UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549D.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 27,September 25, 2011

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 1-10542

UNIFI, INC.
(Exact name of registrant as specified in its charter)

 New York 11-2165495
 (State or other jurisdiction of incorporation or organization)(I.R.S. EmployerIdentification No.)
 
 New York    11-2165495
(State or other jurisdiction of  
incorporation or organization)            
 (I.R.S. Employer
Identification No.)
P.O. Box 19109 - 7201-7201 West Friendly Avenue Greensboro, NC
(Address
 27419
 (Address of principal executive offices)
27419
(Zip Code)
   (Zip Code)
Registrant’s telephone number, including area code:(336) 294-4410
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes [X] No [  ]

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 Large accelerated filer   [ ]   Accelerated filer   [X]     Non-accelerated filer  [ ]    Smaller Reporting Company   [ ]
(Do not check if a smaller reporting company)

 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 2,October 28, 2011 was 20,071,653.
20,088,094.
 
 
 
 

UNIFI, INC.
Form 10-Q for the Quarterly Period Ended March 27,September 25, 2011

Table of Contents

  Page
Part I.  Financial Information
 
Item 1.Financial Statements: 
 
Condensed Consolidated Balance Sheets as of
March 27,September 25, 2011 and June 27, 201026, 20113
   
 
Condensed Consolidated Statements of Operations for the Quarters and Nine-MonthsThree Months Ended
March 27,September 25, 2011 and March 28,September 26, 20104
   
 
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended September 25, 2011 and September 26, 2010
5
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended September 25, 2011
6
Condensed Consolidated Statements of Cash Flows for the Nine-MonthsThree Months Ended
March 27,September 25, 2011 and March 28,September 26, 201057
   
 Notes to Condensed Consolidated Financial Statements68
   
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations2732
   
Item 3.Quantitative and Qualitative Disclosures about Market Risk5144
   
Item 4.Controls and Procedures5246
   
Part II.  Other Information
  
Part II.  Other Information 
Item 1.Legal Proceedings5346
   
Item 1A.Risk Factors5346
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds5446
   
Item 3.Defaults Upon Senior Securities5446
   
Item 4.[Removed and Reserved.]5446
   
Item 5.Other Information5446
   
Item 6.Exhibits5447

 
 
2
 

Part I.  Financial Information

Item 1.  Financial Statements

UNIFI, INC.
Condensed Consolidated Balance SheetsCONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Amountsamounts in thousands)thousands, except share and per share amounts)

 
March 27,
2011
  
June 27,
 2010
 
 (Unaudited)     September 25, 2011  June 26, 2011 
ASSETS            
Current assets:      
Cash and cash equivalents $19,142  $42,691  $19,821  $27,490 
Receivables, net of allowances of $2.9 million and $3.5 million, respectively  104,665   91,243 
Receivables, net  95,778   100,175 
Inventories  136,715   111,007   135,976   134,883 
Income taxes receivable  383   —   769   578 
Deferred income taxes  2,126   1,623   4,390   5,712 
Other current assets  6,216   6,119   4,841   5,231 
Total current assets  269,247   252,683   261,575   274,069 
                
Property, plant and equipment  749,580   747,857 
Less accumulated depreciation  (596,735)  (596,358)
  152,845   151,499 
Property, plant and equipment, net  141,797   151,027 
Intangible assets, net  12,235   14,135   11,027   11,612 
Investments in unconsolidated affiliates  89,854   73,543   92,340   91,258 
Other non-current assets  9,051   12,605   8,606   9,410 
Total assets $533,232  $504,465  $515,345  $537,376 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:        
Accounts payable $48,352  $40,662  $46,036  $42,842 
Accrued expenses  18,473   21,725   16,008   17,495 
Income taxes payable  709   505   767   421 
Current portion of notes payable  —   15,000 
Current maturities of long-term debt and other liabilities  459   327 
Current portion of long-term debt  348   342 
Total current liabilities  67,993   78,219   63,159   61,100 
Long-term debt  163,622   168,322 
Other long-term liabilities  3,947   4,007 
Deferred income taxes  2,453   4,292 
Total liabilities  233,181   237,721 
Commitments and contingencies        
                
Notes payable, less current portion  133,722   163,722 
Long-term debt and other liabilities  40,619   2,531 
Deferred income taxes  384   97 
Commitments and contingencies        
Shareholders’ equity:        
Common stock  2,007   2,006 
Common stock, $0.10 par (500,000,000 shares authorized, 20,086,094 and 20,080,253 shares outstanding)
  2,009   2,008 
Capital in excess of par value  32,318   31,579   33,015   32,599 
Retained earnings  227,758   216,183   241,558   241,272 
Accumulated other comprehensive income  28,431   10,128   5,582   23,776 
  290,514   259,896 
Total shareholders’ equity  282,164   299,655 
Total liabilities and shareholders’ equity $533,232  $504,465  $515,345  $537,376 


See accompanying notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
 
 
3
 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
UNIFI, INC.
Condensed Consolidated Statements of Operations
(Unaudited) (Amounts(amounts in thousands, except per share data)amounts)

  For the Quarters Ended  For the Nine-Months Ended 
  March 27, 2011  March 28, 2010  March 27, 2011  March 28, 2010 
Summary of Operations:            
Net sales $178,164  $154,687  $512,986  $439,793 
Cost of sales  163,017   138,177   457,595   386,541 
Restructuring charges  9   254   1,555   254 
Write down of long-lived assets  —   —   —   100 
Selling, general and administrative expenses  10,344   11,252   32,223   34,568 
Provision (benefit) for bad debts  41   (105)  86   (93)
Other operating expense (income), net  158   (346)  417   (542)
                 
Non-operating (income) expense:                
Interest income  (584)  (775)  (1,995)  (2,355)
Interest expense  5,016   5,697   15,347   16,412 
Other non-operating expense  78   —   528   — 
Loss (gain) on extinguishment of debt  2,193   —   3,337   (54)
Equity in losses (earnings) of unconsolidated affiliates  2,103   (2,175)  (11,887)  (5,847)
                 
Income (loss) from operations before income taxes  (4,211)  2,708   15,780   10,809 
Provision (benefit) for income taxes  (166)  1,937   4,205   5,596 
Net income (loss) $(4,045) $771  $11,575  $5,213 
                 
Income (loss) per common share:                
Basic $(.20) $.04  $.58  $.26 
                 
Diluted $(.20) $.04  $.57  $.25 
                 
Weighted average outstanding shares of common stock (a):
                
Basic  20,069   20,057   20,062   20,414 
                 
Diluted  20,069   20,274   20,477   20,518 

(a)    All outstanding share amounts and computations using such amounts have been retroactively adjusted to reflect the November 3, 2010 1-for-3 reverse stock split.


  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Net sales
 $171,013  $175,092 
Cost of sales
  159,183   153,546 
Gross profit
  11,830   21,546 
Restructuring charges
  —   363 
Selling, general and administrative expenses
  10,371   11,510 
Provision (benefit) for bad debts
  205   (41)
Other operating (income) expense, net
  (41)  243 
Operating income
  1,295   9,471 
         
Interest income
  (647)  (743)
Interest expense
  4,380   5,269 
Loss on extinguishment of debt
  462   1,144 
Equity in earnings of unconsolidated affiliates
  (3,459)  (8,951)
Income before income taxes
  559   12,752 
Provision for income taxes
  273   2,517 
Net income
 $286  $10,235 
         
Net income per common share:        
Basic
 $0.01  $0.51 
         
Diluted
 $0.01  $0.50 
 

See accompanying notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
 
 
4
 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
UNIFI, INC.
Condensed Consolidated Statements of Cash Flows
 (Unaudited) (Amounts(amounts in thousands)

  For the Nine-Months Ended 
  
March 27,
 2011
  
March 28,
 2010
 
       
Cash and cash equivalents at beginning of year $42,691  $42,659 
Operating activities:        
Net income  11,575   5,213 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Earnings of unconsolidated affiliates, net of distributions  (7,568)  (4,236)
Depreciation  17,664   17,204 
Amortization  2,636   3,454 
Stock-based compensation expense  624   1,836 
Deferred compensation expense  504   463 
Loss on asset sales  242   953 
Loss (gain) on extinguishment of debt  3,337   (54)
Write down of long-lived assets  —   100 
Restructuring charges  —   254 
Deferred income tax  (63)  (449)
Provision (benefit) for bad debts  86   (93)
Other  157   268 
Change in assets and liabilities, excluding effects of foreign currency adjustments  (30,607)  (4,089)
Net cash (used in) provided by operating activities  (1,413)  20,824 
         
Investing activities:        
Capital expenditures  (17,334)  (7,963)
Investment in unconsolidated affiliates  (707)  (550)
Return of capital from unconsolidated affiliate  500   — 
Change in restricted cash  —   5,776 
Proceeds from sale of capital assets  189   1,393 
Proceeds from split dollar life insurance surrenders  3,241   — 
Other  —   (246)
Net cash used in investing activities  (14,111)  (1,590)
         
Financing activities:        
Payments of notes payable  (47,588)  — 
Payments of other long-term debt  (105,325)  (6,211)
Borrowings of other long-term debt  143,125   — 
Proceeds from stock option exercises  118   — 
Purchase and retirement of Company stock  (2)  (4,995)
Debt refinancing fees  (825)  (381)
Other  (364)  — 
Net cash used in financing activities  (10,861)  (11,587)
         
Effect of exchange rate changes on cash and cash equivalents  2,836   2,190 
Net (decrease) increase in cash and cash equivalents  (23,549)  9,837 
Cash and cash equivalents at end of period $19,142  $52,496 
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Net income
 $286  $10,235 
Other comprehensive income (loss) before tax:        
Foreign currency adjustments
  (17,225)  6,707 
Loss on cash flow hedge
  (969)  — 
Other comprehensive income (loss), before tax
  (18,194)  6,707 
         
Income tax expense related to items of other comprehensive income (loss)  —   — 
Other comprehensive income (loss), net of tax
  (18,194)  6,707 
Comprehensive income (loss)
 $(17,908) $16,942 

See accompanying notes to condensed consolidated financial statements.Condensed Consolidated Financial Statements.
 
 
5
 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
For the Three Months Ended September 25, 2011
(amounts in thousands)

  Shares Outstanding  Common Stock  Capital in Excess of Par Value (1)  Retained Earnings  
Accumulated Other Comprehensive
Income
  Total Shareholders’ Equity 
Balance June 26, 2011  20,080  $2,008  $32,599   241,272   23,776   299,655 
Options exercised
  6   1   48   —   —   49 
Stock-based compensation  —   —   368   —   —   368 
Other comprehensive loss  —   —   —   —   (18,194)  (18,194)
Net income
  —   —   —   286   —   286 
Balance September 25, 2011  20,086  $2,009  $33,015  $241,558  $5,582  $282,164 

NotesSee accompanying notes to Condensed Consolidated Financial StatementsStatements.
 
1.   Basis of Presentation

The Condensed Consolidated Balance Sheet of Unifi, Inc. together with its subsidiaries (the “Company”) at June 27, 2010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by United States (“U.S.”) generally accepted accounting principles (“GAAP”) for complete financial statements.  Except as noted with respect to the balance sheet at June 27, 2010, this information is unaudited and reflects all adjustments which are, in the opinion of management, necessary to present fairly the financial position at March 27, 2011, and the results of operations and cash flows for the periods ended March 27, 2011 and March 28, 2010.  Such adjustments consisted of normal recurring items necessary for fair presentation in conformity with U.S. GAAP.  Preparing financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results may differ from these estimates.  Interim results are not necessarily indicative of results for a full year.  The information included in this Quarterly Report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010, as recast in its Current Report on Form 8-K filed January 7, 2011 to reflect the reverse stock split of the Company’s common stock at a reverse stock split ratio of 1-for-3, which became effective November 3, 2010. All share and per share computations have been retroactively adjusted for all periods presented to reflect the decrease in shares as a result of the reverse stock split.

The significant accounting policies followed by the Company including a consolidation policy are presented on pages 67 to 73 of the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010, as recast as discussed above.

2.   Inventories

Inventories are comprised of the following (amounts in thousands):
  
March 27,
2011
  
June 27,
 2010
 
       
Raw materials and supplies $64,834  $51,255 
Work in process  7,022   6,726 
Finished goods  64,859   53,026 
  $136,715  $111,007 

3.   Other Current Assets

Other current assets are comprised of the following (amounts in thousands):
  
March 27,
2011
  
June 27,
 2010
 
       
Prepaid expenses:      
Insurance $746  $862 
Value added tax  2,754   2,286 
Information technology services  116   223 
Other  569   368 
Deposits  2,031   2,380 
  $6,216  $6,119 

 
6
 

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

  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Cash and cash equivalents at beginning of year
 $27,490  $42,691 
Operating activities:        
Net income
  286   10,235 
Adjustments to reconcile net income to net cash provided by operating activities:        
Equity in earnings of unconsolidated affiliates
  (3,459)  (8,951)
Dividends received from unconsolidated affiliates
  2,005   2,532 
Depreciation and amortization
  6,782   6,743 
Net loss (gain) on sale of assets
  64   (65)
Loss on extinguishment of debt
  462   1,144 
Non-cash compensation expense
  243   347 
Deferred income taxes
  (718)  225 
Other
  (1)  7 
Changes in assets and liabilities, excluding effects of foreign currency adjustments:
        
Receivables
  403   (2,751)
Inventories
  (7,386)  (7,620)
Other current assets and income taxes receivable
  (129)  107 
Accounts payable and accrued expenses
  2,622   1,284 
Income taxes payable
  647   774 
Net cash provided by operating activities
  1,821   4,011 
Investing activities:        
Capital expenditures
  (1,122)  (5,495)
Investments in unconsolidated affiliates
  (360)  (225)
Proceeds from sale of assets
  173   180 
Net cash used in investing activities
  (1,309)  (5,540)
Financing activities:        
Payments of notes payable
  (10,288)  (15,863)
Payments on revolving credit facility
  (53,500)  (40,525)
Proceeds from borrowings on revolving credit facility
  58,800   40,525 
Proceeds from stock option exercises
  49   — 
Debt financing fees
  —   (821)
Net cash used in financing activities
  (4,939)  (16,684)
         
Effect of exchange rate changes on cash and cash equivalents  (3,242)  1,796 
Net decrease in cash and cash equivalents
  (7,669)  (16,417)
Cash and cash equivalents at end of period
 $19,821  $26,274 
 
See accompanying notes to Condensed Consolidated Financial Statements.
7

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

1. Background
Unifi, Inc., a New York corporation formed in 1969 (together with its subsidiaries, the “Company” or “Unifi”) is a publicly-traded, multi-national manufacturing company.  The Company processes and sells high-volume commodity yarns, specialized yarns designed to meet certain customer specifications and premier value-added (“PVA”) yarns with enhanced performance characteristics and higher expected gross margin percentages.  The Company sells its polyester and nylon products to other yarn manufacturers, 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 recycled polyester polymer beads (“Chip”), partially oriented yarn (“POY”), textured, solution and package dyed, twisted and beamed yarns.  The Company’s nylon products include textured, solution dyed and covered spandex yarns.  The Company maintains one of the industry’s most comprehensive product offerings and has ten manufacturing operations in four countries and participates in joint ventures in Israel and the United States (“U.S.”).  In addition, the Company has a wholly-owned subsidiary in the People’s Republic of China (“China”) focused on the sale and promotion of the Company’s specialty and PVA products in the Asian textile market, primarily in China.

2. Basis of Presentation
The Company’s current fiscal quarter ended on Sunday September 25, 2011.  However, the Company’s Brazilian, Colombian, and Chinese subsidiaries’ fiscal quarter ended on September 30, 2011.  No significant transactions or events have occurred between these dates and the date of the Company’s financial statements.  The three months ended September 25, 2011 and the three months ended September 26, 2010 each consist of thirteen week periods.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair statement of the results for interim periods have been included.  The preparation of financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the amounts reported and certain financial statement disclosures.  Actual results may vary from these estimates.

These condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.  There were no changes in the nature of our significant accounting policies or the application of our accounting policies from those reported in our most recent Annual Report on Form 10-K.  Certain prior period information has been reclassified to conform to the current period presentation.

The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year.

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

3. Accounting Pronouncements
Recently Adopted Accounting Pronouncements
There were no new accounting pronouncements adopted during the period.

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

4. Receivables, net
Receivables, net consist of the following:
  September 25, 2011  June 26, 2011 
Customer receivables
 $96,212  $100,893 
Allowance for uncollectible accounts
  (1,199)  (1,147)
Reserves for yarn quality claims
  (1,167)  (1,101)
Net customer receivables  93,846   98,645 
Related parties receivables
  599   512 
Other receivables
  1,333   1,018 
Total receivables, net $95,778  $100,175 
8
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)
 
Other receivables consist primarily of receivables for duty drawback, interest and refunds due to the Company for value added taxes.

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 26, 2011
 $(1,147) $(1,101)
Charged to costs and expenses
  (205)  (367)
Charged to other accounts
  80   170 
Deductions
  73   131 
Balance at September 25, 2011
 $(1,199) $(1,167)

Amounts charged to costs and expenses for the allowance for uncollectible accounts are reflected in the Provision for bad debts and amounts charged to costs and expenses for the reserves for yarn quality claims are primarily reflected as a reduction in the Net sales lines of the Condensed Consolidated Statements of Operations.  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.  For the allowance for uncollectible accounts, deductions represent amounts written off which were deemed to not be collectible, net of any recoveries.  For the reserve for yarn quality claims, deductions represent adjustments to either increase or decrease claims based on negotiated amounts or actual versus estimated claim differences.

5.  Inventories
Inventories consist of the following:
  September 25, 2011  June 26, 2011 
Raw materials
 $50,134  $52,387 
Supplies
  5,695   6,016 
Work in process
  6,330   7,000 
Finished goods
  77,788   74,399 
Gross inventories
  139,947   139,802 
Inventory reserves
  (3,971)  (4,919)
Total inventories
  135,976  $134,883 

Certain foreign inventories of $32,723 and $43,734 as of September 25, 2011 and June 26, 2011, respectively, were valued under the average cost method.  The change from the beginning of the year was due to declining prices and lower quantities on-hand at the Company’s Brazilian operations as well as the weakening of the Brazilian Real versus the U.S. dollar.  Included in the Company’s finished goods is $169 and $164 of consigned goods located in El Salvador.

6. Other Current Assets
Other current assets consist of the following:
  September 25, 2011  June 26, 2011 
Value added taxes receivable
 $2,123  $2,971 
Prepaid expenses
  1,320   1,282 
Vendor deposits
  1,204   921 
Other expenses
  194   57 
Total other current assets
 $4,841  $5,231 

Prepaid expenses consist of advance payments for insurance, public exchange and rating services, professional fees, membership dues, subscriptions and information technology services.  Other expenses include non-income related tax payments and employee advances.

 
4.
9
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

7.  Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following:
  September 25, 2011  June 26, 2011 
Land
 $3,275  $3,454 
Land improvements
  11,400   11,400 
Buildings and improvements
  147,335   151,484 
Assets under capital lease
  9,520   9,520 
Machinery and equipment
  540,183   545,279 
Computers, software and office equipment
  17,770   19,585 
Construction in progress
  2,280   4,583 
Transportation equipment
  4,850   5,162 
Gross property, plant and equipment
  736,613   750,467 
Less: accumulated depreciation
  (586,031)  (590,878)
Less: accumulated amortization – capital lease
  (8,785)  (8,562)
Property, plant and equipment, net
 $141,797  $151,027 

Depreciation expense, internal software development costs amortization, repair and maintenance expenses and capitalized interest were as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Depreciation expense
 $5,905  $5,752 
Internal software development costs amortization
  71   99 
Repair and maintenance expenses
  4,328   4,432 
Capitalized interest
  —   — 

Internal software development costs classified within property, plant and equipment (“PP&E”) consist of the following:
  September 25, 2011  June 26, 2011 
Internal software development costs
 $1,900  $1,900 
Accumulated amortization
  (1,639)  (1,568)
Net internal software development costs
 $261  $332 

8.  Intangible Assets, Net

Intangible assets, subject to amortizationnet consist of athe following:
  September 25, 2011  June 26, 2011 
Customer list
 $22,000  $22,000 
Non-compete agreements
  4,000   4,000 
Total intangible assets, gross
  26,000   26,000 
         
Accumulated amortization - customer list
  (12,640)  (12,134)
Accumulated amortization - non-compete agreements  (2,333)  (2,254)
Total accumulated amortization
  (14,973)  (14,388)
Intangible assets, net
 $11,027  $11,612 

In fiscal year 2007, the Company purchased the polyester and nylon texturing operations of Dillon Yarn Corporation (“Dillon”).  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 $22.0 million and non-compete agreementthe projected cash flows, an estimated useful life of $4.0 million which were entered into in connection with an asset acquisition consummated in fiscal year 2007.thirteen years was determined.  The customer list is being amortized in a manner which reflects the expected economic benefit that will be received over its thirteen year life.  The non-compete agreements are being amortized using the straight-linestraight line method over ten years, which is equalthe periods covered by the covenants not to the term of the agreement and its extensions.  There are no residual values relatedcompete.
10
Unifi, Inc.
Notes to these intangible assets.  Accumulated amortization at March 27, 2011 and June 27, 2010Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Amortization expense for these intangible assets was $13.8 million and $11.9 million, respectively.  These intangible assets relate to the polyester segment.as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Customer list amortization expense
 $506  $543 
Non-compete amortization expense
  79   95 
   Total amortization expense
 $585  $638 

The following table representspresents the expected intangible asset amortization for the next five fiscal years (amounts in thousands):years:
 
 Aggregate Amortization Expenses 
 2012  2013  2014  2015  2016 
                2012  2013  2014  2015  2016 
Customer list $2,022  $1,837  $1,481  $1,215  $969  $2,022  $1,837  $1,481  $1,215  $969 
Non-compete agreements  317   317   317   317   317   317   317   317   317   317 
 $2,339  $2,154  $1,798  $1,532  $1,286 
Total intangible amortization
 $2,339  $2,154  $1,798  $1,532  $1,286 

5.   Investments in Unconsolidated Affiliates9.   Other Non-Current Assets
Other non-current assets consist of the following:
  September 25, 2011  June 26, 2011 
Long-term deposits
 $5,310  $5,709 
Debt financing fees
  2,849   3,245 
Other
  447   456 
Total other non-current assets
 $8,606  $9,410 

Long-term deposits consist primarily of deposits with utility companies and value added tax deposits.  Other non-current assets primarily consists of premiums on split dollar life insurance policies which represents the value of the Company’s right of return on premiums paid for retiree owned insurance contracts.

10. Accrued Expenses
Accrued expenses consist of the following:
  September 25, 2011  June 26, 2011 
Payroll and fringe benefit costs
 $5,748  $11,119 
Utilities
  2,467   2,237 
Interest
  5,283   1,900 
Property taxes
  1,327   885 
Retiree medical liability
  178   202 
Other
  1,005   1,152 
Total accrued expenses
 $16,008  $17,495 

Other accruals consist primarily of sales taxes, marketing expenses, freight expenses, customer deposits, rent and other non-income related taxes.  The decreased accrual for payroll and fringe benefit costs is primarily due to the timing associated with payment of awards previously earned and the amounts expected to be earned under variable compensation programs.  The increased accrual for interest is due to timing of scheduled interest payments for certain of the Company’s debt obligations.

11. Defined Contribution Plan
The Company matches employee contributions made to the Unifi, Inc. Retirement Savings Plan (the “DC Plan”), an existing 401(k) defined contribution plan, which covers eligible domestic salaried and hourly employees. Under the terms of the DC Plan, the Company matches 100% of the first three percent of eligible employee contributions and 50% of the next two percent of eligible contributions.

The following table represents the Company’s investments in unconsolidated affiliates:contribution expenses were as follows:
 
Affiliate Name
Date
Acquired
Locations
Percent
Ownership
Parkdale America, LLC (“PAL”)Jun-97North Carolina, South Carolina, Virginia, and Georgia34%
U.N.F. Industries, LLC (“UNF”)Sep-00Migdal Ha – Emek, Israel50%
UNF America, LLC (“UNF America”)Oct-09Ridgeway, Virginia50%
Repreve Renewables, LLC (“Repreve Renewables”)Apr-10Soperton, Georgia40%

Summarized balance sheet information as of March 27, 2011 and June 27, 2010 and summarized income statement information for the quarters and year-to-date periods ended March 27, 2011 and March 28, 2010 of the combined unconsolidated equity affiliates are as follows (amounts in thousands):
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Matching contribution expenses
 $558  $630 
 
  
March 27,
 2011
  
June 27,
 2010
 
  (Unaudited)  (Unaudited) 
Current assets $342,532  $211,220 
Non-current assets  168,975   127,081 
Current liabilities  92,678   53,458 
Non-current liabilities  106,139   27,621 
Shareholders’ equity and capital accounts  312,690   257,222 

 
711
 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)

12.  Long-Term Debt
Long-term debt consists of the following:
  September 25, 2011  June 26, 2011 
Notes payable $123,722  $133,722 
Revolving credit facility  39,900   34,600 
Capital lease obligation  348   342 
Total debt  163,970   168,664 
Current portion of long-term debt  (348)  (342)
Total long-term debt $163,622  $168,322 

Notes Payable
On May 26, 2006, the Company issued $190,000 of 11.5% senior secured notes (“2014 notes”) due May 15, 2014 with interest payable on May 15 and November 15 of each year. The 2014 notes are guaranteed on a senior, secured basis by each of the Company’s existing and future restricted domestic subsidiaries. The 2014 notes and guarantees are secured by first-priority liens, subject to permitted liens, on substantially all of the Company’s PP&E, domestic capital stock and some foreign capital stock.  Domestic capital stock includes the capital stock of the Company’s domestic subsidiaries and certain of its joint ventures. Foreign capital stock includes up to 65% of the voting stock of the Company’s first-tier foreign subsidiaries. The terms of the 2014 notes do not contain financial maintenance covenants.
The Company can currently elect to redeem some or all of the 2014 notes at redemption prices equal to or in excess of par depending on the year the optional redemption occurs.  The Company may also purchase its 2014 notes in open market purchases or in privately negotiated transactions and then retire them or it may refinance all or a portion of the 2014 notes with a new debt offering.

On August 5, 2011, the Company completed the redemption of an aggregate principal amount of $10,000 of its 2014 notes. The Company redeemed a portion of the 2014 notes under the terms of the indenture governing the 2014 notes (the “Indenture”)  at 102.875% making the aggregate redemption price $10,288 which excluded $256 in accrued interest. The Company financed the redemption through borrowings under its revolving credit facility.  In connection with the redemption, the Company entered into a twenty-one month, $10,000 interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on $10,000 of LIBOR-based variable rate borrowings under the Company’s revolving credit facility.  This interest rate swap allows the Company to fix the LIBOR rate at 0.75%.

The following table presents the components of the Company’s partial redemptions of its 2014 notes and the charges for the extinguishment of debt:
Date 
Principal
Amount
 
Redemption
Price
 Premium (Discount) 
Costs and
Other Fees
 Loss / (Gain)
August 5, 2011
 $10,000 102.875% $288 $174 $462
Total – FY 2012
 $10,000   $288 $174 $462
               
June 30, 2010
 $15,000 105.75% $862 $282 $1,144
February 16, 2011
  30,000 105.75%  1,725  468  2,193
Total – FY 2011
 $45,000   $2,587 $750 $3,337
               
September 15, 2009
 $500 86.75% $(66) $12 $(54)
Total – FY 2010
 $500   $(66) $12 $(54)
               
April 3, 2009
 $8,778 100.00% $— $226 $226
June 3, 2009
  2,000 73.75%  (525)  48  (477)
Total – FY 2009
 $10,778   $(525) $274 $(251)

12
 
 
 For the Quarters Ended 
 
March 27,
 2011
 
March 28,
 2010
 
 (Unaudited) (Unaudited) 
Net sales $313,543  $194,546 
Gross profit  10,889   15,552 
Income from operations  6,791   10,991 
Net (loss) income  (3,068)  10,980 
   
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

 For the Nine-Months Ended 
 
March 27,
 2011
 
March 28,
 2010
 
 (Unaudited) (Unaudited) 
Net sales $757,852  $411,758 
Gross profit  58,867   35,289 
Income from operations  46,528   21,329 
Net income  37,201   22,411 
Revolving Credit Facility

The Company included in its equity in losses (earnings) of unconsolidated affiliates $1.2 million of additional losses for PAL related to PAL’s January 1, 2011 year end.   The Company evaluatedConcurrent with the effect of this adjustment on its current and prior quarter and determined the adjustment to be immaterial to both its balance sheets and statements of operations.  Certain prior period amounts in the table above have been changed to reflect PAL’s final reported financial results.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Codification No. 810-10, Consolidation of Variable Interest Entities (“ASC 810-10”), and issued Accounting Standards Update (“ASU”) No. 2009-17,  Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17” which amends the ASC to include SFAS No. 167 “Amendments to FASB Interpretation No. 46(R)”.  This amendment requires that an analysis be performed to determine whether a company has a controlling financial interest in a variable interest entity.  This analysis identifies the primary beneficiary of a variable interest entity (“VIE”) as the enterprise that has the power to direct the activities of a VIE.  The statement requires an ongoing assessment of whether a company is the primary beneficiary of a VIE when the holdersissuance of the entity, as a group, lose power, through voting or similar rights, to direct the actions that most significantly affect the entity's economic performance.   ASC 810-10 and ASU 2009-17 are effective for annual reporting beginning after November 15, 2009. The Company adopted ASC 810-10 and ASU 2009-17 as of June 28, 2010 and the adoption of these ASUs did not have a material effect on the Company’s financial position or results of operations.

