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EX-31 - EXHIBIT 31.1 - UNIFI INCex31-1.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 December 28, 2014

 

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.)

   

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

 

 

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 such shorter period that the registrant was required to submit and post such files). Yes [ X ] 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 definitions 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 February 2, 2015 was 18,185,633.

 

 
 

 

 

UNIFI, INC.

FORM 10-Q FOR THE QUARTER ENDED DECEMBER 28, 2014

 

TABLE OF CONTENTS

 


 

  Part I. FINANCIAL INFORMATION  
    Page
     

Item 1.

Financial Statements:

 3
     
 

Condensed Consolidated Balance Sheets as of December 28, 2014 and June 29, 2014

 3
     
 

Condensed Consolidated Statements of Income for the Three Months and Six Months Ended December 28, 2014 and December 29, 2013

4
     
 

Condensed Consolidated Statements of Comprehensive Income for the Three Months and Six Months Ended December 28, 2014 and December 29, 2013

5
     
 

Condensed Consolidated Statement of Shareholders’ Equity for the Six Months Ended December 28, 2014

6
     
 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 28, 2014 and December 29, 2013

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

 48
     

Item 4.

Controls and Procedures

 49
     
     

Part II. OTHER INFORMATION

     
     

Item 1.

Legal Proceedings

 50
     

Item 1A.

Risk Factors

 50
     

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 50
     

Item 3.

Defaults Upon Senior Securities

 50
     

Item 4.

Mine Safety Disclosures

 50
     

Item 5.

Other Information

 50
     

Item 6.

Exhibits

51
     
 

Signatures

 52
     
 

Exhibit Index

 53

 

 
2

 

 

Part I.      FINANCIAL INFORMATION

 

Item 1.      FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(amounts in thousands, except share and per share amounts)

 

 

   

December 28, 2014

   

June 29, 2014

 

ASSETS

               

Cash and cash equivalents

  $ 17,897     $ 15,907  

Receivables, net

    76,319       93,925  

Inventories

    115,703       113,370  

Income taxes receivable

    4,434       179  

Deferred income taxes

    1,928       1,794  

Other current assets

    5,496       6,052  

Total current assets

    221,777       231,227  
                 

Property, plant and equipment, net

    124,328       123,802  

Deferred income taxes

    3,314       2,329  

Intangible assets, net

    6,372       7,394  

Investments in unconsolidated affiliates

    105,748       99,229  

Other non-current assets

    4,952       5,086  

Total assets

  $ 466,491     $ 469,067  
                 

LIABILITIES AND SHAREHOLDERS’ EQUITY

               

Accounts payable

  $ 41,853     $ 51,364  

Accrued expenses

    11,639       18,589  

Income taxes payable

    200       3,134  

Current portion of long-term debt

    13,353       7,215  

Total current liabilities

    67,045       80,302  

Long-term debt

    97,905       92,273  

Other long-term liabilities

    7,639       7,549  

Deferred income taxes

    5,809       2,205  

Total liabilities

    178,398       182,329  

Commitments and contingencies

               
                 

Common stock, $0.10 par value (500,000,000 shares authorized, 18,185,633 and 18,313,959 shares outstanding)

    1,819       1,831  

Capital in excess of par value

    43,483       42,130  

Retained earnings

    258,367       245,673  

Accumulated other comprehensive loss

    (17,321 )     (4,619 )

Total Unifi, Inc. shareholders’ equity

    286,348       285,015  

Non-controlling interest

    1,745       1,723  

Total shareholders’ equity

    288,093       286,738  

Total liabilities and shareholders’ equity

  $ 466,491     $ 469,067  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
3

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(amounts in thousands, except per share amounts)

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

   

December 28, 2014

   

December 29, 2013

 

Net sales

  $ 163,149     $ 160,617     $ 337,331     $ 329,286  

Cost of sales

    139,866       142,120       293,093       290,804  

Gross profit

    23,283       18,497       44,238       38,482  

Selling, general and administrative expenses

    12,584       11,491       23,870       21,605  

Provision for bad debts

    63       87       654       49  

Other operating expense, net

    702       1,145       2,163       2,769  

Operating income

    9,934       5,774       17,551       14,059  

Interest income

    (309 )     (142 )     (626 )     (1,356 )

Interest expense

    1,209       903       2,028       2,155  

Equity in earnings of unconsolidated affiliates

    (3,281 )     (5,122 )     (7,002 )     (11,245 )

Income before income taxes

    12,315       10,135       23,151       24,505  

Provision for income taxes

    3,193       3,924       7,354       9,675  

Net income including non-controlling interest

    9,122       6,211       15,797       14,830  

Less: net (loss) attributable to non-controlling interest

    (296 )     (232 )     (698 )     (483 )

Net income attributable to Unifi, Inc.

  $ 9,418     $ 6,443     $ 16,495     $ 15,313  
                                 

Net income attributable to Unifi, Inc. per common share:

                               

Basic

  $ 0.52     $ 0.34     $ 0.90     $ 0.80  

Diluted

  $ 0.50     $ 0.32     $ 0.88     $ 0.76  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
4

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(amounts in thousands)

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

   

December 28, 2014

   

December 29, 2013

 

Net income including non-controlling interest

  $ 9,122     $ 6,211     $ 15,797     $ 14,830  

Other comprehensive (loss) income:

                               

Foreign currency translation adjustments

    (5,483 )     (3,140 )     (12,524 )     (3,462 )

Foreign currency translation adjustments for an unconsolidated affiliate

    (371 )           (371 )      

Reclassification adjustments on cash flow hedge

    89       145       193       300  

Other comprehensive loss, net

    (5,765 )     (2,995 )     (12,702 )     (3,162 )
                                 

Comprehensive income including non-controlling interest

    3,357       3,216       3,095       11,668  

Less: comprehensive (loss) attributable to non-controlling interest

    (296 )     (232 )     (698 )     (483 )

Comprehensive income attributable to Unifi, Inc.

