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 March 25, 2018, UNIFI’s investment in PAL was $109,440 and UNIFI’s combined investments in UNF and UNFA were $2,809, 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 March 2018, 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 March 25, 2018	$	127,531
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
Investment as of March 25, 2018	$	109,440

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 March 25, 2018, UNIFI’s open purchase orders related to this agreement were $5,686.

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

	For the Nine Months Ended
	March 25, 2018		March 26, 2017
UNF	$	1,463	$	1,676
UNFA		16,291		14,910
Total	$	17,754	$	16,586

As of March 25, 2018 and June 25, 2017, UNIFI had combined accounts payable due to UNF and UNFA of $2,692 and $2,301, respectively.

UNIFI has determined that UNF and UNFA are variable interest entities (“VIEs”) and 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 current assets, 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 tables below. PAL is defined as significant and its information is separately disclosed. PAL does not meet the criteria for segment reporting.

	As of March 25, 2018						As of June 25, 2017
	PAL		Other		Total		PAL		Other		Total
Current assets	$	267,775	$	9,967	$	277,742	$	247,820	$	10,340	$	258,160
Noncurrent assets		165,940		923		166,863		183,418		1,039		184,457
Current liabilities		54,943		3,773		58,716		54,389		3,588		57,977
Noncurrent liabilities		3,683		—		3,683		3,263		—		3,263
Shareholders’ equity and capital accounts		375,089		7,117		382,206		373,586		7,791		381,377

UNIFI’s portion of undistributed earnings		40,113		1,153		41,266		46,248		1,916		48,164

	For the Three Months Ended March 25, 2018						For the Three Months Ended March 26, 2017
	PAL		Other		Total		PAL		Other		Total
Net sales	$	199,473	$	5,764	$	205,237	$	202,216	$	5,403	$	207,619
Gross profit		6,078		1,001		7,079		8,728		1,118		9,846
Income from operations		80		601		681		6,102		680		6,782
Net income		1,409		611		2,020		3,905		581		4,486
Depreciation and amortization		9,081		48		9,129		9,612		46		9,658

Cash received by PAL under cotton rebate program		3,220		—		3,220		3,163		—		3,163
Earnings recognized by PAL for cotton rebate program		3,386		—		3,386		3,592		—		3,592

Distributions received		1,798		750		2,548		—		—		—

	For the Nine Months Ended March 25, 2018						For the Nine Months Ended March 26, 2017
	PAL		Other		Total		PAL		Other		Total
Net sales	$	578,841	$	18,213	$	597,054	$	561,190	$	16,461	$	577,651
Gross profit		22,167		3,583		25,750		15,989		3,646		19,635
Income from operations		8,114		2,295		10,409		4,114		2,274		6,388
Net income		8,357		2,327		10,684		2,541		2,191		4,732
Depreciation and amortization		29,566		142		29,708		32,796		130		32,926

Cash received by PAL under cotton rebate program		10,162		—		10,162		10,925		—		10,925
Earnings recognized by PAL for cotton rebate program		9,832		—		9,832		10,388		—		10,388

Distributions received		8,976		2,250		11,226		—		1,500		1,500