16. Investments in Unconsolidated Affiliates and Variable Interest Entities

UNIFI currently maintains investments in three entities classified as unconsolidated affiliates: PAL; U.N.F. Industries, Ltd. (“UNF”); and UNF America LLC (“UNFA”). As of September 24, 2017, UNIFI’s investment in PAL was $111,184 and UNIFI’s combined investments in UNF and UNFA were $4,243, each of which is reflected within investments in unconsolidated affiliates in the accompanying condensed consolidated balance sheets.

Parkdale America, LLC

PAL is a limited liability company treated as a partnership for income tax reporting purposes. UNIFI accounts for its investment in PAL using the equity method of accounting. 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. The derivative instruments used are listed and traded on an exchange and are valued using quoted prices classified within Level 1 of the fair value hierarchy. As of September 2017, PAL had no futures contracts designated as cash flow hedges.

The reconciliation between UNIFI’s share of the underlying equity of PAL and its investment is as follows:

Underlying equity as of September 24, 2017	$	129,373
Initial excess capital contributions		53,363
Impairment charge recorded by UNIFI in fiscal 2007		(74,106	)
Anti-trust lawsuit against PAL in which UNIFI did not participate		2,652
Cotton rebate adjustments to PAL's depreciation expense		(98	)
Investment as of September 24, 2017	$	111,184

U.N.F. Industries Ltd.

Raw material and production services for UNF are provided by Nilit Ltd. under separate supply and services agreements. UNF’s fiscal year end is December 31 and it is a registered Israeli private company located in Migdal Ha-Emek, Israel.

UNF America LLC

Raw material and production services for UNFA are provided by Nilit America Inc. under separate supply and services agreements. UNFA’s fiscal year end is December 31 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 UNFA, UNIFI entered into a supply agreement with UNF and UNFA whereby UNIFI agreed to purchase all of its first quality nylon POY requirements for texturing (subject to certain exceptions) from either UNF or UNFA. The agreement has no stated minimum purchase quantities and pricing is negotiated every six months, based on market rates. As of September 24, 2017, UNIFI’s open purchase orders related to this agreement were $3,643.

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

	For the Three Months Ended
	September 24, 2017		September 25, 2016
UNF	$	608	$	778
UNFA		5,280		5,388
Total	$	5,888	$	6,166

As of September 24, 2017 and June 25, 2017, UNIFI had combined accounts payable due to UNF and UNFA of $2,621 and $2,301, respectively.

UNIFI has determined that UNF and UNFA are variable interest entities (“VIEs”) and has also determined that UNIFI is the primary beneficiary of these entities, based on the terms of the supply agreement discussed above. As a result, these entities should be consolidated with UNIFI’s financial results. As UNIFI purchases substantially all of the output from the two entities, the two entities’ balance sheets constitute 3% or less of UNIFI’s total assets and total liabilities, and because such balances are not expected to comprise a larger portion in the future, UNIFI has not included the accounts of UNF and UNFA in its consolidated financial statements. The financial results of UNF and UNFA are included in UNIFI’s consolidated financial statements with a one-month lag, using the equity method of accounting and with intercompany profits eliminated in accordance with UNIFI’s accounting policy. Other than the supply agreement discussed above, UNIFI does not provide any other commitments or guarantees related to either UNF or UNFA.

Condensed balance sheet and income statement information for UNIFI’s unconsolidated affiliates (including reciprocal balances) is presented in the following tables. PAL is defined as significant and its information is separately disclosed. PAL does not meet the criteria for segment reporting.

	As of September 24, 2017
	PAL		Other		Total
Current assets	$	262,830	$	10,869	$	273,699
Noncurrent assets		180,849		1,019		181,868
Current liabilities		59,959		3,579		63,538
Noncurrent liabilities		3,211		—		3,211
Shareholders’ equity and capital accounts		380,509		8,309		388,818

UNIFI’s portion of undistributed earnings		41,908		2,264		44,172

	As of June 25, 2017
	PAL		Other		Total
Current assets	$	247,820	$	10,340	$	258,160
Noncurrent assets		183,418		1,039		184,457
Current liabilities		54,389		3,588		57,977
Noncurrent liabilities		3,263		—		3,263
Shareholders’ equity and capital accounts		373,586		7,791		381,377

	For the Three Months Ended September 24, 2017
	PAL		Other		Total
Net sales	$	202,791	$	5,693	$	208,484
Gross profit		13,710		954		14,664
Income from operations		9,956		509		10,465
Net income		8,346		518		8,864
Depreciation and amortization		9,600		47		9,647

Cash received by PAL under cotton rebate program		2,241		—		2,241
Earnings recognized by PAL for cotton rebate program		3,255		—		3,255

Distributions received		7,178		—		—

	For the Three Months Ended September 25, 2016
	PAL		Other		Total
Net sales	$	205,900	$	6,002	$	211,902
Gross profit		5,496		1,545		7,041
Income from operations		861		1,085		1,946
Net income		874		1,097		1,971
Depreciation and amortization		11,476		39		11,515

Cash received by PAL under cotton rebate program		4,127		—		4,127
Earnings recognized by PAL for cotton rebate program		3,889		—		3,889

Distributions received		—		750		750