  $ 3,653     $ 3,448     $ 3,793     $ 12,151  

  

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
5

 

 

 

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (Unaudited)

For the Six Months Ended December 28, 2014

(amounts in thousands)

 

 

   

Shares

   

Common Stock

   

Capital in

Excess of

Par Value

   

Retained

Earnings

   

Accumulated Other

Comprehensive

Loss

   

Total

Unifi, Inc. Shareholders’ Equity

   

Non-controlling Interest

   

Total

Shareholders’

Equity

 
                                                                 

Balance at June 29, 2014

    18,314     $ 1,831     $ 42,130     $ 245,673     $ (4,619 )   $ 285,015     $ 1,723     $ 286,738  

Options exercised

    5             36                   36             36  

Stock-based compensation

                1,564                   1,564             1,564  

Conversion of restricted stock units

    16       2       (2 )                              

Common stock repurchased and retired under publicly announced program

    (149 )     (14 )     (345 )     (3,801 )           (4,160 )           (4,160 )

Excess tax benefit on stock-based compensation plans

                100                   100             100  

Other comprehensive loss, net

                            (12,702 )     (12,702 )           (12,702 )

Contributions from non-controlling interest

                                        720       720  

Net income (loss)

                      16,495             16,495       (698 )     15,797  

Balance at December 28, 2014

    18,186     $ 1,819     $ 43,483     $ 258,367     $ (17,321 )   $ 286,348     $ 1,745     $ 288,093  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
6

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(amounts in thousands)

 

   

For The Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

 

Cash and cash equivalents at beginning of year

  $ 15,907     $ 8,755  

Operating activities:

               

Net income including non-controlling interest

    15,797       14,830  

Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:

               

Equity in earnings of unconsolidated affiliates

    (7,002 )     (11,245 )

Distributions received from unconsolidated affiliates

          3,059  

Depreciation and amortization expense

    8,986       8,625  

Non-cash compensation expense, net

    1,897       1,611  

Excess tax benefit on stock-based compensation plans

    (100 )     (3,536 )

Deferred income taxes

    1,620       25  

Other

    48       1,751  

Changes in assets and liabilities:

               

Receivables, net

    14,239       19,829  

Inventories

    (7,005 )     (1,609 )

Other current assets and income taxes receivable

    (4,330 )     684  

Accounts payable and accruals

    (11,741 )     (17,645 )

Income taxes payable

    (2,897 )     3,137  

Other non-current assets

    53       4,714  

Net cash provided by operating activities

    9,565       24,230  
                 

Investing activities:

               

Capital expenditures

    (13,442 )     (9,431 )

Proceeds from sale of assets

    101       268  

Proceeds from other investments

    54       392  

Other

    (145 )     (60 )

Net cash used in investing activities

    (13,432 )     (8,831 )
                 

Financing activities:

               

Proceeds from revolving credit facility

    79,400       72,700  

Payments on revolving credit facility

    (86,400 )     (74,800 )

Proceeds from term loan

    22,000       7,200  

Payment on term loan

    (2,813 )      

Common stock repurchased and retired under publicly announced programs

    (4,160 )     (18,687 )

Common stock tendered to the Company for withholding tax obligations and retired

          (1,654 )

Proceeds from stock option exercises

    36       2,833  

Excess tax benefit on stock-based compensation plans

    100       3,536  

Contributions from non-controlling interest

    720       346  

Other

    (959 )     (31 )

Net cash provided by (used in) financing activities

    7,924       (8,557 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (2,067 )     (75 )

Net increase in cash and cash equivalents

    1,990       6,767  

Cash and cash equivalents at end of period

  $ 17,897     $ 15,522  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 
7

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements

 

1. Background

 

Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, “we”, the “Company” or “Unifi”), is a multi-national manufacturing company that 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. The Company sells yarns made from polyester and nylon to other yarn manufacturers and knitters and weavers that produce fabric for the apparel, hosiery, home furnishings, automotive upholstery, industrial and other end-use markets. The Company’s polyester products include polyester polymer beads (“Chip”), partially oriented yarn (“POY”), textured, solution and package dyed, twisted, beamed and draw wound yarns; each is available in virgin or recycled varieties (the latter made from both pre-consumer yarn waste and post-consumer waste, including plastic bottles). The Company’s nylon products include textured, solution dyed and covered spandex products.

 

The Company maintains one of the textile industry’s most comprehensive yarn product offerings, and it has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”). The Company’s principal geographic markets for its products are located in the U.S., Canada, Mexico, Central America and South America. 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 PVA and other specialty products in the Asian textile market, primarily in China, as well as in the European market.

 

2. Basis of Presentation; Condensed Notes

 

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. As contemplated by the instructions of the Securities and Exchange Commission to Form 10-Q, the following notes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended June 29, 2014 (the “2014 Form 10-K”).

 

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, all adjustments considered necessary for a fair statement of the results for interim periods have been included. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The June 29, 2014 condensed consolidated balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP. The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures. Actual results may vary from these estimates.

 

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

 

Fiscal Year

The Company’s current fiscal quarter ended on December 28, 2014, the last Sunday in December. The Company’s Brazilian, Colombian and Chinese subsidiaries’ fiscal quarter ended on December 31, 2014 and there were no significant transactions or events that occurred between the Company’s fiscal quarter end and its subsidiaries’ fiscal quarter end. The three months ended December 28, 2014 and December 29, 2013 each consisted of thirteen fiscal weeks. The six months ended December 28, 2014 and December 29, 2013 each consisted of twenty-six fiscal weeks.

 

Reclassifications

Certain reclassifications of prior years’ data have been made to conform to the current year presentation.

 

3. Recent 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. Acquisition

 

Acquisition of Draw Winding Business from Dillon Yarn Corporation

On December 2, 2013, the Company acquired certain draw winding assets and the associated business from American Drawtech Company, Inc. (“ADC”), a division of Dillon Yarn Corporation (“Dillon”), pursuant to the exercise of an option granted to the Company under the terms of a commissioning agreement with Dillon, for $2,934, which included accounts payable and an accrued contingent liability.  The assets acquired include Dillon’s draw winding inventory and production machinery and equipment.  This acquisition increased the Company’s polyester production capacity and has allowed the Company to expand its presence in targeted industrial, belting, hose and thread markets by increasing its product offerings to include mid-tenacity flat yarns.  Mr. Mitchel Weinberger, a member of the Company’s Board of Directors (the “Board”), is also Dillon’s President and Chief Operating Officer and an Executive Vice President and a director of ADC.

