Edgar Filing: UNIFI INC

unifi_10q-122312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 23, 2012

[ ] 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 January 28, 2013 was 20,104,189.

UNIFI, INC.

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

Table of Contents

Part I. Financial Information
		Page

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of December 23, 2012 and June 24, 2012	3

	Condensed Consolidated Statements of Operations for the Three Months Ended and Six Months Ended December 23, 2012 and December 25, 2011	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended and Six Months Ended December 23, 2012 and December 25, 2011	5

	Condensed Consolidated Statements of Shareholders’ Equity for the Six Months Ended December 23, 2012	6

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 23, 2012 and December 25, 2011	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49

Item 4.	Controls and Procedures	50


Part II. Other Information


Item 1.	Legal Proceedings	51

Item 1A.	Risk Factors	51

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Defaults Upon Senior Securities	51

Item 4.	Mine Safety Disclosures	51

Item 5.	Other Information	51

Item 6.	Exhibits	52

Part I. Financial Information

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

	December 23, 2012		June 24, 2012
ASSETS
Cash and cash equivalents	$	15,246	$	10,886
Receivables, net		88,618		99,236
Inventories		107,101		112,750
Income taxes receivable		1,047		596
Deferred income taxes		4,754		7,807
Other current assets		7,714		6,722
Total current assets		224,480		237,997

Property, plant and equipment, net		119,129		127,090
Deferred income taxes		1,537		1,290
Intangible assets, net		8,694		9,771
Investments in unconsolidated affiliates		96,212		95,763
Other non-current assets		10,898		10,322
Total assets	$	460,950	$	482,233

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	38,623	$	48,541
Accrued expenses		12,422		14,402
Income taxes payable		158		1,332
Current portion of long-term debt		7,263		7,237
Total current liabilities		58,466		71,512
Long-term debt		99,419		114,315
Other long-term liabilities		5,038		4,832
Deferred income taxes		1,055		794
Total liabilities		163,978		191,453
Commitments and contingencies

Common stock, $0.10 par (500,000,000 shares authorized, 20,104,189 and 20,090,094 shares outstanding)		2,011		2,009
Capital in excess of par value		35,771		34,723
Retained earnings		257,483		252,763
Accumulated other comprehensive income		415		28
Total Unifi, Inc. shareholders’ equity		295,680		289,523
Non-controlling interest		1,292		1,257
Total shareholders’ equity		296,972		290,780
Total liabilities and shareholders’ equity	$	460,950	$	482,233

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(amounts in thousands, except per share amounts)

	For the Three Months Ended						For the Six Months Ended
	December 23, 2012			December 25, 2011			December 23, 2012			December 25, 2011
Net sales	$	172,071		$	167,110		$	344,971		$	338,123
Cost of sales		155,380			156,228			310,260			315,411
Gross profit		16,691			10,882			34,711			22,712
Selling, general and administrative expenses		11,532			10,986			22,679			21,357
Provision for bad debts		73			357			183			562
Other operating expense, net		580			490			1,161			449
Operating income (loss)		4,506			(951	)		10,688			344
Interest income		(144	)		(495	)		(268	)		(1,142	)
Interest expense		1,361			4,222			2,805			8,602
Loss on extinguishment of debt		114			—			356			462
Loss on previously held equity interest		—			3,656			—			3,656
Other non-operating income		—			(1,479	)		—			(1,479	)
Equity in earnings of unconsolidated affiliates		(1,258	)		(844	)		(1,929	)		(4,303	)
Income (loss) before income taxes		4,433			(6,011	)		9,724			(5,452	)
Provision for income taxes		2,216			1,806			5,449			2,079
Net income (loss) including non-controlling interest		2,217			(7,817	)		4,275			(7,531	)
Less: net (loss) attributable to non-controlling interest		(209	)		(209	)		(445	)		(209	)
Net income (loss) attributable to Unifi, Inc.	$	2,426		$	(7,608	)	$	4,720		$	(7,322	)

Net income (loss) attributable to Unifi, Inc. per common share:
Basic	$	0.12		$	(0.38	)	$	0.23		$	(0.36	)
Diluted	$	0.12		$	(0.38	)	$	0.23		$	(0.36	)

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)

(amounts in thousands)

	For the Three Months Ended						For the Six Months Ended
	December 23, 2012			December 25, 2011			December 23, 2012			December 25, 2011
Net income (loss) including non-controlling interest	$	2,217		$	(7,817	)	$	4,275		$	(7,531	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(352	)		(1,107	)		(664	)		(18,332	)
Gain (loss) on cash flow hedges, net of reclassification adjustment		384			966			935			(3	)
Other comprehensive income (loss) before income taxes		32			(141	)		271			(18,335	)
Income tax provision (benefit) on cash flow hedges		62			—			(116	)		—
Other comprehensive (loss) income, net of tax		(30	)		(141	)		387			(18,335	)

