UNIFI INC 10-Q

Item 1. Financial Statements CONDENSED CONSOLIDATED BA LANCE SHEETS (Unaudited) (In thousands, except share and per share amounts) April 2, 2023 July 3, 2022 ASSETS Cash and cash equivalents $ 49,706 $ 53,290 Receivables, net 87,968 106,565 Inventories 143,178 173,295 Income taxes receivable 1,777 160 Other current assets 15,093 18,956 Total current assets 297,722 352,266 Property, plant and equipment, net 229,195 216,338 Operating lease assets 8,327 8,829 Deferred income taxes 3,172 2,497 Other non-current assets 12,986 8,788 Total assets $ 551,402 $ 588,718 LIABILITIES AND SHAREHOLDERS’ EQUITY Accounts payable $ 47,702 $ 73,544 Income taxes payable 1,875 1,526 Current operating lease liabilities 1,874 2,190 Current portion of long-term debt 11,544 11,726 Other current liabilities 13,494 19,806 Total current liabilities 76,489 108,792 Long-term debt 124,162 102,309 Non-current operating lease liabilities 6,543 6,736 Deferred income taxes 4,389 4,983 Other long-term liabilities 4,911 4,449 Total liabilities 216,494 227,269 Commitments and contingencies Common stock, $ 0.10 par value ( 500,000,000 shares authorized; 18,054,498 and 17,979,362 shares issued and outstanding as of April 2, 2023 and July 3, 2022, respectively) 1,805 1,798 Capital in excess of par value 68,562 66,120 Retained earnings 322,081 353,136 Accumulated other comprehensive loss ( 57,540 ) ( 59,605 ) Total shareholders’ equity 334,908 361,449 Total liabilities and shareholders’ equity $ 551,402 $ 588,718 See accompanying notes to condensed consolidated financial statements. 1 CONDENSED CONSOLIDATED STATE MENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts) For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Net sales $ 156,738 $ 200,780 $ 472,469 $ 598,182 Cost of sales 147,085 181,636 464,253 536,051 Gross profit 9,653 19,144 8,216 62,131 Selling, general and administrative expenses 12,063 14,389 35,584 39,025 Benefit for bad debts ( 56 ) ( 169 ) ( 38 ) ( 489 ) Other operating expense (income), net 324 ( 831 ) ( 139 ) ( 2 ) Operating (loss) income ( 2,678 ) 5,755 ( 27,191 ) 23,597 Interest income ( 554 ) ( 492 ) ( 1,615 ) ( 944 ) Interest expense 2,073 709 5,209 2,140 Equity in earnings of unconsolidated affiliates ( 158 ) ( 41 ) ( 539 ) ( 385 ) Recovery of non-income taxes, net — 815 — 815 (Loss) income before income taxes ( 4,039 ) 4,764 ( 30,246 ) 21,971 Provision for income taxes 1,145 2,698 809 10,296 Net (loss) income $ ( 5,184 ) $ 2,066 $ ( 31,055 ) $ 11,675 Net (loss) income per common share: Basic $ ( 0.29 ) $ 0.11 $ ( 1.72 ) $ 0.63 Diluted $ ( 0.29 ) $ 0.11 $ ( 1.72 ) $ 0.62 See accompanying notes to condensed consolidated financial statements. 2 CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited) (In thousands) For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Net (loss) income $ ( 5,184 ) $ 2,066 $ ( 31,055 ) $ 11,675 Other comprehensive income: Foreign currency translation adjustments 4,526 13,921 2,065 5,833 Changes in interest rate swaps, net of tax of nil, $ 105 , nil and $ 248 , respectively — 340 — 803 Other comprehensive income, net 4,526 14,261 2,065 6,636 Comprehensive (loss) income $ ( 658 ) $ 16,327 $ ( 28,990 ) $ 18,311 See accompanying notes to condensed consolidated financial statements. 3 CONDENSED CONSOLIDATED STATEM ENTS OF SHAREHOLDERS’ EQUITY (Unaudited) (In thousands) Shares Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance at January 1, 2023 18,049 $ 1,805 $ 67,875 $ 327,265 $ ( 62,066 ) $ 334,879 Options exercised 4 1 33 — — 34 Conversion of equity units 1 ( 1 ) 1 — — — Stock-based compensation — — 656 — — 656 Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions — — ( 3 ) — — ( 3 ) Other comprehensive income, net of tax — — — — 4,526 4,526 Net loss — — — ( 5,184 ) — ( 5,184 ) Balance at April 2, 2023 18,054 $ 1,805 $ 68,562 $ 322,081 $ ( 57,540 ) $ 334,908 Shares Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance at July 3, 2022 17,979 $ 1,798 $ 66,120 $ 353,136 $ ( 59,605 ) $ 361,449 Options exercised 7 1 52 — — 53 Conversion of equity units 63 6 ( 6 ) — — — Stock-based compensation 12 1 2,464 — — 2,465 Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions ( 7 ) ( 1 ) ( 68 ) — — ( 69 ) Other comprehensive income, net of tax — — — — 2,065 2,065 Net loss — — — ( 31,055 ) — ( 31,055 ) Balance at April 2, 2023 18,054 $ 1,805 $ 68,562 $ 322,081 $ ( 57,540 ) $ 334,908 Shares Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance at December 26, 2021 18,498 $ 1,850 $ 67,006 $ 353,393 $ ( 61,057 ) $ 361,192 Options exercised — — — — — — Conversion of equity units 4 — — — — — Stock-based compensation — — 721 — — 721 Common stock repurchased and retired under publicly announced program ( 50 ) ( 5 ) ( 181 ) ( 766 ) — ( 952 ) Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions ( 1 ) — ( 23 ) — — ( 23 ) Other comprehensive income, net of tax — — — — 14,261 14,261 Net income — — — 2,066 — 2,066 Balance at March 27, 2022 18,451 $ 1,845 $ 67,523 $ 354,693 $ ( 46,796 ) $ 377,265 Shares Common Stock Capital in Excess of Par Value Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity Balance at June 27, 2021 18,490 $ 1,849 $ 65,205 $ 344,797 $ ( 53,432 ) $ 358,419 Options exercised 9 1 ( 1 ) — — — Conversion of equity units 68 6 ( 6 ) — — — Stock-based compensation 5 1 2,827 — — 2,828 Common stock repurchased and retired under publicly announced program ( 102 ) ( 10 ) ( 367 ) ( 1,779 ) — ( 2,156 ) Common stock withheld in satisfaction of tax withholding obligations under net share settle transactions ( 19 ) ( 2 ) ( 135 ) — — ( 137 ) Other comprehensive income, net of tax — — — — 6,636 6,636 Net income — — — 11,675 — 11,675 Balance at March 27, 2022 18,451 $ 1,845 $ 67,523 $ 354,693 $ ( 46,796 ) $ 377,265 See accompanying notes to condensed consolidated financial statements. 4 CONDENSED CONSOLIDATED STATEME NTS OF CASH FLOWS (Unaudited) (In thousands) For the Nine Months Ended April 2, 2023 March 27, 2022 Cash and cash equivalents at beginning of period $ 53,290 $ 78,253 Operating activities: Net (loss) income ( 31,055 ) 11,675 Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities: Equity in earnings of unconsolidated affiliates ( 539 ) ( 385 ) Distribution received from unconsolidated affiliate — 750 Depreciation and amortization expense 20,388 19,176 Non-cash compensation expense 2,791 3,081 Recovery of income taxes ( 3,799 ) — Deferred income taxes ( 1,199 ) ( 3,019 ) Other, net 252 ( 22 ) Changes in assets and liabilities: Receivables, net 18,585 ( 13,537 ) Inventories 31,080 ( 20,170 ) Other current assets 4,271 ( 2,503 ) Income taxes ( 1,241 ) 670 Accounts payable and other current liabilities ( 31,644 ) 1,084 Other, net 459 1,137 Net cash provided (used) by operating activities 8,349 ( 2,063 ) Investing activities: Capital expenditures ( 32,461 ) ( 30,094 ) Other, net ( 193 ) ( 2,150 ) Net cash used by investing activities ( 32,654 ) ( 32,244 ) Financing activities: Proceeds from ABL Revolver 142,400 80,300 Payments on ABL Revolver ( 121,000 ) ( 61,800 ) Payments on ABL Term Loan ( 4,800 ) ( 7,500 ) Proceeds from construction financing 6,533 2,340 Payments on finance lease obligations ( 1,413 ) ( 2,876 ) Common stock repurchased and retired under publicly announced program — ( 2,156 ) Other, net ( 683 ) ( 345 ) Net cash provided by financing activities 21,037 7,963 Effect of exchange rate changes on cash and cash equivalents ( 316 ) 1,063 Net decrease in cash and cash equivalents ( 3,584 ) ( 25,281 ) Cash and cash equivalents at end of period $ 49,706 $ 52,972 See accompanying notes to condensed consolidated financial statements. 5 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Background Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, “UNIFI,” the “Company,” “we,” “us” or “our”), is a multinational company that manufactures and sells innovative recycled and synthetic products, made from polyester and nylon, primarily to other yarn manufacturers and knitters and weavers (UNIFI’s “direct customers”) that produce yarn and/or fabric for the apparel, hosiery, home furnishings, automotive, industrial, and other end-use markets (UNIFI’s “indirect customers”). We sometimes refer to these indirect customers as “brand partners.” Polyester products include partially oriented yarn (“POY”), textured, solution and package dyed, twisted, beamed, and draw wound yarns, and each is available in virgin or recycled varieties. Recycled solutions, made from both pre-consumer and post-consumer waste, include plastic bottle flake (“Flake”), polyester polymer beads (“Chip”), and staple fiber. Nylon products include virgin or recycled textured, solution dyed, and spandex covered yarns. UNIFI maintains one of the textile industry’s most comprehensive product offerings that includes a range of specialized, value-added and commodity solutions, with principal geographic markets in North America, Central America, South America, Asia, and Europe. UNIFI has direct manufacturing operations in four countries and participates in joint ventures with operations in Israel and the United States (“U.S.”). 2. Basis of Presentation; Condensed Notes The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. As contemplated by the instructions of the SEC to Form 10-Q, the following notes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to UNIFI’s year-end audited consolidated financial statements and related notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended July 3, 2022 (the “2022 Form 10-K”). The financial information included in this report has been prepared by UNIFI, without audit. In the opinion of management, all adjustments, which consist of normal, recurring adjustments, considered necessary for a fair statement of the results for interim periods have been included. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures. Actual results may vary from these estimates. All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted. The fiscal quarter for each of Unifi, Inc., its primary domestic operating subsidiaries and its subsidiary in El Salvador ended on April 2, 2023. Unifi, Inc.’s remaining material operating subsidiaries’ fiscal quarter ended on March 31, 2023. There were no significant transactions or events that occurred between Unifi, Inc.’s fiscal quarter end and such wholly owned subsidiaries’ fiscal quarter end. The three-month periods ended April 2, 2023 and March 27, 2022 both consisted of 13 weeks. The nine-month periods ended April 2, 2023 and March 27, 2022 both consisted of 39 weeks. 3. Recent Accounting Pronouncements Based on UNIFI’s review of Accounting Standards Updates issued since the filing of the 2022 Form 10-K, there have been no newly issued or newly applicable accounting pronouncements that have had, or are expected to have, a material impact on UNIFI’s consolidated financial statements. 6 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 4. Revenue The following tables present net sales disaggregated by (i) classification of customer type and (ii) REPREVE ® Fiber sales: For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Third-party manufacturer $ 155,423 $ 199,623 $ 468,653 $ 592,505 Service 1,315 1,157 3,816 5,677 Net sales $ 156,738 $ 200,780 $ 472,469 $ 598,182 For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 REPREVE ® Fiber $ 49,619 $ 71,930 $ 141,664 $ 225,360 All other products and services 107,119 128,850 330,805 372,822 Net sales $ 156,738 $ 200,780 $ 472,469 $ 598,182 Third-Party Manufacturer Third-party manufacturer revenue is primarily generated through sales to direct customers. Such sales represent satisfaction of UNIFI’s performance obligations required by the associated revenue contracts. Each of UNIFI’s reportable segments derives revenue from sales to third-party manufacturers. Service Revenue Service revenue is primarily generated, as services are rendered, through fulfillment of toll manufacturing of textile products or transportation services governed by written agreements. Such toll manufacturing and transportation services represent satisfaction of UNIFI’s performance obligations required by the associated revenue contracts. REPREVE ® Fiber REPREVE ® Fiber represents UNIFI's collection of fiber products on our recycled platform, with or without added technologies. Variable Consideration For all variable consideration, where appropriate, UNIFI estimates the amount using the expected value method, which takes into consideration historical experience, current contractual requirements, specific known market events, and forecasted customer buying and payment patterns. Overall, these reserves reflect UNIFI’s best estimates of the amount of consideration to which the customer is entitled based on the terms of the contracts. Variable consideration has been immaterial to UNIFI’s financial statements for all periods presented. 5. Long-Term Debt Debt Obligations The following table and narrative presents the detail of UNIFI’s debt obligations. Capitalized terms not otherwise defined within this Note shall have the meanings attributed to them in the Amended and Restated Credit Agreement, dated as of March 26, 2015 (together with amendments, the "Prior Credit Agreement"), or the Second Amended and Restated Credit Agreement, dated as of October 28, 2022 (the "2022 Credit Agreement"). Weighted Average Scheduled Interest Rate as of Principal Amounts as of Maturity Date April 2, 2023 April 2, 2023 July 3, 2022 ABL Revolver October 2027 6.4 % $ 10,200 $ 41,300 ABL Term Loan October 2027 6.3 % 112,700 65,000 Finance lease obligations (1) 4.3 % 9,027 7,261 Construction financing (2) 6.1 % 4,083 729 Total debt 136,010 114,290 Current ABL Term Loan ( 9,200 ) ( 10,000 ) Current portion of finance lease obligations ( 2,344 ) ( 1,726 ) Unamortized debt issuance costs ( 304 ) ( 255 ) Total long-term debt $ 124,162 $ 102,309 (1) Scheduled maturity dates for finance lease obligations range from March 2025 to November 2027 . (2) Refer to the discussion below under “ Construction Financing ” for further information. ABL Facility Unifi, Inc. entered into the Sixth Amendment to Amended and Restated Credit Agreement (the “Sixth Amendment”) on September 2, 2022. The Sixth Amendment modified the Trigger Level of the Prior Credit Agreement, which relates to, among other things, the requirement to maintain a certain Fixed Charge Coverage Ratio, with such Trigger Level occurring when Excess Availability falls below (a) for the period beginning on September 2, 2022 through and including the date that is 60 days after such date, $ 16,500 and (b) at all other times, the greatest of (i) $ 10,000 , (ii) 20 % of the Maximum Revolver Amount, and (iii) 12.5 % of the sum of the Maximum Revolver Amount plus the outstanding principal amount of the Term Loan. 7 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) On October 28, 2022, Unifi, Inc. and certain of its subsidiaries entered into the 2022 Credit Agreement with a syndicate of lenders. The 2022 Credit Agreement provides for a $ 230,000 senior secured credit facility (the “2022 ABL Facility”), including a $ 115,000 revolving credit facility and a term loan ("2022 ABL Term Loan") that can be reset up to a maximum amount of $ 115,000 , once per fiscal year, if certain conditions are met. The 2022 ABL Facility has a maturity date of October 28, 2027 . The 2022 ABL Term Loan requires quarterly principal payments of $ 2,300 that began on February 1, 2023. Borrowings under the 2022 ABL Facility bear interest at SOFR plus 0.10% plus an applicable margin of 1.25 % to 1.75 %, or the Base Rate (as defined in the 2022 Credit Agreement) plus an applicable margin of 0.25 % to 0.75 %, with interest paid most commonly on a monthly basis. Prior to entering the 2022 Credit Agreement, Unifi, Inc. and certain of its subsidiaries maintained the Prior Credit Agreement that established a $ 200,000 senior secured credit facility (the “Prior ABL Facility”), including a $ 100,000 revolving credit facility and a term loan that could be reset up to a maximum amount of $ 100,000 , once per fiscal year, if certain conditions were met. The Prior ABL Facility had a maturity date of December 18, 2023 . Prior ABL Facility borrowings bore interest at LIBOR plus an applicable margin of 1.25 % to 1.75 %, or the Base Rate plus an applicable margin of 0.25 % to 0.75 %, with interest paid on a monthly basis. In connection with the 2022 Credit Agreement, UNIFI recorded a $ 273 loss on debt extinguishment to interest expense in the second quarter of fiscal 2023. Construction Financing In May 2021, UNIFI entered into an agreement with a third party lender that provides for construction-period financing for certain texturing machinery included in our capital allocation plans. UNIFI records project costs to construction in progress and the corresponding liability to construction financing (within long-term debt). The agreement provides for monthly, interest-only payments during the construction period at a rate of SOFR plus 1.25 %, and contains terms customary for a financing of this type. Each borrowing under the agreement provides for 60 monthly payments, which will commence upon the completion of the construction period. In connection with this construction financing arrangement, UNIFI has borrowed a total of $ 9,755 and transitioned $ 5,672 of completed asset costs to finance lease obligations as of April 2, 2023. 6. Income Taxes The provision for income taxes and effective tax rate were as follows: For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Provision for income taxes $ 1,145 $ 2,698 $ 809 $ 10,296 Effective tax rate ( 28.3 )% 56.6 % ( 2.7 )% 46.9 % Income Tax Expense UNIFI’s provision for income taxes for the nine months ended April 2, 2023 and March 27, 2022 was calculated by applying the estimated annual effective tax rate to year-to-date pre-tax book income and adjusting for discrete items that occurred during the period. The effective tax rates for the three months and nine months ended April 2, 2023 varied from the U.S. federal statutory rate primarily due to losses for which UNIFI does not expect to realize a future tax benefit and a discrete tax benefit related to the recovery of certain Brazilian income taxes paid in prior years. The effective tax rates for the three months and nine months ended March 27, 2022 were higher than the U.S. federal statutory rate primarily due to an increase in the valuation allowance for deferred tax assets, earnings taxed at higher rates in foreign jurisdictions, and deferred tax on unremitted earnings. Unrecognized Tax Benefits UNIFI regularly assesses the outcomes of both completed and ongoing examinations to ensure that its provision for income taxes is sufficient. Certain returns that remain open to examination have utilized carryforward tax attributes generated in prior tax years, including net operating losses, which could potentially be revised upon examination. 7. Shareholders’ Equity On October 31, 2018, UNIFI announced that its Board of Directors (the “Board”) approved a share repurchase program (the “2018 SRP”) under which UNIFI is authorized to acquire up to $ 50,000 of its common stock. Under the 2018 SRP, purchases may be made from time to time in the open market at prevailing market prices, through private transactions or block trades. The timing and amount of repurchases will depend on market conditions, share price, applicable legal requirements, and other factors. The share repurchase authorization is discretionary and has no expiration date. Repurchases, if any, are expected to be financed through cash generated from operations and borrowings under the ABL Revolver and are subject to applicable limitations and restrictions as set forth in the ABL Facility. UNIFI may discontinue repurchases at any time that management determines additional purchases are not beneficial or advisable. 