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EX-21.1 - LIST OF SUBSIDIARIES - UNIFI INCex21-1.htm
EX-32.2 - CERTIFICATION CFO - UNIFI INCex32-2.htm
EX-32.1 - CERTIFICATION CEO - UNIFI INCex32-1.htm
EX-12.1 - STATEMENT OF COMPUTATION - UNIFI INCex12-1.htm
EX-31.1 - CERTIFICATION CEO - UNIFI INCex31-1.htm
EX-23.2 - CONSENT - UNIFI INCex23-2.htm
EX-23.1 - CONSENT - UNIFI INCex23-1.htm
EX-31.2 - CERTIFICATION CFO - UNIFI INCex31-2.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended June 26, 2011
 
OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from          to          
 
Commission file number 1-10542
 
UNIFI, INC.
(Exact name of registrant as specified in its charter)
 
New York
11-2165495
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
P.O. Box 19109 – 7201 West Friendly Avenue
27419-9109
Greensboro, NC
(Zip Code)
(Address of principal executive offices)
 
 
Registrant’s telephone number, including area code:
(336) 294-4410
 
Securities registered pursuant to Section 12(b) of the Act:
 
               Title of each class             
      Name of each exchange on which registered      
                     Common Stock                  
                  New York Stock Exchange                  
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes [  ] No [X]
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [X]  No [ ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files).  Yes [  ] No [  ]
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [X]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer  [  ]    Accelerated filer   [X]     Non-accelerated filer  [   ]   Smaller reporting company [  ]
        (Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [   ] No [ X ]
 
As of December 26, 2010, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was $236,674,880.  The registrant has no non-voting stock.
 
As of September 6, 2011, the number of shares of the Registrant’s common stock outstanding was 20,086,094.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the “SEC”) in connection with the solicitation of proxies for the Annual Meeting of Shareholders of Unifi, Inc., to be held on October 26, 2011, are incorporated by reference into Part III.  (With the exception of those portions which are specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed or incorporated by reference as part of this report.)
 
 

 
 
UNIFI, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS

 
Part I
    Page
Item 1.
Business
3
Item 1A.
Risk Factors
11
Item 1B.
Unresolved Staff Comments
18
Item 1C.
Executive Officers of the Registrant
19
Item 2.
Properties
20
Item 3.
Legal Proceedings
20
Item 4.
[Removed and Reserved]
20
 
Part II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
21
Item 6.
Selected Financial Data
23
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
43
Item 8.
Financial Statements and Supplementary Data
44
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
44
Item 9A.
Controls and Procedures
44
Item 9B.
Other Information
45
 
Part III
 
Item 10.
Directors, Executive Officers, and Corporate Governance
46
Item 11.
Executive Compensation
46
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
46
Item 13.
Certain Relationships and Related Transactions, and Director Independence
47
Item 14.
Principal Accounting Fees and Services
47
 
Part IV
 
Item 15.
Exhibits and Financial Statement Schedules
Signatures
48
53
 
 
2

 
 
PART I
 
 
Presentation:
All amounts and share amounts, except per share amounts, are presented in thousands, except as otherwise noted.
 
Fiscal Years:
All references to “2011”, “2010”, “2009”  and “2007” relate to the 52 week fiscal years ended on June 26, 2011, June 27, 2010, June 28, 2009 and June 24, 2007, respectively.  All references to “2008” relate to the 53 week fiscal year ended June 29, 2008. The Company’s fiscal year ends on the last Sunday in June.  However, the Company’s Brazilian, Colombian, and Chinese subsidiaries’ fiscal years end on June 30th.  There are no significant transactions or events that have occurred between these dates and the date of the Company’s financial statements.
 
Item 1.  Business
Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, the “Company” or “Unifi”), is a publicly-traded, multi-national manufacturing company.  The Company’s net sales and net income for fiscal year 2011 were $712,812 and $25,089, respectively.  The Company processes and sells high-volume commodity products, specialized yarns designed to meet certain customer specifications and premier value-added (“PVA”) yarns with enhanced performance characteristics and higher expected gross margin percentages.  The Company sells its polyester and nylon products to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishings, automotive upholstery, industrial and other end-use markets.  The Company’s polyester yarn products include recycled polyester polymer beads (“Chip”), partially oriented yarn (“POY”), textured, solution and package dyed, twisted and beamed yarns.  The Company’s nylon products include textured, solution dyed and covered spandex products.  The Company maintains one of the industry’s most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”).  In addition, the Company has a wholly-owned subsidiary in the People’s Republic of China (“China”) focused on the sale and promotion of the Company’s specialty and PVA products in the Asian textile market, primarily in China as well as into Europe.
 
The Company’s operations are managed in three operating segments, each of which is a reportable segment for financial reporting purposes:
Polyester Segment.  The polyester segment manufactures recycled Chip, POY, textured, dyed, twisted and beamed yarns with sales to other yarn manufacturers, knitters and weavers that produce yarn and/or fabric for the apparel, automotive upholstery, hosiery, home furnishings, industrial and other end-use markets.  The polyester segment consists of manufacturing operations in the U.S. and El Salvador.
 
Nylon Segment.  The nylon segment manufactures textured nylon and covered spandex products with sales to knitters and weavers that produce fabric for the apparel, hosiery, sock and other end-use markets.  The nylon segment consists of manufacturing operations in the U.S. and Colombia.
 
International Segment.  The international segment’s products include textured polyester and resale yarns. The international segment sells its yarns to knitters and weavers that produce fabric for the apparel, automotive upholstery, home furnishings, industrial and other end-use markets primarily in the South American and Asian regions.  The segment includes manufacturing and sales offices in Brazil and a sales office in China.
 
Other information regarding the Company’s reportable segments, including revenues, a measurement of profit or loss, and total assets by segment, is provided in “Footnote 28. Business Segment Information” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
 
Recent Developments and Outlook:
Deleveraging Strategy.  During fiscal year 2011, the Company used excess operating cash and borrowings under its revolving credit facility to redeem $45,000 of its 11.5% 2014 notes due May 15, 2014 (“2014 notes”).  The Company subsequently completed an additional $10,000 redemption of its 2014 notes on August 5, 2011 at a redemption price of 102.875% which was financed through borrowings under its revolving credit facility.  Interest expense decreased from $21,889 in fiscal year 2010 to $19,190 in fiscal year 2011 primarily due to a lower average outstanding debt related to the Company’s 2014 notes and a decline in the weighted average interest rate from 11.9% in fiscal year 2010 to 11.0% in fiscal year 2011.  Going forward, the Company expects to continue to utilize its excess operating cash and borrowings under its revolving credit facility to redeem additional amounts of these 2014 notes (the "Deleveraging Strategy").
 
 
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Investment in Central America.  In order to more effectively service the Central American market, the Company began dismantling and relocating idled polyester texturing equipment from its Yadkinville, North Carolina facility to El Salvador during the third quarter of fiscal year 2010 and completed the startup of the Unifi Central America, Ltda. de C.V. (“UCA”) manufacturing facility in the second quarter of fiscal year 2011.  This investment has resulted in a net increase of the Company’s texturing capacity of approximately 15%.  The new manufacturing facility in El Salvador has allowed the Company to become a local supplier to the U.S.-Dominican Republic-Central American Free Trade Agreement (“CAFTA”) region as global sourcing continues to move programs from Asia as the region becomes a competitive alternative to Asian supply chains for certain apparel categories.  The Company expects year-over-year volume growth from the CAFTA region and is in the process of adding additional texturing capacity to its plant in El Salvador to meet this future demand.
 
Investment in a Recycling Center.  On May 4, 2011, the Company officially opened its state-of-the-art REPREVE® (“Repreve”) recycling center in Yadkinville, North Carolina increasing its investment in the commercialization of recycled PVA products. This facility is expected to improve the availability of recycled raw materials and significantly increase product capabilities and competitiveness in this growing market.  The technology installed in this operation allows the Company to expand the Repreve brand by increasing the amount and types of recyclable material that can be processed through its facility. The Company expects this will also make it an even stronger partner in the development and commercialization of value-added products that meet the sustainability demands of today’s brands and retailers.  These investments and activities are critical to achieving the Company’s target of doubling its PVA sales within three years.
 
China Growth.  The Company’s Chinese subsidiary increased its net sales by approximately 60% and its sales volumes by approximately 40% in fiscal year 2011, as compared to fiscal year 2010, as the Company continued to improve its development, sourcing, resale and servicing of PVA products in the Asian region.
 
Operational Excellence.  Over the past year, the Company expanded its efforts in LEAN manufacturing and statistical process control in all of its operations aiming for measurable improvements in the cost of operations. These efforts have resulted in demonstrated savings over the last several years as well as greatly improved operational flexibility and are expected to result in continued improvement over the next several years.
 
Inflation.  For the most recently completed fiscal year and for the foreseeable future, the Company expects rising costs to continue for the consumables that it uses to produce and ship its products, as well as for its utilities and certain employee and medical costs.  While the Company attempts to mitigate these rising costs through its operational efficiencies and increased selling prices, inflation may become a factor that begins to negatively impact the Company’s profitability.
 
Raw Materials.  The feedstock for the Company’s raw materials have seen significant cost increases during the past year which peaked in the fourth quarter of fiscal year 2011.  In addition, purified terephthalic acid (“PTA”) pricing, which is a major component of polyester, declined by 10% in Asia in the June 2011 quarter compared to the prior quarter, while it increased by 2% in the U.S.  While the Company expects the price difference to return to normal which would reverse the competitive edge that Asia had in the June 2011 quarter, such dramatic increases and changes in raw material costs could negatively impact the Company’s operating results if sales prices cannot be adjusted in tandem with such fast or unexpected rises in cost.
 
Brazil.  During fiscal year 2011, on a local currency basis, the Company’s Brazilian operation experienced approximately an 8% decline in its gross profits on a per unit basis.  Sales volumes have been negatively impacted over the prior fiscal year as market conditions weakened.  Gross profit was also negatively impacted by a higher average cost of raw materials.  The Brazilian operation has also been negatively impacted by increasing levels of imports of yarn, fabric and garments from Asia due in part to the strengthening of the Brazilian Real against the U.S. dollar.
 
Organizational Changes.
On February 10, 2011, the Company announced the appointment of Ms. Suzanne M. Present to its Board of Directors (“Board”).  On February 25, 2011, the Company announced that its Board appointed Mr. William L. Jasper as the Company’s Chairman of the Board.  Mr. Jasper continues to serve as the Company’s Chief Executive Officer (“CEO”).  The announcement followed the death of Mr. Stephen Wener, the Company’s former Chairman of the Board.  Mr. Wener had served as a member of the Board since 2007, was a member of the Company’s Executive Committee and had been the President and CEO of Dillon Yarn Corporation (“Dillon”).  The Company also appointed Mr. R. Roger Berrier, Jr. as its President and Chief Operating Officer.  Prior to this announcement, Mr. Berrier, a member of the Board, served as Executive Vice President of Sales, Marketing, and Asian Operations.  On March 9, 2011, the Company appointed Mr. Mitchel Weinberger to its Board.  Mr. Weinberger is the current President and Chief Operating Officer of Dillon.
 
 
4

 
 
Reverse Stock Split.  On October 27, 2010, the shareholders of the Company approved a reverse stock split of the Company’s common stock (the “reverse stock split”) at a reverse stock split ratio of 1-for-3.  The reverse stock split became effective November 3, 2010 pursuant to a Certificate of Amendment to the Company’s Restated Certificate of Incorporation filed with the Secretary of State of New York.  The Company had 20,060 shares of common stock issued and outstanding immediately following the completion of the reverse stock split. The Company is authorized in its Restated Certificate of Incorporation to issue up to a total of 500,000 shares of common stock at a $0.10 par value per share which was unchanged by the amendment.
 
Strategy.  Although the Company has improved its overall performance there are many challenges still ahead related to competition, inflation, raw material costs and weakness of the U.S. and global economies.  The Company believes the future success of its current business model will be based on the success of the regional free trade markets in which it trades and its ability to: increase its sales of PVA yarns including its Repreve recycled yarns; implement cost saving strategies; pass on raw material price increases to its customers; and strategically penetrate growth markets, such as China, Central America, and Brazil.  The Company will continue to focus on sustaining and continuously improving operations and profitability, and increasing its net sales and earnings in global markets.  The Company will strive to create additional value through mix enrichment, share gain, process improvement throughout the organization, and expanding the number of customers and programs using its high value and PVA yarns.
 
Industry Overview:
The synthetic filament industry includes petrochemical and raw material producers, polyester and nylon fiber and yarn manufacturers, fabric and finished product producers, consumer brands and retailers.  Product pricing, innovation, quality, support, location and trade regulation compliance are competing and differentiating attributes among synthetic filament yarn producers within the industry. Both product innovation and product quality are particularly important, as product innovation gives customers competitive advantages and product quality provides for improved manufacturing efficiencies.
 
Since 1980, global demand for polyester has grown steadily, and in calendar year 2003, polyester replaced cotton as the fiber with the largest percentage of sales worldwide.  In calendar year 2010, global polyester consumption accounted for an estimated 48% of global fiber consumption and demand is projected to increase by approximately 4% to 5% annually through 2015.  In calendar year 2010, global nylon consumption accounted for an estimated 5% of global fiber consumption and demand is projected to increase by approximately 2% annually through 2015.  In the U.S., the polyester and nylon fiber sectors together accounted for approximately 57% of the textile consumption during calendar year 2010.
 
According to the National Council of Textile Organizations, the U.S. textile market’s total shipments were $51 billion for the calendar year 2010.  The end-use markets in which the Company participates for synthetic yarns represent approximately 9% of the total U.S. textile market.  The industrial and consumer, floor covering, apparel and hosiery, and furnishings markets account for 42%, 36%, 14% and 8% of total production, respectively. The industry has increased productivity by 45% over the last ten years, making textiles one of the top industries among all industrial sectors in productivity increases. During 2001 to 2009, the U.S. textile and apparel industry spent approximately $15 billion in capital expenditures, making it one of the most modern and productive textile sectors in the world. During calendar year 2010, the U.S. textile sector exported more than $15 billion of textile products and employed approximately 396,000 people making it one of the largest manufacturing employers in the U.S.
 
Rules of Origin:
A significant number of the Company’s customers, particularly in the apparel market, produce finished goods that meet the eligibility requirements for duty-free treatment in the regions covered by the North American Free Trade Agreement (“NAFTA”), CAFTA, the Caribbean Basin Trade Partnership Act (“CBTPA”) and the Andean Trade Promotion and Drug Eradication Act (“ATPDEA”).  These regional trade preference acts and free trade agreements (“FTAs”) contain rules of origin requirements.  In order to be eligible for duty-free treatment, the garment, fabric, yarn (such as POY) and fibers (extruded and spun) are generally required to be fully formed within the respective region.  The Company is the largest filament yarn manufacturer and one of the few producers of such qualifying yarns for the NAFTA, CAFTA, CBTPA, and ATPDEA regions.
 
Government legislation such as the Berry Amendment and the Kissell Amendment also stipulate rules of origin for certain purchases of U.S. governmental agencies.  The Berry Amendment generally requires the U.S. Department of Defense to purchase textile and apparel articles which are manufactured in the U.S. of yarns and fibers produced in the U.S.  The American Recovery and Reinvestment Act passed on February 13, 2009 contained a similar provision, referred to as the Kissell Amendment, that generally requires the U.S. Department of Homeland Security’s Transportation Security Administration and the U.S. Coast Guard to buy textile and apparel products made in the U.S. Further legislation will be required to maintain benefits under the Kissell Amendment requirements as the stimulus funds under the American Recovery and Reinvestment Act have been exhausted.  The Company is the largest and one of the few producers of such yarns for Berry and Kissell Amendment compliant programs.
 
 
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Trade Regulation:
Over the last decade, international imports of fabric and finished goods in the U.S. have significantly increased.  The primary drivers for that growth were lower overseas operating costs, increased overseas sourcing by U.S. retailers, the entry of China into the World Trade Organization and the staged elimination of all textile and apparel quotas.  Although global apparel imports represent a significant percentage of the U.S. market, regional trade agreements, which allow duty free advantages for apparel made from regional fibers, yarns and fabrics, allow the Company opportunities to participate in the growing import market.  Since the beginning of 2009, the share of trade from these regional trade areas has remained relatively stable and the Company is optimistic about the prospects of future stability and potential growth.
 
NAFTA is a permanent FTA between the U.S., Canada and Mexico that became effective on January 1, 1994.  The agreement contains safeguards sought by the U.S. textile industry, including certain rules of origin for textile and apparel products that must be met for these products to receive duty-free benefits under NAFTA.  In general, textile and apparel products must be produced from yarns and fabrics made in the NAFTA region, and all subsequent processing must occur in the NAFTA region to receive duty-free treatment.
 