 

 
8

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

The acquisition has been accounted for as a business combination, which requires assets acquired and liabilities assumed to be recognized at their fair values as of the acquisition date.  The Company concluded that the acquisition did not represent a material business combination. The fair values of the assets acquired, liabilities assumed and consideration transferred are as follows:

 

Assets:

       

Inventory

  $ 434  

Machinery and equipment

    835  

Customer list

    1,615  

Non-compete agreement

    50  

Total assets

  $ 2,934  
         

Liabilities:

       

Accounts payable

  $ 434  

Contingent consideration

    2,500  

Total liabilities

  $ 2,934  

 

The contingent consideration liability represents the present value of the expected future payments due to Dillon over the five-year period following the acquisition date.  The payments due are equal to one-half of the operating profit of the draw winding business, as calculated using an agreed-upon definition.  The assumptions used in estimating the contingent consideration liability were based on inputs not observable in the market and represent Level 3 fair value measurements. These estimates are reviewed quarterly and any adjustment is recorded through operating income.  

 

See “Note 9. Intangible Assets, Net” for further discussion of the customer list and non-compete agreement.

 

See “Note 17. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities” for further discussion of the recurring measurement of the contingent consideration.

 

5. Receivables, Net

 

Receivables, net consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Customer receivables

  $ 78,106     $ 95,270  

Allowance for uncollectible accounts

    (1,465 )     (1,035 )

Reserves for yarn quality claims

    (640 )     (618 )

Net customer receivables

    76,001       93,617  

Related party receivables

    25       17  

Other receivables

    293       291  

Total receivables, net

  $ 76,319     $ 93,925  

 

Other receivables consist primarily of receivables for duty drawback, healthcare claim reimbursement, interest and refunds from vendors.

 

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 29, 2014

  $ (1,035 )   $ (618 )

Charged to costs and expenses

    (654 )     (631 )

Charged to other accounts

    144       22  

Deductions

    80       587  

Balance at December 28, 2014

  $ (1,465 )   $ (640 )

 

 
9

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

Amounts charged to costs and expenses for the allowance for uncollectible accounts are reflected in the provision for bad debts and deductions represent amounts written off which were deemed to not be collectible, net of any recoveries. Amounts charged to costs and expenses for the reserves for yarn quality claims are primarily reflected as a reduction of net sales and deductions represent adjustments to either increase or decrease claims based on negotiated amounts or actual versus estimated claim differences. 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.

 

6. Inventories

 

Inventories consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Raw materials

  $ 44,505     $ 42,244  

Supplies

    5,135       5,345  

Work in process

    6,067       7,404  

Finished goods

    61,071       59,716  

Gross inventories

    116,778       114,709  

Inventory reserves

    (1,075 )     (1,339 )

Total inventories

  $ 115,703     $ 113,370  

 

The cost for the majority of the Company’s inventories is determined using the first-in, first-out method. Certain foreign inventories and limited categories of supplies of $30,510 and $32,822 as of December 28, 2014 and June 29, 2014, respectively, were valued under the average cost method.

 

7. Other Current Assets

 

Other current assets consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Vendor deposits

  $ 1,810     $ 2,369  

Value added taxes receivable

    1,296       1,197  

Prepaid expenses

    1,928       1,876  

Other

    462       610  

Total other current assets

  $ 5,496     $ 6,052  

 

Vendor deposits primarily relate to down payments made toward the purchase of raw materials by the Company’s U.S., Brazilian and Chinese operations. Value added taxes receivable are recoverable taxes associated with the sales and purchase activities of the Company’s foreign operations. Prepaid expenses consist of advance payments for insurance, professional fees, membership dues, subscriptions, non-income related tax payments, marketing and information technology services.

 

Other consists primarily of premiums on a split dollar life insurance policy that represents the value of the Company’s right of return on premiums paid for a retiree-owned insurance contract with a maturity date of January 1, 2015 and amounts held by the Company’s Colombian subsidiary in an investment fund under liquidation.

 

8. Property, Plant and Equipment, Net

 

Property, plant and equipment, net consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Land

  $ 2,801     $ 2,957  

Land improvements

    11,676       11,676  

Buildings and improvements

    145,228       145,458  

Assets under capital leases

    4,587       4,587  

Machinery and equipment

    532,639       532,650  

Computers, software and office equipment

    16,846       17,404  

Transportation equipment

    4,818       4,901  

Construction in progress

    5,932       6,896  

Gross property, plant and equipment

    724,527       726,529  

Less: accumulated depreciation

    (599,663 )     (602,436 )

Less: accumulated amortization – capital leases

    (536 )     (291 )

Total property, plant and equipment, net

  $ 124,328     $ 123,802  

 

 
10

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

Depreciation expense, including the amortization of assets under capital leases, internal software development costs amortization, repairs and maintenance expenses, and capitalized interest were as follows:

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

   

December 28, 2014

   

December 29, 2013

 

Depreciation expense

  $ 3,792     $ 3,599     $ 7,620     $ 7,386  

Internal software development costs amortization

    37       35       71       69  

Repair and maintenance expenses

    4,290       4,286       8,948       8,516  

Capitalized interest

    6       41       53       83  

 

9. Intangible Assets, Net

 

Intangible assets, net consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Customer lists

  $ 23,615     $ 23,615  

Non-compete agreements

    4,293       4,293  

Licenses

    265       265  

Trademarks

    353       339  

Patents

    163       162  

Total intangible assets, gross

    28,689       28,674  
                 

Accumulated amortization - customer lists

    (18,635 )     (17,838 )

Accumulated amortization - non-compete agreements

    (3,375 )     (3,214 )

Accumulated amortization - licenses

    (102 )     (86 )

Accumulated amortization - trademarks

    (199 )     (141 )

Accumulated amortization - patents

    (6 )     (1 )

Total accumulated amortization

    (22,317 )     (21,280 )

Total intangible assets, net

  $ 6,372     $ 7,394  

 

In fiscal year 2007, the Company purchased the texturing operations of Dillon, which are included in the Company’s Polyester Segment. 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 amortized in a manner which reflects the expected economic benefit that will be received over its thirteen-year life. The non-compete agreement is amortized using the straight-line method over the period currently covered by the agreement. The amortization expense is included within the Polyester Segment’s depreciation and amortization expense.

