Pursuant to instruction G of Form 10-K the following is included as an unnumbered item to PART I.
The executive officers of the registrant are generally elected annually by the Board of Directors at its first meeting held after each annual meeting of our shareholders.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.
OVERVIEW
Our business consists principally of marketing, manufacturing and selling floorcovering products to high-end residential and commercial customers through our various sales forces and brands. We focus exclusivelyprimarily on the upper-endupper end of the floorcovering market where we believe we have strong brands and competitive advantages with our style and design capabilities and customer relationships. Our Fabrica, Masland, and Dixie Home brands have a significant presence in the high-end residential floorcovering markets. Our Atlas | Masland Contract brand participates in the upper-end specified commercial marketplace. Dixie International sells all of our brands outside of the North American market.
Historically, we participated in the upper end specified commercial flooring marketplace through our Atlas | Masland Contract brand. On September 13, 2021, we sold our Commercial business. The results of our Commercial business activity are included in discontinued operations in the included financial statements.
Our business is primarily concentrated in areasnet sales from continuing operations were $341 million for the fiscal year ended December 25, 2021 and $251 million for the fiscal year ended December 26, 2020. Comparisons to the prior year are skewed by the negative impact of the soft floorcovering markets which include broadloom carpet, carpet tiles and rugs. However, over the past few years, there has been a significant shiftCOVID-19 pandemic in the flooring marketplace as hard surface products have grown at a rate much faster than soft surface products. We have responded to this accelerated shift to hard surface flooring by launching several initiatives in both our residential and commercial brands. Our commercial brands offer Luxury Vinyl Flooring (“LVF”) products under the Calibré brand in the commercial markets. Our residential brands, Dixie Home and Masland Residential, offer Stainmaster® PetProtect™ Luxury Vinyl Flooring and our premium residential brand, Fabrica, offers a high-end engineered wood line. For 2019 we are building on the momentum we gained by tripling our residential hard surface business in 2018 with the launchsecond quarter of TruCor™, our new solid polymer core or “SPC” Luxury Vinyl Flooring line. This latest addition to our rigid core Luxury Vinyl Flooring offering is designed to create an extremely durable and waterproof Luxury Vinyl Flooring product with a broader range of price points to meet the needs of various consumers. To facilitate this growth, in 2019 we are expanding our distribution of hard surface products to our west coast distribution center2020 as well as high demand for residential products in 2021. Strong activity in the housing markets related to remodeling and new home construction have driven a strong demand for residential floor covering products in 2021.
Our net income for the twelve months ended December 25, 2021 was $1.6 million. The income was driven by strong sales volume, resulting in high production volume in our east coast service center.
During 2018, our netmanufacturing plants, and selling and administrative expenses at levels that are favorably in line with sales decreased 1.8%volume when compared with 2017. Salesprior periods. These favorable areas were offset by rising costs of residential products increased 3.6% in 2018 versus 2017. Residential soft surface sales were up 1.4% in 2018 as comparedraw materials and unfavorable adjustments to 2017, while, we estimate,our LIFO inventory reserve, both of which negatively impacted our gross margin on the industryyear.
Our interest expense for the twelve month period ended December 25, 2021 was up$4,742 which compares favorably to the interest expense of $5,803 from the same period in the low to mid-single digits. Residential hard surface sales tripled in 2018 relative to sales in 2017. We anticipate the residential housing market, though having slowed recently, will have steady but moderate growthprior year. The reduced interest expense is a factor of our reduction and restructuring of debt over the next several years. Commercial product sales decreased 13.2% during 2018. Soft surface sales of commercial products were down 19.5%, while, we believe,last three years which included the industry was downsale and leaseback transaction for our facility in the mid-single digits. We anticipate the commercial market to be relatively flat in 2019.
In 2018, we had an operating loss of $15.8 million compared with an operating income of $3.9 million in 2017. The reduced sales volume in 2018 adversely affected our gross profit as we under absorbed our costs since we had increased our capacity anticipating higher volume production. In addition, we had rising raw material costs which, passed on to our customers through higher prices, were recovered after we experienced such cost increases. The majority of our higher costs were in the first and fourth quarters of the year as we suffered with reduced demand in those time periods. We reduced plant running schedules in the fourth quarter to reduce inventories to a more appropriate level. We incurred charges during the year totaling $14.1 million comprised of $2.7 million in inventory write-downs, $3.2 million in restructuring charges, $6.7 million in asset impairments, including the write-off of goodwill and intangibles, and a $1.5-million-dollar charge for settlement of a class action litigation. Our debt declined by $5.2 million over the course of 2018. To offset those higher costs, we continued the implementation of our previously announced Profit Improvement Plan (“the Plan”). The Plan, begunSanta Anna, California in the fourth quarter of 2017, resulted2018 and the divestiture of our Commercial division in the reductionthird quarter of 284 associates during2021. We have reduced debt by $64 million from our most recent high level of debt at $141 million at September 29, 2018 to $77 million at December 25, 2021.
During the second quarter of 2021, the trademark for certain branded fibers our company has historically used in certain products was sold to a mass market retailer. Under the terms of the agreement, the availability of the trademark for use by our company, and is anticipated to resultothers in the reductionindustry, was phased out. Prior to the sale of approximately 330 associatesthis trademark, our company had previously begun developing alternative offerings in response to prior disruptions in fiber supply. We accelerated the development process and we believe the movement away from dependence on the particular trademark and related fibers will provide the company with opportunities to develop enhanced competitive products with alternate fibers. We have also assisted our specialty retail customers with the transition to our new offerings through a non-disruptive, turnkey solution offering a retail friendly selling solution including new signage and merchandising materials.
RANSOMWARE INCIDENT
On April 17, 2021, we detected a ransomware attack on portions of our information technology systems. Response protocols were initiated immediately, we contacted our cybersecurity insurance provider, notified legal authorities and engaged cybersecurity experts. All systems impacted by this attack have been substantially restored and additional security measures have been put in place. We continue to assess the endfinancial impact of the firstinterruption to our business caused by this event.
COVID-19 PANDEMIC
After experiencing a significant reduction in sales volume with the initial onset of the COVID-19 pandemic in the second quarter of 2019.2020, we started to see a gradual and consistent improvement in sales through the remainder of 2020 and throughout 2021. The sales growth was driven by a strong housing market and high residential remodeling activity. Although the pandemic continued in 2021, and we continue to take necessary safety precautions to protect the health of our employees, we have been able to limit the impact on operations. However, we cannot be certain as to any additional future impact of the COVID-19 crisis.
ExpensesDIVESTITURE OF COMMERCIAL BUSINESS
On September 13, 2021, the Company sold its Atlas|Masland commercial business (the “Commercial Business”) to Mannington Mills, Inc. (the “Purchaser”).
In accordance with the Asset Purchase Agreement dated September 13, 2021, the Company sold assets that include certain inventory and certain items of machinery and equipment used exclusively in the Commercial Business, and related intellectual
property for a purchase price of $20.5 million. The Purchaser also assumed the liability to fulfill the Plan totaled approximately $9.2 million in 2018. orders represented by advance customer deposit liabilities of $3.1 million.
The Plan expenses includedCompany retained the Commercial Business’ cash deposits, all accounts receivable, and certain inventory write downs, restructuring costs, and asset impairments as we re-configured ourequipment. Additionally, the Company agreed not to compete with the specified commercial business and right sized our residential manufacturing operationsthe Atlas|Masland markets for lower unit demand. Total cost reductions asa period of 5 years following September 13, 2021. The agreement allows for the Company to sell the commercial inventory retained by the company after the divestiture.
As a result of the Plan are expectedtransaction the Company has effectively exited the Commercial Business and will now focus exclusively on its residential floorcovering segment. The sale of Atlas|Masland represents a strategic shift that will have a major effect on the Company’s operations. The Company has accounted for the transaction as discontinued operations on the date the entity was disposed. Accordingly, the Company is reporting the results of Atlas|Masland operations and cash flows, and balance sheet classifications for the current and comparative periods as discontinued operations. Prior to be over $17 million on an annual basis once fully implemented in 2019. We began the structural consolidation of our commercial business with the closure of our Chickamauga tufting operation as we moved the equipment to other facilities. This plant closure, complete at the end of 2018, lowered our cost and improved our response time to this segmentconsummation of the marketplace. We begansale, the process of exiting our Commerce, California Atlas tufting facilities this past fallCompany was neither actively marketing the business for sale nor had intentions to abandon the Commercial Business and as a result did not present the results as assets held for sale or discontinued operations in prior filings. See footnotes to the financial statements for the Company’s discontinued operations reporting.
At closing, the Company received approximately $18.4 million in net proceeds, after depositing $2.1 million within an escrow account. The escrow account is for certain potential seller indemnifications and will be completely out of those commercial tufting operations byreleased to the endCompany in two installments. The first installment, for 50% of the first quarter of 2019. The bulkescrow, was paid to the company 90 days after closing and the remaining 50% of the Atlas equipment was transferredoriginal escrow amount will be paid 18 months from the closing date. In order to our Atmore, Alabamarelease liens on certain fixed assets included in the Asset Purchase Agreement, the Company placed $2.1 million in cash collateral in an account with the lender (Greater Nevada Credit Union). The remaining proceeds were applied to the Company's debt with its senior credit facility (Fifth Third Bank).
The gain on the sale of assets is summarized as follows: | | | | | | | | | | | |
| | | |
| Net Proceeds, including escrowed funds | 20,500 | | |
| | | |
| Inventory, net | (9,195) | | |
| Fixed Assets | (2,278) | | |
| Contract Liabilities | 3,127 | | |
| Net tangible assets sold | (8,346) | | |
| Gain on sale of assets sold, prior to associated costs | 12,154 | | |
| | | |
| Other transaction related costs | | |
| Adjustments to Accruals, Reserves and Allowances | (8,462) | | 1 |
| Transaction Costs | (1,032) | | 2 |
| Total other transaction related costs | (9,494) | | |
| | | |
| Gain on sale of discontinued operations | 2,660 | | |
| | | |
1) For the remaining retained commercial tufting operation with various other items movedinventory and fixed assets, the Company recognized adjustment to our Santa Ana, California and Eton, Georgia operations. We moved our commercial rug operation and commercial samples support function from California to our Saraland facility near Mobile, Alabama. We reduced our staffing to better match production to meet our demand in our Atmore, Eton, Adairsville and Roanoke facilities as we were able to take advantagerecognize the effects of the increased productivitytransaction. For inventory, the Company recognized lower of our associatescost or market adjustments of approximately $6.6 million. The Company’s remaining fixed assets will be disposed of by sale and the Company recognized an adjustment of approximately $1.8 million to reflect the lower of its carrying value or estimated fair value less cost to sell. For these assets, the Company has suspended the associated depreciation and will recognize changes in these operations. the fair value less cost to sell as gains or losses in future periods until the date of sale.
2) Transaction costs were legal expenses and involuntary employee termination costs related to one-time benefit arrangements.
In addition, the Company and the Purchaser simultaneously entered into a transition services agreement pursuant to which the physical movementCompany assisted Mannington in transitioning the AtlasMasland business to Mannington, by, among other things, assisting in filling open orders and completing the manufacture of equipment and inventory, we consolidated our commercial design functionswork in Saraland as well as consolidated our entire sales support functions. Our sales forces were merged to create Atlas | Masland Contract, now equipped withprogress that resulted in a much broader product line and providing modular carpet tile, broadloom carpet, luxury vinyl flooring, and commercial wool and nylon rugs. This combined sales forcetemporary continued involvement in the Commercial Business until December 31,2021. The Company has the added benefit of not only a broad product line but distinct design capabilities in custom products as well.
In the fourth quarter of 2018, our testing of goodwill indicated a full impairment of the value of the asset. In accordance withshown the results of our tests the valuethese operations as a component of the goodwill asset was written off to asset impairment. The amount of the adjustment was $3.4 million.discontinued operations.
NASDAQ NOTICE
On January 31, 2019, we received a deficiency notice from NASDAQ stating that we no longer comply with NASDAQ Marketplace Rule 5550(a)(2) because the bid price of our common stock closed below the required minimum $1.00 per share for the previous 30 consecutive business days. The notice also indicated that, in accordance with Marketplace Rule 5810(c)(3)(A), we have a period of 180 calendar days, until July 30, 2019, to regain compliance with Rule 5550(a)(2). If at any time before July 30, 2019 the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will notify us that we have regained compliance with Rule 5550(a)(2). To the extent that we are unable to resolve the listing deficiency, there is a risk that our common stock may be delisted from NASDAQ, which would adversely impact liquidity of our common stock and potentially result in even lower bid prices for our common stock.
Since the initial notice, the NASDAQ has determined that for the 12 consecutive business days from February 4 to February 20, 2019, the closing bid price of our common stock has been at $1.00 per share or greater. Accordingly, we have regained compliance with Listing Rule 5550(a)(2) and this matter is now closed.
RESULTS OF OPERATIONS
Fiscal Year Ended December 29, 201825, 2021 Compared with Fiscal Year Ended December 30, 201726, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended (amounts in thousands) | | | |
| December 25, 2021 | % of Net Sales | | 12/26/2020
(As Adjusted) | % of Net Sales | | Increase (Decrease) | % Change |
| Net sales | $ | 341,247 | | 100.0 | % | | $ | 250,869 | | 100.0 | % | | $ | 90,378 | | 36.0 | % |
| Cost of sales | 263,992 | | 77.4 | % | | 193,538 | | 77.1 | % | | 70,454 | | 36.4 | % |
| Gross profit | 77,255 | | 22.6 | % | | 57,331 | | 22.9 | % | | 19,924 | | 34.8 | % |
| Selling and administrative expenses | 67,926 | | 19.9 | % | | 58,175 | | 23.2 | % | | 9,751 | | 16.8 | % |
| Other operating (income) expense, net | (927) | | (0.3) | % | | (108) | | — | % | | (819) | | 758.3 | % |
| Facility consolidation and severance expenses, net | 255 | | 0.1 | % | | 3,752 | | 1.5 | % | | (3,497) | | (93.2) | % |
| Operating income (loss) | 10,001 | | 2.9 | % | | (4,488) | | (1.8) | % | | 14,489 | | (322.8) | % |
| Interest expense | 4,742 | | 1.4 | % | | 5,803 | | 2.3 | % | | (1,061) | | (18.3) | % |
| Other (income) expense, net | 1 | | — | % | | 678 | | 0.3 | % | | (677) | | (99.9) | % |
| | | | | | | | |
| | | | | | | | |
| Income (loss) before taxes | 5,258 | | 1.5 | % | | (10,969) | | (4.4) | % | | 16,227 | | (147.9) | % |
| Income tax expense (benefit) | 105 | | — | % | | (1,146) | | (0.5) | % | | 1,251 | | (109.2) | % |
| Income (loss) from continuing operations | 5,153 | | 1.5 | % | | (9,823) | | (3.9) | % | | 14,976 | | (152.5) | % |
| Income (Loss) from discontinued operations, net of tax | (3,537) | | (1.0) | % | | 615 | | 0.2 | % | | (4,152) | | (675.1) | % |
| | | | | | | | |
| Net income (loss) | $ | 1,616 | | 0.5 | % | | $ | (9,208) | | (3.7) | % | | $ | 10,824 | | (117.5) | % |
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended (amounts in thousands) | | | |
| | December 29, 2018 | % of Net Sales | | December 30, 2017 | % of Net Sales | | Increase (Decrease) | % Change |
| Net sales | $ | 405,033 |
| 100.0 | % | | $ | 412,462 |
| 100.0 | % | | $ | (7,429 | ) | (1.8 | )% |
| Cost of sales | 318,042 |
| 78.5 | % | | 311,249 |
| 75.5 | % | | 6,793 |
| 2.2 | % |
| Gross profit | 86,991 |
| 21.5 | % | | 101,213 |
| 24.5 | % | | (14,222 | ) | (14.1 | )% |
| Selling and administrative expenses | 92,473 |
| 22.8 | % | | 96,189 |
| 23.3 | % | | (3,716 | ) | (3.9 | )% |
| Other operating expense, net | 458 |
| 0.1 | % | | 441 |
| 0.1 | % | | 17 |
| 3.9 | % |
| Facility consolidation and severance expenses, net | 3,167 |
| 0.8 | % | | 636 |
| 0.2 | % | | 2,531 |
| 398.0 | % |
| Impairment of assets | 6,709 |
| 1.7 | % | | — |
| — | % | | 6,709 |
| — | % |
| Operating income (loss) | (15,816 | ) | (3.9 | )% | | 3,947 |
| 0.9 | % | | (19,763 | ) | (500.7 | )% |
| Interest expense | 6,491 |
| 1.6 | % | | 5,739 |
| 1.4 | % | | 752 |
| 13.1 | % |
| Other expense, net | 3 |
| — | % | | 21 |
| — | % | | (18 | ) | (85.7 | )% |
| Loss before taxes | (22,310 | ) | (5.5 | )% | | (1,813 | ) | (0.5 | )% | | (20,497 | ) | 1,130.6 | % |
| Income tax provision (benefit) | (831 | ) | (0.2 | )% | | 7,509 |
| 1.8 | % | | (8,340 | ) | (111.1 | )% |
| Loss from continuing operations | (21,479 | ) | (5.3 | )% | | (9,322 | ) | (2.3 | )% | | (12,157 | ) | 130.4 | % |
| Income (Loss) from discontinued operations | 95 |
| — | % | | (233 | ) | (0.1 | )% | | 328 |
| (140.8 | )% |
| Net loss | $ | (21,384 | ) | (5.3 | )% | | $ | (9,555 | ) | (2.4 | )% | | $ | (11,829 | ) | 123.8 | % |
Net Sales. Net sales for the year ended December 29, 201825, 2021 were $405.0$341.2 million compared with $412.5 million$250.9 in the year-earlier period, a decreasean increase of 1.8%36.0% for the year-over-year comparison. Sales of residential floorcovering productsNet sales in 2020 were up 3.6% and sales of commercial floorcovering products decreased 13.2%. The decrease in commercial net sales was due to distractions causedheavily impacted by the restructuringinitial outbreak of our commercial operations andthe COVID-19 pandemic. After the initial impact of the pandemic in the second quarter of 2020, sales force during 2018.demand began to increase in line with the demand in the residential housing market.
Gross Profit. Gross profit, as a percentage of net sales, decreased 3.0.3 percentage points in 20182021 compared with 2017. Gross profit2020. The Company saw significant increases in 2018 wasraw material costs throughout 2021. Increases in the price of our products were implemented on a delayed basis after the initial impact of the cost increase. These cost increases created an inflationary impact that increased our LIFO reserve on inventory for continuing operations by $16.2 million in 2021 which negatively impacted our margins. These increased costs were partially offset by inventory write downshigher absorption of $2.7 million taken during the year as part of our Profit Improvement Plan.fixed costs due to increased sales volume in 2021.
Selling and Administrative Expenses. Selling and administrative expenses were $92.5$67.9 million in 20182021 compared with $96.2$58.2 million in 2017, or a decrease of .5%2020, but lower as a percentage of sales.the higher sales volume. Selling and administrative expenses as a percent of the net sales for 2021 and 2020 were 19.9% and 23.2% respectively. The improved resultsincrease in the 2018 selling and administrative expenses arein 2021 was the result of changes made as part of our Profit Improvement Plan.increased investment in samples, marketing and travel expense in 2021 after the reduced spending in these areas in 2020 due to the pandemic.
Other Operating Expense, Net.Income. Net other operating expenseincome was an expense of $458$927 thousand in 20182021 compared with expensean income of $441$108 thousand in 2017.2020. In 2021, the income was primarily the result of $1.7 million in insurance proceeds related to a claim at our Roanoke, Alabama facility partially offset by $1.1 million in legal expenses.
Facility Consolidation and Severance Expenses, Net. Facility consolidation expenses were $3.2$.3 million in 20182021 compared with $636 thousand$3.8 million in the year-earlier period. FacilityThe facility consolidation expenses increased in 2018incurred during 2020 were primarily related to our COVID-19 Continuity Plan including severance and financing related charges, as we continuedwell as residual costs from our Profit Improvement Plan announcedincluding adjustments for workers' compensation related charges. The expenses in 2017, which includes2021 were primarily related to residual expense activity from the consolidationProfit Improvement Plan.
Operating Income (Loss). The operating income in 2021 was $10.0 million compared to a loss of our two commercial brands, consolidation$4.5 million in 2020. The 2020 loss was heavily driven by the negative sales impact during the height of commercial manufacturing operationsthe COVID-19 pandemic. The 2021 operating income was primarily the result of higher sales volume and sales forces, and an overall reviewlower expenses from restructuring.
Interest Expense. Interest expense of corporate wide operations and functions. As$4.7 million in 2021 was a reduction of $1.1 million from $5.8 million incurred in 2020. The reduction is the result of lower levels of debt in 2021 offset by adjustments to other comprehensive income as a result of this plan, we incurred expensesfinancing initiatives in the fourth quarter of $3.2 million during 2018 primarily2021 and elimination of related to facility consolidation expenses and severance costs.interest rate swap agreements.
Asset Impairments. The asset impairments recorded in 2018 were $6.7 million. There were no asset impairment expenses in 2017. The asset impairments incurred in 2018 included the impairment of fixed assets as part of our Profit Improvement Plan ($1.2 million). We also incurred intangible asset impairments ($2.1 million) and goodwill impairment ($3.4 million).
Operating Income (Loss). Operations reflected an operating loss of $15.8 million in 2018 compared with an operating income of $3.9 million in 2017. The operating results for 2018 were impacted by the lower sales volume, settlement of a class action lawsuit, and facility consolidation, asset impairments, and severance costs related to the Profit Improvement Plan.
Interest Expense. Interest expense increased $752 thousand in 2018 principally due to higher levels of debt and higher rates than a year ago.
Income Tax ProvisionExpense (Benefit). Our effective income tax rate was an expense of 2.00% in 2021. The benefit relates to federal and state cash taxes paid offset by certain federal and state credits and also includes a benefit for the termination of certain derivative contracts for which there existed stranded tax effects within other comprehensive income. In 2021, we decreased our valuation allowance by $1.4 million related to our net deferred tax asset and specific state net operating loss and state tax credit carryforwards.
Our effective income tax rate was a benefit of 3.72%10.49% in 2018.2020. The benefit relates to certain federal and state credits and also includes a benefit for the reductiontermination of certain indefinite lived assets not covered by our valuation allowance. In 2018 we increased our valuation allowance by $4 million related to our net deferredderivative contracts for which there existed stranded tax asset and specific state net operating loss and state credit carryforwards.effects within Other Comprehensive Income.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.
The income tax expense for 2017 was $7.5 million, which included a charge of $1.4 million related to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a charge of $6.4 million to increase our valuation allowance related to our net deferred tax asset. The majority of the increase in the valuation allowance is related to the revised treatment of net operating losses under the Tax Act. Absent the impact of the Tax Act, our effective income tax benefit rate for 2017 would have been 36.4%.
Net (Income) Loss. Continuing operations reflected a lossan income of $21.5$5.2 million, or $1.36$0.32 per diluted share in 2018,2021, compared with a loss from continuing operations of $9.3$9.8 million, or $0.59$0.64 per diluted share in 2017.2020. Our discontinued operations reflected an incomea loss of $95 thousand,$3.5 million, or $0.01$0.23 per diluted share in 20182021 compared with a lossan income of $233$615 thousand, or $0.01$0.04 per diluted share in 2017.2020. Including discontinued operations, we had a net lossincome of $21.4$1.6 million, or $1.35$0.09 per diluted share, in 20182021 compared with a net loss of $9.6$9.2 million, or $0.60 per diluted share, in 2017.2020.
Fiscal Year Ended December 30, 2017 Compared with Fiscal Year Ended December 31, 2016
|
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended (amounts in thousands) | | | |
| | December 30, 2017 | % of Net Sales | | December 31, 2016 | % of Net Sales | | Increase (Decrease) | % Change |
| Net sales | $ | 412,462 |
| 100.0 | % | | $ | 397,453 |
| 100.0 | % | | $ | 15,009 |
| 3.8 | % |
| Cost of sales | 311,249 |
| 75.5 | % | | 302,028 |
| 76.0 | % | | 9,221 |
| 3.1 | % |
| Gross profit | 101,213 |
| 24.5 | % | | 95,425 |
| 24.0 | % | | 5,788 |
| 6.1 | % |
| Selling and administrative expenses | 96,171 |
| 23.3 | % | | 96,983 |
| 24.4 | % | | (812 | ) | (0.8 | )% |
| Other operating expense, net | 441 |
| 0.1 | % | | 401 |
| 0.1 | % | | 40 |
| 10.0 | % |
| Facility consolidation and severance expenses, net | 636 |
| 0.2 | % | | 1,456 |
| 0.4 | % | | (820 | ) | (56.3 | )% |
| Operating income (loss) | 3,965 |
| 0.9 | % | | (3,415 | ) | (0.9 | )% | | 7,380 |
| (216.1 | )% |
| Interest expense | 5,739 |
| 1.4 | % | | 5,392 |
| 1.4 | % | | 347 |
| 6.4 | % |
| Other expense, net | 39 |
| — | % | | 22 |
| — | % | | 17 |
| 77.3 | % |
| Loss before taxes | (1,813 | ) | (0.5 | )% | | (8,829 | ) | (2.3 | )% | | 7,016 |
| (79.5 | )% |
| Income tax provision (benefit) | 7,509 |
| 1.8 | % | | (3,622 | ) | (0.9 | )% | | 11,131 |
| (307.3 | )% |
| Loss from continuing operations | (9,322 | ) | (2.3 | )% | | (5,207 | ) | (1.4 | )% | | (4,115 | ) | 79.0 | % |
| Loss from discontinued operations | (233 | ) | (0.1 | )% | | (131 | ) | — | % | | (102 | ) | 77.9 | % |
| Income on disposal of discontinued operations | — |
| — | % | | 60 |
| — | % | | (60 | ) | — | % |
| Net loss | $ | (9,555 | ) | (2.4 | )% | | $ | (5,278 | ) | (1.4 | )% | | $ | (4,277 | ) | 81.0 | % |
Our fiscal year ended December 30, 2017 had 52 weeks and fiscal year ended December 31, 2016 had 53 weeks. Discussions below related to percentage changes in net sales forDiscontinued operations includes the annual periods have been adjusted to reflect the comparable number of weeks and are qualified with the term “net sales as adjusted”. For comparative purposes, we define "net sales as adjusted" as net sales less the last week of sales in a 53 week fiscal year. We believe “net sales as adjusted” will assist our financial statement users in obtaining comparable data between the reporting periods. (See reconciliation of net sales to net sales as adjusted in the table below.)
