UNIFI INC 10-Q

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 December 31, 2023, while a reference to the “prior period” refers to the three-month period ended January 1, 2023. A reference to the “current six-month period” refers to the six-month period ended December 31, 2023, while a reference to the “prior six-month period” refers to the six-month period ended January 1, 2023. Such references may be accompanied by certain phrases for added clarity. The current period and the prior period each consisted of 13 weeks. The current six-month period and the prior six-month period each consisted of 26 weeks. Our discussions in this Item 2 focus on our results during, or as of, the three months ended December 31, 2023 and January 1, 2023, and, to the extent applicable, any material changes from the information discussed in the 2023 Form 10-K or other important intervening developments or information. These discussions should be read in conjunction with the 2023 Form 10-K for more detailed and background information about our business, operations, and financial condition. Discussion of foreign currency translation is primarily associated with changes in the Brazilian Real (“BRL”) and changes in the Chinese Renminbi (“RMB”) versus the U.S. Dollar (“USD”). Weighted average exchange rates were as follows: For the Three Months Ended For the Six Months Ended December 31, 2023 January 1, 2023 December 31, 2023 January 1, 2023 BRL to USD 4.96 5.26 4.92 5.25 RMB to USD 7.22 7.09 7.23 6.95 All amounts, except per share amounts, are presented in thousands (000s), except as otherwise noted. Overview and Significant General Matters UNIFI focuses on delivering products and solutions to direct customers and brand partners throughout the world, leveraging our internal manufacturing capabilities and an enhanced global supply chain that delivers a diverse range of synthetic and recycled fibers and polymers. Our strategic initiatives include (i) leveraging our competitive advantages to grow market share in each of the major geographies we serve, (ii) expanding our presence in non-apparel markets with additional REPREVE ® products, (iii) advancing the development and commercialization of innovative and sustainable solutions, and (iv) increasing brand awareness for REPREVE ® . We have increased our focus on sales opportunities beyond traditional apparel customers and continue to drive innovation throughout our portfolio to further diversify the business and enhance gross profit. We believe our strategic initiatives will increase revenue and profitability and generate improved cash flows from operations. Current Economic Environment The current economic environment and significant decrease in textile product demand adversely impacted our consolidated sales and profitability in fiscal 2023 and the first half of fiscal 2024. In addition to the current unfavorable economic environment and the inventory destocking measures taken by brands and retailers, the following pressures have been present: (i) the impact of inflation on consumer spending, (ii) rising interest rates for consumers and customers, including the impact on the carrying costs of customer inventories, (iii) the Russia-Ukraine conflict, and (iv) the conflict in the Middle East and the potential impacts to petroleum pricing and geopolitics. UNIFI will continue to monitor these and other aspects of the current economic environment and work closely with stakeholders to ensure business continuity and liquidity. We recognize the disruption to global markets and supply chains caused by (i) Russia’s invasion of Ukraine and (ii) the conflict in the Middle East. While we had a raw material supplier based in Israel for which the recent supply levels have been insignificant, we have not been directly impacted by either conflict. Indirectly, we recognize that additional or prolonged impacts to the petroleum or other global markets could cause further inflationary pressures to our global raw material costs or unforeseen adverse impacts. Input Costs and Global Production Volatility Despite lowered input and freight costs and a marginally more stable labor pool during fiscal 2023 and 2024, the global demand volatility and uncertainty that existed in fiscal 2023 continued into fiscal 2024. The threat of recession and global tensions continue to create uncertainty. Such existing challenges and future uncertainty, particularly for rising input costs, labor productivity, and global demand, could worsen and/or continue for prolonged periods, materially impacting our consolidated sales and gross profit. Also, the need for future selling price adjustments in connection with inflationary costs could impact our ability to retain current customer programs and compete successfully for new programs in certain regions. Cash Deposits and Financial Institution Risk During fiscal 2023, 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 when presently available. Accordingly, UNIFI has not modified its mix of financial institutions holding cash deposits, but UNIFI will continue to monitor the environment and current events to ensure any increase in concentration or credit risk is appropriately and timely addressed. If any of our lending counterparties are unable to perform on their commitments, our liquidity could be impacted. We actively monitor all lending counterparties, and none have indicated that they may be unable to perform on their commitments. In addition, we periodically review our lending counterparties, considering the stability of the institutions and other aspects of the relationships. Based on our monitoring activities, we currently believe our lending counterparties will be able to perform their commitments. 