ufi20120923_10q.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 23, 2012

 

OR

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to        

 

Commission File Number: 1-10542

 

UNIFI, INC.

(Exact name of registrant as specified in its charter)

 

New York 11-2165495
(State or other jurisdiction of  (I.R.S. Employer
incorporation or organization)  Identification No.)

 

P.O. Box 19109 -7201 West Friendly Avenue 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 [ 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 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 29, 2012 was 20,095,094.

 

 
 

 

  

UNIFI, INC.

Form 10-Q for the Quarterly Period Ended September 23, 2012

 

Table of Contents


 

Part I. Financial Information

     

Page

       

Item 1.

Financial Statements:

   
       
 

Condensed Consolidated Balance Sheets as of September 23, 2012 and June 24, 2012

    3
       
 

Condensed Consolidated Statements of Income for the Three Months Ended September 23, 2012 and September 25, 2011

    4
       
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 23, 2012 and September 25, 2011

    5
       
 

Condensed Consolidated Statements of Changes in Shareholders' Equity for the Three Months Ended September 23, 2012

    6
       
 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 23, 2012 and September 25, 2011

    7
       
 

Notes to Condensed Consolidated Financial Statements

    8
       

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

    28
       

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

    40
       

Item 4.

Controls and Procedures

    41
       
 

Part II. Other Information

       
       

Item 1.

Legal Proceedings

    42
       

Item 1A.

Risk Factors

    42
       

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

    42
       

Item 3.

Defaults Upon Senior Securities

    42
       

Item 4.

Mine Safety Disclosures

    42
       

Item 5.

Other Information

    42
       

Item 6.

Exhibits

    43

 

 
2

 

  

Part I.      Financial Information

 

Item 1.      Financial Statements

 

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

 

 

 

September 23, 2012

June 24, 2012

ASSETS

               

Cash and cash equivalents

  $ 12,592   $ 10,886

Receivables, net

    95,549     99,236

Inventories

    116,710     112,750

Income taxes receivable

    382     596

Deferred income taxes

    6,476     7,807

Other current assets

    6,468     6,722

Total current assets

    238,177     237,997
                 

Property, plant and equipment, net

    122,133     127,090

Deferred income taxes

    1,414     1,290

Intangible assets, net

    9,232     9,771

Investments in unconsolidated affiliates

    95,185     95,763

Other non-current assets

    10,169     10,322

Total assets

  $ 476,310   $ 482,233
                 

LIABILITIES AND SHAREHOLDERS' EQUITY

               

Accounts payable

  $ 44,569   $ 48,541

Accrued expenses

    11,094     14,402

Income taxes payable

    464     1,332

Current portion of long-term debt

    7,200     7,237

Total current liabilities

    63,327     71,512

Long-term debt

    112,750     114,315

Other long-term liabilities

    5,569     4,832

Deferred income taxes

    831     794

Total liabilities

    182,477     191,453

Commitments and contingencies

               
                 

Common stock, $0.10 par (500,000,000 shares authorized, 20,095,094 and 20,090,094 shares outstanding)

    2,010     2,009

Capital in excess of par value

    35,100     34,723

Retained earnings

    255,057     252,763

Accumulated other comprehensive income

    445     28

Total Unifi, Inc. shareholders' equity

    292,612     289,523

Non-controlling interest

    1,221     1,257

Total shareholders' equity

    293,833     290,780

Total liabilities and shareholders' equity

  $ 476,310   $ 482,233
 

 

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

 

September 23, 2012

September 25, 2011

Net sales

  $ 172,900   $ 171,013

Cost of sales

    154,880     159,183

Gross profit

    18,020     11,830

Selling, general and administrative expenses

    11,147     10,371

Provision for bad debts

    110     205

Other operating expense (income), net

    581     (41 )

Operating income

    6,182     1,295
                 

Interest income

    (124 )     (647 )

Interest expense

    1,444     4,380

Loss on extinguishment of debt

    242     462

Equity in earnings of unconsolidated affiliates

    (671 )     (3,459 )

Income before income taxes

    5,291     559

Provision for income taxes

    3,233     273

Net income including non-controlling interest

    2,058     286

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

    (236 )    

Net income attributable to Unifi, Inc.

  $ 2,294   $ 286
                 

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

               

Basic

  $ 0.11   $ 0.01

Diluted

  $ 0.11   $ 0.01
  

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 23, 2012

September 25, 2011

Net income including non-controlling interest

  $ 2,058   $ 286

Other comprehensive income (loss):

               

Foreign currency translation adjustments

    (312 )     (17,225 )

Gain (loss) on cash flow hedges

    551     (969 )

Other comprehensive income (loss) before income taxes

    239     (18,194 )

Less: income tax (benefit) provided on cash flow hedges

    (178 )    

Other comprehensive income (loss), net of tax

    417     (18,194 )
                 

Comprehensive income (loss) including non-controlling interest

    2,475     (17,908 )

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

    (236 )    

Comprehensive income (loss) attributable to Unifi, Inc.

  $ 2,711   $ (17,908 )
 

See accompanying notes to Condensed Consolidated Financial Statements.

