Note 1 Description of the Company and Basis of Presentation

International Textile Group, Inc. (“ITG”, the “Company”, “we”, “us” or “our”) is a global, diversified textile manufacturer headquartered in Greensboro, North Carolina, with operations in the United States, Mexico, and China. The Company believes it is one of the world’s largest and most diversified producers of denim fabrics and the largest producer of better denim fabrics for products distributed through department stores and specialty retailers. In addition, the Company believes it is one of the largest worsted wool manufacturers and commission printers and finishers in North America, and is a leading developer, marketer and manufacturer of performance synthetic apparel fabrics, technical and value added fabrics, contract fabrics for interior furnishings, automotive safety fabrics, and other textile products used in a variety of niche industrial and commercial applications.

The December 31, 2015 consolidated balance sheet data included herein was derived from the Company’s audited financial statements. The unaudited consolidated financial statements included herein have been prepared by ITG pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) as well as accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the information furnished reflects all adjustments necessary for a fair statement of the results for the reported interim periods and as of the reported dates, which consist of only normal recurring adjustments. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted from this report, as is permitted by such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of any given quarter are not necessarily indicative of the results to be expected for any other quarter or the full fiscal year.

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts recorded in the consolidated financial statements and the related notes to consolidated financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to the valuation of receivables, inventories, goodwill, intangible assets, other long-lived assets, guarantee obligations, and assumptions used in the calculation of, among others, income taxes, pension and postretirement benefits, legal and environmental costs, and of the assumptions on which to base estimates and judgments. These estimates and assumptions are based upon historical factors, current circumstances and expectations, and the experience and judgment of the Company’s management. Management believes that its estimates impacting the accompanying consolidated financial statements, including for these matters, are reasonable based on facts currently available. Illiquid credit markets, volatile foreign currencies and equity values as well as changes in general or industry-specific economic conditions affecting the Company can increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results may differ from these estimates. Management monitors relevant factors and will adjust such estimates and assumptions when facts and circumstances dictate. Changes in these estimates are reflected in the financial statements in the periods in which such change occurs.

The unaudited consolidated financial statements and other financial information included in this Quarterly Report on Form 10-Q, unless otherwise specified, have been presented to separately show the effects of discontinued operations.

Business and Credit Concentrations

The Company’s business is dependent on the success of, and its relationships with, its largest customers. No single customer accounted for 10% or more of the Company’s consolidated accounts receivable as of March 31, 2016 or December 31, 2015, and one customer, V.F. Corporation, accounted for approximately 12% of the Company’s consolidated net sales in 2015 and in the three months ended March 31, 2016, which sales were in the bottom-weight woven fabrics segment. Additionally, the Company believes that two of its customers, Levi Strauss & Co. (in the bottom-weight woven fabrics segment) and the U.S. Department of Defense (in the bottom-weight woven fabrics and commission finishing segments), are able to direct certain of their respective producers to purchase products directly from the Company for use in these customers’ products. Although neither Levi Strauss & Co. nor the U.S. Department of Defense are directly liable for the payment by any of those producers for products purchased from the Company, the Company believes that continued sales to the producers of Levi Strauss & Co. and U.S. Department of Defense products are dependent upon the Company maintaining strong supplier/customer relationships with each of Levi Strauss & Co. and the U.S Department of Defense.

The Company has a purchase agreement with Summit Yarn LLC, an affiliate of Parkdale America, LLC, to provide for a continuing long-term supply of yarn for certain of the Company’s operations. Purchases of raw materials from Summit Yarn LLC and Parkdale were approximately $57.2 million in 2015 and approximately $14.8 million in the three months ended March 31, 2016, which purchases were in the bottom-weight woven fabrics segment. The Company believes that its purchases from Summit Yarn LLC comprise the majority of the production of that entity.

The loss of or reduction in business from any key customer or supplier or a worsening of certain customer or supplier relationships could have a material adverse effect on the Company’s overall results of operations, cash flows or financial position.