13 Key Performance Indicators and Non-GAAP Financial Measures UNIFI continuously reviews performance indicators to measure its success. These performance indicators form the basis of management’s discussion and analysis included below: • sales volume and revenue for UNIFI and for each reportable segment; • gross (loss) profit and gross margin for UNIFI and for each reportable segment; • net loss and diluted EPS; • Segment (Loss) Profit, which equals segment gross (loss) profit plus segment depreciation expense; • unit conversion margin, which represents unit net sales price less unit raw material costs, for UNIFI and for each reportable segment; • working capital, which represents current assets less current liabilities; • Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), which represents net loss before net interest expense, income tax expense, and depreciation and amortization expense; • Adjusted EBITDA, which represents EBITDA adjusted to exclude, from time to time, certain other adjustments necessary to understand and compare the underlying results of UNIFI; • Adjusted Net Loss, which represents net loss calculated under GAAP, adjusted to exclude certain amounts which management believes do not reflect the ongoing operations and performance of UNIFI and/or for which exclusion may be necessary to understand and compare the underlying results of UNIFI; • Adjusted EPS, which represents Adjusted Net Loss divided by UNIFI’s diluted weighted average common shares outstanding; • Adjusted Working Capital, which equals receivables plus inventories and other current assets, less accounts payable and other current liabilities; and • Net Debt, which represents debt principal less cash and cash equivalents. EBITDA, Adjusted EBITDA, Adjusted Net Loss, Adjusted EPS, Adjusted Working Capital, and Net Debt (collectively, the “non-GAAP financial measures”) are not determined in accordance with GAAP and should not be considered a substitute for performance measures determined in accordance with GAAP. The calculations of the non-GAAP financial measures are subjective, based on management’s belief as to which items should be included or excluded in order to provide the most reasonable and comparable view of the underlying operating performance of the business. We may, from time to time, modify the amounts used to determine our non-GAAP financial measures. When applicable, management’s discussion and analysis includes specific consideration for items that comprise the reconciliations of its non-GAAP financial measures. We believe that these non-GAAP financial measures better reflect UNIFI’s underlying operations and performance and that their use, as operating performance measures, provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles, and ages of related assets, among otherwise comparable companies. Management uses Adjusted EBITDA (i) as a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it removes the impact of items (a) directly related to our asset base (primarily depreciation and amortization) and/or (b) that we would not expect to occur as a part of our normal business on a regular basis; (ii) for planning purposes, including the preparation of our annual operating budget; (iii) as a valuation measure for evaluating our operating performance and our capacity to incur and service debt, fund capital expenditures, and expand our business; and (iv) as one measure in determining the value of other acquisitions and dispositions. Adjusted EBITDA is a key performance metric utilized in the determination of variable compensation. We also believe Adjusted EBITDA is an appropriate supplemental measure of debt service capacity because it serves as a high-level proxy for cash generated from operations and is relevant to our fixed charge coverage ratio. Management uses Adjusted Net Loss and Adjusted EPS (i) as measurements of net operating performance because they assist us in comparing such performance on a consistent basis, as they remove the impact of (a) items that we would not expect to occur as a part of our normal business on a regular basis and (b) components of the provision for income taxes that we would not expect to occur as a part of our underlying taxable operations; (ii) for planning purposes, including the preparation of our annual operating budget; and (iii) as measures in determining the value of other acquisitions and dispositions. Management uses Adjusted Working Capital as an indicator of UNIFI’s production efficiency and ability to manage inventories and receivables. Management uses Net Debt as a liquidity and leverage metric to determine how much debt would remain if all cash and cash equivalents were used to pay down debt principal. 