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EX-31.1 - EXHIBIT 31.1 - UNIFI INCex31-1.htm
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EX-32.1 - EXHIBIT 32.1 - UNIFI INCex32-1.htm
EX-10.1 - EXHIBIT 10.1 - UNIFI INCex10-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 25, 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 incorporation or organization)       (I.R.S. EmployerIdentification No.)
 
P.O. Box 19109 -7201 West Friendly Avenue Greensboro, NC        27419
 (Address of principal executive offices)        (Zip Code)
 
Registrant’s telephone number, including area code: (336) 294-4410
 
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  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 Exchange Act). Yes [ ] No [X]

The number of shares outstanding of the issuer’s common stock, par value $.10 per share, as of October 28, 2011 was 20,088,094.
 


 
 

 

UNIFI, INC.
Form 10-Q for the Quarterly Period Ended September 25, 2011

Table of Contents


   
Page
Part I.  Financial Information
     
Item 1.
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of September 25, 2011 and June 26, 2011
3
     
 
Condensed Consolidated Statements of Operations for the Three Months Ended September 25, 2011 and September 26, 2010
4
     
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 25, 2011 and September 26, 2010
5
     
 
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended September 25, 2011
6
     
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 25, 2011 and September 26, 2010
7
     
 
Notes to Condensed Consolidated Financial Statements
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
32
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
44
     
Item 4.
Controls and Procedures
46
     
Part II.  Other Information
     
Item 1.
Legal Proceedings
46
     
Item 1A.
Risk Factors
46
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
46
     
Item 3.
Defaults Upon Senior Securities
46
     
Item 4.
[Removed and Reserved.]
46
     
Item 5.
Other Information
46
     
Item 6.
Exhibits
47
 
 
2

 

Part I.  Financial Information

Item 1.  Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(amounts in thousands, except share and per share amounts)

   
September 25, 2011
   
June 26, 2011
 
ASSETS
           
Cash and cash equivalents
  $ 19,821     $ 27,490  
Receivables, net
    95,778       100,175  
Inventories
    135,976       134,883  
Income taxes receivable
    769       578  
Deferred income taxes
    4,390       5,712  
Other current assets
    4,841       5,231  
Total current assets
    261,575       274,069  
                 
Property, plant and equipment, net
    141,797       151,027  
Intangible assets, net
    11,027       11,612  
Investments in unconsolidated affiliates
    92,340       91,258  
Other non-current assets
    8,606       9,410  
Total assets
  $ 515,345     $ 537,376  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Accounts payable
  $ 46,036     $ 42,842  
Accrued expenses
    16,008       17,495  
Income taxes payable
    767       421  
Current portion of long-term debt
    348       342  
Total current liabilities
    63,159       61,100  
Long-term debt
    163,622       168,322  
Other long-term liabilities
    3,947       4,007  
Deferred income taxes
    2,453       4,292  
Total liabilities
    233,181       237,721  
Commitments and contingencies
               
                 
Common stock, $0.10 par (500,000,000 shares authorized, 20,086,094 and 20,080,253 shares outstanding)
    2,009       2,008  
Capital in excess of par value
    33,015       32,599  
Retained earnings
    241,558       241,272  
Accumulated other comprehensive income
    5,582       23,776  
Total shareholders’ equity
    282,164       299,655  
Total liabilities and shareholders’ equity
  $ 515,345     $ 537,376  

See accompanying notes to Condensed Consolidated Financial Statements.
 
 
3

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(amounts in thousands, except per share amounts)

   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Net sales
  $ 171,013     $ 175,092  
Cost of sales
    159,183       153,546  
Gross profit
    11,830       21,546  
Restructuring charges
          363  
Selling, general and administrative expenses
    10,371       11,510  
Provision (benefit) for bad debts
    205       (41 )
Other operating (income) expense, net
    (41 )     243  
Operating income
    1,295       9,471  
                 
Interest income
    (647 )     (743 )
Interest expense
    4,380       5,269  
Loss on extinguishment of debt
    462       1,144  
Equity in earnings of unconsolidated affiliates
    (3,459 )     (8,951 )
Income before income taxes
    559       12,752  
Provision for income taxes
    273       2,517  
Net income
  $ 286     $ 10,235  
                 
Net income per common share:
               
Basic
  $ 0.01     $ 0.51  
                 
Diluted
  $ 0.01     $ 0.50  
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
4

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(amounts in thousands)

   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Net income
  $ 286     $ 10,235  
Other comprehensive income (loss) before tax:
               
Foreign currency adjustments
    (17,225 )     6,707  
Loss on cash flow hedge
    (969 )      
Other comprehensive income (loss), before tax
    (18,194 )     6,707  
                 
Income tax expense related to items of other comprehensive income (loss)
           
Other comprehensive income (loss), net of tax
    (18,194 )     6,707  
Comprehensive income (loss)
  $ (17,908 )   $ 16,942  
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
5

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Three Months Ended September 25, 2011
(amounts in thousands)

   
Shares Outstanding
   
Common Stock
   
Capital in Excess of Par Value (1)
   
Retained Earnings
   
Accumulated Other Comprehensive
Income
   
Total Shareholders’ Equity
 
Balance June 26, 2011
    20,080     $ 2,008     $ 32,599       241,272       23,776       299,655  
Options exercised
    6       1       48                   49  
Stock-based compensation
                368                   368  
Other comprehensive loss
                            (18,194 )     (18,194 )
Net income
                      286             286  
Balance September 25, 2011
    20,086     $ 2,009     $ 33,015     $ 241,558     $ 5,582     $ 282,164  

See accompanying notes to Condensed Consolidated Financial Statements.
 
 
6

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(amounts in thousands)

   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Cash and cash equivalents at beginning of year
  $ 27,490     $ 42,691  
Operating activities:
               
Net income
    286       10,235  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Equity in earnings of unconsolidated affiliates
    (3,459 )     (8,951 )
Dividends received from unconsolidated affiliates
    2,005       2,532  
Depreciation and amortization
    6,782       6,743  
Net loss (gain) on sale of assets
    64       (65 )
Loss on extinguishment of debt
    462       1,144  
Non-cash compensation expense
    243       347  
Deferred income taxes
    (718 )     225  
Other
    (1 )     7  
Changes in assets and liabilities, excluding effects of foreign currency adjustments:
               
Receivables
    403       (2,751 )
Inventories
    (7,386 )     (7,620 )
Other current assets and income taxes receivable
    (129 )     107  
Accounts payable and accrued expenses
    2,622       1,284  
Income taxes payable
    647       774  
Net cash provided by operating activities
    1,821       4,011  
Investing activities:
               
Capital expenditures
    (1,122 )     (5,495 )
Investments in unconsolidated affiliates
    (360 )     (225 )
Proceeds from sale of assets
    173       180  
Net cash used in investing activities
    (1,309 )     (5,540 )
Financing activities:
               
Payments of notes payable
    (10,288 )     (15,863 )
Payments on revolving credit facility
    (53,500 )     (40,525 )
Proceeds from borrowings on revolving credit facility
    58,800       40,525  
Proceeds from stock option exercises
    49        
Debt financing fees
          (821 )
Net cash used in financing activities
    (4,939 )     (16,684 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (3,242 )     1,796  
Net decrease in cash and cash equivalents
    (7,669 )     (16,417 )
Cash and cash equivalents at end of period
  $ 19,821     $ 26,274  
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
7

 

Unifi, Inc.
Notes to Condensed Consolidated Financial Statements
(amounts in thousands, except per share amounts)

1. Background
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 processes and sells high-volume commodity yarns, 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  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 yarns.  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.

