Retailers have reacted to the global economic downturn by focusing more on basic, lower value offerings, slowing the adoption cycle of some of the Company's PVA products. This has resulted in decreases in the Company's PVA sales volume, though at a slightly lower rate than the Company's overall volumes. The Company remains committed to its PVA growth strategy and will continue to invest in the development and marketing of PVA products. The Company believes in the principles of sustainability and environmental responsibility, and its portfolio of Repreve® 100% recycled products, will provide it with a distinct competitive advantage in this important and growing area. In the first quarter of fiscal year 2010, the Company's Brazilian operation's volumes were flat as compared to the same quarter in the prior year however it is reporting improved results due to improved conversion margins and decreased manufacturing costs. The Brazilian subsidiary's operations have recovered after two slow quarters, driven by significant gain in market share and a more timely economic recovery as compared to the U.S. Accordingly, the Company expects continued growth in revenues from its Brazilian operations over the next several quarters.
Despite the decline in revenues, the Company is reporting improved results as compared to the same quarter in the prior year. Consolidated gross profit increased $6.0 million or 45% as compared to the prior year quarter. The Company's gross profit was positively impacted by fundamental improvements made in the Company's operating costs combined with lower raw material costs that were well below the historic high costs the Company experienced in the same quarter in the prior year.
The Company's newly formed China subsidiary, UTSC, is operating on plan and is expected to grow with several new programs nearing adoption. UTSC recently introduced Repreve® polyester staple fiber in China, adding to the most extensive array of recycled fibers in the Asian markets.
On September 30, 2009 the Company completed an agreement with the Company's partner, Nilit to shift one-third of the spinning assets of UNF, to its newly formed joint venture, UNF America, LLC, for the purpose of producing nylon partially oriented yarn ("POY") in Nilit's Martinsville, Virginia plant. This new configuration will allow UNF America, LLC to produce Berry Amendment and North American Free Trade Agreement ("NAFTA") compliant yarns. The new agreement will shorten the Company's supply chain resulting in improvements in the working capital, flexibility and the financial results of its nylon joint ventures. Parkdale America, LLC ("PAL") entered into an agreement for PAL to buy most of the spun cotton yarn manufacturing operations from Hanesbrands, Inc ("HBI"). In addition, PAL will supply a substantial amount of HBI's yarn demand in the western hemisphere. Under the agreement, PAL will take over the operations of three HBI manufacturing plants, and will supply HBI from those facilities and other existing U.S. production plants. While the funding required to finance this purchase and the required working capital will likely limit the Company's ability to receive large dividends from PAL, the Company does expect this agreement will substantially improve the financial performance of the joint venture and ultimately the fair value of its investment.
The fundamental advantages of the U.S.-Dominican Republic-Central American Free Trade Agreement ("CAFTA"), which are its competitive costs and shorter, more flexible supply chain, remain attractive to apparel manufacturers. The Company believes in the long-term growth of the region in spite of the recent decline in the region's market share of man-made fiber apparel. This decline was not unexpected, considering the recession driven trend to lower cost apparel. Currently, approximately 8% of the Company's U.S. production is shipped directly to fabric customers in the CAFTA region. After assessing several options, the Company has decided to establish a wholly-owned base of operations in Central America. These operations will provide the Company's Central American fabric customers order flexibility due to a more just-in-time product delivery. During the first quarter of fiscal 2010, the Company established its presence in the region by entering into an agreement with a warehouse in El Salvador

to house and ship U.S. product to the Company's regional customers and it expects its wholly-owned operations to be running within the next six to nine months.
Key Performance Indicators
The Company continuously reviews performance indicators to measure its success. The following are the indicators management uses to assess performance of the Company's business:
• sales volume, which is an indicator of demand;

• margins, which are indicators of product mix and profitability;

• adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization ("adjusted EBITDA"), which the Company defines as pre-tax income before interest expense, depreciation and amortization expense and loss or income from discontinued operations, adjusted to exclude equity in earnings and losses of unconsolidated affiliates, write down of long-lived assets and unconsolidated affiliate, non-cash compensation expense net of distributions, gains and losses on sales of property, plant and equipment, currency and hedging gains and losses, asset consolidation and optimization expense, goodwill impairment, gain and loss on extinguishment of debt, restructuring charges and recoveries, and Kinston shutdown costs, as revised from time to time, which the Company believes is a supplemental measure of its performance and ability to service debt; and

• adjusted working capital (accounts receivable plus inventory less accounts payable and accruals) as a percentage of sales, which is an indicator of the Company's production efficiency and ability to manage its inventory and receivables.

