Edgar Filing: UNIFI INC

ufi20140330_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 30, 2014

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

THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 1-10542

UNIFI, INC.

(Exact name of registrant as specified in its charter)

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

7201 West Friendly Avenue		27419-9109
Greensboro, NC		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code: (336) 294-4410

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]

The number of shares outstanding of the issuer’s common stock, par value $.10 per share, as of May 5, 2014 was 18,511,970.

UNIFI, INC.

FORM 10-Q FOR THE QUARTER ENDED MARCH 30, 2014

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION
		Page

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of March 30, 2014 and June 30, 2013	3

	Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended March 30, 2014 and March 24, 2013	4

	Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended March 30, 2014 and March 24, 2013	5

	Condensed Consolidated Statements of Shareholders’ Equity for the Nine Months Ended March 30, 2014	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 30, 2014 and March 24, 2013	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	45

Item 4.	Controls and Procedures	46


Part II. OTHER INFORMATION


Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

	Signatures	49

	Exhibit Index	50

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

	March 30, 2014			June 30, 2013
ASSETS
Cash and cash equivalents	$	13,159		$	8,755
Receivables, net		97,390			98,392
Inventories		110,916			110,667
Income taxes receivable		50			1,388
Deferred income taxes		1,898			1,715
Other current assets		5,254			5,913
Total current assets		228,667			226,830

Property, plant and equipment, net		118,708			115,164
Deferred income taxes		2,459			2,196
Intangible assets, net		7,867			7,772
Investments in unconsolidated affiliates		98,430			93,261
Other non-current assets		4,508			10,243
Total assets	$	460,639		$	455,466

LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable	$	53,276		$	45,544
Accrued expenses		16,472			18,485
Income taxes payable		1,550			851
Current portion of long-term debt		4,905			65
Total current liabilities		76,203			64,945
Long-term debt		93,606			97,688
Other long-term liabilities		7,379			5,053
Deferred income taxes		2,231			1,300
Total liabilities		179,419			168,986
Commitments and contingencies

Common stock, $0.10 par (500,000,000 shares authorized, 18,555,370 and 19,205,209 shares outstanding)		1,855			1,921
Capital in excess of par value		42,280			36,375
Retained earnings		242,142			252,112
Accumulated other comprehensive loss		(6,679	)		(5,500	)
Total Unifi, Inc. shareholders’ equity		279,598			284,908
Non-controlling interest		1,622			1,572
Total shareholders’ equity		281,220			286,480
Total liabilities and shareholders’ equity	$	460,639		$	455,466

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(amounts in thousands, except per share amounts)

	For the Three Months Ended						For the Nine Months Ended
	March 30, 2014			March 24, 2013			March 30, 2014			March 24, 2013
Net sales	$	176,864		$	168,249		$	506,150		$	513,220
Cost of sales		157,105			155,568			447,909			465,828
Gross profit		19,759			12,681			58,241			47,392
Selling, general and administrative expenses		12,290			11,262			33,895			33,941
Provision for bad debts		137			74			186			257
Other operating expense, net		1,239			616			4,008			1,777
Operating income		6,093			729			20,152			11,417
Interest income		(214	)		(240	)		(1,570	)		(508	)
Interest expense		962			1,236			3,117			4,041
Loss on extinguishment of debt		—			746			—			1,102
Other non-operating expense		—			96			—			96
Equity in earnings of unconsolidated affiliates		(3,585	)		(4,783	)		(14,830	)		(6,712	)
Income before income taxes		8,930			3,674			33,435			13,398
Provision for income taxes		4,476			2,510			14,151			7,959
Net income including non-controlling interest		4,454			1,164			19,284			5,439
Less: net (loss) attributable to non-controlling interest		(289	)		(235	)		(772	)		(680	)
Net income attributable to Unifi, Inc.	$	4,743		$	1,399		$	20,056		$	6,119

Net income attributable to Unifi, Inc. per common share:
Basic	$	0.25		$	0.07		$	1.05		$	0.30
Diluted	$	0.24		$	0.07		$	1.01		$	0.30

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(amounts in thousands)

	For the Three Months Ended						For the Nine Months Ended
	March 30, 2014			March 24, 2013			March 30, 2014			March 24, 2013
Net income including non-controlling interest	$	4,454		$	1,164		$	19,284		$	5,439
Other comprehensive income (loss):
Foreign currency translation adjustments		1,850			891			(1,612	)		227
(Loss) gain on cash flow hedges for an unconsolidated affiliate		—			(14	)		—			1,214
Gain (loss) on cash flow hedges, net of reclassification adjustments		133			192			433			(101	)
Other comprehensive income (loss) before income taxes		1,983			1,069			(1,179	)		1,340
Income tax (provision) benefit provided on cash flow hedges		—			(76	)		—			40
Other comprehensive income (loss), net		1,983			993			(1,179	)		1,380

Comprehensive income including non-controlling interest		6,437			2,157			18,105			6,819
Less: comprehensive (loss) attributable to non-controlling interest		(289	)		(235	)		(772	)		(680	)
Comprehensive income attributable to Unifi, Inc.	$	6,726		$	2,392		$	18,877		$	7,499

