dxyn-20211225
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 25, 2021
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________.
Commission File Number 0-2585
The Dixie Group, Inc.
(Exact name of registrant as specified in its charter)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
Common Stock, $3.00 par value NASDAQ Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
Title of class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ̈ Yes þNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ̈ Yes þNo
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þYes ̈ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þYes ̈ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ̈ Accelerated filer ̈Non-accelerated filer ̈ Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ̈ Yes þ No
The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 27, 2020 (the last business day of the registrant's most recently completed fiscal second quarter) was $10,862,025. The aggregate market value was computed by reference to the closing price of the Common Stock on such date. In making this calculation, the registrant has assumed, without admitting for any purpose, that all executive officers, directors, and holders of more than 10% of a class of outstanding Common Stock, and no other persons, are affiliates. No market exists for the shares of Class B Common Stock, which is neither registered under Section 12 of the Act nor subject to Section 15(d) of the Act.
Indicate the number of shares outstanding of each of the registrant's classes of Common Stock as of the latest practicable date.
Class Outstanding as of February 25, 2022
Class B Common Stock, $3.00 Par Value 1,004,975 shares
Class C Common Stock, $3.00 Par Value — shares
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the following document are incorporated by reference:
Proxy Statement of the registrant for annual meeting of shareholders to be held May 4, 2022 (Part III).
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THE DIXIE GROUP, INC.
Index to Annual Report
on Form 10-K for
Year Ended December 25, 2021
PART I Page
Item 1. Business 4
Item 1A. Risk Factors 6
Item 1B. Unresolved Staff Comments 10
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Mine Safety Disclosures 12
Executive Officers of the Registrant 13
PART II
Item 6. Selected Financial Data 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9A. Controls and Procedures 23
Item 9B. Other Information 23
PART III
Item 10. Directors, Executive Officers and Corporate Governance 24
Item 11. Executive Compensation 24
Item 14. Principal Accounting Fees and Services 25
PART IV
Item 15. Exhibits and Financial Statement Schedules 25
Signatures 26
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm 30
Consolidated Balance Sheets - December 25, 2021 and December 26, 2020 31
Notes to Consolidated Financial Statements 35
Exhibit Index 66
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FORWARD-LOOKING INFORMATION
This Report contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include the use of terms or phrases such as "expects," "estimates," "projects," "believes," "anticipates," "intends," and similar terms and phrases. Such forward-looking statements relate to, among other matters, our future financial performance, business prospects, growth strategies or liquidity. The following important factors may affect our future results and could cause those results to differ materially from our historical results; these factors include, in addition to those "Risk Factors" detailed in Item 1A of this report, and described elsewhere in this document, the cost and availability of capital, raw material and transportation costs related to petroleum price levels, the cost and availability of energy supplies, the loss of a significant customer or group of customers, the ability to attract, develop and retain qualified personnel, materially adverse changes in economic conditions generally in carpet, rug and floorcovering markets we serve and other risks detailed from time to time in our filings with the Securities and Exchange Commission.
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PART I.
Item 1.BUSINESS
General
Our business consists principally of marketing, manufacturing and selling floorcovering products to high-end residential customers through our various sales forces and brands. We focus exclusively on the upper-end of the floorcovering market where we believe we have strong brands and competitive advantages with our style and design capabilities and customer relationships. Our Fabrica, Masland, and Dixie Home brands have a significant presence in the high-end residential floorcovering markets.
Our business participates in markets for soft floorcoverings, which include broadloom carpet and rugs, and hard surfaces, including luxurious vinyl flooring (LVF) and engineered wood. Over the past few years, there has been a significant shift in the flooring marketplace as hard surface products have grown at a rate much faster than soft surface products. We have responded to this accelerated shift to hard surface flooring by launching several initiatives in hard surface offerings. We launched TRUCORTM and TRUCOR PrimeTM offering LVF products. In 2021, we experienced significant growth in sales of our TRUCORTM family of products and our Fabrica Wood program. We continue to innovate in our soft floorcovering residential markets with a new tufting technology, “TECHnique”, which is being showcased in our Masland and Fabrica lines. TECHnique delivers beautiful patterns through precise yarn placement and control at each needle.
We have one reportable segment, Floorcovering.
Our Brands
Our brands are well known, highly regarded and offer meaningful alternatives to the discriminating customer.
Fabrica markets and manufactures luxurious residential carpet, custom rugs, and engineered wood at selling prices that we believe are approximately five times the average for the residential soft floorcovering industry. Its primary customers are interior decorators and designers, selected retailers and furniture stores, luxury home builders and manufacturers of luxury motor coaches and yachts. Fabrica is among the leading premium brands in the domestic marketplace and is known for styling innovation and unique colors and patterns. Fabrica consists of extremely high quality carpets and area rugs in both nylon and wool, with a wide variety of patterns and textures. Fabrica is viewed by the trade as the premier quality brand for very high-end carpet and enjoys an established reputation as a styling trendsetter and a market leader in providing both custom and designer products to the very high-end residential sector.
Masland Residential, founded in 1866, markets and manufactures design-driven specialty carpets and rugs for the high-end residential marketplace. In addition, it offers luxury vinyl flooring products to the marketplace it serves. Its residential broadloom carpet products are marketed at selling prices that we believe are over three times the average for the residential soft floorcovering industry. Its products are marketed through the interior design community, as well as to consumers through specialty floorcovering retailers. Masland Residential has strong brand recognition within the upper-end residential market. Masland Residential competes through innovative styling, color, product design, quality and service.
Dixie Home provides stylishly designed, differentiated products that offer affordable fashion to residential consumers. Dixie Home markets an array of residential tufted broadloom carpet and rugs to selected retailers and home centers under the Dixie Home and private label brands. In addition, it offers luxury vinyl flooring products to the marketplace it serves. Its objective is to make the Dixie Home brand the choice for styling, service and quality in the more moderately priced sector of the high-end residential market. Its products are marketed at selling prices which we believe average two times the soft floorcovering industry's average selling price.
Industry
We are a flooring manufacturer in an industry composed of a wide variety of companies from small privately held firms to large multinationals. In 2020, according to the most recent information available, the U.S. floorcovering industry reported $26.6 billion in sales, down approximately 1.3% from 2019's sales total. In 2020, the primary categories of flooring in the U.S., based on sales dollars, were carpet and rug (38%), luxury vinyl flooring (LVF) (20%), ceramic tile (13%), wood (13%), stone (7%), vinyl (4%), and laminate and other (5%). In 2020, the primary categories of flooring in the U.S., based on square feet, were carpet and rug (45%), luxury vinyl flooring (LVF) (21%), ceramic tile (13%), vinyl (8%), wood (6%), laminate (4%), and stone and other (3%). Each of these categories is influenced by the residential construction, commercial construction, and residential remodeling markets. These markets are influenced by many factors including consumer confidence, spending for durable goods, turnover in housing and the overall strength of the economy.
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The carpet and rug category has two primary markets, residential and commercial, with the residential market making up the largest portion of the industry's sales. A substantial portion of industry shipments is made in response to replacement demand. Residential products consist of broadloom carpets and rugs in a broad range of styles, colors and textures. Commercial products consist primarily of broadloom carpet and modular carpet tile for a variety of institutional applications such as office buildings, restaurant chains, schools and other commercial establishments. The carpet industry also manufactures carpet for the automotive, recreational vehicle, small boat and other industries.
The Carpet and Rug Institute (the "CRI") is the national trade association representing carpet and rug manufacturers. Information compiled by the CRI suggests that the domestic carpet and rug industry is comprised of fewer than 100 manufacturers, with a significant majority of the industry's production concentrated in a limited number of manufacturers focused on the lower end of the price curve. We believe that this industry focus provides us with opportunities to capitalize on our competitive strengths in selected markets where innovative styling, design, product differentiation, focused service and limited distribution add value.
Competition
The floorcovering industry is highly competitive. We compete with other carpet, rug and hard surface manufacturers. In addition, the industry provides multiple floorcovering surfaces such as luxury vinyl tile and wood. Though soft floorcovering is still the dominant floorcovering surface, it has gradually lost market share to hard floorcovering surfaces over the last 25 years. We believe our products are among the leaders in styling and design in the high-end residential carpet markets. However, a number of manufacturers produce competitive products and some of these manufacturers have greater financial resources than we do.
We believe the principal competitive factors in our primary floorcovering markets are styling, color, product design, quality and service. In the high-end residential markets, we compete with various other floorcovering suppliers. Nevertheless, we believe we have competitive advantages in several areas. We have an attractive portfolio of brands that we believe are well known, highly regarded by customers and complementary; by being differentiated, we offer meaningful alternatives to the discriminating customer. We believe our investment in new yarns and innovative tufting and dyeing technologies, strengthens our ability to offer product differentiation to our customers. In addition, we have established longstanding relationships with key suppliers of luxury vinyl flooring and with significant customers in most of our markets. Finally, our reputation for innovative design excellence and our experienced management team enhance our competitive position. See "Risk Factors" in Item 1A of this report.
Backlog
Sales order backlog is not material to understanding our business, due to relatively short lead times for order fulfillment in the markets for the vast majority of our products.