6.   Other Non-current Assets

Other non-current assets are comprised of the following (amounts in thousands):
  
March 27,
 2011
  
June 27,
2010
 
       
Cash surrender value of life insurance of former key employees $374  $3,615 
Bond issue costs and debt refinancing fees  2,924   3,585 
Long-term deposits  5,591   5,281 
Other  162   124 
  $9,051  $12,605 

Bond issue costs and refinancing fees have been amortized on the straight-line method over the life of the corresponding debt. On June 30, 2010,2014 notes, the Company redeemed $15 million of the Company’s 11.5% senior secured notes due May 15, 2014 (the “2014 notes”) at a redemption price of 105.75% of the principal amount of the redeemed 2014 notes.  This redemption was financed through a combination of internally generated cash and borrowings under the Company’samended its senior secured asset-based revolving credit facility (“Amended Credit Agreement”) which, along with revising certain terms and covenants, extended its maturity date to May 15, 2011.  On September 9, 2010, the Company and the Subsidiary Guarantors (as co-borrowers) entered into the First Amendment to the Amended and Restated Credit Agreement ("First Amended Credit Agreement”) with Bank of America, N.A. (as both Administrative Agent and Lender thereunder) (as amended, “revolvingLender).  The First Amended Credit Agreement provides for a revolving credit facility”).  As a result,facility of $100,000 (with the ability of the Company recordedto request that the borrowing capacity be increased up to $150,000) that matures on September 9, 2015.  However, if the 2014 notes have not been paid in full on or before February 15, 2014, the maturity date of the Company’s revolving credit facility will be automatically adjusted to February 15, 2014.

The First Amended Credit Agreement contains customary affirmative and negative covenants for asset-based loans that restrict future borrowings and certain transactions. The covenants include restrictions and limitations on (i) sales of assets, consolidation, merger, dissolution and the issuance of capital stock, (ii) permitted encumbrances on property, (iii) the incurrence of indebtedness, (iv) the making of loans or investments, (v) the declaration of dividends and redemptions and (vi) transactions with affiliates.  As long as pro forma excess availability is at least 27.5% of the total credit facility or, if applicable, other specific conditions are met, the Company can make certain distributions and investments including (i) the payment or making of any dividend, (ii) the redemption or other acquisition of any of the Company’s capital stock, (iii) cash investments in joint ventures, (iv) acquisition of the property and assets or capital stock or a $1.1 millionbusiness unit of another entity and (v) loans or other investments to a non-borrower subsidiary.  The First Amended Credit Agreement requires the Company to maintain a trailing twelve month fixed charge coverage ratio of at least 1.0 to 1.0 should borrowing availability decrease below 15% of the total credit facility.  There are no capital expenditure limitations under the First Amended Credit Agreement.  The Company was in compliance with all such covenants at September 25, 2011.

The First Amended Credit Agreement is secured by first-priority liens on the Company’s and its subsidiary guarantors’ inventory, accounts receivable, general intangibles, investment property and certain other property. The Company’s ability to borrow under the First Amended Credit Agreement is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to other conditions and limitations.  Borrowings under the First Amended Credit Agreement bear interest at rates of LIBOR plus 2.00% to 2.75% and/or prime plus 0.75% to 1.50% depending on the Company’s level of excess availability. The unused line fee under the First Amended Credit Agreement is 0.375% to 0.50% of the unused line amount.

The weighted average interest rate for the early extinguishment of debt inrevolving credit facility borrowings for the quarterthree months ended September 26, 201025, 2011 including the effects of all interest rate swaps was 3.4%.  The Company has $2,695 of standby letters of credit at September 25, 2011, none of which $0.8 millionhave been drawn upon. As of September 25, 2011 and June 26, 2011, the Company had $54,598 and $51,734 of borrowing availability under the revolving credit facility, respectively.

The following table presents the scheduled maturities of the Company’s long-term debt on a fiscal year basis:
 2012  2013  2014  2015  2016  Thereafter  Total 
$348  $—  $123,722  $—  $39,900  $—  $163,970 

Amortization charged to interest expense related to debt financing was as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Interest expense
 $221  $254 

13.  Other Long-Term Liabilities
Other long-term liabilities consist of the premium paid for the bonds and $0.3 million related to the write off of related bond issue costs.following:
  September 25, 2011  June 26, 2011 
Deferred compensation plan
 $1,741  $1,866 
Retiree medical liability
  696   696 
Derivative instruments
  486   408 
Long-term portion of income taxes payable
  868   868 
Non-income related taxes
  156   169 
Total other long-term liabilities
 $3,947  $4,007 
 
 
813
 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)
On February 16,
The Company maintains an unfunded supplemental post-employment plan for a select group of management employees.  Each participant’s account is credited annually based upon a percentage of their base salary with each participant’s balance adjusted quarterly to reflect returns based upon a stock market index.  The amounts of (income) expense recorded for this plan within Selling, general and administrative (“SG&A”) expenses for the three months ended September 25, 2011 and September 26, 2010 were ($126) and $155, respectively.  Amounts are paid to participants only after termination of their employment.  The retiree medical liability relates to a frozen plan that consists of the discounted future claims the Company redeemed an additional aggregate principal amount of $30 millionexpects to pay for certain retiree benefits based on claims history and the terms of the 2014 notesbenefit agreements.

14. Income Taxes
The Company’s income tax provision for the quarter ended September 25, 2011 resulted in tax expense of $273 at a redemption pricean effective rate of 105.75%48.8%.  The income tax rate for the period is different from the U.S. statutory rate due to losses in tax jurisdictions for which no tax benefit could be recognized, foreign dividends taxed in the U.S. and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rate.  The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from U.S. operations and foreign sources versus annual projections and changes in foreign currencies in relation to the principal amount of the redeemed 2014 notes in accordance with the indenture.U.S. dollar.  As a result, the Company recordedCompany’s effective tax rate may fluctuate significantly on a $2.2 million charge for the early extinguishment of debt in the March 2011 quarter of which $1.7 million related to the premium paid to redeem the bonds and $0.5 million related to the write off of related bond issuance costs.

As of March 27, 2011 and June 27, 2010, accumulated amortization for bond issue costs and refinancing fees was $5.4 million and $4.6 million, respectively.

7.   Accrued Expenses

Accrued expenses are comprised of the following (amounts in thousands):
  
March 27,
 2011
  
June 27,
2010
 
Payroll and fringe benefits $8,852  $14,127 
Severance  —   301 
Interest  5,785   2,429 
Utilities  1,928   2,539 
Retiree reserve  153   165 
Property  taxes  426   876 
Other  1,329   1,288 
  $18,473  $21,725 

8.   Income Taxesquarterly basis.

The Company’s income tax provision for the quarter ended March 27, 2011September 26, 2010 resulted in tax benefitexpense of $2,517 at an effective rate of 4.0% compared to the quarter ended March 28, 2010 which resulted in tax expense at an effective rate of 71.5%19.7%.  The Company’s income tax provisionrate for the year-to-date period ended March 27, 2011 resulted in tax expense at an effective rate of 26.7% compared to the year-to-date period ended March 28, 2010 which resulted in tax expense at an effective rate of 51.8%.

The difference between the Company’s income tax benefit andwas different from the U.S. statutory rate due to the utilization of prior losses for the quarter ended March 27, 2011 and the difference between the Company’s income tax expense andwhich no benefit had been recognized previously, foreign dividends taxed in the U.S. statutory rate for the year-to-date period ended March 27, 2011was primarily dueand earnings attributable to losses from one of its equity affiliates, increases in uncertain tax positions, and foreign operations which are taxed at rates lower than the U.S., which was partially offset by foreign dividends taxed in the U.S.  The differences between the Company’s income tax expense and the U.S. statutory rate for the quarter and year-to-date period ended March 28, 2010 was primarily due to losses in the U.S. and other jurisdictions for which no tax benefit could be recognized while operating profit was generated in other taxable jurisdictions.rate.

During the third quarter ended March 27, 2011 the Company changed its indefinite reinvestment assertion related to a portion of the earnings and profits held by Unifi do Brasil, Ltda. (“UDB”).  The Company plans to eventually repatriate approximately $16 million of earnings and profits currently held by UDB.  Therefore the Company has established a deferred tax liability, net of estimated foreign tax credit, of approximately $2.3 million related to the additional income tax that would be due as a result of the current plan to repatriate in future periods.

During the quarter ended March 27, 2011, the Company identified additional uncertain tax positions of $0.4 million and also accrued interest and penalties related to uncertain tax positions of $0.3 million.  The Company did not accrue any interest or penalties related to uncertain tax positions during the quarter or year-to-date period ending March 28, 2010.
9
Notes to Condensed Consolidated Financial Statements – (Continued)

Deferred income taxes have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities.  In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences reverse. Management considers the scheduled reversal of taxable temporary differences, taxable income in carryback periods, projected future taxable income and tax planning strategies in making this assessment.  The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries due to negative evidence concerning the realization of those deferred tax assets in recent years.  As results of operations improve, theThe Company continues to evaluate both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released.  A release of the valuation allowance could have a material effect on net earnings in the period of release.

During the fiscal year ended June 26, 2011, the Company changed its indefinite reinvestment assertion related to approximately $26,630 of the earnings and profits held by Unifi do Brazil, Ltda. (“UDB”).  During the first quarter of fiscal year 2012, the Company repatriated $7,400. The Company also changed its indefinite reinvestment assertion by an additional $13,415.  The Company incorporated these changes and adjusted the deferred tax liability, net of estimated foreign tax credits to $3,756 to reflect the additional income tax that would be due as a result of the current plan to repatriate in future periods.  All remaining undistributed earnings are deemed to be indefinitely reinvested and accordingly, no provision for U.S. federal and state income taxes is required to be provided thereon.

The Company is subject to income tax examinations for U.S. federal income taxes for fiscal years 20042005 through 2010,2011, for non-U.S. income taxes for tax years 2001 through 2010,2011 and for state and local income taxes for fiscal years 2001 through 2010.2011.

9.   Shareholders’ Equity

On October 27, 2010, the shareholders of the Company approved a reverse stock split ofThere have been no significant changes in the Company’s common stock (the “reverse stock split”) at a reverse stock split ratio of 1-for-3.liability for uncertain tax positions since June 26, 2011.  The reverse stock split became effective November 3, 2010 pursuantCompany’s estimate for the potential outcome for any uncertain tax issue is highly judgmental.  Management believes that any reasonably foreseeable outcomes related to a Certificate of Amendmentthese matters have been adequately provided for.  However, future results may include favorable or unfavorable adjustments to the Company’s Restated Certificate of Incorporation filed with the Secretary of State of New York.  The Company had 20,059,544 shares of common stock issued and outstanding immediately following the completion of the reverse stock split. The Company is authorized in its Restated Certificate of Incorporation to issue up to a total of 500,000,000 shares of common stock at a $.10 par value per share which was unchanged by the amendment.  The reverse stock split did not affect the registration of the common stock under the Securities Exchange Act of 1934, as amended or the listing of the common stock on the New York Stock Exchange under the symbol “UFI”, although the post-split shares are considered a new listing with a new CUSIP number.  In the Condensed Consolidated Balance Sheets, the line item shareholders’ equity has been retroactively adjusted to reflect the reverse stock split for all periods presented by reducing the line item common stock and increasing the line item capital in excess of par value, with no change to shareholders’ equityestimated tax liabilities in the aggregate.

On November 25, 2009,period the Company agreed to purchase 628,333 shares (adjusted for the November 2010 reverse stock split)assessments are made or resolved or when statutes of its common stock at a purchase price of $7.95 per share from Invemed Catalyst Fund, L.P. (basedlimitation on an approximate 10% discount to the closing price of the common stock on November 24, 2009). The purchase of the shares pursuant to the transaction was not pursuant to the Company’s stock repurchase plan. The transaction closed on November 30, 2009 at a total purchase price of $5 million.potential assessments expire.
 
 
1014
 
Notes to Condensed Consolidated Financial Statements – (Continued)
10.   Income (Loss) Per Common Share

The following table sets forth the reconciliation of basic and diluted per share computations (amounts in thousands, except per share data).  All share and per share computations have been retroactively adjusted for all periods presented to reflect the reverse stock split.

  For the Quarters Ended  For the Nine-Months Ended 
  
March 27,
2011
  
March 28,
2010
  
March 27,
2011
  
March 28,
2010
 
Determination of shares:            
Weighted average common shares outstanding  20,069   20,057   20,062   20,414 
Assumed conversion of dilutive stock options and restricted stock awards  —   217   415   104 
Diluted weighted average common shares outstanding  20,069   20,274   20,477   20,518 
                 
Income (loss) per common share – basic $(.20) $.04  $.58  $.26 
                 
Income (loss) per common share – diluted $(.20) $.04  $.57  $.25 

For the quarter ended March 27, 2011, no options or restricted stock awards were included in the computation of diluted loss per share because the Company reported a net loss.  The following table represents the number of stock options to purchase shares of common stock which were not included in the calculation of diluted earnings per share because they were anti-dilutive (amounts in thousands):

  For the Quarters Ended  For the Nine-Months Ended 
  
March 27,
2011
  
March 28,
2010
  
March 27,
2011
  
March 28,
2010
 
Stock options  1,121   247   221   247 
Restricted stock units  25   —   —   — 
Total  1,146   247   221   247 

11.   Comprehensive (Loss) Income

The following is the Company’s comprehensive (loss) income for the quarters and year-to-date periods ending March 27, 2011 and March 28, 2010, respectively (amounts in thousands):
  For the Quarters Ended  For the Nine-Months Ended 
  
March 27,
2011
  
March 28,
2010
  
March 27,
2011
  
March 28,
2010
 
             
Net (loss) income $(4,045) $771  $11,575  $5,213 
Translation adjustments  2,277   (2,013)  10,430   8,250 
OCI – unconsolidated affiliate  1,403   —   8,129   — 
Loss on hedging contracts  (256)  —   (256)  — 
Comprehensive (loss) income $(621) $(1,242) $29,878  $13,463 

Other comprehensive income associated with an unconsolidated affiliate, PAL, has historically been immaterial to the Company and therefore the Company did not record its share of PAL’s other comprehensive income in its balance sheet in previous periods.  Due to a significant increase in cotton prices and the large percentage of future cotton purchases that PAL has hedged in order to ensure availability of supply and protect the gross margin of its fixed-price yarn sales, PAL’s other comprehensive income has increased considerably.
 
11
Notes to Condensed Consolidated Financial Statements – (Continued)

During the quarter ended March 27, 2011, the Company changed its indefinite reinvestment assertion related to a portion of the earnings and profits held by UDB.  Accordingly, the Company has established an income tax liability, net of estimated foreign tax credit in the amount of $0.4 million, on a portion of its currency translation adjustments.  During the quarter ended March 27, 2011, the Company provided a deferred tax liability of $3.1 million on the other comprehensive income from unconsolidated affiliate.  As discussed in “Footnote 8 - Income Taxes”, the Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries.

12.   Segment Disclosures

The following is the Company’s segment information for the quarters ended March 27, 2011 and March 28, 2010 (amounts in thousands):

  Polyester  Nylon  Total 
Quarter ended March 27, 2011:         
Net sales to external customers $137,914  $40,250  $178,164 
Depreciation and amortization  5,789   804   6,593 
Segment operating profit  3,138   1,656   4,794 
             
Quarter ended March 28, 2010:            
Net sales to external customers $112,604  $42,083  $154,687 
Depreciation and amortization  5,591   860   6,451 
Segment operating profit  2,721   2,283   5,004 

The following table provides reconciliations from segment data to consolidated reporting data (amounts in thousands):

  For the Quarters Ended 
  March 27,  March 28, 
  2011  2010 
Depreciation and amortization:      
Depreciation and amortization of specific reportable segment assets $6,593  $6,451 
Depreciation included in other operating (income) expense, net  6   34 
Amortization included in interest expense, net  235   276 
Consolidated depreciation and amortization $6,834  $6,761 
         
Reconciliation of segment operating income to (loss) income from operations before income taxes:        
Reportable segments operating income $4,794  $5,004 
Provision (benefit) for bad debts  41   (105)
Other operating expense (income), net  158   (346)
Interest expense, net  4,432   4,922 
Other non-operating expenses  78   — 
Loss on extinguishment of debt  2,193   — 
Equity in losses (earnings) of unconsolidated affiliates  2,103   (2,175)
(Loss) income from operations before income taxes $(4,211) $2,708 

12
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
The following is the Company’s segment information for the nine-month periods ended March 27, 2011 and March 28, 2010 (amounts(amounts in thousands):thousands, except per share amounts)

  Polyester  Nylon  Total 
Nine-Months ended March 27, 2011:         
Net sales to external customers $391,991  $120,995  $512,986 
Depreciation and amortization  17,057   2,493   19,550 
Segment operating profit  13,373   8,240   21,613 
             
Nine-Months ended March 28, 2010:            
Net sales to external customers $321,340  $118,453  $439,793 
Depreciation and amortization  17,109   2,615   19,724 
Segment operating profit  10,509   7,821   18,330 
15.  Shareholders’ Equity
No dividends have been paid in the last two fiscal years. The Indenture governing the 2014 notes and the First Amended Credit Agreement restricts the Company’s ability to pay dividends or make distributions on its common stock.

Effective July 26, 2000, the Company’s Board of Directors (“Board”) authorized the repurchase of up to 3,333 shares of its common stock of which approximately 1,064 shares were subsequently repurchased.  The following table provides reconciliations from segment datarepurchase program was suspended in November 2003.  There is remaining authority for the Company to consolidated reporting data (amounts in thousands):repurchase approximately 2,269 shares of its common stock under the repurchase plan.  The repurchase plan has no stated expiration or termination date.

  For the Nine-Months Ended 
  March 27,  March 28, 
  2011  2010 
Depreciation and amortization:      
Depreciation and amortization of specific reportable segment assets $19,550  $19,724 
Depreciation included in other operating (income) expense, net  14   105 
Amortization included in interest expense, net  736   829 
Consolidated depreciation and amortization $20,300  $20,658 
         
Reconciliation of segment operating income to income from operations before income taxes:        
Reportable segments operating income $21,613  $18,330 
Provision (benefit) for bad debts  86   (93)
Other operating expense (income), net  417   (542)
Interest expense, net  13,352   14,057 
Other non-operating expenses  528   — 
Loss (gain) on extinguishment of debt  3,337   (54)
Equity in earnings of unconsolidated affiliates  (11,887)  (5,847)
Income from operations before income taxes $15,780  $10,809 

For purposes of segment reporting, segment operating profit represents segment net sales less cost of sales, segment restructuring charges, segment impairments of long-lived assets, and allocated selling, general and administrative (“SG&A”) expenses.  Certain non-segment manufacturing and unallocated SG&A costs are allocated to the operating segments based on activity drivers relevant to the respective costs.  This allocation methodology is updated as part of the annual budgeting process.

Restructuring charges in fiscal year 2011 include the cost of dismantling and relocating polyester machinery to UCA and the reinstallation of previously dismantled polyester texturing machines in Yadkinville, North Carolina.
The primary differences between the segmented financial information of the operating segments, as reported to management and the Company’s consolidated reporting relate to the provision (benefit) for bad debts, net other operating expense (income), net interest expense, other non-operating expenses, and equity in (earnings) losses of unconsolidated affiliates and related impairments.
13
Notes to Condensed Consolidated Financial Statements – (Continued)
13.   Stock-Based16. Stock Based Compensation

During the first quarter of fiscal year 2010,2012, the Compensation Committee of the Board of Directors (“Board”) authorized the issuance of 566,659and the Company issued 127 stock options to certain key employees from the 2008 Unifi, Inc. Long-Term Incentive Plan (“2008 Long-Term Incentive Plan”LTIP”) to certain key employees and certain members of, a plan approved by the Board.Company's shareholders in 2008.  The stock options have a service condition, vest ratably over a three year period and have ten year contractual terms.  The exercise price of the options is $12.47 per share.  The Company used the Black-Scholes model to estimate the weighted-averageweighted average grant date fair value of $3.34$7.88 per share.

During the secondfirst quarter of fiscal year 2011,2012, the Compensation Committee of the Board authorized the issuance of an aggregate of 25,200and the Company issued 64 restricted stock units (“RSUs”) underfrom the 2008 Long-Term Incentive PlanLTIP to the Company’s non-employee directors.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 will become fully vested on November 27, 2011, provided the grantee remains in continuous service asvest ratably over a member of the Board from the grant date until the vesting date. If prior to the vesting date, the grantee dies or has a separation from service as a result of disability, the grantee’s RSUs will become fully vested.three year period.  The vested RSUs will be converted into an equivalent number of shares of Company common stock on each vesting date and distributed to the grantee, followingor the grantee’s termination of services as a membergrantee may elect to defer the receipt of the Board.shares of stock until separation from service.   If after July 27, 2012 and prior to the final vesting date the grantee has a separation from service without cause, the remaining unvested RSUs will become fully vested and will be converted to an equivalent number of shares of stock and issued to the grantee.  The Company estimated the grant-date fair value of the award to be $13.89$12.47 per RSU.RSU based on the fair value of the Company's stock at the award grant date.

The Company incurred $0.2 million$368 and $0.6 million$192 in stock based compensation expense in the thirdfirst quarter of fiscal years 2012 and 2011, and 2010 respectively, and $0.6 million and $1.8 million for the year-to-date periods respectively, in stock-based compensation expense which was recorded asto SG&A expenseexpenses with the offset to capital in excess of par value.

The Company issued 5,443 and 14,3316 shares of common stock during the thirdfirst quarter and year-to-date periods of fiscal year 2011 respectively,2012 as a result of the exercise of stock options.  There were no stock options exercised during the thirdfirst quarter or the year-to-date periods of fiscal year 2010.2011.

All share and per share amounts have been retroactively adjusted for all periods presented to reflect the decrease in shares as a result17. Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of the reverse stock split which became effective November 3, 2010.following:
  September 25, 2011  June 26, 2011 
Foreign currency translation adjustments
 $6,267  $26,621 
Loss on effective portion of derivative instruments
  (2,023)  (1,054)
Foreign currency gain (loss) on intercompany loan
  1,338   (1,791)
Accumulated other comprehensive income
 $5,582  $23,776 

14.   Other Operating Expense (Income), Net

The following table summarizesLoss on effective portion of derivative instruments includes $1,537 and $646 of other comprehensive loss related to one of the Company’s other operating expense (income), net (amounts in thousands):

  For the Quarters Ended  For the Nine-Months Ended 
  March 27, 2011  March 28, 2010  March 27, 2011  March 28, 2010 
Loss on sale or disposal of PP&E $189  $1,010  $242  $953 
Currency (gains) losses  (13)  61   297   (59)
Gain from sale of nitrogen credits  —   (1,400)  —   (1,400)
Other, net  (18)  (17)  (122)  (36)
Other operating expense (income), net $158  $(346) $417  $(542)
unconsolidated affiliates at September 25, 2011 and June 26, 2011, respectively.

 
1415
 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)

(amounts in thousands, except per share amounts)
15.   Derivatives Financial Instruments and Fair Value Measurements

18. Computation of Earnings Per Share
The computation of basic and diluted income per share (“EPS”) was as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Basic EPS:      
Net income
 $286  $10,235 
Weighted average common shares outstanding
  20,086   20,057 
Basic EPS
 $0.01  $0.51 
         
Diluted EPS:        
Net income
 $286  $10,235 
Weighted average common shares outstanding
  20,086   20,057 
Net potential common share equivalents – stock options and RSU’s  345   322 
Weighted average common shares outstanding
  20,431   20,379 
Diluted EPS
 $0.01  $0.50 
         
Excluded from the calculation of common share equivalents:        
Anti-dilutive common share equivalents
  406   231 
         
Excluded from the calculation of diluted shares:        
Unvested options that vest upon achievement of certain market conditions  577   583 

The calculation of earnings per common share is based on the weighted average number of the Company’s common shares outstanding for the applicable period.  The calculation of diluted earnings per common share presents the effect of all potential dilutive common shares that were outstanding during the respective period, unless the effect of doing so is anti-dilutive.

19.   Derivative Instruments and Hedging Activities
Following its established procedures and controls, the Company conducts a portion of its business in various foreign currencies.  As a result, it is subject to the transaction exposure that arises from foreign exchange rate movements between the dates that foreign currency transactions are recorded and the dates they are consummated.  The Company utilizes some natural hedging to mitigate these transaction exposures. The Company also enters intomay use derivative financial instruments such as foreign currency forward contracts or interest rate swaps for the purchase and salepurposes of European, North American and Brazilian currenciesreducing its ongoing business exposures to use as economic hedges against balance sheet and income statement currency exposures.  These forward contracts are principally entered into for the purchase of inventory and equipment and the sale of Company products into export markets.  Counter-parties for these instruments are major financial institutions.  The Company accounts forfluctuations in foreign currency forward contracts at fair value. Changes in the fair value of these contracts are recorded in the line item other operating expense (income), net in the Condensed Consolidated Statements of Operations.

Foreign currency forward contracts are used as economic hedges for the exposure for sales in foreign currencies based on specific sales made to customers. Generally, approximately 60% to 75% of the sales value of these orders is covered by forward contracts. Maturity dates of the forward contracts are intended to match anticipated receivable collections. The Company marks the forward contracts to market at month end and any realized and unrealized gainsexchange rates or losses are recorded as other operating expense (income). The Company also enters currency forward contracts for committed machinery and inventory purchases.  Generally up to 5% of inventory purchases made by the Company’s Brazilian subsidiary are covered by forward contracts although 100% of the cost may be covered by individual contracts in certain instances.  As of March 27, 2011, the latest maturity date for all outstanding sales and purchase foreign currency forward contracts is June 2011.

The Company also, on occasion, enters into derivative instruments that it designates as a hedge, for a forecasted transaction, of the variability of cash flows to be received (“cash flow hedge”).  The Company utilizes derivative financial instruments to hedge its exposure to changes in interest rates.  All derivatives financial instruments are recorded on the balance sheet at their respective fair value.  The Company does not use financial instruments or derivativesenter into derivative contracts for any trading or other speculative purposes.

During the third quarter of fiscal year 2011, the Company adopted a strategy to utilize a combination of internally generated cash and borrowings on its revolving credit facility to repurchase and retire portions of its 11.5% 2014 notes.  The Company’s policy to mitigate its exposure to the interestInterest rate risk associated with the variable London Interbank Offered Rate (“LIBOR”) rate borrowings on its revolving credit facility while benefiting from a reduced fixed rate on its 2014 notes was effected through its entering a 27-month interest rate swap on the first $25 million of revolving credit facility borrowings as further discussed below.

swaps:
On February 15, 2011, the Company entered into a 27-month, $25 milliontwenty-seven month, $25,000 interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on the first $25 million$25,000 of LIBOR-based variable rate borrowings under the Company’s revolving credit facility due to fluctuations in the LIBOR benchmark interest rate.  The Company intends to maintain at least $25 million of LIBOR-based variable rate borrowings in place for the duration of the interest rate swap.facility.  The interest rate swap allows the Company to pay a fixed interestfix the LIBOR rate ofat 1.39% on such borrowings.  The Company designated the swap as a cash flow hedge and formally documented all aspects of the relationship between the hedging instrument (the interest rate swap) and the item being hedged (the LIBOR-based variable rate borrowings).   The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives designated as hedging instruments are highly effective in offsetting the changes in the cash flow of the hedge items.  If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company will discontinue hedge accounting prospectively.

At inception and through the end of the March 2011 quarter, the interest rate swap was determined to be highly effective and the change in its fair value was reported on the balance sheet.  For the quarter ended March 27,On August 5, 2011, the Company recognized other comprehensive losscompleted the redemption of $0.3 million based onan aggregate principal amount of $10,000 of its 2014 notes at 102.875%. In connection with the change in fair value ofredemption, the interest rate swap; no hedge ineffectiveness was recognized in interest income or interest expense over the same period.  The Company expects theentered into a twenty-one month, $10,000 interest rate swap to continueprovide a hedge against the variability of cash flows.  This interest rate swap allows the Company to befix the LIBOR rate at 0.75%.

The Company has designated these swaps as cash flow hedges and determined that the hedges have been and still are highly effective through its termination dateeffective.  At September 25, 2011, the amount of loss recognized in accumulated other comprehensive income for the Company’s cash flow hedge derivative instruments was $486.  For the fiscal quarter ended September 25, 2011, the Company did not reclassify any gains (losses) from accumulated other comprehensive income to net income and have no impact on future period earnings.does not expect to do so during the next twelve months.

 
1516
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)
Assets and Liabilities Measured at Fair Value on a Recurring Basis

Foreign currency forward contracts:
The Company has adoptedenters into foreign currency forward contracts as economic hedges for exposures related to certain sales, inventory purchases and equipment purchases denominated in currencies that are not the guidance issuedfunctional currency of certain entities.  As of September 25, 2011, the latest maturity date for all outstanding foreign currency forward contracts is during November 2011.  These items are not designated as hedges by the Financial Accounting Standards Board (“FASB”) which established a framework for measuringCompany and disclosing fair value measurements relatedare marked to financialmarket each period and non-financial assets. There is a common definition of fair value used and a hierarchy for fair value measurements based onoffset by the type of inputs that are used to valueforeign exchange gains (losses) resulting from the assets or liabilities at fair value.

The levelsunderlying exposures of the fair value hierarchy are:
●  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date,
●  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, or
●  Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
foreign currency denominated assets and liabilities.

The fair valuevalues of the Company’s derivative financial instruments as of March 27, 2011 and June 27, 2010 were as follows (amounts in thousands):follows:
As of September 25, 2011:  
Notional Amount
  
USD Equivalent
 Balance Sheet Location Fair value 
Foreign exchange contractsMXN $3,100  $253 Other current assets $28 
Interest rate swapsUSD $35,000  $35,000 Other long-term liabilities $(486)

  
March 27,
2011
  
June 27,
2010
 
  Level 2  Level 2 
Derivatives designated as cash flow hedges:      
Interest rate swap (loss) $(256) $— 
         
Derivatives not designated as hedging instruments:        
         
Foreign currency purchase contracts:        
Notional amount $—  $2,826 
Fair value  —   2,873 
Net unrealized gain $—  $(47)
         
Foreign currency sales contracts:        
Notional amount $739  $1,231 
Fair value  747   1,217 
Net unrealized (loss) gain $(8) $14 
As of June 26, 2011:  
Notional Amount
  
USD Equivalent
 Balance Sheet Location Fair value 
Foreign exchange contractsMXN $ 9,200  $770 Accrued expenses $(2)
Interest rate swapsUSD $25,000  $25,000 Other long-term liabilities $(408)

The fair value of the interest rate swap held by the Company is based on using market expectations for future LIBOR rates at the measurement date to convert future cash flows to a single present value amount and is reported in the line item long-term debt and other liabilities in the Condensed Consolidated Balance Sheets.  The fair values of the Company’s foreign exchange forward contracts heldand interest rate swaps are estimated by obtaining month-end market quotes for contracts with similar terms.