 

On December 2, 2013, the Company acquired certain draw winding assets and the associated business from Dillon, as described in “Note 4. Acquisition.” A customer list and a non-compete agreement were recorded in connection with the business combination, utilizing similar valuation methods as described above for the fiscal year 2007 transaction. The customer list is amortized over a nine-year estimated useful life based on the expected economic benefit. The non-compete agreement is amortized using the straight-line method over the five-year term of the agreement. The amortization expense is included within the Polyester Segment’s depreciation and amortization expense.

 

During fiscal year 2012, the Company acquired a controlling interest (and continues to hold such 60% membership interest) in Repreve Renewables, LLC (“Renewables”), a development stage enterprise formed to cultivate, grow and sell dedicated energy crops, including biomass intended for use as a feedstock in the production of energy and potential applications for poultry bedding. The non-compete agreement for Renewables is amortized using the straight-line method over the five-year term of the agreement. The licenses for Renewables are amortized using the straight-line method over their estimated useful lives of four to eight years.

 

 
11

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

The Company capitalizes expenses incurred to register trademarks for REPREVE® and other PVA products in various countries. The Company has determined that these trademarks have varying useful lives of up to three years and are being amortized using the straight-line method.

 

Amortization expense for intangible assets consists of the following:

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

   

December 28, 2014

   

December 29, 2013

 

Customer lists

  $ 398     $ 370     $ 797     $ 740  

Non-compete agreements

    81       79       161       157  

Licenses

    8       7       16       15  

Trademarks

    30       22       58       46  

Patents

    2             5        

Total amortization expense

  $ 519     $ 478     $ 1,037     $ 958  

 

10. Other Non-Current Assets

 

Other non-current assets consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Biomass foundation and feedstock

  $ 2,688     $ 2,683  

Debt financing fees

    2,019       2,093  

Long-term deposits

    242       295  

Other

    3       15  

Total other non-current assets

  $ 4,952     $ 5,086  

 

Biomass foundation and feedstock are currently being developed and propagated by Renewables for potential markets in the poultry bedding and bioenergy industries. Long-term deposits consist primarily of vendor deposits.

 

11. Accrued Expenses

 

Accrued expenses consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Payroll and fringe benefits

  $ 6,234     $ 12,406  

Utilities

    1,855       2,876  

Property taxes

    1,528       821  

Contingent consideration

    525       537  

Other

    1,497       1,949  

Total accrued expenses

  $ 11,639     $ 18,589  

 

Other consists primarily of workers compensation and other employee related claims, severance payments, interest, marketing expenses, freight expenses, rent, deferred incentives and other non-income related taxes.

 

12. Long-Term Debt

 

Debt Obligations

The following table presents the total balances outstanding for the Company’s debt obligations, their scheduled maturity dates and the weighted average interest rates for borrowings (including the effects of the interest rate swap) as well as the applicable current portion of long-term debt:

 

    Scheduled    

Weighted Average Interest Rate as of

 

Principal Amounts as of

 
   

Maturity Date

    December 28, 2014  

December 28, 2014

   

June 29, 2014

 

ABL Revolver

 

March 2019

   

2.2%

  $ 19,000     $ 26,000  

ABL Term Loan

 

March 2019

   

3.2%

    87,187       68,000  

Term loan from unconsolidated affiliate

 

August 2015

   

3.0%

    1,250       1,250  

Capital lease obligations

 

(1)

   

(2)

    3,821       4,238  

Total debt

              111,258       99,488  

Current portion of long-term debt

              (13,353 )     (7,215 )

Total long-term debt

            $ 97,905     $ 92,273  
 

(1)

Scheduled maturity dates for capital lease obligations range from January 2017 to November 2027.

 

(2)

Interest rates for capital lease obligations range from 2.3% to 4.6%.

 

 
12

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

On May 24, 2012, the Company entered into a credit agreement (the “Credit Agreement”) to establish a $150,000 senior secured credit facility (“ABL Facility”) with Wells Fargo Bank, N.A. and Bank of America, N.A. The ABL Facility has been amended several times, such that it has a maturity date of March 28, 2019 and consists of a $100,000 revolving credit facility (“ABL Revolver”) and a $90,000 term loan (“ABL Term Loan”).

 

ABL Facility

The ABL Facility is secured by a first-priority security interest in substantially all owned property and assets (together with proceeds and products) of Unifi, Inc., Unifi Manufacturing, Inc. and certain subsidiary guarantors (the “Loan Parties”). It is also secured by a first-priority security interest in all (or 65% in the case of certain first tier controlled foreign corporations, as required by the lenders) of the stock of (or other ownership interests in) each of the Loan Parties (other than the Company) and certain subsidiaries of the Loan Parties, together with all proceeds and products thereof. The ABL Facility is further secured by a first-priority lien on the Company’s limited liability company membership interest in Parkdale America, LLC (“PAL”).

 

The Credit Agreement, as amended, includes representations and warranties made by the Loan Parties, affirmative and negative covenants and events of default that are usual and customary for financings of this type. If excess availability under the ABL Revolver falls below the defined Trigger Level, a financial covenant requiring the Loan Parties to maintain a fixed charge coverage ratio on a monthly basis of at least 1.05 to 1.0 becomes effective. The Trigger Level as of December 28, 2014 was $23,398. In addition, the ABL Facility contains restrictions on certain payments and investments, including restrictions on the payment of dividends and share repurchases, unless excess availability is greater than the Trigger Level for the thirty-day period prior to the making of such a distribution (as calculated on a pro forma basis as if all such payments and any revolving loans made in connection therewith were made on the first day of such period) and the fixed charge coverage ratio is at least 1.0 to 1.0 (as calculated on a pro forma basis as if all such payments made pursuant to the most recent compliance certificate date were made on the last day of the applicable twelve-month period). Subject to certain provisions, the ABL Term Loan may be prepaid at par, in whole or in part, at any time before the maturity date, at the Company’s discretion.

 

The Company’s ability to borrow under the ABL Revolver is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to certain conditions and limitations. ABL Revolver borrowings bear interest at the London Interbank Offer Rate (“LIBOR”) plus an applicable margin of 1.75% to 2.25%, or the Base Rate plus an applicable margin of 0.75% to 1.25%, with interest currently being paid on a monthly basis. The Base Rate means the greater of (i) the prime lending rate as publicly announced from time to time by Wells Fargo, (ii) the Federal Funds Rate plus 0.5%, and (iii) LIBOR plus 1.0%. There is also a monthly unused line fee under the ABL Revolver of 0.25% to 0.375%.