Trademarks
Our floorcovering businesses own a variety of trademarks under which our products are marketed. Among such trademarks, the names "Fabrica", "Masland", "Dixie Home" and TRUCORTM are of greatest importance to our business. We believe that we have taken adequate steps to protect our interest in all significant trademarks.
Customer and Product Concentration
As a percentage of our net sales, one customer, a mass merchant, accounted for approximately 9% in 2021 and 9% in 2020 and as a percentage of our customer's trade accounts receivable, accounted for approximately 20% in 2021 and 23% in 2020. No other customer was more than 10 percent of our sales during the periods presented. During 2021, sales to our top ten customers accounted for approximately 13% of our sales and our top 20 customers accounted for approximately 16% of our sales. We do not make a material amount of sales in foreign countries.
We do not have any single class of products that accounts for more than 10% of our sales.
Seasonality
Our sales historically have normally reached their lowest level in the first quarter, with the remaining sales being distributed relatively equally among the second, third and fourth quarters. During 2020, primarily as a result of the COVID-19 pandemic, our sales reached their lowest level in the second quarter (approximately 19% of our annual sales) with the remaining sales being distributed relatively equally among the first, third and fourth quarters. Working capital requirements have normally reached their highest levels in the third and fourth quarters of the year.
Environmental
Our operations are subject to federal, state and local laws and regulations relating to the generation, storage, handling, emission, transportation and discharge of materials into the environment. The costs of complying with environmental protection laws and
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regulations have not had a material adverse impact on our financial condition or results of operations in the past. See "Risk Factors” in Item 1A of this report.
Raw Materials
Our primary raw material is continuous filament yarn. Nylon is the primary yarn we utilize and, to a lesser extent, wool and polyester yarn is used. Additionally, we utilize polypropylene carpet backing, latex, dyes and chemicals, and man-made topical applications in the construction of our products.The volatility of petroleum prices could adversely affect our supply and cost of synthetic fibers. Our synthetic yarns are purchased primarily from domestic fiber suppliers and wool is purchased from a number of international sources. Our other raw materials are purchased primarily from domestic suppliers, although the majority of our luxury vinyl tile is sourced outside the United States. Where possible, we pass raw material price increases through to our customers; however, there can be no assurance that cost increases can be passed through to customers and that increases in raw material prices will not have an adverse effect on our profitability. See "Risk Factors” in Item 1A of this report. There are multiple sources of nylon yarn; however, an unanticipated termination or interruption of our supply arrangements could adversely affect our supplies of raw materials and could have a material effect on our operations. See "Risk Factors” in Item 1A of this report.
Utilities
We use electricity as our principal energy source, with oil or natural gas used in some facilities for dyeing and finishing operations as well as heating. We have not experienced any material problem in obtaining adequate supplies of electricity, natural gas or oil. Energy shortages of extended duration could have an adverse effect on our operations, and price volatility could negatively impact future earnings. See "Risk Factors” in Item 1A of this report.
Working Capital
We are required to maintain significant levels of inventory in order to provide the enhanced service levels demanded by the nature of our business and our customers, and to ensure timely delivery of our products. Consistent and dependable sources of liquidity are required to maintain such inventory levels. Failure to maintain appropriate levels of inventory could materially adversely affect our relationships with our customers and adversely affect our business. See "Risk Factors” in Item 1A of this report.
Employment Level
At December 25, 2021, we employed 1,322 associates in our operations.
Available Information
Our internet address is www.thedixiegroup.com. We make the following reports filed by us with the Securities and Exchange Commission available, free of charge, on our website under the heading "Investor Relations":
1.annual reports on Form 10-K;
2. quarterly reports on Form 10-Q;
3. current reports on Form 8-K; and
4. amendments to the foregoing reports.
The contents of our website are not a part of this report.
Item 1A. Risk Factors
In addition to the other information provided in this Report, the following risk factors should be considered when evaluating the results of our operations, future prospects and an investment in shares of our Common Stock. Any of these factors could cause our actual financial results to differ materially from our historical results, and could give rise to events that might have a material adverse effect on our business, financial condition and results of operations.
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Our financial condition and results or operations have been and will likely continue to be adversely impacted by the COVID-19 pandemic and the related downturn in economic conditions.
The COVID-19 pandemic continues to impact areas where we operate and sell our products and services. The COVID-19 outbreak in the second quarter of 2020 had a material adverse effect on our ability to operate and our results of operations as public health organizations recommended, and many governments implemented, measures to slow and limit the transmission of the virus, including shelter in place and social distancing ordinances. Although the accessibility of vaccines and other preventive measures have lessened the impact, a new variant may necessitate a return of such restrictive, preventive measures which may have a material adverse effect on our business for an indefinite period of time, such as the potential shut down of certain locations, decreased employee availability, disruptions to the businesses of our selling channel partners, and others. Our suppliers and customers may also face these and other challenges, which could lead to a disruption in our supply chain as well as decreased construction and renovation spending and consumer demand for our products and services. These issues may also materially affect our current and future access to sources of liquidity, particularly our cash flows from operations, and access to financing. The long-term economic impact and near-term financial impacts of the COVID-19 pandemic, including but not limited to, potential near term or long-term risk of asset impairment, restructuring, and other charges, cannot be reliably quantified or estimated at this time due to the uncertainty of future developments.
The floorcovering industry is sensitive to changes in general economic conditions and a decline in residential activity or home remodeling and refurbishment could have a material adverse effect on our business.
The floorcovering industry, in which we participate, is highly dependent on general economic conditions, such as consumer confidence and income, corporate and government spending, interest rate levels, availability of credit and demand for housing. We derive a majority of our sales from the replacement segment of the market. Therefore, economic changes that result in a significant or prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on our business and results of operations.
The residential floorcovering market is highly dependent on housing activity, including remodeling. The U.S. and global economies, along with the residential markets in such economies, can negatively impact the floorcovering industry and our business. Although the impact of a decline in new housing activity is typically accompanied by an increase in remodeling and replacement activity, these activities typically lag during a cyclical downturn. Additional or extended downturns could cause prolonged deterioration. A significant or prolonged decline in residential housing activity could have a material adverse effect on our business and results of operations.
We have significant levels of sales in certain channels of distribution and reduction in sales through these channels could adversely affect our business.
A significant amount of our sales are generated through a certain mass merchant retailer. A change in strategy by this customer to emphasize products at a lower price point than we currently offer will limit future sales opportunities with this customer. The reductions of sales through this channel could adversely affect our business if we are not able to replace the volume through other sales outlets and product offerings. The impact of the event has been minimized due to minimal margins on sales through this channel due to price pressure from the retailer and increased raw material costs for our products. We expect to be able to utilize the production capacity made available to help fulfill the current high demand for residential products.
We have significant levels of indebtedness that could result in negative consequences to us.
We have a significant amount of indebtedness relative to our equity. Insufficient cash flow, profitability, or the value of our assets securing our loans could have a material adverse effect on our ability to generate sufficient funds to satisfy the terms of our senior loan agreements and other debt obligations. Additionally, the inability to access debt or equity markets at competitive rates in sufficient amounts to satisfy our obligations could adversely impact our business. Further, our trade relations depend on our economic viability and insufficient capital could harm our ability to attract and retain customers and or supplier relationships.
Uncertainty in the credit market or downturns in the economy and our business could affect our overall availability and cost of credit.
Uncertainty in the credit markets could affect the availability and cost of credit. Market conditions could impact our ability to obtain financing in the future, including any financing necessary to refinance existing indebtedness. The cost and terms of such financing is uncertain. Continued operating losses could affect our ability to continue to access the credit markets under our current terms and conditions. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.
Our stock price has been and could remain volatile, which could further adversely affect the market price of our stock, our ability to raise additional capital and/or cause us to be subject to securities class action litigation.
The market price of our common stock has historically experienced and may continue to experience significant volatility. Our progress in restructuring our business, our quarterly operating results, our perceived prospects, lack of securities analysts’
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recommendations or earnings estimates, changes in general conditions in the economy or the financial markets, adverse events related to our strategic relationships, significant sales of our common stock by existing stockholders, and other developments affecting us or our competitors could cause the market price of our common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies for reasons unrelated to their operating performance and may adversely affect the price of our common stock. Such market price volatility could adversely affect our ability to raise additional capital. In addition, we may be subject to securities class action litigation as a result of volatility in the price of our common stock, which could result in substantial costs and diversion of management’s attention and resources and could harm our stock price, business, prospects, results of operations and financial condition
We face intense competition in our industry, which could decrease demand for our products and could have a material adverse effect on our profitability.
The floorcovering industry is highly competitive. We face competition from a number of domestic manufacturers and independent distributors of floorcovering products and, in certain product areas, foreign manufacturers. Significant consolidation within the floorcovering industry has caused a number of our existing and potential competitors to grow significantly larger and have greater access to resources and capital than we do. Maintaining our competitive position may require us to make substantial additional investments in our product development efforts, manufacturing facilities, distribution network and sales and marketing activities. These additional investments may be limited by our access to capital, as well as restrictions set forth in our credit facilities. Competitive pressures and the accelerated growth of hard surface alternatives, have resulted in decreased demand for our soft floorcovering products and in the loss of market share to hard surface products. As a result, competition from providers of other soft surfaces has intensified and may result in decreased demand for our products. In addition, we face, and will continue to face, competitive pressures on our sales price and cost of our products. As a result of any of these factors, there could be a material adverse effect on our sales and profitability.