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (Unaudited)

For the Nine Months Ended March 30, 2014

(amounts in thousands)

	Shares			Common Stock			Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Loss			Total Unifi, Inc. Shareholders’ Equity			Non- controlling Interest			Total Shareholders’ Equity


Balance at June 30, 2013		19,205		$	1,921		$	36,375		$	252,112		$	(5,500	)	$	284,908		$	1,572		$	286,480
Options exercised		788			78			6,561			—			—			6,639			—			6,639
Conversion of restricted stock units		31			3			(3	)		—			—			—			—			—
Common stock repurchased and retired under publicly announced program		(1,273	)		(127	)		(2,239	)		(28,349	)		—			(30,715	)		—			(30,715	)
Common stock tendered to the Company for the exercise of stock options and retired		(134	)		(14	)		(3,540	)		(29	)		—			(3,583	)		—			(3,583	)
Common stock tendered to the Company for withholding tax obligations and retired		(62	)		(6	)		—			(1,648	)		—			(1,654	)		—			(1,654	)
Stock-based compensation		—			—			1,573			—			—			1,573			—			1,573
Excess tax benefit on stock-based compensation plans		—			—			3,553			—			—			3,553			—			3,553
Other comprehensive loss, net		—			—			—			—			(1,179	)		(1,179	)		—			(1,179	)
Contributions from non-controlling interest		—			—			—			—			—			—			822			822
Net income (loss)		—			—			—			20,056			—			20,056			(772	)		19,284
Balance at March 30, 2014		18,555		$	1,855		$	42,280		$	242,142		$	(6,679	)	$	279,598		$	1,622		$	281,220

See accompanying Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(amounts in thousands)

	For The Nine Months Ended
	March 30, 2014			March 24, 2013
Cash and cash equivalents at beginning of year	$	8,755		$	10,886
Operating activities:
Net income including non-controlling interest		19,284			5,439
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
Equity in earnings of unconsolidated affiliates		(14,830	)		(6,712	)
Dividends received from unconsolidated affiliates		9,832			10,531
Depreciation and amortization expense		13,290			19,263
Loss on extinguishment of debt		—			1,102
Non-cash compensation expense		2,091			1,896
Excess tax benefit on stock-based compensation plans		(3,553	)		—
Deferred income taxes		417			4,703
Restructuring charges		1,296			—
Other		851			341
Changes in assets and liabilities, excluding effects of foreign currency adjustments:
Receivables, net		537			2,094
Inventories		(1,075	)		4,460
Other current assets and income taxes receivable		2,344			607
Accounts payable and accrued expenses		2,905			1,756
Income taxes payable		4,268			(470	)
Other non-current assets		4,780			(84	)
Net cash provided by operating activities		42,437			44,926
Investing activities:
Capital expenditures		(13,390	)		(4,522	)
Proceeds from sale of assets		2,186			56
Proceeds from other investments		428			592
Other investments		—			(1,835	)
Other		(188	)		(272	)
Net cash used in investing activities		(10,964	)		(5,981	)
Financing activities:
Proceeds from revolving credit facility		99,500			64,100
Payments on revolving credit facility		(126,600	)		(63,800	)
Proceeds from term loan		25,200			—
Payments on term loans		—			(26,530	)
Payments of debt financing fees		(3	)		(113	)
Proceeds from related party term loan		—			1,250
Common stock repurchased and retired under publicly announced program		(30,715	)		(9,671	)
Common stock tendered to the Company for withholding tax obligations and retired		(1,654	)		—
Proceeds from stock option exercises		3,056			78
Contributions from non-controlling interest		822			880
Excess tax benefit on stock-based compensation plans		3,553			—
Other		(152	)		(41	)
Net cash used in financing activities		(26,993	)		(33,847	)

Effect of exchange rate changes on cash and cash equivalents		(76	)		(83	)
Net increase in cash and cash equivalents		4,404			5,015
Cash and cash equivalents at end of period	$	13,159		$	15,901

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, “we”, the “Company” or “Unifi”), is a multi-national manufacturing company that processes and sells high-volume commodity yarns, specialized yarns designed to meet certain customer specifications, and premier value-added (“PVA”) yarns with enhanced performance characteristics. The Company sells yarns made from polyester and nylon to other yarn manufacturers and knitters and weavers that produce fabric for the apparel, hosiery, sock, home furnishings, automotive upholstery, industrial and other end-use markets. The Company’s polyester products include polyester polymer beads (“Chip”), partially oriented yarn (“POY”), textured, solution and package dyed, draw wound, twisted and beamed yarns; each is 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 yarn product offerings, and it has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”). The Company’s principal 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 PVA and other specialty products in the Asian textile market, primarily in China, as well as into the European market.

