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 tile in the domestic floorcovering market. The Company has one reportable segment, floorcovering. 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.
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 financial statements in conformity with U.S. generally accepted accounting principles 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 "2016," "2015," and "2014," mean the fiscal years ended December 31, 2016, December 26, 2015, and December 27, 2014, respectively. The year 2016 contained 53 weeks, all other years presented contained 52 weeks.
Reclassifications
The Company reclassified certain amounts in 2015 and 2014 to conform to the 2016 presentation.
Discontinued Operations
The 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,
one
customer accounted for approximately
10%
in 2016,
9%
in 2015 and
9%
in 2014. No other customer accounted for more than 10% of net sales in 2016, 2015 or 2014, nor did the Company make a significant amount of sales to foreign countries during 2016, 2015 or 2014.
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. 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.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Property, Plant and Equipment
Property, plant and equipment is 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 first step of 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 first step of the assessment, a second step in the assessment is performed by comparing the "implied fair value" of the Company's reporting units' goodwill with the carrying value of the reporting units' goodwill. For this purpose, the "implied fair value" of goodwill for each reporting unit that has goodwill associated with its operations is determined in the same manner as the amount of goodwill is determined in a business combination (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).
Customer Claims and Product Warranties
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its products. At the time sales are recorded, the Company records reserves for the estimated costs of defective products and failure of its products to meet applicable performance standards. The level of reserves the Company establishes is based primarily upon historical experience, including the level of sales and evaluation of pending claims.
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 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 on its Consolidated Balance Sheet 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.
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
Revenues, including shipping and handling amounts, are recognized when the following criteria are met: there is persuasive evidence that a sales agreement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer takes title to the goods and assumes the risks and rewards of ownership, which is generally on the date of shipment. At the time revenue is recognized, the Company records a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions that exist at the time revenue is recognized. Revenues are recorded net of taxes collected from customers.
Advertising Costs and Vendor Consideration
The Company engages in promotional and advertising programs that include rebates, discounts, points and cooperative 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. Substantially all such expenses are recorded as a deduction from sales. The cost of cooperative advertising programs is recorded as selling and administrative expenses when the Company can identify a tangible 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 2016, 2015, or 2014.
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
Rent is expensed over the lease period, including the effect of any rent holiday and rent escalation provisions, which effectively amortizes the rent holidays and rent escalations on a straight-line basis over the lease period. Leasehold improvements are amortized over the shorter of their economic lives or the lease term, excluding renewal options. Any leasehold improvement made by the Company and funded by the lessor is treated as a leasehold improvement and amortized over the shorter of its economic life or
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
the lease term. Any funding provided by the lessor for such improvements is treated as deferred costs and amortized over the lease period.
Stock-Based Compensation
The Company recognizes compensation expense relating to share-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).
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board ("FASB") issued 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 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14,
"Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date."
The amendments in ASU 2015-14 deferred the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Management is continuing to evaluate the standard’s impact on the Company’s Consolidated Financial Statements. The Company has developed a project team relative to the process of adopting this ASU and is currently completing a detailed review of the Company’s revenue arrangements to determine any necessary adjustments to existing accounting policies. For the majority of these arrangements, no significant impacts are expected as these transactions generally consist of a single performance obligation to transfer promised goods or services. The Company currently anticipates utilizing the retrospective method upon adoption.
In August 2014, the FASB issued ASU No. 2014-15,
"Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern."
The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance was effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The adoption of this ASU in 2016 did not have a significant impact on the Consolidated Financial Statements.
In April 2015, the FASB issued ASU No. 2015-05,
"Customer's Accounting for Fees Paid in a Cloud Computing Arrangement."
ASU 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance did not change GAAP for a customer's accounting for service contracts. The adoption of this ASU in 2016 did not have a significant impact on the Consolidated Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, "
Inventory (Topic 330): Simplifying the Measurement of Inventory.
" Topic 330 currently requires an entity to measure inventory at the lower of cost or market. Market could be replacement cost, net realizable value, or net realizable value less an approximately normal profit margin. This ASU does not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company measures substantially all inventories using the LIFO method; therefore, the Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Financial Statements.
In September 2015, the FASB issued ASU No. 2015-16, "
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.
" The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting amounts previously reported. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. This ASU was effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The adoption of this ASU in 2016 did not have a significant impact on the Consolidated Financial Statements.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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. The 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, the ASU clarifies the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, "
Leases (Topic 842),"
which requires lessees to recognize on the balance sheet a right-of use asset, representing its 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. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities may elect to apply. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company is continuing to evaluate the impact of the adoption of this ASU on the Consolidated Financial Statements. The Company has developed a project team relative to the process of adopting this ASU and is currently completing a detailed review of the Company’s leasing arrangements to determine the impact.
In March 2016, the FASB issued ASU No. 2016-09, "
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,"
which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. Early application is permitted. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Financial Statements.
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 currently used 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 Consolidated 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, with early adoption permitted. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated 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 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 with early adoption permitted. Entities are required to apply the standard’s provisions on a retrospective basis. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01,
“Business Combinations (Topic 805): Clarifying the Definition of a Business,”
which narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition (or disposal) of assets or a business. The definition of a business affects areas of accounting such as acquisitions, disposals and goodwill. Under this ASU, fewer acquired sets are expected to be considered businesses. For public entities, ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted under certain circumstances. The Company would apply this guidance to applicable transactions after the adoption date.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
In January 2017, the FASB issued ASU No. 2017-04,
“Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
.” Under the new standard, goodwill impairment would be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. For public entities, ASU 2017-04 is effective for annual or any interim goodwill impairment tests in annual periods beginning after December 15, 2019, with early adoption permitted. The Company does not believe the adoption of this ASU will have a significant impact on the Consolidated Financial Statements.
NOTE 3 - RECEIVABLES, NET
Receivables are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Customers, trade
|
$
|
39,749
|
|
|
$
|
46,110
|
|
Other receivables
|
3,963
|
|
|
5,166
|
|
Gross receivables
|
43,712
|
|
|
51,276
|
|
Less: allowance for doubtful accounts
|
(107
|
)
|
|
(470
|
)
|
Receivables, net
|
$
|
43,605
|
|
|
$
|
50,806
|
|
Bad debt expense was
$38
in 2016,
$146
in 2015, and
$399
in 2014.
