UNIFI INC - Quarter Report: 2016 March (Form 10-Q)

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		March 27, 2016				June 28, 2015
ASSETS
Cash and cash equivalents		$	15,287			$	10,013
Receivables, net			82,454				83,863
Inventories			105,944				111,615
Income taxes receivable			2,848				1,451
Other current assets			4,016				6,022
Total current assets			210,549				212,964
Property, plant and equipment, net			168,975				136,222
Deferred income taxes			1,588				3,922
Intangible assets, net			4,144				5,388
Investments in unconsolidated affiliates			117,952				113,901
Other non-current assets			5,748				3,975
Total assets		$	508,956			$	476,372
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable		$	42,143			$	45,023
Accrued expenses			15,053				16,640
Income taxes payable			1,404				676
Current portion of long-term debt			15,058				12,385
Total current liabilities			73,658				74,724
Long-term debt			106,703				91,725
Other long-term liabilities			11,476				10,740
Deferred income taxes			4,990				90
Total liabilities			196,827				177,279
Commitments and contingencies
Common stock, $0.10 par value (500,000,000 shares authorized, 17,839,916 and 18,007,749 shares outstanding)			1,784				1,801
Capital in excess of par value			46,056				44,261
Retained earnings			296,828				278,331
Accumulated other comprehensive loss			(34,096	)			(26,899	)
Total Unifi, Inc. shareholders’ equity			310,572				297,494
Non-controlling interest			1,557				1,599
Total shareholders’ equity			312,129				299,093
Total liabilities and shareholders’ equity		$	508,956			$	476,372

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		For the Three Months Ended								For the Nine Months Ended
		March 27, 2016				March 29, 2015				March 27, 2016				March 29, 2015
Net sales		$	161,278			$	172,187			$	479,779			$	512,170
Cost of sales			137,914				150,180				413,618				446,784
Gross profit			23,364				22,007				66,161				65,386
Selling, general and administrative expenses			12,142				12,647				35,391				37,266
Provision for bad debts			411				—				1,583				647
Other operating expense, net			819				329				879				891
Operating income			9,992				9,031				28,308				26,582
Interest income			(190	)			(247	)			(519	)			(873	)
Interest expense			908				1,209				2,708				3,237
Loss on extinguishment of debt			—				1,040				—				1,040
Equity in earnings of unconsolidated affiliates			(4,167	)			(5,459	)			(7,330	)			(12,461	)
Income before income taxes			13,441				12,488				33,449				35,639
Provision for income taxes			4,166				2,729				10,194				10,083
Net income including non-controlling interest			9,275				9,759				23,255				25,556
Less: net (loss) attributable to non-controlling interest			(414	)			(257	)			(923	)			(955	)
Net income attributable to Unifi, Inc.		$	9,689			$	10,016			$	24,178			$	26,511
Net income attributable to Unifi, Inc. per common share:
Basic		$	0.54			$	0.55			$	1.35			$	1.46
Diluted		$	0.53			$	0.53			$	1.31			$	1.41

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		For the Three Months Ended								For the Nine Months Ended
		March 27, 2016				March 29, 2015				March 27, 2016				March 29, 2015
Net income including non-controlling interest		$	9,275			$	9,759			$	23,255			$	25,556
Other comprehensive income (loss):
Foreign currency translation adjustments			3,723				(10,368	)			(6,800	)			(22,892	)
Foreign currency translation adjustments for an unconsolidated affiliate			42				(414	)			(454	)			(785	)
Reclassification adjustments on interest rate swap			19				19				57				212
Other comprehensive income (loss), net			3,784				(10,763	)			(7,197	)			(23,465	)
Comprehensive income (loss) including non-controlling interest			13,059				(1,004	)			16,058				2,091
Less: comprehensive (loss) attributable to non-controlling interest			(414	)			(257	)			(923	)			(955	)
Comprehensive income (loss) attributable to Unifi, Inc.		$	13,473			$	(747	)		$	16,981			$	3,046