2. Basis of Presentation; Condensed Notes

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. As contemplated by the instructions of the Securities and Exchange Commission to Form 10-Q, the following notes have been condensed and, therefore, do not contain all disclosures required in connection with annual financial statements. Reference should be made to the Company’s year-end audited consolidated financial statements and notes thereto contained in its Annual Report on Form 10-K for the fiscal year ended June 30, 2013 (the “2013 Form 10-K”).

The financial information included in this report has been prepared by the Company, without audit. In the opinion of management, all adjustments considered necessary for a fair statement of the results for interim periods have been included. Nevertheless, the results shown for interim periods are not necessarily indicative of results to be expected for the full year. The June 30, 2013 condensed consolidated balance sheet data was derived from the audited financial statements, but does not include all disclosures required by GAAP. The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures. Actual results may vary from these estimates.

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

Fiscal Year

The Company’s current fiscal quarter ended on March 30, 2014. The Company’s Brazilian, Colombian and Chinese subsidiaries’ fiscal quarter ended on March 31, 2014. There were no significant transactions or events that occurred between the Company’s fiscal quarter end and its subsidiaries’ fiscal quarter end for this period. The three months ended March 30, 2014 and the three months ended March 24, 2013 each consisted of thirteen week periods. The nine months ended March 30, 2014 and the nine months ended March 24, 2013 each consisted of thirty-nine week periods.

Reclassifications

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

3. Recent Accounting Pronouncements

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

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

4. Acquisition

On December 2, 2013, the Company acquired certain draw winding assets and the associated business from American Drawtech, a division of Dillon Yarn Corporation (“Dillon”), pursuant to the exercise of an option granted to the Company under the terms of a commissioning agreement with Dillon, for $2,934, which amount included accounts payable and an accrued contingent liability. The assets acquired include Dillon’s draw winding inventory and production machinery and equipment. This acquisition increased the Company’s polyester production capacity and has allowed the Company to expand its presence in targeted industrial, belting, hose and thread markets by increasing its product offerings to include mid-tenacity flat yarns. Mr. Mitchel Weinberger, a member of the Company’s Board of Directors (the “Board”), is Dillon’s president and chief operating officer. Since the acquisition date, the business has generated $2,030 in net sales for the Company’s Polyester Segment.

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

Assets:
Inventory	$	434
Machinery and equipment		835
Customer list		1,615
Non-compete agreement		50
Total assets	$	2,934

Liabilities:
Accounts payable	$	434
Contingent consideration		2,500
Total liabilities	$	2,934

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

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

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

5. Receivables, Net

Receivables, net consist of the following:

	March 30, 2014			June 30, 2013
Customer receivables	$	98,798		$	99,324
Allowance for uncollectible accounts		(1,145	)		(972	)
Reserves for yarn quality claims		(717	)		(893	)
Net customer receivables		96,936			97,459
Related party receivables		17			204
Other receivables		437			729
Total receivables, net	$	97,390		$	98,392

Other receivables consist primarily of receivables for duty drawback, amounts due from customers for returnable packaging, 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 30, 2013	$	(972	)	$	(893	)
Charged to costs and expenses		(186	)		(1,400	)
Charged to other accounts		4			3
Deductions		9			1,573
Balance at March 30, 2014	$	(1,145	)	$	(717	)

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

6. Inventories

Inventories consist of the following:

	March 30, 2014			June 30, 2013
Raw materials	$	40,523		$	42,001
Supplies		5,359			5,286
Work in process		8,581			6,237
Finished goods		57,563			58,179
Gross inventories		112,026			111,703
Inventory reserves		(1,110	)		(1,036	)
Total inventories	$	110,916		$	110,667

The cost for the majority of the Company’s inventories is determined using the first-in, first-out method. Certain foreign inventories of $30,658 and $31,139 as of March 30, 2014 and June 30, 2013, respectively, were valued under the average cost method.

7. Other Current Assets

Other current assets consist of the following:

	March 30, 2014		June 30, 2013
Vendor deposits	$	2,147	$	2,633
Value added taxes receivable		1,106		1,729
Prepaid expenses		1,345		1,376
Other investments		237		166
Other		419		9
Total other current assets	$	5,254	$	5,913

Vendor deposits primarily relate to down payments made toward the purchase of raw materials by the Company’s U.S., Brazilian and Chinese operations. Value added taxes receivable are recoverable taxes associated with the sales and purchasing 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 by the Company’s Colombian subsidiary within an investment fund of a financial institution located in Colombia that is currently being liquidated. The Company was notified of this liquidation in December 2012 and the Company no longer has immediate access to these funds. The Company has recorded a total of $373 in impairment charges in other operating expense, net since the Company received notification of the liquidation of this investment, of which $155 was recorded during the quarter ended March 30, 2014 and $218 was recorded in fiscal year 2013.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

Other consists primarily of premiums on a split dollar life insurance policy that represents the value of the Company’s right of return on premiums paid for a retiree owned insurance contract that matures in 2015.