8 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) The following table summarizes UNIFI’s repurchases and retirements of its common stock under the 2018 SRP for the fiscal periods noted: Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs Average Price Paid per Share Approximate Dollar Value that May Yet Be Repurchased Under Publicly Announced Plans or Programs Fiscal 2019 — $ — $ 50,000 Fiscal 2020 84 $ 23.72 $ 48,008 Fiscal 2021 — $ — $ 48,008 Fiscal 2022 617 $ 14.84 $ 38,859 Fiscal 2023 (through April 2, 2023) — $ — $ 38,859 Total 701 $ 15.90 $ 38,859 Repurchased shares are retired and have the status of authorized and unissued shares. The cost of the repurchased shares is recorded as a reduction to common stock to the extent of the par value of the shares acquired and the remainder is allocated between capital in excess of par value and retained earnings, on a pro rata basis. 8. Stock-Based Compensation On October 29, 2020 , UNIFI’s shareholders approved the Unifi, Inc. Second Amended and Restated 2013 Incentive Compensation Plan (the “2020 Plan”). The 2020 Plan set the number of shares available for future issuance pursuant to awards granted under the 2020 Plan to 850 . No additional awards can be granted under prior plans; however, awards outstanding under a respective prior plan remain subject to that plan’s provisions. The following table provides the number of awards remaining available for future issuance under the 2020 Plan as of April 2, 2023: Authorized under the 2020 Plan 850 Plus: Awards expired, forfeited or otherwise terminated unexercised 4 Less: Awards granted to employees ( 544 ) Less: Awards granted to non-employee directors ( 114 ) Available for issuance under the 2020 Plan 196 On October 27, 2021, UNIFI’s shareholders approved the Unifi, Inc. Employee Stock Purchase Plan (the “ESPP”) as described in Unifi, Inc.’s Definitive Proxy Statement on Schedule 14A filed with the SEC on September 2, 2021. The ESPP reserved 100 Company shares, is intended to be a qualified plan under applicable tax law, and allows eligible employees to purchase Company shares at a 15 % discount from market value. ESPP activity is reflected as options exercised in the condensed consolidated statements of shareholders’ equity. 9. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities Financial Instruments For the nine months ended April 2, 2023 and March 27, 2022, there were no significant changes to UNIFI’s assets and liabilities measured at fair value, and there were no transfers into or out of the levels of the fair value hierarchy. UNIFI believes that there have been no significant changes to its credit risk profile or the interest rates available to UNIFI for debt issuances with similar terms and average maturities, and UNIFI estimates that the fair values of its debt obligations approximate the carrying amounts. Other financial instruments include cash and cash equivalents, receivables, accounts payable, and accrued expenses. The financial statement carrying amounts of these items approximate the fair values due to their short-term nature. Grantor Trust The UNIFI, Inc. Deferred Compensation Plan (the “DCP”), established in fiscal 2022, is an unfunded non-qualified deferred compensation plan in which certain key employees are eligible to participate. The fair values of the investment assets held by the grantor trust established in connection with the DCP were approxima tely $ 2,586 and $ 2,196 as of April 2, 2023 and July 3, 2022, respectively, and are classified as trading securities within Other non-current assets. The grantor trust assets have readily-available market values and are classified as Level 1 trading securities in the fair value hierarchy. Trading gains and losses associated with these investments are recorded to Other operating (income) expense, net. The associated DCP liability is recorded within Other long-term liabilities, and any increase or decrease in the liability is also recorded in Other operating (income) expense, net. During the nine months ended April 2, 2023, we rec orded net gains on investments held by the trust of $ 78 . Derivative Instruments UNIFI uses derivative financial instruments such as interest rate swaps to reduce its ongoing business exposures to fluctuations in interest rates. UNIFI does not enter into derivative contracts for speculative purposes. Since June 2022, UNIFI has had no outstanding derivative instruments. 9 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 10. Accumulated Other Comprehensive Loss The components of and the changes in accumulated other comprehensive loss, net of tax, as applicable, consist of the following: Foreign Currency Translation Adjustments Accumulated Other Comprehensive Loss Balance at July 3, 2022 $ ( 59,605 ) $ ( 59,605 ) Other comprehensive income 2,065 2,065 Balance at April 2, 2023 $ ( 57,540 ) $ ( 57,540 ) A summary of the after-tax effects of the components of other comprehensive loss, net for the three-month and nine-month periods ended April 2, 2023 and March 27, 2022 is included in the accompanying condensed consolidated statements of comprehensive (loss) income. 11. Earnings Per Share The components of the calculation of earnings per share (“EPS”) are as follows: For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Net (loss) income $ ( 5,184 ) $ 2,066 $ ( 31,055 ) $ 11,675 Basic weighted average shares 18,052 18,473 18,029 18,500 Net potential common share equivalents — 469 — 474 Diluted weighted average shares 18,052 18,942 18,029 18,974 Excluded from the calculation of common share equivalents: Anti-dilutive common share equivalents — 443 — 330 Excluded from the calculation of diluted shares: Unvested stock options that vest upon achievement of certain market conditions 333 333 333 333 The calculation of EPS is based on the weighted average number of Unifi, Inc.’s common shares outstanding for the applicable period. The calculation of diluted EPS presents the effect of all potential dilutive common shares that were outstanding during the respective period, unless the effect of doing so is anti-dilutive. 12. Commitments and Contingencies Collective Bargaining Agreements While employees of UNIFI’s Brazilian operations are unionized, none of the labor force employed by UNIFI’s domestic or other foreign subsidiaries is currently covered by a collective bargaining agreement. Environmental On September 30, 2004, Unifi Kinston, LLC (“UK”), a subsidiary of Unifi, Inc., completed its acquisition of polyester filament manufacturing assets located in Kinston, North Carolina (“Kinston”) from Invista S.a.r.l. (“INVISTA”). The land for the Kinston site was leased pursuant to a 99 -year ground lease (the “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 U.S. Environmental Protection Agency and the North Carolina Department of Environmental Quality (“DEQ”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and remediate the AOCs to comply with applicable regulatory standards. Effective March 20, 2008, UK entered into a lease termination agreement associated with conveyance of certain assets at the Kinston site to DuPont. This agreement terminated the Ground Lease and relieved UK of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to UK’s period of operation of the Kinston site, which was from 2004 to 2008. At this time, UNIFI has no basis to determine if or when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same. UK continues to own property (the “Kentec site”) acquired in the 2004 transaction with INVISTA that has contamination from DuPont’s prior operations and is monitored by DEQ. The Kentec site has been remediated by DuPont, and DuPont has received authority from DEQ to discontinue further remediation, other than natural attenuation. Prior to transfer of responsibility to UK, DuPont and UK had a duty to monitor and report the environmental status of the Kentec site to DEQ. Effective April 10, 2019, UK assumed sole remediator responsibility of the Kentec site pursuant to its contractual obligations with INVISTA and received $ 180 of net monitoring and reporting costs due from DuPont. In connection with monitoring, UK expects to sample and report to DEQ annually. At this time, UNIFI does not expect any active site remediation will be required but expects that any costs associated with active site remediation, if ever required, would likely be immaterial. 10 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 13. Related Party Transactions There were no related party receivables as of April 2, 2023 or July 3, 2022. Related party payables for Salem Leasing Corporation consisted of the following: April 2, 2023 July 3, 2022 Accounts payable $ 405 $ 432 Operating lease obligations 575 811 Finance lease obligations 3,995 4,933 Total related party payables $ 4,975 $ 6,176 The following were the Company’s significant related party transactions: For the Three Months Ended For the Nine Months Ended Affiliated Entity Transaction Type April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Salem Leasing Corporation Payments for transportation equipment costs and finance lease debt service $ 1,048 $ 1,030 $ 3,431 $ 3,117 14. Business Segment Information UNIFI defines operating segments as components of the organization for which discrete financial information is available and operating results are evaluated on a regular basis by UNIFI’s principal executive officer, who is the chief operating decision maker (the “CODM”), in order to assess performance and allocate resources. Characteristics of UNIFI which were relied upon in making the determination of reportable segments include the nature of the products sold, the internal organizational structure, the trade policies in the geographic regions in which UNIFI operates, and the information that is regularly reviewed by the CODM for the purpose of assessing performance and allocating resources. In the fourth fiscal quarter of fiscal 2022, UNIFI realigned its operating and reportable segments to correspond with changes to its operating model, management structure, and organizational responsibilities, reflecting the manner in