2. Basis of Presentation
The Company’s current fiscal quarter ended on Sunday September 25, 2011.  However, the Company’s Brazilian, Colombian, and Chinese subsidiaries’ fiscal quarter ended on September 30, 2011.  No significant transactions or events have occurred between these dates and the date of the Company’s financial statements.  The three months ended September 25, 2011 and the three months ended September 26, 2010 each consist of thirteen week periods.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included.  The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures.  Actual results may vary from these estimates.

These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.  There were no changes in the nature of our significant accounting policies or the application of our accounting policies from those reported in our most recent Annual Report on Form 10-K.  Certain prior period information has been reclassified to conform to the current period presentation.

The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.

All amounts and share amounts, except per share amounts, are presented in thousands, except as otherwise noted.

3. Accounting Pronouncements
Recently Adopted Accounting Pronouncements
There were no new accounting pronouncements adopted during the period.

Recently Issued Accounting Pronouncements
There have been no newly issued or newly applicable accounting pronouncements that have or are expected to have a significant impact on the Company's financial statements.

4. Receivables, net
Receivables, net consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Customer receivables
  $ 96,212     $ 100,893  
Allowance for uncollectible accounts
    (1,199 )     (1,147 )
Reserves for yarn quality claims
    (1,167 )     (1,101 )
Net customer receivables
    93,846       98,645  
Related parties receivables
    599       512  
Other receivables
    1,333       1,018  
Total receivables, net
  $ 95,778     $ 100,175  
 
 
8

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
 
Other receivables consist primarily of receivables for duty drawback, interest and refunds due to the Company for value added taxes.

The changes in the Company’s allowance for uncollectible accounts and reserves for yarn quality claims were as follows:
 
   
Allowance for Uncollectible Accounts
   
Reserves for Yarn Quality Claims
 
Balance at June 26, 2011
  $ (1,147 )   $ (1,101 )
Charged to costs and expenses
    (205 )     (367 )
Charged to other accounts
    80       170  
Deductions
    73       131  
Balance at September 25, 2011
  $ (1,199 )   $ (1,167 )

Amounts charged to costs and expenses for the allowance for uncollectible accounts are reflected in the Provision for bad debts and amounts charged to costs and expenses for the reserves for yarn quality claims are primarily reflected as a reduction in the Net sales lines of the Condensed Consolidated Statements of Operations.  Amounts charged to other accounts primarily include the impact of translating the activity of the Company’s foreign affiliates from their respective local currencies to the U.S. dollar.  For the allowance for uncollectible accounts, deductions represent amounts written off which were deemed to not be collectible, net of any recoveries.  For the reserve for yarn quality claims, deductions represent adjustments to either increase or decrease claims based on negotiated amounts or actual versus estimated claim differences.

5.  Inventories
Inventories consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Raw materials
  $ 50,134     $ 52,387  
Supplies
    5,695       6,016  
Work in process
    6,330       7,000  
Finished goods
    77,788       74,399  
Gross inventories
    139,947       139,802  
Inventory reserves
    (3,971 )     (4,919 )
Total inventories
    135,976     $ 134,883  

Certain foreign inventories of $32,723 and $43,734 as of September 25, 2011 and June 26, 2011, respectively, were valued under the average cost method.  The change from the beginning of the year was due to declining prices and lower quantities on-hand at the Company’s Brazilian operations as well as the weakening of the Brazilian Real versus the U.S. dollar.  Included in the Company’s finished goods is $169 and $164 of consigned goods located in El Salvador.

6. Other Current Assets
Other current assets consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Value added taxes receivable
  $ 2,123     $ 2,971  
Prepaid expenses
    1,320       1,282  
Vendor deposits
    1,204       921  
Other expenses
    194       57  
Total other current assets
  $ 4,841     $ 5,231  

Prepaid expenses consist of advance payments for insurance, public exchange and rating services, professional fees, membership dues, subscriptions and information technology services.  Other expenses include non-income related tax payments and employee advances.

 
9

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

7.  Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Land
  $ 3,275     $ 3,454  
Land improvements
    11,400       11,400  
Buildings and improvements
    147,335       151,484  
Assets under capital lease
    9,520       9,520  
Machinery and equipment
    540,183       545,279  
Computers, software and office equipment
    17,770       19,585  
Construction in progress
    2,280       4,583  
Transportation equipment
    4,850       5,162  
Gross property, plant and equipment
    736,613       750,467  
Less: accumulated depreciation
    (586,031 )     (590,878 )
Less: accumulated amortization – capital lease
    (8,785 )     (8,562 )
Property, plant and equipment, net
  $ 141,797     $ 151,027  

Depreciation expense, internal software development costs amortization, repair and maintenance expenses and capitalized interest were as follows:
 
   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Depreciation expense
  $ 5,905     $ 5,752  
Internal software development costs amortization
    71       99  
Repair and maintenance expenses
    4,328       4,432  
Capitalized interest
           

Internal software development costs classified within property, plant and equipment (“PP&E”) consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Internal software development costs
  $ 1,900     $ 1,900  
Accumulated amortization
    (1,639 )     (1,568 )
Net internal software development costs
  $ 261     $ 332  

8.  Intangible Assets, Net
Intangible assets, net consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Customer list
  $ 22,000     $ 22,000  
Non-compete agreements
    4,000       4,000  
Total intangible assets, gross
    26,000       26,000  
                 
Accumulated amortization - customer list
    (12,640 )     (12,134 )
Accumulated amortization - non-compete agreements
    (2,333 )     (2,254 )
Total accumulated amortization
    (14,973 )     (14,388 )
Intangible assets, net
  $ 11,027     $ 11,612  

In fiscal year 2007, the Company purchased the polyester and nylon texturing operations of Dillon Yarn Corporation (“Dillon”).  The valuation of the customer list acquired was determined by estimating the discounted net earnings attributable to the customer relationships that were purchased after considering items such as possible customer attrition.  Based on the length and trend of the projected cash flows, an estimated useful life of thirteen years was determined.  The customer list is being amortized in a manner which reflects the expected economic benefit that will be received over its thirteen year life.  The non-compete agreements are amortized using the straight line method over the periods covered by the covenants not to compete.
 