NOTE 4 - INVENTORIES, NET
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Raw materials
|
$
|
34,261
|
|
|
$
|
46,164
|
|
Work-in-process
|
16,739
|
|
|
21,306
|
|
Finished goods
|
57,053
|
|
|
58,037
|
|
Supplies and other
|
120
|
|
|
192
|
|
LIFO reserve
|
(10,936
|
)
|
|
(10,553
|
)
|
Inventories, net
|
$
|
97,237
|
|
|
$
|
115,146
|
|
Reduction of inventory quantities in 2016 resulted in liquidations of LIFO inventories carried at prevailing costs established in prior years and increased cost of sales by
$141
in 2016.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land and improvements
|
$
|
7,781
|
|
|
$
|
7,610
|
|
Buildings and improvements
|
62,055
|
|
|
61,396
|
|
Machinery and equipment
|
177,745
|
|
|
174,636
|
|
Assets under construction
|
2,386
|
|
|
2,819
|
|
|
249,967
|
|
|
246,461
|
|
Accumulated depreciation
|
(157,160
|
)
|
|
(145,315
|
)
|
Property, plant and equipment, net
|
$
|
92,807
|
|
|
$
|
101,146
|
|
Depreciation of property, plant and equipment, including amounts for capital leases, totaled
$12,944
in 2016,
$13,525
in 2015 and
$12,212
in 2014.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 6 - ACQUISITIONS
Atlas Carpet Mills, Inc.
Effective March 19, 2014, the Company acquired all outstanding stock of Atlas Carpet Mills, Inc. ("Atlas") for total purchase price consideration of
$18,759
, including a cash payment of
$16,543
, accrued consideration relating to holdbacks for certain inventories and customer claims of
$923
and accrued consideration for a working capital adjustment of
$1,293
. The Company financed the transaction with availability under its amended credit facility. The Company incurred direct acquisition costs of approximately
$645
related to this acquisition. These incremental costs are classified as selling and administrative expenses in the Company's Consolidated Statements of Operations.
Atlas is a California-based manufacturer and marketer of high-end commercial broadloom and tile carpeting serving soft floorcovering markets. Atlas has a strong reputation for exceptional design, quality and service. This brand is sold through the existing Atlas sales force and broadens the Company's product offerings for commercial applications along with the Company's Masland Contract brand.
The acquisition was accounted for as a business combination which generally requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The acquisition did not represent a significant business combination. The fair value of the net assets acquired exceeded the purchase price resulting in a bargain purchase of
$10,937
(
$6,781
after tax). The following table summarizes the fair values of the assets acquired and liabilities assumed. The components of the purchase price allocation consisted of the following:
|
|
|
|
|
Cash
|
$
|
2,466
|
|
Receivables
|
4,998
|
|
Inventories
|
10,981
|
|
Other current assets
|
797
|
|
Assets held for sale
|
5,152
|
|
Property, plant and equipment
|
6,716
|
|
Finite intangible asset
|
3,300
|
|
Other assets
|
859
|
|
Accounts payable
|
(2,286
|
)
|
Accrued expenses
|
(2,883
|
)
|
Capital lease obligation
|
(404
|
)
|
Fair value of net assets acquired
|
$
|
29,696
|
|
Total consideration
|
18,759
|
|
Gain on purchase of business
|
$
|
(10,937
|
)
|
The Company believes that several factors were significant in the recognition of a gain from the acquisition of Atlas. Atlas had higher cost of dyeing due to the lack of capacity utilization and therefore needed to lower costs by combining dye facilities with another operation. In addition, Atlas had a higher cost of modular carpet tile manufacturing due to outsourcing the tile manufacturing operations. Therefore, Atlas would have had to make significant investments in product and manufacturing equipment to be competitive in the modular carpet manufacturing business. Finally, the Seller had the desire to see Atlas operated as an independent brand and organization in the future. All of these objectives were achieved by combining Atlas with the Company in a mutually advantageous relationship.
Burtco Enterprises, Inc.
Effective September 22, 2014, the Company acquired certain assets and assumed certain liabilities of Burtco Enterprises, Inc. ("Burtco") for total purchase price consideration of
$2,549
, including a cash payment of
$2,430
and accrued consideration for a working capital adjustment of
$119
. The Company incurred direct acquisition costs of approximately
$101
related to this acquisition. These incremental costs are classified as selling and administrative expenses in the Company's Consolidated Statements of Operations.
Since 1979, Burtco has created high-quality, custom-crafted carpet designed for the hospitality industry. Burtco manufactures both wool and solution-dyed computer yarn placement (CYP) products that are used in public spaces and hotel guest rooms. These products broaden the product offerings for commercial applications under the Company's Masland Contract brand.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The acquisition was accounted for as a business combination which generally requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The acquisition did not represent a significant business combination. The fair value of the net assets acquired totaled
$2,722
. The fair value of the net assets acquired exceeded the purchase price resulting in a pre-tax bargain purchase of
$173
.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill is
$3,389
as of December 31, 2016 and December 26, 2015. The Company performed its annual assessment of goodwill in the fourth quarters of 2016, 2015 and 2014 and
no
impairment was indicated. The following table represents the details of the Company's intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Customer relationships
|
$
|
208
|
|
|
$
|
(64
|
)
|
|
$
|
144
|
|
|
$
|
208
|
|
|
$
|
(48
|
)
|
|
$
|
160
|
|
Rug design coding
|
144
|
|
|
(57
|
)
|
|
87
|
|
|
144
|
|
|
(43
|
)
|
|
101
|
|
Trade names
|
3,300
|
|
|
(764
|
)
|
|
2,536
|
|
|
3,300
|
|
|
(489
|
)
|
|
2,811
|
|
Total
|
$
|
3,652
|
|
|
$
|
(885
|
)
|
|
$
|
2,767
|
|
|
$
|
3,652
|
|
|
$
|
(580
|
)
|
|
$
|
3,072
|
|
Amortization expense for intangible assets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Customer relationships
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
59
|
|
Rug design coding
|
14
|
|
|
14
|
|
|
15
|
|
Trade names
|
275
|
|
|
275
|
|
|
277
|
|
Amortization expense
|
$
|
305
|
|
|
$
|
305
|
|
|
$
|
351
|
|
The estimated future amortization expense during each of the next five fiscal years is as follows:
|
|
|
|
|
|
Year
|
|
Amount
|
2017
|
|
$
|
305
|
|
2018
|
|
305
|
|
2019
|
|
305
|
|
2020
|
|
305
|
|
2021
|
|
305
|
|
NOTE 8 - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Compensation and benefits (1)
|
$
|
7,492
|
|
|
$
|
9,173
|
|
Provision for customer rebates, claims and allowances
|
8,882
|
|
|
8,995
|
|
Advanced customer deposits
|
8,212
|
|
|
6,674
|
|
Outstanding checks in excess of cash
|
2,074
|
|
|
3,006
|
|
Other
|
6,166
|
|
|
6,490
|
|
Accrued expenses
|
$
|
32,826
|
|
|
$
|
34,338
|
|
|
|
(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
$1,873
.
