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") 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 28, 2019. Operating results for the three month period ended March 28, 2020 are not necessarily indicative of the results that may be expected for the entire 2020 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 2020
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” This update is a part of FASB’s disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The amendments in this update remove, modify, and add certain disclosure requirements within Topic 820. This standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. 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 adoption of this ASU did not have a significant impact on the consolidated condensed financial statements.
In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. In particular, the risk of cessation of the London Interbank Offered Rate (LIBOR). Among the amendments are expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of the transition from LIBOR to alternative reference interest rates, but does not expect a significant impact to its operating results, financial position or cash flows.
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 smaller reporting entities, ASU 2016-13 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The 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), is not expected to 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 2018-14, “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.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
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 month periods ended March 28, 2020 and March 30, 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Residential floorcovering products
|
$
|
58,780
|
|
|
$
|
63,428
|
|
Commercial floorcovering products
|
21,350
|
|
|
24,508
|
|
Other services
|
448
|
|
|
670
|
|
Total net sales
|
$
|
80,578
|
|
|
$
|
88,606
|
|
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.
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 DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
The activity in the advanced deposits for the three month periods ended March 28, 2020 and March 30, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Beginning contract liability
|
$
|
4,685
|
|
|
$
|
6,013
|
|
Revenue recognized from contract liabilities included in the beginning balance
|
(3,107
|
)
|
|
(7,211
|
)
|
Increases due to cash received, net of amounts recognized in revenue during the period
|
3,621
|
|
|
6,287
|
|
Ending contract liability
|
$
|
5,199
|
|
|
$
|
5,089
|
|
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 8.) The Company does not provide an additional service-type warranty.
NOTE 4 - RECEIVABLES, NET
Receivables are summarized as follows:
|
|
|
|
|
|
|
|
|
|
March 28,
2020
|
|
December 28,
2019
|
Customers, trade
|
$
|
36,025
|
|
|
$
|
34,285
|
|
Other receivables
|
2,385
|
|
|
3,115
|
|
Gross receivables
|
38,410
|
|
|
37,400
|
|
Less: allowance for doubtful accounts
|
(181
|
)
|
|
(262
|
)
|
Receivables, net
|
$
|
38,229
|
|
|
$
|
37,138
|
|
Bad debt expense (credit) was $(35) for the three months ended March 28, 2020 and $89 for the three months ended March 30, 2019.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 5 - INVENTORIES, NET
Inventories are summarized as follows:
|
|
|
|
|
|
|
|
|
|
March 28,
2020
|
|
December 28,
2019
|
Raw materials
|
$
|
34,606
|
|
|
$
|
32,377
|
|
Work-in-process
|
16,207
|
|
|
18,642
|
|
Finished goods
|
66,224
|
|
|
64,978
|
|
Supplies and other
|
225
|
|
|
260
|
|
LIFO reserve
|
(19,035
|
)
|
|
(20,748
|
)
|
Inventories, net
|
$
|
98,227
|
|
|
$
|
95,509
|
|
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
March 28,
2020
|
|
December 28,
2019
|
Land and improvements
|
$
|
3,422
|
|
|
$
|
3,422
|
|
Buildings and improvements
|
51,479
|
|
|
51,432
|
|
Machinery and equipment
|
179,412
|
|
|
179,993
|
|
Assets under construction
|
2,011
|
|
|
1,459
|
|
|
236,324
|
|
|
236,306
|
|
Accumulated depreciation
|
(173,070
|
)
|
|
(170,864
|
)
|
Property, plant and equipment, net
|
$
|
63,254
|
|
|
$
|
65,442
|
|
Depreciation of property, plant and equipment, including amounts for finance leases, totaled $2,980 in the three months ended March 28, 2020 and $3,043 in the three months ended March 30, 2019.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
|
|
|
|
|
|
|
|
|
|
March 28,
2020
|
|
December 28,
2019
|
Compensation and benefits
|
$
|
8,070
|
|
|
$
|
8,804
|
|
Provision for customer rebates, claims and allowances
|
6,974
|
|
|
7,682
|
|
Advanced customer deposits
|
5,199
|
|
|
4,685
|
|
Outstanding checks in excess of cash
|
2,052
|
|
|
—
|
|
Other
|
5,595
|
|
|
4,247
|
|
Accrued expenses
|
$
|
27,890
|
|
|
$
|
25,418