The effect of marked to market hedging derivative instruments was as follows:
   For the Three Months Ended 
   September 25, 2011  September 26, 2010 
Derivatives not designated as hedges:Classification      
Foreign exchange contracts – MXN/USDOther operating (income) expense $(29) $18 
Foreign exchange contracts – EU/USDOther operating (income) expense  —   (238)
Total (gain) loss recognized in income  $(29) $(220)

By entering into derivative instrument contracts, the Company atexposes itself to counterparty credit risk.  The Company attempts to minimize this risk by selecting counterparties with investment grade credit ratings, limiting the respective quarter-end dates are based on discounted quarter-end forward currency ratesamount of exposure to any single counterparty and are reported in line item receivables inregularly monitoring its market position with each counterparty.  The Company’s derivative instruments do not contain any credit-risk related contingent features.

20.  Fair Value of Financial Instruments and Non-Financial Assets and Liabilities
As of September 25, 2011, the Condensed Consolidated Balance Sheet. The total impact of foreign currency related itemsCompany did not have any non-financial assets or liabilities that are reportedrequired to be measured at fair value on a recurring basis.  The following tables present the line item other operating expense (income), net in the Condensed Consolidated Statements of Operations, including transactions that were hedged and those unrelated to hedging, was a pre-tax gain of $13 thousand and a pre-tax loss of $0.1 million for the quarters ended March 27, 2011 and March 28, 2010, respectively.  For the year-to-date periods ended March 27, 2011 and March 28, 2010, the total impact of foreign currency related items resulted in a pre-tax loss of $0.3 million and a pre-tax gain of $0.1 million, respectively.  These are considered Level 2 inputs inlevel within the fair value hierarchy.hierarchy used to measure certain financial assets and liabilities accounted for at fair value on a recurring basis:
As of September 25, 2011: Level 1  Level 2  Level 3 
Assets at fair value:         
Derivatives related to foreign exchange contracts
 $—  $28  $— 
Total assets at fair value
 $—  $28  $— 
             
Liabilities at fair value:            
Derivatives related to interest rate swaps
  —   (486)  — 
Total liabilities at fair value
 $—  $(486) $— 

17
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
As of June 26, 2011: Level 1  Level 2  Level 3 
Liabilities at fair value:         
Derivatives related to foreign exchange contracts
  —   (2)  — 
Derivatives related to interest rate swaps
  —   (408)  — 
Total liabilities at fair value
 $—  $(410) $— 

There were no financial instruments measured at fair value that were in an asset position at June 26, 2011.

The carrying amounts of cash and cash equivalents, receivables, accounts payable and accrued expenses approximated fair value as of September 25, 2011 and June 26, 2011 because of their short-term nature.  The carrying amount of the revolving credit facility approximated fair value as of September 25, 2011 and June 26, 2011 because the facility has a floating interest rate.  The fair value of the Company’s 2014 notes is based on theirthe last traded price within the period and is considered a Level 2 measurement.  The estimated fair values and carrying amounts outstanding, including any current portions, are presented as follows:
  September 25, 2011  June 26, 2011 
2014 notes – estimated fair value
 $127,267  $138,402 
2014 notes – carrying amount
  123,722   133,722 

21.  Other Operating (Income) Expense, Net
The components of other operating (income) expense, net were as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Net (gain) loss on sale of assets
 $64  $(65)
Foreign currency transaction (gains) losses  (21)  364 
Other, net
  (84)  (56)
Other operating (income) expense, net
 $(41) $243 

22.   Investments in privately negotiated transactions, onUnconsolidated Affiliates and Variable Interest Entities
Parkdale America, LLC
In June 1997, the latest trade date prior to period end.  The fair valueCompany and Parkdale Mills, Inc. (“Mills”) entered into a Contribution Agreement that set forth the terms and conditions by which the two companies contributed all of the Company’s 2014 notes was $139.4 millionassets of their spun cotton yarn operations utilizing open-end and $184.1 millionair-jet spinning technologies to create Parkdale America, LLC (“PAL”).  In exchange for its contribution, the Company received a 34% ownership interest in PAL which is accounted for using the equity method of accounting.  PAL’s fiscal year end is the Saturday nearest to December 31 and is a limited liability company treated as a partnership for income tax reporting purposes.  PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel markets located throughout North and South America.  PAL has 14 manufacturing facilities located primarily in North Carolina and Virginia.  For its most recently completed fiscal year, PAL’s five largest customers accounted for approximately 80% of total gross sales and 75% of total gross accounts receivable outstanding.

In August 2008, a federal government program commenced providing economic adjustment assistance to domestic users of upland cotton.  The program offers a subsidy for cotton consumed in domestic production and the subsidy is paid the month after the eligible cotton is consumed.  The subsidy must be used within eighteen months after the marketing year earned to purchase qualifying capital expenditures in the U.S. for production of goods from upland cotton.  The marketing year is from August 1 to July 31.  The program provides a subsidy of four cents per pound through July 31, 2012 and three cents per pound thereafter.  The Company recognizes its share of PAL’s income for the cotton subsidy when the cotton has been consumed and the qualifying assets have been acquired with an appropriate allocation methodology considering the dual criteria of the quarters ended March 27, 2011subsidy.

On October 28, 2009, PAL acquired certain real property and June 27, 2010, respectively.  These are considered Level 1 inputsmachinery and equipment, as well as entered into lease agreements for certain real property, machinery and equipment, which constitute most of the yarn manufacturing operations of Hanesbrands Inc. (“HBI”).  PAL also entered into a yarn supply agreement with HBI to supply at least 95% of the yarn used in the fair value hierarchy.  The fair valuemanufacturing of certain financial instruments held byits apparel products at any of its locations in North America, Central America or the Company, including cash equivalents, trade receivables, accounts payable and accrued liabilities approximateCaribbean Basin for a six-year period with an option for HBI to extend the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments.  The carrying amount of the revolving credit facility included in the line item long-term debt and other liabilities in the Condensed Consolidated Balance Sheets approximates fair value because the facility has a floating interest rate.  These are considered Level 1 inputs in the fair value hierarchy.agreement for two additional three-year periods.
 
 
1618
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)

ThereOn March 30, 2011, PAL amended its revolving credit facility to increase the maximum borrowing capacity from one hundred million to two hundred million dollars and extend the maturity date from October 28, 2012 to July 31, 2014.  PAL’s revolving credit facility charges a variable interest rate based on either the prime rate or LIBOR rate plus an applicable percentage.  PAL’s revolving credit facility also has covenants in place such as an annual limit on capital expenditures, a minimum fixed-charge coverage ratio and a minimum leverage ratio. PAL informed the Company that as of September 2011, PAL’s outstanding borrowings on the revolving credit facility were no transfersone hundred twenty million dollars and PAL was in compliance with all debt covenants.

PAL is subject to price risk related to fixed-price yarn sales.  To protect the gross margin of these sales, PAL may enter into or out ofcotton futures to manage changes in raw material costs.  The derivative instruments used are listed and traded on an exchange and are thus valued using quoted prices classified within Level 1 of the fair value hierarchy.  PAL may also designate certain futures contracts as cash flow hedges with the effective portion of gains and losses recorded in accumulated other comprehensive income until the underlying transactions are recognized in income.  As of September 2011, PAL’s accumulated other comprehensive income was comprised of losses related to futures contracts totaling $4,521.  All of PAL’s other derivatives not designated as hedges or Level 2the ineffective portion of any designated hedges are marked to market each period with the changes in fair value recognized in current period earnings.  In addition, PAL may enter into forward contracts for certain cotton purchases, which qualify as derivative instruments.  However, these contracts meet the applicable criteria to qualify for the periods ended March 27,“normal purchases or normal sales” exemption.

As of September 25, 2011, the Company’s investment in PAL was $83,886 and is shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets.  The reconciliation between the Company’s share of the underlying equity of PAL and its investment is as follows:
Underlying equity at September 2011
 $102,786 
Initial excess capital contributions
  53,363 
Impairment charge recorded in fiscal year 2007
  (74,106)
Anti-trust lawsuit against PAL in which the Company did not participate  2,652 
EAP adjustments
  (809)
Investment at September 2011
 $83,886 

U.N.F. Industries, Ltd.
In September 2000, the Company and Nilit Ltd. (“Nilit”) formed a 50/50 joint venture, U.N.F. Industries Ltd. (“UNF”), for the purpose of operating nylon extrusion assets to manufacture nylon POY.  UNF’s eight extruders are located at Nilit’s production facilities in Migdal Ha-Emek, Israel.  All raw material and production services for UNF are provided by Nilit under separate supply and services agreements.  All first quality production is sold to the Company.  UNF’s fiscal year end is December 31st and is a registered Israeli private company.

UNF America, LLC
In October 2009, the Company and Nilit America Inc. (“Nilit America”) formed a 50/50 joint venture, UNF America LLC (“UNF America”), for the purpose of operating a nylon extrusion facility which manufactures nylon POY.  UNF America’s four extruders are located in Ridgeway, Virginia and are operated by Nilit America.  All raw material and production services for UNF America are provided by Nilit America under separate supply and services agreements.  All first quality production is sold to the Company.  UNF America’s fiscal year end is December 31st and is a limited liability company treated as a partnership for income tax reporting purposes.

In conjunction with the formation of UNF America, the Company entered into a supply agreement with UNF and UNF America whereby the Company agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNF America.  The agreement has no stated minimum purchase quantities.  Pricing under this supply agreement is negotiated every six months, based on market rates.  As of September 25, 2011, the Company’s open purchase orders related to this agreement were $24,897.

19
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
The Company’s raw material purchases under this supply agreement consist of the following:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
UNF
 $5,486  $5,953 
UNF America
  3,716   4,701 
Total
 $9,202  $10,654 

As of September 25, 2011 and June 27, 2010.26, 2011, the Company had combined outstanding accounts payable due to UNF and UNF America of $3,346 and $4,124, respectively.

16.   Related Party TransactionAs of September 2011, the Company’s combined investments in UNF and UNF America were $3,780 and are shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets.  The financial results of UNF and UNF America are included in the Company’s financial statements with a one month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with the Company’s accounting policy.  The Company has determined that UNF and UNF America are variable interest entities (“VIEs”), the Company is the primary beneficiary and, under U.S. GAAP, the Company should consolidate the two entities.  As the Company purchases substantially all of the output from the two entities, and, as the two entities’ balance sheets constitute less than 2.0% of the Company’s current assets, total assets and total liabilities, the Company has not included the accounts of UNF and UNF America in its consolidated financial statements. Other than the supply agreement discussed above, the Company does not provide any other commitments or guarantees related to either UNF or UNF America.

Repreve Renewables, LLC
In each of December 2008, 2009, andApril 2010, the Company and Dillon Yarn Company (“Dillon”) extended the polyester services portion ofentered into an agreement with two other unaffiliated entities to form Repreve Renewables, LLC (“Renewables”) and received a 40% ownership interest for salesits four million dollar contribution.  Renewables is a development stage enterprise formed to cultivate, grow and services, each timesell biomass crops, including crop feedstock intended for use as a termfuel in the production of one year.  Asenergy as well as to provide value added processes for cultivating, harvesting or using biomass crops.  Renewables has the exclusive license to commercialize FREEDOM™ Giant Miscanthus (“FGM”).  FGM is a result,miscanthus grass strain used to convert sunlight to biomass energy.  Renewables’ success will depend in part on its ability to license individual growers to produce FGM and sell feedstock to those growers.

Renewables has generated net losses since its inception and, while not obligated to do so, the Company recorded $0.3 millionexpects to make ongoing contributions to the extent necessary to continue Renewables’ business.  Through September 2011, the Company has made $1,477 of additional capital contributions since inception for its share of working capital and $0.3 millionon-going operating costs.

The Company has determined Renewables is a VIE but the Company is not the primary beneficiary and therefore it does not need to be consolidated.  As of SG&A expenseSeptember 25, 2011, the Company’s $4,674 investment in Renewables is shown within Investments in unconsolidated affiliates in the Condensed Consolidated Balance Sheets and represents the Company’s maximum exposure to loss.

On October 5, 2011, the Company completed a purchase transaction which gives the Company a controlling interest in Renewables.  During the second quarter of fiscal year 2012, the Company will perform the necessary valuation procedures and apply the applicable purchase accounting rules which could result in an immaterial loss.

Unaudited, condensed balance sheet and income statement information for the Company’s unconsolidated affiliates is as follows.  As PAL is defined as significant, its information is separately disclosed.
  As of September 25, 2011 
  PAL  Other  Total 
Current assets
 $372,686  $11,566  $384,252 
Noncurrent assets
  149,852   11,150   161,002 
Current liabilities
  86,428   4,862   91,290 
Noncurrent liabilities
  133,800   —   133,800 
Shareholders’ equity and capital accounts
  302,310   17,854   320,164 
             
The Company’s portion of undistributed earnings
  14,459   937   15,396 
20
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
  As of June 26, 2011 
  PAL  Other  Total 
Current assets
 $398,338  $13,405  $411,743 
Noncurrent assets
  155,505   9,588   165,093 
Current liabilities
  100,284   5,588   105,872 
Noncurrent liabilities
  154,054   —   154,054 
Shareholders’ equity and capital accounts
  299,505   17,405   316,910 

  For the Three Months Ended September 25, 2011 
  PAL  Other  Total 
Net sales
 $346,075  $10,267  $356,342 
Gross profit
  13,077   664   13,741 
Income (loss) from operations
  11,115   (201)  10,914 
Net income (loss)
  11,325   (245)  11,080 
Depreciation and amortization
  9,295   56   9,351 
             
Cash received by PAL under EAP program
  6,171   —   6,171 
Earnings recognized by PAL for EAP program
  5,956   —   5,956 
             
Dividends and cash distributions received
  2,005   —   2,005 

  For the Three Months Ended September 26, 2010 
  PAL  Other  Total 
Net sales
 $209,801  $11,576  $221,377 
Gross profit
  27,092   2,007   29,099 
Income from operations
  23,910   1,262   25,172 
Net income
  25,393   986   26,379 
Depreciation and amortization
  6,523   342   6,865 
             
Cash received by PAL under EAP program
  7,124   —   7,124 
Earnings recognized by PAL for EAP program
  18,376   —   18,376 
             
Dividends and cash distributions received
  2,532   —   2,532 

23.  Restructuring Charges
On January 11, 2010, the Company announced the creation of Unifi Central America, Ltda. de C.V. (“UCA”).  With a base of operations established in El Salvador, UCA serves customers primarily in the Central American region.  The Company began dismantling and relocating polyester equipment from its Yadkinville, North Carolina facility to the region during the third quarter of fiscal years 2011year 2010 and 2010, respectively, related to this contract andcompleted the related amendments and $1.0 million and $1.2 million forstartup of the year-to-date periodUCA manufacturing facility in the second quarter of fiscal year 20112011. The costs incurred for equipment relocation costs to UCA and 2010, respectively.  On March 9, 2011,reinstalling previously idled texturing equipment to replace the Company appointed Mr. Mitchel Weinberger, the President and Chief Operating Officer of Dillon, to its Board following the unexpected death of Mr. Stephen Wener, the former President and Chief Executive Officer of Dillon.  Mr. Wener had been a member ofmanufacturing capacity at the Company’s Board since May 24, 2007. The terms of the Company’s sales and service agreement with Dillon are, in management’s opinion, no less favorable than the Company would have been ableYadkinville, North Carolina facility were charged to negotiate with an independent third party for similar services.restructuring expense as incurred.

17.The components of restructuring charges were as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Equipment relocation costs
 $—  $363 
Reinstallation costs
  —   — 
Restructuring charges
 $—  $363 
21
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)
24. Commitments and Contingencies

Environmental
On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located atin 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 containmentcontamination at the identified AOCs and clean it up to comply with applicable regulatory standards.  Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with conveyance of certain assets at Kinston to DuPont.  This agreement terminated the Ground Lease and relieved the Company of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site.  However, the Company continues to own a satellite service facility acquired in the INVISTA transaction that has contamination from DuPont’s operations and is monitored by DENR.  This site has been remediated by DuPont and DuPont has received authority from DENR to discontinue remediation, other than natural attenuation.  DuPont’s duty to monitor and report to DENR will be transferred to the Company in the future, at which time DuPont must pay the Company for seven years of monitoring and reporting costs and the Company will assume responsibility for any future remediation and monitoring of the site.  At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.

Litigation
The Company is aware of certain claims and potential claims against it for the alleged use of non-compliant “Berry Amendment” nylon POY in yarns that the Company sold which may have ultimately been used to manufacture certain U.S. military garments (the “Military Claims”).  As of June 27, 2010,Although the Company recorded an accrualbelieves it has certain potential defenses to the claims, the estimate of possible losses, before considering any potential salvage values for the Military Claims of which $0.3 million was paid or settled duringgarments, ranges from $200 to $2,100.  The Company has appropriately accrued for this contingency. It is reasonably possible that the Company’s estimate may differ from the actual claim amount; however, the Company believes any change would not be material to the financial statements.

25. Related Party Transactions
During the quarter ended September 25, 2011, the Company had sales to Cupron Medical, Inc. (“Cupron”).  Mr. William J. Armfield, IV, is a member of the Company’s Board and is a current shareholder of Cupron.  For a discussion of the nature of all other related party relationships see Footnote 27. “Related Party Transactions” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 26, 2010.2011.

18.   Recent Accounting Pronouncements

The FASB has issued ASU No. 2010-28, “Intangibles - GoodwillRelated party receivables and Other (Topic 350): When to Perform Step 2payables consist of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. This ASU reflects the decision reached in EITF Issue No. 10-A. The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples, which require that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010.  The Company does not expect that this ASU will have a material effect on its financial position or its results of operations.following:
  September 25, 2011  June 26, 2011 
Related Party Receivables:      
Dillon Yarn Corporation $11  $6 
Cupron Medical, Inc.
  95   — 
American Drawtech Company, Inc.
  493   506 
    Total related party receivables (included within Receivables, net) $599  $512 
Related Party Payables:        
Dillon Yarn Corporation
 $221  $276 
American Drawtech Company, Inc.
  —   11 
Salem Leasing Corporation
  245   280 
    Total related party payables (included within Accounts payable) $466  $567 

 
1722
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Related party transactions were as follows:
   For the Three Months Ended 
Affiliated EntityTransaction Type September 25, 2011  September 26, 2010 
Dillon Yarn CorporationCosts under Sales Service Agreement $250  $325 
Dillon Yarn Corporation
Sales
  22   5 
Dillon Yarn Corporation
Yarn Purchases
  871   593 
American Drawtech Company
Sales
  1,201   538 
American Drawtech Company
Yarn Purchases
  22   28 
Salem Leasing Corporation
Transportation Equipment Costs
  753   784 
Cupron Medical, Inc.
Sales
  96   — 

26. Business Segment Information
Each reportable segment derives its revenues as follows:
·The polyester segment manufactures recycled Chip, POY, textured, dyed, twisted and beamed yarns with sales to other yarn manufacturers, knitters and weavers that produce yarn and/or fabric for the apparel, automotive upholstery, hosiery, home furnishings, industrial and other end-use markets.  The polyester segment consists of manufacturing operations in the U.S. and El Salvador.
·The nylon segment manufactures textured nylon and covered spandex yarns with sales to knitters and weavers that produce fabric for the apparel, hosiery, sock and other end-use markets.  The nylon segment consists of manufacturing operations in the U.S. and Colombia.
·The international segment’s products include textured polyester and various types of resale yarns. The international segment sells its yarns to knitters and weavers that produce fabric for the apparel, automotive upholstery, home furnishings, industrial and other end-use markets primarily in the South American and Asian regions.  The segment includes manufacturing and sales offices in Brazil and a sales office in China.

The Company evaluates the operating performance of its segments based upon Segment Adjusted Profit which is defined as segment gross profit plus segment depreciation and amortization less segment SG&A.  Segment operating profit represents segment net sales less cost of sales, restructuring and impairment charges and SG&A expenses.  The accounting policies for the segments are consistent with the Company’s accounting policies.  Intersegment sales are accounted for at current market prices.  Selected financial information for the Polyester, Nylon and International segments is presented below:
  For the Three Months Ended September 25, 2011 
  Polyester  Nylon  International  Total 
Net sales to external customers
 $92,528  $40,961  $37,524  $171,013 
Intersegment sales
  453   8   —   461 
Segment adjusted profit
  2,426   3,024   2,564   8,014 
Segment operating profit (loss)
  (2,373)  2,241   1,591   1,459 
Segment depreciation and amortization
  4,799   783   973   6,555 
Segment assets
  224,740   82,276   98,783   405,799 
Capital expenditures
  189   71   805   1,065 

  For the Three Months Ended September 26, 2010 
  Polyester  Nylon  International  Total 
Net sales to external customers
 $85,587  $44,173  $45,332  $175,092 
Intersegment sales
  835   489   398   1,722 
Segment adjusted profit
  5,705   4,767   6,050   16,522 
Segment operating profit
  612   3,913   5,148   9,673 
Segment depreciation and amortization
  4,730   854   902   6,486 
Restructuring charges
  363   —   —   363 
Segment assets
  207,303   86,548   118,430   412,281 
Capital expenditures
  3,043   371   1,923   5,337 
23
 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)
 
The FASB has issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information$57 and $158 difference between total capital expenditures for Business Combinations”. This ASU reflectslong-lived assets and the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity, as defined by Topic 805 Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements,segment total for the entity should disclose revenuethree months ended September 25, 2011 and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosuresSeptember 26, 2010, respectively, relates to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  The Company does not expect this ASU will have a material effect on its financial position or results of operations.various, unallocated corporate projects.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20 “Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”Reconciliations from segment data to amend the disclosure requirements related to financing receivables. The guidance requires additional disclosures about the nature of an entity’s credit riskconsolidated reporting data are as it relates to its receivables, how that risk is analyzed for purposes of providing a credit loss provision, and the reasons for changes in the loss provision.  These disclosures are intended to provide financial statement users with more transparency related to an entity’s credit risk practices and the related allowances for credit losses. The disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010.  The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010.  Accordingly, the Company adopted the guidance for period-end disclosures effective as of the end of its second quarter of fiscal year 2011 with the guidance for period activity disclosures to be implemented during its third quarter of fiscal year 2011.  The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Segment operating profit
 $1,459  $9,673 
(Benefit) provision for bad debts
  205   (41)
Other operating (income) expense, net
  (41)  243 
Operating income
  1,295   9,471 
Interest income
  (647)  (743)
Interest expense
  4,380   5,269 
Loss on extinguishment of debt
  462   1,144 
Equity in earnings of unconsolidated affiliates
  (3,459)  (8,951)
Income before income taxes
 $559  $12,752 

19.
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Segment depreciation and amortization
 $6,555   6,486 
Depreciation included in other operating (income) expense  6   3 
Amortization included in interest expense
  221   254 
Consolidated depreciation and amortization
 $6,782  $6,743 

  September 25, 2011  September 26, 2010 
Segment assets
 $405,799  $412,281 
Other current corporate assets
  4,080   2,429 
Unallocated corporate PP&E
  9,854   10,248 
Other non-current assets
  3,272   3,870 
Investments in unconsolidated affiliates
  92,340   80,494 
Consolidated assets
 $515,345  $509,322 

27.  Subsequent Events

The Company evaluated all events and material transactions for potential recognition or disclosure through such time as these statements were filed with the Securities and Exchange Commission (“SEC”) and determined there were no other items deemed reportable.

20.   Condensed Consolidated Guarantor28.  Supplemental Cash Flow Information
Cash payments for interest and Non-Guarantor Financial Statements

The guarantor subsidiaries presented below represent the Company’s subsidiaries that are subject to the terms and conditions outlined in the indenture governing the Company’s issuance of the 2014 notes and the guarantees, jointly and severally, on a senior secured basis. The non-guarantor subsidiaries presented below represent the foreign subsidiaries which do not guarantee the notes. Each subsidiary guarantor is 100% owned, directly or indirectly, by Unifi, Inc. and all guarantees are full and unconditional.

Supplemental financial information for the Company and its guarantor subsidiaries and non-guarantor subsidiaries of the 2014 notes is presented below.taxes were as follows:
 
18
Notes to Condensed Consolidated Financial Statements – (Continued)
Balance Sheet Information as of March 27, 2011 (amounts in thousands):

 Parent 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 Eliminations Consolidated 
ASSETS 
Current assets:               
Cash and cash equivalents $126  $160  $18,856  $—  $19,142 
Receivables, net  —   72,180   32,485   —   104,665 
Intercompany accounts receivable  522,254   (514,038)  831   (9,047)  — 
Inventories  —   86,725   49,889   101   136,715 
Income taxes receivable  353   —   30   —   383 
Deferred income taxes  —   —   2,126   —   2,126 
Other current assets  126   883   5,207   —   6,216 
Total current assets  522,859   (354,090)  109,424   (8,946)  269,247 
                     
Property, plant and equipment  11,348   627,304   110,928   —   749,580 
Less accumulated depreciation  (2,400)  (510,061)  (84,274)  —   (596,735)
   8,948   117,243   26,654   —   152,845 
                     
Intangible assets, net  —   12,235   —   —   12,235 
Investments in unconsolidated affiliates  —   81,263   8,591   —   89,854 
Investments in consolidated subsidiaries  422,838   —   —   (422,838)  — 
Other non-current assets  3,298   3,048   19,094   (16,389)  9,051 
  $957,943  $(140,301) $163,763  $(448,173) $533,232 
                     
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Current liabilities:                    
Accounts payable $142  $39,676  $8,534  $—  $48,352 
Intercompany accounts payable  490,986   (490,382)  8,443   (9,047)  — 
Accrued expenses  6,060   9,102   3,311   —   18,473 
Income taxes payable  (1,537)  —   2,246   —   709 
Current maturities of long-term debt and other liabilities  —   459   —   —   459 
Total current liabilities  495,651   (441,145)  22,534   (9,047)  67,993 
                     
Notes payable  133,722   —   —   —   133,722 
Long-term debt and other liabilities  38,056   2,563   —   —   40,619 
Deferred income taxes  —   —   384   —   384 
Shareholders’/ invested equity  290,514   298,281   140,845   (439,126)  290,514 
  $957,943  $(140,301) $163,763  $(448,173) $533,232 
19
Notes to Condensed Consolidated Financial Statements – (Continued)

Balance Sheet Information as of June 27, 2010 (amounts in thousands):
 Parent Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated 
ASSETS 
Current assets:               
Cash and cash equivalents $9,938  $1,832  $30,921  $—  $42,691 
Receivables, net  —   67,979   23,264   —   91,243 
Intercompany accounts receivable  221,670   (209,991)  720   (12,399)  — 
Inventories  —   69,930   41,077   —   111,007 
Deferred income taxes  —   —   1,623   —   1,623 
Other current assets  79   1,052   4,988   —   6,119 
Total current assets  231,687   (69,198)  102,593   (12,399)  252,683 
                     
Property, plant and equipment  11,348   643,930   92,579   —   747,857 
Less accumulated depreciation  (2,185)  (523,771)  (70,402)  —   (596,358)
   9,163   120,159   22,177   —   151,499 
                     
Intangible assets, net  —   14,135   —   —   14,135 
Investments in unconsolidated affiliates  —   65,446   8,097   —   73,543 
Investments in consolidated subsidiaries  407,605   —   —   (407,605)  — 
Other non-current assets  7,200   2,999   7,446   (5,040)  12,605 
  $655,655  $133,541  $140,313  $(425,044) $504,465 
                     
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Current liabilities:                    
Accounts payable $218  $33,158  $7,286  $—  $40,662 
Intercompany accounts payable  214,087   (213,457)  11,769   (12,399)  — 
Accrued expenses  2,732   15,699   3,294   —   21,725 
Income taxes payable  —   (44)  549   —   505 
Current portion of notes payable  15,000   —   —   —   15,000 
Current maturities of long-term debt and other liabilities  —   327   —   —   327 
Total current liabilities  232,037   (164,317)  22,898   (12,399)  78,219 
                     
Notes payable, less current portion  163,722   —   —   —   163,722 
Long-term debt and other liabilities  —   2,531   5,040   (5,040)  2,531 
Deferred income taxes  —   —   97   —   97 
Shareholders’/ invested equity  259,896   295,327   112,278   (407,605)  259,896 
  $655,655  $133,541  $140,313  $(425,044) $504,465 
20
Notes to Condensed Consolidated Financial Statements – (Continued)
Statement of Operations Information for the Quarter Ended March 27, 2011 (amounts in thousands):
  Parent  
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  Eliminations  Consolidated 
Summary of Operations:               
Net sales $—  $126,051  $52,676  $(563) $178,164 
Cost of sales  —   119,023   44,870   (876)  163,017 
Restructuring charges  —   9   —   —   9 
Equity in subsidiaries  6,292   —   —   (6,292)  — 
Selling, general and administrative expenses  —   7,563   2,781   —   10,344 
(Benefit) provision for bad debts  —   (357)  398   —   41 
Other operating (income) expense, net  (7,244)  7,322   100   (20)  158 
                     
Non-operating (income) expenses:                    
Interest income  —   (63)  (670)  149   (584)
Interest expense  4,873   9   283   (149)  5,016 
Other non-operating expenses  78   —   —   —   78 
Loss on extinguishment of debt  2,193   —   —   —   2,193 
Equity in (earnings) losses of unconsolidated affiliates  —   2,450   (419)  72   2,103 
(Loss) income from operations before income taxes  (6,192)  (9,905)  5,333   6,553   (4,211)
(Benefit) provision for income taxes  (2,147)  —   1,981   —   (166)
Net (loss) income $(4,045) $(9,905) $3,352  $6,553  $(4,045)
21
Notes to Condensed Consolidated Financial Statements – (Continued)

Statement of Operations Information for the Quarter Ended March 28, 2010 (amounts in thousands):
  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Summary of Operations:               
Net sales  $—  $117,116  $38,063  $(492) $154,687 
Cost of sales  —   107,416   31,294   (533)  138,177 
Restructuring charges  —   254   —   —   254 
Equity in subsidiaries  (905)  —   —   905   — 
Selling, general and administrative expenses  —   9,050   2,197   5   11,252 
Benefit for bad debts  —   (11)  (94)  —   (105)
Other operating (income) expense, net  (5,782)  5,380   56   —   (346)
                     
Non-operating (income) expenses:                    
Interest income  (11)  1   (765)  —   (775)
Interest expense  5,681   16   —   —   5,697 
Equity in (earnings) losses of unconsolidated affiliates  —   (1,994)  (197)  16   (2,175)
Income (loss) from operations before income taxes  1,017   (2,996)  5,572   (885)  2,708 
Provision for income taxes  246   4   1,687   —   1,937 
Net income (loss) $771  $(3,000) $3,885  $(885) $771 
22
Notes to Condensed Consolidated Financial Statements – (Continued)
Statement of Operations Information for the Nine-Months Ended March 27, 2011 (amounts in thousands):
  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Summary of Operations:               
Net sales $—  $360,748  $153,591  $(1,353) $512,986 
Cost of sales  —   326,791   132,765   (1,961)  457,595 
Restructuring charges  —   1,555   —   —   1,555 
Equity in subsidiaries  (10,711)  —   —   10,711   — 
Selling, general and administrative expenses  —   23,526   8,697   —   32,223 
(Benefit) provision for bad debts  —   (559)  645   —   86 
Other operating (income) expense, net  (19,311)  17,238   660   1,830   417 
                     
Non-operating (income) expenses:                    
Interest income  —   (193)  (2,154)  352   (1,995)
Interest expense  15,147   43   509   (352)  15,347 
Other non-operating expenses  528   —   —   —   528 
Loss on extinguishment of debt  3,337   —   —   —   3,337 
Equity in (earnings) losses of unconsolidated affiliates  —   (10,607)  (1,614)  334   (11,887)
Income (loss) from operations before income taxes  11,010   2,954   14,083   (12,267)  15,780 
(Benefit ) provision for income taxes  (565)  —   4,770   —   4,205 
Net income (loss) $11,575  $2,954  $9,313  $(12,267) $11,575 
23
Notes to Condensed Consolidated Financial Statements – (Continued)

Statement of Operations Information for the Nine-Months Ended March 28, 2010 (amounts in thousands):
  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Summary of Operations:               
Net sales  $—  $327,350  $112,994  $(551) $439,793 
Cost of sales  —   296,923   90,186   (568)  386,541 
Restructuring charges  —   254   —   —   254 
Write down of long-lived assets  —   100   —   —   100 
Equity in subsidiaries  (5,479)  —   —   5,479   — 
Selling, general and administrative expenses  (16)  27,619   7,019   (54)  34,568 
Benefit for bad debts  —   (74)  (19)  —   (93)
Other operating (income) expense, net  (16,919)  16,540   (163)  —   (542)
                     
Non-operating (income) expenses:                    
Interest income  (28)  (138)  (2,189)  —   (2,355)
Interest expense  16,657   (254)  9   —   16,412 
Gain on extinguishment of debt  (54)  —   —   —   (54)
Equity in (earnings) losses of unconsolidated affiliates  —   (6,070)  (515)  738   (5,847)
Income (loss) from operations before income taxes  5,839   (7,550)  18,666   (6,146)  10,809 
Provision for income taxes  626   12   4,958   —   5,596 
Net income (loss) $5,213  $(7,562) $13,708  $(6,146) $5,213 
 For the Three Months Ended 
 September 25, 2011 September 26, 2010 
Interest, net of capitalized interest
$ 778 $ 380 
Income taxes, net of refunds
  793   1,742 
 
 
24
 
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)

29. Condensed Consolidating Financial Statements
In accordance with the Indenture governing the Company’s 2014 notes, certain of the Company’s subsidiaries have guaranteed the notes, jointly and severally, on a senior secured basis.

