NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial statements which do not include all the information and notes required by such accounting principles for annual financial statements. In the opinion of management, all adjustments (generally consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements. The accompanying financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in The Dixie Group, Inc.'s and its wholly-owned subsidiaries (the "Company") 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 29, 2018. Operating results for the three and six month periods ended June 29, 2019 are not necessarily indicative of the results that may be expected for the entire 2019 year.
Based on applicable accounting standards, the Company has determined that it has one reportable segment, Floorcovering, comprised of two operating segments, Residential and Commercial. Pursuant to applicable 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.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in Fiscal 2019
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, "
Leases (Topic 842)
," which requires lessees to recognize on the Consolidated Condensed Balance Sheet right-of-use assets, representing the right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-11 providing an optional transition method allowing entities to apply the new lease standard at the adoption date and recognize a cumulative effect adjustment in the period of adoption. The Company has elected to take this transition method.
The Company adopted the new standard effective December 30, 2018, the first day of the Company's fiscal year. Consistent with the optional transition method allowed as part of the modified retrospective transition approach provided in ASU No. 2018-11, the Company did not adjust comparative periods. The new standard applied to leases that have commenced as of the effective date, December 30, 2018, with a cumulative effect adjustment recorded as of that date. The Company also elected to apply the package of practical expedients allowed in ASC 842-10-65-1 whereby the Company need not reassess whether any expired or existing contracts are or contain leases, the Company need not reassess the lease classification for any expired or existing leases, and the Company need not reassess initial direct costs for any existing leases. The Company's adoption of the ASU resulted in the addition of Right of Use Assets on the Consolidated Condensed Balance Sheet for the right to use the underlying assets of operating leases. The Company did not elect to use hindsight for transition when considering judgments and estimates such as assessments of lessee options to extend or terminate a lease or purchase the underlying asset. In addition, the corresponding liability for the remaining balance of the operating leases is included in the liability section of the Consolidated Condensed Balance Sheet. For all asset classes, the Company elected to not recognize a right-of-use asset and lease liability for leases with a term of twelve months or less. The adoption of this ASU did not have a material adjustment to the Consolidated Statements of Stockholders' Equity or the Consolidated Condensed Statements of Operations.
Accounting Standards Yet to Be Adopted
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, including the subsequently issued codification improvements update ("
Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
," ASU 2019-04) and the targeted transition relief update ("
Financial Instruments-Credit Losses (Topic 326
)," ASU 2019-05), will have a significant impact on the consolidated condensed financial statements due to the nature of the Company's customers and the limited amount of write-offs in past years.
In August 2018, the FASB issued ASU 2018-13, “
Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
.” This update is a part of FASB’s disclosure framework project to improve
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
the effectiveness of disclosures in the notes to financial statements. The amendments in this update remove, modify, and add certain disclosure requirements within Topic 820. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted upon issuance of this update and an entity is permitted to early adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until the effective date. Certain disclosure amendments are to be applied prospectively for only the most recent interim or annual period presented, while other amendments are to be applied retrospectively to all periods presented. The Company does not believe that the adoption of this ASU will have a significant impact on its consolidated condensed financial statements.
In August 2018, the FASB issued ASU 2018-14, “
Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.”
This update is a part of FASB’s disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. This standard is effective for fiscal years ending after December 15, 2020 and early adoption is permitted. Upon adoption, this update is to be applied on a retrospective basis to all periods presented. The Company does not believe that the adoption of this ASU will have a significant impact on its consolidated condensed financial statements.
NOTE 3 - REVENUE
Revenue Recognition Policy
The Company derives its revenues primarily from the sale of floorcovering products and processing services. Revenues are recognized when control of these products or services is transferred to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products and services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components as payment is received at or shortly after the point of sale. The Company determined revenue recognition through the following steps:
|
|
•
|
Identification of the contract with a customer
|
|
|
•
|
Identification of the performance obligations in the contract
|
|
|
•
|
Determination of the transaction price
|
|
|
•
|
Allocation of the transaction price to the performance obligations in the contract
|
|
|
•
|
Recognition of revenue when, or as, the performance obligation is satisfied
|
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue by end-user markets for the three and six month periods ended June 29, 2019 and June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Residential floorcovering products
|
$
|
73,092
|
|
|
$
|
75,034
|
|
|
$
|
136,518
|
|
|
$
|
142,129
|
|
Commercial floorcovering products
|
26,708
|
|
|
30,954
|
|
|
51,218
|
|
|
62,242
|
|
Other services
|
594
|
|
|
450
|
|
|
1,265
|
|
|
926
|
|
Total net sales
|
$
|
100,394
|
|
|
$
|
106,438
|
|
|
$
|
189,001
|
|
|
$
|
205,297
|
|
Residential floorcovering products.
Residential floorcovering products include broadloom carpet, rugs, luxury vinyl flooring and engineered hardwood. These products are sold into the designer, retailer, mass merchant and builder markets.
Commercial floorcovering products.
