Note 24 - Investments in Unconsolidated Affiliates and Variable Interest Entities

9 Months Ended

Mar. 24, 2013

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, both foreign and domestic.  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 82% of total revenues and 77% of total gross accounts receivable outstanding, with the largest customer accounting for approximately 38% of revenues and 35% of accounts receivable.

During August 2008, a federal government program commenced providing economic adjustment assistance to domestic users of upland cotton (the “EAP program”).  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 equal to the greater of (1) the sum of the prime rate plus an applicable percentage or (2) the sum of LIBOR plus an applicable percentage.  PAL’s revolving credit facility includes covenants that require PAL to limit capital expenditures, maintain a minimum fixed-charge coverage ratio, restrict its leverage ratio and maintain a minimum tangible net worth. PAL informed the Company that as of March 2013, PAL’s cash on-hand was $24,554, PAL had $5,000 of outstanding borrowings on its revolving credit facility and PAL was in compliance with all debt covenants.

PAL is subject to price risk related to anticipated fixed-price yarn sales.  To protect the gross margin of these sales, PAL may enter into cotton futures to manage changes in raw material prices in order to protect the gross margin of fixed-priced yarn sales.  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.  As of March 2013, PAL had no futures contracts designated as cash flow hedges.

As of March 24, 2013, the Company’s investment in PAL was $88,304 and is 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 March 2013	$	106,803
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		(408	)
Investment as of March 2013	$	88,304

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 March 24, 2013, the Company’s open purchase orders related to this agreement were $6,711.

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

	For the Nine Months Ended
	March 24, 2013		March 25, 2012
UNF	$	8,792	$	10,294
UNF America		16,936		12,446
Total	$	25,728	$	22,740

As of March 24, 2013 and June 24, 2012, the Company had combined accounts payable due to UNF and UNF America of $3,744 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 constitute 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 March 24, 2013, the Company’s combined investments in UNF and UNF America were $4,667 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 March 24, 2013 (Unaudited)
	PAL		Other		Total
Current assets	$	256,820	$	10,643	$	267,463
Noncurrent assets		114,125		3,188		117,313
Current liabilities		37,530		4,629		42,159
Noncurrent liabilities		19,288		—		19,288
Shareholders’ equity and capital accounts		314,127		9,202		323,329
The Company’s portion of undistributed earnings		17,750		1,542		19,292

	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 March 24, 2013 (Unaudited)
	PAL		Other		Total
Net sales	$	197,242	$	8,188	$	205,430
Gross profit		20,956		944		21,900
Income from operations		12,053		549		12,602
Net income		12,553		573		13,126
Depreciation and amortization		6,577		25		6,602
Cash received by PAL under EAP program		4,439		—		4,439
Earnings recognized by PAL for EAP program		2,576		—		2,576
Dividends and cash distributions received		7,807		—		7,807

As of the end of PAL’s fiscal March 2013 and fiscal December 2012 periods, PAL’s amounts of deferred revenues related to the EAP program were $6,930 and $4,990, respectively.

	For the Three Months Ended March 25, 2012 (Unaudited)
	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		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

As of the end of PAL’s fiscal March 2012 and fiscal December 2011 periods, PAL’s amounts of deferred revenues related to the EAP program were $0 and $0, respectively.

	For the Nine Months Ended March 24, 2013 (Unaudited)
	PAL		Other		Total
Net sales	$	567,854	$	26,423	$	594,277
Gross profit		30,445		4,322		34,767
Income from operations		12,823		3,053		15,876
Net income		14,439		3,068		17,507
Depreciation and amortization		22,577		75		22,652
Cash received by PAL under EAP program		13,208		—		13,208
Earnings recognized by PAL for EAP program		6,444		—		6,444
Dividends and cash distributions received		10,031		500		10,531

As of the end of PAL’s fiscal March 2013 and fiscal June 2012 periods, PAL’s amounts of deferred revenues related to the EAP program were $6,930 and $166, respectively.

	For the Nine Months Ended March 25, 2012 (Unaudited)
	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		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

As of the end of PAL’s fiscal March 2012 and fiscal June 2011 periods, PAL’s amounts of deferred revenues related to the EAP program were $0 and $0, respectively.