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
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 Condensed Balance Sheets. The following is a summary of the Company's product warranty activity:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Product warranty reserve at beginning of period
|
$
|
1,002
|
|
|
$
|
1,069
|
|
Warranty liabilities accrued
|
278
|
|
|
508
|
|
Warranty liabilities settled
|
(381
|
)
|
|
(528
|
)
|
Changes for pre-existing warranty liabilities
|
—
|
|
|
(14
|
)
|
Product warranty reserve at end of period
|
$
|
899
|
|
|
$
|
1,035
|
|
NOTE 9 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
March 28,
2020
|
|
December 28,
2019
|
Revolving credit facility
|
$
|
61,656
|
|
|
$
|
59,693
|
|
Notes payable - buildings
|
6,109
|
|
|
6,213
|
|
Notes payable - equipment and other
|
2,817
|
|
|
3,533
|
|
Finance lease - buildings
|
11,247
|
|
|
11,296
|
|
Finance lease obligations
|
9,305
|
|
|
8,187
|
|
Deferred financing costs, net
|
(522
|
)
|
|
(571
|
)
|
Total long-term debt
|
90,612
|
|
|
88,351
|
|
Less: current portion of long-term debt
|
6,742
|
|
|
6,684
|
|
Long-term debt
|
$
|
83,870
|
|
|
$
|
81,667
|
|
Revolving Credit Facility
During the fourth quarter of 2019, the Company amended its credit agreement with Wells Fargo Capital Finance to reduce the size of the Senior Credit Facility from $150,000 to $120,000 and adjust the availability limitation related to the fixed coverage ratio from $16,500 to $15,000 upon closing of the sale lease back of the Susan Street property. The changes to the credit facility were implemented by the twelfth and thirteenth amendments to the credit agreement, effective October 3, 2019 and October 22, 2019, respectively. These amendments were intended to permit the sale and leaseback of the Company's Susan Street Facility and, upon completion of the sale, to adjust the credit agreement's borrowing base. 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 March 28, 2020, 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 4.64% at March 28, 2020 and 4.79% at December 28, 2019, 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 $15,000. As part of Amendment Thirteen to the credit agreement an additional availability block of $5,000 was established to be reduced upon reaching a specially defined fixed charge coverage ratio of 1.1 to 1.0 for a consecutive period of 3 months or 6 months. Contingent upon reaching the desired fixed coverage ratio, the availability block will reduce to $2,500
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
when the three-month threshold is reached and $0 once reaching the six-month threshold. Amendment Thirteen also adjusted the size of the restricted borrowing availability that is triggered when the fixed charge coverage ratio is less than 1.1 to 1.0. Subsequent to March 28, 2020, the Company has entered into an amendment to the credit agreement with Wells Fargo Capital Finance. See "Note 24 - Subsequent Event" for further explanation.
As of March 28, 2020, the unused borrowing availability under the revolving credit facility was $25,987; 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 $10,987 (the amount above $15,000) at March 28, 2020. Availability under the credit agreement will vary based on seasonal business factors and periodic changes to the qualified asset base, which consists of accounts receivable, inventories and fixed assets.
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%.
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.
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 11.79% 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.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 10 - LEASES
Balance sheet information related to right-of-use assets and liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
March 28, 2020
|
|
December 28, 2019
|
Operating Leases:
|
|
|
|
|
Operating lease right-of-use assets
|
Operating lease right-of-use assets
|
$
|
24,034
|
|
|
$
|
24,835
|
|
|
|
|
|
|
Current portion of operating lease liabilities
|
Current portion of operating lease liabilities
|
3,169
|
|
|
3,172
|
|
Noncurrent portion of operating lease liabilities
|
Operating lease liabilities
|
21,378
|
|
|
22,123
|
|
Total operating lease liabilities
|
|
$
|
24,547
|
|
|
$
|
25,295
|
|
|
|
|
|
|
Finance Leases:
|
|
|
|
|
Finance lease right-of-use assets (1)
|
Property, plant, and equipment, net
|
$
|
16,703
|
|
|
$
|
15,152
|
|
|
|
|
|
|
Current portion of finance lease liabilities (1)
|
Current portion of long-term debt
|
4,523
|
|
|
4,011
|
|
Noncurrent portion of finance lease liabilities (1)
|
Long-term debt
|
16,029
|
|
|
15,472
|
|
|
|
$
|
20,552
|
|
|
$
|
19,483
|
|
(1) Includes leases classified as failed sale-leaseback transactions.
