NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company's businesses consist principally of marketing, manufacturing and selling finished carpet, rugs and luxury vinyl flooring in the domestic floorcovering market. The Company sells floorcovering products in both residential and commercial applications. Additionally, the Company provides manufacturing support to its carpet businesses through its separate processing operations.
Based on applicable accounting standards, the Company has determined that it has one reportable segment, Floorcovering comprising of two operating segments, Residential and Commercial. Pursuant to accounting standards, the Company has aggregated the two operating segments into one reporting segment because they have similar economic characteristics, and the operating segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the production processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products or provide their services; and (e) the nature of the regulatory environment.
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 ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.
Fiscal Year
The Company ends its fiscal year on the last Saturday of December. All references herein to "2017," "2016," and "2015," mean the fiscal years ended December 30, 2017, December 31, 2016, and December 26, 2015, respectively. The year 2016 contained 53 weeks, all other years presented contained 52 weeks.
Reclassifications
The Company reclassified certain amounts in 2016 and 2015 to conform to the 2017 presentation.
Discontinued Operations
The financial statements separately report discontinued operations and the results of continuing operations (See Note 20).
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
14%
in 2017,
10%
in 2016 and
9%
in 2015. No other customer accounted for more than 10% of net sales in 2017, 2016, or 2015, nor did the Company make a significant amount of sales to foreign countries during 2017, 2016, or 2015.
Credit Risk
The Company grants credit to its customers with defined payment terms, performs ongoing evaluations of the credit worthiness of its customers and generally does not require collateral. Accounts receivable are carried at their outstanding principal amounts, less an anticipated amount for discounts and an allowance for doubtful accounts, which management believes is sufficient to cover potential credit losses based on historical experience and periodic evaluation of the financial condition of the Company's customers. As a percentage of customer's trade accounts receivable,
one
customer accounted for approximately
31%
in 2017 and
28%
in
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
2016. Notes receivable are carried at their outstanding principal amounts, less an allowance for doubtful accounts to cover potential credit losses based on the financial condition of borrowers and collateral held by the Company.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method, which generally matches current costs of inventory sold with current revenues, for substantially all inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at the lower of cost or impaired value. Provisions for depreciation and amortization of property, plant and equipment have been computed for financial reporting purposes using the straight-line method over the estimated useful lives of the related assets, ranging from
10
to
40
years for buildings and improvements, and
3
to
10
years for machinery and equipment. Costs to repair and maintain the Company's equipment and facilities are expensed as incurred. Such costs typically include expenditures to maintain equipment and facilities in good repair and proper working condition.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when circumstances indicate that the carrying value of an asset may not be fully recoverable. When the carrying value of the asset exceeds the value of its estimated undiscounted future cash flows, an impairment charge is recognized equal to the difference between the asset's carrying value and its fair value. Fair value is estimated using discounted cash flows, prices for similar assets or other valuation techniques.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of identified net assets acquired in business combinations. In accordance with the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic ("ASC") 350,
“Intangibles-Goodwill and Other,”
the Company tests goodwill for impairment annually in the fourth quarter of each year or more frequently if events or circumstances indicate that the carrying value of goodwill associated with a reporting unit may not be fully recoverable. The goodwill impairment tests are based on determining the fair value of the specified reporting units based on management judgments and assumptions using the discounted cash flows and comparable company market valuation approaches. The Company has identified its reporting unit as its floorcovering business for the purposes of allocating goodwill and assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions about sales growth rates, operating margins, the weighted average cost of capital (“WACC”) and comparable company market multiples. When developing these key judgments and assumptions, the Company considers economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results. Should a significant or prolonged deterioration in economic conditions occur or a decline in comparable company market multiples, then key judgments and assumptions could be impacted.
In the goodwill assessment process, the Company compares the carrying value of a reporting unit, including goodwill, to the fair value of the reporting unit to identify potential goodwill impairments. The Company estimates the fair value of the reporting unit by using both a discounted cash flow and comparable company market valuation approach. If an impairment is indicated in the assessment, the impairment would be measured as the amount by which the reporting unit's carrying value exceeds its fair value, not to exceed the carrying value of goodwill. (See Note 6).
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 6).
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 evaluates the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources. In the event that the Company is not able to realize all or a portion of the deferred tax assets in the future, a valuation allowance is provided. The Company recognizes such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense.
Derivative Financial Instruments
The Company does not hold speculative financial instruments, nor does it hold or issue financial instruments for trading purposes. The Company uses derivative instruments, currently interest rate swaps, to minimize the effects of interest rate volatility.
The Company recognizes all derivatives at fair value. Derivatives that are designated as cash flow hedges are linked to specific liabilities on the Company's balance sheet. The Company assesses, both at inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. When it is determined that a derivative is not highly effective or the derivative expires, is sold, terminated, or exercised, the Company discontinues hedge accounting for that specific hedge instrument. Changes in the fair value of effective cash flow hedges are deferred in accumulated other comprehensive income (loss) ("AOCIL") and reclassified to earnings in the same periods during which the hedge transaction affects earnings. Changes in the fair value of derivatives that are not effective cash flow hedges are recognized in results of operations.
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 including product warranties and customer claims 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 2017, 2016, or 2015.
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.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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 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 stock-based payments based on the fair value of the equity or liability instrument issued. Restricted stock grants with pro-rata vesting are expensed using the straight-line method. (Terms of the Company's awards are specified in Note 15). The Company accounts for forfeitures when they actually occur.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in Fiscal 2017
In July 2015, the FASB issued Accounting Standards Update ("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 the LIFO or the retail inventory method. This ASU was effective for the Company's fiscal year beginning January 1, 2017. The Company measures substantially all inventories using the LIFO method; therefore, the adoption of this ASU did not have an impact on its financial statements.
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. This ASU was effective for the Company's fiscal year beginning January 1, 2017. The adoption of this ASU did not have a significant impact on the financial statements. The Company applied the ASU prospectively for the Consolidated Statements of Cash Flows. The Company made an accounting policy election to account for forfeitures when they actually occur.
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 has elected to early adopt this ASU beginning with its fiscal year beginning January 1, 2017. The adoption of this ASU did not have any impact on the financial statements.
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 has elected to early adopt this ASU beginning with its fiscal year beginning January 1, 2017. The adoption of this ASU did not have any impact on the financial statements.
On December 22, 2017, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP related to the enactment of the Tax Cut and Jobs Act of 2017. This guidance was adopted in the fourth quarter of 2017. Additional information regarding this guidance is contained in Note 13.
