Note 25 - Investments in Unconsolidated Affiliates and Variable Interest Entities

6 Months Ended

Dec. 25, 2011

Equity Method Investments Disclosure [Text Block]

25. 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.  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 13 manufacturing facilities located primarily in North Carolina.  According to its most recently issued audited financial statements, 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 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 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 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 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 December 2011, PAL’s outstanding borrowings on the revolving credit facility were one hundred 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 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 2011, PAL’s accumulated other comprehensive income was comprised of losses related to futures contracts totaling $2,104.  All of PAL’s other derivatives not designated as hedges or the 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 “normal purchases or normal sales” exemption.

As of December 25, 2011, the Company’s investment in PAL was $85,374 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 December 2011	$	104,285
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		(820	)
Investment at December 2011	$	85,374

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 it 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 it 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 December 25, 2011, the Company’s open purchase orders related to this agreement were $2,212.

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

	For the Six Months Ended
	December 25, 2011		December 26, 2010
UNF	$	7,862	$	11,292
UNF America		7,069		9,862
Total	$	14,931	$	21,154

As of December 25, 2011 and June 26, 2011, the Company had combined outstanding accounts payable due to UNF and UNF America of $1,974 and $4,124, respectively.

As of December 2011, the Company’s combined investments in UNF and UNF America were $3,846 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.

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.  The operating results of Renewables are included through the end of the Company’s first quarter of fiscal year 2012, thereafter Renewables’ results have been consolidated.

	As of December 25, 2011
	PAL		Other		Total
Current assets	$	317,644	$	10,384	$	328,028
Noncurrent assets		140,647		809		141,456
Current liabilities		42,529		3,872		46,401
Noncurrent liabilities		109,041		—		109,041
Shareholders’ equity and capital accounts		306,721		7,321		314,042
The Company’s portion of undistributed earnings		16,146		1,003		17,149

	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 December 25, 2011
	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 expense		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 Three Months Ended December 26, 2010
	PAL		Other		Total
Net sales	$	212,357	$	10,575	$	222,932
Gross profit		16,871		2,007		18,878
Income from operations		13,342		1,223		14,565
Net income		13,011		879		13,890
Depreciation and amortization expense		8,331		341		8,672
Cash received by PAL under EAP program		7,387		—		7,387
Earnings recognized by PAL for EAP program		8,001		—		8,001
Dividends and cash distributions received		—		—		—

	For the Six Months Ended December 25, 2011
	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 expense		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

	For the Six Months Ended December 26, 2010
	PAL		Other		Total
Net sales	$	422,158	$	22,151	$	444,309
Gross profit		43,963		4,015		47,978
Income from operations		37,252		2,485		39,737
Net income		38,403		1,866		40,269
Depreciation and amortization expense		14,875		683		15,558
Cash received by PAL under EAP program		14,511		—		14,511
Earnings recognized by PAL for EAP program		26,377		—		26,377
Dividends and cash distributions received		2,532		—		2,532