Lease cost recognized in the consolidated condensed financial statements is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 28, 2020
|
|
March 30, 2019
|
Operating lease cost
|
|
$
|
1,292
|
|
|
$
|
908
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
Amortization of lease assets
|
|
790
|
|
|
748
|
|
Interest on lease liabilities
|
|
343
|
|
|
350
|
|
Total finance lease costs
|
|
$
|
1,133
|
|
|
$
|
1,098
|
|
Other supplemental information related to leases is summarized as follows:
|
|
|
|
|
|
|
|
|
|
March 28, 2020
|
|
|
March 30, 2019
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
8.27
|
|
|
6.30
|
|
Finance leases
|
|
11.35
|
|
|
11.50
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
6.98
|
%
|
|
8.44
|
%
|
Finance leases
|
|
7.27
|
%
|
|
6.61
|
%
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities for the three months ended March 28, 2020:
|
|
|
|
|
Operating cash flows from operating leases
|
|
1,228
|
|
|
968
|
|
Operating cash flows from finance leases
|
|
343
|
|
|
350
|
|
Financing cash flows from finance leases
|
|
1,151
|
|
|
1,038
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
The following table summarizes the Company's undiscounted future minimum lease payments under non-cancellable contractual obligations for operating and financing liabilities as of March 28, 2020:
|
|
|
|
|
|
|
Fiscal Year
|
|
Operating Leases
|
Finance Leases
|
2020
|
|
3,614
|
|
4,432
|
|
2021
|
|
4,465
|
|
5,122
|
|
2022
|
|
4,073
|
|
2,790
|
|
2023
|
|
3,200
|
|
1,698
|
|
2024
|
|
2,893
|
|
1,042
|
|
Thereafter
|
|
14,466
|
|
16,039
|
|
Total future minimum lease payments (undiscounted)
|
|
32,711
|
|
31,123
|
|
Less: Present value discount
|
|
(8,164
|
)
|
(10,571
|
)
|
Total lease liability
|
|
24,547
|
|
20,552
|
|
NOTE 11 - FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange value of an asset or a liability in an orderly transaction between market participants. The fair value guidance outlines a valuation framework and establishes a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and disclosures. The hierarchy consists of three levels as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities as of the reported date;
Level 2 - Other than quoted market prices in active markets for identical assets or liabilities, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other than quoted prices for assets or liabilities and prices that are derived principally from or corroborated by market data by correlation or other means; and
Level 3 - Measurements using management's best estimate of fair value, where the determination of fair value requires significant management judgment or estimation.
The following table reflects the fair values of assets and liabilities measured and recognized at fair value on a recurring basis on the Company's Consolidated Condensed Balance Sheets as of March 28, 2020 and December 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
March 28,
2020
|
|
December 28,
2019
|
|
Fair Value Hierarchy Level
|
Liabilities:
|
|
|
|
|
|
Interest rate swaps (1)
|
$
|
2,590
|
|
|
$
|
1,653
|
|
|
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 months ending March 28, 2020 or March 30, 2019. If any, the Company recognizes the transfers at the end of the reporting period.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 28,
2020
|
|
December 28,
2019
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Financial assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
19
|
|
|
$
|
19
|
|
|
$
|
769
|
|
|
$
|
769
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
Long-term debt, including current portion
|
70,060
|
|
|
69,986
|
|
|
68,868
|
|
|
72,115
|
|
Finance leases, including current portion
|
20,552
|
|
|
21,671
|
|
|
19,483
|
|
|
20,361
|
|
Operating leases, including current portion
|
24,547
|
|
|
24,547
|
|
|
25,295
|
|
|
25,295
|
|
Interest rate swaps
|
2,590
|
|
|
2,590
|
|
|
1,653
|
|
|
1,653
|
|
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 12 - DERIVATIVES
The Company's earnings, cash flows and financial position are exposed to market risks relating to interest rates. It is the Company's policy to minimize its exposure to adverse changes in interest rates and manage interest rate risks inherent in funding the Company with debt. The Company addresses this risk by maintaining a mix of fixed and floating rate debt and entering into interest rate swaps for a portion of its variable rate debt to minimize interest rate volatility.