Certain of the Company’s consolidated subsidiaries are subject to restrictions in relevant financing documents that limit the cash dividends they can pay and loans they may make to the Company. Of the Company’s consolidated cash balance of $7.7 million at March 31, 2016, approximately $0.2 million held by certain subsidiaries was restricted due to certain contractual arrangements. In addition, certain of the Company’s foreign consolidated subsidiaries are subject to various governmental statutes and regulations that restrict and/or limit loans and dividend payments they may make to the Company. At March 31, 2016, the Company’s proportionate share of restricted net assets of its consolidated subsidiaries was approximately $26.3 million.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue From Contracts With Customers (Topic 606)”, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-09 is based on the principle that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. ASU 2014-09 was originally proposed to be effective for the Company for annual periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date” , which defers the effective date of ASU 2014-09 for one year, making ASU 2014-09 effective for annual periods beginning after December 15, 2017 for all public business entities, including interim periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. ASU 2016-08 amends the principal-versus-agent implementation guidance and illustrations in Topic 606. The FASB issued ASU 2016-08 in response to concerns identified by stakeholders, including those related to (1) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (2) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” . ASU 2016-10 amends the guidance in Topic 606 related to identifying performance obligations and accounting for licenses of intellectual property. The amendments address implementation issues that were raised by stakeholders and discussed by the Revenue Recognition Transition Resource Group. The updates are not intended to change the core principles of Topic 606; however, they attempt to clarify important aspects of the guidance and improve its operability. The FASB also amended examples and added several new examples to illustrate the new guidance. The Company is currently evaluating the impact, if any, that ASU 2014-09, ASU 2015-14, ASU 2016-08 and ASU 2016-10 will have on its consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. ASU 2014-15 requires an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued. ASU 2014-15 defines and clarifies that substantial doubt exists when conditions and events indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date financial statements are issued or available to be issued and requires management to perform the assessment every interim and annual period. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. ASU 2014-15 does not impact companies’ financial statements. Adoption of this standard is not expected to have an impact on the Company’s financial statement disclosures.

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. ASU 2015-11 simplifies the subsequent measurement of inventories by replacing the three measurements under the current lower of cost or market test with one measurement under a lower of cost or net realizable value test. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The guidance applies only to inventories for which cost is determined by methods other than the last in first-out (“LIFO”) method or the retail inventory method. The guidance is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact, if any, that ASU 2015-11 is expected to have on its consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, simplifies the impairment assessment of equity investments without readily determinable fair values, eliminates the requirement to disclose the methods and significant assumptions used to estimate fair value, requires use of the exit price notion when measuring fair value, requires separate presentation in certain financial statements, and requires an evaluation of the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. ASU 2016-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect that the adoption of ASU 2016-01 will have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” . ASU 2016-02 requires a lessee to recognize a right-of-use asset and a lease liability in its balance sheet, initially measured at the present value of the lease payments, for both financing and operating leases (other than leases with a term of twelve months or less). ASU 2016-02 also requires a lessee to recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term generally on a straight-line basis, and it also requires additional qualitative and quantitative disclosures. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the Emerging Issues Task Force)” . ASU 2016-05 clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public companies, ASU 2016-05 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of ASU 2016-05 will have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force)” . ASU 2016-06 simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by clarifying that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. For public companies, ASU 2016-06 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect that the adoption of ASU 2016-06 will have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, “Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting”. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest. It also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. For all companies, ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, applied prospectively. Earlier application is permitted. The Company does not expect that the adoption of ASU 2016-07 will have a material impact on its consolidated financial statements.

Note 2 Discontinued Operations

The Company deconsolidated its ITG-Phong Phu Joint Venture (“ITG-PP”), a cotton-based fabrics and garment manufacturing operation in Vietnam, as of May 25, 2012 as a result of the entry into an enforcement agreement pursuant to which Vietnam Technological Commercial Joint Stock Bank (“Techcombank”) took possession of certain assets of ITG-PP in accordance with the terms of its credit agreement with ITG-PP. The obligations of ITG-PP are non-recourse to the Company or any other subsidiary of the Company, but are secured by the assets of ITG-PP. As of the date hereof, no final sale of the assets has occurred.

Because the disposal or transfer of assets and obligations of the ITG-PP business comprised the entire business operations of such entity and the Company has no significant continuing cash flows from, or continuing involvement with, such operation, the results of operations of the ITG-PP business is presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented. ITG-PP did not have any net sales in the three months ended March 31, 2016 or 2015. In accordance with GAAP, the Company allocates parent company interest to discontinued operations based on parent company debt that is required to be repaid from proceeds of the transaction giving rise to the disposition. No parent company interest has been allocated to the ITG-PP discontinued operations due to the uncertainty of any amounts to be received by the Company.

Note 4 Impairment Testing of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, the Company updates each quarter the test of recoverability of the value of its long-lived assets pursuant to the provisions of FASB ASC 360, “ Property, Plant, and Equipment ”. Such recoverability reviews and tests did not result in any impairment charges in the three months ended March 31, 2016 or 2015. The Company cannot predict the occurrence of any future events that might adversely affect the carrying value of long-lived assets. A decline in general economic or industry-specific business conditions could result in future impairment charges with respect to the Company’s long-lived assets, including any of its property, plant and equipment.

(1)      Non-recourse to the U.S. parent company.