Statements of Cash Flows InformationThe following presents the condensed consolidating financial statements separately for:
·Parent company, the issuer of the guaranteed obligations;
·Guarantor subsidiaries, on a combined basis, as specified in the Indenture;
·Non-guarantor subsidiaries, on a combined basis;
·Consolidating entries and eliminations representing adjustments to (a) eliminate intercompany transactions, (b) eliminate intercompany profit in inventory, (c) eliminate investments in its subsidiaries and (d) record consolidating entries; and
·Parent company, on a consolidated basis.

Each subsidiary guarantor is 100% owned by Unifi, Inc. or its wholly-owned subsidiary, Unifi Manufacturing, Inc. and all guarantees are full and unconditional.  The non-guarantor subsidiaries predominantly represent the foreign subsidiaries which do not guarantee the 2014 notes.  Each entity in the consolidating financial information follows the same accounting policies as described in the consolidated financial statements.  Supplemental financial information for the Nine-Months Ended March 27, 2011 (amounts in thousands):Company and its guarantor subsidiaries and non-guarantor subsidiaries for the 2014 notes is presented below.
  Parent  
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  Eliminations  Consolidated 
Operating activities:               
Net cash (used in) provided by operating activities $(2,556) $4,709  $(3,678) $112  $(1,413)
                     
Investing activities:                    
Capital expenditures  —   (11,935)  (5,399)  —   (17,334)
Investment in unconsolidated affiliate  —   —   (707)  —   (707)
Return of capital from unconsolidated affiliate  —   —   500   —   500 
Proceeds from sale of capital assets  —   9   180   —   189 
Proceeds from split dollar life insurance surrenders  3,241   —   —   —   3,241 
Net cash provided by (used in) investing activities
  3,241   (11,926)  (5,426)  —   (14,111)
                     
Financing activities:                    
Payments of notes payable  (47,588)  —   —   —   (47,588)
Payments of other long-term debt  (105,325)  —   —   —   (105,325)
Borrowings of other long-term debt  143,125   —   —   —   143,125 
Proceeds from stock option exercises  118   —   —   —   118 
Dividend paid  —   5,909   (5,909)  —   — 
Purchase and retirement of Company stock  (2)  —   —   —   (2)
Debt refinancing fees  (825)  —   —   —   (825)
Other  —   (364)  —   —   (364)
Net cash (used in) provided by financing activities  (10,497)  5,545   (5,909)  —   (10,861)
                     
Effect of exchange rate changes on cash and cash equivalents  —   —   2,948   (112)  2,836 
                     
Net decrease in cash and cash equivalents  (9,812)  (1,672)  (12,065)  —   (23,549)
Cash and cash equivalents at beginning of period  9,938   1,832   30,921   —   42,691 
Cash and cash equivalents at end of period $126  $160  $18,856  $—  $19,142 

 
25
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements –- (Continued)
(amounts in thousands, except per share amounts)

Statements of Cash Flows Information for the Nine-Months Ended March 28, 2010 (amounts in thousands):
  Parent  
Guarantor
Subsidiaries
  
Non-Guarantor
Subsidiaries
  Eliminations  Consolidated 
Operating activities:               
Net cash provided by (used in) operating activities $2,680  $6,101  $12,150  $(107) $20,824 
                     
Investing activities:                    
Capital expenditures  (12)  (6,003)  (1,948)  —   (7,963)
Investment in unconsolidated affiliate  —   —   (550)  —   (550)
Change in restricted cash  —   —   5,776   —   5,776 
Proceeds from sale of capital assets  —   1,267   126   —   1,393 
Other  (168)  —   (78)  —   (246)
Net cash (used in) provided by investing activities
  (180)  (4,736)  3,326   —   (1,590)
                     
Financing activities:                    
Payments of long-term debt  (435)  —   (5,776)  —   (6,211)
Purchase and retirement of Company stock  (4,995)  —   —   —   (4,995)
Other  —   (381)  —   —   (381)
Net cash used in  financing activities  (5,430)  (381)  (5,776)  —   (11,587)
                     
Effect of exchange rate changes on cash and cash equivalents  —   —   2,083   107   2,190 
                     
Net increase (decrease) in cash and cash equivalents  (2,930)  984   11,783   —   9,837 
Cash and cash equivalents at beginning of period  11,509   (812)  31,962   —   42,659 
Cash and cash equivalents at end of period $8,579  $172  $43,745  $—  $52,496 
Balance Sheet Information as of September 25, 2011:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
ASSETS                    
Cash and cash equivalents
 $2,029  $(1,883) $19,675  $—  $19,821 
Receivables
  —   69,213   26,565   —   95,778 
Intercompany accounts receivable  125,409   (118,485)  946   (7,870)  — 
Inventories
  —   96,063   39,913   —   135,976 
Income taxes receivable
  575   —   194   —   769 
Deferred income taxes
  2,296   —   2,094   —   4,390 
Other current assets
  99   990   3,752   —   4,841 
Total current assets
  130,408   45,898   93,139   (7,870)  261,575 
                     
Property, plant and equipment, net  8,833   109,791   23,173   —   141,797 
Intangible assets, net
  —   11,027   —   —   11,027 
Investments in unconsolidated affiliates  —   83,886   8,454   —   92,340 
Investments in consolidated subsidiaries  431,698   —   —   (431,698)  — 
Intercompany notes receivable  —   —   19,706   (19,706)  — 
Other non-current assets
  3,224   3,048   2,334   —   8,606 
Total assets
 $574,163  $253,650  $146,806  $(459,274) $515,345 
                     
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Accounts payable
 $84  $40,107  $5,845  $—  $46,036 
Intercompany accounts payable  120,085   (119,676)  7,456   (7,865)  — 
Accrued expenses
  5,426   7,855   2,727   —   16,008 
Income taxes payable
  —   —   767   —   767 
Current portion of long-term debt  —   348   —   —   348 
Total current liabilities
  125,595   (71,366)�� 16,795   (7,865)  63,159 
                     
Long-term debt
  163,622   —   —   —   163,622 
Intercompany notes payable
  —   —   19,706   (19,706)  — 
Other long-term liabilities
  486   2,437   1,024   —   3,947 
Deferred income taxes
  2,296   —   157   —   2,453 
Total liabilities
  291,999   (68,929)  37,682   (27,571)  233,181 
Shareholders’/ invested equity  282,164   322,579   109,124   (431,703)  282,164 
Total liabilities and shareholders’ equity $574,163   253,650   146,806   (459,274) $515,345 

 
26
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Balance Sheet Information as of June 26, 2011:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
ASSETS                    
Cash and cash equivalents
 $1,656  $323  $25,511  $—  $27,490 
Receivables
  —   69,800   30,375   —   100,175 
Intercompany accounts receivable  3   6,755   500   (7,258)  — 
Inventories
  —   84,193   50,690   —   134,883 
Income taxes receivable
  419   —   159   —   578 
Deferred income taxes
  3,482   —   2,230   —   5,712 
Other current assets
  122   588   4,521   —   5,231 
Total current assets
  5,682   161,659   113,986   (7,258)  274,069 
                     
Property, plant and equipment, net  8,889   114,510   27,628   —   151,027 
Intangible assets, net
  —   11,612   —   —   11,612 
Investments in unconsolidated affiliates  —   82,955   8,303   —   91,258 
Investments in consolidated subsidiaries  456,288   —   —   (456,288)  — 
Intercompany notes receivable  —   —   16,545   (16,545)  — 
Other non-current assets
  3,619   3,048   2,743   —   9,410 
Total assets
 $474,478  $373,784  $169,205  $(480,091) $537,376 
                     
LIABILITIES AND SHAREHOLDERS’ EQUITY 
Accounts payable
 $164  $35,207  $7,471  $—  $42,842 
Intercompany accounts payable  409   —   6,849   (7,258)  — 
Accrued expenses
  2,037   11,717   3,741   —   17,495 
Income taxes payable
  —   —   421   —   421 
Current portion of long-term debt  —   342   —   —   342 
Total current liabilities
  2,610   47,266   18,482   (7,258)  61,100 
                     
Long-term debt
  168,322   —   —   —   168,322 
Intercompany notes payable
  —   —   16,545   (16,545)  — 
Other long-term liabilities
  409   2,562   1,036   —   4,007 
Deferred income taxes
  3,482   —   810   —   4,292 
Total liabilities
  174,823   49,828   36,873   (23,803)  237,721 
Shareholders’/ invested equity  299,655   323,956   132,332   (456,288)  299,655 
Total liabilities and shareholders’ equity $474,478  $373,784  $169,205  $(480,091) $537,376 

27
 
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Statement of Operations Information for the Three Months Ended September 25, 2011:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Net sales
 $—  $123,920  $47,093  $—  $171,013 
Cost of sales
  —   116,210   43,145   (172)  159,183 
Gross profit
  —   7,710   3,948   172   11,830 
Equity in subsidiaries
  (36)  —   —   36   — 
Selling, general and administrative expenses  —   7,784   2,587   —   10,371 
(Benefit) provision for bad debts  —   238   (33)  —   205 
Other operating (income) expense, net  (4,923)  4,937   (63)  8   (41)
Operating income (loss)
  4,959   (5,249)  1,457   128   1,295 
Interest income
  —   (62)  (745)  160   (647)
Interest expense
  4,363   17   160   (160)  4,380 
Loss on extinguishment of debt  462   —   —   —   462 
Equity in earnings (losses) of unconsolidated affiliates  —   (3,827)  67   301   (3,459)
Income (loss) before income taxes  134   (1,377)  1,975   (173)  559 
(Benefit) provision for income taxes  (152)  —   425   —   273 
Net income (loss)
 $286  $(1,377) $1,550  $(173) $286 

Statement of Comprehensive Income (Loss) Information for the Three Months Ended September 25, 2011:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Net income (loss)
 $286  $(1,377) $1,550  $(173) $286 
                     
Other comprehensive income (loss):                    
Foreign currency adjustments  (17,225)  —   (17,225)  17,225   (17,225)
Loss on cash flow hedges
  (78)  (891)  —   —   (969)
Other comprehensive income  (17,303)  (891)  (17,225)  17,225   (18,194)
                     
Comprehensive income (loss) $(17,017) $(2,268) $(15,675) $17,052  $(17,908)

28
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Statement of Operations Information for the Three Months Ended September 26, 2010:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Net sales
 $—  $122,058  $53,432  $(398) $175,092 
Cost of sales
  —   107,371   46,648   (473)  153,546 
Gross profit
  —   14,687   6,784   75   21,546 
Restructuring charges
  —   363   —   —   363 
Equity in subsidiaries
  (11,328)  —   —   11,328   — 
Selling, general and administrative expenses  —   8,190   3,320   —   11,510 
(Benefit) provision for bad debts  —   (292)  251   —   (41)
Other operating (income) expense, net  (6,404)  5,171   550   926   243 
Operating income (loss)
  17,732   1,255   2,663   (12,179)  9,471 
Interest income
  —   (66)  (677)  —   (743)
Interest expense
  5,156   17   96   —   5,269 
Loss on extinguishment of debt  1,144   —   —   —   1,144 
Equity in earnings (losses) of unconsolidated affiliates  —   (8,634)  (594)  277   (8,951)
Income (loss) before income taxes  11,432   9,938   3,838   (12,456)  12,752 
Provision for income taxes
  1,197   —   1,320    —   2,517 
Net income (loss)
 $10,235  $9,938  $2,518  $(12,456) $10,235 

Statement of Comprehensive Income (Loss) Information for the Three Months Ended September 26, 2010:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Net income (loss)
 $10,235  $9,938  $2,518  $(12,456) $10,235 
                     
Other comprehensive income (loss):                    
Foreign currency adjustments  6,707   —   6,707   (6,707)  6,707 
Loss on cash flow hedges
  —   —   —   —   — 
Other comprehensive income (loss)  6,707       6,707   (6,707)  6,707 
                     
Comprehensive income (loss) $16,942  $9,938  $9,225  $(19,163) $16,942 

29
Unifi, Inc.
Notes to Condensed Consolidated Financial Statements - (Continued)
(amounts in thousands, except per share amounts)

Statements of Cash Flows Information for Three Months Ended September 25, 2011:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Operating activities:               
Net cash provided by (used in) operating activities $(2,093)  $(1,989) $5,915  $(12) $1,821 
                     
Investing activities:                    
Capital expenditures
  5   (306)  (821)  —   (1,122)
Investments in unconsolidated affiliates  —   —   (360)  —   (360)
Proceeds from sale of assets
  —   89   92   (8)  173 
Net cash provided by (used in) investing activities  5   (217)  (1,089)  (8)  (1,309)
                     
Financing activities:                    
Payments of notes payable
  (10,288)  —   —   —   (10,288)
Payments on revolving credit facility  (53,500)  —   —   —   (53,500)
Proceeds from borrowings on revolving credit facility  58,800   —   —   —   58,800 
Proceeds from stock option exercises  49   —   —   —   49 
Cash dividend paid
  7,400   —   (7,400)  —   — 
Net cash provided by (used in) by financing activities  2,461   —   (7,400)  —   (4,939)
                     
Effect of exchange rate changes on cash and cash equivalents  —   —   (3,262)  20   (3,242)
                     
Net increase (decrease) in cash and cash equivalents  373   (2,206)  (5,836)  —   (7,669)
Cash and cash equivalents at beginning of the year  1,656   323   25,511   —   27,490 
Cash and cash equivalents at end of the period $2,029  $(1,883) $19,675  $—  $19,821 

30

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

Statements of Cash Flows Information for Three Months Ended September 26, 2010:

  Parent  Guarantor Subsidiaries  Non-Guarantor Subsidiaries  Eliminations  Consolidated 
Operating activities:               
Net cash provided by (used in) operating activities $6,921  $1,149  $(4,380) $321  $4,011 
                     
Investing activities:                    
Capital expenditures
  —   (3,020)  (2,475)  —   (5,495)
Investments in unconsolidated affiliates  —   —   (225)  —   (225)
Proceeds from sale of assets
  —   —   180   —   180 
Net cash used in investing activities  —   (3,020)  (2,520)  —   (5,540)
                     
Financing activities:                    
Payments of notes payable
  (15,863)  —   —   —   (15,863)
Payments on revolving credit facility  (40,525)  —   —   —   (40,525)
Proceeds from borrowings on revolving credit facility  40,525   —   —   —   40,525 
Debt financing fees
  (821)  —   —   —   (821)
Net cash used in financing activities  (16,684)  —   —   —   (16,684)
                     
Effect of exchange rate changes on cash and cash equivalents  —   —   2,117   (321)  1,796 
                     
Net decrease in cash and cash equivalents  (9,763)  (1,871)  (4,783)  —   (16,417)
Cash and cash equivalents at beginning of the year  9,938   1,832   30,921   —   42,691 
Cash and cash equivalents at end of the period $175  $(39) $26,138  $—  $26,274 

31
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’sManagement’s discussion and analysis of certain significant factors that have affected the Company’s operations and material changes in financial condition of Unifi, Inc. and its subsidiaries (the “Company”) during the periods included in the accompanying Condensed Consolidated Financial Statements.

Forward-Looking Statements
The following discussion contains certain forward-looking statements about the Company’s financial condition and results of operations.

Forward-looking statements are those that do not relate solely to historical fact.  They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events.  They may contain words such as “believe,” “anticipate,” “expect,” “estimate,” “intend,” “project,” “plan,” “will,” or words or phrases of similar meaning.  They may relate to, among other things, the risks described below:
●
the competitive nature of the textile industry and the impact of worldwide competition;
●
changes in the trade regulatory environment and governmental policies and legislation;
●
the availability, sourcing and pricing of raw materials;
●
general domestic and international economic and industry conditions in markets where the Company competes, such as recession and other economic and political factors over which the Company has no control;
●
changes in consumer spending, customer preferences, fashion trends and end-uses;
●
the ability to reduce production costs;
●
changes in currency exchange rates, interest and inflation rates;
●
the financial condition of the Company’s customers;
●
the ability to sell excess assets;
●
technological advancements and the continued availability of financial resources to fund capital expenditures;
●
the operating performance of joint ventures, alliances and other equity investments;
●
the accurate financial reporting of information from equity method investees;
●
the impact of environmental, health and safety regulations;
●
the loss of a material customer(s);
●
the ability to protect intellectual property;
●
employee relations;
●
volatility of financial and credit markets;
●
the continuity of the Company’s leadership;
●
availability of and access to credit on reasonable terms; and
●
the success of the Company’s strategic business initiatives.

These forward-looking statements reflect the Company’s current views with respect to future events and are based on assumptions and subject to risks and uncertainties that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements.  These risks and uncertainties may include those discussed above.  New risks can emerge from time to time.  It is not possible for the Company to predict all of these risks, nor can it assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements.  The Company will not update these forward-looking statements, even if its situation changes in the future, except as required by federal securities laws.

Business Overview

The Company is a leading North American producerprocesses and processor of multi-filamentsells high-volume commodity yarns, specialized yarns designed to meet certain customer specifications, and PVA yarns with enhanced performance characteristics and higher expected gross margin percentages.  The Company sells its polyester and nylon yarns.products 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 maintains one of the industry’s most comprehensive product offerings and emphasizes quality, stylehas ten manufacturing operations in four countries and performanceparticipates in all of its products. The Company manufactures partially oriented, textured, dyed, twistedjoint ventures in Israel and beamed polyester yarns as well as textured nylon and nylon and polyester covered spandex products. The Company adds value to the supply chain through the development and introduction of branded yarns that provide unique eco-friendly, performance, comfort and/or aesthetic characteristics that enhance demand for its products.U.S.  In an effort to distinguish its specialty and premier value-added products in the marketplace,addition, the Company has developed an extensive product offering of premier value-added (“PVA”) yarns, commercialized under several brand names, including Repreve®, Sorbtek®, A.M.Y.®, Mynx® UV, Reflexx®, Augusta® and aio®.

The Company sells its products to other yarn manufacturers, knitters and weavers that produce fabrics for the apparel, hosiery, furnishings, automotive, industrial and other end-use markets and operate in the textile and apparel industry. Over the last decade, global trade flows of textile and apparel markets continued their shift to lower-cost production areas.  Supply chains from greater China (including Hong Kong and Macau) have taken share globally, and while much of that share came from the United States (“U.S.”) textile producers, recent growth in Central America has offset some of the share losses from the U.S.  Significant investment in the region by established industry players has resulted in increased sales volumes and stability within the combined North America and Central America regional market.
         Polyester Segment.  The polyester segment manufactures partially oriented, textured, dyed, twisted and beamed yarns with sales to other yarn manufacturers, knitters and weavers that produce fabric for the apparel, automotive, hosiery, furnishings, industrial and other end-use markets.  The polyester segment primarily manufactures its products in Brazil, El Salvador, and the U.S., which has the Company’s largest operations and number of locations.  The polyester segment also includes a wholly-owned subsidiary in China focused on the sale and promotion of the Company’s specialty and PVA products in the Asian textile market, primarily withinin China.

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The Company’s operations are managed in three operating segments, each of which is a reportable segment for financial reporting purposes:
Polyester Segment.  The polyester segment manufactures recycled Chip, POY, textured, dyed, twisted and beamed yarns with sales to other yarn manufacturers, knitters and weavers that produce yarn and/or fabric for the apparel, automotive upholstery, hosiery, home furnishings, industrial and other end-use markets.  The polyester segment consists of manufacturing operations in the U.S. and El Salvador.

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

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

Recent Developments
Deleveraging Strategy: During the current quarter, the Company redeemed $10,000 of its 2014 notes and Outlookcontinues to expect to generate positive cash flow from operations and working capital cost savings initiatives to further strengthen its balance sheet, (the “Deleveraging Strategy”).

Raw Materials: Despite indications that polyester raw materials would decline in the September 2011 quarter, raw material costs rose slightly and continued to remain at the highest levels in over thirty years.  The higher than expected raw material costs were driven by a series of unplanned outages of feedstock production during a period of tight supply across the polyester supply chain.  The U.S.-Asia gap in polymer pricing has grown to 9 to 10 cents per pound from 2 to 3 cents per pound earlier this year and made Asian imported yarns more competitive.

Inventory Destocking: While the Company believes that retail sales volumes have remained flat, the overall inventory in the supply chain has increased.  Producer and wholesaler inventories, each of which has traditionally averaged about 50 days, reached 58 and 63 days, respectively.  Throughout the quarter, producers and wholesalers reacted to the elevated inventory levels by curtailing purchases.  As a result of this inventory destocking, the volumes of the Company’s polyester and nylon segment have been negatively impacted.

Brazil: The strengthening of the Brazilian Real has negatively impacted the competitiveness of the local apparel supply chain and resulted in lower sales volumes.  The stronger Real has negatively impacted both volume and conversion margin by making imports of the competing fibers, garments and apparel more competitively priced.  The Brazil operation, due to the long supply chain for the procurement of its raw materials, was also negatively impacted by the cost of higher priced inventory flowing through the operation during this fiscal quarter.

PVA: The sales of branded products continue to remain in-line with the Company’s targets.  Domestically, PVA sales volumes held stronger than the remainder of our business and increased versus the prior year quarter.  Internationally, PVA sales volumes were negatively impacted by our results in Brazil and the temporary delay of orders from a large volume customer for our Chinese sales office.

Inflation: The Company continues to be impacted by inflationary increases in areas such as employee costs and benefits, consumables and utility costs.  The Company attempts to mitigate the impacts of these rising costs through its operational efficiencies and increased selling prices.  Inflation may become a factor that begins to significantly impact the Company’s profitability.

Investment in Central America:  The CAFTA region which continues to be a competitive alternative to Asian supply chains, has for the last two and a half years maintained its share of synthetic apparel supply to U.S. retail, and continues to see ongoing investments being made in the region.  The Company expects to complete the installation of additional texturing capacity at its plant in El Salvador by the end of this fiscal year.

Repreve Recycling Center:  The new recycling facility allows the Company to expand the REPREVE® brand by increasing the amount and types of recyclable material that can be processed through its facilities and to develop and commercialize value-added products that meet the sustainability demands for brands and retailers.
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U.S.-South Korean Free Trade Agreement: Even though the agreement was passed and South Korea provides little or no export opportunities for the Company or for U.S. textile manufacturers, the Company foresees limited impact on its business as South Korea is not a low cost provider of textiles in comparison to other Asian countries.  The Company believes that the largest potential threats are caused by the failure of the agreement to address the potential damage from the lack of customs enforcement language and the exposure of illegal transshipments from China through South Korea.

Key Performance Indicators
The Company continuously reviews performance indicators to measure its success.  The following are the indicators management uses to assess performance of the Company’s business:
●
sales volume for the Company and for each of its reportable segments;
●
gross profits and gross margin for the Company and for each of its reportable segments;
●
Earnings Before Interest, Taxes, Depreciation, and Amortization (“EBITDA”) represents net income or loss before net interest expense, income tax expense and depreciation and amortization expense;
●
Consolidated EBITDA represents EBITDA adjusted to exclude equity in earnings of unconsolidated affiliates;
●
Adjusted EBITDA represents Consolidated EBITDA adjusted to exclude restructuring charges, startup costs, non-cash compensation expense net of distributions, loss on extinguishment of debt, and other adjustments.  Other adjustments include gains or losses on sales or disposals of property, plant, or equipment (“PP&E”) and currency and derivative gains or losses.  The Company may, from time to time, change the items included within Adjusted EBITDA;
●
Segment Adjusted Profit equals segment gross profit, less segment SG&A expenses, plus segment depreciation and amortization;
EBITDA, Consolidated EBITDA, Adjusted EBITDA and Segment Adjusted Profit are financial measurements that management uses to facilitate its analysis and understanding of the Company’s business operations. Management believes they are useful to investors because they provide a supplemental way to understand the underlying operating performance and debt service capacity of the Company.  The calculation of EBITDA, Consolidated EBITDA, Adjusted EBITDA and Segment Adjusted Profit are subjective measures based on management’s belief as to which items should be included or excluded, in order to provide the most reasonable view of the underlying operating performance of the business.  EBITDA, Consolidated EBITDA, Adjusted EBITDA and Segment Adjusted Profit are not considered to be in accordance with generally accepted accounting principles (“non-GAAP measurements”) and should not be considered a substitute for performance measures calculated in accordance with GAAP.