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 9 - PRODUCT WARRANTY RESERVES
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its products. Product warranty reserves are included in accrued expenses in the Company's Consolidated Financial Statements. The following is a summary of the Company's product warranty activity.
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Product warranty reserve at beginning of period
|
$
|
2,159
|
|
|
$
|
2,214
|
|
Warranty liabilities accrued
|
6,406
|
|
|
6,201
|
|
Warranty liabilities settled
|
(6,687
|
)
|
|
(8,695
|
)
|
Changes for pre-existing warranty liabilities
|
429
|
|
|
2,439
|
|
Product warranty reserve at end of period
|
$
|
2,307
|
|
|
$
|
2,159
|
|
NOTE 10 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Revolving credit facility
|
$
|
70,583
|
|
|
$
|
80,569
|
|
Notes payable - buildings
|
13,150
|
|
|
13,881
|
|
Acquisition note payable - Development Authority of Gordon County
|
1,147
|
|
|
2,314
|
|
Acquisition note payable - Robertex
|
1,564
|
|
|
2,321
|
|
Notes payable - equipment and other
|
11,633
|
|
|
15,008
|
|
Capital lease obligations
|
11,145
|
|
|
12,751
|
|
Deferred financing costs, net
|
(844
|
)
|
|
(795
|
)
|
Total long-term debt
|
108,378
|
|
|
126,049
|
|
Less: current portion of long-term debt
|
10,122
|
|
|
10,142
|
|
Long-term debt
|
$
|
98,256
|
|
|
$
|
115,907
|
|
Revolving Credit Facility
On September 23, 2016, the Company amended its revolving credit facility to revise certain definitions and extend the maturity date from March 2019 to September 2021. The revolving credit facility provides for a maximum of
$150,000
of revolving credit, subject to borrowing base availability. The borrowing base is currently equal to specified percentages 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. The revolving credit facility is secured by a first priority lien on substantially all of the Company's assets.
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, 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, with the exception that the applicable margin cannot go below
1.75%
until after March 31, 2017. As of December 31, 2016, the applicable margin on our revolving credit facility was
1.75%
. 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%
per annum. The weighted-average interest rate on borrowings outstanding under the revolving credit facility was
4.40%
at December 31, 2016 and
3.12%
at December 26, 2015.
The revolving credit facility includes certain affirmative and negative covenants that impose restrictions on the Company's financial and business operations. The revolving credit facility requires the Company to maintain a fixed charge coverage ratio of
1.1
to 1.0 during any period that borrowing availability was less than
$16,500
. As of December 31, 2016, the unused borrowing availability under the revolving credit facility was
$45,614
; however, since the Company's fixed charge coverage ratio was less than 1.1 to 1.0, the unused availability accessible by the Company was
$29,114
(the amount above
$16,500
) at December 31, 2016.
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 will effectively fix 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 a 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 became 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 provides for abatement for certain components of the real and personal property taxes for up to ten years. At any time, the Company has the option to pay off the obligation, plus a nominal amount. The debt to the Authority bears interest at
6.00%
and is payable in equal monthly installments of principal and interest of
$106
over
57
months.
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 is payable in
five
annual installments of principal of
$800
plus interest. The note matures June 30, 2018.
Notes Payable - Equipment and Other
The Company's equipment financing notes have terms ranging from
5
to
7
years, bear interest ranging from
1.00%
to
6.86%
and are due in monthly or quarterly 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.
Capital Lease Obligations
The Company's capitalized lease obligations have terms ranging from
3
to
7
years, bear interest ranging from
2.90%
to
7.37%
and are due in monthly or quarterly installments through their maturity dates. The Company's capital lease obligations are secured by the specific equipment leased.
Interest Payments and Debt Maturities
Interest payments for continuing operations were
$5,088
in 2016,
$4,449
in 2015, and
$3,757
in 2014. Maturities of long-term debt for periods following December 31, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
Capital Leases
|
|
Total
|
(See Note 18)
|
|
2017
|
$
|
6,782
|
|
|
$
|
3,340
|
|
|
$
|
10,122
|
|
2018
|
4,584
|
|
|
3,115
|
|
|
7,699
|
|
2019
|
2,761
|
|
|
1,949
|
|
|
4,710
|
|
2020
|
1,866
|
|
|
1,677
|
|
|
3,543
|
|
2021
|
72,320
|
|
|
1,050
|
|
|
73,370
|
|
Thereafter
|
9,764
|
|
|
14
|
|
|
9,778
|
|
Total maturities of long-term debt
|
$
|
98,077
|
|
|
$
|
11,145
|
|
|
$
|
109,222
|
|
Deferred financing costs, net
|
(844
|
)
|
|
—
|
|
|
(844
|
)
|
Total long-term debt
|
$
|
97,233
|
|
|
$
|
11,145
|
|
|
$
|
108,378
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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 31, 2016 and December 26, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Fair Value Hierarchy Level
|
Liabilities:
|
|
|
|
|
|
Interest rate swaps (1)
|
$
|
3,695
|
|
|
$
|
4,689
|
|
|
Level 2
|
Contingent consideration (2)
|
200
|
|
|
584
|
|
|
Level 3
|
|
|
(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, the Company recorded a contingent consideration liability at fair value. This fair value measurement was based on calculations that utilize significant inputs not observable in the market including forecasted revenues, gross margins and discount rates and thus represent Level 3 measurements. This fair value measurement is directly impacted by the Company's estimates. Accordingly, if the estimates within the fair value measurement are higher or lower, the Company would record additional charges or benefits, respectively, as appropriate.
|
Changes in the fair value measurements using significant unobservable inputs (Level 3) during the years ending
December 31, 2016
and
December 26, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
584
|
|
|
$
|
1,855
|
|
Fair value adjustments
|
(230
|
)
|
|
(657
|
)
|
Settlements
|
(154
|
)
|
|
(614
|
)
|
Ending balance
|
$
|
200
|
|
|
$
|
584
|
|
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during
2016
or
2015
. If any, the Company recognizes the transfers in or transfers out at the end of the reporting period.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
140
|
|
|
$
|
140
|
|
|
$
|
281
|
|
|
$
|
281
|
|
Notes receivable, including current portion
|
282
|
|
|
282
|
|
|
282
|
|
|
282
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases, including current portion
|
108,378
|
|
|
105,270
|
|
|
126,049
|
|
|
123,318
|
|
Interest rate swaps
|
3,695
|
|
|
3,695
|
|
|
4,689
|
|
|
4,689
|
|
The fair values of the Company's long-term debt and capital 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.
