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SOPHISTICATION
Luxury
E X C LU S I V E
Satisfying the
discerning customer
with premium
brands
The Dixie Group is the preeminent provider of premium carpets and rugs to both the residential and
corporate markets. We are committed to sophistication and style, contemporary color palettes, unique design,
and excellent quality in the mid to upper-end categories of flooring. The Dixie Group emphasizes superior
product design that continues to lead trends and satisfy the discerning consumer and corporate customer. We
aim to satisfy the consumer with recognition, trust, quality, value and inspiration.
Fabrica, Masland and Dixie Home encompass the brands of our sophisticated residential offerings. These
brands are known for fine quality and innovative styling that provide beauty and comfort to home interiors.
Our residential brands target both great price points as well as fashion-oriented patterns. In 2018, The
Dixie Group united Atlas and Masland Contract to create a unified commercial brand. Atlas | Masland Contract
services the exclusive corporate and hospitality sectors along with all areas of the specified commercial
markets. Our commitment is to provide a unique line of brands that satisfy the needs of the premium soft floor
covering market.
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LETTER TO SHAR EHOLDERS
“ We are committed to supplying fine floor covering products to our customers that meet
the style, design and quality standards they have come to expect from us and would like to
thank them for their continued support this past year.”
2018 was a year of change for both Dixie and the industry.
The industry dynamics have shifted as we have seen the
soft floorcovering market shrink in square feet by nearly
4% since 2015, while at the same time we saw the rapid rise
of a new market segment with luxury vinyl flooring which
has taken market share from all major flooring categories.
We estimate that the U.S. soft floorcovering market has
shrunk from 55% of the market in square feet in 2015 to
around 50% in 2018. The soft surface market has stayed
flat in dollars, primarily due to the rise in commercial car-
pet tile with its significantly higher average selling price.
During this time, we have been shifting our emphasis to
include hard surfaces products, primarily luxury vinyl floor-
ing, in our product offering. Our residential business has
continued to gain market share as we have expanded our
footprint throughout the retail environment. Residentially
our operational focus this past year has been on taking
advantage of our increased productivity as we lower our
labor and other input costs. Beginning in late 2017 when
we brought our two commercial floorcovering businesses
under the leadership of David Hobbs, we have been me-
thodically combining our operations, culminating with the
complete integration of our management, support func-
tions, sales forces and commercial facilities by the end of
the first quarter of 2019. Commercially we have been driv-
ing our product offering towards solution dyed modular
carpet tile while we reorganize the commercial business to
bring it into sustained profitability.
The residential business soft surface product line grew
by 2% while the industry, we believe, was flat. Our hard
surface sales tripled during this same time period. In the
residential market in 2018, we had our largest product
launch ever. We launched over 150 new products for 2018,
including 67 carpet styles and 86 hard surface designs.
Our focus in 2018 was to enhance our importance to our
residential dealer network and to gain retail floor space by
broadening our product offering as we expanded our main
street commercial and mill branded soft flooring product
selection. We are especially pleased with our new Masland
eNeRgy in store display with 20 exciting main street com-
mercial products. This high styled main street category
was developed by Masland in the mid 2000’s and we are
re-invigorating this line with new products, designs and
an updated selling vehicle. The eNeRgy line is a complete
selection of broadloom and modular carpet tile designed
for the commercial market serviced through our network
of full service dealers. We began shipment of our new
EnVision 6,6™ soft floorcovering collection. This new pro-
gram is an extension of our Dixie Home product line with
nicely styled carpet products at moderate price points to
reach a wider range of consumers. These products are
made with type 6,6 nylon to ensure the highest quality
and performance standards. In addition, we launched the
Fabrica wood line, initially with selective distribution in the
southeast but later expanded across the United States.
The Fabrica collection features “best in class” unique
flooring looks including French oak, maple and birch with
a style and quality consistent with the high-end quality of
Fabrica’s brand. We expanded our luxury vinyl flooring
offering and placement by 40% while offering more prod-
uct selection with both plank and tile offerings in our
STAINMASTER® PetProtect® line. For 2019 we are building
on the momentum we gained by tripling our residential
hard surface business in 2018 with the launch of TruCor™,
our new solid polymer core or “SPC” luxury vinyl floor-
ing line. This latest addition to our rigid core luxury vinyl
flooring offering is designed to create an extremely du-
rable and waterproof luxury vinyl flooring product with a
broader range of price points to meet the needs of various
consumers. To facilitate this growth, we are expanding our
distribution of hard surface products to our west coast dis-
tribution center as well as our east coast service center.
Our results in the commercial market have been impacted
by the restructuring we have been undergoing since late
2017. Our commercial sales for the year were down over
13% while the commercial soft floorcovering market, we
believe, was down marginally. We expanded our product
offering in luxury vinyl flooring with our sales doubling
through our Calibrè line of luxury vinyl flooring products.
We have introduced a new collection of modular carpet
tile products in 2018, such as Top Notch using Thrive® by
Universal® Fibers, a solution dyed nylon 6,6 that stands
LETTER TO SHAR EHOLDERS
alone as the most environmentally conscious solution-dyed
high performance nylon 6,6 carpet fiber in the world with
the highest level of recycled material, the lowest CO2
emission and built-in encapsulated stain resistance. As
we have merged the two commercial sales forces into
Atlas | Masland Contract, we are positioned, with our newly
reformulated footprint and complete line of broad-
loom carpet, modular carpet tile, luxury vinyl flooring and
commercial rugs to service our customers with excellent
service and cutting edge design from our focused opera-
tional facilities dedicated to the commercial marketplace.
Our profit improvement plan has captured the many efforts
we have implemented to improve operations during 2018.
We began the structural consolidation of our commercial
business with the closure of the Chickamauga tufting plant
as we moved the equipment to other facilities. This plant
closure, complete at the end of 2018, lowered our cost and
improved our response time to this segment of the mar-
ketplace. We began the process of exiting our Commerce,
California Atlas tufting facilities this past fall and will be
completely out of those commercial tufting operations by
the end of the first quarter of 2019. The bulk of the At-
las equipment was transferred to our Atmore, Alabama
commercial tufting operation with various other items
moved to our Santa Ana, California and Eton, Georgia
operations. We moved our commercial rug operation and
commercial samples support function from California to
our Saraland facility near Mobile, Alabama. We reduced
our staffing to better match production to meet our
demand in our Atmore, Eton, Adairsville and Roanoke
facilities as we were able to take advantage of the
increased productivity of our associates in these opera-
tions. In addition to the physical movement of equipment
and inventory, we consolidated our commercial design
functions in Saraland as well as consolidated our entire
sales support functions. Our sales forces were merged
to create Atlas | Masland Contract, now equipped with a
much broader product line and providing modular carpet
tile, broadloom carpet, luxury vinyl flooring, and commer-
cial wool and nylon rugs. This combined sales force has
the added benefit of not only a broad product line but
distinct design capabilities in custom products as well.
We have done a department by department review of
all of our operations and functions within the company,
from sales through manufacturing. Though we are sad to
lose many fine members of the Dixie team, we feel we are
stronger after having reduced our headcount by over 330
associates, or 17% of our workforce, from the beginning
of 2018. During this process we have identified many cost
reductions from marketing through operational support
functions and will continue to cut costs wherever advan-
tageous. Our combined expenses of the Plan, including
inventory write downs, restructuring and severance
expenses and related asset impairments were $9.2 million
during 2018. However, our total cost reductions, on an an-
nualized basis, are over $17 million once fully implemented
during 2019. In addition, we have now written off all of our
intangible and goodwill assets.
We want to thank Walt Hubbard, a faithful member of our
board since 2005, for his many years of service to Dixie.
Walt provided Dixie with unique insight with his expe-
rience as a former supplier to the industry and his long
manufacturing experience. We will miss him with his an-
nounced retirement from the board this year.
We want to thank all of our associates for all of the hard
work they have been through this past year, and we appre-
ciate their efforts to move us forward to sustained profit-
ability. We appreciate both our investors and our board
of directors for their valued input. We are committed to
supplying fine floorcovering products to our customers
that meet the style, design and quality standards they
have come to expect from us and would like to thank them
for their continued support this past year.
Sincerely,
DANIEL K. FRIERSON
Chairman and Chief Executive Officer
March 22, 2019
3
EXCEPTIONAL R ESIDENTIAL PRODUCTS
Fabrica, Masland and Dixie Home encompass the brands of our high-end residential offerings. Each brand has an essential framework
to provide differentiated style, design and quality. The goal is to create products that will transform interior spaces by manufacturing
products that give the consumer endless choices for their home décor. Through an exceptional line of brands, our upper-end residential
products are marketed to domestic and international customers in residential markets. While we continue to lead with carpet as our
primary offering, we have entered into the Luxury Vinyl Flooring segment this year with our Masland and Dixie Home brands. Our
STAINMASTER™ PetProtect™ Luxury Vinyl Flooring offerings perfectly complement the already diverse range of residential flooring
options with a range of high-end designs, constructions and price points, allowing us to immediately compete in the fastest growing
residential flooring segment. Our brands live in the heart of the American Home. We believe that The Dixie Group brands exist to
create the world’s most comfortable floors.
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EXCEPTIONAL R ESIDENTIAL PRODUCTS
FABRICA Uncompromising Craftsmanship.
Being “Best in Class” takes tremendous
focus and a remarkable commitment to
detail. Our Foundational Décor is under-
stated elegance and timeless in its beauty.
When it comes to style and design, Fabrica’s
rich foundational décor doesn’t overpower,
dominate, or compete with the troves of
treasures and trophies that rest upon and
surround it. We continue our pursuit of
quality without compromise, combining
innovative yarn technology with manufac-
turing excellence to push boundaries in
broadloom carpeting.
MASLAND CARPETS AND RUGS
Empowerment, Creative and Limitless. At
Masland, we believe in giving customers
creative freedom to express themselves.
The Masland difference is versatility by
design, to give customers what they need
to create and transform the space they
want, the way they want. To accomplish
this, Masland offers a robust selection of
flooring types and styles to complement
and enhance a wide range of décor. The
Masland legacy lives on today through
cutting edge designs that are fashion
forward, bold and market-centric.
DIXIE HOME Attainable Style and Beauty.
At Dixie Home, we believe all families
deserve beautiful flooring that lasts. To
fulfill that vision, we drew on decades of
textile knowledge and experience. We
combined the latest patterns and colors
using premium branded yarns and carefully
chosen materials. And now, Dixie Home
stands up to any lifestyle, because we don’t
want to be remembered just for our good
looks. Today, our mission continues. With
beauty that surprises and comfort that per-
forms, at Dixie Home we make style work.
Live your life on us.
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ATL AS | MASL AND CONTR ACT
The Dixie Group has combined the Atlas
and Masland Contract sales forces and
product portfolios creating a unified
commercial flooring brand: Atlas | Masland
Contract. This unification is an exciting
opportunity for us to be a greater resource
to our customers in the hyper-competitive
commercial flooring market. The combined
product portfolios of Atlas and Masland
Contract leverage a diversity in technolo-
gies, yarn systems, and styling which
positions Atlas | Masland Contract as a
comprehensive resource to the commercial
flooring market. Whether a project calls
for broadloom carpet, modular carpet tile,
area rugs, walk-off material or luxury vinyl
flooring, Atlas | Masland Contract has
the product and expertise to service any
commercial segment.
UNIQUE COMMERCIAL BRANDS
Dixie has assembled a group of unique commercial brands with one common denominator. Each of our divisions market to brand
conscious companies where smart design enhances their image and helps them achieve their goals. The diverse spaces we build prod-
ucts for—hotels, office buildings, government facilities, worship spaces, restaurants, senior living communities, universities, retail and
more—are all important aesthetically and we style and manufacture products that will reflect a positive brand image in the best possible
way. Additionally, we believe that outstanding design is a two-fold proposition, that environmental responsibility must be on equal
footing with interior architecture and design. To that end, our environmental initiatives are solid and serious. Since 2014, commercial
manufacturing has reduced electricity by 29%, natural gas by 85%, and water an astounding 97% reduction. Our production facilities are
also offset 100% with renewable energy credits where the amount of energy consumed is matched by energy generated through a clean
power facility and added back to the national electric grid.
7
The Dixie Group is
committed to using
sustainable materi-
als and processes to
create products that
reflect favorably on
both the environ-
ment and humanity.
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At Dixie, we are committed to embracing new technologies that result in more
efficient ways to manufacture our products, conserving our natural resources,
and creating less waste. We understand that everything we do has an impact on
our planet, and our focus is to leave the smallest possible footprint that impacts
the environment globally. At Dixie, “environment” is not just a word in a slogan, it
is the heartbeat of what we do!
The Dixie Group also believes in working smarter to create products that elimi-
nate wasteful production methods. All manufacturing facilities recycle their
waste by-products. We are proud to say that our Fabrica division won the WRAP
Award from the California Integrated Waste Management Board for being
recognized as one of the local businesses which had implemented outstanding
waste reduction efforts.
In the Atmore and Saraland facilities for 2018, we diverted over 4 million pounds
of waste from the landfill. Of the diverted material, 90% has been repurposed
into new, usable, raw materials.
Consumption of water, electricity and natural gas used in the dyeing and
finishing processes has been significantly reduced. In the last four years, Masland
Contract has reduced electricity by 29%, natural gas by 85%, and water—an
astounding 97% reduction. In our Atlas | Masland Contract production facilities,
100% of energy consumption is offset 1:1 by renewable energy credits. This is
where the amount of energy consumed is matched by energy generated by a
clean power facility and added back to the national electric grid.
1 0 - K R E P O R T
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 2018
OR
For the transition period from _________ to ________.
Commission File Number 0-2585
The Dixie Group, Inc.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation of organization)
(I.R.S. Employer Identification No.)
Tennessee
62-0183370
475 Reed Road, Dalton, GA 30720
(706) 876-5800
(Address of principal executive offices and zip code)
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $3.00 par value
Securities registered pursuant to Section 12(g) of the Act:
Title of class
None
Name of each exchange on which registered
NASDAQ Stock Market, LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes
No
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.
Yes
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).
Yes
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.
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
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 29, 2018 (the last business day of the registrant's most recently
completed fiscal second quarter) was $30,303,294. 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
Common Stock, $3.00 Par Value
Class B Common Stock, $3.00 Par Value
Class C Common Stock, $3.00 Par Value
Outstanding as of February 22, 2019
15,522,588
shares
839,304
shares
0
shares
Specified portions of the following document are incorporated by reference:
Proxy Statement of the registrant for annual meeting of shareholders to be held May 1, 2019 (Part III).
DOCUMENTS INCORPORATED BY REFERENCE
1
THE DIXIE GROUP, INC.
Index to Annual Report
on Form 10-K for
Year Ended December 29, 2018
PART I
Page
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
Executive Officers of the Registrant
PART II
Item 5.
Item 6.
Item 7.
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
PART IV
Item 16.
Form 10-K Summary
Signatures
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 29, 2018 and December 30, 2017
Consolidated Statements of Operations - Years ended December 29, 2018, December 30, 2017, and
December 31, 2016
Consolidated Statements of Comprehensive Income (Loss) - Years ended December 29, 2018,
December 30, 2017, and December 31, 2016
Consolidated Statements of Cash Flows - Years ended December 29, 2018, December 30, 2017,
and December 31, 2016
Consolidated Statements of Stockholders' Equity - December 29, 2018, December 30, 2017, and
December 31, 2016
Notes to Consolidated Financial Statements
Exhibit Index
2
4
7
10
11
11
12
13
14
17
18
28
28
28
28
28
29
29
29
29
29
30
30
31
35
36
37
38
39
40
41
71
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.