In 2000, the U.S. passed the CBTPA, amended by the Trade Act of 2002, which allows apparel products manufactured in the Caribbean region using yarns and fabric fully formed in the region to be imported into the U.S. duty and quota free.
 
Implementation of the CAFTA began in 2006, between seven signatory countries: the U.S., the Dominican Republic, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua.  The CAFTA supersedes the CBTPA for the CAFTA signatory countries and provides permanent benefits not only for apparel produced in the region, but for all textile products that meet the rules of origin.  Qualifying textile and apparel products that are produced in any of the seven signatory countries from fabric, yarn and fibers that are also produced in any of the seven signatory countries may be imported into the U.S. duty free.  Two CAFTA amendments were implemented in August 2008; one includes changes to require that pocketing yarn and fabric used in trousers would have to be produced in the U.S. or a CAFTA signatory country and a second “cumulation” rule that permits a certain amount of woven apparel produced in a CAFTA signatory country containing Mexican or Canadian yarns and fabrics to enter the U.S. duty free.  An agreement was reached during a CAFTA Ministerial in February, 2011, to fix a number of technical errors in the CAFTA, including one to require that single ply synthetic sewing thread must originate from one of the signatory countries.  This measure requires further legislative action for full implementation but is expected to have a favorable impact on the Company’s twisted yarn business, as the Company will be the largest and one of a few suppliers of twisted yarns eligible to be used in these sewing thread applications.
 
The ATPDEA passed on August 6, 2002, effectively granting participating Andean countries favorable trade terms similar to those of the other regional trade preference programs.  Under the ATPDEA, apparel manufactured in Bolivia, Colombia, Ecuador and Peru using yarns and fabric produced in the U.S., or in these four Andean countries, could be imported into the U.S. duty and quota free through December 31, 2006.  A temporary extension of the ATPDEA was granted to coincide with the ongoing FTA negotiations with several of these Andean nations.  The U.S.-Peru Trade Promotion Agreement, signed on April 12, 2006, and FTA’s with Colombia and Panama awaiting Congressional action also follow, for the most part, the same yarn forward rules of origin for textile and apparel products as NAFTA.  The ATPDEA has expired, but efforts are underway to extend this program until July 2013.  Bolivia is no longer eligible under this agreement.
 
Additionally, the Company operates under FTA’s with Australia, Bahrain, Chile, Israel, Jordan, Morocco, Oman and Singapore.  Congressional action is pending on the U.S.-South Korean FTA (“Korea FTA”). The agreement fails to address the potential damage the lack of strict customs enforcement language and exposure to transshipment could cause for U.S. textile producers. The Obama Administration has begun negotiations for the eight-nation TransPacific Partnership Agreement (“TPP”); however, the first few rounds have focused on the preliminary framework of the agreement and the rules of origin for textiles and apparel have yet to be presented.
 
The Company believes the requirements of the rules of origin and the associated duty-free cost advantages in the regional free trade agreements, such as NAFTA and CAFTA, together with legislation such as the Berry and Kissell Amendments, and the growing need for quick response and inventory turns, ensures that a significant portion of the existing textile industry will remain based in the America regions.  The Company expects that the CAFTA and ATPDEA regions will continue to increase their percentage of the U.S. market.  The Company is the largest of only a few significant producers of eligible yarn under these trade agreements.  As a result, one of the Company’s business strategies is to leverage its eligibility status to increase its share of business with regional fabric producers and domestic producers who ship their products into the region for further duty free processing.
 
Approximately 59% of the Company’s sales are sold as compliant yarn under the terms of FTA’s or Kissell or Berry Amendments.
 
 
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Markets:
In calendar year 2000, 56% of the garments purchased in the U.S. were produced in the North and Central American regions. By calendar year 2009, approximately 18% of the garments purchased at U.S. retail were produced in these regions. In the last three years, the garment market share has stabilized in these regions and began to grow on a unit basis. This recent trend supports the Company’s view that the remaining apparel production in the regions is more specialized.  The apparel market which includes hosiery represents approximately 65% of the Company’s sales.  The Company has seen a steady increase in inventory days at both the apparel producer and apparel wholesaler levels, indicating a buildup of inventory in the supply chain.  In fact, with the retailers pushing for their suppliers to carry more on hand inventory, inventory days at apparel producers and wholesalers are at the highest levels in the last four years, which indicates the potential for a reduction in the Company’s sales volumes for the Company’s first quarter of fiscal year 2012.
 
The home furnishing market represents approximately 15% of the Company’s sales.  Retail sales of home furnishings have remained relatively flat.  New home sales continue to be one of the weakest sectors of the economy, and existing home sales remain soft as potential buyers continue to face low appraisals and tight credit.
 
The Company’s industrial market represents approximately 12% of its sales. This market includes belting, tapes, filtration, ropes, protective fabrics, awnings, etc.  Sales in the industrial market remained relatively flat in fiscal year 2011.
 
The automotive upholstery market represents approximately 5% of the Company’s sales and has been less susceptible to import penetration because of the exacting specifications and quality requirements often imposed on manufacturers of automotive upholstery and the just-in-time delivery requirements.  Effective customer service and prompt response to customer feedback are logistically more difficult for an importer to provide.  After a 32% decline in North American automotive production during calendar year 2009 due to the U.S. economic downturn, production grew by 38% in calendar year 2010 and an additional 9% during first half of calendar year 2011 compared to the prior year comparable periods.  Sales in the automotive market were slightly up in fiscal year 2011.
 
Competition:
The industry in which the Company currently operates is global and highly competitive.  On a global basis, the Company competes not only as a yarn producer but also as part of a regional supply chain.  The Company competes with a number of other foreign and domestic producers of polyester and nylon yarns.  While competitors have traditionally focused on commodity production, they are now increasingly focused on specialty and value-added products where the Company generates higher margins.  The Company is also impacted by the importation of textile, apparel and hosiery products which adversely impact the demand for polyester and nylon yarns in the Company’s markets.  Several foreign competitors in the Company’s supply chain have significant competitive advantages, including lower wages, raw material costs, capital costs, and favorable currency exchange rates against the U.S. dollar which could make the Company’s products, or the related supply chains, less competitive which may cause the Company’s sales and operating results to decline.
 
The major regional competitors for polyester yarns are O’Mara, Inc., and NanYa Plastics Corp. of America (“NanYa”) in the U.S., AKRA, S.A. de C.V. in the NAFTA region, and C S Central America S.A. de C.V. (“CS Central America”) in the CAFTA region.  The Company’s major competitors in Brazil are Avanti Industria Comercio Importacao e Exportacao Ltda., Polyenka Ltda., and other imported yarns and fibers.  The major regional competitors for nylon yarns are Sapona Manufacturing Company, Inc., and McMichael Mills, Inc. in the U.S. and Worldtex, Inc in the ATPDEA region.
 
Products:
The Company manufactures polyester related products in the U.S., El Salvador and Brazil and nylon yarns in the U.S. and Colombia for a wide range of end-uses.  In addition, the Company purchases fully-drawn yarn and certain drawn textured yarns for resale to its customers.  The Company processes and sells POY, as well as high-volume commodity, specialty and PVA yarns, domestically and internationally, with PVA yarns making up approximately 17%, 15% and 13% of consolidated sales for fiscal years 2011, 2010 and 2009, respectively.
 
The Company works closely with its customers to develop yarns using a research and development staff that evaluates trends and uses the latest technology to create innovative specialty and PVA yarns reflecting current consumer preferences.  The Company also adds value to the supply chain and enhances consumer demand for its products through the development and introduction of branded yarns that provide unique ecological, performance, comfort and aesthetic advantages.  The Company’s branded portion of its yarn portfolio continues to provide product differentiation to brands, retailers and consumers and includes products such as:
 
● 
Repreve, a family of eco-friendly yarns made from recycled materials.  Since introduced in August 2006, Repreve has been the Company’s most successful branded product and now includes more than twelve different recycled product options.  The product options include filament polyester (available as 100% hybrid blend or 100% post-consumer), filament nylon, staple polyester and recycled performance fibers.  The Company’s recycled performance fibers are manufactured to provide performance and/or functional properties to fabrics and end products such as flame retardation, moisture wicking, and performance stretch.  Repreve can be found in well-known brands and retailers including Haggar, Polartec, The North Face, Patagonia, REI, LL Bean, AllSteel, Hon, Steelcase, Perry Ellis, Home Depot, H&M, Sears, Macy’s, Kohl’s, Lee, Hunter Douglas Contract and Greg Norman.
 
 
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● 
aio® all-in-one performance yarns combine multiple performance properties into a single yarn.  aio® is being used by brands MJ Soffe and New Balance for several U.S. military apparel products.
 
● 
Sorbtek®, a permanent moisture management yarn primarily used in performance base layer applications, compression apparel, athletic bras, sports apparel, socks and other non-apparel related items.  Sorbtek® can be found in many well-known apparel brands, including Adidas and Asics, and is also used by MJ Soffe and New Balance for the U.S. military.
 
● 
A.M.Y. ®, a yarn with permanent antimicrobial properties for odor control.  A.M.Y.® is being used by MJ Soffe and New Balance for the U.S. military.
 
● 
Reflexx®, a family of stretch yarns that can be found in a wide array of end-use applications from home furnishings to performance wear and from hosiery and socks to work wear and denim.  Reflexx® can be found in many products including those used by the U.S. military.
 
For fiscal years 2011, 2010 and 2009, the Company incurred $4,145, $3,578 and $3,382 of expense, respectively, for its product development and research and development activities.
 
Customers:
The Company’s polyester segment has approximately 450 customers, its nylon segment has approximately 200 customers, and its international segment has approximately 600 customers in a variety of geographic markets.  Yarn is manufactured based upon product specifications and shipped based upon customer order requirements.  Customer payment terms are generally consistent across the segments and are based on prevailing industry practices for the sale of yarn domestically or internationally.
 
The Company’s sales are not materially dependent on a single customer or a small group of customers with no single customer comprising greater than ten percent of consolidated sales.  The Company’s top ten customers accounted for approximately 30% of sales for fiscal year 2011 and 33% of receivables as of June 26, 2011.
 
Sales and Marketing:
The Company employs a sales force of approximately forty persons operating out of sales offices in the U.S., Brazil, China, El Salvador and Colombia.  The Company relies on independent sales agents for sales in several other countries.  The Company seeks to create strong customer relationships and continually seeks ways to build and strengthen those relationships throughout the supply chain.  Through frequent communications with customers, partnering with customers in product development and engaging key downstream brands and retailers, the Company has created significant pull-through sales and brand recognition for its products.  For example, the Company works with brands and retailers to educate and create demand for its value-added products.  The Company then works with key fabric mill partners to develop specific fabric for those brands and retailers utilizing its PVA products.  Based on the results of many commercial and branded programs, this strategy has proven to be successful for the Company.
 
Suppliers and Sourcing:
The primary raw material suppliers for the polyester segment are NanYa for Chip and POY.  For the international segment, Reliance Industries, Ltd (“Reliance”) is the main supplier for POY.  The primary suppliers of nylon POY to the nylon segment are HN Fibers, Ltd., U.N.F. Industries Ltd. (“UNF”), UNF America, LLC (“UNF America”), Invista S.a.r.l. (“INVISTA”), Universal Premier Fibers, LLC, and Nilit US (“Nilit”) (formerly Nylstar).  UNF Industries and UNF America are 50/50 joint ventures between the Company and Nilit.  The Company produces its own and buys certain of its compliant raw material fibers from both the U.S. and Israel.  The Company produces a portion of its Chip requirements in its recycling center and purchases the remainder of its requirements from external suppliers for use in its spinning facility.  Although the Company does not generally have difficulty in obtaining raw nylon POY or raw polyester POY, the Company has in the past and may in the future experience interruptions or limitations in the supply of polyester Chip and other raw materials used to manufacture polyester POY, which could materially and adversely affect its operations.
 
 
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The Company also purchases certain nylon and polyester products for resale in the U.S., Brazil, and China.  The domestic resale product suppliers include NanYa, Universal Premier Fibers, LLC, Qingdao Bangyuan Industries Company Ltd, and Nilit.  The Company’s Brazilian operation purchases resale products primarily from PT Asia Pacific Fibers TBK, Reliance, Alok Industries, Ltd., Indo-Thai Synthetics Co, Ltd., Jiangsu Shenghong Chemical Fibre Co., Ltd, and Wujiang Canhua Import & Export C., Ltd.  The Company’s China subsidiary primarily purchases its resale products from an affiliate of Sinopec Yizheng Chemical Fiber Co., Ltd, its former joint venture partner.
 
Manufacturing Processes:
The Company uses advanced production processes to manufacture its high-quality yarns cost-effectively.  The Company believes that its flexibility and know-how in producing specialty yarns provides important development and commercialization advantages.  The Company produces polyester POY for its commodity, specialty and PVA yarns in its polyester spinning facility located in Yadkinville, North Carolina.  The POY yarns can be sold externally or further processed internally.  Additional processing of polyester products includes texturing, package dyeing, twisting and beaming.  The texturing process, which is common to both polyester and nylon, involves the use of high-speed machines to draw, heat and false-twist the POY to produce yarn having various physical characteristics, depending on its ultimate end-use.  Texturing gives the yarn greater bulk, strength, stretch, consistent dye-ability and a softer feel, thereby making it suitable for use in knitting and weaving of fabric.  Package dyeing allows for matching of customer specific color requirements for yarns sold into the automotive, home furnishings and apparel markets.  Twisting incorporates real twist into the filament yarns which can be sold for such uses as sewing thread, home furnishings and apparel.  Beaming places both textured and covered yarns onto beams to be used by customers in warp knitting and weaving applications.  Additional processing of nylon products primarily includes covering which involves the wrapping or air entangling of filament or spun yarn around a core yarn.  This process enhances a fabric’s ability to stretch, recover its original shape and resist wrinkles while maintaining a softer feel.
 
In 2011, the Company opened a new recycle Chip facility in Yadkinville, North Carolina increasing its investment in the commercialization of recycled PVA products. This facility allows the Company to improve the availability of recycled raw materials and significantly increase product capabilities and competitiveness in the growing market for Repreve.
 
Employees:
The Company employs approximately 2,700 employees.  The number of employees in the polyester segment, nylon segment, international segment and its corporate office are approximately 1,500, 600, 500 and 100, respectively.  While employees of the Company’s foreign operations are generally unionized, none of the domestic employees are currently covered by collective bargaining agreements.
 
Backlog:
The level of unfilled orders is affected by many factors including the timing of orders and the delivery time for the specific products, as well as the customer’s ability or inability to cancel the related order.  As such, the Company does not consider the amount of unfilled orders, or backlog, to be a meaningful indicator of expected levels of future sales.
 
Seasonality:
Generally, the Company is not significantly impacted by seasonality.  Excluding the effects of fiscal years with fifty three operating weeks, the most significant effects on the Company’s results of operations are due to the periods in which either the Company or its customers take planned manufacturing shutdowns during traditional holiday and plant shutdown periods.
 
Inflation:
The Company expects rising costs to continue for the consumables that it uses to produce and ship its products, as well as for its utilities and certain employee and medical costs.  While the Company attempts to mitigate these rising costs through its operational efficiencies and/or increased selling prices, inflation may become a factor that begins to negatively impact the Company’s profitability.
 
Intellectual Property:
The Company licenses certain trademarks, including Dacron® and Softec™ from INVISTA.  The Company has thirty two U.S. registered trademarks.  Due to its current recognition and potential growth opportunities, the Company believes that Repreve is its most significant trademark.  Ownership rights in trademarks do not expire if the trademarks are continued in use and properly protected.
 
Environmental Matters:
The Company is subject to various federal, state and local environmental laws and regulations limiting the use, storage, handling, release, discharge and disposal of a variety of hazardous substances and wastes used in or resulting from its operations and potential remediation obligations thereunder, particularly the Federal Water Pollution Control Act, the Clean Air Act, the Resource Conservation and Recovery Act (including provisions relating to underground storage tanks) and the Comprehensive Environmental Response, Compensation, and Liability Act, commonly referred to as “Superfund” or “CERCLA” and various state counterparts.  The Company believes that it has obtained, and is in compliance in all material respects with, all significant permits required to be issued by federal, state or local law in connection with the operation of its business.
 
 
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The Company’s operations are also governed by laws and regulations relating to workplace safety and worker health, principally the Occupational Safety and Health Act and regulations thereunder which, among other things, establish exposure standards regarding hazardous materials and noise standards, and regulate the use of hazardous chemicals in the workplace.
 
The Company believes that the operation of its production facilities and the disposal of waste materials are substantially in compliance with applicable federal, state and local laws and regulations and that there are no material ongoing or anticipated capital expenditures associated with environmental control facilities necessary to remain in compliance with such provisions.  The Company incurs normal operating costs associated with the discharge of materials into the environment but does not believe that these costs are material or inconsistent with other domestic competitors.
 