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		For The Nine Months Ended
		March 27, 2016				March 29, 2015
Cash and cash equivalents at beginning of year		$	10,013			$	15,907
Operating activities:
Net income including non-controlling interest			23,255				25,556
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities:
Equity in earnings of unconsolidated affiliates			(7,330	)			(12,461	)
Distributions received from unconsolidated affiliates			2,947				598
Depreciation and amortization expense			13,040				13,324
Loss on extinguishment of debt			—				1,040
Non-cash compensation expense			2,189				2,462
Excess tax benefit on stock-based compensation plans			(120	)			(102	)
Deferred income taxes			7,015				(74	)
Other, net			(170	)			700
Changes in assets and liabilities:
Receivables, net			(571	)			(546	)
Inventories			2,359				(709	)
Other current assets and income taxes receivable			(988	)			(2,745	)
Accounts payable and accrued expenses			(5,280	)			(6,157	)
Income taxes payable			786				(1,265	)
Other non-current assets			(32	)			76
Other non-current liabilities			1,143				—
Net cash provided by operating activities			38,243				19,697
Investing activities:
Capital expenditures			(36,769	)			(19,393	)
Proceeds from sale of assets			2,103				130
Other, net			(2,010	)			(85	)
Net cash used in investing activities			(36,676	)			(19,348	)
Financing activities:
Proceeds from ABL Revolver			116,100				113,900
Payments on ABL Revolver			(118,100	)			(122,800	)
Proceeds from ABL Term Loan			17,375				22,000
Payments on ABL Term Loan			(6,875	)			(5,625	)
Proceeds from a term loan supplement			4,000				—
Proceeds from construction financing			790				—
Payments on capital lease obligations			(3,026	)			(761	)
Payments of debt financing fees			(217	)			(934	)
Common stock repurchased and retired under publicly announced programs			(6,211	)			(4,160	)
Proceeds from stock option exercises			114				41
Excess tax benefit on stock-based compensation plans			120				102
Contributions from non-controlling interest			880				1,119
Other			(506	)			(406	)
Net cash provided by financing activities			4,444				2,476
Effect of exchange rate changes on cash and cash equivalents			(737	)			(3,980	)
Net increase (decrease) in cash and cash equivalents			5,274				(1,155	)
Cash and cash equivalents at end of period		$	15,287			$	14,752

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1. Background

 

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

 

The Company maintains one of the textile industry’s most comprehensive yarn 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 geographic markets for its products are located in the U.S., Canada, Mexico, Central America and South America. In addition, the Company has a wholly-owned subsidiary in the People’s Republic of China (“China”) focused on the sale and promotion of the Company’s PVA and other specialty products in the Asian textile market, primarily in China, as well as in the European market.

 

In addition to the Company’s operations described above, the Company’s investments include, but are not limited to, (i) a 60% controlling membership interest in Repreve Renewables, LLC (“Renewables”), an agricultural company focused on the development, production and commercialization of dedicated biomass feedstock for use in the animal bedding, bio-energy and other bio-based products markets; and (ii) a 34% non-controlling partnership interest in Parkdale America, LLC (“PAL”), a producer of cotton and synthetic yarns for sale to the textile industry and apparel market, both foreign and domestic.

 

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 28, 2015 (the “2015 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, which consist of normal recurring 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 preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures. Actual results may vary from these estimates.

 

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

 

Fiscal Year

The Company’s current fiscal quarter ended on March 27, 2016, the last Sunday in March. The Company’s Chinese subsidiary’s fiscal quarter ended on March 28, 2016. The Company’s Brazilian and Colombian subsidiaries’ fiscal quarter ended on March 31, 2016. There were no significant transactions or events that occurred between the Company’s fiscal quarter end and its subsidiaries’ fiscal quarter end. The three months ended March 27, 2016 and March 29, 2015 each consisted of thirteen fiscal weeks. The nine months ended March 27, 2016 and March 29, 2015 each consisted of thirty-nine fiscal weeks.

 

Reclassifications

Certain reclassifications of prior years’ data have been made to conform to the current year presentation. Also see note 3.

 

Net sales, cost of sales, selling, general and administrative (“SG&A”) expenses, and other operating expense, net for the three months and nine months ended March 29, 2015 have been revised herein, where applicable, to correspond to the presentation for the three and nine months ended March 27, 2016, consistent with note 27 in the 2015 Form 10-K.