3
Item 1.
BUSINESS
General
PART I.
Our business consists principally of marketing, manufacturing and selling floorcovering products to high-end residential and
commercial 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 Atlas and Masland Contract brands participate in the upper-end specified commercial marketplace. Dixie International
sells all of our brands outside of the North American market.
Our business is primarily concentrated in areas of the soft floorcovering markets which include broadloom carpet, carpet tiles and
rugs. However, 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 both our residential and commercial brands. Our commercial brands offer luxury vinyl flooring
(“LVF”) products under the Calibré brand in the commercial markets. Our residential brands, Dixie Home and Masland Residential,
offer Stainmaster® PetProtect™ luxury vinyl flooring. In 2018, our residential brand, Fabrica, began offering a high-end engineered
wood line.
We have one reportable segment, Floorcovering, which is comprised of two operating segments, Residential and Commercial. We
have aggregated the two operating segments into one reporting segment because they have similar economic characteristics, and
the operating segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the
production processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their
products or provide their services; and (e) the nature of the regulatory environment.
Our Brands
Our brands are well known, highly regarded and complementary; by being differentiated, we offer meaningful alternatives to the
discriminating customer.
Fabrica markets and manufactures luxurious residential carpet and custom rugs, 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 and commercial
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 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.
Atlas | Masland Contract is our combined brand of the former Atlas Carpet Mills and Masland Contract. We strategically re-aligned
our business in 2018 by merging the two brands into one cohesive operating unit with a broader array of products but a single
management, marketing, back office, manufacturing and sales structure to serve the specified commercial marketplace. Its
commercial products are marketed to the architectural and specified design community and directly to commercial end users, as
well as to consumers through specialty floorcovering retailers. Atlas | Masland Contract also sells to the hospitality market with both
custom designed and running line products. Utilizing computerized yarn placement technology, as well as offerings utilizing our
state of the art Infinity tufting technology, this brand provides excellent service and design flexibility to the hospitality market serving
upper-end hotels, conference centers and senior living markets. Its broadloom, rug product and luxury vinyl flooring offerings are
designed for the interior designer in the upper-end of the hospitality market who appreciates sophisticated texture, color and patterns
with excellent service. Atlas | Masland Contract has strong brand recognition within the upper-end contract market, and competes
through innovative styling, color, patterns, quality and service.
4
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 2017, according to the most recent information available, the U.S. floorcovering industry reported $25.5 billion
in sales, up approximately 4.8% over 2016's sales of $24.3 billion. In 2017, the primary categories of flooring in the U.S., based on
sales dollars, were carpet and rug (45%), wood (14%), ceramic tile (14%), luxury vinyl flooring (LVF) (9%), vinyl (6%), stone (6%) and
laminate and other (6%). In 2017, the primary categories of flooring in the U.S., based on square feet, were carpet and rug (51%),
ceramic tile (14%), vinyl (12%), luxury vinyl flooring (8%), wood (7%), laminate (5%) 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.
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 and rug manufacturers and other types of
floorcoverings. 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 and high-end
commercial 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 and commercial 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, such as Stainmaster's® LiveWell™ and PetProtect™, 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, such as the providers of Stainmaster® for which we utilize both
branded yarns and luxury vinyl flooring, and 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", "Atlas", “Masland Contract” and "Masland Hospitality" are of greatest importance to our
business. We have applied for a trademark on "Atlas | Masland Contract", our new commercial sales force brand. 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, Lowe's, a mass merchant, accounted for approximately 13% in 2018, 14% in 2017,
and 10% in 2016 and as a percentage of our customer's trade accounts receivable, accounted for approximately 34% in 2018 and
31% in 2017. No other customer was more than 10 percent of our sales during the periods presented. During 2018, sales to our
top ten customers accounted for approximately 16% of our sales and our top 20 customers accounted for approximately 17% of
our sales. We do not make a material amount of sales in foreign countries.
5
We do not have any single class of products that accounts for more than 10 percent of our sales. However, sales of our floorcovering
products may be classified by significant end-user markets into which we sell, and such information for the past three years is
summarized as follows:
Residential floorcovering products
Commercial floorcovering products
Seasonality
2018
72%
28%
2017
68%
32%
2016
66%
34%
Our sales historically have normally reached their lowest level in the first quarter (approximately 23% of our annual sales), with the
remaining sales being distributed relatively equally among the second, 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
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 bulk continuous filament for 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. 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 price 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. We purchase a significant portion of our primary raw material (nylon yarn) from one supplier. We believe there are other
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 29, 2018, we employed 1,646 associates in our operations.
6
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.
2.
3.
4.
annual reports on Form 10-K;
quarterly reports on Form 10-Q;
current reports on Form 8-K; and
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.
The floorcovering industry is sensitive to changes in general economic conditions and a decline in residential or
commercial construction activity or corporate 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 floorcovering industry is highly dependent on construction activity, including new construction, which is cyclical in nature. The
U.S. and global economies, along with the residential and commercial markets in such economies, can negatively impact the
floorcovering industry and our business. Although the impact of a decline in new construction activity is typically accompanied by
an increase in remodeling and replacement activity, these activities typically lag during a cyclical downturn. Although the difficult
economic conditions have improved since the last cyclical downturn in 2008, there may be additional downturns that could cause
the industry to deteriorate in the foreseeable future. A significant or prolonged decline in residential or commercial construction
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 significant reduction of sales through
this channel could adversely affect our business. Such a shift could occur if this retailer decided to reduce the amount of emphasis
on soft surface flooring or determine that our concentration of better goods was not advantageous to their marketing program.
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 affect 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.
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. Despite recent improvement in overall economic
conditions, 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.
If our stock price falls below $1.00 for an extended time, our common stock may be subject to delisting from The NASDAQ
Stock Market.
On January 31, 2019, we received a deficiency notice from NASDAQ stating that we were not in compliance with NASDAQ
Marketplace Rule 5550(a)(2) because the bid price of our common stock closed below the required minimum $1.00 per share for
7
the previous 30 consecutive business days. The notice also indicated that, in accordance with Marketplace Rule 5810(c)(3)(A), we
have a period of 180 calendar days, until July 30, 2019, to regain compliance with Rule 5550(a)(2), and that, if at any time before
July 30, 2019 the bid price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days,
NASDAQ would notify us that we have regained compliance with Rule 5550(a)(2).
Following the initial notice, the NASDAQ has determined that for the 12 consecutive business days from February 4 to February
20, 2019, the closing bid price of our common stock has been at $1.00 per share or greater. Accordingly, we have regained compliance
with Listing Rule 5550(a)(2).
To the extent that we are unable to stay in compliance with the relevant NASDAQ bid price listing rule, there is a risk that our
common stock may be delisted from NASDAQ, which would adversely impact liquidity of our common stock and potentially result
in even lower bid process for our common stock.
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. In 2018,
the sales price of our common stock fluctuated from a high of $4.05 per share in the first quarter of 2018 to a low of $0.62 per share
in the fourth quarter of 2018. Our progress in restructuring our business, our quarterly operating results, our perceived prospects,
lack of securities analysts’ 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. Our 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 affect 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
8
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.
Unanticipated termination or interruption of our arrangements with third-party suppliers of nylon yarn 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 is purchased from one
supplier. Our yarn supplier is one of the leading fiber suppliers within the industry and is the exclusive supplier of certain innovative
branded fiber technology upon which we rely. We believe our offerings of this innovative fiber technology contribute materially to
the competitiveness of our products. While we believe there are other sources of nylon yarns, an unanticipated termination or
interruption of our current supply of branded nylon yarn could have a material adverse effect on our ability to supply our product to
our customers and have a material adverse impact on our competitiveness if we are unable to replace our nylon supplier with
another supplier that can offer similar innovative and branded fiber products. 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 for competitive
costs, performance characteristics, brand value, and diversity of supply.
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, intrusions and malware or otherwise, could disrupt our normal operations. There
can be no assurance that we can effectively carry out our disaster recovery plan to handle the 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.
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.
9
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.
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.
10
Item 2.
PROPERTIES
The following table lists our facilities according to location, type of operation and approximate total floor space as of February 22,
2019:
Location
Administrative:
Saraland, AL
Commerce, CA*
Santa Ana, CA
Calhoun, GA
Dalton, GA*
Type of Operation
Administrative
Administrative
Administrative
Administrative
Administrative
Total Administrative
Manufacturing and Distribution:
Atmore, AL
Roanoke, AL
Saraland, AL
Commerce, CA*
Porterville, CA*
Santa Ana, CA
Adairsville, GA
Calhoun, GA *
Calhoun, GA
Eton, GA
Dalton, GA*
Carpet Manufacturing, Distribution
Carpet Yarn Processing
Carpet, Rug and Tile Manufacturing, Distribution
Carpet Manufacturing, Distribution
Carpet Yarn Processing
Carpet and Rug Manufacturing, Distribution
Samples and Rug Manufacturing, Distribution
Distribution
Carpet Dyeing & Processing
Carpet Manufacturing, Distribution
Samples Warehouse and Distribution
Total Manufacturing and Distribution
* Leased properties
TOTAL
Approximate Square Feet
29,000
21,800
4,000
10,600
50,800
116,200
610,000
204,000
384,000
232,800
249,000
200,000
292,000
99,000
193,300
408,000
40,000
2,912,100
3,028,300
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 the 3M Company and approximately 30 other carpet manufacturers, by the Gadsden (Alabama)
Water Works in the circuit court of Etowah County Alabama [The Water Works and Sewer Board of the City of Gadsden v. 3M
Company, et al, civil action No. 31-CV-2016-900676.00] and by the Town of Centre (Alabama) Water Works in the circuit court of
Cherokee County Alabama [The Water Works and Sewer Board of the Town of Centre v. 3M Company, et al, civil action No. 13-
CV-2017-900049.00]. Both cases seek monetary damages and injunctive relief related to the use of certain chemical compounds
in the manufacture and finishing of carpet products “in and around Dalton Georgia.” On motion of the defendants, the cases were
removed to the U.S. District Court for the Northern District of Alabama (Middle Division) Case No. 4:16-CV-01755-SGC and Case
No. 4:17-CV-01026-KOB. Subsequently, the Gadsden Water Works filed a motion to have the case remanded back to the state
court and such motion has been granted. Currently, we have joined several other co-defendants in filing a Petition for Writ of
Mandamus with the Alabama Supreme Court asking for an Order directing the trial court to grant our and other codefendants’
motions to dismiss the Alabama-filed actions for lack of personal jurisdiction. The Petitions have been consolidated by the Alabama
Supreme Court with the Town of Centre (Alabama) matter (described above). The Petitions are still pending and there is no statutory
deadline for the court to issue a decision. The lawsuits allege that perflourinated compounds (“PFC”), perflourinated acid (“PFOA”)
and perfluorooctane sulfonate (“PFOS”) manufactured by 3M were used in certain finishing and treatment processes by the
defendants and, as a consequence of such use, were subsequently either discharged into or leached into the water systems around
Dalton, Georgia. The Complaints seek damages that exceed $10, but are otherwise unspecified in amount in addition to injunctive
relief and punitive damages. We intend to defend the matters vigorously and are unable to estimate the potential exposure to loss,
if any, at this time.
On November 16, 2018 the Superior Court of the State of California granted preliminary approval of a class action settlement in
the matter of Carlos Garcia v. Fabrica International, Inc. et al Orange County Superior Court Case No. 30-2017-00949461-CU-OE-
11
CXC. The court further approved the procedures for Settlement Class Members to opt-out of or object to the Settlement. The terms
of the settlement provide that Fabrica, a wholly owned subsidiary of ours, has agreed to pay $1,514,000 (the “Gross Settlement
Amount”) to fully resolve all claims in the Lawsuit, including payments to Settlement Class Members, Class Counsel’s attorneys’
fees and expenses, settlement administration costs, and the Class Representative’s Service Award. The amount of the proposed
settlement was recorded during the quarter ended June 30, 2018. The deadline for class members to opt-out was February 1,
2019. The deadline for the plaintiff to file a motion for final approval of the class action settlement is March 29, 2019. The final
fairness hearing is scheduled for April 12, 2019.
We are one of multiple parties to three lawsuits filed in Madison County Illinois, styled Brenda Bridgeman, Individually and as Special
Administrator of the Estate of Robert Bridgeman, Deceased, vs. American Honda Motor Co., Inc., f/k/a Metropolitan Life Insurance
Co., et al No. 15-L-374, styled Charles Anderson, Pltf., vs. 3M Company, et al, No. 17-L-525 and styled Danny Atkins and Pamela
Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2. All three lawsuits entail a claim for damages to be determined in excess
of $50,000 filed on behalf of either a former employee or the estate of an individual which alleges that the deceased contracted
mesothelioma as a result of exposure to asbestos while employed by us. Discovery in each matter is ongoing, and a tentative trial
date has been set for one of the cases. We have denied liability, are defending the matters vigorously and are unable to estimate
our potential exposure to loss, if any, at this time. In August of 2017, the lawsuit styled Sandra D. Watts, Individually and as Special
Administrator of the Estate of Dianne Averett, Deceased vs. 4520 Corp., Inc. f/k/a Benjamin F. Shaw Company, et al No. 12-L-2032
was placed in the category of "special closed with settlements and bankruptcy claims pending" to all remaining defendants. In
March 2018, the lawsuit styled Charles Anderson, Individually and as Special Administrator of the Estate of Charles Anderson,
Deceased vs. 3M Company, et al, No. 17-L-525 was dismissed without prejudice. In October 2018, the lawsuit styled Danny Atkins
and Pamela Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2 was dismissed without prejudice.
Item 4.
MINE SAFETY DISCLOSURES
Not applicable.
12
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 22, 2019, are listed below
along with their business experience during the past five years.
Name, Age and Position
Business Experience During Past Five Years
Daniel K. Frierson, 77
Chairman of the Board, and
Chief Executive Officer, Director
Director since 1973, Chairman of the Board since 1987 and Chief Executive Officer since
1980. He is the Chairman of the Company's Executive Committee. He is past Chairman of
The Carpet and Rug Institute. He serves as Director of Astec Industries, Inc. headquartered
in Chattanooga, Tennessee.
D. Kennedy Frierson, Jr., 51
Vice President and Chief
Operating Officer, Director
Director since 2012 and Vice President and Chief Operating Officer since August 2009. Vice
President and President Masland Residential from February 2006 to July 2009. President
Masland Residential from December 2005 to January 2006. Executive Vice President and
General Manager, Dixie Home, 2003 to 2005. Business Unit Manager, Bretlin, 2002 to 2003.
Jon A. Faulkner, 58
Vice President and Chief
Financial Officer
Thomas M. Nuckols, 51
Vice President and President,
Dixie Residential
E. David Hobbs, 67
Vice President and President,
Dixie Commercial
W. Derek Davis, 68
Vice President, Human
Resources and Corporate
Secretary
Vice President and Chief Financial Officer since October 2009. Vice President of Planning
and Development from February 2002 to September 2009. Executive Vice President of Sales
and Marketing for Steward, Inc. from 1997 to 2002.