14 Review of Results of Operations Three Months Ended December 31, 2023 Compared to Three Months Ended January 1, 2023 Consolidated Overview The below tables provide: • the components of net loss and the percentage increase or decrease over the prior period amounts, • a reconciliation from net loss to EBITDA and Adjusted EBITDA, and following the tables is a discussion and analysis of the significant components of net loss. Net loss For the Three Months Ended December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 136,917 100.0 $ 136,212 100.0 0.5 Cost of sales 135,281 98.8 144,212 105.9 (6.2 ) Gross profit (loss) 1,636 1.2 (8,000 ) (5.9 ) (120.5 ) SG&A 12,408 9.1 11,748 8.6 5.6 Provision (benefit) for bad debts 1,289 0.9 (156 ) (0.1 ) nm Restructuring costs 5,101 3.7 — — nm Other operating expense, net 481 0.4 226 0.2 112.8 Operating loss (17,643 ) (12.9 ) (19,818 ) (14.6 ) (11.0 ) Interest expense, net 1,916 1.4 1,375 1.0 39.3 Equity in earnings of unconsolidated affiliates (93 ) (0.1 ) (86 ) (0.1 ) 8.1 Loss before income taxes (19,466 ) (14.2 ) (21,107 ) (15.5 ) (7.8 ) Provision (benefit) for income taxes 380 0.3 (3,070 ) (2.3 ) (112.4 ) Net loss $ (19,846 ) (14.5 ) $ (18,037 ) (13.2 ) 10.0 nm = not meaningful EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures) The reconciliations of the amounts reported under GAAP for Net loss to EBITDA and Adjusted EBITDA were as follows: For the Three Months Ended December 31, 2023 January 1, 2023 Net loss $ (19,846 ) $ (18,037 ) Interest expense, net 1,916 1,375 Provision (benefit) for income taxes 380 (3,070 ) Depreciation and amortization expense (1) 6,922 6,693 EBITDA (10,628 ) (13,039 ) Loss on joint venture dissolution (2) 2,750 — Severance (3) 2,351 — Adjusted EBITDA $ (5,527 ) $ (13,039 ) (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 second quarter of fiscal 2024, UNIFI recorded a loss of $2,750 related to the dissolution of UNF. (3) In the second quarter of fiscal 2024, UNIFI incurred severance costs in connection with overall cost reduction efforts in the U.S. Adjusted Net Loss and Adjusted EPS (Non-GAAP Financial Measures) For the Three Months Ended December 31, 2023 For the Three Months Ended January 1, 2023 Pre-tax Loss Tax Impact Net Loss Diluted EPS Pre-tax Loss Tax Impact Net Loss Diluted EPS GAAP results $ (19,466 ) $ (380 ) $ (19,846 ) $ (1.10 ) $ (21,107 ) $ 3,070 $ (18,037 ) $ (1.00 ) Loss on joint venture dissolution (1) 2,750 — 2,750 0.15 — — — — Severance (2) 2,351 — 2,351 0.14 — — — — Recovery of income taxes (3) — — — — — (3,799 ) (3,799 ) (0.21 ) Adjusted results $ (14,365 ) $ (380 ) $ (14,745 ) $ (0.81 ) $ (21,107 ) $ (729 ) $ (21,836 ) $ (1.21 ) Weighted average common shares outstanding 18,110 18,034 15 (1) In the second quarter of fiscal 2024, UNIFI recorded a loss of $2,750 related to the dissolution of UNF. (2) In the second quarter of fiscal 2024, UNIFI incurred severance costs in connection with overall cost reduction efforts in the U.S. (3) In the second quarter of fiscal 2023, UNIFI recorded a recovery of income taxes in connection with filing amended tax returns in Brazil relating to certain income taxes paid in prior fiscal years. Net Sales Consolidated net sales for the current period increased by $705, or 0.5%, and consolidated sales volumes increased 13.0%, compared to the prior period. The increase was primarily due to improvements in volumes in all segments, however sales levels remain below historical averages, primarily due to lower global demand in connection with the weakness in apparel sector and inventory destocking efforts of major brands and retailers, especially those impacting the Americas and Asia Segments. Consolidated weighted average sales prices decreased 13.5%, primarily attributable to lower selling prices in response to lower input costs, along with (a) competitive pricing pressures in Brazil and (b) a greater mix of Chip product sales in the Americas Segment. REPREVE ® Fiber products for the current period comprised 33%, or $45,725, of consolidated net sales, compared to 31%, or $42,866, for the prior period. Gross Profit (Loss) Gross profit for the current period improved by $9,636, or 120.5%, compared to the prior period. Gross profit improved as a result of (i) increased sales volumes, (ii) cost saving initiatives, and (iii) more stable raw material costs. However, gross profit continues to be negatively impacted by weak fixed cost absorption in the Americas Segment, where utilization and productivity remain below historical averages due to depressed demand. • For the Americas Segment, gross loss improved due to (i) higher sales volumes, (ii) variable cost management efforts, and (iii) a more stable raw material cost environment, but remains adversely impacted by overall weak global demand and weak fixed cost absorption in connection with low production. • For the Brazil Segment, gross profit increased primarily due to (i) improved underlying unit margins and (ii) higher sales volumes. • For the Asia Segment, gross profit increased primarily due to (i) improved underlying margins and sales mix and (ii) higher sales volumes compared to the prior period despite continued weak global demand. SG&A SG&A for the current period increased compared to the prior period, primarily due to (i) higher compensation expenses prior to the cost reduction actions executed in the current period. Provision (Benefit) for Bad Debts The current period's provision reflects an increase for a specifically identified customer balance originating in the U.S. fiber market. Restructuring Costs Restructuring costs consisted of (i) a loss of $2,750 for the dissolution of UNF and (ii) severance charges of $2,351 in connection with overall cost reduction efforts in the U.S. Other Operating Expense, Net The current period and prior period include foreign currency transaction losses (gains) of $464 and ($78), respectively, with no other meaningful activity. Interest Expense, Net Interest expense, net increased in connection with higher debt principal and higher interest rates. Equity in Earnings of Unconsolidated Affiliates There was no material activity for the current period or the prior period. Income Taxes Provision (benefit) for income taxes and the effective tax rate were as follows: For the Three Months Ended December 31, 2023 January 1, 2023 Provision (benefit) for income taxes $ 380 $ (3,070 ) Effective tax rate (2.0 )% 14.5 % 16 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 a discrete tax benefit related to the recovery of certain Brazilian income taxes in the prior period. Net Loss The increase in net loss was primarily attributable to restructuring costs, higher bad debt expense, higher interest expense, net, and higher income tax expense, partially offset by improved gross profit. Adjusted EBITDA and Adjusted EPS (Non-GAAP Financial Measures) Adjusted EBITDA and Adjusted EPS increased primarily due to improved gross profit, partially offset by higher bad debt and SG&A expenses. Segment Overview Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current period. Americas Segment The components of Segment Loss, 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 December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 80,549 100.0 $ 85,242 100.0 (5.5 ) Cost of sales 87,287 108.4 98,326 115.3 (11.2 ) Gross loss (6,738 ) (8.4 ) (13,084 ) (15.3 ) (48.5 ) Depreciation expense 5,508 6.9 5,542 6.5 (0.6 ) Segment Loss $ (1,230 ) (1.5 ) $ (7,542 ) (8.8 ) (83.7 ) Segment net sales as a percentage of consolidated amounts 58.8 % 62.6 % Segment Loss as a percentage of consolidated amounts (15.5 )% nm The change in net sales for the Americas Segment was as follows: Net sales for the prior period $ 85,242 Net change in average selling price and sales mix (12,152 ) Increase in sales volumes 7,459 Net sales for the current period $ 80,549 The change in net sales for the Americas Segment from the prior period to the current period was primarily attributable to (i) the net change in average selling price and sales mix that reflects both (a) lower input costs and (b) a larger proportion of lower-priced Chip sales in the current period and (ii) lower proportion of fiber sales volumes following continued weak global textile demand. The change in Segment Loss for the Americas Segment was as follows: Segment Loss for the prior period $ (7,542 ) Net increase in underlying margins 6,972 Change in sales volumes (660 ) Segment Loss for the current period $ (1,230 ) The improvement in Segment Loss for the Americas Segment from the prior period to the current period was primarily attributable to variable cost management efforts and more stable raw material costs in the current period, along with volume improvements. Segment Loss for the Americas Segment continued to be negatively impacted by weak fixed cost absorption as fiber production remains below historical averages. As fiber products carry a higher selling price and allocation of production costs versus Flake and Chip, lower fiber production drives weaker fixed cost absorption and adversely impacts gross profit and gross margin. 17 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 December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 26,061 100.0 $ 25,687 100.0 1.5 Cost of sales 22,922 87.9 24,357 94.8 (5.9 ) Gross profit 3,139 12.1 1,330 5.2 136.0 Depreciation expense 766 2.9 391 1.5 95.9 Segment Profit $ 3,905 15.0 $ 1,721 6.7 126.9 Segment net sales as a percentage of consolidated amounts 19.0 % 18.9 % Segment Profit as a percentage of consolidated amounts 49.4 % (83.3 )% The change in net sales for the Brazil Segment was as follows: Net sales for the prior period $ 25,687 Increase in sales volumes 3,782 Favorable foreign currency translation effects 1,522 Decrease in average selling price (4,930 ) Net sales for the current period $ 26,061 The increase in net sales for the Brazil Segment from the prior period to the current period was primarily attributable to (i) higher sales volumes and (ii) favorable foreign currency translation effects, partially offset by selling price pressures from low-priced imports. The change in Segment Profit for the Brazil Segment was as follows: Segment Profit for the prior period $ 1,721 Increase in underlying unit margins 1,848 Increase in sales volumes 251 Favorable foreign currency translation effects 85 Segment Profit for the current period $ 3,905 The increase in Segment Profit for the Brazil Segment from the prior period to the current period was primarily attributable to an overall increase in underlying unit margins and improved sales volumes, partially offset by pressure on selling prices from low-priced import competition. We continue to prioritize innovation and differentiation to improve our portfolio and competitive position in Brazil. Asia Segment The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior period amounts for the Asia Segment, were as follows: For the Three Months Ended December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 30,307 100.0 $ 25,283 100.0 19.9 Cost of sales 25,072 82.7 21,529 85.2 16.5 Gross profit 5,235 17.3 3,754 14.8 39.5 Depreciation expense — — — — — Segment Profit $ 5,235 17.3 $ 3,754 14.8 39.5 Segment net sales as a percentage of consolidated amounts 22.1 % 18.6 % Segment Profit as a percentage of consolidated amounts 66.2 % (181.6 )% The change in net sales for the Asia Segment was as follows: Net sales for the prior period $ 25,283 Net increase in sales volumes 4,811 Change in average selling price and sales mix 592 Unfavorable foreign currency translation effects (379 ) Net sales for the current period $ 30,307 18 The increase in net sales for the Asia Segment from the prior period to the current period was primarily attributable