 
10

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Amortization expense for intangible assets was as follows:
 
   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Customer list amortization expense
  $ 506     $ 543  
Non-compete amortization expense
    79       95  
   Total amortization expense
  $ 585     $ 638  

The following table presents the expected intangible asset amortization for the next five fiscal years:
 
   
2012
   
2013
   
2014
   
2015
   
2016
 
Customer list
  $ 2,022     $ 1,837     $ 1,481     $ 1,215     $ 969  
Non-compete agreements
    317       317       317       317       317  
   Total intangible amortization
  $ 2,339     $ 2,154     $ 1,798     $ 1,532     $ 1,286  

9.   Other Non-Current Assets
Other non-current assets consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Long-term deposits
  $ 5,310     $ 5,709  
Debt financing fees
    2,849       3,245  
Other
    447       456  
Total other non-current assets
  $ 8,606     $ 9,410  

Long-term deposits consist primarily of deposits with utility companies and value added tax deposits.  Other non-current assets primarily consists of premiums on split dollar life insurance policies which represents the value of the Company’s right of return on premiums paid for retiree owned insurance contracts.

10. Accrued Expenses
Accrued expenses consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Payroll and fringe benefit costs
  $ 5,748     $ 11,119  
Utilities
    2,467       2,237  
Interest
    5,283       1,900  
Property taxes
    1,327       885  
Retiree medical liability
    178       202  
Other
    1,005       1,152  
Total accrued expenses
  $ 16,008     $ 17,495  

Other accruals consist primarily of sales taxes, marketing expenses, freight expenses, customer deposits, rent and other non-income related taxes.  The decreased accrual for payroll and fringe benefit costs is primarily due to the timing associated with payment of awards previously earned and the amounts expected to be earned under variable compensation programs.  The increased accrual for interest is due to timing of scheduled interest payments for certain of the Company’s debt obligations.

11. Defined Contribution Plan
The Company matches employee contributions made to the Unifi, Inc. Retirement Savings Plan (the “DC Plan”), an existing 401(k) defined contribution plan, which covers eligible domestic salaried and hourly employees. Under the terms of the DC Plan, the Company matches 100% of the first three percent of eligible employee contributions and 50% of the next two percent of eligible contributions.

The contribution expenses were as follows:
 
   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Matching contribution expenses
  $ 558     $ 630  
 
 
11

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

12.  Long-Term Debt
Long-term debt consists of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Notes payable
  $ 123,722     $ 133,722  
Revolving credit facility
    39,900       34,600  
Capital lease obligation
    348       342  
Total debt
    163,970       168,664  
Current portion of long-term debt
    (348 )     (342 )
Total long-term debt
  $ 163,622     $ 168,322  

Notes Payable
On May 26, 2006, the Company issued $190,000 of 11.5% senior secured notes (“2014 notes”) due May 15, 2014 with interest payable on May 15 and November 15 of each year. The 2014 notes are guaranteed on a senior, secured basis by each of the Company’s existing and future restricted domestic subsidiaries. The 2014 notes and guarantees are secured by first-priority liens, subject to permitted liens, on substantially all of the Company’s PP&E, domestic capital stock and some foreign capital stock.  Domestic capital stock includes the capital stock of the Company’s domestic subsidiaries and certain of its joint ventures. Foreign capital stock includes up to 65% of the voting stock of the Company’s first-tier foreign subsidiaries. The terms of the 2014 notes do not contain financial maintenance covenants.
 
The Company can currently elect to redeem some or all of the 2014 notes at redemption prices equal to or in excess of par depending on the year the optional redemption occurs.  The Company may also purchase its 2014 notes in open market purchases or in privately negotiated transactions and then retire them or it may refinance all or a portion of the 2014 notes with a new debt offering.

On August 5, 2011, the Company completed the redemption of an aggregate principal amount of $10,000 of its 2014 notes. The Company redeemed a portion of the 2014 notes under the terms of the indenture governing the 2014 notes (the “Indenture”)  at 102.875% making the aggregate redemption price $10,288 which excluded $256 in accrued interest. The Company financed the redemption through borrowings under its revolving credit facility.  In connection with the redemption, the Company entered into a twenty-one month, $10,000 interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on $10,000 of LIBOR-based variable rate borrowings under the Company’s revolving credit facility.  This interest rate swap allows the Company to fix the LIBOR rate at 0.75%.

The following table presents the components of the Company’s partial redemptions of its 2014 notes and the charges for the extinguishment of debt:
 
Date
 
Principal
Amount
 
Redemption
Price
 
Premium (Discount)
 
Costs and
Other Fees
 
Loss / (Gain)
August 5, 2011
 
$
10,000
 
102.875%
 
$
288
 
$
174
 
$
462
Total – FY 2012
 
$
10,000
     
$
288
 
$
174
 
$
462
                             
June 30, 2010
 
$
15,000
 
105.75%
 
$
862
 
$
282
 
$
1,144
February 16, 2011
   
30,000
 
105.75%
   
1,725
   
468
   
2,193
Total – FY 2011
 
$
45,000
     
$
2,587
 
$
750
 
$
3,337
                             
September 15, 2009
 
$
500
 
86.75%
 
$
(66)
 
$
12
 
$
(54)
Total – FY 2010
 
$
500
     
$
(66)
 
$
12
 
$
(54)
                             
April 3, 2009
 
$
8,778
 
100.00%
 
$
 
$
226
 
$
226
June 3, 2009
   
2,000
 
73.75%
   
(525)
   
48
   
(477)
Total – FY 2009
 
$
10,778
     
$
(525)
 
$
274
 
$
(251)

 
12

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Revolving Credit Facility
Concurrent with the issuance of the 2014 notes, the Company amended its senior secured asset-based revolving credit facility (“Amended Credit Agreement”) which, along with revising certain terms and covenants, extended its maturity date to May 15, 2011.  On September 9, 2010, the Company and the Subsidiary Guarantors (as co-borrowers) entered into the First Amendment to the Amended and Restated Credit Agreement ("First Amended Credit Agreement”) with Bank of America, N.A. (as both Administrative Agent and Lender).  The First Amended Credit Agreement provides for a revolving credit facility of $100,000 (with the ability of the Company to request that the borrowing capacity be increased up to $150,000) that matures on September 9, 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.