The following is a summary of the Company's interest rate swaps outstanding as of March 28, 2020:
|
|
|
|
|
|
|
|
|
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
|
$
|
6,109
|
|
(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 following table summarizes the fair values of derivative instruments included in the Company's financial statements:
|
|
|
|
|
|
|
|
|
|
|
|
Location on Consolidated Balance Sheets
|
|
Fair Value
|
|
|
March 28,
2020
|
|
December 28,
2019
|
Liability Derivatives:
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
Interest rate swaps, current portion
|
Accrued expenses
|
|
$
|
1,485
|
|
|
$
|
841
|
|
Interest rate swaps, long-term portion
|
Other long-term liabilities
|
|
1,105
|
|
|
812
|
|
Total Liability Derivatives
|
|
|
$
|
2,590
|
|
|
$
|
1,653
|
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
The following tables summarize the pre-tax impact of derivative instruments on the Company's financial statements:
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) Recognized in AOCIL on the effective portion of the Derivative
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Derivatives designated as hedging instruments:
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
(1,137
|
)
|
|
$
|
(399
|
)
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from AOCIL on the effective portion into Earnings (1)(2)
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Derivatives designated as hedging instruments:
|
|
|
|
Cash flow hedges - interest rate swaps
|
$
|
208
|
|
|
$
|
(56
|
)
|
|
|
(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 March 28, 2020 is $1,485.
|
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors a 401(k) defined contribution plan that covers approximately 84% 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 expense for this 401(k) plan was $106 and $230 for the three months ended March 28, 2020 and March 30, 2019, respectively.
Additionally, the Company sponsors a 401(k) defined contribution plan that covers approximately 16% of the Company's current associates at one facility who are under a collective-bargaining agreement. 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 $26 and $34 for the three months ended March 28, 2020 and March 30, 2019, 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 $13,159 at March 28, 2020 and $16,203 at December 28, 2019 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 $13,486 at March 28, 2020 and $16,500 at December 28, 2019 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 $78 and $83 for the three months ended March 28, 2020 and March 30, 2019, 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.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 14 - INCOME TAXES
The benefit rate for the three months ending March 28, 2020 was 0.1% compared with an effective tax rate of 1.5% for the three months ending March 30, 2019. 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 three months of 2020. The Company is in a net deferred tax liability position of $91 at March 28, 2020 and December 28, 2019, 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 $487 and $480 at March 28, 2020 and December 28, 2019, respectively. Such benefits, if recognized, would affect the Company's effective tax rate. There were no significant interest or penalties accrued as of March 28, 2020 and December 28, 2019.
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 2015 remain open to examination for U.S. federal income taxes. The majority of state jurisdictions remain open for tax years subsequent to 2015. A few state jurisdictions remain open to examination for tax years subsequent to 2014.
NOTE 15 - 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
|
|
March 28,
2020
|
|
March 30,
2019
|
Basic earnings (loss) per share:
|
|
|
|
Loss from continuing operations
|
$
|
(2,613
|
)
|
|
$
|
(6,641
|
)
|
Less: Allocation of earnings to participating securities
|
—
|
|
|
—
|
|
Loss from continuing operations available to common shareholders - basic
|
$
|
(2,613
|
)
|
|
$
|
(6,641
|
)
|
Basic weighted-average shares outstanding (1)
|
15,356
|
|
|
15,809
|
|
Basic earnings (loss) per share - continuing operations
|
$
|
(0.17
|
)
|
|
$
|
(0.42
|
)
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
Loss from continuing operations available to common shareholders - basic
|
$
|
(2,613
|
)
|
|
$
|
(6,641
|
)
|
Add: Undistributed earnings reallocated to unvested shareholders
|
—
|
|
|
—
|
|
Loss from continuing operations available to common shareholders - basic
|
$
|
(2,613
|
)
|
|
$
|
(6,641
|
)
|
Basic weighted-average shares outstanding (1)
|
15,356
|
|
|
15,809
|
|
Effect of dilutive securities:
|
|
|
|
Stock options (2)
|
—
|
|
|
—
|
|
Directors' stock performance units (2)
|
—
|
|
|
—
|
|
Diluted weighted-average shares outstanding (1)(2)
|
15,356
|
|
|
15,809
|
|
Diluted earnings (loss) per share - continuing operations
|
$
|
(0.17
|
)
|
|
$
|
(0.42
|
)
|
|
|
(1)
|
Includes Common and Class B Common shares, excluding unvested participating securities of 490 thousand as of March 28, 2020 and 476 thousand as of March 30, 2019.
|
|
|
(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 months ended March 28, 2020 were 278 thousand and for the three months ended March 30, 2019 were 394 thousand.
|
NOTE 16 - 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 $93 for the three months ended March 28, 2020 and $157 for the three months ended March 30, 2019.
On March 12, 2020, the Company issued 131,867 shares of restricted stock to officers and other key employees. The grant-date fair value of the awards was $132, or $1.00 per share, and is expected to be recognized as stock compensation expense over a weighted-average period of 8.4 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.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Components of accumulated other comprehensive loss, net of tax, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Post-Retirement Liabilities
|
|
Total
|
Balance at December 28, 2019
|
$
|
(1,048
|
)
|
|
$
|
240
|
|
|
$
|
(808
|
)
|
Unrealized gain on interest rate swaps
|
(1,137
|
)
|
|
—
|
|
|
(1,137
|
)
|
Reclassification of loss into earnings from interest rate swaps, net of tax of $0
|
208
|
|
|
—
|
|
|
208
|
|
Reclassification of net actuarial gain into earnings from postretirement benefit plans
|
—
|
|
|
(7
|
)
|
|
(7
|
)
|
Reclassification of prior service credits into earnings from postretirement benefit plans
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Balance at March 28, 2020
|
$
|
(1,977
|
)
|
|
$
|
232
|
|
|
$
|
(1,745
|
)
|
NOTE 18 - 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 21).
Legal Proceedings
The Company has been sued, together with 3M Company and approximately 30 other named defendants and unnamed "fictitious defendants" including various carpet manufacturers and suppliers, in four lawsuits whereby the plaintiffs seek monetary damages and injunctive relief related to the manufacture, supply, and/or use of certain chemical products in the manufacture, finishing, and treatment of carpet products in the Dalton, Georgia area. These chemical products allegedly include without limitation perflourinated compounds ("PFC") such as perflourinated acid ("PFOA") and perfluorooctane sulfonate ("PFOS"). In each lawsuit, the plaintiff(s) alleges that, as a consequence of these actions, these chemical compounds discharge or leach into the water systems around Dalton and then flow into the waters in or near the water bodies from which the plaintiff(s) draw for drinking water.
Two of these lawsuits were filed in Alabama. The first lawsuit in Alabama was filed on September 22, 2016 by The Water Works and Sewer Board of the City of Gadsden (Alabama) in the Circuit Court of Etowah County, Alabama (styled The Water Works and Sewer Board of the City of Gadsden v. 3A1 Company, et al., Civil Action No. 31-CV-2016-900676.00). The second lawsuit in Alabama was filed on May 15, 2017 by The Water Works and Sewer Board of the Town of Centre (Alabama) in the Circuit Court of Cherokee County, Alabama (styled The Water Works and Sewer Board of the Town of Centre v. 3M Company, et al., Civil Action No. 13-CV- 2017-900049.00). In each of these Alabama lawsuits, the plaintiff seeks damages that include but are not limited to the expenses associated with the future installation and operation of a filtration system capable of removing from the water the chemicals that are allegedly present as a result of the manufacturing and treatment process described above. Each plaintiff requests a jury trial, does not specify an amount of damages other than an assertion that its damages exceed $10, and requests injunctive relief. The Company has answered the complaint in each of these lawsuits, intends to defend those matters vigorously, and is unable to estimate its potential exposure to loss, if any, for these lawsuits at this time.
