales volumes, (b) variable cost management efforts, and (c) a more stable raw material cost environment.
• For the Brazil Segment, gross profit decreased primarily due to decreasing market prices in Brazil due to low-cost import competition, partially offset by higher sales volume from market share gains and favorable foreign currency translation effects.
• For the Asia Segment, gross profit increased primarily due to (i) a strong sales mix and (ii) higher sales volumes compared to the prior nine-month period despite continued weak global demand.

SG&A

SG&A did not change meaningfully from the prior nine-month period to the current nine-month period, nor did the change include any significant offsetting impacts.

Provision (Benefit) for Bad Debts

The current nine-month period's provision reflects an increase for a specifically identified customer balance originating in the U.S. fiber market.

Restructuring Costs

Restructuring costs consisted of (i) a loss of $2,750 for the dissolution of UNF, our former joint venture partner in Israel, and (ii) severance charges of $2,351 in connection with overall cost reduction efforts in the U.S.

Other Operating Expense (Income), Net

The current nine-month period and the prior nine-month period include foreign currency transaction losses (gains) of $395 and ($629), respectively, with no other meaningful activity. The prior nine-month period also includes $623 paid to a vendor to facilitate an 18-month delay for contracted equipment purchases.

Interest Expense, Net

Interest expense, net increased in connection with higher average borrowings on the revolving credit facility combined with higher average interest rates.

Equity in Loss (Earnings) of Unconsolidated Affiliates

There was no material activity for the current nine-month period or the prior nine-month period.

Income Taxes

Provision for income taxes and the effective tax rate were as follows:

The effective tax rate is subject to variation due to a number of factors, including variability in pre-tax book income; the mix of income by jurisdiction; changes in deferred tax valuation allowances; and changes in statutes, regulations, and case law. Additionally, the impacts of discrete and other rate impacting items are more pronounced when loss before income taxes is lower.

The increase in the effective tax rate from the prior nine-month period to the current nine-month period was primarily attributable to lower book income for foreign subsidiaries, in combination with lower deferred tax expense on unremitted foreign earnings in the current nine-month period.

Net Loss

The increase in net loss was primarily attributable to lower gross profit, restructuring costs, higher bad debt expense, lower earnings from unconsolidated affiliates, and higher interest expense, net.

Adjusted EBITDA and Adjusted EPS (Non-GAAP Financial Measures)

Adjusted EBITDA and Adjusted EPS decreased primarily due to lower gross profit, higher bad debt expense, lower earnings from unconsolidated affiliates, and other operating expenses (income), net.

Segment Overview

Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current nine-month period.

Americas Segment

The components of Segment (Loss) Profit, each component as a percentage of net sales, and the percentage increase or decrease over the prior nine-month period amounts for the Americas Segment, were as follows:

21

The change in net sales for the Americas Segment was as follows:

The decrease in net sales for the Americas Segment from the prior nine-month period to the current nine-month period was primarily attributable to the net change in average selling price and sales mix that includes lower raw material input costs, partially offset by an increase in sales volumes. Both periods were unfavorably impacted by the continued weak global textile demand environment.

The change in Segment (Loss) Profit for the Americas Segment was as follows:

The decrease in Segment Profit for the Americas Segment from the prior nine-month period to the current nine-month period was primarily attributable to (i) higher manufacturing costs and (ii) lower conversion margins. Segment Loss for the Americas Segment continues to be negatively impacted by a lower proportion of fiber sales volumes. As fiber products carry a higher selling price and allocation of production costs versus Chip and Flake, lower fiber production drives weaker fixed cost absorption and adversely impacts gross profit and gross margin. These negative impacts were partially offset by variable cost management efforts and more stable raw material costs in the current nine-month period.

Brazil Segment

The components of Segment Profit, each component as a percentage of net sales, and the percentage increase or decrease over the prior nine-month period amounts for the Brazil Segment, were as follows:

The change in net sales for the Brazil Segment was as follows:

The decrease in net sales for the Brazil Segment from the prior nine-month period to the current nine-month period was primarily attributable to lower average selling prices due to pressure from low-priced import competition, partially offset by (i) an improvement in sales volumes from market share gains and (ii) favorable foreign currency translation effects from the strengthening of the BRL versus the USD.

The change in Segment Profit for the Brazil Segment was as follows:

The decrease in Segment Profit for the Brazil Segment from the prior nine-month period to the current nine-month period was primarily attributable to lower conversion margins mainly due to pressure on selling prices from low-priced imports, mostly offset by (i) increases in sales volumes discussed above and (ii) favorable foreign currency translation effects. We continue to prioritize innovation and differentiation to improve our portfolio and competitive position in Brazil.