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 31, 2016
:
|
|
|
|
|
|
|
|
|
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
|
$
|
25,000
|
|
|
September 1, 2015 through September 1, 2021
|
3.304%
|
1 Month LIBOR
|
Interest rate swap
|
$
|
7,462
|
|
(1)
|
November 7, 2014 through November 7, 2024
|
4.500%
|
1 Month LIBOR
|
Interest rate swap
|
$
|
5,661
|
|
(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 amount amortizes by $26 monthly to maturity.
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
|
|
2016
|
|
2015
|
Liability Derivatives:
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Interest rate swaps, current portion
|
Accrued Expenses
|
$
|
1,342
|
|
|
$
|
1,159
|
|
Interest rate swaps, long-term portion
|
Other Long-Term Liabilities
|
2,353
|
|
|
3,530
|
|
Total Liability Derivatives
|
|
$
|
3,695
|
|
|
$
|
4,689
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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
|
|
2016
|
|
2015
|
|
2014
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
(263
|
)
|
|
$
|
(2,410
|
)
|
|
$
|
(3,110
|
)
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) Reclassified from AOCIL on the effective portion into Income (1)(2)
|
|
2016
|
|
2015
|
|
2014
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
(1,291
|
)
|
|
$
|
(777
|
)
|
|
$
|
(372
|
)
|
|
|
(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 2016 is
$1,342
.
|
The amount of gain (loss) recognized in income on the ineffective portion of interest rate swaps, if any, is included in other (income) expense, net on the Company's Consolidated Statements of Operations. There was
no
ineffective portion for the periods presented.
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors a 401(k) defined contribution plan that covers a significant portion, or approximately
87%
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
$425
in
2016
,
$454
in
2015
and
$382
in
2014
.
Additionally, the Company sponsors a 401(k) defined contribution plan that covers those associates at one facility who are under a collective-bargaining agreement, or approximately
13%
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
$71
in
2016
,
$82
in
2015
and
$87
in
2014
.
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 owed to participants under this plan were
$14,992
at
December 31, 2016
and
$14,155
at
December 26, 2015
and are included in other long-term liabilities 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 was
$15,679
at
December 31, 2016
and
$14,981
at
December 26, 2015
and is included in other assets in the Company's Consolidated Balance Sheets.
Multi-Employer Pension Plan
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
13%
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
2016
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
2016
and
2015
is for the plan's year-end at
2015
and
2014
, 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
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
2016
|
2015
|
2016
|
|
2015
|
|
2014
|
|
The Pension Plan of the National Retirement Fund
|
13-6130178 - 001
|
Red
|
Red
|
Implemented
|
$
|
274
|
|
$
|
268
|
|
$
|
279
|
|
Yes
|
6/3/2017
|
(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
per hour (from $0.50 to $0.53) effective June 1, 2015 to May 31, 2016, and a surcharge equal to
$0.02
per hour (from $0.53 to $0.55) effective June 1, 2016 to May 31, 2017, respectively. Based upon current employment and benefit levels, the Company's contributions to the multi-employer pension plan are expected to be approximately
$287
for 2017.
(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 inherited a legacy postretirement benefit plan that provides life insurance to a limited number of associates as a result of a prior acquisition. The Company also sponsors a postretirement benefit plan that provides dental insurance for a limited number of associates who retired prior to January 1, 2003 and 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 plans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
290
|
|
|
$
|
315
|
|
Service cost
|
7
|
|
|
7
|
|
Interest cost
|
15
|
|
|
18
|
|
Participant contributions
|
—
|
|
|
2
|
|
Actuarial (gain) loss
|
3
|
|
|
(48
|
)
|
Benefits paid
|
(1
|
)
|
|
(5
|
)
|
Medicare Part D subsidy
|
—
|
|
|
1
|
|
Benefit obligation at end of year
|
314
|
|
|
290
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
—
|
|
|
—
|
|
Employer contributions
|
1
|
|
|
2
|
|
Participant contributions
|
—
|
|
|
2
|
|
Benefits paid
|
(1
|
)
|
|
(5
|
)
|
Medicare Part D subsidy
|
—
|
|
|
1
|
|
Fair value of plan assets at end of year
|
—
|
|
|
—
|
|
Unfunded amount
|
$
|
(314
|
)
|
|
$
|
(290
|
)
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The balance sheet classification of the Company's liability for postretirement benefit plans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Accrued expenses
|
$
|
13
|
|
|
$
|
12
|
|
Other long-term liabilities
|
301
|
|
|
278
|
|
Total liability
|
$
|
314
|
|
|
$
|
290
|
|
Benefits expected to be paid on behalf of associates for postretirement benefit plans during the period 2017 through 2026 are summarized as follows:
|
|
|
|
|
Years
|
Postretirement
Plans
|
2017
|
$
|
13
|
|
2018
|
12
|
|
2019
|
12
|
|
2020
|
12
|
|
2021
|
12
|
|
2022 - 2026
|
66
|
|
Assumptions used to determine benefit obligations of the Company's postretirement benefit plans are summarized as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Weighted-average assumptions as of year-end:
|
|
|
|
Discount rate (benefit obligations)
|
4.00
|
%
|
|
4.25
|
%
|
Assumptions used and related effects of health care cost are summarized as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Health care cost trend assumed for next year
|
—
|
%
|
|
8.00
|
%
|
Rate to which the cost trend is assumed to decline
|
—
|
%
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
|
|
2017
|
|
Components of net periodic benefit cost (credit) for all postretirement plans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Interest cost
|
15
|
|
|
18
|
|
|
22
|
|
Amortization of prior service credits
|
(4
|
)
|
|
(86
|
)
|
|
(88
|
)
|
Recognized net actuarial gains
|
(33
|
)
|
|
(40
|
)
|
|
(31
|
)
|
Settlement gain
|
—
|
|
|
—
|
|
|
(251
|
)
|
Net periodic benefit cost (credit)
|
$
|
(15
|
)
|
|
$
|
(101
|
)
|
|
$
|
(341
|
)
|
Pre-tax amounts included in AOCIL for the Company's postretirement benefit plans at 2016 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plans