Vice President and President of Dixie Residential since November 2017. Executive Vice
President, Dixie Residential from February 2017 to November 2017. Dupont/Invista, from 1989
to 2017, Senior Director of Mill Sales and Product Strategy from 2015 to 2017.
Vice President and President of Dixie Commercial since October 2017. President, Masland
Contract from September 2016 to October 2017. Executive President of Operations, Masland
Contract from 2012 to September 2016. Vice President of Planning, Mohawk Industries from
2010 to 2011, Interface Americas from 1984 to 2010, President, Interface Americas from 2005
to 2009.
Vice President of Human Resources since January 1991 and Corporate Secretary since
January 2016. Corporate Employee Relations Director, 1988 to 1991.
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.
13
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 22, 2019, the total number of holders of our Common Stock was approximately 2,800 including an estimated 2,400
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
Fiscal Month Ending
November 3, 2018
December 1, 2018
December 29, 2018
Three Fiscal Months Ended December 29, 2018
Total Number
of Shares
Purchased
Average
Price Paid
Per Share
— $
—
—
— $
—
—
—
—
Quarterly Financial Data, Dividends and Price Range of Common Stock
Total Number
of Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Maximum
Number (or
approximate
dollar value) of
Shares That May
Yet Be
Purchased
Under Plans or
Programs
—
—
—
— $
2,170,597
Following are quarterly financial data, dividends and price range of Common Stock for the four quarterly periods in the years ended
December 29, 2018 and December 30, 2017. Due to rounding, the totals of the quarterly information for each of the years reflected
below may not necessarily equal the annual totals. 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 12/29/2018 and 12/30/17.
14
THE DIXIE GROUP, INC.
QUARTERLY FINANCIAL DATA, DIVIDENDS AND PRICE RANGE OF COMMON STOCK
(unaudited) (dollars in thousands, except per share data)
2018
Net sales
Gross profit
Operating loss
Loss from continuing operations
Income (loss) from discontinued operations
Net loss
Basic earnings (loss) per share:
Continuing operations
Discontinued operations
Net loss
Diluted earnings (loss) per share:
Continuing operations
Discontinued operations
Net loss
Common Stock Prices:
High
Low
2017
Net sales
Gross profit
Operating income (loss)
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss)
Basic earnings (loss) per share:
Continuing operations
Discontinued operations
Net income (loss)
Diluted earnings (loss) per share:
Continuing operations
Discontinued operations
Net income (loss)
Common Stock Prices:
High
Low
1ST
2ND
3RD
4TH
$
98,858
$
106,438
$
101,562
$
21,580
(1,515)
(2,884)
(23)
25,144
(355)
(1,972)
157
21,887
(1,179)
(2,922)
(40)
98,175
18,380
(12,765)
(13,700)
1
$
$
$
$
$
$
$
$
$
$
$
$
$
(2,907) $
(1,815) $
(2,962) $
(13,699)
(0.18) $
(0.13) $
(0.19) $
(0.00)
0.01
(0.00)
(0.18) $
(0.12) $
(0.19) $
(0.18) $
(0.13) $
(0.19) $
(0.00)
0.01
(0.00)
(0.18) $
(0.12) $
(0.19) $
(0.87)
0.00
(0.87)
(0.87)
0.00
(0.87)
$
4.05
2.60
$
3.27
2.20
$
2.40
1.40
1.85
0.62
1ST
2ND
3RD
4TH
97,541
$
107,187
$
102,650
$
105,084
25,161
628
(575)
(29)
28,426
3,179
1,226
(123)
24,857
767
(547)
(11)
22,769
(608)
(9,427)
(69)
(604) $
1,103
$
(558) $
(9,496)
(0.04) $
(0.00)
(0.04) $
(0.04) $
(0.00)
(0.04) $
0.08
$
(0.03) $
(0.01)
(0.00)
0.07
$
(0.03) $
0.08
$
(0.03) $
(0.01)
(0.00)
0.07
$
(0.03) $
(0.60)
(0.00)
(0.60)
(0.60)
(0.00)
(0.60)
$
3.95
3.35
$
5.21
3.30
$
4.75
3.75
4.30
3.40
15
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, 2018. The comparison assumes that $100.00 was invested on December 31, 2013, 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.
16
Item 6.
SELECTED FINANCIAL DATA
The Dixie Group, Inc.
Historical Summary
(dollars in thousands, except share and per share data)
FISCAL YEARS
OPERATIONS
Net sales
Gross profit
Operating income (loss)
Income (loss) from continuing operations before
taxes
Income tax provision (benefit)
Income (loss) from continuing operations
Depreciation and amortization
Dividends
Capital expenditures
Assets purchased under capital leases & notes,
including deposits utilized and accrued purchases
FINANCIAL POSITION
Total assets
Working capital
Long-term debt
Stockholders' equity
PER SHARE
Income (loss) from continuing operations:
Basic
Diluted
Dividends:
Common Stock
Class B Common Stock
Book value
GENERAL
2018 (1)
2017 (2)
2016 (3)
2015 (4)(5)
2014 (6)
$
405,033
$
412,462
$
397,453
$
422,483
$
406,588
86,991
(15,816)
(22,310)
(831)
(21,479)
12,653
—
4,052
389
101,213
3,947
(1,813)
7,509
(9,322)
12,947
—
12,724
95,425
(3,436)
(8,829)
(3,622)
(5,207)
13,515
—
4,904
106,230
1,882
(2,992)
(714)
(2,278)
14,119
—
6,826
95,497
(5,584)
1,726
1,053
673
12,850
—
9,492
859
427
5,403
23,333
$
252,778
$
283,907
268,987*
298,218*
290,447*
96,534
120,251
58,984
105,113
123,446
79,263
81,727
98,256
87,122
98,632
115,907
90,804
100,602
117,153
92,977
$
(1.36) $
(0.59) $
(0.33) $
(0.15) $
(1.36)
(0.59)
(0.33)
(0.15)
—
—
3.60
—
—
4.91
—
—
5.40
—
—
5.67
0.03
0.03
—
—
5.90
Weighted-average common shares outstanding:
Basic
Diluted
Number of shareholders (7)
Number of associates
15,763,890
15,698,915
15,638,112
15,535,980
14,381,601
15,763,890
15,698,915
15,638,112
15,535,980
14,544,073
2,800
1,646
2,800
1,930
3,000
1,746
3,000
1,822
3,000
1,740
*These periods do not have prior period adoption adjustment or the right to return asset for the ASC 606 adoption.
(1) 2018 results include expenses of $3,167 for facility consolidation and severance expenses and $6,709 for the impairment of tangible and
intangible assets.
(2) Includes expenses of $636 for facility consolidation and severance expenses in 2017.
(3) Includes expenses of $1,456, or $859 net of tax, for facility consolidation expenses in 2016.
(4) Includes expenses of $2,946, or $1,915 net of tax, for facility consolidation expenses in 2015.
(5) Includes the results of operations of Atlas Carpet Mills, Inc. and Burtco Enterprises, Inc. subsequent to their acquisitions on March 19, 2014
and September 22, 2014, respectively.
(6) Includes expenses of $5,514, or $3,364 net of tax, for facility consolidation expenses, $1,133, or $691 net of tax, for impairment of assets and
income of $11,110, or $6,777 net of tax, for bargain purchases on the acquisitions of Atlas Carpet Mills and Burtco Enterprises.
(7) The approximate number of record holders of our Common Stock for 2014 through 2018 includes Management's estimate of shareholders who
held our Common Stock in nominee names as follows: 2014 - 2,550 shareholders; 2015 - 2,550 shareholders; 2016 - 2,600 shareholders;
2017 - 2,400 shareholders; 2018 - 2,400 shareholders.
17
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 residential and
commercial 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 Atlas | Masland Contract brand participates in the upper-end specified commercial marketplace. Dixie International
sells all of our brands outside of the North American market.
Our business is primarily concentrated in areas of the soft floorcovering markets which include broadloom carpet, carpet tiles and
rugs. However, 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 both our residential and commercial brands. Our commercial brands offer Luxury Vinyl Flooring
(“LVF”) products under the Calibré brand in the commercial markets. Our residential brands, Dixie Home and Masland Residential,
offer Stainmaster® PetProtect™ Luxury Vinyl Flooring and our premium residential brand, Fabrica, offers a high-end engineered
wood line. For 2019 we are building on the momentum we gained by tripling our residential hard surface business in 2018 with the
launch of TruCor™, our new solid polymer core or “SPC” Luxury Vinyl Flooring line. This latest addition to our rigid core Luxury
Vinyl Flooring offering is designed to create an extremely durable and waterproof Luxury Vinyl Flooring product with a broader
range of price points to meet the needs of various consumers. To facilitate this growth, in 2019 we are expanding our distribution
of hard surface products to our west coast distribution center as well as our east coast service center.
During 2018, our net sales decreased 1.8% compared with 2017. Sales of residential products increased 3.6% in 2018 versus
2017. Residential soft surface sales were up 1.4% in 2018 as compared to 2017, while, we estimate, the industry was up in the
low to mid-single digits. Residential hard surface sales tripled in 2018 relative to sales in 2017. We anticipate the residential housing
market, though having slowed recently, will have steady but moderate growth over the next several years. Commercial product
sales decreased 13.2% during 2018. Soft surface sales of commercial products were down 19.5%, while, we believe, the industry
was down in the mid-single digits. We anticipate the commercial market to be relatively flat in 2019.
In 2018, we had an operating loss of $15.8 million compared with an operating income of $3.9 million in 2017. The reduced sales
volume in 2018 adversely affected our gross profit as we under absorbed our costs since we had increased our capacity anticipating
higher volume production. In addition, we had rising raw material costs which, passed on to our customers through higher prices,
were recovered after we experienced such cost increases. The majority of our higher costs were in the first and fourth quarters of
the year as we suffered with reduced demand in those time periods. We reduced plant running schedules in the fourth quarter to
reduce inventories to a more appropriate level. We incurred charges during the year totaling $14.1 million comprised of $2.7 million
in inventory write-downs, $3.2 million in restructuring charges, $6.7 million in asset impairments, including the write-off of goodwill
and intangibles, and a $1.5-million-dollar charge for settlement of a class action litigation. Our debt declined by $5.2 million over
the course of 2018. To offset those higher costs, we continued the implementation of our previously announced Profit Improvement
Plan (“the Plan”). The Plan, begun in the fourth quarter of 2017, resulted in the reduction of 284 associates during 2018 and is
anticipated to result in the reduction of approximately 330 associates by the end of the first quarter of 2019.
Expenses related to the Plan totaled approximately $9.2 million in 2018. The Plan expenses included inventory write downs,
restructuring costs, and asset impairments as we re-configured our commercial business and right sized our residential
manufacturing operations for lower unit demand. Total cost reductions as a result of the Plan are expected to be over $17 million
on an annual basis once fully implemented in 2019. We began the structural consolidation of our commercial business with the
closure of our Chickamauga tufting operation as we moved the equipment to other facilities. This plant closure, complete at the
end of 2018, lowered our cost and improved our response time to this segment of the marketplace. We began the process of exiting
our Commerce, California Atlas tufting facilities this past fall and will be completely out of those commercial tufting operations by
the end of the first quarter of 2019. The bulk of the Atlas equipment was transferred to our Atmore, Alabama commercial tufting
operation with various other items moved to our Santa Ana, California and Eton, Georgia operations. We moved our commercial
rug operation and commercial samples support function from California to our Saraland facility near Mobile, Alabama. We reduced
our staffing to better match production to meet our demand in our Atmore, Eton, Adairsville and Roanoke facilities as we were able
to take advantage of the increased productivity of our associates in these operations. In addition to the physical movement of
equipment and inventory, we consolidated our commercial design functions in Saraland as well as consolidated our entire sales
support functions. Our sales forces were merged to create Atlas | Masland Contract, now equipped with a much broader product
line and providing modular carpet tile, broadloom carpet, luxury vinyl flooring, and commercial wool and nylon rugs. This combined
sales force has the added benefit of not only a broad product line but distinct design capabilities in custom products as well.
In the fourth quarter of 2018, our testing of goodwill indicated a full impairment of the value of the asset. In accordance with the
results of our tests the value of the goodwill asset was written off to asset impairment. The amount of the adjustment was $3.4
million.
18
NASDAQ NOTICE
On January 31, 2019, we received a deficiency notice from NASDAQ stating that we no longer comply with NASDAQ Marketplace
Rule 5550(a)(2) because the bid price of our common stock closed below the required minimum $1.00 per share for the previous
30 consecutive business days. The notice also indicated that, in accordance with Marketplace Rule 5810(c)(3)(A), we have a period
of 180 calendar days, until July 30, 2019, to regain compliance with Rule 5550(a)(2). If at any time before July 30, 2019 the bid
price of our common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, NASDAQ will notify
us that we have regained compliance with Rule 5550(a)(2). To the extent that we are unable to resolve the listing deficiency, there
is a risk that our common stock may be delisted from NASDAQ, which would adversely impact liquidity of our common stock and
potentially result in even lower bid prices for our common stock.
Since the initial notice, the NASDAQ has determined that for the 12 consecutive business days from February 4 to February 20,
2019, the closing bid price of our common stock has been at $1.00 per share or greater. Accordingly, we have regained compliance
with Listing Rule 5550(a)(2) and this matter is now closed.
19
RESULTS OF OPERATIONS
Fiscal Year Ended December 29, 2018 Compared with Fiscal Year Ended December 30, 2017
Fiscal Year Ended (amounts in thousands)
December 29,
2018
% of Net
Sales
December 30,
2017
% of Net
Sales
Increase
(Decrease) % Change
$
405,033
100.0 % $
412,462
100.0 % $
(7,429)
Net sales
Cost of sales
Gross profit
Selling and administrative expenses
Other operating expense, net
Facility consolidation and severance expenses, net
Impairment of assets
Operating income (loss)
Interest expense
Other expense, net
Loss before taxes
Income tax provision (benefit)
Loss from continuing operations
Income (Loss) from discontinued operations
318,042
86,991
92,473
458
3,167
6,709
78.5 %
21.5 %
22.8 %
0.1 %
0.8 %
1.7 %
(15,816)
(3.9)%
6,491
3
(22,310)
(831)
(21,479)
95
1.6 %
— %
(5.5)%
(0.2)%
(5.3)%
— %
311,249
75.5 %
6,793
101,213
24.5 %
(14,222)
(14.1)%
96,189
23.3 %
(3,716)
(1.8)%
2.2 %
(3.9)%
3.9 %
398.0 %
— %
17
2,531
6,709
(19,763)
(500.7)%
752
(18)
13.1 %
(85.7)%
441
636
—
3,947
5,739
21
0.1 %
0.2 %
— %
0.9 %
1.4 %
— %
(1,813)
(0.5)%
(20,497)
1,130.6 %
7,509
1.8 %
(8,340)
(111.1)%
(9,322)
(2.3)%
(12,157)
130.4 %
(233)
(0.1)%
328
(140.8)%
Net loss
$
(21,384)
(5.3)% $
(9,555)
(2.4)% $ (11,829)
123.8 %
Net Sales. Net sales for the year ended December 29, 2018 were $405.0 million compared with $412.5 million in the year-earlier
period, a decrease of 1.8% for the year-over-year comparison. Sales of residential floorcovering products were up 3.6% and sales
of commercial floorcovering products decreased 13.2%. The decrease in commercial net sales was due to distractions caused by
the restructuring of our commercial operations and sales force during 2018.