Commercial floorcovering products include broadloom carpet, carpet tile, rugs, and luxury vinyl flooring. These products are sold into the corporate, hospitality, healthcare, government, and education markets through the use of designers, architects, flooring contractors and independent retailers.
Other services.
Other services include carpet yarn processing and carpet dyeing services.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
Contract Balances
Other than receivables that represent an unconditional right to consideration, which are presented separately (See Note 4), the Company does not recognize any contract assets which give conditional rights to receive consideration, as the Company does not incur costs to obtain customer contracts that are recoverable. The Company often receives cash payments from customers in advance of the Company’s performance for limited production run orders resulting in contract liabilities. These contract liabilities are classified in accrued expenses in the Consolidated Condensed Balance Sheets based on the timing of when the Company expects to recognize revenue, which is typically less than a year. The net decrease or increase in the contract liabilities is primarily driven by order activity for limited runs requiring deposits offset by the recognition of revenue and application of deposit on the receivables ledger for such activity during the period. The activity in the advanced deposits for the three and six month periods ended June 29, 2019 and June 30, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Beginning contract liability
|
$
|
5,089
|
|
|
$
|
5,296
|
|
|
$
|
6,013
|
|
|
$
|
5,717
|
|
Revenue recognized from contract liabilities included in the beginning balance
|
(3,326
|
)
|
|
(4,711
|
)
|
|
(4,817
|
)
|
|
(5,005
|
)
|
Increases due to cash received, net of amounts recognized in revenue during the period
|
3,536
|
|
|
6,139
|
|
|
4,103
|
|
|
6,012
|
|
Ending contract liability
|
$
|
5,299
|
|
|
$
|
6,724
|
|
|
$
|
5,299
|
|
|
$
|
6,724
|
|
Performance Obligations
For performance obligations related to residential floorcovering and commercial floorcovering products, control transfers at a point in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the customer and the customer must have the significant risks and rewards of ownership. The Company’s principal terms of sale are FOB Shipping Point and FOB Destination and the Company transfers control and records revenue for product sales either upon shipment or delivery to the customer, respectively. Revenue is allocated to each performance obligation based on its relative stand-alone selling prices. Stand-alone selling prices are based on observable prices at which the Company separately sells the products or services.
Variable Consideration
The nature of the Company’s business gives rise to variable consideration, including rebates, allowances, and returns that generally decrease the transaction price, which reduces revenue. These variable amounts are generally credited to the customer, based on achieving certain levels of sales activity, product returns, or price concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends.
Warranties
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its products for a period of up to two years. The Company accrues for estimated future assurance warranty costs in the period in which the sale is recorded. The costs are included in Cost of Sales in the Consolidated Condensed Statements of Operations and the product warranty reserve is included in accrued expenses in the Consolidated Condensed Balance Sheets. The Company calculates its accrual using the portfolio approach based upon historical experience and known trends. (See Note 9.) The Company does not provide an additional service-type warranty.
Bill-and-Hold Arrangement
At the customer's request, the Company entered into a bill-and-hold arrangement with one customer. At the point of billing and recognition of revenue by the Company, the Company retained physical possession of the inventory, segregated the inventory and no longer had the ability to use or direct it to another customer. The inventory was available to be physically transferred to the customer at their request. During the three months ended March 30, 2019 the Company recognized revenue of
$1,311
and during
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
the three months ended June 29, 2019 the Company recognized revenue for another transaction of
$61
. As of June 29, 2019, substantially all of both orders had been shipped to the customer.
NOTE 4 - RECEIVABLES, NET
Receivables are summarized as follows:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 29,
2018
|
Customers, trade
|
$
|
45,062
|
|
|
$
|
40,121
|
|
Other receivables
|
2,577
|
|
|
2,595
|
|
Gross receivables
|
47,639
|
|
|
42,716
|
|
Less: allowance for doubtful accounts
|
(277
|
)
|
|
(174
|
)
|
Receivables, net
|
$
|
47,362
|
|
|
$
|
42,542
|
|
Bad debt expense was
$42
and
$131
for the three and six months ended June 29, 2019 and
$57
and
$117
for the three and six months ended June 30, 2018, respectively.