U.S. Credit Facility

The Company and certain of its U.S. subsidiaries are party to an Amended and Restated Credit Agreement with Wells Fargo Bank, N.A. as agent and lender, and certain other lenders (as amended, the “U.S. Credit Agreement”). As amended to date, the U.S. Credit Agreement provides for a revolving credit facility of $85.0 million (the “U.S. Revolver”) and a term loan of $5.8 million (the “U.S. Term Loan”).

The U.S. Term Loan is due and payable on January 1, 2017, and outstanding amounts under the U.S. Revolver are due and payable on December 18, 2019. The U.S. Term Loan requires repayments of $0.3 million per month until maturity. Borrowings under the U.S. Credit Agreement bear interest at the London Interbank Offered Rate (“LIBOR”), plus an applicable margin, or other published bank rates, plus an applicable margin, at the Company’s option. At March 31, 2016, there was $13.5 million outstanding under the U.S. Revolver at a weighted average interest rate of 3.5% and $2.1 million principal outstanding under the U.S. Term Loan at a weighted average interest rate of 3.2% (effective interest rate of 9.6%). As of March 31, 2016, the Company had $8.3 million of standby letters of credit issued in the normal course of business that reduced borrowing availability under the U.S. Revolver, none of which had been drawn upon. At March 31, 2016, the Company’s average adjusted availability (as defined under the U.S. Credit Agreement) under the U.S. Revolver was $60.3 million. Depending on amounts borrowed and average adjusted availability, the U.S. Revolver requires the payment of an unused commitment fee in the range of 0.25% to 0.375% annually, payable monthly.

If the Company’s excess availability (as defined in the U.S. Credit Agreement) falls below certain predefined levels, the lenders under the U.S. Credit Agreement can draw upon a standby letter of credit in the amount of $16.3 million (the “WLR LC”); no such amounts had been drawn by the lenders as of March 31, 2016. The U.S. Credit Agreement provides for reductions of the WLR LC of up to $5.0 million, or termination of the WLR LC, based upon amounts of the U.S. Term Loan repaid under the U.S. Credit Agreement, the maintenance of a specified fixed charge coverage ratio, the level of average excess availability, and certain other conditions. The WLR LC has been provided by WLR Recovery Fund IV, L.P. (“Fund IV”), which is controlled by WL Ross & Co. LLC, our controlling stockholder (“WLR LLC”). One member of our board of directors is also affiliated with various investment funds controlled by WLR LLC (collectively, the “WLR Affiliates”) that directly own a majority of our voting stock.

The obligations of the Company (and certain of its U.S. subsidiaries) under the U.S. Credit Agreement are secured by certain of the Company’s (and its U.S. subsidiaries’) U.S. assets, a pledge by the Company (and its U.S. subsidiaries) of the stock of their respective U.S. subsidiaries and a pledge by the Company (and its U.S. subsidiaries) of the stock of certain of their respective foreign subsidiaries.

The U.S. Credit Agreement contains affirmative and negative covenants and events of default customary for agreements of this type. The Company was in compliance with such covenants as of March 31, 2016. The U.S. Credit Agreement also contains a cross default and cross acceleration provision relating to that certain Note Purchase Agreement, originally dated as of June 6, 2007 (as amended, the “Note Purchase Agreement”).

Subsidiary Credit Facilities

In January 2015, a wholly-owned subsidiary of the Company, Burlington Morelos S.A. de C.V. (“Burlington Morelos”), entered into a five year, $12.2 million term loan with Banco Nacional de Mexico, S.A. (“Banamex”) with principal repayments of $0.2 million per month until January 2020, with the remaining principal balance due in February 2020. The obligations of Burlington Morelos under such term loan are denominated in U.S. dollars and are secured by a pledge of all property, plant and equipment of Burlington Morelos and its subsidiaries. The interest rate on borrowings under this term loan agreement is variable at LIBOR plus 3.5%. At March 31, 2016, the principal amount outstanding under the Burlington Morelos term loan was $10.2 million at an interest rate of 3.9% (effective interest rate of 4.4%).

In January 2015, a wholly-owned subsidiary of the Company, Parras Cone de Mexico, S.A. de C.V. (“Parras Cone”), entered into a $10.6 million term loan agreement. The term loan facility contained an option to increase borrowings by up to $4.0 million until January 2016, and Parras Cone has borrowed the entire $4.0 million available under this additional loan commitment. The term loan agreement requires principal repayments in varying amounts of up to $0.3 million per month until March 2021, with balloon payments of $2.7 million in February 2020 and $0.5 million in April 2021. The obligations of Parras Cone under this loan are denominated in U.S. dollars, are secured by all of the assets of Parras Cone, and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under this term loan is variable at LIBOR plus 3.5%. At March 31, 2016, total principal amount outstanding under the Parras Cone term loan was $12.8 million at a weighted average interest rate of 3.9% (effective interest rate of 4.3%).