Gross Profit. Gross profit, as a percentage of net sales, decreased 3.0 percentage points in 2018 compared with 2017. Gross
profit in 2018 was negatively impacted by inventory write downs of $2.7 million taken during the year as part of our Profit Improvement
Plan.
Selling and Administrative Expenses. Selling and administrative expenses were $92.5 million in 2018 compared with $96.2
million in 2017, or a decrease of .5% as a percentage of sales. The improved results in the 2018 selling expenses are the result of
changes made as part of our Profit Improvement Plan.
Other Operating Expense, Net. Net other operating expense was an expense of $458 thousand in 2018 compared with expense
of $441 thousand in 2017.
Facility Consolidation and Severance Expenses, Net. Facility consolidation expenses were $3.2 million in 2018 compared with
$636 thousand in the year-earlier period. Facility consolidation expenses increased in 2018 as we continued our Profit Improvement
Plan, announced in 2017, which includes the consolidation of our two commercial brands, consolidation of commercial manufacturing
operations and sales forces, and an overall review of corporate wide operations and functions. As a result of this plan, we incurred
expenses of $3.2 million during 2018 primarily related to facility consolidation expenses and severance costs.
Asset Impairments. The asset impairments recorded in 2018 were $6.7 million. There were no asset impairment expenses in
2017. The asset impairments incurred in 2018 included the impairment of fixed assets as part of our Profit Improvement Plan ($1.2
million). We also incurred intangible asset impairments ($2.1 million) and goodwill impairment ($3.4 million).
Operating Income (Loss). Operations reflected an operating loss of $15.8 million in 2018 compared with an operating income of
$3.9 million in 2017. The operating results for 2018 were impacted by the lower sales volume, settlement of a class action lawsuit,
and facility consolidation, asset impairments, and severance costs related to the Profit Improvement Plan.
Interest Expense. Interest expense increased $752 thousand in 2018 principally due to higher levels of debt and higher rates than
a year ago.
20
Income Tax Provision (Benefit). Our effective income tax rate was a benefit of 3.72% in 2018. The benefit relates to certain
federal and state credits and also includes a benefit for the reduction of certain indefinite lived assets not covered by our valuation
allowance. In 2018 we increased our valuation allowance by $4 million related to our net deferred tax asset and specific state net
operating loss and state credit carryforwards.
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered
the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018.
The income tax expense for 2017 was $7.5 million, which included a charge of $1.4 million related to the re-measurement of certain
net deferred tax assets using the lower U.S. corporate income tax rate and a charge of $6.4 million to increase our valuation
allowance related to our net deferred tax asset. The majority of the increase in the valuation allowance is related to the revised
treatment of net operating losses under the Tax Act. Absent the impact of the Tax Act, our effective income tax benefit rate for 2017
would have been 36.4%.
Net Loss. Continuing operations reflected a loss of $21.5 million, or $1.36 per diluted share in 2018, compared with a loss from
continuing operations of $9.3 million, or $0.59 per diluted share in 2017. Our discontinued operations reflected an income of $95
thousand, or $0.01 per diluted share in 2018 compared with a loss of $233 thousand, or $0.01 per diluted share in 2017. Including
discontinued operations, we had a net loss of $21.4 million, or $1.35 per diluted share, in 2018 compared with a net loss of $9.6
million, or $0.60 per diluted share, in 2017.
Fiscal Year Ended December 30, 2017 Compared with Fiscal Year Ended December 31, 2016
Fiscal Year Ended (amounts in thousands)
December 30,
2017
% of Net
Sales
December 31,
2016
% of Net
Sales
Increase
(Decrease)
%
Change
$
412,462
100.0 % $
397,453
100.0 % $
15,009
Net sales
Cost of sales
Gross profit
Selling and administrative expenses
Other operating expense, net
Facility consolidation and severance expenses, net
Operating income (loss)
Interest expense
Other expense, net
Loss before taxes
Income tax provision (benefit)
Loss from continuing operations
Loss from discontinued operations
Income on disposal of discontinued operations
311,249
101,213
96,171
441
636
3,965
5,739
39
75.5 %
24.5 %
23.3 %
0.1 %
0.2 %
0.9 %
1.4 %
— %
(1,813)
(0.5)%
7,509
(9,322)
(233)
—
1.8 %
(2.3)%
(0.1)%
— %
302,028
95,425
96,983
401
1,456
76.0 %
24.0 %
24.4 %
0.1 %
0.4 %
9,221
5,788
3.8 %
3.1 %
6.1 %
(812)
(0.8)%
40
10.0 %
(820)
(56.3)%
(3,415)
(0.9)%
7,380
(216.1)%
5,392
22
(8,829)
(3,622)
(5,207)
(131)
60
1.4 %
— %
(2.3)%
(0.9)%
(1.4)%
— %
— %
347
17
6.4 %
77.3 %
7,016
(79.5)%
11,131
(307.3)%
(4,115)
79.0 %
(102)
77.9 %
(60)
— %
Net loss
$
(9,555)
(2.4)% $
(5,278)
(1.4)% $
(4,277)
81.0 %
Our fiscal year ended December 30, 2017 had 52 weeks and fiscal year ended December 31, 2016 had 53 weeks. Discussions
below related to percentage changes in net sales for the annual periods have been adjusted to reflect the comparable number of
weeks and are qualified with the term “net sales as adjusted”. For comparative purposes, we define "net sales as adjusted" as net
sales less the last week of sales in a 53 week fiscal year. We believe “net sales as adjusted” will assist our financial statement
users in obtaining comparable data between the reporting periods. (See reconciliation of net sales to net sales as adjusted in the
table below.)
21
Reconciliation of Net Sales to Net Sales as Adjusted
Fiscal Year Ended (amounts in thousands)
Net Sales
December 30,
2017
Net Sales
December 31,
2016
Week 53
Net Sales as
Adjusted
December 31,
2016
Increase
(Decrease)
Net Sales
as Adjusted
% Change
Net sales as adjusted
$
412,462
$
397,453 $
(5,380) $
392,073 $
20,389
5.2%
Net Sales. Net sales for the year ended December 30, 2017 were $412.5 million compared with $397.5 million in the year-earlier
period, an increase of 3.8%, or 5.2% on a “net sales as adjusted” basis, for the year-over-year comparison. Sales for the industry
were flat for 2017 compared with the prior year. Our 2017 year-over-year floorcovering sales comparison reflected an increase of
5.0%, or 6.5% on a “net sales as adjusted” basis, in net sales. Sales of residential floorcovering products were up 8.0%, or 9.3%
on a “net sales as adjusted” basis, and sales of commercial floorcovering products decreased 0.8%, or increased 0.9% on a “net
sales as adjusted” basis. The increase in net sales was due to strong demand for our residential products through our mass merchant
distribution channels. We gained market space on the west coast vacated by Royalty Carpet Mills when they ceased operations
during June of 2017.
Gross Profit. Gross profit, as a percentage of net sales, increased 0.5 percentage points in 2017 compared with 2016. Despite
the improved sales volumes in 2017, our gross profit was adversely affected by rising costs in raw materials and increased operating
costs. We incurred startup costs related to several manufacturing initiatives including (1) adding yarn processing at our Atmore,
Alabama facility, (2) installing a pre-coat line for our modular tile products, (3) completing our Colormaster beck dye and skein dye
consolidation, and (4) starting up our Porterville yarn operation in California. With the completion of these initiatives, we have in
place a foundation that will allow us to operate more efficiently and reduce waste costs.
Selling and Administrative Expenses. Selling and administrative expenses were $96.2 million in 2017 compared with $97.0
million in 2016, or a decrease of 1.1% as a percentage of sales. Selling and administrative expenses decreased as a percentage
of sales primarily as a result of the higher sales volumes during 2017. In addition, selling and administrative expenses decreased
as a result of lower sampling expenses in 2017 compared with 2016.
Other Operating Expense, Net. Other operating expense, net was an expense of $441 thousand in 2017 compared with expense
of $401 thousand in 2016.
Facility Consolidation and Severance Expenses, Net. Facility consolidation expenses were $636 thousand in 2017 compared
with $1.5 million in the year-earlier period. Facility consolidation expenses decreased in 2017 as we completed our Warehousing,
Distribution & Manufacturing Consolidation Plan during 2016. During 2017, we announced a Profit Improvement Plan which included
the consolidation of our two commercial brands. This plan will consolidate the brands into one management team, sharing operations
in sales, marketing, product development and manufacturing. As a result of this plan, we incurred expenses of $636 thousand
during 2017 primarily related to severance costs.
Operating Income (Loss). Operations reflected operating income of $4.0 million in 2017 compared with an operating loss of $3.4
million in 2016. Despite the improved sales volumes in 2017, our gross profit was adversely affected by rising costs in raw materials
and increased operating costs. We incurred startup costs related to several manufacturing initiatives including (1) adding yarn
processing at our Atmore, Alabama facility, (2) installing a pre-coat line for our modular tile products, (3) completing our Colormaster
beck dye and skein dye consolidation, and (4) starting up our Porterville yarn operation in California. With the completion of these
initiatives, we have in place a foundation that will allow us to operate more efficiently and reduce waste costs. In addition, we
incurred expenses related to our Profit Improvement Plan during the year as we consolidated our two commercial brands.
Interest Expense. Interest expense increased $347 thousand in 2017 principally due to higher rates than a year ago.
Income Tax Provision (Benefit). On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The
Tax Act, among other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently,
we wrote down our net deferred tax assets as of December 30, 2017 by $8.2 million to reflect the estimated impact of the Tax Act.
This amount included a charge of $1.8 million related to the re-measurement of certain net deferred tax assets using the lower U.S.
corporate income tax rate and a charge of $6.4 million to increase our valuation allowance related to our net deferred tax asset.
The majority of the increase in the valuation allowance is related to the revised treatment of net operating losses under the Tax Act.
Absent the impact of the Tax Act, our effective income tax benefit rate for 2017 would have been 36.4%.
Our effective income tax rate was a benefit of 41.0% in 2016. In 2016, we increased our valuation allowances by $106 thousand
related to state income tax loss carryforwards and state income tax credit carryforwards. Additionally, 2016 included approximately
$395 thousand of federal tax credits.
22
Net Loss. Continuing operations reflected a loss of $9.3 million, or $0.59 per diluted share in 2017, compared with a loss from
continuing operations of $5.2 million, or $0.33 per diluted share in 2016. Our discontinued operations reflected a loss of $233
thousand, or $0.01 per diluted share in 2017 compared with a loss of $131 thousand, or $0.01 per diluted share and income on
disposal of discontinued operations of $60 thousand, or $0.00 per diluted share in 2016. Including discontinued operations, we had
a net loss of $9.6 million, or $0.60 per diluted share, in 2017 compared with a net loss of $5.3 million, or $0.34 per diluted share,
in 2016.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 29, 2018, cash provided by operations was $5.1 million. Inventories decreased $8.5 million,
receivables decreased $3.8 million and accounts payable and accrued expenses decreased $4.2 million. Inventories were planned
more closely in 2018 and decreased with lower demand. Receivables decreased on lower sales volume. In addition to items related
to the general operating expenses, accounts payable and accrued expenses includes a liability of $1.5 million for settlement of a
class action lawsuit and severances related to the Profit Improvement Plan.
Capital asset acquisitions for the year ended December 29, 2018 were $4.1 million. In 2018 proceeds from sale of equipment totaled
$1.9 million, primarily related to assets in our plants that were closed as part of our Profit Improvement Plan. Approximately $389
thousand of equipment was acquired under capital leases and accounts payable. Depreciation and amortization for the year ended
December 29, 2018 were $12.7 million. We expect capital expenditures to be approximately $6.0 million in 2019 while depreciation
and amortization is expected to be approximately $13.0 million. Planned capital expenditures in 2019 are primarily for new equipment.
During the year ended December 29, 2018, cash used in financing activities was $2.9 million. We had borrowings of $1.5 million
on the revolving credit facility and $3.3 million on notes payables and payments of $10.4 million on notes payable and lease
obligations.
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. As of December 29, 2018, the unused borrowing
availability under our revolving credit facility was $31.9 million. Our revolving credit facility requires us to maintain a fixed charge
coverage ratio of 1.1 to 1.0 during any period that borrowing availability is less than $16.5 million. As of the date hereof, our fixed
coverage ratio was less than 1.1 to 1.0, accordingly the unused availability accessible by us was $15.4 million (the amount above
$16.5 million) at December 29, 2018. 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. See Note 23 to our Consolidated Financial Statements for additional information
regarding liquidity and capital resources.
Debt Facilities
Revolving Credit Facility. The revolving credit facility provides for a maximum of $150.0 million of revolving credit, subject to
borrowing base availability. The borrowing base is currently equal to specified percentages of our eligible accounts receivable,
inventories, fixed assets and real property less reserves established, from time to time, by the administrative agent under the facility.
The revolving credit facility matures on September 23, 2021. The revolving credit facility is secured by a first priority lien on
substantially all of our assets.
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 selected by us, plus an applicable margin ranging between 1.50% and 2.00%, or (b) the higher of the prime rate, the
Federal Funds rate plus 0.5%, or a daily LIBOR rate plus 1.00%, plus an applicable margin ranging between 0.50% and 1.00%.
The applicable margin is determined based on availability under the revolving credit facility with margins increasing as availability
decreases. As of December 29, 2018, the applicable margin on our revolving credit facility was 1.75%. We pay an unused line fee
on the average amount by which the aggregate commitments exceed utilization of the revolving credit facility equal to 0.375% per
annum. The weighted-average interest rate on borrowings outstanding under the revolving credit facility was 4.58% at December
29, 2018 and 4.12% at December 30, 2017.
The revolving credit facility includes certain affirmative and negative covenants that impose restrictions on our financial and business
operations. The revolving credit facility restricts our borrowing availability if our fixed charge coverage ratio is less than 1.1 to 1.0.
During any period that our fixed charge coverage ratio is less than 1.1 to 1.0, our borrowing availability is reduced by $16.5 million.
As of December 29, 2018, the unused borrowing availability under the revolving credit facility was $31.9 million; however, since
our fixed charge coverage ratio was less than 1.1 to 1.0, the unused availability accessible by us was $15.4 million (the amount
above $16.5 million) at December 29, 2018.
23
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%.
On January 23, 2015, we entered into a ten-year $6.3 million note payable to finance an owned facility in Saraland, Alabama. The
note payable is scheduled to mature on January 7, 2025 and is secured by the facility. The note payable bears interest at a variable
rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $26 thousand, plus interest
calculated on the declining balance of the note, with a final payment of $3.1 million due on maturity. In addition, we entered into a
forward interest rate swap with an amortizing notional amount effective January 7, 2017 which effectively fixes the interest rate at
4.30%.