Asia Segment

The components of Segment Profit, each component as a percentage of net sales, and the percentage increase or decrease over the prior nine-month period amounts for the Asia Segment, were as follows:

The change in net sales for the Asia Segment was as follows:

The change in net sales for the Asia Segment from the prior nine-month period to the current nine-month period was primarily attributable to an improvement in sales volumes compared to the prior nine-month period despite continued weak global demand and inventory destocking by brands and retailers, particularly for apparel, mostly offset by (i) unfavorable foreign currency translation effects due to the weakening of the RMB versus the USD and (ii) changes in average selling prices and sales mix.

The change in Segment Profit for the Asia Segment was as follows:

The increase in Segment Profit for the Asia Segment from the prior nine-month period to the current nine-month period was attributable to (i) an improved gross margin rate associated with a strong sales mix of REPREVE products and (ii) the increase in sales volumes discussed above, partially offset by unfavorable foreign currency translation effects.

Liquidity and Capital Resources

Note 5, “Long-Term Debt” to the condensed consolidated financial statements includes the detail of UNIFI’s debt obligations and terms and conditions thereof. Further discussion and analysis of liquidity and capital resources follow.

UNIFI’s primary capital requirements are for working capital, capital expenditures, debt service, and share repurchases. UNIFI’s primary sources of capital are cash generated from operations, borrowings available under the 2022 Credit Agreement, and asset financing arrangements. For the current nine-month period, cash provided by operations was $1,160 and, at March 31, 2024, availability under the ABL Revolver was $47,369.

As of March 31, 2024, all of UNIFI’s $128,670 of debt obligations were guaranteed by certain of its domestic operating subsidiaries, while nearly all of UNIFI’s cash and cash equivalents were held by its foreign subsidiaries. Cash and cash equivalents held by foreign subsidiaries may not be presently available to fund UNIFI’s domestic capital requirements, including its domestic debt obligations. UNIFI employs a variety of strategies to ensure that its worldwide cash is available in the locations where it is needed.

The following table presents a summary of cash and cash equivalents, borrowings available under financing arrangements, liquidity, working capital, and total debt obligations as of March 31, 2024 for domestic operations compared to foreign operations:

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UNIFI’s primary cash requirements, in addition to normal course operating activities (e.g., working capital and payroll), primarily include (i) capital expenditures that generally have commitments of up to 12 months, (ii) contractual obligations that support normal course ongoing operations and production, (iii) operating leases and finance leases, (iv) debt service, and (v) share repurchases.

Liquidity Considerations

Following the establishment of the 2022 Credit Agreement, UNIFI believes its global cash and liquidity positions are sufficient to sustain its operations and to meet its growth needs for the foreseeable future. Additionally, UNIFI considers opportunities to repatriate existing cash to reduce debt and preserve or enhance liquidity. However, further degradation in the macroeconomic environment could introduce additional liquidity risk and require UNIFI to limit cash outflows for discretionary activities while further utilizing available and additional forms of credit.

We do not currently anticipate that any adverse events or circumstances will place critical pressure on our liquidity position or our ability to fund our operations and expected business growth. Should global demand, economic activity, or input availability decline considerably for an even longer period of time, UNIFI maintains the ability to (i) seek additional credit or financing arrangements and/or (ii) re-implement cost reduction initiatives to preserve cash and secure the longevity of the business and operations. Management continues to (i) explore cost savings opportunities and (ii) prioritize repayment of debt in the current operating environment.

When business levels increase, we expect to use cash in support of working capital needs.

The following outlines the attributes relating to our credit facility as of March 31, 2024:

• UNIFI was in compliance with all applicable financial covenants in the 2022 Credit Agreement;
• excess availability before the Trigger Level (as defined in the 2022 Credit Agreement) under the ABL Revolver was $25,519;
• the Trigger Level was $21,850; and
• $0 of standby letters of credit were outstanding.

In addition to making payments in accordance with the scheduled maturities of debt required under its existing debt obligations, UNIFI may, from time to time, elect to repay additional amounts borrowed under the ABL Facility. Funds to make such repayments may come from the operating cash flows of the business or other sources and will depend upon UNIFI’s strategy, prevailing market conditions, liquidity requirements, contractual restrictions, and other factors.

Liquidity Summary

UNIFI has met its historical liquidity requirements for working capital, capital expenditures, debt service requirements, and other operating needs from its cash flows from operations and available borrowings. UNIFI believes that its existing cash balances, cash provided by operating activities, and credit facility will enable UNIFI to meet its foreseeable liquidity requirements. Domestically, UNIFI believes cash balances, cash provided by operating activities, and borrowings available under the ABL Revolver continue to be sufficient to fund UNIFI’s domestic operating activities as well as cash commitments for its investing and financing activities. For its foreign operations, UNIFI expects its existing cash balances, cash provided by operating activities, and available financing arrangements will provide the needed liquidity to fund the associated operating activities and investing activities, such as future capital expenditures. UNIFI believes its operations in Asia and Brazil are in a position to obtain local country financing arrangements due to the operating results of each subsidiary.