 

Fifth Amendment

On August 25, 2014, the Company entered into a Fifth Amendment to Credit Agreement (“Fifth Amendment”). The Fifth Amendment, among other things: (i) increased the ABL Term Loan by $22,000 to $90,000; (ii) increased the fixed quarterly payments on the ABL Term Loan from $2,125 to $2,812; (iii) modified the calculation of the fixed charge coverage ratio to exclude certain capital expenditures and permitted acquisitions, at the election of the Company, through June 30, 2015, subject to a maximum exclusion of $40,000 for any consecutive twelve-month period and other limitations; (iv) increased the ABL Term Loan interest rate from LIBOR plus an applicable margin of 2.25%, or the Base Rate plus an applicable margin of 1.25%, to LIBOR plus an applicable margin of 2.50%, or the Base Rate plus an applicable margin of 1.50%; (v) modified the date on which the eligibility of certain collateral is calculated as a date between July 19, 2015 and December 31, 2015, subject to satisfaction of certain additional conditions, such that the ABL Term Loan amount can be increased again up to $90,000; (vi) related to the making of restricted payments (consisting of dividends and share repurchases), in addition to existing requirements, added a requirement to have a fixed charge coverage ratio of at least 1.0 to 1.0 during the same period, calculated on a pro forma basis as if all such restricted payments made pursuant to the most recent compliance certificate date were made on the last day of the applicable twelve-fiscal-month period; and (vii) removed the requirement to hedge interest rate exposure on funded indebtedness. Debt financing fees of $184 were recorded during the six months ended December 28, 2014 related to the amendment.

 

As of December 28, 2014, the Company was in compliance with all financial covenants; the excess availability under the ABL Revolver was $60,919; the fixed charge coverage ratio was 4.5 to 1.0; and the Company had $525 of standby letters of credit, none of which have been drawn upon.

 

 
13

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

Term Loan from Unconsolidated Affiliate

On August 30, 2012, a foreign subsidiary of the Company entered into an unsecured loan agreement under which it borrowed $1,250 from the Company’s unconsolidated affiliate, U.N.F. Industries Ltd. The loan does not amortize and bears interest at 3%, payable semi-annually. The entire principal balance is due August 30, 2015, the maturity date.

 

Scheduled Debt Maturities

The following table presents the scheduled maturities of the Company’s outstanding debt obligations for the remainder of fiscal year 2015 and the fiscal years thereafter:

 

   

Scheduled Maturities on a Fiscal Year Basis

 
   

2015

   

2016

   

2017

   

2018

   

2019

   

Thereafter

 

ABL Revolver

  $     $     $     $     $ 19,000     $  

ABL Term Loan

    5,625       11,250       11,250       11,250       47,812        

Capital lease obligations

    423       866       808       558       366       800  

Term loan from unconsolidated affiliate

          1,250                          

Total

  $ 6,048     $ 13,366     $ 12,058     $ 11,808     $ 67,178     $ 800  

 

Debt Financing Fees

Debt financing fees are classified within other non-current assets and consist of the following:

 

Balance at June 29, 2014

  $ 2,093  

Amounts recorded related to debt modification

    184  

Amortization charged to interest expense

    (258 )

Balance at December 28, 2014

  $ 2,019  

 

Interest Expense

Interest expense consists of the following:

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

   

December 28, 2014

   

December 29, 2013

 

Interest on ABL Facility

  $ 925     $ 812     $ 1,785     $ 1,665  

Other

    43       30       91       69  

Subtotal

    968       842       1,876       1,734  

Reclassification adjustment for cash flow hedge

    89       145       193       300  

Amortization of debt financing fees

    146       105       258       212  

Mark-to-market adjustment for interest rate swap

    12       (148 )     (246 )     (8 )

Interest capitalized to property, plant and equipment, net

    (6 )     (41 )     (53 )     (83 )

Subtotal

    241       61       152       421  

Total interest expense

  $ 1,209     $ 903     $ 2,028     $ 2,155  

 

13. Other Long-Term Liabilities

 

Other long-term liabilities consists of the following:

 

   

December 28, 2014

   

June 29, 2014

 

Supplemental post-employment plan

  $ 3,506     $ 3,173  

Contingent consideration

    1,637       2,026  

Uncertain tax positions

    1,018       1,101  

Interest rate swap

    117       363  

Other

    1,361       886  

Total other long-term liabilities

  $ 7,639     $ 7,549  

 

 
14

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

The Company maintains an unfunded supplemental post-employment plan for certain management employees. Each employee’s account is credited annually based upon a percentage of the participant’s base salary, with each participant’s balance adjusted quarterly to reflect returns based upon a stock market index. Amounts are paid to participants only after termination of employment. Expenses recorded for this plan for the three months ended December 28, 2014 and December 29, 2013 were $234 and $301, respectively, and for the six months ended December 28, 2014 and December 29, 2013 were $333 and $520, respectively.

 

Contingent consideration represents the present value of the long-term portion of contingent payments associated with the Company’s December 2013 acquisition of Dillon’s draw winding business, described in “Note 4. Acquisition” and “Note 17. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities.”

 

Other primarily includes certain retiree and post-employment medical and disability liabilities and deferred incentives.

 

14. Income Taxes

 

The effective income tax rates for the three months and six months ended December 28, 2014 and December 29, 2013 were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be impacted over the course of the fiscal year by the mix and timing of actual earnings from our U.S. and foreign sources versus annual projections and changes in foreign currency exchange rates 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 three months ended December 28, 2014 and December 29, 2013 resulted in tax expense of $3,193 and $3,924, respectively, with an effective tax rate of 25.9% and 38.7%, respectively. The Company’s income tax provision for the six months ended December 28, 2014 and December 29, 2013 resulted in tax expense of $7,354 and $9,675, respectively, with an effective tax rate of 31.8% and 39.5%, respectively.

 

The effective income tax rate for the current quarter and year-to-date period is lower than the U.S. statutory rate due to (i) the recognition of lower taxable income versus book income for an unconsolidated affiliate, (ii) a lower overall effective tax rate for the Company’s foreign earnings and (iii) the domestic production activities deduction, partially offset by state and local taxes and losses in tax jurisdictions for which no tax benefit could be recognized.