If we are unable to anticipate consumer preferences and successfully develop and introduce new, innovative and updated products, we may not be able to maintain or increase our net revenues and profitability.
Our success depends on our ability to identify and originate product trends as well as to anticipate and react to changing consumer demands in a timely manner. All of our products are subject to changing consumer preferences that cannot be predicted with certainty. In addition, long lead times for certain products may make it hard for us to quickly respond to changes in consumer demands. New products may not receive consumer acceptance as consumer preferences could shift rapidly to different types of flooring products or away from these types of products altogether, and our future success depends in part on our ability to anticipate and respond to these changes. Failure to anticipate and respond in a timely manner to changing consumer preferences could lead to, among other things, lower sales and excess inventory levels, which could have a material adverse effect on our financial condition.
Raw material prices may vary and the inability to either offset or pass on such cost increases or avoid passing on decreases larger than the cost decrease to our customers could have a material adverse effect on our business, results of operations and financial condition.
We require substantial amounts of raw materials to produce our products, including nylon and polyester yarn, as well as wool yarns, synthetic backing, latex, and dyes. Substantially all of the raw materials we require are purchased from outside sources. The prices of raw materials and fuel-related costs vary significantly with market conditions. The fact that we source a significant amount of raw materials means that several months of raw materials and work in process are moving through our supply chain at any point in time. We are sourcing the majority of our new luxury vinyl flooring and wood product lines from overseas. We are not able to predict whether commodity costs will significantly increase or decrease in the future. If commodity costs increase in the future and we are not able to reduce or eliminate the effect of the cost increases by reducing production costs or implementing price increases, our profit margins could decrease. If commodity costs decline, we may experience pressures from customers to reduce our selling prices. The timing of any price reductions and decreases in commodity costs may not align. As a result, our margins could be affected.
Disruption to suppliers of raw materials could have a material adverse effect on us.
Nylon yarn is the principal raw material used in our floorcovering products. A significant portion of such yarn has historically been purchased from one supplier. This yarn supplier was one of the leading fiber suppliers within the industry and had been the exclusive supplier of certain branded fiber technology upon which we formerly relied. Access to these branded fibers is no longer available. We have developed and are developing products and product offerings that use other fiber systems, but there can be no certainty that we will be successful in our efforts to develop and market such products. Additionally, the supply of all nylon yarn and yarn systems has been negatively impacted by a variety of overall market factors. The cost of nylon yarns has risen significantly and availability of nylon yarns has been restricted. Our efforts to develop alternate sources and to diversify our yarn suppliers has been accelerated and has met with some success to date; however, continued supply constraints may impact our ability to successfully develop products and effectively service our customers. An interruption in the supply of these or other raw materials or sourced products used in our business or in the supply of suitable substitute materials or products would disrupt our operations, which could have a material adverse effect on our business. We continually evaluate our sources of yarn and other raw materials for competitive costs, performance characteristics, brand value, and diversity of supply.
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We rely on information systems in managing our operations and any system failure or deficiencies of such systems may have an adverse effect on our business.
Our businesses rely on sophisticated systems to obtain, rapidly process, analyze and manage data. We rely on these systems to, among other things, facilitate the purchase, manufacture and distribution of our products; receive, process and ship orders on a timely basis; and to maintain accurate and up-to-date operating and financial data for the compilation of management information. We rely on our computer hardware, software and network for the storage, delivery and transmission of data to our sales and distribution systems, and certain of our production processes are managed and conducted by computer. Any damage by unforeseen events or system failure which causes interruptions to the input, retrieval and transmission of data or increase in the service time, whether caused by human error, natural disasters, power loss, computer viruses, intentional acts of vandalism, various forms of cybercrimes including and not limited to hacking, ransomware, intrusions and malware or otherwise, could disrupt our normal operations. Depending upon the severity of the incident, there can be no assurance that we can effectively carry out our disaster recovery plan to handle a failure of our information systems, or that we will be able to restore our operational capacity within sufficient time to avoid material disruption to our business. The occurrence of any of these events could cause unanticipated disruptions in service, decreased customer service and customer satisfaction and harm to our reputation, which could result in loss of customers, increased operating expenses and financial losses. Any such events could in turn have a material adverse effect on our business, financial condition, results of operations, and prospects.
On April 17, 2021, we detected a ransomware attack on portions of our information technology systems. We initiated recovery efforts and implemented additional security measures in response. Despite the best efforts toward the security of computer networks, all companies are subject to such attacks by cyber criminals as they become more frequent and their ability to circumvent security measures become more sophisticated.
The long-term performance of our business relies on our ability to attract, develop and retain qualified personnel.
To be successful, we must attract, develop and retain qualified and talented personnel in management, sales, marketing, product design and operations. We compete with other floorcovering companies for these employees and invest resources in recruiting, developing, motivating and retaining them. The failure to attract, develop, motivate and retain key employees could negatively affect our business, financial condition and results of operations.
We are subject to various governmental actions that may interrupt our supply of materials.
We import most of our luxury vinyl flooring ("LVF"), some of our wood offering, some of our rugs and broadloom offerings. Though currently a small part of our business, the growth in LVF products is an important product offering to provide our customers a complete selection of flooring alternatives. Recently there have been trade proposals that threatened these product categories with added tariffs which would make our offerings less competitive compared to those manufactured in other countries or produced domestically. These proposals, if enacted, or if expanded, or imposed for a significant period of time, would materially interfere with our ability to successfully enter into these product categories and could have a material adverse effect upon the company's cost of goods and results of operations.
We may experience certain risks associated with internal expansion, acquisitions, joint ventures and strategic investments.
We continually look for strategic and tactical initiatives, including internal expansion, acquisitions and investment in new products, to strengthen our future and to enable us to return to sustained growth and to achieve profitability. Growth through expansion and acquisition involves risks, many of which may continue to affect us after the acquisition or expansion. An acquired company, operation or internal expansion may not achieve the levels of revenue, profitability and production that we expect. The combination of an acquired company’s business with ours involves risks. Further, internally generated growth that involves expansion involves risks as well. Such risks include the integration of computer systems, alignment of human resource policies and the retention of valued talent. Reported earnings may not meet expectations because of goodwill and intangible asset impairment, other asset impairments, increased interest costs and issuance of additional securities or debt as a result of these acquisitions. We may also face challenges in consolidating functions and integrating our organizations, procedures, operations and product lines in a timely and efficient manner.
The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our revenues, level of expenses and operating results. Failure to successfully manage and integrate an acquisition with our existing operations or expansion of our existing operations could lead to the potential loss of customers of the acquired or existing business, the potential loss of employees who may be vital to the new or existing operations, the potential loss of business opportunities or other adverse consequences that could have a material adverse effect on our business, financial condition and results of operations. Even if integration occurs successfully, failure of the expansion or acquisition to achieve levels of anticipated sales growth, profitability or productivity, or otherwise perform as expected, may have a material adverse effect on our business, financial condition and results of operations.
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We are subject to various environmental, safety and health regulations that may subject us to costs, liabilities and other obligations, which could have a material adverse effect on our business, results of operations and financial condition.
We are subject to various environmental, safety and health and other regulations that may subject us to costs, liabilities and other obligations which could have a material adverse effect on our business. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations of agencies or courts. We could incur material expenditures to comply with new or existing regulations, including fines and penalties and increased costs of our operations. Additionally, future laws, ordinances, regulations or regulatory guidelines could give rise to additional compliance or remediation costs that could have a material adverse effect on our business, results of operations and financial condition. For example, producer responsibility regulations regarding end-of-life disposal could impose additional cost and complexity to our business.
Various federal, state and local environmental laws govern the use of our current and former facilities. These laws govern such matters as:
•Discharge to air and water;
•Handling and disposal of solid and hazardous substances and waste, and
•Remediation of contamination from releases of hazardous substances in our facilities and off-site disposal locations.
Our operations also are governed by laws relating to workplace safety and worker health, which, among other things, establish noise standards and regulate the use of hazardous materials and chemicals in the workplace. We have taken, and will continue to take, steps to comply with these laws. If we fail to comply with present or future environmental or safety regulations, we could be subject to future liabilities. However, we cannot ensure that complying with these environmental or health and safety laws and requirements will not adversely affect our business, results of operations and financial condition.
We may be exposed to litigation, claims and other legal proceedings in the ordinary course of business relating to our products or business, which could have a material adverse effect on our business, results of operations and financial condition.
In the ordinary course of business, we are subject to a variety of work-related and product-related claims, lawsuits and legal proceedings, including those relating to product liability, product warranty, product recall, personal injury, and other matters that are inherently subject to many uncertainties regarding the possibility of a loss to our business. Such matters could have a material adverse effect on our business, results of operations and financial condition if we are unable to successfully defend against or resolve these matters or if our insurance coverage is insufficient to satisfy any judgments against us or settlements relating to these matters. Although we have product liability insurance, the policies may not provide coverage for certain claims against us or may not be sufficient to cover all possible liabilities. Further, we may not be able to maintain insurance at commercially acceptable premium levels. Additionally, adverse publicity arising from claims made against us, even if the claims are not successful, could adversely affect our reputation or the reputation and sales of our products.