 

 
5

 

  

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

For the Three Months Ended September 23, 2012

(amounts in thousands)

 

 

 

Shares

Common Stock

Capital in

Excess of

Par Value

Retained

Earnings

Accumulated Other

Comprehensive

Income

Total

Unifi, Inc. Shareholders' Equity

Non-controlling Interest

Total

Shareholders'

Equity

                                                                 

Balance June 24, 2012

    20,090   $ 2,009   $ 34,723   $ 252,763   $ 28   $ 289,523   $ 1,257   $ 290,780

Options exercised

    5     1     28             29         29

Stock-based compensation

            349             349         349

Contributions from non-controlling interest

                            200     200

Other comprehensive income, net of tax

                    417     417         417

Net income (loss)

                2,294         2,294     (236 )     2,058

Balance September 23, 2012

    20,095   $ 2,010   $ 35,100   $ 255,057   $ 445   $ 292,612   $ 1,221   $ 293,833
 

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 23, 2012

September 25, 2011

Cash and cash equivalents at beginning of year

  $ 10,886   $ 27,490

Operating activities:

               

Net income including non-controlling interest

    2,058     286

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

               

Equity in earnings of unconsolidated affiliates

    (671 )     (3,459 )

Dividends received from unconsolidated affiliates

    2,224     2,005

Depreciation and amortization expense

    6,517     6,782

Loss on extinguishment of debt

    242     462

Non-cash compensation expense, net

    621     243

Deferred income taxes

    1,418     (718 )

Other

    23     63

Changes in assets and liabilities, excluding effects of foreign currency adjustments:

               

Receivables, net

    3,602     403

Inventories

    (4,003 )     (7,386 )

Other current assets and income taxes receivable

    600     (129 )

Accounts payable and accrued expenses

    (7,204 )     2,622

Income taxes payable

    (1,046 )     647

Net cash provided by operating activities

    4,381     1,821

Investing activities:

               

Capital expenditures

    (1,091 )     (1,122 )

Investments in unconsolidated affiliates

        (360 )

Proceeds from sale of assets

    36     173

Other

    (41 )    

Net cash used in investing activities

    (1,096 )     (1,309 )

Financing activities:

               

Payments of notes payable

        (10,288 )

Proceeds from revolving credit facilities

    17,500     58,800

Payments on revolving credit facilities

    (14,000 )     (53,500 )

Payments on term loans

    (6,450 )    

Proceeds from related party term loan

    1,250    

Payments of debt financing fees

    (46 )    

Contributions from non-controlling interest

    200    

Other

    (9 )     49

Net cash used in financing activities

    (1,555 )     (4,939 )
                 

Effect of exchange rate changes on cash and cash equivalents

    (24 )     (3,242 )

Net increase (decrease) in cash and cash equivalents

    1,706     (7,669 )

Cash and cash equivalents at end of period

  $ 12,592   $ 19,821

 

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 products, specialized yarns designed to meet certain customer specifications, and premier value-added (“PVA”) yarns with enhanced performance characteristics. The Company sells fibers made from polyester and nylon to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishing, 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 and beamed yarns; each available in virgin or recycled varieties. The Company's nylon products include textured, solution dyed and covered spandex products. The Company maintains one of the industry's most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”). The Company's principal markets 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 specialty and PVA products in the Asian textile market, primarily in China, as well as into Europe.

 

2. Basis of Presentation

The Company's current fiscal quarter ended on Sunday, September 23, 2012. However, the Company's Brazilian, Colombian, and Chinese subsidiaries' fiscal quarter ended on September 30, 2012. No significant transactions or events outside the normal course of business have occurred between the date of the Company's financial statements and these dates. The three months ended September 23, 2012 and the three months ended September 25, 2011 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 the Company's significant accounting policies or the application of its accounting policies from those reported in its 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. 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 of Controlling Interest in 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% membership interest for its $4,000 contribution. Renewables is a development stage enterprise formed to cultivate, grow and sell dedicated energy crops, including biomass 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, which is a C4 plant that was developed by Mississippi State University to be a dedicated energy crop with high biomass yield from minimal input requirements. Renewables' success will depend on its ability to commercialize FGM, license individual growers of FGM and to sell feedstock to biomass conversion facilities. The Company's investment in Renewables is anticipated to provide a unique revenue stream and support its strategy to grow the REPREVE® brand and related sustainability initiatives.

 

 
8

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

On October 6, 2011, the Company and one other existing Renewables member each acquired an additional 20% membership interest from the third Renewables member for $500. The additional membership interest purchased by the Company was paid for with available cash. Using the amounts paid per membership unit in the October 6th transaction as a basis (a Level 1 input), the Company determined that the acquisition date fair value of Renewables was $2,500. This resulted in the Company's previously held 40% equity interest being valued at $1,000. As a result of remeasuring its existing 40% interest to this estimated fair value, the Company recorded a non-operating loss of $3,656 during the quarter ended December 25, 2011.

 

Fair value of consideration transferred

  $ 500

Fair value of the previously held equity interest

    1,000
      1,500

Fair value of the non-controlling interest

    1,000

Total fair value of Renewables

  $ 2,500
 

Fair value of previously held equity interest

  $ 1,000

Less: Investment in Renewables

    (4,656 )

Write-down of previously held equity interest in Renewables

  $ (3,656 )
 

The total fair value of Renewables was allocated to the tangible assets, liabilities and intangible assets acquired as follows:

Cash

  $ 144

Inventories

    45

Other current assets

    197

Biomass foundation and feedstock

    1,611

Property, plant and equipment

    114

Intangible assets

    536

Total assets

    2,647

Current liabilities

    (147 )

Total net assets acquired

  $ 2,500
 

The intangible assets acquired and their respective estimated average remaining useful lives over which each asset will be amortized on a straight line basis are as follows:

 

Amortization

Period (years)

Estimated

Value

Non-compete agreements

    5   $ 243

License to grow FGM

    8     261

Sub-licenses

    4     32

Total

          $ 536
 

The acquisition of the additional 20% membership interest has given the Company a 60% membership interest in Renewables. Prior to the acquisition, the Company's share of Renewables' losses were recorded as Equity in earnings of unconsolidated affiliates. Beginning with the second quarter of fiscal year 2012, the Company's consolidated financial statements include the financial position and results of operations of Renewables. As Renewables is a development stage enterprise and has no revenues and limited operating activities, the results of Renewables' operations since the acquisition are presented within Other operating expense (income), net.

 

Renewables' operating expenses are funded through contributions from its members. Since October 6, 2011, contributions from the non-controlling interest have totaled $1,120.