On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located at Kinston, North Carolina (“Kinston”) from INVISTA.  The land for the Kinston site was leased pursuant to a 99 year ground lease (“Ground Lease”) with E.I. DuPont de Nemours (“DuPont”).  Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the United States Environmental Protection Agency (“EPA”) and North Carolina Department of Environment and Natural Resources (“DENR”) pursuant to the Resource Conservation and Recovery Act Corrective Action program.  The Corrective Action program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and clean it up to comply with applicable regulatory standards.  Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with the conveyance of certain assets at Kinston to DuPont.  This agreement terminated the Ground Lease and relieved the Company of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site.  However, the Company continues to own a satellite service facility acquired in the INVISTA transaction that has contamination from DuPont’s operations and is monitored by DENR.  This site has been remedied by DuPont and DuPont has received authority from DENR to discontinue remediation, other than natural attenuation.  DuPont’s duty to monitor and report to DENR with respect to this site will be transferred to the Company in the future, at which time DuPont must pay the Company for seven years of monitoring and reporting costs and the Company will assume responsibility for any future remediation and monitoring of the site.  At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
 
Net Sales and Long-Lived Assets by Geographic Area:
Geographic information for net sales for the Company’s fiscal years is based on the operating locations from where the items were produced or distributed.  Geographic information for long-lived assets consists of investments in unconsolidated affiliates, other non-current assets, and property, plant and equipment, net, based on where the asset is located.
 
   
2011
   
2010
   
2009
 
Domestic operations:
                 
Net sales
  $ 502,255     $ 463,222     $ 438,429  
Total long-lived assets
    213,021       204,967       209,117  
Brazilian operations:
                       
Net sales
  $ 144,669     $ 130,663     $ 113,761  
Total long-lived assets
    27,926       22,731       22,454  
Other foreign operations:
                       
Net sales
  $ 65,888     $ 28,733     $ 6,225  
Total long-lived assets
    10,748       9,949       3,110  
 
Export sales from the Company’s U.S. operations to external customers were approximately $82,944 in fiscal year 2011, $94,255 in fiscal year 2010, and $86,399 in fiscal year 2009.
 
Joint Ventures:
The Company participates in joint ventures in the U.S. and in Israel.  Two of the joint ventures are suppliers to the Company’s nylon segment.  One is an on-going investment in a domestic cotton and spun yarn manufacturer.  The Company’s newest joint venture is a development stage enterprise that is focused on cultivating and selling bio-mass crops for the bio-fuel and bio-power industries.  As of June 26, 2011, the Company had $91,258 invested in these unconsolidated affiliates.  For fiscal year 2011, $24,352 of the Company’s $32,422 income from continuing operations before income taxes was generated from its investments in these four unconsolidated affiliates.  Other information regarding the Company’s unconsolidated affiliates is provided within Management’s Discussion and Analysis of Financial Condition and Results of Operations in Item 7 as well as in “Footnote 22. Investments in Unconsolidated Affiliates and Variable Interest Entities” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
 
 
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Available Information:
The Company’s Internet address is:  www.unifi.com.  Copies of the Company’s reports, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, that the Company files with or furnishes to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and beneficial ownership reports on Forms 3, 4, and 5, are available as soon as practicable after such material is electronically filed with or furnished to the SEC and may be obtained without charge by accessing the Company’s web site or by writing Mr. Ronald L. Smith at Unifi, Inc. P.O. Box 19109, Greensboro, North Carolina  27419-9109.
 
Item 1A.  Risk Factors
In the course of conducting operations, the Company is exposed to a variety of risks that are inherent to its business.  The following discusses some of the key inherent risk factors that could affect the Company’s business and operations, as well as other risk factors which are particularly relevant to the Company.  Other factors besides those discussed below or elsewhere in this report could also adversely affect the Company’s business and operations, and these risk factors should not be considered a complete list of potential risks that may affect the Company.  New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  See “Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K for further discussion of forward-looking statements about the Company’s financial condition and results of operations.
 
The Company will require a significant amount of cash to service its indebtedness, fund capital expenditures and retire portions of its 2014 notes, and its ability to generate cash depends on many factors beyond its control.
The Company’s principal sources of liquidity are cash flows generated from operations and borrowings under the First Amendment to the Amended and Restated Credit Agreement dated September 9, 2010 (the “First Amended Credit Agreement”).  The Company’s ability to make payments on and to refinance its indebtedness, to fund planned capital expenditures and to redeem portions of the 2014 notes under its Deleveraging Strategy will depend on its ability to generate cash in the future.  This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control.
 
The business may not generate cash flows from operations, and future borrowings may not be available to the Company in an amount sufficient to enable the Company to pay its indebtedness and to fund its other liquidity needs.  If the Company is not able to generate sufficient cash flow or borrowings, the Company may need to refinance or restructure all or a portion of its indebtedness on or before maturity, reduce or delay capital investments or redemptions of the 2014 notes under the Deleveraging Strategy or seek to raise additional capital.  The Company may not be able to implement one or more of these alternatives on terms that are acceptable or at all.  The terms of its existing or future debt agreements may restrict the Company from adopting any of these alternatives.  The failure to generate sufficient cash flows or to achieve any of these alternatives could adversely affect the Company’s financial condition.
 
In addition, without such refinancing, the Company could be forced to sell assets to make up for any shortfall in its payment obligations under unfavorable circumstances.  The Company’s First Amended Credit Agreement and the indenture with respect to the 2014 notes dated May 26, 2006 between the Company and its subsidiary guarantors and U.S. Bank, National Association, as Trustee (the “Indenture”) limit its ability to sell assets and also restrict the use of proceeds from any such sale.  Furthermore, the 2014 notes and the First Amended Credit Agreement are secured by substantially all of its assets.  Therefore, the Company may not be able to sell its assets quickly enough or for sufficient amounts to enable the Company to meet its debt service obligations.
 
The Company’s future operating results, deteriorating conditions in the credit markets, declining credit ratings or abnormally high interest rates or other adverse debt instrument terms could make it difficult for the Company to refinance its indebtedness on favorable terms or at all when it comes due.
The Company’s ability to refinance its indebtedness on favorable terms or at all will depend on its ability to generate adequate operating results in the future, the prevailing conditions of the credit markets, the Company’s credit agency debt ratings, and interest rate and other debt instrument terms available in the credit markets at the time the Company refinances its indebtedness.  The 2014 notes are due and payable in May 2014.  Outstanding amounts under the First Amended Credit Agreement are due and payable in September 2015; however, if the 2014 notes have not been paid in full on or before February 15, 2014, the maturity date of the Company’s revolving credit facility will be automatically adjusted to February 15, 2014.  If the Company were unable to refinance its indebtedness on a timely basis, it could have a material adverse effect on its business, financial condition, results of operations or cash flows.
 
 
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The Company relies on accurate financial reporting information from equity method investees that it does not control.  Errors in financial reporting by these equity method investees could be material to the Company and cause it to have to restate past financial statements.
The Company has ownership interests in equity method investees that it does not control.  The Company relies on accurate financial reporting information from these entities for preparation of its quarterly and annual financial statements.  Errors in the financial reporting information received by the Company from any of these equity method investees could be material to the Company and require it to have to restate past financial statements filed with the Securities and Exchange Commission (the “SEC”).  Such restatements, if they occur could have a material adverse effect on the Company or the market price of its securities.
 
The Company faces intense competition from a number of domestic and foreign yarn producers and importers of textile and apparel products.
The Company’s industry is highly competitive.  The Company competes not only against domestic and foreign yarn producers, but also against importers of foreign sourced fabric and apparel into the U.S. and other countries in which the Company does business.  The Company anticipates that competitor expansions or new competition within these regions may lead to reduced industry utilization rates that could result in reduced gross profit margins for the Company’s products, which may materially adversely affect its business, financial condition, results of operations or cash flows.
 
 In addition, Petrobras Petroleo Brasileiro S.A. (“Petrobras”), a public oil company controlled by the Brazilian government, announced the construction of a polyester manufacturing complex located in the northeast sector of the country.  This new investment in polyester capacity is made by Petrobras through its wholly-owned subsidiary, Petrosuape-Companhia Petroquimica de Pernambuco (“Petrosuape”).  Petrosuape will produce PTA, polyethylene terephthalate (“PET”) resin, polyester Chip, POY and textured polyester.  Construction on various phases of the project has commenced.  Once operational, the textured polyester operations of Petrosuape will most likely be a significant competitor.  The textured polyester operations of Petrosuape are expected to have approximately twice the capacity of the Company’s Brazilian subsidiary, Unifi do Brasil.  Petrosuape’s textured polyester operation started limited production in July 2010 and is expected to be in full commercial production by mid 2012. Such significant capacity expansion may negatively affect the utilization rate of the synthetic textile filament market in Brazil, thereby potentially impacting the operating results of Unifi do Brasil.  In addition, Unifi do Brasil may transfer much of its current POY purchases from imports to Petrosuape POY.  Such a shift will make Unifi do Brasil a significant customer of Petrosuape’s operations; however, it would likely result in Unifi do Brasil losing certain economic assistance benefits provided by local economic incentives.  Competitive pricing from Petrosuape and/or efficiency gains in Unifi do Brasil’s operations may not make up for the loss of these incentives.  A failure to make up these benefits could have a material adverse effect on Unifi do Brasil’s and/or the Company’s business, financial condition, results of operations or cash flows.
 
The primary competitive factors in the textile industry include price, quality, product styling and differentiation, flexibility of production and finishing, delivery time and customer service.  The needs of particular customers and the characteristics of particular products determine the relative importance of these various factors.  Because the Company, and the supply chains in which the Company operates, do not typically operate on the basis of long-term contracts with textile and apparel customers, these competitive factors could cause the Company’s customers to rapidly shift to other producers.  A large number of the Company’s foreign competitors have significant competitive advantages, including lower labor costs, lower raw materials and favorable currency exchange rates against the U.S. dollar.  If any of these advantages increase, the Company’s products could become less competitive, and its sales and profits may decrease as a result.  In addition, while traditionally these foreign competitors have focused on commodity production, they are now increasingly focused on value-added products, where the Company continues to generate higher margins.  The Company, and the supply chains in which the Company operates, may not be able to continue to compete effectively with imported foreign-made textile and apparel products, which would materially adversely affect its business, financial condition, results of operations or cash flows.
 
An increase of illegal transshipments of textile and apparel goods into the U.S. could have a material adverse effect on the Company’s business.
 According to industry experts and trade associations, there has been a significant amount of illegal transshipments of apparel products into the U.S. and such illegal transshipments continue to negatively impact the U.S. textile market.  Illegal transshipment involves circumventing quotas by falsely claiming that textiles and apparel are a product of a particular country of origin or include yarn of a particular country of origin to avoid paying higher duties or to receive benefits from regional FTAs, such as NAFTA and CAFTA.  If illegal transshipment is not monitored and enforcement is not effective, these shipments could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
 
 
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As product demand flow shifts within a region the Company could lose its cost competitiveness due to the location of its assets.
The Company’s polyester segment primarily manufactures its products in the U.S. and El Salvador.  The Company’s nylon segment primarily manufactures its products in Colombia and the U.S.  The Company’s international segment primarily manufactures its products in Brazil and has a sales office in China.  As product demand flow shifts within the regions in which the Company does business, it could lose its cost competitiveness due to the location of its assets.  The Company’s operations may incur higher manufacturing, transportation and/or raw material costs in its present operating locations than it could achieve should its operations be located in these new product demand centers.  This could adversely affect the competitiveness of the Company’s operations and have a material adverse effect on its business, financial condition, results of operations or cash flows.
 
A decline in general economic or political conditions and changes in consumer spending could cause the Company’s sales and profits to decline.
The Company’s products are used in the production of fabric primarily for the apparel, hosiery, home furnishing, automotive, industrial and other similar end-use markets.  Demand for furniture and durable goods, such as automobiles, is often affected significantly by economic conditions.  Demand for a number of categories of apparel also tends to be tied to economic cycles and customer preference.  Domestic demand for textile products therefore tends to vary with the business cycles of the U.S. economy as well as changes in global trade flows, and economic and political conditions.  Future armed conflicts, terrorist activities, economic and political conditions or natural disasters in the U.S. or abroad and any consequential actions on the part of the U.S. government and others may cause general economic conditions in the U.S. to deteriorate or otherwise reduce U.S. consumer spending.
 
The global economy is currently undergoing a period of unprecedented volatility.  The Company cannot predict when economic conditions will improve or stabilize.  A prolonged period of economic volatility or continued decline could adversely affect demand for the Company’s products and have a material adverse effect on its business, financial condition, results of operations or cash flows.  A decline in general economic conditions or consumer confidence may also lead to significant changes to inventory levels and, in turn, replenishment orders placed with suppliers.  These changing demands ultimately work their way through the supply chain and could adversely affect demand for the Company’s products and have a material adverse effect on its business, financial condition, results of operations or cash flows.
 
Also, as one of the many participants in the U.S. and regional textile and apparel supply chains, the Company’s business and competitive position are directly impacted by the business and financial condition of the other participants across the supply chains in which it operates, including other regional yarn manufacturers, knitters and weavers.  If other supply chain participants are unable to access capital, fund their operations and make required technological and other investments in their businesses or experience diminished demand for their products, there could be a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
 
Failure to implement future technological advances in the textile industry or fund capital expenditure requirements could have a material adverse effect on the Company’s competitive position and net sales.
The Company’s operating results depend to a significant extent on its ability to continue to introduce innovative products and applications and to continue to develop its production processes to be a competitive producer.  Accordingly, to maintain its competitive position and its revenue base, the Company must continually modernize its manufacturing processes, plants and equipment.  To this end, the Company has historically made significant investments in its manufacturing infrastructure.  Future technological advances in the textile industry may result in an increase in the efficiency of existing manufacturing and distribution systems or the innovation of new products and the Company may not be able to adapt to such technological changes or offer such products on a timely basis if it does not incur significant capital expenditures.  Existing, proposed or yet undeveloped technologies may render its technology less profitable or less viable, and the Company may not have available the financial and other resources to compete effectively against companies possessing such technologies.  To the extent sources of funds are insufficient to meet its ongoing capital improvement requirements, the Company would need to seek alternative sources of financing or curtail or delay capital spending plans.  The Company may not be able to obtain the necessary financing when needed or on terms acceptable to the Company.  The Company is unable to predict which of the many possible future products and services will meet the evolving industry standards and consumer demands.  If the Company fails to make future capital improvements necessary to continue the modernization of its manufacturing operations and reduction of its costs, its competitive position may suffer, and its net sales may decline.
 
 
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The significant price volatility of many of the Company’s raw materials and rising energy costs may result in increased production costs, which the Company may not be able to pass on to its customers, which could have a material adverse effect on its business, financial condition, results of operations or cash flows.
A significant portion of the Company’s raw materials and energy costs are derived from petroleum-based chemicals.  The prices for petroleum and petroleum-related products and energy costs are volatile and dependent on global supply and demand dynamics, including geo-political risks.  While the Company enters into raw material supply agreements from time to time, these agreements typically provide index pricing based on quoted feedstock market prices.  Therefore, its supply agreements provide only limited protection against price volatility.  While the Company has at times in the past matched cost increases with corresponding product price increases, the Company was not always able to immediately raise product prices, and, ultimately, pass on underlying cost increases to its customers.  The Company has in the past lost and expects that it may continue to lose, customers to its competitors as a result of price increases.  In addition, its competitors may be able to obtain raw materials at a lower cost due to market regulations that favor local producers, and certain other market regulations that favor the Company over other producers may be amended or repealed.  Additional raw material and energy cost increases that the Company is not able to fully pass on to customers or the loss of a large number of customers to competitors as a result of price increases could have a material adverse effect on its business, financial condition, results of operations or cash flows.
 
The Company depends upon limited sources for raw materials, and interruptions in supply could increase its costs of production and cause its operations to suffer.
The Company depends on a limited number of third parties for certain raw material supplies, such as POY and Chip.  Although alternative sources of raw materials exist, the Company may not continue to be able to obtain adequate supplies of such materials on acceptable terms, or at all, from other sources.  The Company is dependent on NAFTA and CAFTA qualified suppliers of POY which in the future may experience interruptions or limitations in the supply of its raw materials, which would increase its product costs and could have a material adverse effect on its business, financial condition, results of operations or cash flows.  These POY suppliers are also at risk with their raw material supply chains.  Any disruption or curtailment in the supply of any of its raw materials could cause the Company to reduce or cease its production in general or require the Company to increase its pricing, which could have a material adverse effect on its business, financial condition, and results of operations or cash flows.
 