The reconciliations of Net Income to EBITDA to Consolidated EBITDA and Adjusted EBITDA are as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Net income
 $286  $10,235 
Provision for income taxes
  273   2,517 
Interest expense, net
  3,733   4,526 
Depreciation and amortization expense
  6,561   6,489 
EBITDA
 $10,853  $23,767 
         
Equity in earnings of unconsolidated affiliates
  (3,459)  (8,951)
Consolidated EBITDA
 $7,394  $14,816 
Restructuring charges
  —   363 
Startup costs (1) 
  —   1,463 
Non-cash compensation, net of distributions
  243   347 
Loss on extinguishment of debt
  462   1,144 
Other
  43   299 
Adjusted EBITDA
 $8,142  $18,432 

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Certain consolidated items listed below are only allocated to the segment level.  The impact of such items are eliminated from Adjusted EBITDA in order to calculate Segment Adjusted Profit.  The reconciliations of Adjusted EBITDA to Segment Adjusted Profit are as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Adjusted EBITDA $8,142  $18,432 
Depreciation included in other operating (income) expense, net  (6)  (3)
Startup costs (1) 
  —   (1,463)
Non-cash compensation, net of distribution
  (243)  (347)
Provision (benefit) for bad debts
  205   (41)
Other, net
  (84)  (56)
Segment Adjusted Profit
 $8,014  $16,522 
(1) During fiscal year 2011, startup costs related to costs associated with UCA operating expenses.
Segment Adjusted Profit by reportable segment is as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Polyester Segment Adjusted Profit
 $2,426  $5,705 
Nylon Segment Adjusted Profit
  3,024   4,767 
International Segment Adjusted Profit
  2,564   6,050 
Total Segment Adjusted Profit
 $8,014  $16,522 

The reconciliations of Segment Net Sales to Consolidated Net Sales are as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Polyester segment net sales
 $92,528  $85,587 
Nylon segment net sales
  40,961   44,173 
International segment net sales
  37,524   45,332 
Subtotal segment net sales
 $171,013  $175,092 
         
Consolidated net sales
 $171,013  $175,092 

The reconciliations of Segment Gross Profit to Consolidated Gross Profit are as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Polyester segment gross profit
 $3,690  $7,662 
Nylon segment gross profit
  4,351   6,196 
International segment gross profit
  3,789   7,688 
Subtotal segment gross profit
 $11,830  $21,546 
         
Consolidated gross profit
 $11,830  $21,546 

The reconciliations of Segment SG&A to Consolidated SG&A are as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Polyester segment SG&A
 $6,063  $6,688 
Nylon segment SG&A
  2,110   2,282 
International segment SG&A
  2,198   2,540 
Subtotal segment SG&A
 $10,371  $11,510 
         
Consolidated SG&A
 $10,371  $11,510 

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The reconciliations of Segment Depreciation and Amortization to Consolidated Depreciation and Amortization are as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Polyester segment depreciation and amortization
 $4,799  $4,730 
Nylon segment depreciation and amortization
  783   854 
International segment depreciation and amortization
  973   902 
Subtotal segment depreciation and amortization
 $6,555  $6,486 
Depreciation included in other operating (income) expense, net  6   3 
Amortization included in interest expense
  221   254 
Consolidated depreciation and amortization
 $6,782  $6,743 

Results of Operations
Review of First Quarter of Fiscal Year 2012 Compared to First Quarter of Fiscal Year 2011
Consolidated Overview
The net income components, each of the net income components as a percentage of total net sales and the percentage increase or decrease of such components over the comparable prior year period are as follows:
  For the Three Months Ended  
  September 25, 2011 September 26, 2010  
     % to Net Sales    % to Net Sales % Change
Net sales
 $171,013 100.0 $175,092 100.0 (2.3)
Cost of sales
  159,183 93.1  153,546 87.7 3.7
Gross profit
  11,830 6.9  21,546 12.3 (45.1)
Restructuring charges
  — —  363 0.2 (100.0)
Selling, general and administrative expenses  10,371 6.0  11,510 6.6 (9.9)
Provision (benefit) for bad debts  205 0.1  (41) — 600.0
Other operating (income) expense, net  (41) —  243 0.1 (116.9)
    Operating income
  1,295 0.8  9,471 5.4 (86.3)
Interest expense, net
  3,733 2.2  4,526 2.6 (17.5)
Earnings from unconsolidated affiliates  (3,459) (2.0)  (8,951) (5.1) (61.4)
Other non-operating (income) expense, net  462 0.3  1,144 0.6 (59.6)
Income before income taxes
  559 0.3  12,752 7.3 (95.6)
Provision for income taxes
  273 0.1  2,517 1.4 (89.2)
    Net income
 $286 0.2 $10,235 5.9 (97.2)

Consolidated Net Sales
Net sales for the September 2011 quarter decreased by $4,079, or 2.3%, as compared to the prior year September quarter as the decline in sales volumes in each of the Company’s reportable segments was not offset by higher selling prices as the Company continues to pass on raw material cost increases.  Overall, sales volumes decreased 11.0% while the weighted average selling prices increased by 8.7%.

Consolidated Gross Profit
Gross profit for the September 2011 quarter decreased by $9,716, or 45.1%, as compared to the prior year September quarter. Gross profit declines were experienced in each of the Company’s reportable segments due to record-high raw material prices and lower sales volumes as demand decreased for most of the Company’s products due to inventory destocking of the apparel supply chain in order to manage inventory levels.  The Company also experienced lower capacity utilization in its manufacturing facilities and related increases in unit costs stemming from production volume declines experienced during the last two quarters as the Company also decreased its inventory levels.  In addition, the Company’s operation in Brazil was significantly impacted by higher average raw material costs and by less expensive imports as the strengthening of the Brazilian Real versus the U.S. dollar created a challenging competitive environment for local production.
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Polyester Segment Gross Profit
The segment gross profit components, the percent to net sales and the percentage increase or decrease over the prior year for the polyester segment are as follows:
  For the Three Months Ended  
  September 25, 2011 September 26, 2010  
     % to Net Sales    % to Net Sales % Change
Net sales
 $92,528 100.0 $85,587 100.0 8.1
Cost of sales
  88,838 96.0  77,925 91.0 14.0
Gross profit
 $3,690 4.0 $7,662 9.0 (51.8)

In the first quarter of fiscal year 2012, net sales for the polyester segment increased $6,941 or 8.1% compared to the prior year first quarter continuedwhile sales volume decreased 2.7% and the weighted average selling price increased by 10.8%.
The $4 million gross profit decline was due primarily to show improvementthe unfavorable impacts of lower sales volumes and higher manufacturing costs due to the timing of various production shutdowns (approximately $2.0 million) and due to lower conversion margins (approximately $2.0 million).
The sales volume decline for the segment consists of declines for each of the segment’s products, except for POY and recycled Chip.  These volume declines were driven by weak demand due to increased inventory in the U.S. apparel supply chain, a widened U.S.-Asia raw material gap and the decision of the Company to exit certain low-end margin business.  While retail inventory continues to remain flat, overall inventory in the supply chain has increased.  Throughout the September 2011 quarter, due to the significantly high inventory levels versus historic norms, producers and wholesalers reacted by destocking inventory.  This reaction to elevated inventory levels has negatively impacted the company’s sales volumes in most of its end-use markets. In an effort to reduce working capital and on-hand inventory levels, the segment began adjusting down its production rate during the quarter to levels lower than the sales rate.  The lower utilization and production levels for the current quarter have had an unfavorable impact on the segment’s manufacturing costs per unit sold which negatively impacted gross profits.

The historic rise in polyester raw material costs, (an increase in the average cost per pound of approximately 50% versus the prior year period), has negatively impacted the segment’s conversion margins during the quarter as not all cost increases were passed along to customers due to early indications that polyester raw materials would decline in the September 2011 quarter.
The polyester segment net sales and gross profit, as a percentage of total consolidated amounts, were 54.1% and 31.2% for the first quarter of fiscal year 2012, compared to 48.9% and 35.6% for the first quarter of fiscal year 2011.

Outlook:
The factors outlined above are expected to continue through the next fiscal quarter.  Assuming lower raw material costs, an end to the inventory destocking and the North American region’s ability to maintain its share against Asia, the Company anticipates polyester profitability improvements in the second half of fiscal year 2012.

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Nylon Segment Gross Profit
The segment gross profit components, the percent to net sales and the percentage increase or decrease over the prior year for the nylon segment are as follows:
  For the Three Months Ended  
  September 25, 2011 September 26, 2010  
     % to Net Sales    % to Net Sales % Change
Net sales
 $40,961 100.0 $44,173 100.0 (7.3)
Cost of sales
  36,610 89.4  37,977 86.0 (3.6)
Gross profit
 $4,351 10.6 $6,196 14.0 (29.8)

In the first quarter of fiscal year 2012, net sales for the nylon segment decreased $3,212 or 7.3% compared to the prior year first quarter while sales volume decreased 16.3% and the weighted average selling price increased by 9.0%.

The $1.8 million decline in gross profit was due primarily to lower sales volumes (approximately $0.8 million) and higher manufacturing costs (approximately $1.2 million) offset by an improved mix (approximately $0.2 million).

The sales volume decline was a result of lower shipments into the ongoing recoverysock, hosiery and knit apparel applications.  This slowdown resulted in a lower percentage of commodity sales but created a positive impact on product mix.  The lower production levels and capacity utilization for the quarter as the segment adjusted its inventory levels created an unfavorable change in the global economysegment’s manufacturing costs.

The nylon segment net sales and continued volume growth ingross profit, as a percentage of total consolidated amounts, were 24.0% and 36.8% for the Americas regionfirst quarter of fiscal year 2012, compared to 25.2% and 28.8% for the impact on selling pricesfirst quarter of higher raw material costs.  fiscal year 2011.

Outlook:
The revivalfactors outlined above are expected to continue through the next fiscal quarter.  The levels of segment sales and production volumes are expected to increase during the second half of fiscal year 2012 assuming an end to the inventory destocking and the North American region’s ability to maintain its share against Asia.

International Segment Gross Profit
The segment gross profit components, the percent to net sales and the percentage increase or decrease over the prior year for the international segment are as follows:
  For the Three Months Ended  
  September 25, 2011 September 26, 2010  
     % to Net Sales    % to Net Sales % Change
Net sales
 $37,524 100.0 $45,332 100.0 (17.2)
Cost of sales
  33,735 89.9  37,644 83.0 (10.4)
Gross profit
 $3,789 10.1 $7,688 17.0 (50.7)

In the first quarter of fiscal year 2012, net sales for the international segment decreased $7,808 or 17.2%, compared to the prior year first quarter, while sales volume decreased 25.0% and weighted average selling price increased by 7.8%.

The $4.0 million decline in gross profit was due primarily to lower sales volumes and conversion margins in Brazil ($3.3 million lower) as well as lower sales volumes in the Company’s Chinese operation.  The strengthening of the Brazilian Real versus the U.S. dollar has negatively impacted both sales volumes (down 22.6%) and conversion margins (down 30.2%) by making imports of competing yarn, marketsfabric and garments and apparel more competitive alternatives.  In addition, the Company’s Brazilian subsidiary has allowedbeen impacted by a higher average cost of raw materials.  Sales volumes at the Company’s Chinese subsidiary were down 41.8% versus the prior year quarter caused by a temporary delay in orders as inventory adjustments were made by the operation’s largest customer, a large performance apparel manufacturer.

The international segment net sales and gross profit, as a percentage of total consolidated amounts, were 21.9% and 32.0% for the first quarter of fiscal year 2012, compared to 25.8% and 35.7% for the first quarter of fiscal year 2011.

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Outlook:
Assuming a weakening of the Brazilian Real back to historical norms and the increase in sales volumes for the Company’s Chinese sales office, the Company expects improved segment operating results for the second half of the current fiscal year.

Consolidated Selling General & Administrative Expenses
Consolidated selling, general and administrative expenses (“SG&A”) decreased in total and as a percentage of net sales for the September 2011 quarter as compared to remain healthy, despite rising raw material prices resulting from the tight global supplyprior year quarter.  Consolidated SG&A decreased by $1,139 or 9.9%, which was primarily a result of polyester feedstock as increasing global demand exceeded production capacity.  Suppliers of key polyester ingredients are workingdecreases in fringe benefit costs, non-cash deferred compensation costs, professional fees, and other employee related costs.  The reduction in fringe benefit costs is mainly related to replenish supply chain inventory levels depletedreductions in certain variable compensation programs due to lower operating results during the recession, causing their plantscurrent quarter.  These decreases were partially offset by increases in salary costs due to run at or near capacitya higher average cost per employee.

Consolidated Restructuring and further tightening global supply. Beginning inImpairments
During the secondfirst quarter of fiscal year 2011, the Company experienced risingincurred $363 related to the relocation of polyester raw material prices stemmingequipment from increasesYadkinville, North Carolina to El Salvador.  These costs were charged to restructuring expense as incurred.

Consolidated (Benefit) Provision for Bad Debts
During the first quarter of fiscal year 2012, there were no significant changes in crude oil prices, the returnCompany’s allowance for uncollectible accounts and certain risk accounts remained relatively unchanged.  The provision for bad debt expense was $205 for the three months ended September 25, 2011, as compared to a benefit of post-recession demand$41 recorded for all fibersthe prior year quarter.

Consolidated Other Operating (Income) Expense, Net
The components of other operating (income) expense, net are as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Net (gain) loss on sale of assets
 $64  $(65)
Foreign currency transaction (gains) losses
  (21)  364 
Other, net
  (84)  (56)
Other operating (income) expense, net
 $(41) $243 

Other, net includes rental income and miscellaneous charges.

Consolidated Interest Expense, Net
Net interest expense decreased from $4,526 in the September 2010 quarter to $3,733 in the September 2011 quarter.  The favorable decline in interest expense for the Company was primarily due to the lower average outstanding debt balance of the 2014 notes as a result of the redemption of $55,000 of its 2014 notes since June 30, 2010.  These redemptions have been financed through a mix of cash generated from operations and borrowings under the Company’s revolving credit facility which carries a lower average interest rate.  The weighted average interest rate of Company debt for the September 2011 quarter and the unplanned temporary slowdown in production in paraxlyeneSeptember 2010 quarter was 9.7% and monoethylene glycol (“MEG”) plants in Asia. Additionally, cotton prices reached historical highs in the March 2011 quarter due to weather-related and other supply disruptions, which when combined with robust global demand, particularly in Asia, has created concerns about availability.  This has caused an increase in demand for polyester staple as11.1%, respectively.

Outlook:
As a substitute for cotton resulting in higher polyester ingredient costs.  Over the long term,result of its recent redemptions, the Company expects feedstock supplies to remain tightincur approximately $850 less net interest expense in fiscal year 2012 versus fiscal year 2011.  As the Company executes its Deleveraging Strategy, the trend for declining interest expense is expected to continue.

Consolidated Non-Operating (Income) Expenses, net
For the three months ended September 25, 2011, non-operating (income) expense consists of losses from extinguishment of debt of $462 due to the Company’s redemption of $10,000 of its 2014 notes under the terms of the indenture governing the 2014 notes (the "Indenture") at 102.875%. For the three months ended September 26, 2010, non-operating (income) expense consists of loss from extinguishment of debt of $1,144 due to the Company’s redemption of $15,000 of its 2014 notes pursuant to the Indenture terms at 105.75%.
Consolidated Income Taxes
The Company’s income tax provision for the next twenty-fourquarter ended September 25, 2011 resulted in tax expense of $273 at an effective rate of 48.8%.  The income tax rate for the period is different from the U.S. statutory rate due to thirty-six months, until planned expansionlosses in tax jurisdictions for which no tax benefit could be recognized, foreign dividends taxed in the U.S. and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rate.  The effective income tax rate can be affected over the fiscal year by the mix and timing of purified terephthalic acid (“PTA”)actual earnings from our U.S. operations and MEG capacity improves supplyforeign sources versus annual projections and brings ingredient costs backchanges in foreign currencies in relation to more normalized levels.  In the meantime, the Company has worked with the supply chain to pass along these raw material price increases to its customers both during the quarter and subsequent to quarter end.U.S. dollar.
 
 
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Sales dollarsThe Company’s income tax provision for the quarter ended September 26, 2010 resulted in tax expense of $2,517 at an effective rate of 19.7%.  The income tax rate for the period is different from the U.S. statutory rate due to the utilization of prior losses for which no benefit had been previously recognized, foreign dividends taxed in the U.S., and earnings attributable to foreign operations which are taxed at rates lower than the U.S. statutory rate.

The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries due to negative evidence concerning the realization of those deferred tax assets in recent years.  The Company continues to evaluate both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released.  A release of the valuation allowance could have a material effect on net earnings in the period of release.

Consolidated Equity in Earnings of Unconsolidated Affiliates
The Company participates in joint ventures in the U.S. and in Israel.  As of September 25, 2011, the Company has $92,340 invested in these unconsolidated affiliates.  For the three months ended September 25, 2011, $3,459 of the Company’s $559 of income before income taxes was generated from its investments in these four unconsolidated affiliates.  See “Footnote 22.  Investments in Unconsolidated Affiliates and Variable Interest Entities” to the Condensed Consolidated Financial Statements included in this Form 10-Q for a detailed discussion of the Company’s investments in these joint ventures.

For the three months ended September 25, 2011, earnings from the Company’s unconsolidated equity affiliates was $3,459 compared to $8,951 for the three months ended September 26, 2010.  During these periods, the Company’s 34% share of PAL’s earnings decreased from $8,633 to $3,827 primarily due to the timing of revenue recognition under the terms of the cotton rebate program.  During the prior year quarter, PAL recognized (within its cost of sales) a higher level of rebates due to the timing of capital expenditures.  The increase in PAL’s net sales is primarily due to higher average selling prices due to the significant rise in cotton costs.  The remaining decrease in the earnings of equity affiliates relates primarily to lower operating results of UNF and UNF America which was primarily driven by decreased sales volumes are upand lower capacity utilization.

Outlook:
The Company expects the rebates to be recognized by PAL during the remainder of fiscal year 2012 to be similar to those recorded during the first quarter of fiscal year 2012.  The Company also expects its equity affiliates to continue to be impacted by lower sales volumes over the short-term with a return to more normalized sales volumes and profitability during the second half of fiscal year 2012.

Consolidated Net Income
Net income for the September 2011 quarter was $286, or $0.01 per basic share, compared to net income of $10,235, or $0.51 per basic share, for the prior year quarter.  The Company’s decreased profitability was due primarily to lower sales volumes over the prior year quarter, higher manufacturing costs and a decrease in earnings from the Company’s unconsolidated affiliates partially offset by 15% and 5%a favorable decline in SG&A expenses.

Consolidated Adjusted EBITDA
Adjusted EBITDA for the fiscal MarchSeptember 2011 quarter decreased $10,290 versus the prior year quarter.  As discussed above, consolidated gross profit decreased $9,716 partially offset by a favorable decline in SG&A costs of $1,139.  The primary differences between the aforementioned changes in gross profit and 17%SG&A expenses and 10%, respectively,the Company’s key performance Adjusted EBITDA metric are primarily start-up costs, non-cash compensation charges, provision (benefit) for bad debts and other operating (income) expense items.

Liquidity and Capital Resources
The Company’s primary capital requirements are for working capital, capital expenditures, debt repayment and service of indebtedness. The Company’s primary sources of capital are cash generated from operations and amounts available under its revolving credit facility.  As of September 25, 2011, cash generated from operations was $1,821 and availability under the revolving credit facility was $54,598.

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Historically, the Company has met its working capital, capital expenditures and service of indebtedness requirements from its cash flows from operations.  For fiscal year 2011 and the first quarter of fiscal year 2012, cash generated from operations did not cover the Company’s working capital needs, capital expenditures and service of indebtedness.  The Company used borrowings from its revolving credit facility to supplement cash flows from operations.
The following table presents a summary of the Company’s cash, working capital, debt obligations and liquidity for its U.S. and foreign operations as of September 25, 2011:
  U.S.  Brazil  All Others  Total 
Working capital
 $115,389  $57,452  $25,575  $198,416 
Long-term debt, including current portion $163,970  $—  $—  $163,970 
                 
Cash and cash equivalents $146  $11,184  $8,491  $19,821 
Borrowings available revolving credit facility  54,598   —   —   54,598 
Liquidity
 $54,744  $11,184  $8,491  $74,419 

During fiscal year 2011, the Company changed its indefinite reinvestment assertion related to $26,630 of the earnings and profits held by UDB.  During fiscal year 2012, the Company increased the assertion related to the future repatriation of UDB earnings and profits by an additional $13,415.  The Company has established a deferred tax liability, net of estimated foreign tax credits, of approximately $3,756 related to the additional income tax that would be due as a result of the current plan to repatriate earnings in future periods.  During fiscal year 2012, the Company repatriated current foreign earnings of $7,400.  All other remaining undistributed earnings are deemed to be indefinitely reinvested.

Working capital decreased by $14,553 from $212,969 as of June 26, 2011 to $198,416 as of September 25, 2011.  This decrease includes a $12,425 currency effect related to the weakening of the Brazilian Real to the U.S. dollar of which $3,242 relates to the effect of currency rate changes on a fiscal year-to-date basis.  However, increasescash and cash equivalents.  Adjusted for the changes due to currency, the changes in the Company’s polyester raw materialsworking capital as compared to June 26, 2011 were comprised of increases for domestic operations and lower nylon volumes placed pressure on margins during the quarter and negatively impacted operating results.decreases for international businesses.  The Company’s nylonincrease in working capital for domestic operations declined mainlyis primarily due to inventory reduction programs at certain of its customers.  The Company’s PVA business continues to grow on a global basis and the Company has developed plans to regain lost margins caused by thean increase in polyesterinventories, partially offset by an increase in accounts payable and nylona decrease in cash.  The decrease in cash is primarily impacted by capital expenditures and debt reduction.  Domestic inventories increased as a result of higher inventory units and rising raw material costs.  These pricing plans startedDomestic accounts payable increased due to the timing of payments made to suppliers for raw material purchases.  The decline in working capital for international businesses is primarily driven by a decrease in inventory and cash, partially offset by decreases in accounts payable and accrued expenses.  A decline in inventory units at the firstCompany’s Brazilian subsidiary accounts for the majority of April 2011the decline in international inventories and are expectedthe decrease in accounts payable is reflective of a lower level of purchases.

Assuming lower raw material costs, an end to the inventory destocking and improvements in the Company’s inventory and working capital turns, the Company expects working capital to be fully implemented by mid-May 2011, as some customers are under order-by-order pricing arrangements, while other customers have monthly or quarterly pricing, with various starting and ending dates.a source for cash for the 2012 fiscal year.

Liquidity Assessment
The competitivenessCompany currently believes that its existing cash balances and cash generated by operations, together with its available credit capacity, will enable the Company to comply with the terms of its indebtedness and meet the U.S.-Dominican Republic-Central America Free Trade Agreement (“CAFTA”) region has continuedforeseeable liquidity requirements.  Domestically, the Company’s cash balances, cash generated by operations and borrowings available under the revolving credit facility continue to improvebe sufficient to fund its domestic operating activities and cash commitments for its investing and financing activities.  For its foreign businesses, the Company’s existing cash balances and cash generated by operations should provide the needed liquidity to fund its foreign operating activities and any foreign investing activities, including future capital expenditures.

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Cash Provided by Operations
Net cash provided by operations was as follows:
  For the Three Months Ended 
  September 25, 2011  September 26, 2010 
Plus cash receipts:      
Receipts from customers
 $171,615  $172,063 
Dividends from unconsolidated affiliates
  2,005   2,532 
Other receipts
  551   895 
Less cash payments:        
Payments to suppliers and other operating cost
  136,031   133,555 
Payments for salaries, wages, and benefits
  34,748   35,138 
Payments for restructuring and severance
  —   664 
Payments for interest
  778   380 
Payments for taxes
  793   1,742 
Net cash provided by operations                                                                              $1,821  $4,011 

Cash received from customers decreased slightly during the September 2011 quarter over the September 2010 quarter as a result of declines in sales volumes.  Selling prices increased on a per unit basis, however, this increase did not offset the sales volume decline.  Payments to suppliers increased as raw material prices exceeded historic highs and reduced demand for textile products in the U.S.  Polyester raw material prices increased approximately 50% in the September 2011 quarter as compared to Asia, which has resultedthe same prior year quarter.  These per unit increases were partially offset by lower production volumes.   Salary, wage and benefit payments decreased slightly as a result of reduced variable compensation payments offset by an increase in increased CAFTA production of apparel using synthetic fibers. Rising manufacturing, transportation and capital costs in China coupled with the CAFTA region’s shorter lead times have made the region an attractive supply chain for U.S brands and retailers. Synthetic apparel imports from the CAFTA region increased 20% in the March 2011 quarter compared toemployee costs.  The Company had 200 additional wage level employees versus the prior year quarter, and the Company currently estimates volume from CAFTA will increase by approximately 18% for the 2011 calendar year compared to 2010.  The Company’s new manufacturing facility, Unifi Central America, Ltda. DE C.V. (“UCA”), located in El Salvador has allowed the Company to maintain market share in the region, while also positioning the Company for additional volume opportunities as global apparel sourcing continues to move to the CAFTA region from Asia and other areas.

    Over the past year, the Company expanded its efforts in manufacturing and statistical process control in all of its operations aiming for measurable improvements in the cost of operations. These efforts, coupled with strategic capital investments designed to grow the Company’s PVA product capabilities, are expected to result in continued improvement of its financial performance over the next several years. One investment includes a capital projectprimarily related to the backward supply chain integrationcompletion of UCA and the Repreve recycling center. The increased borrowings under the Company’s revolving credit facility versus the prior year quarter caused an increase in the frequency of required interest payments.  Restructuring and severance payments decreased as the Company completed its equipment reinstallation involving certain of its polyester facilities.  Taxes paid by the Company decreased from $1,742 to $793 primarily as a result of a decline in tax liabilities related to the Company’s Brazilian subsidiary.  The Company’s cash dividends from unconsolidated affiliates remained relatively flat.  Other receipts include rental income and interest income.

Cash Used in Investing Activities and Financing Activities
Investing and Financing Activities
The Company utilized $1,309 in net investing activities and utilized $4,939 in net financing activities during the September 2011 quarter.  The primary cash expenditures for investing and financing activities during the September 2011 quarter included $10,288 to repurchase a portion of the 2014 notes with a face value of $10,000, $1,122 in capital expenditures and $360 for investment in an unconsolidated affiliate offset by $173 in proceeds from the sale of assets.

The Company utilized $5,540 in net investing activities and utilized $16,684 in net financing activities during the September 2010 quarter.  The primary cash expenditures for investing and financing activities during the September 2010 quarter included $15,863 to repurchase a portion of the 2014 notes with a face value of $15,000, $5,495 in capital expenditures, $821 for debt refinancing fees and $225 for investment in an unconsolidated affiliate offset by $180 in proceeds from the sale of capital assets.

Capital Expenditures
In addition to its normal working capital requirements, the Company requires cash to fund capital expenditures.  During the first quarter of fiscal year 2012, the Company spent $1,122 on capital expenditures compared to $5,495 in the prior year quarter.  The Company estimates its fiscal year 2012 capital expenditures will be approximately $7,000 to $8,000, which primarily consists of routine, on-going capital expenditures to extend the useful life of certain assets.   As of September 25, 2011, the Company had no restricted cash funds that are required to be used for domestic capital expenditures under the Indenture.  The Company may incur additional capital expenditures as it pursues new opportunities to expand its production capabilities or to further streamline its manufacturing processes.

Note Repurchases
The Company may, from time to time, seek to retire or purchase its outstanding debt in open market purchases, in privately negotiated transactions or by calling a portion of the 2014 notes under the terms of the Indenture.  Such retirement or purchase of debt may come from the operating cash flows of the business or other sources and will depend upon the Company’s 100% recycled Repreve® product.  By being more vertically integrated,strategy, prevailing market conditions, liquidity requirements, contractual restrictions and other factors and the amounts involved may be material.  The Company continues to execute its plan to utilize a combination of internally generated cash and excess availability on its revolving credit facility to repurchase and retire portions of its 2014 notes.  The Company expects to maintain a continuous balance outstanding under its revolving credit facility and hedge a substantial amount of the interest rate risk in order to ensure its interest savings.  As a result of the utilization of cash on hand to reduce outstanding debt and the lower rate under the revolving credit facility, the Company expects to improvea significant reduction of its annual fixed carrying cost between the availabilitycommencement of recycled raw materialsthis debt reduction strategy during the 2010 fiscal year and significantly increasethe final repayment of the 2014 notes.
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Long-Term Debt
Long-term debt consists of the following:
  September 25, 2011  June 26, 2011 
Notes payable
 $123,722  $133,722 
Revolving credit facility
  39,900   34,600 
Capital lease obligation  348   342 
Total debt
  163,970   168,664 
Current portion of long-term debt
  (348)  (342)
Total long-term debt
 $163,622  $168,322 

Notes Payable
On May 26, 2006, the Company issued $190,000 of its product capabilities2014 notes with interest payable on May 15 and ability to compete effectively in this growing segment.November 15 of each year. The Company expects this will also make it an even stronger partner in the development and commercialization of value-added products that meet sustainability demands of today’s brands and retailers.  In addition, the Company has invested in new working capitalcan currently elect to support the higher sales volumes as retail sales continue to recover and additional production capacity in El Salvador.

    In Brazil and China, the Company expects to profitably grow the contribution of each of these operations by focusing on gaining market share and expanding volumes in its premier value-added products.  The Company is encouraged by the level of interest and opportunities in China for Repreve and other PVA products.

In order to improve long-term performance, the Company will continue to focus on sustaining and continuously improving operations and profitability, and increasing its net sales and earnings in global markets.  While the Company continues to explore global growth opportunities and diversify its portfolio, the Company’s top priority remains growing and continuously improving its core business. The Company will strive to create additional value through mix enrichment, share gain, process improvement throughout the organization, and expanding the number of customers and programs using its high value and PVA yarns.

On December 28, 2010, the Company announced its commencement of a cash tender offer for any andredeem some or all of the Company’s 11.5% senior secured notes due May 15, 2014 (the “2014 notes”).  Subsequently, on January 11, 2011, the Company announced its termination of the cash tender offer due to the condition of the debt capital markets which made the estimated cost savings generated from a new debt financing insufficient to offset the estimated costs of conducting such a transaction.  Concurrently, the Company announced that it was calling for the redemption of $30.0 million of the 2014 notes at redemption prices equal to or in excess of par depending on the year the optional redemption occurs.  The Company may also purchase its 2014 notes in open market purchases or in privately negotiated transactions and then retire them or it may refinance all or a redemption price of 105.75%portion of the principal amount of the redeemed notes.  2014 notes with a new debt offering.

On February 16,August 5, 2011, the Company completed the transaction for a totalredemption of an aggregate redemption priceprincipal amount of approximately $32.6 million which included accrued interest.  This$10,000 of its 2014 notes at 102.875%. The Company financed the redemption was financed through borrowings under the Company’s senior secured asset-basedits revolving credit facility entered intofacility. In connection with Bank of America, N.A. (as both Administrative Agent and Lender thereunder) (as amended, “revolving credit facility”) which carries a much lower rate than the 2014 notes.

On February 15, 2011,redemption, the Company entered into a 27-month, $25 milliontwenty-one month, $10,000 interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on the first $25 million of London Interbank Offered Rate (“LIBOR”)-based variable rate borrowings under the Company’s revolving credit facility due to fluctuations in the LIBOR benchmark interest rate.  The Company intends to maintain at least $25 million of LIBOR-based variable rate borrowings in place for the duration of the interest rate swap.  Theflows.  This interest rate swap allows the Company to payfix the LIBOR rate at 0.75%.