NOTE 5 - INVENTORIES, NET
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 29,
2018
|
Raw materials
|
$
|
37,002
|
|
|
$
|
36,875
|
|
Work-in-process
|
16,661
|
|
|
20,274
|
|
Finished goods
|
68,268
|
|
|
67,085
|
|
Supplies and other
|
226
|
|
|
190
|
|
LIFO reserve
|
(17,991
|
)
|
|
(19,229
|
)
|
Inventories, net
|
$
|
104,166
|
|
|
$
|
105,195
|
|
In the quarter ended March 30, 2019, the Company incurred an interim inventory liquidation due to a consignment agreement with a primary vendor of raw materials. The former inventory levels are not expected to be reinstated. The Company recognized the effect within the quarter which resulted in liquidations of LIFO inventories carried at prevailing costs established in prior years and reduced cost of sales by
$281
.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 29,
2018
|
Land and improvements
|
$
|
8,528
|
|
|
$
|
8,528
|
|
Buildings and improvements
|
63,282
|
|
|
63,389
|
|
Machinery and equipment
|
180,937
|
|
|
183,900
|
|
Assets under construction
|
4,008
|
|
|
2,675
|
|
|
256,755
|
|
|
258,492
|
|
Accumulated depreciation
|
(176,304
|
)
|
|
(174,381
|
)
|
Property, plant and equipment, net
|
$
|
80,451
|
|
|
$
|
84,111
|
|
Depreciation of property, plant and equipment, including amounts for finance leases, totaled
$2,734
and
$5,777
in the three and six months ended June 29, 2019, respectively, and
$3,036
and
$6,051
in the three and six months ended June 30, 2018, respectively.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 7 - GOODWILL AND OTHER INTANGIBLES
In the fourth quarter of 2018, it was determined that the carrying value of the Company's goodwill was greater than the calculated fair value and that its intangible assets, based on revised projections, were no longer recoverable. As a result of these full impairments, there was
no
amortization expense for the three and six months ended June 29, 2019. Amortization expense for the three and six months ended June 30, 2018 was
$76
and
$153
, respectively.
NOTE 8 - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 29,
2018
|
Compensation and benefits
|
$
|
8,933
|
|
|
$
|
8,186
|
|
Provision for customer rebates, claims and allowances
|
8,850
|
|
|
9,300
|
|
Advanced customer deposits
|
5,299
|
|
|
6,013
|
|
Outstanding checks in excess of cash
|
2,611
|
|
|
3,141
|
|
Other (1)
|
5,325
|
|
|
4,212
|
|
Accrued expenses
|
$
|
31,018
|
|
|
$
|
30,852
|
|
(1) Includes an accrual of
$1,514
for the settlement of a class action lawsuit (See Legal Proceedings section under Note 19).
NOTE 9 - PRODUCT WARRANTY RESERVES
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its products. Product warranty reserves are included in accrued expenses in the Company's Consolidated Condensed Balance Sheets. The following is a summary of the Company's product warranty activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
|
June 29,
2019
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
(As Adjusted)
|
Product warranty reserve at beginning of period
|
$
|
1,035
|
|
|
$
|
1,248
|
|
|
|
$
|
1,069
|
|
|
$
|
1,356
|
|
Warranty liabilities accrued
|
634
|
|
|
623
|
|
|
|
1,143
|
|
|
1,236
|
|
Warranty liabilities settled
|
(563
|
)
|
|
(626
|
)
|
|
|
(1,091
|
)
|
|
(1,318
|
)
|
Changes for pre-existing warranty liabilities
|
(24
|
)
|
|
(2
|
)
|
|
|
(39
|
)
|
|
(31
|
)
|
Product warranty reserve at end of period
|
$
|
1,082
|
|
|
$
|
1,243
|
|
|
|
$
|
1,082
|
|
|
$
|
1,243
|
|
NOTE 10 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 29,
2018
|
Revolving credit facility
|
$
|
96,264
|
|
|
$
|
99,219
|
|
Notes payable - buildings
|
6,421
|
|
|
11,688
|
|
Finance lease - buildings
|
11,383
|
|
|
—
|
|
Finance lease obligations
|
10,176
|
|
|
12,096
|
|
Notes payable - equipment and other
|
3,573
|
|
|
5,528
|
|
Deferred financing costs, net
|
(667
|
)
|
|
(486
|
)
|
Total long-term debt
|
127,150
|
|
|
128,045
|
|
Less: current portion of long-term debt
|
6,345
|
|
|
7,794
|
|
Long-term debt
|
$
|
120,805
|
|
|
$
|
120,251
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
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 one, two or three-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 June 29, 2019, the applicable margin on the Company's 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
4.58%
at June 29, 2019 and December 29, 2018, respectively.
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 June 29, 2019, the unused borrowing availability under the revolving credit facility was
$26,565
; 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
$10,065
(the amount above
$16,500
) at June 29, 2019.
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%
.
Finance Lease - Buildings
On January 14, 2019, the Company, entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Saraland Industrial, LLC, an Alabama limited liability company (the “Purchaser”). Pursuant to the terms of the Purchase and Sale Agreement, the Company sold its Saraland facility, and approximately 17.12 acres of surrounding property located in Saraland, Alabama (the “Property”) to the Purchaser for a purchase price of
$11,500
. Concurrent with the sale of the Property, the Company and the Purchaser entered into a
twenty
-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property at an annual rental rate of
$977
, subject to annual rent increases of
1.25%
. Under the Lease Agreement, the Company has two (
2
) consecutive options to extend the term of the Lease by
ten
years for each such option. This transaction was recorded as a failed sale and leaseback. The Company recorded a liability for the amounts received, will continue to depreciate the asset, and has imputed an interest rate so that the net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term. Concurrently with the sale, the Company paid off the approximately
$5,000
mortgage on the property to First Tennessee Bank National Association and terminated the related fixed interest rate swap agreement.