 

The effective income tax rate for the prior year periods is higher than the U.S. statutory rate due to (i) the impact of state and local taxes, (ii) the recognition of higher taxable versus book income for an unconsolidated affiliate for which the Company maintains a full valuation allowance, (iii) foreign dividends taxed in the U.S. and (iv) losses in tax jurisdictions for which no tax benefit could be recognized.

 

As of December 28, 2014, the Company’s valuation allowance was $18,279 and includes $14,682 for reserves against certain domestic deferred tax assets primarily related to equity investments and foreign tax credits, as well as $3,597 for reserves against certain deferred tax assets of the Company’s foreign subsidiaries that are primarily related to net operating loss carryforwards and equity investments. The Company’s valuation allowance as of June 29, 2014 was $18,615. The decrease in the valuation allowance during the six month period ended December 28, 2014 is attributable to the timing of the Company’s recognition of lower taxable versus book income for an unconsolidated affiliate.

 

There have been no significant changes in the Company’s liability for uncertain tax positions since June 29, 2014. 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.

 

The Company and its domestic subsidiaries file a consolidated federal income tax return, as well as income tax returns in numerous state and foreign jurisdictions. The tax years subject to examination vary by jurisdiction. The Company regularly assesses the outcomes of both completed and ongoing examinations to ensure that the Company’s provision for income taxes is sufficient. Currently, the Company is subject to income tax examinations for U.S. federal income taxes for tax years 2011 through 2014, for foreign income taxes for tax years 2008 through 2014, and for state and local income taxes for tax years 2009 through 2014. The U.S. federal tax returns and state tax returns filed for the 2011 through 2013 tax years have utilized carryforward tax attributes generated in prior tax years, including net operating losses, which could potentially be revised upon examination.

 

 
15

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

15. Shareholders’ Equity

 

During fiscal year 2014, the Company completed its repurchase of shares under its $50,000 stock repurchase program that had been approved by the Board on January 22, 2013 (the “2013 SRP”). On April 23, 2014, the Board approved a new stock repurchase program (the “2014 SRP”) to acquire up to an additional $50,000 of the Company’s common stock. Under the 2014 SRP (as was the case under the 2013 SRP), the Company has been authorized to repurchase shares at prevailing market prices, through open market purchases or privately negotiated transactions at such times and prices and in such manner as determined by management, subject to market conditions, applicable legal requirements, contractual obligations and other factors. Repurchases, if any, are expected to be financed through cash generated from operations and borrowings under the Company’s ABL Revolver, and are subject to applicable limitations and restrictions as set forth in the ABL Facility. The 2014 SRP has no stated expiration or termination date, and there is no time limit or specific time frame otherwise for repurchases. The Company may discontinue repurchases at any time that management determines additional purchases are not beneficial or advisable.

 

The following table summarizes the Company’s repurchases and retirements of its common stock under the 2013 SRP and the 2014 SRP.

 

   

Total Number of

Shares Repurchased

as Part of Publicly

Announced Plans or

Programs

   

Average Price Paid

per Share

   

Maximum

Approximate Dollar

Value that May Yet Be

Repurchased Under

the 2014 SRP

 

Fiscal year 2013

    1,068     $ 18.08          

Fiscal year 2014

    1,524     $ 23.96          

Fiscal year 2015 (through December 28, 2014)

    149     $ 28.00          

Total

    2,741     $ 21.89     $ 40,011  

 

All repurchased shares have been retired and have the status of authorized and unissued shares. The cost of the repurchased shares is recorded as a reduction to common stock to the extent of the par value of the shares acquired and the remainder is allocated between capital in excess of par value and retained earnings. The portion of the remainder that is allocated to capital in excess of par value is limited to a pro rata portion of capital in excess of par value.

 

No dividends were paid during the six months ended December 28, 2014 or in the previous two fiscal years.

 

16. Stock-based Compensation

 

On October 23, 2013, the Company’s shareholders approved the Unifi, Inc. 2013 Incentive Compensation Plan (the “2013 Plan”). The 2013 Plan replaced the 2008 Unifi, Inc. Long-Term Incentive Plan (the “2008 LTIP”). No additional awards will be granted under the 2008 LTIP; however, prior awards outstanding under the 2008 LTIP remain subject to that plan’s provisions. The 2013 Plan authorized the issuance of 1,000 shares of common stock, subject to certain increases in the event outstanding awards under the 2008 LTIP expire, are forfeited or otherwise terminate unexercised.

 

Stock options

During the six months ended December 28, 2014 and December 29, 2013, the Company granted stock options to purchase 150 and 97 shares of common stock, respectively, to certain key employees. The stock options vest ratably over the required three-year service period and have ten-year contractual terms. For the six months ended December 28, 2014 and December 29, 2013, the weighted average exercise price of the options was $27.38 and $22.31 per share, respectively. The Company used the Black-Scholes model to estimate the weighted average grant date fair value of $17.31 and $14.66 per share, respectively.

 

For options granted, the valuation models used the following assumptions:

 

   

For the Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

 

Expected term (years)

  7.3     7.4  

Risk-free interest rate

 

2.2%

   

2.1%

 

Volatility

 

62.6%

   

65.9%

 

Dividend yield

       

 

The Company uses historical data to estimate the expected term and volatility. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for periods corresponding with the expected term of the options.

 

 
16

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

A summary of stock option activity for the six months ended December 28, 2014 is as follows:

 

   

Stock Options

   

Weighted Average

Exercise Price

   

Weighted Average

Remaining

Contractual Life

(Years)

   

Aggregate

Intrinsic Value

 

Outstanding at June 29, 2014

    800     $ 9.77                  

Granted

    150     $ 27.38                  

Exercised

    (5 )   $ 8.75                  

Forfeited

    (4 )   $ 8.75                  

Expired

        $                  

Outstanding at December 28, 2014

    941     $ 12.60       6.1     $ 16,570  

Vested and expected to vest as of December 28, 2014

    934     $ 12.50       6.1     $ 16,526  

Exercisable at December 28, 2014

    682     $ 8.61       5.1     $ 14,714  

 

At December 28, 2014, 10 non-vested options are subject to a market condition that vests the options on the date that the closing price of the Company’s common stock on the New York Stock Exchange has been at least $30 per share for thirty consecutive trading days. During fiscal year 2014, 14 options subject to a similar market condition at a threshold of $24 per share were vested and 10 such vested options remain outstanding at December 28, 2014. The weighted average exercise price of such 20 options subject to a market condition is $8.16.