to (i) increase in sales volume compared to the prior period despite continued weak global demand during the current period and (ii) improved sales mix compared to the prior period, partially offset by unfavorable foreign currency translation effects due to the weakening of the RMB versus the USD. The change in Segment Profit for the Asia Segment was as follows: Segment Profit for the prior period $ 3,754 Change in underlying margins and sales mix 836 Increase in sales volumes 712 Unfavorable foreign currency translation effects (67 ) Segment Profit for the current period $ 5,235 The increase in Segment Profit for the Asia Segment from the prior period to the current period is attributable to (i) an improved gross margin rate associated with a strong sales mix of REPREVE products and (ii) the increase in sales volumes discussed above. Six Months Ended December 31, 2023 Compared to Six Months Ended January 1, 2023 Consolidated Overview The below tables provide: • the components of net loss and the percentage increase or decrease over the prior period amounts, • a reconciliation from net loss to EBITDA and Adjusted EBITDA, and following the tables is a discussion and analysis of the significant components of net loss. Net loss For the Six Months Ended December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 275,761 100.0 $ 315,731 100.0 (12.7 ) Cost of sales 274,700 99.6 317,168 100.5 (13.4 ) Gross profit (loss) 1,061 0.4 (1,437 ) (0.5 ) (173.8 ) SG&A 24,017 8.7 23,521 7.4 2.1 Provision for bad debts 1,080 0.4 18 — nm Restructuring costs 5,101 1.8 — — nm Other operating expense (income), net 535 0.2 (463 ) (0.1 ) nm Operating loss (29,672 ) (10.7 ) (24,513 ) (7.8 ) 21.0 Interest expense, net 3,820 1.4 2,075 0.6 84.1 Equity in earnings of unconsolidated affiliates (293 ) (0.1 ) (381 ) (0.1 ) (23.1 ) Loss before income taxes (33,199 ) (12.0 ) (26,207 ) (8.3 ) 26.7 Benefit for income taxes (83 ) — (336 ) (0.1 ) (75.3 ) Net loss $ (33,116 ) (12.0 ) $ (25,871 ) (8.2 ) 28.0 nm = not meaningful EBITDA and Adjusted EBITDA (Non-GAAP Financial Measures) The reconciliations of the amounts reported under GAAP for Net loss to EBITDA and Adjusted EBITDA were as follows: For the Six Months Ended December 31, 2023 January 1, 2023 Net loss $ (33,116 ) $ (25,871 ) Interest expense, net 3,820 2,075 Benefit for income taxes (83 ) (336 ) Depreciation and amortization expense (1) 13,910 13,390 EBITDA (15,469 ) (10,742 ) Loss on joint venture dissolution (2) 2,750 — Severance (3) 2,351 — Adjusted EBITDA $ (10,368 ) $ (10,742 ) (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 second quarter of fiscal 2024, UNIFI recorded a loss of $2,750 related to the dissolution of UNF. (3) In the second quarter of fiscal 2024, UNIFI incurred severance costs in connection with overall cost reduction efforts in the U.S. 19 Adjusted Net Loss and Adjusted EPS (Non-GAAP Financial Measures) For the Six Months Ended December 31, 2023 For the Six Months Ended January 1, 2023 Pre-tax Loss Tax Impact Net Loss Diluted EPS Pre-tax Loss Tax Impact Net Loss Diluted EPS GAAP results $ (33,199 ) $ 83 $ (33,116 ) $ (1.83 ) $ (26,207 ) $ 336 $ (25,871 ) $ (1.44 ) Loss on joint venture dissolution (1) 2,750 — 2,750 0.15 — — — — Severance (2) 2,351 — 2,351 0.13 — — — — Recovery of income taxes (3) — — — — — (3,799 ) (3,799 ) (0.21 ) Adjusted results $ (28,098 ) $ 83 $ (28,015 ) $ (1.55 ) $ (26,207 ) $ (3,463 ) $ (29,670 ) $ (1.65 ) Weighted average common shares outstanding 18,097 18,017 (1) In the second quarter of fiscal 2024, UNIFI recorded a loss of $2,750 related to the dissolution of UNF. (2) In the second quarter of fiscal 2024, UNIFI incurred severance costs in connection with overall cost reduction efforts in the U.S. (3) In the second quarter of fiscal 2023, UNIFI recorded a recovery of income taxes in connection with filing amended tax returns in Brazil relating to certain income taxes paid in prior fiscal years. Net Sales Consolidated net sales for the current six-month period decreased by $39,970, or 12.7%, while consolidated sales volumes increased 3.1%, compared to the prior six-month period. Despite modest sales volume improvements in each of the reportable segments, volumes remain depressed, particularly in the Americas and Asia Segments as a result of low global demand in connection with the apparel market. Consolidated weighted average sales prices decreased 15.8% which drove the decrease in net sales. The decrease in sales price was primarily attributable to lower selling prices in response to lower input costs, along with (a) competitive pricing pressures in Brazil and (b) a greater mix of Chip and Flake product sales in the Americas Segment. REPREVE ® Fiber products for the current six-month period comprised 32%, or $88,186, of consolidated net sales, compared to 29%, or $92,045, for the prior six-month period. Gross Profit (Loss) Gross profit for the current six-month period improved by $2,498, or 173.8%, compared to the prior six-month period. Gross profit improved as a result of variable cost management efforts and more stable raw material costs, along with increased sales volume. Gross profit was negatively impacted by weak fixed cost absorption in the Americas Segment, where utilization and productivity are materially impactful to gross profit. Although raw material costs for the Americas Segment were stable in fiscal 2024, low production levels and weak demand were significantly adverse. • For the Americas Segment, gross loss improved due to variable cost management efforts and more stable