In July 2015, Parras Cone entered into a separate $7.0 million term loan agreement, with the proceeds from borrowings thereunder to be used for construction of a natural gas powered cogeneration facility at its plant location in Mexico. Under this agreement, Parras Cone can draw upon a $7.0 million commitment until July 2016. The term loan requires equal monthly principal repayments based on the outstanding principal balance beginning in February 2017 and continuing through a period not to exceed 72 months from the date of the draw. The obligations of Parras Cone under such term loan are denominated in U.S. dollars, are secured by all of the assets of Parras Cone and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under the term loan agreement is variable at LIBOR plus 2.95% for the first three years of the term loan and LIBOR plus 2.75% thereafter. As of March 31, 2016, Parras Cone has borrowed $4.2 million under this agreement at a contractual and effective interest rate of 3.4%.

In August 2015, Parras Cone entered into a revolving credit agreement that provides for borrowing availability of up to $18.0 million with a maturity date of August 17, 2018. Borrowings under this facility are denominated in U.S. dollars and are secured by all of the assets of Parras Cone and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under the Parras Cone revolving credit agreement is variable at LIBOR plus 3.25%. At March 31, 2016, the amount outstanding under the Parras Cone revolving credit facility was $15.2 million at a contractual and effective interest rate of 3.7%.

In February 2016, Parras Cone entered into a separate $2.5 million term loan agreement, with the proceeds from borrowings thereunder to be used for new machinery and equipment at its plant location in Mexico. The term loan requires equal monthly principal repayments based on the outstanding principal balance beginning in August 2016 and continuing through a period not to exceed 66 months from the date of the draw. The obligations of Parras Cone under such term loan are denominated in U.S. dollars, are secured by all of the assets of Parras Cone and are guaranteed by Parras Cone’s direct parent, Burlington Morelos. The interest rate on borrowings under the term loan agreement is variable at LIBOR plus 3.5%. At March 31, 2016, total principal amount outstanding under the Parras Cone term loan was $2.5 million at a contractual and effective interest rate of 3.9%.

The credit facilities entered into by the Company’s subsidiaries in Mexico described above contain customary provisions for default for agreements of this nature. Upon the occurrence of an event of default, the lenders may terminate the loan commitments, accelerate all loans and exercise any of their rights as a secured party. Such term loans also contain certain customary financial covenant requirements applicable to the Company’s subsidiaries in Mexico. In addition, Burlington Morelos and its subsidiaries are restricted under such term loans from making annual capital expenditures in excess of certain percentages (as defined in the term loan agreements) of the annual consolidated net sales of such consolidated group. As of March 31, 2016, Burlington Morelos and its subsidiaries were in compliance with such covenants. Borrowings under these credit facilities are non-recourse to the ITG parent company.

Senior Subordinated Notes – Related Party

In June 2007, the Company issued senior subordinated notes with an original maturity date of June 6, 2011 (the “Notes”). Prior to the occurrence of a Qualified Issuance (as defined in the Note Purchase Agreement) of its debt and/or equity securities, interest on the Notes is payable in-kind (“PIK”) on a quarterly basis, either by adding such interest to the principal amount of the Notes, or through the issuance of additional interest-bearing Notes. At each interest payment date occurring after the completion of a Qualified Issuance, 75% of the then-accrued but unpaid interest on the Notes will be payable in cash, and the remaining portion will continue to be payable in-kind.

At various times, the WLR Affiliates purchased from holders certain of the Notes with an original interest rate of 12% per annum which were thereafter amended, restated and reissued in the form of Tranche B Notes. The Tranche B Notes are classified as “Senior subordinated notes - related party, including PIK interest” in the Company’s accompanying consolidated balance sheets. The Tranche B Notes bear PIK interest at 12% per annum and mature on June 30, 2019. At March 31, 2016, $188.1 million aggregate principal amount was outstanding under the Tranche B Notes, including PIK interest.

Debt Maturities

As of March 31, 2016, aggregate maturities of long-term debt for each of the next five 12-month periods were as follows: $6.5 million, $5.4 million, $20.7 million, $212.1 million and $2.4 million.