 

5. Receivables, net

Receivables, net consist of the following:

 

September 23, 2012

June 24, 2012

Customer receivables

  $ 97,170   $ 100,818

Allowance for uncollectible accounts

    (1,133 )     (1,118 )

Reserves for yarn quality claims

    (1,073 )     (939 )

Net customer receivables

    94,964     98,761

Related party receivables

    40     111

Other receivables

    545     364

Total receivables, net

  $ 95,549   $ 99,236
 

 
9

 

 

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 vendor refunds due to the Company.

 

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 24, 2012

  $ (1,118 )   $ (939 )

Charged to costs and expenses

    (110 )     (431 )

Charged to other accounts

    3     (1 )

Deductions

    92     298

Balance at September 23, 2012

  $ (1,133 )   $ (1,073 )
 

Amounts charged to costs and expenses for the allowance for uncollectible accounts are reflected in the Provision for bad debts. For the allowance for uncollectible accounts, 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. 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. 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 consist of the following:

 

September 23, 2012

June 24, 2012

Raw materials

  $ 41,193   $ 43,296

Supplies

    5,345     5,169

Work in process

    7,159     6,604

Finished goods

    65,266     59,659

Gross inventories

    118,963     114,728

Inventory reserves

    (2,253 )     (1,978 )

Total inventories

  $ 116,710   $ 112,750
 

The cost for the majority of the Company's inventories is determined using the FIFO method. Certain foreign inventories of $35,311 and $35,145 as of September 23, 2012 and June 24, 2012, respectively, were valued under the average cost method.

 

7. Other Current Assets

Other current assets consist of the following:

 

September 23, 2012

June 24, 2012

Value added taxes receivable

  $ 2,583   $ 2,495

Vendor deposits

    1,703     2,076

Prepaid expenses

    1,809     1,778

Assets held for sale

    341     341

Other

    32     32

Total other current assets

  $ 6,468   $ 6,722
 

Value added taxes receivable are recoverable taxes associated with the sales and purchase activities of the Company's foreign operations. Vendor deposits primarily relate to down payments made towards the purchase of raw materials from Asia. Prepaid expenses consist of advance payments for insurance, public exchange and rating services, professional fees, membership dues, subscriptions, non-income related tax payments and information technology services. Assets held for sale relate to certain nylon warehouse, land and other improvements located in Fort Payne, Alabama that are currently listed for sale. Other includes miscellaneous employee advances and unrealized foreign currency gains.

 

 
10

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

8. Property, Plant and Equipment, Net

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

 

September 23, 2012

June 24, 2012

Land

  $ 3,027   $ 3,095

Land improvements

    11,489     11,426

Buildings and improvements

    146,273     146,232

Assets under capital lease

    9,520     9,520

Machinery and equipment

    530,791     530,319

Computers, software and office equipment

    16,658     16,350

Transportation equipment

    4,791     4,722

Construction in progress

    1,458     1,774

Gross property, plant and equipment

    724,007     723,438

Less: accumulated depreciation

    (592,519 )     (587,146 )

Less: accumulated amortization – capital lease

    (9,355 )     (9,202 )

Total property, plant and equipment, net

  $ 122,133   $ 127,090
 

Internal software development costs within PP&E consist of the following:

 

September 23, 2012

June 24, 2012

Internal software development costs

  $ 2,014   $ 2,014

Accumulated amortization

    (1,839 )     (1,804 )

Net internal software development costs

  $ 175   $ 210
 

Depreciation expense, internal software development costs amortization, repairs and maintenance expenses and capitalized interest were as follows:

 

For the Three Months Ended

 

September 23, 2012

September 25, 2011

Depreciation expense

  $ 5,777   $ 5,905

Internal software development costs amortization

    35     71

Repair and maintenance expenses

    4,364     4,328

Capitalized interest

       
 

9. Intangible Assets, Net

Intangible assets, net consist of the following:

 

September 23, 2012

June 24, 2012

Customer list

  $ 22,000   $ 22,000

Non-compete agreements

    4,243     4,243

Licenses

    293     293

Total intangible assets, gross

    26,536     26,536
                 

Accumulated amortization - customer list

    (14,606 )     (14,156 )

Accumulated amortization - non-compete agreements

    (2,660 )     (2,581 )

Accumulated amortization - licenses

    (38 )     (28 )

Total accumulated amortization

    (17,304 )     (16,765 )

Total intangible assets, net

  $ 9,232   $ 9,771
 

In fiscal year 2007, the Company purchased the texturing operations of Dillon Yarn Corporation (“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 being amortized in a manner which reflects the expected economic benefit that will be received over its thirteen year life. The Dillon non-compete agreements are amortized using the straight line method over the periods currently covered by the agreements. The amortization expense is included within the Polyester segment's depreciation and amortization expense.

 

During the second quarter of fiscal year 2012, the Company acquired a controlling interest in Renewables. The non-compete agreement acquired is being amortized using the straight line method over the five year term of the agreement. The licenses acquired are being amortized using the straight line method over the estimated useful lives of four to eight years.

 

 
11

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

Amortization expense for intangible assets consists of the following:

For the Three Months Ended

September 23, 2012

September 25, 2011

Customer list

  $ 450   $ 506

Non-compete agreements

    79     79

Licenses

    10    

Total amortization expense

  $ 539   $ 585
 

10. Other Non-Current Assets

Other non-current assets consist of the following:

 

September 23, 2012

June 24, 2012

Long-term deposits

  $ 5,193   $ 5,151

Debt financing fees

    2,643     2,870

Biomass foundation and feedstock

    1,834     1,794

Other

    499     507

Total other non-current assets

  $ 10,169   $ 10,322
 

Long-term deposits consist primarily of deposits with a domestic utility company and value added tax deposits. Biomass foundation and feedstock represents bioenergy foundation and feedstock currently being, or expected to be, propagated by Renewables. Other consists primarily of premiums on a split dollar life insurance policy which represents the value of the Company's right of return on premiums paid for a retiree owned insurance contract which matures in 2015.

