In June 1997, UNIFI 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 PAL. In exchange for its contribution, UNIFI received a 34% equity 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 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 global textile industry and apparel market. Per PAL’s fiscal 2018 audited financial statements, PAL had 12 manufacturing facilities located primarily in the southeast region of the U.S. and in Mexico, and PAL’s five largest customers accounted for approximately 74% of total revenues and 71% of total gross accounts receivable outstanding.

As PAL’s fiscal year end is the Saturday nearest to December 31 and its results are considered significant, UNIFI files an amendment to each Annual Report on Form 10-K on or before 90 days subsequent to PAL’s fiscal year end to provide PAL’s audited financial statements for PAL’s most recent fiscal year. UNIFI filed an amendment to its Annual Report on Form 10-K for fiscal 2018 on March 28, 2019 to provide PAL’s audited financial statements for PAL’s fiscal year ended December 29, 2018. UNIFI expects to file an amendment to this Annual Report on Form 10-K on or before March 27, 2020 to provide PAL’s audited financial statements for PAL’s fiscal year ended December 28, 2019.

The U.S. federal government maintains a program providing economic adjustment assistance to domestic users of upland cotton (the “cotton rebate program”). The cotton rebate program offers a subsidy for cotton consumed in domestic production, and the subsidy is paid the month after the eligible cotton is consumed. To be completely earned, the subsidy must be used within 18 months after the marketing year in which it is 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 provides a subsidy of up to three cents per pound. In December 2018, the U.S. federal government extended the program at the same rate through July 31, 2021, and for subsequent years, subject to funding available through annual appropriations. PAL recognizes its share of 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.

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 June 30, 2019, PAL had no futures contracts designated as cash flow hedges.

As of June 30, 2019, UNIFI’s investment in PAL was $112,398, which was reflected within investments in unconsolidated affiliates in the accompanying consolidated balance sheets. The reconciliation between UNIFI’s share of the underlying equity of PAL and its investment is as follows:

In September 2000, UNIFI 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. Raw material and production services for UNF are provided by Nilit 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.

In October 2009, UNIFI and Nilit America Inc. (“Nilit America”) formed a 50/50 joint venture, UNF America LLC (“UNFA”), for the purpose of operating a nylon extrusion facility which manufactures nylon POY. Raw material and production services for UNFA are provided by Nilit America 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 June 30, 2019, UNIFI’s open purchase orders related to this agreement were $2,919.

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

As of June 30, 2019 and June 24, 2018, UNIFI had combined accounts payable due to UNF and UNFA of $1,728 and $2,301, respectively.

UNIFI has determined that UNF and UNFA are variable interest entities and has also determined that UNIFI is the primary beneficiary of these entities, based on the terms of the supply agreement. 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 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. As of June 30 2019, UNIFI’s combined investments in UNF and UNFA were $1,922 and are shown within investments in unconsolidated affiliates in the accompanying consolidated balance sheets. 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. For UNIFI’s fiscal 2019, 2018 and 2017, PAL’s corresponding fiscal periods each consisted of 52 weeks.

	As of June 30, 2019
	PAL		Other		Total
Current assets	$	299,610	$	7,218	$	306,828
Noncurrent assets		158,304		696		159,000
Current liabilities		70,875		4,069		74,944
Noncurrent liabilities		3,252		—		3,252
Shareholders’ equity and capital accounts		383,787		3,845		387,632

UNIFI’s portion of undistributed earnings		43,343		821		44,164

	As of June 24, 2018
	PAL		Other		Total
Current assets	$	289,683	$	7,598	$	297,281
Noncurrent assets		162,242		875		163,117
Current liabilities		71,026		3,722		74,748
Noncurrent liabilities		3,389		—		3,389
Shareholders’ equity and capital accounts		377,510		4,751		382,261

	For the Fiscal Year Ended June 30, 2019
	PAL		Other		Total
Net sales	$	836,675	$	25,621	$	862,296
Gross profit		24,455		4,713		29,168
Income from operations		6,575		2,988		9,563
Net income		7,534		3,093		10,627
Depreciation and amortization		40,679		190		40,869

Cash received by PAL under cotton rebate program		13,367		—		13,367
Earnings recognized by PAL for cotton rebate program		12,896		—		12,896

Distributions received		647		2,000		2,647

	For the Fiscal Year Ended June 24, 2018
	PAL		Other		Total
Net sales	$	796,010	$	24,097	$	820,107
Gross profit		31,112		4,646		35,758
Income from operations		12,032		2,917		14,949
Net income		12,990		2,961		15,951
Depreciation and amortization		39,404		190		39,594

Cash received by PAL under cotton rebate program		13,797		—		13,797
Earnings recognized by PAL for cotton rebate program		13,334		—		13,334

Distributions received		9,236		3,000		12,236

	For the Fiscal Year Ended June 25, 2017
	PAL		Other		Total
Net sales	$	754,285	$	22,905	$	777,190
Gross profit		26,275		4,877		31,152
Income from operations		10,406		3,061		13,467
Net income		7,814		2,988		10,802
Depreciation and amortization		42,801		177		42,978

Cash received by PAL under cotton rebate program		14,293		—		14,293
Earnings recognized by PAL for cotton rebate program		13,491		—		13,491

Distributions received		822		1,500		2,322

As of the end of PAL’s corresponding 12-month fiscal periods ending in June, PAL’s amounts of deferred revenues related to the cotton rebate program were $0 for all periods.