Short-term Borrowings

The Company and certain of its subsidiaries had short-term borrowing arrangements with certain financial institutions or suppliers in the aggregate amount of $40.6 million at March 31, 2016 and $32.4 million at December 31, 2015, with weighted average interest rates of 5.1% and 5.0%, respectively. At March 31, 2016, such amounts included the following arrangements: ITG and its U.S. subsidiaries had outstanding short-term financing obligations from certain cotton and other suppliers in the amount of $1.9 million; Parras Cone had outstanding short-term working capital loans in the amount of $1.0 million from Banamex; Cone Denim (Jiaxing) Limited had outstanding short-term working capital loans in an aggregate amount of $33.1 million from various Chinese financial institutions, including approximately $6.3 million secured by land and buildings at Jiaxing Burlington Textile Company; and Jiaxing Burlington Textile Company had outstanding short-term working capital loans from certain Chinese financial institutions in the amount of $4.6 million, which are guaranteed by standby letters of credit from the U.S. parent company.

Guarantees

FASB ASC 460, “Guarantees,” provides guidance on the disclosures to be made by a guarantor about its obligations under certain guarantees that it has issued and specific disclosures related to product warranties. As of March 31, 2016, the Company and various of its consolidated subsidiaries were borrowers under various bank credit agreements (collectively, the “Facilities”). Certain of the Facilities are guaranteed by either the Company and/or various of its consolidated subsidiaries. The guarantees are in effect for the duration of the related Facilities. The Company does not provide product warranties within the disclosure provisions of FASB ASC 460. The Company did not have any off-balance sheet arrangements that were material to its financial condition, results of operations or cash flows as of or for the periods ended March 31, 2016 or December 31, 2015, except as noted herein.

In 2011, the Company entered into a Guaranty of Payment (as amended and restated, the “Guaranty”) in favor of Fund IV. The obligations of the Company under the Guaranty are payable in cash or, if cash is not permitted to be paid pursuant to the terms and conditions of the U.S. Credit Agreement and related documentation, then such amounts are payable in additional Tranche B Notes. As of December 31, 2015, Cone Denim (Jiaxing) Limited had outstanding short-term working capital loans from various Chinese financial institutions, including approximately $1.1 million guaranteed by a $1.4 million standby letter of credit from Fund IV pursuant to the Guaranty. On March 23, 2016, such standby letter of credit was terminated and an additional $1.2 million of principal amount of Tranche B Notes were issued in satisfaction of the Company’s obligations thereunder for accrued guaranty fees. Pursuant to the Guaranty, the Company was required to pay a per annum amount equal to 10% of the amount of any outstanding letters of credit pursuant to the Guaranty. At March 31, 2016, there were no letters of credit outstanding pursuant to the Guaranty, and fees under the Guaranty in the three months ended March 31, 2016 and 2015 were not material.

The Company has 150,000,000 shares of common stock authorized at $0.01 par value per share, of which 17,468,327 shares were issued and outstanding at March 31, 2016 and December 31, 2015. As of March 31, 2016, the Company had 100,000,000 shares of preferred stock authorized, including 5,000,000 shares of Series C Preferred Stock (the “Series C Preferred Stock”), of which 114,628 shares were issued and outstanding at March 31, 2016 and December 31, 2015, 15,000,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Stock”), of which 3,165,071 shares were issued and outstanding at March 31, 2016 and December 31, 2015, and 5,000,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred Stock”), none of which were issued or outstanding at March 31, 2016 or December 31, 2015. The Company’s certificate of incorporation provides that the board of directors is authorized to create and issue additional series of preferred stock in the future, with voting powers, dividend rates, redemption terms, repayment rights and obligations, conversion terms, restrictions and such other preferences and qualifications as shall be stated in the resolutions adopted by the board of directors at the time of creation.

The terms of the Series C Preferred Stock provide that, among other things:

Shares of Series A Preferred Stock vote together with shares of the Company’s common stock on all matters submitted to a vote of the Company’s stockholders. Each share of Series A Preferred Stock is entitled to one vote per share on all such matters. Each share of Series A Preferred Stock is convertible, at the option of the holder thereof, into 2.5978 shares of the Company’s common stock. Notwithstanding the foregoing, however, for a period of up to six months from and after the time of an initial filing by the Company relating to a Public Offering (as defined in the Certificate of Designation of Series A Convertible Preferred Stock), any then-applicable conversion rights would be suspended. Upon the consummation of any such Public Offering, each share of Series A Preferred Stock will automatically convert into a number of shares of the Company’s common stock equal to $25.00 (subject to certain adjustments, the “Series A Preferred Stock Liquidation Value”) at the time of conversion divided by the product of (i) the price per share of common stock sold in such Public Offering and (ii) 0.75. The Company may redeem any and all shares of Series A Preferred Stock upon notice to the holders thereof and payment of 110% of the Series A Preferred Stock Liquidation Value. Dividends on the Series A Preferred Stock are cumulative and accrue and are payable quarterly, in arrears, when, as and if declared by the board out of funds legally available therefor, at an annual rate of 7.5%. Dividends are payable in additional shares of Series A Preferred Stock.