 

11. Accrued Expenses 

Accrued expenses consist of the following:

 

September 23, 2012

June 24, 2012

Payroll and fringe benefit costs

  $ 6,709   $ 9,026

Utilities

    2,613     2,540

Interest

    309     398

Retiree medical liability

    136     138

Asset retirement obligation

    63     125

Property taxes

        842

Other

    1,264     1,333

Total accrued expenses

  $ 11,094   $ 14,402
 

The Company has recorded an asset retirement obligation associated with the reclamation and removal costs related to a leased location in its Polyester segment. Other accruals consist primarily of sales taxes, workers compensation and other employee related claims, marketing expenses, freight expenses, rent and other non-income related taxes.

 

12. Long-Term Debt

Long-term debt consists of the following:

 

September 23, 2012

June 24, 2012

ABL Revolver

  $ 54,500   $ 51,000

ABL Term Loan

    48,200     50,000

Term B Loan

    16,000     20,515

Related party term loan

    1,250    

Capital lease obligation

        37

Total debt

    119,950     121,552

Current portion of long-term debt

    (7,200 )     (7,237 )

Total long-term debt

  $ 112,750   $ 114,315
 

Debt Refinancing

On May 24, 2012, the Company entered into a $150,000 senior secured credit facility (“ABL Facility”) with Wells Fargo Bank, N.A. (“Wells Fargo”) and Bank of America, N.A. (“Bank of America”). The ABL Facility consists of a $100,000 revolving credit facility (“ABL Revolver”) and a $50,000 term loan (“ABL Term Loan”). In addition, the Company entered into a $30,000 term loan (“Term B Loan”) with MacKay Shields LLC, a Delaware limited liability company, solely in its capacity as investment advisor or subadviser with investment authority for certain discretionary client accounts. Wilmington Trust National Association (“Wilmington Trust”) serves as the administrative agent under the Term B Loan. The purpose of the new ABL Facility and the Term B Loan was to, among other things, refinance the Company's then existing indebtedness. The ABL Facility and the Term B Loan each have a maturity date of May 24, 2017. The Company has the ability to request that the borrowing capacity of the ABL Revolver be increased to as much as $150,000, at the discretion of the participating lenders.

 

 
12

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

ABL Facility

The ABL Facility is secured by a first-priority perfected security interest in substantially all owned or hereafter acquired property and assets, together with all proceeds and products thereof, of Unifi, Inc., Unifi Manufacturing, Inc. and its subsidiary guarantors (the “Loan Parties”) other than the assets to which the Loan Parties have a second-priority lien. It is also secured by a first priority perfected security interest in all 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; provided, that only 65% of the stock of (or other ownership interests in) first tier controlled foreign corporations are pledged, together with all proceeds and products thereof. The ABL Facility is further secured by a second-priority lien on the Company's indirect limited liability company membership interest in Parkdale America, LLC (“PAL”).

 

The ABL Facility 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.  Should excess availability under the ABL Revolver fall below the greater of $10,000 or 15% of maximum availability, an ABL Facility 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.  In addition, the ABL Facility contains certain restricted payment and restricted investment provisions, including a restriction on the payment of dividends and share repurchases, unless excess availability is greater than $20,000 for the entire thirty day period prior to the making of such a distribution or excess availability is greater than $10,000 for the entire thirty day period prior to the making of such a distribution and the fixed charge coverage ratio for the most recent twelve month period (as calculated on a pro forma basis as if the payment and any revolving loans made in connection therewith were made on the first day of such period) is at least 1.0 to 1.0. As of September 23, 2012, the Company was in compliance with all financial covenants and had a fixed charge coverage ratio of 1.40.

 

The Company's ability to borrow under the ABL Revolver will be 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 (the “LIBOR Rate”) 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 applicable margin is based on the average quarterly excess availability under the ABL Revolver. The Base Rate means the greatest 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) the LIBOR rate plus 1.0%. There is also an unused line fee under the ABL Revolver of 0.25% to 0.375% of the unused line amount which is paid monthly.

 

The Company had $2,175 of standby letters of credit at September 23, 2012, none of which have been drawn upon. As of September 23, 2012, the Company had $30,226 of excess availability under the ABL Revolver.

 

Under the terms of the ABL Facility, the Company is required to hedge at least $50,000 of variable interest rate exposure so long as the outstanding principal of all indebtedness having variable interest rates exceeds $75,000.  The weighted average interest rate for the ABL Revolver as of September 23, 2012, including the effects of all interest rate swaps, was 3.2%.

 

The ABL Term Loan bears interest at LIBOR plus an applicable margin of 2.25% to 2.75% or the Base Rate plus an applicable margin of 1.25% to 1.75% depending upon the Company's level of excess borrowing availability with interest currently being paid on a monthly basis. The weighted average interest rate for the ABL Term Loan as of September 23, 2012, including the effects of all interest rate swaps, was 3.3%. The ABL Term Loan will be repaid in quarterly scheduled principal installments of $1,800 which commenced on September 1, 2012 and a balloon payment of $14,000 in May 2017. 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.

 

Term B Loan

The Term B Loan is secured by a first-priority lien on the Company's limited liability company membership interest in PAL and a second-priority lien on the ABL Facility first-priority collateral described above. The Term B Loan also contains representations and warranties, affirmative and negative covenants and events of default comparable to those included in the ABL Facility. 

 

The Term B Loan bears interest at LIBOR plus 7.50% (with a LIBOR floor of 1.25%) with interest payable monthly. The Term B Loan does not amortize and prepayments are only required if after-tax distributions from PAL are received by the Company (100% of such distributions up to the first $3,000 per calendar year and 50% thereafter), the Company sells all or any part of its membership interest in PAL or under certain other circumstances. The Company may prepay, in whole or in part, the Term B Loan at any time subject to certain provisions, with a call premium of 3% during the first year, 2% during the second year, 1% during the third year and at par thereafter.