Revolving Credit Facility
The Company’s First Amended Credit Agreement provides for a fixed interest raterevolving credit facility of 1.39% on such borrowings.  The Company designated$100,000 (with the swap as a cash flow hedge and formally documented all aspectsability of the relationship betweenCompany to request that the hedging instrument (the interest rate swap)borrowing capacity be increased up to $150,000) and matures on September 9, 2015.  However, if the item being hedged (the LIBOR-based variable rate borrowings)2014 notes have not been paid in full on or before February 15, 2014, the maturity date of the Company’s revolving credit facility will be automatically adjusted to February 15, 2014.  As of September 25, 2011, the Company’s availability under the revolving credit facility was $54,598.

Contingencies
Environmental Liabilities
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 Company assesses, bothland for the Kinston site was leased pursuant to a 99 year Ground Lease with DuPont. Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the EPA and DENR pursuant to the Resource Conservation and Recovery Act Corrective Action program. The Corrective Action program requires DuPont to identify all potential AOC, assess the extent of contamination at the inceptionidentified AOCs and clean them up to comply with applicable regulatory standards.  Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with conveyance of certain of the hedgeassets at Kinston to DuPont. This agreement terminated the Ground Lease and on an ongoing basis, whether derivatives designated as hedging instruments are highly effective in offsettingrelieved the changesCompany of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site. However, the Company continues to own a satellite service facility acquired in the cash flowINVISTA 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 with respect to this site will be transferred to the Company in the future, at which time DuPont must pay the Company seven years of the hedge items.  If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective,monitoring and reporting costs and the Company will discontinue hedge accounting prospectively.assume responsibility for any future remediation and monitoring of this site.  At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
 
 
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On February 10, 2011,Litigation
The Company is aware of certain claims against it for the alleged use of non-compliant Berry Amendment nylon POY in yarns that the Company announced the appointment of Ms. Suzanne M. Presentsold which may have ultimately been used to its Board of Directors (the “Board”).  On February 25, 2011,manufacture certain U.S. military garments.  Although the Company announcedbelieves it has certain potential defenses to the claims, the estimate of possible losses, before considering any potential salvage values for the garments, ranges from $200 to $2,100.  The Company has appropriately accrued for this contingency. It is reasonably possible that its Board appointed Mr. William L. Jasper as the Company’s Chairmanestimate may differ from the actual claim amount; however, the Company believes any change would not be material to the financial statements.

Contractual Obligations
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 BoardCompany is required to make under existing contractual arrangements, such as debt and also appointed Mr. R. Roger Berrier, Jr. aslease agreements.  Except for the Company’s President and Chief Operating Officer.  Mr. Jasper continues to serve as the Company’s Chief Executive Officer.  Prior to this announcement, Mr. Berrier, a member of the Board, served as Executive Vice President of Sales, Marketing, and Asian Operations. These announcements were the result of the unexpected death of Mr. Stephen Wener, the Company’s former Chairman of the Board, on February 21, 2011.  Mr. Wener had served as a member of the Board since 2007 and was a member$10,000 redemption of the Company’s Executive Committee.  Mr. Wener had2014 notes discussed above, there have been no material changes in the President and Chief Executive Officer of Dillon Yarn Company (“Dillon”).  On March 9, 2011, the Company appointed Mr. Mitchel Weinberger to its Board.  Mr. Weinberger is the President and Chief Operating Officer of Dillon.

        On October 27, 2010, the shareholders of the Company approved a reverse stock splitscheduled maturities of the Company’s common stock (the “reverse stock split”) at a reverse stock split ratio of 1-for-3.  The reverse stock split became effective November 3, 2010 pursuant to a Certificate of Amendment tocontractual obligations as disclosed in the table under the heading “Contractual Obligations” in the Company’s Restated Certificate of Incorporation filed withAnnual Report on Form 10-K for the Secretary of State of New York.  The Company had 20,059,544 shares of common stock issued and outstanding immediately following the completion of the reverse stock split. fiscal year ended June 26, 2011.

Off Balance Sheet Arrangements
The Company is authorized in its Restated Certificate of Incorporationnot a party to issue upany off-balance sheet arrangements that have, or are reasonably likely to have, a total of 500,000,000 shares of common stock at a $.10 par value per share which was unchanged by the amendment.  The reverse stock split did not affect the registration of the common stock under the Securities Exchange Act of 1934, as amendedcurrent or the listing of the common stockfuture material effect on the New York Stock Exchange under the symbol “UFI”, although the post-split shares are considered a new listing with a new CUSIP number.  In the Condensed Consolidated Balance Sheets, the line item shareholders’ equity has been retroactively adjusted to reflect the reverse stock split for all periods presented by reducing the line item common stock and increasing the line itemCompany’s financial condition, results of operations, liquidity or capital in excess of par value, with no change to shareholders’ equity in the aggregate.  All share and per share computations have been retroactively adjusted for all periods presented to reflect the decrease in shares as a result of this transaction.expenditures.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”)GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  The SEC has defined a company’s most critical accounting policies as those involving accounting estimates that require management to make assumptions about matters that are highly uncertain at the time and where different reasonable estimates or changes in the accounting estimate from quarter to quarter could materially impact the presentation of the financial statements.  The following discussion provides further information about theCompany’s critical accounting policy related to the Company’s valuation allowance for deferred tax assets and is an addition to the Company’s “Critical Accounting Policies”policies are discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’sour most recent Annual Report on Form 10-K for the fiscal year ended June 27, 2010, as recast for the effect of the 1-for-3 reverse stock split on November 3, 2010 in its Current Report on Form 8-K filed January 7, 2011.

Valuation Allowance for Deferred Tax Assets.  The Company maintains a valuation allowance against certain of its deferred tax assets as the Company has determined that it is more likely than not that it will not be able to realize these deferred tax assets.  The Company’s realization of its deferred tax assets is based on several factors that require continued assessment.  One of the factors is the existence of future taxable income within a certain time period and is therefore uncertain and judgmental.  Other factors include the potential for carryback and carryforward of various tax attributes, the possibility of reasonable tax planning, and the reversal of taxable temporary differences.  On a quarterly basis, the Company reviews these factors in determining the likelihood of realizability of its deferred tax assets.  The valuation allowance on the Company’s net deferred tax assets in certain jurisdictions is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance.  A release of the valuation allowance could have a material effect on earnings in the period of release.
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Key Performance Indicators

The Company continuously reviews performance indicators to measure its success.  The following are the indicators management uses to assess performance of the Company’s business:

·  sales volume, which is an indicator of demand;
·  gross margin, which is an indicator of product mix and profitability;
·  
adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“adjusted EBITDA”), which the Company defines as net income or loss before income tax expense (benefit), net interest expense, and depreciation and amortization expense (excluding interest portion of amortization), adjusted to exclude equity in earnings and losses of unconsolidated affiliates, write down of long-lived assets, non-cash compensation expense net of distributions, gains or losses on sales or disposals of property, plant and equipment (“PP&E”), currency and derivative gains or losses, gains or losses on extinguishment of debt and other non-operating refinancing costs, restructuring charges, gain from sale of nitrogen credits, and startup costs, as revised from time to time, which the Company believes is a supplemental measure of its operating performance and debt service capacity; and
·  adjusted working capital (accounts receivable plus inventory less accounts payable and accruals) as a percentage of sales, which is an indicator of the Company’s production efficiency and ability to manage its inventory and receivables.

Consolidated net sales for the third quarter of fiscal year 2011 were $178.2 million, an increase of $23.5 million, or 15.2%, as compared to the same quarter in the prior year. This improvement was a result of improved volumes and higher selling prices related to higher raw material costs.  Sales volumes increased 5% in the third quarter of fiscal year 2011 as compared to the third quarter of fiscal year 2010, primarily driven by gains in the Company’s domestic business as well as improvements derived from the Company’s Chinese and Central American operations.  PVA net sales increased by 41% in the current quarter over the prior year third quarter.  These improvements in PVA sales dollars and volumes are a leading factor in the Company’s overall improved sales results. Other factors include volume growth in the Company’s China and Central America operations and price improvements in its Brazilian operations.

Consolidated gross profit decreased $1.3 million to $15.2 million for the third quarter of fiscal year 2011 as compared to the prior year third quarter.  This decrease in gross profit was primarily attributable to increased raw material prices and manufacturing costs. During the Company’s fiscal December 2010 and March 2011 quarters, raw material prices increased 19% and 25%, respectively.  Consolidated variable manufacturing costs increased by $2.6 million and consolidated fixed manufacturing costs increased by $1.4 million.  Offsetting this increase is an improvement in conversion (net sales less raw material cost) of $2.7 million for the March 2011 fiscal quarter when compared to the March 2010 fiscal quarter.

The Company’s adjusted EBITDA for the quarter-to-date period of fiscal year 2011 was $12.3 million, which is a decline of $0.4 million from the prior year quarter.  Adjusted EBITDA for the year-to-date period of fiscal year 2011 was $46.4 million, which is an improvement of $5.3 million over the same period of fiscal year 2010, as described in more detail below.  The increase in year-to-date adjusted EBITDA over the prior year period is due in part to improved sales volumes, a higher proportion of PVA sales, and increased selling prices, which allowed the Company to regain conversion margin lost as a result of rising raw material prices during the latter half of fiscal year 2010 and cover raw material price increases experienced in the second quarter of fiscal year 2011. The Company’s positive results were due to a combination of continuous efforts to improve its manufacturing processes and expand its market share.

Adjusted EBITDA

Adjusted EBITDA is a financial measurement that management uses to facilitate its analysis and understanding of the Company’s business operations. Management believes it is useful to investors because it provides a supplemental way to understand the underlying operating performance of the Company.  The calculation of adjusted EBITDA is a subjective measure based on management’s belief as to which items should be included or excluded, in order to provide the most reasonable view of the underlying operating performance of the business.  Adjusted EBITDA is not considered to be in accordance with GAAP and should not be considered a substitute for performance measures calculated in accordance with GAAP.
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The following table presents the Company’s calculation of adjusted EBITDA beginning with Net (loss) income:

  For the Quarters Ended  For the Nine-Months Ended 
  March 27, 2011  March 28, 2010  March 27, 2011  March 28, 2010 
  (Amounts in thousands) 
Net (loss) income $(4,045) $771  $11,575  $5,213 
Interest expense, net  4,432   4,922   13,352   14,057 
Provision (benefit) for income taxes  (166)  1,937   4,205   5,596 
Depreciation and amortization expense  6,599   6,485   19,564   19,829 
Equity in losses (earnings) of unconsolidated affiliates  2,103   (2,175)  (11,887)  (5,847)
Non-cash compensation expense, net of distributions  392   683   1,095   2,299 
Loss on sales or disposals of PP&E  189   1,010   242   953 
Currency and derivative (gains) losses  (14)  61   296   (59)
Write down of long-lived assets  —   —   —   100 
Loss (gain) on extinguishment of debt and other non-operating expense  2,271   —   3,865   (54)
Restructuring charges  9   254   1,555   254 
Gain from sale of nitrogen credits  —   (1,400)  —   (1,400)
Startup costs (a)
  502   167   2,540   167 
Adjusted EBITDA $12,272  $12,715  $46,402  $41,108 

(a)  Initial UCA operating expenses incurred during fiscal year 2011 related to pre-operating expenses including the hiring and training of new employees and the costs of operating personnel to initiate the new operations. Start-up expenses also include losses incurred in the period subsequent to when UCA assets became available for use but prior to the achievement of a reasonable level of production.  In addition, beginning in the third quarter of fiscal year 2011, the Company also incurred pre-operating expenses related to its new recycling center located in Yadkinville, North Carolina.  The Company expects the recycling center to be fully operational by June 2011.

Joint Ventures and Other Equity Investments

The following table represents the Company’s investments in unconsolidated affiliates:
Affiliate Name
Date
Acquired
Locations
Percent
Ownership
Parkdale America, LLC (“PAL”)Jun-97North Carolina, South Carolina, Virginia, and Georgia34%
U.N.F. Industries, LLC (“UNF”)Sep-00Migdal Ha – Emek, Israel50%
UNF America, LLC (“UNF America”)Oct-09Ridgeway, Virginia50%
Repreve Renewables, LLC (“Repreve Renewables”)Apr-10Soperton, Georgia40%

Summarized balance sheet information as of March 27, 2011 and March 28, 2010 and summarized income statement information for the quarter and year-to-date periods ended March 27, 2011 and March 28, 2010 of the combined unconsolidated equity affiliates are as follows (amounts in thousands):

  March 27, 2011 
  (Unaudited) 
  PAL  Other  Total 
          
Current assets $326,872  $15,660  $342,532 
Non-current assets  159,288   9,687   168,975 
Current liabilities  87,806   4,872   92,678 
Non-current liabilities  106,139   ―   106,139 
Shareholders’ equity and capital accounts  292,215   20,475   312,690 
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  June 27, 2010 
  (Unaudited) 
  PAL  Other  Total 
          
Current assets $198,958  $12,262  $211,220 
Non-current assets  120,380   6,701   127,081 
Current liabilities  48,220   5,238   53,458 
Non-current liabilities  25,621   2,000   27,621 
Shareholders’ equity and capital accounts  245,497   11,725   257,222 

  For the Quarter Ended March 27, 2011 
  (Unaudited) 
  PAL  Other  Total 
          
Net sales $303,964  $9,579  $313,543 
Gross profit  9,304   1,585   10,889 
EAP revenues  7,290   ―   7,290 
Depreciation and amortization  8,257   343   8,600 
Income from operations  5,963   828   6,791 
Net (loss) income  (3,743)  675   (3,068)

  For the Quarter Ended March 28, 2010 
  (Unaudited) 
  PAL  Other  Total 
          
Net sales $189,021  $5,525  $194,546 
Gross profit  14,729   823   15,552 
EAP revenues  3,408   ―   3,408 
Depreciation and amortization  5,154   342   5,496 
Income from operations  10,728   263   10,991 
Net income  10,587   393   10,980 

  For the Nine-Months Ended March 27, 2011 
  (Unaudited) 
  PAL  Other  Total 
          
Net sales $726,122  $31,730  $757,852 
Gross profit  53,267   5,600   58,867 
EAP revenues  34,977   ―   34,977 
Depreciation and amortization  23,090   1,026   24,116 
Income from operations  43,216   3,312   46,528 
Net income  34,660   2,541   37,201 

  For the Nine-Months Ended March 28, 2010 
  (Unaudited) 
  PAL  Other  Total 
          
Net sales $396,718  $15,040  $411,758 
Gross profit  33,094   2,195   35,289 
EAP revenues  5,788   ―   5,788 
Depreciation and amortization  15,895   1,257   17,152 
Income from operations  20,410   919   21,329 
Net income  21,382   1,029   22,411 
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PAL.  PAL receives benefits under the Food, Conservation, and Energy Act of 2008 (“2008 U.S. Farm Bill”) which extended the existing upland cotton and extra long staple cotton programs (the “Program”), including economic adjustment assistance provisions for ten years.  Beginning August 1, 2008, the Program provided textile mills a subsidy of four cents per pound on eligible upland cotton consumed during the first four years and three cents per pound for the last six years.  The economic assistance received under this Program must be used to acquire, construct, install, modernize, develop, convert or expand land, plant, buildings, equipment, or machinery.  Capital expenditures must be directly attributable to the purpose of manufacturing upland cotton into eligible cotton products in the U.S.  The recipients have the marketing year from August 1 to July 31, plus eighteen months to make the capital expenditures.  Under the Program, the subsidy payment is received from the U.S. Department of Agriculture (“USDA”) the month after the eligible cotton is consumed.  However, the economic assistance benefit is not recognized by PAL into operating income until the period when both criteria10-K.  There have been met; i.e. eligible upland cotton has been consumed, and qualifying capital expenditures under the Program have been made.

During the Company’s third quarter and year-to-date periods of fiscal year 2011, PAL received $7.3 million and $21.6 million of economic assistance, respectively, and recognized $7.3 million and $35.0 million of economic assistance, respectively, in its operating income in accordance with the provisions of the Program.  As a result of the timing of qualified capital expenditures, PAL’s deferred revenue relatingno material changes to the Program decreased from $13.4 million as of June 27, 2010 to nil as of March 27, 2011.

The Company recorded a loss of $2.4 million from PAL for the quarter ended March 27, 2011 as compared to income of $2.0 million in the same prior year quarter.  The Company has been informed that PAL’s loss in the current quarter was primarily driven by the timing of a price index stipulated in a long-term supply contract with a large customer and the accounting for PAL’s cotton hedging activity.

The Company included in the line item equity in losses (earnings) of unconsolidated affiliates in the Condensed Consolidated Statements of Operations $1.2 million of additional losses for PAL related to PAL’s January 1, 2011 year end.   The Company evaluated the effect of this adjustment on its current and prior quarter and determined the adjustment to be immaterial to both its balance sheets and statements of operations.  Certain prior period amounts in the table above have been changed to reflect PAL’s final reported financial results.

On October 28, 2009, PAL acquired certain real property and machinery and equipment, as well as entered into lease agreements for real property and machinery and equipment, that constitute most of the yarn manufacturing operations of Hanesbrands, Inc. (“HBI”). Concurrent with that transaction, PAL entered into a yarn supply agreement with HBI to supply at least 95% of the yarn used in the manufacturing of HBI’s apparel products at any of HBI’s locations in North America, Central America, or the Caribbean Basin for a six-year period with an option for HBI to extend for two additional three-year periods. The yarn supply agreement also covers PAL’s supply of certain yarns used in HBI’s manufacturing in China through December 31, 2011.  As a result of the HBI acquisition and the timing of significantly higher capital expenditures during calendar year 2010, PAL utilized borrowings under its revolver to fund its operations.  On its April 2, 2011 balance sheet, PAL included in its current assets and non-current liabilities $23.9 million in cash and $95.0 million of debt on its revolver, respectively.

The Company’s investment in PAL at March 27, 2011 was $81.3 million and the underlying equity in the net assets of PAL at March 27, 2011 was $99.4 million.  The difference between the carrying value of the Company’s investment in PAL and the underlying equity in PAL is attributable to initial excess capital contributions by the Company of $53.4 million, the Company’s share of the settlement cost of an anti-trust lawsuit against PAL in which the Company did not participate of $2.6 million offset by an impairment charge taken by the Company on its investment in PAL of $74.1 million.  For the quarter and year-to-date periods ended March 27, 2011, the Company received $0.4 million and $2.9 million in dividends, respectively.

UNF.  On September 27, 2000, the Company formed a 50/50 joint venture, UNF, with Nilit Ltd. (“Nilit”), to produce nylon partially oriented yarn (“POY”) at Nilit’s manufacturing facility in Migdal Ha-Emek, Israel.  The Company’s investment in UNF at March 27, 2011 was $2.9 million.  For the quarter and year-to-date periods ended March 27, 2011, the Company received $0.9 million in dividends from UNF.

UNF America.  On October 8, 2009, the Company formed a 50/50 joint venture, UNF America, with Nilit for the purpose of producing nylon POY in Nilit’s Ridgeway, Virginia plant. The Company’s initial investment in UNF America was $50 thousand dollars. In addition, the Company loaned UNF America $0.5 million for working capital.  The loan carried interest at LIBOR plus one and one-half percent and both principal and interest would be paid from the future profits of UNF America at such time as deemed appropriate by its members.  The loan was treated as an additional investment by the Company for accounting purposes.  As of March 27, 2011, UNF America had repaid all of the working capital loan plus interest back to the Company.  The Company’s investment in UNF America at March 27, 2011 was $1.1 million.  For the quarter and year-to-date periods ended March 27, 2011, the Company received $0.5 million in dividends from UNF America.
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In conjunction with the formation of UNF America, the Company entered into a supply agreement with UNF and UNF America whereby the Company is committed to purchase its requirements, subject to certain exceptions, of first quality nylon POY for texturing (excluding specialty yarns) from UNF or UNF America.  Pricing under the contract is negotiated every six months and is based on market rates.

Repreve Renewables.  On April 26, 2010, the Company entered into an agreement to form Repreve Renewables, a joint venture in which the Company owns a 40% interest.  This joint venture was established for the purpose of acquiring the assets and the expertise related to the business of cultivating, growing, and selling biomass crops, including feedstock for establishing biomass crops that are intended to be used as a fuel or in the production of fuels or energy in the U.S. and the European Union.  The Company received its ownership interest in the joint venture for an initial contribution of $4.0 million.  As of March 27, 2011, the Company has contributed an additional $0.9 million for its share of working capital and recorded $0.3 million for the Company’s share of accumulated net losses, resulting in an investment balance of $4.6 million.
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Review of Third Quarter Fiscal Year 2011 compared to Third Quarter Fiscal Year 2010

The following table sets forth the net income components for each of the Company’s business segments for the fiscal quarters ended March 27, 2011 and March 28, 2010.  The table also sets forth each of the segments’ net sales as a percent to total net sales, the net income components as a percent to total net sales and the percentage increase or decrease of such components over the comparable prior year period (amounts in thousands, except percentages):
  For the Quarters Ended   
  March 27, 2011 March 28, 2010   
              
     % to Total    % to Total % Change 
Net sales             
Polyester $137,914 77.4 $112,604 72.8 22.5 
Nylon  40,250 22.6  42,083 27.2 (4.4) 
Total $178,164 100.0 $154,687 100.0 15.2 
              
     
% to
 Net Sales
    
% to
 Net Sales
   
Cost of sales             
Polyester $126,383 70.9 $100,744 65.1 25.4 
Nylon  36,634 20.6  37,433 24.2 (2.1) 
Total  163,017 91.5  138,177 89.3 18.0 
              
Restructuring charges             
Polyester  9 ―  254 0.1 (96.5) 
Nylon  ― ―  ― ― ― 
Total  9 ―  254 0.1 (96.5) 
              
Selling, general and administrative expenses             
Polyester  8,384 4.7  8,885 5.8 (5.6) 
Nylon  1,960 1.1  2,367 1.5 (17.2) 
Total  10,344 5.8  11,252 7.3 (8.1) 
              
Provision (benefit) for bad debts  41 ―  (105) (0.1) (139.0) 
Other operating expense (income), net  158 0.1  (346) (0.2) (145.7) 
Non-operating (income) expense, net  8,806 5.0  2,747 1.8 220.6 
(Loss) income from operations before income taxes  (4,211) (2.4)  2,708 1.8 (255.5) 
Provision (benefit) for income taxes  (166) (0.1)  1,937 1.3 (108.6) 
Net (loss) income $(4,045) (2.3) $771 0.5 (624.6) 


Consolidated net sales from operations increased $23.5 million, or 15.2% for the third quarter of fiscal year 2011 compared to the prior year third quarter.  Consolidated unit sales volumes increased by 5.0% for the third quarter of fiscal year 2011 reflecting improvements in most of the Company’s operations as demand for retail apparel and home furnishings continue to improve.   The weighted-average selling price increased by 10.1% compared to the same quarter of the prior fiscal year as improved market conditions allowed for the recovery of increased raw material costs experienced in the second quarter of fiscal year 2011.  Net sales of the Company’s PVA products increased by 41% in the current quarter over the prior year third quarter, with the average selling price per pound increasing by 3.0% primarily driven by a change in sales mix.  PVA sales volumes improved by 36% when comparing the same periods. These improvements in PVA sales dollars and volumes are a leading factor in the Company’s overall improved sales results.
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Domestic net sales increased $8.9 million or 7.6% primarily due to improvements in demand in the retail markets.  Correspondingly, domestic volumes improved 2.9%.  Retail sales of apparel increased 4.3% compared to the prior year third quarter.  Retail sales of home furnishings increased 0.8%.

Net sales for the Company’s Brazilian subsidiary, Unifi do Brasil, Ltda. (“UDB”), on a U.S. dollar basis increased by $4.4 million or 14.2% in the March 2011 quarter compared to the March 2010 quarter, which includes an increase of $2.6 million in positive currency exchange impact.  On a local currency basis, the Brazilian real, net sales improved R$3.1 million or 5.6% in the March 2011 quarter which was primarily driven by an increase in sales prices intended to cover higher raw material prices.  However, UDB sales volumes were negatively impacted in the current quarter as a result of increased competition from imported yarns due to the strengthening of the Brazilian real against the U.S. dollar and, as a result, volumes decreased by 13.2% for the current quarter compared to the same prior year quarter.
The Company’s Chinese subsidiary, Unifi Textiles Suzhou Co., Ltd. (“UTSC”), had net sales of $7.0 million in the current quarter as compared to $4.0 million in the prior year third quarter, an improvement of 75.0%.  This is primarily a result of the Company improving its sales and promotion of PVA products in the Asian region. UTSC volumes increased 34.0% over the prior year third quarter.

 The Company’s subsidiary in El Salvador, UCA, increased its net sales to $8.2 million in the third quarter of fiscal year 2011 as compared to $1.7 million in the prior year third quarter as the Company completed the start-up of its manufacturing facility and strategically improved its sales opportunities in the Central American region.

The Company’s Colombian subsidiary, Unifi Latin America, S.A. (“ULA”), had an increase in net sales of $0.7 million while sales volumes increased by 28.3% for the March 2011 quarter compared to the same quarter of the prior year.

Consolidated gross profit decreased $1.3 million to $15.2 million for the third quarter of fiscal year 2011 as compared to the prior year third quarter.  This decrease in gross profit was primarily attributable to an increase in consolidated manufacturing costs of $4.0 million offset partially by an improvement in conversion dollars (net sales less raw material cost) of $2.7 million. The increase in conversion was primarily related to the Company’s foreign operations.  On a local currency basis, UDB’s conversion increased 23.0% on a per unit basis due to an increase in sales pricing to cover raw material price increases while still selling lower priced inventorythese policies during the current quarter.  Sales prices increased by 21.6% which was offset by increases in per unit raw material costs of 20.8%.  On a U.S. dollar basis, UDB’s conversion increased 33.1% on a per unit basis increasing $1.8 million overall primarily due to improved sales mix.  The remaining net increase in conversion is related to UCA’s, UTSC’s, and ULA’s contributions of $1.5 million, $0.4 million, and $0.3 million, respectively, to the Company’s consolidated conversion. Domestic conversion decreased by $1.4 million primarily as a result of higher priced raw materials that the Company experienced in the March 2011 quarter and were unable to pass along to its customers.  Offsetting the improvements in conversion, consolidated manufacturing costs increased $4.0 million, or 2.4% on a per unit basis, for the March 2011 quarter over the March 2010 quarter.  Consolidated variable manufacturing costs increased by $2.6 million or 1.6% on a per unit basis due primarily to packaging costs, wages and fringe benefits, utility costs, warehousing, and other variable expenses offset by an increase in the amount of variable expenses capitalized to inventory. Consolidated fixed manufacturing costs increased $1.4 million, or 4.3% on a per unit basis, primarily as a result of depreciation expenses, other manufacturing costs, salaries and fringe benefits, and a decrease in the amount of fixed expenses capitalized to inventory.

Selling, General, and Administrative Expenses

Consolidated selling, general, and administrative (“SG&A”) expense decreased $0.9 million during the third quarter of fiscal year 2011 as compared to the prior year third quarter.  The decrease was primarily a result of decreases of $0.8 million in salary and other fringe benefit expenses, $0.3 million in depreciation and amortization expenses, and $0.3 million in non-cash deferred compensation costs offset by increases in sales and marketing of $0.2 million, professional fees of $0.2 million, and other expenses of $0.1 million.
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Other Operating Expense (Income), Net

The following table shows the components of other operating expense (income), net (amounts in thousands):

  For the Quarters Ended 
  
March 27,
 2011
  
March 28,
 2010
 
       
Loss on sale or disposal of PP&E $189  $1,010 
Currency (gains) losses  (13)  61 
Gain from sale of nitrogen credits  ―   (1,400)
Other, net  (18)  (17)
Other operating expense (income), net $158  $(346)

Non-operating (Income) Expense, net

Net non-operating expenses were $8.8 million in the current quarter as compared to net non-operating expenses of $2.7 million in the prior year third quarter primarily due to decreased earnings from the Company’s equity affiliates of $4.3 million and  losses on extinguishments of debt of $2.2 million.  In addition, the Company incurred $0.1 million of costs related to its decision to abandon the refinancing of its 2014 notes.  See “Recent Developments and Outlook” and “Joint Ventures and Other Equity Investments” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion.

Income from Operations Before Income Taxes

As reflected in the tables and discussions above, the Company recognized $4.2 million of loss from operations before income taxes compared to income of $2.7 million in the prior year third quarter.  The decrease in income from operations was primarily attributable to decreased gross profit in the domestic operations as a result of increased raw material costs and a decrease in nylon volumes, a decrease in earnings from the Company’s unconsolidated affiliates, and losses on extinguishments of debt.  However, the Company experienced improvements in polyester volumes as a result of increased retail demand in the Company’s core markets and a decrease in consolidated SG&A expenses.

Income Taxes

The Company’s income tax provision for the quarter ended March 27, 2011 resulted in tax benefit at an effective rate of 4.0% compared to the quarter ended March 28, 2010, which resulted in tax expense at an effective rate of 71.5%.  The difference between the Company’s income tax benefit and the U.S. statutory rate for the quarter ended March 27, 2011 was primarily due to the losses from one of its equity affiliates, increases in uncertain tax positions, and foreign operations taxed at rates lower than the U.S., which was partially offset by foreign dividends taxed in the U.S.  The differences between the Company’s income tax expense and the U.S. statutory rate for the quarter ended March 28, 2010 was primarily due to losses in the U.S. and other jurisdictions for which no tax benefit could be recognized, while operating profit was generated in other taxable jurisdictions.

During the quarter ended March 27, 2011, the Company changed its indefinite reinvestment assertion related to a portion of the earnings and profits held by UDB.  The Company plans to eventually repatriate approximately $16 million of earnings and profits currently held by UDB.  Therefore the Company has established a deferred tax liability, net of estimated foreign tax credit, of approximately $2.3 million related to the additional income tax that would be due as a result of the current plan to repatriate in future periods.