In February 2018, the FASB issued ASU No. 2018-02,
“Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
” This ASU was released in response to a financial reporting issue that arose as a consequence of the Tax Cuts and Jobs Act enacted by the federal government on December 22, 2017. Previous U.S. GAAP required deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect being included in income from continuing operations in the reporting period that included the enactment date, even in situations where the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather than in income from continuing operations. By not also being able to adjust items
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
within accumulated other comprehensive income for the reduction of the historical corporate income tax rate, companies would have items in accumulated other comprehensive income that do not reflect the appropriate tax rate, referred to as a stranded tax effect. The amendments in this ASU allow the reclassification from accumulated other comprehensive income to retained earnings for any stranded tax effects that are a result of the Tax Cuts and Jobs Act. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years with early adoption permitted for financial statements that have not yet been issued or have not yet been made available for issuance. The Company has elected to early adopt this ASU beginning with its fiscal year ending December 30, 2017. This will allow the Company to align the timing of the reclassification of the stranded tax effects with the effect of the Tax Cuts and Jobs Act. The total amount reclassed from accumulated other comprehensive income to retained earnings was
$211
. The Company's policy is to release tax effects remaining in accumulated other comprehensive income as individual units of account are sold, terminated or extinguished.
Accounting Standards Yet to Be Adopted
In May 2014, the 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. The ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The standard permits the use of either the retrospective or cumulative effect transition method. The ASU also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required for customer contracts, significant judgments and changes in judgments. The Company has completed the process of evaluating the effect of the adoption and determined there will be no changes required to its reported revenues as a result of the adoption. The majority of the Company's revenue arrangements generally consist of a single performance obligation to transfer promised goods or services. Based on the Company's evaluation process and review of its contracts with customers, the timing (point in time) and amount of revenue recognized previously is consistent with the how revenue will be recognized. The Company will adopt this new standard effective January 2018, using the retrospective method approach and will expand our financial statement disclosures in order to comply with the ASU. The Company has determined that the adoption of this ASU is not anticipated to have a significant impact on its financial statements.
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 its 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 the right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. 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 its 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, which consist primarily of building and equipment leases, to determine the impact.
In June 2016, the FASB issued ASU No. 2016-13, "
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,"
which amends the impairment model to utilize an expected loss methodology in place of the current incurred loss methodology, which will result in the more timely recognition of losses. For public entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company does not believe the adoption of this ASU will have a significant impact on its financial statements due to the nature of the Company's customers and the limited amount of write-offs in past years.
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
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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 its 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. Since the Company has no restricted cash, it does not believe the adoption of this ASU will have a significant impact on its financial statements.
In February 2017, the FASB issued ASU No. 2017-05,
"Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets."
This ASU clarifies the scope and application of ASC 610-20 on the sale or transfer of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales. The amendments are effective at the same time as the new revenue standard. For public entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim reporting periods within those fiscal years. The Company is currently assessing if there will be any impact on its financial statements.
In March 2017, the FASB issued ASU No. 2017-07,
"Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
," which will change the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost will be included within the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net periodic benefit pension cost will be presented separately outside of operating income. Additionally, only service costs may be capitalized in assets. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not believe the adoption of this ASU will have a significant impact on its financial statements.
In May 2017, the FASB issued ASU No. 2017-09, "
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.
" This ASU provides amendments to the current guidance on determining which changes to the terms and conditions of share-based payment awards require the application of modification accounting. The effects of a modification should be accounted for unless there are no changes between the fair value, vesting conditions, and classification of the modified award and the original award immediately before the original award is modified. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company does not believe the adoption of this ASU will have a significant impact on its financial statements.
In August 2017, the FASB issued ASU No. 2017-12, "
Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.
" The amendments in this ASU update current guidance by more closely aligning the results of cash flow and fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not believe the adoption of this ASU will have a significant impact on its financial statements.
NOTE 3 - RECEIVABLES, NET
Receivables are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Customers, trade
|
$
|
43,683
|
|
|
$
|
39,749
|
|
Other receivables
|
2,930
|
|
|
3,963
|
|
Gross receivables
|
46,613
|
|
|
43,712
|
|
Less: allowance for doubtful accounts
|
(133
|
)
|
|
(107
|
)
|
Receivables, net
|
$
|
46,480
|
|
|
$
|
43,605
|
|
Bad debt expense was
$70
in 2017,
$38
in 2016, and
$146
in 2015.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 4 - INVENTORIES, NET
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Raw materials
|
$
|
39,264
|
|
|
$
|
34,261
|
|
Work-in-process
|
24,454
|
|
|
16,739
|
|
Finished goods
|
65,172
|
|
|
57,053
|
|
Supplies and other
|
143
|
|
|
120
|
|
LIFO reserve
|
(15,376
|
)
|
|
(10,936
|
)
|
Inventories, net
|
$
|
113,657
|
|
|
$
|
97,237
|
|
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land and improvements
|
$
|
7,886
|
|
|
$
|
7,781
|
|
Buildings and improvements
|
62,852
|
|
|
62,055
|
|
Machinery and equipment
|
188,971
|
|
|
177,745
|
|
Assets under construction
|
2,443
|
|
|
2,386
|
|
|
262,152
|
|
|
249,967
|
|
Accumulated depreciation
|
(168,367
|
)
|
|
(157,160
|
)
|
Property, plant and equipment, net
|
$
|
93,785
|
|
|
$
|
92,807
|
|
Depreciation of property, plant and equipment, including amounts for capital leases, totaled
$12,436
in 2017,
$12,944
in 2016 and
$13,525
in 2015.
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill is
$3,389
as of December 30, 2017 and December 31, 2016. The Company performed its annual assessment of goodwill in the fourth quarters of 2017, 2016, and 2015 and
no
impairment was indicated. The following table represents the details of the Company's intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Customer relationships
|
$
|
208
|
|
|
$
|
(80
|
)
|
|
$
|
128
|
|
|
$
|
208
|
|
|
$
|
(64
|
)
|
|
$
|
144
|
|
Rug design coding
|
144
|
|
|
(72
|
)
|
|
72
|
|
|
144
|
|
|
(57
|
)
|
|
87
|
|
Trade names
|
3,300
|
|
|
(1,039
|
)
|
|
2,261
|
|
|
3,300
|
|
|
(764
|
)
|
|
2,536
|
|
Total
|
$
|
3,652
|
|
|
$
|
(1,191
|
)
|
|
$
|
2,461
|
|
|
$
|
3,652
|
|
|
$
|
(885
|
)
|
|
$
|
2,767
|
|
Amortization expense for intangible assets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Customer relationships
|
$
|
16
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Rug design coding
|
15
|
|
|
14
|
|
|
14
|
|
Trade names
|
275
|
|
|
275
|
|
|
275
|
|
Amortization expense
|
$
|
306
|
|
|
$
|
305
|
|
|
$
|
305
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The estimated future amortization expense during each of the next five fiscal years is as follows:
|
|
|
|
|
|
Year
|
|
Amount
|
2018
|
|
$
|
305
|
|
2019
|
|
305
|
|
2020
|
|
305
|
|
2021
|
|
305
|
|
2022
|
|
305
|
|
NOTE 7 - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Compensation and benefits (1)
|
$
|
9,276
|
|
|
$
|
7,492
|
|
Provision for customer rebates, claims and allowances
|
8,751
|
|
|
8,882
|
|
Advanced customer deposits
|
5,717
|
|
|
8,212
|
|
Outstanding checks in excess of cash
|
379
|
|
|
2,074
|
|
Other
|
6,168
|
|
|
6,166
|
|
Accrued expenses
|
$
|
30,291
|
|
|
$
|
32,826
|
|
|
|
(1)
|
Includes a liability related to the Company's self-insured Workers' Compensation program. This program is collateralized by letters of credit in the aggregate amount of
$2,171
.