Changes in the trade regulatory environment could weaken the Company’s competitive position dramatically and have a material adverse effect on its business, financial condition, results of operations or cash flows.
A number of sectors of the textile industry in which the Company sells its products, particularly apparel, hosiery and home furnishings, are subject to intense foreign competition.  Other sectors of the textile industry in which the Company sells its products may in the future become subject to more intense foreign competition.  There are currently a number of trade regulations and duties in place to protect the U.S. textile industry against competition from low-priced foreign producers, such as China.  Changes in such trade regulations and duties may make its products less attractive from a price standpoint than the goods of its competitors or the finished apparel products of a competitor in the supply chain, which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.  In addition, increased foreign capacity and imports that compete directly with its products could have a similar effect.  Furthermore, one of the Company’s key business strategies is to expand its business within countries that are parties to FTAs with the U.S.  Any relaxation of duties or other trade protections with respect to countries that are not parties to those FTAs could therefore decrease the importance of the trade agreements and have a material adverse effect on its business, financial condition, results of operations or cash flows.
 
 The proposed Korea FTA is potentially problematic for various sectors of the U.S. textile industry.  In contrast to FTA’s in recent years, the Korea FTA is the first FTA since the NAFTA agreement where the country in question has a large, vertically integrated and developed textile sector.  Duty-free treatment under the proposed agreement could adversely affect the U.S. textile and apparel industries due to concerns with transshipments and the fact that this FTA would give Korea a greater competitive advantage by further reducing the cost of Korean products in the U.S.  The Korea FTA was negotiated under “Fast Track” during the Bush Administration, and changes to the treatment of automobiles under the FTA were negotiated by the Obama Administration to reduce opposition in the U.S. Congress.  The Obama Administration has indicated it would like to introduce the bill in Congress in the fall of 2011.  The U.S. textile industry continues to work with the U.S. Trade Office and the Administration to address its concerns with the Korea FTA.
 
The Company has significant foreign operations and its results of operations may be adversely affected by the risks associated with doing business in foreign locations.
The Company has operations in Brazil, China, Colombia, El Salvador and a joint venture in Israel.  The Company serves customers in Canada, Mexico, Israel and various countries in Europe, Central America, South America, Africa, and Asia.  The Company’s foreign operations are subject to certain political, economic and other uncertainties not encountered by its domestic operations that can materially impact the Company’s supply chains, or other aspects of its foreign operations.  The risks of international operations include trade barriers, duties, exchange controls, national and regional labor strikes, social and political unrest, general economic risks, required compliance with a variety of foreign laws, including tax laws, the difficulty of enforcing agreements and collecting receivables through foreign legal systems, taxes on distributions or deemed distributions to the Company or any of its U.S. subsidiaries, maintenance of minimum capital requirements and import and export controls.
 
 
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Through its subsidiaries, the Company is subject to the tax laws of many jurisdictions. Changes in tax laws or the interpretation of tax laws can affect the Company’s earnings, as can the resolution of various pending and contested tax issues. In most jurisdictions, the Company regularly has audits and examinations by the designated tax authorities, and additional tax assessments are common.
 
Through its foreign operations, the Company is also exposed to currency fluctuations and exchange rate risks.  Fluctuations in foreign exchange rates will impact period-to-period comparisons of its reported results.  Additionally, the Company operates in countries with foreign exchange controls.  These controls may limit its ability to repatriate funds from its international operations and joint ventures or otherwise convert local currencies into U.S. dollars.  These limitations could adversely affect the Company’s ability to access cash from these operations.
 
Unifi do Brasil receives certain regulatory benefits through the sales of its product in Brazil. If these benefits are significantly reduced or repealed, it would have a material adverse effect on the Company’s profitability and cash flows.
 
The Company’s Deleveraging Strategy could result in the Company maintaining larger balances outstanding under its First Amended Credit Agreement and decrease the Company’s excess borrowing availability, which could adversely affect the Company’s financial condition and prevent it from fulfilling its obligations under its debt agreements.
On an ongoing basis, the Company anticipates utilizing its liquidity to continue to redeem portions of its 2014 notes incrementally through a combination of internally generated cash and borrowings under the First Amended Credit Agreement.  The Company expects to maintain a continuous balance outstanding under the First Amended Credit Agreement and to hedge a substantial amount of the interest rate risk in order to ensure its interest savings as it executes the Deleveraging Strategy.
 
The Company’s First Amended Credit Agreement requires the Company to meet a minimum fixed charge coverage ratio test if borrowing capacity is less than 15% of the total credit facility.  The consummation of the redemption of the 2014 notes and implementation of the Deleveraging Strategy may result in the Company maintaining reduced levels of excess availability under the First Amended Credit Agreement, but not to the extent that the fixed charge coverage ratio test applies.  If the Company’s availability under the First Amended Credit Agreement falls below 15% of the total credit facility, it may not be able to maintain the required fixed charge coverage ratio.  Additionally, the First Amended Credit Agreement restricts the Company’s ability to make certain distributions and investments should its borrowing capacity decrease to below 27.5% of the total credit facility.   These restrictions could limit the Company’s ability to plan for or react to market conditions or meet its capital needs.  The Company may not be granted waivers or amendments to its First Amended Credit Agreement if for any reason the Company is unable to meet its requirements, or the Company may not be able to refinance its debt on terms acceptable to it, or at all.
 
The success of the Company depends on the ability of its senior management team, as well as the Company’s ability to attract and retain key personnel.
The Company’s success is highly dependent on the abilities of its management team.  The management team must be able to effectively work together to successfully conduct the Company’s current operations, as well as implement the Company’s strategies.  If it is unable to do so, the results of operations and financial condition of the Company may suffer.  The failure to retain current key managers or key members of the design, product development, manufacturing, merchandising or marketing staff, or to hire additional qualified personnel for its operations could be detrimental to the Company’s business.  The Company currently does not have any employment agreements with its corporate officers and cannot assure investors that any of these individuals will remain with the Company.  The Company currently does not have life insurance policies on any of the members of the senior management team.
 
Unforeseen or recurring operational problems at any of the Company’s facilities may cause significant lost production, which could have a material adverse effect on its business, financial condition, results of operations or cash flows.
The Company’s manufacturing processes could be affected by operational problems that could impair its production capability.  Each of its facilities contains complex and sophisticated machines that are used in its manufacturing processes.  Disruptions at any of its facilities could be caused by maintenance outages; prolonged power failures or reductions; a breakdown, failure or substandard performance of any of its machines; the effect of noncompliance with material environmental requirements or permits; disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads; fires, floods, earthquakes or other catastrophic disasters; labor difficulties; or other operational problems.  Any prolonged disruption in operations at any of its facilities could cause significant lost production, which would have a material adverse effect on its business, financial condition, results of operations or cash flows.
 
 
15

 
 
The Company’s future success will depend in part on its ability to protect its intellectual property rights, and the Company’s inability to enforce these rights could cause it to lose sales and any competitive advantage it has.
The Company’s success depends in part upon its ability to protect and preserve its rights in its trademarks and other intellectual property it owns or licenses.  The Company relies on the trademark, copyright and trade secret laws of the U.S. and other countries, as well as nondisclosure and confidentiality agreements, to protect its intellectual property rights.  However, the Company may be unable to prevent third parties, employees or contractors from using its intellectual property without authorization, breaching any nondisclosure or confidentiality agreements with it, or independently developing technology that is similar to the Company’s property.  The use of the Company’s intellectual property by others without authorization may reduce any competitive advantage that it has developed, cause it to lose sales or otherwise harm its business.  The Company has obtained U.S. and foreign trademark registrations, and will continue to evaluate the registration of additional trademarks, as appropriate.  The Company cannot guarantee that its applications will be approved by the applicable governmental authorities or that third parties may not seek to oppose or otherwise challenge its registrations or applications.  A failure to obtain or maintain trademark registrations in the U.S. and other countries could limit the Company’s ability to protect its trademarks and impede its marketing efforts in those jurisdictions.
 
The Company cannot be certain that the conduct of its business does not and will not infringe the intellectual property rights of others, or that third parties do not and will not infringe on or misappropriate its intellectual property.  The Company may be subject to, or initiate, legal proceedings and claims in the ordinary course of its business, which could result in costly litigation and divert the efforts of its personnel.  Depending on the success of these proceedings, the Company may be required to enter into licensing or consent agreements (if available on acceptable terms or at all), or to pay damages or cease using certain trademarks or other intellectual property.  Although its intellectual property plays an important role in maintaining its competitive position, no single trademark, patent, copyright or license is, in the Company’s view, of such value to it that the Company’s business would be materially affected by the expiration, termination or infringement thereof.
 
Failure to successfully reduce the Company’s production costs may adversely affect its financial results.
A significant portion of the Company’s strategy relies upon its ability to successfully rationalize and improve the efficiency of its operations.  In particular, the Company’s strategy relies on its ability to reduce its production costs in order to remain competitive.  The Company has consolidated multiple unprofitable businesses and made significant capital expenditures to more completely automate its production facilities to lessen its dependence on labor and decrease waste.  If the Company is not able to continue to successfully implement cost reduction measures, or if these efforts do not generate the level of cost savings that it expects going forward or result in higher than expected costs, there could be a material adverse effect on its business, financial condition, results of operations or cash flows.
 
The Company is currently implementing various strategic business initiatives, and the success of the Company’s business will depend on its ability to effectively develop and implement these initiatives.
The Company is currently implementing various strategic business initiatives, including a new recycling center that improves its capability and flexibility in the production of PVA yarns and vertically integrating into recycled polyester Chip production for use in its Repreve product offering.  The development and implementation of these initiatives requires financial and management commitments outside of day-to-day operations.  These commitments could have a significant impact on the Company’s operations and profitability, particularly if the initiatives prove to be unsuccessful.  Moreover, if the Company is unable to implement an initiative in a timely manner, or if those initiatives turn out to be ineffective or are executed improperly, the Company’s business, financial condition, results of operations or cash flows could be adversely affected.
 
The Company’s substantial level of indebtedness could adversely affect its financial condition.
The Company’s outstanding indebtedness could have important consequences, including the following:
 
● 
its high level of indebtedness could make it more difficult for the Company to satisfy its obligations with respect to the 2014 notes, including its repurchase obligations;
 
● 
the restrictions imposed on the operation of its business may hinder its ability to take advantage of strategic opportunities to grow its business;
 
● 
its ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;
 
● 
the Company must use a substantial portion of its cash flow from operations to pay interest on its indebtedness, which will reduce the funds available to the Company for operations and other purposes;
 
● 
its high level of indebtedness could place the Company at a competitive disadvantage compared to its competitors that may have proportionately less debt;
 
● 
it may be exposed to the risk of increased interest rates as certain of its borrowings, including borrowings under its First Amended Credit Agreement, are at variable rates of interest;
 
 
16

 
 
● 
its cost of borrowing may increase;
 
● 
its flexibility in planning for, or reacting to, changes in its business and the industry in which it operates may be limited; and
 
● 
its high level of indebtedness makes the Company more vulnerable to economic downturns and adverse developments in its business.
 
Any of the foregoing could have a material adverse effect on the Company’s business, financial condition, results of operations, prospects and ability to satisfy its obligations under its indebtedness.
 
Despite its current indebtedness levels, the Company may still be able to incur substantially more debt.  This could further exacerbate the risks associated with its substantial leverage.
The Company and its subsidiaries may be able to incur substantial additional indebtedness, including additional secured indebtedness, in the future.  The terms of its current debt restrict, but do not completely prohibit, the Company from doing so.  The Company’s First Amended Credit Agreement permits up to $100,000 of borrowings, which the Company can request be increased to $150,000 under certain circumstances, with a borrowing base specified in the credit facility as equal to specified percentages of eligible accounts receivable and inventory.  In addition, the Indenture allows the Company to issue additional notes under certain circumstances and to incur certain other additional secured debt, and allows its foreign subsidiaries to incur additional debt.  The Indenture does not prevent the Company from incurring other liabilities that do not constitute indebtedness.  If new debt or other liabilities are added to its current debt levels, the related risks that the Company now faces could intensify.
 
The terms of the Company’s outstanding indebtedness impose significant operating and financial restrictions, which may prevent the Company from pursuing certain business opportunities and taking certain actions.
The terms of the Company’s outstanding indebtedness impose significant operating and financial restrictions on the Company.  These restrictions will limit or prohibit, among other things, its ability to:
 
● 
incur and guarantee indebtedness or issue preferred stock;
 
● 
repay subordinated indebtedness prior to its stated maturity;
 
● 
pay dividends or make other distributions on or redeem or repurchase the Company’s stock;
 
● 
issue capital stock;
 
● 
make certain investments or acquisitions;
 
● 
create liens;
 
● 
sell certain assets or merge with or into other companies;
 
● 
enter into certain transactions with stockholders and affiliates; and
 
● 
restrict dividends, distributions or other payments from its subsidiaries.
 
These restrictions could limit its ability to plan for or react to market conditions or meet its capital needs.  The Company may not be granted waivers or amendments to its First Amended Credit Agreement if for any reason the Company is unable to meet its requirements or the Company may not be able to refinance its indebtedness on terms that are acceptable to it, or at all. The breach of any of these covenants or restrictions could result in a default under the Indenture or its First Amended Credit Agreement.  An event of default under its debt agreements would permit some of its lenders to declare all amounts borrowed from them to be due and payable.  Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under its First Amended Credit Agreement would permit the lenders under the First Amended Credit Agreement to terminate all commitments to extend further credit under that agreement.  Furthermore, if the Company was unable to repay the amounts due and payable under its First Amended Credit Agreement, those lenders could proceed against the collateral granted to them to secure that indebtedness and force the Company into bankruptcy or liquidation.  In the event its lenders or note holders accelerate the repayment of its borrowings, the Company and its guarantor subsidiaries may not have sufficient assets to repay that indebtedness.  As a result of these restrictions, the Company may be:
● 
limited in how it conducts its business;
 
● 
unable to raise additional debt or equity financing to operate during general economic or business downturns; or
 
● 
unable to compete effectively or to take advantage of new business opportunities.
 
These restrictions may affect the Company’s ability to grow in accordance with its plans.
 
 
17

 
 
The Company has made and may continue to make investments in entities that it does not control.
The Company has established joint ventures and made minority interest investments designed, among other things, to increase its vertical integration, increase efficiencies in its procurement, manufacturing processes, marketing and distribution in the U.S. and other markets.  The Company’s inability to control entities in which it invests may affect its ability to receive distributions from those entities or to fully implement its business plan.  The incurrence of debt or entry into other agreements by an entity not under its control may result in restrictions or prohibitions on that entity’s ability to pay dividends or make other distributions.  Even where these entities are not restricted by contract or by law from making distributions, the Company may not be able to influence the occurrence or timing of such distributions.  In addition, if any of the other investors in these entities fails to observe its commitments, that entity may not be able to operate according to its business plan or the Company may be required to increase its level of commitment.  If any of these events were to occur, its business, results of operations, financial condition or cash flows could be adversely affected.  Because the Company does not own a majority or maintain voting control of these entities, the Company does not have the ability to control their policies, management or affairs.  The interests of persons who control these entities or partners may differ from the Company’s, and they may cause such entities to take actions which are not in the Company’s best interest.  If the Company is unable to maintain its relationships with its partners in these entities, the Company could lose its ability to operate in these areas which could have a material adverse effect on its business, financial condition, results of operations or cash flows.
 
The Parkdale America, LLC joint venture may lose Economic Adjustment Assistance to Users of Upland Cotton which could adversely affect the Company’s investment income and cash flows.
One of the Company’s joint ventures, Parkdale America, LLC (“PAL”), receives economic adjustment payments (“EAP”) from the Commodity Credit Corporation under the Economic Assistance program to Users of Upland Cotton, Subpart C of the 2008 Farm Bill.  The program provides textile mills a subsidy of four cents per pound on eligible upland cotton consumed during the first four years and three cents per pound for the last six years of the program.  The economic assistance received under this program must be used to acquire, construct, install, modernize, develop, convert or expand land, plant, buildings, equipment, or machinery.  Capital expenditures must be directly attributable to the purpose of manufacturing upland cotton into eligible cotton products in the U.S.  Since August 1, 2008, PAL has received $65,164 of economic assistance under the program. Should PAL no longer meet the criteria to receive economic assistance under the program or should the program be discontinued, PAL’s business could be significantly impacted.
 
Compliance with environmental and other regulations could require significant expenditures.
The Company is subject to various federal, state, local and foreign laws and regulations that govern its activities, operations and products that may have adverse environmental, health and safety effects, including laws and regulations relating to generating emissions, water discharges, waste, product and packaging content and workplace safety. Noncompliance with these laws and regulations may result in substantial monetary penalties and criminal sanctions. Future events that could give rise to manufacturing interruptions or environmental remediation include changes in existing laws and regulations, the enactment of new laws and regulations, a release of hazardous substances on or from its properties or any associated offsite disposal location, or the discovery of contamination from current or prior activities at any of its properties. While the Company is not aware of any proposed regulations or remedial obligations that could trigger significant costs or capital expenditures in order to comply, any such regulations or obligations could adversely affect its business, results of operations, financial condition and cash flows.
 