Our business operations could suffer significant losses from natural disasters, catastrophes, fire or other unexpected events.
Many of our business activities involve substantial investments in manufacturing facilities and many products are produced at a limited number of locations. These facilities could be materially damaged by natural disasters, such as floods, tornadoes, hurricanes and earthquakes, or by fire or other unexpected events such as adverse weather conditions or other disruptions to our facilities, supply chain or our customer's facilities. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, and/or suffer material losses in operational capacity, which could have a material adverse impact on our business, financial condition and results of operations.
Item 1B.UNRESOLVED STAFF COMMENTS
None.
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Item 2. PROPERTIES
The following table lists our facilities according to location, type of operation and approximate total floor space as of February 25, 2022:
Location Type of Operation Approximate Square Feet
Administrative:
Saraland, AL* Administrative 29,000
Santa Ana, CA* Administrative 4,000
Calhoun, GA Administrative 10,600
Dalton, GA* Administrative 50,800
Total Administrative 94,400
Manufacturing and Distribution:
Atmore, AL Carpet Manufacturing, Distribution 610,000
Roanoke, AL Carpet Yarn Processing 204,000
Saraland, AL* Carpet, Rug and Tile Manufacturing, Distribution 384,000
Porterville, CA* Carpet Yarn Processing 249,000
Santa Ana, CA* Carpet and Rug Manufacturing, Distribution 200,000
Adairsville, GA Samples and Rug Manufacturing, Distribution 292,000
Calhoun, GA Carpet Dyeing & Processing 193,300
Eton, GA Carpet Manufacturing, Distribution 408,000
Dalton, GA* Samples Warehouse and Distribution 40,000
Total Manufacturing and Distribution 2,580,300
In addition to the facilities listed above, we lease a small amount of office space in various locations.
In our opinion, our manufacturing facilities are well maintained and our machinery is efficient and competitive. Operations of our facilities generally vary between 120 and 168 hours per week. Substantially all of our owned properties are subject to mortgages, which secure the outstanding borrowings under our senior credit facilities.
Item 3. LEGAL PROCEEDINGS
We have 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) alleged that, as a consequence of these actions, these chemical compounds have discharged or leached into the water systems around Dalton and then flow into the waters in or near the water bodies from which the plaintiff(s) draw for drinking water.
Two of these lawsuits were filed in Alabama. The first lawsuit in Alabama was filed on September 22, 2016 by The Water Works and Sewer Board of the City of Gadsden (Alabama) in the Circuit Court of Etowah County, Alabama (styled The Water Works and Sewer Board of the City of Gadsden v. 3M 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). These lawsuits have been settled upon payment to the plaintiff of a sum deemed to be immaterial. Both lawsuits have been dismissed.
The other two lawsuits were filed in Georgia. The first lawsuit in Georgia was filed on November 19, 2019 by the City of Rome (Georgia) in the Superior Court of Floyd County, Georgia (styled The City of Rome, Georgia v. 3M Company, et al., No. 19CV02405JFL003). The second lawsuit in Georgia was originally filed on November 26, 2019 and is presented as a class action lawsuit by and on behalf of a class of persons who obtain drinking water from the City of Rome, Georgia and the Floyd County Water Department (and similarly situated persons) (generally, for these purposes, residents of Floyd County) (styled Jarrod Johnson v. 3M Company, et al., Civil Action No. 19-CV-02448-JFL-003) (the "Class Action Lawsuit"). On January 10, 2020, the Class Action Lawsuit was removed to the United States District Court for the Northern District of Georgia, Rome Division (styled Jarrod Johnson v. 3M Company, et al Civil Action No. 4:20-CV-0008-AT). We agreed to settle and obtain
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dismissal of these lawsuits shortly after the end of the third quarter of 2021 upon payment of a sum to the plaintiff in the City of Rome matter. We deem the sum of the payment to be immaterial to the Company. Delivery of the settlement agreement and dismissal of each of the matters is pending.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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Pursuant to instruction G of Form 10-K the following is included as an unnumbered item to PART I.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions and offices held by the executive officers of the registrant as of February 25, 2022, are listed below along with their business experience during the past five years.
Name, Age and Position Business Experience During Past Five Years
The executive officers of the registrant are generally elected annually by the Board of Directors at its first meeting held after each annual meeting of our shareholders.
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PART II.
Item 5.MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock trades on the NASDAQ Global Market under the symbol DXYN. No market exists for our Class B Common Stock.
As of February 25, 2022, the total number of holders of our Common Stock was approximately 4,445 including an estimated 3,700 shareholders who hold our Common Stock in nominee names. The total number of holders of our Class B Common Stock was 10.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
Three Fiscal Months Ended December 26, 2020 — $ — — —
*The company had no active programs to repurchase stock from the market
Dividends and Price Range of Common Stock
There is a restriction on the payment of dividends under our revolving credit facility and we have not paid any dividends in the years ended December 25, 2021 and December 26, 2020.
The following table provides the price range of common stock for the four fiscal quarterly periods in the years ended December 25, 2021 and December 26, 2020.
THE DIXIE GROUP, INC.
QUARTERLY PRICE RANGE OF COMMON STOCK
FISCAL QUARTER
Common Stock Prices:
Common Stock Prices:
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Shareholder Return Performance Presentation
We compare our performance to two different industry indices published by Dow Jones, Inc. The first of these is the Dow Jones US Furnishings Index, which is composed of publicly traded companies classified by Dow Jones in the furnishings industry. The second is the Dow Jones US Building Materials & Fixtures Index, which is composed of publicly traded companies classified by Dow Jones in the building materials and fixtures industry.
In accordance with SEC rules, set forth below is a line graph comparing the yearly change in the cumulative total shareholder return on our Common Stock against the total return of the Standard & Poor's Small Cap 600 Stock Index, plus both the Dow Jones US Furnishings Index and the Dow Jones US Building Materials & Fixtures Index, in each case for the five year period ended December 31, 2021. The comparison assumes that $100.00 was invested on December 31, 2016, in our Common Stock, the S&P Small Cap 600 Index, and each of the two Peer Groups, and assumes the reinvestment of dividends.
The foregoing shareholder performance presentation shall not be deemed "soliciting material" or to be "filed" with the Commission subject to Regulation 14A, or subject to the liabilities of Section 18 of the Exchange Act.
Item 6. SELECTED FINANCIAL DATA
As part of the scaled disclosures for smaller reporting companies, selected financial data is not required.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report.
OVERVIEW
Our business consists principally of marketing, manufacturing and selling floorcovering products to high-end customers through our various sales forces and brands. We focus primarily on the upper end of the floorcovering market where we believe we have strong brands and competitive advantages with our style and design capabilities and customer relationships. Our Fabrica, Masland, and Dixie Home brands have a significant presence in the high-end residential floorcovering markets. Dixie International sells all of our brands outside of the North American market.
Historically, we participated in the upper end specified commercial flooring marketplace through our Atlas | Masland Contract brand. On September 13, 2021, we sold our Commercial business. The results of our Commercial business activity are included in discontinued operations in the included financial statements.
Our net sales from continuing operations were $341 million for the fiscal year ended December 25, 2021 and $251 million for the fiscal year ended December 26, 2020. Comparisons to the prior year are skewed by the negative impact of the COVID-19 pandemic in the second quarter of 2020 as well as high demand for residential products in 2021. Strong activity in the housing markets related to remodeling and new home construction have driven a strong demand for residential floor covering products in 2021.
Our net income for the twelve months ended December 25, 2021 was $1.6 million. The income was driven by strong sales volume, resulting in high production volume in our manufacturing plants, and selling and administrative expenses at levels that are favorably in line with sales volume when compared with prior periods. These favorable areas were offset by rising costs of raw materials and unfavorable adjustments to our LIFO inventory reserve, both of which negatively impacted our gross margin on the year.
Our interest expense for the twelve month period ended December 25, 2021 was $4,742 which compares favorably to the interest expense of $5,803 from the same period in the prior year. The reduced interest expense is a factor of our reduction and restructuring of debt over the last three years which included the sale and leaseback transaction for our facility in Santa Anna, California in the fourth quarter of 2018 and the divestiture of our Commercial division in the third quarter of 2021. We have reduced debt by $64 million from our most recent high level of debt at $141 million at September 29, 2018 to $77 million at December 25, 2021.
During the second quarter of 2021, the trademark for certain branded fibers our company has historically used in certain products was sold to a mass market retailer. Under the terms of the agreement, the availability of the trademark for use by our company, and others in the industry, was phased out. Prior to the sale of this trademark, our company had previously begun developing alternative offerings in response to prior disruptions in fiber supply. We accelerated the development process and we believe the movement away from dependence on the particular trademark and related fibers will provide the company with opportunities to develop enhanced competitive products with alternate fibers. We have also assisted our specialty retail customers with the transition to our new offerings through a non-disruptive, turnkey solution offering a retail friendly selling solution including new signage and merchandising materials.