Reconciliation of Net Sales to Net Sales as Adjusted
|
| | | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended (amounts in thousands) | |
| | Net Sales December 30, 2017 | | Net Sales December 31, 2016 | Week 53 | Net Sales as Adjusted December 31, 2016 | Increase (Decrease) | Net Sales as Adjusted % Change |
| Net sales as adjusted | $ | 412,462 |
|
| $ | 397,453 |
| $ | (5,380 | ) | $ | 392,073 |
| $ | 20,389 |
| 5.2 | % |
Net Sales. Net sales for the year ended December 30, 2017 were $412.5 million compared with $397.5 million in the year-earlier period, an increase of 3.8%, or 5.2% on a “net sales as adjusted” basis, for the year-over-year comparison. Sales for the industry were flat for 2017 compared with the prior year. Our 2017 year-over-year floorcovering sales comparison reflected an increase of 5.0%, or 6.5% on a “net sales as adjusted” basis, in net sales. Sales of residential floorcovering products were up 8.0%, or 9.3% on a “net sales as adjusted” basis, and sales of commercial floorcovering products decreased 0.8%, or increased 0.9% on a “net sales as adjusted” basis. The increase in net sales was due to strong demand for our residential products through our mass merchant distribution channels. We gained market space on the west coast vacated by Royalty Carpet Mills when they ceased operations during June of 2017.
Gross Profit. Gross profit, as a percentage of net sales, increased 0.5 percentage points in 2017 compared with 2016. Despite the improved sales volumes in 2017, our gross profit was adversely affected by rising costs in raw materials and increased operating costs. We incurred startup costs related to several manufacturing initiatives including (1) adding yarn processing at our Atmore, Alabama facility, (2) installing a pre-coat line for our modular tile products, (3) completing our Colormaster beck dye and skein dye consolidation, and (4) starting up our Porterville yarn operation in California. With the completion of these initiatives, we have in place a foundation that will allow us to operate more efficiently and reduce waste costs.
Selling and Administrative Expenses. Selling and administrative expenses were $96.2 million in 2017 compared with $97.0 million in 2016, or a decrease of 1.1% as a percentage of sales. Selling and administrative expenses decreased as a percentage of sales primarily as a result of the higher sales volumes during 2017. In addition, selling and administrative expenses decreased as a result of lower sampling expenses in 2017 compared with 2016.
Other Operating Expense, Net. Other operating expense, net was an expense of $441 thousand in 2017 compared with expense of $401 thousand in 2016.
Facility Consolidation and Severance Expenses, Net. Facility consolidation expenses were $636 thousand in 2017 compared with $1.5 million in the year-earlier period. Facility consolidation expenses decreased in 2017 as we completed our Warehousing, Distribution & Manufacturing Consolidation Plan during 2016. During 2017, we announced a Profit Improvement Plan which included the consolidation of our two commercial brands. This plan will consolidate the brands into one management team, sharing operations in sales, marketing, product development and manufacturing. As a result of this plan, we incurred expenses of $636 thousand during 2017 primarily related to severance costs.
Operating Income (Loss). Operations reflected operating income of $4.0 million in 2017 compared with an operating loss of $3.4 million in 2016. Despite the improved sales volumes in 2017, our gross profit was adversely affected by rising costs in raw materials and increased operating costs. We incurred startup costs related to several manufacturing initiatives including (1) adding yarn processing at our Atmore, Alabama facility, (2) installing a pre-coat line for our modular tile products, (3) completing our Colormaster beck dye and skein dye consolidation, and (4) starting up our Porterville yarn operation in California. With the completion of these initiatives, we have in place a foundation that will allow us to operate more efficiently and reduce waste costs. In addition, we incurred expenses related to our Profit Improvement Plan during the year as we consolidated our two commercial brands.
Interest Expense. Interest expense increased $347 thousand in 2017 principally due to higher rates than a year ago.
Income Tax Provision (Benefit). On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax assets as of December 30, 2017 by $8.2 million to reflect the estimated impact of the Tax Act. This amount included a charge of $1.8 millionresults related to the re-measurementCommercial Business. In the third quarter of certain net deferred tax assets using2021, the lower U.S. corporate income tax rateCompany divested the commercial business. The revenue, margin and a charge of $6.4 millionselling expenses for the Commercial Business have been moved to increase our valuation allowancediscontinued operations. See footnote 21 to the consolidated financial statements for additional details related to our net deferred tax asset. The majority of the increase in the valuation allowance is related to the revised treatment of net operating losses under the Tax Act. Absent the impact of the Tax Act, our effective income tax benefit rate for 2017 would have been 36.4%.discontinued operations.
Our effective income tax rate was a benefit of 41.0% in 2016. In 2016, we increased our valuation allowances by $106 thousand related to state income tax loss carryforwards and state income tax credit carryforwards. Additionally, 2016 included approximately $395 thousand of federal tax credits.
Net Loss. Continuing operations reflected a loss of $9.3 million, or $0.59 per diluted share in 2017, compared with a loss from continuing operations of $5.2 million, or $0.33 per diluted share in 2016. Our discontinued operations reflected a loss of $233 thousand, or $0.01 per diluted share in 2017 compared with a loss of $131 thousand, or $0.01 per diluted share and income on disposal of discontinued operations of $60 thousand, or $0.00 per diluted share in 2016. Including discontinued operations, we had a net loss of $9.6 million, or $0.60 per diluted share, in 2017 compared with a net loss of $5.3 million, or $0.34 per diluted share, in 2016.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 29, 2018,25, 2021, cash used in continuing operations was $6.6 million driven by increases in working capital. Increased sales volume resulted in an increase of $7.8 million in accounts receivable. Higher demand and increased costs drove inventories up by $14.8 million. These increases were slightly offset by a decrease in accounts payable and other accrued expenses of $7.3 million. The reduction in accounts payable and other accrued expenses was offset by increases in prepaids and other current assets of $1.9 million as the Company was required to prepay one primary raw material provider at fiscal year end December 25, 2021.
Net cash provided by operationsinvesting activities was $5.1 million. Inventories decreased $8.5 million, receivables decreased $3.8 million and accounts payable and accrued expenses decreased $4.2 million. Inventories were planned more closely in 2018 and decreased with lower demand. Receivables decreased on lower sales volume. In addition to items related to the general operating expenses, accounts payable and accrued expenses includes a liability of $1.5 million for settlement of a class action lawsuit and severances related to the Profit Improvement Plan.
Capital asset acquisitions for the year ended December 29, 2018 were $4.1 million. In 2018 proceeds from sale of equipment totaled $1.9 million, primarily related to assets in our plants that were closed as part of our Profit Improvement Plan. Approximately $389 thousand of equipment was acquired under capital leases and accounts payable. Depreciation and amortization for the year ended December 29, 2018 were $12.7 million. We expect capital expenditures to be approximately $6.0$15.1 million in 2019 while depreciation and amortization is expected to be approximately $13.0 million. Planned capital expendituresthe fiscal year 2021. This amount was primarily the result of the divestiture of the Commercial Business in 2019 are primarily for new equipment.the third quarter of 2021.
During the year ended December 29, 2018,25, 2021, cash used in financing activities was $2.9$.3 million. We had net borrowings of $1.5$4.8 million on the revolving credit facility and $3.3 million on notes payables and payments of $10.4 millionfacility. Payments on notes payable net of borrowings decreased cash by $2.9 million and lease obligations.finance leases were reduced by payments, net of borrowings, of $3.2 million. The balance in amount of checks outstanding in excess of cash at year end 2021 increased from prior year resulting in a cash inflow of $1.1 million.
We believe our operating cash flows, credit availability under our revolving credit facility and other sources of financing are adequate to finance our anticipated liquidity requirements under current operating conditions. As of December 29, 2018,We cannot predict, and are unable to know, the unused borrowing availability under our revolving credit facility was $31.9 million. Our revolving credit facility requires us to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability is less than $16.5 million. Aslong-term impact of the date hereof,COVID-19 pandemic and the related economic consequences or how these events may affect our fixed coverage ratiofuture liquidity. Availability under the new Senior Secured Revolving Credit Facility on December 25, 2021 was less than 1.1 to 1.0, accordingly the unused availability accessible by us was $15.4 million (the amount above $16.5 million) at December 29, 2018.$37.6 million. Significant additional cash expenditures above our normal liquidity requirements, significant deterioration in economic conditions or continued operating losses could affect our business and require supplemental financing or other funding sources. There can be no assurance that such supplemental financing or other sources of funding can be obtained or will be obtained on terms favorable to us. See Note 23 to our Consolidated Financial Statements for additional information regarding liquidity and capital resources.
Debt Facilities
Revolving Credit Facility. During the fourth quarter of 2020, we entered into a $75.0 million Senior Secured Revolving Credit Facility with Fifth Third Bank National Association as lender. The revolving credit facilityloan is secured by a first priority security interest on all accounts receivable, cash, and inventory, and provides for a maximum of $150.0 million of revolving credit, subject to borrowing base availability. The borrowing base is currently equal to specifiedlimited by certain percentages of our eligiblevalues of the accounts receivable inventories, fixed assets and real property less reserves established, from time to time, by the administrative agent under the facility.inventory. The revolving credit facility matures on September 23, 2021. The revolving credit facility is secured by a first priority lien on substantially all of our assets.October 30, 2025.
At our election, advances of the revolving credit facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, or 3 month periods, as selected by us,defined with a floor or 0.75% or published LIBOR, plus an applicable margin ranging between 1.50% and 2.00%, or (b) the higher of the prime rate the Federal Funds rate plus 0.5%, or a daily LIBOR rate plus 1.00%, plus an applicable margin ranging between 0.50% and 1.00%. The applicable margin is determined based on availability under the revolving credit facility with margins increasing as availability decreases. As of December 29, 2018,25, 2021, the applicable margin on our revolving credit facility was 1.75%. for LIBOR and 0.75% for Prime. We pay an unused line fee on the average amount by which the aggregate commitments exceed utilization of the revolving credit facility equal to 0.375%0.25% per annum. The weighted-average interest rate on borrowings outstanding under the revolving credit facility was 4.58%3.00% at December 29, 201825, 2021 and 4.12%2.68% at December 30, 2017.26, 2020.
The revolving credit facility includes certain affirmativeagreement is subject to customary terms and negative covenants that impose restrictionsconditions and annual administrative fees with pricing varying on our financialexcess availability and business operations. The revolving credit facility restricts our borrowing availability if oura fixed charge coverage ratioratio. The agreement is also subject to certain compliance, affirmative, and financial covenants. We are only subject to the financial covenants if borrowing availability is less than 1.1 to 1.0. During any period that our fixed charge coverage ratio is less than 1.1 to 1.0, our borrowing12.5% of the availability, and remains until the availability is reduced by $16.5 million.greater than 12.5% for thirty consecutive days. As of December 29, 2018,25, 2021, the unused borrowing availability under the revolving credit facility was $31.9 million; however, since$37.6 million.
Term Loans. Effective October 28, 2020, we entered into a $10.0 million principal amount USDA Guaranteed term loan with AmeriState Bank as lender. The term of the loan is 25 years and bears interest at a minimum 5.00% rate or 4.00% above 5-year treasury, to be reset every 5 years at 3.5% above 5-year treasury. The loan is secured by a first mortgage on our fixed charge coverage ratio was less than 1.1Atmore, Alabama and Roanoke, Alabama facilities and requires certain compliance, affirmative, and financial covenants.
Effective October 29, 2020, we entered into a $15.0 million principal amount USDA Guaranteed term loan with the Greater Nevada Credit Union as lender. The term of the loan is 10 years and bears interest at a minimum 5.00% rate or 4.00% above 5- year treasury, to 1.0,be reset after 5 years at 3.5% above 5-year treasury. The loan is secured by a first lien on a substantial portion of the unused availability accessible by us was $15.4 million (the amount above $16.5 million) at December 29, 2018.Company’s machinery and equipment, a certificate of deposit and a second lien on our Atmore and Roanoke facilities. Payments on the loan are interest only over the first three years and principal and interest over the remaining seven years.
Notes Payable - Buildings. On November 7, 2014, we entered into a ten-year $8.3 million note payable to purchase a previously leased distribution center in Adairsville, Georgia. The note payable is scheduled to mature on November 7, 2024 and is secured by the distribution center. The note payable bears interest at a variable rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $35 thousand, plus interest calculated on the declining balance of the note, with a final payment of $4.2 million due on maturity. In addition, we entered into an interest rate swap with an amortizing notional amount effective November 7, 2014 which effectively fixes the interest rate at 4.50%.
On January 23, 2015, we entered into a ten-year $6.3 million note payable to finance an owned facility in Saraland, Alabama. The note payable is scheduled to mature on January 7, 2025 and is secured by the facility. The note payable bears interest at a variable rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $26 thousand, plus interest calculated on the declining balance of the note, with a final payment of $3.1 million due on maturity. In addition, we entered into a forward interest rate swap with an amortizing notional amount effective January 7, 2017 which effectively fixes the interest rate at 4.30%.
Acquisition Note Payable - Development Authority of Gordon County. On November 2, 2012, we signed a 6.00% seller-financed note of $5.5 million with Lineage PCR, Inc. (“Lineage”) related to the acquisition of the continuous carpet dyeing facility in Calhoun, Georgia. Effective December 28, 2012, through a series of agreements between us, the Development Authority of Gordon County, Georgia (the “Authority”) and Lineage, obligations with identical payment terms as the original note to Lineage were now payment obligations to the Authority. These transactions were consummated in order to provide a tax abatement to us related to the real estate and equipment at this facility. The tax abatement plan provided for abatement for certain components of the real and personal property taxes for up to ten years. At any time, we have the option to pay off the obligation, plus a nominal amount. The debt to the Authority bore interest at 6.00% and was payable in equal monthly installments of principal and interest of $106 thousand over 57 months. The note matured on November 2, 2017 and the final installment was paid at that time.
Acquisition Note Payable - Robertex. On July 1, 2013, we signed a 4.50% seller-financed note of $4.0 million, which was recorded at a fair value of $3.7 million, with Robert P. Rothman related to the acquisition of Robertex Associates, LLC ("Robertex") in Calhoun, Georgia. The note was payable in five annual installments of principal of $800 thousand plus interest. The note matured on June 30, 2018.
Notes Payable - Equipment and Other. Our equipment financing notes have terms ranging from 1 to 7 years, bear interest ranging from 1.00%1.60% to 7.68%7.00% through the year and are due in monthly installments through their maturity dates. Our equipment financing notes are secured by the specific equipment financed and do not contain any financial covenants.
CapitalFinance Lease - Buildings. On January 14, 2019, we entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Saraland Industrial, LLC, an Alabama limited liability company (the “Purchaser”). Pursuant to the terms of the Purchase and Sale Agreement, we sold our Saraland facility, and approximately 17.12 acres of surrounding property located in Saraland, Alabama (the “Property”) to the Purchaser for a purchase price of $11,500. Concurrent with the sale of the Property, we and the Purchaser entered into a twenty-year lease agreement (the “Lease Agreement”), whereby we will lease back the Property at an annual rental rate of $977, subject to annual rent increases of 1.25%. Under the Lease Agreement, we have two (2) consecutive options to extend the term of the Lease by ten years for each such option. This transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded 90% of its fair value. We recorded a liability for the amounts received, will continue to depreciate the asset, and have imputed an interest rate so that the net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term. Concurrently with the sale, we paid off the approximately $5,000 mortgage on the property to First Tennessee Bank National Association and terminated the related fixed interest rate swap agreement.
Finance Lease Obligations. Our capitalizedfinance lease obligations have terms ranging from 3 to 7 years, bear interest ranging from 3.55% to 7.76% and are due in monthly or quarterly installments through their maturity dates. Our capitalfinance lease obligations are secured by the specific equipment leased. (See Note 1011 to our Consolidated Financial Statements).
Contractual Obligations
The following table summarizes our future minimum payments under contractual obligations as of December 29, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due By Period |
| | | (dollars in millions) |
| | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total |
| Debt | | $ | 3.8 |
| | $ | 1.9 |
| | $ | 101.0 |
| | $ | 1.0 |
| | $ | 0.7 |
| | $ | 8.0 |
| | 116.4 |
|
| Interest - debt (1) | | 0.6 |
| | 0.5 |
| | 0.5 |
| | 0.4 |
| | 0.4 |
| | 0.3 |
| | 2.7 |
|
| Capital leases | | 4.0 |
| | 3.8 |
| | 3.2 |
| | 0.9 |
| | 0.2 |
| | — |
| | 12.1 |
|
| Interest - capital leases | | 0.6 |
| | 0.4 |
| | 0.2 |
| | — |
| | — |
| | — |
| | 1.2 |
|
| Operating leases | | 3.0 |
| | 2.5 |
| | 2.1 |
| | 1.7 |
| | 0.9 |
| | 3.2 |
| | 13.4 |
|
| Purchase commitments | | 2.7 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2.7 |
|
| Totals | | 14.7 |
| | 9.1 |
| | 107.0 |
| | 4.0 |
| | 2.2 |
| | 11.5 |
| | 148.5 |
|
(1) Interest rates used for variable rate debt were those in effect at December 29, 2018.
Stock-Based Awards
We recognize compensationcompensation expense related to share-based stock awards based on the fair value of the equity instrument over the period of vesting for the individual stock awards that were granted. At December 29, 2018,25, 2021, the total unrecognized compensation expense related to unvested restricted stock awards was $1.5 million with a weighted-average vesting period of 7.7 years. At December 29, 2018, the total unrecognized compensation expense related to Directors' Stock Performance Units was $24$1,337 thousand with a weighted-average vesting period of 0.36.5 years. At December 29, 2018, the total25, 2021, there was no unrecognized compensation expense related to unvested stock options was $72 thousand with a weighted-average vesting period of 0.4 years.options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at December 29, 201825, 2021 or December 30, 2017.26, 2020.
Income Tax Considerations
In the tax year ended December 29, 201825, 2021 we increased our valuation allowances by $4$1.4 million related to our net deferred tax asset and specific state net operating loss and state credit carryforwards.
During 20192022 and 2020,2023, we do not anticipate any cash outlays for income taxes to exceed $100 thousand.$1 million. This is due to tax loss carryforwards and tax credit carryforwards that will be used to partially offset taxable income. At December 29, 2018,25, 2021, we were in a net deferred tax liability position of $568$91 thousand.
Discontinued Operations - Environmental Contingencies
We havehave reserves for environmental obligations established at five previously owned sites that were associated with our discontinued textile businesses. We have a reserve of $1.7$1.9 million for environmental liabilities at these sites as of December 29, 2018.25, 2021. The liability established represents our best estimate of loss and is the reasonable amount to which there is any meaningful degree of certainty given the periods of estimated remediation and the dollars applicable to such remediation for those periods. The actualactual timeline to remediate, and thus, the ultimate cost to complete such remediation through these remediation efforts, may differ significantly from our estimates. Pre-tax cost for environmental remediation obligations classified as discontinued operations were primarily a result of specific events requiring action and additional expense in each period.
Fair Value of Financial Instruments
At December 29, 2018,25, 2021, we had no assets or liabilities measured at fair value that fall under a level 3 classification in the hierarchy (those subject to significant management judgment or estimation).
Certain Related Party Transactions
We are a party to a five-year lease with the seller of Atlas Carpet Mills, Inc. to lease three manufacturing facilities as part of the acquisition in 2014. The lessor is controlled by an associate of ours. Rent paid to the lessor during 2018, 2017, and 2016 was $1,003, $978, and $793, respectively. The lease was based on current market values for similar facilities.
We purchase a portion of our product needs in the form of fiber, yarn and carpet from Engineered Floors, an entity substantially controlled by Robert E. Shaw, a shareholder of ours.our Company. An affiliate of Mr. Shaw holds approximately 7.2%7.6% of our Common Stock,
which represents approximately 3.5%3.2% of the total vote of all classes of our Common Stock. Engineered Floors is one of several suppliers of such materials to us. Total purchases from Engineered Floors for 2018, 20172021 and 20162020 were approximately $8,200, $7,200$3.9 million and $7,300,$4.5 million, respectively; or approximately 2.6%,1.4% and 2.3%, and 2.4% of our cost of goods sold in 2018, 2017,2021 and 2016,2020, respectively. Purchases from Engineered Floors are based on market value, negotiated prices. We have no contractual commitments with Mr. Shaw associated with our business relationship with Engineered Floors. Transactions with Engineered Floors are reviewed annually by our board of directors.
We arewere a party to a ten-year lease with the Rothman Family Partnership to lease a manufacturing facility as part of the Robertex acquisition in 2013. The controlling principal of the lessor is controlled bywas an associate of ours.our Company until June 30, 2018. Rent paid to the lessor during 2018, 2017,2021 and 20162020 was $278, $273,$196 thousand and $267,$289 thousand, respectively. The lease was based on current market values for similar facilities. In addition, we have a note payable to Robert P. Rothman related to the acquisition of Robertex Inc. (See Note 10 to our Consolidated Financial Statements).This lease was terminated on August 31, 2021.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize on the balance sheet right-of-use assets, representing the right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. We have completed the process of identifying our population of leases and we have identified and implemented internal procedures and controls to properly disclose and report our results beginning with our quarterly report on Form 10-Q for the quarter ending March 30, 2019. With the adoption of the new lease standard, for operating leases we will recognize right of use assets of approximately $10.3 million and a corresponding lease liability of the same amount at the beginning of fiscal year 2019.
See Note 2 to our Consolidated Financial Statements of this Form 10-K for a discussion of the standard described above and other new accounting pronouncements which is incorporated herein by reference.
Critical Accounting Policies
Certain estimates and assumptions are made when preparing our financial statements. Estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict. As a result, actual amounts could differ from estimates made when our financial statements are prepared.
The Securities and Exchange Commission requires management to identify its most critical accounting policies, defined as those that are both most important to the portrayal of our financial condition and operating results and the application of which requires our most difficult, subjective, and complex judgments. Although our estimates have not differed materially from our experience, such estimates pertain to inherently uncertain matters that could result in material differences in subsequent periods.
We believe application of the following accounting policies require significant judgments and estimates and represent our critical accounting policies. Other significant accounting policies are discussed in Note 1 to our Consolidated Financial Statements.
•Revenue recognition. The Company derives its We derive our revenues primarily from the sale of floorcovering products and processing services. Revenues are recognized when control of these products or services is transferred to itsour customers, in an amount that reflects the consideration the Company expectswe expect to be entitled to in exchange for those products and services. Sales, value add, and other taxes the Company collectswe collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company doesWe do not have any significant financing components as payment is received at or shortly after the point of sale. The Company determinedWe determine revenue recognition through the following steps:
▪Identification of the contract with a customer
▪Identification of the performance obligations in the contract
▪Determination of the transaction price
▪Allocation of the transaction price to the performance obligations in the contract
▪Recognition of revenue when, or as, the performance obligation is satisfied
| |
▪ | Identification of the contract with a customer |
| |
▪ | Identification of the performance obligations in the contract |
| |
▪ | Determination of the transaction price |
| |
▪ | Allocation of the transaction price to the performance obligations in the contract |
| |
▪ | Recognition of revenue when, or as, the performance obligation is satisfied |
•Variable Consideration. The nature of the Company’sour business gives rise to variable consideration, including rebates, allowances, and returns that generally decrease the transaction price, which reduces revenue. These variable amounts are generally credited to the customer, based on achieving certain levels of sales activity, product returns, or price concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends.
•Customer claims and product warranties. The Company We generally providesprovide product warranties related to manufacturing defects and specific performance standards for itsour products for a period of up to two years. The Company accruesWe accrue for estimated future assurance warranty costs in the period in which the sale is recorded. The costs are included in Cost of Sales in the Consolidated Condensed Statements of Operations and the product warranty reserve is included in accrued expenses in the Consolidated Condensed Balance Sheets. The Company calculates itsWe calculate our accrual using the portfolio approach based upon historical experience and known trends. The Company doesWe do not provide an additional service-type warranty.
Accounts receivable allowances. We provide allowances for expected cash discounts and doubtful accounts based upon historical experience and periodic evaluations of the financial condition of our customers. If the financial conditions of our customers were to significantly deteriorate, or other factors impair their ability to pay their debts, credit losses could differ from allowances recorded in our Consolidated Financial Statements.
•Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out method (LIFO), which generally matches current costs of inventory sold with current revenues, for substantially all inventories. Reserves are also established to adjust inventories that are off-quality, aged or obsolete to their estimated net realizable value. Additionally, rates of recoverability per unit of off-quality, aged or obsolete inventory are estimated based on historical rates of recoverability and other known conditions or circumstances that may affect future recoverability. Actual results could differ from assumptions used to value our inventory.