Item 1B.  Unresolved Staff Comments
None.
 
 
18

 
 
Item 1C.  Executive Officers of the Registrant
The following is a description of the name, age, position and offices held, and the period served in such position or offices for each of the executive officers of the Company.
 
Chairman of the Board and Chief Executive Officer
WILLIAM L. JASPER — Age: 58 – Mr. Jasper was appointed Chairman of the Board in February 2011 and has served as the Company’s Chief Executive Officer since September 2007.  In September 2004, Mr. Jasper joined the Company as the General Manager of the Polyester Division and later was promoted to Vice President of Sales in April 2006.  Prior to joining the Company, he was the Director of INVISTA’s Dacron® polyester filament business.  Before working at INVISTA, Mr. Jasper held various management positions in operations, technology, sales and business for DuPont since 1980.  He has been a director since September 2007 and is the Chairman of the Board’s Executive Committee.
 
President and Chief Operating Officer
R. ROGER BERRIER — Age: 42 – Mr. Berrier was appointed President and Chief Operating Officer in February 2011.  Mr. Berrier had been the Executive Vice President of Sales, Marketing and Asian Operations of the Company since September 2007.  Mr. Berrier had been the Vice President of Commercial Operations since April 2006 and the Commercial Operations Manager responsible for corporate product development, marketing and brand sales management from April 2004 to April 2006.  Mr. Berrier joined the Company in 1991 and has held various management positions within operations, including international operations, machinery technology, research and development and quality control.  He has served as a director on the Board since September 2007 and is a member of the Board’s Executive Committee.
 
Vice Presidents
RONALD L. SMITH — Age: 43 – Mr. Smith has been Vice President and Chief Financial Officer of the Company since October 2007.  He was appointed Vice President of Finance and Treasurer in September 2007.  Mr. Smith held the position of Treasurer and had additional responsibility for Investor Relations from May 2005 to October 2007 and was the Vice President of Finance, Unifi Kinston, LLC from September 2004 to April 2005.  Mr. Smith joined the Company in 1994 and has held positions as Controller, Chief Accounting Officer and Director of Business Development and Corporate Strategy.
 
THOMAS H. CAUDLE, JR. — Age: 59 – Mr. Caudle has been the Vice President of Manufacturing since October 2006.  He was the Vice President of Global Operations of the Company from April 2003 until October 2006.  Mr. Caudle had been Senior Vice President in charge of manufacturing for the Company since July 2000 and Vice President of Manufacturing Services of the Company since January 1999.  Mr. Caudle has been an employee of the Company since 1982.
 
CHARLES F. MCCOY— Age: 47 – Mr. McCoy has been the Vice President, Secretary and General Counsel of the Company since October 2000, the Corporate Compliance Officer since 2002, the Corporate Governance Officer of the Company since 2004, and Chief Risk Officer since July 2009.  Mr. McCoy has been an employee of the Company since January 2000, when he joined the Company as Corporate Secretary and General Counsel.
 
Each of the executive officers was elected by the Company’s Board at the Annual Meeting of the Board held on October 27, 2010.  Each executive officer was elected to serve until the next Annual Meeting of the Board or until his successor was elected and qualified.  No executive officer has a family relationship as close as first cousin with any other executive officer or director.
 
 
19

 
 
Item 2.  Properties
The following table consists of a summary of principal properties owned or leased by the Company as of June 26, 2011:
 
Location
 
Description
Polyester Segment Properties:
   
     
Domestic:
   
Yadkinville, NC
 
Five plants and three warehouses (1)
Reidsville, NC
 
One plant (1)
Mayodan, NC
 
One warehouse (2)
Cooleemee, NC
 
One warehouse (2)
     
Foreign:
   
Ciudad Arce, El Salvador                                                           
 
One plant (2)
     
Nylon Segment Properties:
   
     
Domestic
   
Madison, NC
 
One plant and one warehouse (1)
Fort Payne, AL
 
One central distribution center (1)
     
Foreign:
   
Bogota, Colombia
 
One plant (1)
     
International Segment Properties:
   
     
Foreign:
   
Alfenas, Brazil
 
One plant and one warehouse (1)
Sao Paulo, Brazil
 
One corporate office (2) and two sales offices (2)
Suzhou, China
 
One sales office (2)
(1) Owned in simple fee
   
(2) Leased facilities
   
 
In addition to the above properties, the Company owns a property located at 7201 West Friendly Ave. in Greensboro, North Carolina which serves as the corporate administrative office for all the Company’s segments.  Such property consists of a building containing approximately 100,000 square feet located on a tract of land containing approximately nine acres.
 
As of June 26, 2011, the Company owned approximately 4.4 million square feet of manufacturing, warehouse and office space.
 
Management believes all of its operating properties are well maintained and in good condition.  In fiscal year 2011, the Company’s manufacturing plants in the polyester segments operated at or near capacity while the manufacturing plants in the nylon and international segments operated below capacity.  Management does not perceive any capacity constraints in the foreseeable future.
 
Item 3.  Legal Proceedings
There are no pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which any of its property is the subject.
 
Item 4.  [Removed and Reserved]
 
 
20

 
 
PART II
 
Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
The Company’s common stock is listed for trading on the New York Stock Exchange (“NYSE”) under the symbol “UFI.”  The following table consists of the high and low sales prices of the Company’s common stock as reported on the NYSE Composite Tape for the Company’s two most recent fiscal years.
 
All per share prices, share amounts and computations using such amounts have been retroactively adjusted to reflect the November 3, 2010 1-for-3 reverse stock split.
 
   
High
   
Low
 
Fiscal year 2011:
           
First quarter ended September 26, 2010                                                                                                             
  $ 13.95     $ 10.92  
Second quarter ended December 26, 2010                                                                                                             
    17.21       12.69  
Third quarter ended March 27, 2011
    19.87       14.85  
Fourth quarter ended June 26, 2011                                                                                                             
    17.93       11.60  
                 
Fiscal year 2010:
               
First quarter ended September 27, 2009
  $ 11.07     $ 3.66  
Second quarter ended December 27, 2009                                                                                                             
    11.34       8.10  
Third quarter ended March 28, 2010                                                                                                             
    12.30       9.48  
Fourth quarter ended June 27, 2010                                                                                                             
    13.11       9.90  
 
As of September 6, 2011, there were 365 record holders of the Company’s common stock.  A significant number of the outstanding shares of common stock which are beneficially owned by individuals and entities are registered in the name of Cede & Co.  Cede & Co. is a nominee of the Depository Trust Company, a securities depository for banks and brokerage firms.  The Company estimates that there are approximately 4,100 beneficial owners of its common stock.
 
No dividends were paid in the past two fiscal years and none are expected to be paid in the foreseeable future.  The Indenture governing the 2014 notes and the Company’s First Amended Credit Agreement restrict its ability to pay dividends or make distributions on its capital stock. See "Footnote 12. Long-Term Debt" to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
 
Purchases of Equity Securities
Effective July 26, 2000, the Company’s Board of Directors authorized the repurchase of up to 3,333 shares of its common stock of which approximately 1,044 shares were subsequently repurchased.  The repurchase program was suspended in November 2003 and the Company has no immediate plans to reinstitute the program.  There is remaining authority for the Company to repurchase approximately 2,289 shares of its common stock under the repurchase plan.  The repurchase plan has no stated expiration or termination date.
 
On November 25, 2009, the Company agreed to purchase 628 shares of its common stock at a purchase price of $7.95 per share from Invemed Catalyst Fund, L.P. (based on an approximate 10% discount to the closing price of the common stock on November 24, 2009). The purchase of the shares was not pursuant to the Company’s stock repurchase plan. The transaction closed on November 30, 2009 at a total purchase price of $4,995.
 
 
21

 
 
PERFORMANCE GRAPH - SHAREHOLDER RETURN ON COMMON STOCK
 
Set forth below is a line graph comparing the cumulative total shareholder return on the Company’s common stock with (i) the New York Stock Exchange Composite Index, a broad equity market index, and (ii) a peer group selected by the Company in good faith (the “Peer Group”), assuming in each case, the investment of $100 on June 25, 2006 and reinvestment of dividends.  Including the Company, the Peer Group consists of eleven publicly traded textile companies, including Albany International Corp., Culp, Inc., Decorator Industries, Inc., Dixie Group, Inc., Hampshire Group, Limited, Interface, Inc., Joe’s Jeans Inc., JPS Industries, Inc., Lydall, Inc., and Mohawk Industries, Inc.
 
Graph Image
 
   
June 25, 2006
   
June 24, 2007
   
June 29, 2008
   
June 28, 2009
   
June 27, 2010
   
June 26, 2011
 
Unifi, Inc.
    100.00       94.58       85.76       47.80       136.27       137.06  
NYSE Composite
    100.00       113.81       113.81       80.35       94.15       113.50  
Peer Group
    100.00       133.82       90.33       46.07       72.01       88.19  
 
 
22

 
 
Item 6.  Selected Financial Data
 
   
Fiscal Year
 
   
2011
   
2010
   
2009
   
2008
   
2007
 
Summary of Operations:
                             
Net sales
  $ 712,812     $ 622,618     $ 558,415     $ 719,545     $ 696,422  
Cost of sales
    638,160       549,367       528,722       667,806       656,492  
Gross profit
    74,652       73,251       29,693       51,739       39,930  
Restructuring charges (recoveries)
    1,484       739       91       4,027       (157 )
Impairment of long-lived assets and goodwill (1)
          100       18,930       2,780       16,731  
Selling, general and administrative expenses
    44,659       47,934       40,309       48,729       46,419  
(Benefit) provision for bad debts
    (304 )     123       2,414       214       7,174  
Other operating (income) expense, net
    121       (1,033 )     (5,491 )     (6,427 )     (2,601 )
Operating income (loss)
    28,692       25,388       (26,560 )     2,416       (27,636 )
                                         
Non-operating (income) expense:
                                       
Interest income
    (2,511 )     (3,125 )     (2,933 )     (2,910 )     (3,187 )
Interest expense
    19,190       21,889       23,152       26,056       25,518  
Other non-operating expense
    606                          
Loss (gain) on extinguishment of debt (2)
    3,337       (54 )     (251 )           25  
Equity in (earnings) losses of unconsolidated affiliates
    (24,352 )     (11,693 )     (3,251 )     (1,402 )     4,292  
Impairment of investments in unconsolidated affiliates (3)
                1,483       10,998       84,742  
                                         
Income (loss) from continuing operations before income taxes
    32,422       18,371       (44,760 )     (30,326 )     (139,026 )
Provision (benefit) for income taxes
    7,333       7,686       4,301       (10,949 )     (21,769 )
Income (loss) from continuing operations
    25,089       10,685       (49,061 )     (19,377 )     (117,257 )
Income from discontinued operations, net of tax
                65       3,226       1,465  
Net income (loss)
  $ 25,089     $ 10,685     $ (48,996 )   $ (16,151 )   $ (115,792 )
                                         
Per share of common stock: (basic)*
                                       
Income (loss) from continuing operations
  $ 1.25     $ 0.53     $ (2.38 )   $ (0.96 )   $ (6.26 )
Income from discontinued operations, net of tax
                      0.16       0.08  
Net income (loss)
  $ 1.25     $ 0.53     $ (2.38 )   $ (0.80 )   $ (6.18 )
                                         
Per share of common stock: (diluted)*
                                       
Income (loss) from continuing operations
  $ 1.22     $ 0.52     $ (2.38 )   $ (0.96 )   $ (6.26 )
Income from discontinued operations, net of tax
                      0.16       0.08  
Net income (loss)
  $ 1.22     $ 0.52     $ (2.38 )   $ (0.80 )   $ (6.18 )
                                         
Balance Sheet Data:
                                       
Cash and cash equivalents
  $ 27,490     $ 42,691     $ 42,659     $ 20,248     $ 40,031  
Property, plant and equipment, net
    151,027       151,499       160,643       177,299       209,955  
Total assets
    537,376       504,512       476,932       591,531       665,953  
Total debt
    168,664       179,390       180,259       194,341       228,932  
Shareholders’ equity
    299,655       259,896       244,969       305,669       304,954  
Working capital
    212,969       174,464       175,808       186,817       196,808  
 
   *
All share amounts and computations using such amounts have been retroactively adjusted to reflect the November 3, 2010 1-for-3 reverse stock split.
(1)
See “Footnote 24.  Impairment Charges” included in the Company’s Consolidated Financial Statements included as Item 8 of this Annual Report on Form 10-K for a detailed discussion of impairments of long-lived assets and goodwill.
(2)
See “Footnote 12.  Long-term Debt” included in the Company’s Consolidated Financial Statements included as Item 8 of this Annual Report on Form 10-K for a detailed discussion of loss (gain) on extinguishment of debt.
(3)
See “Footnote 8.  Impairment Charges” included in the Company’s Consolidated Financial Statements included as Item 8 of Annual Report on Form 10-K for fiscal year ended June 28, 2009 for a detailed discussion of impairments of investment in unconsolidated affiliates.
 
 
23

 
 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-Looking Statements
The following discussion contains certain forward-looking statements about the Company’s financial condition and results of operations.
 
Forward-looking statements are those that do not relate solely to historical fact.  They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events.  They may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will,” or words or phrases of similar meaning.  They may relate to, among other things, the risks described under the caption “Item 1A—Risk Factors” above and:
 
● 
the competitive nature of the textile industry and the impact of worldwide competition;
 
● 
changes in the trade regulatory environment and governmental policies and legislation;
 
● 
the availability, sourcing and pricing of raw materials;
 
● 
general domestic and international economic and industry conditions in markets where the Company competes, such as recession and other economic and political factors over which the Company has no control;
 
● 
changes in consumer spending, customer preferences, fashion trends and end-uses;
 
● 
its ability to reduce production costs;
 
● 
changes in currency exchange rates, interest and inflation rates;
 
● 
the financial condition of its customers;
 
● 
its ability to sell excess assets;
 
● 
technological advancements and the continued availability of financial resources to fund capital expenditures;
 
● 
the operating performance of joint ventures, alliances and other equity investments;
 
● 
the accurate financial reporting of information from equity method investees;
 
● 
the impact of environmental, health and safety regulations;
 
● 
the loss of a material customer;
 
● 
the ability to protect its intellectual property;
 
● 
employee relations;
 
● 
volatility of financial and credit markets;
 
● 
the continuity of the Company’s leadership;
 
● 
availability of and access to credit on reasonable terms; and
 
● 
the success of the Company’s strategic business initiatives.
 
These forward-looking statements reflect the Company’s current views with respect to future events and are based on assumptions and subject to risks and uncertainties that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements.  These risks and uncertainties may include those discussed above or in “Item 1A—Risk Factors.”  New risks can emerge from time to time.  It is not possible for the Company to predict all of these risks, nor can it assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements.  The Company will not update these forward-looking statements, even if its situation changes in the future, except as required by federal securities laws.
 
 
24

 
 
Business Overview
The Company processes and sells both high-volume commodity products, specialized yarns designed to meet certain customer specifications, and PVA yarns with enhanced performance characteristics and higher expected gross margin percentages.  The Company sells its polyester and nylon products to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishings, automotive upholstery, industrial and other end-use markets.  The Company’s polyester yarn products include recycled Chip, POY, textured, solution and package dyed, twisted and beamed yarns.  The Company’s nylon products include textured, solution dyed and covered spandex products.  The Company maintains one of the industry’s most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the U.S.  In addition, the Company has a wholly-owned subsidiary in China focused on the sale and promotion of the Company’s specialty and PVA products in the Asian textile market, primarily in China.
 
The Company’s operations are managed in three operating segments, each of which is a reportable segment for financial reporting purposes:
Polyester Segment.  The polyester segment manufactures recycled Chip, POY, textured, dyed, twisted and beamed yarns with sales to other yarn manufacturers, knitters and weavers that produce yarn and/or fabric for the apparel, automotive upholstery, hosiery, home furnishings, industrial and other end-use markets.  The polyester segment consists of manufacturing operations in the U.S. and El Salvador.
 
Nylon Segment.  The nylon segment manufactures textured nylon and covered spandex products with sales to knitters and weavers that produce fabric for the apparel, hosiery, sock and other end-use markets.  The nylon segment consists of manufacturing operations in the U.S. and Colombia.
 
International Segment.  The international segment’s products include textured polyester and resale yarns. The international segment sells its yarns to knitters and weavers that produce fabric for the apparel, automotive upholstery, home furnishings, industrial and other end-use markets primarily in the South American and Asian regions.  The segment includes manufacturing and sales offices in Brazil and a sales office in China.
 