Comprehensive income (loss) including non-controlling interest		2,187			(7,958	)		4,662			(25,866	)
Less: comprehensive (loss) attributable to non-controlling interest		(209	)		(209	)		(445	)		(209	)
Comprehensive income (loss) attributable to Unifi, Inc.	$	2,396		$	(7,749	)	$	5,107		$	(25,657	)

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

For the Six Months Ended December 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		—		—		1,020			—		—		1,020		—			1,020
Conversion of restricted stock units		9		1		(1	)		—		—		—		—			—
Stock option tax benefit		—		—		1			—		—		1		—			1
Contributions from non-controlling interest		—		—		—			—		—		—		480			480
Other comprehensive income, net of tax		—		—		—			—		387		387		—			387
Net income (loss)		—		—		—			4,720		—		4,720		(445	)		4,275
Balance December 23, 2012		20,104	$	2,011	$	35,771		$	257,483	$	415	$	295,680	$	1,292		$	296,972

See accompanying notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(amounts in thousands)

	For The Six Months Ended
	December 23, 2012			December 25, 2011
Cash and cash equivalents at beginning of year	$	10,886		$	27,490
Operating activities:
Net income (loss) including non-controlling interest		4,275			(7,531	)
Adjustments to reconcile net income (loss) including non-controlling interest to net cash provided by operating activities:
Equity in earnings of unconsolidated affiliates		(1,929	)		(4,303	)
Dividends received from unconsolidated affiliates		2,724			2,005
Depreciation and amortization expense		12,997			13,468
Loss on extinguishment of debt		356			462
Loss on previously held equity interest		—			3,656
Non-cash compensation expense, net		1,326			1,395
Deferred income taxes		3,159			(575	)
Other		97			55
Changes in assets and liabilities, excluding effects of foreign currency adjustments:
Receivables, net		10,447			12,130
Inventories		5,467			14,381
Other current assets and income taxes receivable		(784	)		(1,561	)
Accounts payable and accrued expenses		(12,235	)		(19,830	)
Income taxes payable		(1,161	)		550
Net cash provided by operating activities		24,739			14,302
Investing activities:
Capital expenditures		(2,872	)		(3,259	)
Investments in unconsolidated affiliates		—			(360	)
Other investments		(1,620	)		—
Acquisition, net of cash acquired		—			(356	)
Proceeds from sale of assets		56			181
Other		(55	)		14
Net cash used in investing activities		(4,491	)		(3,780	)
Financing activities:
Payments of notes payable		—			(10,288	)
Proceeds from revolving credit facilities		28,700			92,800
Payments on revolving credit facilities		(35,700	)		(92,400	)
Payments on term loans		(10,516	)		—
Proceeds from related party term loan		1,250			—
Contributions from non-controlling interest		480			120
Other		(73	)		60
Net cash used in financing activities		(15,859	)		(9,708	)

Effect of exchange rate changes on cash and cash equivalents		(29	)		(3,627	)
Net increase (decrease) in cash and cash equivalents		4,360			(2,813	)
Cash and cash equivalents at end of period	$	15,246		$	24,677

See accompanying notes to Condensed Consolidated Financial Statements.

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 Europe.

2. Basis of Presentation

The Company’s current fiscal quarter ended on Sunday, December 23, 2012. However, the Company’s Brazilian, Colombian, and Chinese subsidiaries’ fiscal quarter ended on December 31, 2012. No significant transactions or events outside the normal course of business occurred between the date of the Company’s financial statements and these dates. The three months ended December 23, 2012 and the three months ended December 25, 2011 each consist of thirteen week periods. The six months ended December 23, 2012 and the six months ended December 25, 2011 each consist of twenty-six 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 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.

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.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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, net.

Renewables’ operating expenses are funded through contributions from its members. Since October 6, 2011, contributions from the non-controlling interest have totaled $1,400.