Finance Lease Obligations
The Company's finance lease obligations have terms ranging from
3
to
7
years, bear interest ranging from
3.55%
to
7.76%
and are due in monthly or quarterly installments through their maturity dates. The Company's finance lease obligations are secured by the specific equipment leased.
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.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 11 - LEASES
The Company determines if an arrangement is an operating lease or a financing lease at inception. Lease assets and obligations are recognized at the lease commencement date based on the present value of lease payments over the term of the lease. The Company generally uses its incremental borrowing rate, which is based on information available at the lease commencement date, to determine the present value of lease payments.
The Company has operating leases primarily for real estate and equipment used in manufacturing. Operating lease expense is recognized in continuing operations by amortizing the amount recorded as an asset on a straight-line basis over the lease term. Financing lease expense is comprised of both interest expense, which will be recognized using the effective interest method, and amortization of the right-of-use assets. These expenses are presented consistently with the presentation of other interest expense and amortization or depreciation of similar assets. In determining lease asset values, the Company considers fixed and variable payment terms, prepayments, incentives, and options to extend, terminate or purchase. Renewal, termination, or purchase options affect the lease term used for determining lease asset value only if the option is reasonably certain to be exercised.
Balance sheet information related to right-of-use assets and liabilities is as follows:
|
|
|
|
|
|
|
Balance Sheet Location
|
June 29, 2019
|
Operating Leases:
|
|
|
Operating lease right-of-use assets
|
Operating lease right-of-use assets
|
$
|
8,393
|
|
|
|
|
Current portion of operating lease liabilities
|
Current portion of operating lease liabilities
|
1,973
|
|
Noncurrent portion of operating lease liabilities
|
Operating lease liabilities
|
6,831
|
|
Total operating lease liabilities
|
|
$
|
8,804
|
|
|
|
|
Finance Leases:
|
|
|
Finance lease right-of-use assets
|
Property, plant, and equipment, net
|
$
|
16,553
|
|
|
|
|
Current portion of finance lease liabilities
|
Current portion of long-term debt
|
4,150
|
|
Noncurrent portion of finance lease liabilities
|
Long-term debt
|
17,409
|
|
|
|
$
|
21,559
|
|
Lease cost recognized in the consolidated condensed financial statements is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 29, 2019
|
|
June 29, 2019
|
Operating lease cost
|
|
$
|
815
|
|
|
$
|
1,723
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of lease assets
|
|
750
|
|
|
1,498
|
|
Interest on lease liabilities
|
|
335
|
|
|
685
|
|
Total Finance lease costs
|
|
$
|
1,085
|
|
|
$
|
2,183
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
Other supplemental information related to leases is summarized as follows:
|
|
|
|
|
|
|
June 29, 2019
|
|
Weighted average remaining lease term (in years):
|
|
|
Operating leases
|
|
6.20
|
|
Finance leases
|
|
11.62
|
|
|
|
|
Weighted average discount rate:
|
|
|
Operating leases
|
|
8.47
|
%
|
Finance leases
|
|
6.65
|
%
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the six months ended June 29, 2019:
|
|
|
Operating cash flows from operating leases
|
|
794
|
|
Operating cash flows from finance leases
|
|
685
|
|
Financing cash flows from finance leases
|
|
2,089
|
|
The following table summarizes the Company's undiscounted future minimum lease payments under non-cancellable contractual obligations for operating and financing liabilities as of June 29, 2019:
|
|
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
Finance Leases
|
2019
|
|
1,422
|
|
2,768
|
|
2020
|
|
2,360
|
|
5,207
|
|
2021
|
|
1,986
|
|
4,347
|
|
2022
|
|
1,559
|
|
2,015
|
|
2023
|
|
877
|
|
1,283
|
|
Thereafter
|
|
3,347
|
|
17,082
|
|
Total future minimum lease payments (undiscounted)
|
|
11,551
|
|
32,702
|
|
Less: Present value discount
|
|
(2,747
|
)
|
(11,143
|
)
|
Total lease liability
|
|
8,804
|
|
21,559
|
|
NOTE 12 - FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange value of an asset or a liability in an orderly transaction between market participants. The fair value guidance outlines a valuation framework and establishes a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and disclosures. The hierarchy consists of three levels as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities as of the reported date;
Level 2 - Other than quoted market prices in active markets for identical assets or liabilities, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other than quoted prices for assets or liabilities and prices that are derived principally from or corroborated by market data by correlation or other means; and
Level 3 - Measurements using management's best estimate of fair value, where the determination of fair value requires significant management judgment or estimation.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
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 Condensed Balance Sheets as of June 29, 2019 and December 29, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 29,
2018
|
|
Fair Value Hierarchy Level
|
Assets:
|
|
|
|
|
|
Interest rate swaps (1)
|
$
|
—
|
|
|
$
|
36
|
|
|
Level 2
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Interest rate swaps (1)
|
$
|
1,924
|
|
|
$
|
1,008
|
|
|
Level 2
|
|
|
(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.
|
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during the three and six months ending June 29, 2019 or June 30, 2018. If any, the Company recognizes the transfers at the end of the reporting period.