 

 
13

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

The components of Loss on extinguishment of debt consist of the following:

 

For the Three Months Ended

 
 

September 23, 2012

September 25, 2011

Prepayment premium for 11.5% Senior Secured Notes due May 2014

  $   $ 288

Prepayment premium for Term B Loan

    135    
      135     288
                 

Non-cash charges due to prepayments

    107     174

Loss on extinguishment of debt

  $ 242   $ 462
 

On July 2, 2012, the Company made an additional $4,515 optional prepayment of the Term B Loan and recorded a $242 charge for the early extinguishment of debt related to the 3% call premium and the associated write-off of debt financing fees.

 

Debt Financing Fees

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

 

September 23, 2012

Balance at June 24, 2012

  $ 2,870

Amounts paid related to debt refinancing

    46

Amortization charged to interest expense

    (166 )

Amounts charged to extinguishment of debt due to prepayments

    (107 )

Balance at September 23, 2012

  $ 2,643
 

Amortization of the debt financing fees is classified within Interest expense and consists of the following:

 

For the Three Months Ended

 
 

September 23, 2012

September 25, 2011

Amortization of debt financing fees

  $ 166   $ 221
 

Related Party Term Loan

On August 30, 2012, a foreign subsidiary of the Company entered into an unsecured loan agreement with its unconsolidated affiliate U.N.F. Industries Ltd. (“UNF”) and borrowed $1,250. The loan bears interest at 3% with interest payable semi-annually. The loan does not amortize and has a maturity date of August 30, 2014 at which time the entire principal balance is due.

 

Subsequent Events

On October 9, 2012, the Company provided notice that it would make a $2,200 optional prepayment of the Term B Loan. This prepayment was subsequently completed on October 17, 2012, and the Company recorded a $112 charge for the early extinguishment of debt in the December 2012 quarter related to the 3% call premium and the associated non-cash charge for the write-off of deferred financing costs.

 

13. Other Long-Term Liabilities

Other long-term liabilities consist of the following:

 

September 23, 2012

June 24, 2012

Supplemental post-employment plan

  $ 2,467   $ 2,195

Derivative instruments

    1,467     1,015

Other

    1,635     1,622

Total other long-term liabilities

  $ 5,569   $ 4,832
 

Other includes certain retiree and post-employment medical liabilities, tax contingencies and certain non-income related taxes associated with the Company's foreign subsidiaries.

 

The Company maintains an unfunded supplemental post-employment plan for certain 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. Amounts are paid to participants only after termination of their employment. The following table presents the expense recorded within SG&A expenses for this plan:

 

For the Three Months Ended

 
 

September 23, 2012

September 25, 2011

Supplemental post-employment plan expenses

  $ 272   $ (126 )
 

 
14

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

14. Income Taxes

The effective income tax rates for the three month periods ended September 23, 2012 and September 25, 2011 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 fiscal year by the mix and timing of actual earnings from our U.S. operations 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 quarter ended September 23, 2012 resulted in tax expense of $3,233, with an effective tax rate of 61.1%. The effective income tax rate for the period is higher than the U.S. statutory rate due to foreign dividends taxed in the U.S., the timing of the Company's recognition of higher taxable versus book income for an unconsolidated affiliate for which the Company maintains a full valuation allowance and losses in tax jurisdictions for which no tax benefit could be recognized.

 

The Company's income tax provision for the quarter ended September 25, 2011 resulted in tax expense of $273, with 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 and foreign dividends taxed in the U.S.

 

As of September 23, 2012, the Company's valuation allowance includes $11,504 for reserves against certain deferred tax assets primarily related to equity investments and foreign tax credit carryforwards, as well as $2,660 for reserves against certain deferred tax assets of the Company's foreign subsidiaries that are primarily related to net operating loss carryforwards.

 

There have been no significant changes in the Company's liability for uncertain tax positions since June 24, 2012. 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 2005 through 2012, for foreign income taxes for tax years 2007 through 2012, and for state and local income taxes for tax years 2002 through 2012. The Internal Revenue Service is currently auditing the Company's 2010 tax year.

 

15. Shareholders' Equity

On October 27, 2010, the shareholders of the Company approved a reverse stock split of the Company's common stock (the “reverse stock split”) at a ratio of 1-for-3. The reverse stock split became effective November 3, 2010. The Company had 20,060 shares of common stock issued and outstanding immediately following the completion of the reverse stock split. The Company is authorized in its Restated Certificate of Incorporation to issue up to a total of 500,000 shares of common stock at a $0.10 par value per share which was unchanged by the amendment. All share and per share amounts have been retroactively adjusted to reflect the reverse stock split.

 

No dividends were paid in the last three fiscal years.

 

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.

 

The ABL Facility contains certain provisions that limit the Company's ability to make restricted payments, including distributions to its shareholders or repurchasing outstanding shares of its common stock. In order to make restricted payments, the Company must have, on a pro forma basis, excess availability greater than $20,000 for the entire thirty day period prior to the making of such a distribution or excess availability greater than $10,000 and a fixed charge coverage ratio for the most recent twelve month period is at least 1.0 to 1.0.

 

16. Stock Based Compensation

On October 29, 2008, the shareholders of the Company approved the 2008 Unifi, Inc. Long-Term Incentive Plan (“2008 LTIP”). The 2008 LTIP authorized the issuance of up to 2,000 shares of common stock pursuant to the grant or exercise of stock options, including incentive stock options, non-qualified stock options and restricted stock, but not more than 1,000 shares may be issued as restricted stock. Option awards are granted with an exercise price not less than the market price of the Company's stock at the date of grant. The 2008 LTIP replaced the 1999 Unifi, Inc. Long-Term Incentive Plan (“1999 LTIP”), however, prior grants outstanding under the 1999 LTIP remain subject to that plan's provisions.

 

 
15

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

Stock options subject to service conditions

During the quarter ended September 23, 2012, the Company issued 138 stock options under the 2008 LTIP to certain key employees. The stock options vest ratably over the required three year service period and have ten year contractual terms. The weighted average exercise price of the options was $11.15 per share. The Company used the Black-Scholes model to estimate the weighted average grant date fair value of $7.28 per share.