Acquisition Note Payable - Development Authority of Gordon County. On November 2, 2012, we signed a 6.00% seller-
financed note of $5.5 million with Lineage PCR, Inc. (“Lineage”) related to the acquisition of the continuous carpet dyeing facility
in Calhoun, Georgia. Effective December 28, 2012, through a series of agreements between us, the Development Authority of
Gordon County, Georgia (the “Authority”) and Lineage, obligations with identical payment terms as the original note to Lineage
were now payment obligations to the Authority. These transactions were consummated in order to provide a tax abatement to us
related to the real estate and equipment at this facility. The tax abatement plan provided for abatement for certain components of
the real and personal property taxes for up to ten years. At any time, we have the option to pay off the obligation, plus a nominal
amount. The debt to the Authority bore interest at 6.00% and was payable in equal monthly installments of principal and interest
of $106 thousand over 57 months. The note matured on November 2, 2017 and the final installment was paid at that time.
Acquisition Note Payable - Robertex. On July 1, 2013, we signed a 4.50% seller-financed note of $4.0 million, which was recorded
at a fair value of $3.7 million, with Robert P. Rothman related to the acquisition of Robertex Associates, LLC ("Robertex") in Calhoun,
Georgia. The note was payable in five annual installments of principal of $800 thousand plus interest. The note matured on June
30, 2018.
Notes Payable - Equipment and Other. Our equipment financing notes have terms ranging from 1 to 7 years, bear interest ranging
from 1.00% to 7.68% and are due in monthly installments through their maturity dates. Our equipment financing notes are secured
by the specific equipment financed and do not contain any financial covenants.
Capital Lease Obligations. Our capitalized lease obligations have terms ranging from 3 to 7 years, bear interest ranging from
3.55% to 7.76% and are due in monthly or quarterly installments through their maturity dates. Our capital lease obligations are
secured by the specific equipment leased. (See Note 10 to our Consolidated Financial Statements).
24
Contractual Obligations
The following table summarizes our future minimum payments under contractual obligations as of December 29, 2018
Payments Due By Period
(dollars in millions)
Debt
Interest - debt (1)
Capital leases
Interest - capital leases
Operating leases
Purchase commitments
Totals
2019
2020
2021
2022
2023
Thereafter
Total
$
$
3.8
0.6
4.0
0.6
3.0
2.7
14.7
1.9
0.5
3.8
0.4
2.5
—
9.1
$
101.0
$
0.5
3.2
0.2
2.1
—
107.0
$
1.0
0.4
0.9
—
1.7
—
4.0
$
0.7
0.4
0.2
—
0.9
—
2.2
8.0
0.3
—
—
3.2
—
116.4
2.7
12.1
1.2
13.4
2.7
11.5
148.5
(1) Interest rates used for variable rate debt were those in effect at December 29, 2018.
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 29, 2018, the total unrecognized compensation
expense related to unvested restricted stock awards was $1.5 million with a weighted-average vesting period of 7.7 years. At
December 29, 2018, the total unrecognized compensation expense related to Directors' Stock Performance Units was $24 thousand
with a weighted-average vesting period of 0.3 years. At December 29, 2018, the total unrecognized compensation expense related
to unvested stock options was $72 thousand with a weighted-average vesting period of 0.4 years.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at December 29, 2018 or December 30, 2017.
Income Tax Considerations
In the tax year ended December 29, 2018 we increased our valuation allowances by $4 million related to our net deferred tax asset
and specific state net operating loss and state credit carryforwards.
During 2019 and 2020, we do not anticipate any cash outlays for income taxes to exceed $100 thousand. This is due to tax loss
carryforwards and tax credit carryforwards that will be used to offset taxable income. At December 29, 2018, we were in a net
deferred tax liability position of $568 thousand.
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 $1.7 million for environmental liabilities at these sites as of December 29, 2018. 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 29, 2018, we had no 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 are a party to a five-year lease with the seller of Atlas Carpet Mills, Inc. to lease three manufacturing facilities as part of the
acquisition in 2014. The lessor is controlled by an associate of ours. Rent paid to the lessor during 2018, 2017, and 2016 was
$1,003, $978, and $793, respectively. The lease was based on current market values for similar facilities.
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 ours. An affiliate of Mr. Shaw holds approximately 7.2% of our Common Stock,
25
which represents approximately 3.5% 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 2018, 2017 and 2016 were approximately $8,200,
$7,200 and $7,300, respectively; or approximately 2.6%, 2.3%, and 2.4% of our cost of goods sold in 2018, 2017, and 2016,
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 are a party to a ten-year lease with the Rothman Family Partnership to lease a manufacturing facility as part of the Robertex
acquisition in 2013. The lessor is controlled by an associate of ours. Rent paid to the lessor during 2018, 2017, and 2016 was $278,
$273, and $267, respectively. The lease was based on current market values for similar facilities. In addition, we have a note payable
to Robert P. Rothman related to the acquisition of Robertex Inc. (See Note 10 to our Consolidated Financial Statements).
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize on the balance
sheet right-of-use assets, representing the right to use the underlying asset for the lease term, and a lease liability for all leases
with terms greater than 12 months. We have completed the process of identifying our population of leases and we have identified
and implemented internal procedures and controls to properly disclose and report our results beginning with our quarterly report
on Form 10-Q for the quarter ending March 30, 2019. With the adoption of the new lease standard, for operating leases we will
recognize right of use assets of approximately $10.3 million and a corresponding lease liability of the same amount at the beginning
of fiscal year 2019.
See Note 2 to our Consolidated Financial Statements of this Form 10-K for a discussion of the standard described above and other
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. The Company derives its revenues primarily from the sale of floorcovering products and processing
services. Revenues are recognized when control of these products or services is transferred to its customers, in an amount
that reflects the consideration the Company expects to be entitled to in exchange for those products and services. Sales,
value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.
Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the
context of the contract are recognized as expense. The Company does not have any significant financing components
as payment is received at or shortly after the point of sale. The Company determined revenue recognition through the
following steps:
Identification of the contract with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the performance obligation is satisfied
Variable Consideration. The nature of the Company’s business gives rise to variable consideration, including rebates,
allowances, and returns that generally decrease the transaction price, which reduces revenue. These variable amounts
are generally credited to the customer, based on achieving certain levels of sales activity, product returns, or price
concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are
included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized
will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable
consideration are estimated based upon historical experience and known trends.
26
•
•
•
•
•
•
Customer claims and product warranties. The Company generally provides product warranties related to manufacturing
defects and specific performance standards for its products for a period of up to two years. The Company accrues for
estimated future assurance warranty costs in the period in which the sale is recorded. The costs are included in Cost of
Sales in the Consolidated Condensed Statements of Operations and the product warranty reserve is included in accrued
expenses in the Consolidated Condensed Balance Sheets. The Company calculates its accrual using the portfolio approach
based upon historical experience and known trends. The Company does not provide an additional service-type warranty.
Accounts receivable allowances. We provide allowances for expected cash discounts and doubtful accounts based
upon historical experience and periodic evaluations of the financial condition of our customers. If the financial conditions
of our customers were to significantly deteriorate, or other factors impair their ability to pay their debts, credit losses could
differ from allowances recorded in our Consolidated Financial Statements.
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.
Goodwill. Goodwill is tested annually for impairment during the fourth quarter or earlier if significant events or substantive
changes in circumstances occur that may indicate that goodwill may not be recoverable. The goodwill impairment tests
are based on determining the fair value of the specified reporting units based on management judgments and assumptions
using the discounted cash flows and comparable company market valuation approaches. We have identified our reporting
unit as our floorcovering business for the purposes of allocating goodwill and assessing impairments. The valuation
approaches are subject to key judgments and assumptions that are sensitive to change such as judgments and assumptions
about sales growth rates, operating margins, the weighted average cost of capital (“WACC”), synergies from the viewpoint
of a market participant and comparable company market multiples. When developing these key judgments and
assumptions, we consider economic, operational and market conditions that could impact the fair value of the reporting
unit. However, estimates are inherently uncertain and represent only management’s reasonable expectations regarding
future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in
all likelihood, differ in some respects from actual future results. We performed our annual assessment of goodwill in the
fourth quarter of 2018 and an impairment was indicated. In accordance with the results of our testing, the goodwill was
considered impaired and the asset was removed and a corresponding expense was recorded for asset impairment on the
Consolidated Statements of Operations. (See Note 7 to our Consolidated Financial Statements)
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 $17.0 million at December 29, 2018 and $13.0 million at December
30, 2017. On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act, among
other things, lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. Consequently, we
wrote down our net deferred tax assets as of December 30, 2017 by $8.2 million to reflect the estimated impact of the Tax
Act. This amount included a charge of $1.8 million related to the re-measurement of certain net deferred tax assets using
the lower U.S. corporate income tax rate and a charge of $6.4 million to increase our valuation allowance related to our
net deferred tax asset. The majority of the increase in the valuation allowance is related to the revised treatment of net
operating losses under the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, we have completed our analysis and
all adjustments have been included in income from continuing operations as an adjustment to income tax expense. At
December 29, 2018, we were in a net deferred tax liability position of $568 thousand. For further information regarding
our valuation allowances, see Note 14 to our 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
27
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.
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 29, 2018, $49,220, or approximately 38% 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
$492.
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 29, 2018, 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.
28
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 1, 2019 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 29, 2018, members of our audit committee are Michael L. Owens, Chairman,
William F. Blue, Jr., Charles E. Brock, Walter W. Hubbard, Lowry F. Kline, and Hilda W. 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 1, 2019 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 1, 2019 are incorporated herein by reference.
Equity Compensation Plan Information as of December 29, 2018
The following table sets forth information as to our equity compensation plans as of the end of the 2018 fiscal year:
Plan Category
(a)
Number of
securities to be
issued upon
exercise of the
outstanding
options, warrants
and rights
(b)
Weighted-
average
exercise price
of outstanding
options,
warrants and
rights
(c)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a)
Equity Compensation Plans approved by security holders
421,821 (1)
$
4.90 (2)
217,686
(1)
(2)
Includes the options to purchase 103,500 shares and 195,000 shares of Common Stock under our 2006 Stock Awards Plan and 2016 Stock
Awards Plan, respectively, and 123,321 Performance Units issued under the 2016 Stock Awards 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.
Includes the aggregate weighted-average of (i) the exercise price per share for outstanding options to purchase 103,500 shares and 195,000
shares of Common Stock under our 2006 Stock Awards Plan and 2016 Stock Awards Plan, respectively, and (ii) the price per share of the
Common Stock on the grant date for each of 123,321 Performance Units issued under the 2016 Stock Awards Plan (each unit equivalent to
one share of Common Stock).
Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The section entitled "Certain Transactions Between the Company and Directors and Officers" in the Proxy Statement of the registrant
for the annual meeting of shareholders to be held May 1, 2019 is incorporated herein by reference.
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 1, 2019 is incorporated herein by reference.
29
Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV.
(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.
30
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 8, 2019
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
/s/ DANIEL K. FRIERSON
Chairman of the Board, Director and Chief Executive Officer
March 8, 2019
Daniel K. Frierson
/s/ JON A. FAULKNER
Vice President, Chief Financial Officer
March 8, 2019
Jon A. Faulkner
/s/ ALLEN L. DANZEY
Allen L. Danzey
Chief Accounting Officer
March 8, 2019
/s/ D. KENNEDY FRIERSON, JR.
Vice President, Chief Operating Officer and Director
March 8, 2019
D. Kennedy Frierson, Jr.
/s/ WILLIAM F. BLUE, JR.
Director
William F. Blue, Jr.
/s/ CHARLES E. BROCK
Director
Charles E. Brock
/s/ WALTER W. HUBBARD
Director
Walter W. Hubbard
/s/ LOWRY F. KLINE
Lowry F. Kline
Director
/s/ HILDA S. MURRAY
Director
Hilda S. Murray
/s/ MICHAEL L. OWENS
Director
Michael L. Owens
31
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
March 8, 2019
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 29, 2018
THE DIXIE GROUP, INC.
DALTON, GEORGIA
32
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
Management's report on internal control over financial reporting
Report of independent registered public accounting firm
Consolidated balance sheets - December 29, 2018 and December 30, 2017
Consolidated statements of operations - Years ended December 29, 2018, December 30, 2017, and
December 31, 2016
Consolidated statements of comprehensive income (loss) - Years ended December 29, 2018, December 30,
2017, and December 31, 2016
Consolidated statements of cash flows - Years ended December 29, 2018, December 30, 2017, and
December 31, 2016
Consolidated statements of stockholders' equity - Years ended December 29, 2018, December 30, 2017, and
December 31, 2016
Notes to consolidated financial statements
Schedule II - Valuation and Qualifying Accounts
Page
34
35
36
37
38
39
40
41
70
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.
33
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 29, 2018, based on those criteria.
/s/ Daniel K. Frierson
Chairman of the Board and
Chief Executive Officer
/s/ Jon A. Faulkner
Chief Financial Officer
34
The Shareholders and the Board of Directors of The Dixie Group, Inc.
Report of Independent Registered Public Accounting Firm
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of The Dixie Group, Inc. (the "Company") as of December 29, 2018
and December 30, 2017, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity
and cash flows for each of the three years in the period ended December 29, 2018, and the related notes and schedule listed in
the Index at Item 15(a)(2) (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 29, 2018 and December 30, 2017, and the
results of its operations and its cash flows for each of the three years in the period ended December 29, 2018, in conformity with
U.S. generally accepted accounting principles.
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
audits 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.
/s/ Dixon Hughes Goodman LLP
We have served as the Company's auditor since 2013.
Atlanta, Georgia
March 8, 2019
35
THE DIXIE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Receivables, net
Inventories, net
Prepaid expenses
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT, NET
GOODWILL AND OTHER INTANGIBLES
OTHER ASSETS
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Accrued expenses
Current portion of long-term debt
TOTAL CURRENT LIABILITIES
LONG-TERM DEBT
OTHER LONG-TERM LIABILITIES
TOTAL LIABILITIES
December 29,
2018
December 30,
2017
(As Adjusted)
$
18
$
42,542
105,195
5,204
152,959
84,111
—
15,708
19
46,480
113,657
4,669
164,825
93,785
5,850
19,447
$
$
252,778
$
283,907
$
17,779
30,852
7,794
56,425
120,251
17,118
193,794
18,541
31,360
9,811
59,712
123,446
21,486
204,644
COMMITMENTS AND CONTINGENCIES (See Note 18)
STOCKHOLDERS' EQUITY
Common Stock ($3 par value per share): Authorized 80,000,000 shares, issued and
outstanding - 15,522,588 shares for 2018 and 15,279,812 shares for 2017
Class B Common Stock ($3 par value per share): Authorized 16,000,000 shares,
issued and outstanding - 839,304 shares for 2018 and 861,499 shares for 2017
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
TOTAL STOCKHOLDERS' EQUITY
46,568
45,839
2,518
156,390
(146,384)
(108)
58,984
2,584
157,139
(125,000)
(1,299)
79,263
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
252,778
$
283,907
See accompanying notes to the consolidated financial statements.