The First Amended Credit Agreement contains customary affirmative and negative covenants for asset-based loans that restrict future borrowings and certain transactions. The covenants include restrictions and limitations on (i) sales of assets, consolidation, merger, dissolution and the issuance of capital stock, (ii) permitted encumbrances on property, (iii) the incurrence of indebtedness, (iv) the making of loans or investments, (v) the declaration of dividends and redemptions and (vi) transactions with affiliates.  As long as pro forma excess availability is at least 27.5% of the total credit facility or, if applicable, other specific conditions are met, the Company can make certain distributions and investments including (i) the payment or making of any dividend, (ii) the redemption or other acquisition of any of the Company’s capital stock, (iii) cash investments in joint ventures, (iv) acquisition of the property and assets or capital stock or a business unit of another entity and (v) loans or other investments to a non-borrower subsidiary.  The First Amended Credit Agreement requires the Company to maintain a trailing twelve month fixed charge coverage ratio of at least 1.0 to 1.0 should borrowing availability decrease below 15% of the total credit facility.  There are no capital expenditure limitations under the First Amended Credit Agreement.  The Company was in compliance with all such covenants at September 25, 2011.

The First Amended Credit Agreement is secured by first-priority liens on the Company’s and its subsidiary guarantors’ inventory, accounts receivable, general intangibles, investment property and certain other property. The Company’s ability to borrow under the First Amended Credit Agreement is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to other conditions and limitations.  Borrowings under the First Amended Credit Agreement bear interest at rates of LIBOR plus 2.00% to 2.75% and/or prime plus 0.75% to 1.50% depending on the Company’s level of excess availability. The unused line fee under the First Amended Credit Agreement is 0.375% to 0.50% of the unused line amount.

The weighted average interest rate for the revolving credit facility borrowings for the three months ended September 25, 2011 including the effects of all interest rate swaps was 3.4%.  The Company has $2,695 of standby letters of credit at September 25, 2011, none of which have been drawn upon. As of September 25, 2011 and June 26, 2011, the Company had $54,598 and $51,734 of borrowing availability under the revolving credit facility, respectively.

The following table presents the scheduled maturities of the Company’s long-term debt on a fiscal year basis:
 
 
2012
   
2013
   
2014
   
2015
   
2016
   
Thereafter
   
Total
 
$ 348     $     $ 123,722     $     $ 39,900     $     $ 163,970  

Amortization charged to interest expense related to debt financing was as follows:
 
   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Interest expense
  $ 221     $ 254  

13.  Other Long-Term Liabilities
Other long-term liabilities consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Deferred compensation plan
  $ 1,741     $ 1,866  
Retiree medical liability
    696       696  
Derivative instruments
    486       408  
Long-term portion of income taxes payable
    868       868  
Non-income related taxes
    156       169  
Total other long-term liabilities
  $ 3,947     $ 4,007  
 
 
13

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

The Company maintains an unfunded supplemental post-employment plan for a select group of management employees.  Each participant’s account is credited annually based upon a percentage of their base salary with each participant’s balance adjusted quarterly to reflect returns based upon a stock market index.  The amounts of (income) expense recorded for this plan within Selling, general and administrative (“SG&A”) expenses for the three months ended September 25, 2011 and September 26, 2010 were ($126) and $155, respectively.  Amounts are paid to participants only after termination of their employment.  The retiree medical liability relates to a frozen plan that consists of the discounted future claims the Company expects to pay for certain retiree benefits based on claims history and the terms of the benefit agreements.

14. Income Taxes
The Company’s income tax provision for the quarter ended September 25, 2011 resulted in tax expense of $273 at an effective rate of 48.8%.  The income tax rate for the period is different from the U.S. statutory rate due to losses in tax jurisdictions for which no tax benefit could be recognized, foreign dividends taxed in the U.S. and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rate.  The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from U.S. operations and foreign sources versus annual projections and changes in foreign currencies in relation to the U.S. dollar.  As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis.

The Company’s income tax provision for the quarter ended September 26, 2010 resulted in tax expense of $2,517 at an effective rate of 19.7%.  The income tax rate for the period was different from the U.S. statutory rate due to the utilization of prior losses for which no benefit had been recognized previously, foreign dividends taxed in the U.S. and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rate.

Deferred income taxes have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities.  In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences reverse. Management considers the scheduled reversal of taxable temporary differences, taxable income in carryback periods, projected future taxable income and tax planning strategies in making this assessment.  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 continues to evaluate 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 net earnings in the period of release.

During the fiscal year ended June 26, 2011, the Company changed its indefinite reinvestment assertion related to approximately $26,630 of the earnings and profits held by Unifi do Brazil, Ltda. (“UDB”).  During the first quarter of fiscal year 2012, the Company repatriated $7,400. The Company also changed its indefinite reinvestment assertion by an additional $13,415.  The Company incorporated these changes and adjusted the deferred tax liability, net of estimated foreign tax credits to $3,756 to reflect the additional income tax that would be due as a result of the current plan to repatriate in future periods.  All remaining undistributed earnings are deemed to be indefinitely reinvested and accordingly, no provision for U.S. federal and state income taxes is required to be provided thereon.

The Company is subject to income tax examinations for U.S. federal income taxes for fiscal years 2005 through 2011, for non-U.S. income taxes for tax years 2001 through 2011 and for state and local income taxes for fiscal years 2001 through 2011.

There have been no significant changes in the Company’s liability for uncertain tax positions since June 26, 2011.  The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental.  Management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for.  However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire.
 
 
14

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

15.  Shareholders’ Equity
No dividends have been paid in the last two fiscal years. The Indenture governing the 2014 notes and the First Amended Credit Agreement restricts the Company’s ability to pay dividends or make distributions on its common stock.

Effective July 26, 2000, the Company’s Board of Directors (“Board”) authorized the repurchase of up to 3,333 shares of its common stock of which approximately 1,064 shares were subsequently repurchased.  The repurchase program was suspended in November 2003.  There is remaining authority for the Company to repurchase approximately 2,269 shares of its common stock under the repurchase plan.  The repurchase plan has no stated expiration or termination date.

16. Stock Based Compensation
During the first quarter of fiscal year 2012, the Compensation Committee of the Board authorized the issuance of and the Company issued 127 stock options to certain key employees from the 2008 Unifi, Inc. Long-Term Incentive Plan (“2008 LTIP”), a plan approved by the Company's shareholders in 2008.  The stock options have a service condition, vest ratably over a three year period and have ten year contractual terms.  The exercise price of the options is $12.47 per share.  The Company used the Black-Scholes model to estimate the weighted average grant date fair value of $7.88 per share.

During the first quarter of fiscal year 2012, the Compensation Committee of the Board authorized the issuance of and the Company issued 64 restricted stock units (“RSUs”) from the 2008 LTIP to certain key employees.  The RSUs are subject to a vesting restriction and convey no rights of ownership in shares of Company stock until such RSUs have vested and been distributed to the grantee in the form of Company stock.  The RSUs vest ratably over a three year period.  The RSUs will be converted into an equivalent number of shares of stock on each vesting date and distributed to the grantee, or the grantee may elect to defer the receipt of the shares of stock until separation from service.   If after July 27, 2012 and prior to the final vesting date the grantee has a separation from service without cause, the remaining unvested RSUs will become fully vested and will be converted to an equivalent number of shares of stock and issued to the grantee.  The Company estimated the grant-date fair value of the award to be $12.47 per RSU based on the fair value of the Company's stock at the award grant date.