raw material costs in the current six-month period, partially offset by weak global demand and weak fixed cost absorption in connection with low production levels. • 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 increased primarily due to (i) a strong sales mix and (ii) higher sales volumes compared to the period six-month period despite weak global demand. SG&A SG&A did not change meaningfully from the prior six-month period to the current period, nor did the change include any significant offsetting impacts. Provision for Bad Debts The current six-month period's provision reflects an increase for a specifically identified customer balance originating in the U.S. fiber market. Restructuring Costs Restructuring costs consisted of (i) a loss of $2,750 when UNIFI dissolved its interest in UNF under an agreement with its former joint venture partner and (ii) severance charges of $2,351 in connection with overall cost reduction efforts in the U.S. Other Operating Expense (Income), Net The current six-month period and prior six-month period include foreign currency transaction losses (gains) of $430 and ($803), respectively, with no other meaningful activity. 20 Interest Expense, Net Interest expense, net increased in connection with higher debt principal and higher interest rates. Equity in Earnings of Unconsolidated Affiliates There was no material activity for the current six-month period or the prior six-month period. Income Taxes Benefit for income taxes and the effective tax rate were as follows: For the Six Months Ended December 31, 2023 January 1, 2023 Benefit for income taxes $ (83 ) $ (336 ) Effective tax rate 0.3 % 1.3 % 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 six-month period to the current six-month period is primarily attributable to a discrete tax benefit related to the recovery of certain Brazilian income taxes in the prior six-month period. Net Loss The increase in net loss was primarily attributable to restructuring costs, higher bad debt expense, and higher interest expense, net, partially offset by improved gross profit. Adjusted EBITDA and Adjusted EPS (Non-GAAP Financial Measures) Adjusted EBITDA and Adjusted EPS increased primarily due to improved gross profit, partially offset by higher bad debt expense and other operating expenses. Segment Overview Following is a discussion and analysis of the revenue and profitability performance of UNIFI’s reportable segments for the current six-month period. Americas Segment The components of Segment Loss, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Americas Segment, were as follows: For the Six Months Ended December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 162,122 100.0 $ 192,886 100.0 (15.9 ) Cost of sales 176,240 108.7 210,839 109.3 (16.4 ) Gross loss (14,118 ) (8.7 ) (17,953 ) (9.3 ) (21.4 ) Depreciation expense 11,005 6.8 11,022 5.7 (0.2 ) Segment Loss $ (3,113 ) (1.9 ) $ (6,931 ) (3.6 ) (55.1 ) Segment net sales as a percentage of consolidated amounts 58.8 % 61.1 % Segment Loss as a percentage of consolidated amounts (22.8 )% (66.4 )% The change in net sales for the Americas Segment was as follows: Net sales for the prior six-month period $ 192,886 Net change in average selling price and sales mix (35,980 ) Increase in sales volumes 5,216 Net sales for the current six-month period $ 162,122 The change in net sales for the Americas Segment from the prior six-month period to the current six-month period was primarily attributable to (i) the net change in average selling price and sales mix that reflects both (a) lower input costs and (b) a larger proportion of lower-priced Chip and Flake sales in the current six-month period and (ii) lower fiber sales volumes following weaker global textile demand. 21 The change in Segment Loss for the Americas Segment was as follows: Segment Loss for the prior six-month period $ (6,931 ) Change in underlying margins and sales mix 4,005 Change in sales volumes (187 ) Segment Loss for the current six-month period $ (3,113 ) The improvement in Segment Loss for the Americas Segment from the prior six-month period to the current six-month period was primarily attributable to variable cost management efforts and more stable raw material costs in the current six-month period. Segment Loss for the Americas Segment continued to be negatively impacted by low fiber sales volumes. As fiber products carry a higher selling price and allocation of production costs versus Chip and Flake, lower fiber production drives weaker fixed cost absorption and adversely impacts gross profit and gross margin. Brazil Segment The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Brazil Segment, were as follows: For the Six Months Ended December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 55,970 100.0 $ 64,566 100.0 (13.3 ) Cost of sales 50,664 90.5 56,449 87.4 (10.2 ) Gross profit 5,306 9.5 8,117 12.6 (34.6 ) Depreciation expense 1,606 2.8 861 1.3 86.5 Segment Profit $ 6,912 12.3 $ 8,978 13.9 (23.0 ) Segment net sales as a percentage of consolidated amounts 20.3 % 20.4 % Segment Profit as a percentage of consolidated amounts 50.6 % 85.9 % The change in net sales for the Brazil Segment was as follows: Net sales for the prior six-month period $ 64,566 Decrease in average selling price and change in sales mix (15,632 ) Favorable foreign currency translation effects 4,409 Increase in sales volumes 2,627 Net sales for the current six-month period $ 55,970 The decrease in net sales for the Brazil Segment from the prior six-month period to the current