Goodwill. Goodwill is tested annually for impairment during the fourth quarter or earlier if significant events or substantive changes in circumstances occur that may indicate that goodwill may not be recoverable. The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. We have identified our reporting unit as our floorcovering business for the purposes of allocating goodwill and assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about sales growth rates, operating margins, the weighted average cost of capital (“WACC”), synergies from the viewpoint of a market participant and comparable company market multiples. When developing these key judgments and assumptions, we consider economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. We performed our annual assessment of goodwill in the fourth quarter of 2018 and an impairment was indicated. In accordance with the results of our testing, the goodwill was considered impaired and the asset was removed and a corresponding expense was recorded for asset impairment on the Consolidated Statements of Operations. (See Note 7 to our Consolidated Financial Statements)
•Self-insured accruals. We estimate costs required to settle claims related to our self-insured medical, dental and workers' compensation plans. These estimates include costs to settle known claims, as well as incurred and unreported claims. The estimated costs of known and unreported claims are based on historical experience. Actual results could differ from assumptions used to estimate these accruals.
•Income taxes. Our effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in a future period. We evaluate the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that we are not able to realize all or a portion of our deferred tax assets in the future, a valuation allowance is provided. We recognize such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. We had valuation allowances of $17.0$12.9 million at December 29, 201825, 2021 and $13.0$14.2 million at December 30, 2017. On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we wrote down our net deferred tax assets as of December 30, 2017 by $8.2 million to reflect the estimated impact of the Tax Act. This amount included a charge of $1.8 million related to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a charge of $6.4 million to increase our valuation allowance related to our net deferred tax asset. The majority of the increase in the valuation allowance is related to the revised treatment of net operating losses under the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, we have completed our analysis and all adjustments have been included in income from continuing operations as an adjustment to income tax expense.26, 2020. At December 29, 2018,25, 2021, we were in a net deferred tax liability position of $568$91 thousand. For further information regarding our valuation allowances, see Note 14 to ourthe Consolidated Financial Statements.
•Loss contingencies. We routinely assess our exposure related to legal matters, environmental matters, product liabilities or any other claims against our assets that may arise in the normal course of business. If we determine that it is probable
a loss has been incurred, the amount of the loss, or an amount within the range of loss, that can be reasonably estimated will be recorded.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in thousands)
Our earnings, cash flows and financial position are exposed to market risks relating to interest rates, among other factors. It is our policy to minimize our exposure to adverse changes in interest rates and manage interest rate risks inherent in funding our Company with debt. We address this financial exposure through a risk management program that includes maintaining a mix of fixed and floating rate debt and the use of interest rate swap agreements (See Note 12 to the Consolidated Financial Statements).
At December 29, 2018, $49,220,25, 2021, $35,922, or approximately 38%47% of our total debt, was subject to floating interest rates. A one-hundred basis point fluctuation in the variable interest rates applicable to this floating rate debt would have an annual pre-tax impact of approximately $492.$326. Included in the $35,922, is the amount outstanding for the term loans of $24,764. Both loans are currently set to bear interest of 5% for five years. Every five years, these rates will be reset to reflect the then current 5-year treasury rate plus a margin. See Note 9 for further discussion of these loans.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The supplementary financial information required by ITEM 302 of Regulation S-K is included in PART II, ITEM 5 of this report and the Financial Statements are included in a separate section of this report.
| |
Item 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 29, 2018,26, 2021, the date of the financial statements included in this Form 10-K (the “Evaluation Date”). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the Evaluation Date.
(b) Changes in Internal Control over Financial Reporting.No changes in our internal control over financial reporting occurred during the quarter covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures, as well as diverse interpretation of U. S. generally accepted accounting principles by accounting professionals. It is also possible that internal control over financial reporting can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. These inherent limitations are known features of the financial reporting process; therefore, while it is possible to design into the process safeguards to reduce such risk, it is not possible to eliminate all risk.
Our management report on internal control over financial reporting is contained in Item 15(a)(1) of this report.
| |
Item 9B. | OTHER INFORMATION |
Item 9B.OTHER INFORMATION
None.
PART III.
| |
Item 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The sections entitled "Information about Nominees for Director" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 1, 20194, 2022 are incorporated herein by reference. Information regarding the executive officers of the registrant is presented in PART I of this report.
We adopted a Code of Business Conduct and Ethics (the "Code of Ethics") which applies to our principal executive officer, principal financial officer and principal accounting officer or controller, and any persons performing similar functions. A copy of the Code of Ethics is incorporated by reference herein as Exhibit 14 to this report.
Audit Committee Financial Expert
The Board has determined that Michael L. Owens is an audit committee financial expert as defined by Item 407 (e)(5) of Regulation S-K of the Securities Exchange Act of 1934, as amended, and is independent within the meaning of the applicable Securities and Exchange Commission rules and NASDAQ standards. For a brief listing of Mr. Owens' relevant experience, please refer to the "Election of Directors" section of the Company's Proxy Statement.
Audit Committee
We have a standing audit committee. At December 29, 2018,25, 2021, members of our audit committee are Michael L. Owens, Chairman, William F. Blue, Jr., Charles E. Brock, Walter W. Hubbard, Lowry F. Kline, and Hilda W.S. Murray.
| |
Item 11. | EXECUTIVE COMPENSATION |
Item 11.EXECUTIVE COMPENSATION
The sections entitled "Compensation Discussion and Analysis", "Executive Compensation Information" and "Director Compensation" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 1, 20194, 2022 are incorporated herein by reference.
| |
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The section entitled "Principal Shareholders", as well as the beneficial ownership table (and accompanying notes), in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 1, 20194, 2022 are incorporated herein by reference.
Equity Compensation Plan Information as of December 29, 201825, 2021
The following table sets forth information as to our equity compensation plans as of the end of the 20182021 fiscal year:
| | | | | | | | | | | | | | | | | |
| | (a) | | (b) | | (c) |
| Plan Category | Number of securities to be issued upon exercise of the outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
| Equity Compensation Plans approved by security holders | 271,320 | | (1) | $ | 4.86 | | (2) | 250,802 | |
(1)Includes the options to purchase 141,000 shares of Common Stock under our 2016 Incentive Compensation Plan and 130,320 Performance Units issued under the 2016 Incentive Compensation Plan, each unit being equivalent to one share of Common Stock. Does not include shares of Common Stock issued but not vested pursuant to outstanding restricted stock awards.
(2)Includes the aggregate weighted-average of (i) the exercise price per share for outstanding options to purchase 141,000 shares of Common Stock under our 2016 Incentive Compensation Plan and (ii) the price per share of the Common Stock on the grant date for each of 130,320 Performance Units issued under the 2016 Incentive Compensation Plan (each unit equivalent to one share of Common Stock).
|
| | | | | | | | | |
| | (a) | | (b) | | (c) |
| Plan Category | Number of securities to be issued upon exercise of the outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
| Equity Compensation Plans approved by security holders | 421,821 |
| (1) | $ | 4.90 |
| (2) | 217,686 |
|
| |
(1) | Includes the options to purchase 103,500 shares and 195,000 shares of Common Stock under our 2006 Stock Awards Plan and 2016 Stock Awards Plan, respectively, and 123,321 Performance Units issued under the 2016 Stock Awards Plan, each unit being equivalent to one share of Common Stock. Does not include shares of Common Stock issued but not vested pursuant to outstanding restricted stock awards. |
| |
(2) | Includes the aggregate weighted-average of (i) the exercise price per share for outstanding options to purchase 103,500 shares and 195,000 shares of Common Stock under our 2006 Stock Awards Plan and 2016 Stock Awards Plan, respectively, and (ii) the price per share of the Common Stock on the grant date for each of 123,321 Performance Units issued under the 2016 Stock Awards Plan (each unit equivalent to one share of Common Stock). |
| |
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The sectionsections entitled "Certain Transactions Between the Company and Directors and Officers" and "Independent Directors" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 1, 2019 is4, 2022 are incorporated herein by reference.
| |
Item 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The section entitled "Audit Fees Discussion" in the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held May 1, 20194, 2022 is incorporated herein by reference. The independent registered public accounting firm is Dixon Hughes Goodman LLP (PCAOB Firm ID No. 57) located in Atlanta, Georgia.
PART IV.
| |
Item 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
(a) | (1) Financial Statements - The response to this portion of Item 15 is submitted as a separate section of this report. |
(a)(1) Financial Statements - The response to this portion of Item 15 is submitted as a separate section of this report.
(2) Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate section of this report.
(3) Exhibits - Please refer to the Exhibit Index which is attached hereto.
| |
(b) | Exhibits - The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15(a)(3) above. |
| |
(c) | Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15(a)(2). |
(b)Exhibits - The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15(a)(3) above.
(c)Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15(a)(2).
Item 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | |
| Date: March 23, 2022 | | The Dixie Group, Inc. |
| | |
Date: March 8, 2019 | | The Dixie Group, Inc. |
| | |
| | /s/ DANIEL K. FRIERSON |
| | By: Daniel K. Frierson |
| | Chairman of the Board and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Capacity | | Date |
| | | | |
| /s/ DANIEL K. FRIERSON | | Chairman of the Board, Director and Chief Executive Officer | | March 23, 2022 |
| Daniel K. Frierson | | | | |
| | | | |
Signature | | Capacity | | Date |
| | | | |
/s/ DANIEL K. FRIERSONALLEN L. DANZEY | | Chairman of the Board, Director and Chief Executive Officer | | March 8, 2019 |
Daniel K. Frierson | | | | |
| | | | |
/s/ JON A. FAULKNER | | Vice President, Chief Financial Officer | | March 8, 201923, 2022 |
Jon A. Faulkner | | | | |
| | | | |
/s/ ALLEN L. DANZEY | | Chief Accounting Officer | | March 8, 2019 |
| Allen L. Danzey | | | | |
| | | | |
| /s/ D. KENNEDY FRIERSON, JR. | | Vice President, Chief Operating Officer and Director | | March 8, 201923, 2022 |
| D. Kennedy Frierson, Jr. | | | | |
| | | | |
| /s/ WILLIAM F. BLUE, JR. | | Director | | March 8, 201923, 2022 |
| William F. Blue, Jr. | | | | |
| | | | |
| /s/ CHARLES E. BROCK | | Director | | March 8, 201923, 2022 |
| Charles E. Brock | | | | |
| | | | |
/s/ WALTER W. HUBBARD | | Director | | March 8, 2019 |
Walter W. Hubbard | | | | |
| | | | |
| /s/ LOWRY F. KLINE | | Director | | March 8, 201923, 2022 |
| Lowry F. Kline | | | | |
| | | | |
| /s/ HILDA S. MURRAY | | Director | | March 8, 201923, 2022 |
| Hilda S. Murray | | | | |
| | | | |
| /s/ MICHAEL L. OWENS | | Director | | March 8, 201923, 2022 |
| Michael L. Owens | | | | |
ANNUAL REPORT ON FORM 10-K
ITEM 8 AND ITEM 15(a)(1) AND ITEM 15(a)(2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 29, 201825, 2021
THE DIXIE GROUP, INC.
DALTON, GEORGIA
FORM 10-K - ITEM 8 and ITEM 15(a)(1) and (2)
THE DIXIE GROUP, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement schedules of The Dixie Group, Inc. and subsidiaries are included in Item 8 and Item 15(a)(1) and 15(c):
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or the information is otherwise shown in the financial statements or notes thereto, and therefore such schedules have been omitted.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures, as well as diverse interpretation of U. S. generally accepted accounting principles by accounting professionals. It is also possible that internal control over financial reporting can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. These inherent limitations are known features of the financial reporting process; therefore, while it is possible to design into the process safeguards to reduce such risk, it is not possible to eliminate all risk.
Management, including our principal executive officer and principal financial officer, has used the criteria set forth in the report entitled “Internal Control - Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) to evaluate the effectiveness of its internal control over financial reporting. Management has concluded that its internal control over financial reporting was effective as of December 29, 2018,25, 2021, based on those criteria.
/s/ Daniel K. Frierson
Chairman of the Board and
Chief Executive Officer
/s/ Jon A. FaulknerAllen L. Danzey
Chief Financial Officer
Report of Independent Registered Public Accounting Firm
The Shareholders and the Board of Directors of The Dixie Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Dixie Group, Inc. (the "Company") as of December 29, 201825, 2021 and December 30, 2017,26, 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity and cash flows for each of the threetwo years in the period ended December 29, 2018,25, 2021, and the related notes and schedule listed in the Index at Item 15(a)(2)15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 29, 201825, 2021 and December 30, 2017,26, 2020, and the results of its operations and its cash flows for each of the threetwo years in the period ended December 29, 2018,25, 2021, in conformity with U.S. generally accepted accounting principles.principles in the United States of America (“U.S. GAAP”).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Critical Audit Matter – LIFO Reserve
As disclosed in Notes 1 and 5 to the consolidated financial statements, the Company recognizes its inventory using the last-in, first-out (“LIFO”) method, which requires a reserve to adjust the historical cost carrying value of inventory to the lower of LIFO or market. As of December 25, 2021, the LIFO reserve was approximately $30,498,000. There is inherent complexity in the accounting for the LIFO reserve including complex calculations based on inventory pools, changes in those pools, and lower of cost or market adjustments.
We identified the LIFO reserve as a critical audit matter. The principal considerations for that determination included the complexity of the calculations, the judgment required for market adjustments, and the nature and extent of audit effort required to address the matter.
Our audit procedures to test the appropriateness of the LIFO Reserve, among others:
•We tested the completeness of the LIFO reserve by evaluating whether all appropriate inventory items were included in the LIFO reserve calculation and in the appropriate category. This included reconciling the inventory used to calculate the LIFO reserve to the inventory subledger.
•We independently recalculated management’s LIFO pool calculation, including pool increases or inventory liquidations.
•We tested the aggregation of the pools used to arrive at the LIFO reserve, and considered whether methodologies were consistently applied, or that changes, if any, were in accordance with U.S. GAAP.
•We tested a sample of inventory items and tested whether the lower of cost or market adjustments made by management were in accordance with U.S. GAAP.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2013.
Atlanta, Georgia
March 8, 201923, 2022
THE DIXIE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
| | | | | | | | | | | |
| | December 25,
2021 | | December 26, 2020
(As Adjusted) |
| ASSETS | | | |
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 1,471 | | | $ | 1,920 | |
| Receivables, net | 40,291 | | | 32,902 | |
| Inventories, net | 82,739 | | | 67,900 | |
| Prepaid expenses | 9,925 | | | 7,979 | |
| | | |
| Current assets of discontinued operations | 5,991 | | | 23,464 | |
| TOTAL CURRENT ASSETS | 140,417 | | | 134,165 | |
| | | |
| PROPERTY, PLANT AND EQUIPMENT, NET | 48,658 | | | 52,905 | |
| OPERATING LEASE RIGHT-OF-USE ASSETS | 22,534 | | | 21,151 | |
| | | |
| OTHER ASSETS | 21,138 | | | 16,975 | |
| LONG-TERM ASSETS OF DISCONTINUED OPERATIONS | 2,752 | | | 8,506 | |
| TOTAL ASSETS | $ | 235,499 | | | $ | 233,702 | |
| | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| CURRENT LIABILITIES | | | |
| Accounts payable | $ | 16,748 | | | $ | 15,106 | |
| Accrued expenses | 26,214 | | | 19,483 | |
| Current portion of long-term debt | 3,361 | | | 6,116 | |
| Current portion of operating lease liabilities | 2,528 | | | 3,089 | |
| Current liabilities of discontinued operations | 5,362 | | | 11,502 | |
| TOTAL CURRENT LIABILITIES | 54,213 | | | 55,296 | |
| | | |
| LONG-TERM DEBT, NET | 73,701 | | | 72,041 | |
| OPERATING LEASE LIABILITIES | 20,692 | | | 18,630 | |
| | | |
| OTHER LONG-TERM LIABILITIES | 16,030 | | | 17,636 | |
| LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS | 4,488 | | | 6,308 | |
| TOTAL LIABILITIES | 169,124 | | | 169,911 | |
| | | |
| COMMITMENTS AND CONTINGENCIES (See Note 18) | 0 | | 0 |
| | | |
| STOCKHOLDERS' EQUITY | | | |
| Common Stock ($3 par value per share): Authorized 80,000,000 shares, issued and outstanding - 14,792,647 shares for 2021 and 14,557,435 shares for 2020 | 44,378 | | | 43,672 | |
| Class B Common Stock ($3 par value per share): Authorized 16,000,000 shares, issued and outstanding - 1,004,975 shares for 2021 and 880,313 shares for 2020 | 3,015 | | | 2,641 | |
| Additional paid-in capital | 157,658 | | | 158,329 | |
| Accumulated deficit | (138,706) | | | (140,321) | |
| Accumulated other comprehensive income (loss) | 30 | | | (530) | |
| TOTAL STOCKHOLDERS' EQUITY | 66,375 | | | 63,791 | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 235,499 | | | $ | 233,702 | |
|
| | | | | | | |
| | December 29,
2018 | | December 30,
2017 |
| ASSETS | | | (As Adjusted) |
|
| CURRENT ASSETS | | | |
| Cash and cash equivalents | $ | 18 |
| | $ | 19 |
|
| Receivables, net | 42,542 |
| | 46,480 |
|
| Inventories, net | 105,195 |
| | 113,657 |
|
| Prepaid expenses | 5,204 |
| | 4,669 |
|
| TOTAL CURRENT ASSETS | 152,959 |
| | 164,825 |
|
| | | | |
| PROPERTY, PLANT AND EQUIPMENT, NET | 84,111 |
| | 93,785 |
|
| GOODWILL AND OTHER INTANGIBLES | — |
| | 5,850 |
|
| OTHER ASSETS | 15,708 |
| | 19,447 |
|
| TOTAL ASSETS | $ | 252,778 |
| | $ | 283,907 |
|
| | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| CURRENT LIABILITIES | | | |
| Accounts payable | $ | 17,779 |
| | $ | 18,541 |
|
| Accrued expenses | 30,852 |
| | 31,360 |
|
| Current portion of long-term debt | 7,794 |
| | 9,811 |
|
| TOTAL CURRENT LIABILITIES | 56,425 |
| | 59,712 |
|
| | | | |
| LONG-TERM DEBT | 120,251 |
| | 123,446 |
|
| OTHER LONG-TERM LIABILITIES | 17,118 |
| | 21,486 |
|
| TOTAL LIABILITIES | 193,794 |
| | 204,644 |
|
| | | | |
| COMMITMENTS AND CONTINGENCIES (See Note 18) |
| |
|
| | | | |
| STOCKHOLDERS' EQUITY | | | |
| Common Stock ($3 par value per share): Authorized 80,000,000 shares, issued and outstanding - 15,522,588 shares for 2018 and 15,279,812 shares for 2017 | 46,568 |
| | 45,839 |
|
| Class B Common Stock ($3 par value per share): Authorized 16,000,000 shares, issued and outstanding - 839,304 shares for 2018 and 861,499 shares for 2017 | 2,518 |
| | 2,584 |
|
| Additional paid-in capital | 156,390 |
| | 157,139 |
|
| Accumulated deficit | (146,384 | ) | | (125,000 | ) |
| Accumulated other comprehensive income (loss) | (108 | ) | | (1,299 | ) |
| TOTAL STOCKHOLDERS' EQUITY | 58,984 |
| | 79,263 |
|
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 252,778 |
| | $ | 283,907 |
|
See accompanying notes to the consolidated financial statements.
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
| | | | | | | | | | | | | |
| | Year Ended |
| | December 25,
2021 | | December 26, 2020
(As Adjusted) | | |
| | | | | |
| NET SALES | $ | 341,247 | | | $ | 250,869 | | | |
| Cost of sales | 263,992 | | | 193,538 | | | |
| GROSS PROFIT | 77,255 | | | 57,331 | | | |
| | | | | |
| Selling and administrative expenses | 67,926 | | | 58,175 | | | |
| | | | | |
| Other operating (income) expense, net | (927) | | | (108) | | | |
| Facility consolidation and severance expenses, net | 255 | | | 3,752 | | | |
| | | | | |
| OPERATING INCOME (LOSS) | 10,001 | | | (4,488) | | | |
| | | | | |
| Interest expense | 4,742 | | | 5,803 | | | |
| Other (income) expense, net | 1 | | | 678 | | | |
| | | | | |
| | | | | |
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES | 5,258 | | | (10,969) | | | |
| Income tax provision (benefit) | 105 | | | (1,146) | | | |
| INCOME (LOSS) FROM CONTINUING OPERATIONS | 5,153 | | | (9,823) | | | |
| Income (loss) from discontinued operations, net of tax | (3,537) | | | 615 | | | |
| | | | | |
| NET INCOME (LOSS) | $ | 1,616 | | | $ | (9,208) | | | |
| | | | | |
| BASIC EARNINGS (LOSS) PER SHARE: | | | | | |
| Continuing operations | $ | 0.33 | | | $ | (0.64) | | | |
| Discontinued operations | (0.23) | | | 0.04 | | | |
| | | | | |
| Net income (loss) | $ | 0.10 | | | $ | (0.60) | | | |
| | | | | |
| BASIC SHARES OUTSTANDING | 15,114 | | | 15,316 | | | |
| | | | | |
| DILUTED EARNINGS (LOSS) PER SHARE: | | | | | |
| Continuing operations | $ | 0.32 | | | $ | (0.64) | | | |
| Discontinued operations | (0.23) | | | 0.04 | | | |
| | | | | |
| Net income (loss) | $ | 0.09 | | | $ | (0.60) | | | |
| | | | | |
| DILUTED SHARES OUTSTANDING | 15,250 | | | 15,436 | | | |
| | | | | |
| DIVIDENDS PER SHARE: | | | | | |
| Common Stock | $ | — | | | $ | — | | | |
| Class B Common Stock | — | | | — | | | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 29,
2018 | | December 30,
2017 | | December 31,
2016 |
| | | | (As Adjusted) |
| | (As Adjusted) |
|
| NET SALES | $ | 405,033 |
| | $ | 412,462 |
| | $ | 397,453 |
|
| Cost of sales | 318,042 |
| | 311,249 |
| | 302,028 |
|
| GROSS PROFIT | 86,991 |
| | 101,213 |
| | 95,425 |
|
| | | | | | |
| Selling and administrative expenses | 92,473 |
| | 96,189 |
| | 97,004 |
|
| Other operating expense, net | 458 |
| | 441 |
| | 401 |
|
| Facility consolidation and severance expenses, net | 3,167 |
| | 636 |
| | 1,456 |
|
| Impairment of assets | 6,709 |
| | — |
| | — |
|
| OPERATING INCOME (LOSS) | (15,816 | ) | | 3,947 |
| | (3,436 | ) |
| | | | | | |
| Interest expense | 6,491 |
| | 5,739 |
| | 5,392 |
|
| Other expense, net | 3 |
| | 21 |
| | 1 |
|
| LOSS FROM CONTINUING OPERATIONS BEFORE TAXES | (22,310 | ) | | (1,813 | ) | | (8,829 | ) |
| Income tax provision (benefit) | (831 | ) | | 7,509 |
| | (3,622 | ) |
| LOSS FROM CONTINUING OPERATIONS | (21,479 | ) | | (9,322 | ) | | (5,207 | ) |
| Income (loss) from discontinued operations, net of tax | 95 |
| | (233 | ) | | (131 | ) |
| Income on disposal of discontinued operations, net of tax | — |
| | — |
| | 60 |
|
| NET LOSS | $ | (21,384 | ) | | $ | (9,555 | ) | | $ | (5,278 | ) |
| | | | | | |
| BASIC EARNINGS (LOSS) PER SHARE: | | | | | |
| Continuing operations | $ | (1.36 | ) | | $ | (0.59 | ) | | $ | (0.33 | ) |
| Discontinued operations | 0.01 |
| | (0.01 | ) | | (0.01 | ) |
| Disposal of discontinued operations | — |
| | — |
| | 0.00 |
|
| Net loss | $ | (1.35 | ) | | $ | (0.60 | ) | | $ | (0.34 | ) |
| | | | | | |
| BASIC SHARES OUTSTANDING | 15,764 |
| | 15,699 |
| | 15,638 |
|
| | | | | | |
| DILUTED EARNINGS (LOSS) PER SHARE: | | | | | |
| Continuing operations | $ | (1.36 | ) | | $ | (0.59 | ) | | $ | (0.33 | ) |
| Discontinued operations | 0.01 |
| | (0.01 | ) | | (0.01 | ) |
| Disposal of discontinued operations | — |
| | — |
| | 0.00 |
|
| Net loss | $ | (1.35 | ) | | $ | (0.60 | ) | | $ | (0.34 | ) |
| | | | | | |
| DILUTED SHARES OUTSTANDING | 15,764 |
| | 15,699 |
| | 15,638 |
|
| | | | | | |
| DIVIDENDS PER SHARE: | | | | | |
| Common Stock | $ | — |
| | $ | — |
| | $ | — |
|
| Class B Common Stock | — |
| | — |
| | — |
|
See accompanying notes to the consolidated financial statements.