|
|
Balance at 2016
|
|
2017 Expected Amortization
|
Prior service credits
|
$
|
(12
|
)
|
|
$
|
(4
|
)
|
Unrecognized actuarial gains
|
(400
|
)
|
|
(33
|
)
|
Totals
|
$
|
(412
|
)
|
|
$
|
(37
|
)
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 14 - INCOME TAXES
The provision (benefit) for income taxes on income (loss) from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current
|
|
|
|
|
|
Federal
|
$
|
(396
|
)
|
|
$
|
277
|
|
|
$
|
1,081
|
|
State
|
34
|
|
|
(261
|
)
|
|
(292
|
)
|
Total current
|
(362
|
)
|
|
16
|
|
|
789
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
(3,003
|
)
|
|
(641
|
)
|
|
232
|
|
State
|
(257
|
)
|
|
(89
|
)
|
|
32
|
|
Total deferred
|
(3,260
|
)
|
|
(730
|
)
|
|
264
|
|
Income tax provision (benefit)
|
$
|
(3,622
|
)
|
|
$
|
(714
|
)
|
|
$
|
1,053
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Statutory rate applied to income (loss) from continuing operations before taxes
|
$
|
(3,090
|
)
|
|
$
|
(1,047
|
)
|
|
$
|
604
|
|
Plus state income taxes, net of federal tax effect
|
(145
|
)
|
|
(227
|
)
|
|
(169
|
)
|
Total statutory provision (benefit)
|
(3,235
|
)
|
|
(1,274
|
)
|
|
435
|
|
Effect of differences:
|
|
|
|
|
|
Nondeductible meals and entertainment
|
148
|
|
|
147
|
|
|
143
|
|
Domestic production activities deduction
|
—
|
|
|
—
|
|
|
112
|
|
Federal tax credits
|
(395
|
)
|
|
(441
|
)
|
|
(483
|
)
|
Reserve for uncertain tax positions
|
31
|
|
|
35
|
|
|
109
|
|
Goodwill
|
(13
|
)
|
|
(124
|
)
|
|
(124
|
)
|
Change in valuation allowance
|
106
|
|
|
977
|
|
|
569
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
117
|
|
Other items
|
(264
|
)
|
|
(34
|
)
|
|
175
|
|
Income tax provision (benefit)
|
$
|
(3,622
|
)
|
|
$
|
(714
|
)
|
|
$
|
1,053
|
|
In 2016, the company increased valuation allowances by
$106
related to state income tax 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.
In 2015, the Company increased valuation allowances by
$977
related to state income tax 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.
In 2014, the Company increased valuation allowances by
$569
related to state income tax loss carryforwards and credit carryforwards. This was primarily the result of actual 2014 pretax earnings being significantly less than the 2014 forecasted earnings used in the 2013 analysis, a change in California apportionment rules that limit the utilization of net operating loss and credit carryforwards in future years and a projected tax loss in 2014 that resulted in the need to record a valuation allowance against that loss in separate company reporting states.
Income tax payments, net of (income tax refunds) received for continuing and discontinued operations were
$(190)
in 2016,
$48
in 2015 and
$345
in 2014.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Significant components of the Company's deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred tax assets:
|
|
|
|
Inventories
|
$
|
4,057
|
|
|
$
|
3,927
|
|
Retirement benefits
|
3,387
|
|
|
3,337
|
|
State net operating losses
|
3,672
|
|
|
3,563
|
|
Federal net operating losses
|
5,930
|
|
|
4,345
|
|
State tax credit carryforwards
|
1,728
|
|
|
1,731
|
|
Federal tax credit carryforwards
|
3,361
|
|
|
2,943
|
|
Allowances for bad debts, claims and discounts
|
3,442
|
|
|
3,688
|
|
Other
|
5,001
|
|
|
4,856
|
|
Total deferred tax assets
|
30,578
|
|
|
28,390
|
|
Valuation allowance
|
(5,400
|
)
|
|
(5,294
|
)
|
Net deferred tax assets
|
25,178
|
|
|
23,096
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
17,568
|
|
|
18,370
|
|
Total deferred tax liabilities
|
17,568
|
|
|
18,370
|
|
|
|
|
|
Net deferred tax asset
|
$
|
7,610
|
|
|
$
|
4,726
|
|
At December 31, 2016,
$5,930
of deferred tax assets related to approximately
$16,943
of federal net operating loss carryforwards and
$3,672
of deferred tax assets related to approximately
$83,088
of state net operating loss carryforwards. In addition,
$3,361
of federal tax credit carryforwards and
$1,728
of state tax credit carryforwards were available to the Company. The federal net operating loss carryforwards and the federal tax credit carryforwards will expire between
2029
and
2036
. The state net operating loss carryforwards and the state tax credit carryforwards will expire between
2017
and
2037
. A valuation allowance of
$5,400
is recorded to reflect the estimated amount of deferred tax assets that may not be realized during the carryforward periods. At December 31, 2016, the Company is in a net deferred tax asset position of
$7,610
which is included in other assets in the Company's Consolidated Balance Sheets. The Company performed an analysis related to the net deferred tax asset and believes that the net tax asset is recoverable in future periods.
Tax Uncertainties
The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were
$406
and
$375
at December 31, 2016 and December 26, 2015, respectively. Such benefits, if recognized, would affect the Company's effective tax rate. There were
no
significant interest or penalties accrued as of December 31, 2016 and December 26, 2015.
The following is a summary of the change in the Company's unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
$
|
375
|
|
|
$
|
400
|
|
|
$
|
291
|
|
Additions based on tax positions taken during a current period
|
31
|
|
|
35
|
|
|
109
|
|
Reductions related to settlement of tax matters
|
—
|
|
|
(60
|
)
|
|
—
|
|
Balance at end of year
|
$
|
406
|
|
|
$
|
375
|
|
|
$
|
400
|
|
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 2012 remain open to examination for U.S. federal income taxes. The majority of state jurisdictions remain open for tax years subsequent to 2012. A few state jurisdictions remain open to examination for tax years subsequent to 2011.
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
twenty
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 one 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.
On May 20, 2014, the Company completed an equity offering of
2,500,000
shares of Common Stock at a price of
$10.65
per share, raising approximately
$24,559
after deducting underwriter fees and costs directly related to the offering. The Company used the net proceeds from the offering for general corporate purposes and to reduce the balance under the Company's revolving credit facility, including borrowings associated with the acquisition of Atlas Carpet Mills.