The other two lawsuits were filed in Georgia. The first lawsuit in Georgia was filed on November 19, 2019 by the City of Rome (Georgia) in the Superior Court of Floyd County, Georgia (styled The City of Rome, Georgia v. 3A1 Company, et al., No. 19CV02405JFL003). The plaintiff in that case also seeks damages that include without limitation the expenses associated with the future installation and operation of a filtration system capable of removing from the water the chemicals that are allegedly present as a result of the manufacturing and treatment process described above. The plaintiff requests a jury trial and also seeks injunctive relief. While the amount of damages is unspecified, the plaintiff asserts it has spent "tens of millions" to remove the chemicals from the county's water supply and will incur additional costs related to removing such chemicals in the future. The
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
Company has answered the complaint, intends to defend the matter vigorously, and is unable to estimate its potential exposure to loss, if any, at this time.
The second lawsuit in Georgia was filed on November 26, 2019 and is presented as a class action lawsuit by and on behalf of a class of persons who obtain drinking water from the City of Rome, Georgia and the Floyd County Water Department (and similarly situated persons) (generally, for these purposes, residents of Floyd County) (styled Jarrod Johnson v. 3M Company, et al., Civil Action No. 19-CV-02448-JFL-003) (the "Class Action Lawsuit"). The plaintiffs in this case allege their damages include without limitation the surcharges incurred for the costs of partially filtering the chemicals from their drinking water. The Complaint requests a jury trial and asserts damages unspecified in amount, in addition to requests for injunctive relief.
NOTE 19 - OTHER (INCOME) EXPENSE, NET
Other operating expense (income), net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Other operating (income) expense, net
|
|
|
|
(Gain) loss on property, plant and equipment disposals
|
$
|
(37
|
)
|
|
$
|
57
|
|
(Gain) loss on currency exchanges
|
(33
|
)
|
|
22
|
|
Retirement income
|
(18
|
)
|
|
(33
|
)
|
Miscellaneous income
|
(4
|
)
|
|
(20
|
)
|
Other operating (income) expense, net
|
$
|
(92
|
)
|
|
$
|
26
|
|
Other income, net is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Other income, net:
|
|
|
|
Post-retirement income
|
$
|
(3
|
)
|
|
$
|
(4
|
)
|
Interest income
|
(2
|
)
|
|
(38
|
)
|
Miscellaneous expense
|
1
|
|
|
—
|
|
Other income, net
|
$
|
(4
|
)
|
|
$
|
(42
|
)
|
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 20 - 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 included 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 aligned its west coast production facilities, better utilizing its west coast real estate by moving production to its Santa Ana, California and Atmore, Alabama operations to more efficiently distribute its west coast products. Furthermore, the Company re-configured 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. The plan is now substantially complete.