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
| | | | | | | | | | | | | |
| | Year Ended |
| | December 25,
2021 | | December 26, 2020
(As Adjusted) | | |
| NET INCOME (LOSS) | $ | 1,616 | | | $ | (9,208) | | | |
| | | | | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | | | | | |
| Unrealized gain (loss) on interest rate swaps | 94 | | | (1,316) | | | |
| Income taxes | — | | | — | | | |
| Unrealized gain (loss) on interest rate swaps, net | 94 | | | (1,316) | | | |
| | | | | |
| Reclassification of loss into earnings from interest rate swaps (1) | 646 | | | 1,967 | | | |
| Income taxes | 174 | | | 343 | | | |
| Reclassification of loss into earnings from interest rate swaps, net | 472 | | | 1,624 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Unrecognized net actuarial gain (loss) on postretirement benefit plans | 18 | | | — | | | |
| Income taxes | — | | | — | | | |
| Unrecognized net actuarial gain (loss) on postretirement benefit plans, net | 18 | | | — | | | |
| | | | | |
| Reclassification of net actuarial gain into earnings from postretirement benefit plans (2) | (24) | | | (27) | | | |
| Income taxes | — | | | — | | | |
| Reclassification of net actuarial gain into earnings from postretirement benefit plans, net | (24) | | | (27) | | | |
| | | | | |
| Reclassification of prior service credits into earnings from postretirement benefit plans (2) | — | | | (3) | | | |
| Income taxes | — | | | — | | | |
| Reclassification of prior service credits into earnings from postretirement benefit plans, net | — | | | (3) | | | |
| | | | | |
| TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | 560 | | | 278 | | | |
| | | | | |
| COMPREHENSIVE INCOME (LOSS) | $ | 2,176 | | | $ | (8,930) | | | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 29,
2018 | | December 30,
2017 | | December 31,
2016 |
| NET LOSS | $ | (21,384 | ) | | $ | (9,555 | ) | | $ | (5,278 | ) |
| | | | | | |
| OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | | | | | |
| Unrealized gain (loss) on interest rate swaps | 531 |
| | 180 |
| | (263 | ) |
| Income taxes | — |
| | 68 |
| | (100 | ) |
| Unrealized gain (loss) on interest rate swaps, net | 531 |
| | 112 |
| | (163 | ) |
| | | | | | |
| Reclassification of loss into earnings from interest rate swaps (1) | 673 |
| | 1,250 |
| | 1,291 |
|
| Income taxes | — |
| | 475 |
| | 491 |
|
| Reclassification of loss into earnings from interest rate swaps, net | 673 |
| | 775 |
| | 800 |
|
| | | | | | |
| Unrecognized net actuarial gain (loss) on postretirement benefit plans | 18 |
| | 11 |
| | (3 | ) |
| Income taxes | — |
| | 4 |
| | (1 | ) |
| Unrecognized net actuarial gain (loss) on postretirement benefit plans, net | 18 |
| | 7 |
| | (2 | ) |
| | | | | | |
| Reclassification of net actuarial gain into earnings from postretirement benefit plans (2) | (27 | ) | | (30 | ) | | (33 | ) |
| Income taxes | — |
| | (11 | ) | | (13 | ) |
| Reclassification of net actuarial gain into earnings from postretirement benefit plans, net | (27 | ) | | (19 | ) | | (20 | ) |
| | | | | | |
| Reclassification of prior service credits into earnings from postretirement benefit plans (2) | (4 | ) | | (4 | ) | | (4 | ) |
| Income taxes | — |
| | (1 | ) | | (2 | ) |
| Reclassification of prior service credits into earnings from postretirement benefit plans, net | (4 | ) | | (3 | ) | | (2 | ) |
| | | | | | |
| TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX | 1,191 |
| | 872 |
| | 613 |
|
| | | | | | |
| COMPREHENSIVE LOSS | $ | (20,193 | ) | | $ | (8,683 | ) | | $ | (4,665 | ) |
(2) Amounts for postretirement plans reclassified from accumulated other comprehensive income (loss) to net income (loss) were included in selling and administrative expenses in the Company's Consolidated Statements of Operations.
| |
(1) | Amounts for cash flow hedges reclassified from accumulated other comprehensive income (loss) to net loss were included in interest expense in the Company's Consolidated Statement of Operations. |
| |
(2) | Amounts for postretirement plans reclassified from accumulated other comprehensive income (loss) to net loss were included in selling and administrative expenses in the Company's Consolidated Statement of Operations. |
See accompanying notes to the consolidated financial statements.
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands) | | | | | | | | | | | | | |
| | Year Ended |
| | December 25,
2021 | | December 26, 2020
(As Adjusted) | | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| Income (loss) from continuing operations | $ | 5,153 | | | $ | (9,823) | | | |
| Income (loss) from discontinued operations | (3,537) | | | 615 | | | |
| | | | | |
| Net income (loss) | 1,616 | | | (9,208) | | | |
| | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| | | | | |
| Depreciation and amortization | 8,474 | | | 9,550 | | | |
| | | | | |
| Benefit for deferred income taxes | (69) | | | (343) | | | |
| Net loss (gain) on property, plant and equipment disposals | 210 | | | 41 | | | |
| | | | | |
| | | | | |
| | | | | |
| Stock-based compensation (credit) expense | 477 | | | 431 | | | |
| | | | | |
| Bad debt expense | 451 | | | 90 | | | |
| Write-off of deferred financing costs | — | | | 157 | | | |
| Changes in operating assets and liabilities: | | | | | |
| Receivables | (7,840) | | | (4,671) | | | |
| Inventories | (14,838) | | | 7,970 | | | |
| Prepaids and other current assets | (1,946) | | | (2,173) | | | |
| Accounts payable and accrued expenses | 7,314 | | | 4,156 | | | |
| Other operating assets and liabilities | (4,025) | | | 2,115 | | | |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | (6,639) | | | 7,500 | | | |
| NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES - DISCONTINUED OPERATIONS | (8,770) | | | 6,049 | | | |
| | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Net proceeds from sales of property, plant and equipment | 19,475 | | | 44 | | | |
| | | | | |
| Purchase of property, plant and equipment | (4,376) | | | (1,359) | | | |
| | | | | |
| | | | | |
| | | | | |
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES | 15,099 | | | (1,315) | | | |
| NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES - DISCONTINUED OPERATIONS | 141 | | | (401) | | | |
| | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| | | | | |
| Net borrowings (payments) on revolving credit facility | 4,806 | | | (31,341) | | | |
| Borrowings on notes payable - buildings and other term loans | — | | | 25,000 | | | |
| Payments on notes payable - buildings and other term loans | (606) | | | (343) | | | |
| | | | | |
| Borrowings on notes payable - equipment and other | 1,565 | | | 1,460 | | | |
| Payments on notes payable - equipment and other | (3,883) | | | (2,380) | | | |
| Borrowings on finance leases | — | | | 2,211 | | | |
| Payments on finance leases | (3,152) | | | (4,756) | | | |
| Change in outstanding checks in excess of cash | 1,059 | | | 2,094 | | | |
| | | | | |
| | | | | |
| Repurchases of Common Stock | (69) | | | (921) | | | |
| | | | | |
| Payments for debt issuance costs | — | | | (1,706) | | | |
| NET CASH USED IN FINANCING ACTIVITIES | (280) | | | (10,682) | | | |
| | | | | |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (449) | | | 1,151 | | | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 1,920 | | | 769 | | | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 1,471 | | | $ | 1,920 | | | |
| | | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | |
| Interest paid | $ | 3,141 | | | $ | 3,591 | | | |
| Interest paid for financing leases | 1,483 | | | 1,702 | | | |
| Income taxes paid (received), net | 982 | | | (100) | | | |
| Right-of-use assets obtained in exchange for new operating lease | 4,922 | | | 653 | | | |
| | | | | |
| Equipment purchased under notes payable | — | | | 1,314 | | | |
| | | | | |
| | | | | |
| | | | | |
| Assets acquired in acquisitions, net of cash acquired | 1,025 | | | — | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Year Ended |
| | December 29,
2018 | | December 30,
2017 | | December 31,
2016 |
| CASH FLOWS FROM OPERATING ACTIVITIES | |
| | |
| | |
|
| Loss from continuing operations | $ | (21,479 | ) | | $ | (9,322 | ) | | $ | (5,207 | ) |
| Income (loss) from discontinued operations | 95 |
| | (233 | ) | | (131 | ) |
| Income on disposal of discontinued operations | — |
| | — |
| | 60 |
|
| Net loss | (21,384 | ) | | (9,555 | ) | | (5,278 | ) |
| | | | | | |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | |
| Depreciation and amortization | 12,653 |
| | 12,947 |
| | 13,515 |
|
| Provision (benefit) for deferred income taxes | (537 | ) | | 8,181 |
| | (3,260 | ) |
| Net loss (gain) on property, plant and equipment disposals | (1,047 | ) | | 170 |
| | 725 |
|
| Impairment of assets | 1,164 |
| | — |
| | — |
|
| Impairment of goodwill and intangibles | 5,545 |
| | — |
| | — |
|
| Stock-based compensation (credit) expense | (29 | ) | | 940 |
| | 1,324 |
|
| Excess tax benefits from stock-based compensation | — |
| | — |
| | (3 | ) |
| Bad debt expense | 163 |
| | 70 |
| | 38 |
|
| Changes in operating assets and liabilities: | | | | | |
| Receivables | 3,775 |
| | (2,945 | ) | | 7,163 |
|
| Inventories | 8,462 |
| | (16,420 | ) | | 17,909 |
|
| Other current assets | (535 | ) | | 776 |
| | (1,014 | ) |
| Accounts payable and accrued expenses | (4,198 | ) | | (3,161 | ) | | (6,827 | ) |
| Other operating assets and liabilities | 1,073 |
| | (609 | ) | | (371 | ) |
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | 5,105 |
| | (9,606 | ) | | 23,921 |
|
| | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Net proceeds from sales of property, plant and equipment | 1,856 |
| | — |
| | 1 |
|
| Purchase of property, plant and equipment | (4,052 | ) | | (12,724 | ) | | (4,904 | ) |
| NET CASH USED IN INVESTING ACTIVITIES | (2,196 | ) | | (12,724 | ) | | (4,903 | ) |
| | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Net borrowings (payments) on revolving credit facility | 1,512 |
| | 27,125 |
| | (9,986 | ) |
| Payments on notes payable - buildings | (731 | ) | | (731 | ) | | (731 | ) |
| Payments on notes payable related to acquisitions | (791 | ) | | (1,920 | ) | | (1,924 | ) |
| Borrowings on notes payable - equipment and other | 3,273 |
| | 7,612 |
| | 2,674 |
|
| Payments on notes payable - equipment and other | (4,260 | ) | | (4,145 | ) | | (4,653 | ) |
| Payments on capital leases | (4,617 | ) | | (3,921 | ) | | (3,171 | ) |
| Change in outstanding checks in excess of cash | 2,762 |
| | (1,695 | ) | | (932 | ) |
| Repurchases of Common Stock | (58 | ) | | (116 | ) | | (152 | ) |
| Excess tax benefits from stock-based compensation | — |
| | — |
| | 3 |
|
| Payments for debt issuance costs | — |
| | — |
| | (287 | ) |
| NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES | (2,910 | ) | | 22,209 |
| | (19,159 | ) |
| | | | | | |
| DECREASE IN CASH AND CASH EQUIVALENTS | (1 | ) | | (121 | ) | | (141 | ) |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 19 |
| | 140 |
| | 281 |
|
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 18 |
| | $ | 19 |
| | $ | 140 |
|
| | | | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | |
| Equipment purchased under capital leases | 223 |
| | 621 |
| | 169 |
|
| Equipment purchased under notes payable | — |
| | 59 |
| | — |
|
| Accrued purchases of equipment | 166 |
| | 179 |
| | 258 |
|
| Shortfall of tax benefits from stock-based compensation | — |
| | — |
| | (192 | ) |
See accompanying notes to the consolidated financial statements.
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Class B Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Balance at December 28, 2019 | $ | 45,075 | | | $ | 2,510 | | | $ | 157,547 | | | $ | (131,113) | | | $ | (808) | | | $ | 73,211 | |
| Repurchases of Common Stock - 555,875 shares | (1,668) | | | — | | | 747 | | | — | | | — | | | (921) | |
| Restricted stock grants issued - 131,867 shares | 265 | | | 131 | | | (396) | | | — | | | — | | | — | |
| Stock-based compensation expense | — | | | — | | | 431 | | | — | | | — | | | 431 | |
| Net loss | — | | | — | | | — | | | (9,208) | | | — | | | (9,208) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | 278 | | | 278 | |
| Balance at December 26, 2020 | $ | 43,672 | | | $ | 2,641 | | | $ | 158,329 | | | $ | (140,321) | | | $ | (530) | | | $ | 63,791 | |
| | | | | | | | | | | |
| Repurchases of Common Stock - 20,329 shares | (61) | | | — | | | (8) | | | — | | | — | | | (69) | |
| | | | | | | | | | | |
| Restricted stock grants issued - 387,680 shares | 789 | | | 374 | | | (1,163) | | | — | | | — | | | — | |
| Restricted stock grants forfeited - 7,477 shares | (22) | | | — | | | 18 | | | — | | | — | | | (4) | |
| Class B converted into Common Stock - 2,635 shares | — | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation expense | — | | | — | | | 481 | | | — | | | — | | | 481 | |
| Net income | — | | | — | | | — | | | 1,616 | | | — | | | 1,616 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | 560 | | | 560 | |
| Balance at December 25, 2021 | $ | 44,378 | | | $ | 3,015 | | | $ | 157,657 | | | $ | (138,705) | | | $ | 30 | | | $ | 66,375 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Class B Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders' Equity |
| Balance at December 26, 2015 | $ | 45,466 |
| | $ | 2,555 |
| | $ | 155,734 |
| | $ | (110,378 | ) | | $ | (2,573 | ) | | $ | 90,804 |
|
| Repurchases of Common Stock - 35,815 shares | (107 | ) | | — |
| | (45 | ) | | — |
| | — |
| | (152 | ) |
| Restricted stock grants issued - 149,215 shares | 354 |
| | 93 |
| | (447 | ) | | — |
| | — |
| | — |
|
| Restricted stock grants forfeited - 1,314 shares | (4 | ) | | — |
| | 4 |
| | — |
| | — |
| | — |
|
| Class B converted into Common Stock - 12,144 shares | 36 |
| | (36 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense | — |
| | — |
| | 1,324 |
| | — |
| | — |
| | 1,324 |
|
| Excess tax benefits from stock-based compensation | — |
| | — |
| | (189 | ) | | — |
| | — |
| | (189 | ) |
| Net loss | — |
| | — |
| | — |
| | (5,278 | ) | | — |
| | (5,278 | ) |
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | 613 |
| | 613 |
|
| Balance at December 31, 2016 | 45,745 |
| | 2,612 |
| | 156,381 |
| | (115,656 | ) | | (1,960 | ) | | 87,122 |
|
| Repurchases of Common Stock - 33,112 shares | (100 | ) | | — |
| | (16 | ) | | — |
| | — |
| | (116 | ) |
| Restricted stock grants issued - 60,000 shares | 180 |
| | — |
| | (180 | ) | | — |
| | — |
| | — |
|
| Restricted stock grants forfeited - 4,629 shares | (14 | ) | | — |
| | 12 |
| | — |
| | — |
| | (2 | ) |
| Class B converted into Common Stock - 9,215 shares | 28 |
| | (28 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense | — |
| | — |
| | 942 |
| | — |
| | — |
| | 942 |
|
| Net loss | — |
| | — |
| | — |
| | (9,555 | ) | | — |
| | (9,555 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 872 |
| | 872 |
|
| Reclassification of stranded tax effects | — |
| | — |
| | — |
| | 211 |
| | (211 | ) | | — |
|
| Balance at December 30, 2017 | 45,839 |
| | 2,584 |
|
| 157,139 |
|
| (125,000 | ) |
| (1,299 | ) | | 79,263 |
|
| Common Stock issued - 39,711 shares | 119 |
| | — |
| | (119 | ) | | — |
| | — |
| | — |
|
| Repurchases of Common Stock - 20,226 shares | (61 | ) | | — |
| | 4 |
| | — |
| | — |
| | (57 | ) |
| Restricted stock grants issued - 307,292 shares | 677 |
| | 245 |
| | (922 | ) | | — |
| | — |
| | — |
|
| Restricted stock grants forfeited - 106,196 shares | (25 | ) | | (292 | ) | | (621 | ) | | — |
| | — |
| | (938 | ) |
| Class B converted into Common Stock - 6,250 shares | 19 |
| | (19 | ) | | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense | — |
| | — |
| | 909 |
| | — |
| | — |
| | 909 |
|
| Net loss | — |
| | — |
| | — |
| | (21,384 | ) | | — |
| | (21,384 | ) |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 1,191 |
| | 1,191 |
|
| Balance at December 29, 2018 | $ | 46,568 |
| | $ | 2,518 |
| | $ | 156,390 |
| | $ | (146,384 | ) | | $ | (108 | ) | | $ | 58,984 |
|
See accompanying notes to the consolidated financial statements.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company's businesses consist principally of marketing, manufacturing and selling finished carpet, rugs, and luxury vinyl flooring and engineered wood flooring in the domestic floorcovering market. The Company sells floorcovering products in both residential and commercial applications. Additionally, the Company provides manufacturing support to its carpet businesses through its separate processing operations.
Based on applicable accounting standards, the Company has determined that it has one1 reportable segment, Floorcovering comprising of two operating segments, Residential and Commercial. Pursuant to accounting standards,Floorcovering.
On September 13, 2021, the Company acting by and through its wholly owned operating subsidiary, TDG Operations, LLC, sold its Atlas|Masland commercial business (the “Commercial Business”). As a result of entering into a definitive agreement, we have classified the related assets and liabilities associated with our Commercial Business as held for discontinued operations in our consolidated balance sheet . The results of our Commercial Business have been presented as discontinued operations in our consolidated statement of income for all periods presented as the sale represents a shift in our business that has aggregateda major effect on our operations and financial results. Prior to the two operating segments into one reporting segment because they have similar economic characteristics, and the operating segments are similar in allconsummation of the following areas: (a)sale, the natureCompany was neither actively marketing the business for sale nor had intentions to abandon the Commercial Business and as a result did not present the results as assets held for sale or discontinued operations in prior filings. Interest expense and general and administrative expenses were not allocated to discontinued operations. Our consolidated financial statements and disclosures as of and for the year ended December 26, 2020 have been adjusted to reflect such discontinued operations classifications. See Note 21 for further detail of the products and services; (b)Company’s discontinued operations reporting.
Unless specifically noted otherwise, footnote disclosures reflect the natureresults of the production processes; (c) the type or classcontinuing operations only. The results of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e) the nature of the regulatory environment.discontinued operations are presented in footnote 21.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of The Dixie Group, Inc. and its wholly-owned subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.
Fiscal Year
The Company ends its fiscal year on the last Saturday of December. All references herein to "2018," "2017,""2021" and "2016,""2020" mean the fiscal years ended December 29, 2018, December 30, 2017,25, 2021 and December 31, 2016,26, 2020 respectively. The year 2016 contained 53 weeks, all otherAll years presented contained 52 weeks.
Reclassifications
The Company reclassified certain amounts in 2017 and 2016 to conform to the 2018 presentation (See Note 2).
Discontinued Operations
The consolidated financial statements separately report discontinued operations and the results of continuing operations (See Note 21).
Cash and Cash Equivalents
Highly liquid investments with original maturities of three months or less when purchased are reported as cash equivalents.
Market Risk
The Company sells carpet to floorcovering retailers, the interior design, architectural and specifier communities and supplies carpet yarn and carpet dyeing and finishing services to certain manufacturers. The Company's customers are located principally throughout the United States. As a percentage of net sales, one1 customer accounted for approximately 13%9% in 2018, 14%2021 and 9% in 2017 and 10% in 2016.2020. No other customer accounted for more than 10% of net sales in 2018, 2017,2021 or 2016,2020, nor did the Company make a significant amount of sales to foreign countries during 2018, 2017,2021 or 2016.2020.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Credit Risk
The Company grants credit to its customers with defined payment terms, performs ongoing evaluations of the credit worthiness of its customers and generally does not require collateral. Accounts receivable are carried at their outstanding principal amounts, less an anticipated amount for discounts and an allowance for doubtful accounts, which management believes is sufficient to cover potential credit losses based on historical experience and periodic evaluation of the financial condition of the Company's customers. As a percentage of customer's trade accounts receivable, one1 customer accounted for approximately 34%20% in 2018, 31%2021 and 23% in 2017,
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
and 28% in 2016.2020. Notes receivable are carried at their outstanding principal amounts, less an allowance for doubtful accounts to cover potential credit losses based on the financial condition of borrowers and collateral held by the Company.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method, which generally matches current costs of inventory sold with current revenues, for substantially all inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at the lower of cost or impaired value. Provisions for depreciation and amortization of property, plant and equipment have been computed for financial reporting purposes using the straight-line method over the estimated useful lives of the related assets, ranging from 10 to 40 years for buildings and improvements, and 3 to 10 years for machinery and equipment. Costs to repair and maintain the Company's equipment and facilities are expensed as incurred. Such costs typically include expenditures to maintain equipment and facilities in good repair and proper working condition.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when circumstances indicate that the carrying value of an asset may not be fully recoverable. When the carrying value of the asset exceeds the value of its estimated undiscounted future cash flows, an impairment charge is recognized equal to the difference between the asset's carrying value and its fair value. Fair value is estimated using discounted cash flows, prices for similar assets or other valuation techniques.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of identified net assets acquired in business combinations. In accordance with the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 350, “Intangibles-Goodwill and Other,” the Company tests goodwill for impairment annually in the fourth quarter of each year or more frequently if events or circumstances indicate that the carrying value of goodwill associated with a reporting unit may not be fully recoverable. The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. The Company has identified its reporting unit as its floorcovering business for the purposes of allocating goodwill and assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about sales growth rates, operating margins, the weighted average cost of capital (“WACC”) and comparable company market multiples. When developing these key judgments and assumptions, the Company considers economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur or a decline in comparable company market multiples, then key judgments and assumptions could be impacted.
In the goodwill assessment process, the Company compares the carrying value of a reporting unit, including goodwill, to the fair value of the reporting unit to identify potential goodwill impairments. The Company estimates the fair value of the reporting unit by using both a discounted cash flow and comparable company market valuation approach. If an impairment is indicated in the assessment, the impairment would be measured as the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. (See Note 7).
Identifiable intangible assets with finite lives are generally amortized on a straight-line basis over their respective lives, which range from 10 to 20 years (See Note 7).
Self-Insured Benefit Programs
The Company records liabilities to reflect an estimate of the ultimate cost of claims related to its self-insured medical and dental benefits and workers' compensation. The amounts of such liabilities are based on an analysis of the Company's historical experience for each type of claim.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the future tax consequences of the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company evaluates the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources. In the event that the Company is not able to realize all or a portion of the deferred tax assets in the future, a valuation allowance is provided. The Company recognizes such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense.
Derivative Financial Instruments
The Company does not hold speculative financial instruments, nor does it hold or issue financial instruments for trading purposes. The Company uses derivative instruments, currently interest rate swaps, to minimize the effects of interest rate volatility.
The Company recognizes all derivatives at fair value. Derivatives that are designated as cash flow hedges are linked to specific liabilities on the Company's balance sheet. The Company assesses, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. When it is determined that a derivative is not highly effective or the derivative expires, is sold, terminated, or exercised, the Company discontinues hedge accounting for that specific hedge instrument. Changes in the fair value of effective cash flow hedges are deferred in accumulated other comprehensive income (loss) ("AOCIL") and reclassified to earnings in the same periods during which the hedge transaction affects earnings. Changes in the fair value of derivatives that are not effective cash flow hedges are recognized in results of operations.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Treasury Stock
The Company classifies treasury stock as a reduction to Common Stock for the par value of such shares acquired and the difference between the par value and the price paid for each share recorded either entirely to retained earnings or to additional paid-in-capital for periods in which the Company does not have retained earnings. This presentation reflects the repurchased shares as authorized but unissued as prescribed by state statute.
Revenue Recognition
The Company derives its revenues primarily from the sale of floorcovering products and processing services. Revenues are recognized when control of these products or services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products and services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. The Company determined revenue recognition through the following steps:
•Identification of the contract with a customer
•Identification of the performance obligations in the contract
•Determination of the transaction price
•Allocation of the transaction price to the performance obligations in the contract
•Recognition of revenue when, or as, the performance obligation is satisfied
Performance Obligations
For performance obligations related to residential floorcovering and commercial floorcovering products, control transfers at a point in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer and the customer must have the significant risks and rewards of ownership. The Company’s principal terms of sale are FOB Shipping Point and FOB Destination and the Company transfers control and records revenue for product sales either upon shipment or delivery to the customer, respectively. Revenue is allocated to each performance obligation based on its relative stand-alone selling prices. Stand-alone selling prices are based on observable prices at which the Company separately sells the products or services.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Variable Consideration
The nature of the Company’s business gives rise to variable consideration, including rebates, allowances, and returns that generally decrease the transaction price, which reduces revenue. These variable amounts are generally credited to the customer, based on achieving certain levels of sales activity, product returns, or price concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends.
Advertising Costs
The Company engages in promotional and advertising programs. Expenses relating to these programs are charged to results of operations during the period of the related benefits. These arrangements do not require significant estimates of costs. Costs related to cooperative advertising programs are normally recorded as selling and administrative expenses when the Company can reasonably identify the benefit associated with the program and can reasonably estimate that the fair value of the benefit is equal to or greater than its cost. The amount of advertising and promotion expenses included in selling and administrative expenses was not significant for the years 2018, 2017 or 2016.2021 and 2020.
Warranties
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its products for a period of up to two years. The Company accrues for estimated future assurance warranty costs in the period in which the sale is recorded. The costs are included in Costcost of Salessales in the Consolidated Condensed Statements of Operations and the product warranty reserve is included in accrued expenses in the Consolidated Condensed Balance Sheets. The Company calculates its accrual using
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
the portfolio approach based upon historical experience and known trends.trends (See Note 9.)9). The Company does not provide an additional service-type warranty.
Cost of Sales
Cost of sales includes all costs related to manufacturing the Company's products, including purchasing and receiving costs, inspection costs, warehousing costs, freight costs, internal transfer costs or other costs of the Company's distribution network.
Selling and Administrative Expenses
Selling and administrative expenses include all costs, not included in cost of sales, related to the sale and marketing of the Company's products and general administration of the Company's business.