Corporate Restructuring
Severance
The Company recorded severance expense of $2.4 million for its former President and Chief Executive Officer ("CEO") during the first quarter of fiscal year 2008 and $1.7 million of severance expense related to its former Chief Financial Officer ("CFO") during the second quarter of fiscal year 2008.
In the third quarter of fiscal year 2009, the Company reorganized, reducing its workforce due to the economic downturn. Approximately 200 salaried and wage employees were affected by this reorganization related to the Company's efforts to reduce costs. As a result, the Company recorded $0.3 million in severance charges related to certain allocated salaried corporate and manufacturing support staff.
The table below summarizes changes to the accrued severance and accrued restructuring accounts for the quarter ended September 27, 2009 (amounts in thousands):

                                        Balance at                                                                       Balance at
                                       June 28, 2009        Charges         Adjustments         Amounts Used         September 27, 2009

Accrued severance                      $   1,687  (1)           20                 -                  (415 )          $          1,292

(1) As of June 28, 2009, the Company classified $0.3 million of executive severance as long-term.

Joint Ventures and Other Equity Investments The following table represents the Company's investments in unconsolidated affiliates:

                                              Date                                    Percent
             Affiliate Name                 Acquired            Location             Ownership

Yihua Unifi Fibre Company Limited            Aug-05         Yizheng, Jiangsu                50 %
("YUFI") (1)                                                   Province,
                                                          People's Republic of
                                                                 China

Parkdale America, LLC ("PAL")                Jun-97         North and South                 34 %
                                                                Carolina

U.N.F. Industries, LLC ("UNF")               Sep-00        Migdal Ha - Emek,                50 %
                                                                 Israel

(1) The Company completed the sale of YUFI during the fourth quarter of fiscal year 2009.

Condensed income statement information for the quarters ended September 27, 2009 and September 28, 2008, of the combined unconsolidated equity affiliates are as follows (amounts in thousands):

                                            For the Quarter Ended September 27, 2009
                                       YUFI (1)          PAL          UNF          Total
     Net sales                                       $  94,870     $  4,576     $  99,446
     Gross profit                                        7,683          726         8,409
     Depreciation and amortization                       4,552          474         5,026
     Income from operations                              4,771          394         5,165
     Net income                                          6,917          355         7,272

                                            For the Quarter Ended September 28, 2008
                                         YUFI            PAL          UNF          Total
     Net sales                        $  39,881      $ 122,083     $  5,892     $ 167,856
     Gross profit (loss)                 (2,048 )        6,246         (789 )       3,409
     Depreciation and amortization        1,395          4,457          474         6,326
     Income (loss) from operations       (4,156 )        3,478       (1,270 )      (1,948 )
     Net income (loss)                   (4,617 )       10,146       (1,143 )       4,386

In June 1997, the Company and Parkdale Mills, Inc. entered into a contribution agreement whereby both 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 contributions, the Company received a 34% ownership interest in the joint venture. PAL is a producer of cotton and synthetic yarns for sale to the textile and apparel industries primarily within North America. PAL has 10 manufacturing facilities primarily located in central and western North Carolina and in South Carolina. For the quarters ended September 27, 2009 and September 28, 2008 the Company recognized net equity earnings of $2.4 million and $3.5 million, respectively. The Company received distributions from PAL of $1.6 million and $2.1 million for the first quarters of fiscal years 2010 and 2009, respectively.
PAL receives benefits under the Food, Conservation, and Energy Act of 2008 ("2008 U.S. Farm Bill") which extended the existing upland cotton and extra long staple cotton programs, including economic adjustment assistance provisions for ten years. Beginning August 1, 2008, the program provides textile mills a subsidy of four cents per pound on eligible upland cotton consumed during the first four years and three cents per pound for the last six years. The economic assistance received under this program must be used to acquire, construct, install, modernize, develop, convert or expand land, plant, buildings, equipment, or machinery. Capital expenditures must be directly attributable to the purpose of manufacturing upland cotton into eligible cotton products in the U.S. The recipients have the marketing year from August 1 to July 31, plus eighteen months to make the capital expenditures. In the period when both criteria have been met; eligible upland cotton has been consumed, and qualifying capital expenditures under the program have been made, the economic assistance is recognized as reductions to cost of sales. PAL received economic assistance under the program of $14.0 million and $4.0 million during the eleven months ended June 28, 2009 and the quarter ended September 27, 2009, respectively. Based on the previously discussed accounting treatment, PAL recognized reductions to cost of sales of $9.7 million and $0.4 million for the same respective periods. Accordingly as of September 27, 2009, $7.9 million of the received economic assistance remains as deferred revenue to be recognized as future qualifying capital expenditures are made.