Recent Developments and Outlook:
Deleveraging Strategy.  During fiscal year 2011, the Company used excess operating cash and borrowings under its revolving credit facility to redeem $45,000 of its 2014 notes.  The Company subsequently completed an additional $10,000 redemption of its 2014 notes on August 5, 2011 at a redemption price of 102.875% which was financed through borrowings under its revolving credit facility.  Interest expense decreased from $21,889 in fiscal year 2010 to $19,190 in fiscal year 2011 primarily due to a lower average outstanding debt related to the Company’s 2014 notes and a decline in the weighted average interest rate from 11.9% in fiscal year 2010 to 11.0% in fiscal year 2011.  Going forward, the Company expects to continue to utilize its excess operating cash and borrowings under its revolving credit facility to redeem additional amounts of these 2014 notes.
 
Investment in Central America.  In order to more effectively service the Central American market, the Company began dismantling and relocating idled polyester texturing equipment from its Yadkinville, North Carolina facility to El Salvador during the third quarter of fiscal year 2010 and completed the startup of the UCA manufacturing facility in the second quarter of fiscal year 2011.  This investment has resulted in a net increase of the Company’s texturing capacity of approximately 15%.  The new manufacturing facility in El Salvador has allowed the Company to become a local supplier to the CAFTA region as global sourcing continues to move programs from Asia as the region becomes a competitive alternative to Asian supply chains for certain apparel categories.  The Company expects year-over-year volume growth from the CAFTA region and is in the process of adding additional texturing capacity to its plant in El Salvador to meet this future demand.
 
Investment in a Recycling Center.  On May 4, 2011, the Company officially opened its state-of-the-art Repreve recycling center in Yadkinville, North Carolina increasing its investment in the commercialization of recycled PVA products. This facility is expected to improve the availability of recycled raw materials and significantly increase product capabilities and competitiveness in this growing market.  The technology installed in this operation allows the Company to expand the Repreve brand by increasing the amount and types of recyclable material that can be processed through its facility. The Company expects this will also make it an even stronger partner in the development and commercialization of value-added products that meet the sustainability demands of today’s brands and retailers.  These investments and activities are critical to achieving the Company’s target of doubling its PVA sales within three years.
 
China Growth.  The Company’s Chinese subsidiary increased its net sales by approximately 60% and its sales volumes by approximately 40% in fiscal year 2011, as compared to fiscal year 2010, as the Company continued to improve its development, sourcing, resale and servicing of PVA products in the Asian region.
 
 
25

 
 
Operational Excellence.  Over the past year, the Company expanded its efforts in LEAN manufacturing and statistical process control in all of its operations aiming for measurable improvements in the cost of operations. These efforts have resulted in demonstrated savings over the last several years as well as greatly improved operational flexibility and are expected to result in continued improvement over the next several years.
 
Inflation.  For the most recently completed fiscal year and for the foreseeable future, the Company expects rising costs to continue for the consumables that it uses to produce and ship its products, as well as for its utilities and certain employee and medical costs.  While the Company attempts to mitigate these rising costs through its operational efficiencies and increased selling prices, inflation may become a factor that begins to negatively impact the Company’s profitability.
 
Raw Materials.  The feedstock for the Company’s raw materials have seen significant cost increases during the past year which peaked in the fourth quarter of fiscal year 2011.  In addition, PTA pricing, which is a major component of polyester, declined by 10% in Asia in the June 2011 quarter compared to the prior quarter, while it increased by 2% in the U.S.  While the Company expects the price difference to return to normal which would reverse the competitive edge that Asia had in the June 2011 quarter, such dramatic increases and changes in raw material costs could negatively impact the Company’s operating results if sales prices cannot be adjusted in tandem with such fast or unexpected rises in cost.
 
Brazil.  During fiscal year 2011, on a local currency basis, the Company’s Brazilian operation experienced approximately an 8% decline in its gross profits on a per unit basis.  Sales volumes have been negatively impacted over the prior fiscal year as market conditions weakened.  Gross profit was also negatively impacted by a higher average cost of raw materials.  The Brazilian operation has also been negatively impacted by increasing levels of imports of yarn, fabric and garments from Asia due in part to the strengthening of the Brazilian Real against the U.S. dollar.
 
Strategy.  Although the Company has improved its overall performance there are many challenges still ahead related to competition, inflation, raw material costs and weakness of the U.S. and global economies.  The Company believes the future success of its current business model will be based on the success of the regional free trade markets in which it trades and its ability to: increase its sales of PVA yarns including its Repreve recycled yarns; implement cost saving strategies; pass on raw material price increases to its customers; and strategically penetrate growth markets, such as China, Central America, and Brazil.  The Company will continue to focus on sustaining and continuously improving operations and profitability, and increasing its net sales and earnings in global markets.  The Company will strive to create additional value through mix enrichment, share gain, process improvement throughout the organization, and expanding the number of customers and programs using its high value and PVA yarns.
 
Key Performance Indicators
The Company continuously reviews performance indicators to measure its success.  The following are the indicators management uses to assess performance of the Company’s business:
● 
sales volume for the Company and for each of its reportable segments;
 
● 
gross profits and gross margin for the Company and for each of its reportable segments;
 
● 
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) represents net income or loss before net interest expense, income tax expense, and depreciation and amortization expense;
 
● 
Consolidated EBITDA represents EBITDA adjusted to exclude equity in earnings of unconsolidated affiliates.
 
● 
Adjusted EBITDA represents Consolidated EBITDA adjusted to exclude restructuring charges, startup costs, non-cash compensation expense net of distributions, gains or losses on extinguishment of debt, impairment of long-lived assets and goodwill impairment, and other adjustments.  Other adjustments include gains or losses on sales or disposals of property, plant, or equipment (“PP&E”), currency and derivative gains or losses, other non-operating expenses, and the gain from sale of nitrogen credits.  The Company may, from time to time, change the items included within Adjusted EBITDA;
 
● 
Segment Adjusted Profit equals segment gross profit, less segment SG&A expenses, plus segment depreciation and amortization;
 
● 
Adjusted working capital dollars (accounts receivable plus inventory less accounts payable and accruals) and Adjusted working capital as a percentage of sales are indicators of the Company’s production efficiency and ability to manage its inventory and receivables.
 
EBITDA, Consolidated EBITDA, Adjusted EBITDA and Segment Adjusted Profit are financial measurements that management uses to facilitate its analysis and understanding of the Company’s business operations. Management believes they are useful to investors because they provide a supplemental way to understand the underlying operating performance and debt service capacity of the Company.  The calculation of EBITDA, Consolidated EBITDA, Adjusted EBITDA, Segment Adjusted Profit, and Adjusted working capital are subjective measures based on management’s belief as to which items should be included or excluded, in order to provide the most reasonable view of the underlying operating performance of the business.  EBITDA, Consolidated EBITDA, Adjusted EBITDA, Segment Adjusted Profit and Adjusted working capital are not considered to be in accordance with generally accepted accounting principles (“non-GAAP measurements”) and should not be considered a substitute for performance measures calculated in accordance with GAAP.
 
 
26

 
 
Results of Operations
The following table presents a summary of net income (loss) for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Net sales                                                                                 
  $ 712,812     $ 622,618     $ 558,415  
Cost of sales                                                                                 
    638,160       549,367       528,722  
  Gross profit                                                                                 
    74,652       73,251       29,693  
Selling, general and administrative expenses and other operating expenses, net
    45,960       47,863       56,253  
  Operating income (loss)                                                                                 
    28,692       25,388       (26,560 )
Non-operating (income) expense, net                                                                                 
    (3,730 )     7,017       18,200  
Income (loss) from continuing operations before income taxes
    32,422       18,371       (44,760 )
Provision for income taxes                                                                                 
    7,333       7,686       4,301  
Income (loss) from continuing operations                                                                                 
    25,089       10,685       (49,061 )
Income from discontinued operations, net of tax                                                                                 
                65  
Net income (loss)                                                                               
  $ 25,089     $ 10,685     $ (48,996 )
 
The following table presents the reconciliations of net income (loss) to Consolidated EBITDA and Adjusted EBITDA for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Net income (loss)                                                                                
  $ 25,089     $ 10,685     $ (48,996 )
Provision for income taxes                                                                                
    7,333       7,686       4,301  
Interest expense, net                                                                                
    16,679       18,764       20,219  
Depreciation and amortization expense                                                                                
    25,562       26,312       31,326  
   EBITDA                                                                                
  $ 74,663     $ 63,447     $ 6,850  
                         
Equity in earnings of unconsolidated affiliates                                                                                
    (24,352 )     (11,693 )     (3,251 )
  Consolidated EBITDA                                                                                
  $ 50,311     $ 51,754     $ 3,599  
Restructuring charges                                                                                
    1,484       739       91  
Impairment of long-lived assets and goodwill                                                                                
          100       18,930  
Startup costs (1)                                                                                
    3,065       1,027        
Non-cash compensation, net of distributions                                                                                
    1,361       2,555       1,500  
Loss (gain) on extinguishment of debt                                                                                
    3,337       (54 )     (251 )
Impairment of investment in unconsolidated affiliates
                1,483  
Other                                                                                
    902       (865 )     (2,067 )
Adjusted EBITDA     $ 60,460     $ 55,256     $ 23,285  
 
The following table presents the reconciliation of Segment Adjusted Profit to Adjusted EBITDA for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Net sales                                                                               
  $ 712,812     $ 622,618     $ 558,415  
Cost of sales                                                                               
    638,160       549,367       528,722  
Gross profit                                                                               
    74,652       73,251       29,693  
Selling, general and administrative expenses                                                                               
    44,659       47,934       40,309  
Operating profit (loss)before other operating (income) expense, net
    29,993       25,317       (10,616 )
Depreciation and amortization of specific reportable segment assets
    25,543       26,201       31,183  
Segment Adjusted Profit                                                                               
  $ 55,536     $ 51,518     $ 20,567  
Startup costs (1)                                                                               
    3,065       1,027        
Asset consolidation and optimization expense                                                                               
                3,508  
Non-cash compensation, net of distributions                                                                               
    1,361       2,555       1,500  
Benefit (provision) for bad debts                                                                               
    304       (123 )     (2,414 )
Other                                                                               
    194       279       124  
Adjusted EBITDA                                                                               
  $ 60,460     $ 55,256     $ 23,285  
 
(1) During fiscal year 2011, startup costs related to costs associated with UCA operating expenses as well as the cost to install machinery in Yadkinville, North Carolina.  During fiscal year 2010, initial UCA operating expenses incurred related to pre-operating expenses including the hiring and training of new employees and the costs of operating personnel to initiate the new operations. Start-up expenses also include losses incurred in the period subsequent to when UCA assets became available for use but prior to the achievement of a reasonable level of production.
 
 
27

 
 
The following table presents the reconciliation of Segment Net Sales to Consolidated Net Sales for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Polyester segment net sales                                                                               
  $ 375,605     $ 308,691     $ 289,864  
Nylon segment net sales                                                                               
    163,354       165,098       151,736  
International segment net sales                                                                               
    173,853       148,829       116,815  
Subtotal segment net sales                                                                               
  $ 712,812     $ 622,618     $ 558,415  
                         
Consolidated net sales                                                                               
  $ 712,812     $ 622,618     $ 558,415  
 
The following table presents the reconciliation of Segment Gross Profit to Consolidated Gross Profit for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Polyester segment gross profit                                                                               
  $ 24,730     $ 21,622     $ 2,504  
Nylon segment gross profit                                                                               
    19,771       20,778       11,883  
International segment gross profit                                                                               
    30,151       30,851       15,306  
Subtotal segment gross profit                                                                               
  $ 74,652     $ 73,251     $ 29,693  
                         
Consolidated gross profit                                                                               
  $ 74,652     $ 73,251     $ 29,693  
 
The following table presents the reconciliation of Segment SG&A to Consolidated SG&A for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Polyester segment SG&A                                                                               
  $ 25,687     $ 28,732     $ 25,376  
Nylon segment SG&A                                                                               
    8,874       9,939       8,450  
International segment SG&A                                                                               
    10,098       9,263       6,483  
Subtotal segment SG&A                                                                               
  $ 44,659     $ 47,934     $ 40,309  
                         
Consolidated SG&A                                                                               
  $ 44,659     $ 47,934     $ 40,309  
 
The following table presents the reconciliation of Segment Depreciation and Amortization to Consolidated Depreciation and Amortization for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Polyester segment depreciation and amortization                                                                               
  $ 17,924     $ 19,679     $ 20,236  
Nylon segment depreciation and amortization                                                                               
    3,287       3,477       6,859  
International segment depreciation and amortization
    4,332       3,045       4,088  
Subtotal segment depreciation and amortization                                                                               
  $ 25,543     $ 26,201     $ 31,183  
Depreciation included in other operating (income) expense
    19       111       143  
Amortization included in interest expense                                                                             
    415       1,104       1,147  
Consolidated depreciation and amortization                                                                               
  $ 25,977     $ 27,416     $ 32,473  
 
 
28

 
 
The following table presents Segment Adjusted Profit for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Polyester Segment Adjusted Profit                                                                             
  $ 16,967     $ 12,569     $ (2,636 )
Nylon Segment Adjusted Profit                                                                       
    14,184       14,316       10,292  
International Segment Adjusted Profit                                                                         
    24,385       24,633       12,911  
Subtotal Segment Adjusted Profit                                                                               
  $ 55,536     $ 51,518     $ 20,567  
 
Review of Fiscal Year 2011 Results of Operations Compared to Fiscal Year 2010
 
Consolidated Overview
The following table presents the net income components for fiscal year 2011 and fiscal year 2010.  The table also presents each of the net income components as a percent to total net sales and the percentage increase or decrease of such components over the prior year:
 
   
2011
 
2010
     
         
% to Total
       
% to Total
   
% Inc. (Dec.)
Consolidated
                         
Net sales
 
$
712,812
 
100.0
 
$
622,618
 
100.0
   
14.5
Cost of sales
   
638,160
 
89.5
   
549,367
 
88.2
   
16.2
Gross profit
   
74,652
 
10.5
   
73,251
 
11.8
   
1.9
Restructuring charges
   
1,484
 
0.2
   
739
 
0.1
   
100.8
Impairment of long-lived assets
   
 
   
100
 
   
Selling, general and administrative expenses
   
44,659
 
6.3
   
47,934
 
7.7
   
(6.8)
(Benefit) provision for bad debts
   
(304)
 
   
123
 
   
(347.2)
Other operating (income) expense, net
   
121
 
   
(1,033)
 
(0.1)
   
(111.7)
Operating income
   
28,692
 
4.0
   
25,388
 
4.1
   
13.0
Interest expense, net
   
16,679
 
2.3
   
18,764
 
3.0
   
(11.1)
Earnings from unconsolidated affiliates
   
(24,352)
 
(3.4)
   
(11,693)
 
(1.9)
   
108.3
Other non-operating (income) expense, net
   
3,943
 
0.6
   
(54)
 
   
Income from operations before income taxes
   
32,422
 
4.5
   
18,371
 
3.0
   
76.5
Provision for income taxes
   
7,333
 
1.0
   
7,686
 
1.3
   
(4.6)
Net income
 
$
25,089
 
3.5
 
$
10,685
 
1.7
   
134.8
 
Consolidated Net Sales
Consolidated net sales increased by $90,194, or 14.5%, for fiscal year 2011 compared to the prior year as a result of improved sales volumes of 5.9% related to capacity expansion in El Salvador and the ongoing recovery in the global economy.  On a consolidated basis, the weighted-average selling price per pound increased by 8.6% compared to the prior fiscal year driven by mix enrichment and the Company’s ability to pass along increasing raw material prices experienced throughout most of the year which peaked in the fourth quarter of fiscal year 2011.
 
Consolidated Gross Profit
Consolidated gross profit increased by $1,401 to $74,652 for fiscal year 2011 as compared to fiscal year 2010.  This increase in gross profit was primarily attributable to higher sales volumes and improved conversions (net sales less raw material cost), partially offset by increased manufacturing cost.  Conversion on a per unit basis improved 0.4% as the Company improved its mix through increased PVA sales.  Total manufacturing costs increased $13,029 as a result of the higher volumes and, on a unit basis, increased 1.5% which primarily reflects lower capacity utilization rates within the nylon segment and certain inflationary costs.
 
 
29

 
 
Polyester Segment Gross Profit
The following table presents the segment gross profit components for the polyester segment for fiscal years 2011 and 2010.  The table also presents the percent to net sales and the percentage increase or decrease over the prior year:
 
   
2011
 
2010
     
         
% to
 Net Sales
       
% to
 Net Sales
   
% Inc.(Dec.)
Net sales                                               
 
$
375,605
 
100.0
 
$
308,691
 
100.0
   
21.8
Cost of sales                                               
   
350,875
 
93.4
   
287,069
 
93.0
   
22.2
Gross profit                                               
   
24,730
 
6.6
   
21,622
 
7.0
   
14.4
 
In fiscal year 2011, polyester net sales increased by 21.8% compared to fiscal year 2010.  The Company’s polyester segment sales volumes increased 11.8% and the weighted-average selling price increased 10%.  Increased volumes are primarily a result of increased demand for the segment’s products due to improvements in retail sales of apparel and increased production levels from the CAFTA region at the expense of Asian supply chains.  The polyester segment’s new manufacturing facility in El Salvador has allowed the Company to participate in additional volume opportunities as global sourcing continues to move to the CAFTA region from Asia.  The increase in weighted-average selling price primarily reflects increases to recover lost conversion as raw material prices increased throughout most of the current fiscal year.

