Note 24 - Investments in Unconsolidated Affiliates and Variable Interest Entities

12 Months Ended

Jun. 24, 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 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 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 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 June 2012, PAL’s cash on-hand was $33,855, 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 June 2012, PAL’s accumulated other comprehensive income was comprised of losses related to futures contracts totaling $3,570.  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 June 24, 2012, the Company’s investment in PAL was $92,131 and shown within Investments in unconsolidated affiliates in the Consolidated Balance Sheets.  The reconciliation between the Company’s share of the underlying equity of PAL and its investment is as follows:

Underlying equity as of June 2012	$	110,711
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		(489	)
Investment as of June 2012	$	92,131

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 June 24, 2012, the Company’s open purchase orders related to this agreement were $8,727.

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

	For the Fiscal Years Ended
	June 24, 2012			June 26, 2011			June 27, 2010
UNF		$	12,875		$	18,698		$	14,848
UNF America			17,956			17,570			9,314
Total		$	30,831		$	36,268		$	24,162

As of June 24, 2012 and June 26, 2011, the Company had combined accounts payable due to UNF and UNF America of $4,184 and $4,124, respectively.

The Company is the primary beneficiary of these entities based on the terms of the supply agreement 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 June 24, 2012, the Company’s combined investments in UNF and UNF America were $3,632 and are shown within Investments in unconsolidated affiliates in the 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.  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 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 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
The Company’s portion of undistributed earnings		22,381		769		23,150

	As of June 26, 2011 (Unaudited)
	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 Fiscal Year Ended June 24, 2012 (Unaudited)
	PAL		Other		Total
Net sales	$	1,063,126	$	31,958	$	1,095,084
Gross profit		66,266		3,589		69,855
Income from operations		57,203		1,414		58,617
Net income		56,069		1,461		57,530
Depreciation and amortization		33,549		131		33,680
Cash received by PAL under EAP program		22,090		—		22,090
Earnings recognized by PAL for EAP program		21,769		—		21,769
Dividends and cash distributions received		9,616		1,000		10,616

	For the Fiscal Year Ended June 26, 2011 (Unaudited)
	PAL		Other		Total
Net sales	$	1,110,184	$	38,292	$	1,148,476
Gross profit		80,754		5,739		86,493
Income from operations		70,132		2,545		72,677
Net income		68,946		1,794		70,740
Depreciation and amortization		31,979		1,185		33,164
Cash received by PAL under EAP program		28,795		—		28,795
Earnings recognized by PAL for EAP program		40,160		—		40,160
Dividends and cash distributions received		4,500		1,400		5,900

	For the Fiscal Year Ended June 27, 2010 (Unaudited)
	PAL		Other		Total
Net sales	$	599,926	$	22,915	$	622,841
Gross profit		53,715		3,481		57,196
Income from operations		37,388		1,508		38,896
Net income		37,660		1,296		38,956
Depreciation and amortization		21,676		1,599		23,275
Cash received by PAL under EAP program		22,342		—		22,342
Earnings recognized by PAL for EAP program		16,162		—		16,162
Dividends and cash distributions received		3,265		—		3,265