six-month period was primarily attributable to selling price pressures from low-priced imports, partially offset by favorable foreign currency translation effects and an improvement in sales volumes. The change in Segment Profit for the Brazil Segment was as follows: Segment Profit for the prior six-month period $ 8,978 Decrease in underlying margins (3,044 ) Favorable foreign currency translation effects 613 Increase in sales volumes 365 Segment Profit for the current six-month period $ 6,912 The decrease in Segment Profit for the Brazil Segment from the prior six-month period to the current six-month period was primarily attributable to an overall decrease in gross margin mainly due to pressure on selling prices from low-priced import competition. We continue to prioritize innovation and differentiation to improve our portfolio and competitive position in Brazil. 22 Asia Segment The components of Segment Profit, each component as a percentage of net sales and the percentage increase or decrease over the prior six-month period amounts for the Asia Segment, were as follows: For the Six Months Ended December 31, 2023 January 1, 2023 % of Net Sales % of Net Sales % Change Net sales $ 57,669 100.0 $ 58,279 100.0 (1.0 ) Cost of sales 47,796 82.9 49,880 85.6 (4.2 ) Gross profit 9,873 17.1 8,399 14.4 17.5 Depreciation expense — — — — — Segment Profit $ 9,873 17.1 $ 8,399 14.4 17.5 Segment net sales as a percentage of consolidated amounts 20.9 % 18.5 % Segment Profit as a percentage of consolidated amounts 72.2 % 80.4 % The change in net sales for the Asia Segment was as follows: Net sales for the prior six-month period $ 58,279 Unfavorable foreign currency translation effects (2,040 ) Change in average selling price and sales mix (277 ) Net increase in sales volumes 1,707 Net sales for the current six-month period $ 57,669 The nominal change in net sales for the Asia Segment from the prior six-month period to the current six-month period was primarily attributable to (i) unfavorable foreign currency translation effects due to the weakening of the RMB versus the USD, offset by an improvement in sales volume compared to the prior six-month period despite continued weak global demand and inventory destocking by brands and retailers, particularly for apparel. The change in Segment Profit for the Asia Segment was as follows: Segment Profit for the prior six-month period $ 8,399 Change in underlying margins and sales mix 1,550 Increase in sales volumes 245 Unfavorable foreign currency translation effects (321 ) Segment Profit for the current six-month period $ 9,873 The increase in Segment Profit for the Asia Segment from the prior six-month period to the current six-month period is attributable to (i) an improved gross margin rate associated with a strong sales mix of REPREVE products and (ii) the increase in sales volumes discussed above, offset by unfavorable foreign currency translation effects. Liquidity and Capital Resources Note 5, “Long-Term Debt” to the condensed consolidated financial statements includes the detail of UNIFI’s debt obligations and terms and conditions thereof. Further discussion and analysis of liquidity and capital resources follow. UNIFI’s primary capital requirements are for working capital, capital expenditures, debt service, and share repurchases. UNIFI’s primary sources of capital are cash generated from operations, borrowings available under the 2022 Credit Agreement, and asset financing arrangements. For the current six-month period, cash provided by operations was $2,517, and, at December 31, 2023, availability under the ABL Revolver was $43,082. As of December 31, 2023, all of UNIFI’s $132,760 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 December 31, 2023 for domestic operations compared to foreign operations: Domestic Foreign Total Cash and cash equivalents $ 25 $ 35,954 $ 35,979 Borrowings available under financing arrangements 43,082 — 43,082 Liquidity $ 43,107 $ 35,954 $ 79,061 Working capital $ 73,768 $ 113,710 $ 187,478 Total debt obligations $ 132,760 $ — $ 132,760 23 UNIFI’s primary cash requirements, in addition to normal course operating activities (e.g. working capital and payroll), primarily include (i) capital expenditures that generally have commitments of up to 12 months, (ii) contractual obligations that support normal course ongoing operations and production, (iii) operating leases and finance leases, (iv) debt service, and (v) share repurchases. Liquidity Considerations Following the establishment of the 2022 Credit Agreement, UNIFI’s global cash and liquidity positions are sufficient to sustain its operations and meet its growth needs. Additionally, UNIFI considers opportunities to repatriate existing cash to reduce debt and preserve or enhance liquidity. However, further degradation in the macroeconomic environment could introduce additional liquidity risk and require UNIFI to limit cash outflows for discretionary activities while further utilizing available and additional forms of credit. We do not currently anticipate that any adverse events or circumstances will place critical pressure on our liquidity position or our ability to fund our operations and expected business growth. Should global demand, economic activity, or input availability decline considerably for an even longer period of time, UNIFI maintains the ability to (i) seek additional credit or financing arrangements and/or (ii) re-implement cost reduction initiatives to preserve cash and secure the longevity of the business and operations. Management