Note 25 - Investments in Unconsolidated Affiliates and Variable Interest Entities

9 Months Ended

Mar. 25, 2012

Equity Method Investments and Joint Ventures 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.  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 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 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 gross sales and 72% 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 currently provides a subsidy of four cents per pound through July 31, 2012 and 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 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 $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 minimum leverage ratio. PAL informed the Company that as of March 2012, PAL’s cash on-hand was $37,666, outstanding borrowings on the revolving credit facility were $55,000 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 March 2012, PAL’s accumulated other comprehensive income was comprised of gains related to futures contracts totaling $27.  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 March 25, 2012, the Company’s investment in PAL was $94,174 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 March 2012	$	112,786
Initial excess capital contributions		53,363
Impairment charge recorded in fiscal year 2007		(74,106	)
Antitrust lawsuit against PAL in which the Company did not participate		2,652
EAP adjustments		(521	)
Investment at March 2012	$	94,174

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.  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.  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 March 25, 2012, the Company’s open purchase orders related to this agreement were $4,479.

The Company’s raw material purchases under this supply agreement were as follows:

	For the Nine Months Ended
	March 25, 2012			March 27, 2011
UNF		$	10,294		$	16,093
UNF America			12,446			14,039
Total		$	22,740		$	30,132

As of March 25, 2012 and June 26, 2011, the Company had combined outstanding accounts payable due to UNF and UNF America of $4,504 and $4,124, respectively.

As of March 2012, the Company’s combined investments in UNF and UNF America were $3,709 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, and thereafter Renewables’ results have been consolidated.

	As of March 25, 2012
	PAL		Other		Total
Current assets	$	302,550	$	12,193	$	314,743
Noncurrent assets		135,832		784		136,616
Current liabilities		43,569		5,150		48,719
Noncurrent liabilities		63,091		—		63,091
Shareholders’ equity and capital accounts		331,722		7,827		339,549
The Company’s portion of undistributed earnings		23,987		586		24,573

	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 March 25, 2012
	PAL		Other		Total
Net sales	$	239,370	$	6,266	$	245,636
Gross profit		37,466		1,096		38,562
Income from operations		28,481		644		29,125
Net income		27,721		650		28,371
Depreciation and amortization expense		7,568		25		7,593
Cash received by PAL under EAP program		5,751		—		5,751
Earnings recognized by PAL for EAP program		5,718		—		5,718
Dividends and cash distributions received		1,645		500		2,145

	For the Three Months Ended March 27, 2011
	PAL			Other		Total
Net sales	$	303,964		$	9,579	$	313,543
Gross profit		9,304			1,585		10,889
Income from operations		5,963			828		6,791
Net (loss) income		(3,743	)		675		(3,068	)
Depreciation and amortization expense		8,278			343		8,621
Cash received by PAL under EAP program		7,092			—		7,092
Earnings recognized by PAL for EAP program		6,844			—		6,844
Dividends and cash distributions received		387			1,400		1,787

	For the Nine Months Ended March 25, 2012
	PAL		Other		Total
Net sales	$	856,255	$	23,123	$	879,378
Gross profit		61,092		2,099		63,191
Income from operations		42,689		357		43,046
Net income		41,026		331		41,357
Depreciation and amortization expense		25,892		106		25,998
Cash received by PAL under EAP program		17,067		—		17,067
Earnings recognized by PAL for EAP program		16,961		—		16,961
Dividends and cash distributions received		3,650		500		4,150

	For the Nine Months Ended March 27, 2011
	PAL		Other		Total
Net sales	$	726,122	$	31,730	$	757,852
Gross profit		53,267		5,600		58,867
Income from operations		43,216		3,312		46,528
Net income		34,660		2,541		37,201
Depreciation and amortization expense		23,153		1,026		24,179
Cash received by PAL under EAP program		21,603		—		21,603
Earnings recognized by PAL for EAP program		33,221		—		33,221
Dividends and cash distributions received		2,919		1,400		4,319