|
NOTE 8 - 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.
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Product warranty reserve at beginning of period
|
$
|
2,307
|
|
|
$
|
2,159
|
|
Warranty liabilities accrued
|
6,049
|
|
|
6,406
|
|
Warranty liabilities settled
|
(6,160
|
)
|
|
(6,687
|
)
|
Changes for pre-existing warranty liabilities
|
(321
|
)
|
|
429
|
|
Product warranty reserve at end of period
|
$
|
1,875
|
|
|
$
|
2,307
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 9 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Revolving credit facility
|
$
|
97,708
|
|
|
$
|
70,583
|
|
Notes payable - buildings
|
12,419
|
|
|
13,150
|
|
Acquisition note payable - Development Authority of Gordon County
|
—
|
|
|
1,147
|
|
Acquisition note payable - Robertex
|
791
|
|
|
1,564
|
|
Notes payable - equipment and other
|
8,474
|
|
|
11,633
|
|
Capital lease obligations
|
14,530
|
|
|
11,145
|
|
Deferred financing costs, net
|
(665
|
)
|
|
(844
|
)
|
Total long-term debt
|
133,257
|
|
|
108,378
|
|
Less: current portion of long-term debt
|
9,811
|
|
|
10,122
|
|
Long-term debt
|
$
|
123,446
|
|
|
$
|
98,256
|
|
Revolving Credit Facility
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 matures on September 23, 2021. 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. As of December 30, 2017, 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
4.12%
at December 30, 2017 and
4.40%
at December 31, 2016.
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 restricts the Company's borrowing availability if its fixed charge coverage ratio is less than
1.1
to 1.0. During any period that the fixed charge coverage ratio is less than 1.1 to 1.0, the Company's borrowing availability is reduced by
$16,500
. As of December 30, 2017, the unused borrowing availability under the revolving credit facility was
$32,928
; 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
$16,428
(the amount above
$16,500
) at December 30, 2017.
Notes Payable - Buildings
On November 7, 2014, the Company entered into a ten-year
$8,330
note payable to purchase a previously leased distribution center in Adairsville, Georgia. The note payable is scheduled to mature on November 7, 2024 and is secured by the distribution center. The note payable bears interest at a variable rate equal to one-month LIBOR plus
2.0%
and is payable in equal monthly installments of principal of
$35
, plus interest calculated on the declining balance of the note, with a final payment of
$4,165
due on maturity. In addition, the Company entered into an interest rate swap with an amortizing notional amount effective November 7, 2014 which effectively fixes the interest rate at
4.50%
.
On January 23, 2015, the Company entered into a ten-year
$6,290
note payable to finance an owned facility in Saraland, Alabama. The note payable is scheduled to mature on January 7, 2025 and is secured by the facility. The note payable bears interest at a variable rate equal to one-month LIBOR plus
2.0%
and is payable in equal monthly installments of principal of
$26
, plus interest calculated on the declining balance of the note, with a final payment of
$3,145
due on maturity. In addition, the Company entered into a forward interest rate swap with an amortizing notional amount effective January 7, 2017 which effectively fixes the interest rate at
4.30%
.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Acquisition Note Payable - Development Authority of Gordon County
On November 2, 2012, the Company signed a
6.00%
seller-financed note of
$5,500
with Lineage PCR, Inc. (
“
Lineage
”
) related to the acquisition of the continuous carpet dyeing facility in Calhoun, Georgia. Effective December 28, 2012, through a series of agreements between the Company, the Development Authority of Gordon County, Georgia (the
“
Authority
”
) and Lineage, obligations with identical payment terms as the original note to Lineage were now payment obligations to the Authority. These transactions were consummated in order to provide a tax abatement to the Company related to the real estate and equipment at this facility. The tax abatement plan provided for abatement for certain components of the real and personal property taxes for up to ten years. At any time, the Company had the option to pay off the obligation, plus a nominal amount. The debt to the Authority bore interest at
6.00%
and was payable in equal monthly installments of principal and interest of
$106
over
57
months. The note matured on November 2, 2017 and the final installment was paid at that time.
Acquisition Note Payable - Robertex
On July 1, 2013, the Company signed a
4.50%
seller-financed note of
$4,000
, which was recorded at a fair value of
$3,749
, with Robert P. Rothman related to the acquisition of Robertex Associates, LLC ("Robertex") in Calhoun, Georgia. The note 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
1
to
7
years, bear interest ranging from
1.00%
to
7.68%
and are due in monthly installments through their maturity dates. The Company's equipment financing notes are secured by the specific equipment financed and do not contain any financial covenants.
Capital Lease Obligations
The Company's capitalized lease obligations have terms ranging from
3
to
7
years, bear interest ranging from
3.55%
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
$5,373
in 2017,
$5,088
in 2016, and
$4,449
in 2015. Maturities of long-term debt for periods following December 30, 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
Capital Leases (See Note 17)
|
|
Total
|
|
2018
|
$
|
5,527
|
|
|
$
|
4,284
|
|
|
$
|
9,811
|
|
2019
|
2,782
|
|
|
3,382
|
|
|
6,164
|
|
2020
|
1,873
|
|
|
3,180
|
|
|
5,053
|
|
2021
|
99,446
|
|
|
2,534
|
|
|
101,980
|
|
2022
|
1,001
|
|
|
913
|
|
|
1,914
|
|
Thereafter
|
8,763
|
|
|
237
|
|
|
9,000
|
|
Total maturities of long-term debt
|
$
|
119,392
|
|
|
$
|
14,530
|
|
|
$
|
133,922
|
|
Deferred financing costs, net
|
(665
|
)
|
|
—
|
|
|
(665
|
)
|
Total long-term debt
|
$
|
118,727
|
|
|
$
|
14,530
|
|
|
$
|
133,257
|
|
NOTE 10 - 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
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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 30, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Fair Value Hierarchy Level
|
Liabilities:
|
|
|
|
|
|
Interest rate swaps (1)
|
$
|
2,229
|
|
|
$
|
3,695
|
|
|
Level 2
|
Contingent consideration (2)
|
25
|
|
|
200
|
|
|
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 30, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
200
|
|
|
$
|
584
|
|
Fair value adjustments
|
(163
|
)
|
|
(230
|
)
|
Settlements
|
(12
|
)
|
|
(154
|
)
|
Ending balance
|
$
|
25
|
|
|
$
|
200
|
|
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during
2017
or
2016
. If any, the Company recognizes the transfers in or transfers out at the end of the reporting period.