continues to (i) explore cost savings opportunities and (ii) prioritize repayment of debt in the current operating environment. When business levels increase, we expect to use cash in support of working capital needs. The following outlines the attributes relating to our credit facility as of December 31, 2023: • UNIFI was in compliance with all applicable financial covenants in the 2022 Credit Agreement; • excess availability before the Trigger Level (as defined in the 2022 Credit Agreement) under the ABL Revolver was $21,002; • the Trigger Level was $22,080; 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 financing arrangements will provide the needed liquidity to fund the associated operating activities and investing activities, such as future capital expenditures. UNIFI’s 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: December 31, 2023 July 2, 2023 Long-term debt $ 120,144 $ 128,604 Current portion of long-term debt 12,357 12,006 Unamortized debt issuance costs 259 289 Debt principal 132,760 140,899 Less: cash and cash equivalents 35,979 46,960 Net Debt $ 96,781 $ 93,939 The increase in Net Debt primarily reflects capital expenditures during the fiscal year, partially offset by the generation of operating cash flows during fiscal 2024. 24 Working Capital and Adjusted Working Capital (Non-GAAP Financial Measure) The following table presents the components of working capital and the reconciliation of working capital to Adjusted Working Capital: December 31, 2023 July 2, 2023 Cash and cash equivalents $ 35,979 $ 46,960 Receivables, net 69,583 83,725 Inventories 135,676 150,810 Income taxes receivable 2,421 238 Other current assets 12,290 12,327 Accounts payable (34,709 ) (44,455 ) Other current liabilities (17,409 ) (12,932 ) Income taxes payable (2,263 ) (789 ) Current operating lease liabilities (1,733 ) (1,813 ) Current portion of long-term debt (12,357 ) (12,006 ) Working capital $ 187,478 $ 222,065 Less: Cash and cash equivalents (35,979 ) (46,960 ) Less: Income taxes receivable (2,421 ) (238 ) Less: Income taxes payable 2,263 789 Less: Current operating lease liabilities 1,733 1,813 Less: Current portion of long-term debt 12,357 12,006 Adjusted Working Capital $ 165,431 $ 189,475 Adjusted Working Capital decreased $24,044 from July 2, 2023 to December 31, 2023. The decrease in receivables, net was primarily due to a decrease in sales and the timing of cash receipts. The decrease in inventories was primarily attributable to lower weighted average costs in the current six-month period and lower units on hand. The decrease in accounts payable followed the decrease in inventories and production activity in the current six-month period. The increase in other current liabilities primarily reflects the liabilities recorded in the current period for severance and the dissolution of UNF. The change in income taxes receivable reflects the foreign tax payments made in the current six-month period. The change in income taxes payable reflects the impact of the interim tax provision. The changes in other current assets, current operating lease liabilities, and current portion of long-term debt were insignificant. Operating Cash Flows The significant components of net cash provided by operating activities are summarized below. For the Six Months Ended December 31, 2023 January 1, 2023 Net loss $ (33,116 ) $ (25,871 ) Equity in earnings of unconsolidated affiliates (293 ) (381 ) Depreciation and amortization expense 13,988 13,478 Recovery of income taxes — (3,799 ) Non-cash compensation expense 1,387 1,976 Deferred income taxes (1,714 ) (304 ) Subtotal (19,748 ) (14,901 ) Receivables, net 14,367 40,552 Inventories 15,081 25,422 Accounts payable and other current liabilities (4,763 ) (47,599 ) Other changes (2,420 ) 3,798 Net cash provided by operating activities $ 2,517 $ 7,272 The decrease in operating cash flows was primarily due to weaker earnings in the current six-month period compared to the prior six-month period. Investing Cash Flows Investing activities primarily includes $5,982 for capital expenditures. UNIFI expects recent and future capital projects to provide benefits to future profitability. The additional assets from these capital projects consist primarily of machinery and equipment. Financing Cash Flows Financing activities primarily include net payments on the ABL Revolver and payments on the ABL Term Loan. Share Repurchase Program As described in Note 7, “Shareholders’ Equity,” no share repurchases have been completed in fiscal 2024. 25 Contractual Obligations UNIFI incurs various financial obligations and commitments in the ordinary course of business. Financial obligations are considered to represent known future cash payments that UNIFI is required to make under existing contractual arrangements, such as debt and lease agreements. There have been no material changes in the scheduled maturities of UNIFI’s contractual obligations as disclosed under the heading “Contractual Obligations” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Form 10-K, except for the capital purchase obligations are approximately $6,000, $0 and $19,000 for fiscal years 2024, 2025 and 2026, respectively. Off-Balance Sheet Arrangements UNIFI is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on UNIFI’s financial condition, results of operations, liquidity, or capital expenditures. Critical Accounting Policies UNIFI’s critical accounting policies are discussed in the 2023 Form 10-K. There have been no changes to UNIFI’s critical accounting policies in fiscal 2024.