Shares of Series B Preferred Stock are authorized to be issued pursuant to the Company’s 2008 Equity Incentive Plan (the “2008 Plan”). The certificate of designation relating to the Series B Preferred Stock provides the following:

There were no shares of Series B Preferred Stock outstanding during any period presented.

Pursuant to the certificates of designation of the Series C Preferred Stock and the Series A Preferred Stock, the Company is prohibited from paying dividends, if declared by the Company’s board of directors, on such preferred stock until funds are legally available therefor. As of March 31, 2016, dividends in arrears on preferred stock were $22.8 million, or $199.29 per share, on the Series C Preferred Stock, and $14.7 million, or $4.65 per share, on the Series A Preferred Stock, each payable in additional shares of such preferred stock.

The components of, and changes in, accumulated other comprehensive loss, net of income taxes, were as follows (in thousands):

Based on the number of shares of Series A Preferred Stock outstanding as of March 31, 2016 and the Series A Preferred Stock Liquidation Value thereof on such date, the Series A Preferred Stock could potentially be converted at the option of the holders thereof into 9,750,525 shares of the Company’s common stock. The following table sets forth the number of shares that could potentially dilute basic earnings per share in the future that were not included in the diluted loss per share computations because their inclusion would have been antidilutive (in thousands).

Note 8 Derivative Instruments

Derivative instruments used periodically by the Company for foreign currency, cotton, wool and natural gas purchases consist primarily of forward purchase contracts. The Company does not utilize financial instruments for trading or other speculative purposes. The Company has historically qualified for the “normal purchases exception” under GAAP for derivatives related to its cotton and wool forward purchase contracts and certain of its natural gas contracts and, as a result, these derivative instruments are not marked to market in the Company’s consolidated financial statements. The Company monitors its risk associated with the volatility of certain foreign currencies against its functional currency, the U.S. dollar. The Company periodically uses certain derivative financial instruments to reduce exposure to volatility of certain foreign currencies and has designated certain of such instruments as cash flow hedges under hedge accounting rules in the three months ended March 31, 2016 and 2015. At March 31, 2016 and December 31, 2015, the Company had the following outstanding forward purchase contracts that were entered into to hedge forecasted purchases in certain of the subsequent monthly periods ending on the indicated dates:

The fair value of the Company’s derivative instruments recognized in the March 31, 2016 and December 31, 2015 consolidated balance sheets consisted of the following (in thousands):

The effect of derivative instruments on the financial performance of the Company was as follows (in thousands):

The Company did not exclude any amounts of its foreign currency cash flow hedges from effectiveness testing during any periods presented herein, and such tests resulted in the hedges being effective, or expected to be effective, in offsetting the variability of the designated forecasted cash flows. The maximum duration of foreign currency cash flow hedge contracts do not exceed twelve months; therefore, gains and losses reported in accumulated other comprehensive loss are expected to be reclassified into earnings within the next twelve months. The estimated net loss related to cash flow hedges that will be reclassified from accumulated other comprehensive loss into earnings over the next twelve months is $1.1 million.

The Company did not designate its Swiss Franc and Euro foreign currency derivative contracts as hedges for any of the periods presented herein. The Company’s Swiss Franc and Euro foreign currency derivative contracts are used to hedge the future cash flows related to the purchase of certain machinery and equipment. Accordingly, gains and losses on these derivative contracts are recorded as a component of the amount of deposits on, or cost of, the machinery and equipment; such gains and losses were not material in the three months ended March 31, 2016 or 2015.

Note 9 Commitments and Contingencies

Asbestos materials are present at certain of the Company’s facilities, and applicable regulations would require the Company to handle and dispose of these items in a special manner if these facilities were to undergo certain major renovations or if they were demolished. FASB ASC 410, “ Asset Retirement and Environmental Obligations ,” provides guidance on the recognition and/or disclosure of liabilities related to legal obligations to perform asset retirement activity. In accordance with FASB ASC 410, the Company has not recognized a liability associated with these obligations, because the fair value of such liabilities cannot be reasonably estimated due to the absence of any plans to renovate, demolish or otherwise change the use of these facilities. The Company expects to maintain these facilities by repair and maintenance activities that do not involve the removal of any of these items and has not identified any need for major renovations caused by technology changes, operational changes or other factors. In accordance with FASB ASC 410, the Company will recognize a liability in the period in which sufficient information becomes available to reasonably estimate its fair value. As of March 31, 2016, the Company did not have any liabilities recorded for these obligations.

As of March 31, 2016, the Company had raw material and service contract commitments totaling $33.3 million and capital expenditure commitments of $7.6 million related to new looms and other equipment upgrades at various U.S. and foreign plant locations not reflected as liabilities on the accompanying consolidated balance sheet. In July 2015, the Company committed to build a natural gas powered cogeneration facility at the Company’s Parras Cone plant location in Mexico. Construction of the facility began in August 2015 and is expected to be operational by end of 2016. These commitments were not reflected as liabilities on the accompanying consolidated balance sheet because the Company had not received or taken title to the related assets.

Raw material commitments are mainly related to firm purchase commitments for cotton and wool used in the manufacture of apparel fabrics. Such non-cancellable firm purchase commitments are secured to provide the Company with a consistent supply of a commercially acceptable grade of raw materials necessary to meet its operating requirements as well as to meet the product specifications and sourcing requirements with respect to anticipated future customer orders.

The Company and its subsidiaries have and expect to have, from time to time, various claims and other lawsuits pending against them arising in the ordinary course of business. The Company may also be liable for environmental contingencies with respect to environmental cleanup activities. The Company makes provisions in its financial statements for known litigation and claims based on the Company’s assessment of the possible outcome of such litigation and claims, including the possibility of settlement. It is not possible to determine with certainty the ultimate liability of the Company in any of the matters described above, if any, but in the opinion of management, their outcome is not expected to have a material adverse effect upon the financial condition or results of operations or cash flows of the Company.

Note 10 Segment and Other Information

The Company is organized and managed primarily according to product categories and manufacturing processes rather than by markets or end-use customers. The Company currently has four operating segments that are reported to the chief operating decision maker (“CODM”) and three reportable segments that are presented herein. The bottom-weight woven fabrics segment consists of heavy weight woven fabrics with a high number of ounces of material per square yard, including woven denim fabrics, synthetic fabrics, worsted and worsted wool blend fabrics used for government uniform fabrics for dress U.S. military uniforms, airbag fabrics used in the automotive industry, and technical and value added fabrics used in a variety of niche industrial and commercial applications, including highly engineered materials used in numerous applications and a broad range of industries, such as for fire service apparel, ballistics materials, filtration, military fabrics and outdoor awnings and covers. The commission finishing segment consists of textile printing and finishing services for customers primarily focusing on decorative fabrics and specialty prints as well as government uniform fabrics primarily for battle fatigue U.S. military uniforms. The all other segment consists of expenses related to transportation services and other miscellaneous items. ITG-PP business is presented as discontinued operations in the Company’s consolidated statements of operations for all periods presented (see Note 2).

Net sales, income (loss) from continuing operations before income taxes, and total assets for the Company’s reportable segments are presented below (in thousands). The Company evaluates performance and allocates resources based on profit or loss before interest, income taxes, restructuring and impairment charges, certain unallocated corporate expenses, and other income (expense)-net. Intersegment net sales for the three months ended March 31, 2016 and 2015 were primarily attributable to commission finishing sales of $0.1 million and less than $0.1 million, respectively.

Note 11 Restructuring Activities

The charges for restructuring included in income from continuing operations included the following (in thousands):

Hourly and salaried workforce reductions of 69 employees undertaken at our worsted wool fabric manufacturing facility in Mexico resulted in severance and other termination benefits of $0.3 million recorded in the three months ended March 31, 2016 in the bottom-weight woven fabrics segment. These workforce reductions were primarily attributable to the outlook for lower demand for certain products at this facility.

In April 2014, the Company implemented an initiative to reduce its corporate administrative cost structure. Because the Company’s size, complexity and business structure has decreased in recent years, the Company’s board of directors determined that cost savings could be achieved with the restructuring of the Company’s executive structure. As a result of this restructuring, the Company and one of its executive officers entered into an agreement in April 2014 that provides certain benefits through December 31, 2017. Such benefits and other related corporate costs in the aggregate amount of $3.0 million were recorded in 2014 with a remaining liability balance of $1.2 million as of March 31, 2016.

Following is a summary of activity related to restructuring accruals (in thousands). The Company expects to pay $0.5 million of the liability outstanding at March 31, 2016 during the remainder of 2016 and $0.7 million in 2017.

Note 12 Fair Value Measurements

FASB ASC 820, “Fair Value Measurement”, requires disclosure of a fair value hierarchy of inputs that the Company uses to value an asset or a liability. Under FASB ASC 820 there is a common definition of fair value to be used and a hierarchy for fair value measurements based on the type of inputs that are used to value the assets or liabilities at fair value.

The levels of the fair-value hierarchy are described as follows:

Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date,

Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, and

Level 3: Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company enters into foreign-currency forward purchase contracts and other derivative instruments from time to time, in addition to any commodity derivative contracts that are designated as normal purchases. These derivative contracts are principally with financial institutions and other commodities brokers, the fair values of which are obtained from third-party broker quotes.