The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
140
|
|
|
$
|
140
|
|
Notes receivable, including current portion
|
282
|
|
|
282
|
|
|
282
|
|
|
282
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt and capital leases, including current portion
|
133,257
|
|
|
131,203
|
|
|
108,378
|
|
|
105,270
|
|
Interest rate swaps
|
2,229
|
|
|
2,229
|
|
|
3,695
|
|
|
3,695
|
|
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 11 - 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 DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The following is a summary of the Company's interest rate swaps as of
December 30, 2017
:
|
|
|
|
|
|
|
|
|
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
|
$
|
7,046
|
|
(1)
|
November 7, 2014 through November 7, 2024
|
4.500%
|
1 Month LIBOR
|
Interest rate swap
|
$
|
5,373
|
|
(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
|
|
2017
|
|
2016
|
Liability Derivatives:
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
Interest rate swaps, current portion
|
Accrued Expenses
|
$
|
842
|
|
|
$
|
1,342
|
|
Interest rate swaps, long-term portion
|
Other Long-Term Liabilities
|
1,387
|
|
|
2,353
|
|
Total Liability Derivatives
|
|
$
|
2,229
|
|
|
$
|
3,695
|
|
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
|
|
2017
|
|
2016
|
|
2015
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
180
|
|
|
$
|
(263
|
)
|
|
$
|
(2,410
|
)
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) Reclassified from AOCIL on the effective portion into Income (1)(2)
|
|
2017
|
|
2016
|
|
2015
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
(1,250
|
)
|
|
$
|
(1,291
|
)
|
|
$
|
(777
|
)
|
|
|
(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 2017 is
$842
.
|
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 12 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors a 401(k) defined contribution plan that covers a significant portion, or approximately
86%
of the Company's associates. This plan includes a mandatory Company match on the first
1%
of participants' contributions. The Company matches the next
2%
of participants' contributions if the Company meets prescribed earnings levels. The plan also provides for additional Company contributions above the
3%
level if the Company attains certain additional performance targets. Matching contribution expense for this 401(k) plan was
$484
in
2017
,
$425
in
2016
and
$454
in
2015
.
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
14%
of the Company's associates. Under this plan, the Company generally matches participants' contributions, on a sliding scale, up to a maximum of
2.75%
of the participant's earnings. Matching contribution expense for the collective-bargaining 401(k) plan was
$125
in
2017
,
$71
in
2016
and
$82
in
2015
.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Non-Qualified Retirement Savings Plan
The Company sponsors a non-qualified retirement savings plan that allows eligible associates to defer a specified percentage of their compensation. The obligations owed to participants under this plan were
$17,010
at
December 30, 2017
and
$14,992
at
December 31, 2016
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
$18,232
at
December 30, 2017
and
$15,679
at
December 31, 2016
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
14%
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
2017
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
2017
and
2016
is for the plan's year-end at
2016
and
2015
, respectively. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded and plans in the green zone are at least 80% funded. The "FIP/RP Status Pending/Implemented" column indicates a plan for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the collective-bargaining agreement to which the plan is subject.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
2017
|
2016
|
2017
|
|
2016
|
|
2015
|
|
The Pension Plan of the National Retirement Fund
|
13-6130178 - 001
|
Red
|
Red
|
Implemented
|
$
|
313
|
|
$
|
274
|
|
$
|
268
|
|
Yes
|
6/3/2018
|
(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, a surcharge equal to
$0.02
per hour (from $0.53 to $0.55) effective June 1, 2016 to May 31, 2017, and a surcharge equal to
$0.03
per hour (from $0.55 to $0.58) effective June 1, 2017 to May 31, 2018, respectively. Based upon current employment and benefit levels, the Company's contributions to the multi-employer pension plan are expected to be approximately
$328
for 2018.
(2) The Company's contributions to the plan do not represent more than 5% of the total contributions to the plan for the most recent plan year available.