RANSOMWARE INCIDENT
On April 17, 2021, we detected a ransomware attack on portions of our information technology systems. Response protocols were initiated immediately, we contacted our cybersecurity insurance provider, notified legal authorities and engaged cybersecurity experts. All systems impacted by this attack have been substantially restored and additional security measures have been put in place. We continue to assess the financial impact of the interruption to our business caused by this event.
COVID-19 PANDEMIC
After experiencing a significant reduction in sales volume with the initial onset of the COVID-19 pandemic in the second quarter of 2020, we started to see a gradual and consistent improvement in sales through the remainder of 2020 and throughout 2021. The sales growth was driven by a strong housing market and high residential remodeling activity. Although the pandemic continued in 2021, and we continue to take necessary safety precautions to protect the health of our employees, we have been able to limit the impact on operations. However, we cannot be certain as to any additional future impact of the COVID-19 crisis.
DIVESTITURE OF COMMERCIAL BUSINESS
On September 13, 2021, the Company sold its Atlas|Masland commercial business (the “Commercial Business”) to Mannington Mills, Inc. (the “Purchaser”).
In accordance with the Asset Purchase Agreement dated September 13, 2021, the Company sold assets that include certain inventory and certain items of machinery and equipment used exclusively in the Commercial Business, and related intellectual
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property for a purchase price of $20.5 million. The Purchaser also assumed the liability to fulfill the orders represented by advance customer deposit liabilities of $3.1 million.
The Company retained the Commercial Business’ cash deposits, all accounts receivable, and certain inventory and equipment. Additionally, the Company agreed not to compete with the specified commercial business and the Atlas|Masland markets for a period of 5 years following September 13, 2021. The agreement allows for the Company to sell the commercial inventory retained by the company after the divestiture.
As a result of the transaction the Company has effectively exited the Commercial Business and will now focus exclusively on its residential floorcovering segment. The sale of Atlas|Masland represents a strategic shift that will have a major effect on the Company’s operations. The Company has accounted for the transaction as discontinued operations on the date the entity was disposed. Accordingly, the Company is reporting the results of Atlas|Masland operations and cash flows, and balance sheet classifications for the current and comparative periods as discontinued operations. Prior to the consummation of the sale, the Company was neither actively marketing the business for sale nor had intentions to abandon the Commercial Business and as a result did not present the results as assets held for sale or discontinued operations in prior filings. See footnotes to the financial statements for the Company’s discontinued operations reporting.
At closing, the Company received approximately $18.4 million in net proceeds, after depositing $2.1 million within an escrow account. The escrow account is for certain potential seller indemnifications and will be released to the Company in two installments. The first installment, for 50% of the escrow, was paid to the company 90 days after closing and the remaining 50% of the original escrow amount will be paid 18 months from the closing date. In order to release liens on certain fixed assets included in the Asset Purchase Agreement, the Company placed $2.1 million in cash collateral in an account with the lender (Greater Nevada Credit Union). The remaining proceeds were applied to the Company's debt with its senior credit facility (Fifth Third Bank).
The gain on the sale of assets is summarized as follows:
Net Proceeds, including escrowed funds 20,500
Inventory, net (9,195)
Contract Liabilities 3,127
Net tangible assets sold (8,346)
Gain on sale of assets sold, prior to associated costs 12,154
Other transaction related costs
Adjustments to Accruals, Reserves and Allowances (8,462) 1
Transaction Costs (1,032) 2
Total other transaction related costs (9,494)
Gain on sale of discontinued operations 2,660
1) For the remaining retained commercial inventory and fixed assets, the Company recognized adjustment to recognize the effects of the transaction. For inventory, the Company recognized lower of cost or market adjustments of approximately $6.6 million. The Company’s remaining fixed assets will be disposed of by sale and the Company recognized an adjustment of approximately $1.8 million to reflect the lower of its carrying value or estimated fair value less cost to sell. For these assets, the Company has suspended the associated depreciation and will recognize changes in the fair value less cost to sell as gains or losses in future periods until the date of sale.
2) Transaction costs were legal expenses and involuntary employee termination costs related to one-time benefit arrangements.
In addition, the Company and the Purchaser simultaneously entered into a transition services agreement pursuant to which the Company assisted Mannington in transitioning the AtlasMasland business to Mannington, by, among other things, assisting in filling open orders and completing the manufacture of work in progress that resulted in a temporary continued involvement in the Commercial Business until December 31,2021. The Company has shown the results of these operations as a component of discontinued operations.
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RESULTS OF OPERATIONS
Fiscal Year Ended December 25, 2021 Compared with Fiscal Year Ended December 26, 2020
Fiscal Year Ended (amounts in thousands)
Net Sales. Net sales for the year ended December 25, 2021 were $341.2 million compared with $250.9 in the year-earlier period, an increase of 36.0% for the year-over-year comparison. Net sales in 2020 were heavily impacted by the initial outbreak of the COVID-19 pandemic. After the initial impact of the pandemic in the second quarter of 2020, sales demand began to increase in line with the demand in the residential housing market.
Gross Profit. Gross profit, as a percentage of net sales, decreased .3 percentage points in 2021 compared with 2020. The Company saw significant increases in raw material costs throughout 2021. Increases in the price of our products were implemented on a delayed basis after the initial impact of the cost increase. These cost increases created an inflationary impact that increased our LIFO reserve on inventory for continuing operations by $16.2 million in 2021 which negatively impacted our margins. These increased costs were partially offset by higher absorption of fixed costs due to increased sales volume in 2021.
Selling and Administrative Expenses. Selling and administrative expenses were $67.9 million in 2021 compared with $58.2 million in 2020, but lower as a percentage of the higher sales volume. Selling and administrative expenses as a percent of the net sales for 2021 and 2020 were 19.9% and 23.2% respectively. The increase in selling and administrative expenses in 2021 was the result of increased investment in samples, marketing and travel expense in 2021 after the reduced spending in these areas in 2020 due to the pandemic.
Other Operating Income. Net other operating income was $927 thousand in 2021 compared with an income of $108 thousand in 2020. In 2021, the income was primarily the result of $1.7 million in insurance proceeds related to a claim at our Roanoke, Alabama facility partially offset by $1.1 million in legal expenses.
Facility Consolidation and Severance Expenses, Net. Facility consolidation expenses were $.3 million in 2021 compared with $3.8 million in the year-earlier period. The facility consolidation expenses incurred during 2020 were primarily related to our COVID-19 Continuity Plan including severance and financing related charges, as well as residual costs from our Profit Improvement Plan including adjustments for workers' compensation related charges. The expenses in 2021 were primarily related to residual expense activity from the Profit Improvement Plan.
Operating Income (Loss). The operating income in 2021 was $10.0 million compared to a loss of $4.5 million in 2020. The 2020 loss was heavily driven by the negative sales impact during the height of the COVID-19 pandemic. The 2021 operating income was primarily the result of higher sales volume and lower expenses from restructuring.
Interest Expense. Interest expense of $4.7 million in 2021 was a reduction of $1.1 million from $5.8 million incurred in 2020. The reduction is the result of lower levels of debt in 2021 offset by adjustments to other comprehensive income as a result of financing initiatives in the fourth quarter of 2021 and elimination of related interest rate swap agreements.
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Income Tax Expense (Benefit). Our effective income tax rate was an expense of 2.00% in 2021. The benefit relates to federal and state cash taxes paid offset by certain federal and state credits and also includes a benefit for the termination of certain derivative contracts for which there existed stranded tax effects within other comprehensive income. In 2021, we decreased our valuation allowance by $1.4 million related to our net deferred tax asset and specific state net operating loss and state tax credit carryforwards.
Our effective income tax rate was a benefit of 10.49% in 2020. The benefit relates to certain federal and state credits and also includes a benefit for the termination of certain derivative contracts for which there existed stranded tax effects within Other Comprehensive Income.
Net (Income) Loss. Continuing operations reflected an income of $5.2 million, or $0.32 per diluted share in 2021, compared with a loss from continuing operations of $9.8 million, or $0.64 per diluted share in 2020. Our discontinued operations reflected a loss of $3.5 million, or $0.23 per diluted share in 2021 compared with an income of $615 thousand, or $0.04 per diluted share in 2020. Including discontinued operations, we had a net income of $1.6 million, or $0.09 per diluted share, in 2021 compared with a net loss of $9.2 million, or $0.60 per diluted share, in 2020.
Discontinued operations includes the financial results related to the Commercial Business. In the third quarter of 2021, the Company divested the commercial business. The revenue, margin and selling expenses for the Commercial Business have been moved to discontinued operations. See footnote 21 to the consolidated financial statements for additional details related to discontinued operations.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 25, 2021, cash used in continuing operations was $6.6 million driven by increases in working capital. Increased sales volume resulted in an increase of $7.8 million in accounts receivable. Higher demand and increased costs drove inventories up by $14.8 million. These increases were slightly offset by a decrease in accounts payable and other accrued expenses of $7.3 million. The reduction in accounts payable and other accrued expenses was offset by increases in prepaids and other current assets of $1.9 million as the Company was required to prepay one primary raw material provider at fiscal year end December 25, 2021.
Net cash provided by investing activities was $15.1 million in the fiscal year 2021. This amount was primarily the result of the divestiture of the Commercial Business in the third quarter of 2021.
During the year ended December 25, 2021, cash used in financing activities was $.3 million. We had net borrowings of $4.8 million on the revolving credit facility. Payments on notes payable net of borrowings decreased cash by $2.9 million and finance leases were reduced by payments, net of borrowings, of $3.2 million. The balance in amount of checks outstanding in excess of cash at year end 2021 increased from prior year resulting in a cash inflow of $1.1 million.
We believe our operating cash flows, credit availability under our revolving credit facility and other sources of financing are adequate to finance our anticipated liquidity requirements under current operating conditions. We cannot predict, and are unable to know, the long-term impact of the COVID-19 pandemic and the related economic consequences or how these events may affect our future liquidity. Availability under the new Senior Secured Revolving Credit Facility on December 25, 2021 was $37.6 million. Significant additional cash expenditures above our normal liquidity requirements, significant deterioration in economic conditions or continued operating losses could affect our business and require supplemental financing or other funding sources. There can be no assurance that such supplemental financing or other sources of funding can be obtained or will be obtained on terms favorable to us.
Debt Facilities
Revolving Credit Facility. During the fourth quarter of 2020, we entered into a $75.0 million Senior Secured Revolving Credit Facility with Fifth Third Bank National Association as lender. The loan is secured by a first priority security interest on all accounts receivable, cash, and inventory, and provides for borrowing limited by certain percentages of values of the accounts receivable and inventory. The revolving credit facility matures on October 30, 2025.
At our election, advances of the revolving credit facility bear interest at annual rates equal to either (a) LIBOR for 1, 2, or 3 month periods, as defined with a floor or 0.75% or published LIBOR, plus an applicable margin ranging between 1.50% and 2.00%, or (b) the higher of the prime rate plus an applicable margin ranging between 0.50% and 1.00%. The applicable margin is determined based on availability under the revolving credit facility with margins increasing as availability decreases. As of December 25, 2021, the applicable margin on our revolving credit facility was 1.75% for LIBOR and 0.75% for Prime. We pay an unused line fee on the average amount by which the aggregate commitments exceed utilization of the revolving credit facility equal to 0.25% per annum. The weighted-average interest rate on borrowings outstanding under the revolving credit facility was 3.00% at December 25, 2021 and 2.68% at December 26, 2020.
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The agreement is subject to customary terms and conditions and annual administrative fees with pricing varying on excess availability and a fixed charge coverage ratio. The agreement is also subject to certain compliance, affirmative, and financial covenants. We are only subject to the financial covenants if borrowing availability is less than 12.5% of the availability, and remains until the availability is greater than 12.5% for thirty consecutive days. As of December 25, 2021, the unused borrowing availability under the revolving credit facility was $37.6 million.
Term Loans. Effective October 28, 2020, we entered into a $10.0 million principal amount USDA Guaranteed term loan with AmeriState Bank as lender. The term of the loan is 25 years and bears interest at a minimum 5.00% rate or 4.00% above 5-year treasury, to be reset every 5 years at 3.5% above 5-year treasury. The loan is secured by a first mortgage on our Atmore, Alabama and Roanoke, Alabama facilities and requires certain compliance, affirmative, and financial covenants.
Effective October 29, 2020, we entered into a $15.0 million principal amount USDA Guaranteed term loan with the Greater Nevada Credit Union as lender. The term of the loan is 10 years and bears interest at a minimum 5.00% rate or 4.00% above 5- year treasury, to be reset after 5 years at 3.5% above 5-year treasury. The loan is secured by a first lien on a substantial portion of the Company’s machinery and equipment, a certificate of deposit and a second lien on our Atmore and Roanoke facilities. Payments on the loan are interest only over the first three years and principal and interest over the remaining seven years.
Notes Payable - Buildings. On November 7, 2014, we entered into a ten-year $8.3 million note payable to purchase a previously leased distribution center in Adairsville, Georgia. The note payable is scheduled to mature on November 7, 2024 and is secured by the distribution center. The note payable bears interest at a variable rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $35 thousand, plus interest calculated on the declining balance of the note, with a final payment of $4.2 million due on maturity. In addition, we entered into an interest rate swap with an amortizing notional amount effective November 7, 2014 which effectively fixes the interest rate at 4.50%.
Notes Payable - Equipment and Other. Our equipment financing notes have terms ranging from 1 to 7 years, bear interest ranging from 1.60% to 7.00% through the year and are due in monthly installments through their maturity dates. Our equipment financing notes are secured by the specific equipment financed and do not contain any financial covenants.
Finance Lease - Buildings. On January 14, 2019, we entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Saraland Industrial, LLC, an Alabama limited liability company (the “Purchaser”). Pursuant to the terms of the Purchase and Sale Agreement, we sold our Saraland facility, and approximately 17.12 acres of surrounding property located in Saraland, Alabama (the “Property”) to the Purchaser for a purchase price of $11,500. Concurrent with the sale of the Property, we and the Purchaser entered into a twenty-year lease agreement (the “Lease Agreement”), whereby we will lease back the Property at an annual rental rate of $977, subject to annual rent increases of 1.25%. Under the Lease Agreement, we have two (2) consecutive options to extend the term of the Lease by ten years for each such option. This transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded 90% of its fair value. We recorded a liability for the amounts received, will continue to depreciate the asset, and have imputed an interest rate so that the net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term. Concurrently with the sale, we paid off the approximately $5,000 mortgage on the property to First Tennessee Bank National Association and terminated the related fixed interest rate swap agreement.
Finance Lease Obligations. Our finance lease obligations are due in monthly or quarterly installments through their maturity dates. Our finance lease obligations are secured by the specific equipment leased. (See Note 11 to our Consolidated Financial Statements).
Stock-Based Awards
We recognize compensation expense related to share-based stock awards based on the fair value of the equity instrument over the period of vesting for the individual stock awards that were granted. At December 25, 2021, the total unrecognized compensation expense related to unvested restricted stock awards was $1,337 thousand with a weighted-average vesting period of 6.5 years. At December 25, 2021, there was no unrecognized compensation expense related to unvested stock options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at December 25, 2021 or December 26, 2020.
Income Tax Considerations
In the tax year ended December 25, 2021 we increased our valuation allowances by $1.4 million related to our net deferred tax asset and specific state net operating loss and state credit carryforwards.
During 2022 and 2023, we do not anticipate any cash outlays for income taxes to exceed $1 million. This is due to tax loss carryforwards and tax credit carryforwards that will be used to partially offset taxable income. At December 25, 2021, we were in a net deferred tax liability position of $91 thousand.
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Discontinued Operations - Environmental Contingencies
We have reserves for environmental obligations established at five previously owned sites that were associated with our discontinued textile businesses. We have a reserve of $1.9 million for environmental liabilities at these sites as of December 25, 2021. The liability established represents our best estimate of loss and is the reasonable amount to which there is any meaningful degree of certainty given the periods of estimated remediation and the dollars applicable to such remediation for those periods. The actual timeline to remediate, and thus, the ultimate cost to complete such remediation through these remediation efforts, may differ significantly from our estimates. Pre-tax cost for environmental remediation obligations classified as discontinued operations were primarily a result of specific events requiring action and additional expense in each period.
Fair Value of Financial Instruments
At December 25, 2021, we had no assets or liabilities measured at fair value that fall under a level 3 classification in the hierarchy (those subject to significant management judgment or estimation).
Certain Related Party Transactions
We purchase a portion of our product needs in the form of fiber, yarn and carpet from Engineered Floors, an entity substantially controlled by Robert E. Shaw, a shareholder of our Company. An affiliate of Mr. Shaw holds approximately 7.6% of our Common Stock, which represents approximately 3.2% of the total vote of all classes of our Common Stock. Engineered Floors is one of several suppliers of such materials to us. Total purchases from Engineered Floors for 2021 and 2020 were approximately $3.9 million and $4.5 million, respectively; or approximately 1.4% and 2.3% of our cost of goods sold in 2021 and 2020, respectively. Purchases from Engineered Floors are based on market value, negotiated prices. We have no contractual commitments with Mr. Shaw associated with our business relationship with Engineered Floors. Transactions with Engineered Floors are reviewed annually by our board of directors.
We were 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 principal of the lessor was an associate of our Company until June 30, 2018. Rent paid to the lessor during 2021 and 2020 was $196 thousand and$289 thousand, respectively. The lease was based on current market values for similar facilities. This lease was terminated on August 31, 2021.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements of this Form 10-K for a discussion of new accounting pronouncements which is incorporated herein by reference.
Critical Accounting Policies
Certain estimates and assumptions are made when preparing our financial statements. Estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict. As a result, actual amounts could differ from estimates made when our financial statements are prepared.
The Securities and Exchange Commission requires management to identify its most critical accounting policies, defined as those that are both most important to the portrayal of our financial condition and operating results and the application of which requires our most difficult, subjective, and complex judgments. Although our estimates have not differed materially from our experience, such estimates pertain to inherently uncertain matters that could result in material differences in subsequent periods.
We believe application of the following accounting policies require significant judgments and estimates and represent our critical accounting policies. Other significant accounting policies are discussed in Note 1 to our Consolidated Financial Statements.