8. Property, Plant and Equipment, Net

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

	March 30, 2014			June 30, 2013
Land	$	2,931		$	2,949
Land improvements		11,676			11,676
Buildings and improvements		145,451			144,833
Machinery and equipment		523,628			526,910
Computers, software and office equipment		16,952			16,647
Transportation equipment		4,751			4,866
Assets under capital lease		4,040			1,234
Construction in progress		8,478			5,691
Gross property, plant and equipment		717,907			714,806
Less: accumulated depreciation		(599,199	)		(599,642	)
Total property, plant and equipment, net	$	118,708		$	115,164

Depreciation expense and repair and maintenance expenses were as follows:

	For the Three Months Ended				For the Nine Months Ended
	March 30, 2014		March 24, 2013		March 30, 2014		March 24, 2013
Depreciation expense	$	3,866	$	5,570	$	11,321	$	17,161
Repair and maintenance expenses		4,946		4,478		13,462		13,143

9. Intangible Assets, Net

Intangible assets, net consist of the following:

	March 30, 2014			June 30, 2013
Customer lists	$	23,615		$	22,000
Non-compete agreements		4,293			4,243
Licenses		265			265
Trademarks		328			246
Total intangible assets, gross		28,501			26,754

Accumulated amortization - customer lists		(17,310	)		(15,993	)
Accumulated amortization - non-compete agreements		(3,133	)		(2,895	)
Accumulated amortization - licenses		(78	)		(55	)
Accumulated amortization - trademarks		(113	)		(39	)
Total accumulated amortization		(20,634	)		(18,982	)
Total intangible assets, net	$	7,867		$	7,772

In fiscal year 2007, the Company purchased the texturing operations of Dillon, which are included in the Company’s Polyester Segment. The valuation of the customer list acquired was determined by estimating the discounted net earnings attributable to the customer relationships that were purchased after considering items such as possible customer attrition. Based on the length and trend of the projected cash flows, an estimated useful life of thirteen years was determined. The customer list is being amortized in a manner that reflects the expected economic benefit that will be received over its thirteen year life. The non-compete agreement is amortized using the straight line method over the periods currently covered by the agreement.

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

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

On October 6, 2011, the Company acquired a controlling interest in Repreve Renewables, LLC (“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 their estimated useful lives of four to eight years.

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

Amortization expense for intangible assets consists of the following:

	For the Three Months Ended				For the Nine Months Ended
	March 30, 2014		March 24, 2013		March 30, 2014		March 24, 2013
Customer lists	$	577	$	451	$	1,317	$	1,352
Non-compete agreements		81		78		238		235
Licenses		8		10		23		29
Trademarks		28		—		74		—
Total amortization expense	$	694	$	539	$	1,652	$	1,616

10. Other Non-Current Assets

Other non-current assets consist of the following:

	March 30, 2014		June 30, 2013
Long-term deposits	$	271	$	5,050
Debt financing fees		2,130		2,117
Biomass foundation and feedstock		1,959		1,852
Other investments		—		674
Other		148		550
Total other non-current assets	$	4,508	$	10,243

Long-term deposits consist primarily of vendor deposits. Biomass foundation and feedstock are currently being developed and propagated by Renewables for potential markets in the poultry bedding and bioenergy industries. See “Note 7. Other Current Assets” for further discussion of other investments.

11. Accrued Expenses

Accrued expenses consist of the following:

	March 30, 2014		June 30, 2013
Payroll and fringe benefits	$	10,891	$	11,676
Utilities		2,428		3,058
Severance		648		1,049
Contingent consideration		562		—
Property taxes		468		798
Retiree medical liability		84		106
Interest		99		102
Other		1,292		1,696
Total accrued expenses	$	16,472	$	18,485

Accrued severance is comprised of the current portion of amounts due under severance agreements between the Company and two of its former executive officers and certain other employees. See “Note 20. Other Operating Expense, Net” for further discussion of severance costs. Contingent consideration is the current portion of the estimated amounts payable to Dillon related to the Company’s December 2013 acquisition of Dillon’s draw winding business. See “Note 17. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities” for further discussion. Other consists primarily of unearned revenues related to returnable packaging, workers compensation and other employee related claims, marketing expenses, freight expenses, rent and other non-income related taxes.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

12. Long-Term Debt

Debt Obligations

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

	Scheduled		Weighted Average Interest Rate as of		Principal Amounts as of
	Maturity Date		March 30, 2014		March 30, 2014			June 30, 2013
ABL Revolver	March 2019			3.4%	$	25,400		$	52,500
ABL Term Loan	March 2019			3.1%		68,000			42,800
Term loan from unconsolidated affiliate	August 2015			3.0%		1,250			1,250
Capital lease obligations		(1)		(2)		3,861			1,203
Total debt						98,511			97,753
Current portion of long-term debt						(4,905	)		(65	)
Total long-term debt					$	93,606		$	97,688

(1)

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

(2)

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

ABL Facility

On May 24, 2012, the Company entered into a credit agreement (the “Credit Agreement”) to establish a $150,000 senior secured credit facility (“ABL Facility”) with Wells Fargo Bank, N.A. and Bank of America, N.A. In addition, the Company entered into a $30,000 term loan (“Term B Loan”) which was repaid on January 8, 2013. The Company entered into a First Amendment to Credit Agreement on December 27, 2012, a Second Amendment to Credit Agreement on June 25, 2013, a Third Amendment to Credit Agreement on January 16, 2014 (the “Third Amendment”), and a Fourth Amendment to Credit Agreement on March 28, 2014 (the “Fourth Amendment”). The ABL Facility, as amended, has a maturity date of March 28, 2019, and consists of a $100,000 revolving credit facility (“ABL Revolver”) and a $68,000 term loan (“ABL Term Loan”).