During the quarter ended March 27, 2011, the Company identified additional uncertain tax positions of $0.4 million and also accrued interest and penalties related to uncertain tax positions of $0.3 million.  The Company did not accrue any interest or penalties related to uncertain tax positions during the quarter ended March 28, 2010.

Deferred income taxes have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities.  In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the periods in which those temporary differences reverse. Management considers the scheduled reversal of taxable temporary differences, taxable income in carryback periods, projected future taxable income and tax planning strategies in making this assessment.  The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries due to negative evidence concerning the realization of those deferred tax assets in recent years.  As results of operations improve, the Company continues to evaluate both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released.  A release of the valuation allowance could have a material effect on earnings in the period of release.
37
The Company is subject to income tax examinations for U.S. federal income taxes for fiscal years 2004 through 2010, for non-U.S. income taxes for tax years 2001 through 2010, and for state and local income taxes for fiscal years 2001 through 2010.

Polyester Operations

Consolidated polyester unit volumes increased by 7.7% for the quarter ended March 27, 2011, while weighted-average net selling prices increased by 14.8% as compared to the quarter ended March 28, 2010 primarily due to improvements in core markets, retail apparel and retail home furnishings.  Net sales for the polyester segment for the third quarter of fiscal year 2011 increased by $25.3 million or 22.5% as compared to the same quarter in the prior year. Net sales and sales volumes of the Company’s polyester PVA products increased by 49% and 41%, respectively in the current quarter over the prior year third quarter.  The improvements in polyester PVA sales dollars and volumes are a leading factor in the Company’s overall improved polyester sales results.

Domestically, polyester net sales increased by $12.0 million, or 15.7%, for the third quarter of fiscal year 2011 as compared to the third quarter of fiscal year 2010.  The Company increased its sales prices across all polyester products, increasing the weighted-average selling price by 9.3%.  Domestic unit volumes increased by 6.4% as a result of the increase in consumer demand.

On a U.S. dollar basis, net sales for UDB increased by $4.4 million or 14.2% in the March 2011 quarter compared to the prior year third quarter which includes an increase of $2.6 million in positive currency exchange impact.  On a local currency basis, net sales increased by R$3.1 million or 5.6%. Brazilian polyester sales volumes decreased by 13.2% for the third quarter of fiscal year 2011 versus the third quarter of the prior fiscal year.  Average net sales price on a local currency basis increased 21.6% as a result of increased raw material costs.

The Company’s Chinese subsidiary, UTSC, had an increase in its polyester net sales to $6.5 million in the third quarter of fiscal year 2011 as compared to $4.0 million in the prior year third quarter as the Company improved its sales and promotion of PVA products in the Asian region.

The Company’s subsidiary in El Salvador, UCA, had an increase in its polyester net sales to $7.5 million in the third quarter of fiscal year 2011 as compared to $1.1 million in the prior year third quarter as the Company completed the start-up of its manufacturing facility and strategically improved its sales opportunities in the Central American region.

Gross profit for the consolidated polyester segment decreased $0.3 million, or 2.8%, for the third quarter of fiscal year 2011 over the third quarter of fiscal year 2010.  On a per unit basis, gross profit decreased 9.7%.  During the third quarter of fiscal year 2011, conversion increased 1.7% on a per unit basis compared to the same quarter of the prior year.  This increase is primarily attributable to improvements in the Company’s Brazilian subsidiary. Consolidated per unit manufacturing costs increased 3.3%, which consisted of a 3.0% increase in per unit variable manufacturing costs and a 3.9% increase in per unit fixed manufacturing costs, as discussed further below.

Domestic gross profit decreased by $1.3 million, or 24.7%, for the third quarter of fiscal year 2011 over the third quarter of fiscal year 2010 primarily as a result of a decline in conversion dollars and an increase in converting costs.  Domestic polyester conversion dollars remained flat, however on a per unit basis conversion declined 5.9% due to increased raw material prices.  Domestic variable manufacturing costs increased by $0.8 million due primarily to packaging costs, wages and fringe benefits, other variable, and variable costs capitalized to inventory offset by decreased utilities and warehousing.  However, variable manufacturing costs decreased 1.6% on a per unit basis as a result of improved volumes and operational efficiencies.  Domestic fixed manufacturing costs increased $0.5 million, or 4.0% on a per unit basis, primarily as a result of increase in depreciation expenses, other fixed costs, and a decrease in the amount of fixed expenses capitalized to inventory offset by a decrease in salaries and fringes and allocated manufacturing costs.
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On a local currency basis (the Brazilian real), gross profit for UDB increased by R$0.5 million, or 20.4% on a per unit basis, for the March 2011 quarter as compared to the prior year third quarter.  On a local currency basis, UDB’s conversion increased 23.0% on a per unit basis due to an increase in sales pricing to cover raw material price increases while still selling lower priced inventory during the current quarter.  Sales prices on a per unit basis increased by 21.6% which was offset by increases in per unit raw material costs of 20.8%.  Brazilian volumes were negatively impacted in the current quarter as a result of increased competition from imported yarns due to the strengthening of the Brazilian real against the U.S. dollar. Variable manufacturing costs increased by R$0.7 million and fixed manufacturing costs increased by R$0.2 million.  On a U.S. dollar basis, gross profit increased by $0.8 million, or 30.4% on a per unit basis which includes a $0.5 million positive currency exchange impact.

Consolidated polyester SG&A expenses for the third quarter of fiscal year 2011 were $8.4 million compared to $8.9 million in the same quarter in the prior year.  The polyester segment’s SG&A expenses consist of polyester foreign subsidiaries’ costs and allocated domestic costs.  The percentage of domestic SG&A costs allocated to each segment is determined at the beginning of every fiscal year using specific budgeted cost drivers.  See the “Selling, General, and Administrative Expenses” discussion above for further details regarding the Company’s SG&A expenses.

Nylon Operations

Consolidated nylon unit volumes decreased by 12.4% in the third quarter of fiscal year 2011 compared to the prior year quarter while average net selling prices increased by 8.0%.  Net sales for the nylon segment in the third quarter of fiscal year 2011 decreased by $1.8 million, or 4.4%, as compared to the third quarter of fiscal year 2010.  The decrease in nylon net sales and sales volumes were primarily driven by a reduction of consumer demand for shape wear and hosiery and inventory reduction initiatives by two of the Company’s large nylon customers.

Gross profit for the nylon segment decreased by $1.0 million, or 22.2%, in the third quarter of fiscal year 2011 compared to the prior year quarter.  Conversion margin for the nylon segment decreased by $1.0 million.  On a per unit basis, conversion increased by 6.8%.  Total manufacturing costs remained flat.

The Company’s subsidiary in El Salvador, UCA, had an increase in its nylon net sales to $0.7 million in the third quarter of fiscal year 2011 as compared to $0.6 million in the prior year third quarter.

The Company’s Colombian subsidiary, ULA, had an increase in net sales of $0.7 million while sales volumes increased 28.3% for the March 2011 quarter compared to the same quarter of the prior year.

Consolidated nylon SG&A expenses for the third quarter of fiscal year 2011 were $2.0 million compared to $2.4 million in the same quarter in the prior year.  The nylon segment’s SG&A expenses consist of nylon foreign subsidiary costs and allocated domestic costs.  The percentage of domestic SG&A costs allocated to each segment is determined at the beginning of every fiscal year using specific budgeted cost drivers.  See the “Selling, General, and Administrative Expenses” discussion above for further details regarding the Company’s SG&A expenses.

Corporate

On January 11, 2011, the Company announced the termination of its cash tender offer for any and all of the Company’s 2014 notes due to the condition of the debt capital markets which made the estimated cost savings generated from a new debt financing insufficient to offset the estimated costs of conducting such a transaction.  As a result of this transaction, the Company recorded $78 thousand in professional fees related to the unsuccessful debt financing.

On February 16, 2011, the Company redeemed an aggregate principal amount of $30 million of the 2014 notes at a redemption price of 105.75% of the principal amount of the redeemed 2014 notes in accordance with the indenture.  As a result, the Company recorded a $2.2 million charge for the early extinguishment of debt in the March 2011 quarter of which $1.7 million related to the premium paid to redeem the bonds and $0.5 million related to the write off of related bond issuance costs.
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Review of Year-To-Date Fiscal Year 2011 compared to Year-To-Date Fiscal Year 2010

The following table sets forth the net income components for each of the Company’s business segments for the year-to-date periods ended March 27, 2011 and March 28, 2010.  The table also sets forth each of the segments’ net sales as a percent to total net sales, the net income components as a percent to total net sales and the percentage increase or decrease of such components over the comparable prior year period (amounts in thousands, except percentages):
  For the Nine-Months Ended   
  March 27, 2011 March 28, 2010   
              
     % to Total    % to Total % Change 
Net sales             
Polyester $391,991 76.4 $321,340 73.1 22.0 
Nylon  120,995 23.6  118,453 26.9 2.1 
Total $512,986 100.0 $439,793 100.0 16.6 
              
     
% to
 Net Sales
    
% to
 Net Sales
   
Cost of sales             
Polyester $350,946 68.4 $283,186 64.4 23.9 
Nylon  106,649 20.8  103,355 23.5 3.2 
Total  457,595 89.2  386,541 87.9 18.4 
              
Restructuring charges             
Polyester  1,555 0.3  254 ― 512.2 
Nylon  ― ―  ― ― ― 
Total  1,555 0.3  254 ― 512.2 
              
Write down of long-lived assets             
Polyester  ― ―  100 ― ― 
Nylon  ― ―  ― ― ― 
Total  ― ―  100 ― ― 
              
Selling, general and administrative expenses             
Polyester  26,117 5.1  27,291 6.2 (4.3) 
Nylon  6,106 1.2  7,277 1.7 (16.1) 
Total  32,223 6.3  34,568 7.9 (6.8) 
              
Provision (benefit) for bad debts  86 0.0  (93) ― (192.5) 
Other operating expense (income), net  417 0.1  (542) (0.1) (176.9) 
Non-operating expense (income), net  5,330 1.0  8,156 1.8 (34.6) 
Income from operations before income taxes  15,780 3.1  10,809 2.5 46.0 
Provision for income taxes  4,205 0.8  5,596 1.3 (24.9) 
Net income $11,575 2.3 $5,213 1.2 122.0 
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Consolidated net sales from operations increased $73.2 million, or 16.6%, for the year-to-date period of fiscal year 2011 compared to the prior year-to-date period.  Consolidated unit sales volumes increased by 9.8% for the year-to-date period of fiscal year 2011 reflecting improvements in all operations as demand for retail apparel and other segments improved.  The weighted-average selling price increased by 6.8% compared to the same period of the prior fiscal year as improved market conditions allowed for some recovery of increased raw material costs.  Net sales of the Company’s PVA products increased by 41% in the current year-to-date period over the prior year-to-date period, although the average selling price per pound remained flat due to sales mix.  PVA sales volumes improved 41% when comparing the same periods. These improvements in PVA sales dollars and volumes are a leading factor in the Company’s overall improved sales results.

On a year-over-year basis, domestic net sales increased $33.4 million, or 10.2%, from improvements in demand in the retail markets.  Correspondingly, domestic volumes improved 6.8%.  Retail sales of apparel increased 4.4% compared to the prior year-to-date period.  Retail sales of home furnishings increased 1.8% over the prior year year-to-date period.

Net sales for UDB on a U.S. dollar basis increased by $10.9 million, or 11.4%, for the March 2011 year-to-date period compared to the March 2010 year-to-date period, which includes an increase of $5.6 million in positive currency exchange impact.  On a local currency basis, net sales improved R$9.0 million or 5.2% primarily driven by increases in sales prices intended to cover increases in raw material prices.  UDB sales volumes were negatively impacted as a result of increased competition from imported yarns due to the strengthening of the Brazilian real against the U.S. dollar and as a result decreased by 7.6% for the current year-to-date period compared to the same prior year period.Recent Accounting Pronouncements

The Company’s Chinese subsidiary, UTSC, had net sales of $20.6 million in the March 2011 year-to-date period as compared to $10.4 million in the same prior year-to-date period, an improvement of 98.1%.  This is a result of the Company improving its sales and promotion of PVA products in the Asian region. UTSC volumes increased 61.3% over the same prior year-to-date period.

The Company’s subsidiary in El Salvador, UCA, had an increase in its net sales to $20.6 million for the March 2011 year-to-date period as compared to $2.5 million in the same prior year-to-date period as the Company completed the start-up of its manufacturing facility and strategically improved its sales opportunities in the Central American region.

The Company’s Colombian subsidiary, ULA, had an increase in net sales of $0.6 million while sales volumes remained flat for the March 2011 year-to-date period compared to the same prior year-to-date period.

Consolidated gross profit increased $2.1 million to $55.4 million for the year-to-date period of fiscal year 2011 as compared to the prior year-to-date period.  This increase in gross profit was primarily attributable to improved conversion of $14.8 million of which $8.7 million is related to the Company’s domestic operations.  This increase was a result of improved sales volumes, mix, and pricing, which allowed the Company to recover previously lost margins due to higher raw material costs experienced in prior quarters. On a local currency basis, UDB’s conversion increased 2.9% on a per unit basis as a result of improved margins on its manufactured products compared to the same prior period. On a U.S. dollar basis, UDB’s conversion increased 9.1% on a per unit basis or $0.3 million overall primarily due as a result of sales price increases related to increased POY prices. The remaining net increase in conversion is related to the Company’s other foreign subsidiaries.  Offsetting the improvements in conversion, consolidated manufacturing costs increased $12.7 million, or 1% on a per unit basis, for the March 2011 year-to-date period over the March 2010 year-to-date period.  Consolidated variable manufacturing costs increased by $7.9 million primarily due to packaging costs, wages and fringe benefits, utility costs, warehousing, transportation and other variable offset by increases in variable expenses capitalized to inventory.  Consolidated fixed manufacturing costs increased $4.8 million primarily as a result of an increase in depreciation expenses, other fixed manufacturing costs, allocated manufacturing costs, and salaries and fringe benefits offset by higher fixed costs capitalized to inventory.

Selling, General, and Administrative Expenses

Consolidated SG&A expense decreased $2.3 million during the year-to-date period of fiscal year 2011 as compared to the prior year-to-date period.  The decrease was primarily a result of decreases of $1.1 million in salaries and fringes benefit expenses, $1.2 million in non-cash deferred compensation costs, $1.0 million in depreciation and amortization expenses, and $0.2 million in sales and marketing expenses offset by increases of $1.0 million in professional fees and $0.2 million in other expenses.

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Other Operating Expense (Income), Net

The following table shows the components of other operating expense (income), net (amounts in thousands):

  For the Nine-Months Ended 
  
March 27,
 2011
  
March 28,
 2010
 
       
Loss on sale or disposal of PP&E $242  $953 
Currency losses (gains)  297   (59)
Gain from sale of nitrogen credits  ―   (1,400)
Other, net  (122)  (36)
Other operating expense (income), net $417  $(542)

Non-operating (Income) Expense, net

Earnings from equity affiliates for the year-to-date period ended March 27, 2011 was $11.9 million, which was an improvement of $6.0 million over the same prior year period.  The majority of this improvement came from the Company’s 34% membership interest in PAL, which contributed $10.6 million to the Company’s current year-to-date earnings compared to $6.1 million for the same prior year period.  PAL’s improved performance is primarily a result of the timing of revenue recognition related to the EAP cotton rebate program.

As discussed under the caption “Recent Developments and Outlook” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the Company sought to refinance its 2014 notes.  Due to market conditions, the Company strategically abandoned the refinancing of its 2014 notes for a preferable, lower cost option to redeem a portion of its 2014 notes utilizing its revolving credit facility.  As a result, the Company incurred $0.5 million of costs related to its decision to change its refinancing strategy.

Income from Operations Before Income Taxes

As reflected in the tables and discussions above, the Company recognized $15.8 million of income from operations before income taxes, which was an increase of $5.0 million over the prior year-to-date period.  The increase in income from operations was primarily attributable to improved gross profit in the domestic operations and UTSC as a result of increased retail demand in the Company’s core markets, increased earnings from the Company’s unconsolidated affiliates, and a decrease in consolidated SG&A expenses offset by an increase in consolidated restructuring charges and a decline in income from operations before income taxes from its Brazilian operations.

Income Taxes

The Company’s income tax provision for the year-to-date period ended March 27, 2011 resulted in tax expense at an effective rate of 26.7% compared to the year-to-date period ended March 28, 2010, which resulted in tax expense at an effective rate of 51.8%.  The difference between the Company’s income tax expense and the U.S. statutory rate for the year-to-date period ended March 27, 2011 was primarily due to the utilization of prior losses for which no benefit had been recognized previously, increases in uncertain tax positions, and foreign operations taxed at rates lower than the U.S., which was partially offset by foreign dividends taxed in the U.S.  The differences between the Company’s income tax expense and the U.S. statutory rate for the year-to-date period ended March 28, 2010 was primarily due to losses in the U.S. and other jurisdictions for which not tax benefit could be recognized, while operating profit was generated in other taxable jurisdictions.

During the third quarter ended March 27, 2011 the Company changed its indefinite reinvestment assertion related to a portion of the earnings and profits held by UDB.  The Company plans to eventually repatriate approximately $16 million of earnings and profits currently held by UDB.  Therefore the Company has established a deferred tax liability, net of estimated foreign tax credit, of approximately $2.3 million related to the additional income tax that would be due as a result of the current plan to repatriate in future periods.
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During the year-to-date ended March 27, 2011, the Company identified additional uncertain tax positions of $0.4 million and also accrued interest and penalties related to uncertain tax positions of $0.3 million.  The Company did not accrue any interest or penalties related to uncertain tax positions during the quarter or year-to-date periods ended March 28, 2010.

    Deferred income taxesThere have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities.  In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portionno newly issued or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of taxable income during the periods in which those temporary differences reverse. Management considers the scheduled reversal of taxable temporary differences, taxable income in carryback periods, projected future taxable income and tax planning strategies in making this assessment.  The Company currently has a full valuation allowance against its net deferred tax assets in the U.S. and certain foreign subsidiaries due to negative evidence concerning the realization of those deferred tax assets in recent years.  As results of operations improve, the Company continues to evaluate both positive and negative evidence to determine whether and when the valuation allowance, or a portion thereof, should be released.  A release of the valuation allowance could have a material effect on earnings in the period of release.

The Company is subject to income tax examinations for U.S. federal income taxes for fiscal years 2004 through 2010, for non-U.S. income taxes for tax years 2001 through 2010, and for state and local income taxes for fiscal years 2001 through 2010.

Polyester Operations

Consolidated polyester unit volumes increased by 10.7% for the year-to-date period ended March 27, 2011, while weighted-average net selling price increased by 11.3% as compared to the year-to-date period ended March 28, 2010 primarily due to the recovery of core markets, retail apparel and retail home furnishings and increases in raw material costs.  Net sales for the polyester segment for the year-to-date period of fiscal year 2011 increased by $70.7 million or 22.0% as compared to the prior year-to-date period. Net sales and sales volumes of the Company’s polyester PVA products increased by 48% and 45%, respectively, in the year-to-date period over the prior year-to-date period.  These improvements in polyester PVA sales dollars and volumes are a leading factor in the Company’s overall improved polyester sales results.

Domestically, polyester net sales increased by $33.7 million, or 15.8% for the year-to-date period of fiscal year 2011 as compared to the year-to-date period of fiscal year 2010.  The Company increased its sales prices across all polyester products, increasing the weighted-average selling price by 7.9%.  Domestic unit volumes increased by 7.9% as a result of the increase in consumer demand in all segments, as discussed above.

Net sales for UDB increased by $10.9 million or 11.4% in the year-to-date period compared to the prior year-to-date period which includes an increase of $5.6 million in positive currency exchange impact.  On a local currency basis, UDB’s net sales increased by R$9.0 million or 5.2%. UDB’s polyester sales volume decreased by 7.6% for the year-to-date period of fiscal year 2011 versus the same period of the prior fiscal year.

The Company’s Chinese subsidiary, UTSC, had an increase in its polyester net sales to $19.5 million in the year-to-date period of fiscal year 2011 as compared to $10.3 million in the prior year-to-date period as the Company improved its sales and promotion of PVA products in the Asian region.

The Company’s subsidiary in El Salvador, UCA, had an increase in its polyester net sales to $18.3 million for the year-to-date period of fiscal year 2011 as compared to $1.4 million in the prior year-to-date period as the Company completed the start-up of its manufacturing facility and strategically improved its sales opportunities in the Central American region.

Gross profit for the consolidated polyester segment increased $2.9 million, or 7.6% for the current year-to-date period over the prior year-to-date same period.  On a per unit basis, gross profit decreased 2.8%. During the year-to-date period of fiscal year 2011, conversion increased 2.2% on a per unit basis compared to the same period of the prior year.  This increase is primarily attributable to improvements in the Company’s domestic conversion as a result of increases in PVA sales and increased selling prices which allowed the Company to recover previously lost margins due to higher raw material costs experienced in prior quarters.  Per unit manufacturing costs increased 3.8% which consisted of increased per unit variable manufacturing costs of 2.0% and increased per unit fixed manufacturing costs of 7.8% as discussed further below.
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Domestic polyester gross profit increased by $4.6 million, or 28.3%, for the year-to-date period of fiscal year 2011 over the prior year-to-date period primarily as a result of improvement in conversion dollars.  Domestic polyester conversion increased by $9.2 million or 3.6% on a per unit basis, due to a higher proportion of PVA sales and improved pricing as the Company regained conversion lost during the second half of fiscal year 2010.  Variable manufacturing costs increased by $2.5 million due primarily to packaging costs, wage and fringe benefits, other variable utilities offset by increases in variable expenses capitalized to inventory.  However variable manufacturing costs decreased 2.6% on a per unit basis as a result of improved volumes and operational efficiencies.  Fixed manufacturing costs increased $2.1 million or 8.4% on a per unit basis primarily as a result of an increase in depreciation costs, allocated manufacturing costs, and other fixed, offset by increases in fixed costs capitalized to inventory and decreases in salaries and fringe benefits.

On a local currency basis, gross profit for the Company’s Brazilian operations decreased by R$5.3 million, or 7.1% on a per pound basis for the current year-to-date period as compared to the prior year-to-date period.  UDB’s volumes and conversion margins were negatively impacted in the year-to-date period as a result of increased competition from imported yarns due to the strengthening of the Brazilian real against the U.S. dollar. Variable manufacturing costs increased by R$1.0 million while fixed manufacturing costs increased by R$1.2 million.  On a U.S. dollar basis, UDB’s gross profit decreased by $1.9 million or 1.5% on a per unit basis.

Consolidated polyester SG&A expenses for the year-to-date period of fiscal year 2011 were $26.1 million compared to $27.3 million in the same period in the prior year.  The polyester segment’s SG&A expenses consist of polyester foreign subsidiaries’ costs and allocated domestic costs.  The percentage of domestic SG&A costs allocated to each segment is determined at the beginning of every fiscal year using specific budgeted cost drivers. See the “Selling, General, and Administrative Expenses” discussion above for further details regarding the Company’s SG&A expenses.

Nylon Operations

Consolidated nylon unit volumes increased by 3.0% in the year-to-date period of fiscal year 2011 compared to the prior year-to-date period while average net selling prices decreased by 0.8%.  Net sales for the nylon segment in the year-to-date period of fiscal year 2011 increased by $2.5 million, or 2.1%, as compared to the prior year-to-date period.  The increase in nylon net sales and the decrease in average selling price were primarily driven by increased sales of lower priced textured products as a percentage of total net sales.

Gross profit for the nylon segment decreased by $0.8 million, or 5.0%, in the year-to-date period of fiscal year 2011 compared to the prior year-to-date period.  Conversion margin for the nylon segment decreased by $0.3 million and variable manufacturing costs increased by $0.5 million primarily due to increases in packaging cost, wage and fringe benefits, warehousing, transportation, and other variable costs offset by a decrease in utility costs and an increase in variable costs capitalized to inventory.  On a per unit basis, conversion decreased 3.4% offset by a decrease in manufacturing costs of 1.1% due to a lower priced product mix.  Fixed manufacturing costs remained flat as compared to the prior year.

The Company’s subsidiary in El Salvador, UCA, had an increase in its nylon net sales to $2.2 million for the March 2011 year-to-date period as compared to $1.0 million in the same prior year-to-date period.

The Company’s Colombian subsidiary, ULA, had an increase in nylon net sales of $0.6 million or 14.4% while sales volumes increased 6.0% for the March 2011 year-to-date period compared to the same prior year-to-date period.

Consolidated nylon SG&A expenses for the year-to-date period of fiscal year 2011 were $6.1 million compared to $7.3 million in the same period in the prior year.  The nylon segment’s SG&A expenses consist of nylon foreign subsidiary costs and allocated domestic costs.  The percentage of domestic SG&A costs allocated to each segment is determined at the beginning of every fiscal year using specific budgeted cost drivers.  See the “Selling, General, and Administrative Expenses” discussion above for further details regarding the Company’s SG&A expenses.
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Corporate

On January 11, 2011, the Company announced the termination of its cash tender offer for any and all of the Company’s 2014 notes due to the condition of the debt capital markets which made the estimated cost savings generated from a new debt financing insufficient to offset the estimated costs of conducting such a transaction.  For the year-to-date period March 2011, the Company has recorded $0.5 million in professional fees related to the unsuccessful debt financing.

On June 30, 2010, the Company redeemed $15.0 million of its 2014 notes at a redemption price of 105.75% of the principal amount of the redeemed 2014 notes.  This redemption was financed through a combination of internally generated cash and borrowings under the Company’s revolving credit facility.  As a result, the Company recorded a $1.1 million charge for the early extinguishment of debt in the September 2010 quarter of which $0.8 million related to the premium paid for the bonds and $0.3 million related to the retirement of related bond issue costs.

On February 16, 2011, the Company redeemed an additional aggregate principal amount of $30 million of the 2014 notes at a redemption price of 105.75% of the principal amount of the redeemed 2014 notes in accordance with the indenture.  As a result, the Company recorded a $2.2 million charge for the early extinguishment of debt in the March 2011 quarter of which $1.7 million related to the premium paid to redeem the bonds and $0.5 million related to the write off of related bond issuance costs.


Liquidity and Capital Resources

Liquidity Assessment

The Company’s primary capital requirements are for working capital, capital expenditures, debt repayment, and service of indebtedness.  Historically, the Company has met its working capital and capital maintenance requirements from its operations.  Asset acquisitions and joint venture investments have been financed by asset sales proceeds, cash reserves and borrowing under its financing agreements discussed below.

In addition to its normal operating cash and working capital requirements and service of its indebtedness, the Company will also require cash to reduce debt, fund capital expenditures, and enable cost reductions through restructuring projects as follows:

·  
Deleveraging Strategy.  During in the third quarter of fiscal year 2011, the Company executed its plan to utilize a combination of internally generated cash and limited borrowings on its revolving credit facility to repurchase and retire portions of its 2014 notes.  The Company expects to maintain a continuous balance outstanding under its revolving credit facility and hedge a substantial amount of the interest rate risk in order to ensure its interest savings.  As a result of the utilization of cash on hand to reduce outstanding debt and the lower rate under the revolving credit facility, the Company expects a significant reduction of its annual fixed carrying cost between the commencement of this debt reduction strategy and the final repayment of the 2014 notes.

·  
Capital Expenditures.  During the first nine months of fiscal year 2011, the Company spent $17.3 million on capital expenditures compared to $8.0 million during the same period in fiscal year 2010.  The Company estimates its fiscal year 2011 capital expenditures will be approximately $21.5 million, which includes approximately $17.0 million of strategic capital expenditures focused on modernizing and improving current productivity levels of its plants and equipment.  In February 2010, the Board approved a plan to expand its production capabilities to include a new state-of-the art recycled chip facility in Yadkinville, North Carolina.  This backward integration of the recycle supply chain will provide opportunities for the Company to recycle both post-consumer and post-industrial waste back into its Repreve® products. This will allow the Company to improve the availability of recycled raw materials, and significantly increase product capabilities and competitiveness in this growing market segment. The Company completed the installation of the machinery during the current quarter and began limited production at the end of March 2011.  The Company expects that production will steadily increase through May 2011 as the Company transitions the supply chain to its new internally produced recycled chip.  As of March 2011, the total investment in this capital project was $8.4 million. The Company may incur additional capital expenditures as it pursues new opportunities to expand its production capabilities or to further streamline its manufacturing processes.
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·  
Joint Venture Investments.  During the first nine months of fiscal year 2011, the Company received $4.3 million in dividend distributions from its joint ventures.  Historically, the Company has received distributions from certain of its joint ventures every year; however it is unlikely that the Company will receive material distributions from PAL in the near future due to PAL’s current debt levels.  In addition, the Company contributed an additional $0.7 million for working capital to its Repreve Renewables joint venture.  The Company may strategically increase its interest in its joint ventures, sell its interest in its joint ventures, invest in new joint ventures or transfer idle equipment to its joint ventures.

Cash Provided by Operations

The following table summarizes the net cash (used in) provided by operations (amounts in millions):

  For the Nine-Months Ended 
  
March 27,
 2011
  
March 28,
 2010
 
       
Cash (used in) provided by operations      
Cash receipts:      
Receipts from customers $501.6  $435.0 
Dividends from unconsolidated affiliates  4.3   1.6 
Other receipts  2.0   3.3 
Cash payments:        
Payments to suppliers and other operating costs  404.7   325.6 
Payments for salaries, wages, and benefits  86.1   76.4 
Payments for restructuring  1.9   1.1 
Payments for interest  11.4   10.3 
Payments for taxes  4.9   5.4 
Other  0.3   0.3 
Cash (used in) provided by operations $(1.4) $20.8 

Cash decreased from $20.8 million of cash provided by operations for the year-to-date period of fiscal year 2010 to $1.4 million cash used by operations in the year-to-date period of fiscal year 2011.  Cash received from customers increased from $435.0 million to $501.6 million primarily due to higher net sales volumes.  Payments to suppliers and for other operating costs increased from $325.6 million to $404.7 million primarily as a result of higher sales volumes and increased raw material prices.  Salary, wage and benefit payments increased from $76.4 million to $86.1 million primarily as a result of payment of the prior year bonuses.  Restructuring payments were $1.9 million for the current year-to-date period compared to $1.1 million from the same prior year period. The increase in restructuring payments relates to cost incurred by the Company to dismantle and move machinery to El Salvador and reinstall previously dismantled texturing machines in Yadkinville.  Interest expense is higher due to the timing of the early redemption of the $30 million aggregate principal amount of 2014 notes in February 2011.  Taxes paid by the Company decreased from $5.4 million to $4.9 million as a result of a decrease in tax liabilities related to the Company’s Brazilian subsidiary.  The Company received cash dividends of $4.3 million and $1.6 million from its unconsolidated equity affiliates for the first nine-month periods of fiscal year 2011 and 2010, respectively.  Cash received from other miscellaneous sources including interest decreased from $3.3 million in the prior year-to-date period to $2.0 million in the current year-to-date period.