36
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share data)
Year Ended
December 29,
2018
December 30,
2017
December 31,
2016
(As Adjusted)
(As Adjusted)
$
405,033
$
412,462
$
NET SALES
Cost of sales
GROSS PROFIT
Selling and administrative expenses
Other operating expense, net
Facility consolidation and severance expenses, net
Impairment of assets
OPERATING INCOME (LOSS)
Interest expense
Other expense, net
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES
Income tax provision (benefit)
LOSS FROM CONTINUING OPERATIONS
Income (loss) from discontinued operations, net of tax
Income on disposal of discontinued operations, net of tax
NET LOSS
BASIC EARNINGS (LOSS) PER SHARE:
Continuing operations
Discontinued operations
Disposal of discontinued operations
Net loss
BASIC SHARES OUTSTANDING
DILUTED EARNINGS (LOSS) PER SHARE:
Continuing operations
Discontinued operations
Disposal of discontinued operations
Net loss
DILUTED SHARES OUTSTANDING
DIVIDENDS PER SHARE:
Common Stock
Class B Common Stock
See accompanying notes to the consolidated financial statements.
$
$
$
$
$
$
37
318,042
86,991
92,473
458
3,167
6,709
(15,816)
6,491
3
(22,310)
(831)
(21,479)
95
—
(21,384) $
311,249
101,213
96,189
441
636
—
3,947
5,739
21
(1,813)
7,509
(9,322)
(233)
—
397,453
302,028
95,425
97,004
401
1,456
—
(3,436)
5,392
1
(8,829)
(3,622)
(5,207)
(131)
60
(9,555) $
(5,278)
(1.36) $
0.01
—
(1.35) $
(0.59) $
(0.01)
—
(0.60) $
(0.33)
(0.01)
0.00
(0.34)
15,764
15,699
15,638
(1.36) $
0.01
—
(1.35) $
(0.59) $
(0.01)
—
(0.60) $
(0.33)
(0.01)
0.00
(0.34)
15,764
15,699
15,638
— $
—
— $
—
—
—
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
NET LOSS
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain (loss) on interest rate swaps
Income taxes
Unrealized gain (loss) on interest rate swaps, net
Reclassification of loss into earnings from interest rate swaps (1)
Income taxes
Reclassification of loss into earnings from interest rate swaps, net
Unrecognized net actuarial gain (loss) on postretirement benefit plans
Income taxes
Unrecognized net actuarial gain (loss) on postretirement benefit plans,
net
Reclassification of net actuarial gain into earnings from postretirement
benefit plans (2)
Income taxes
Reclassification of net actuarial gain into earnings from postretirement
benefit plans, net
Reclassification of prior service credits into earnings from
postretirement benefit plans (2)
Income taxes
Reclassification of prior service credits into earnings from
postretirement benefit plans, net
Year Ended
December 29,
2018
December 30,
2017
December 31,
2016
$
(21,384) $
(9,555) $
(5,278)
531
—
531
673
—
673
18
—
18
(27)
—
(27)
(4)
—
(4)
180
68
112
1,250
475
775
11
4
7
(30)
(11)
(19)
(4)
(1)
(3)
(263)
(100)
(163)
1,291
491
800
(3)
(1)
(2)
(33)
(13)
(20)
(4)
(2)
(2)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
1,191
872
613
COMPREHENSIVE LOSS
$
(20,193) $
(8,683) $
(4,665)
(1) Amounts for cash flow hedges reclassified from accumulated other comprehensive income (loss) to net loss were included in interest expense
in the Company's Consolidated Statement of Operations.
(2) Amounts for postretirement plans reclassified from accumulated other comprehensive income (loss) to net loss were included in selling and
administrative expenses in the Company's Consolidated Statement of Operations.
See accompanying notes to the consolidated financial statements.
38
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
December 29,
2018
Year Ended
December 30,
2017
December 31,
2016
CASH FLOWS FROM OPERATING ACTIVITIES
Loss from continuing operations
Income (loss) from discontinued operations
Income on disposal of discontinued operations
Net loss
$
(21,479) $
95
—
(21,384)
(9,322) $
(233)
—
(9,555)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization
Provision (benefit) for deferred income taxes
Net loss (gain) on property, plant and equipment disposals
Impairment of assets
Impairment of goodwill and intangibles
Stock-based compensation (credit) expense
Excess tax benefits from stock-based compensation
Bad debt expense
Changes in operating assets and liabilities:
Receivables
Inventories
Other current assets
Accounts payable and accrued expenses
Other operating assets and liabilities
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sales of property, plant and equipment
Purchase of property, plant and equipment
NET CASH USED IN INVESTING ACTIVITIES
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings (payments) on revolving credit facility
Payments on notes payable - buildings
Payments on notes payable related to acquisitions
Borrowings on notes payable - equipment and other
Payments on notes payable - equipment and other
Payments on capital leases
Change in outstanding checks in excess of cash
Repurchases of Common Stock
Excess tax benefits from stock-based compensation
Payments for debt issuance costs
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
12,653
(537)
(1,047)
1,164
5,545
(29)
—
163
3,775
8,462
(535)
(4,198)
1,073
5,105
1,856
(4,052)
(2,196)
1,512
(731)
(791)
3,273
(4,260)
(4,617)
2,762
(58)
—
—
(2,910)
12,947
8,181
170
—
—
940
—
70
(2,945)
(16,420)
776
(3,161)
(609)
(9,606)
—
(12,724)
(12,724)
27,125
(731)
(1,920)
7,612
(4,145)
(3,921)
(1,695)
(116)
—
—
22,209
DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
(1)
19
18
$
(121)
140
19
$
SUPPLEMENTAL CASH FLOW INFORMATION:
Equipment purchased under capital leases
Equipment purchased under notes payable
Accrued purchases of equipment
Shortfall of tax benefits from stock-based compensation
See accompanying notes to the consolidated financial statements.
223
—
166
—
621
59
179
—
(5,207)
(131)
60
(5,278)
13,515
(3,260)
725
—
—
1,324
(3)
38
7,163
17,909
(1,014)
(6,827)
(371)
23,921
1
(4,904)
(4,903)
(9,986)
(731)
(1,924)
2,674
(4,653)
(3,171)
(932)
(152)
3
(287)
(19,159)
(141)
281
140
169
—
258
(192)
39
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands, except share data)
Balance at December 26, 2015
$ 45,466
$
2,555
$ 155,734
$ (110,378) $
(2,573) $
90,804
Common
Stock
Class B
Common
Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
Repurchases of Common Stock - 35,815
shares
Restricted stock grants issued - 149,215
shares
Restricted stock grants forfeited - 1,314
shares
Class B converted into Common Stock -
12,144 shares
Stock-based compensation expense
Excess tax benefits from stock-based
compensation
Net loss
Other comprehensive loss
(107)
354
(4)
36
—
—
—
—
—
93
—
(36)
—
—
—
—
(45)
(447)
4
—
1,324
(189)
—
—
—
—
—
—
—
—
(5,278)
—
—
—
—
—
—
—
—
613
(152)
—
—
—
1,324
(189)
(5,278)
613
Balance at December 31, 2016
45,745
2,612
156,381
(115,656)
(1,960)
87,122
Repurchases of Common Stock - 33,112
shares
Restricted stock grants issued - 60,000
shares
Restricted stock grants forfeited - 4,629
shares
Class B converted into Common Stock -
9,215 shares
Stock-based compensation expense
Net loss
Other comprehensive income
Reclassification of stranded tax effects
Balance at December 30, 2017
Common Stock issued - 39,711 shares
Repurchases of Common Stock - 20,226
shares
Restricted stock grants issued - 307,292
shares
Restricted stock grants forfeited - 106,196
shares
Class B converted into Common Stock -
6,250 shares
Stock-based compensation expense
Net loss
Other comprehensive income
(100)
180
(14)
28
—
—
—
—
45,839
119
(61)
677
—
—
—
(28)
—
—
—
—
(16)
(180)
12
—
942
—
—
—
—
—
—
—
—
(9,555)
—
211
—
—
—
—
—
—
872
(211)
(116)
—
(2)
—
942
(9,555)
872
—
2,584
157,139
(125,000)
(1,299)
79,263
—
—
(119)
4
245
(922)
(25)
(292)
(621)
19
—
—
—
(19)
—
—
—
—
909
—
—
—
—
—
—
—
—
(21,384)
—
—
—
—
—
—
—
—
1,191
—
(57)
—
(938)
—
909
(21,384)
1,191
Balance at December 29, 2018
$ 46,568
$
2,518
$ 156,390
$ (146,384) $
(108) $
58,984
See accompanying notes to the consolidated financial statements.
40
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 and luxury vinyl flooring
in the domestic floorcovering market. The Company sells floorcovering products in both residential and commercial applications.
Additionally, the Company provides manufacturing support to its carpet businesses through its separate processing operations.
Based on applicable accounting standards, the Company has determined that it has one reportable segment, Floorcovering
comprising of two operating segments, Residential and Commercial. Pursuant to accounting standards, the Company has
aggregated the two operating segments into one reporting segment because they have similar economic characteristics, and the
operating segments are similar in all of the following areas: (a) the nature of the products and services; (b) the nature of the production
processes; (c) the type or class of customer for their products and services; (d) the methods used to distribute their products or
provide their services; and (e) the nature of the regulatory environment.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of The Dixie Group, Inc. and its wholly-owned subsidiaries (the
"Company"). Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates and these differences could be material.
Fiscal Year
The Company ends its fiscal year on the last Saturday of December. All references herein to "2018," "2017," and "2016," mean the
fiscal years ended December 29, 2018, December 30, 2017, and December 31, 2016, respectively. The year 2016 contained 53
weeks, all other years presented contained 52 weeks.
Reclassifications
The Company reclassified certain amounts in 2017 and 2016 to conform to the 2018 presentation (See Note 2).
Discontinued Operations
The financial statements separately report discontinued operations and the results of continuing operations (See Note 21).
Cash and Cash Equivalents
Highly liquid investments with original maturities of three months or less when purchased are reported as cash equivalents.
Market Risk
The Company sells carpet to floorcovering retailers, the interior design, architectural and specifier communities and supplies carpet
yarn and carpet dyeing and finishing services to certain manufacturers. The Company's customers are located principally throughout
the United States. As a percentage of net sales, one customer accounted for approximately 13% in 2018, 14% in 2017 and 10%
in 2016. No other customer accounted for more than 10% of net sales in 2018, 2017, or 2016, nor did the Company make a significant
amount of sales to foreign countries during 2018, 2017, or 2016.
Credit Risk
The Company grants credit to its customers with defined payment terms, performs ongoing evaluations of the credit worthiness of
its customers and generally does not require collateral. Accounts receivable are carried at their outstanding principal amounts, less
an anticipated amount for discounts and an allowance for doubtful accounts, which management believes is sufficient to cover
potential credit losses based on historical experience and periodic evaluation of the financial condition of the Company's customers.
As a percentage of customer's trade accounts receivable, one customer accounted for approximately 34% in 2018, 31% in 2017,
41
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
and 28% in 2016. Notes receivable are carried at their outstanding principal amounts, less an allowance for doubtful accounts to
cover potential credit losses based on the financial condition of borrowers and collateral held by the Company.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method, which generally
matches current costs of inventory sold with current revenues, for substantially all inventories.
Property, Plant and Equipment
Property, plant and equipment are stated at the lower of cost or impaired value. Provisions for depreciation and amortization of
property, plant and equipment have been computed for financial reporting purposes using the straight-line method over the estimated
useful lives of the related assets, ranging from 10 to 40 years for buildings and improvements, and 3 to 10 years for machinery and
equipment. Costs to repair and maintain the Company's equipment and facilities are expensed as incurred. Such costs typically
include expenditures to maintain equipment and facilities in good repair and proper working condition.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when circumstances indicate that the carrying value of an asset may not be fully
recoverable. When the carrying value of the asset exceeds the value of its estimated undiscounted future cash flows, an impairment
charge is recognized equal to the difference between the asset's carrying value and its fair value. Fair value is estimated using
discounted cash flows, prices for similar assets or other valuation techniques.
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price over the fair value of identified net assets acquired in business combinations. In
accordance with the provisions of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic
("ASC") 350, “Intangibles-Goodwill and Other,” the Company tests goodwill for impairment annually in the fourth quarter of each
year or more frequently if events or circumstances indicate that the carrying value of goodwill associated with a reporting unit may
not be fully recoverable. The goodwill impairment tests are based on determining the fair value of the specified reporting units
based on management judgments and assumptions using the discounted cash flows and comparable company market valuation
approaches. The Company has identified its reporting unit as its floorcovering business for the purposes of allocating goodwill and
assessing impairments. The valuation approaches are subject to key judgments and assumptions that are sensitive to change
such as judgments and assumptions about sales growth rates, operating margins, the weighted average cost of capital (“WACC”)
and comparable company market multiples. When developing these key judgments and assumptions, the Company considers
economic, operational and market conditions that could impact the fair value of the reporting unit. However, estimates are inherently
uncertain and represent only management’s reasonable expectations regarding future developments. These estimates and the
judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future
results. Should a significant or prolonged deterioration in economic conditions occur or a decline in comparable company market
multiples, then key judgments and assumptions could be impacted.
In the goodwill assessment process, the Company compares the carrying value of a reporting unit, including goodwill, to the fair
value of the reporting unit to identify potential goodwill impairments. The Company estimates the fair value of the reporting unit by
using both a discounted cash flow and comparable company market valuation approach. If an impairment is indicated in the
assessment, the impairment would be measured as the amount by which the reporting unit's carrying value exceeds its fair value,
not to exceed the carrying value of goodwill. (See Note 7).
Identifiable intangible assets with finite lives are generally amortized on a straight-line basis over their respective lives, which range
from 10 to 20 years (See Note 7).
Self-Insured Benefit Programs
The Company records liabilities to reflect an estimate of the ultimate cost of claims related to its self-insured medical and dental
benefits and workers' compensation. The amounts of such liabilities are based on an analysis of the Company's historical experience
for each type of claim.
42
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the future tax consequences of the differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The Company evaluates the
recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources. In the
event that the Company is not able to realize all or a portion of the deferred tax assets in the future, a valuation allowance is provided.
The Company recognizes such amounts through a charge to income in the period in which that determination is made or when tax
law changes are enacted. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax
expense.
Derivative Financial Instruments
The Company does not hold speculative financial instruments, nor does it hold or issue financial instruments for trading purposes.
The Company uses derivative instruments, currently interest rate swaps, to minimize the effects of interest rate volatility.
The Company recognizes all derivatives at fair value. Derivatives that are designated as cash flow hedges are linked to specific
liabilities on the Company's balance sheet. The Company assesses, both at inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. When
it is determined that a derivative is not highly effective or the derivative expires, is sold, terminated, or exercised, the Company
discontinues hedge accounting for that specific hedge instrument. Changes in the fair value of effective cash flow hedges are
deferred in accumulated other comprehensive income (loss) ("AOCIL") and reclassified to earnings in the same periods during
which the hedge transaction affects earnings. Changes in the fair value of derivatives that are not effective cash flow hedges are
recognized in results of operations.
Treasury Stock
The Company classifies treasury stock as a reduction to Common Stock for the par value of such shares acquired and the difference
between the par value and the price paid for each share recorded either entirely to retained earnings or to additional paid-in-capital
for periods in which the Company does not have retained earnings. This presentation reflects the repurchased shares as authorized
but unissued as prescribed by state statute.