5. Receivables, net

Receivables, net consist of the following:

	December 23, 2012			June 24, 2012
Customer receivables	$	90,002		$	100,818
Allowance for uncollectible accounts		(1,282	)		(1,118	)
Reserves for yarn quality claims		(919	)		(939	)
Net customer receivables		87,801			98,761
Related party receivables		47			111
Other receivables		770			364
Total receivables, net	$	88,618		$	99,236

Other receivables consist primarily of receivables for duty drawback, interest, value added tax and refunds from vendors.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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		(183	)		(569	)
Charged to other accounts		4			—
Deductions		15			589
Balance at December 23, 2012	$	(1,282	)	$	(919	)

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:

	December 23, 2012			June 24, 2012
Raw materials	$	37,342		$	43,296
Supplies		5,329			5,169
Work in process		5,103			6,604
Finished goods		61,334			59,659
Gross inventories		109,108			114,728
Inventory reserves		(2,007	)		(1,978	)
Total inventories	$	107,101		$	112,750

The cost for the majority of the Company’s inventories is determined using the FIFO method. Certain foreign inventories of $32,221 and $35,145 as of December 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:

	December 23, 2012		June 24, 2012
Vendor deposits	$	2,661	$	2,076
Value added taxes receivable		2,166		2,495
Prepaid expenses		1,843		1,778
Other investments		698		—
Assets held for sale		341		341
Other		5		32
Total other current assets	$	7,714	$	6,722

Vendor deposits primarily relate to down payments made towards the purchase of raw materials by the U.S. and Brazilian operations from Asia. Value added taxes receivable are recoverable taxes associated with the sales and purchase activities of the Company’s foreign operations. Prepaid expenses consist of advance payments for insurance, professional fees, membership dues, subscriptions, non-income related tax payments and information technology services. Other investments relate to cash held in the Company’s Colombian subsidiary that are 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 amounts. The total of Company amounts held by the fund was $1,620 at December 23, 2012. The amounts expected to be received in calendar year 2013 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 December 23, 2012, 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.

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:

	December 23, 2012			June 24, 2012
Land	$	3,024		$	3,095
Land improvements		11,676			11,426
Buildings and improvements		146,390			146,232
Assets under capital lease		10,754			9,520
Machinery and equipment		530,288			530,319
Computers, software and office equipment		16,392			16,350
Transportation equipment		4,764			4,722
Construction in progress		2,257			1,774
Gross property, plant and equipment		725,545			723,438
Less: accumulated depreciation		(596,904	)		(587,146	)
Less: accumulated amortization - capital lease		(9,512	)		(9,202	)
Total property, plant and equipment, net	$	119,129		$	127,090

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

	December 23, 2012			June 24, 2012
Internal software development costs	$	2,035		$	2,014
Accumulated amortization		(1,872	)		(1,804	)
Net internal software development costs	$	163		$	210

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

	For the Three Months Ended				For the Six Months Ended
	December 23, 2012		December 25, 2011		December 23, 2012		December 25, 2011
Depreciation expense	$	5,746	$	5,794	$	11,523	$	11,699
Internal software development costs amortization		33		63		68		134
Repair and maintenance expenses		4,300		3,661		8,665		7,989
Capitalized interest		—		—		—		—

Depreciation expense includes the amortization of assets under capital leases.

9. Intangible Assets, Net

Intangible assets, net consist of the following:

	December 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		(15,057	)		(14,156	)
Accumulated amortization - non-compete agreements		(2,738	)		(2,581	)
Accumulated amortization - licenses		(47	)		(28	)
Total accumulated amortization		(17,842	)		(16,765	)
Total intangible assets, net	$	8,694		$	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.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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.

Amortization expense for intangible assets consists of the following:

	For the Three Months Ended				For the Six Months Ended
	December 23, 2012		December 25, 2011		December 23, 2012		December 25, 2011
Customer list	$	451	$	505	$	901	$	1,011
Non-compete agreements		78		91		157		170
Licenses		9		9		19		9
Total amortization expense	$	538	$	605	$	1,077	$	1,190

10. Other Non-Current Assets

Other non-current assets consist of the following:

	December 23, 2012		June 24, 2012
Long-term deposits	$	5,189	$	5,151
Debt financing fees		2,449		2,870
Biomass foundation and feedstock		1,849		1,794
Other investments		922		—
Other		489		507
Total other non-current assets	$	10,898	$	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. 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:

	December 23, 2012		June 24, 2012
Payroll and fringe benefit costs	$	8,327	$	9,026
Utilities		1,974		2,540
Interest		260		398
Property taxes		127		842
Retiree medical liability		115		138
Asset retirement obligation		40		125
Other		1,579		1,333
Total accrued expenses	$	12,422	$	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, customer deposits and other non-income related taxes.

12. Long-Term Debt

Long-term debt consists of the following:

	December 23, 2012			June 24, 2012
ABL Revolver	$	44,000		$	51,000
ABL Term Loan		46,400			50,000
Term B Loan		13,800			20,515
Related party term loan		1,250			—
Capital lease obligations		1,232			37
Total debt		106,682			121,552
Current portion of long-term debt		(7,263	)		(7,237	)
Total long-term debt	$	99,419		$	114,315

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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”) served as the administrative agent under the Term B Loan. 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 as described below was prepaid in full subsequent to the current quarter. 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.

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 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 December 23, 2012, the Company was in compliance with all financial covenants, the excess availability under the ABL Revolver was $35,447 and the fixed charge coverage ratio was 1.51.

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 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 December 23, 2012, 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 weighted average interest rate for borrowings under the ABL Revolver as of December 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 December 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 $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.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

Term B Loan

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.

Optional Prepayments

On October 17, 2012, the Company made a $2,200 optional prepayment of the Term B Loan and recorded a $114 charge for the early extinguishment of debt related to the 3% call premium and the associated write-off of debt financing fees. On July 2, 2012, the Company made a $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.

Subsequent Events

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 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 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).

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. As a result, the Company made a $2,550 mandatory prepayment of the Term B Loan on December 27, 2012 and will record 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 will record a $563 charge for the early extinguishment of debt related to the 3% call premium and the associated write-off of debt financing fees.

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

	For the Three Months Ended				For the Six Months Ended
	December 23, 2012		December 25, 2011		December 23, 2012		December 25, 2011
Prepayment premium for 11.5% Senior Secured Notes due May 2014	$	—	$	—	$	—	$	288
Prepayment call premium for Term B Loan		66		—		201		—
Non-cash charges due to write-off of debt financing fees		48		—		155		174
Loss on extinguishment of debt	$	114	$	—	$	356	$	462

Debt Financing Fees

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

	December 23, 2012
Balance at June 24, 2012	$	2,870
Amounts paid related to debt refinancing		63
Amortization charged to interest expense		(329	)
Amounts charged to extinguishment of debt due to prepayments		(155	)
Balance at December 23, 2012	$	2,449

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

	For the Three Months Ended				For the Six Months Ended
	December 23, 2012		December 25, 2011		December 23, 2012		December 25, 2011
Amortization of debt financing fees	$	163	$	224	$	329	$	445

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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 total 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 4.64%.

13. Other Long-Term Liabilities

Other long-term liabilities consist of the following:

	December 23, 2012		June 24, 2012
Supplemental post-employment plan	$	2,501	$	2,195
Derivative instruments		1,327		1,015
Other		1,210		1,622
Total other long-term liabilities	$	5,038	$	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 Six Months Ended
	December 23, 2012		December 25, 2011		December 23, 2012		December 25, 2011
Supplemental post-employment plan expenses	$	34	$	257	$	306	$	131

14. Income Taxes

The effective income tax rates for the three month and six month periods ended December 23, 2012 and December 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 the Company’s 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 December 23, 2012 resulted in tax expense of $2,216 with an effective tax rate of 50.0%. The Company’s income tax provision for the year-to-date period ended December 23, 2012 resulted in tax expense of $5,449 with an effective tax rate of 56.0%. The effective income tax rate for the periods are 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 December 25, 2011 resulted in tax expense of $1,806 with an effective rate of (30.0%). The Company’s income tax provision for the year-to-date period ended December 25, 2011 resulted in tax expense of $2,079, with an effective rate of (38.1%). The income tax rate for the periods are 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 December 23, 2012, the Company’s valuation allowance includes $12,296 for reserves against certain deferred tax assets primarily related to equity investments and foreign tax credit carryforwards, as well as $2,670 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 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.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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. At December 23, 2012, there was 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 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.

Subsequent Event

On January 22, 2013, the Company’s Board approved a new stock repurchase program to acquire up to $50,000 of the Company’s common stock. The new repurchase program replaced the prior stock repurchase program. 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 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 repurchase, nor is there a minimum number of shares intended to be repurchased or specific time frame in which the Company intends to repurchase. The Company has not repurchased any shares under the new repurchase program.

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 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:

	December 23, 2012
Expected term (years)		7.5
Interest rate		1.0%
Volatility		66.9%
Dividend yield		—

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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 December 23, 2012, and changes during the six months ended December 23, 2012 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 December 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 December 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		5.2		828	$	6.73
$	10.01	-	$	15.00		315	$	11.53		8.2		92	$	11.24
$	15.01	-	$	21.72		6	$	20.55		1.0		6	$	20.55
Totals						1,149	$	8.13		6.0		926	$	7.28

At December 23, 2012, the remaining unrecognized compensation cost related to the unvested stock options subject to service conditions was $993 which is expected to be recognized over a weighted average period of 2.3 years.

Stock options subject to market conditions

There were no options granted during the year-to-date period ended December 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 December 23, 2012, and changes during the six months ended December 23, 2012 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 December 23, 2012		494		73		567	$	5.63

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 December 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		4.8		—	$	—
$	10.01	-	$	12.48		73	$	12.48		5.9		—	$	—
Totals						567	$	8.71		5.0		—	$	—

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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

The stock option activity for the six month period ended December 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 December 23, 2012		1,716		$	8.32

For the six month periods ended December 23, 2012 and December 25, 2011, the total intrinsic value of options exercised was $26 and $33, respectively. The amount of cash received from the exercise of options was $29 and $60 for the year-to-date periods ended December 23, 2012 and December 25, 2011, 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 issued, 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.

A summary of the Company’s RSUs issued to non-employee directors and changes during the six month period ended December 23, 2012 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 December 23, 2012		91		$	11.48

For the RSUs issued to non-employee directors, there were no unvested RSUs and no unrecognized compensation cost at December 23, 2012.

Restricted stock units – key employees

During the first quarter of fiscal year 2013, 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.

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 six month period ended December 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 December 23, 2012		75		$	11.94

The remaining unrecognized compensation cost related to the unvested RSUs at December 23, 2012 is $273, which is expected to be recognized over a weighted average period of 2.6 years.

The activity for the six month period ended December 23, 2012 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 December 23, 2012		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 Six Months Ended
	December 23, 2012		December 25, 2011		December 23, 2012		December 25, 2011
Stock options subject to service conditions	$	222	$	203	$	459	$	392
Stock options subject to market conditions		—		—		—		(18	)
RSUs issued to non-employee directors		400		497		400		566
RSUs issued to key employees		49		195		161		323
Total compensation cost	$	671	$	895	$	1,020	$	1,263

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

As of December 23, 2012, total unrecognized compensation costs related to all unvested stock based compensation arrangements was $1,266. The weighted average period over which these costs are expected to be recognized is 2.4 years.

As of December 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	(105	)
Less: RSUs granted to key employees	(96	)
Plus: Options forfeited	27
Plus: RSUs forfeited	¾
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”), 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.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

The following table presents the employer contribution expense related to the DC Plan incurred each year:

	For the Three Months Ended				For the Six Months Ended
	December 23, 2012		December 25, 2011		December 23, 2012		December 25, 2011
Matching contribution expense	$	464	$	490	$	989	$	1,092

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 income (loss) activity, net of tax:
Foreign currency translation adjustments		(664	)		¾			(664	)
Unrealized loss on interest rate derivative contracts		¾			(233	)		(233	)
Reclassification adjustment for losses on interest rate derivative contracts included in net income		¾			56			56
Change in unconsolidated affiliate’s cash flow hedges		¾			1,228			1,228
Other comprehensive income (loss), net of tax		(664	)		1,051			387
Balance at December 23, 2012	$	1,353		$	(938	)	$	415

Derivative financial instruments includes $14 of gains and $1,214 for losses on cash flow hedges related to one of the Company’s unconsolidated affiliates at December 23, 2012 and June 24, 2012, respectively. The cumulative tax benefit on derivative financial instruments was $355 and $239 at December 23, 2012 and June 24, 2012, respectively. The income tax benefit provided on the components of Other comprehensive income (loss) was $152 on the Unrealized loss on interest rate derivative contracts and $36 allocated to the Reclassification adjustment for losses on interest rate derivative contracts included in net income.

19. Computation of Earnings Per Share

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

	For the Three Months Ended					For the Six Months Ended
	December 23, 2012		December 25, 2011			December 23, 2012		December 25, 2011
Basic EPS
Net income (loss) attributable to Unifi, Inc.	$	2,426	$	(7,608	)	$	4,720	$	(7,322	)

Weighted average common shares outstanding		20,099		20,088			20,095		20,087
Basic EPS	$	0.12	$	(0.38	)	$	0.23	$	(0.36	)

Diluted EPS
Net income (loss) attributable to Unifi, Inc.	$	2,426	$	(7,608	)	$	4,720	$	(7,322	)

Weighted average common shares outstanding		20,099		20,088			20,095		20,087
Net potential common share equivalents – stock options and RSUs		554		¾			509		¾
Adjusted weighted average common shares outstanding		20,653		20,088			20,604		20,087
Diluted EPS	$	0.12	$	(0.38	)	$	0.23	$	(0.36	)

Excluded from the calculation of common share equivalents:
Anti-dilutive common share equivalents		272		1,251			272		1,251

Excluded from the calculation of diluted shares:
Unvested options that vest upon achievement of certain market conditions		567		567			567		567

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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.

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. 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.

The Company has designated the Bank of America swaps as cash flow hedges and determined that they are highly effective. At December 23, 2012, the amount of pre-tax loss recognized in Accumulated other comprehensive income for these cash flow hedge derivative instruments was $145. For the year-to-date period ended December 23, 2012, the Company did not reclassify any gains (losses) related to these swaps from Accumulated other comprehensive income to Interest expense.

On November 26, 2012, the Company de-designated its Wells Fargo interest rate swap as a cash flow hedge resulting in the reclassification of a pre-tax unrealized loss of $92 from Accumulated other comprehensive income to interest expense during the second quarter of fiscal year 2013. The Company expects to reclassify $551 of pre-tax unrealized loss from Accumulated other comprehensive income to Interest expense during the next twelve months. Concurrently, the Company recognized, as interest expense, a $73 gain on the fair value of this derivative.

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 December 23, 2012, the latest maturity date for all outstanding foreign currency forward contracts is during February 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.

The fair values of derivative financial instruments were as follows:

As of December 23, 2012:		Notional Amount		USD Equivalent		Balance Sheet Location	Fair value
Foreign exchange contracts	MXN		3,000	$	229	Other current liabilities	$	(2	)
Interest rate swaps	USD	$	85,000	$	85,000	Other long-term liabilities	$	(1,327	)

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)

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

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
		December 23, 2012			December 25, 2011
Derivatives not designated as hedges:	Classification
Foreign exchange contracts – MXN/USD	Other operating (income) expense	$	3		$	(11	)
Foreign exchange contracts – USD/$R	Other operating (income) expense		—			(2	)
Interest rate swap	Interest expense		(73	)		—
Total (gain) loss recognized in income		$	(70	)	$	(13	)

		For the Six Months Ended
		December 23, 2012			December 25, 2011
Derivatives not designated as hedges:	Classification
Foreign exchange contracts – MXN/USD	Other operating (income) expense	$	38		$	(40	)
Foreign exchange contracts – USD/$R	Other operating (income) expense		—			(2	)
Interest rate swap	Interest expense		(73	)		—
Total (gain) loss recognized in income		$	(35	)	$	(42	)

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.

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 December 23, 2012
	Level 1		Level 2			Level 3
Foreign exchange derivative contracts	$	—	$	(2	)	$	—
Interest rate derivative contracts		—		(1,327	)		—
Total liabilities	$	—	$	(1,329	)	$	—

	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 December 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.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

22. Other Operating Expense, Net

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

	For the Three Months Ended						For the Six Months Ended
	December 23, 2012			December 25, 2011			December 23, 2012			December 25, 2011
Operating expenses for Renewables	$	519		$	512		$	1,104		$	512
Net loss (gain) on sale or disposal of assets		57			(2	)		79			63
Foreign currency transaction losses		41			78			57			57
Other, net		(37	)		(98	)		(79	)		(183	)
Total other operating expense, net	$	580		$	490		$	1,161		$	449

Operating expenses for Renewables includes $45 and $25 of depreciation and amortization expenses for the quarters ended December 23, 2012 and December 25, 2011, respectively, and $91 and $25 for the year-to-date periods ended December 23, 2012 and December 25, 2011, respectively. Other, net consists primarily of rental income.

23. Other Non-Operating Income

The components of other non-operating income were as follows:

	For the Three Months Ended					For the Six Months Ended
	December 23, 2012		December 25, 2011			December 23, 2012		December 25, 2011
Refund of Brazilian non-income related tax	$	—	$	(1,479	)	$	—	$	(1,479	)
Other		—		—			—		—
Total other non-operating income	$	—	$	(1,479	)	$	—	$	(1,479	)

During the second quarter of fiscal year 2012, the Company’s Brazilian operation, Unifi do Brasil (“UDB”), recorded a gain of $1,479 from a refund of non-income related taxes plus interest. During the 2000-2004 tax years UDB paid a tax based on gross revenue to the Brazilian federal government, which included a tax on interest income. The interest income portion of the tax was successfully challenged in the Brazilian courts. The taxes paid plus accrued interest was refunded to UDB during the December 2011 and March 2012 quarters.

24. 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 PAL 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.

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 December 2012, PAL’s cash on-hand was $30,371, 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 income until the underlying transactions are recognized in income. As of December 2012, PAL’s accumulated other comprehensive gain was comprised of gains related to futures contracts totaling $42. 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 December 23, 2012, the Company’s investment in PAL was $91,832 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 December 2012	$	110,356
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		(433	)
Investment as of December 2012	$	91,832

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 December 23, 2012, the Company’s open purchase orders related to this agreement were $5,404.

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

	For the Six Months Ended
	December 23, 2012		December 25, 2011
UNF	$	6,326	$	7,862
UNF America		11,311		7,069
Total	$	17,637	$	14,931

As of December 23, 2012 and June 24, 2012, the Company had combined accounts payable due to UNF and UNF America of $3,721 and $4,184, respectively.

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 agreements 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 December 23, 2012, the Company’s combined investments in UNF and UNF America were $4,380 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 agreements 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 December 23, 2012 (Unaudited)
	PAL		Other		Total
Current assets	$	240,201	$	9,506	$	249,707
Noncurrent assets		118,554		3,213		121,767
Current liabilities		45,603		3,959		49,562
Noncurrent liabilities		11,536		—		11,536
Shareholders’ equity and capital accounts		301,615		8,761		310,376

The Company’s portion of undistributed earnings		21,288		1,264		22,552

	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 December 23, 2012 (Unaudited)
	PAL		Other		Total
Net sales	$	169,222	$	9,343	$	178,565
Gross profit		6,541		1,725		8,266
Income from operations		1,340		1,282		2,622
Net income		1,847		1,296		3,143
Depreciation and amortization		8,209		25		8,234

Cash received by PAL under EAP program		3,842		—		3,842
Earnings recognized by PAL for EAP program		1,549		—		1,549

Dividends and cash distributions received		—		500		500

	For the Three Months Ended December 25, 2011 (Unaudited)
	PAL		Other			Total
Net sales	$	270,810	$	6,590		$	277,400
Gross profit		10,549		339			10,888
Income (loss) from operations		3,093		(86	)		3,007
Net income (loss)		1,980		(75	)		1,905
Depreciation and amortization		8,942		25			8,967

Cash received by PAL under EAP program		5,144		—			5,144
Earnings recognized by PAL for EAP program		4,964		—			4,964

Dividends and cash distributions received		—		—			—

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

	For the Six Months Ended December 23, 2012 (Unaudited)
	PAL		Other		Total
Net sales	$	370,612	$	18,185	$	388,797
Gross profit		9,489		3,378		12,867
Income from operations		770		2,504		3,274
Net income		1,885		2,496		4,381
Depreciation and amortization		16,000		50		16,050

Cash received by PAL under EAP program		8,768		—		8,768
Earnings recognized by PAL for EAP program		3,868		—		3,868

Dividends and cash distributions received		2,224		500		2,724

	For the Six Months Ended December 25, 2011 (Unaudited)
	PAL		Other			Total
Net sales	$	616,885	$	16,857		$	633,742
Gross profit		23,626		1,002			24,628
Income (loss) from operations		14,209		(287	)		13,922
Net income (loss)		13,305		(319	)		12,986
Depreciation and amortization		18,237		81			18,318

Cash received by PAL under EAP program		11,316		—			11,316
Earnings recognized by PAL for EAP program		10,920		—			10,920

Dividends and cash distributions received		2,005		—			2,005

Subsequent Event

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.

25. Commitments and Contingencies

Collective Bargaining Agreements

While employees of the Company’s foreign operations are generally unionized, none of the Company’s domestic labor force is currently covered by a collective bargaining agreement.

Environmental

On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located in Kinston, North Carolina from INVISTA S.a.r.l. (“INVISTA”). The land for the Kinston site was leased pursuant to a 99 year ground lease (“Ground Lease”) with E.I. DuPont de Nemours (“DuPont”). Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the U.S. Environmental Protection Agency (“EPA”) and the North Carolina Department of Environment and Natural Resources (“DENR”) pursuant to the Resource Conservation and Recovery Act Corrective Action program. The Corrective Action program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and clean it up to comply with applicable regulatory standards. Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with conveyance of certain assets at Kinston to DuPont. This agreement terminated the Ground Lease and relieved the Company of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site. However, the Company continues to own a satellite service facility acquired in the INVISTA transaction that has contamination from DuPont’s operations and is monitored by DENR. This site has been remediated by DuPont and DuPont has received authority from DENR to discontinue remediation, other than natural attenuation. DuPont’s duty to monitor and report to DENR will be transferred to the Company in the future, at which time DuPont must pay the Company for seven years of monitoring and reporting costs and the Company will assume responsibility for any future remediation and monitoring of the site. At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

26. Related Party Transactions

On November 19, 2012, the Company entered into a capital lease with Salem Leasing Corporation for certain transportation equipment. The 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 4.64%.

For a further discussion of the nature of certain related party relationships see “Footnote 27. Related Party Transactions” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 24, 2012.

Related party receivables and payables consist of the following:

	December 23, 2012			June 24, 2012
Dillon Yarn Corporation	$	1		$	7
Cupron, Inc.		7			—
American Drawtech Company, Inc.		39			104
Total related party receivables (included within receivables, net)	$	47		$	111

Dillon Yarn Corporation	$	163		$	206
American Drawtech Company, Inc.		(6	)		20
Salem Leasing Corporation		271			270
Total related party payables (included within accounts payable)	$	428		$	496

Related party transactions consist of the following:

		For the Three Months Ended
Affiliated Entity	Transaction Type	December 23, 2012			December 25, 2011
Dillon Yarn Corporation	Sales and Service Agreement	$	141		$	288
Dillon Yarn Corporation	Sales		2			82
Dillon Yarn Corporation	Yarn Purchases		505			659
American Drawtech Company, Inc.	Sales		137			844
American Drawtech Company, Inc.	Yarn Purchases		(6	)		20
Salem Leasing Corporation	Transportation Equipment Costs		744			778
Cupron, Inc.	Sales		13			—

		For the Six Months Ended
Affiliated Entity	Transaction Type	December 23, 2012		December 25, 2011
Dillon Yarn Corporation	Sales and Service Agreement	$	267	$	569
Dillon Yarn Corporation	Sales		6		103
Dillon Yarn Corporation	Yarn Purchases		1,269		1,249
American Drawtech Company, Inc.	Sales		234		2,045
American Drawtech Company, Inc.	Yarn Purchases		37		42
Salem Leasing Corporation	Transportation Equipment Costs		1,530		1,531
Cupron, Inc.	Sales		15		96

27. Business Segment Information

The Company has three operating segments which are also its reportable segments. Each reportable segment derives its revenues as follows:

The Polyester segment manufactures Chip, POY, textured, dyed, twisted and beamed yarns, virgin and recycled, with sales primarily to other yarn manufacturers, knitters and weavers that produce yarn and/or fabric for the apparel, hosiery, automotive upholstery, home furnishing, industrial and other end-use markets. The Polyester segment consists of manufacturing operations in the U.S. and El Salvador.

The Nylon segment manufactures textured nylon and covered spandex yarns with sales to knitters and weavers that produce fabric for the apparel, hosiery, sock and other end-use markets. The Nylon segment consists of manufacturing operations in the U.S. and Colombia.

The International segment’s products primarily include textured polyester and various types of resale yarns and staple fiber. The International segment sells its yarns to knitters and weavers that produce fabric for the apparel, automotive upholstery, home furnishing, industrial and other end-use markets primarily in the South American and Asian regions. This segment includes manufacturing and sales offices in Brazil and a sales office in China.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements - (Continued)

(amounts in thousands, except per share amounts)

The Company evaluates the operating performance of its segments based upon Segment Adjusted Profit which is defined as segment gross profit plus segment depreciation and amortization less segment SG&A and segment other adjustments. Segment operating profit represents segment net sales less cost of sales, restructuring and other charges and SG&A expenses. The accounting policies for the segments are consistent with the Company’s accounting policies. Intersegment sales are accounted for at current market prices. Selected financial information for the Polyester, Nylon and International segments is presented below:

	For the Three Months Ended December 23, 2012
	Polyester		Nylon		International		Total
Net sales	$	97,322	$	39,541	$	35,208	$	172,071
Cost of sales		88,885		35,525		30,970		155,380
Gross profit		8,437		4,016		4,238		16,691
Selling, general and administrative expenses		7,177		2,466		1,889		11,532
Segment operating profit	$	1,260	$	1,550	$	2,349	$	5,159

	For the Three Months Ended December 25, 2011
	Polyester			Nylon		International		Total
Net sales	$	95,105		$	38,816	$	33,189	$	167,110
Cost of sales		92,844			34,289		29,095		156,228
Gross profit		2,261			4,527		4,094		10,882
Selling, general and administrative expenses		6,577			2,215		2,194		10,986
Segment operating (loss) profit	$	(4,316	)	$	2,312	$	1,900	$	(104	)

The reconciliations of Segment operating profit (loss) to consolidated Income (loss) before income taxes are as follows:

	For the Three Months Ended
	December 23, 2012			December 25, 2011
Polyester	$	1,260		$	(4,316	)
Nylon		1,550			2,312
International		2,349			1,900
Segment operating profit (loss)		5,159			(104	)
Provision for bad debts		73			357
Other operating expense, net		580			490
Operating income (loss)		4,506			(951	)
Interest income		(144	)		(495	)
Interest expense		1,361			4,222
Loss on extinguishment of debt		114			—
Loss on previously held equity interest		—			3,656
Other non-operating income		—			(1,479	)
Equity in earnings of unconsolidated affiliates		(1,258	)		(844	)
Income (loss) before income taxes	$	4,433		$	(6,011	)

	For the Six Months Ended December 23, 2012
	Polyester		Nylon		International		Total
Net sales	$	190,358	$	79,554	$	75,059	$	344,971
Cost of sales		173,714