The following table provides a summary of the fair values of certain of the Company’s assets and liabilities measured on a recurring basis under FASB ASC 820 as of March 31, 2016 and December 31, 2015 (in thousands):

In 2014, the Company completed the sale of certain assets of Narricot Industries LLC (“Narricot ”), which represented the Company’s former narrow fabrics segment, to certain subsidiaries of Asheboro Elastics Corp. (collectively “AEC”). The sale price included a three-year, 6.5% promissory note for $3.2 million. Amounts due under the promissory note are secured by a first lien on all of the property, plant and equipment of Narricot sold in the transaction. As previously disclosed, the Company considers the note due from AEC to be impaired. The Company has various appraisals as well as a written third party assessment relating to the value of the underlying collateral. If the Company attempts to foreclose on the collateral, the Company will attempt to obtain the highest value therefor; however, the Company has estimated that the collateral is valued at approximately $1.7 million in an orderly liquidation, net of selling commissions. The Company recognizes interest income on impaired loans only upon the receipt of cash, which is applied first to overdue interest and then to overdue principal amounts.

The Company cannot predict future events that might adversely affect the carrying value of assets. Any decline in economic conditions or other factors could result in additional impairment charges.

The accompanying consolidated financial statements include certain financial instruments, and the fair value of such instruments may differ from amounts reflected on a historical basis. Such financial instruments consist of cash deposits, accounts receivable, notes receivable, advances to affiliates, accounts payable, certain accrued liabilities, short-term borrowings and long-term debt. Based on certain procedures and analyses performed as of March 31, 2016 related to expected yield (under Level 2 of the fair value hierarchy), the Company estimated that the fair value of its Notes was approximately the principal plus accrued interest at March 31, 2016. The estimate of fair value of borrowings under the Company’s various bank loans and other financial instruments (under Level 2 of the fair value hierarchy) generally approximates the carrying values at March 31, 2016 because of the short-term nature of these loans and instruments and/or because certain loans contain variable interest rates that fluctuate with market rates.

Note 14 Income Taxes

The Company recorded income tax expense of $0.8 million in each of the three months ended March 31, 2016 and 2015. The Company files a consolidated U.S. federal income tax return with International Textile Group, Inc. as the parent company. The Company also has subsidiaries operating in various jurisdictions outside the United States and files income tax returns in the required jurisdictions. In certain foreign jurisdictions, the Company’s subsidiaries have operated under tax incentive programs that provided reduced or zero tax rates for certain subsidiaries for certain periods that remain currently open for examination by local authorities. Foreign entities record income tax expense based on the applicable laws and requirements of their respective tax jurisdictions. The Company has recorded valuation allowances to reduce the U.S. and certain foreign deferred tax assets for the portion of the tax benefit that management considers that it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income in the jurisdictions in which these deferred tax assets were recognized.

Income tax expense for the three months ended March 31, 2016 is different from the amount obtained by applying statutory rates to income before income taxes primarily due to a net decrease in the valuation allowance of $1.1 million related to certain profitable operations during the period and certain other tax attributes, a tax benefit of $1.0 million resulting from certain newly enacted tax relief measures related to the previously disclosed 2014 tax reform legislation in Mexico, income tax expense of $0.5 million related to the negative impact of local foreign currency adjustments related to U.S. dollar-denominated net assets in Mexico and China, tax expense related to other foreign tax adjustments of $0.5 million, state income tax expense and other U.S tax adjustments of $0.1 million, and certain foreign and domestic business expenses that are not tax deductible. Income tax expense for the three months ended March 31, 2015 is different from the amount obtained by applying statutory rates to loss before income taxes primarily due to an increase of $1.7 million related to the expiration of certain net operating loss carryforwards in China, which was offset by a reduction in the valuation allowance of $1.7 million, an increase of $0.3 million related to foreign income tax rate differentials and adjustments, an increase of $0.2 million in the valuation allowance related to an increase in certain net operating losses and net deferred income tax assets, state income tax expense of $0.2 million, and certain foreign and domestic business expenses that are not tax deductible.

As described in Note 2, ITG-PP was deconsolidated as of May 25, 2012 for financial reporting purposes under GAAP. The entire amount of the tax impact ultimately recorded by the Company has been, and is expected to be, reduced by a valuation allowance as management believes that it is more likely than not that any tax benefits will not be realized. Because the final sale of the ITG-PP assets and subsequent liquidation of ITG-PP have not yet occurred, management does not currently have the necessary information to determine the ultimate impact of these transactions on the Company’s income taxes. Management does not expect that the ultimate tax impact of the deconsolidation, the final sale of ITG-PP assets, and the ultimate liquidation of ITG-PP will have a material impact on the Company’s consolidated balance sheet, results of operations or cash flows.