On October 19, 2009 PAL notified the Company that $8.2 million of the $9.7 million in capital expenditures recognized for fiscal 2009 had been disqualified by the U.S. Department of Agriculture. PAL has appealed the decision with the U.S. Department of Agriculture, but it is unknown to the Company as to when a final ruling will be made. In the event that PAL's appeal is unsuccessful, PAL may be required to adjust prior period earnings, but PAL expects there will be sufficient future qualifying capital expenditures to recapture any benefit that may remain disqualified after the appeal process has been completed.
In August 2005, the Company formed YUFI, a 50/50 joint venture with Sinopec Yizheng Chemical Fiber Co., Ltd, ("YCFC"), to manufacture process and market polyester filament yarn in YCFC's facilities in Yizheng, Jiangsu Province, People's Republic of China ("China"). During fiscal year 2008, the Company's management explored strategic options with its joint venture partner in China with the ultimate goal of determining if there was a viable path to profitability for YUFI. On July 30, 2008, the Company announced that it had reached a proposed agreement to sell its 50% interest in YUFI to its partner for $10.0 million.
In December 2008, the Company renegotiated the proposed agreement to sell its interest in YUFI to YCFC for $9.0 million and in March 2009 the sale closed. The Company continues to service customers in Asia through Unifi Textiles Suzhou Co., Ltd. ("UTSC"), a wholly-owned subsidiary based in Suzhou, China, that is focused on the development, sales and service of PVA yarns.
In September 2000, the Company and Nilit Ltd ("Nilit") formed UNF, a 50/50 joint venture to produce nylon POY at Nilit's manufacturing facility in Migdal Ha-Emek, Israel which is the Company's primary source of nylon POY for its texturing operations. For the quarters ended September 27, 2009 and September 28, 2008, the Company recognized net equity losses of $0.3 million and net income of $32 thousand, respectively.
On September 30, 2009, the Company completed an agreement with the Company's partner, Nilit, to shift one-third of the spinning assets of UNF, to its newly formed joint venture, UNF America, LLC, for the purpose of producing nylon POY in Nilit's Martinsville, Virginia plant. This new configuration will allow UNF America, LLC to produce Berry Amendment and North American Free Trade Agreement ("NAFTA") compliant yarns. The new agreement will shorten the Company's supply chain resulting in improvements in the working capital, flexibility and the financial results of its nylon joint ventures.

Review of First Quarter Fiscal Year 2010 compared to First Quarter Fiscal Year 2009
The following table sets forth the income (loss) from continuing operations components for each of the Company's business segments for the fiscal quarters ended September 27, 2009 and September 28, 2008. The table also sets forth each of the segments' net sales as a percent to total net sales, the net income
(loss) components as a percent to total net sales and the percentage increase or decrease of such components over the comparable prior year period (amounts in thousands, except percentages):

                                    For the Quarters Ended
                      September 27, 2009               September 28, 2008
                                  % to Total                       % to Total       % Change
     Net sales
     Polyester   $   104,460             73.1     $   122,979             72.8          (15.1 )
     Nylon            38,391             26.9          46,030             27.2          (16.6 )

     Total       $   142,851            100.0     $   169,009            100.0          (15.5 )




                                                     % to Sales                         % to Sales
Gross profit
Polyester                            $ 13,803                9.7        $  8,200                4.8            68.3
Nylon                                   5,603                3.9           5,225                3.1             7.2

Total                                  19,406               13.6          13,425                7.9            44.6

Write down of long-lived assets
Polyester                                 100                  -               -                  -               -
Nylon                                       -                  -               -                  -               -

Total                                     100                  -               -                  -               -

Selling, general and
administrative expenses
Polyester                               8,832                6.2           8,361                4.9             5.6
Nylon                                   2,332                1.6           2,184                1.3             6.8

Total                                  11,164                7.8          10,545                6.2             5.9