 

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

 

September 23, 2012

Expected term (years)

    7.5

Interest rate

    1.0 %

Volatility

    66.9 %

Dividend yield

   
 

The Company uses historical data to estimate the expected life, volatility and estimated forfeitures. The risk-free interest rate for the expected term of the option 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.

 

A summary of the Company's non-vested shares related to options subject to service conditions as of September 23, 2012, and changes during the current fiscal quarter is as follows:

 

Under the 2008 LTIP

Weighted Average

Grant Date Fair Value

Non-vested at June 24, 2012

    312   $ 5.19

Granted

    138   $ 7.28

Vested

    (227 )   $ 4.19

Forfeited

      $

Non-vested at September 23, 2012

    223   $ 7.50
 

The following table sets forth the exercise prices, the number of options outstanding and exercisable, and the remaining contractual lives of the Company's stock options subject to service conditions for selected price ranges as of September 23, 2012:

Options Outstanding

Options Exercisable

Exercise Price

Number of
Options

Outstanding

Weighted
Average

Exercise Price

Weighted Average Contractual Life

Remaining

(Years)

Number of

Options

Exercisable

Weighted

Average

Exercise Price

$5.73 - $10.00     828   $ 6.73     5.5     828   $ 6.73
$10.01 - $15.00     315   $ 11.53     8.5     92   $ 11.24
$15.01 - $21.72     6   $ 20.55     1.3     6   $ 20.55

Total

    1,149   $ 8.13     6.3     926   $ 7.28
 

At September 23, 2012, the remaining unrecognized compensation cost related to the unvested stock options subject to service conditions was $1,215 which is expected to be recognized over a weighted average period of 2.6 years.

 

Stock options subject to market conditions

There were no options granted during the quarter ended September 23, 2012 that contained market condition vesting provisions. A summary of the Company's non-vested shares related to options subject to market conditions as of September 23, 2012, and changes during the current fiscal quarter is as follows:

 

Under the 1999 LTIP

Under the 2008 LTIP

Total Shares

Weighted Average

Grant Date Fair Value

Non-vested at June 24, 2012

    494     73     567   $ 5.63

Granted

              $

Vested

              $

Forfeited

              $

Non-vested at September 23, 2012

    494     73     567   $ 5.63
 

 
16

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

The stock options are subject to a market condition which 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 $18, $24 or $30 per share (depending on the terms of the specific award) for thirty consecutive trading days.

 

The following table sets forth the exercise prices, the number of options outstanding and exercisable, and the remaining contractual lives of the Company's stock options subject to market conditions, for selected price ranges as of September 23, 2012:

Options Outstanding

Options Exercisable

Exercise Price

 

Number of

Options Outstanding

 

Weighted

Average

Exercise Price

 

Weighted Average Contractual Life

Remaining

(Years)

 

Number of

Options

Exercisable

 

Weighted

Average

Exercise Price

$ 8.00

- $ 10.00     494   $ 8.15     5.1       $

$ 10.01

- $ 12.48     73   $ 12.48     6.2       $

Total

              567   $ 8.71     5.2       $
 

The remaining unrecognized compensation cost related to the stock options subject to market conditions at September 23, 2012 was nil.

 

The stock option activity for the quarter ended September 23, 2012 for all plans and all vesting conditions is as follows:

 

Options Outstanding

Weighted

Average

Exercise Price

Shares under option at June 24, 2012

    1,583   $ 8.06

Granted

    138   $ 11.15

Exercised

    (5 )   $ 5.73

Expired

      $

Forfeited

      $

Shares under option at September 23, 2012

    1,716   $ 8.32
 

For the quarters ended September 23, 2012 and September 25, 2011, the total intrinsic value of options exercised was $26 and $26, respectively. The amount of cash received from the exercise of options was $29 and $49 for the quarters ended September 23, 2012 and September 25, 2011, respectively. The tax benefit realized from stock options exercised was not material for all periods presented.

 

Restricted stock units – non-employee directors

There were no new restricted stock units (“RSUs”) issued to non-employee directors during the quarter ended September 23, 2012. The total number of vested RSUs issued to non-employee directors outstanding as of September 23, 2012 was 70 which is unchanged from June 24, 2012. For the RSUs issued to non-employee directors, there were no unvested stock units and no unrecognized compensation cost at September 23, 2012.

 

Restricted stock units – key employees

During the quarter ended September 23, 2012, the Company issued 32 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 with one third of the RSUs vesting on each of the following dates: August 25, 2013, July 25, 2014 and July 25, 2015. 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 25, 2013 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 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 $11.23 per RSU based on the fair value of the Company's stock at the award grant date.

 

 
17

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

A summary of the Company's RSUs issued to key employees and changes during the quarter ended September 23, 2012 consist of the following:

 

Units

Weighted

Average Grant Date Fair Value

Non-vested at June 24, 2012

    64   $ 12.47

Granted

    32   $ 11.23

Vested

    (21 )   $ 12.47

Forfeited

      $

Non-vested at September 23, 2012

    75   $ 11.94
 

The remaining unrecognized compensation cost related to the unvested RSUs at September 23, 2012 is $323, which is expected to be recognized over a weighted average period of 2.9 years.

 

The activity for the quarter ended September 23, 2012 for all RSUs, for all grantees, was as follows:

 

RSUs Outstanding

RSUs outstanding at June 24, 2012

    134

Granted

    32

Converted

   

Forfeited

   

RSUs outstanding at September 23, 2012

    166
 

Summary:

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

 

September 23, 2012

September 25, 2011

Stock options subject to service conditions

  $ 237   $ 189

Stock options subject to market conditions

        (18 )

RSUs issued to non-employee directors

        69

RSUs issued to key employees

    112     128

Total compensation cost

  $ 349   $ 368
 

The total income tax benefit recognized for stock based compensation was not material for all periods presented.