The Third Amendment, among other things: (i) revised the definition of permitted indebtedness to allow the Company to enter into permitted sales and leaseback transactions of equipment in an aggregate amount not to exceed $4,000 per fiscal year; (ii) revised the definition of permitted dispositions to increase the amount of certain asset sales or dispositions from $500 to $4,000 per fiscal year; and (iii) revised the mandatory prepayment provision to increase the amount of net proceeds received from certain permitted dispositions that would be required to prepay the outstanding ABL Facility debt from $500 to $4,000 per fiscal year. No amendment fee was required.

The Fourth Amendment, among other things: (i) increased the ABL Term Loan by $18,000 to $68,000; (ii) beginning October 1, 2014, requires $2,125 of fixed quarterly payments on the ABL Term Loan; (iii) extended the maturity date of the ABL Facility from May 24, 2018 to March 28, 2019; (iv) modified the calculation of the fixed charge coverage ratio to exclude certain capital expenditures, at the election of the Company, through June 30, 2015, subject to a maximum exclusion of $18,000 for any consecutive twelve month period and other limitations; and (v) modified the definition of the “Trigger Level”, such that it is reached when excess availability under the ABL Revolver falls below the greater of $10,000, 20% of the maximum revolver amount or 12.5% of the sum of the maximum revolver amount plus the outstanding principal amount of the ABL Term Loan. In connection with the Fourth Amendment, $327 of debt financing fees was recorded and will be amortized through the ABL Facility maturity date.

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

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

The Credit Agreement, as amended, includes representations and warranties made by the Loan Parties, affirmative and negative covenants and events of default that are usual and customary for financings of this type. Should excess availability under the ABL Revolver fall below the Trigger Level, a financial covenant requiring the Loan Parties to maintain a fixed charge coverage ratio on a monthly basis of at least 1.05 to 1.0 becomes effective. The Trigger Level as of March 30, 2014 was $21,000. In addition, the ABL Facility contains restrictions on certain payments and investments, including restrictions on the payment of dividends and share repurchases, unless excess availability is greater than the Trigger Level for the thirty day period prior to the making of such a distribution (as calculated on a pro forma basis as if the payment and any revolving loans made in connection therewith were made on the first day of such period).

The Company’s ability to borrow under the ABL Revolver is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to certain conditions and limitations. ABL Revolver borrowings bear interest at the London Interbank Offer Rate (“LIBOR”) plus an applicable margin of 1.75% to 2.25%, or the Base Rate plus an applicable margin of 0.75% to 1.25%, with interest currently being paid on a monthly basis. The 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) LIBOR plus 1.0%. There is also a monthly unused line fee under the ABL Revolver of 0.25% to 0.375% of the unused line amount.

The ABL Term Loan bears interest at LIBOR plus an applicable margin of 2.25%, or the Base Rate plus an applicable margin of 1.25%, with interest currently being paid on a monthly basis. 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.

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 rates of interest exceeds $75,000.

As of March 30, 2014, the Company was in compliance with all financial covenants, the excess availability under the ABL Revolver was $62,740, the fixed charge coverage ratio was 7.64 to 1.0 and the Company had $2,325 of standby letters of credit, none of which have been drawn upon.

Term Loan from Unconsolidated Affiliate

On August 30, 2012, a foreign subsidiary of the Company entered into an unsecured loan agreement for $1,250 with its unconsolidated affiliate, U.N.F. Industries Ltd. The loan bears interest at 3%, payable semi-annually, and does not amortize. The maturity date has been extended from August 30, 2014 to August 30, 2015, at which time the entire principal balance is due. Accordingly, $1,250 has been recorded in long-term debt as of March 30, 2014.

Capital Lease Obligations

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%.

During the three months ended March 30, 2014, the Company entered into three capital leases with an unrelated third party for certain machinery and equipment, with original amounts due of $2,800.