The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 29,
2019
|
|
December 29,
2018
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
18
|
|
|
$
|
18
|
|
Notes receivable
|
—
|
|
|
—
|
|
|
282
|
|
|
282
|
|
Interest rate swaps
|
—
|
|
|
—
|
|
|
36
|
|
|
36
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
105,591
|
|
|
103,518
|
|
|
115,949
|
|
|
112,519
|
|
Finance leases, including current portion
|
21,559
|
|
|
18,918
|
|
|
12,096
|
|
|
11,723
|
|
Operating leases, including current portion
|
8,880
|
|
|
8,880
|
|
|
—
|
|
|
—
|
|
Interest rate swaps
|
1,924
|
|
|
1,924
|
|
|
1,008
|
|
|
1,008
|
|
The fair values of the Company's long-term debt and finance 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 13 - DERIVATIVES
The Company's earnings, cash flows and financial position are exposed to market risks relating to interest rates. It is the Company's policy to minimize its exposure to adverse changes in interest rates and manage interest rate risks inherent in funding the Company with debt. The Company addresses this risk by maintaining a mix of fixed and floating rate debt and entering into interest rate swaps for a portion of its variable rate debt to minimize interest rate volatility.
The following is a summary of the Company's interest rate swaps outstanding as of June 29, 2019:
|
|
|
|
|
|
|
|
|
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
|
$
|
6,421
|
|
(1)
|
November 7, 2014 through November 7, 2024
|
4.500%
|
1 Month LIBOR
|
(1) Interest rate swap notional amount amortizes by
$35
monthly to maturity.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
The following table summarizes the fair values of derivative instruments included in the Company's financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
Location on Consolidated Balance Sheets
|
|
Fair Value
|
|
|
June 29,
2019
|
|
December 29,
2018
|
Asset Derivatives:
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps, current portion
|
Prepaids and other current assets
|
|
$
|
—
|
|
|
$
|
14
|
|
Interest rate swaps, long-term portion
|
Other assets
|
|
—
|
|
|
22
|
|
Total Asset Derivatives
|
|
|
$
|
—
|
|
|
$
|
36
|
|
|
|
|
|
|
|
Liability Derivatives:
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps, current portion
|
Accrued expenses
|
|
$
|
682
|
|
|
$
|
335
|
|
Interest rate swaps, long-term portion
|
Other long-term liabilities
|
|
1,242
|
|
|
673
|
|
Total Liability Derivatives
|
|
|
$
|
1,924
|
|
|
$
|
1,008
|
|
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
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
(705
|
)
|
|
$
|
323
|
|
|
$
|
(1,104
|
)
|
|
$
|
1,128
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from AOCIL on the effective portion into Earnings (1)(2)
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
(93
|
)
|
|
$
|
(177
|
)
|
|
$
|
(149
|
)
|
|
$
|
(406
|
)
|
|
|
(1)
|
The amount of gain (loss) reclassified from AOCIL is included in interest expense on the Company's consolidated condensed financial statements.
|
|
|
(2)
|
The amount of loss expected to be reclassified from AOCIL into earnings during the next 12 months subsequent to June 29, 2019 is
$682
.
|
The Company recorded a gain of
$38
for the settlement of the fixed interest rate swap agreement associated with the Saraland sale and leaseback.
NOTE 14 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors a 401(k) defined contribution plan that covers approximately
85%
of the Company's current 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 (credit) expense for this 401(k) plan was
$(7)
and
$(33)
for the three months ended June 29, 2019 and June 30, 2018, respectively, and
$223
and
$231
for the six months ended June 29, 2019 and June 30, 2018, respectively. The reduction in the matching contribution expense for the three months ended June 29, 2019 and June 30, 2018 was a result of revising the estimated match for the year.
Additionally, the Company sponsors a 401(k) defined contribution plan that covers approximately
15%
of the Company's current associates at one facility who are under a collective-bargaining agreement. Under this plan, the Company generally matches
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
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
$43
and
$38
for the three months ended June 29, 2019 and June 30, 2018, respectively, and
$77
and
$67
for the six months ended June 29, 2019 and June 30, 2018, respectively.