 

At December 28, 2014, the remaining unrecognized compensation cost related to unvested stock options was $2,257, which is expected to be recognized over a weighted average period of 2.4 years.

 

For the six months ended December 28, 2014 and December 29, 2013, the total intrinsic value of options exercised was $81, and $12,521, respectively. The amount of cash received from the exercise of options was $36 and $2,833 and the tax benefit realized from stock options exercised was $32 and $4,905 for the six months ended December 28, 2014 and December 29, 2013, respectively.

 

Restricted stock units

During the six months ended December 28, 2014 and December 29, 2013, the Company granted 17 and 25 restricted stock units (“RSUs”), respectively, to the Company’s non-employee directors. The director RSUs became fully vested on the grant date. The director RSUs convey no rights of ownership in shares of Company stock until such director RSUs have been distributed to the grantee in the form of Company stock. The vested director RSUs will be converted into an equivalent number of shares of Company common stock and distributed to the grantee following the grantee’s termination of service as a member of the Board. The grantee may elect to defer receipt of the shares of stock in accordance with the deferral options provided under the Unifi, Inc. Director Deferred Compensation Plan. The Company estimated the fair value of such awards granted during the six months ended December 28, 2014 and December 29, 2013 to be $28.58 and $23.23 per director RSU, respectively.

 

During July 2013, the Company granted 22 RSUs to certain key employees. The employee RSUs are subject to a vesting restriction and convey no rights of ownership in shares of Company stock until such employee RSUs have vested and been distributed to the grantee in the form of Company stock. The employee RSUs vest over a three-year period, and will be converted into an equivalent number of shares of stock (for distribution to the grantee) on each vesting date, unless the grantee has elected to defer the receipt of the shares of stock until separation from service. If, after the first anniversary of the grant date and prior to the final vesting date, the grantee has a separation from service without cause for any reason other than the employee’s resignation, the remaining unvested employee 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 fair value of such awards granted to be $22.08 per employee RSU.

 

The Company estimates the fair value of RSUs based on the market price of the Company’s common stock at the award grant date.

 

 
17

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

A summary of the RSU activity for the six months ended December 28, 2014 is as follows:

 

   

Non-vested

   

Weighted Average

Grant Date

Fair Value

   

Vested

   

Total

   

Weighted Average

Grant Date

Fair Value

 

Outstanding at June 29, 2014

    49     $ 16.11       152       201     $ 14.19  

Granted

    17     $ 28.58             17     $ 28.58  

Vested

    (46 )   $ 19.86       46           $ 19.86  

Converted

        $       (16 )     (16 )   $ 14.06  

Forfeited

        $                 $  

Outstanding at December 28, 2014

    20     $ 18.35       182       202     $ 15.45  

 

At December 28, 2014, the number of RSUs vested and expected to vest was 202 with an aggregate intrinsic value of $6,121. The aggregate intrinsic value of the 182 vested RSUs at December 28, 2014 was $5,492.

 

The remaining unrecognized compensation cost related to the unvested RSUs at December 28, 2014 is $137, which is expected to be recognized over a weighted average period of 1.5 years.

 

For the six months ended December 28, 2014 and December 29, 2013, the total intrinsic value of RSUs converted was $425 and $696, respectively. The tax benefit realized from the conversion of RSUs was $166 and $275 for the six months ended December 28, 2014 and December 29, 2013, respectively.

 

Summary

The total cost charged against income related to all stock-based compensation arrangements was as follows:

 

   

For the Three Months Ended

   

For the Six Months Ended

 
   

December 28, 2014

   

December 29, 2013

   

December 28, 2014

   

December 29, 2013

 

Stock options

  $ 499     $ 282     $ 963     $ 438  

RSUs

    539       670       601       773  

Total compensation cost

  $ 1,038     $ 952     $ 1,564     $ 1,211  

 

The total income tax benefit recognized for stock-based compensation was $413 and $376 for the six months ended December 28, 2014 and December 29, 2013, respectively.

 

As of December 28, 2014, total unrecognized compensation costs related to all unvested stock-based compensation arrangements was $2,394. The weighted average period over which these costs are expected to be recognized is 2.3 years.

 

As of December 28, 2014, a summary of the number of securities remaining available for future issuance under equity compensation plans is as follows:

Authorized under the 2013 Plan

    1,000  

Plus: Awards expired, forfeited or otherwise terminated unexercised from the 2008 LTIP

     

Less: Service-condition options granted

    (155 )

Less: RSUs granted to non-employee directors

    (42 )

Available for issuance under the 2013 Plan

    803  

 

17. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities

 

Financial Instruments

The Company may use derivative financial instruments such as foreign currency forward contracts or interest rate swaps to reduce 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.

 

Foreign currency forward contracts

The Company may enter into foreign currency forward contracts as economic hedges for exposures related to certain sales, inventory purchases and equipment purchases which are denominated in currencies that are not its functional currency. Foreign currency forward contracts are not designated as hedges by the Company and are marked to market each period and offset by the foreign exchange (gains) losses included in other operating expense, net resulting from the underlying exposures of the foreign currency denominated assets and liabilities. As of December 28, 2014, there were no outstanding foreign currency forward contracts.

 

 
18

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

Interest rate swap

On May 18, 2012, the Company entered into a five year, $50,000 interest rate swap with Wells Fargo to provide a hedge against the variability of cash flows related to LIBOR-based variable rate borrowings under the Company’s ABL Facility. It increased to $85,000 in May 2013 (when certain other interest rate swaps terminated) and decreases $5,000 per quarter beginning in August 2013 until the balance again reaches $50,000 in February 2015, where it will remain through the life of the instrument. This interest rate swap allows the Company to fix LIBOR at 1.06% and terminates on May 24, 2017. At December 28, 2014, the notional amount of the interest rate swap was $55,000.