 

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3. Recent Accounting Pronouncements

 

During the second quarter of fiscal 2016, the Company early adopted Accounting Standards Update (“ASU”) 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The ASU eliminates the existing requirement for entities to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Instead, upon adoption, entities are required to classify all deferred tax assets and liabilities as noncurrent. Adopting this ASU provides simplification in the presentation of deferred tax assets and liabilities and alignment with International Financial Reporting Standards.

 

Retrospective application of June 28, 2015 balances reflect the revised presentation requirements of ASU 2015-17, as outlined in the table below.

 

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The ASU is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The ASU is effective for the Company’s fiscal year 2020, and early adoption is permitted.

 

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The ASU is intended to clarify implementation guidance on principal versus agent considerations while reducing the potential for diversity in practice arising from inconsistent application. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of ASU 2014-09 and 2015-14. The guidance is effective for the Company’s fiscal year 2019.

 

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, while reducing cost and complexity. The ASU is effective for the Company’s fiscal year 2018, and early adoption is permitted.

 

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The ASU is intended to clarify implementation guidance on performance obligations and licensing while reducing the potential for diversity in practice arising from inconsistent application. The effective date and transition requirements for ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09 and 2015-14. The guidance is effective for the Company’s fiscal year 2019.

 

The Company is evaluating the effect the new guidance will have on its consolidated financial statements and related disclosures.

 

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

 

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4. Receivables, Net

 

Receivables, net consists of the following:

 

 

Other receivables consist primarily of receivables for duty drawback and refunds due from vendors.

 

The changes in the Company’s allowance for uncollectible accounts are as follows:

 

 

5. Inventories

 

Inventories consists of the following:

 

 

The cost for the majority of the Company’s inventories is determined using the first-in, first-out method. Certain foreign inventories and limited categories of supplies of $25,613 and $28,426 as of March 27, 2016 and June 28, 2015, respectively, were valued under the average cost method.

 

6. Property, Plant and Equipment, Net

 

Property, plant and equipment, net (“PP&E”) consists of the following:

 

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

Assets under capital leases consists of the following:

 

 

During the nine months ended March 27, 2016, the Company entered into capital leases for machinery and transportation equipment with an aggregate present value of $4,154.

 

Depreciation expense and repairs and maintenance expenses were as follows:

 

 

7. Intangible Assets, Net

 

Intangible assets, net consists of the following:

 

 

Amortization expense for intangible assets consists of the following:

 

 

8. Accrued Expenses

 

Accrued expenses consists of the following:

 

 

See note 14 for further information regarding the contingent consideration. Other consists primarily of employee-related claims and payments, interest, marketing expenses, freight expenses, rent, deferred incentives and other non-income related taxes.

 

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9. Long-Term Debt

 

Debt Obligations

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

 

(1)

The weighted average interest rate as of March 27, 2016 for the ABL Term Loan includes the effects of the interest rate swap with a notional balance of $50,000.

(2)

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

(3)

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

(4)

Refer to the discussion below under the subheading “—Construction Financing” for further information.

 

On March 26, 2015, the Company and its subsidiary, Unifi Manufacturing, Inc., entered into an Amended and Restated Credit Agreement (as subsequently amended, the “Amended Credit Agreement”) for a $200,000 senior secured credit facility (the “ABL Facility”) with a syndicate of lenders. The ABL Facility consists of a $100,000 revolving credit facility (the “ABL Revolver”) and a term loan that can be reset up to a maximum amount of $100,000, once per fiscal year, if certain conditions are met (the “ABL Term Loan”). Such a principal increase occurred during the quarter ended December 27, 2015, as described below under the subheading “—Second Amendment”. The ABL Facility has a maturity date of March 26, 2020.

 

The Amended Credit Agreement replaced a previous senior secured credit facility dated May 24, 2012 with a similar syndicate of lenders, which, after multiple amendments, would have matured on March 28, 2019 and consisted of a $100,000 revolving credit facility and a $90,000 term loan. As used herein, the terms “ABL Facility,” “ABL Revolver” and “ABL Term Loan” shall mean the senior secured credit facility, the revolving credit facility or the term loan, respectively, under the Amended Credit Agreement or the previous senior secured credit facility, as applicable.

 

ABL Facility

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

 

If excess availability under the ABL Revolver falls below the defined Trigger Level, a financial covenant requiring the Loan Parties to maintain a fixed charge coverage ratio on a monthly basis of at least 1.05 to 1.0 becomes effective. The Trigger Level as of March 27, 2016 was $24,078. In addition, the ABL Facility contains restrictions on particular payments and investments, including certain restrictions on the payment of dividends and share repurchases. Subject to specific 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.

 

As of March 27, 2016, the Company was in compliance with all financial covenants and the excess availability under the ABL Revolver was $78,049. At March 27, 2016, the fixed charge coverage ratio was 2.8 to 1.0 and the Company had $200 of standby letters of credit, none of which have been drawn upon.

 

Second Amendment

On November 19, 2015, the Company entered into the Second Amendment to Amended and Restated Credit Agreement (“Second Amendment”). The Second Amendment increased the percentage applied to real estate valuations, on a one-time basis, from 60% to 75%, for purposes of calculating the Term Loan collateral. Simultaneous to entering into the Second Amendment, the Company entered into the Fourth Amended and Restated Term Note, thereby resetting the ABL Term Loan balance to $95,000. Pursuant to the Second Amendment, the ABL Term Loan is subject to quarterly amortizing payments of $2,375.

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

Renewables’ Promissory Note

In September 2015, Renewables delivered a promissory note in the amount of $135, and cash, to an unrelated third party for the purchase of certain land, consisting of thirty-seven acres located in Seven Springs, North Carolina, valued at $191. Such promissory note bears fixed interest at 3.0%, with principal and interest payable annually over a five-year period.

 

Renewables’ Term Loan

In September 2015, Renewables entered into a secured debt financing arrangement consisting of a master loan agreement and corresponding term loan supplement, with unrelated parties, having a borrowing capacity of up to $4,000. In October 2015, Renewables borrowed $4,000. The agreements include representations and warranties made by Renewables, financial covenants, affirmative and negative covenants and events of default that are usual and customary for financings of this type. Borrowings bear interest at LIBOR plus an applicable margin of 3.25%, payable monthly in arrears. Principal payments of $111 per month begin in September 2019 and are payable through July 2022, followed by a final payment equal to the remaining unpaid principal balance in August 2022.

 

Term Loan from Unconsolidated Affiliate

On August 30, 2012, a foreign subsidiary of the Company entered into an unsecured loan agreement under which it borrowed $1,250 from the Company’s unconsolidated affiliate, U.N.F. Industries Ltd. The entire principal balance was repaid in April 2016.

 

Capital Lease Obligations

During the nine months ended March 27, 2016, the Company entered into capital leases with an aggregate present value of $4,154. Fixed interest rates for these capital leases range from 3.4% to 3.8%, with maturity dates in August 2020.

 

Construction Financing

In December 2015, the Company entered into an agreement with a third party lender that provides for construction-period financing for certain build-to-suit assets. The Company will record project costs to construction in progress and the corresponding liability to construction financing (within long-term debt). The agreement provides for monthly, interest-only payments during the construction period, at a rate of 3.5%, and contains terms customary for a financing of this type.

 

The agreement provides for 60 monthly payments, which will commence at the earlier of the completion of the construction period or July 1, 2017, with an interest rate of 3.2%.

 

In connection with this construction financing arrangement, the Company has recorded (i) $210 of deferred financing fees and (ii) long-term debt of $3,889 (to reflect $790 of proceeds for construction financing and $3,099 for construction in progress paid by the third party lender).

 

Scheduled Debt Maturities

The following table presents the scheduled maturities of the Company’s outstanding debt obligations for the remainder of fiscal year 2016 and the fiscal years thereafter:

 

 

(1)

Repaid in full in April 2016.

(2)

Total reported here excludes $3,889 for construction financing, described above.

 

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10. Other Long-Term Liabilities

 

Other long-term liabilities consists of the following:

 

 

See note 14 for further information regarding the contingent consideration. Other primarily includes certain retiree and post-employment medical and disability liabilities, and deferred energy incentive credits.

 

11. Income Taxes

 

The provision for income taxes was as follows:

 

 

The effective tax rate for the periods presented above is lower than the U.S. statutory rate due to (i) a decrease in the valuation allowance reflecting the recognition of lower taxable income versus book income for the Company’s investment in PAL (for which the Company maintains a full valuation allowance), which was partially offset by an increase in the valuation allowance for net operating losses, including Renewables (for which no tax benefit could be recognized); (ii) a lower overall effective tax rate for the Company’s foreign earnings (reflecting free-trade zone sales in El Salvador and lower statutory tax rates in both Brazil and China) and (iii) the domestic production activities deduction. These items were partially offset by (a) state and local taxes net of the assumed federal benefit and (b) losses in tax jurisdictions for which no tax benefit could be recognized.

 

Additionally, the effective tax rate for the periods ended March 29, 2015 included recognition of renewable energy credits.

 

The audit of the 2013 tax year by the Internal Revenue Service was closed in December 2015 and did not generate a significant change in uncertain tax positions. The Company regularly assesses the outcomes of both completed and ongoing examinations to ensure that the Company’s provision for income taxes is sufficient. Certain returns that remain open to examination have utilized carryforward tax attributes generated in prior tax years, including net operating losses, which could potentially be revised upon examination.

 

During the nine months ended March 27, 2016, the Company utilized foreign tax credits as a deduction by amending its 2011 federal return. Components of the Company’s deferred tax valuation allowance are as follows:

 

 

(1) Other relates primarily to Renewables.

 

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12. Shareholders’ Equity

 

The following table summarizes the Company’s repurchases and retirements of its common stock under Board-approved stock repurchase programs for the fiscal periods noted.

 

 

No dividends were paid during the nine months ended March 27, 2016 or in the two most recent fiscal years.

 

13. 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 can 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.

 

As of March 27, 2016, a summary of the number of securities remaining available for future issuance under equity compensation plans is as follows:

 

 

Stock options

During the nine months ended March 27, 2016 and March 29, 2015, the Company granted stock options to purchase 82 and 150 shares of common stock, respectively, to certain key employees. The stock options vest ratably over the required three-year service period and have ten-year contractual terms. For the nine months ended March 27, 2016 and March 29, 2015, the weighted average exercise price of the options was $32.36 and $27.38 per share, respectively. The Company used the Black-Scholes model to estimate the weighted average grant date fair value of $20.27 and $17.31 per share, respectively.

 

Restricted stock units

During the nine months ended March 27, 2016 and March 29, 2015, the Company granted 24 and 17 restricted stock units (“RSUs”), respectively, to the Company’s non-employee directors. The director RSUs became fully vested on the grant date. The director RSUs were granted with the same terms and provisions as described in note 16 of the 2015 Form 10-K.

 

During the nine months ended March 27, 2016, the Company granted 20 RSUs to a key employee. The employee RSUs were granted with the same terms and provisions as described in note 16 of the 2015 Form 10-K, with a three-year vesting period.

 

The Company estimated the weighted average fair value of restricted stock unit awards granted during the nine months ended March 27, 2016 and March 29, 2015 to be $27.95 and $28.58 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.

 

See note 16 included in the 2015 Form 10-K for further information regarding the Company’s stock-based compensation.

 

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

 

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.

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

Foreign currency forward contracts

The Company may enter into foreign currency forward contracts as economic hedges for exposures related to certain sales, inventory purchases and equipment purchases which are denominated in currencies that are not its functional currency. Foreign currency forward contracts are not designated as hedges by the Company and are marked to market each period and offset by the foreign exchange (gains) losses included in other operating expense, net resulting from the underlying exposures of the foreign currency denominated assets and liabilities. As of March 27, 2016, there were no outstanding foreign currency forward contracts.

 

Interest rate swap

On May 18, 2012, the Company entered into a five year, $50,000 interest rate swap with Wells Fargo to provide a hedge against the variability of cash flows related to LIBOR-based variable rate borrowings under the Company’s ABL Facility. 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 the interest rate swap as a cash flow hedge. See note 15 for information regarding the reclassifications of amounts from accumulated other comprehensive loss related to the interest rate swap.

 

Contingent consideration

On December 2, 2013, the Company acquired certain draw-winding assets in a business combination and recorded a contingent consideration liability. The fair value of the contingent consideration is measured at each reporting period using a discounted cash flow methodology, based on inputs not observable in the market (Level 3 classification in the fair value hierarchy). The inputs to the discounted cash flow model include the estimated payments through the term of the agreement, based on an agreed-upon definition and schedule, adjusted to risk-neutral estimates using a market price of risk factor that considers relevant metrics of comparable entities, discounted using an observable cost of debt over the term of the estimated payments. Any change in the fair value from either the passage of time or events occurring after the acquisition date is recorded in other operating expense, net. While adjustments have been made to reflect lower-than-expected results for draw-winding operations during fiscal year 2016, there have been no significant changes to the other inputs or assumptions used to develop the fair value measurement since the acquisition date.

 

A reconciliation of the changes in the fair value follows:

 

 

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:

 

 

 

Estimates for the fair value of the interest rate swap are obtained from month-end market quotes for contracts with similar terms.

 

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.

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

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

 

There were no transfers into or out of the levels of the fair value hierarchy for the nine months ended March 27, 2016 and March 29, 2015.

 

15. Accumulated Other Comprehensive Loss

 

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

 

 

A summary of the after-tax effects of the components of other comprehensive loss for the three months and nine months ended March 27, 2016 and March 29, 2015 follows. The summary below excludes pre-tax and tax amounts, as there are no tax components for the activity reflected.

 

 

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16. Earnings Per Share

 

The components of the calculation of earnings per share (“EPS”) are as follows:

 

 

The calculation of earnings per 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.

 

17. Investments in Unconsolidated Affiliates and Variable Interest Entities

 

The Company currently maintains investments in three entities classified as unconsolidated affiliates: PAL; U.N.F. Industries Ltd. (“UNF”); and UNF America LLC (“UNFA”). As of March 27, 2016, the Company’s investment in PAL was $113,732 and the Company’s combined investments in UNF and UNFA were $4,220, reflected within investments in unconsolidated affiliates in the consolidated balance sheets.

 

Parkdale America, LLC

PAL is a limited liability company treated as a partnership for income tax reporting purposes. The Company has a 34% ownership interest in PAL, which is accounted for using the equity method of accounting. PAL is a producer of cotton and synthetic yarns for sale to the textile industry and apparel market, both foreign and domestic. PAL is subject to price risk related to anticipated fixed-price yarn sales. To protect the gross margin of these sales, PAL may enter into cotton futures to manage changes in raw material prices. 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. As of March 2016, PAL had no futures contracts designated as cash flow hedges.

 

As PAL’s fiscal year end is the Saturday nearest to December 31 and its results are considered significant (in accordance with Regulation S-X Rule 3-09), the Company files an amendment to each Annual Report on Form 10-K on or before 90 days subsequent to PAL’s fiscal year end to provide PAL’s audited financial statements for PAL’s most recent fiscal year. The Company filed an amendment to its 2015 Annual Report on Form 10-K for the fiscal year ended June 28, 2015 on March 31, 2016 to provide PAL’s audited financial statements for PAL’s fiscal year ended January 2, 2016. The Company expects to file an amendment to the upcoming 2016 Annual Report on Form 10-K on or before March 31, 2017 to provide PAL’s audited financial statements for PAL’s fiscal year ended December 31, 2016.

 

On February 27, 2015, PAL purchased two manufacturing facilities, plus inventory, for approximately $13,000 cash, and entered into a yarn supply agreement with the seller. PAL has accounted for the transaction as a business combination under the acquisition method, recognizing the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The Company and PAL concluded that the acquisition did not represent a material business combination. PAL recognized a bargain purchase gain of approximately $9,381.

 

The reconciliation between the Company’s share of the underlying equity of PAL and its investment is as follows:

 

 

U.N.F. Industries Ltd.

Raw material and production services for UNF are provided by the Company’s 50% joint venture partner under separate supply and services agreements. UNF’s fiscal year end is December 31 and it is a registered Israeli private company located in Migdal Ha-Emek, Israel.

 

UNF America LLC

Raw material and production services for UNFA are provided by the Company’s 50% joint venture partner under separate supply and services agreements. UNFA’s fiscal year end is December 31 and it is a limited liability company treated as a partnership for income tax reporting purposes located in Ridgeway, Virginia.

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

In conjunction with the formation of UNFA, the Company entered into a supply agreement with UNF and UNFA whereby the Company agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNFA. The agreement has no stated minimum purchase quantities and pricing is negotiated every six months, based on market rates. As of March 27, 2016, the Company’s open purchase orders related to this agreement were $3,364.

 

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

 

 

As of March 27, 2016 and June 28, 2015, the Company had combined accounts payable due to UNF and UNFA of $2,584 and $4,038, respectively.

 

The Company has determined that UNF and UNFA are variable interest entities (“VIEs”) and has also determined that the Company is the primary beneficiary of these entities, based on the terms of the supply agreement. As a result, these entities should be consolidated in the Company’s financial results. As the Company purchases substantially all of the output from the two entities, the two entities’ balance sheets constitute 3% or less of the Company’s current assets, total assets and total liabilities (when excluding reciprocal balances), and because such balances are not expected to comprise a larger portion in the future, the Company has not included the accounts of UNF and UNFA in its consolidated financial statements. The financial results of UNF and UNFA are included in the Company’s financial statements with a one-month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with the Company’s accounting policy. Other than the supply agreement discussed above, the Company does not provide any other commitments or guarantees related to either UNF or UNFA.

 

Condensed balance sheet and income statement information for the Company’s unconsolidated affiliates (including reciprocal balances) is presented in the following tables. As PAL is defined as significant, its information is separately disclosed.

 

 

 

 

 

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

 

 

 

 

18. Commitments and Contingencies

 

Collective Bargaining Agreements

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

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

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 to 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 which was from 2004 to 2008. 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 or when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.

 

Operating Leases

The Company routinely leases sales and administrative office space, warehousing and distribution centers, manufacturing space, transportation equipment, manufacturing equipment, and other information technology and office equipment from third parties. In addition, Renewables leases farm land for use in growing giant miscanthus. In connection with the expansion of growing crop fields, Renewables has entered into multiple operating leases for land during the nine months ended March 27, 2016, many of which have lease terms of ten years with a renewal option and cancellation terms of one year.

 

Other Commitments

The Company has assumed various financial obligations and commitments in the normal course of its operations and financing activities. Financial obligations are considered to represent known future cash payments that the Company is required to make under existing contractual arrangements.

 

During the nine months ended March 27, 2016, the Company entered into certain agreements to purchase assets in connection with the construction of a plastic bottle processing plant for the Polyester Segment. Unpaid amounts relating to these agreements total approximately $7,300.

 

In October 2015, the Company entered into a commitment to construct assets for use in conversion of third party product. While the subject assets are being financed by a construction financing arrangement (described in note 9), in the course of facilitating construction, the Company will incur commitments to equipment vendors and contractors. As of March 27, 2016, such commitments total approximately $6,300.

 

During the quarter ended March 27, 2016, the Company entered into a three year agreement with a vendor for waste removal services related to the future operation of its bottle processing facility. The minimum commitment under this contract is approximately $2,600.

 

The Company will incur commitments to contractors and equipment vendors related to the expansion of its REPREVE^® Recycling Center. As of March 27, 2016, such commitments total approximately $4,100.

 

19. Related Party Transactions

 

For details regarding the nature of certain related party relationships, see note 25 included in the 2015 Form 10-K.

 

Related party receivables consist of the following:

 

 

 

Unifi, Inc.

Notes to Condensed Consolidated Financial Statements (Continued) 

 

Related party payables consist of the following:

 

 

Related party transactions consist of the following:

 

 

 

From time to time, the Company exchanges equipment or extends the term of operating leases for certain transportation equipment under a master lease agreement with Salem Leasing Corporation. During the first half of fiscal year 2016, the Company exchanged multiple power units pursuant to such master lease agreement, with terms extending over the next four to six years. The increase to the respective June 28, 2015 obligation approximates $6,300 as of March 27, 2016.

 

Through April 24, 2015, Mr. Mitchel Weinberger was a member of the Company’s Board. Related party transaction amounts for entities affiliated with Mr. Weinberger are omitted from current disclosures as such entities no longer constitute related parties of the Company.