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
$15,496
at June 29, 2019 and
$13,943
at December 29, 2018 and are included in other long-term liabilities in the Company's Consolidated Condensed Balance Sheets. The obligations are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company, except as unsecured general creditors. The Company utilizes a Rabbi Trust to hold, invest and reinvest deferrals and contributions under the plan. Amounts are invested in Company-owned life insurance in the Rabbi Trust and the cash surrender value of the policies was
$15,495
at June 29, 2019 and
$13,822
at December 29, 2018 and is included in other assets in the Company's Consolidated Condensed 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. Expenses related to the multi-employer pension plan were
$87
and
$81
for the three months ended June 29, 2019 and June 30, 2018, respectively, and
$170
and
$173
for the six months ended June 29, 2019 and June 30, 2018, respectively. If the Company were to withdraw from the multi-employer plan, a withdrawal liability would be due, the amount of which would be determined by the plan. The withdrawal liability, as determined by the plan, would be a function of contribution rates, fund status, discount rates and various other factors at the time of any such withdrawal.
NOTE 15 - INCOME TAXES
The effective tax rate for the six months ending June 29, 2019 was
1.7%
compared with a benefit rate of
3.8%
for the six months ending June 30, 2018. The Company maintains a full valuation allowance against the deferred tax assets resulting in only refundable credits and a small amount of state taxes being recognized in the tax expense for the first six months of 2019. The Company is in a net deferred tax liability position of
$642
and
$568
at June 29, 2019 and December 29, 2018, respectively, which is included in other long-term liabilities in the Company's Consolidated Condensed Balance Sheets.
The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were
$455
and
$441
at June 29, 2019 and December 29, 2018, respectively. Such benefits, if recognized, would affect the Company's effective tax rate. There were
no
significant interest or penalties accrued as of June 29, 2019 and December 29, 2018.
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 2014 remain open to examination for U.S. federal income taxes. The majority of state jurisdictions remain open for tax years subsequent to 2014. A few state jurisdictions remain open to examination for tax years subsequent to 2013.
NOTE 16 - 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 (loss) per share. Accounting guidance requires additional disclosure of earnings (loss) per share for common stock and unvested share-based payment awards, separately disclosing distributed and undistributed earnings. Undistributed earnings represent earnings that were available for distribution but were not distributed. Common stock and unvested share-based payment awards earn dividends equally. All earnings were undistributed in all periods presented.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
The following table sets forth the computation of basic and diluted earnings (loss) per share from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
Loss from continuing operations
|
$
|
(1,181
|
)
|
|
$
|
(1,972
|
)
|
|
$
|
(7,822
|
)
|
|
$
|
(4,857
|
)
|
Less: Allocation of earnings to participating securities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss from continuing operations available to common shareholders - basic
|
$
|
(1,181
|
)
|
|
$
|
(1,972
|
)
|
|
$
|
(7,822
|
)
|
|
$
|
(4,857
|
)
|
Basic weighted-average shares outstanding (1)
|
15,885
|
|
|
15,763
|
|
|
15,847
|
|
|
15,739
|
|
Basic earnings (loss) per share - continuing operations
|
$
|
(0.07
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.31
|
)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
Loss from continuing operations available to common shareholders - basic
|
$
|
(1,181
|
)
|
|
$
|
(1,972
|
)
|
|
$
|
(7,822
|
)
|
|
$
|
(4,857
|
)
|
Add: Undistributed earnings reallocated to unvested shareholders
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Loss from continuing operations available to common shareholders - basic
|
$
|
(1,181
|
)
|
|
$
|
(1,972
|
)
|
|
$
|
(7,822
|
)
|
|
$
|
(4,857
|
)
|
Basic weighted-average shares outstanding (1)
|
15,885
|
|
|
15,763
|
|
|
15,847
|
|
|
15,739
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Directors' stock performance units (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted weighted-average shares outstanding (1)(2)
|
15,885
|
|
|
15,763
|
|
|
15,847
|
|
|
15,739
|
|
Diluted earnings (loss) per share - continuing operations
|
$
|
(0.07
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.31
|
)
|
|
|
(1)
|
Includes Common and Class B Common shares, excluding
476
thousand unvested participating securities.
|
|
|
(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 for the three and six months ended June 29, 2019 and were
383
thousand and for the three and six months ended June 30, 2018 were
426
thousand.
|
NOTE 17 - 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 Condensed Statements of Operations. The number of shares to be issued is determined by dividing the specified dollar value of the award by the market value per share on the grant date. The Company's stock compensation expense was
$130
and
$287
for the three and six months ended June 29, 2019, respectively, and
$228
and
$455
for the three and six months ended June 30, 2018, respectively.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 18 - 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 29, 2018
|
$
|
(383
|
)
|
|
$
|
275
|
|
|
$
|
(108
|
)
|
Unrealized gain on interest rate swaps
|
(1,104
|
)
|
|
—
|
|
|
(1,104
|
)
|
Reclassification of loss into earnings from interest rate swaps, net of tax of $10
|
139
|
|
|
—
|
|
|
139
|
|
Reclassification of net actuarial gain into earnings from postretirement benefit plans
|
—
|
|
|
(14
|
)
|
|
(14
|
)
|
Reclassification of prior service credits into earnings from postretirement benefit plans
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Balance at June 29, 2019
|
$
|
(1,348
|
)
|
|
$
|
259
|
|
|
$
|
(1,089
|
)
|
NOTE 19 - COMMITMENTS AND CONTINGENCIES
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 22).