Scheduled Debt Maturities

The following table presents the scheduled maturities of the Company’s outstanding debt obligations for the remainder of fiscal year 2014 and the fiscal years thereafter:

	Scheduled Maturities on a Fiscal Year Basis
	2014		2015		2016		2017		2018		Thereafter
ABL Revolver	$	—	$	—	$	—	$	—	$	—	$	25,400
ABL Term Loan		—		6,375		8,500		8,500		8,500		36,125
Term loan from unconsolidated affiliate		—		—		1,250		—		—		—
Capital lease obligations		162		661		681		634		558		1,165
Total debt	$	162	$	7,036	$	10,431	$	9,134	$	9,058	$	62,690

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

Debt Financing Fees

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

	March 30, 2014
Balance at beginning of year	$	2,117
Amounts recorded related to debt modification		330
Amortization charged to interest expense		(317	)
Balance at end of period	$	2,130

Interest Expense

Interest expense consists of the following:

	For the Three Months Ended						For the Nine Months Ended
	March 30, 2014			March 24, 2013			March 30, 2014			March 24, 2013
Interest on ABL Facility	$	785		$	1,007		$	2,450		$	2,747
Interest on Term B Loan		—			43			—			722
Amortization of debt financing fees		105			157			317			486
Marked to market adjustment for interest rate swap		(99	)		(103	)		(107	)		(177	)
Reclassification adjustment for interest rate swap		133			106			433			198
Interest capitalized to property, plant and equipment, net		(39	)		—			(122	)		—
Other		77			26			146			65
Total interest expense	$	962		$	1,236		$	3,117		$	4,041

Loss on Extinguishment of Debt

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

	For the Three Months Ended				For the Nine Months Ended
	March 30, 2014		March 24, 2013		March 30, 2014		March 24, 2013
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
Loss on extinguishment of debt	$	—	$	746	$	—	$	1,102

13. Other Long-Term Liabilities

Other long-term liabilities consist of the following:

	March 30, 2014		June 30, 2013
Supplemental post-employment plan	$	2,940	$	2,665
Contingent consideration		2,025		—
Income tax contingencies		1,233		1,275
Derivative instruments		217		324
Severance		—		137
Other		964		652
Total other long-term liabilities	$	7,379	$	5,053

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

Contingent consideration represents the present value of the long-term portion of contingent payments associated with the Company’s December 2013 acquisition of Dillon’s draw winding business. See “Note 17. Fair Value of Financial Instruments and Non-Financial Assets and Liabilities” for further discussion. Severance represents the long-term portion of monies due under severance agreements with former executive officers of the Company. See “Note 20. Other Operating Expense, Net” for further discussion of these charges. Other primarily includes certain employee related liabilities and deferred energy incentive credits.

The Company maintains an unfunded supplemental post-employment plan for certain management employees. Each employee’s account is credited annually based upon a percentage of the participant’s base salary, with each participant’s balance adjusted quarterly to reflect returns based upon a stock market index. Amounts are paid to participants only after termination of employment. The following table presents the expenses recorded for this plan:

	For the Three Months Ended					For the Nine Months Ended
Classification	March 30, 2014			March 24, 2013		March 30, 2014		March 24, 2013
Selling general and administrative expenses	$	118		$	303	$	547	$	609
Other operating expense, net		(14	)		—		77		—
Total	$	104		$	303	$	624	$	609

14. Income Taxes

The effective income tax rates for the three month and nine month periods ended March 30, 2014 and March 24, 2013 were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be impacted over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currency exchange rates in relation to the U.S. dollar. As a result, the Company’s effective tax rate may fluctuate significantly on a quarterly basis.

The Company’s effective tax rate for the three month and nine month periods ending March 30, 2014 was 50.1% and 42.3%, respectively, and its effective tax rate for the three month and nine month periods ending March 24, 2013 was 68.3% and 59.4%, respectively. The Company’s effective tax rate for each of the periods presented was higher than the U.S. federal statutory rate primarily due to the unfavorable effects of foreign dividends taxed in the U.S., the impact of state taxes, 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.

As of March 30, 2014, the Company’s valuation allowance was $18,147 and includes $15,115 related to reserves against certain deferred tax assets for unconsolidated affiliates and foreign tax credit carryforwards, as well as $3,032 for reserves against certain deferred tax assets of the Company’s foreign subsidiaries that are primarily related to net operating loss carryforwards. The Company’s valuation allowance as of June 30, 2013 was $16,690.

There have been no significant changes in the Company’s liability for uncertain tax positions since June 30, 2013. The Company’s estimate for the potential outcome for any uncertain tax issue is highly judgmental. Management believes that any reasonably foreseeable outcomes related to these matters have been adequately provided for. However, future results may include favorable or unfavorable adjustments to estimated tax liabilities in the period the assessments are made or resolved or when statutes of limitation on potential assessments expire.

The Company and its domestic subsidiaries file a consolidated federal income tax return, as well as income tax returns in numerous state and foreign jurisdictions. The tax years subject to examination vary by jurisdiction. The Company regularly assesses the outcomes of both completed and ongoing examinations to ensure that the Company’s provision for income taxes is sufficient. Currently, the Company is subject to examinations for U.S. federal income taxes for tax years 2010 through 2013, for foreign income taxes for tax years 2007 through 2013, and for state and local income taxes for tax years 2003 through 2013. The U.S. federal tax returns and state tax returns filed for the 2010 through 2013 tax years have utilized carryforward tax attributes generated in prior tax years, including net operating losses, which could potentially be revised upon examination.

15. Shareholders’ Equity

On January 22, 2013, the Board approved a stock repurchase program (the “2013 SRP”) to acquire up to $50,000 of the Company’s common stock. As of March 30, 2014, the Company had completed its repurchase of shares under the 2013 SRP.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

The following table summarizes the Company’s repurchases and retirements of its common stock since the inception of the 2013 SRP:

	Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs		Average Price Paid per Share		Maximum Approximate Dollar Value that May Yet Be Repurchased Under the Plans or Programs
Fiscal year 2013		1,068	$	18.08
Fiscal year 2014		1,273	$	24.11
Total		2,341	$	21.36	$	—

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

Subsequent Event

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

No dividends were paid during the last two fiscal years.

16. Stock Based Compensation

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

Stock options

During the nine months ended March 30, 2014 and March 24, 2013, the Company granted stock options to purchase 97 and 138 shares of common stock, respectively, to certain key employees. The stock options vest ratably over the required three year service period. For the nine months ended March 30, 2014 and March 24, 2013, the weighted average exercise price of the options granted was $22.31 and $11.15 per share, respectively. The Company used the Black-Scholes model to estimate the weighted average grant date fair value of $14.66 and $7.28 per share, respectively.

The valuation models used the following assumptions:

	For the Nine Months Ended
	March 30, 2014		March 24, 2013
Expected term (years)		7.4		7.5
Interest rate		2.1%		1.0%
Volatility		65.9%		66.9%
Dividend yield		—		—

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

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

A summary of stock option activity for the nine months ended March 30, 2014 is as follows:

	Stock Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at June 30, 2013		1,541		$	8.41
Granted		97		$	22.31
Exercised		(788	)	$	8.41
Forfeited		(33	)	$	13.69
Expired		(7	)	$	20.55
Outstanding at March 30, 2014		810		$	9.75		6.1	$	10,364
Vested and expected to vest as of March 30, 2014		805		$	9.71		6.1	$	10,343
Exercisable at March 30, 2014		598		$	7.56		5.3	$	8,952

At March 30, 2014, the remaining unrecognized compensation cost related to unvested stock options was $989, which is expected to be recognized over a weighted average period of 2.1 years.

For the nine month periods ended March 30, 2014 and March 24, 2013, the total intrinsic value of options exercised was $12,826, and $123, respectively. The amount of cash received from the exercise of options was $3,056 and $78 for the nine month periods ended March 30, 2014 and March 24, 2013, respectively. The tax benefit realized from stock options exercised was $4,930 and $20 for the nine month periods ended March 30, 2014 and March 24, 2013, respectively. During the second quarter of the 2014 fiscal year, the Company received and retired 134 shares of its common stock, with a fair value of $3,583, tendered in lieu of cash for the exercise of stock options.

Restricted stock units

During the nine months ended March 30, 2014 and March 24, 2013, the Company granted 22 and 32 restricted stock units (“RSUs”), respectively, 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 over a three year period, and will be converted into an equivalent number of shares of stock (for distribution to the grantee) on each vesting date, unless the grantee has elected to defer the receipt of the shares of stock until separation from service. If, after the first anniversary of the grant date and prior to the final vesting date, the grantee has a separation from service without cause for any reason other than the employee’s resignation, the remaining unvested RSUs will become fully vested and will be converted to an equivalent number of shares of stock and issued to the grantee. The Company estimated the fair value of the awards granted during the nine months ended March 30, 2014 and March 24, 2013 to be $22.08 and $11.23 per RSU, respectively.

During the nine months ended March 30, 2014 and March 24, 2013, the Company granted 25 and 30 RSUs, respectively, 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 awards granted during the nine months ended March 30, 2014 and March 24, 2013 to be $23.23 and $13.57 per RSU, respectively.

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

A summary of the RSU activity for the nine months ended March 30, 2014 is as follows:

	Non-vested			Weighted Average Grant Date Fair Value		Vested			Total			Weighted Average Grant Date Fair Value
Outstanding at June 30, 2013		75		$	11.94		112			187		$	11.78
Granted		47		$	22.68		—			47		$	22.68
Vested		(71	)	$	15.96		71			—		$	15.96
Converted		—		$	—		(31	)		(31	)	$	12.06
Forfeited		(2	)	$	22.08		—			(2	)	$	22.08
Outstanding at March 30, 2014		49		$	16.11		152			201		$	14.19

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

At March 30, 2014, the number of RSUs vested and expected to vest was 201, with an aggregate intrinsic value of $4,535. The aggregate intrinsic value of the 152 vested RSUs at March 30, 2014 was $3,427.

The remaining unrecognized compensation cost related to the unvested RSUs at March 30, 2014 is $320, which is expected to be recognized over a weighted average period of 2.2 years.

For the nine month periods ended March 30, 2014 and March 24, 2013, the total intrinsic value of RSUs converted was $696 and $114, respectively. The tax benefit realized from the conversion of RSUs was $275 and $45 for the nine months ended March 30, 2014 and March 24, 2013, respectively.