 

As of September 23, 2012, total unrecognized compensation costs related to all unvested stock based compensation arrangements was $1,538. The weighted average period over which these costs are expected to be recognized is 2.6 years.

 

As of September 23, 2012, a summary of the number of securities remaining available for future issuance under equity compensation plans is as follows:

Authorized under the 2008 LTIP

    2,000

Less: Market condition options granted

    (93 )

Less: Service condition options granted

    (832 )

Less: RSUs granted to non-employee directors

    (75 )

Less: RSUs granted to key employees

    (96 )

Plus: Options forfeited

    27

Plus: RSUs forfeited

   

Available for issuance under the 2008 LTIP

    931
 

17. 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 salary 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 following table presents the employer contribution expense related to the DC Plan incurred each year:

 

For the Three Months Ended

 

September 23, 2012

September 25, 2011

Matching contribution expense

  $ 525   $ 602
 

 
18

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

18. Accumulated Other Comprehensive Income

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

 

Foreign

Currency Translation Adjustments

Derivative Financial Instruments

Accumulated Other Comprehensive Income

Balance at June 24, 2012

  $ 2,017   $ (1,989 )   $ 28

Other comprehensive (loss) income activity, net of tax

    (312 )     729     417

Balance at September 23, 2012

  $ 1,705   $ (1,260 )   $ 445
 

Derivative financial instruments includes $210 and $1,214 for losses on cash flow hedges related to one of the Company's unconsolidated affiliates at September 23, 2012 and June 24, 2012, respectively. The cumulative tax benefit on derivative financial instruments was $417 and $239 at September 23, 2012 and June 24, 2012, respectively.

 

19. Computation of Earnings Per Share

The computation of basic and diluted earnings per share (“EPS”) was as follows:


For the Three Months Ended

 

September 23, 2012

September 25, 2011

Basic EPS

               

Net income attributable to Unifi, Inc.

  $ 2,294   $ 286
                 

Weighted average common shares outstanding

    20,091     20,086

Basic EPS

  $ 0.11   $ 0.01
                 

Diluted EPS

               

Net income attributable to Unifi, Inc.

  $ 2,294   $ 286
                 

Weighted average common shares outstanding

    20,091     20,086

Net potential common share equivalents – stock options and RSUs

    462     345

Adjusted weighted average common shares outstanding

    20,553     20,431

Diluted EPS

  $ 0.11   $ 0.01
                 

Excluded from the calculation of common share equivalents:

               

Anti-dilutive common share equivalents

    272     406
                 

Excluded from the calculation of diluted shares:

               

Unvested options that vest upon achievement of certain market conditions

    567     577
 

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. Common share equivalents where the exercise price is above the average market price are excluded in the calculation of diluted earnings per common share.

 

20. Derivative 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.

 

 
19

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

Interest rate swaps

On February 15, 2011, the Company entered into a twenty-seven month, $25,000 interest rate swap with Bank of America to provide a hedge against the variability of cash flows (monthly interest expense payments) on LIBOR-based variable rate borrowings. The interest rate swap allows the Company to fix the LIBOR rate at 1.39% and terminates on May 17, 2013. On August 5, 2011, the Company entered into a twenty-one month, $10,000 interest rate swap with Bank of America to provide a hedge against the variability of cash flows related to additional variable rate borrowings. This interest rate swap allows the Company to fix the LIBOR rate at 0.75% and terminates on May 17, 2013. 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 additional variable rate borrowings under the Company's ABL Revolver and ABL Term Loan. This interest rate swap increases to $85,000 in May 2013 (when the $25,000 and $10,000 interest rate swaps with Bank of America terminate) and then decreases $5,000 per quarter beginning in August 2013 until the balance again reaches $50,000 in February 2015 (where it will remain through May 2017) which allows the Company to keep $50,000 of ABL Revolver borrowings hedged for the five year period from May 2012 to May 2017 and a portion of the ABL Term Loan hedged from May 2012 to February 2015. This interest rate swap allows the Company to fix the LIBOR rate at 1.06% and terminates on May 24, 2017.

 

The Company has designated these swaps as cash flow hedges and determined that they are highly effective. At September 23, 2012, the amount of pre-tax loss recognized in Accumulated other comprehensive income for the Company's cash flow hedge derivative instruments was $1,467. For the year to date period ended September 23, 2012, the Company did not reclassify any gains (losses) from Accumulated other comprehensive income to Interest expense.

 

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. As of September 23, 2012, the latest maturity date for all outstanding foreign currency forward contracts is during December 2012. 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 23, 2012:

 

Notional Amount

USD Equivalent

Balance Sheet Location

Fair value

Foreign exchange contracts

MXN

    2,100   $ 160

Other current liabilities

  $ (2 )

Interest rate swaps

USD

  $ 85,000   $ 85,000

Other long-term liabilities

  $ (1,467 )
 

As of June 24, 2012:

 

Notional Amount

USD Equivalent

Balance Sheet Location

Fair value

Foreign exchange contracts

MXN

    6,500   $ 497

Other current assets

  $ 28

Interest rate swaps

USD

  $ 85,000   $ 85,000

Other long-term liabilities

  $ (1,015 )
(MXN represents the Mexican Peso)

 

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

Derivatives not designated as hedges:

Classification:

September 23, 2012

September 25, 2011

Foreign exchange contracts – MXN/USD

Other operating expenses, net

  $ 36   $ (29 )

Total (gain) loss recognized in income

  $ 36   $ (29 )
 

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

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

21. Fair Value of Financial Instruments and Non-Financial Assets and 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:

 

Assets (Liabilities) at Fair Value as of September 23, 2012

 

Level 1

Level 2

Level 3

Foreign exchange derivative contracts

  $   $ (2 )   $

Interest rate derivative contracts

        (1,467 )    

Total liabilities

  $   $ (1,469 )   $
 

 

Assets (Liabilities) at Fair Value as of June 24, 2012

 

Level 1

Level 2

Level 3

Foreign exchange derivative contracts

  $   $ 28   $

Total assets

  $   $ 28   $
                         

Interest rate derivative contracts

  $   $ (1,015 )   $

Total liabilities

  $   $ (1,015 )   $
 

There were no financial instruments measured at fair value that were in an asset position at September 23, 2012. The Company did not have any non-financial assets or liabilities that were required to be measured at fair value on a recurring basis.