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 following table sets forth the computation of basic and diluted earnings (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Basic earnings (loss) per share:
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
|
$
|
673
|
|
Less: Allocation of earnings to participating securities
|
—
|
|
|
—
|
|
|
(197
|
)
|
Income (loss) from continuing operations available to common shareholders - basic
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
|
$
|
476
|
|
Basic weighted-average shares outstanding (1)
|
15,638
|
|
|
15,536
|
|
|
14,382
|
|
Basic earnings (loss) per share - continuing operations
|
$
|
(0.33
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
Income (loss) from continuing operations available to common shareholders - basic
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
|
$
|
476
|
|
Add: Undistributed earnings reallocated to unvested shareholders
|
—
|
|
|
—
|
|
|
3
|
|
Income (loss) from continuing operations available to common shareholders - basic
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
|
$
|
479
|
|
Basic weighted-average shares outstanding (1)
|
15,638
|
|
|
15,536
|
|
|
14,382
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options (2)
|
—
|
|
|
—
|
|
|
97
|
|
Directors' stock performance units (2)
|
—
|
|
|
—
|
|
|
65
|
|
Diluted weighted-average shares outstanding (1)(2)
|
15,638
|
|
|
15,536
|
|
|
14,544
|
|
Diluted earnings (loss) per share - continuing operations
|
$
|
(0.33
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
0.03
|
|
|
|
(1)
|
Includes Common and Class B Common shares, in thousands.
|
|
|
(2)
|
Because their effects are anti-dilutive, 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. Aggregate shares excluded were
220
in
2016
,
333
in
2015
and
434
in
2014
.
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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 Financial Statements. 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 was
$1,324
in
2016
,
$1,406
in
2015
and
$1,195
in
2014
.
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.
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.
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
3
years. For participants over age
60
, Career Share Awards fully vest when the participant becomes (i) qualified to retire from the Company and (ii) has retained such shares
2
years following the grant date. For the participants under age
60
, Career Shares vest ratably over
5
years beginning on the participant's 61st birthday.
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
per share, and is expected to be recognized as stock compensation expense over a weighted-average period of
8.7
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 March 12, 2015, the Company issued
114,625
shares of restricted stock to officers and other key employees. The grant-date fair value of the awards was
$1,021
, or
$8.910
per share, and is expected to be recognized as stock compensation expense over a weighted-average period of
7.4
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 April 29, 2015, the Company granted
100,000
shares of restricted stock to the Company's Chief Executive Officer. The grant-date fair value of the award was
$982
, or
$9.815
per share and will be recognized as stock compensation expense over a
4
year vesting period from the date the award was granted. Vesting of the award is subject to both a service condition and performance 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 August 1, 2015, the Company granted
10,000
shares of restricted stock to an employee. The grant-date fair value of the award was
$100
, or
$9.980
per share and will be recognized as stock compensation over a
3
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.
During 2014, the Company issued
101,315
shares of restricted stock to officers and other key employees. The grant-date fair value of the awards was
$1,588
, or
$15.675
per share, and will be recognized as stock compensation expense over the vesting periods which range from
2
to
13
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 three years ended December 31, 2016 is summarized as follows:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value
|
Outstanding at December 28, 2013
|
525,799
|
|
|
$
|
6.64
|
|
Granted
|
101,315
|
|
|
15.68
|
|
Vested
|
(144,875
|
)
|
|
4.50
|
|
Forfeited
|
(125,000
|
)
|
|
12.78
|
|
Outstanding at December 27, 2014
|
357,239
|
|
|
7.92
|
|
Granted
|
224,625
|
|
|
9.36
|
|
Vested
|
(155,991
|
)
|
|
7.18
|
|
Forfeited
|
(9,078
|
)
|
|
10.97
|
|
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
|
|
As of
December 31, 2016
, unrecognized compensation cost related to unvested restricted stock was
$1,915
. That cost is expected to be recognized over a weighted-average period of
6.9
years. The total fair value of shares vested was approximately
$456
,
$1,410
and
$1,512
during
2016
,
2015
and
2014
, 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) under the Director's Stock Plan. 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 31, 2016
,
116,232
Stock Performance Units were outstanding under this plan. As of December 31, 2016, unrecognized compensation cost related to Stock Performance Units was
$41
. That cost is expected to be recognized over a weighted-average period of
0.3
years.
Stock Options
Options granted under the Company's 2006 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 all options granted. No options were granted during
2016
,
2015
or
2014
.
The fair value of each option was estimated on the date of grant using the Black-Scholes model. Expected volatility was based on historical volatility of the Company's stock, calculated 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 life of options.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Option activity for the three years ended
December 31, 2016
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, 2013
|
660,355
|
|
|
$
|
11.33
|
|
|
|
|
$
|
—
|
|
Exercised
|
(53,950
|
)
|
|
10.22
|
|
|
|
|
—
|
|
Forfeited
|
(167,170
|
)
|
|
14.36
|
|
|
|
|
—
|
|
Outstanding at December 27, 2014
|
439,235
|
|
|
10.31
|
|
|
|
|
—
|
|
Exercised
|
(89,435
|
)
|
|
6.78
|
|
|
|
|
—
|
|
Forfeited
|
(246,300
|
)
|
|
13.82
|
|
|
|
|
—
|
|
Outstanding at December 26, 2015
|
103,500
|
|
|
5.00
|
|
|
|
|
—
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Outstanding at December 31, 2016
|
103,500
|
|
|
$
|
5.00
|
|
|
2.8
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
December 27, 2014
|
439,235
|
|
|
$
|
10.31
|
|
|
|
|
—
|
|
December 26, 2015
|
103,500
|
|
|
5.00
|
|
|
|
|
—
|
|
December 31, 2016
|
103,500
|
|
|
5.00
|
|
|
2.8
|
|
—
|
|
At
December 31, 2016
, 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
2016
,
2015
and
2014
was
$0
,
$221
and
$140
, respectively. At
December 31, 2016
, 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)
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, 2013
|
(144
|
)
|
|
360
|
|
|
216
|
|
Unrealized loss on interest rate swaps, net of tax of $1,182
|
(1,928
|
)
|
|
—
|
|
|
(1,928
|
)
|
Reclassification of loss into earnings from interest rate swaps, net of tax of $141
|
231
|
|
|
—
|
|
|
231
|
|
Unrecognized net actuarial gain on postretirement benefit plans, net of tax of $26
|
—
|
|
|
41
|
|
|
41
|
|
Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $12
|
—
|
|
|
(19
|
)
|
|
(19
|
)
|
Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $34
|
—
|
|
|
(54
|
)
|
|
(54
|
)
|
Balance at December 27, 2014
|
(1,841
|
)
|
|
328
|
|
|
(1,513
|
)
|
Unrealized loss on interest rate swaps, net of tax of $916
|
(1,494
|
)
|
|
—
|
|
|
(1,494
|
)
|
Reclassification of loss into earnings from interest rate swaps, net of tax of $295
|
482
|
|
|
—
|
|
|
482
|
|
Unrecognized net actuarial gain on postretirement benefit plans, net of tax of $18
|
—
|
|
|
30
|
|
|
30
|
|
Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $15
|
—
|
|
|
(25
|
)
|
|
(25
|
)
|
Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $33
|
—
|
|
|
(53
|
)
|
|
(53
|
)
|
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
|
)
|
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Commitments
The Company had purchase commitments of
$3,517
at
December 31, 2016
, primarily related to machinery and equipment. The Company enters into fixed-price contracts with suppliers to purchase natural gas to support certain manufacturing processes. The Company had contract purchases of
$855
in
2016
,
$1,151
in
2015
and
$977
in
2014
. At
December 31, 2016
, the Company has commitments to purchase natural gas of
$640
for 2017 and
$428
for 2018.