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. Currently, the Company joined several other co-defendants in filing a Petition for Writ of Mandamus with the Alabama Supreme Court asking for an Order directing the trial court to grant the Company’s and other codefendants’ motions to dismiss the Alabama-filed actions for lack of personal jurisdiction. The Petitions have been consolidated by the Alabama Supreme Court with the Town of Centre (Alabama) matter (described above). The Petitions are still pending and there is no statutory deadline for the court to issue a decision. The lawsuits allege that perflourinated compounds (“PFC”), perflourinated acid (“PFOA”) and perfluorooctane sulfonate (“PFOS”) manufactured by 3M were 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 seek damages that exceed
$10
, but are otherwise unspecified in amount in addition to injunctive relief and punitive damages. The Company intends to defend the matters vigorously and is unable to estimate the potential exposure to loss, if any, at this time.
On November 16, 2018 the Superior Court of the State of California granted preliminary approval of a class action settlement in the matter of Carlos Garcia v. Fabrica International, Inc. et al Orange County Superior Court Case No. 30-2017-00949461-CU-OE-CXC. The court further approved the procedures for Settlement Class Members to opt-out of or object to the Settlement. The terms of the settlement provide that Fabrica, a wholly owned subsidiary of the Company, has agreed to pay
$1,514
(the “Gross Settlement Amount”) to fully resolve all claims in the Lawsuit, including payments to Settlement Class Members, Class Counsel’s attorneys’ fees and expenses, settlement administration costs, and the Class Representative’s Service Award. The amount of the proposed settlement was recorded during the quarter ended June 30, 2018. The deadline for class members to opt-out was February 1,
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
2019. The deadline for the plaintiff to file a motion for final approval of the class action settlement was March 29, 2019. The final fairness hearing took place on April 12, 2019 with final approval being granted.
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. In March 2018, the lawsuit styled Charles Anderson, Individually and as Special Administrator of the Estate of Charles Anderson, Deceased vs. 3M Company, et al, No. 17-L-525 was dismissed without prejudice. In October 2018, the lawsuit styled Danny Atkins and Pamela Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2 was dismissed without prejudice.
The Company has been sued in the matter styled: The Canyons Grand Summit Resort Hotel Owners Association, Inc. v. The Dixie Group Inc. d/b/a Masland Contract Carpet, Case No. 190500139, in the Third District Court, State of Utah, Summit County, Silver Summit Department, which was filed on March 29, 2019. This claim seeks monetary damages of
$500
over carpet sold for installation in a condominium complex. The Company intends to defend the matter vigorously and is unable to estimate the potential exposure to loss, if any, at this time.
See Note 21 under the Notes to Consolidated Condensed Financial Statements for discussion of a series of workers compensation claims filed related to the closure of manufacturing facilities in California.
NOTE 20 - OTHER (INCOME) EXPENSE, NET
Other operating (income) expense, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Other operating expense, net:
|
|
|
|
|
|
|
|
Loss on property, plant and equipment disposals
|
$
|
1
|
|
|
$
|
82
|
|
|
$
|
62
|
|
|
$
|
82
|
|
(Gain) loss on currency exchanges
|
82
|
|
|
5
|
|
|
104
|
|
|
(3
|
)
|
Amortization of intangibles
|
—
|
|
|
76
|
|
|
—
|
|
|
153
|
|
Retirement (income) expenses
|
9
|
|
|
(120
|
)
|
|
(24
|
)
|
|
(66
|
)
|
Settlement of class action litigation
|
—
|
|
|
1,514
|
|
|
—
|
|
|
1,514
|
|
Miscellaneous (income) expense
|
(12
|
)
|
|
(50
|
)
|
|
(31
|
)
|
|
(413
|
)
|
Other operating expense, net
|
$
|
80
|
|
|
$
|
1,507
|
|
|
$
|
111
|
|
|
$
|
1,267
|
|
Other (income) expense, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Other (income) expense, net:
|
|
|
|
|
|
|
|
Post-retirement income
|
$
|
(4
|
)
|
|
$
|
(5
|
)
|
|
(7
|
)
|
|
(9
|
)
|
Interest income
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
—
|
|
Miscellaneous (income) expense
|
8
|
|
|
6
|
|
|
7
|
|
|
12
|
|
Other (income) expense, net
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
(38
|
)
|
|
$
|
3
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 21 - FACILITY CONSOLIDATION AND SEVERANCE EXPENSES, NET
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, the Company is focusing nearly all commercial solution dyed make-to-order production in its 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 Santa Ana, California and Atmore, Alabama operations and preparing for more efficient distribution of its west coast products. Furthermore, the Company is re-configuring its east coast distribution facilities to provide more efficient distribution of its products. In addition, the Company realized reductions in related support functions such as accounting and information services.
Expenses in the Profit Improvement Plan for the three months ended June 29, 2019 included
$1,052
for post employment workers' compensation claims filed post employment by certain employees who were terminated as part of the closure and reorganization of the Company's west coast facilities. The Company is investigating these claims.