which business performance is evaluated, resources are allocated, and financial statement users can best understand the results of operations. Accordingly, UNIFI is now reporting the Americas Segment, Brazil Segment, and Asia Segment. The Americas Segment represents the combination of the previously reported Polyester Segment, Nylon Segment, and All Other category. There are no changes to the composition of the historical Brazil Segment and Asia Segment. Comparative prior period disclosures have been updated to conform to the new presentation. UNIFI has three reportable segments. • The operations within the Americas Segment exhibit similar long-term economic characteristics and primarily sell into an economic trading zone covered by the USMCA and CAFTA-DR to similar customers utilizing similar methods of distribution. These operations derive revenues primarily from manufacturing synthetic and recycled textile products with sales primarily to yarn manufacturers, knitters, and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive, home furnishings, industrial, medical, and other end-use markets principally in North and Central America. The Americas Segment consists of sales and manufacturing operations in the U.S., El Salvador, and Colombia. • The Brazil Segment primarily manufactures and sells polyester-based products to knitters and weavers that produce fabric for the apparel, automotive, home furnishings, industrial, and other end-use markets principally in Brazil. The Brazil Segment includes a manufacturing location and sales offices in Brazil. • The operations within the Asia Segment exhibit similar long-term economic characteristics and sell to similar customers utilizing similar methods of distribution primarily in Asia and Europe. The Asia Segment primarily sources synthetic and recycled textile products from third-party suppliers and sells to other yarn manufacturers, knitters, and weavers that produce fabric for the apparel, automotive, home furnishings, industrial, and other end-use markets principally in Asia. The Asia Segment includes sales offices in China, Turkey, and Hong Kong. UNIFI evaluates the operating performance of its segments based upon Segment Profit, which represents segment gross profit (loss) plus segment depreciation expense. This measurement of segment profit or loss best aligns segment reporting with the current assessments and evaluations performed by, and information provided to, the CODM. The accounting policies for the segments are consistent with UNIFI’s accounting policies. Intersegment sales are omitted from segment disclosures, as they are (i) insignificant to UNIFI’s segments and eliminated from consolidated reporting and (ii) excluded from segment evaluations performed by the CODM. Selected financial information is presented below: For the Three Months Ended April 2, 2023 Americas Brazil Asia Total Net sales $ 101,946 $ 27,380 $ 27,412 $ 156,738 Cost of sales 98,788 24,998 23,299 147,085 Gross profit 3,158 2,382 4,113 9,653 Segment depreciation expense 5,574 549 — 6,123 Segment Profit $ 8,732 $ 2,931 $ 4,113 $ 15,776 11 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) For the Three Months Ended March 27, 2022 Americas Brazil Asia Total Net sales $ 119,736 $ 29,767 $ 51,277 $ 200,780 Cost of sales 113,952 23,784 43,900 181,636 Gross profit 5,784 5,983 7,377 19,144 Segment depreciation expense 5,226 382 — 5,608 Segment Profit $ 11,010 $ 6,365 $ 7,377 $ 24,752 For the Nine Months Ended April 2, 2023 Americas Brazil Asia Total Net sales $ 294,832 $ 91,946 $ 85,691 $ 472,469 Cost of sales 309,627 81,447 73,179 464,253 Gross (loss) profit ( 14,795 ) 10,499 12,512 8,216 Segment depreciation expense 16,596 1,410 — 18,006 Segment Profit $ 1,801 $ 11,909 $ 12,512 $ 26,222 For the Nine Months Ended March 27, 2022 Americas Brazil Asia Total Net sales $ 345,259 $ 91,106 $ 161,817 $ 598,182 Cost of sales 329,436 67,657 138,958 536,051 Gross profit 15,823 23,449 22,859 62,131 Segment depreciation expense 15,446 1,042 — 16,488 Segment Profit $ 31,269 $ 24,491 $ 22,859 $ 78,619 The reconciliations of segment gross profit to consolidated (loss) income before income taxes are as follows: For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Americas $ 3,158 $ 5,784 $ ( 14,795 ) $ 15,823 Brazil 2,382 5,983 10,499 23,449 Asia 4,113 7,377 12,512 22,859 Segment gross profit 9,653 19,144 8,216 62,131 Selling, general and administrative expenses 12,063 14,389 35,584 39,025 Benefit for bad debts ( 56 ) ( 169 ) ( 38 ) ( 489 ) Other operating expense (income), net 324 ( 831 ) ( 139 ) ( 2 ) Operating (loss) income ( 2,678 ) 5,755 ( 27,191 ) 23,597 Interest income ( 554 ) ( 492 ) ( 1,615 ) ( 944 ) Interest expense 2,073 709 5,209 2,140 Equity in earnings of unconsolidated affiliates ( 158 ) ( 41 ) ( 539 ) ( 385 ) Recovery of non-income taxes, net — 815 — 815 (Loss) income before income taxes $ ( 4,039 ) $ 4,764 $ ( 30,246 ) $ 21,971 There have been no material changes in segment assets during fiscal 2023. 15. Investments in Unconsolidated Affiliates Included within Other non-current assets are UNIFI’s investments in unconsolidated affiliates: U.N.F. Industries, Ltd. (“UNF”) and UNF America LLC (“UNFA”) (collectively “UNFs”). U.N.F. Industries, Ltd. Raw material and production services for UNF are provided by Nilit Ltd. under separate supply and services agreements. UNF’s fiscal year end is December 31, and it is a registered Israeli private company located in Migdal Ha-Emek, Israel. UNF America LLC Raw material and production services for UNFA are provided by Nilit America Inc. under separate supply and services agreements. UNFA’s fiscal year end is December 31, and it is a limited liability company located in Ridgeway, Virginia. UNFA is treated as a partnership for its income tax reporting. In conjunction with the formation of UNFA, UNIFI entered into a supply agreement with UNF and UNFA whereby UNIFI agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNFA. The supply agreement has no stated minimum purchase quantities and pricing is typically negotiated every six months, based on market rates. As of April 2, 2023, UNIFI’s open purchase orders related to this supply agreement were $ 5,044 . 12 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) UNIFI’s raw material purchases under this supply agreement consisted of the following: For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 UNFA $ 6,604 $ 8,267 $ 19,395 $ 20,849 UNF — 93 37 239 Total $ 6,604 $ 8,360 $ 19,432 $ 21,088 As of April 2, 2023 and July 3, 2022, UNIFI had combined accounts payable due to UNF and UNFA of $ 4,621 and $ 5,565 , respectively. UNIFI has determined that UNF and UNFA are variable interest entities and that UNIFI is the primary beneficiary of these entities, based on the terms of the supply agreement discussed above. As a result, these entities should be consolidated with UNIFI’s financial results. As (i) UNIFI purchases substantially all of the output from the two entities, (ii) the two entities’ balance sheets constitute 3 % or less of UNIFI’s current assets and total assets, and (iii) such balances are not expected to comprise a larger portion in the future, UNIFI has not included the accounts of UNF and UNFA in its consolidated financial statements and instead is accounting for these entities as equity investments. As of April 2, 2023, UNIFI’s combined investments in UNF and UNFA were $ 2,504 . The financial results of UNF and UNFA are included in UNIFI’s consolidated financial statements with a one-month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with UNIFI’s accounting policy. Other than the supply agreement discussed above, UNIFI does not provide any other commitments or guarantees related to either UNF or UNFA. Condensed balance sheet and income statement information for UNIFI’s unconsolidated affiliates (including reciprocal balances) are presented in the tables below. April 2, 2023 July 3, 2022 Current assets $ 9,150 $ 10,705 Non-current assets 521 605 Current liabilities 6,542 8,056 Non-current liabilities — — Shareholders’ equity and capital accounts 3,129 3,254 UNIFI’s portion of undistributed earnings 2,445 2,013 For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 Net sales $ 5,041 $ 8,816 $ 21,076 $ 22,301 Gross profit 282 487 1,215 1,059 (Loss) income from operations ( 138 ) 60 ( 87 ) ( 194 ) Net (loss) income ( 154 ) 54 ( 125 ) ( 199 ) Depreciation and amortization 27 29 83 93 Distributions received — 750 — 750 16. Supplemental Cash Flow Information Cash payments for interest and taxes consist of the following: For the Nine Months Ended April 2, 2023 March 27, 2022 Interest, net of capitalized interest of $ 403 and $ 322 , respectively $ 4,143 $ 1,980 Income tax payments, net 4,760 11,626 Cash payments for taxes shown above consist primarily of income and withholding tax payments made by UNIFI in both U.S. and foreign jurisdictions, net of refunds. The nine months ended March 27, 2022 includes an income tax payment of $ 3,749 related to the recovery of non-income taxes in Brazil. Non-Cash Investing and Financing Activities As of April 2, 2023 and July 3, 2022, $ 1,332 and $ 2,456 , respectively, were included in accounts payable for unpaid capital expenditures. As of March 27, 2022 and June 27, 2021, $ 1,981 and $ 2,080 , respectively, were included in accounts payable for unpaid capital expenditures. During the nine months ended April 2, 2023 and March 27, 2022, UNIFI recorded non-cash activity relating to finance leases of $ 3,179 and $ 1,764 respectively. In connection with the commencement of the 2022 Credit Agreement in October 2022, $ 52,500 of borrowings outstanding on the revolving credit facility were transferred to the term loan, such that revolver borrowings were reduced by $ 52,500 and term loan borrowings were increased by $ 52,500 with no flow of cash. 13 Unifi, Inc. Notes to Condensed Consolidated Financial Statements (Continued) (Unaudited) 17. Other Financial Data Select balance sheet information is presented in the following table. April 2, 2023 July 3, 2022 Receivables, net: Customer receivables $ 84,599 $ 99,963 Allowance for uncollectible accounts ( 1,356 ) ( 1,498 ) Reserves for quality claims ( 834 ) ( 860 ) Net customer receivables 82,409 97,605 Banker's acceptance notes 4,579 7,849 Other receivables 980 1,111 Total receivables, net $ 87,968 $ 106,565 Inventories: Raw materials $ 50,681 $ 69,994 Supplies 11,984 11,953 Work in process 8,860 10,358 Finished goods 75,637 84,477 Gross inventories 147,162 176,782 Net realizable value adjustment ( 3,984 ) ( 3,487 ) Total inventories $ 143,178 $ 173,295 Other current assets: Vendor deposits $ 5,623 $ 6,910 Value-added taxes receivable 3,881 1,987 Prepaid expenses and other 2,827 3,004 Recovery of non-income taxes, net 2,359 6,770 Contract assets 403 285 Total other current assets $ 15,093 $ 18,956 Property, plant and equipment, net: Land $ 3,166 $ 3,160 Land improvements 16,443 16,443 Buildings and improvements 166,675 164,252 Assets under finance leases 13,947 10,921 Machinery and equipment 643,347 635,699 Computers, software and office equipment 26,213 25,348 Transportation equipment 10,643 10,591 Construction in progress 22,316 20,397 Gross property, plant and equipment 902,750 886,811 Less: accumulated depreciation ( 668,540 ) ( 666,569 ) Less: accumulated amortization – finance leases ( 5,015 ) ( 3,904 ) Total property, plant and equipment, net $ 229,195 $ 216,338 Other non-current assets: Recovery of taxes $ 5,492 $ 1,463 Grantor trust 2,586 2,196 Investments in unconsolidated affiliates 2,504 2,072 Intangible assets, net 1,479 2,500 Other 925 557 Total other non-current assets $ 12,986 $ 8,788 Other current liabilities: Payroll and fringe benefits $ 8,415 $ 9,414 Utilities 1,578 2,287 Deferred revenue 1,471 1,694 Incentive compensation 443 3,916 Property taxes and other 1,587 2,495 Total other current liabilities $ 13,494 $ 19,806 Other long-term liabilities: Nonqualified deferred compensation plan obligation $ 2,501 $ 1,982 Uncertain tax positions 1,894 1,575 Other 516 892 Total other long-term liabilities $ 4,911 $ 4,449 14 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following is management’s discussion and analysis of certain significant factors that have affected 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 April 2, 2023, while a reference to the “prior period” refers to the three-month period ended March 27, 2022. A reference to the “current nine-month period” refers to the nine-month period ended April 2, 2023, while a reference to the “prior nine-month period” refers to the nine-month period ended March 27, 2022. 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 and nine months ended April 2, 2023 and March 27, 2022, and, to the extent applicable, any material changes from the information discussed in the 2022 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 2022 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: For the Three Months Ended For the Nine Months Ended April 2, 2023 March 27, 2022 April 2, 2023 March 27, 2022 BRL to USD 5.19 5.20 5.23 5.32 RMB to USD 6.85 6.35 6.92 6.40 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 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 has adversely impacted our consolidated sales and profitability in fiscal 2023. In addition to the current unfavorable economic environment and the inventory destocking measures taken by brands and retailers, the following pressures have continued from fiscal 2022 into fiscal 2023: (i) the impact of inflation on consumer spending, (ii) rising interest rates, (iii) the Russia-Ukraine conflict, and (iv) supply chain volatility. 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. Input Costs and Global Production Volatility In addition to the escalation of input costs in fiscal 2022, UNIFI experienced inefficiencies in the global supply chain in connection with (i) freight costs and logistics slowdowns in foreign markets; (ii) a tighter labor pool in the U.S.; and (iii) suppressed productivity from our business partners resulting from pandemic-related lockdowns in certain regions, particularly Asia. Despite lowered input and freight costs and a marginally more stable labor pool during fiscal 2023, the global demand volatility and uncertainty that began in late fiscal 2022 has continued throughout fiscal 2023, as the threat of recession and global tensions continue to create uncertainty. The 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 During the current period, certain regional bank crises and failures generated additional uncertainty and volatility in the financial and credit markets. 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. relatively quickly. 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 the financial institutions within our 2022 Credit Agreement or construction financing arrangement (“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 profit and gross margin for UNIFI and for each reportable segment; 15 • net (loss) income 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) income 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) Income, which represents net (loss) income 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) Income 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) Income, 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) Income 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. 16 Review of Results of Operations Three Months Ended April 2, 2023 Compared to Three Months Ended March 27, 2022 Consolidated Overview The below tables provide: • the components of net (loss) income and the percentage increase or decrease over the prior period amounts, • a reconciliation from net (loss) income to EBITDA and Adjusted EBITDA, and • a reconciliation from net (loss) income to Adjusted Net (Loss) Income and Adjusted EPS. Following the tables is a discussion and analysis of the significant components of net (loss) income. Net (loss) income For the Three Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 156,738 100.0 $ 200,780 100.0 (21.9 ) Cost of sales 147,085 93.8 181,636 90.5 (19.0 ) Gross profit 9,653 6.2 19,144 9.5 (49.6 ) SG&A 12,063 7.7 14,389 7.2 (16.2 ) Benefit for bad debts (56 ) — (169 ) (0.1 ) (66.9 ) Other operating expense (income), net 324 0.2 (831 ) (0.4 ) nm Operating (loss) income (2,678 ) (1.7 ) 5,755 2.8 nm Interest expense, net 1,519 1.0 217 0.1 nm Equity in earnings of unconsolidated affiliates (158 ) (0.1 ) (41 ) — nm Recovery of non-income taxes, net — — 815 0.4 (100.0 ) (Loss) income before income taxes (4,039 ) (2.6 ) 4,764 2.3 nm Provision for income taxes 1,145 0.7 2,698 1.3 (57.6 ) Net (loss) income $ (5,184 ) (3.3 ) $ 2,066 1.0 nm nm = not meaningful EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures) The reconciliations of the amounts reported under GAAP for Net (loss) income to EBITDA and Adjusted EBITDA were as follows: For the Three Months Ended April 2, 2023 March 27, 2022 Net (loss) income $ (5,184 ) $ 2,066 Interest expense, net 1,519 217 Provision for income taxes 1,145 2,698 Depreciation and amortization expense (1) 6,871 6,433 EBITDA 4,351 11,414 Contract modification costs (2) 623 — Recovery of non-income taxes, net (3) — 815 Adjusted EBITDA $ 4,974 $ 12,229 (1) Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. 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. (3) In fiscal 2021, UNIFI recognized an estimated benefit for the recovery of non-income taxes in Brazil. During the quarter ended March 27, 2022, UNIFI reduced the estimated benefit based on additional clarity and review of the recovery process. 17 Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures) The tables below set forth reconciliations of (i) (Loss) income before income taxes (“Pre-tax (Loss) Income”), Provision for income taxes (“Tax Impact”), and Net (Loss) Income to Adjusted Net (Loss) Income and (ii) Diluted EPS to Adjusted EPS. For the Three Months Ended April 2, 2023 For the Three Months Ended March 27, 2022 Pre-tax Loss Tax Impact Net Loss Diluted EPS Pre-tax Income Tax Impact Net Income Diluted EPS GAAP results $ (4,039 ) $ (1,145 ) $ (5,184 ) $ (0.29 ) $ 4,764 $ (2,698 ) $ 2,066 $ 0.11 Contract modification costs (1) 623 — 623 0.04 — — — — Recovery of non-income taxes, net (2) — — — — 815 (257 ) 558 0.03 Adjusted results $ (3,416 ) $ (1,145 ) $ (4,561 ) $ (0.25 ) $ 5,579 $ (2,955 ) $ 2,624 $ 0.14 Weighted average common shares outstanding 18,052 18,942 (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. (2) In fiscal 2021, UNIFI recognized an estimated benefit for the recovery of non-income taxes in Brazil. During the quarter ended March 27, 2022, UNIFI reduced the estimated benefit based on additional clarity and review of the recovery process. Net Sales Consolidated net sales for the current period decreased by $44,042, or 21.9%, and consolidated sales volumes decreased 22.3%, compared to the prior period. The decreases occurred primarily due to lower volumes in the Americas and Asia Segments as a result of lower global demand in connection with the inventory destocking efforts of major brands and retailers. Consolidated weighted average sales prices increased 0.4%, an insignificant change. REPREVE ® Fiber products for the current period comprised 32%, or $49,619, of consolidated net sales, down from 36%, or $71,930, for the prior period. The lower volumes and net sales in the Asia Segment, which has the highest proportion of REPREVE ® Fiber sales as a percentage of segment net sales, was the main driver for the lower REPREVE ® Fiber sales. Gross Profit Gross profit for the current period decreased by $9,491, or 49.6%, compared to the prior period. Gross profit decreased as a result of the decline in net sales, combined with weak fixed cost absorption for the Americas Segment, where utilization and productivity are materially impactful to gross profit. Although raw material costs for the Americas Segment have decreased meaningfully in fiscal 2023, the associated benefit was muted by low production levels and weak demand. • For the Americas Segment, gross profit decreased due to weaker global demand in connection with the inventory destocking efforts of major brands and retailers and weak fixed cost absorption in connection with lower production. • For the Brazil Segment, gross profit decreased primarily due to decreasing market prices in Brazil due to low-cost import competition. • For the Asia Segment, gross profit decreased primarily due to lower sales volumes in connection with weaker global demand in connection with the inventory destocking efforts of major brands and retailers. SG&A SG&A for the current period decreased compared to the prior period, primarily due to (i) lower incentive compensation for the current period and (ii) lower discretionary expenses, including marketing and advertising. Benefit for Bad Debts The current period and prior period bad debt changes reflect no material activity. Other Operating Expense (Income), Net The current period and prior period include foreign currency transaction losses (gains) of $174 and $(895), respectively. The current 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 debt principal following continued capital investments and higher interest rates. 