Net Debt (Non-GAAP Financial Measure)

The reconciliations for Net Debt are as follows:

The increase in Net Debt primarily reflects capital expenditures during the current nine-month period, partially offset by the generation of operating cash flows during that period.

Working Capital and Adjusted Working Capital (Non-GAAP Financial Measure)

The following table presents the components of working capital and the reconciliation of working capital to Adjusted Working Capital:

Adjusted Working Capital decreased $28,475 from July 2, 2023 to March 31, 2024.

The decrease in receivables, net was primarily due to a decrease in sales and the timing of cash receipts. The decrease in inventories was primarily attributable to lower weighted average costs in the current nine-month period. The change in income taxes receivable reflects the foreign tax payments made in the current nine-month period. The decrease in other current assets was primarily due to the decrease in Brazil's recovery of non-income taxes in the current nine-month period. The decrease in accounts payable followed the decrease in inventories and production activity in the current nine-month period. The increase in other current liabilities primarily reflects the liabilities recorded in the current nine-month period for severance and incentive compensation earned in fiscal 2024. The change in income taxes payable reflects the impact of the interim tax provision. The changes in current operating lease liabilities and current portion of long-term debt were insignificant.

Operating Cash Flows

The significant components of net cash provided by operating activities are summarized below.

The decrease in operating cash flows was primarily due to weaker earnings in the current nine-month period compared to the prior nine-month period, partially offset by working capital improvements.

Investing Cash Flows

Investing activities primarily include $8,566 for capital expenditures. UNIFI expects recent and future capital projects to provide benefits to future profitability. The additional assets from these capital projects consist primarily of machinery and equipment. In March 2023, UNIFI amended certain existing contracts related to future purchases of texturing machinery by delaying the scheduled receipt and installation of such equipment in the U.S. and El Salvador for 18 months. In December 2023, UNIFI extended this delay by an additional 12 months at no cost to the Company.

Financing Cash Flows

Financing activities primarily include net payments on the ABL Revolver and payments on the ABL Term Loan.

Share Repurchase Program

As described in Note 7, “Shareholders’ Equity,” no share repurchases have been completed in fiscal 2024.

Contractual Obligations

UNIFI incurs various financial obligations and commitments in the ordinary course of business. Financial obligations are considered to represent known future cash payments that UNIFI is required to make under existing contractual arrangements, such as debt and lease agreements.

There have been no material changes in the scheduled maturities of UNIFI’s contractual obligations as disclosed under the heading “Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Form 10-K, except for the capital purchase obligations are approximately $6,000, $0 and $19,000 for fiscal 2024, 2025, and 2026, respectively.

Off-Balance Sheet Arrangements

UNIFI is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on UNIFI’s financial condition, results of operations, liquidity, or capital expenditures.

Critical Accounting Policies

UNIFI’s critical accounting policies are discussed in the 2023 Form 10-K. There have been no changes to UNIFI’s critical accounting policies in fiscal 2024.

UNIFI is exposed to market risks associated with changes in interest rates, fluctuations in foreign currency exchange rates, and raw material and commodity costs, which may adversely affect its financial position, results of operations, or cash flows. UNIFI does not enter into derivative financial instruments for trading purposes, nor is it a party to any leveraged financial instruments.

Interest Rate Risk

UNIFI is exposed to interest rate risk through its borrowing activities. As of March 31, 2024, UNIFI had borrowings under its ABL Facility that totaled $118,500. UNIFI’s sensitivity analysis indicates that a 50-basis point interest rate increase as of March 31, 2024 would result in an increase in annual interest expense of approximately $700.

Foreign Currency Exchange Rate Risk

A complete discussion of foreign currency exchange rate risk is included in the 2023 Form 10-K and is supplemented by the following disclosures.

As of March 31, 2024, UNIFI had no outstanding foreign currency forward contracts. As of March 31, 2024, foreign currency exchange rate risk positions included the following:

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Raw Material and Commodity Cost Risks

A complete discussion of raw material and commodity cost risks is included in the 2023 Form 10-K.

Other Risks

UNIFI is also exposed to geopolitical risk, including changing laws and regulations governing international trade, such as quotas, tariffs, and tax laws. The degree of impact and the frequency of these events cannot be predicted.

As of March 31, 2024, an evaluation of the effectiveness of UNIFI’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of UNIFI’s management, including the principal executive officer and the principal financial officer. Based on that evaluation, UNIFI’s principal executive officer and principal financial officer concluded that UNIFI’s disclosure controls and procedures are effective to ensure that information required to be disclosed by UNIFI in its reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that information required to be disclosed by UNIFI in the reports UNIFI files or submits under the Exchange Act is accumulated and communicated to UNIFI’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in UNIFI’s internal control over financial reporting during the three months ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, UNIFI’s internal control over financial reporting.

There have been no material changes in UNIFI’s risk factors from those included in “Item 1A. Risk Factors” in the 2023 Form 10-K.