Gross profit for the polyester segment increased 14.4% over fiscal year 2010.  On a unit basis, gross profit improved 2.3% as compared to the prior year.  The increase in gross profit is mainly attributable to increased volumes and mix enrichment from higher PVA sales.  Polyester conversion on a per unit basis remained flat against the prior year despite higher levels of PVA sales as increases in sales prices lagged increases in raw material costs.

Total manufacturing costs increased 11.0% for fiscal year 2011 as compared to the prior year and decreased 0.7% on a per unit basis.  Manufacturing costs were primarily unfavorably impacted by higher wage and fringe benefit costs of $3,149, packaging supplies of $2,596, utilities of $1,859, depreciation expenses of $1,228 and other fixed costs of $1,854.  The increases for employee related costs are driven primarily by both the total cost per employee (due to wage increases and rising medical costs) and the number of employees at the new locations in El Salvador and the Company’s recycling center.  The increases in packaging and utilities are due to increased consumption from higher capacity utilization, as well as inflation negatively impacting these input costs.  The other fixed costs primarily relate to certain UCA start-up costs and losses incurred during the period in which UCA assets became available for use but prior to the achievement of a reasonable level of production.  The segment’s variable manufacturing costs decreased by approximately 2.7% on a per unit basis due to a higher capacity utilization offsetting the spending increases.  The segment’s fixed manufacturing costs per unit increased approximately 7% due to the negative effects of the start-up costs and higher depreciation expenses.

The polyester segment net sales and gross profit as a percentage of total consolidated amounts were 52.7% and 33.1% for fiscal year 2011 compared to 49.6% and 29.5% for fiscal year 2010, respectively.
 
Outlook for 2012:
The Company expects to see improvements from its new recycling center and plant operations in El Salvador, however, these improvements will be mitigated by the negative effects of inflation for certain consumables and utilities as well as increasing employee costs.  For the polyester segment, volumes are expected to be flat and selling prices are expected to move in tandem with the changes in raw material costs.  The emphasis on and success of PVA products greatly impacts the operating results of this segment.
 
Nylon Segment Gross Profit
The following table presents the segment gross profit components for the nylon segment for fiscal years 2011 and 2010.  The table also presents the percent to net sales and the percentage increase or decrease over the prior year:
 
   
2011
 
2010
   
         
% to
Net Sales
       
% to
Net Sales
 
% Inc.(Dec.)
Net sales                                               
 
$
163,354
 
100.0
 
$
165,098
 
100.0
 
(1.1)
Cost of sales                                               
   
143,583
 
87.9
   
144,320
 
87.4
 
(0.5)
Gross profit                                               
   
19,771
 
12.1
   
20,778
 
12.6
 
(4.8)
 
Fiscal year 2011 nylon segment net sales decreased 1.1% compared to fiscal year 2010.  Nylon segment sales volumes decreased by 2.2% while the weighted-average selling price increased by 1.1%.  The decline in nylon sales volume was due to softening demand primarily in the hosiery and sock end-use markets during the second half of fiscal year 2011.  The increase in the average selling price was primarily a result of increases in raw material pricing partially offset by a shift in the mix of products sold.
 
 
30

 
 
Gross profit for the nylon segment decreased 4.8% in fiscal year 2011 as compared to fiscal year 2010.  Total conversion dollars decreased $553 or 0.8% primarily as a result of lower sales volumes and the shift in mix.  Manufacturing costs increased 3.7% on a per unit basis.  During 2011, the segment experienced a slightly lower capacity utilization rate.  The lower utilization rate coupled with higher packaging, warehousing and certain allocated manufacturing costs have caused the increase in per unit cost.  Efforts to decrease spending for utilities and wages were unable to offset these increases.

The nylon segment net sales and gross profit, as a percentage of total consolidated amounts, were 22.9% and 26.5% for fiscal year 2011 compared to 26.5% and 28.4% for fiscal year 2010, respectively.
 
Outlook for 2012:
For the nylon segment, volumes are expected to be flat and selling prices will move in tandem with the changes in raw material costs.  This segment is very susceptible to changes in product mix and the fixed nature of the majority of its spending makes production volume a key metric.  The Company continues to predict inflationary costs, which if not offset by manufacturing efficiencies, could negatively impact the segment’s profitability.
 
International Segment Gross Profit
The following table presents the segment gross profit components for the international segment for fiscal years 2011 and 2010.  The table also presents the percent to net sales and the percentage increase or decrease over the prior year:
 
   
2011
 
2010
   
         
% to
 Net Sales
       
% to
Net Sales
 
% Inc.(Dec.)
Net sales                                               
 
$
173,853
 
100.0
 
$
148,829
 
100.0
 
16.8
Cost of sales                                               
   
143,702
 
82.7
   
117,978
 
79.3
 
21.8
Gross profit
   
30,151
 
17.3
   
30,851
 
20.7
 
(2.3)
 
International segment net sales for fiscal year 2011 increased 16.8% as compared to fiscal year 2010.  International segment sales volumes decreased 2.7% and the weighted-average selling price increased 19.5% as compared to the prior year.  Gross profit for the international segment decreased compared to the prior year which is comprised of a decline in gross profit in Brazil which was partially offset by an increase in gross profit in Unifi Textiles Suzhou Co., Ltd. (“UTSC”).
 
During fiscal year 2011, on a local currency basis, the Company’s Brazilian operation experienced 7.8% decline in its gross profits on a per unit basis.  Sales volumes have decreased 9.6% over the prior fiscal year due to increased competition from imported yarn, fabric and garments from Asia.  This increased market penetration is due to the recent strengthening of the Brazilian Real against the U.S. dollar and dramatic changes in Asian polyester prices over the last half of the fiscal year.  Variable manufacturing costs increased by 18.6% on a per unit basis, primarily as a result of increases in packing materials and utilities.  Fixed manufacturing costs increased 19.0% on a per unit basis, mainly due to higher depreciation expense and increased salaries and fringe benefit costs.  The increases in per unit manufacturing costs also reflect a lower capacity utilization rate resulting from lower volumes.  On a U.S. dollar basis, net sales increased 10.7% in fiscal year 2011 compared to the prior year which includes a $9,863 positive currency exchange impact.  Gross profit on a U.S. dollar basis decreased 10.3%.

The Company’s Chinese subsidiary increased its polyester net sales by approximately 60% and its sales volumes by approximately 40% in fiscal year 2011 as compared to 2010 as the Company continued to improve its development, sourcing, resale and servicing of PVA products in the Asian region.

The international segment net sales and gross profit as a percentage of total consolidated amounts were 24.4% and 40.4% for fiscal year 2011 compared to 23.9% and 42.1% for fiscal year 2010, respectively.
 
Outlook for 2012:
The Company expects to see continued improvements in its Chinese subsidiary as volumes and PVA sales increase.  The Company expects volumes and profitability for its Brazilian operations to temporarily decline during the first half of fiscal year 2012 due to the increasing levels of imports and higher average raw material costs.  During the second half of fiscal year 2012, the Company expects its Brazilian operation to return to more normalized levels, with a slight weakening of the Brazilian Real against the U.S. dollar and its raw material prices returning to more normal levels.
 
 
31

 
 
Consolidated Selling General & Administrative Expenses
Consolidated selling, general and administrative expenses (“SG&A”) decreased in total and as a percentage of net sales for fiscal year 2011 as compared to the prior year.  The 7% decrease in SG&A costs of $3,275 for fiscal year 2011 was primarily a result of a decrease of $1,213 in fringe benefit costs, a decrease of $1,160 in non-cash deferred compensation costs, and a reduction in depreciation and amortization expenses of $1,264.  The reduction in fringe benefit costs is mainly related to reductions in certain variable compensation programs.
 
Consolidated Restructuring and Impairments
The Company incurred $948 and $770 related to the relocation of idled polyester equipment from Yadkinville, North Carolina to El Salvador during fiscal years 2011 and 2010, respectively.  In addition, the Company incurred $628 for costs of reinstalling idle texturing equipment to replace the manufacturing capacity in its Yadkinville, North Carolina facility in fiscal year 2011.  These costs were charged to restructuring expense as incurred.
 
Consolidated (Benefit) Provision for Bad Debts
Due to improved economic conditions, the overall health of the Company’s accounts receivable and certain risk accounts continued to improve.  As a result, the Company recorded a $304 benefit as compared to an expense of $123 recorded in the prior fiscal year.
 
Consolidated Other Operating (Income) Expense, Net
The following table presents the components of other operating (income) expense, net for fiscal years 2011 and 2010:
   
2011
   
2010
 
             
Net loss on sale or disposal of PP&E                                                                                                    
  $ 368     $ 680  
Currency gains                                                                                                    
    (19 )     (145 )
Gain from sale of nitrogen credits                                                                                                    
          (1,400 )
Other, net                                                                                                    
    (228 )     (168 )
Other operating (income) expense, net                                                                                                
  $ 121     $ (1,033 )
 
Consolidated Interest Expense, Net
Interest expense decreased from $21,889 in fiscal year 2010 to $19,190 in fiscal year 2011 primarily due to lower average outstanding debt related to the Company’s 2014 notes.  During the current fiscal year, the Company used excess operating cash and lower rate borrowings under its revolving credit facility to redeem $45,000 of its 2014 notes.  The weighted average interest rate of Company debt for fiscal year 2011 and 2010 was 11.0% and 11.9%, respectively.  Interest income was $2,511 in fiscal year 2011 and $3,125 in fiscal year 2010.
 
Outlook for 2012:
As a result of the above redemptions, the Company expects to incur approximately $2.3 million less net interest expense in fiscal year 2012.  As the Company executes on its Deleveraging Strategy, the trend for declining interest expense is expected to continue.
 
Consolidated Non-Operating (Income) Expenses, net
Non-operating (income) expense consists of losses from extinguishment of debt of $3,337 in fiscal year 2011 and gains on extinguishments of debt of $54 in fiscal year 2010. In addition, the Company incurred charges of $606 in fiscal year 2011 primarily for fees associated with an unsuccessful debt refinancing.
 
Consolidated Income Taxes
   
2011
   
2010
 
Income (loss) from continuing operations before income taxes:
           
United States                                                                                                      
  $ 14,737     $ (4,399 )
Foreign                                                                                                      
    17,685       22,770  
    $ 32,422     $ 18,371  
 
The provision for (benefit from) income taxes, net for fiscal years 2011 and 2010 consists of the following:
   
2011
   
2010
 
Federal                                                                                                      
  $ 3     $ (48 )
Foreign                                                                                                      
    7,330       7,734  
Income tax provision                                                                                                        
  $ 7,333     $ 7,686  
 
 
32

 
 
The Company recognized income tax expense at an effective tax rate of 22.6% and 41.8% for fiscal years 2011 and 2010, respectively.  The lower effective tax rate for 2011 compared to the statutory rate of 35% is due to the reduction in the Company’s valuation allowance in 2011, partially offset by taxes on repatriated foreign earnings.  During 2011, the Company changed its indefinite reinvestment assertion related to the future repatriation of Unifi do Brasil, Ltda. (“UDB”) earnings and profits by $26,630.
 
The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries due to negative evidence concerning the realization of those deferred tax assets in recent years.  The Company had a valuation allowance of $30,164 and $39,988 as of June 26, 2011 and June 27, 2010, respectively.  The $9,824 net decrease in fiscal year 2011 resulted primarily from a decrease in temporary differences, the effects of the change in the indefinite reinvestment assertion, and a utilization of state and federal net operating loss carryforwards.
 
The Company continually evaluates both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released.  A release of the valuation allowance could have a material effect on earnings in the period of release.
 
Consolidated Equity in (Earnings) Losses of Unconsolidated Affiliates
The Company participates in joint ventures in the U.S. and in Israel.  As of June 26, 2011, the Company has $91,258 invested in these unconsolidated affiliates.  For fiscal year 2011, $24,352 of the Company’s $32,422 of income from continuing operations before income taxes was generated from its investments in these four unconsolidated affiliates.  See “Footnote 22.  Investments in Unconsolidated Affiliates and Variable Interest Entities” to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a detailed discussion of the Company’s investments in these joint ventures.
 
Earnings from the Company’s unconsolidated equity affiliates was $24,352 in fiscal year 2011 compared to $11,693 in fiscal year 2010.  The Company’s 34% share of PAL’s earnings increased from $11,605 in fiscal year 2010 to $22,655 in fiscal year 2011 primarily due to improved economic conditions, increased sales volumes, and the timing of the recognition of income related to the economic assistance benefits. The remaining increase relates to the improved performance of UNF and UNF America which was primarily driven by increased volumes and capacity utilization.
 
Outlook for 2012:
For fiscal year 2012, the Company expects no significant changes in the earnings from unconsolidated affiliates.
 
Consolidated Net Income
Net income for fiscal year 2011 was $25,089, or $1.25 per basic share, compared to net income of $10,685, or $0.53 per basic share, for the prior fiscal year.  The Company’s increased profitability was due primarily to higher sales volumes over the prior fiscal year, improved operational efficiencies, decreased SG&A expenses, and increased earnings from the Company’s unconsolidated affiliates.
 
Consolidated Adjusted EBITDA
Adjusted EBITDA for fiscal year 2011 increased $5,203 versus fiscal year 2010.  As discussed above, consolidated gross profit increased $1,401 while SG&A decreased $3,275.  The primary differences between the aforementioned changes in gross profit and SG&A expenses and the Company’s key performance Adjusted EBITDA metric are primarily start-up costs, non-cash compensation charges, provision (benefit) for bad debt, other operating (income) expense items and depreciation.
 
 
33

 
 
Review of Fiscal Year 2010 Results of Operations Compared to Fiscal Year 2009
The following table presents the net income components for fiscal year 2010 and fiscal year 2009.  The table also presents each of the net income components as a percent to total net sales and the percentage increase or decrease of such components over the prior year:
 
   
2010
 
2009
   
         
% to Total
       
% to Total
 
% Inc. (Dec.)
Consolidated
                       
Net sales
 
$
622,618
 
100.0
 
$
558,415
 
100.0
 
11.5
Cost of sales
   
549,367
 
88.2
   
528,722
 
94.7
 
3.9
Gross profit
   
73,251
 
11.8
   
29,693
 
5.3
 
146.7
Restructuring charges
   
739
 
0.1
   
91
 
 
Impairment of long-lived assets and goodwill
   
100
 
   
18,930
 
3.4
 
Selling, general and administrative expenses
   
47,934
 
7.7
   
40,309
 
7.2
 
18.9
Provision for bad debts
   
123
 
   
2,414
 
0.4
 
(94.9)
Other operating (income) expense, net
   
(1,033)
 
(0.1)
   
(5,491)
 
(1.0)
 
(81.2)
Operating income (loss)
   
25,388
 
4.1
   
(26,560)
 
(4.7)
 
(195.6)
Interest expense, net
   
18,764
 
3.0
   
20,219
 
3.6
 
(7.2)
Earnings from unconsolidated affiliates
   
(11,693)
 
(1.9)
   
(3,251)
 
(0.5)
 
259.7
Non-operating (income) expense, net
   
(54)
 
   
1,232
 
0.2
 
(104.4)
Income (loss) from continuing operations before income taxes
   
18,371
 
3.0
   
(44,760)
 
(8.0)
 
(141.0)
Provision for income taxes
   
7,686
 
1.3
   
4,301
 
0.8
 
78.7
Income (loss) from continuing operations
   
10,685
 
1.7
   
(49,061)
 
(8.8)
 
(121.8)
Income from discontinued operations, net of tax
   
 
   
65
 
 
Net income (loss)
 
$
10,685
 
1.7
 
$
(48,996)
 
(8.8)
 
(121.8)
 
Consolidated Net Sales
Consolidated net sales from continuing operations increased by $64,203, or 11.5%, for fiscal year 2010 compared to the prior year.  For the fiscal year 2010, unit sales volumes increased by 15.9% reflecting improvements for all segments.  The increase in sales volumes predominantly for the Company’s commodity products was attributable to the recovery from the recent global economic downturn which had impacted all textile supply chains and markets.  The weighted-average selling price per unit for the Company’s products on a consolidated basis decreased 4.4% as compared to the prior fiscal year.
 