•Revenue recognition. We derive our revenues primarily from the sale of floorcovering products and processing services. Revenues are recognized when control of these products or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products and services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. We do not have any significant financing components as payment is received at or shortly after the point of sale. We determine revenue recognition through the following steps:
▪Identification of the contract with a customer
▪Identification of the performance obligations in the contract
▪Determination of the transaction price
▪Allocation of the transaction price to the performance obligations in the contract
▪Recognition of revenue when, or as, the performance obligation is satisfied
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•Variable Consideration. The nature of our business gives rise to variable consideration, including rebates, allowances, and returns that generally decrease the transaction price, which reduces revenue. These variable amounts are generally credited to the customer, based on achieving certain levels of sales activity, product returns, or price concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends.
•Customer claims and product warranties. We generally provide product warranties related to manufacturing defects and specific performance standards for our products for a period of up to two years. We accrue for estimated future assurance warranty costs in the period in which the sale is recorded. The costs are included in Cost of Sales in the Consolidated Statements of Operations and the product warranty reserve is included in accrued expenses in the Consolidated Balance Sheets. We calculate our accrual using the portfolio approach based upon historical experience and known trends. We do not provide an additional service-type warranty.
•Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out method (LIFO), which generally matches current costs of inventory sold with current revenues, for substantially all inventories. Reserves are also established to adjust inventories that are off-quality, aged or obsolete to their estimated net realizable value. Additionally, rates of recoverability per unit of off-quality, aged or obsolete inventory are estimated based on historical rates of recoverability and other known conditions or circumstances that may affect future recoverability. Actual results could differ from assumptions used to value our inventory.
•Self-insured accruals. We estimate costs required to settle claims related to our self-insured medical, dental and workers' compensation plans. These estimates include costs to settle known claims, as well as incurred and unreported claims. The estimated costs of known and unreported claims are based on historical experience. Actual results could differ from assumptions used to estimate these accruals.
•Income taxes. Our effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in a future period. We evaluate the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that we are not able to realize all or a portion of our deferred tax assets in the future, a valuation allowance is provided. We recognize such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. We had valuation allowances of $12.9 million at December 25, 2021 and $14.2 million at December 26, 2020. At December 25, 2021, we were in a net deferred tax liability position of $91 thousand. For further information regarding our valuation allowances, see Note 14 to the Consolidated Financial Statements.
•Loss contingencies. We routinely assess our exposure related to legal matters, environmental matters, product liabilities or any other claims against our assets that may arise in the normal course of business. If we determine that it is probable a loss has been incurred, the amount of the loss, or an amount within the range of loss, that can be reasonably estimated will be recorded.
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Dollars in thousands)
Our earnings, cash flows and financial position are exposed to market risks relating to interest rates, among other factors. It is our policy to minimize our exposure to adverse changes in interest rates and manage interest rate risks inherent in funding our Company with debt. We address this financial exposure through a risk management program that includes maintaining a mix of fixed and floating rate debt and the use of interest rate swap agreements (See Note 12 to the Consolidated Financial Statements).
At December 25, 2021, $35,922, or approximately 47% of our total debt, was subject to floating interest rates. A one-hundred basis point fluctuation in the variable interest rates applicable to this floating rate debt would have an annual pre-tax impact of approximately $326. Included in the $35,922, is the amount outstanding for the term loans of $24,764. Both loans are currently set to bear interest of 5% for five years. Every five years, these rates will be reset to reflect the then current 5-year treasury rate plus a margin. See Note 9 for further discussion of these loans.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The supplementary financial information required by ITEM 302 of Regulation S-K is included in PART II, ITEM 5 of this report and the Financial Statements are included in a separate section of this report.
Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such terms are defined in Rules 13(a)-15(e) and 15(d)-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of December 26, 2021, the date of the financial statements included in this Form 10-K (the “Evaluation Date”). Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the Evaluation Date.
(b) Changes in Internal Control over Financial Reporting.No changes in our internal control over financial reporting occurred during the quarter covered by this report that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures, as well as diverse interpretation of U. S. generally accepted accounting principles by accounting professionals. It is also possible that internal control over financial reporting can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. These inherent limitations are known features of the financial reporting process; therefore, while it is possible to design into the process safeguards to reduce such risk, it is not possible to eliminate all risk.
Our management report on internal control over financial reporting is contained in Item 15(a)(1) of this report.
Item 9B.OTHER INFORMATION
None.
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PART III.
Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The sections entitled "Information about Nominees for Director" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 4, 2022 are incorporated herein by reference. Information regarding the executive officers of the registrant is presented in PART I of this report.
We adopted a Code of Business Conduct and Ethics (the "Code of Ethics") which applies to our principal executive officer, principal financial officer and principal accounting officer or controller, and any persons performing similar functions. A copy of the Code of Ethics is incorporated by reference herein as Exhibit 14 to this report.
Audit Committee Financial Expert
The Board has determined that Michael L. Owens is an audit committee financial expert as defined by Item 407 (e)(5) of Regulation S-K of the Securities Exchange Act of 1934, as amended, and is independent within the meaning of the applicable Securities and Exchange Commission rules and NASDAQ standards. For a brief listing of Mr. Owens' relevant experience, please refer to the "Election of Directors" section of the Company's Proxy Statement.
Audit Committee
We have a standing audit committee. At December 25, 2021, members of our audit committee are Michael L. Owens, Chairman, William F. Blue, Jr., Charles E. Brock, Lowry F. Kline, and Hilda S. Murray.
Item 11.EXECUTIVE COMPENSATION
The sections entitled "Compensation Discussion and Analysis", "Executive Compensation Information" and "Director Compensation" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 4, 2022 are incorporated herein by reference.
Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The section entitled "Principal Shareholders", as well as the beneficial ownership table (and accompanying notes), in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 4, 2022 are incorporated herein by reference.
Equity Compensation Plan Information as of December 25, 2021
The following table sets forth information as to our equity compensation plans as of the end of the 2021 fiscal year:
(a) (b) (c)
(1)Includes the options to purchase 141,000 shares of Common Stock under our 2016 Incentive Compensation Plan and 130,320 Performance Units issued under the 2016 Incentive Compensation Plan, each unit being equivalent to one share of Common Stock. Does not include shares of Common Stock issued but not vested pursuant to outstanding restricted stock awards.
(2)Includes the aggregate weighted-average of (i) the exercise price per share for outstanding options to purchase 141,000 shares of Common Stock under our 2016 Incentive Compensation Plan and (ii) the price per share of the Common Stock on the grant date for each of 130,320 Performance Units issued under the 2016 Incentive Compensation Plan (each unit equivalent to one share of Common Stock).
Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The sections entitled "Certain Transactions Between the Company and Directors and Officers" and "Independent Directors" in the Proxy Statement of the registrant for the annual meeting of shareholders to be held May 4, 2022 are incorporated herein by reference.
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Item 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
The section entitled "Audit Fees Discussion" in the Proxy Statement of the Registrant for the Annual Meeting of Shareholders to be held May 4, 2022 is incorporated herein by reference. The independent registered public accounting firm is Dixon Hughes Goodman LLP (PCAOB Firm ID No. 57) located in Atlanta, Georgia.
PART IV.
Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements - The response to this portion of Item 15 is submitted as a separate section of this report.
(2) Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate section of this report.
(3) Exhibits - Please refer to the Exhibit Index which is attached hereto.
(b)Exhibits - The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15(a)(3) above.
(c)Financial Statement Schedules - The response to this portion of Item 15 is submitted as a separate section of this report. See Item 15(a)(2).
Item 16. FORM 10-K SUMMARY
None.
Table of Contents25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 23, 2022 The Dixie Group, Inc.
/s/ DANIEL K. FRIERSON
By: Daniel K. Frierson
Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date
Daniel K. Frierson
/s/ ALLEN L. DANZEY Vice President, Chief Financial Officer March 23, 2022
Allen L. Danzey
D. Kennedy Frierson, Jr.
/s/ WILLIAM F. BLUE, JR. Director March 23, 2022
William F. Blue, Jr.
/s/ CHARLES E. BROCK Director March 23, 2022
Charles E. Brock
/s/ LOWRY F. KLINE Director March 23, 2022
Lowry F. Kline
/s/ HILDA S. MURRAY Director March 23, 2022
Hilda S. Murray
/s/ MICHAEL L. OWENS Director March 23, 2022
Michael L. Owens
Table of Contents26
ANNUAL REPORT ON FORM 10-K
ITEM 8 AND ITEM 15(a)(1) AND ITEM 15(a)(2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 25, 2021
THE DIXIE GROUP, INC.
DALTON, GEORGIA
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FORM 10-K - ITEM 8 and ITEM 15(a)(1) and (2)
THE DIXIE GROUP, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and financial statement schedules of The Dixie Group, Inc. and subsidiaries are included in Item 8 and Item 15(a)(1) and 15(c):
Table of Contents Page
Management's report on internal control over financial reporting 29
Report of independent registered public accounting firm 30
Consolidated balance sheets - December 25, 2021 and December 26, 2020 31
Notes to consolidated financial statements 35
Schedule II - Valuation and Qualifying Accounts 65
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, or are inapplicable, or the information is otherwise shown in the financial statements or notes thereto, and therefore such schedules have been omitted.
Table of Contents28
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended.
Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures, as well as diverse interpretation of U. S. generally accepted accounting principles by accounting professionals. It is also possible that internal control over financial reporting can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Furthermore, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. These inherent limitations are known features of the financial reporting process; therefore, while it is possible to design into the process safeguards to reduce such risk, it is not possible to eliminate all risk.
Management, including our principal executive officer and principal financial officer, has used the criteria set forth in the report entitled “Internal Control - Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) to evaluate the effectiveness of its internal control over financial reporting. Management has concluded that its internal control over financial reporting was effective as of December 25, 2021, based on those criteria.
/s/ Daniel K. Frierson
Chairman of the Board and
Chief Executive Officer
/s/ Allen L. Danzey
Chief Financial Officer
Table of Contents29
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors of The Dixie Group, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Dixie Group, Inc. (the "Company") as of December 25, 2021 and December 26, 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity for each of the two years ended December 25, 2021, and the related notes and schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 25, 2021 and December 26, 2020, and the results of its operations and its cash flows for each of the two years ended December 25, 2021, in conformity with generally accepted accounting principles in the United States of America (“U.S. GAAP”).
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Critical Audit Matter – LIFO Reserve
As disclosed in Notes 1 and 5 to the consolidated financial statements, the Company recognizes its inventory using the last-in, first-out (“LIFO”) method, which requires a reserve to adjust the historical cost carrying value of inventory to the lower of LIFO or market. As of December 25, 2021, the LIFO reserve was approximately $30,498,000. There is inherent complexity in the accounting for the LIFO reserve including complex calculations based on inventory pools, changes in those pools, and lower of cost or market adjustments.
We identified the LIFO reserve as a critical audit matter. The principal considerations for that determination included the complexity of the calculations, the judgment required for market adjustments, and the nature and extent of audit effort required to address the matter.
Our audit procedures to test the appropriateness of the LIFO Reserve, among others:
•We tested the completeness of the LIFO reserve by evaluating whether all appropriate inventory items were included in the LIFO reserve calculation and in the appropriate category. This included reconciling the inventory used to calculate the LIFO reserve to the inventory subledger.
•We independently recalculated management’s LIFO pool calculation, including pool increases or inventory liquidations.
•We tested the aggregation of the pools used to arrive at the LIFO reserve, and considered whether methodologies were consistently applied, or that changes, if any, were in accordance with U.S. GAAP.
•We tested a sample of inventory items and tested whether the lower of cost or market adjustments made by management were in accordance with U.S. GAAP.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2013.
Atlanta, Georgia
March 23, 2022
Table of Contents30
THE DIXIE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,471 $ 1,920
Current assets of discontinued operations 5,991 23,464
LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 2,752 8,506
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt 3,361 6,116
Current portion of operating lease liabilities 2,528 3,089
Current liabilities of discontinued operations 5,362 11,502
LONG-TERM LIABILITIES OF DISCONTINUED OPERATIONS 4,488 6,308
COMMITMENTS AND CONTINGENCIES (See Note 18)
STOCKHOLDERS' EQUITY
Accumulated other comprehensive income (loss) 30 (530)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 235,499 $ 233,702
See accompanying notes to the consolidated financial statements.
Table of Contents31
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Year Ended
Other operating (income) expense, net (927) (108)
Facility consolidation and severance expenses, net 255 3,752
Other (income) expense, net 1 678
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES 5,258 (10,969)
Income tax provision (benefit) 105 (1,146)
INCOME (LOSS) FROM CONTINUING OPERATIONS 5,153 (9,823)
Income (loss) from discontinued operations, net of tax (3,537) 615
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations $ 0.33 $ (0.64)
Discontinued operations (0.23) 0.04
Net income (loss) $ 0.10 $ (0.60)
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations $ 0.32 $ (0.64)
Discontinued operations (0.23) 0.04
Net income (loss) $ 0.09 $ (0.60)
DIVIDENDS PER SHARE:
Common Stock $ — $ —
Class B Common Stock — —
See accompanying notes to the consolidated financial statements.
Table of Contents32
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
Year Ended
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain (loss) on interest rate swaps 94 (1,316)
Income taxes — —
Unrealized gain (loss) on interest rate swaps, net 94 (1,316)
Reclassification of loss into earnings from interest rate swaps (1) 646 1,967
Reclassification of loss into earnings from interest rate swaps, net 472 1,624
Unrecognized net actuarial gain (loss) on postretirement benefit plans 18 —
Income taxes — —
Unrecognized net actuarial gain (loss) on postretirement benefit plans, net 18 —
Income taxes — —
Income taxes — —
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 560 278
COMPREHENSIVE INCOME (LOSS) $ 2,176 $ (8,930)
(1) Amounts for cash flow hedges reclassified from accumulated other comprehensive income (loss) to net income (loss) were included in interest expense in the Company's Consolidated Statements of Operations.
(2) Amounts for postretirement plans reclassified from accumulated other comprehensive income (loss) to net income (loss) were included in selling and administrative expenses in the Company's Consolidated Statements of Operations.
See accompanying notes to the consolidated financial statements.
Table of Contents33
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended
CASH FLOWS FROM OPERATING ACTIVITIES
Income (loss) from continuing operations $ 5,153 $ (9,823)
Income (loss) from discontinued operations (3,537) 615
Depreciation and amortization 8,474 9,550
Benefit for deferred income taxes (69) (343)
Net loss (gain) on property, plant and equipment disposals 210 41
Stock-based compensation (credit) expense 477 431
Write-off of deferred financing costs — 157
Changes in operating assets and liabilities:
Prepaids and other current assets (1,946) (2,173)
Accounts payable and accrued expenses 7,314 4,156
Other operating assets and liabilities (4,025) 2,115
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (6,639) 7,500
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sales of property, plant and equipment 19,475 44
Purchase of property, plant and equipment (4,376) (1,359)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 15,099 (1,315)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving credit facility 4,806 (31,341)
Borrowings on notes payable - buildings and other term loans — 25,000
Payments on notes payable - buildings and other term loans (606) (343)
Borrowings on notes payable - equipment and other 1,565 1,460
Payments on notes payable - equipment and other (3,883) (2,380)
Borrowings on finance leases — 2,211
Payments on finance leases (3,152) (4,756)
Change in outstanding checks in excess of cash 1,059 2,094
Repurchases of Common Stock (69) (921)
Payments for debt issuance costs — (1,706)
NET CASH USED IN FINANCING ACTIVITIES (280) (10,682)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (449) 1,151
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,920 769
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,471 $ 1,920
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid for financing leases 1,483 1,702
Income taxes paid (received), net 982 (100)
Right-of-use assets obtained in exchange for new operating lease 4,922 653
Equipment purchased under notes payable — 1,314
Assets acquired in acquisitions, net of cash acquired 1,025 —
See accompanying notes to the consolidated financial statements.
Table of Contents34
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
Stock-based compensation expense — — 431 — — 431
Other comprehensive income — — — — 278 278
Repurchases of Common Stock - 20,329 shares (61) — (8) — — (69)
Restricted stock grants forfeited - 7,477 shares (22) — 18 — — (4)
Class B converted into Common Stock - 2,635 shares — — — — — —
Stock-based compensation expense — — 481 — — 481
Other comprehensive loss — — — — 560 560
See accompanying notes to the consolidated financial statements.
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THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company's businesses consist principally of marketing, manufacturing and selling finished carpet, rugs, luxury vinyl flooring and engineered wood flooring in the domestic floorcovering market. The Company sells floorcovering products in residential applications. Additionally, the Company provides manufacturing support to its carpet businesses through its separate processing operations.
Based on applicable accounting standards, the Company has determined that it has one reportable segment, Floorcovering.
On September 13, 2021, the Company acting by and through its wholly owned operating subsidiary, TDG Operations, LLC, sold its Atlas|Masland commercial business (the “Commercial Business”). As a result of entering into a definitive agreement, we have classified the related assets and liabilities associated with our Commercial Business as held for discontinued operations in our consolidated balance sheet . The results of our Commercial Business have been presented as discontinued operations in our consolidated statement of income for all periods presented as the sale represents a shift in our business that has a major effect on our operations and financial results. Prior to the consummation of the sale, the Company was neither actively marketing the business for sale nor had intentions to abandon the Commercial Business and as a result did not present the results as assets held for sale or discontinued operations in prior filings. Interest expense and general and administrative expenses were not allocated to discontinued operations. Our consolidated financial statements and disclosures as of and for the year ended December 26, 2020 have been adjusted to reflect such discontinued operations classifications. See Note 21 for further detail of the Company’s discontinued operations reporting.
Unless specifically noted otherwise, footnote disclosures reflect the results of continuing operations only. The results of discontinued operations are presented in footnote 21.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of The Dixie Group, Inc. and its wholly-owned subsidiaries (the "Company"). Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and these differences could be material.
Fiscal Year
The Company ends its fiscal year on the last Saturday of December. All references herein to "2021" and "2020" mean the fiscal years ended December 25, 2021 and December 26, 2020 respectively. All years presented contained 52 weeks.
Discontinued Operations
The consolidated financial statements separately report discontinued operations and the results of continuing operations (See Note 21).
Cash and Cash Equivalents
Highly liquid investments with original maturities of three months or less when purchased are reported as cash equivalents.
Market Risk