 

Since its debt refinancing in May 2012, 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 these long-term debt obligations approximate their 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 because of their short-term nature.

 

22. Other Operating Expense (Income), Net

The components of Other operating expense (income), net consist of the following:

 

For the Three Months Ended

 

September 23, 2012

September 25, 2011

Operating expenses for Renewables

  $ 585   $

Net loss on sale or disposal of assets

    22     64

Foreign currency transaction losses (gains)

    16     (21 )

Other, net

    (42 )     (84 )

Total other operating expense (income), net

  $ 581   $ (41 )
 

Other, net consists primarily of rental income. Operating expenses for Renewables includes $46 of non-cash depreciation and amortization charges.

 

23. 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. Effective January 1, 2012, Mills' interest in PAL was assigned to Parkdale Incorporated. 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 13 manufacturing facilities located primarily in the southeast region of the U.S. According to its most recently issued audited financial statements, PAL's five largest customers accounted for approximately 80% of total revenues and 72% of total gross accounts receivable outstanding, with the largest customer accounting for approximately 37% of revenues and 37% of accounts receivable.

 

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 provided a subsidy of four cents per pound through July 31, 2012 and provides a subsidy of three cents per pound for six years 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 constituted 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.

 

 
21

 

 

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 $100,000 to $200,000 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 maximum leverage ratio. PAL informed the Company that as of September 2012, PAL's cash on-hand was $62,819, PAL had no outstanding borrowings on its revolving credit facility 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 loss until the underlying transactions are recognized in income. As of September 2012, PAL's accumulated other comprehensive loss was comprised of losses related to futures contracts totaling $619. Any ineffective portion of changes in fair value of cash flow hedges are recognized in earnings as they occur. All of PAL's other derivatives not designated as 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 23, 2012, the Company's investment in PAL was $90,952 and shown within Investments in unconsolidated affiliates. The reconciliation between the Company's share of the underlying equity of PAL and its investment is as follows:

Underlying equity as of September 2012

  $ 109,503

Initial excess capital contributions

    53,363

Impairment charge recorded in 2007

    (74,106 )

Anti-trust lawsuit against PAL in which the Company did not participate

    2,652

EAP adjustments

    (460 )

Investment as of September 2012

  $ 90,952
 

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. All raw material and production services for UNF are provided by Nilit under separate supply and services agreements. UNF's fiscal year end is December 31st and it is a registered Israeli private company located in Migdal Ha-Emek, Israel.

 

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. All raw material and production services for UNF America are provided by Nilit America under separate supply and services agreements. UNF America's fiscal year end is December 31st and it is a limited liability company treated as a partnership for income tax reporting purposes located in Ridgeway, Virginia.

 

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 and pricing is negotiated every six months, based on market rates. As of September 23, 2012, the Company's open purchase orders related to this agreement were $8,013.

 

The Company's raw material purchases under this supply agreement consist of the following:


For the Three Months Ended

 

September 23, 2012

September 25, 2011

UNF

  $ 3,263   $ 5,486

UNF America

    5,698     3,716

Total

  $ 8,961   $ 9,202
 

As of September 23, 2012 and June 24, 2012, the Company had combined accounts payable due to UNF and UNF America of $3,801 and $4,184, respectively.

 

 
22

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

 

The Company is the primary beneficiary of these entities based on the terms of the supply agreement discussed above. As a result, the Company has determined that UNF and UNF America are variable interest entities (“VIEs”) and, in accordance with U.S. GAAP, should be consolidated in the Company's financial results. As the Company purchases substantially all of the output from the two entities, and, as the two entities' balance sheets constitutes 3% or less 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. As of September 23, 2012, the Company's combined investments in UNF and UNF America were $4,233 and are shown within Investments in unconsolidated affiliates. 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. Other than the supply agreement discussed above, the Company does not provide any other operating commitments or guarantees related to either UNF or UNF America.

 

Unaudited, condensed balance sheet and income statement information for the Company's unconsolidated affiliates is presented in the following tables. As PAL is defined as significant, its information is separately disclosed. The operating results of Renewables are included through the end of the Company's first quarter of fiscal year 2012, and thereafter Renewables results have been consolidated.

As of September 23, 2012 (Unaudited)

 

PAL

Other

Total

Current assets

  $ 261,900   $ 9,952   $ 271,852

Noncurrent assets

    125,220     3,238     128,458

Current liabilities

    55,269     5,749     61,018

Noncurrent liabilities

    9,783         9,783

Shareholders' equity and capital accounts

    322,068     7,441     329,509
                         

The Company's portion of undistributed earnings

    20,170     1,278     21,448
 

As of June 24, 2012 (Unaudited)

 

PAL

Other

Total

Current assets

  $ 259,558   $ 12,018   $ 271,576

Noncurrent assets

    130,677     759     131,436

Current liabilities

    56,899     4,512     61,411

Noncurrent liabilities

    7,717         7,717

Shareholders' equity and capital accounts

    325,619     8,265     333,884
 

 

For the Three Months Ended September 23, 2012 (Unaudited)

 

PAL

Other

Total

Net sales

  $ 201,390   $ 8,842   $ 210,232

Gross profit

    2,948     1,653     4,601

(Loss) income from operations

    (571 )     1,223     652

Net income

    38     1,200     1,238

Depreciation and amortization

    7,791     25     7,816
                         

Cash received by PAL under EAP program

    4,926         4,926

Earnings recognized by PAL for EAP program

    2,319         2,319
                         

Dividends and cash distributions received

    2,224         2,224
 

 

 

For the Three Months Ended September 25, 2011 (Unaudited)

 

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