Costs related to the facility consolidation plans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 29, 2019
|
|
Accrued Balance at December 29, 2018
|
|
2019 Expenses To Date (1)
|
|
2019 Cash Payments
|
|
Accrued Balance at June 29, 2019
|
|
Total Costs Incurred To Date
|
|
Total Expected Costs
|
Corporate Office Consolidation Plan
|
$
|
98
|
|
|
$
|
8
|
|
|
$
|
42
|
|
|
$
|
64
|
|
|
$
|
824
|
|
|
$
|
824
|
|
Profit Improvement Plan
|
846
|
|
|
3,808
|
|
|
4,271
|
|
|
383
|
|
|
7,602
|
|
|
8,294
|
|
Total All Plans
|
$
|
944
|
|
|
$
|
3,816
|
|
|
$
|
4,313
|
|
|
$
|
447
|
|
|
$
|
8,426
|
|
|
$
|
9,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Impairments
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,323
|
|
|
$
|
3,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance at December 30, 2017
|
|
2018 Expenses To Date (1)
|
|
2018 Cash Payments
|
|
Accrued Balance at June 30, 2018
|
|
|
|
|
Corporate Office Consolidation Plan
|
$
|
171
|
|
|
$
|
4
|
|
|
$
|
40
|
|
|
$
|
135
|
|
|
|
|
|
Profit Improvement Plan
|
334
|
|
|
402
|
|
|
653
|
|
|
83
|
|
|
|
|
|
Totals
|
$
|
505
|
|
|
$
|
406
|
|
|
$
|
693
|
|
|
$
|
218
|
|
|
|
|
|
(1) Costs incurred under these plans are classified as "facility consolidation and severance expenses, net" in the Company's Consolidated Condensed Statements of Operations.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 22 - 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 29,
2019
|
|
June 30,
2018
|
|
June 29,
2019
|
|
June 30,
2018
|
Income (loss) from discontinued operations:
|
|
|
|
|
|
|
|
Workers' compensation credits from former textile operations
|
$
|
3
|
|
|
$
|
208
|
|
|
31
|
|
|
214
|
|
Environmental remediation costs from former textile operations
|
(38
|
)
|
|
(51
|
)
|
|
(97
|
)
|
|
(79
|
)
|
Income (loss) from discontinued operations, before taxes
|
$
|
(35
|
)
|
|
$
|
157
|
|
|
(66
|
)
|
|
135
|
|
Income tax benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
(35
|
)
|
|
$
|
157
|
|
|
$
|
(66
|
)
|
|
$
|
135
|
|
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
$1,749
as of June 29, 2019 and
$1,728
as of December 29, 2018. 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 the Company's estimates. Pre-tax cost for environmental remediation obligations classified as discontinued operations were primarily a result of specific events requiring action and additional expense in each period.
NOTE 23 - RELATED PARTY TRANSACTIONS
The Company was a party to a five-year lease with the seller of Atlas Carpet Mills, Inc. to lease three manufacturing facilities as part of the acquisition in 2014. The original lease agreements have expired and the Company has entered into new agreements for two of the three manufacturing facilities. The new lease agreements will expire on September 30, 2019. The lessor was controlled by an associate of the Company until March of 2019. Rent paid to the lessor during the three and six months ended June 29, 2019 was
$123
and
$374
, respectively. Rent paid to the lessor during the three and six months ended June 30, 2018 was
$251
and
$501
, respectively. 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
7.2%
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 during the three and six months ended June 29, 2019 were approximately
$1,599
and
$3,034
, respectively; or approximately
2.1%
of the Company's cost of goods sold. Total purchases from Engineered Floors during the three and six months ended June 30, 2018 were approximately
$2,855
and
$4,570
, respectively; or approximately
3.5%
and
2.9%
, respectively, of the Company's cost of goods sold. 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 ten-year lease with the Rothman Family Partnership to lease a facility as part of the Robertex acquisition in 2013. The controlling principle of the lessor was an associate of the Company until June 30, 2018. Rent paid to the lessor during the three and six months ended June 29, 2019 was
$70
and
$140
, respectively. Rent paid to the lessor during the three and six months ended June 30, 2018 was
$69
and
$138
, respectively. The lease was based on current market values for similar facilities. In addition, the Company had a note payable to Robert P. Rothman related to the acquisition of Robertex Inc. The note matured on June 30, 2018.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 24 - SUBSEQUENT EVENT
On August 7, 2019, the Company entered into a letter of intent to sell its facility in Santa Ana, California. The transaction is subject to entering into a definitive purchase and lease agreement. Under the lease agreement, the company will lease the property for
10
years with
two
5
year renewal options. The property consists of 10 acres with one building totaling approximately 200,000 square feet. The transaction is anticipated to close in early October, 2019. The purchase price is in excess of
$40,000
and is anticipated to generate an after tax gain on sale in excess of
$20,000
.