The Company incurred $368 and $192 in stock based compensation expense in the first quarter of fiscal years 2012 and 2011, respectively, which was recorded to SG&A expenses with the offset to capital in excess of par value.

The Company issued 6 shares of common stock during the first quarter of fiscal year 2012 as a result of the exercise of stock options.  There were no stock options exercised during the first quarter of fiscal year 2011.

17. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Foreign currency translation adjustments
  $ 6,267     $ 26,621  
Loss on effective portion of derivative instruments
    (2,023 )     (1,054 )
Foreign currency gain (loss) on intercompany loan
    1,338       (1,791 )
Accumulated other comprehensive income
  $ 5,582     $ 23,776  

Loss on effective portion of derivative instruments includes $1,537 and $646 of other comprehensive loss related to one of the Company’s unconsolidated affiliates at September 25, 2011 and June 26, 2011, respectively.

 
15

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

18. Computation of Earnings Per Share
The computation of basic and diluted income per share (“EPS”) was as follows:
 
   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Basic EPS:
           
Net income
  $ 286     $ 10,235  
Weighted average common shares outstanding
    20,086       20,057  
Basic EPS
  $ 0.01     $ 0.51  
                 
Diluted EPS:
               
Net income
  $ 286     $ 10,235  
Weighted average common shares outstanding
    20,086       20,057  
Net potential common share equivalents – stock options and RSU’s
    345       322  
Weighted average common shares outstanding
    20,431       20,379  
Diluted EPS
  $ 0.01     $ 0.50  
                 
Excluded from the calculation of common share equivalents:
               
Anti-dilutive common share equivalents
    406       231  
                 
Excluded from the calculation of diluted shares:
               
Unvested options that vest upon achievement of certain market conditions
    577       583  

The calculation of earnings per common share is based on the weighted average number of the Company’s common shares outstanding for the applicable period.  The calculation of diluted earnings per common share presents the effect of all potential dilutive common shares that were outstanding during the respective period, unless the effect of doing so is anti-dilutive.

19.   Derivative Instruments and Hedging Activities
Following its established procedures and controls, the Company may use derivative financial instruments such as foreign currency forward contracts or interest rate swaps for purposes of reducing its ongoing business exposures to fluctuations in foreign currency exchange rates or interest rates.  The Company does not enter into derivative contracts for speculative purposes.

Interest rate swaps:
On February 15, 2011, the Company entered into a twenty-seven month, $25,000 interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on the first $25,000 of LIBOR-based variable rate borrowings under the Company’s revolving credit facility.  The interest rate swap allows the Company to fix the LIBOR rate at 1.39%.

On August 5, 2011, the Company completed the redemption of an aggregate principal amount of $10,000 of its 2014 notes at 102.875%. In connection with the redemption, the Company entered into a twenty-one month, $10,000 interest rate swap to provide a hedge against the variability of cash flows.  This interest rate swap allows the Company to fix the LIBOR rate at 0.75%.

The Company has designated these swaps as cash flow hedges and determined that the hedges have been and still are highly effective.  At September 25, 2011, the amount of loss recognized in accumulated other comprehensive income for the Company’s cash flow hedge derivative instruments was $486.  For the fiscal quarter ended September 25, 2011, the Company did not reclassify any gains (losses) from accumulated other comprehensive income to net income and does not expect to do so during the next twelve months.

 
16

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Foreign currency forward contracts:
The Company enters into foreign currency forward contracts as economic hedges for exposures related to certain sales, inventory purchases and equipment purchases denominated in currencies that are not the functional currency of certain entities.  As of September 25, 2011, the latest maturity date for all outstanding foreign currency forward contracts is during November 2011.  These items are not designated as hedges by the Company and are marked to market each period and offset by the foreign exchange gains (losses) resulting from the underlying exposures of the foreign currency denominated assets and liabilities.

The fair values of derivative financial instruments were as follows:
 
As of September 25, 2011:
   
Notional Amount
   
USD Equivalent
 
Balance Sheet Location
 
Fair value
 
Foreign exchange contracts
MXN
  $ 3,100     $ 253  
Other current assets
  $ 28  
Interest rate swaps
USD
  $ 35,000     $ 35,000  
Other long-term liabilities
  $ (486 )

As of June 26, 2011:
   
Notional Amount
   
USD Equivalent
 
Balance Sheet Location
 
Fair value
 
Foreign exchange contracts
MXN
  9,200     $ 770  
Accrued expenses
  $ (2 )
Interest rate swaps
USD
  $ 25,000     $ 25,000  
Other long-term liabilities
  $ (408 )

The fair values of the Company’s foreign exchange contracts and interest rate swaps are estimated by obtaining month-end market quotes for contracts with similar terms.

The effect of marked to market hedging derivative instruments was as follows:
 
     
For the Three Months Ended
 
     
September 25, 2011
   
September 26, 2010
 
Derivatives not designated as hedges:
Classification
           
Foreign exchange contracts – MXN/USD
Other operating (income) expense
  $ (29 )   $ 18  
Foreign exchange contracts – EU/USD
Other operating (income) expense
          (238 )
Total (gain) loss recognized in income
    $ (29 )   $ (220 )

By entering into derivative instrument contracts, the Company exposes itself to counterparty credit risk.  The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings, limiting the amount of exposure to any single counterparty and regularly monitoring its market position with each counterparty.  The Company’s derivative instruments do not contain any credit-risk related contingent features.

20.  Fair Value of Financial Instruments and Non-Financial Assets and Liabilities
As of September 25, 2011, the Company did not have any non-financial assets or liabilities that are required to be measured at fair value on a recurring basis.  The following tables present the level within the fair value hierarchy used to measure certain financial assets and liabilities accounted for at fair value on a recurring basis:
 
As of September 25, 2011:
 
Level 1
   
Level 2
   
Level 3
 
Assets at fair value:
                 
Derivatives related to foreign exchange contracts
  $     $ 28     $  
Total assets at fair value
  $     $ 28     $  
                         
Liabilities at fair value:
                       
Derivatives related to interest rate swaps
          (486 )      
Total liabilities at fair value
  $     $ (486 )   $  

 
17

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
 
As of June 26, 2011:
 
Level 1
   
Level 2
   
Level 3
 
Liabilities at fair value:
                 
Derivatives related to foreign exchange contracts
          (2 )      
Derivatives related to interest rate swaps
          (408 )      
Total liabilities at fair value
  $     $ (410 )   $  

There were no financial instruments measured at fair value that were in an asset position at June 26, 2011.