Postretirement Plans
The Company sponsors a postretirement benefit plan that provides life insurance to a limited number of associates upon retirement as part of a collective bargaining agreement.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Information about the benefit obligation and funded status of the Company's postretirement benefit plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Change in benefit obligation:
|
|
|
|
Benefit obligation at beginning of year
|
$
|
314
|
|
|
$
|
290
|
|
Service cost
|
7
|
|
|
7
|
|
Interest cost
|
16
|
|
|
15
|
|
Actuarial (gain) loss
|
(11
|
)
|
|
3
|
|
Benefits paid
|
(1
|
)
|
|
(1
|
)
|
Benefit obligation at end of year
|
325
|
|
|
314
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
Fair value of plan assets at beginning of year
|
—
|
|
|
—
|
|
Employer contributions
|
1
|
|
|
1
|
|
Benefits paid
|
(1
|
)
|
|
(1
|
)
|
Fair value of plan assets at end of year
|
—
|
|
|
—
|
|
|
|
|
|
Unfunded amount
|
$
|
(325
|
)
|
|
$
|
(314
|
)
|
The balance sheet classification of the Company's liability for the postretirement benefit plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Accrued expenses
|
$
|
14
|
|
|
$
|
13
|
|
Other long-term liabilities
|
311
|
|
|
301
|
|
Total liability
|
$
|
325
|
|
|
$
|
314
|
|
Benefits expected to be paid on behalf of associates for the postretirement benefit plan during the period 2018 through 2027 are summarized as follows:
|
|
|
|
|
Years
|
Postretirement
Plan
|
2018
|
$
|
14
|
|
2019
|
14
|
|
2020
|
13
|
|
2021
|
13
|
|
2022
|
14
|
|
2023 - 2027
|
72
|
|
Assumptions used to determine the benefit obligation of the Company's postretirement benefit plan are summarized as follows:
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Weighted-average assumptions as of year-end:
|
|
|
|
Discount rate (benefit obligation)
|
4.00
|
%
|
|
4.00
|
%
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Components of net periodic benefit cost (credit) for the postretirement plan are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Service cost
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Interest cost
|
16
|
|
|
15
|
|
|
18
|
|
Amortization of prior service credits
|
(4
|
)
|
|
(4
|
)
|
|
(86
|
)
|
Recognized net actuarial gains
|
(30
|
)
|
|
(33
|
)
|
|
(40
|
)
|
Net periodic benefit cost (credit)
|
$
|
(11
|
)
|
|
$
|
(15
|
)
|
|
$
|
(101
|
)
|
Pre-tax amounts included in AOCIL for the Company's postretirement benefit plan at 2017 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Postretirement Benefit Plan
|
|
Balance at 2017
|
|
2018 Expected Amortization
|
Prior service credits
|
$
|
(8
|
)
|
|
$
|
(4
|
)
|
Unrecognized actuarial gains
|
(381
|
)
|
|
(30
|
)
|
Totals
|
$
|
(389
|
)
|
|
$
|
(34
|
)
|
NOTE 13 - INCOME TAXES
The provision (benefit) for income taxes on income (loss) from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
Federal
|
$
|
278
|
|
|
$
|
(396
|
)
|
|
$
|
277
|
|
State
|
(950
|
)
|
|
34
|
|
|
(261
|
)
|
Total current
|
(672
|
)
|
|
(362
|
)
|
|
16
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
Federal
|
7,535
|
|
|
(3,003
|
)
|
|
(641
|
)
|
State
|
646
|
|
|
(257
|
)
|
|
(89
|
)
|
Total deferred
|
8,181
|
|
|
(3,260
|
)
|
|
(730
|
)
|
Income tax provision (benefit)
|
$
|
7,509
|
|
|
$
|
(3,622
|
)
|
|
$
|
(714
|
)
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Differences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income tax rate to income (loss) from continuing operations before taxes are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Federal statutory rate
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
Statutory rate applied to income (loss) from continuing operations before taxes
|
$
|
(635
|
)
|
|
$
|
(3,090
|
)
|
|
$
|
(1,047
|
)
|
Plus state income taxes, net of federal tax effect
|
(198
|
)
|
|
(145
|
)
|
|
(227
|
)
|
Total statutory provision (benefit)
|
(833
|
)
|
|
(3,235
|
)
|
|
(1,274
|
)
|
Effect of differences:
|
|
|
|
|
|
Nondeductible meals and entertainment
|
161
|
|
|
148
|
|
|
147
|
|
Federal tax credits
|
(200
|
)
|
|
(395
|
)
|
|
(441
|
)
|
Reserve for uncertain tax positions
|
8
|
|
|
31
|
|
|
35
|
|
Goodwill
|
—
|
|
|
(13
|
)
|
|
(124
|
)
|
Change in valuation allowance
|
6,470
|
|
|
106
|
|
|
977
|
|
Tax reform
|
1,749
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
146
|
|
|
—
|
|
|
—
|
|
Other items
|
8
|
|
|
(264
|
)
|
|
(34
|
)
|
Income tax provision (benefit)
|
$
|
7,509
|
|
|
$
|
(3,622
|
)
|
|
$
|
(714
|
)
|
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered the U.S. corporate income tax rate from
35%
to
21%
effective January 1, 2018. Consequently, the Company wrote down its net deferred tax assets as of December 30, 2017 by
$8,169
to reflect the estimated impact of the Tax Act. This amount included a charge of
$1,749
related to the re-measurement of certain net deferred tax assets using the lower U.S. corporate income tax rate and a charge of
$6,420
to increase the valuation allowance related to the net deferred tax asset. The majority of the increase in the valuation allowance is related to the revised treatment of net operating losses under the Tax Act.
While the Company has substantially completed its provisional analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects, the charge related to the Tax Act may differ, possibly materially, due to, among other things, further refinement of its calculations, changes in interpretations and assumptions that the Company has made or additional guidance that may be issued related to the Tax Act. The Company will complete its analysis over a one-year measurement period from the enactment date, and any adjustments during this measurement period will be included in income from continuing operations as an adjustment to income tax expense in the reporting period when such adjustments are determined.
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.
Income tax payments, net of (income tax refunds) received for continuing and discontinued operations were
$44
in 2017,
$(190)
in 2016 and
$48
in 2015.
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:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Inventories
|
$
|
3,146
|
|
|
$
|
4,057
|
|
Retirement benefits
|
2,200
|
|
|
3,387
|
|
State net operating losses
|
4,196
|
|
|
3,672
|
|
Federal net operating losses
|
3,204
|
|
|
5,930
|
|
State tax credit carryforwards
|
1,963
|
|
|
1,728
|
|
Federal tax credit carryforwards
|
3,365
|
|
|
3,361
|
|
Allowances for bad debts, claims and discounts
|
2,373
|
|
|
3,442
|
|
Other
|
3,649
|
|
|
5,001
|
|
Total deferred tax assets
|
24,096
|
|
|
30,578
|
|
Valuation allowance
|
(12,994
|
)
|
|
(5,400
|
)
|
Net deferred tax assets
|
11,102
|
|
|
25,178
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
12,207
|
|
|
17,568
|
|
Total deferred tax liabilities
|
12,207
|
|
|
17,568
|
|
|
|
|
|
Net deferred tax asset (liability)
|
$
|
(1,105
|
)
|
|
$
|
7,610
|
|
At December 30, 2017,
$3,204
of deferred tax assets related to approximately
$15,328
of federal net operating loss carryforwards and
$4,196
of deferred tax assets related to approximately
$78,399
of state net operating loss carryforwards. In addition,
$3,365
of federal tax credit carryforwards and
$1,963
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
2018
and
2037
. A valuation allowance of
$12,994
is recorded to reflect the estimated amount of deferred tax assets that may not be realized during the carryforward periods. At December 30, 2017, the Company is in a net deferred tax liability position of
$1,105
which is included in other liabilities in the Company's Consolidated Balance Sheets. The net deferred tax asset in 2016 was included in other assets in the Company's Consolidated Balance Sheets.
Tax Uncertainties
The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were
$414
and
$406
at December 30, 2017 and December 31, 2016, respectively. Such benefits, if recognized, would affect the Company's effective tax rate. There were
no
significant interest or penalties accrued as of December 30, 2017 and December 31, 2016.