Provision for bad debts                   576                0.4             558                  -             3.2
Other operating
(income) expense, net                     (87 )                -            (561 )                -           (84.5 )
Non-operating (income) expense,
net                                     2,629                1.9           1,570                0.9            67.5

Income from continuing
operations before income taxes          5,024                3.5           1,313                0.8           282.6
Provision for income taxes              2,535                1.8           1,885                1.1            34.5

Income (loss) from continuing
operations                              2,489                1.7            (572 )             (0.3 )        (535.0 )
Loss from discontinued
operations, net of tax                      -                  -            (104 )             (0.1 )        (100.0 )

Net income (loss)                    $  2,489                1.7        $   (676 )             (0.4 )        (468.2 )

As reflected in the tables above, the Company recognized a $5.0 million profit from continuing operations before income taxes which was a $3.7 million increase over the prior year. The increase in income from continuing operations was primarily attributable to increased conversion margins in the domestic nylon operations, decreased converting costs in the domestic polyester operations and decreased converting costs in the Brazilian operations.

Consolidated net sales from continuing operations decreased $26.2 million, or 15.5% for the first quarter of fiscal year 2010 compared to the prior year first quarter. Consolidated unit sales volumes decreased by 5.1% for the first quarter of fiscal year 2010 primarily due to the global downturn that began the second quarter of the prior fiscal year and impacted all supply chains and markets. Compared to the prior year quarter, polyester and nylon segment volumes decreased 2.5% and 22.4%, respectively. The weighted-average selling price on a consolidated basis decreased by 10.4% for the same period. Refer to the segment operations under the captions "Polyester Operations" and "Nylon Operations" for a further discussion of each segment's operating results.
Consolidated gross profit from continuing operations increased by $6.0 million to $19.4 million for the first quarter of fiscal year 2010 as compared to the prior year first quarter. This increase in gross profit was primarily attributable to improved per unit manufacturing costs for the polyester segment. Manufacturing costs on a per unit basis decreased 17.8% for the polyester segment as the Company aligned operational costs with lower sales volumes and benefited from increased Brazilian incentives. The nylon segment also experienced an improvement in gross profit due to higher conversion margins of 13.4% on a per unit basis attributable to mix enrichment and the resulting higher average selling prices. Refer to the segment operations under the captions "Polyester Operations" and "Nylon Operations" for a further discussion of each segment's operating results.
Selling, General, and Administrative Expenses Consolidated selling, general and administrative ("SG&A") expenses increased by $0.6 million, or 5.9%, during the first quarter of fiscal year 2010 as compared to the same prior year quarter. The increase in SG&A in the first quarter was primarily a result of increases of $0.5 million in non-cash deferred compensation costs, $0.2 million in sales and service fees, and $0.2 million in equipment maintenance expenses offset by decreases of $0.2 million in salary and fringe expenses and $0.1 million in depreciation expenses. Other Operating (Income) Expense, Net
Other operating (income) expense, net decreased from $0.6 million of income in the first quarter of fiscal year 2009 to $0.1 million of income in the first quarter of fiscal year 2010. The following table shows the components of other operating (income) expense, net (amounts in thousands):

                                                   For the Quarters Ended
                                             September 27,         September 28,
                                                 2009                  2008
    Gain on sale of fixed assets            $           (94 )     $          (316 )
    Currency (gains) losses                              13                  (304 )
    Other, net                                           (6 )                  59

    Other operating (income) expense, net   $           (87 )     $          (561 )

Income Taxes
The Company's income tax provision for the quarter ended September 27, 2009 resulted in tax expense at an effective rate of 50.5% compared to the quarter ended September 28, 2008 which resulted in a tax expense at an effective rate of 143.5%. The difference between the Company's income tax expense and the U.S. statutory rate for the quarter ended September 27, 2009 is primarily due to losses in the U.S. and other jurisdictions for which no tax benefit can be recognized while operating profit is generated in other taxable jurisdictions. The difference between the Company's income tax benefit and the U.S. statutory rate for the quarter ended September 28, 2008 was also due to losses in the U.S. and other jurisdictions for which no tax benefit could be recognized.

Deferred income taxes have been provided for the temporary differences between financial statement carrying amounts and the tax basis of existing assets and liabilities. The valuation allowance on the Company's net domestic deferred tax assets is reviewed quarterly and will be maintained until sufficient positive . . .