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximated fair value as of September 25, 2011 and June 26, 2011 because of their short-term nature.  The carrying amount of the revolving credit facility approximated fair value as of September 25, 2011 and June 26, 2011 because the facility has a floating interest rate.  The fair value of the Company’s 2014 notes is based on the last traded price within the period and is considered a Level 2 measurement.  The estimated fair values and carrying amounts outstanding, including any current portions, are presented as follows:
 
   
September 25, 2011
   
June 26, 2011
 
2014 notes – estimated fair value
  $ 127,267     $ 138,402  
2014 notes – carrying amount
    123,722       133,722  

21.  Other Operating (Income) Expense, Net
The components of other operating (income) expense, net were as follows:
 
   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Net (gain) loss on sale of assets
  $ 64     $ (65 )
Foreign currency transaction (gains) losses
    (21 )     364  
Other, net
    (84 )     (56 )
Other operating (income) expense, net
  $ (41 )   $ 243  

22.   Investments in Unconsolidated Affiliates and Variable Interest Entities
Parkdale America, LLC
In June 1997, the Company and Parkdale Mills, Inc. (“Mills”) entered into a Contribution Agreement that set forth the terms and conditions by which the two companies contributed all of the assets of their spun cotton yarn operations utilizing open-end and air-jet spinning technologies to create Parkdale America, LLC (“PAL”).  In exchange for its contribution, the Company received a 34% ownership interest in PAL which is accounted for using the equity method of accounting.  PAL’s fiscal year end is the Saturday nearest to December 31 and is a limited liability company treated as a partnership for income tax reporting purposes.  PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel markets located throughout North and South America.  PAL has 14 manufacturing facilities located primarily in North Carolina and Virginia.  For its most recently completed fiscal year, PAL’s five largest customers accounted for approximately 80% of total gross sales and 75% of total gross accounts receivable outstanding.

In August 2008, a federal government program commenced providing economic adjustment assistance to domestic users of upland cotton.  The program offers a subsidy for cotton consumed in domestic production and the subsidy is paid the month after the eligible cotton is consumed.  The subsidy must be used within eighteen months after the marketing year earned to purchase qualifying capital expenditures in the U.S. for production of goods from upland cotton.  The marketing year is from August 1 to July 31.  The program provides a subsidy of four cents per pound through July 31, 2012 and three cents per pound thereafter.  The Company recognizes its share of PAL’s income for the cotton subsidy when the cotton has been consumed and the qualifying assets have been acquired with an appropriate allocation methodology considering the dual criteria of the subsidy.

On October 28, 2009, PAL acquired certain real property and machinery and equipment, as well as entered into lease agreements for certain real property, machinery and equipment, which constitute most of the yarn manufacturing operations of Hanesbrands Inc. (“HBI”).  PAL also entered into a yarn supply agreement with HBI to supply at least 95% of the yarn used in the manufacturing of its apparel products at any of its locations in North America, Central America or the Caribbean Basin for a six-year period with an option for HBI to extend the agreement for two additional three-year periods.
 
 
18

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

On March 30, 2011, PAL amended its revolving credit facility to increase the maximum borrowing capacity from one hundred million to two hundred million dollars and extend the maturity date from October 28, 2012 to July 31, 2014.  PAL’s revolving credit facility charges a variable interest rate based on either the prime rate or LIBOR rate plus an applicable percentage.  PAL’s revolving credit facility also has covenants in place such as an annual limit on capital expenditures, a minimum fixed-charge coverage ratio and a minimum leverage ratio. PAL informed the Company that as of September 2011, PAL’s outstanding borrowings on the revolving credit facility were one hundred twenty million dollars and PAL was in compliance with all debt covenants.

PAL is subject to price risk related to fixed-price yarn sales.  To protect the gross margin of these sales, PAL may enter into cotton futures to manage changes in raw material costs.  The derivative instruments used are listed and traded on an exchange and are thus valued using quoted prices classified within Level 1 of the fair value hierarchy.  PAL may also designate certain futures contracts as cash flow hedges with the effective portion of gains and losses recorded in accumulated other comprehensive income until the underlying transactions are recognized in income.  As of September 2011, PAL’s accumulated other comprehensive income was comprised of losses related to futures contracts totaling $4,521.  All of PAL’s other derivatives not designated as hedges or the ineffective portion of any designated hedges are marked to market each period with the changes in fair value recognized in current period earnings.  In addition, PAL may enter into forward contracts for certain cotton purchases, which qualify as derivative instruments.  However, these contracts meet the applicable criteria to qualify for the “normal purchases or normal sales” exemption.

As of September 25, 2011, the Company’s investment in PAL was $83,886 and is shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets.  The reconciliation between the Company’s share of the underlying equity of PAL and its investment is as follows:
 
Underlying equity at September 2011
  $ 102,786  
Initial excess capital contributions
    53,363  
Impairment charge recorded in fiscal year 2007
    (74,106 )
Anti-trust lawsuit against PAL in which the Company did not participate
    2,652  
EAP adjustments
    (809 )
Investment at September 2011
  $ 83,886  

U.N.F. Industries, Ltd.
In September 2000, the Company and Nilit Ltd. (“Nilit”) formed a 50/50 joint venture, U.N.F. Industries Ltd. (“UNF”), for the purpose of operating nylon extrusion assets to manufacture nylon POY.  UNF’s eight extruders are located at Nilit’s production facilities in Migdal Ha-Emek, Israel.  All raw material and production services for UNF are provided by Nilit under separate supply and services agreements.  All first quality production is sold to the Company.  UNF’s fiscal year end is December 31st and is a registered Israeli private company.

UNF America, LLC
In October 2009, the Company and Nilit America Inc. (“Nilit America”) formed a 50/50 joint venture, UNF America LLC (“UNF America”), for the purpose of operating a nylon extrusion facility which manufactures nylon POY.  UNF America’s four extruders are located in Ridgeway, Virginia and are operated by Nilit America.  All raw material and production services for UNF America are provided by Nilit America under separate supply and services agreements.  All first quality production is sold to the Company.  UNF America’s fiscal year end is December 31st and is a limited liability company treated as a partnership for income tax reporting purposes.

In conjunction with the formation of UNF America, the Company entered into a supply agreement with UNF and UNF America whereby the Company agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNF America.  The agreement has no stated minimum purchase quantities.  Pricing under this supply agreement is negotiated every six months, based on market rates.  As of September 25, 2011, the Company’s open purchase orders related to this agreement were $24,897.

 
19

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
 
The Company’s raw material purchases under this supply agreement consist of the following:
 
   
For the Three Months Ended
 
    September 25, 2011    
September 26, 2010
 
UNF
  $ 5,486     $ 5,953  
UNF America
    3,716       4,701  
Total
  $ 9,202     $ 10,654  

As of September 25, 2011 and June 26, 2011, the Company had combined outstanding accounts payable due to UNF and UNF America of $3,346 and $4,124, respectively.