The following is a summary of the change in the Company's unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of year
|
$
|
406
|
|
|
$
|
375
|
|
|
$
|
400
|
|
Additions based on tax positions taken during a current period
|
8
|
|
|
31
|
|
|
35
|
|
Reductions related to settlement of tax matters
|
—
|
|
|
—
|
|
|
(60
|
)
|
Balance at end of year
|
$
|
414
|
|
|
$
|
406
|
|
|
$
|
375
|
|
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 2013 remain open to examination for federal income taxes. The majority of state jurisdictions remain open for tax years subsequent to 2013. A few state jurisdictions remain open to examination for tax years subsequent to 2012.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 14 - 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Basic earnings (loss) per share:
|
|
|
|
|
|
Income (loss) from continuing operations
|
$
|
(9,322
|
)
|
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
Less: Allocation of earnings to participating securities
|
—
|
|
|
—
|
|
|
—
|
|
Income (loss) from continuing operations available to common shareholders - basic
|
$
|
(9,322
|
)
|
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
Basic weighted-average shares outstanding (1)
|
15,699
|
|
|
15,638
|
|
|
15,536
|
|
Basic earnings (loss) per share - continuing operations
|
$
|
(0.59
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
Income (loss) from continuing operations available to common shareholders - basic
|
$
|
(9,322
|
)
|
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
Add: Undistributed earnings reallocated to unvested shareholders
|
—
|
|
|
—
|
|
|
—
|
|
Income (loss) from continuing operations available to common shareholders - basic
|
$
|
(9,322
|
)
|
|
$
|
(5,207
|
)
|
|
$
|
(2,278
|
)
|
Basic weighted-average shares outstanding (1)
|
15,699
|
|
|
15,638
|
|
|
15,536
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options (2)
|
—
|
|
|
—
|
|
|
—
|
|
Directors' stock performance units (2)
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average shares outstanding (1)(2)
|
15,699
|
|
|
15,638
|
|
|
15,536
|
|
Diluted earnings (loss) per share - continuing operations
|
$
|
(0.59
|
)
|
|
$
|
(0.33
|
)
|
|
$
|
(0.15
|
)
|
|
|
(1)
|
Includes Common and Class B Common shares, excluding
434
unvested participating securities, in thousands.
|
|
|
(2)
|
Shares issuable under stock option plans where the exercise price is greater than the average market price of the Company's Common Stock during the relevant period and directors' stock performance units have been excluded to the extent they are anti-dilutive. Aggregate shares excluded were
448
in
2017
,
220
in
2016
and
333
in
2015
.
|
NOTE 15 - 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
$940
in
2017
,
$1,324
in
2016
and
$1,406
in
2015
.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
2016 Incentive Compensation Plan
On May 3, 2016, the Company's shareholders' approved and adopted the Company's 2016 Incentive Compensation Plan (the "2016 Incentive Compensation Plan") which provides for the issuance of a maximum of
800,000
shares of Common Stock and/or Class B Common Stock for the grant of options, and/or other stock-based or stock-denominated awards to employees, officers, directors, and agents of the Company and its participating subsidiaries. The 2016 Incentive Compensation Plan and the allocation of shares thereunder superseded and replaced The Dixie Group, Inc. Stock Awards Plan, as amended (the "2006 Plan") and the allocation of shares thereunder. The 2006 Plan was terminated with respect to new awards. Awards previously granted under the 2006 Plan continue to be governed by the terms of that plan and are not affected by its termination.
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
three
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
two
years following the grant date. For the participants under age
60
, Career Shares vest ratably over
five
years beginning on the participant's 61st birthday.
On March 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
$3.50
per share, and will be recognized as stock compensation expense over a
three
-year vesting period from the date the awards were granted. Each award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On September 1, 2017, the Company granted
10,000
shares of restricted stock to a key employee. The grant-date fair value of the award was
$42
, or
$4.15
per share, and will be recognized as stock compensation expense over a
three
-year vesting period from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On September 18, 2017, the Company granted
10,000
shares of restricted stock to a key employee. The grant-date fair value of the award was
$41
, or
$4.05
per share, and will be recognized as stock compensation expense over a
three
-year vesting period from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On March 11, 2016, the Company issued
149,215
shares of restricted stock to officers and other key employees. The grant-date
fair value of the awards was
$651
, or
$4.360
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
four
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
three
year vesting period from the date the
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
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.
Restricted stock activity for the three years ended December 30, 2017 is summarized as follows:
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average Grant-Date Fair Value
|
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
|
|
Granted
|
60,000
|
|
|
3.70
|
|
Vested
|
(78,908
|
)
|
|
8.79
|
|
Forfeited
|
(4,629
|
)
|
|
5.96
|
|
Outstanding at December 30, 2017
|
433,841
|
|
|
$
|
6.66
|
|
As of
December 30, 2017
, unrecognized compensation cost related to unvested restricted stock was
$1,368
. That cost is expected to be recognized over a weighted-average period of
7.3
years. The total fair value of shares vested was approximately
$276
,
$456
and
$1,410
during
2017
,
2016
and
2015
, respectively.
Stock Performance Units
The Company's non-employee directors receive an annual retainer of
$18
in cash and
$18
in value of Stock Performance Units (subject to a
$5.00
minimum per unit). If market value at the date of the grants is above
$5.00
per share; there is no reduction in the number of units issued. However, if the market value at the date of the grants is below
$5.00
, units will be reduced to reflect the
$5.00
per share minimum. Upon retirement, the Company issues the number of shares of Common Stock equivalent to the number of Stock Performance Units held by non-employee directors at that time. As of
December 30, 2017
,
141,432
Stock Performance Units were outstanding under this plan. As of December 30, 2017, unrecognized compensation cost related to Stock Performance Units was
$34
. 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 and the 2016 Plan were exercisable for periods determined at the time the awards are granted. Effective 2009, the Company established a
$5.00
minimum exercise price on all options granted.
On May 30, 2017, the Company granted
203,000
options with a market condition to certain key employees of the Company at a weighted-average exercise price of
$4.30
. The grant-date fair value of these options was
$306
. These options vest over a
two
-year period and require the Company's stock to trade at or above
$7.00
for
five
consecutive trading days after the
two
-year period and within
five
years of issuance to meet the market condition.
The fair value of each option was estimated on the date of grant using a
lattice model
. Expected volatility was based on historical volatility of the Company's stock, using the most recent period equal to the expected life of the options. The risk-free interest rate was based on the U.S. Treasury yield for a term equal to the expected life of the option at the time of grant. The Company uses historical exercise behavior data of similar employee groups to determine the expected life of options.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The following weighted-average assumptions were used to estimate the fair value of stock options granted during the year ended December 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016 (1)
|
|
2015 (1)
|
Expected Volatility
|
47.80
|
%
|
|
—
|
%
|
|
—
|
%
|
Risk-free interest rate
|
1.79
|
%
|
|
—
|
%
|
|
—
|
%
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected life of options (yrs)
|
5
|
|
|
0
|
|
|
0
|
|
(1) No options were granted during the years ended December 31, 2016 and December 26, 2015.