Revenue Recognition
The Company derives its revenues primarily from the sale of floorcovering products and processing services. Revenues are
recognized when control of these products or services is transferred to its customers, in an amount that reflects the consideration
the Company expects to be entitled to in exchange for those products and services. Sales, value add, and other taxes the Company
collects concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers
are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The
Company does not have any significant financing components as payment is received at or shortly after the point of sale. The
Company determined revenue recognition through the following steps:
•
•
•
•
•
Identification of the contract with a customer
Identification of the performance obligations in the contract
Determination of the transaction price
Allocation of the transaction price to the performance obligations in the contract
Recognition of revenue when, or as, the performance obligation is satisfied
Performance Obligations
For performance obligations related to residential floorcovering and commercial floorcovering products, control transfers at a point
in time. To indicate the transfer of control, the Company must have a present right to payment, legal title must have passed to the
customer and the customer must have the significant risks and rewards of ownership. The Company’s principal terms of sale are
FOB Shipping Point and FOB Destination and the Company transfers control and records revenue for product sales either upon
shipment or delivery to the customer, respectively. Revenue is allocated to each performance obligation based on its relative stand-
alone selling prices. Stand-alone selling prices are based on observable prices at which the Company separately sells the products
or services.
43
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Variable Consideration
The nature of the Company’s business gives rise to variable consideration, including rebates, allowances, and returns that generally
decrease the transaction price, which reduces revenue. These variable amounts are generally credited to the customer, based on
achieving certain levels of sales activity, product returns, or price concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in
the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the
uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon
historical experience and known trends.
Advertising Costs
The Company engages in promotional and advertising programs. Expenses relating to these programs are charged to results of
operations during the period of the related benefits. These arrangements do not require significant estimates of costs. Costs related
to cooperative advertising programs are normally recorded as selling and administrative expenses when the Company can
reasonably identify the benefit associated with the program and can reasonably estimate that the fair value of the benefit is equal
to or greater than its cost. The amount of advertising and promotion expenses included in selling and administrative expenses was
not significant for the years 2018, 2017 or 2016.
Warranties
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its
products for a period of up to two years. The Company accrues for estimated future assurance warranty costs in the period in
which the sale is recorded. The costs are included in Cost of Sales in the Consolidated Condensed Statements of Operations and
the product warranty reserve is included in accrued expenses in the Consolidated Condensed Balance Sheets. The Company
calculates its accrual using the portfolio approach based upon historical experience and known trends. (See Note 9.) The Company
does not provide an additional service-type warranty.
Cost of Sales
Cost of sales includes all costs related to manufacturing the Company's products, including purchasing and receiving costs,
inspection costs, warehousing costs, freight costs, internal transfer costs or other costs of the Company's distribution network.
Selling and Administrative Expenses
Selling and administrative expenses include all costs, not included in cost of sales, related to the sale and marketing of the Company's
products and general administration of the Company's business.
Operating Leases
Rent is expensed over the lease period, including the effect of any rent holiday and rent escalation provisions, which effectively
amortizes the rent holidays and rent escalations on a straight-line basis over the lease period. Leasehold improvements are amortized
over the shorter of their economic lives or the lease term, excluding renewal options. Any leasehold improvement made by the
Company and funded by the lessor is treated as a leasehold improvement and amortized over the shorter of its economic life or
the lease term. Any funding provided by the lessor for such improvements is treated as deferred costs and amortized over the lease
period.
Stock-Based Compensation
The Company recognizes compensation expense relating to stock-based payments based on the fair value of the equity or liability
instrument issued. Restricted stock grants with pro-rata vesting are expensed using the straight-line method. (Terms of the
Company's awards are specified in Note 16). The Company accounts for forfeitures when they actually occur.
NOTE 2 - RECENT ACCOUNTING PRONOUNCEMENTS
Accounting Standards Adopted in Fiscal 2018
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09,
"Revenue from Contracts with Customers (Topic 606)". The ASU requires an entity to recognize the amount of revenue to which it
expects to be entitled for the transfer of promised goods or services to customers. The ASU and all subsequently issued clarifying
ASUs replaced most existing revenue recognition guidance in U.S. GAAP. The ASU was effective for annual reporting periods
44
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
beginning after December 15, 2017, including interim reporting periods within that reporting period. The standard permits the use
of either the retrospective or cumulative effect transition method. The ASU also required expanded disclosures relating to the nature,
amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and
quantitative disclosures are required for customer contracts, significant judgments and changes in judgments. The Company adopted
the new standard effective December 31, 2017, the first day of the Company's fiscal year, using the full retrospective method
approach and expanded its financial statement disclosures in order to comply with the ASU. (See Note 3.) The adoption of this
ASU did not have a significant impact on the Company's consolidated financial statements. The majority of the Company's revenue
arrangements generally consist of a single performance obligation to transfer promised goods or services. Based on the Company's
evaluation process and review of its contracts with customers, the timing (point in time) and amount of revenue recognized previously
is consistent with how revenue is recognized under the new standard.
Therefore, no changes were required to its reported revenues as a result of the adoption. However, the adoption resulted in the
recognition of an asset related to certain product returns by increasing the returns liability for December 30, 2017 and recognizing
a corresponding asset for the estimated value of the returns from customers; this gross up had no corresponding impact on the
Consolidated Condensed Statements of Operations. The Consolidated Balance Sheets as of December 30, 2017 has been adjusted
to reflect retrospective application of the new accounting standard as follows:
ASSETS
Prepaids and other current assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses
December 30, 2017
As Previously
Reported
Adjustments
As Adjusted
$
$
3,600
$
1,069
$
4,669
30,291
$
1,069
$
31,360
As part of the adoption of the ASU, the Company elected to use the following practical expedients (i) to exclude disclosures of
transaction prices allocated to remaining performance obligations when the Company expects to recognize such revenue for all
periods prior to the date of initial application of the ASU; (ii) not to adjust the promised amount of consideration for the effects of a
significant financing component when the Company expects, at contract inception, that the period between the Company's transfer
of a promised product or service to a customer and when the customer pays for that product or service will be one year or less; (iii)
to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less; (iv) not
to recast revenues for contracts that begin and end in the same fiscal year; and (v) not to assess whether promised goods or services
are performance obligations if they are immaterial in the context of the contract with the customer. The Company's revenue is
recognized at a point in time based on the transfer of control whereby the Company does not invest in contract costs that are
recoverable. In addition, performance obligations and customer payments are within one year or less.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities," which addresses the recognition, measurement, presentation and
disclosure of financial assets and liabilities. This ASU primarily affects the accounting for equity investments, financial liabilities
under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, this ASU clarifies
the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale
debt securities. This ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The adoption of this ASU did not have a significant impact on the financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments," which provides clarification guidance on certain cash flow presentation issues that have developed due to
diversity in practice. These issues include certain cash receipts and payments for debt prepayment or extinguishment costs, the
maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance
settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization.
ASU 2016-15 clarifies that when cash receipts and cash payments have aspects of more than one class of cash flows and cannot
be separated, classification will depend on the predominant source or use. For public entities, ASU 2016-15 is effective for annual
periods beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this ASU did not
have a significant impact on the financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which clarifies
guidance on the classification and presentation of restricted cash in the statement of cash flows. Under the ASU, changes in restricted
cash and restricted cash equivalents would be included along with those of cash and cash equivalents in the statement of cash
45
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
flows. In addition, a reconciliation between the balance sheet and the statement of cash flows would be disclosed when the balance
sheet includes more than one line item for cash and cash equivalents and restricted cash and cash equivalents. For public entities,
ASU 2016-18 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years.
Entities are required to apply the standard’s provisions on a retrospective basis. Since the Company has no restricted cash, the
adoption of this ASU did not have an impact on the financial statements.
In February 2017, the FASB issued ASU No. 2017-05, "Other Income-Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets." This ASU clarifies the scope and application of ASC 610-20 on the sale or transfer of nonfinancial assets and in substance
nonfinancial assets to noncustomers, including partial sales. The amendments are effective at the same time as the new revenue
standard. For public entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim
reporting periods within those fiscal years. The adoption of this ASU did not have a significant impact on the financial statements.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation - Retirement Benefits (Topic 715): Improving the Presentation
of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost," which changed the presentation of net periodic benefit
cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost are included within the
same income statement line item as other compensation costs arising from services rendered during the period, while other
components of net periodic benefit pension cost are presented separately outside of operating income. Additionally, only service
costs may be capitalized in assets. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Effective December 31, 2017, the first day of the Company's fiscal year, the Company adopted
this ASU. The Company adopted this ASU retrospectively, utilizing the practical expedient by using the amounts disclosed in the
postretirement plan note for the prior comparative periods as the estimation basis for applying the retrospective presentation
requirements. which resulted in an immaterial amount being reclassified between selling and administrative expenses and other
(income) expense, net in the Company's Consolidated Condensed Statements of Operations.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting." This ASU provides amendments to the current guidance on determining which changes to the terms and conditions
of share-based payment awards require the application of modification accounting. The effects of a modification should be accounted
for unless there are no changes between the fair value, vesting conditions, and classification of the modified award and the original
award immediately before the original award is modified. ASU 2017-09 is effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. The adoption of this ASU did not have an impact on the financial statements.
Accounting Standards Yet to Be Adopted
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which requires lessees to recognize on the balance
sheet right-of-use assets, representing the right to use the underlying asset for the lease term, and a lease liability for all leases
with terms greater than 12 months. The guidance also requires qualitative and quantitative disclosures designed to assess the
amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-11 providing an
optional transition method allowing entities to apply the new lease standard at the adoption date and recognize a cumulative effect
adjustment to the opening balance of retained earnings in the period of adoption.
In line with the optional transition method allowed as part of the modified retrospective transition approach provided in ASU No.
2018-11, the Company has elected to not adjust comparative periods. The new standard will be applied to leases that have
commenced as of the effective date, December 30, 2018, with a cumulative effect adjustment recorded as of that date. The Company
has also elected to apply the package of practical expedients allowed in ASC 842-10-65-1 whereby the Company need not reassess
whether any expired or existing contracts are or contain leases, the Company need not reassess the lease classification for any
expired or existing leases, and the Company need not reassess initial direct costs for any existing leases.
We have completed the process of identifying our population of leases and we have identified and implemented internal procedures
and controls to properly disclose and report our results beginning with our quarterly report on Form 10-Q for the quarter ending
March 30, 2019.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments," which amends the impairment model to utilize an expected loss methodology in place of the current
incurred loss methodology, which will result in the more timely recognition of losses. For public entities, ASU 2016-13 is effective
for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early application will be
permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
The Company does not believe the adoption of this ASU will have a significant impact on the financial statements due to the nature
of the Company's customers and the limited amount of write-offs in past years.
In August 2017, the FASB issued ASU No. 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities." The amendments in this ASU update current guidance by more closely aligning the results of cash flow and
fair value hedge accounting with risk management activities through changes to both the designation and measurement guidance
46
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company does not believe
the adoption of this ASU will have a significant impact on the financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement.” This update is a part of FASB’s disclosure framework project to improve
the effectiveness of disclosures in the notes to financial statements. The amendments in this update remove, modify, and add certain
disclosure requirements within Topic 820. This standard is effective for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2019. Early adoption is permitted upon issuance of this update and an entity is permitted to early
adopt any removed or modified disclosures upon issuance of this update and delay adoption of the additional disclosures until the
effective date. Certain disclosure amendments are to be applied prospectively for only the most recent interim or annual period
presented, while other amendments are to be applied retrospectively to all periods presented. The company does not believe that
the adoption of this ASU will have a significant impact on its financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic
715-20) - Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans.” This update is a part of
FASB’s disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. The
amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other
postretirement plans. This standard is effective for fiscal years ending after December 15, 2020 and early adoption is permitted.
Upon adoption, this update is to be applied on a retrospective basis to all periods presented. The company does not believe that
the adoption of this ASU will have a significant impact on its financial statements.
In October 2018, the FASB issued ASU 2018-16, “Derivatives and Hedging (Topic 815) - Inclusion of the Secured Overnight Financing
Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.” This update
permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes. For entities that
have not already adopted Update 2017-12, the amendments in this Update are required to be adopted concurrently with the
amendments in Update 2017-12. The Company will adopt this standard beginning first quarter 2019 and does not believe that the
adoption of this ASU will have a significant impact on its financial statements.
NOTE 3 - REVENUE
Disaggregation of Revenue from Contracts with Customers
The following table disaggregates the Company’s revenue by end-user markets for the twelve months ended December 29, 2018,
December 30, 2017, and December 31, 2016:
Residential floorcovering products
Commercial floorcovering products
Other services
Total net sales
2018
2017
2016
$
$
289,129
$
279,038
$
113,971
1,933
131,372
2,052
262,892
127,816
6,745
405,033
$
412,462
$
397,453
Residential floorcovering products. Residential floorcovering products include broadloom carpet, rugs, luxury vinyl flooring and
engineered hardwood. These products are sold into the designer, retailer, mass merchant and builder markets.
Commercial floorcovering products. Commercial floorcovering products include broadloom carpet, carpet tile, rugs, and luxury vinyl
flooring. These products are sold into the corporate, hospitality, healthcare, government, and education markets through the use
of designers and architects.
Other services. Other services include carpet yarn processing and carpet dyeing services.
47
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Contract Balances
The Company often receives cash payments from customers in advance of the Company’s performance for limited production run
orders resulting in contract liabilities. These contract liabilities are classified in accrued expenses in the Consolidated Balance
Sheets based on the timing of when the Company expects to recognize revenue, which is typically less than a year. The net
decrease or increase in the contract liabilities is primarily driven by order activity for limited runs requiring deposits offset by the
recognition of revenue and application of deposit on the receivables ledger for such activity during the period. The activity in the
advanced deposits for the twelve months ended December 29, 2018, December 30, 2017, and December 31, 2016 is as follows:
Beginning contract liability
Revenue recognized from contract liabilities included in the beginning
balance
Increases due to cash received, net of amounts recognized in revenue
during the period
Ending contract liability
NOTE 4 - RECEIVABLES, NET
Receivables are summarized as follows:
Customers, trade
Other receivables
Gross receivables
Less: allowance for doubtful accounts
Receivables, net
Bad debt expense was $163 in 2018, $70 in 2017, and $38 in 2016.
NOTE 5 - INVENTORIES, NET
Inventories are summarized as follows:
Raw materials
Work-in-process
Finished goods
Supplies and other
LIFO reserve
Inventories, net
2018
2017
2016
$
$
5,717
$
8,212
$
6,674
(5,717)
(7,820)
(5,894)
6,013
5,325
6,013
$
5,717
$
7,432
8,212
2018
2017
$
$
40,121
$
2,595
42,716
(174)
42,542
$
43,683
2,930
46,613
(133)
46,480
2018
2017
$
36,875
$
20,274
67,085
190
(19,229)
$
105,195
$
39,264
24,454
65,172
143
(15,376)
113,657
Reduction of inventory quantities in 2018 resulted in liquidations of LIFO inventories carried at prevailing costs established in prior
years and increased cost of sales by $168 in 2018.
48
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following:
Land and improvements
Buildings and improvements
Machinery and equipment
Assets under construction
Accumulated depreciation
Property, plant and equipment, net
2018
2017
$
8,528
$
63,389
183,900
2,675
258,492
(174,381)
$
84,111
$
7,886
62,852
188,971
2,443
262,152
(168,367)
93,785
Depreciation of property, plant and equipment, including amounts for capital leases, totaled $12,141 in 2018, $12,436 in 2017 and
$12,944 in 2016.