Operating Leases
RentThe Company determines if an arrangement is expensedan operating lease or a financing lease at inception. A lease exists if the Company obtains substantially all of the economic benefits of, and has the right to control the use of, an asset for a period of time. Right-of-use assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease agreement. Lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the term of the lease. Right-of-use assets may also be adjusted to reflect any prepayments made or any incentive payments received. Generally, the Company's leases do not provide a readily determinable implicit interest rate, therefore, the Company uses its incremental borrowing rate, which is based on information available at the lease period, includingcommencement date, to determine the effectpresent value of any rent holidaylease payments.
The Company has operating leases primarily for real estate and rent escalation provisions, which effectively amortizes the rent holidays and rent escalationsequipment used in manufacturing. Operating lease expense is recognized in continuing operations on a straight-line basis over the lease period. Leasehold improvementsterm within cost of sales and selling and administrative expenses. Financing lease expense is comprised of both interest expense, which is recognized using the effective interest method, and amortization of the right-of-use assets. These expenses are amortized overpresented consistently with the shorterpresentation of their economic livesother interest expense and amortization or depreciation of similar assets. In determining lease asset values, the Company considers fixed and variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination, or purchase options affect the lease term excluding renewal options. Any leasehold improvement made byused for determining lease asset value only if the Company and funded by the lessoroption is treated as a leasehold improvement and amortized over the shorter of its economic life or the lease term. Any funding provided by the lessor for such improvements is treated as deferred costs and amortized over the lease period.reasonably certain to be exercised.
Stock-Based Compensation
The Company recognizes compensation expense relating to stock-based payments based on the fair value of the equity or liability instrument issued. Restricted stock grants with pro-rata vesting are expensed using the straight-line method. (Terms of the Company's awards are specified in Note 16)17). The Company accounts for forfeitures when they actually occur.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in Fiscal 20182021
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU and all subsequently issued clarifying ASUs replaced most existing revenue recognition guidance in U.S. GAAP. The ASU was effective for annual reporting periods
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
beginning after December 15, 2017, including interim reporting periods within that reporting period. The standard permits the use of either the retrospective or cumulative effect transition method. The ASU also required expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required for customer contracts, significant judgments and changes in judgments. The Company adopted the new standard effective December 31, 2017, the first day of the Company's fiscal year, using the full retrospective method approach and expanded its financial statement disclosures in order to comply with the ASU. (See Note 3.) The adoption of this ASU did not have a significant impact on the Company's consolidated financial statements. The majority of the Company's revenue arrangements generally consist of a single performance obligation to transfer promised goods or services. Based on the Company's evaluation process and review of its contracts with customers, the timing (point in time) and amount of revenue recognized previously is consistent with how revenue is recognized under the new standard.
Therefore, no changes were required to its reported revenues as a result of the adoption. However, the adoption resulted in the recognition of an asset related to certain product returns by increasing the returns liability for December 30, 2017 and recognizing a corresponding asset for the estimated value of the returns from customers; this gross up had no corresponding impact on the Consolidated Condensed Statements of Operations. The Consolidated Balance Sheets as of December 30, 2017 has been adjusted to reflect retrospective application of the new accounting standard as follows:
|
| | | | | | | | | | | |
| | December 30, 2017 |
| | As Previously Reported | | Adjustments | | As Adjusted |
| ASSETS | | | | | |
| Prepaids and other current assets | $ | 3,600 |
| | $ | 1,069 |
| | $ | 4,669 |
|
| | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | |
| Accrued expenses | $ | 30,291 |
| | $ | 1,069 |
| | $ | 31,360 |
|
As part of the adoption of the ASU, the Company elected to use the following practical expedients (i) to exclude disclosures of transaction prices allocated to remaining performance obligations when the Company expects to recognize such revenue for all periods prior to the date of initial application of the ASU; (ii) not to adjust the promised amount of consideration for the effects of a significant financing component when the Company expects, at contract inception, that the period between the Company's transfer of a promised product or service to a customer and when the customer pays for that product or service will be one year or less; (iii) to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less; (iv) not to recast revenues for contracts that begin and end in the same fiscal year; and (v) not to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer. The Company's revenue is recognized at a point in time based on the transfer of control whereby the Company does not invest in contract costs that are recoverable. In addition, performance obligations and customer payments are within one year or less.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which addresses the recognition, measurement, presentation and disclosure of financial assets and liabilities. This ASU primarily affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, this ASU clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU did not have a significant impact on the financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," which provides clarification guidance on certain cash flow presentation issues that have developed due to diversity in practice. These issues include certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. For public entities, ASU 2016-15 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU did not have a significant impact on the financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which clarifies guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance sheet includes more than one line item for cash and cash equivalents and restricted cash and cash equivalents. For public entities, ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to apply the standard’s provisions on a retrospective basis. Since the Company has no restricted cash, the adoption of this ASU did not have an impact on the financial statements.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets." This ASU clarifies the scope and application of ASC 610-20 on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The amendments are effective at the same time as the new revenue standard. For public entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. The adoption of this ASU did not have a significant impact on the financial statements.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which changed the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost are included within the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net periodic benefit pension cost are presented separately outside of operating income. Additionally, only service costs may be capitalized in assets. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Effective December 31, 2017, the first day of the Company's fiscal year, the Company adopted this ASU. The Company adopted this ASU retrospectively, utilizing the practical expedient by using the amounts disclosed in the postretirement plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. which resulted in an immaterial amount being reclassified between selling and administrative expenses and other (income) expense, net in the Company's Consolidated Condensed Statements of Operations.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." This ASU provides amendments to the current guidance on determining which changes to the terms and conditions of share-based payment awards require the application of modification accounting. The effects of a modification should be accounted for unless there are no changes between the fair value, vesting conditions, and classification of the modified award and the original award immediately before the original award is modified. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU did not have an impact on the financial statements.
Accounting Standards Yet to Be Adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize on the balance sheet right-of-use assets, representing the right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-11 providing an optional transition method allowing entities to apply the new lease standard at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption.
In line with the optional transition method allowed as part of the modified retrospective transition approach provided in ASU No. 2018-11, the Company has elected to not adjust comparative periods. The new standard will be applied to leases that have commenced as of the effective date, December 30, 2018, with a cumulative effect adjustment recorded as of that date. The Company has also elected to apply the package of practical expedients allowed in ASC 842-10-65-1 whereby the Company need not reassess whether any expired or existing contracts are or contain leases, the Company need not reassess the lease classification for any expired or existing leases, and the Company need not reassess initial direct costs for any existing leases.
We have completed the process of identifying our population of leases and we have identified and implemented internal procedures and controls to properly disclose and report our results beginning with our quarterly report on Form 10-Q for the quarter ending March 30, 2019.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which amends the impairment model to utilize an expected loss methodology in place of the current incurred loss methodology, which will result in the more timely recognition of losses. For public entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not believe the adoption of this ASU will have a significant impact on the financial statements due to the nature of the Company's customers and the limited amount of write-offs in past years.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." The amendments in this ASU update current guidance by more closely aligning the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not believe the adoption of this ASU will have a significant impact on the financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This update is a part of FASB’s disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The amendments in this update remove, modify, and add certain disclosure requirements within Topic 820. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this update and an entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until the effective date. Certain disclosure amendments are to be applied prospectively for only the most recent interim or annual period presented, while other amendments are to be applied retrospectively to all periods presented. The company does not believe that the adoption of this ASU will have a significant impact on its financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation“Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.” This update is a part of FASB’s disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This standard is effective for fiscal years ending after December 15, 2020 and early adoption is permitted. Upon adoption, this update is to be applied on a retrospective basis to all periods presented. The company does not believe that the adoption of this ASU willdid not have a significant impact on itsthe consolidated financial statements.
In October 2018,December 2019, the FASB issued ASU 2018-16, “DerivativesNo. 2019-12, "Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes." The standard eliminates the need for an organization to analyze whether the following apply in a given period: (1) the exception to the incremental approach for intraperiod tax allocation; (2) the exceptions to accounting for basis differences when there are ownership changes in foreign investments; and Hedging (Topic 815) - Inclusion(3) the exception in interim periods income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also is designed to improve financial statement preparers’ application of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rateincome tax-related guidance and simplify GAAP for Hedge Accounting Purposes.” This update permits the use of the OIS rate(1) franchise taxes that are partially based on SOFR asincome, (2) transactions with a U.S. benchmark interest rate for hedge accounting purposes. Forgovernment that result in a step-up in the tax basis of goodwill, (3) separate financial statements of legal entities that haveare not already adopted Update 2017-12, thesubject to tax, (4) enacted changes in tax laws in interim periods and (5) certain income tax accounting for employee stock
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
ownership plans and affordable housing projects. The amendments in this Update are requiredeffective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. See footnote 14 on Income Taxes for further information.
Accounting Standards Yet to be adopted concurrently withBe Adopted
In June 2016, the amendmentsFASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which amends the impairment model to utilize an expected loss methodology in Update 2017-12.place of the current incurred loss methodology, which will result in the more timely recognition of losses. For smaller reporting entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company will adopt this standard beginning first quarter 2019ASU, including the subsequently issued codification improvements update ("Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and doesHedging, and Topic 825, Financial Instruments," ASU 2019-04) and the targeted transition relief update ("Financial Instruments-Credit Losses (Topic 326)," ASU 2019-05), is not believe that the adoption of this ASU willexpected to have a significant impact on itsthe consolidated financial statements.statements due to the nature of the Company's customers and the limited amount of write-offs in past years.
NOTE 3 - REVENUE
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue from continuing and discontinued operations by end-user markets for the twelve months ended December 29, 2018, December 30, 2017, and December 31, 2016:markets:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020
(As Adjusted) | | | | | | |
| Residential floorcovering products, continuing operations | | $ | 341,247 | | | $ | 250,869 | | | | | | | |
| Commercial floorcovering products, discontinued operations | | $ | 48,070 | | | $ | 65,070 | | | | | | | |
| Total net sales, continuing and discontinued operations | | $ | 389,317 | | | $ | 315,939 | | | | | | | |
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Residential floorcovering products | | $ | 289,129 |
| | $ | 279,038 |
| | $ | 262,892 |
|
| Commercial floorcovering products | | 113,971 |
| | 131,372 |
| | 127,816 |
|
| Other services | | 1,933 |
| | 2,052 |
| | 6,745 |
|
| Total net sales | | $ | 405,033 |
| | $ | 412,462 |
| | $ | 397,453 |
|
Residential floorcovering products. Residential floorcovering products include broadloom carpet, rugs, luxury vinyl flooring and engineered hardwood. These products are sold into the designer, retailer, mass merchant and builder markets.
Commercial floorcovering products. Commercial floorcoveringfloorcovering products include broadloom carpet, carpet tile, rugs, and luxury vinyl flooring. These products are sold into the corporate, hospitality, healthcare, government, and education markets through the use of designers and architects.
Other services. Other services include carpet yarn processing and carpet dyeing services.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Contract Balances
Other than receivables that represent an unconditional right to consideration, which are presented separately (See Note 4), the Company does not recognize any contract assets which give conditional rights to receive consideration, as the Company does not incur costs to obtain customer contracts that are recoverable. The Company often receives cash payments from customers in advance of the Company’s performance for limited production run orders resulting in contract liabilities. These contract liabilities are classified in accrued expenses in the Consolidated Condensed Balance Sheets based on the timing of when the Company expects to recognize revenue, which is typically less than a year. The net decrease or increase in the contract liabilities is primarily driven by order activity for limited runs requiring deposits offset by the recognition of revenue and application of deposit on the receivables ledger for such activity during the period. The activity in the advanced deposits for the twelve months ended December 29, 2018, December 30, 2017, and December 31, 2016 iscontinuing operations are as follows:
| | | | | | | | | | | | | |
| 2021 | | 2020
(As Adjusted) | | |
| Beginning contract liability | $ | 1,005 | | | $ | 920 | | | |
| Revenue recognized from contract liabilities included in the beginning balance | (927) | | | (883) | | | |
| Increases due to cash received, net of amounts recognized in revenue during the period | 1,207 | | | 968 | | | |
| Ending contract liability | $ | 1,285 | | | $ | 1,005 | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Beginning contract liability | $ | 5,717 |
| | $ | 8,212 |
| | $ | 6,674 |
|
| Revenue recognized from contract liabilities included in the beginning balance | (5,717 | ) | | (7,820 | ) | | (5,894 | ) |
| Increases due to cash received, net of amounts recognized in revenue during the period | 6,013 |
| | 5,325 |
| | 7,432 |
|
| Ending contract liability | $ | 6,013 |
| | $ | 5,717 |
| | $ | 8,212 |
|
NOTE 4 - RECEIVABLES, NET
Receivables are summarized as follows:
| | | | | | | | | | | |
| 2021 | | 2020
(As Adjusted) |
| Customers, trade | $ | 37,148 | | | $ | 31,074 | |
| Other receivables | 3,251 | | | 1,920 | |
| Gross receivables | 40,399 | | | 32,994 | |
| Less: allowance for doubtful accounts | (108) | | | (92) | |
| Receivables, net | $ | 40,291 | | | $ | 32,902 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| Customers, trade | $ | 40,121 |
| | $ | 43,683 |
|
| Other receivables | 2,595 |
| | 2,930 |
|
| Gross receivables | 42,716 |
| | 46,613 |
|
| Less: allowance for doubtful accounts | (174 | ) | | (133 | ) |
| Receivables, net | $ | 42,542 |
| | $ | 46,480 |
|
Bad debt expense was $163$451 in 2018, $702021 and $90 in 2017, and $38 in 2016.2020.
NOTE 5 - INVENTORIES, NET
Inventories are summarized as follows:
| | | | | | | | | | | |
| 2021 | | 2020
(As Adjusted) |
| Raw materials | $ | 35,337 | | | $ | 23,877 | |
| Work-in-process | 15,186 | | | 12,086 | |
| Finished goods | 62,592 | | | 46,017 | |
| Supplies and other | 122 | | | 168 | |
| LIFO reserve | (30,498) | | | (14,248) | |
| Inventories, net | $ | 82,739 | | | $ | 67,900 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| Raw materials | $ | 36,875 |
| | $ | 39,264 |
|
| Work-in-process | 20,274 |
| | 24,454 |
|
| Finished goods | 67,085 |
| | 65,172 |
|
| Supplies and other | 190 |
| | 143 |
|
| LIFO reserve | (19,229 | ) | | (15,376 | ) |
| Inventories, net | $ | 105,195 |
| | $ | 113,657 |
|
Reduction of inventory quantities in 2018 resulted in liquidations of LIFO inventories carried at prevailing costs established in prior years and increased cost of sales by $168 in 2018.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
| | | | | | | | | | | |
| 2021 | | 2020
(As Adjusted) |
| Land and improvements | $ | 3,422 | | | $ | 3,422 | |
| Buildings and improvements | 51,430 | | | 51,479 | |
| Machinery and equipment | 158,248 | | | 158,492 | |
| Assets under construction | 811 | | | 1,167 | |
| 213,911 | | | 214,560 | |
| Accumulated depreciation | (165,253) | | | (161,655) | |
| Property, plant and equipment, net | $ | 48,658 | | | $ | 52,905 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| Land and improvements | $ | 8,528 |
| | $ | 7,886 |
|
| Buildings and improvements | 63,389 |
| | 62,852 |
|
| Machinery and equipment | 183,900 |
| | 188,971 |
|
| Assets under construction | 2,675 |
| | 2,443 |
|
| | 258,492 |
| | 262,152 |
|
| Accumulated depreciation | (174,381 | ) | | (168,367 | ) |
| Property, plant and equipment, net | $ | 84,111 |
| | $ | 93,785 |
|
Depreciation of property, plant and equipment, including amounts for capitalfinance leases, totaled $12,141$8,272 in 2018, $12,4362021 and $9,332 in 2017 and $12,944 in 2016.2020.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill is $0 as of December 29, 2018 and $3,389 as of December 30, 2017. The Company performed its annual assessment of goodwill in the fourth quarters of 2018, 2017, and 2016 with no impairment indicated in 2017 and 2016. At the end of 2018, it was determined that the carrying value was greater than calculated fair value. Also at the end of 2018, the intangibles were determined to not be recoverable based on revised projections. Impairment costs incurred are classified as "impairment of assets" in the Company's Consolidated Statements of Operations.
The following table represents the details of the Company's intangible assets subject to amortization:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Gross | | Accumulated Amortization | | Impairment | | Net | | Gross | | Accumulated Amortization | | Net |
| Customer relationships | $ | 208 |
| | $ | (96 | ) | | $ | (112 | ) | | $ | — |
| | $ | 208 |
| | $ | (80 | ) | | $ | 128 |
|
| Rug design coding | 144 |
| | (86 | ) | | (58 | ) | | — |
| | 144 |
| | (72 | ) | | 72 |
|
| Trade names | 3,300 |
| | (1,314 | ) | | (1,986 | ) | | — |
| | 3,300 |
| | (1,039 | ) | | 2,261 |
|
| Total | $ | 3,652 |
| | $ | (1,496 | ) | | $ | (2,156 | ) | | $ | — |
| | $ | 3,652 |
| | $ | (1,191 | ) | | $ | 2,461 |
|
Amortization expense for intangible assets is summarized as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Customer relationships | $ | 16 |
| | $ | 16 |
| | $ | 16 |
|
| Rug design coding | 14 |
| | 15 |
| | 14 |
|
| Trade names | 275 |
| | 275 |
| | 275 |
|
| Amortization expense | $ | 305 |
| | $ | 306 |
| | $ | 305 |
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 87 - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
| | | | | | | | | | | |
| 2021 | | 2020
(As Adjusted) |
| Compensation and benefits (1) | $ | 10,703 | | | $ | 6,357 | |
| Provision for customer rebates, claims and allowances | 7,562 | | | 6,998 | |
| Advanced customer deposits | 1,285 | | | 1,005 | |
| Outstanding checks in excess of cash | 3,153 | | | 2,094 | |
| Other | 3,511 | | | 3,029 | |
| Accrued expenses | $ | 26,214 | | | $ | 19,483 | |
(1)Includes a liability related to the Company's self-insured Workers' Compensation program. This program is collateralized by letters of credit in the aggregate amount of $3,233.
|
| | | | | | | |
| | 2018 | | 2017 |
| | | | (As Adjusted) |
|
| Compensation and benefits (1) | $ | 8,186 |
| | $ | 9,276 |
|
| Provision for customer rebates, claims and allowances | 9,300 |
| | 9,820 |
|
| Advanced customer deposits | 6,013 |
| | 5,717 |
|
| Outstanding checks in excess of cash | 3,141 |
| | 379 |
|
| Other (2) | 4,212 |
| | 6,168 |
|
| Accrued expenses | $ | 30,852 |
| | $ | 31,360 |
|
| |
(1) | Includes a liability related to the Company's self-insured Workers' Compensation program. This program is collateralized by letters of credit in the aggregate amount of $2,328. |
| |
(2) | Includes an accrual of $1,514 for the settlement of a class action lawsuit (See Legal Proceedings section under Note 18). |
NOTE 98 - PRODUCT WARRANTY RESERVES
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its products. Product warranty disclosures below have been adjusted for periods in the prior year to conform to the definition for "Warranties" as provided in ASU No. 2014-09, "Revenue from Customers (Topic 606)", as adopted by the Company at the beginning of its fiscal year 2018. Product warranty reserves are included in accrued expenses in the Company's Consolidated Condensed Balance Sheets. The following is a summary of the Company's product warranty activity:activity for continuing operations:
| | | | | | | | | | | |
| |
| | 2021 | | 2020
(As Adjusted) |
| | | |
| Product warranty reserve at beginning of period | $ | 895 | | | $ | 796 | |
| | | |
| Warranty liabilities accrued | 636 | | | 640 | |
| Warranty liabilities settled | (481) | | | (541) | |
| Changes for pre-existing warranty liabilities | — | | | — | |
| Product warranty reserve at end of period | $ | 1,050 | | | $ | 895 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| | | | (As Adjusted) |
|
| Product warranty reserve at beginning of period | $ | 1,173 |
| | $ | 1,165 |
|
| Warranty liabilities accrued | 2,341 |
| | 2,491 |
|
| Warranty liabilities settled | (2,380 | ) | | (2,931 | ) |
| Changes for pre-existing warranty liabilities | (65 | ) | | 448 |
|
| Product warranty reserve at end of period | $ | 1,069 |
| | $ | 1,173 |
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands, except per share data)
NOTE 109 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
| | | | | | | | |
| 2021 | 2020 |
| Revolving credit facility | $ | 33,158 | | $ | 28,353 | |
| Term loans | 24,781 | | 24,970 | |
| Notes payable - buildings | 5,484 | | 5,900 | |
| Notes payable - equipment and other | 1,607 | | 3,926 | |
| Finance lease - buildings | 10,873 | | 11,097 | |
| Finance lease obligations | 2,913 | | 5,841 | |
| Deferred financing costs, net | (1,754) | | (1,930) | |
| Total long-term debt | 77,062 | | 78,157 | |
| Less: current portion of long-term debt | 3,361 | | 6,116 | |
| Long-term debt | $ | 73,701 | | $ | 72,041 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| Revolving credit facility | $ | 99,219 |
| | $ | 97,708 |
|
| Notes payable - buildings | 11,688 |
| | 12,419 |
|
| Acquisition note payable - Robertex | — |
| | 791 |
|
| Notes payable - equipment and other | 5,528 |
| | 8,474 |
|
| Capital lease obligations | 12,096 |
| | 14,530 |
|
| Deferred financing costs, net | (486 | ) | | (665 | ) |
| Total long-term debt | 128,045 |
| | 133,257 |
|
| Less: current portion of long-term debt | 7,794 |
| | 9,811 |
|
| Long-term debt | $ | 120,251 |
| | $ | 123,446 |
|
Revolving Credit Facility
During the fourth quarter of 2020, the Company entered into a $75,000 Senior Secured Revolving Credit Facility with Fifth Third Bank National Association as lender. The revolving credit facilityloan is secured by a first priority security interest on all accounts receivable, cash, and inventory, and provides for a maximum of $150,000 of revolving credit, subject to borrowing base availability. The borrowing base is currently equal to specifiedlimited by certain percentages of values of the Company's eligible accounts receivable inventories, fixed assets and real property less reserves established, from time to time, by the administrative agent under the facility.inventory. The revolving credit facility matures on September 23, 2021. The revolving credit facility is secured by a first priority lien on substantially all of the Company's assets.October 30, 2025.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
At the Company's election, advances of the revolving credit facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, or 3 month periods, as selected by the Company,defined with a floor or 0.75% or published LIBOR, plus an applicable margin ranging between 1.50% and 2.00%, or (b) the higher of the prime rate the Federal Funds rate plus 0.5%, or a daily LIBOR rate plus 1.00%, plus an applicable margin ranging between 0.50% and 1.00%. The applicable margin is determined based on availability under the revolving credit facility with margins increasing as availability decreases. As of December 29, 2018,25, 2021, the applicable margin on ourthe Company's revolving credit facility was 1.75%. for LIBOR and 0.75% for Prime. The Company pays an unused line fee on the average amount by which the aggregate commitments exceed utilization of the revolving credit facility equal to 0.375%0.25% per annum. The weighted-average interest rate on borrowings outstanding under the revolving credit facility was 4.58%3.00% at December 29, 201825, 2021 and 4.12% at2.68% for December 30, 2017.26, 2020.
The revolving credit facility includes certain affirmativeagreement is subject to customary terms and negative covenants that impose restrictionsconditions and annual administrative fees with pricing varying on the Company's financialexcess availability and business operations. The revolving credit facility restricts the Company's borrowing availability if itsa fixed charge coverage ratioratio. The agreement is also subject to certain compliance, affirmative, and financial covenants. As of the reporting date, the Company is in compliance or has obtained an appropriate waiver for all such applicable covenants. The Company is only subject to the financial covenants if borrowing availability is less than 1.1 to 1.0. During any period that12.5% of the fixed charge coverage ratio is less than 1.1 to 1.0,availability, and remains until the Company's borrowing availability is reduced by $16,500.greater than 12.5% for thirty consecutive days. As of December 29, 2018,26, 2021, the unused borrowing availability under the revolving credit facility was $31,886; however, since$37,632.
Effective October 30, 2020, the Company's fixed charge coverage ratioprevious Senior Secured Credit Facility with Wells Fargo Capital Finance, LLC was less than 1.1 to 1.0,terminated and repaid, with the unused availability accessiblesubsequent new loans, by the Company was $15,386 (theupon notice to the lender in accordance with the terms of the facility.
Term Loans
Effective October 28, 2020, the Company entered into a $10,000 principal amount USDA Guaranteed term loan with AmeriState Bank as lender. The term of the loan is 25 years and bears interest at a minimum 5.00% rate or 4.00% above $16,500)5-year treasury, to be reset every 5 years at December3.5% above 5-year treasury. The loan is secured by a first mortgage on the Company’s Atmore, Alabama and Roanoke, Alabama facilities and requires certain compliance, affirmative, and financial covenants. As of the reporting date, the Company is in compliance with all such covenants.
Effective October 29, 2018.2020, the Company entered into a $15,000 principal amount USDA Guaranteed term loan with the Greater Nevada Credit Union as lender. The term of the loan is 10 years and bears interest at a minimum 5.00% rate or 4.00% above 5- year treasury, to be reset after 5 years at 3.5% above 5-year treasury. The loan is secured by a first lien on a substantial portion of the Company’s machinery and equipment, a second lien on the Company’s Atmore and Roanoke facilities and a certificate of deposit. The loan requires certain compliance, affirmative, and financial covenants and, as of the reporting date, the Company is
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
in compliance with all such covenants. Payments on the loan are interest only over the first three years and principal and interest over the remaining seven years.
Notes Payable - Buildings
On November 7, 2014, the Company entered into a ten-year $8,330 note payable to purchase a previously leased distribution center in Adairsville, Georgia. The note payable is scheduled to mature on November 7, 2024 and is secured by the distribution center. The note payable bears interest at a variable rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $35, plus interest calculated on the declining balance of the note, with a final payment of $4,165 due on maturity. In addition, the Company entered into an interest rate swap with an amortizing notional amount effective November 7, 2014 which effectively fixes the interest rate at 4.50%.
On January 23, 2015, the Company entered into a ten-year $6,290 note payable to finance an owned facility in Saraland, Alabama. The note payable is scheduled to mature on January 7, 2025 and is secured by the facility. The note payable bears interest at a variable rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $26, plus interest calculated on the declining balance of the note, with a final payment of $3,145 due on maturity. In addition, the Company entered into a forward interest rate swap with an amortizing notional amount effective January 7, 2017 which effectively fixes the interest rate at 4.30%.
Acquisition Note Payable - Development Authority of Gordon County
On November 2, 2012, the Company signed a 6.00% seller-financed note of $5,500 with Lineage PCR, Inc. (“Lineage”) related to the acquisition of the continuous carpet dyeing facility in Calhoun, Georgia. Effective December 28, 2012, through a series of agreements between the Company, the Development Authority of Gordon County, Georgia (the “Authority”) and Lineage, obligations with identical payment terms as the original note to Lineage were now payment obligations to the Authority. These transactions were consummated in order to provide a tax abatement to the Company related to the real estate and equipment at this facility. The tax abatement plan provided for abatement for certain components of the real and personal property taxes for up to ten years. At any time, the Company had the option to pay off the obligation, plus a nominal amount. The debt to the Authority bore interest at 6.00% and was payable in equal monthly installments of principal and interest of $106 over 57 months. The note matured on November 2, 2017 and the final installment was paid at that time.
Acquisition Note Payable - Robertex
On July 1, 2013, the Company signed a 4.50% seller-financed note of $4,000, which was recorded at a fair value of $3,749, with Robert P. Rothman related to the acquisition of Robertex Associates, LLC ("Robertex") in Calhoun, Georgia. The note was payable in five annual installments of principal of $800 plus interest. The note matured on June 30, 2018.
Notes Payable - Equipment and Other
The Company's equipment financing notes have terms ranging from 1 to 7 years, bearbore interest ranging from 1.00%1.60% to 7.68%7.00% through the year 2021 and are due in monthly installments through their maturity dates. The Company's equipment financing notes are secured by the specific equipment financed and do not contain any financial covenants.
CapitalFinance Lease - Buildings
On January 14, 2019, the Company, entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Saraland Industrial, LLC, an Alabama limited liability company (the “Purchaser”). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its Saraland facility, and approximately 17.12 acres of surrounding property located in Saraland, Alabama (the “Property”) to the Purchaser for a purchase price of $11,500. Concurrent with the sale of the Property, the Company and the Purchaser entered into a twenty-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rental rate of $977, subject to annual rent increases of 1.25%. Under the Lease Agreement, the Company has two (2) consecutive options to extend the term of the Lease by ten years for each such option. This transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded 90% of its fair value. The Company recorded a liability for the amounts received, will continue to depreciate the asset, and has imputed an interest rate so that the net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term. Concurrently with the sale, the Company paid off the approximately $5,000 mortgage on the property to First Tennessee Bank National Association and terminated the related fixed interest rate swap agreement.
Finance Lease Obligations
The Company's capitalizedfinanced lease obligations have terms ranging from 3 to 7 years, bear interest ranging from 3.55% to 7.76% and are due in monthly or quarterly installments through their maturity dates. The Company's capitalfinance lease obligations are secured by the specific equipment leased.
See Note 10 for further discussion of the impact of COVID-19 on the Company's finance lease obligations.
Debt Maturities
Maturities of long-term debt for periods following December 25, 2021 are as follows:
| | | | | | | | | | | | | | | | | |
| | Long-Term
Debt | | Finance Leases (See Note 10) | | Total |
|
| 2022 | $ | 2,257 | | | $ | 1,104 | | | $ | 3,361 | |
| 2023 | 943 | | | 2,344 | | | 3,287 | |
| 2024 | 6,578 | | | 325 | | | 6,903 | |
| 2025 | 35,345 | | | 357 | | | 35,702 | |
| 2026 | 2,279 | | | 396 | | | 2,675 | |
| Thereafter | 17,627 | | | 9,261 | | | 26,888 | |
| Total maturities of long-term debt | $ | 65,029 | | | $ | 13,787 | | | $ | 78,816 | |
| Deferred financing costs, net | (1,754) | | | — | | | (1,754) | |
| Total long-term debt | $ | 63,275 | | | $ | 13,787 | | | $ | 77,062 | |
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 10 - LEASES
Interest Payments
COVID-19 Pandemic
In response to the large volume of anticipated lease concessions to be granted related to the effects of the COVID-19 pandemic, and Debt Maturitiesthe resulting expected cost and complexity of applying the lease modification requirements in ASC 842, the FASB issued Staff Q&A-Topic 842 and Topic 840: Accounting for Lease Concessions Related to the Effects of the COVID-19 Pandemic, in April 2020 as interpretive guidance to provide clarity in response to the crisis. The FASB staff indicated that it would be acceptable for entities to make an election to account for lease concessions related to the effects of the COVID-19 pandemic consistent with how they would be accounted for as though enforceable rights and obligations for those concessions existed in the original contract. Consequently, for such lease concessions, an entity will not need to reassess each existing contract to determine whether enforceable rights and obligations for concessions exist and an entity can then elect to apply or not to apply the lease modification guidance in ASC 842 to those contracts. This election is available for concessions related to the effects of the COVID-19 pandemic that will result in the total payments required by the modified contract being substantially the same as or less than total payments required by the original contract.
The Company has made this election and, consequently, for such lease concessions, did not reassess each existing contract to determine whether enforceable rights and obligations for concessions existed and elected not to apply the lease modification guidance in ASC 842 to those contracts. The Company has accounted for the concessions as if no changes to the lease contract were made and has subsequently increased accounts payable and has continued to recognize expense during the deferral period.
Cash paid for interest for continuing operations was $6,290 in 2018, $5,373 in 2017,
Balance sheet information related to right-of-use assets and $5,088 in 2016. Maturities of long-term debt for periods following December 29, 2018 areliabilities is as follows:
| | | | | | | | | | | | | | | | | |
| Balance Sheet Location | | December 25, 2021 | | 12/26/2020
(As Adjusted) |
| Operating Leases: | | | | | |
| Operating lease right-of-use assets | Operating lease right-of-use assets | | $ | 22,534 | | | $ | 21,151 | |
| | | | | |
| Current portion of operating lease liabilities | Current portion of operating lease liabilities | | 2,528 | | | 3,089 | |
| Noncurrent portion of operating lease liabilities | Operating lease liabilities | | 20,692 | | | 18,630 | |
| Total operating lease liabilities | | | $ | 23,220 | | | $ | 21,719 | |
| | | | | |
| Finance Leases: | | | | | |
| Finance lease right-of-use assets (1) | Property, plant, and equipment, net | | $ | 10,111 | | | $ | 14,332 | |
| | | | | |
| Current portion of finance lease liabilities (1) | Current portion of long-term debt | | 1,104 | | | 2,771 | |
| Noncurrent portion of finance lease liabilities (1) | Long-term debt | | 12,683 | | | 14,167 | |
| | | $ | 13,787 | | | $ | 16,938 | |
(1) Includes leases classified as failed sale-leaseback transactions.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
|
| | | | | | | | | | | |
| | Long-Term Debt | | Capital Leases (See Note 18) | | Total |
| |
| 2019 | $ | 3,841 |
| | $ | 3,953 |
| | $ | 7,794 |
|
| 2020 | 1,873 |
| | 3,804 |
| | 5,677 |
|
| 2021 | 100,957 |
| | 3,157 |
| | 104,114 |
|
| 2022 | 1,001 |
| | 945 |
| | 1,946 |
|
| 2023 | 731 |
| | 237 |
| | 968 |
|
| Thereafter | 8,032 |
| | — |
| | 8,032 |
|
| Total maturities of long-term debt | $ | 116,435 |
| | $ | 12,096 |
| | $ | 128,531 |
|
| Deferred financing costs, net | (486 | ) | | — |
| | (486 | ) |
| Total long-term debt | $ | 115,949 |
| | $ | 12,096 |
| | $ | 128,045 |
|
| | | | | | | | | | | | | | | | | | |
| | | | December 25, 2021 | | December 26, 2020 |
| Operating lease cost | | | | $ | 4,479 | | | $ | 4,734 | |
| | | | | | |
| Finance lease cost: | | | | | | |
| Amortization of lease assets (1) | | | | 2,069 | | | 3,160 | |
| Interest on lease liabilities (1) | | | | 1,483 | | | 1,702 | |
| Total finance lease costs (1) | | | | $ | 3,552 | | | $ | 4,862 | |
(1) Includes leases classified as failed sale-leaseback transactions.
Other supplemental information related to leases is summarized as follows:
| | | | | | | | | | | | | | |
| | December 25, 2021 | | December 26, 2020 |
| Weighted average remaining lease term (in years): | | | | |
| Operating leases | | 7.65 | | 7.89 |
| Finance leases (1) | | 13.82 | | 12.57 |
| | | | |
| Weighted average discount rate: | | | | |
| Operating leases | | 6.30 | % | | 6.81 | % |
| Finance leases (1) | | 9.73 | % | | 9.42 | % |
| | | | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | 4,395 | | | 4,568 | |
| Operating cash flows from finance leases (1) | | 1,483 | | | 1,702 | |
| Financing cash flows from finance leases (1) | | 3,152 | | | 4,756 | |
(1) Includes leases classified as failed sale-leaseback transactions.
The following table summarizes the Company's undiscounted future minimum lease payments under non-cancellable contractual obligations for operating and financing lease liabilities as of year end:
| | | | | | | | | | | |
| Fiscal Year | | Operating Leases | Finance Leases |
| 2022 | | 3,919 | | 2,386 | |
| 2023 | | 3,708 | | 3,409 | |
| 2024 | | 3,631 | | 1,045 | |
| 2025 | | 3,670 | | 1,053 | |
| 2026 | | 3,707 | | 1,066 | |
| Thereafter | | 11,003 | | 13,918 | |
| Total future minimum lease payments (undiscounted) | | 29,638 | | 22,877 | |
| Less: Present value discount | | (6,418) | | (9,090) | |
| Total lease liability | | 23,220 | | 13,787 | |
On October 22, 2019, the Company sold its Susan Street facility in Santa Ana, California to CenterPoint Properties Trust. The sale price was $37,195. The gain on the sale transaction was $25,121. The transaction was accounted for as a successful sale-leaseback.
Concurrent with the sale of the Susan Street facility, the Company (by a wholly-owned subsidiary) entered into an operating lease to lease back the property for a term of 10 years with 2 5 year renewal options. The initial annual rental is $2,083 increasing at 2% per year for the term of the lease. The lease requires the landlord to make certain required capital improvements, at no further rental increase or charge to the Company. The Company is responsible for normal maintenance of the building and facilities. The Company concurrently executed a lease guaranty, pursuant to which it guaranteed the prompt payment when due of all rent payments to be made under the lease agreement.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
NOTE 11 - FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange value of an asset or a liability in an orderly transaction between market participants. The fair value guidance outlines a valuation framework and establishes a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and disclosures. The hierarchy consists of three levels as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities as of the reported date;
Level 2 - Other than quoted market prices in active markets for identical assets or liabilities, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other than quoted prices for assets or liabilities and prices that are derived principally from or corroborated by market data by correlation or other means; and
Level 3 - Measurements using management's best estimate of fair value, where the determination of fair value requires significant management judgment or estimation.
The following table reflects the fair values of assets and liabilities measured and recognized at fair value on a recurring basis on the Company's Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017:Sheets:
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | Fair Value Hierarchy Level |
| | | | | |
| | | | | |
| | | | | |
| Liabilities: | | | | | |
| Interest rate swaps (1) | $ | 210 | | | $ | 440 | | | Level 2 |
| | | | | |
|
| | | | | | | | | |
| | 2018 | | 2017 | | Fair Value Hierarchy Level |
| Assets: | | | | | |
| Interest rate swaps (1) | $ | 36 |
| | $ | — |
| | Level 2 |
| | | | | | |
| Liabilities: | | | | | |
| Interest rate swaps (1) | $ | 1,008 |
| | $ | 2,229 |
| | Level 2 |
| Contingent consideration (2) | — |
| | 25 |
| | Level 3 |
| |
(1) | (1) The Company uses certain external sources in deriving the fair value of the interest rate swaps. The interest rate swaps were valued using observable inputs (e.g., LIBOR yield curves, credit spreads). Valuations of interest rate swaps may fluctuate considerably from period-to-period due to volatility in underlying interest rates, which are driven by market conditions and the duration of the instrument. Credit adjustments could have a significant impact on the valuations due to changes in credit ratings of the Company or its counterparties. |
| |
(2) | As a result of the Robertex acquisition in 2013, a contingent consideration liability was recorded by the Company. |
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Changes in the fair value measurementsof the interest rate swaps. The interest rate swaps were valued using observable inputs (e.g., LIBOR yield curves, credit spreads). Valuations of interest rate swaps may fluctuate considerably from period-to-period due to volatility in underlying interest rates, which are driven by market conditions and the duration of the instrument. Credit adjustments could have a significant unobservable inputs (Level 3) duringimpact on the years ending December 29, 2018 and December 30, 2017 were as follows:
|
| | | | | | | |
| | 2018 | | 2017 |
| Beginning balance | $ | 25 |
| | $ | 200 |
|
| Fair value adjustments | 1 |
| | (163 | ) |
| Settlements | (26 | ) | | (12 | ) |
| Ending balance | $ | — |
| | $ | 25 |
|
There were no transfersvaluations due to changes in credit ratings of assets or liabilities between Level 1, Level 2 and Level 3 during 2018 or 2017. If any, the Company recognizes the transfers in or transfers out at the end of the reporting period.its counterparties.
The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| | Carrying | | Fair | | Carrying | | Fair |
| | Amount | | Value | | Amount | | Value |
| Financial assets: | | | | | | | |
| Cash and cash equivalents | $ | 1,471 | | | $ | 1,471 | | | $ | 1,920 | | | $ | 1,920 | |
| | | | | | | |
| | | | | | | |
| Financial liabilities: | | | | | | | |
| Long-term debt, including current portion | 63,275 | | | 61,721 | | | 61,219 | | | 58,803 | |
| Finance leases, including current portion | 13,787 | | | 16,389 | | | 16,938 | | | 18,451 | |
| Interest rate swaps | 210 | | | 210 | | | 440 | | | 440 | |
|
| | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Carrying | | Fair | | Carrying | | Fair |
| | Amount | | Value | | Amount | | Value |
| Financial assets: | | | | | | | |
| Cash and cash equivalents | $ | 18 |
| | $ | 18 |
| | $ | 19 |
| | $ | 19 |
|
| Notes receivable, including current portion | 282 |
| | 282 |
| | 282 |
| | 282 |
|
| Interest rate swaps | 36 |
| | 36 |
| | — |
| | — |
|
| Financial liabilities: | |
| | | | | | |
| Long-term debt and capital leases, including current portion | 128,045 |
| | 124,242 |
| | 133,257 |
| | 131,203 |
|
| Interest rate swaps | 1,008 |
| | 1,008 |
| | 2,229 |
| | 2,229 |
|
The fair values of the Company's long-term debt and capitalfinance leases were estimated using market rates the Company believes would be available for similar types of financial instruments and represent level 2 measurements. The fair values of cash and cash equivalents and notes receivable approximate their carrying amounts due to the short-term nature of the financial instruments.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
NOTE 12 - DERIVATIVES
The Company's earnings, cash flows and financial position are exposed to market risks relating to interest rates. It is the Company's policy to minimize its exposure to adverse changes in interest rates and manage interest rate risks inherent in funding the Company with debt. The Company addresses this risk by maintaining a mix of fixed and floating rate debt and entering into interest rate swaps for a portion of its variable rate debt to minimize interest rate volatility.
The following is a summary of the Company's interest rate swaps as of December 29, 2018:year end::
| | | Type | Notional Amount | | Effective Date | Fixed Rate | Variable Rate | Type | Notional Amount | | Effective Date | Fixed Rate | Variable Rate |
| Interest rate swap | $ | 25,000 |
| | September 1, 2016 through September 1, 2021 | 3.105% | 1 Month LIBOR | Interest rate swap | $ | 5,796 | | (1) | November 7, 2014 through November 7, 2024 | 4.500% | 1 Month LIBOR |
| Interest rate swap | $ | 25,000 |
| | September 1, 2015 through September 1, 2021 | 3.304% | 1 Month LIBOR | |
| Interest rate swap | $ | 6,629 |
| (1) | November 7, 2014 through November 7, 2024 | 4.500% | 1 Month LIBOR | |
| Interest rate swap | $ | 5,058 |
| (2) | January 7, 2017 through January 7, 2025 | 4.300% | 1 Month LIBOR | |
(1) Interest rate swap notional amount amortizes by $35 monthly to maturity.
(2) Interest rate swap notional
The following table summarizes the fair values of derivative instruments included in the Company's Consolidated Balance Sheets:
| | | | | | | | | | | | | | |
| Location on Consolidated Balance Sheets | Fair Value |
| 2021 | | 2020 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Liability Derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps, current portion | Accrued Expenses | $ | 110 | | | $ | 135 | |
| Interest rate swaps, long-term portion | Other Long-Term Liabilities | 100 | | | 305 | |
| Total Liability Derivatives | | $ | 210 | | | $ | 440 | |
The following tables summarize the pre-tax impact of derivative instruments on the Company's consolidated financial statements:
| | | | | | | | | | | | | | | |
| | Amount of Gain or (Loss) Recognized in AOCIL on the effective portion of the Derivative | | |
| | | | | |
| | 2021 | | 2020 | | | | |
| Derivatives designated as hedging instruments: | | | | | | | |
| Cash flow hedges - interest rate swaps | $ | 94 | | | $ | (1,316) | | | | | |
| | | | | | | |
| | Amount of Gain or (Loss) Reclassified from AOCIL on the effective portion into Income (1)(2) | | |
| | | | | |
| | 2021 | | 2020 | | | | |
| Derivatives designated as hedging instruments: | | | | | | | |
| Cash flow hedges - interest rate swaps | $ | 135 | | | $ | 1,106 | | | | | |
| | | | | | | |
| Amount of Gain or (Loss) Recognized on the Dedesignated Portion in Income on Derivative (3) | | |
| 2021 | | 2020 | | | | |
| Derivatives dedesignated as hedging instruments: | | | | | | | |
| Cash flow hedges - interest rate swaps | $ | 511 | | | $ | 861 | | | | | |
(1)The amount amortizes by $26 monthly to maturity.
of gain (loss) reclassified from AOCIL is included in interest expense on the Company's Consolidated Statements of Operations.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
(2)The amount of loss expected to be reclassified from AOCIL into earnings during the next 12 months subsequent to December 25, 2021 is $123. See footnote 23 Subsequent Events for further information.
The following table summarizes the fair values of derivative instruments included in the Company's Consolidated Balance Sheets:
|
| | | | | | | | |
| | Location on Consolidated Balance Sheets | Fair Value |
| | 2018 | | 2017 |
| Asset Derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps - current portion | Prepaids and other current assets | $ | 14 |
| | $ | — |
|
| Interest rate swaps - long-term portion | Other Assets | 22 |
| | — |
|
| Total Asset Derivatives | | $ | 36 |
| | $ | — |
|
| | | | | |
| Liability Derivatives: | | | | |
| Derivatives designated as hedging instruments: | | | | |
| Interest rate swaps, current portion | Accrued Expenses | $ | 335 |
| | $ | 842 |
|
| Interest rate swaps, long-term portion | Other Long-Term Liabilities | 673 |
| | 1,387 |
|
| Total Liability Derivatives | | $ | 1,008 |
| | $ | 2,229 |
|
The following tables summarize the pre-tax impact of derivative instruments on the Company's financial statements:
|
| | | | | | | | | | | |
| | Amount of Gain or (Loss) Recognized in AOCIL on the effective portion of the Derivative |
| | 2018 | | 2017 | | 2016 |
| Derivatives designated as hedging instruments: | | | | | |
| Cash flow hedges - interest rate swaps | $ | 531 |
| | $ | 180 |
| | $ | (263 | ) |
| | | | | | |
| | Amount of Gain or (Loss) Reclassified from AOCIL on the effective portion into Income (1)(2) |
| | 2018 | | 2017 | | 2016 |
| Derivatives designated as hedging instruments: | | | | | |
| Cash flow hedges - interest rate swaps | $ | (673 | ) | | $ | (1,250 | ) | | $ | (1,291 | ) |
| |
(1) | The amount of gain (loss) reclassified from AOCIL is included in interest expense on the Company's Consolidated Statements of Operations. |
| |
(2) | The amount of loss expected to be reclassified from AOCIL into earnings during the next 12 months subsequent to fiscal 2018 is $322. |
(3)The amount of gain (loss) recognized in income on the ineffectivededesignated portion of interest rate swaps if any, is included in other (income)income or other expense net on the Company's Consolidated Statements of Operations. There was no ineffective portionThe amount of expense recognized on the Company's Consolidated Statements of Operations for the periods presented.terminated portion of interest rate swaps is included in interest expense.
On October 30, 2020, the Company terminated 2 interest rate swap agreements tied to its revolving line of credit. The cost to terminate the swap agreements was $1,427. During the fourth quarter of 2020, the Company performed its retrospective and prospective effectiveness assessments of the interest rate swap agreements. Based upon the Company's ability to secure additional fixed asset borrowings, the Company could no longer assert that the cash flows for $25,000 of notional amount of the interest rate swaps are probable. Because it is probable that none of the remaining forecasted interest payments that were being hedged by the second $25,000 interest rate swap will occur, the related losses that had been deferred in AOCIL were immediately reclassified into other (income) expense. However, the losses related to the first $25,000 interest rate swap was reclassified from AOCIL to interest expense as the hedged interest payments are recognized as the Company could not establish that future cash flows are probable not to occur on the first interest rate swap.
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors a 401(k) defined contribution plan that covers a significant portion, or approximately 85%86% of the Company's associates. This plan includes a mandatory Company match on the first 1% of participants' contributions. The Company matches the next 2% of participants' contributions if the Company meets prescribed earnings levels. The plan also provides for additional Company contributions above the 3% level if the Company attains certain additional performance targets. Matching contribution expense for this 401(k) plan was $448$1,176 in 2018, $4842021 and $345 in 2017 and $425 in 2016.2020.
Additionally, the Company sponsors a 401(k) defined contribution plan that covers those associates at one1 facility who are under a collective-bargaining agreement, or approximately 15%14% of the Company's associates. Under this plan, the Company generally matches participants' contributions, on a sliding scale, up to a maximum of 2.75% of the participant's earnings. Matching contribution expense for the collective-bargaining 401(k) plan was $123$101 in 2018, $1252021 and $96 in 2017 and $71 in 2016.2020.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Non-Qualified Retirement Savings Plan
The Company sponsors a non-qualified retirement savings plan that allows eligible associates to defer a specified percentage of their compensation. The obligations for continuing operations owed to participants under this plan were $13,943$15,794 at December 29, 201825, 2021 and $17,010$15,081 at December 30, 201726, 2020 and are included in other long-term liabilities in the Company's Consolidated Balance Sheets. The obligations for discontinued operations owed to participants under this plan were $2,218 at December 25, 2021 and $2,566 at December 26, 2020 and are included in long term liabilities of discontinued operations in the Company's Consolidated Balance Sheets.The obligations are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The Company utilizes a Rabbi Trust to hold, invest and reinvest deferrals and contributions under the plan. Amounts are invested in Company-owned life insurance in the Rabbi Trust and the cash surrender value of the policies for continuing operations was $13,822$16,608 at December 29, 201825, 2021 and $18,232$15,385 at December 30, 201726, 2020 and is included in other assets in the Company's Consolidated Balance Sheets. The cash surrender value of the policies for discontinued operations was $2,218 at December 25, 2021 and $2,566 at December 26, 2020 and is included in long term assets of discontinued operations in the Company's Consolidated Balance Sheets.
Multi-Employer Pension Plan
TheRecognized within discontinued operations, the Company contributes to a multi-employer pension plan under the terms of a collective-bargaining agreement that covers its union-represented employees. These union-represented employees represented approximately 15% of the Company's total employees. The risks of participating in multi-employer plans are different from single-employer plans. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. If the Company chooses to stop participating in the multi-employer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company's participation in the multi-employer pension plan for 20182021 is provided in the table below. The "EIN/Pension Plan Number" column provides the Employee Identification Number (EIN) and the three digit plan number. The most recent Pension Protection Act (PPA) zone status available in 20182021 and 20172020 is for the plan's year-end at 20172020 and 2016,2019, respectively. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded and plans in the green zone are at least 80% funded. The "FIP/RP Status Pending/Implemented" column indicates a plan for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
| | | Pension Fund | EIN/Pension Plan Number | Pension Protection Act Zone Status | FIP/RP Status Pending/Implemented (1) | Contributions (2) | Surcharge Imposed (1) | Expiration Date of Collective-Bargaining Agreement | Pension Fund | EIN/Pension Plan Number | Pension Protection Act Zone Status | FIP/RP Status Pending/Implemented (1) | Contributions (2) | Surcharge Imposed (1) | Expiration Date of Collective-Bargaining Agreement |
| 2018 | 2017 | 2018 |
| 2017 |
| 2016 |
| 2021 | December 26, 2020
(As Adjusted) | 2021 | 2020 | 2019 |
| The Pension Plan of the National Retirement Fund | 13-6130178 - 001 | Red | Implemented | $ | 320 |
| $ | 313 |
| $ | 274 |
| Yes | 6/1/2019 | The Pension Plan of the National Retirement Fund | 13-6130178 - 001 | Red | Implemented | $ | 280 | | $ | 272 | | $ | 335 | | Yes | 6/4/2022 |
(1) The collective-bargaining agreement requires the Company to contribute to the plan at the rate of $0.47 per compensated hour for each covered employee. The Company will make additional contributions, as mandated by law, in accordance with the fund's 2010 Rehabilitation Plan which required a surcharge equal to $0.03 per hour (from $0.47 to $0.50) effective June 1, 2014 to May 31, 2015, a surcharge equal to $0.03$0.03 per hour (from $0.50 to $0.53) effective June 1, 2015 to May 31, 2016, a surcharge equal to $0.02 per hour (from $0.53 to $0.55) effective June 1, 2016 to May 31, 2017, a surcharge equal to $0.03 per hour (from $0.55 to $0.58) effective June 1, 2017 to May 31, 2018, and a surcharge equal to $0.02 per hour (from $0.58 to $0.60) effective June 1, 2018 to May 31, 2019.2019, a surcharge equal to $0.03 per hour (from $0.60 to $0.63) effective June 1, 2019 to May 31, 2020, and a surcharge equal to $0.03 per hour (from $0.63 to $0.66) effective June 1, 2020 to May 31, 2021. Based upon current employment and benefit levels, the Company's contributions to the multi-employer pension plan are expected to be approximately $323$290 for 2019.2022.
(2) The Company's contributions to the plan do not represent more than 5% of the total contributions to the plan for the most recent plan year available.
Postretirement Plans
The Company sponsors a postretirement benefit plan that provides life insurance to a limited number of associates upon retirement as part of a collective bargaining agreement.
Information about the benefit obligation and funded status of the Company's postretirement benefit plan is summarized as follows:
| | | | | | | | | | | |
| | 2021 | | 2020 |
| Change in benefit obligation: | | | |
| Benefit obligation at beginning of year | $ | 390 | | | $ | 360 | |
| Service cost | 8 | | | 8 | |
| Interest cost | 16 | | | 17 | |
| | | |
| Actuarial (gain) loss | (17) | | | 6 | |
| Benefits paid | (1) | | | (1) | |
| | | |
| Benefit obligation at end of year | 396 | | | 390 | |
| | | |
| Change in plan assets: | | | |
| Fair value of plan assets at beginning of year | — | | | — | |
| Employer contributions | 1 | | | 1 | |
| | | |
| Benefits paid | (1) | | | (1) | |
| | | |
| Fair value of plan assets at end of year | — | | | — | |
| | | |
| Unfunded amount | $ | (396) | | | $ | (390) | |
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Information about the benefit obligation and funded status of the Company's postretirement benefit plan is summarized as follows: |
| | | | | | | |
| | 2018 | | 2017 |
| Change in benefit obligation: | | | |
| Benefit obligation at beginning of year | $ | 325 |
| | $ | 314 |
|
| Service cost | 8 |
| | 7 |
|
| Interest cost | 17 |
| | 16 |
|
| Actuarial (gain) loss | (18 | ) | | (11 | ) |
| Benefits paid | (1 | ) | | (1 | ) |
| Benefit obligation at end of year | 331 |
| | 325 |
|
| | | | |
| Change in plan assets: | | | |
| Fair value of plan assets at beginning of year | — |
| | — |
|
| Employer contributions | 1 |
| | 1 |
|
| Benefits paid | (1 | ) | | (1 | ) |
| Fair value of plan assets at end of year | — |
| | — |
|
| | | | |
| Unfunded amount | $ | (331 | ) | | $ | (325 | ) |
The balance sheet classification of the Company's liability for the postretirement benefit plan is summarized as follows:
| | | | | | | | | | | |
| | 2021 | | 2020 |
| Accrued expenses | $ | 19 | | | $ | 17 | |
| Other long-term liabilities | 377 | | | 373 | |
| Total liability | $ | 396 | | | $ | 390 | |
|
| | | | | | | |
| | 2018 | | 2017 |
| Accrued expenses | $ | 15 |
| | $ | 14 |
|
| Other long-term liabilities | 316 |
| | 311 |
|
| Total liability | $ | 331 |
| | $ | 325 |
|
Benefits expected to be paid on behalf of associates for the postretirement benefit plan during the period 20192021 through 20282030 are summarized as follows:
| | | | | |
| Years | Postretirement
Plan |
| 2022 | $ | 19 | |
| 2023 | 18 | |
| 2024 | 17 | |
| 2025 | 17 | |
| 2026 | 16 | |
| 2027-31 | 83 | |
|
| | | |
| Years | Postretirement Plan |
| 2019 | $ | 15 |
|
| 2020 | 14 |
|
| 2021 | 14 |
|
| 2022 | 14 |
|
| 2023 | 14 |
|
| 2024 - 2028 | 73 |
|
Assumptions used to determine the benefit obligation of the Company's postretirement benefit plan are summarized as follows:
| | | | | | | | | | | |
| | 2021 | | 2020 |
| Weighted-average assumptions as of year-end: | | | |
| Discount rate (benefit obligation) | 3.25 | % | | 3.25 | % |
|
| | | | | |
| | 2018 | | 2017 |
| Weighted-average assumptions as of year-end: | | | |
| Discount rate (benefit obligation) | 4.00 | % | | 4.00 | % |
Components of net periodic benefit cost (credit) for the postretirement plan are summarized as follows:
| | | | | | | | | | | | | |
| | | |
| | 2021 | | 2020 | | |
| Service cost | $ | 8 | | | $ | 8 | | | |
| Interest cost | 16 | | | 17 | | | |
| Amortization of prior service credits | — | | | — | | | |
| Recognized net actuarial gains | (22) | | | (25) | | | |
| | | | | |
| Net periodic benefit cost (credit) | $ | 2 | | | $ | — | | | |
Pre-tax amounts included in AOCIL for the Company's postretirement benefit plan at 2020 are summarized as follows:
| | | | | | | | | | | |
| | Postretirement Benefit Plan |
| | Balance at 2021 | | 2022 Expected Amortization |
| | | |
| Unrecognized actuarial gains | $ | (309) | | | $ | (22) | |
| Totals | $ | (309) | | | $ | (22) | |
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Components of net periodic benefit cost (credit) for the postretirement plan are summarized as follows:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Service cost | $ | 8 |
| | $ | 7 |
| | $ | 7 |
|
| Interest cost | 17 |
| | 16 |
| | 15 |
|
| Amortization of prior service credits | (4 | ) | | (4 | ) | | (4 | ) |
| Recognized net actuarial gains | (28 | ) | | (30 | ) | | (33 | ) |
| Net periodic benefit cost (credit) | $ | (7 | ) | | $ | (11 | ) | | $ | (15 | ) |
Pre-tax amounts included in AOCIL for the Company's postretirement benefit plan at 2018 are summarized as follows:
|
| | | | | | | |
| | Postretirement Benefit Plan |
| | Balance at 2018 | | 2019 Expected Amortization |
| Prior service credits | $ | (3 | ) | | $ | (4 | ) |
| Unrecognized actuarial gains | (372 | ) | | (27 | ) |
| Totals | $ | (375 | ) | | $ | (31 | ) |
NOTE 14 - INCOME TAXES
The provision (benefit) for income taxes on income (loss) from continuing operations consists of the following:
| | | | | | | | | | | | | |
| | 2021 | | 2020
(As Adjusted) | | |
| Current | | | | | |
| Federal | $ | 141 | | | $ | (912) | | | |
| State | 136 | | | 109 | | | |
| Total current | 277 | | | (803) | | | |
| | | | | |
| Deferred | | | | | |
| Federal | (139) | | | (277) | | | |
| State | (33) | | | (66) | | | |
| Total deferred | (172) | | | (343) | | | |
| Income tax provision (benefit) | $ | 105 | | | $ | (1,146) | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Current | | | | | |
| Federal | $ | (178 | ) | | $ | 278 |
| | $ | (396 | ) |
| State | (116 | ) | | (950 | ) | | 34 |
|
| Total current | (294 | ) | | (672 | ) | | (362 | ) |
| | | | | | |
| Deferred | | | | | |
| Federal | (434 | ) | | 7,535 |
| | (3,003 | ) |
| State | (103 | ) | | 646 |
| | (257 | ) |
| Total deferred | (537 | ) | | 8,181 |
| | (3,260 | ) |
| Income tax provision (benefit) | $ | (831 | ) | | $ | 7,509 |
| | $ | (3,622 | ) |
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Differences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate to income (loss) from continuing operations before taxes are summarized as follows:
| | | | | | | | | | | | | |
| | 2021 | | 2020
(As Adjusted) | | |
| Federal statutory rate | 21 | % | | 21 | % | | |
| Statutory rate applied to income (loss) from continuing operations before taxes | $ | 1,104 | | | $ | (2,296) | | | |
| Plus state income taxes, net of federal tax effect | 81 | | | 34 | | | |
| Total statutory provision (benefit) | 1,185 | | | (2,262) | | | |
| Effect of differences: | | | | | |
| Nondeductible meals and entertainment | 1 | | | 30 | | | |
| Executive compensation limitation | 37 | | | — | | | |
| Federal tax credits | (227) | | | (279) | | | |
| Reserve for uncertain tax positions | 7 | | | 7 | | | |
| | | | | |
| Change in valuation allowance | (857) | | | 1,236 | | | |
| | | | | |
| | | | | |
| Stock-based compensation | (18) | | | 141 | | | |
| | | | | |
| Other items | (23) | | | (19) | | | |
| Income tax provision (benefit) | $ | 105 | | | $ | (1,146) | | | |
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Federal statutory rate | 21 | % | | 35 | % | | 35 | % |
| Statutory rate applied to income (loss) from continuing operations before taxes | $ | (4,685 | ) | | $ | (635 | ) | | $ | (3,090 | ) |
| Plus state income taxes, net of federal tax effect | (173 | ) | | (198 | ) | | (145 | ) |
| Total statutory provision (benefit) | (4,858 | ) | | (833 | ) | | (3,235 | ) |
| Effect of differences: | | | | | |
| Nondeductible meals and entertainment | 90 |
| | 161 |
| | 148 |
|
| Executive compensation limitation | 258 |
| | — |
| | — |
|
| Federal tax credits | (286 | ) | | (200 | ) | | (395 | ) |
| Reserve for uncertain tax positions | 27 |
| | 8 |
| | 31 |
|
| Goodwill | — |
| | — |
| | (13 | ) |
| Change in valuation allowance | 3,990 |
| | 6,470 |
| | 106 |
|
| Tax reform | — |
| | 1,749 |
| | — |
|
| Stock-based compensation | 82 |
| | 146 |
| | — |
|
| Other items | (134 | ) | | 8 |
| | (264 | ) |
| Income tax provision (benefit) | $ | (831 | ) | | $ | 7,509 |
| | $ | (3,622 | ) |
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The Company substantially completed its provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects during the fourth quarter of 2017. Pursuant to Staff Accounting Bulletin No. 118, the Company has completed its analysis and all adjustments have been included in income from continuing operations as an adjustment to income tax expense.
The income tax benefit for the twelve months ended December 29, 2018 was $831. During the fourth quarter of 2017, the Company recorded a full valuation allowance against its deferred tax assets, which remains in effect as of December 25, 2021. The Company intends to maintain this position until there is sufficient evidence to support the reversal of all or some portion of these allowances. The Company also has certain assets with indefinite lives for which the basis is different for book and tax. In accordance with ASC 740-10-30-18, the deferred tax liability related to these intangible assets resulting in only refundable credits and a smallcannot be used to offset deferred tax assets when determining the amount of state taxes being recognized in the valuation allowance for deferred tax benefit for 2018.assets which are not more-likely-than-not to be realized. The result is that the Company is in a net deferred tax liability position of $568 and $1,105$91 at December 29, 201825, 2021 and December 30, 2017 respectively. These amounts are included26, 2020, respectively, which is recorded in other long-term liabilities in the Company's Consolidated Balance Sheets.
The income tax expenseprovision for 2017the twelve months ended December 25, 2021 was $7,509, which included$105 compared with an income tax benefit of $1,146 for the twelve months ended December 26, 2020. Due to its full valuation allowance against its deferred tax balances, the Company is only able to recognize refundable credits, a chargesmall amount of $1,749state taxes, and benefits for both the reduction of certain indefinite lived assets not covered by the Company's valuation allowance and the recognition of stranded tax effects within other comprehensive income (loss) related to the re-measurementtermination of certain net deferredderivative contracts in the tax assets usingbenefit for 2020 and 2021. In 2021, the lower U.S. corporateCompany adopted ASU 2019-12 which impacts the accounting for income tax rate and a charge of $6,420 to increase our valuation allowance related to our net deferred tax asset. The majoritytaxes. One of the increaseitems in the valuation allowancenew accounting standard is relateda removal of the exception to the revised treatmentincremental approach for intraperiod tax allocation in the event of net operating losses under the Tax Act. Absent the impact of the Tax Act, our effectivea loss from continuing operations and income tax benefit rate for 2017 would have been 36.4%.
from other financial statement components. In 2016,2020, the Company increased valuation allowances by $106 related to state income taxhad a loss carryforwards and state income tax credit carryforwards to reflect the estimated amount of deferred tax assets that may not be realized during the carryforward periods.
Income tax payments, net of (income tax refunds) received for continuing and discontinued operations were $20 in 2018, $44 in 2017 and $(190) in 2016.
from
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
continuing operations and income from discontinued operations. Because the Company did not early adopt ASU 2019-12 for the 2020 reporting year, the income from discontinued operations was considered a source of taxable income to realize a partial tax benefit for the loss generated by continuing operations. As such, the 2020 financial statements reflect tax expense in discontinued operations and a tax benefit in continuing operations. Applying the change on a prospective basis, this did not occur in 2021 and as such created a difference in the effective tax rate for continuing operations between 2020 and 2021.
Significant components of the Company's deferred tax assets and liabilities are as follows:
| | | | | | | | | | | |
| | 2021 | | 2020
(As Adjusted) |
| Deferred tax assets: | | | |
| Inventories | $ | 2,316 | | | $ | 2,061 | |
| Retirement benefits | 824 | | | 1,126 | |
| State net operating losses | 3,033 | | | 3,305 | |
| Federal net operating losses | — | | | 556 | |
| State tax credit carryforwards | 1,669 | | | 1,688 | |
| Federal tax credit carryforwards | 4,136 | | | 4,413 | |
| Allowances for bad debts, claims and discounts | 1,779 | | | 1,874 | |
| Other | 3,958 | | | 4,595 | |
| Total deferred tax assets | 17,715 | | | 19,618 | |
| Valuation allowance | (12,851) | | | (14,202) | |
| Net deferred tax assets | 4,864 | | | 5,416 | |
| | | |
| Deferred tax liabilities: | | | |
| Property, plant and equipment | 4,955 | | | 5,507 | |
| Total deferred tax liabilities | 4,955 | | | 5,507 | |
| | | |
| Net deferred tax liability | $ | (91) | | | $ | (91) | |
|
| | | | | | | |
| | 2018 | | 2017 |
| Deferred tax assets: | | | |
| Inventories | $ | 4,128 |
| | $ | 3,146 |
|
| Retirement benefits | 1,718 |
| | 2,200 |
|
| State net operating losses | 4,142 |
| | 4,196 |
|
| Federal net operating losses | 4,560 |
| | 3,204 |
|
| State tax credit carryforwards | 1,688 |
| | 1,963 |
|
| Federal tax credit carryforwards | 3,721 |
| | 3,365 |
|
| Allowances for bad debts, claims and discounts | 2,199 |
| | 2,373 |
|
| Other | 5,646 |
| | 3,649 |
|
| Total deferred tax assets | 27,802 |
| | 24,096 |
|
| Valuation allowance | (16,993 | ) | | (12,994 | ) |
| Net deferred tax assets | 10,809 |
| | 11,102 |
|
| | | | |
| Deferred tax liabilities: | | | |
| Property, plant and equipment | 11,377 |
| | 12,207 |
|
| Total deferred tax liabilities | 11,377 |
| | 12,207 |
|
| | | | |
| Net deferred tax liability | $ | (568 | ) | | $ | (1,105 | ) |
At December 29, 2018, $4,56025, 2021, $3,033 of deferred tax assets related to approximately $21,712 of federal net operating loss carryforwards and $4,142 of deferred tax assets related to approximately $76,797$58,180 of state net operating loss carryforwards. In addition, $3,721$4,136 of federal tax credit carryforwards and $1,688$1,669 of state tax credit carryforwards were available to the Company. The federal net operating loss carryforwards and the federal tax credit carryforwards originating prior to 2018 will expire between 2029 and 2039.2042. The federal net operating loss carryforwards generated in 2018 have no expiration. The state net operating loss carryforwards and the state tax credit carryforwards will expire between 20182021 and 2039.2041. A valuation allowance of $16,993$12,851 is recorded to reflect the estimated amount of deferred tax assets that may not be realized during the carryforward periods. At December 29, 2018,25, 2021, the Company is in a net deferred tax liability position of $568$91 which is included in other long-term liabilities in the Company's Consolidated Balance Sheets.
Tax Uncertainties
The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were $441$494 at December 29, 2018, $41425, 2021 and $487 at December 30, 2017 and $406 at December 31, 2016.26, 2020. Such benefits, if recognized, would affect the Company's effective tax rate. There were no significant interest or penalties accrued as of December 29, 2018, December 30, 2017,25, 2021 or December 31, 2016.26, 2020.
The following is a summary of the change in the Company's unrecognized tax benefits:
| | | | | | | | | | | | | |
| | 2021 | | 2020 | | |
| Balance at beginning of year | $ | 487 | | | $ | 480 | | | |
| | | | | |
| Additions based on tax positions taken during a current period | 7 | | | 7 | | | |
| | | | | |
| | | | | |
| Balance at end of year | $ | 494 | | | $ | 487 | | | |
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Balance at beginning of year | $ | 414 |
| | $ | 406 |
| | $ | 375 |
|
| Additions based on tax positions taken during a current period | 27 |
| | 8 |
| | 31 |
|
| Reductions related to settlement of tax matters | — |
| | — |
| | — |
|
| Balance at end of year | $ | 441 |
| | $ | 414 |
| | $ | 406 |
|
The Company and its subsidiaries are subject to United States federal income taxes, as well as income taxes in a number of state jurisdictions. The tax years subsequent to 20142017 remain open to examination for U.S. federal income taxes. The majority of state jurisdictions remain open for tax years subsequent to 2014.2017. A few state jurisdictions remain open to examination for tax years subsequent to 2013.2016.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 15 - COMMON STOCK AND EARNINGS (LOSS) PER SHARE
Common & Preferred Stock
The Company's charter authorizes 80,000,000 shares of Common Stock with a $3 par value per share and 16,000,000 shares of Class B Common Stock with a $3 par value per share. Holders of Class B Common Stock have the right to twenty20 votes per share on matters that are submitted to Shareholders for approval and to dividends in an amount not greater than dividends declared and paid on Common Stock. Class B Common Stock is restricted as to transferability and may be converted into Common Stock on a one1 share for one share basis. The Company's charter also authorizes 200,000,000 shares of Class C Common Stock, $3 par value per share, and 16,000,000 shares of Preferred Stock. No shares of Class C Common Stock or Preferred Stock have been issued.
Earnings (Loss) Per Share
The Company's unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are considered participating securities and are included in the computation of earnings per share. The accounting guidance requires additional disclosure of EPS for common stock and unvested share-based payment awards, separately disclosing distributed and undistributed earnings. Undistributed earnings represent earnings that were available for distribution but were not distributed. Common stock and unvested share-based payment awards earn dividends equally. All earnings were undistributed in all periods presented.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
The following table sets forth the computation of basic and diluted earnings (loss) per share from continuing operations:
| | | | | | | | | | | | | | | |
| | | | | |
| | 2021 | | 2020
(As Adjusted) | | | | |
| Basic earnings (loss) per share: | | | | | | | |
| Income (loss) from continuing operations | $ | 5,153 | | | $ | (9,823) | | | | | |
| Less: Allocation of earnings to participating securities | (200) | | | — | | | | | |
| Income (loss) from continuing operations available to common shareholders - basic | $ | 4,953 | | | $ | (9,823) | | | | | |
| Basic weighted-average shares outstanding (1) | 15,114 | | | 15,316 | | | | | |
| Basic earnings (loss) per share - continuing operations | $ | 0.33 | | | $ | (0.64) | | | | | |
| | | | | | | |
| Diluted earnings (loss) per share: | | | | | | | |
| Income (loss) from continuing operations available to common shareholders - basic | $ | 4,953 | | | $ | (9,823) | | | | | |
| Add: Undistributed earnings reallocated to unvested shareholders | 2 | | | — | | | | | |
| Income (loss) from continuing operations available to common shareholders - basic | $ | 4,955 | | | $ | (9,823) | | | | | |
| Basic weighted-average shares outstanding (1) | 15,114 | | | 15,316 | | | | | |
| Effect of dilutive securities: | | | | | | | |
| Stock options (2) | 6 | | | — | | | | | |
| Directors' stock performance units (2) | 130 | | | — | | | | | |
| Diluted weighted-average shares outstanding (1)(2) | 15,250 | | | 15,316 | | | | | |
| Diluted earnings (loss) per share - continuing operations | $ | 0.32 | | | $ | (0.64) | | | | | |
(1)Includes Common and Class B Common shares, excluding 669 and 360 unvested participating securities, in thousands, for 2021 and 2020, respectively.
(2)Shares issuable under stock option plans where the exercise price is greater than the average market price of the Company's Common Stock during the relevant period and directors' stock performance units have been excluded to the extent they are anti-dilutive. Aggregate shares excluded were 4 in 2021 and 281 in 2020.
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| Basic earnings (loss) per share: | | | | | |
| Income (loss) from continuing operations | $ | (21,479 | ) | | $ | (9,322 | ) | | $ | (5,207 | ) |
| Less: Allocation of earnings to participating securities | — |
| | — |
| | — |
|
| Income (loss) from continuing operations available to common shareholders - basic | $ | (21,479 | ) | | $ | (9,322 | ) | | $ | (5,207 | ) |
| Basic weighted-average shares outstanding (1) | 15,764 |
| | 15,699 |
| | 15,638 |
|
| Basic earnings (loss) per share - continuing operations | $ | (1.36 | ) | | $ | (0.59 | ) | | $ | (0.33 | ) |
| | | | | | |
| Diluted earnings (loss) per share: | | | | | |
| Income (loss) from continuing operations available to common shareholders - basic | $ | (21,479 | ) | | $ | (9,322 | ) | | $ | (5,207 | ) |
| Add: Undistributed earnings reallocated to unvested shareholders | — |
| | — |
| | — |
|
| Income (loss) from continuing operations available to common shareholders - basic | $ | (21,479 | ) | | $ | (9,322 | ) | | $ | (5,207 | ) |
| Basic weighted-average shares outstanding (1) | 15,764 |
| | 15,699 |
| | 15,638 |
|
| Effect of dilutive securities: | | | | | |
| Stock options (2) | — |
| | — |
| | — |
|
| Directors' stock performance units (2) | — |
| | — |
| | — |
|
| Diluted weighted-average shares outstanding (1)(2) | 15,764 |
| | 15,699 |
| | 15,638 |
|
| Diluted earnings (loss) per share - continuing operations | $ | (1.36 | ) | | $ | (0.59 | ) | | $ | (0.33 | ) |
| |
(1) | Includes Common and Class B Common shares, excluding 570 unvested participating securities, in thousands. |
| |
(2) | Shares issuable under stock option plans where the exercise price is greater than the average market price of the Company's Common Stock during the relevant period and directors' stock performance units have been excluded to the extent they are anti-dilutive. Aggregate shares excluded were 422 in 2018, 448 in 2017 and 220 in 2016. |
NOTE 16 - STOCK PLANS AND STOCK COMPENSATION EXPENSE
The Company recognizes compensation expense relating to share-based payments based on the fair value of the equity instrument issued and records such expense in selling and administrative expenses in the Company's Consolidated Statements of Operations. The number of shares to be issued is determined by dividing the specified dollar value of the award by the market value per share on the grant date. The Company's stock compensation expense (credit) was $(29)$477 in 2018, $9402021 and $431 in 2017 and $1,324 in 2016. The credit in 2018 is related to the reversal of stock compensation that did not vest.2020.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
2016 Incentive Compensation Plan
On May 3, 2016, the Company's shareholders' approved and adopted the Company's 2016 Incentive Compensation Plan (the "2016 Incentive Compensation Plan") which provides for the issuance of a maximum of 800,000 shares of Common Stock and/or Class B Common Stock for the grant of options, and/or other stock-based or stock-denominated awards to employees, officers, directors, and agents of the Company and its participating subsidiaries. The 2016 Incentive Compensation Plan and the allocation of shares thereunder superseded and replaced The Dixie Group, Inc. Stock Awards Plan, as amended (the "2006 Plan") and the allocation of shares thereunder. The 2006 Plan was terminated with respect to new awards. Awards previously granted under the 2006 Plan continue to be governed by the terms of that plan and are not affected by its termination. On May 6, 2020, the board approved an amendment of the Company's 2016 Incentive Compensation Plan to increase the original number of shares by an additional 500,000.
2006 Stock Awards Plan
The Company had a Stock Awards Plan, ("2006 Plan"), as amended, which provided for the issuance of up to 1,800,000 shares of Common Stock and/or Class B Common Stock as stock-based or stock-denominated awards to directors of the Company and to salaried employees of the Company and its participating subsidiaries.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
Restricted Stock Awards
Each executive officer has the opportunity to earn a Primary Long-Term Incentive Award of restricted stock and separately receive an award of restricted stock denominated as “Career Shares.” The number of shares issued, if any, is based on the market price of the Company’s Common Stock at the time of grant of the award, subject to a $5.00 per share minimum value. Primary Long-Term Incentive Awards vest over three years. For participants over age 60, Career Share AwardsShares awards fully vest when the participant becomes (i) qualified to retire from the Company and (ii) has retained such shares two years following the grant date. For the participants under age 60, Career Shares vest ratably over five years beginning on the participant's 61st birthday.