Working capital increased from $174.5 million at June 27, 2010 to $201.3 million at March 27, 2011 due to increases in inventories of $25.7 million, decreases in current portion of notes payable of $15.0 million, increases in accounts receivables of $13.4 million, decreases in accrued expenses of $3.2 million, increases in deferred income tax of $0.5 million, income taxes receivable of $0.4 million, and increases in other current assets of $0.1 million, offset by decreases in cash of $23.5 million, increases in accounts payable of $7.7 million, increases in income tax payable of $0.2 million, and increases in current maturities of long-term debt and other liabilities of $0.1 million. The working capital current ratio was 4.0 at March 27, 2011 and 3.2 at June 27, 2010.
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Cash Used In Investing Activities and Financing Activities

The Company utilized $14.1 million in net investing activities and utilized $10.9 million in net financing activities during the nine-month period ended March 27, 2011.  The primary cash expenditures for investing and financing activities during the first nine months of fiscal year 2011 included $47.6 million to repurchase a portion of the 2014 notes with a face value of $45.0 million, $17.3 million in capital expenditures, $0.7 million for a working capital investment in an unconsolidated affiliate, $0.8 for debt refinancing fees, and $0.4 million for other financing activities, offset by $37.8 million in net borrowings from the Company’s revolving credit facility, $3.2 million from the proceeds from split dollar life insurance surrenders, $0.2 million in proceeds from the sale of capital assets and $0.5 million related to return of capital from unconsolidated equity affiliates and $0.1 million from the proceeds from stock option exercises.

The Company’s ability to meet its debt service obligations and reduce its total debt will depend upon its ability to generate cash in the future which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond its control.  The Company may not be able to generate sufficient cash flow from operations, and future borrowings may not be available to the Company under its revolving credit facility in an amount sufficient to enable it to repay its debt or to fund its other liquidity needs.  If its future cash flow from operations and other capital resources are insufficient to pay its obligations as they mature or to fund its liquidity needs, the Company may be forced to reduce or delay its business activities and capital expenditures, sell assets, obtain additional debt or equity capital or restructure or refinance all or a portion of its debt on or before maturity.  The Company may not be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all.  In addition, the terms of its existing and future indebtedness, including its 2014 notes which mature on May 15, 2014 and its revolving credit facility, may limit its ability to pursue any of these alternatives.  See “Item 1A. Risk Factors—The Company will require a significant amount of cash to service its indebtedness and fund capital expenditures, and its ability to generate cash depends on many factors beyond its control” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010.  Some risks that could adversely affect its ability to meet its debt service obligations include, but are not limited to, intense domestic and foreign competition in its industry, general domestic and international economic conditions, changes in currency exchange rates, interest and inflation rates, the financial condition of its customers and the operating performance of joint ventures, alliances and other equity investments.

Note Repurchases.  The Company may, from time to time, seek to retire or purchase its outstanding debt in open market purchases, in privately negotiated transactions or by calling a portion of the 2014 notes under the terms of the indenture governing the 2014 notes (the “Indenture”). Such retirement or purchase of debt may come from the operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.  During the third quarter of fiscal year 2011, the Company executed its plan to utilize a combination of internally generated cash and limited borrowings on its revolving credit facility to repurchase and retire portions of its 2014 notes.   On February 16, 2011, the Company redeemed an aggregate principal amount of $30 million of the 2014 notes in accordance with the Indenture. Pursuant to the terms of the Indenture, the redemption price for the 2014 notes was 105.75% of the principal amount of the redeemed 2014 notes, plus accrued and unpaid interest. Upon completion of this redemption, the aggregate principal amount of the 2014 notes outstanding was $133.7 million.  The Company expects to maintain a continuous balance outstanding under its revolving credit facility and hedge a substantial amount of the interest rate risk in order to ensure its interest savings.  As a result of the utilization of cash on hand to reduce outstanding debt and the lower rate under the revolving credit facility, the Company expects a significant reduction of its annual fixed carrying cost between the commencement of this debt reduction strategy and the final repayment of the 2014 notes.  See “Long-term Debt” included in the “Liquidity and Capital Resources” section below for a detailed discussion of the interest rates and covenants related to the Company’s revolving credit facility.

Contingencies

Environmental Liabilities.  On September 30, 2004, the Company completed its acquisition of the polyester filament manufacturing assets located at Kinston from INVISTA S.a.r.l. (“INVISTA”).  The land for the Kinston site was leased pursuant to a 99 year ground lease (“Ground Lease”) with E.I. DuPont de Nemours (“DuPont”).  Since 1993, DuPont has been investigating and cleaning up the Kinston site under the supervision of the U.S. Environmental Protection Agency (“EPA”) and the North Carolina Department of Environment and Natural Resources (“DENR”) pursuant to the Resource Conservation and Recovery Act Corrective Action program.  The Corrective Action program requires DuPont to identify all potential areas of environmental concern (“AOCs”), assess the extent of containment at the identified AOCs and clean it up to comply withnewly applicable regulatory standards.  Effective March 20, 2008, the Company entered into a Lease Termination Agreement associated with conveyance of certain assets at Kinston to DuPont.  This agreement terminated the Ground Lease and relieved the Company of any future responsibility for environmental remediation, other than participation with DuPont, if so called upon, with regard to the Company’s period of operation of the Kinston site.  However, the Company continues to own a satellite service facility acquired in the INVISTA transaction that has contamination from DuPont’s operations and is monitored by DENR.  This site has been remediated by DuPont and DuPont has received authority from DENR to discontinue remediation, other than natural attenuation.  DuPont’s duty to monitor and report to DENR will be transferred to the Company in the future, at which time DuPont must pay the Company for seven years of monitoring and reporting costs and the Company will assume responsibility for any future remediation and monitoring of the site.  At this time, the Company has no basis to determine if and when it will have any responsibility or obligation with respect to the AOCs or the extent of any potential liability for the same.
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Berry Amendment Contingencies.  The Company is aware of certain claims and potential claims against it for the alleged use of non-compliant “Berry Amendment” nylon POY in yarns that the Company sold which may have ultimately been used to manufacture certain U.S. military garments (the “Military Claims”).  As of June 27, 2010, the Company recorded an accrual for the Military Claims of which $0.3 million was paid or settled during the quarter ended September 26, 2010.

Other Factors Affecting Liquidity

Stock Repurchase Program.  Effective July 26, 2000, the Board increased the remaining authorization to repurchase up to 3.3 million shares of the Company’s common stock of which approximately 1.0 million shares were subsequently repurchased.  The repurchase program was suspended in November 2003 and the Company has no immediate plans to reinstitute the program.  There is remaining authority for the Company to repurchase approximately 2.3 million shares of its common stock under the repurchase plan.  The repurchase plan has no stated expiration or termination date.  All share amounts and computations using such amounts have been retroactively adjusted to reflect the November 3, 2010 1-for-3 reverse stock split.

Market Conditions.  Deterioration of global economic conditions could reduce demand for the Company’s product faster than management’s ability to react through further consolidation of its manufacturing capacity, since the Company is a high volume, high fixed cost business. These conditions could also materially affect the Company’s customers causing reductions or cancellations of existing sales orders and inhibit the collectibility of receivables.  In addition, the Company’s suppliers may be unable to fulfill the Company’s outstanding orders or could change credit terms that would negatively affect the Company’s liquidity.  All of these factors could adversely impact the Company’s results of operations, financial condition and cash flows.

Long-Term Debt

On May 26, 2006, the Company issued $190 million of 2014 notes.  In connection with the issuance, the Company incurred $7.3 million in professional fees and other expenses which are being amortized to expense over the life of the 2014 notes. Interest is payable on the 2014 notes on May 15 and November 15 of each year. The 2014 notes are unconditionally guaranteed on a senior, secured basis by each of the Company’s existing and future restricted domestic subsidiaries. The 2014 notes and guarantees are secured by first-priority liens, subject to permitted liens, on substantially all of the Company’s and the Company’s subsidiary guarantors’ assets other than the assets securing the Company’s obligations under its revolving credit facility as discussed below. The assets include but are not limited to, property, plant and equipment, domestic capital stock and some foreign capital stock.  Domestic capital stock includes the capital stock of the Company’s domestic subsidiaries and certain of its joint ventures. Foreign capital stock includes up to 65% of the voting stock of the Company’s first-tier foreign subsidiaries, whether now owned or hereafter acquired, except for certain excluded assets. The 2014 notes and guarantees are secured by second-priority liens, subject to permitted liens, on the Company’s and its subsidiary guarantors’ assets that will secure the 2014 notes and guarantees on a first-priority basis. The estimated fair value of the 2014 notes, based on quoted market prices, as of March 27, 2011 was approximately $139.4 million.

In accordance with the collateral documents and the Indenture, the proceeds from the sale of PP&E (First Priority Collateral) will be deposited into the First Priority Collateral Account whereby the Company may use the restricted funds to purchase additional qualifying assets.  From May 26, 2006 through March 27, 2011, the Company sold PP&E secured by first-priority liens in an aggregate amount of $29.5 million and purchased qualifying assets in the same amount, leaving no funds remaining in the First Priority Collateral Account.
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The Company can currently elect to redeem some or all of the 2014 notes at redemption prices equal to or in excess of par depending on the year the optional redemption occurs.  The Company may also purchase its 2014 notes in open market purchases or in privately negotiated transactions and then retire them or it may refinance all or a portion of the 2014 notes with a new debt offering.  Such purchases or refinancing of the 2014 notes will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors.  On January 11, 2011, the Company announced that it was calling for the redemption of $30.0 million of the 2014 notes at a redemption price of 105.75% of the principal amount of the redeemed notes and on February 16, 2011 the Company completed the transaction.  The Company financed this redemption through borrowings under its revolving credit facility discussed below.  As a result, the Company recorded a $2.2 million charge for the early extinguishment of debt in the March 2011 quarter which was comprised of $1.7 million of call premiums and a $0.5 million non-cash charge to write off unamortized debt issuance costs.

On September 9, 2010, the Company and its subsidiary guarantors (as co-borrowers) entered into a revolving credit facility with Bank of America, N.A. (as both Administrative Agent and Lender thereunder).  The First Amended Credit Agreement provides for a revolving credit facility in an amount of $100 million (with the ability of the Company to request that the borrowing capacity be increased up to $150 million) and matures on September 9, 2015, provided that unless the 2014 notes have been prepaid, redeemed, defeased or otherwise repaid in full on or before February 15, 2014, the maturity date will be adjusted to February 15, 2014. The First Amended Credit Agreement (“revolving cedit facility”) amends a prior senior secured asset-based revolving credit facility which had a stated maturity date of May 15, 2011.  See “Footnote 3.  Long-term Debt and Other Liabilities” included in the Company’s Annual Report on Form 10-K for fiscal year ended June 27, 2010 for a discussion of the revolving credit facility.  As of March 27, 2011, under the terms of the revolving credit facility, the Company had $37.8 million of borrowings and borrowing availability of $54.8 million.

 The revolving credit facility is secured by first-priority liens on the Company’s and its subsidiary guarantors’ inventory, accounts receivable, general intangibles (other than uncertificated capital stock of subsidiaries and other persons), investment property (other than capital stock of subsidiaries and other persons), chattel paper, documents, instruments, supporting obligations, letter of credit rights, deposit accounts and other related personal property and all proceeds relating to any of the above, and by second-priority liens, subject to permitted liens, on the Company’s and its subsidiary guarantors’ assets securing the 2014 notes and guarantees on a first-priority basis, in each case other than certain excluded assets. The Company’s ability to borrow under the revolving credit facility is limited to a borrowing base equal to specified percentages of eligible accounts receivable and inventory and is subject to other conditions and limitations.

Borrowings under the revolving credit facility bear interest at rates of LIBOR plus 2.00% to 2.75% and/or prime plus 0.75% to 1.50%. The interest rate matrix is based on the Company’s excess availability under the revolving credit facility. The unused line fee under the revolving credit facility is 0.375% to 0.50% of the unused line amount. In connection with the refinancing of the revolving credit facility, the Company recorded fees and expenses totaling approximately $0.8 million, which were added to the $0.2 million of remaining debt refinancing fees from the prior senior secured asset-based revolving credit facility and are being amortized over the term of the new facility.

The revolving credit facility contains customary affirmative and negative covenants for asset-based loans that restrict future borrowings and certain transactions. Such covenants include restrictions and limitations on (i) sales of assets, consolidation, merger, dissolution and the issuance of the Company’s capital stock, any subsidiary guarantor and any domestic subsidiary thereof, (ii) permitted encumbrances on the Company’s property, any subsidiary guarantor and any domestic subsidiary thereof, (iii) the incurrence of indebtedness by the Company, any subsidiary guarantor or any domestic subsidiary thereof, (iv) the making of loans or investments by the Company, any subsidiary guarantor or any domestic subsidiary thereof, (v) the declaration of dividends and redemptions by the Company or any subsidiary guarantor and (vi) transactions with affiliates by the Company or any subsidiary guarantor. The covenants under the revolving credit facility are, however, generally less restrictive than the prior senior secured asset-based revolving credit facility as the Company is no longer required to maintain a fixed charge coverage ratio of at least 1.0 to 1.0 to make certain distributions and investments so long as pro forma excess availability is at least 27.5% of the total credit facility.  These distributions and investments include (i) the payment or making of any dividend, (ii) the redemption or other acquisition of any of the Company’s capital stock, (iii) cash investments in joint ventures, (iv) acquisition of the property and assets or capital stock or a business unit of another entity and (v) loans or other investments to a non-borrower subsidiary.   The revolving credit facility requires the Company to maintain a trailing twelve month fixed charge coverage ratio of at least 1.0 to 1.0 should borrowing availability decrease below 15% of the total credit facility.  There are no capital expenditure limitations under the revolving credit facility.
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On February 15, 2011, the Company entered into a 27-month, $25 million interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on the first $25 million of LIBOR-based variable rate borrowings under the Company’s revolving credit facility due to fluctuations in the LIBOR benchmark interest rate.  The Company intends to maintain at least $25 million of LIBOR-based variable rate borrowings in place for the duration of the interest rate swap.  The interest rate swap allows the Company to pay a fixed interest rate of 1.39% on such borrowings.  The Company designated the swap as a cash flow hedge and formally documented all aspects of the relationship between the hedging instrument (the interest rate swap) and the item being hedged (the LIBOR-based variable rate borrowings).  The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives designated as hedging instruments are highly effective in offsetting the changes in the cash flow of the hedge items.  If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company will discontinue hedge accounting prospectively.

Off Balance Sheet Arrangements

The Company is not a party to any off-balance sheet arrangementspronouncements that have or are reasonably likelyexpected to have a current or future material effectsignificant impact on the Company’sCompany's financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.statements.

Forward-Looking Statements

Forward-looking statements are those that do not relate solely to historical fact.  These forward-looking statements reflect the Company’s current views with respect to future events and are based on assumptions and subject to risks and uncertainties that may cause actual results to differ materially from trends, plans or expectations set forth in the forward-looking statements.  They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events.  They may contain words such as “believe”, “anticipate”, “expect”, “estimate”, “intend”, “project”, “plan”, “will”, or words or phrases of similar meaning.  Readers of this report should not rely solely on the forward-looking statements and should consider all risks and uncertainties throughout this report as well as those discussed under “Item 1A.  Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010.  Factors that may cause actual results to differ from expectations include:

·  the competitive nature of the textile industry and the impact of worldwide competition;
·  changes in the trade regulatory environment and governmental policies and legislation;
·  the availability, sourcing and pricing of raw materials;
·  general domestic and international economic and industry conditions in markets where the Company competes, such as recession and other economic and political factors over which the Company has no control;
·  changes in consumer spending, customer preferences, fashion trends and end-uses;
·  its ability to reduce production costs;
·  changes in currency exchange rates, interest and inflation rates;
·  the financial condition of its customers;
·  its ability to sell excess assets;
·  technological advancements and the continued availability of financial resources to fund capital expenditures;
·  the operating performance of joint ventures, alliances and other equity investments;
·  the impact of environmental, health and safety regulations;
·  the loss of a material customer;
·  employee relations;
·  volatility of financial and credit markets;
·  the continuity of the Company’s leadership;
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·  availability of and access to credit on reasonable terms; and
·  the success of the Company’s consolidation initiatives.
New risks can emerge from time to time.  It is not possible for the Company to predict all of these risks, nor can it assess the extent to which any factor, or combination of factors, may cause actual results to differ from those contained in forward-looking statements.  The Company will not update these forward-looking statements, even if its situation changes in the future, except as required by federal securities laws.

Item 3.  Quantitative and Qualitative Disclosures aboutAbout Market Risk

The Company is exposed to market risks associated with changes in interest rates, and currency fluctuation rates and raw material and commodity risks which may adversely affect its financial position, results of operations and cash flows.  In addition, theThe Company does not enter into derivative financial instruments for trading purposes nor is also exposedit a party to other risks in the operation of its business.any leveraged financial instruments.

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Interest Rate RiskRisk:: The Company is exposed to interest rate risk through its various borrowing activities.  The majority of the Company’s borrowings are in long-termits 2014 notes which have a fixed rate bonds; however theof interest.  The Company does incur interestalso has borrowings on its borrowings under its revolving credit facility at rateswhich have a variable rate of LIBOR plus 2.00% to 2.75% and/or prime plus 0.75% to 1.50%.  As of March 27, 2011, theinterest. The Company had $37.8 million of borrowings and had a borrowing availability of $54.8 million undermay hedge its interest rate variability on its revolving credit facility.  On February 15, 2011, the Company entered into a 27-month, $25 million interest rate swap with Bank of America, N.A. to provide a hedge against the variability of cash flows (monthly interest expense payments) on the first $25 million of LIBOR-based variable rate borrowings under the Company’s revolving credit facility due to fluctuations in the LIBOR benchmark interest rate.  The Company intends to maintain at least $25 million of LIBOR-based variable rate borrowings in place for the duration of theusing an interest rate swap.  The interest rate swap allows the Company to pay a fixed interest rate of 1.39% on such borrowings.  Therefore, the market rate risk associated with a 100 basis point change inCompany’s principal cash flows and weighted average interest rates would notexpected to be material toincurred through the Company at the present time.debt maturity dates are as follows:
  Expected Maturity Date on a Fiscal Year Basis 
  2012  2013  2014  2015  2016  Fair Value 
Long-term debt:                  
2014 notes payable $—  $—  $123,722  $—  $—  $127,267 
Fixed interest rate  11.5%  11.5%  11.5%  —   —     
                         
Revolving credit facility $—  $—  $—  $—  $39,900  $39,900 
Variable interest rate
(2.0-2.75% +)
 LIBOR  LIBOR  LIBOR  LIBOR  LIBOR     
                         
Interest rate derivatives:                        
Variable to fixed $—  $25,000  $—  $—  $—  $(422)
Average pay rate
(2.0-2.75% +)
  1.39%  1.39%  —   —   —     
                         
Variable to fixed $—  $10,000  $—  $—  $—  $(64)
Average pay rate
(2.0-2.75% +)
  0.75%  0.75%  —   —   —     

Currency Exchange Rate RiskRisk::  The Company conducts a portion of its business in various foreign countries and in various foreign currencies.  As a result, it isEach of the Company’s operations may enter into transactions (sales, purchases, or fixed purchase commitments, etc.) that are denominated in currencies other than the operation’s functional currency and which subject to the transaction exposure that arises from foreign exchange rate movements between the dates thatCompany to foreign currency transactions are recorded and the dates they are consummated.exchange risk.  The Company utilizes some natural hedging to mitigate these transaction exposures. The Company also enters into foreign currency forward contracts for the purchase and sale of European, North American and Brazilian currencies to use as economic hedges against balance sheet and income statement currency exposures.  These forward contracts are principally entered into for the purchase of inventory and equipment and the sale of Company products into export markets.  Counter-parties for these instruments are major financial institutions.  The Company accounts for foreign currency forward contracts at fair value. Changes in the fair value of these contracts are recorded in the line item other operating expense (income), net in the Condensed Consolidated Statements of Operations.  The Company does notmay enter into forward currency contracts to hedge this exposure.  For sales transactions such as these, contracts for speculative or trading purposes and does not designate these contracts as hedge contracts.

Foreign currency forward contracts are used as economicthe Company typically hedges for the exposure for sales in foreign currencies based on specific sales made to customers. Generally, approximately 60% to 75% of the sales value of these orders is covered by using forward currency contracts.  MaturityThe maturity dates of the forward contracts are intended to match the anticipated receivable collections.collection dates of the receivables.  The Company marks themay also enter into forward currency contracts to market at month end and any realized and unrealized gainshedge its exposure for certain equipment or losses are recorded asinventory purchase commitments.  As of September 25, 2011, the Company does not have a significant amount of exposure related to forward currency contracts.

As of September 25, 2011, the Company’s subsidiaries outside the U.S., whose functional currency is other operating expense (income).than the U.S. dollar, held 18.9% of consolidated total assets. The Company also enters currency forward contracts for committed machinery and inventory purchases.  Generally up to 5% of inventory purchases made by the Company’s Brazilian subsidiary are covered by forward contracts although 100% of the cost may be covered by individual contracts in certain instances.  As of March 27, 2011, the latest maturity date for all outstanding sales and purchasedoes not enter into foreign currency forward contracts is June 2011.derivatives to hedge its net investment in its foreign operations.

AssetsRaw Material and Liabilities Measured at Fair Value on a Recurring Basis

The Company has adopted the guidance issued by the Financial Accounting Standards Board (“FASB”) which established a framework for measuring and disclosing fair value measurements related to financial and non-financial assets. There is a common definition of fair value used and a hierarchy for fair value measurements based on the type of inputs that are used to value the assets or liabilities at fair value.
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The levels of the fair value hierarchy are:
·  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date,
·  Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, or
·  Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

The fair valueCommodity Risks:  A significant portion of the Company’s derivative instruments as of March 27, 2011 and June 27, 2010 were as follows (amounts in thousands):

  
March 27,
2011
  
June 27,
2010
 
  Level 2  Level 2 
Derivatives designated as cash flow hedges:      
Interest rate swap (loss) $(256) $— 
         
Derivatives not designated as hedging instruments:        
         
Foreign currency purchase contracts:        
Notional amount $—  $2,826 
Fair value  —   2,873 
Net unrealized gain $—  $(47)
         
Foreign currency sales contracts:        
Notional amount $739  $1,231 
Fair value  747   1,217 
Net unrealized (loss) gain $(8) $14 

raw materials are derived from petroleum-based chemicals.  The fair valuecosts of the interest rate swap held byCompany’s raw materials can be volatile and availability can depend on global supply and demand dynamics, including certain geo-political risks.  The Company does not use financial instruments to hedge its exposure to changes in raw material costs.  The costs of the primary raw materials that the Company isuses throughout all of its operations are generally traded based on using market expectations for future LIBOR rates at the measurement date to convert future cash flows to a single present value amount.  The fair values of the foreign exchange forward contracts held by the Company at the respective quarter-end dates are based on discounted quarter-end forward currency rates. The total impact of foreign currency related items including transactions that were hedged and those unrelated to hedging, was a pre-tax gain of $13 thousand and a pre-tax loss of $0.1 million for the quarters ended March 27, 2011 and March 28, 2010, respectively.  For the year-to-date periods ended March 27, 2011 and March 28, 2010, the total impact of foreign currency related items resulted in a pre-tax loss of $0.3 million and a pre-tax gain of $0.1 million, respectively.U.S. dollar pricing.

Inflation and Other RisksRisks:  :  The inflation rate in most countries in which the Company conducts business has been low in recent years and the impact on the Company’s cost structure has not been significant.  The Company is also exposed to political risk, including changing laws and regulations governing international trade such as quotas, and tariffs and tax laws.laws and incentives.  The degree of impact and the frequency of these events cannot be predicted.

Market Capitalization versus Book Value:  As of the end of the first quarter of fiscal year 2012, the Company’s book value was $14.05 per share.  During the September 2011 quarter, the Company’s common shares traded at a high of $14.61 and ended the quarter at a low of $8.51 per share.  Due to the disparity between the share values, the Company considered the recoverability of its assets and does not believe any of its assets to be impaired at this time.

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Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures
As of March 27,September 25, 2011, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as amended) was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on that evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

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Changes in Internal Control over Financial Reporting
There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Part II.  Other Information

Item 1.  Legal Proceedings

There are no pending legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which the Company is a party or of which any of its property is the subject.

Item 1A.  Risk Factors
 
The Company’s debt reduction strategy will result in the Company maintaining larger balances outstanding under its revolving credit facility and decrease the Company’s excess borrowing availability, which could adversely affect the Company’s financial condition and prevent it from fulfilling its obligations under its debt agreements.

 On February 16, 2011, the Company redeemed $30.0 million of the 2014 notes at a redemption price of 105.75% of the principal amount of the redeemed notes (the “Redemption”). The Company financed the Redemption through borrowings under the revolving credit facility.  On an ongoing basis, the Company anticipates utilizing its liquidity to continue to redeem portions of its 2014 notes incrementally through a combination of internally generated cash and borrowings under its revolving credit facility.  The Company expects to maintain a continuous balance outstanding under its revolving credit facility and hedge a substantial amount of the interest rate risk in order to ensure its interest savings as it executes this debt reduction strategy.

The Company’s revolving credit facility requires the Company to meet a minimum fixed charge coverage ratio test if borrowing capacity is less than 15% of the total credit facility.  The consummation of the Redemption and implementation of the debt reduction strategy resulted in the Company maintaining reduced levels of excess availability under the revolving credit facility before the fixed charge coverage ratio test applies.  After completion of the Redemption, the Company’s availability under the revolving credit facility decreased to $54.8 million, or 54.8% of the total credit facility as of March 27, 2011.  If the Company’s availability under the revolving credit facility falls below 15%, it may not be able to maintain the required fixed charge coverage ratio.  Additionally, the revolving credit facility restricts the Company’s ability to make certain distributions and investments should its borrowing capacity decrease to below 27.5% of the total credit facility.   These restrictions could limit the Company’s ability to plan for or react to market conditions or meet its capital needs.  The Company may not be granted waivers or amendments to its revolving credit facility if for any reason the Company is unable to meet its requirements, or the Company may not be able to refinance its debt on terms acceptable to the Company, or at all.

Any of the foregoing could have a material adverse effect on the Company’s business, financial condition, results of operations, prospects and ability to satisfy the Company’s obligations under its debt agreements.

Other than the risk factor discussed above, thereThere are no other material changes to the Company's risk factors set forth under “Part“Item 1A. Risk Factors” in its Annual Report on Form 10-K for the fiscal year ended June 27, 2010.
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26, 2011.

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

Items 2(a) and (b) are not applicable.

(c)  The following table summarizes the Company’s repurchases of its common stock during the quarter ended March 27, 2011.  All share amounts have been retroactively adjusted to give effect to the November 3, 2010 1-for-3 reverse stock split.
(c)  The following table summarizes the Company’s repurchases of its common stock during the quarter ended September 25, 2011.

PeriodTotal Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may Yet Be Purchased Under the Plans or Programs (1)
        
12/27/10 – 01/27/11— — —2,269,080
01/28/6/27/11 – 02/27/7/26/11———2,269,080
02/28/11 – 03/27/11———2,269,080
Total—— —  

 (1)  Effective July 26, 2000, the Board increased the remaining authorization to repurchase up to 3.3 million shares of the Company’s common stock, of which approximately 1.0 million shares were subsequently repurchased.  The repurchase program was suspended in November 2003 and the Company has no immediate plans to reinstitute the program.  There is remaining authority for the Company to repurchase approximately 2.3 million shares of its common stock under the repurchase plan.  The repurchase plan has no stated expiration or termination date.  All share amounts and computations using such amounts have been retroactively adjusted to reflect the November 3, 2010 1-for-3 reverse stock split.——2,269,080
7/27/11 – 8/26/11———2,269,080
8/27/11 – 9/25/11———2,269,080
Total———

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  [Removed and Reserved.]

Item 5.  Other Information

Not applicable.

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Item 6.  Exhibits

Exhibit NumberDescription
10.1Form of Restricted Stock Unit Agreement for Employees for restricted stock units granted under the 2008 Unifi, Inc. Long-Term Incentive Plan.
31.1Chief Executive Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Chief Financial Officer’s certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1Chief Executive Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Chief Financial Officer’s certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101The following materials from Unifi, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 25, 2011, formatted in eXtensbile Business Reporting Language (“XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) the Condensed Consolidated Statements of Cash Flows, and (vi) the Notes to the Condensed Consolidated Financial Statements (tagged as blocks of text)*
*Exhibit will be filed within 30 days of the filing of the Form 10-Q, as permitted by Regulation S-T Item 405(a)(2).

 
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UNIFI, INC.


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
          UNIFI, INC.
                                             (Registrant)
 
 
   
    
Date:    May 6,November 4, 2011         /s/ RONALD L. SMITH 
  Ronald L. Smith 
  Vice President and Chief Financial Officer 
  (Principal Financial Officer and PrincipalDuly Authorized Officer)


Date:    November 4, 2011        /s/ JAMES M. OTTERBERG 
  James M. Otterberg
Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized Officer) 

 
 
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