18 Equity in Earnings of Unconsolidated Affiliates There was no material activity for the current period or the prior period. Recovery of Non-income Taxes, Net In fiscal 2021, UNIFI recognized an estimated benefit from the expected recovery of non-income taxes in Brazil. During the prior period, UNIFI reduced the estimate by $815 based on additional clarity and precedent surrounding the recovery process. Income Taxes Provision for income taxes and the effective tax rate were as follows: For the Three Months Ended April 2, 2023 March 27, 2022 Provision for income taxes $ 1,145 $ 2,698 Effective tax rate (28.3 )% 56.6 % 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 income (loss) before income taxes is lower. The decrease in the effective tax rate from the prior period to the current period is primarily attributable to lower income for foreign subsidiaries, in combination with the impact of further losses in the U.S. and the associated valuation allowance for deferred tax assets. Net (Loss) Income The decrease in net (loss) income was primarily attributable to the decrease in gross profit and the associated adverse impact of lower U.S. earnings on the effective tax rate, partially offset by lower SG&A in the current period. Adjusted EBITDA (Non-GAAP Financial Measure) Adjusted EBITDA decreased primarily in connection with lower gross profit, partially offset by lower SG&A in the current period. Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures) Adjusted Net (Loss) Income and Adjusted EPS decreased from the prior period to the current period, commensurate with the decrease in net (loss) income. 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: For the Three Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 101,946 100.0 $ 119,736 100.0 (14.9 ) Cost of sales 98,788 96.9 113,952 95.2 (13.3 ) Gross profit 3,158 3.1 5,784 4.8 (45.4 ) Depreciation expense 5,574 5.5 5,226 4.4 6.7 Segment Profit $ 8,732 8.6 $ 11,010 9.2 (20.7 ) Segment net sales as a percentage of consolidated amounts 65.0 % 59.6 % Segment Profit as a percentage of consolidated amounts 55.3 % 44.5 % The change in net sales for the Americas Segment was as follows: Net sales for the prior period $ 119,736 Decrease in sales volumes (11,513 ) Net change in average selling price and sales mix (6,277 ) Net sales for the current period $ 101,946 19 The change in net sales for the Americas Segment from the prior period to the current period was primarily attributable to lower sales volumes following weaker global textile demand. Net change in average selling price and sales mix reflects a larger proportion of lower-priced Flake and Chip sales in the current period. The change in Segment Profit for the Americas Segment was as follows: Segment Profit for the prior period $ 11,010 Net decrease in underlying margins (1,220 ) Decrease in sales volumes (1,058 ) Segment Profit for the current period $ 8,732 The decrease in Segment Profit for the Americas Segment from the prior period to the current period was primarily attributable to lower production volumes driving weaker fixed cost absorption in connection with lower sales volumes. 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: For the Three Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 27,380 100.0 $ 29,767 100.0 (8.0 ) Cost of sales 24,998 91.3 23,784 79.9 5.1 Gross profit 2,382 8.7 5,983 20.1 (60.2 ) Depreciation expense 549 2.0 382 1.3 43.7 Segment Profit $ 2,931 10.7 $ 6,365 21.4 (54.0 ) Segment net sales as a percentage of consolidated amounts 17.5 % 14.8 % Segment Profit as a percentage of consolidated amounts 18.6 % 25.7 % The change in net sales for the Brazil Segment was as follows: Net sales for the prior period $ 29,767 Decrease in average selling price (6,900 ) Increase in sales volumes 4,439 Favorable foreign currency translation effects 74 Net sales for the current period $ 27,380 The decrease in net sales for the Brazil Segment from the prior period to the current period was primarily attributable to pricing pressure from import competition, partially offset by higher sales volumes in connection with market share gains. The change in Segment Profit for the Brazil Segment was as follows: Segment Profit for the prior period $ 6,365 Decrease in underlying unit margins (4,440 ) Increase in sales volumes 954 Favorable foreign currency translation effects 52 Segment Profit for the current period $ 2,931 The decrease in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to an overall decrease in gross margin mainly due to pressure on selling prices from low-priced import competition. 20 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: For the Three Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 27,412 100.0 $ 51,277 100.0 (46.5 ) Cost of sales 23,299 85.0 43,900 85.6 (46.9 ) Gross profit 4,113 15.0 7,377 14.4 (44.2 ) Depreciation expense — — — — — Segment Profit $ 4,113 15.0 $ 7,377 14.4 (44.2 ) Segment net sales as a percentage of consolidated amounts 17.5 % 25.5 % Segment Profit as a percentage of consolidated amounts 26.1 % 29.8 % The change in net sales for the Asia Segment was as follows: Net sales for the prior period $ 51,277 Net decrease in sales volumes (24,720 ) Unfavorable foreign currency translation effects (3,161 ) Change in average selling price and sales mix 4,016 Net sales for the current period $ 27,412 The decrease in net sales for the Asia Segment from the prior period to the current period was primarily attributable to weaker global demand in connection with the inventory destocking efforts of major brands and retailers driving lower sales volumes, partially offset by a strong sales mix. The change in Segment Profit for the Asia Segment was as follows: Segment Profit for the prior period $ 7,377 Decrease in sales volumes (3,548 ) Unfavorable foreign currency translation effects (471 ) Change in underlying margins and sales mix 755 Segment Profit for the current period $ 4,113 The decrease in Segment Profit for the Asia Segment from the prior period to the current period follows the decline in net sales and sales volumes discussed above, as the comparable gross margin rate for the Asia Segment improved with a strong sales mix. Nine Months Ended April 2, 2023 Compared to Nine Months Ended March 27, 2022 Consolidated Overview The below tables provide: • the components of net (loss) income and the percentage increase or decrease over the prior nine-month period amounts, • a reconciliation from net (loss) income to EBITDA and Adjusted EBITDA, and • a reconciliation from net (loss) income to Adjusted Net (Loss) Income and Adjusted EPS. Following the tables is a discussion and analysis of the significant components of net (loss) income. 21 Net (loss) income For the Nine Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 472,469 100.0 $ 598,182 100.0 (21.0 ) Cost of sales 464,253 98.3 536,051 89.6 (13.4 ) Gross profit 8,216 1.7 62,131 10.4 (86.8 ) SG&A 35,584 7.5 39,025 6.6 (8.8 ) Benefit for bad debts (38 ) — (489 ) (0.1 ) (92.2 ) Other operating income, net (139 ) — (2 ) — nm Operating (loss) income (27,191 ) (5.8 ) 23,597 3.9 nm Interest expense, net 3,594 0.7 1,196 0.2 nm Equity in earnings of unconsolidated affiliates (539 ) (0.1 ) (385 ) (0.1 ) 40.0 Recovery of non-income taxes, net — — 815 0.1 (100.0 ) (Loss) income before income taxes (30,246 ) (6.4 ) 21,971 3.7 nm Provision for income taxes 809 0.2 10,296 1.7 (92.1 ) Net (loss) income $ (31,055 ) (6.6 ) $ 11,675 2.0 nm nm = not meaningful EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures) The reconciliations of the amounts reported under GAAP for Net (loss) income to EBITDA and Adjusted EBITDA were as follows: For the Nine Months Ended April 2, 2023 March 27, 2022 Net (loss) income $ (31,055 ) $ 11,675 Interest expense, net 3,594 1,196 Provision for income taxes 809 10,296 Depreciation and amortization expense (1) 20,261 19,007 EBITDA (6,391 ) 42,174 Contract modification costs (2) 623 — Recovery of non-income taxes, net (3) — 815 Adjusted EBITDA $ (5,768 ) $ 42,989 (1) Within this reconciliation, depreciation and amortization expense excludes the amortization of debt issuance costs, which are reflected in interest expense, net. Within the accompanying condensed consolidated statements of cash flows, amortization of debt issuance costs is reflected in depreciation and amortization expense. In fiscal 2023, interest expense, net includes $273 of loss on debt extinguishment. (2) In the third quarter of fiscal 2023, UNIFI amended certain existing contracts related to future texturing machinery purchases 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. (3) In fiscal 2021, UNIFI recognized an estimated benefit for the recovery of non-income taxes in Brazil. During the quarter ended March 27, 2022, UNIFI reduced the estimated benefit based on additional clarity and review of the recovery process. Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures) The tables below set forth reconciliations of (i) (Loss) income before income taxes (“Pre-tax (Loss) Income”), Provision for income taxes (“Tax Impact”), and Net (Loss) Income to Adjusted Net (Loss) Income and (ii) Diluted EPS to Adjusted EPS. For the Nine Months Ended April 2, 2023 For the Nine Months Ended March 27, 2022 Pre-tax Loss Tax Impact Net Loss Diluted EPS Pre-tax Income Tax Impact Net Income Diluted EPS GAAP results $ (30,246 ) $ (809 ) $ (31,055 ) $ (1.72 ) $ 21,971 $ (10,296 ) $ 11,675 $ 0.62 Contract modification costs (1) 623 — 623 0.03 — — — — Recovery of income taxes (3) — (3,799 ) (3,799 ) (0.21 ) — — — — Recovery of non-income taxes, net (2) — — — — 815 (257 ) 558 0.02 Adjusted results $ (29,623 ) $ (4,608 ) $ (34,231 ) $ (1.90 ) $ 22,786 $ (10,553 ) $ 12,233 $ 0.64 Weighted average common shares outstanding 18,029 18,974 (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. (2) In fiscal 2021, UNIFI recognized an estimated benefit for the recovery of non-income taxes in Brazil. During the quarter ended March 27, 2022, UNIFI reduced the estimated benefit based on additional clarity and review of the recovery process. (3) 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. 22 Net Sales Consolidated net sales for the current nine-month period decreased by $125,713, or 21.0%, and consolidated sales volumes decreased 26.6%, compared to the prior nine-month period. The decreases occurred primarily due to lower volumes in the Americas and Asia Segments as a result of lower global demand in connection with the inventory destocking efforts of major brands and retailers in addition to pandemic-related lockdowns in Asia, partially offset by higher selling prices in response to higher raw material and input costs. Consolidated weighted average sales prices increased 5.6%, primarily attributable to higher selling prices in response to higher input costs. REPREVE ® Fiber products for the current nine-month period comprised 30%, or $141,664, of consolidated net sales, down from 38%, or $225,360, for the prior nine-month period. The lower volumes and net sales in the Asia Segment, which has the highest proportion of REPREVE ® Fiber sales as a percentage of segment net sales, was the main driver for the lower REPREVE ® Fiber sales. Gross Profit Gross profit for the current nine-month period decreased by $53,915, or 86.8%, compared to the prior nine-month period. Gross profit decreased as a result of the decline in net sales combined with weak fixed cost absorption for the Americas Segment, where utilization and productivity are materially impactful to gross profit. Although raw material costs for the Americas Segment decreased meaningfully in the current nine-month period, the associated benefit was muted by low production levels, weak demand, and higher priced raw material inventory purchased in the fourth fiscal quarter of 2022. • For the Americas Segment, gross profit decreased due to weaker global demand, weak fixed cost absorption in connection with lower production, and overall higher raw material cost levels in beginning inventory, despite a decrease in raw material costs during fiscal 2023. • For the Brazil Segment, gross profit decreased primarily due to the combination of high priced raw material inventory purchased in the fourth fiscal quarter of 2022 and decreasing market prices in Brazil due to low-cost import competition. • For the Asia Segment, gross profit decreased primarily due to lower sales volumes in connection with weaker global demand and pandemic-related lockdowns in Asia. SG&A SG&A for the current nine-month period decreased compared to the prior nine-month period, primarily due to (i) lower incentive compensation for the current nine-month period and (ii) lower discretionary expenses, including marketing and advertising. Benefit for Bad Debts The current nine-month period and prior nine-month period bad debt changes reflect no material activity. Other Operating Income, Net The current nine-month period and prior nine-month period include foreign currency transaction gains of $629 and $365, respectively, in addition to $346 of severance costs in the prior nine-month period. The current nine-month period also includes $623 paid to a vendor to facilitate an 18-month delay for equipment purchases. Interest Expense, Net Interest expense, net increased in connection with higher debt principal following continued capital investments and higher interest rates during the current nine-month period. Interest expense, net for the current nine-month period also includes $273 of loss on debt extinguishment. Equity in Earnings of Unconsolidated Affiliates There was no material activity for the current nine-month period or the prior nine-month period. Recovery of Non-income Taxes, Net In fiscal 2021, UNIFI recognized an estimated benefit from the expected recovery of non-income taxes in Brazil. During the prior nine-month period, UNIFI reduced the estimate by $815 based on additional clarity and precedent surrounding the recovery process. Income Taxes Provision for income taxes and the effective tax rate were as follows: For the Nine Months Ended April 2, 2023 March 27, 2022 Provision for income taxes $ 809 $ 10,296 Effective tax rate (2.7 )% 46.9 % 23 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 income (loss) before income taxes is lower. The decrease in the effective tax rate from the prior nine-month period to the current nine-month period is primarily attributable to lower income for foreign subsidiaries, in combination with the impact of further losses in the U.S. and the associated valuation allowance for deferred tax assets in the current period. Additionally, a discrete tax benefit was recognized in the second quarter of fiscal 2023 related to the recovery of certain Brazilian income taxes paid in prior years. Net (Loss) Income The decrease in net (loss) income was primarily attributable to the decrease in gross profit and the associated adverse impact of lower U.S. earnings on the effective tax rate. Adjusted EBITDA (Non-GAAP Financial Measure) Adjusted EBITDA decreased primarily in connection with lower gross profit. Adjusted Net (Loss) Income and Adjusted EPS (Non-GAAP Financial Measures) Adjusted Net (Loss) Income and Adjusted EPS decreased from the prior nine-month period to the current nine-month period, commensurate with the decrease in net (loss) income. 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 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: For the Nine Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 294,832 100.0 $ 345,259 100.0 (14.6 ) Cost of sales 309,627 105.0 329,436 95.4 (6.0 ) Gross (loss) profit (14,795 ) (5.0 ) 15,823 4.6 (193.5 ) Depreciation expense 16,596 5.6 15,446 4.5 7.4 Segment Profit $ 1,801 0.6 $ 31,269 9.1 (94.2 ) Segment net sales as a percentage of consolidated amounts 62.4 % 57.7 % Segment Profit as a percentage of consolidated amounts 6.9 % 39.8 % The change in net sales for the Americas Segment was as follows: Net sales for the prior nine-month period $ 345,259 Decrease in sales volumes (67,171 ) Net change in average selling price and sales mix 16,744 Net sales for the current nine-month period $ 294,832 The change in net sales for the Americas Segment from the prior nine-month period to the current nine-month period was primarily attributable to lower sales volumes following weaker global textile demand, partially offset by higher average selling prices in response to higher input costs. The change in Segment Profit for the Americas Segment was as follows: Segment Profit for the prior nine-month period $ 31,269 Change in underlying margins and sales mix from excess capacity (23,385 ) Decrease in sales volumes (6,083 ) Segment Profit for the current nine-month period $ 1,801 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 lower production volumes driving weaker fixed cost absorption in connection with lower sales volumes. 24 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: For the Nine Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 91,946 100.0 $ 91,106 100.0 0.9 Cost of sales 81,447 88.6 67,657 74.3 20.4 Gross profit 10,499 11.4 23,449 25.7 (55.2 ) Depreciation expense 1,410 1.6 1,042 1.2 35.3 Segment Profit $ 11,909 13.0 $ 24,491 26.9 (51.4 ) Segment net sales as a percentage of consolidated amounts 19.5 % 15.2 % Segment Profit as a percentage of consolidated amounts 45.4 % 31.2 % The change in net sales for the Brazil Segment was as follows: Net sales for the prior nine-month period $ 91,106 Increase in sales volumes 12,367 Favorable foreign currency translation effects 1,646 Decrease in average selling price and change in sales mix (13,173 ) Net sales for the current nine-month period $ 91,946 The increase in net sales for the Brazil Segment from the prior nine-month period to the current nine-month period was primarily attributable to higher sales volumes and favorable foreign currency translation effects, partially offset by the expected decrease in average selling price following the exceptional pricing levels experienced during the pandemic recovery in fiscal 2022. The Brazil Segment has undertaken aggressive pricing (i) against low-priced competitive imports and (ii) in the pursuit of greater market share. The change in Segment Profit for the Brazil Segment was as follows: Segment Profit for the prior nine-month period $ 24,491 Decrease in underlying margins (16,400 ) Increase in sales volumes 3,330 Favorable foreign currency translation effects 488 Segment Profit for the current nine-month period $ 11,909 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 an overall decrease in gross margin mainly due to the decrease in selling prices discussed above and the impact of higher raw material costs in beginning inventory. 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: For the Nine Months Ended April 2, 2023 March 27, 2022 % of Net Sales % of Net Sales % Change Net sales $ 85,691 100.0 $ 161,817 100.0 (47.0 ) Cost of sales 73,179 85.4 138,958 85.9 (47.3 ) Gross profit 12,512 14.6 22,859 14.1 (45.3 ) Depreciation expense — — — — — Segment Profit $ 12,512 14.6 $ 22,859 14.1 (45.3 ) Segment net sales as a percentage of consolidated amounts 18.1 % 27.1 % Segment Profit as a percentage of consolidated amounts 47.7 % 29.1 % The change in net sales for the Asia Segment was as follows: Net sales for the prior nine-month period $ 161,817 Net decrease in sales volumes (76,783 ) Unfavorable foreign currency translation effects (11,107 ) Change in average selling price and sales mix 11,764 Net sales for the current nine-month period $ 85,691 25 The decrease in net sales for the Asia Segment from the prior nine-month period to the current nine-month period was primarily attributable to weaker global demand and pandemic-related lockdowns driving lower sales volumes, partially offset by a strong sales mix. The change in Segment Profit for the Asia Segment was as follows: Segment Profit for the prior nine-month period $ 22,859 Decrease in sales volumes (10,807 ) Unfavorable foreign currency translation effects (1,648 ) Change in underlying margins and sales mix 2,108 Segment Profit for the current nine-month period $ 12,512 The decrease in Segment Profit for the Asia Segment from the prior nine-month period to the current nine-month period follows the decline in net sales and sales volumes discussed above, as the comparable gross margin rate for the Asia Segment improved due to a stronger sales mix. 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 $8,349, and, at April 2, 2023, availability under the ABL Revolver was $69,114. As of April 2, 2023, all of UNIFI’s $136,010 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 April 2, 2023 for domestic operations compared to foreign operations: Domestic Foreign Total Cash and cash equivalents $ 17 $ 49,689 $ 49,706 Borrowings available under financing arrangements 69,114 — 69,114 Liquidity $ 69,131 $ 49,689 $ 118,820 Working capital $ 88,215 $ 133,018 $ 221,233 Total debt obligations $ 136,010 $ — $ 136,010 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 COVID-19 pandemic, global demand recovery allowed for strong results and cash generation in fiscal 2021. However, in fiscal 2022 and through the current nine-month period, inflation and demand uncertainty have introduced new pressures to liquidity. Following the establishment of the 2022 Credit Agreement, UNIFI’s cash and liquidity positions are sufficient to sustain its operations and meet its growth needs. 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. Although global demand for the remainder of calendar 2023 is uncertain, 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 a prolonged 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. Additionally, UNIFI considers opportunities to deploy existing cash to preserve or enhance liquidity. In August 2022, we repatriated approximately $14,000 from our operations in Asia to the U.S. via an existing intercompany note and, after remitting the appropriate withholding taxes, utilized the cash to reduce our outstanding revolver borrowings, thereby increasing the availability. Management regularly evaluates such repatriations and maintains the ability to take additional, similar actions from time to time, as circumstances warrant. Recognizing the continuing weak demand environment, in the third quarter of fiscal 2023, UNIFI negotiated a contract modification with an equipment vendor from which significant capital expenditures had occurred and were planned to continue. The contract modification was executed at a cost to UNIFI of $623 and allows UNIFI to delay the associated equipment purchases and installation activities for 18 months, such that approximately $25,000 of capital expenditures originally expected over the March 2023 to September 2024 period are now expected to occur over the September 2024 to March 2026 period. This action allows for improved short- and mid-term liquidity in light of the current subdued levels of sales and facility utilization and allows for a better matching of future capital expenditures with expected higher levels of future business activity. As textile product demand recovers in the next several quarters, we expect to use cash in support of increasing working capital needs. 26 The following outlines the attributes relating to our credit facility as of April 2, 2023: • UNIFI was in compliance with all applicable financial covenants in the 2022 Credit Agreement; • excess availability under the ABL Revolver was $69,114; • the Trigger Level (as defined in the 2022 Credit Agreement) was $22,770; 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’s 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 foreign financing arrangements will provide the needed liquidity to fund the associated operating activities and investing activities, such as future capital expenditures. UNIFI’s foreign 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: April 2, 2023 July 3, 2022 Long-term debt $ 124,162 $ 102,309 Current portion of long-term debt 11,544 11,726 Unamortized debt issuance costs 304 255 Debt principal 136,010 114,290 Less: cash and cash equivalents 49,706 53,290 Net Debt $ 86,304 $ 61,000 The increase in Net Debt reflects the impact of the constrained demand environment and the anticipated capital expenditures deployed in fiscal 2023. Working Capital and Adjusted Working Capital (Non-GAAP Financial Measures) The following table presents the components of working capital and the reconciliation of working capital to Adjusted Working Capital: April 2, 2023 July 3, 2022 Cash and cash equivalents $ 49,706 $ 53,290 Receivables, net 87,968 106,565 Inventories 143,178 173,295 Income taxes receivable 1,777 160 Other current assets 15,093 18,956 Accounts payable (47,702 ) (73,544 ) Other current liabilities (13,494 ) (19,806 ) Income taxes payable (1,875 ) (1,526 ) Current operating lease liabilities (1,874 ) (2,190 ) Current portion of long-term debt (11,544 ) (11,726 ) Working capital $ 221,233 $ 243,474 Less: Cash and cash equivalents (49,706 ) (53,290 ) Less: Income taxes receivable (1,777 ) (160 ) Less: Income taxes payable 1,875 1,526 Less: Current operating lease liabilities 1,874 2,190 Less: Current portion of long-term debt 11,544 11,726 Adjusted Working Capital $ 185,043 $ 205,466 When comparing from July 3, 2022 to April 2, 2023, working capital and Adjusted Working Capital decreased. The decrease in receivables, net was primarily due to (i) a decrease in sales following lower global demand and (ii) a decrease in banker’s acceptance notes held by our Asia Segment. The decrease in inventories was primarily attributable to a decline in raw material purchases and costs in the current nine-month period. The decrease in other current assets was primarily due to utilization of the fiscal 2021 recovery of non-income taxes in Brazil and lower vendor deposits. The decrease in accounts payable followed the decrease in inventories and production activity in the current nine-month period. The decrease in other current liabilities primarily reflects lower business activities and the routine timing differences for payroll and other operating expenses. The changes in current operating lease liabilities, current portion of long-term debt, income taxes receivable, and income taxes payable were insignificant. 27 Operating Cash Flows The significant components of net cash provided (used) by operating activities are summarized below. For the Nine Months Ended April 2, 2023 March 27, 2022 Net (loss) income $ (31,055 ) $ 11,675 Equity in earnings of unconsolidated affiliates (539 ) (385 ) Depreciation and amortization expense 20,388 19,176 Recovery of income taxes (3,799 ) — Non-cash compensation expense 2,791 3,081 Deferred income taxes (1,199 ) (3,019 ) Subtotal (13,413 ) 30,528 Distribution received from unconsolidated affiliate — 750 Receivables, net 18,585 (13,537 ) Inventories 31,080 (20,170 ) Accounts payable and other current liabilities (31,644 ) 1,084 Other changes 3,741 (718 ) Net cash provided (used) by operating activities $ 8,349 $ (2,063 ) The increase in operating cash flows was primarily due to reducing working capital associated with a decline in overall business activity in the current nine-month period, which was primarily offset by significantly weaker earnings. Investing Cash Flows Investing activities primarily includes $32,461 for capital expenditures. During the current nine-month period, UNIFI invested $32,461 in capital projects, primarily relating to (i) texturing machinery, (ii) further improvements in production capabilities and technology enhancements in the Americas, and (iii) routine annual maintenance capital expenditures. Maintenance capital expenditures are necessary to support UNIFI’s current operations, capacities, and capabilities and exclude expenses relating to repairs and costs that do not extend an asset’s useful life. 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. Financing Cash Flows Financing activities primarily include (i) scheduled payments against outstanding indebtedness and (ii) proceeds from construction financing during the current nine-month period. Share Repurchase Program As described in Note 7, “Shareholders’ Equity,” no share repurchases have been completed in fiscal 2023. 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. After considering the changes generated by the 2022 Credit Agreement and the above discussion of delaying certain equipment purchases by 18 months, there have been no further 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 2022 Form 10-K. 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 2022 Form 10-K. There have been no changes to UNIFI’s critical accounting policies in fiscal 2023. 28