Option activity for the three years ended
December 30, 2017
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 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
|
|
|
|
|
—
|
|
Granted
|
203,000
|
|
|
4.30
|
|
|
|
|
1.51
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
|
|
—
|
|
Outstanding at December 30, 2017
|
306,500
|
|
|
$
|
4.54
|
|
|
3.5
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
December 26, 2015
|
103,500
|
|
|
$
|
5.00
|
|
|
|
|
—
|
|
December 31, 2016
|
103,500
|
|
|
5.00
|
|
|
|
|
—
|
|
December 30, 2017
|
103,500
|
|
|
5.00
|
|
|
1.8
|
|
—
|
|
At
December 30, 2017
, 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
2017
,
2016
and
2015
was
$0
,
$0
and
$221
, respectively. At
December 30, 2017
, unrecognized compensation expense related to unvested stock options was
$211
and is expected to be recognized over a weighted-average period of
1.4
years.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 16 - 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 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
|
)
|
Unrealized gain on interest rate swaps, net of tax of $68
|
112
|
|
|
—
|
|
|
112
|
|
Reclassification of loss into earnings from interest rate swaps, net of tax of $475
|
775
|
|
|
—
|
|
|
775
|
|
Unrecognized net actuarial gain on postretirement benefit plans, net of tax of $4
|
—
|
|
|
7
|
|
|
7
|
|
Reclassification of net actuarial gain into earnings from postretirement benefit plans, net of tax of $11
|
—
|
|
|
(19
|
)
|
|
(19
|
)
|
Reclassification of prior service credits into earnings from postretirement benefit plans, net of tax of $1
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Reclassification of stranded tax effects
|
(258
|
)
|
|
47
|
|
|
(211
|
)
|
Balance at December 30, 2017
|
$
|
(1,587
|
)
|
|
$
|
288
|
|
|
$
|
(1,299
|
)
|
NOTE 17 - COMMITMENTS AND CONTINGENCIES
Commitments
The Company had purchase commitments of
$697
at
December 30, 2017
, 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
$640
in
2017
,
$855
in
2016
and
$1,151
in
2015
. At
December 30, 2017
, the Company has commitments to purchase natural gas of
$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
|
2018
|
$
|
5,006
|
|
|
$
|
3,709
|
|
2019
|
3,898
|
|
|
2,854
|
|
2020
|
3,506
|
|
|
2,364
|
|
2021
|
2,684
|
|
|
1,882
|
|
2022
|
956
|
|
|
1,451
|
|
Thereafter
|
244
|
|
|
3,525
|
|
Total commitments
|
16,294
|
|
|
15,785
|
|
Less amounts representing interest
|
(1,764
|
)
|
|
—
|
|
Total
|
$
|
14,530
|
|
|
$
|
15,785
|
|
Rental expense was approximately
$3,687
,
$3,575
and
$3,593
during
2017
,
2016
and
2015
, respectively.
Property, plant and equipment includes machinery and equipment under capital leases which have asset cost and accumulated depreciation of
$25,250
and
$8,300
, respectively, at
December 30, 2017
, and
$17,987
and
$5,881
, respectively, at
December 31, 2016
.
Contingencies
The Company assesses its exposure related to legal matters, including those pertaining to product liability, safety and health matters and other items that arise in the regular course of its business. If the Company determines that it is probable a loss has been incurred, the amount of the loss, or an amount within the range of loss, that can be reasonably estimated will be recorded.
Environmental Remediation
The Company accrues for losses associated with environmental remediation obligations when such losses are probable and estimable. Remediation obligations are accrued based on the latest available information and are recorded at undiscounted amounts. The Company regularly monitors the progress of environmental remediation. If studies indicate that the cost of remediation has changed from the previous estimate, an adjustment to the liability would be recorded in the period in which such determination is made. (See Note 20).
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] and by the Town of Centre (Alabama) Water Works in the circuit court of Cherokee County Alabama [The Water Works and Sewer Board of the Town of Centre v. 3M Company, et al, civil action No. 13-CV-2017-900049.00]. Both cases seek monetary damages and injunctive relief related to the use of certain chemical compounds in the manufacture and finishing of carpet products “in and around Dalton Georgia.” On motion of the defendants, the cases were removed to the U.S. District Court for the Northern District of Alabama (Middle Division) Case No. 4:16-CV-01755-SGC and Case No. 4:17-CV-01026-KOB. Subsequently, the Gadsden Water Works filed a motion to have the case remanded back to the state court and such motion has been granted. The lawsuits allege that perflourinated compounds (“PFC”), perflourinated acid (“PFOA”) and perfluorooctane sulfonate (“PFOS”) manufactured by 3M were used in certain finishing and treatment processes by the defendants and, as a consequence of such use, were subsequently either discharged into or leached into the water systems around Dalton, Georgia. The Complaints seeks damages that exceed
$10
, but are otherwise unspecified in amount in addition to injunctive relief and punitive damages. The Company intends to defend the matters vigorously and is unable to estimate the potential exposure to loss, if any, at this time.
The Company has received a class action complaint filed by Carlos Garcia, a current employee, individually and on behalf of others similarly situated against Fabrica [
Carlos Garcia et al.
vs.
Fabrica International, Inc., et al.,
in the Superior Court of Orange County, California, Case No. 30-2017-00949461 CU-OE-CXC]. The complaint alleges causes of actions on behalf of classes of Fabrica’s current and former employees during the four-year period immediately preceding the filing of the complaint for failure to pay proper overtime wages, failure to compensate for all meal periods and rest periods, failure to pay all proper overtime and double time, and for the provision and maintaining of inaccurate wage statements. Finally, the complaint asserts a cause of action for unfair competition by means of the above actions and seeks restitution of monies supposedly unlawfully withheld and demands attorneys’ fees and
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
costs. The Company has denied liability, is defending the matters vigorously and is unable to estimate the potential exposure to loss, if any, at this time.
The Company is one of multiple parties to three current lawsuits filed in Madison County Illinois, styled Brenda Bridgeman, Individually and as Special Administrator of the Estate of Robert Bridgeman, Deceased, vs. American Honda Motor Co., Inc., f/k/a Metropolitan Life Insurance Co., et al No. 15-L-374, styled Charles Anderson, Pltf., vs. 3M Company, et al, No. 17-L-525 and styled Danny Atkins and Pamela Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2. All three lawsuits entail a claim for damages to be determined in excess of
$50
filed on behalf of either a former employee or the estate of an individual which alleges that the deceased contracted mesothelioma as a result of exposure to asbestos while employed by the Company. Discovery in each matter is ongoing, and a tentative trial date has been set for one of the cases. 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. In August of 2017, the lawsuit styled Sandra D. Watts, Individually and as Special Administrator of the Estate of Dianne Averett, Deceased vs. 4520 Corp., Inc. f/k/a Benjamin F. Shaw Company, et al No. 12-L-2032 was placed in the category of "special closed with settlements and bankruptcy claims pending" to all remaining defendants.