 

On November 26, 2012, the Company de-designated the interest rate swap as a cash flow hedge. For the year-to-date periods ended December 28, 2014 and December 29, 2013, the Company reclassified pre-tax unrealized losses of $193 and $300 from accumulated other comprehensive loss to interest expense, respectively. The Company has recognized a pre-tax mark-to-market gain of $246 and $8 within interest expense for the six months ended December 28, 2014 and December 29, 2013, respectively, related to this interest rate swap. See “Note 18. Accumulated Other Comprehensive Loss” for further discussion of the reclassifications of unrealized losses from accumulated other comprehensive loss.

 

Contingent consideration

On December 2, 2013, the Company acquired certain assets in a business combination with Dillon and recorded a contingent consideration liability, as described in “Note 4. Acquisition.” The fair value of the contingent consideration is measured at each reporting period using a discounted cash flow methodology based on inputs not observable in the market (Level 3 classification in the fair value hierarchy). The inputs to the discounted cash flow model include the estimated payments through the term of the agreement based on an agreed-upon definition and schedule, adjusted to risk-neutral estimates using a market price of risk factor which considers relevant metrics of comparable entities, discounted using an observable cost of debt over the term of the estimated payments. Any change in the fair value from either the passage of time or events occurring after the acquisition date is recorded in other operating expense, net. As of December 28, 2014, a recent decline in actual sales volume versus forecasted sales volume has been considered in reflecting a slight decrease in expected future payments, while no other inputs and assumptions used to develop the fair value measurement have changed since the acquisition date.

 

A reconciliation of the changes in the fair value follows:

 

Contingent consideration as of June 29, 2014

  $ 2,563  

Change in fair value

    (43 )

Payments

    (358 )

Contingent consideration as of December 28, 2014

  $ 2,162  

 

Based on the present value of the expected future payments, $525 is reflected in accrued expenses and $1,637 is reflected in other long-term liabilities.

 

The Company’s financial assets and liabilities accounted for at fair value on a recurring basis and the level within the fair value hierarchy used to measure these items are as follows:

 

As of December 28, 2014

Notional Amount

   

USD

Equivalent

 

Balance Sheet

Location

 

Fair Value

Hierarchy

 

Fair

Value

 

Foreign currency contracts

EUR

        $  

Other current assets

 

Level 2

  $  

Interest rate swap

USD

  $ 55,000     $ 55,000  

Other long-term liabilities

 

Level 2

  $ 117  

Contingent consideration

             

Accrued expenses and other long-term liabilities

 

Level 3

  $ 2,162  

 

As of June 29, 2014

Notional Amount

   

USD

Equivalent

 

Balance Sheet

Location

 

Fair Value

Hierarchy

 

Fair

Value

 

Foreign currency contracts

EUR

    495     $ 668  

Other current assets

 

Level 2

  $ 7  

Interest rate swap

USD

  $ 65,000     $ 65,000  

Other long-term liabilities

 

Level 2

  $ 363  

Contingent consideration

             

Accrued expenses and other long-term liabilities

 

Level 3

  $ 2,563  

 

(EUR represents the Euro)

 

 
19

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

Estimates for the fair value of the Company’s foreign currency forward contracts and interest rate swaps are obtained from 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

 

Derivatives not designated as hedges

Classification

 

December 28, 2014

   

December 29, 2013

 

Foreign exchange contracts

Other operating expense, net

  $     $ (16 )

Interest rate swap

Interest expense

    12       (148 )

Total loss (gain) recognized in income

    $ 12     $ (164 )

 

     

For the Six Months Ended

 

Derivatives not designated as hedges

Classification

 

December 28, 2014

   

December 29, 2013

 

Foreign exchange contracts

Other operating expense, net

  $ 7     $ (22 )

Interest rate swap

Interest expense

    (246 )     (8 )

Total (gain) loss recognized in income

    $ (239 )   $ (30 )

 

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.

 

The Company believes that there have been no significant changes to its credit risk profile or the interest rates available to the Company for debt issuances with similar terms and average maturities and the Company estimates that the fair values of its debt obligations approximate the carrying amounts. Other financial instruments include cash and cash equivalents, receivables, accounts payable and accrued expenses. The financial statement carrying amounts of these items approximate the fair value due to their short-term nature.

 

There were no transfers into or out of the levels of the fair value hierarchy for the six months ended December 28, 2014.

 

Non-Financial Assets and Liabilities

The Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring basis.

 

18. Accumulated Other Comprehensive Loss

 

The components and the changes in accumulated other comprehensive loss, net of tax, as applicable, consist of the following:

 

   

Foreign

Currency Translation Adjustments

   

Unrealized (Loss) Gain On Interest Rate Swap

   

Accumulated

Other Comprehensive

Loss

 

Balance at June 29, 2014

  $ (4,241 )   $ (378 )   $ (4,619 )

Other comprehensive (loss) income, net of tax

    (12,895 )     193       (12,702 )

Balance at December 28, 2014

  $ (17,136 )   $ (185 )   $ (17,321 )

 

A summary of the pre-tax, tax and after-tax effects of the components of other comprehensive loss for the quarters ended December 28, 2014 and December 29, 2013 is provided as follows:

 

   

For the Three Months Ended December 28, 2014

 
   

Pre-tax

   

Tax

   

After-tax

 

Other comprehensive (loss) income:

                       

Foreign currency translation adjustments

  $ (5,483 )   $     $ (5,483 )

Foreign currency translation adjustments for an unconsolidated affiliate

    (371 )           (371 )

Reclassification adjustment on cash flow hedge

    89             89  

Other comprehensive loss

  $ (5,765 )   $     $ (5,765 )

 

 
20

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

 

   

For the Three Months Ended December 29, 2013

 
   

Pre-tax

   

Tax

   

After-tax

 

Other comprehensive (loss) income:

                       

Foreign currency translation adjustments

  $ (3,140 )   $     $ (3,140 )

Reclassification adjustment on cash flow hedge

    145             145  

Other comprehensive loss

  $ (2,995 )   $     $ (2,995 )

 

A summary of the pre-tax, tax and after-tax effects of the components of other comprehensive loss for the six months ended December 28, 2014 and December 29, 2013 is provided as follows:

 

   

For the Six Months Ended December 28, 2014

 
   

Pre-tax

   

Tax

   

After-tax

 

Other comprehensive (loss) income: