unifi_10q-032413.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 March 24, 2013

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 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 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 registrant’s common stock, par value $.10 per share, as of April 29, 2013 was 19,555,643.
 
 
 

 

UNIFI, INC.
Form 10-Q for the Quarterly Period Ended March 24, 2013

Table of Contents


Part I. Financial Information
       
Page
         
Item 1.
 
Financial Statements:
  3
         
   
Condensed Consolidated Balance Sheets as of March 24, 2013 and June 24, 2012
  3
         
   
Condensed Consolidated Statements of Income for the Three Months Ended and Nine Months Ended March 24, 2013 and March 25, 2012
  4
         
   
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended and Nine Months Ended March 24, 2013 and March 25, 2012
  5
         
   
Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended March 24, 2013
  6
         
   
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 24, 2013 and March 25, 2012
  7
         
   
Notes to Condensed Consolidated Financial Statements
  8
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  33
         
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
  51
         
Item 4.
 
Controls and Procedures
  52
         
 
Part II. Other Information
         
         
Item 1.
 
Legal Proceedings
  53
         
Item 1A.
 
Risk Factors
  53
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
  53
         
Item 3.
 
Defaults Upon Senior Securities
  53
         
Item 4.
 
Mine Safety Disclosures
  53
         
Item 5.
 
Other Information
  53
         
Item 6.
 
Exhibits
  54
         
    Signatures   55
         
   
Exhibit Index
  56
 
 
2

 
 
Part I. Financial Information

Item 1.      Financial Statements

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


   
March 24, 2013
   
June 24, 2012
 
ASSETS
           
Cash and cash equivalents
  $ 15,901     $ 10,886  
Receivables, net
    97,219       99,236  
Inventories
    108,749       112,750  
Income taxes receivable
    1,152       596  
Deferred income taxes
    3,304       7,807  
Other current assets
    5,969       6,722  
Total current assets
    232,294       237,997  
                 
Property, plant and equipment, net
    115,698       127,090  
Deferred income taxes
    1,527       1,290  
Intangible assets, net
    8,348       9,771  
Investments in unconsolidated affiliates
    92,971       95,763  
Other non-current assets
    10,444       10,322  
Total assets
  $ 461,282     $ 482,233  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Accounts payable
  $ 53,561     $ 48,541  
Accrued expenses
    11,966       14,402  
Income taxes payable
    866       1,332  
Current portion of long-term debt
    7,264       7,237  
Total current liabilities
    73,657       71,512  
Long-term debt
    91,104       114,315  
Other long-term liabilities
    5,156       4,832  
Deferred income taxes
    1,180       794  
Total liabilities
    171,097       191,453  
Commitments and contingencies
               
                 
Common stock, $0.10 par (500,000,000 shares authorized, 19,541,755 and 20,090,094 shares outstanding)
    1,954       2,009  
Capital in excess of par value
    35,077       34,723  
Retained earnings
    250,289       252,763  
Accumulated other comprehensive income
    1,408       28  
Total Unifi, Inc. shareholders’ equity
    288,728       289,523  
Non-controlling interest
    1,457       1,257  
Total shareholders’ equity
    290,185       290,780  
Total liabilities and shareholders’ equity
  $ 461,282     $ 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
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Net sales
  $ 168,249     $ 179,037     $ 513,220     $ 517,160  
Cost of sales
    155,568       165,447       465,828       480,858  
Gross profit
    12,681       13,590       47,392       36,302  
Selling, general and administrative expenses
    11,262       11,148       33,941       32,505  
Provision (benefit) for bad debts
    74       (144 )     257       418  
Other operating expense, net
    616       669       1,777       1,118  
Operating income
    729       1,917       11,417       2,261  
Interest income
    (240 )     (571 )     (508 )     (1,713 )
Interest expense
    1,236       4,189       4,041       12,791  
Loss on extinguishment of debt
    746             1,102       462  
Loss on previously held equity interest
                      3,656  
Other non-operating expense (income)
    96       (9 )     96       (1,488 )
Equity in earnings of unconsolidated affiliates
    (4,783 )     (9,863 )     (6,712 )     (14,166 )
Income before income taxes
    3,674       8,171       13,398       2,719  
Provision for income taxes
    2,510       861       7,959       2,940  
Net income (loss) including non-controlling interest
    1,164       7,310       5,439       (221 )
Less: net (loss) attributable to non-controlling interest
    (235 )     (225 )     (680 )     (434 )
Net income attributable to Unifi, Inc.
  $ 1,399     $ 7,535     $ 6,119     $ 213  
                                 
Net income attributable to Unifi, Inc. per common share:
                               
Basic
  $ 0.07     $ 0.38     $ 0.30     $ 0.01  
Diluted
  $ 0.07     $ 0.37     $ 0.30     $ 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
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Net income (loss) including non-controlling interest
  $ 1,164     $ 7,310     $ 5,439     $ (221 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustments
    891       2,793       227       (15,539 )
(Loss) gain on cash flow hedges for an unconsolidated affiliate
    (14 )     724       1,214       655  
Gain (loss) on cash flow hedges, net of reclassification adjustments
    192       (11 )     (101 )     55  
Other comprehensive income (loss) before income taxes
    1,069       3,506       1,340       (14,829 )
Income tax provision (benefit) on cash flow hedges
    76             (40 )      
Other comprehensive income (loss), net of tax
    993       3,506       1,380       (14,829 )
                                 
Comprehensive income (loss) including non-controlling interest
    2,157       10,816       6,819       (15,050 )
Less: comprehensive (loss) attributable to non-controlling interest
    (235 )     (225 )     (680 )     (434 )
Comprehensive income (loss) attributable to Unifi, Inc.
  $ 2,392     $ 11,041     $ 7,499     $ (14,616 )
 
See accompanying notes to Condensed Consolidated Financial Statements.
 
 
5

 
 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)
For the Nine Months Ended March 24, 2013
(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 at June 24, 2012
    20,090     $ 2,009     $ 34,723     $ 252,763     $ 28     $ 289,523     $ 1,257     $ 290,780  
Options exercised
    14       1       77                   78             78  
Stock based compensation
                1,287                   1,287             1,287  
Conversion of restricted stock units
    9       1       (1 )                              
Repurchase and retirement of common stock
    (571 )     (57 )     (1,021 )     (8,593 )           (9,671 )           (9,671 )
Stock option tax benefit
                12                   12             12  
Contributions from non-controlling interest
                                        880       880  
Other comprehensive income, net of tax
                            1,380       1,380             1,380  
Net income (loss)
                      6,119             6,119       (680 )     5,439  
Balance at March 24, 2013
    19,542     $ 1,954     $ 35,077     $ 250,289     $ 1,408     $ 288,728     $ 1,457     $ 290,185  

See accompanying notes to Condensed Consolidated Financial Statements.
 
 
6

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

   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
 
Cash and cash equivalents at beginning of year
  $ 10,886     $ 27,490  
Operating activities:
               
Net income (loss) including non-controlling interest
    5,439       (221 )
Adjustments to reconcile net income (loss) including non-controlling interest to net cash provided by operating activities:
               
Equity in earnings of unconsolidated affiliates
    (6,712 )     (14,166 )
Dividends received from unconsolidated affiliates
    10,531       4,150  
Depreciation and amortization expense
    19,263       20,384  
Loss on extinguishment of debt
    1,102       462  
Loss on previously held equity interest
          3,656  
Non-cash compensation expense
    1,896       2,070  
Deferred income taxes
    4,703       (505 )
Other
    300       239  
Changes in assets and liabilities, excluding effects of foreign currency adjustments:
               
Receivables, net
    2,094       (4,009 )
Inventories
    4,460       16,784  
Other current assets and income taxes receivable
    564       (859 )
Accounts payable and accrued expenses
    1,756       (1,574 )
Income taxes payable
    (470 )     843  
Net cash provided by operating activities
    44,926       27,254  
Investing activities:
               
Capital expenditures
    (4,522 )     (5,329 )
Investments in unconsolidated affiliates
          (360 )
Other investments
    (1,835 )      
Proceeds from other investments
    592        
Acquisition, net of cash acquired
          (356 )
Proceeds from sale of assets
    56       224  
Other
    (272 )     14  
Net cash used in investing activities
    (5,981 )     (5,807 )
Financing activities:
               
Payments of notes payable
          (10,288 )
Proceeds from revolving credit facilities
    64,100       95,600  
Payments on revolving credit facilities
    (63,800 )     (95,200 )
Payments on term loans
    (26,530 )      
Proceeds from related party term loan
    1,250        
Repurchase and retirement of common stock
    (9,671 )      
Contributions from non-controlling interest
    880       320  
Other
    (76 )     (442 )
Net cash used in financing activities
    (33,847 )     (10,010 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (83 )     (3,107 )
Net increase in cash and cash equivalents
    5,015       8,330  
Cash and cash equivalents at end of period
  $ 15,901     $ 35,820  
 
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 (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 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 the European market.

2.  Basis of Presentation
The Company’s current fiscal quarter ended on Sunday, March 24, 2013.  However, the Company’s Brazilian, Colombian and Chinese subsidiaries’ fiscal quarter ended on March 31, 2013.  No significant transactions or events outside the normal course of business occurred between the date of the Company’s financial statements and March 31, 2013.  The three months ended March 24, 2013 and the three months ended March 25, 2012 each consist of thirteen week periods.  The nine months ended March 24, 2013 and the nine months ended March 25, 2012 each consist of thirty-nine 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 (including 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 intended for use as a feedstock 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 6, 2011 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 fiscal 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 )
Loss on previously held equity interest in Renewables
  $ (3,656 )
 
The total fair value of Renewables at that time 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 the 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 agreement
    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 with limited operating activities, the results of Renewables’ operations since the acquisition are presented within Other operating expense, net.

Renewables’ operating expenses are funded through contributions from its members.  Since October 6, 2011, contributions from the non-controlling interest have totaled $1,800.

5.  Receivables, Net
Receivables, net consist of the following:
 
   
March 24, 2013
   
June 24, 2012
 
Customer receivables
  $ 98,645     $ 100,818  
Allowance for uncollectible accounts
    (1,333 )     (1,118 )
Reserves for yarn quality claims
    (993 )     (939 )
Net customer receivables
    96,319       98,761  
Related party receivables
    177       111  
Other receivables
    723       364  
Total receivables, net
  $ 97,219     $ 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, insurance and property claims, value-added tax 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 24, 2012
  $ (1,118 )   $ (939 )
Charged to costs and expenses
    (257 )     (1,059 )
Charged to other accounts
    (1 )     (1 )
Deductions
    43       1,006  
Balance at March 24, 2013
  $ (1,333 )   $ (993 )
 
Amounts charged to costs and expenses for the allowance for uncollectible accounts are reflected in the Provision (benefit) 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:
   
March 24, 2013
   
June 24, 2012
 
Raw materials
  $ 38,319     $ 43,296  
Supplies
    5,127       5,169  
Work in process
    7,356       6,604  
Finished goods
    59,658       59,659  
Gross inventories
    110,460       114,728  
Inventory reserves
    (1,711 )     (1,978 )
Total inventories
  $ 108,749     $ 112,750  
 
The cost for the majority of the Company’s inventories is determined using the first-in, first-out method. Certain foreign inventories of $31,537 and $35,145 as of March 24, 2013 and June 24, 2012, respectively, were valued under the average cost method.

7.  Other Current Assets
Other current assets consist of the following:
 
   
March 24, 2013
   
June 24, 2012
 
Value added taxes receivable
  $ 1,905     $ 2,495  
Vendor deposits
    1,854       2,076  
Prepaid expenses
    1,501       1,778  
Other investments
    353        
Assets held for sale
    341       341  
Other
    15       32  
Total other current assets
  $ 5,969     $ 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 by the Company's U.S., Brazilian and Chinese operations from Asian vendors. Prepaid expenses consist of advance payments for insurance, professional fees, membership dues, subscriptions, non-income related tax payments and information technology services. Other investments relate to cash held by the Company’s Colombian subsidiary within an investment fund that is being liquidated. The Company was notified of this liquidation in December 2012 and the Company no longer has immediate access to these funds. The total of Company amounts held by the fund was $1,149 at March 24, 2013. Amounts expected to be received within the next twelve calendar months under a payment schedule agreed to by the fund’s investors have been recorded in Other current assets, with the remainder recorded in Other non-current assets. As of March 24, 2013, all amounts are considered collectible. 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 (“PP&E”) consists of the following:
 
   
March 24, 2013
   
June 24, 2012
 
Land
  $ 3,032     $ 3,095  
Land improvements
    11,676       11,426  
Buildings and improvements
    146,679       146,232  
Assets under capital leases
    1,234       9,520  
Machinery and equipment
    530,211       530,319  
Computers, software and office equipment
    16,733       16,350  
Transportation equipment
    4,823       4,722  
Construction in progress
    2,685       1,774  
Gross property, plant and equipment
    717,073       723,438  
Less: accumulated depreciation
    (601,347 )     (587,146 )
Less: accumulated amortization - capital leases
    (28 )     (9,202 )
Total property, plant and equipment, net
  $ 115,698     $ 127,090  
 
Internal software development costs within PP&E consist of the following:
 
   
March 24, 2013
   
June 24, 2012
 
Internal software development costs
  $ 2,069     $ 2,014  
Accumulated amortization
    (1,902 )     (1,804 )
Net internal software development costs
  $ 167     $ 210  
 
Depreciation expense, internal software development costs amortization, repair and maintenance expenses and capitalized interest were as follows:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Depreciation expense
  $ 5,540     $ 6,035     $ 17,063     $ 17,734  
Internal software development costs amortization
    30       59       98       193  
Repair and maintenance expenses
    4,478       3,958       13,143       11,947  
Capitalized interest
                       
 
Depreciation expense includes the amortization of assets under capital leases.

9.  Intangible Assets, Net
Intangible assets, net consist of the following:
 
   
March 24, 2013
   
June 24, 2012
 
Customer list
  $ 22,000     $ 22,000  
Non-compete agreements
    4,243       4,243  
Licenses
    293       293  
Trademarks
    193        
Total intangible assets, gross
    26,729       26,536  
                 
Accumulated amortization - customer list
    (15,508 )     (14,156 )
Accumulated amortization - non-compete agreements
    (2,816 )     (2,581 )
Accumulated amortization - licenses
    (57 )     (28 )
Total accumulated amortization
    (18,381 )     (16,765 )
Total intangible assets, net
  $ 8,348     $ 9,771  
 
 
11

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

During the three months ended March 24, 2013, as part of its efforts to market REPREVE® to consumers worldwide and to raise its visibility among brands, the Company capitalized $193 of expenses incurred to register certain trademarks in various countries.  The Company has determined that these trademarks have varying useful, definite lives of up to ten years.

Amortization expense for intangible assets consists of the following:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Customer list
  $ 451     $ 505     $ 1,352     $ 1,517  
Non-compete agreements
    78       79       235       249  
Licenses
    10       10       29       19  
Total amortization expense
  $ 539     $ 594     $ 1,616     $ 1,785  
 
10. Other Non-Current Assets
Other non-current assets consist of the following:
 
   
March 24, 2013
   
June 24, 2012
 
Long-term deposits
  $ 5,231     $ 5,151  
Debt financing fees
    2,066       2,870  
Biomass foundation and feedstock
    1,833       1,794  
Other investments
    796        
Other
    518       507  
Total other non-current assets
  $ 10,444     $ 10,322  
 
Long-term deposits consist primarily of a deposit with a domestic utility company and value-added tax deposits. Biomass foundation and feedstock are currently being developed and propagated by Renewables for the bioenergy industry. See “Footnote 7. Other Current Assets” for further discussion of Other investments. 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:
 
   
March 24, 2013
   
June 24, 2012
 
Payroll and fringe benefit costs
  $ 7,606     $ 9,080  
Utilities
    2,162       2,540  
Interest
    205       398  
Property taxes
    331       842  
Retiree medical liability
    49       138  
Asset retirement obligation
          125  
Other
    1,613       1,279  
Total accrued expenses
  $ 11,966     $ 14,402  
 
Other consists primarily of sales taxes, workers compensation and other employee related claims, marketing expenses, freight expenses, rent, customer deposits and other non-income related taxes.
 
 
12

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

12.  Long-Term Debt
The following table presents a summary of the total balances outstanding for the Company’s debt obligations, their scheduled maturity dates and the weighted average interest rate for borrowings (including the effects of any interest rate swaps) as well as the applicable current portion of long-term debt:
 
         
Weighted Average
 Interest Rate
   
Principal Amounts as of
 
   
Scheduled
Maturity Date
   
as of
March 24, 2013
   
March 24, 2013
   
June 24, 2012
 
ABL Revolver
 
May 2017
      3.4%     $ 51,300     $ 51,000  
ABL Term Loan
 
May 2017
      3.4%       44,600       50,000  
Term B Loan
                    20,515  
Related party term loan
 
August 2014
      3.0%       1,250        
Capital lease obligations
 
Various
   
Various
      1,218       37  
Total debt
                    98,368       121,552  
Current portion of long-term debt
                    (7,264 )     (7,237 )
Total long-term debt
                  $ 91,104     $ 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.  The purpose of entering into the ABL Facility and the Term B Loan was to, among other things, refinance the Company’s then existing indebtedness.  The ABL Facility has a maturity date of May 24, 2017.  The Term B Loan had a maturity date of May 24, 2017, but was prepaid in full on January 8, 2013.

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”).  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 first-priority lien on the Company’s 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 certain restrictions 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 March 24, 2013, the Company was in compliance with all financial covenants, the excess availability under the ABL Revolver was $34,199 and the fixed charge coverage ratio was 1.32.

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 (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 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) 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.
 
 
13

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

The Company had $1,175 of standby letters of credit at March 24, 2013, none of which have been drawn upon.

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 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 ABL Term Loan is scheduled to be repaid in quarterly principal installments of $1,800 and a balloon payment of $15,800 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.

First Amendment
On December 27, 2012, the Company entered into a First Amendment to Credit Agreement (“First Amendment”) to the ABL Facility with its lenders in connection with the Company’s then anticipated January 8, 2013 repayment of all amounts outstanding under the Term B Loan.  The First Amendment modified the definition of fixed charges within the Credit Agreement for the ABL Facility and within the Company’s fixed charge coverage ratio calculation to exclude any mandatory or optional prepayments of the Term B Loan made after December 25, 2012 and prior to February 4, 2013, in an amount not to exceed $13,800, subject to the satisfaction of certain specified conditions (which were met by the Company).  An amendment fee of $50 was paid to the participating lenders during the quarter ended March 24, 2013.

Term B Loan
On December 26, 2012, the Company received a $7,807 cash distribution from PAL, $2,707 of which was deemed to be a tax distribution and $5,100 of which was a special dividend.  Under the terms of the Term B Loan, the Company was required to make a $2,550 mandatory prepayment of the Term B Loan on December 27, 2012 and recorded a $127 charge for the early extinguishment of debt related to the 3% call premium and the associated write-off of debt financing fees.  On January 8, 2013, the Company made an $11,250 optional prepayment of the Term B Loan, repaying in full the remaining amount outstanding.  The Company recorded a $619 charge for the early extinguishment of debt related to the 3% call premium, professional and bank fees, and the associated write off of debt financing fees.

The Term B Loan was 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 contained representations and warranties, affirmative and negative covenants and events of default comparable to those included in the ABL Facility. 

The Term B Loan carried interest at LIBOR plus 7.50% (with a LIBOR floor of 1.25%) with interest payable monthly.  The Term B Loan did not amortize and prepayments were only required if after-tax distributions from PAL were received by the Company (100% of such distributions up to the first $3,000 per calendar year and 50% thereafter), the Company sold all or any part of its membership interest in PAL or under certain other circumstances.  The Company could 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.

The components of Loss on extinguishment of debt consist of the following:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Prepayment call premium for 11.5% Senior Secured Notes due May 2014
  $     $     $     $ 288  
Prepayment call premium and other costs for Term B Loan
    470             671        
Non-cash charges due to write-off of debt financing fees
    276             431       174  
Loss on extinguishment of debt
  $ 746     $     $ 1,102     $ 462  
 
Debt Financing Fees
Debt financing fees are classified within Other non-current assets and consist of the following:
 
   
March 24, 2013
 
Balance at June 24, 2012
  $ 2,870  
Amounts paid related to debt refinancing
    113  
Amortization charged to interest expense
    (486 )
Amounts charged to extinguishment of debt due to prepayments
    (431 )
Balance at March 24, 2013
  $ 2,066  
 
 
14

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
 
Amortization of debt financing fees is classified within Interest expense and consists of the following:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Amortization of debt financing fees
  $ 157     $ 227     $ 486     $ 672  
 
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.

Capital Lease Obligation
On November 19, 2012, the Company entered into a capital lease with Salem Leasing Corporation for certain transportation equipment.  The original amount due under the fifteen year term of the lease is $1,234 and payments are made monthly.  The implicit annual interest rate under the lease is approximately 4.6%.

13.  Other Long-Term Liabilities
Other long-term liabilities consist of the following:
 
   
March 24, 2013
   
June 24, 2012
 
Supplemental post-employment plan
  $ 2,804     $ 2,195  
Derivative instruments
    1,136       1,015  
Other
    1,216       1,622  
Total other long-term liabilities
  $ 5,156     $ 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 amounts recorded within Selling, general and administrative expenses for this plan:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Supplemental post-employment plan expenses
  $ 303     $ 280     $ 609     $ 411  
 
14. Income Taxes
The effective income tax rates for the three month and nine month periods ended March 24, 2013 and March 25, 2012 were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items specifically related to interim periods.  The effective income tax rate can be impacted over the fiscal year by the mix and timing of actual earnings from the Company’s U.S. operations, unconsolidated affiliates and foreign sources versus annual projections and by 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 March 24, 2013 resulted in tax expense of $2,510 with an effective tax rate of 68.3%.  The Company’s income tax provision for the nine months ended March 24, 2013 resulted in tax expense of $7,959 with an effective tax rate of 59.4%.  The effective income tax rates for these periods are different 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 three months ended March 25, 2012 resulted in tax expense of $861 with an effective tax rate of 10.5%.  The Company’s income tax provision for the nine months ended March 25, 2012 resulted in tax expense of $2,940, with an effective rate of 108.1%.  The income tax rates for these periods are different from the U.S. statutory rate due to foreign dividends taxed in the U.S., losses in tax jurisdictions for which no tax benefit could be recognized, and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rates.
 
 
15

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

As of March 24, 2013, the Company’s valuation allowance includes $13,768 for reserves against certain deferred tax assets primarily related to equity investments and foreign tax credit carryforwards, as well as $2,792 for reserves against certain deferred tax assets of the Company’s foreign subsidiaries that are primarily related to net operating loss carryforwards.  As of June 24, 2012, the Companys valuation allowance totaled $13,911.

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.  During the third quarter of fiscal year 2013, the Internal Revenue Service completed an audit of the Company’s 2010 tax year, with no changes being made to the tax return reported.  The Company remains subject to income tax examinations for U.S. federal income taxes for tax years 2010 through 2012, for foreign income taxes for tax years 2007 through 2012, and for state and local income taxes for tax years 2008 through 2012.  The U.S. federal returns and certain state tax returns filed for the 2010 through 2012 tax years have utilized carryforward tax attributes generated in prior tax years, including net operating losses that could potentially be revised upon examination.

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.

On January 22, 2013, the Company’s Board terminated the previous stock repurchase program and approved a new stock repurchase program to acquire up to $50,000 worth of the Company’s common stock.  Under the new repurchase program, the Company is authorized to repurchase shares at prevailing market prices, through open market purchases or privately negotiated transactions at such times, manner and prices as are determined by management, subject to market conditions, applicable legal requirements, contractual obligations and other factors. Repurchases are expected to be financed through cash from operations and borrowings under the Company’s ABL Revolver, and are subject to applicable limitations and requirements as set forth in the ABL Facility.  The repurchase program has no stated expiration or termination date.  The Company may discontinue repurchases at any time that management determines additional purchases are not warranted.  Under the repurchase program, there is no time limit for repurchases, nor are there a minimum number of shares intended to be repurchased or specific time frame in which the Company intends to repurchase.

The following table summarizes the Company’s repurchases and retirements of its common stock during the three months ended March 24, 2013.
 
Total Number of
Shares Repurchased and Retired
 
Average Price Paid
per Share
 
Total Number of Shares
Repurchased as Part of Publicly
Announced Plans or Programs
 
Maximum Approximate
Dollar Value that May Yet
Be Repurchased Under the
Plans or Programs
             
571
 
$16.93
 
571
 
$40,330
 
 
16

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

All repurchased shares have been retired and have the status of authorized and unissued shares.  The cost of the repurchased shares above par value has been allocated between Capital in excess of par value and Retained earnings.

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.

Stock options subject to service conditions
During the first quarter of fiscal year 2013, the Company granted 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 the options granted, the valuation models used the following weighted average assumptions:
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 March 24, 2013, and changes during the nine months ended March 24, 2013 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 March 24, 2013
    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 March 24, 2013:
 
         
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       819     $ 6.74       5.0       819     $ 6.74  
$10.01 - $15.00       315     $ 11.53       8.0       92     $ 11.24  
$15.01 - $21.72       6     $ 20.55       0.8       6     $ 20.55  
Totals
          1,140     $ 8.15       5.8       917     $ 7.29  
 
 
17

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
 
At March 24, 2013, the remaining unrecognized compensation cost related to the unvested stock options subject to service conditions was $776 which is expected to be recognized over a weighted average period of 2.1 years.

Stock options subject to market conditions
There were no options granted during the nine month period ended March 24, 2013 that contained market condition vesting provisions. A summary of the Company’s non-vested shares related to options subject to market conditions as of March 24, 2013 and changes during the nine months ended March 24, 2013 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
    (7 )           (7 )   $ 5.21  
Non-vested at March 24, 2013
    487       73       560     $ 5.64  
 
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 March 24, 2013:
 
         
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       487     $ 8.15       4.6           $  
$10.01 - $12.48       73     $ 12.48       5.7           $  
Totals
          560     $ 8.72       4.7           $  
 
The remaining unrecognized compensation cost related to the stock options subject to market conditions at March 24, 2013 was nil.

The stock option activity for the nine month period ended March 24, 2013 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
    (14 )   $ 5.73  
Expired
        $  
Forfeited
    (7 )   $ 8.16  
Shares under option at March 24, 2013
    1,700     $ 8.33  
 
For the nine month periods ended March 24, 2013 and March 25, 2012, the total intrinsic value of options exercised was $123 and $40, respectively and the amount of cash received from the exercise of options was $78 and $71, respectively. The tax benefit realized from stock options exercised was not material for all periods presented.

Restricted stock units – non-employee directors
During the second quarter of fiscal year 2013, the Board authorized, and the Company granted, 30 restricted stock units (“RSUs”) under the 2008 LTIP to the Company’s non-employee directors.  The RSUs became fully vested on the grant date.  The RSUs convey no rights of ownership in shares of Company stock until such RSUs have been distributed to the grantee in the form of Company stock.  The vested 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 the award to be $13.57 per RSU based on the fair value of the Company’s common stock at the award grant date.
 
 
18

 
 
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 non-employee directors and changes during the nine month period ended March 24, 2013 consist of the following:
 
   
Units
   
Weighted
Average Grant
Date Fair Value
 
Vested at June 24, 2012
    70     $ 10.56  
Granted (vested on grant date)
    30     $ 13.57  
Converted
    (9 )   $ 11.00  
Vested at March 24, 2013
    91     $ 11.48  
 
For the RSUs issued to non-employee directors, there were no unvested RSUs and no unrecognized compensation cost at March 24, 2013.

Restricted stock units – key employees
During the first quarter of fiscal year 2013, the Company granted 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.

A summary of the Company’s RSUs issued to key employees and changes during the nine month period ended March 24, 2013 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 March 24, 2013
    75     $ 11.94  
 
The remaining unrecognized compensation cost related to the unvested RSUs at March 24, 2013 is $223, which is expected to be recognized over a weighted average period of 2.4 years.

The activity for the nine month period ended March 24, 2013 for all RSUs, for all grantees, was as follows:
 
   
RSUs Outstanding
 
RSUs outstanding at June 24, 2012
    134  
Granted
    62  
Converted
    (9 )
Forfeited
     
RSUs outstanding at March 24, 2013
    187  

Summary
The total cost charged against income related to all stock based compensation arrangements was as follows:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Stock options subject to service conditions
  $ 217     $ 200     $ 676     $ 592  
Stock options subject to market conditions
                      (18 )
RSUs issued to non-employee directors
                400       566  
RSUs issued to key employees
    50       196       211       519  
Total stock based compensation cost
  $ 267     $ 396     $ 1,287     $ 1,659  
 
 
19

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
 
The total income tax benefit recognized for stock based compensation was not material for all periods presented.

As of March 24, 2013, total unrecognized compensation costs related to all unvested stock based compensation arrangements was $999.  The weighted average period over which these costs are expected to be recognized is 2.1 years.

As of March 24, 2013, 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
    (105 )
Less: RSUs granted to key employees
    (96 )
Plus: Options forfeited
    27  
Plus: RSUs forfeited
     
Available for issuance under the 2008 LTIP
    901  
 
17. Defined Contribution Plan
The Company matches employee contributions made to the Unifi, Inc. Retirement Savings Plan (the “DC Plan”), a 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
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Matching contribution expense
  $ 477     $ 427     $ 1,466     $ 1,519  
 
18.  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.
 
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 March 24, 2013, the latest maturity date for all outstanding foreign currency forward contracts is during June 2013.  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.
 
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.
 
 
20

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
 
The Company has designated the Bank of America swaps as cash flow hedges and determined that they are highly effective.  At March 24, 2013, the amount of pre-tax loss recognized in Accumulated other comprehensive income for these cash flow hedge derivative instruments was $58.  For the nine months ended March 24, 2013, the Company did not reclassify any gains (losses) related to these swaps from Accumulated other comprehensive income to Interest expense.

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.  It 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.  This interest rate swap allows the Company to fix the LIBOR rate at 1.06% and terminates on May 24, 2017.
 
On November 26, 2012, the Company de-designated its Wells Fargo interest rate swap as a cash flow hedge.  During the three months ended March 24, 2013, the Company reclassified a pre-tax unrealized loss of $106 from Accumulated other comprehensive income to Interest expense.  For the nine months ended March 24, 2013, the Company reclassified pre-tax unrealized losses of $198 from Accumulated other comprehensive income to Interest expense and the Company expects to reclassify additional losses of $578 during the next twelve months. Since the de-designation of this interest rate swap, the Company has recognized pre-tax unrealized gains within Interest expense of $103 and $177 for the three month and nine month periods ended March 24, 2013, respectively.
 
The fair values of derivative financial instruments were as follows:
 
As of March 24, 2013:
   
Notional Amount
   
USD Equivalent
 
Balance Sheet Location
 
Fair Value
 
Foreign currency contracts
MXN
    4,000     $ 313  
Accrued expenses
  $ (9 )
Interest rate swaps
USD
  $ 85,000     $ 85,000  
Other long-term liabilities
  $ (1,136 )
 
As of June 24, 2012:
   
Notional Amount
   
USD Equivalent
 
Balance Sheet Location
 
Fair Value
 
Foreign currency 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)

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
 
     
March 24, 2013
   
March 25, 2012
 
Derivatives not designated as hedges:
Classification
           
Foreign currency contracts – MXN/USD
Other operating expense, net
  $ 15     $ 32  
Foreign currency contracts – USD/$R
Other operating expense, net
           
Interest rate swaps
Interest expense
    (103 )      
Total (gain) loss recognized
    $ (88 )   $ 32  
 
 
21

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
 
     
For the Nine Months Ended
 
     
March 24, 2013
   
March 25, 2012
 
Derivatives not designated as hedges:
Classification
           
Foreign currency contracts – MXN/USD
Other operating expense, net
  $ 53     $ (9 )
Foreign currency contracts – USD/$R
Other operating expense, net
          (2 )
Interest rate swaps
Interest expense
    (177 )      
Total (gain) loss recognized
    $ (124 )   $ (11 )
 
($R represents the Brazilian Real)

By entering into contracts for derivative financial 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 financial instruments do not contain any credit risk related contingent features.

19.  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 March 24, 2013
 
   
Level 1
   
Level 2
   
Level 3
 
Foreign currency contracts
  $     $ (9 )   $  
Interest rate swaps
          (1,136 )      
Total liabilities
  $     $ (1,145 )   $  
 
   
Assets (Liabilities) at Fair Value as of June 24, 2012
 
   
Level 1
   
Level 2
   
Level 3
 
Foreign currency contracts
  $     $ 28     $  
Total assets
  $     $ 28     $  
                         
Interest rate swaps
  $     $ (1,015 )   $  
Total liabilities
  $     $ (1,015 )   $  
 
There were no financial instruments measured at fair value that were in an asset position at March 24, 2013. 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.
 
20. 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 income (loss) activity, net of tax:
                       
Foreign currency translation adjustments
    227             227  
Unrealized loss on interest rate swaps
          (180 )     (180 )
Reclassification adjustments included in net income for losses on interest rate swaps
          119       119  
Change in cash flow hedges for an unconsolidated affiliate
          1,214       1,214  
Other comprehensive income, net of tax
    227       1,153       1,380  
Balance at March 24, 2013
  $ 2,244     $ (836 )   $ 1,408  
 
 
22

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
 
The components of Accumulated other comprehensive income include amounts for foreign currency translation adjustments and derivative financial instruments related to the Company’s interest rate swaps and cotton futures for the Company’s unconsolidated affiliate, Parkdale America, LLC (“PAL”). The balance of Accumulated other comprehensive income at June 24, 2012 included income tax benefits totaling $239 related to the unrealized losses on the Company’s interest rate swaps that were designated for hedge accounting. No taxes have been provided on the amounts included in Accumulated other comprehensive income related to foreign currency translation adjustments or PAL’s cotton futures. The balance of Accumulated other comprehensive income at March 24, 2013 includes income tax benefits totaling $279 related to the Company’s interest rate swaps. Derivative financial instruments include $0 and $1,214 as of March 24, 2013 and June 24, 2012, respectively, for losses on cash flow hedges related to PAL’s cotton futures. During the second quarter of fiscal year 2013, the Company de-designated one of its interest rate swaps as a cash flow hedge. For the three months ended March 24, 2013, the Company reclassified unrealized losses of $106 related its de-designated interest rate swap from Accumulated other comprehensive income to Interest expense with an associated tax benefit of $42. For the nine months ended March 24, 2013, the Company reclassified unrealized losses of $198 related to its de-designated interest rate swap from Accumulated other comprehensive income to Interest expense with an associated tax benefit of $79. As of March 24, 2013, the net amount included in Accumulated other comprehensive income related to the Company’s de-designated interest rate swap was $640, including tax benefits totaling $417.
 
21.  Computation of Earnings Per Share
The computation of basic and diluted earnings per common share (“EPS”) was as follows:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Basic EPS
                       
Net income attributable to Unifi, Inc.
  $ 1,399     $ 7,535     $ 6,119     $ 213  
                                 
Weighted average common shares outstanding
    20,082       20,089       20,091       20,088  
Basic EPS
  $ 0.07     $ 0.38     $ 0.30     $ 0.01  
                                 
Diluted EPS
                               
Net income attributable to Unifi, Inc.
  $ 1,399     $ 7,535     $ 6,119     $ 213  
                                 
Weighted average common shares outstanding
    20,082       20,089       20,091       20,088  
Net potential common share equivalents – stock options and RSUs
    598       272       540       269  
Adjusted weighted average common shares outstanding
    20,680       20,361       20,631       20,357  
Diluted EPS
  $ 0.07     $ 0.37     $ 0.30     $ 0.01  
                                 
Excluded from the calculation of common share equivalents:
                               
Anti-dilutive common share equivalents
    272       213       272       199  
                                 
Excluded from the calculation of diluted shares:
                               
Unvested options that vest upon achievement of certain market conditions
    560       567       560       567  
 
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.
 
22.  Other Operating Expense, Net
The components of Other operating expense, net consist of the following:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 24, 2013
   
March 25, 2012
   
March 24, 2013
   
March 25, 2012
 
Operating expenses for Repreve Renewables
  $ 582     $ 555     $ 1,686     $ 1,067  
Net loss on sale or disposal of assets
    105       149       184       212  
Foreign currency transaction (gains) losses
    (20 )     37       37       94  
Other, net
    (51 )     (72 )     (130 )     (255 )
Total other operating expense, net
  $ 616     $ 669     $ 1,777     $ 1,118  
 
Operating expenses for Repreve Renewables includes $55 and $27 of depreciation and amortization expenses for the three months ended March 24, 2013 and March 25, 2012, respectively, and $146 and $52 for the nine months ended March 24, 2013 and March 25, 2012, respectively. Other, net consists primarily of rental income.
 
 
23

 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements – (Continued)
(amounts in thousands, except per share amounts)
 
23. Other Non-Operating Expense (Income)
The components of other non-operating expense (income) were as follows:
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
March 24, 2013
 
March 25, 2012
 
March 24, 2013
 
March 25, 2012
 
Refund of Brazilian non-income related tax
  $     $ (9 )   $     $ (1,488 )
Other
    96