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
|
2017
|
$
|
3,836
|
|
|
$
|
3,114
|
|
2018
|
3,439
|
|
|
2,779
|
|
2019
|
2,141
|
|
|
1,895
|
|
2020
|
1,776
|
|
|
1,436
|
|
2021
|
1,074
|
|
|
1,042
|
|
Thereafter
|
14
|
|
|
4,267
|
|
Total commitments
|
12,280
|
|
|
14,533
|
|
Less amounts representing interest
|
(1,135
|
)
|
|
—
|
|
Total
|
$
|
11,145
|
|
|
$
|
14,533
|
|
Rental expense was approximately
$3,575
,
$3,593
and
$4,066
during
2016
,
2015
and
2014
, respectively.
Property, plant and equipment includes machinery and equipment under capital leases which have asset cost and accumulated depreciation of
$17,987
and
$5,881
, respectively, at
December 31, 2016
, and
$16,654
and
$3,985
, respectively, at
December 26, 2015
.
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 Notes 20 & 21)
Legal Proceedings
The Company has been sued, together with the 3M Company and approximately 30 other carpet manufacturers, by the Gadsden (Alabama) Water Works in the circuit court of Etowah County Alabama [The Water Works and Sewer Board of the City of Gadsden v. 3M Company, et al, civil action No. 31-CV-2016-900676.00], in a case seeking 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 case was removed to the U.S. District Court for the Northern District of Alabama (Middle Division) Case No. 4:16-CV-01755-SGC. As alleged in the lawsuit, the chemicals are perflourinated compounds (“PFC”) perflourinated acid (“PFOA”) and perfluorooctane sulfonate (“PFOS”) manufactured by 3M and used in certain finishing and treatment processes by the defendants and, as a consequence of such use, either discharged into or leached into the water systems around Dalton, Georgia. The Complaint seeks damages “in excess of
$10
”, but otherwise unspecified in amount in addition to injunctive relief. The Company intends to defend the matter vigorously and is unable to estimate its potential exposure to loss, if any, at this time.
The Company is one of multiple parties to two lawsuits, both filed in Madison County Illinois, 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 and 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. Each lawsuit entails a claim for damages to be determined in excess of
$50
filed on behalf of the estate of an individual which alleges that the deceased contracted mesothelioma as a result of exposure to asbestos while employed by the Company. Discovery in both matters is ongoing, and tentative trial dates have been set. The Company has denied liability, is defending the matters vigorously and is unable to estimate its potential exposure to loss, if any, at this time.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 19 - OTHER (INCOME) EXPENSE
Other operating (income) expense, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Other operating expense, net:
|
|
|
|
|
|
(Gain) loss on property, plant and equipment disposals
|
$
|
725
|
|
|
$
|
(114
|
)
|
|
$
|
(30
|
)
|
Loss on currency exchanges
|
167
|
|
|
602
|
|
|
587
|
|
Amortization of intangibles
|
305
|
|
|
305
|
|
|
351
|
|
Retirement expenses
|
154
|
|
|
212
|
|
|
135
|
|
BP settlement gain (1)
|
(841
|
)
|
|
—
|
|
|
—
|
|
Miscellaneous (income) expense
|
(109
|
)
|
|
(133
|
)
|
|
(139
|
)
|
Other operating expense, net
|
$
|
401
|
|
|
$
|
872
|
|
|
$
|
904
|
|
|
|
(1)
|
On November 21, 2016, the Company entered into a full and final release agreement with BP Exploration and Production, Inc. and various related entities pursuant to which the Company released any and all claims related to the Deepwater Horizon oil spill which occurred on April 20, 2010. In exchange for this release, the Company will receive a net amount of
$841
from the settlement. Payment of the settlement amount is scheduled to be paid by April 15, 2017. As of December 31, 2016, this amount is included in receivables and other operating income (expense), net on the Company’s Consolidated Financial Statements.
|
Other (income) expense, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Other (income) expense, net:
|
|
|
|
|
|
Earnings from equity investments
|
—
|
|
|
14
|
|
|
(209
|
)
|
Loss on sale of non-operating assets
|
—
|
|
|
—
|
|
|
41
|
|
Miscellaneous (income) expense
|
22
|
|
|
33
|
|
|
14
|
|
Other (income) expense, net
|
$
|
22
|
|
|
$
|
47
|
|
|
$
|
(154
|
)
|
NOTE 20 - FACILITY CONSOLIDATION EXPENSES, NET
2014 Warehousing, Distribution & Manufacturing Consolidation Plan
The Company developed a plan to align its warehousing, distribution and manufacturing to support its growth and manufacturing strategy resulting in better cost structure and improved distribution capabilities and customer service. The key element and first major step of this plan was the acquisition of a facility to serve as a finished goods warehouse and a cut-order and distribution center in Adairsville, Georgia. Costs related to the consolidation included moving and relocation expenses, information technology expenses and expenses relating to conversion and realignment of equipment. In addition, this plan included the elimination of both carpet dyeing and yarn dyeing in the Company's Atmore, Alabama facility designed to more fully accommodate the distribution and manufacturing realignment. As a result, the dyeing operations in Atmore were moved to the Company's continuous dyeing facility, skein dyeing operation and other outside dyeing processors.