Consolidated Gross Profit
Consolidated gross profit from continuing operations increased $43,558 to $73,251 for fiscal year 2010.  This increase in gross profit was primarily attributable to higher sales volumes, improved conversions (net sales less raw material cost) and improved per unit manufacturing costs for all reportable segments which resulted in a gross margin increase from 5.3% to 11.8%.  Consolidated conversion per unit improved 5.2% as the Company recovered previously lost margins resulting from significantly higher raw material cost in the prior year.  However, this recovery was mitigated by the impact of rising average raw material prices which began during the second quarter of fiscal year 2010.  Gross profit was also positively impacted by improvements in manufacturing costs which declined 16.8% on a per unit basis.  The improvements in manufacturing costs were attributable to increased capacity utilization and to the Company’s continued focus on process improvements.
 
Polyester Segment Gross Profit
The following table presents the segment gross profit components for the polyester segment for fiscal years 2010 and 2009.  The table also presents the percent to net sales and the percentage changes versus the prior year:
 
   
2010
 
2009
   
         
% to
 Net Sales
       
% to
 Net Sales
 
% Inc.(Dec.)
                         
Net sales                                               
 
$
308,691
 
100.0
 
$
289,864
 
100.0
 
6.5
Cost of sales                                               
   
287,069
 
93.0
   
287,360
 
99.1
 
(0.1)
Gross profit                                               
   
21,622
 
7.0
   
2,504
 
0.9
 
763.5
 
 
34

 
 
In fiscal year 2010, net sales for the polyester segment increased by $18,827, or 6.5% compared to fiscal year 2009.  The Company’s polyester segment sales volumes increased approximately 14.2% and the weighted-average selling price decreased approximately 7.7%.   The improvement in polyester sales volume in fiscal year 2010 related to increases in retail sales which favorably impacted the Company’s core markets when compared to fiscal year 2009.  The decrease in weighted-average selling price reflected changes in the Company’s sales product mix to a higher percentage of commodity products following the market shifts and to fully utilize the Company’s manufacturing capacity. Sales of PVA yarns were not significantly impacted by the recession.  Conversion profits on a unit basis remained flat.  Gross profit was also favorably impacted by significant reductions in per unit manufacturing costs of approximately 17% due to higher capacity utilization levels and various operational improvements implemented during the 2010 fiscal year as well as declines in certain employee, depreciation, project and property tax expenses.

UCA began its resale operations during the third quarter of fiscal year 2010 and operated at a slightly negative gross profit as a result of inefficiencies during the startup of the facility.

The polyester segment net sales and gross profit as a percentage of total consolidated amounts were 49.6% and 29.5% for fiscal year 2010 compared to 51.9% and 8.4% for fiscal year 2009, respectively.
 
Nylon Segment Gross Profit
The following table presents the segment gross profit components for the nylon segment for fiscal years 2010 and 2009.  The table also presents the percent to net sales and the percentage changes versus the prior year:
   
2010
 
2009
   
         
% to
 Net Sales
       
% to
Net Sales
 
% Inc.(Dec.)
         
Net sales                                               
 
$
165,098
 
100.0
 
$
151,736
 
100.0
 
8.8
Cost of sales                                               
   
144,320
 
87.4
   
139,853
 
92.2
 
3.2
Gross profit                                               
   
20,778
 
12.6
   
11,883
 
7.8
 
74.9
 
After being negatively impacted by the economic downturn during fiscal year 2009, the nylon segment sales improved considerably during fiscal year 2010 due to the recovery of volumes in the legwear and apparel markets and strength in regional sourcing.  Fiscal year 2010 nylon net sales increased by $13,362, or 8.8% compared to fiscal year 2009.  The Company’s nylon segment sales volumes increased by 11.3% while the weighted-average selling price decreased by 2.5%.  The reduction in the average selling price was primarily due to a shift in the mix of products sold. Gross profit for the nylon segment also increased due to improvements in conversion and manufacturing costs.  Declines in raw material costs from 2009 levels led to higher conversions on a per unit basis.  Higher utilization rates led to favorable changes in the manufacturing costs per unit despite inflationary pressures for certain employee, utility and packaging costs.

The nylon segment net sales and gross profit as a percentage of total consolidated amounts were 26.5% and 28.4% for fiscal year 2010 compared to 27.2% and 40.0% for fiscal year 2009, respectively.
 
International Segment Gross Profit
The following table presents the segment gross profit components for the international segment for fiscal years 2010 and 2009.  The table also presents the percent to net sales and the percentage change versus the prior year:
   
2010
 
2009
   
         
% to
 Net Sales
       
% to
Net Sales
 
% Inc.(Dec.)
Net sales                                               
 
$
148,829
 
100.0
 
$
116,815
 
100.0
 
27.4
Cost of sales                                               
   
117,978
 
79.3
   
101,509
 
86.9
 
16.2
Gross profit
   
30,851
 
20.7
   
15,306
 
13.1
 
101.6
 
In fiscal year 2010, international segment net sales increased by $32,014, or 27.4% compared to fiscal year 2009.  The Company’s international segment sales volumes increased 21.4% and the weighted-average selling price increased approximately 6.0%.  Gross profit for the international segment increased $15,545 compared to the prior year. Total conversion increased $18,824 or 30.9% on a per unit basis as result of increased volumes and improved conversion margin in Brazil. Manufacturing costs increased by $3,279 but decreased 11.2% on a per unit basis which reflects higher volumes and a higher capacity utilization rate in Brazil.
 
 
35

 
 
The Company’s operation in Brazil increased its net sales and volumes versus fiscal year 2009 but experienced declines in selling prices that were offset by greater corresponding declines in raw materials which led to a higher conversion per unit.  The increase in sales volumes was primarily due to the recovery from the recent global economic downturn which had impacted all textile supply chains and markets.  Higher utilization rates led to lower manufacturing costs per unit.  Changes in currency also contributed to the improvement versus fiscal year 2009.
 
The Company’s Chinese subsidiary, UTSC, increased its net sales in fiscal year 2010 compared to 2009 as the Company strategically improved its development, sourcing, and servicing of PVA products in the Asian region.  UTSC began selling products to its customers in February 2009.
 
The international segment net sales and gross profit as a percentage of total consolidated amounts were 23.9% and 42.1% for fiscal year 2010 compared to 20.9% and 51.5% for fiscal year 2009, respectively.

Consolidated SG&A Expenses
Consolidated SG&A expenses increased by $7,625 or 18.9% for fiscal year 2010.  The increase in SG&A for fiscal year 2010 was primarily a result of a $5,172 increase in fringe benefit costs which was primarily related to higher variable compensation expenses. The remaining SG&A expenses increased due to $965 in non-cash deferred compensation costs related to stock option grants, $564 for credit issuance and in sales commissions, and $924 of sales and marketing expenses, employee relations and other miscellaneous expenses.
 
Consolidated Restructuring and Impairments
On January 11, 2010, the Company announced the creation of UCA.  With a base of operations established in El Salvador, UCA serves customers primarily in the Central American region.  The Company began dismantling and relocating idled polyester equipment from its Yadkinville, North Carolina facility to El Salvador during the third quarter of fiscal year 2010 and completed the startup of the UCA manufacturing facility in the second quarter of fiscal year 2011. The Company incurred $770 in polyester equipment relocation costs during fiscal year 2010.
 
During fiscal year 2009, the Company determined that a review of the remaining assets held for sale located in Kinston, North Carolina was necessary as a result of sales negotiations.  As a result of this review, the Company determined that the carrying value of the assets exceeded the fair value and recorded $350 in non-cash impairment charges related to these assets.  During fiscal year 2010, the Company completed the disposal of the assets held for sale in Kinston, North Carolina and, based on the contract price the Company recorded an additional $100 non-cash impairment charge.
 
Based on a decline in its market capitalization during fiscal year 2009 and difficult market conditions, the Company determined that it was appropriate to re-evaluate the carrying value of its goodwill.  As a result of the findings, the Company determined that the goodwill was impaired and recorded an impairment charge of $18,580 in fiscal year 2009.
 
Consolidated Provision for Bad Debts
For fiscal year 2010, the Company recorded a $123 provision for uncollectible accounts.  This compares to a provision of $2,414 recorded in the prior fiscal year.  In fiscal year 2009, the Company experienced unfavorable adjustments as a result of the global decline in economic conditions and the negative effects on both the Company’s accounts receivable aging and its customers; however, in fiscal year 2010, the improved health of the economy and the Company’s accounts receivable aging reversed this trend.
 
Consolidated Other Operating (Income) Expense, Net
The following table presents the components of other operating (income) expense for fiscal years 2010 and 2009:
   
2010
   
2009
 
             
Net (gain) loss on sale or disposal of PP&E                                                                                                        
  $ 680     $ (5,856 )
Gain from sale of nitrogen credits
    (1,400 )      
Currency (gains) losses                                                                                                        
    (145 )     354  
Other, net                                                                                                        
    (168 )     11  
    $ (1,033 )   $ (5,491 )
 
As part of the Company’s acquisition of certain manufacturing assets and inventory located in Kinston, North Carolina from INVISTA, the Company obtained waste water discharge permits (“nitrogen credits”) that were previously issued to INVISTA by the North Carolina Department of Environmental and Natural Resources (“DENR”).  In accordance with the rights afforded the Company as part of this acquisition, the Company sold and received cash proceeds of $1,400 from the sale of the excess nitrogen credits during the third quarter of fiscal year 2010.
 
 
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On September 29, 2008, the Company entered into an agreement to sell certain real property and related assets located in Yadkinville, North Carolina for $7,000.  On December 19, 2008, the Company completed the sale which resulted in net proceeds of $6,646 and a net pre-tax gain of $5,238 in the second quarter of fiscal year 2009.
 
Consolidated Interest Expense, net
Interest expense decreased from $23,152 in fiscal year 2009 to $21,889 in fiscal year 2010 primarily due to lower average outstanding debt related to the Company’s 2014 notes.  The weighted average interest rate of debt outstanding at June 27, 2010 and June 28, 2009 was 11.9% and 11.5%, respectively.  Interest income was $3,125 in fiscal year 2010 and $2,933 in fiscal year 2009.
 
Consolidated Non-Operating (Income) Expenses, net
Other non-operating (income) expense consists of gains from extinguishment of debt of $54 and $251 in fiscal years 2010 and 2009, respectively. During 2009, the Company renegotiated a proposed agreement to sell its interest in YUFI and recorded an impairment charge of $1,483 related to a change in the fair value of its investment and certain disputed accounts receivable.
 
Consolidated Income Taxes
Income (loss) from continuing operations before income taxes consists of the following:
   
2010
   
2009
 
Income (loss) from continuing operations before income taxes:
           
United States                                                                                                    
  $ (4,399 )   $ (54,310 )
Foreign                                                                                                    
    22,770       9,550  
    $ 18,371     $ (44,760 )
 
The provision for (benefit from) income taxes, net applicable to continuing operations for fiscal years 2010 and 2009 consists of the following:
   
2010
   
2009
 
             
Federal                                                                                                    
  $ (48 )   $  
Foreign                                                                                                    
    7,734       4,301  
Income tax provision                                                                                                      
  $ 7,686     $ 4,301  
 
The Company recognized income tax expense at an effective tax rate of 41.8% and 9.6% for fiscal years 2010 and 2009, respectively.  Income tax expense in any period is typically different than such expense determined at the U.S. federal statutory rate primarily due to losses in certain jurisdictions for which no income tax benefits are anticipated, income in foreign jurisdictions where taxes are calculated at statutory rates different than the U.S. federal statutory rate, foreign withholding taxes for which credits are not anticipated, and U.S. state income taxes.  The key difference between the Company’s effective tax rate for 2010 and the statutory tax rate of 35% is due to the mix of tax jurisdictions in which profits or losses exist and the effects of the repatriation of foreign earnings.  The key difference between the Company’s 2010 effective tax rate and the Company’s 2009 effective tax rate relates to the results of the U.S. operations and the assumptions related to the Company’s valuation allowances.  The Company had a valuation allowance of $39,988 and $40,118 as of June 27, 2010 and June 28, 2009, respectively.
 
Consolidated Equity in (Earnings) Losses of Unconsolidated Affiliates
Earnings from the Company’s unconsolidated equity affiliates was $11,693 in fiscal year 2010 compared to $3,251 in fiscal year 2009.  The Company’s 34% share of PAL’s earnings increased from $4,724 of income in fiscal year 2009 to $11,605 of income in fiscal year 2010 primarily due to improved economic conditions, increased sales volumes and the timing of the recognition of income related to cotton subsidies.
 
Consolidated Net Income (Loss)
For fiscal year 2010, the Company recognized $18,371 of income from continuing operations before income taxes which was an increase of $63,131 over the prior year.  The increase in income from continuing operations was primarily attributable to improved gross profit in all reportable segments as a result of improvements in year-over-year retail demand in the Company’s core markets and a reduction in goodwill impairment charges recorded in fiscal year 2009.
 
 
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Consolidated Adjusted EBITDA
Adjusted EBITDA for fiscal year 2010 increased $31,971 versus fiscal year 2009.  As discussed above, gross profit increased $43,558 while SG&A expense increased $7,625.  The primary differences between the aforementioned changes in gross profit and SG&A expenses and the Company’s key performance Adjusted EBITDA metric are primarily start-up costs, non-cash compensation charges, provision (benefit) for bad debt, other operating (income) expense items, asset consolidation and optimization expense and depreciation.
 
Liquidity and Capital Resources
Liquidity Assessment
The Company’s primary capital requirements are for working capital, capital expenditures, debt repayment and service of indebtedness.  The Company’s primary sources of capital are cash generated from operations and amounts available under its revolving credit facility.  Cash generated from operations was $11,880, $20,581 and $16,960 for the fiscal years 2011, 2010 and 2009, respectively.  Working capital increased from $174,464 as of June 27, 2010 to $212,969 as of June 26, 2011 primarily due to an increase in inventory and a decrease in current portion of long-term debt.  Adjusted working capital increased $34,872 primarily due to the increase in inventory values caused by rising raw material prices and increased receivables related to higher selling prices.
 
Historically, the Company has met its working capital, capital expenditures and service of indebtedness requirements from its cash flows from operations.  For fiscal year 2011, cash generated from operations did not cover the Company’s working capital needs, capital expenditures and service of indebtedness.  The Company used borrowings from its revolving credit facility to supplement cash flows from operations.  Availability under the revolving credit facility was $51,734 as of June 26, 2011.
 
For each of the previous three years, before considering the earnings from the Company's unconsolidated equity affiliates, the Company has reported losses in the U.S. from continuing operations while reporting income from continuing operations for its foreign operations. On a consolidated basis, the Company has reported income from continuing operations in each of the last two years before considering earnings from its equity affiliates. The following table presents a summary of the Company’s cash, working capital and debt obligations for its U.S. and foreign operations as of June 26, 2011:
   
U.S.
   
Brazil
   
All Others
   
Total
 
Cash and cash equivalents                                                          
  $ 1,979     $ 18,325     $ 7,186     $ 27,490  
Working capital                                                          
    111,115       78,604       23,250       212,969  
Long-term debt, including current portion
    168,664                   168,664  
 
During 2011, the Company changed its indefinite reinvestment assertion related to $26,630 of the earnings and profits held by UDB.  The Company has established a deferred tax liability, net of estimated foreign tax credit, of approximately $3,854 related to the additional income tax that would be due as a result of the current plan to repatriate earnings in future periods.  All other remaining undistributed earnings are deemed to be indefinitely reinvested.
 
As of June 26, 2011, the Company has $47,970 of federal and $44,325 of state net operating loss carryforwards that may be used to offset future taxable income.  If these loss carryforwards either expire or become utilized, the Company’s cash requirements for federal and state income taxes may increase.  The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries due to negative evidence concerning the realization of those deferred tax assets in recent years.  The Company continually evaluates both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released.  A release of the valuation allowance could have a material effect on earnings in the period of release.
 
The following table presents the amounts of the Company’s various tax carryforwards as of June 26, 2011.  These carryforwards, if unused, will expire as follows:
Federal net operating loss carryforwards                                                                                                
  $ 47,970  
2024 through 2030
State net operating loss carryforwards                                                                                                
    44,325  
2012 through 2031
Federal tax credit carryforwards                                                                                                
    1,542  
2012 through 2031
North Carolina investment tax credit carryforwards                                                                                                
    511  
2012 through 2015
 
The Company currently believes that its existing cash balances, cash generated by operations, together with its available credit capacity, will enable the Company to comply with the terms of its indebtedness and meet the foreseeable liquidity requirements. Domestically, the Company's cash balances, cash generated by operations and borrowings available under the revolving credit facility continue to be sufficient to fund its domestic operating activities and cash commitments for its investing and financing activities. For its Foreign operations, the Company's existing cash balances and cash generated by operations should provide the needed liquidity to fund its foreign operating activities and any foreign investing activities, such as future capital expenditures.
 
 
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Cash Provided by Continuing Operations
The following table presents the net cash provided by continuing operations for fiscal years 2011, 2010 and 2009:
   
2011
   
2010
   
2009
 
Cash receipts:
                 
Receipts from customers