NOTE 18 - OTHER OPERATING EXPENSE, NET
Other operating (income) expense, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Other operating expense, net:
|
|
|
|
|
|
(Gain) loss on property, plant and equipment disposals
|
$
|
170
|
|
|
$
|
725
|
|
|
$
|
(114
|
)
|
(Gain) loss on currency exchanges
|
(72
|
)
|
|
167
|
|
|
602
|
|
Amortization of intangibles
|
306
|
|
|
305
|
|
|
305
|
|
Retirement expenses
|
155
|
|
|
154
|
|
|
212
|
|
BP settlement gain (1)
|
—
|
|
|
(841
|
)
|
|
—
|
|
Miscellaneous (income) expense
|
(118
|
)
|
|
(109
|
)
|
|
(133
|
)
|
Other operating expense, net
|
$
|
441
|
|
|
$
|
401
|
|
|
$
|
872
|
|
|
|
(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 received a net amount of
$841
from the settlement.
|
Other (income) expense, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Other expense, net:
|
|
|
|
|
|
Earnings from equity investments
|
—
|
|
|
—
|
|
|
14
|
|
Miscellaneous (income) expense
|
39
|
|
|
22
|
|
|
33
|
|
Other expense, net
|
$
|
39
|
|
|
$
|
22
|
|
|
$
|
47
|
|
NOTE 19 - FACILITY CONSOLIDATION AND SEVERANCE 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 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
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
levels and that it would need to install a soil cap. The Company recognized expenses of
$331
during 2016 to finalize the cleanup of the site of the Company's former waste water treatment plant.
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.
2017 Profit Improvement Plan
During the fourth quarter of 2017, the Company announced a Profit Improvement Plan to improve profitability through lower cost and streamlined decision making and aligning processes to maximize efficiency. The plan includes consolidating the management of the Company's two commercial brands, Atlas Carpet Mills and Masland Contract, under one management team, sharing operations in sales, marketing, product development and manufacturing. Specific to this plan includes focusing nearly all commercial solution dyed make-to-order production in our Atmore, Alabama operations where the Company has developed such make-to-order capabilities over the last 5 years. Further, the Company is aligning its west coast production facilities, better utilizing its west coast real estate by moving production to its Porterville, California and Atmore, Alabama operations and preparing for more efficient distribution of its west coast products. In addition, the Company had reductions in related support functions such as accounting and information services.
Costs related to the facility consolidation plans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 30, 2017
|
|
Accrued Balance at December 31, 2016
|
|
2017 Expenses (1)
|
|
2017 Cash Payments
|
|
Accrued Balance at December 30, 2017
|
|
Total Costs Incurred to Date
|
|
Total Expected Costs
|
Warehousing, Distribution and Manufacturing Consolidation Plan
|
$
|
266
|
|
|
$
|
(4
|
)
|
|
$
|
262
|
|
|
$
|
—
|
|
|
$
|
7,440
|
|
|
$
|
7,440
|
|
Corporate Office Consolidation Plan
|
248
|
|
|
4
|
|
|
81
|
|
|
171
|
|
|
807
|
|
|
807
|
|
Profit Improvement Plan
|
—
|
|
|
636
|
|
|
302
|
|
|
334
|
|
|
636
|
|
|
1,382
|
|
Total All Plans
|
$
|
514
|
|
|
$
|
636
|
|
|
$
|
645
|
|
|
$
|
505
|
|
|
$
|
8,883
|
|
|
$
|
9,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance at December 26, 2015
|
|
2016 Expenses (1)
|
|
2016 Cash Payments
|
|
Accrued Balance at December 31, 2016
|
|
|
|
|
Warehousing, Distribution and Manufacturing Consolidation Plan
|
$
|
—
|
|
|
$
|
1,381
|
|
|
$
|
1,115
|
|
|
$
|
266
|
|
|
|
|
|
Corporate Office Consolidation Plan
|
341
|
|
|
75
|
|
|
168
|
|
|
248
|
|
|
|
|
|
Total All Plans
|
$
|
341
|
|
|
$
|
1,456
|
|
|
$
|
1,283
|
|
|
$
|
514
|
|
|
|
|
|
(1) Costs incurred under these plans are classified as "facility consolidation and severance expenses, net" 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 20 - 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
Net sales - Carousel operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
417
|
|
|
|
|
|
|
|
Loss from discontinued operations:
|
|
|
|
|
|
Loss from Carousel operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(116
|
)
|
Workers' compensation costs from former textile operations
|
(155
|
)
|
|
(2
|
)
|
|
(53
|
)
|
Environmental remediation costs from former textile operations
|
(225
|
)
|
|
(216
|
)
|
|
(68
|
)
|
Loss from discontinued operations, before taxes
|
$
|
(380
|
)
|
|
$
|
(218
|
)
|
|
$
|
(237
|
)
|
Income tax benefit
|
(147
|
)
|
|
(87
|
)
|
|
(89
|
)
|
Loss from discontinued operations, net of tax
|
$
|
(233
|
)
|
|
$
|
(131
|
)
|
|
$
|
(148
|
)
|
|
|
|
|
|
|
Income on disposal of Carousel discontinued operations before income taxes
|
$
|
—
|
|
|
$
|
100
|
|
|
$
|
—
|
|
Income tax provision
|
—
|
|
|
40
|
|
|
—
|
|
Income on disposal of discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
60
|
|
|
$
|
—
|
|
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
$1,746
as of
December 30, 2017
and
$1,686
as of
December 31, 2016
. 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 21 - 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 2017, 2016, and 2015 was
$978
,
$793
, and
$458
. 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
3.5%
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 2017, 2016 and 2015 were approximately
$7,200
,
$7,300
and
$8,800
, respectively; or approximately
2.3%
,
2.4%
, and
2.8%
of the Company's cost of goods sold in 2017, 2016, and 2015, 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 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 2017, 2016, and 2015 was
$273
,
$267
, and
$262
, 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 9).
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 22 - SUBSEQUENT EVENT
On March 12, 2018, the Company granted
297,292
shares of restricted stock to certain key employees of the Company. The grant-date fair value of the awards was
$832
, or
$2.800
per share, and will be recognized as stock compensation expense over a weighted-average period of
6.1
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.