As of September 2011, the Company’s combined investments in UNF and UNF America were $3,780 and are shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets.  The financial results of UNF and UNF America are included in the Company’s financial statements with a one month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with the Company’s accounting policy.  The Company has determined that UNF and UNF America are variable interest entities (“VIEs”), the Company is the primary beneficiary and, under U.S. GAAP, the Company should consolidate the two entities.  As the Company purchases substantially all of the output from the two entities, and, as the two entities’ balance sheets constitute less than 2.0% of the Company’s current assets, total assets and total liabilities, the Company has not included the accounts of UNF and UNF America in its consolidated financial statements. Other than the supply agreement discussed above, the Company does not provide any other commitments or guarantees related to either UNF or UNF America.

Repreve Renewables, LLC
In April 2010, the Company entered into an agreement with two other unaffiliated entities to form Repreve Renewables, LLC (“Renewables”) and received a 40% ownership interest for its four million dollar contribution.  Renewables is a development stage enterprise formed to cultivate, grow and sell biomass crops, including crop feedstock intended for use as a fuel in the production of energy as well as to provide value added processes for cultivating, harvesting or using biomass crops.  Renewables has the exclusive license to commercialize FREEDOM™ Giant Miscanthus (“FGM”).  FGM is a miscanthus grass strain used to convert sunlight to biomass energy.  Renewables’ success will depend in part on its ability to license individual growers to produce FGM and sell feedstock to those growers.

Renewables has generated net losses since its inception and, while not obligated to do so, the Company expects to make ongoing contributions to the extent necessary to continue Renewables’ business.  Through September 2011, the Company has made $1,477 of additional capital contributions since inception for its share of working capital and on-going operating costs.

The Company has determined Renewables is a VIE but the Company is not the primary beneficiary and therefore it does not need to be consolidated.  As of September 25, 2011, the Company’s $4,674 investment in Renewables is shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets and represents the Company’s maximum exposure to loss.

On October 5, 2011, the Company completed a purchase transaction which gives the Company a controlling interest in Renewables.  During the second quarter of fiscal year 2012, the Company will perform the necessary valuation procedures and apply the applicable purchase accounting rules which could result in an immaterial loss.

Unaudited, condensed balance sheet and income statement information for the Company’s unconsolidated affiliates is as follows.  As PAL is defined as significant, its information is separately disclosed.
 
   
As of September 25, 2011
 
   
PAL
   
Other
   
Total
 
Current assets
  $ 372,686     $ 11,566     $ 384,252  
Noncurrent assets
    149,852       11,150       161,002  
Current liabilities
    86,428       4,862       91,290  
Noncurrent liabilities
    133,800             133,800  
Shareholders’ equity and capital accounts
    302,310       17,854       320,164  
                         
The Company’s portion of undistributed earnings
    14,459       937       15,396  
 
 
20

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
 
   
As of June 26, 2011
 
   
PAL
   
Other
   
Total
 
Current assets
  $ 398,338     $ 13,405     $ 411,743  
Noncurrent assets
    155,505       9,588       165,093  
Current liabilities
    100,284       5,588       105,872  
Noncurrent liabilities
    154,054             154,054  
Shareholders’ equity and capital accounts
    299,505       17,405       316,910  

   
For the Three Months Ended September 25, 2011
 
   
PAL
   
Other
   
Total
 
Net sales
  $ 346,075     $ 10,267     $ 356,342  
Gross profit
    13,077       664       13,741  
Income (loss) from operations
    11,115       (201 )     10,914  
Net income (loss)
    11,325       (245 )     11,080  
Depreciation and amortization
    9,295       56       9,351  
                         
Cash received by PAL under EAP program
    6,171             6,171  
Earnings recognized by PAL for EAP program
    5,956             5,956  
                         
Dividends and cash distributions received
    2,005             2,005  

   
For the Three Months Ended September 26, 2010
 
   
PAL
   
Other
   
Total
 
Net sales
  $ 209,801     $ 11,576     $ 221,377  
Gross profit
    27,092       2,007       29,099  
Income from operations
    23,910       1,262       25,172  
Net income
    25,393       986       26,379  
Depreciation and amortization
    6,523       342       6,865  
                         
Cash received by PAL under EAP program
    7,124             7,124  
Earnings recognized by PAL for EAP program
    18,376             18,376  
                         
Dividends and cash distributions received
    2,532             2,532  

23.  Restructuring Charges
On January 11, 2010, the Company announced the creation of Unifi Central America, Ltda. de C.V. (“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 polyester equipment from its Yadkinville, North Carolina facility to the region 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 costs incurred for equipment relocation costs to UCA and reinstalling previously idled texturing equipment to replace the manufacturing capacity at the Company’s Yadkinville, North Carolina facility were charged to restructuring expense as incurred.

The components of restructuring charges were as follows:
 
   
For the Three Months Ended
 
    September 25, 2011     September 26, 2010  
Equipment relocation costs
  $     $ 363  
Reinstallation costs
           
Restructuring charges
  $     $ 363  
 
 
21

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
 
24. Commitments and Contingencies
Environmental
On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located in Kinston, North Carolina from INVISTA S.a.r.l. (“INVISTA”).  The land for the Kinston site 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 U.S. Environmental Protection Agency (“EPA”) and the 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 contamination 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 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 remediated 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 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.

Litigation
The Company is aware of certain claims against it for the alleged use of non-compliant “Berry Amendment” nylon POY in yarns that the Company sold which may have ultimately been used to manufacture certain U.S. military garments (the “Military Claims”).  Although the Company believes it has certain potential defenses to the claims, the estimate of possible losses, before considering any potential salvage values for the garments, ranges from $200 to $2,100.  The Company has appropriately accrued for this contingency. It is reasonably possible that the Company’s estimate may differ from the actual claim amount; however, the Company believes any change would not be material to the financial statements.

25. Related Party Transactions
During the quarter ended September 25, 2011, the Company had sales to Cupron Medical, Inc. (“Cupron”).  Mr. William J. Armfield, IV, is a member of the Company’s Board and is a current shareholder of Cupron.  For a discussion of the nature of all other related party relationships see Footnote 27. “Related Party Transactions” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 26, 2011.