To complete the Warehousing, Distribution & Manufacturing Consolidation Plan, the Company moved its Saraland rug operation from an expiring leased building to an owned facility in March 2016. The Company completed this consolidation plan during 2016. As a result of eliminating its dyeing operations in Atmore, Alabama, the Company disposed of its waste water treatment plant in 2014. Subsequently, after extensive testing, it was determined that the Company still had some contaminants above background levels and that it would need to install a soil cap. During the first quarter of 2016, the Company accrued
$690
to finalize the cleanup of the site of the Company's former waste water treatment plant. During the fourth quarter of 2016, the Company lowered the accrual by
$359
as the Company was able to refine the plan. Accordingly, if the actual costs are higher or lower, the Company would record an additional charge or benefit, respectively, as appropriate.
2014 Atlas Integration Plan
As a part of the March 19, 2014 acquisition of Atlas, the Company developed a plan to close the operations of the Atlas dyeing facility in Los Angeles and move the carpet dyeing of their products to the Company's dyeing operation located in Santa Ana, California. Costs related to the consolidation included equipment relocation, computer systems modifications and severance costs. These costs were completed in fiscal 2015.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
2015 Corporate Office Consolidation Plan
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.
Costs related to the facility consolidation plans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
Accrued Balance at December 26, 2015
|
|
2016 Expenses (1)
|
|
2016 Cash Payments
|
|
Accrued Balance at December 31, 2016
|
|
Total Costs Incurred to Date
|
|
Total Expected Costs
|
Warehousing, Distribution and Manufacturing Consolidation Plan
|
$
|
—
|
|
|
$
|
1,381
|
|
|
$
|
1,115
|
|
|
$
|
266
|
|
|
$
|
7,444
|
|
|
$
|
7,444
|
|
Atlas Integration Plan
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,669
|
|
|
1,669
|
|
Corporate Office Consolidation Plan
|
341
|
|
|
75
|
|
|
168
|
|
|
248
|
|
|
803
|
|
|
803
|
|
Total All Plans
|
$
|
341
|
|
|
$
|
1,456
|
|
|
$
|
1,283
|
|
|
$
|
514
|
|
|
$
|
9,916
|
|
|
$
|
9,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairments (2)
|
|
|
|
|
|
|
|
|
$
|
1,133
|
|
|
$
|
1,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance at December 27, 2014
|
|
2015 Expenses (1)
|
|
2015 Cash Payments
|
|
Accrued Balance at December 26, 2015
|
|
|
|
|
Warehousing, Distribution and Manufacturing Consolidation Plan
|
$
|
—
|
|
|
$
|
2,016
|
|
|
$
|
2,016
|
|
|
$
|
—
|
|
|
|
|
|
Atlas Integration Plan
|
—
|
|
|
202
|
|
|
202
|
|
|
—
|
|
|
|
|
|
Corporate Office Consolidation Plan
|
—
|
|
|
728
|
|
|
387
|
|
|
341
|
|
|
|
|
|
Total All Plans
|
$
|
—
|
|
|
$
|
2,946
|
|
|
$
|
2,605
|
|
|
$
|
341
|
|
|
|
|
|
(1) Costs incurred under these plans are classified as "facility consolidation expenses, net" in the Company's Consolidated Statements of Operations.
(2) Asset impairments under these plans, when applicable, are classified as "impairment of assets" in the Company's Consolidated Statements of
Operations.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 21 - DISCONTINUED 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
|
|
|
Net sales - Carousel operations
|
$
|
—
|
|
|
$
|
417
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
Loss from discontinued operations:
|
|
|
|
|
|
Loss from Carousel operations
|
$
|
—
|
|
|
$
|
(116
|
)
|
|
$
|
(863
|
)
|
Workers' compensation costs from former textile operations
|
(2
|
)
|
|
(53
|
)
|
|
(55
|
)
|
Environmental remediation costs from former textile operations
|
(216
|
)
|
|
(68
|
)
|
|
(62
|
)
|
Loss from discontinued operations, before taxes
|
$
|
(218
|
)
|
|
$
|
(237
|
)
|
|
$
|
(980
|
)
|
Income tax benefit
|
(87
|
)
|
|
(89
|
)
|
|
(372
|
)
|
Loss from discontinued operations, net of tax
|
$
|
(131
|
)
|
|
$
|
(148
|
)
|
|
$
|
(608
|
)
|
|
|
|
|
|
|
Income (loss) on disposal of Carousel discontinued operations before income taxes
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
(2,363
|
)
|
Income tax provision (benefit)
|
40
|
|
|
—
|
|
|
(896
|
)
|
Income (loss) on disposal of discontinued operations, net of tax
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
(1,467
|
)
|
In the fourth quarter of 2014, the Company discontinued the Carousel specialty tufting and weaving operation that was part of the 2013 Robertex, Inc. acquisition, resulting in the impairment of customer relationships of
$786
and trade names of
$1,271
. These amounts have been included in the loss on disposal of discontinued operations in the Company's Consolidated Statements of Operations.
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
$1,686
as of
December 31, 2016
and
$1,591
as of
December 26, 2015
. 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 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.
NOTE 22 - RELATED PARTY TRANSACTIONS
The Company is a party to a 5-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 the Company. Rent paid to the lessor during 2016, 2015, and 2014 was
$793
,
$458
, and
$343
. The lease was based on current market values for similar facilities.
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
7.4%
of the Company's Common Stock, which represents approximately
3.4%
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 2016, 2015 and 2014 were approximately
$7,300
,
$8,800
and
$11,300
, respectively; or approximately
2.4%
,
2.8%
, and
3.6%
of the Company's cost of goods sold in 2016, 2015, and 2014, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The Company is a party to a 10-year lease with the Rothman Family Partnership to lease a manufacturing facility as part of the Robertex acquisition in 2013. The lessor is controlled by an associate of the Company. Rent paid to the lessor during 2016, 2015, and 2014 was
$267
,
$262
, and
$257
, respectively. The lease was based on current market values for similar facilities. In addition, the Company has a note payable to Robert P. Rothman related to the acquisition of Robertex Inc. (See Note 10).
NOTE 23 - SUBSEQUENT EVENT
On March 10, 2017, the Company granted
40,000
shares of restricted stock to certain key employees of the Company. The grant-date fair value of the awards was
$140
, or
$3.500
per share, and will be recognized as stock compensation expense over a
3
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.