Note 24 - Investments in Unconsolidated Affiliates and Variable Interest Entities

6 Months Ended

Dec. 23, 2012

Equity Method Investments and Joint Ventures Disclosure [Text Block]

24. Investments in Unconsolidated Affiliates and Variable Interest Entities

Parkdale America, LLC

In June 1997, the Company and Parkdale Mills, Inc. (“Mills”) entered into a Contribution Agreement that set forth the terms and conditions by which the two companies contributed all of the assets of their spun cotton yarn operations utilizing open-end and air-jet spinning technologies to create Parkdale America, LLC (“PAL”). In exchange for its contribution, the Company received a 34% ownership interest in PAL which is accounted for using the equity method of accounting. Effective January 1, 2012, Mills’ interest in PAL was assigned to Parkdale Incorporated. PAL’s fiscal year end is the Saturday nearest to December 31 and PAL is a limited liability company treated as a partnership for income tax reporting purposes. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel markets located throughout North and South America. PAL has 13 manufacturing facilities located primarily in the southeast region of the U.S. According to its most recently issued audited financial statements, PAL’s five largest customers accounted for approximately 80% of total revenues and 72% of total gross accounts receivable outstanding, with the largest customer accounting for approximately 37% of revenues and 37% of accounts receivable.

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

On October 28, 2009, PAL acquired certain real property and machinery and equipment, as well as entered into lease agreements for certain real property, machinery and equipment, which constituted most of the yarn manufacturing operations of Hanesbrands Inc. (“HBI”). PAL also entered into a yarn supply agreement with HBI to supply at least 95% of the yarn used in the manufacturing of its apparel products at any of its locations in North America, Central America or the Caribbean Basin for a six-year period with an option for HBI to extend the agreement for two additional three-year periods.

On March 30, 2011, PAL amended its revolving credit facility to increase the maximum borrowing capacity from $100,000 to $200,000 and extend the maturity date from October 28, 2012 to July 31, 2014. PAL’s revolving credit facility charges a variable interest rate based on either the prime rate or LIBOR rate plus an applicable percentage. PAL’s revolving credit facility also has covenants in place such as an annual limit on capital expenditures, a minimum fixed-charge coverage ratio and a maximum leverage ratio. PAL informed the Company that as of December 2012, PAL’s cash on-hand was $30,371, PAL had no outstanding borrowings on its revolving credit facility and PAL was in compliance with all debt covenants.

PAL is subject to price risk related to fixed-price yarn sales. To protect the gross margin of these sales, PAL may enter into cotton futures to manage changes in raw material costs. The derivative instruments used are listed and traded on an exchange and are thus valued using quoted prices classified within Level 1 of the fair value hierarchy. PAL may also designate certain futures contracts as cash flow hedges with the effective portion of gains and losses recorded in accumulated other comprehensive income until the underlying transactions are recognized in income. As of December 2012, PAL’s accumulated other comprehensive gain was comprised of gains related to futures contracts totaling $42. Any ineffective portion of changes in fair value of cash flow hedges are recognized in earnings as they occur. All of PAL’s other derivatives not designated as hedges are marked-to-market each period with the changes in fair value recognized in current period earnings. In addition, PAL may enter into forward contracts for certain cotton purchases, which qualify as derivative instruments. However, these contracts meet the applicable criteria to qualify for the “normal purchases or normal sales” exemption.

As of December 23, 2012, the Company’s investment in PAL was $91,832 and shown within Investments in unconsolidated affiliates. The reconciliation between the Company’s share of the underlying equity of PAL and its investment is as follows:

Underlying equity as of December 2012	$	110,356
Initial excess capital contributions		53,363
Impairment charge recorded in 2007		(74,106	)
Anti-trust lawsuit against PAL in which the Company did not participate		2,652
EAP adjustments		(433	)
Investment as of December 2012	$	91,832

U.N.F. Industries, Ltd.

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

UNF America, LLC

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

In conjunction with the formation of UNF America, the Company entered into a supply agreement with UNF and UNF America whereby the Company agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNF America. The agreement has no stated minimum purchase quantities and pricing is negotiated every six months, based on market rates. As of December 23, 2012, the Company’s open purchase orders related to this agreement were $5,404.

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

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

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

The Company is the primary beneficiary of these entities based on the terms of the supply agreements discussed above. As a result, the Company has determined that UNF and UNF America are variable interest entities (“VIEs”) and, in accordance with U.S. GAAP, should be consolidated in the Company’s financial results. As the Company purchases substantially all of the output from the two entities, and, as the two entities’ balance sheets constitutes 3% or less of the Company’s current assets, total assets and total liabilities, the Company has not included the accounts of UNF and UNF America in its consolidated financial statements. As of December 23, 2012, the Company’s combined investments in UNF and UNF America were $4,380 and are shown within Investments in unconsolidated affiliates. The financial results of UNF and UNF America are included in the Company’s financial statements with a one month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with the Company’s accounting policy. Other than the supply agreements discussed above, the Company does not provide any other operating commitments or guarantees related to either UNF or UNF America.

Unaudited, condensed balance sheet and income statement information for the Company’s unconsolidated affiliates is presented in the following tables. As PAL is defined as significant, its information is separately disclosed. The operating results of Renewables are included through the end of the Company’s first quarter of fiscal year 2012, and thereafter Renewables results have been consolidated.

	As of December 23, 2012 (Unaudited)
	PAL		Other		Total
Current assets	$	240,201	$	9,506	$	249,707
Noncurrent assets		118,554		3,213		121,767
Current liabilities		45,603		3,959		49,562
Noncurrent liabilities		11,536		—		11,536
Shareholders’ equity and capital accounts		301,615		8,761		310,376

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

	As of June 24, 2012 (Unaudited)
	PAL		Other		Total
Current assets	$	259,558	$	12,018	$	271,576
Noncurrent assets		130,677		759		131,436
Current liabilities		56,899		4,512		61,411
Noncurrent liabilities		7,717		—		7,717
Shareholders’ equity and capital accounts		325,619		8,265		333,884

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

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

Dividends and cash distributions received		—		500		500

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

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

Dividends and cash distributions received		—		—			—

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

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

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

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

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

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

Subsequent Event

On December 26, 2012, the Company received a $7,807 cash distribution from PAL, $2,707 of which was deemed to be a tax distribution and $5,100 of which was a special dividend.