Costs related to the facility consolidation plans are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 28, 2020
|
|
Accrued Balance at December 28, 2019
|
|
2020 Expenses To Date (1)
|
|
2020 Cash Payments
|
|
Accrued Balance at March 28, 2020
|
|
Total Costs Incurred To Date
|
|
Total Expected Costs
|
Corporate Office Consolidation Plan
|
$
|
38
|
|
|
$
|
8
|
|
|
$
|
33
|
|
|
$
|
13
|
|
|
$
|
837
|
|
|
$
|
837
|
|
Profit Improvement Plan
|
305
|
|
|
16
|
|
|
138
|
|
|
183
|
|
|
8,816
|
|
|
8,816
|
|
Total All Plans
|
$
|
343
|
|
|
$
|
24
|
|
|
$
|
171
|
|
|
$
|
196
|
|
|
$
|
9,653
|
|
|
$
|
9,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Impairments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,323
|
|
|
$
|
3,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Balance at December 29, 2018
|
|
2019 Expenses To Date (1)
|
|
2019 Cash Payments
|
|
Accrued Balance at March 30, 2019
|
|
|
|
|
Corporate Office Consolidation Plan
|
$
|
98
|
|
|
$
|
5
|
|
|
$
|
22
|
|
|
$
|
81
|
|
|
|
|
|
Profit Improvement Plan
|
846
|
|
|
2,086
|
|
|
2,190
|
|
|
742
|
|
|
|
|
|
Totals
|
$
|
944
|
|
|
$
|
2,091
|
|
|
$
|
2,212
|
|
|
$
|
823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Impairments
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
(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 21 - DISCONTINUED OPERATIONS
The Company has either sold or discontinued certain operations that are accounted for as "Discontinued Operations" under applicable accounting guidance. Discontinued operations are summarized as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 28,
2020
|
|
March 30,
2019
|
Income (loss) from discontinued operations:
|
|
|
|
Workers' compensation (costs) credits from former textile operations
|
$
|
(29
|
)
|
|
$
|
28
|
|
Environmental remediation costs from former textile operations
|
(47
|
)
|
|
(59
|
)
|
Income (loss) from discontinued operations, before taxes
|
$
|
(76
|
)
|
|
$
|
(31
|
)
|
Income tax benefit
|
—
|
|
|
—
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
(76
|
)
|
|
$
|
(31
|
)
|
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 $2,005 as of March 28, 2020 and $1,987 as of December 28, 2019. 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 22 - 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 expired and the Company entered into new agreements for two of the three manufacturing facilities. The new lease agreements expired 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 months ended March 30, 2019 was $251. 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 7.5% 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 months ended March 28, 2020 were approximately $1,277; or approximately 2.1% of the Company's cost of goods sold. Total purchases from Engineered Floors during the three months ended March 30, 2019 were approximately $1,435 ; or approximately 2.1% 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 months ended March 28, 2020 was $72. Rent paid to the lessor during the three months ended March 30, 2019 was $70. The lease was based on current market values for similar facilities.
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(amounts in thousands, except per share data) (Continued)
NOTE 23 - SUBSEQUENT EVENT
The Company, in response to the COVID-19 pandemic, adjusted the credit commitment of its senior loan facility to more closely resemble the amount of collateralized assets currently available as well as increasing the amount of credit available to the Company. The loan commitment for the Credit Agreement between The Dixie Group, Inc. and Wells Fargo Capital Finance, LLC, the Agent, dated as of September 13, 2011 and most recently amended by the Fourteenth Amendment dated as of May 14, 2020, will be reduced from $120,000 to $100,000 effective May 14, 2020. The Company’s applicable margin has been amended to no longer be subject to average daily excess availability. The applicable margin on base rate loans will be 2.25% and LIBOR rate loans will be 3.25%. The availability limitation related to the fixed coverage ratio has also been amended from $15,000 to $12,500. As part of the agreement, the Company has agreed to pursue and consummate a permitted fixed asset loan on or before June 30, 2020 subject to extension at agent’s discretion. Effective May 14, 2020, as part of the amendment, the Company’s availability block has been amended to $3,500. Subsequent to closing on the fixed asset loan or passage of the deadline for consummation of the loan, the availability block will increase to $6,500.
Subsequent to the fiscal quarter ended March 28, 2020, as the extent of the COVID-19 pandemic became apparent, the Company implemented a continuity plan to maintain the health and safety of associates, preserve cash, and minimize the impact on customers. The response included restrictions on travel, implementation of telecommuting where appropriate and limiting contact and maintaining social distancing between associates and with customers. In line with demand, running schedules have been reduced for most facilities to one shift while simultaneously reducing inventories to align them with the lower customer demand. Cost reductions were implemented including cutting non-essential expenditures, reducing capital expenditures, rotating layoffs and furloughs, select job eliminations and temporary salary reductions. The Company also deferred new product introductions and reduced sample and marketing expenses for 2020. Initiatives were taken with suppliers, lenders and landlords to extend payment terms in the second quarter for existing agreements. The Company is taking advantage of deferral of payroll related taxes under the CARES act as well as deferring payments into its defined contribution retirement plan. The expenses incurred as a result of the continuity plan will be under restructuring and disclosed as such in future filings.