Related party receivables and payables consist of the following:
 
   
September 25, 2011
   
June 26, 2011
 
Related Party Receivables:
           
Dillon Yarn Corporation
  $ 11     $ 6  
Cupron Medical, Inc.
    95        
American Drawtech Company, Inc.
    493       506  
    Total related party receivables (included within Receivables, net)
  $ 599     $ 512  
Related Party Payables:
               
Dillon Yarn Corporation
  $ 221     $ 276  
American Drawtech Company, Inc.
          11  
Salem Leasing Corporation
    245       280  
    Total related party payables (included within Accounts payable)
  $ 466     $ 567  

 
22

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Related party transactions were as follows:
 
     
For the Three Months Ended
 
Affiliated Entity
Transaction Type
 
September 25, 2011
   
September 26, 2010
 
Dillon Yarn Corporation
Costs under Sales Service Agreement
  $ 250     $ 325  
Dillon Yarn Corporation
Sales
    22       5  
Dillon Yarn Corporation
Yarn Purchases
    871       593  
American Drawtech Company
Sales
    1,201       538  
American Drawtech Company
Yarn Purchases
    22       28  
Salem Leasing Corporation
Transportation Equipment Costs
    753       784  
Cupron Medical, Inc.
Sales
    96        

26. Business Segment Information
Each reportable segment derives its revenues as follows:
 
·
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.
 
·
The nylon segment manufactures textured nylon and covered spandex yarns 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.
 
·
The international segment’s products include textured polyester and various types of 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.

The Company evaluates the operating performance of its segments based upon Segment Adjusted Profit which is defined as segment gross profit plus segment depreciation and amortization less segment SG&A.  Segment operating profit represents segment net sales less cost of sales, restructuring and impairment charges and SG&A expenses.  The accounting policies for the segments are consistent with the Company’s accounting policies.  Intersegment sales are accounted for at current market prices.  Selected financial information for the Polyester, Nylon and International segments is presented below:
 
   
For the Three Months Ended September 25, 2011
 
   
Polyester
   
Nylon
   
International
   
Total
 
Net sales to external customers
  $ 92,528     $ 40,961     $ 37,524     $ 171,013  
Intersegment sales
    453       8             461  
Segment adjusted profit
    2,426       3,024       2,564       8,014  
Segment operating profit (loss)
    (2,373 )     2,241       1,591       1,459  
Segment depreciation and amortization
    4,799       783       973       6,555  
Segment assets
    224,740       82,276       98,783       405,799  
Capital expenditures
    189       71       805       1,065  

   
For the Three Months Ended September 26, 2010
 
   
Polyester
   
Nylon
   
International
   
Total
 
Net sales to external customers
  $ 85,587     $ 44,173     $ 45,332     $ 175,092  
Intersegment sales
    835       489       398       1,722  
Segment adjusted profit
    5,705       4,767       6,050       16,522  
Segment operating profit
    612       3,913       5,148       9,673  
Segment depreciation and amortization
    4,730       854       902       6,486  
Restructuring charges
    363                   363  
Segment assets
    207,303       86,548       118,430       412,281  
Capital expenditures
    3,043       371       1,923       5,337  
 
 
23

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
 
The $57 and $158 difference between total capital expenditures for long-lived assets and the segment total for the three months ended September 25, 2011 and September 26, 2010, respectively, relates to various, unallocated corporate projects.

Reconciliations from segment data to consolidated reporting data are as follows:
 
   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Segment operating profit
  $ 1,459     $ 9,673  
(Benefit) provision for bad debts
    205       (41 )
Other operating (income) expense, net
    (41 )     243  
Operating income
    1,295       9,471  
Interest income
    (647 )     (743 )
Interest expense
    4,380       5,269  
Loss on extinguishment of debt
    462       1,144  
Equity in earnings of unconsolidated affiliates
    (3,459 )     (8,951 )
Income before income taxes
  $ 559     $ 12,752  

   
For the Three Months Ended
 
   
September 25, 2011
   
September 26, 2010
 
Segment depreciation and amortization
  $ 6,555       6,486  
Depreciation included in other operating (income) expense
    6       3  
Amortization included in interest expense
    221       254  
Consolidated depreciation and amortization
  $ 6,782     $ 6,743  

   
September 25, 2011
   
September 26, 2010
 
Segment assets
  $ 405,799     $ 412,281  
Other current corporate assets
    4,080       2,429  
Unallocated corporate PP&E
    9,854       10,248  
Other non-current assets
    3,272       3,870  
Investments in unconsolidated affiliates
    92,340       80,494  
Consolidated assets
  $ 515,345     $ 509,322  

27.  Subsequent Events
The Company evaluated all events and material transactions for potential recognition or disclosure through such time as these statements were filed with the Securities and Exchange Commission and determined there were no other items deemed reportable.

28.  Supplemental Cash Flow Information
Cash payments for interest and taxes were as follows:
 
 
For the Three Months Ended
 
 
September 25, 2011
 
September 26, 2010
 
Interest, net of capitalized interest
$   778   $   380  
Income taxes, net of refunds
    793       1,742  
 
 
24

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

29. Condensed Consolidating Financial Statements
In accordance with the Indenture governing the Company’s 2014 notes, certain of the Company’s subsidiaries have guaranteed the notes, jointly and severally, on a senior secured basis.

The following presents the condensed consolidating financial statements separately for:
 
·
Parent company, the issuer of the guaranteed obligations;
 
·
Guarantor subsidiaries, on a combined basis, as specified in the Indenture;
 
·
Non-guarantor subsidiaries, on a combined basis;
 
·
Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions, (b) eliminate intercompany profit in inventory, (c) eliminate investments in its subsidiaries and (d) record consolidating entries; and
 
·
Parent company, on a consolidated basis.

Each subsidiary guarantor is 100% owned by Unifi, Inc. or its wholly-owned subsidiary, Unifi Manufacturing, Inc. and all guarantees are full and unconditional.  The non-guarantor subsidiaries predominantly represent the foreign subsidiaries which do not guarantee the 2014 notes.  Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements.  Supplemental financial information for the Company and its guarantor subsidiaries and non-guarantor subsidiaries for the 2014 notes is presented below.

 
25

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Balance Sheet Information as of September 25, 2011:

   
Parent
   
Guarantor Subsidiaries
   
Non-Guarantor Subsidiaries
   
Eliminations
   
Consolidated
 
ASSETS
                                       
Cash and cash equivalents
  $ 2,029     $ (1,883 )   $ 19,675     $     $ 19,821  
Receivables
          69,213       26,565             95,778  
Intercompany accounts receivable
    125,409       (118,485 )     946       (7,870 )      
Inventories
          96,063       39,913             135,976  
Income taxes receivable
    575             194             769  
Deferred income taxes
    2,296             2,094             4,390  
Other current assets
    99       990       3,752             4,841  
Total current assets
    130,408       45,898       93,139       (7,870 )     261,575  
                                         
Property, plant and equipment, net
    8,833       109,791       23,173             141,797  
Intangible assets, net
          11,027                   11,027  
Investments in unconsolidated affiliates
          83,886       8,454             92,340  
Investments in consolidated subsidiaries
    431,698                   (431,698 )      
Intercompany notes receivable
                19,706       (19,706 )      
Other non-current assets
    3,224       3,048       2,334             8,606  
Total assets
  $ 574,163     $ 253,650     $ 146,806     $ (459,274 )   $ 515,345