On March 12, 2018,February 1, 2021, the Company granted 297,292issued 22,000 shares of restricted stock to certain key employees. The grant-date fair value of the awards was $832,$86, or $2.80$3.89 per share, and willis expected to be recognized as stock compensation expense over a weighted-average period of 6.12.5 years from the date the awards were granted. Each award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On July 30, 2018, the Company granted 10,000 shares of restricted stock to an employee. The grant-date fair value of the award was $20, or $2.00 per share and will be recognized as stock compensation over a three-year vesting period from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On March 10, 2017,2021, the Company granted 40,000issued 325,680 shares of restricted stock to certain key employees. The grant-date fair value of the awards was $140,$984, or $3.50 per share, and will be recognized as stock compensation expense over a three-year vesting period from the date the awards were granted. Each award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On September 1, 2017, the Company granted 10,000 shares of restricted stock to a key employee. The grant-date fair value of the award was $42, or $4.15 per share, and will be recognized as stock compensation expense over a three-year vesting period from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On September 18, 2017, the Company granted 10,000 shares of restricted stock to a key employee. The grant-date fair value of the award was $41, or $4.05 per share, and will be recognized as stock compensation expense over a three-year vesting period from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On March 11, 2016, the Company issued 149,215 shares of restricted stock to officers and other key employees. The grant-date
fair value of the awards was $651, or $4.360$3.02 per share, and is expected to be recognized as stock compensation expense over a weighted-average period of 8.75.3 years from the date the awards were granted. Each award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Restricted stock activity for the threetwo years ended December 29, 2018 isare summarized as follows:
| | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Outstanding at December 28, 2019 | 461,423 | | | 4.30 | |
| Granted | 131,867 | | | 1.00 | |
| Vested | (233,639) | | | 3.90 | |
| Outstanding at December 26, 2020 | 359,651 | | | $ | 3.35 | |
| Granted | 387,680 | | | $ | 3.11 | |
| Vested | (70,509) | | | $ | 1.84 | |
| Forfeited | (7,477) | | | $ | 3.40 | |
| Outstanding at December 25, 2021 | 669,345 | | | $ | 3.34 | |
|
| | | | | | |
| | Number of Shares | | Weighted-Average Grant-Date Fair Value |
| Outstanding at December 26, 2015 | 416,795 |
| | $ | 8.90 |
|
| Granted | 149,215 |
| | 4.36 |
|
| Vested | (107,318 | ) | | 8.88 |
|
| Forfeited | (1,314 | ) | | 15.68 |
|
| Outstanding at December 31, 2016 | 457,378 |
| | 7.41 |
|
| Granted | 60,000 |
| | 3.70 |
|
| Vested | (78,908 | ) | | 8.79 |
|
| Forfeited | (4,629 | ) | | 5.96 |
|
| Outstanding at December 30, 2017 | 433,841 |
| | 6.66 |
|
| Granted | 307,292 |
| | 2.77 |
|
| Vested | (64,939 | ) | | 6.58 |
|
| Forfeited | (106,196 | ) | | 9.51 |
|
| Outstanding at December 29, 2018 | 569,998 |
| | $ | 4.04 |
|
As of December 29, 2018,25, 2021, unrecognized compensation cost related to unvested restricted stock was $1,458.$1,337. That cost is expected to be recognized over a weighted-average period of 7.76.5 years. The total fair value of shares vested was approximately $173, $276$243 and $456$241 during 2018, 20172021 and 2016,2020, respectively.
Stock Performance Units
The Company's non-employee directors receive an annual retainer of $18 in cash and $18 in value of Stock Performance Units (subject to a $5.00 minimum per unit). If market value at the date of the grants is above $5.00 per share; there is no reduction in the number of units issued. However, if the market value at the date of the grants is below $5.00, units will be reduced to reflect the $5.00 per share minimum. Upon retirement, the Company issues the number of shares of Common Stock equivalent to the number of Stock Performance Units held by non-employee directors at that time. As of December 29, 2018, 123,32125, 2021, 130,320 Stock Performance Units were outstanding under this plan. As of December 29, 2018,25, 2021, there was no unrecognized compensation cost related to Stock Performance Units was $24. That cost is expected to be recognized over a weighted-average period of 0.3 years.Units.
Stock Options
Options granted under the Company's 2006 Plan and the 2016 Plan were exercisable for periods determined at the time the awards are granted. Effective 2009, the Company established a $5.00 minimum exercise price on allfor calculating the number of options to be granted.
On May 30, 2017, the Company granted 203,000 options with a market condition to certain key employees of the Company at a weighted-average exercise price of $4.30. The grant-date fair value of these options was $306. These options vest over a two-year period and require the Company's stock to trade at or above $7.00 for five5 consecutive trading days after the two-year period and within five years of issuance to meet the market condition.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
The fair value of each option was estimated on the date of grant using a lattice model. Expected volatility was based on historical volatility of the Company's stock, using the most recent period equal to the expected life of the options. The risk-free interest rate was based on the U.S. Treasury yield for a term equal to the expected life of the option at the time of grant. The Company uses historical exercise behavior data of similar employee groups to determine the expected lifelives of options.
No options were granted during the years ended December 25, 2021 and December 26, 2020.
Option activity for the two years ended is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life (in years) | Weighted-Average Fair Value of Options Granted During the Year |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Outstanding at December 28, 2019 | 166,000 | | | 4.33 | | | — | | | — | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited | (15,000) | | | 4.17 | | | — | | | — | |
| Outstanding at December 26, 2020 | 151,000 | | | 4.35 | | | 1.40 | | — | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | — | | | — | | | — | | | — | |
| Forfeited | (10,000) | | | 4.17 | | | — | | | — | |
| Outstanding at December 25, 2021 | 141,000 | | | $ | 4.36 | | | 0.40 | | $ | — | |
| | | | | | | |
| Options exercisable at: | | | | | | | |
| | | | | | | |
| December 26, 2020 | — | | | — | | | — | | | — | |
| December 25, 2021 | — | | | — | | | — | | | — | |
At December 25, 2021, there was no intrinsic value of outstanding stock options and no intrinsic value of exercisable stock options. At December 25, 2021, there was no unrecognized compensation expense related to unvested stock options.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The following weighted-average assumptions were used to estimate the fair value of stock options granted during the year ended December 29, 2018:
|
| | | | | | | | |
| | 2018 (1) | | 2017 | | 2016 (1) |
| Expected Volatility | — | % | | 47.80 | % | | — | % |
| Risk-free interest rate | — | % | | 1.79 | % | | — | % |
| Dividend yield | — | % | | — | % | | — | % |
| Expected life of options (yrs) | 0 |
| | 5 |
| | 0 |
|
(1) No options were granted during the years ended December 29, 2018 and December 31, 2016.
Option activity for the three years ended December 29, 2018 is summarized as follows:
|
| | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Life (in years) | Weighted-Average Fair Value of Options Granted During the Year |
| Outstanding at December 26, 2015 | 103,500 |
| | $ | 5.00 |
| | | | $ | — |
|
| Granted | — |
| | — |
| | | | — |
|
| Exercised | — |
| | — |
| | | | — |
|
| Forfeited | — |
| | — |
| | | | — |
|
| Outstanding at December 31, 2016 | 103,500 |
| | 5.00 |
| | | | — |
|
| Granted | 203,000 |
| | 4.30 |
| | | | 1.51 |
|
| Exercised | — |
| | — |
| | | | — |
|
| Forfeited | — |
| | — |
| | | | — |
|
| Outstanding at December 30, 2017 | 306,500 |
| | 4.54 |
| | | | — |
|
| Granted | — |
| | — |
| | | | — |
|
| Exercised | — |
| | — |
| | | | — |
|
| Forfeited | (8,000 | ) | | 4.17 |
| | | | — |
|
| Outstanding at December 29, 2018 | 298,500 |
| | 4.55 |
| | 2.5 | | $ | — |
|
| | | | | | | | |
| Options exercisable at: | | | | | | | |
| December 31, 2016 | 103,500 |
| | $ | 5.00 |
| | | | — |
|
| December 30, 2017 | 103,500 |
| | 5.00 |
| | | | — |
|
| December 29, 2018 | 103,500 |
| | 5.00 |
| | 0.8 | | — |
|
At December 29, 2018, there was no intrinsic value of outstanding stock options and no intrinsic value of exercisable stock options. The intrinsic value of stock options exercised during 2018, 2017 and 2016 was $0, $0 and $0, respectively. At December 29, 2018, unrecognized compensation expense related to unvested stock options was $72 and is expected to be recognized over a weighted-average period of 0.4 years.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Components of accumulated other comprehensive income (loss), net of tax, are as follows:
| | | | | | | | | | | | | | | | | |
| Interest Rate Swaps | | Post-Retirement Liabilities | | Total |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at December 28, 2019 | (1,048) | | | 240 | | | (808) | |
| Unrealized gain on interest rate swaps, net of tax of $0 | (1,316) | | | — | | | (1,316) | |
| Reclassification of loss into earnings from interest rate swaps, net of tax of $343 | 1,624 | | | — | | | 1,624 | |
| | | | | |
| Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $0 | — | | | (27) | | | (27) | |
| Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $0 | — | | | (3) | | | (3) | |
| Balance at December 26, 2020 | $ | (740) | | | $ | 210 | | | $ | (530) | |
| Unrealized gain on interest rate swaps, net of tax of $0 | 94 | | | — | | | 94 | |
| Reclassification of loss into earnings from interest rate swaps, net of tax of $174 | 472 | | | — | | | 472 | |
| | | | | |
| Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $0 | — | | | (6) | | | (6) | |
| Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $0 | — | | | — | | | — | |
| Balance at December 25, 2021 | $ | (174) | | | $ | 204 | | | $ | 30 | |
|
| | | | | | | | | | | |
| | Interest Rate Swaps | | Post-Retirement Liabilities | | Total |
| Balance at December 26, 2015 | (2,853 | ) | | 280 |
| | (2,573 | ) |
| Unrealized loss on interest rate swaps, net of tax of $100 | (163 | ) | | — |
| | (163 | ) |
| Reclassification of loss into earnings from interest rate swaps, net of tax of $491 | 800 |
| | — |
| | 800 |
|
| Unrecognized net actuarial loss on postretirement benefit plans, net of tax of $1 | — |
| | (2 | ) | | (2 | ) |
| Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $13 | — |
| | (20 | ) | | (20 | ) |
| Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $2 | — |
| | (2 | ) | | (2 | ) |
| Balance at December 31, 2016 | (2,216 | ) | | 256 |
| | (1,960 | ) |
| Unrealized gain on interest rate swaps, net of tax of $68 | 112 |
| | — |
| | 112 |
|
| Reclassification of loss into earnings from interest rate swaps, net of tax of $475 | 775 |
| | — |
| | 775 |
|
| Unrecognized net actuarial gain on postretirement benefit plans, net of tax of $4 | — |
| | 7 |
| | 7 |
|
| Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $11 | — |
| | (19 | ) | | (19 | ) |
| Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $1 | — |
| | (3 | ) | | (3 | ) |
| Reclassification of stranded tax effects | (258 | ) | | 47 |
| | (211 | ) |
| Balance at December 30, 2017 | (1,587 | ) | | 288 |
| | (1,299 | ) |
| Unrealized gain on interest rate swaps, net of tax of $0 | 531 |
| | — |
| | 531 |
|
| Reclassification of loss into earnings from interest rate swaps, net of tax of $0 | 673 |
| | — |
| | 673 |
|
| Unrecognized net actuarial gain on postretirement benefit plans, net of tax of $0 | — |
| | 18 |
| | 18 |
|
| Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $0 | — |
| | (27 | ) | | (27 | ) |
| Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $0 | — |
| | (4 | ) | | (4 | ) |
| Balance at December 29, 2018 | $ | (383 | ) | | $ | 275 |
| | $ | (108 | ) |
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Commitments
The Company had purchase commitments of $2,730$375 at December 29, 2018,25, 2021, primarily related to machinery and equipment. The Company enters into fixed-price contracts with suppliers to purchase natural gas to support certain manufacturing processes.processes in prior years. The Company had no contract purchases of $428 in 2018, $640 in 2017 and $855 in 2016.2021 or 2020. At December 29, 2018,25, 2021, the Company has no commitments to purchase natural gas of $252 for 2019 and $72 for 2020.2022.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The Company leases certain equipment under capital leases and certain buildings, machinery and equipment under operating leases. Commitments for minimum rentals under non-cancelable leases, including any applicable rent escalation clauses, are as follows:
|
| | | | | | | |
| | Capital Leases | | Operating Leases |
| 2019 | $ | 4,590 |
| | $ | 3,002 |
|
| 2020 | 4,205 |
| | 2,533 |
|
| 2021 | 3,333 |
| | 2,121 |
|
| 2022 | 989 |
| | 1,667 |
|
| 2023 | 244 |
| | 882 |
|
| Thereafter | — |
| | 3,155 |
|
| Total commitments | 13,361 |
| | 13,360 |
|
| Less amounts representing interest | (1,265 | ) | | — |
|
| Total | $ | 12,096 |
| | $ | 13,360 |
|
Rental expense was approximately $4,453, $3,687 and $3,575 during 2018, 2017 and 2016, respectively.
Property, plant and equipment includes machinery and equipment under capital leases which have asset cost and accumulated depreciation of $22,400 and $7,866, respectively, at December 29, 2018, and $25,250 and $8,300, respectively, at December 30, 2017.
Contingencies
The Company assesses its exposure related to legal matters, including those pertaining to product liability, safety and health matters and other items that arise in the regular course of its business. If the Company determines that it is probable a loss has been incurred, the amount of the loss, or an amount within the range of loss, that can be reasonably estimated will be recorded.
Environmental Remediation
The Company accrues for losses associated with environmental remediation obligations when such losses are probable and estimable. Remediation obligations are accrued based on the latest available information and are recorded at undiscounted amounts. The Company regularly monitors the progress of environmental remediation. If studies indicate that the cost of remediation has changed from the previous estimate, an adjustment to the liability would be recorded in the period in which such determination is made. (See Note 21).
Legal Proceedings
The Company hasWe have been sued, together with the 3M Company and approximately 30 other named defendants and unnamed "fictitious defendants" including various carpet manufacturers and suppliers, in 4 lawsuits whereby the plaintiffs seek monetary damages and injunctive relief related to the manufacture, supply, and/or use of certain chemical products in the manufacture, finishing, and treatment of carpet products in the Dalton, Georgia area. These chemical products allegedly include without limitation perflourinated compounds ("PFC") such as perflourinated acid ("PFOA") and perfluorooctane sulfonate ("PFOS"). In each lawsuit, the plaintiff(s) alleged that, as a consequence of these actions, these chemical compounds have discharged or leached into the water systems around Dalton and then flow into the waters in or near the water bodies from which the plaintiff(s) draw for drinking water.
Two of these lawsuits were filed in Alabama. The first lawsuit in Alabama was filed on September 22, 2016 by The Water Works and Sewer Board of the City of Gadsden (Alabama) Water Works in the circuit courtCircuit Court of Etowah County, Alabama [The(styled The Water Works and Sewer Board of the City of Gadsden v. 3M Company, et al, civil actional., Civil Action No. 31-CV-2016-900676.00] and by the Town of Centre (Alabama) Water Works in the circuit court of Cherokee County Alabama [The Water Works and Sewer Board of the Town of Centre v. 3M Company, et al, civil action No. 13-CV-2017-900049.00]. Both cases seek monetary damages and injunctive relief related to the use of certain chemical compounds in the manufacture and finishing of carpet products “in and around Dalton Georgia.” On motion of the defendants, the cases were removed to the U.S. District Court for the Northern District of Alabama (Middle Division) Case No. 4:16-CV-01755-SGC and Case No. 4:17-CV-01026-KOB. Subsequently, the Gadsden Water Works filed a motion to have the case remanded back to the state court and such motion has been granted. Currently, the Company joined several other co-defendants in filing a Petition for Writ of Mandamus with the Alabama Supreme Court asking for an Order directing the trial court to grant the Company’s and other codefendants’ motions to dismiss the Alabama-filed actions for lack of personal jurisdiction. The Petitions have been consolidated by the Alabama Supreme Court with the Town of Centre (Alabama) matter (described above)31-CV-2016-900676.00). The Petitions are still pending and there is no statutory deadline for the court to issue a decision. The lawsuits allege that perflourinated compounds (“PFC”), perflourinated acid (“PFOA”) and perfluorooctane sulfonate (“PFOS”) manufactured by 3M were usedsecond lawsuit in certain finishing and treatment processes by the defendants and, as a consequence of such use, were subsequently either discharged into or leached into the water systems around Dalton, Georgia. The Complaints seek damages that exceed $10, but are otherwise unspecified in amount in addition to injunctive relief and punitive damages. The Company intends to defend the matters vigorously and is unable to estimate the potential exposure to loss, if any, at this time.
On November 16, 2018 the Superior Court of the State of California granted preliminary approval of a class action settlement in the matter of Carlos Garcia v. Fabrica International, Inc. et al Orange County Superior Court Case No. 30-2017-00949461-CU-OE-CXC. The court further approved the procedures for Settlement Class Members to opt-out of or object to the Settlement. The terms
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Alabama was filed on May 15, 2017 by The Water Works and Sewer Board of the settlement provide that Fabrica, a wholly owned subsidiaryTown of Centre (Alabama) in the Circuit Court of Cherokee County, Alabama (styled The Water Works and Sewer Board of the Town of Centre v. 3M Company, has agreedet al., Civil Action No. 13-CV- 2017-900049.00). These lawsuits have been settled upon payment to pay $1,514 (the “Gross Settlement Amount”)the plaintiff of a sum deemed to fully resolve all claimsbe immaterial. Both lawsuits have been dismissed.
The other two lawsuits were filed in Georgia. The first lawsuit in Georgia was filed on November 19, 2019 by the City of Rome (Georgia) in the Lawsuit, including payments to Settlement Class Members, Class Counsel’s attorneys’ feesSuperior Court of Floyd County, Georgia (styled The City of Rome, Georgia v. 3M Company, et al., No. 19CV02405JFL003). The second lawsuit in Georgia was originally filed on November 26, 2019 and expenses, settlement administration costs,is presented as a class action lawsuit by and on behalf of a class of persons who obtain drinking water from the City of Rome, Georgia and the Floyd County Water Department (and similarly situated persons) (generally, for these purposes, residents of Floyd County) (styled Jarrod Johnson v. 3M Company, et al., Civil Action No. 19-CV-02448-JFL-003) (the "Class Action Lawsuit"). On January 10, 2020, the Class Representative’s Service Award. The amount ofAction Lawsuit was removed to the proposed settlement was recorded during the quarter ended June 30, 2018. The deadline for class members to opt-out was February 1, 2019. The deadlineUnited States District Court for the plaintiff to file a motion for final approvalNorthern District of the class action settlement is March 29, 2019. The final fairness hearing is scheduled for April 12, 2019.
The Company is one of multiple parties to three current lawsuits filed in Madison County Illinois, styled Brenda Bridgeman, Individually and as Special Administrator of the Estate of Robert Bridgeman, Deceased, vs. American Honda Motor Co., Inc., f/k/a Metropolitan Life Insurance Co., et al No. 15-L-374, styled Charles Anderson, Pltf., vs.Georgia, Rome Division (styled Jarrod Johnson v. 3M Company, et al Civil Action No. 17-L-5254:20-CV-0008-AT). We agreed to settle and styled Danny Atkins and Pamela Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2. All threeobtain dismissal of these lawsuits entailshortly after the end of the third quarter of 2021 upon payment of a claim for damagessum to the plaintiff in the City of Rome matter. We deem the sum of the settlement to be determined in excess of $50 filed on behalf of either a former employee or the estate of an individual which alleges that the deceased contracted mesothelioma as a result of exposureimmaterial to asbestos while employed by the Company. Discovery in each matter is ongoing, and a tentative trial date has been set for oneDelivery of the cases. The Company has denied liability, is defendingsettlement agreement and dismissal of each of the matters vigorously and is unable to estimate its potential exposure to loss, if any, at this time. In August of 2017, the lawsuit styled Sandra D. Watts, Individually and as Special Administrator of the Estate of Dianne Averett, Deceased vs. 4520 Corp., Inc. f/k/a Benjamin F. Shaw Company, et al No. 12-L-2032 was placed in the category of "special closed with settlements and bankruptcy claims pending" to all remaining defendants. In March 2018, the lawsuit styled Charles Anderson, Individually and as Special Administrator of the Estate of Charles Anderson, Deceased vs. 3M Company, et al, No. 17-L-525 was dismissed without prejudice. In October 2018, the lawsuit styled Danny Atkins and Pamela Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2 was dismissed without prejudice.pending.
NOTE 19 - OTHER (INCOME) EXPENSE, NET
Other operating expense, net is summarized as follows:
| | | | | | | | | | | |
| |
| | 2021 | | 2020
(As Adjusted) |
| Other operating (income) expense, net: | | | |
| | | |
| (Gain) loss on property, plant and equipment disposals | $ | 210 | | | $ | 41 | |
| | | |
| (Gain) loss on currency exchanges | 211 | | | (55) | |
| | | |
| Retirement expenses | 212 | | | 40 | |
| Miscellaneous income | (1,560) | | | (134) | |
| Other operating income, net | $ | (927) | | | $ | (108) | |
The 2021 miscellaneous income includes an insurance reimbursement in the amount of 1.7 million for the replacement of assets and business interruption loss.
In April 2015, the Company's Board of Directors approved the Corporate Office Consolidation Plan, to cover the costs of consolidating three of the Company's existing leased divisional and corporate offices to a single leased facility located in Dalton, Georgia. The Company paid a fee to terminate one of the leased facilities, did not renew a second facility and vacated the third facility. Related to the vacated facility, the Company recorded the estimated costs related to the fulfillment of its contractual lease obligation and on-going facility maintenance, net of an estimate of sub-lease expectations. Accordingly, if the estimates differ, the Company would record an additional charge or benefit, as appropriate. Costs related to the consolidation included the lease termination fee, contractual lease obligations and moving costs. The plan is now substantially complete.
During the fourth quarter of 2017, the Company announced a Profit Improvement Plan to improve profitability through lower cost and streamlined decision making and aligning processes to maximize efficiency. The plan includesincluded consolidating the management of the Company's two former commercial brands, Atlas Carpet Mills and Masland Contract, under one management team, sharing operations in sales, marketing, product development and manufacturing. Specific to this plan, includes focusingthe Company had focused nearly all commercial solution dyed make-to-order production in ourits Atmore, Alabama operations where the Company has developed such make-to-order capabilities over the last 5 years. Further, the Company is aligningaligned its west coast production facilities, better utilizing its west coast real estate by moving production to its Porterville,Santa Ana, California and Atmore, Alabama operations and preparing forto more efficient distribution ofefficiently distribute its west coast products. Furthermore, the Company is re-configuringre-configured its east coast
distribution facilities to provide more efficient distribution of its products. In addition, the Company hadrealized reductions in related support functions such as accounting and information services. The plan is now substantially complete.
(1) Costs incurred under these plans are classified as "facility consolidation and severance expenses, net" in the Company's Consolidated Statements of Operations.
The Company has either sold or discontinued certain operations that are accounted for as "Discontinued Operations" under applicable accounting guidance. Discontinued operations are summarized as follows:
Undiscounted reserves are maintained for the self-insured workers' compensation obligations related to the Company's former textile operations. These reserves are administered by a third-party workers' compensation service provider under the supervision of Company personnel. Such reserves are reassessed on a quarterly basis. Pre-tax cost incurred for workers' compensation as a component of discontinued operations primarily represents a change in estimate for each period from unanticipated medical costs associated with the Company's obligations.
Reserves for environmental remediation obligations are established on an undiscounted basis. The Company has an accrual for environmental remediation obligations related to discontinued operations of $1,728$1,913 as of December 29, 201825, 2021 and $1,746$1,924 as of December 30, 2017.26, 2020. The liability established represents the Company's best estimate of possible loss and is the reasonable amount to which there is any meaningful degree of certainty given the periods of estimated remediation and the dollars applicable to such remediation for those periods. The actual timeline to remediate, and thus, the ultimate cost to complete such remediation through these remediation efforts, may differ significantly from ourthe Company's estimates. Pre-tax cost for environmental remediation obligations classified as discontinued operations were primarily a result of specific events requiring action and additional expense in each period.
The Company purchases a portion of its product needs in the form of fiber, yarn and carpet from Engineered Floors, an entity substantially controlled by Robert E. Shaw, a shareholder of the Company. An affiliate of Mr. Shaw holds approximately 7.2%7.6% of the Company's Common Stock, which represents approximately 3.5%3.2% of the total vote of all classes of the Company's Common Stock. Engineered Floors is one of several suppliers of such materials to the Company. Total purchases from Engineered Floors for 2018, 20172021 and 20162020 were approximately $8,200, $7,200$3,875 and $7,300,$4,500 respectively; or approximately 2.6%,1.4% and 2.3%, and 2.4% of the Company's cost of goods sold in 2018, 2017,2021 and 2016,2020, respectively. Purchases from Engineered Floors are based on market value, negotiated prices. The Company has no contractual commitments with Mr. Shaw associated with its business relationship with Engineered Floors. Transactions with Engineered Floors are reviewed annually by the Company's board of directors.
THE DIXIE GROUP, INC.
(1) Uncollectible accounts written off, net of recoveries. The Allowance for Doubtful Accounts is included in Receivables, net on the Consolidated Balance Sheet. See Footnote 4 - Receivables, net for further information.