Summary

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

	For the Three Months Ended				For the Nine Months Ended
	March 30, 2014		March 24, 2013		March 30, 2014		March 24, 2013
Stock options	$	280	$	217	$	718	$	676
RSUs		82		50		855		611
Total compensation cost	$	362	$	267	$	1,573	$	1,287

The total income tax benefit recognized for stock based compensation was $444 and $329 for the nine months ended March 30, 2014 and March 24, 2013, respectively.

As of March 30, 2014, a summary of the number of securities currently available for future issuance under equity compensation plans is as follows:

Authorized under the 2013 Plan	1,000
Plus: Awards expired, forfeited or otherwise terminated unexercised from the 2008 LTIP	—
Less: Service condition options granted	(5	)
Less: RSUs granted to non-employee directors	(25	)
Available for issuance under the 2013 Plan	970

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

Financial Instruments

The Company uses derivative financial instruments, such as foreign currency 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 contracts

The Company enters into foreign currency contracts as economic hedges for exposures related to certain sales, inventory purchases and equipment purchases that are denominated in currencies that are not its functional currency. As of March 30, 2014, the latest maturity date for all outstanding foreign currency contracts is during July 2014. 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 included in other operating expense, net resulting from the underlying exposures of the foreign currency denominated assets and liabilities.

Interest rate swap

On May 18, 2012, the Company entered into a five year, $50,000 interest rate swap with Wells Fargo to provide a hedge against the variability of cash flows related to LIBOR-based variable rate borrowings under the Company’s ABL Revolver and ABL Term Loan. The swap increased to $85,000 in May 2013 and began decreasing $5,000 per quarter in August 2013 and will continue to do so until the balance again reaches $50,000 in February 2015, where it will remain through the life of the instrument. This interest rate swap allows the Company to fix LIBOR at 1.06% and terminates on May 24, 2017.

On November 26, 2012, the Company de-designated this interest rate swap as a cash flow hedge. For the year-to-date period ended March 30, 2014, the Company reclassified pre-tax unrealized losses of $433 from accumulated other comprehensive loss to interest expense; the Company expects to reclassify additional losses of $386 during the next twelve months.

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

Contingent consideration

On December 2, 2013, the Company acquired certain assets in a business combination with Dillon and recorded a contingent consideration liability, as described in “Note 4. Acquisition.” The fair value of the contingent consideration is measured at each reporting period using a discounted cash flow methodology based on inputs not observable in the market (Level 3 classification in the fair value hierarchy) and any change in the fair value from either the passage of time or events occurring after the acquisition date is recorded in other operating expense, net in the consolidated statements of income. As of March 30, 2014, the inputs and assumptions used to develop the fair value measurement have not changed since the acquisition date.

A reconciliation of the changes in the fair value follows:

Contingent consideration as of December 29, 2013	$	2,500
Change in fair value		98
Payment		(11	)
Contingent consideration as of March 30, 2014	$	2,587

Based on the present value of the expected future payments, the Company has recorded a liability of $562 in accrued expenses and $2,025 in other long-term liabilities.

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

As of March 30, 2014	Notional Amount			USD Equivalent			Balance Sheet Location	Fair Value Hierarchy	Fair Value
Foreign currency contracts	MXN		1,200		$	91	Accrued expenses	Level 2	$	(1	)
Foreign currency contracts	EUR		495		$	667	Other current assets	Level 2	$	14
Interest rate swap	USD	$	70,000		$	70,000	Other long-term liabilities	Level 2	$	(217	)
Contingent consideration							Accrued expenses and other long-term liabilities	Level 3	$	(2,587	)

As of June 30, 2013

Notional Amount

USD

Equivalent

Balance Sheet Location

Fair Value

Hierarchy

Fair Value

Foreign currency contracts

MXN

3,800

295

Other current assets

Level 2

Interest rate swap

USD

85,000

Other long-term liabilities

Level 2

(324

)

(MXN represents the Mexican Peso; EUR represents the Euro)

Estimates of the fair value of the Company’s foreign currency contracts and interest rate swaps are obtained from month-end market quotes for contracts with similar terms.

The effect of marked to market hedging derivative instruments was as follows:

		For the Three Months Ended
Derivatives not designated as hedges	Classification	March 30, 2014			March 24, 2013
Foreign currency contracts	Other operating expense, net	$	3		$	15
Interest rate swap	Interest expense		(99	)		(103	)
Total gain recognized in income		$	(96	)	$	(88	)

		For the Nine Months Ended
Derivatives not designated as hedges	Classification	March 30, 2014			March 24, 2013
Foreign currency contracts	Other operating expense, net	$	(19	)	$	53
Interest rate swap	Interest expense		(107	)		(177	)
Total gain recognized in income		$	(126	)	$	(124	)

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements – (Continued)

(amounts in thousands, except per share amounts)

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.

Since its most recent debt refinancing and modification, the Company believes that there have been no significant changes to its credit risk profile or the interest rates available to the Company for debt issuances with similar terms and average maturities, and the Company estimates that the fair values of its 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 their fair value because of their short-term nature.