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill is $0 as of December 29, 2018 and $3,389 as of December 30, 2017. The Company performed
its annual assessment of goodwill in the fourth quarters of 2018, 2017, and 2016 with no impairment indicated in 2017 and 2016.
At the end of 2018, it was determined that the carrying value was greater than calculated fair value. Also at the end of 2018, the
intangibles were determined to not be recoverable based on revised projections. Impairment costs incurred are classified as
"impairment of assets" in the Company's Consolidated Statements of Operations.
The following table represents the details of the Company's intangible assets subject to amortization:
2018
2017
Gross
Accumulated
Amortization
Impairment
Net
Gross
Accumulated
Amortization
Net
Customer relationships
$ 208
$
(96) $
(112) $ — $ 208
$
144
3,300
(86)
(1,314)
(58)
(1,986)
—
144
— 3,300
$ 3,652
$
(1,496) $
(2,156) $ — $3,652
$
(1,191) $ 2,461
(80) $
128
(72)
72
(1,039)
2,261
Rug design coding
Trade names
Total
Amortization expense for intangible assets is summarized as follows:
Customer relationships
Rug design coding
Trade names
Amortization expense
2018
2017
2016
$
$
16
14
275
305
$
$
16
15
275
306
$
$
16
14
275
305
49
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 8 - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
Compensation and benefits (1)
Provision for customer rebates, claims and allowances
Advanced customer deposits
Outstanding checks in excess of cash
Other (2)
Accrued expenses
2018
2017
(As Adjusted)
$
8,186
$
9,300
6,013
3,141
4,212
9,276
9,820
5,717
379
6,168
$
30,852
$
31,360
(1)
(2)
Includes a liability related to the Company's self-insured Workers' Compensation program. This program is collateralized by letters of credit
in the aggregate amount of $2,328.
Includes an accrual of $1,514 for the settlement of a class action lawsuit (See Legal Proceedings section under Note 18).
NOTE 9 - PRODUCT WARRANTY RESERVES
The Company generally provides product warranties related to manufacturing defects and specific performance standards for its
products. Product warranty disclosures below have been adjusted for periods in the prior year to conform to the definition for
"Warranties" as provided in ASU No. 2014-09, "Revenue from Customers (Topic 606)", as adopted by the Company at the beginning
of its fiscal year 2018. Product warranty reserves are included in accrued expenses in the Company's Consolidated Condensed
Balance Sheets. The following is a summary of the Company's product warranty activity:
Product warranty reserve at beginning of period
Warranty liabilities accrued
Warranty liabilities settled
Changes for pre-existing warranty liabilities
Product warranty reserve at end of period
NOTE 10 - LONG-TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
Revolving credit facility
Notes payable - buildings
Acquisition note payable - Robertex
Notes payable - equipment and other
Capital lease obligations
Deferred financing costs, net
Total long-term debt
Less: current portion of long-term debt
Long-term debt
Revolving Credit Facility
2018
2017
(As Adjusted)
$
$
$
1,173
2,341
(2,380)
(65)
1,069
$
1,165
2,491
(2,931)
448
1,173
2018
2017
$
99,219
$
11,688
—
5,528
12,096
(486)
128,045
7,794
$
120,251
$
97,708
12,419
791
8,474
14,530
(665)
133,257
9,811
123,446
The revolving credit facility provides for a maximum of $150,000 of revolving credit, subject to borrowing base availability. The
borrowing base is currently equal to specified percentages of the Company's eligible accounts receivable, inventories, fixed assets
and real property less reserves established, from time to time, by the administrative agent under the facility. The revolving credit
facility matures on September 23, 2021. The revolving credit facility is secured by a first priority lien on substantially all of the
Company's assets.
50
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
At the Company's election, advances of the revolving credit facility bear interest at annual rates equal to either (a) LIBOR for 1, 2
or 3 month periods, as selected by the Company, plus an applicable margin ranging between 1.50% and 2.00%, or (b) the higher
of the prime rate, the Federal Funds rate plus 0.5%, or a daily LIBOR rate plus 1.00%, plus an applicable margin ranging between
0.50% and 1.00%. The applicable margin is determined based on availability under the revolving credit facility with margins
increasing as availability decreases. As of December 29, 2018, the applicable margin on our revolving credit facility was 1.75%.
The Company pays an unused line fee on the average amount by which the aggregate commitments exceed utilization of the
revolving credit facility equal to 0.375% per annum. The weighted-average interest rate on borrowings outstanding under the
revolving credit facility was 4.58% at December 29, 2018 and 4.12% at December 30, 2017.
The revolving credit facility includes certain affirmative and negative covenants that impose restrictions on the Company's financial
and business operations. The revolving credit facility restricts the Company's borrowing availability if its fixed charge coverage ratio
is less than 1.1 to 1.0. During any period that the fixed charge coverage ratio is less than 1.1 to 1.0, the Company's borrowing
availability is reduced by $16,500. As of December 29, 2018, the unused borrowing availability under the revolving credit facility
was $31,886; however, since the Company's fixed charge coverage ratio was less than 1.1 to 1.0, the unused availability accessible
by the Company was $15,386 (the amount above $16,500) at December 29, 2018.
Notes Payable - Buildings
On November 7, 2014, the Company entered into a ten-year $8,330 note payable to purchase a previously leased distribution
center in Adairsville, Georgia. The note payable is scheduled to mature on November 7, 2024 and is secured by the distribution
center. The note payable bears interest at a variable rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly
installments of principal of $35, plus interest calculated on the declining balance of the note, with a final payment of $4,165 due on
maturity. In addition, the Company entered into an interest rate swap with an amortizing notional amount effective November 7,
2014 which effectively fixes the interest rate at 4.50%.
On January 23, 2015, the Company entered into a ten-year $6,290 note payable to finance an owned facility in Saraland, Alabama.
The note payable is scheduled to mature on January 7, 2025 and is secured by the facility. The note payable bears interest at a
variable rate equal to one-month LIBOR plus 2.0% and is payable in equal monthly installments of principal of $26, plus interest
calculated on the declining balance of the note, with a final payment of $3,145 due on maturity. In addition, the Company entered
into a forward interest rate swap with an amortizing notional amount effective January 7, 2017 which effectively fixes the interest
rate at 4.30%.
Acquisition Note Payable - Development Authority of Gordon County
On November 2, 2012, the Company signed a 6.00% seller-financed note of $5,500 with Lineage PCR, Inc. (“Lineage”) related to
the acquisition of the continuous carpet dyeing facility in Calhoun, Georgia. Effective December 28, 2012, through a series of
agreements between the Company, the Development Authority of Gordon County, Georgia (the “Authority”) and Lineage, obligations
with identical payment terms as the original note to Lineage were now payment obligations to the Authority. These transactions
were consummated in order to provide a tax abatement to the Company related to the real estate and equipment at this facility.
The tax abatement plan provided for abatement for certain components of the real and personal property taxes for up to ten years.
At any time, the Company had the option to pay off the obligation, plus a nominal amount. The debt to the Authority bore interest
at 6.00% and was payable in equal monthly installments of principal and interest of $106 over 57 months. The note matured on
November 2, 2017 and the final installment was paid at that time.
Acquisition Note Payable - Robertex
On July 1, 2013, the Company signed a 4.50% seller-financed note of $4,000, which was recorded at a fair value of $3,749, with
Robert P. Rothman related to the acquisition of Robertex Associates, LLC ("Robertex") in Calhoun, Georgia. The note was payable
in five annual installments of principal of $800 plus interest. The note matured on June 30, 2018.
Notes Payable - Equipment and Other
The Company's equipment financing notes have terms ranging from 1 to 7 years, bear interest ranging from 1.00% to 7.68% and
are due in monthly installments through their maturity dates. The Company's equipment financing notes are secured by the specific
equipment financed and do not contain any financial covenants.
Capital Lease Obligations
The Company's capitalized lease obligations have terms ranging from 3 to 7 years, bear interest ranging from 3.55% to 7.76% and
are due in monthly or quarterly installments through their maturity dates. The Company's capital lease obligations are secured by
the specific equipment leased.
51
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Interest Payments and Debt Maturities
Cash paid for interest for continuing operations was $6,290 in 2018, $5,373 in 2017, and $5,088 in 2016. Maturities of long-term
debt for periods following December 29, 2018 are as follows:
2019
2020
2021
2022
2023
Thereafter
Total maturities of long-term debt
Deferred financing costs, net
Total long-term debt
NOTE 11 - FAIR VALUE MEASUREMENTS
Long-Term
Debt
Capital Leases
(See Note 18)
Total
$
$
$
3,841
$
3,953
$
1,873
100,957
1,001
731
8,032
3,804
3,157
945
237
—
7,794
5,677
104,114
1,946
968
8,032
116,435
$
12,096
$
128,531
(486)
—
(486)
115,949
$
12,096
$
128,045
Fair value is defined as the exchange value of an asset or a liability in an orderly transaction between market participants. The fair
value guidance outlines a valuation framework and establishes a fair value hierarchy in order to increase the consistency and
comparability of fair value measurements and disclosures. The hierarchy consists of three levels as follows:
Level 1 - Quoted market prices in active markets for identical assets or liabilities as of the reported date;
Level 2 - Other than quoted market prices in active markets for identical assets or liabilities, quoted prices for similar assets and
liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and other than
quoted prices for assets or liabilities and prices that are derived principally from or corroborated by market data by correlation or
other means; and
Level 3 - Measurements using management's best estimate of fair value, where the determination of fair value requires significant
management judgment or estimation.
The following table reflects the fair values of assets and liabilities measured and recognized at fair value on a recurring basis on
the Company's Consolidated Balance Sheets as of December 29, 2018 and December 30, 2017:
Assets:
Interest rate swaps (1)
Liabilities:
Interest rate swaps (1)
Contingent consideration (2)
2018
2017
Fair Value
Hierarchy Level
36
$
—
Level 2
1,008
$
—
2,229
25
Level 2
Level 3
$
$
(1) The Company uses certain external sources in deriving the fair value of the interest rate swaps. The interest rate swaps were valued using
observable inputs (e.g., LIBOR yield curves, credit spreads). Valuations of interest rate swaps may fluctuate considerably from period-to-period
due to volatility in underlying interest rates, which are driven by market conditions and the duration of the instrument. Credit adjustments could
have a significant impact on the valuations due to changes in credit ratings of the Company or its counterparties.
(2) As a result of the Robertex acquisition in 2013, a contingent consideration liability was recorded by the Company.
52
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Changes in the fair value measurements using significant unobservable inputs (Level 3) during the years ending December 29,
2018 and December 30, 2017 were as follows:
Beginning balance
Fair value adjustments
Settlements
Ending balance
2018
2017
$
25
1
(26)
— $
200
(163)
(12)
25
$
$
There were no transfers of assets or liabilities between Level 1, Level 2 and Level 3 during 2018 or 2017. If any, the Company
recognizes the transfers in or transfers out at the end of the reporting period.
The carrying amounts and estimated fair values of the Company's financial instruments are summarized as follows:
Financial assets:
Cash and cash equivalents
Notes receivable, including current portion
Interest rate swaps
Financial liabilities:
2018
2017
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
18
$
18
$
19
$
282
36
282
36
282
—
19
282
—
Long-term debt and capital leases, including current portion
Interest rate swaps
128,045
1,008
124,242
1,008
133,257
2,229
131,203
2,229
The fair values of the Company's long-term debt and capital leases were estimated using market rates the Company believes would
be available for similar types of financial instruments and represent level 2 measurements. The fair values of cash and cash
equivalents and notes receivable approximate their carrying amounts due to the short-term nature of the financial instruments.
NOTE 12 - DERIVATIVES
The Company's earnings, cash flows and financial position are exposed to market risks relating to interest rates. It is the Company's
policy to minimize its exposure to adverse changes in interest rates and manage interest rate risks inherent in funding the Company
with debt. The Company addresses this risk by maintaining a mix of fixed and floating rate debt and entering into interest rate swaps
for a portion of its variable rate debt to minimize interest rate volatility.
The following is a summary of the Company's interest rate swaps as of December 29, 2018:
Type
Interest rate swap
Interest rate swap
Interest rate swap
Interest rate swap
$
$
$
$
Notional
Amount
25,000
25,000
Effective Date
September 1, 2016 through September 1, 2021
Fixed
Rate
3.105%
Variable Rate
1 Month LIBOR
September 1, 2015 through September 1, 2021
3.304%
1 Month LIBOR
6,629 (1) November 7, 2014 through November 7, 2024
4.500%
1 Month LIBOR
5,058 (2) January 7, 2017 through January 7, 2025
4.300%
1 Month LIBOR
(1) Interest rate swap notional amount amortizes by $35 monthly to maturity.
(2) Interest rate swap notional amount amortizes by $26 monthly to maturity.
53
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The following table summarizes the fair values of derivative instruments included in the Company's Consolidated Balance Sheets:
Location on Consolidated Balance
Sheets
Fair Value
2018
2017
Asset Derivatives:
Derivatives designated as hedging instruments:
Interest rate swaps - current portion
Prepaids and other current assets
Interest rate swaps - long-term portion
Other Assets
Total Asset Derivatives
Liability Derivatives:
Derivatives designated as hedging instruments:
Interest rate swaps, current portion
Accrued Expenses
Interest rate swaps, long-term portion
Other Long-Term Liabilities
Total Liability Derivatives
$
$
$
$
14
22
36
335
673
1,008
$
$
$
$
—
—
—
842
1,387
2,229
The following tables summarize the pre-tax impact of derivative instruments on the Company's financial statements:
Derivatives designated as hedging instruments:
Cash flow hedges - interest rate swaps
$
531
$
180
$
(263)
Amount of Gain or (Loss) Recognized in AOCIL on the
effective portion of the Derivative
2018
2017
2016
Amount of Gain or (Loss) Reclassified from AOCIL on
the effective portion into Income (1)(2)
2018
2017
2016
Derivatives designated as hedging instruments:
Cash flow hedges - interest rate swaps
$
(673) $
(1,250) $
(1,291)
(1) The amount of gain (loss) reclassified from AOCIL is included in interest expense on the Company's Consolidated Statements of Operations.
(2) The amount of loss expected to be reclassified from AOCIL into earnings during the next 12 months subsequent to fiscal 2018 is $322.
The amount of gain (loss) recognized in income on the ineffective portion of interest rate swaps, if any, is included in other (income)
expense, net on the Company's Consolidated Statements of Operations. There was no ineffective portion for the periods presented.
NOTE 13 - EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company sponsors a 401(k) defined contribution plan that covers a significant portion, or approximately 85% of the Company's
associates. This plan includes a mandatory Company match on the first 1% of participants' contributions. The Company matches
the next 2% of participants' contributions if the Company meets prescribed earnings levels. The plan also provides for additional
Company contributions above the 3% level if the Company attains certain additional performance targets. Matching contribution
expense for this 401(k) plan was $448 in 2018, $484 in 2017 and $425 in 2016.
Additionally, the Company sponsors a 401(k) defined contribution plan that covers those associates at one facility who are under
a collective-bargaining agreement, or approximately 15% of the Company's associates. Under this plan, the Company generally
matches participants' contributions, on a sliding scale, up to a maximum of 2.75% of the participant's earnings. Matching contribution
expense for the collective-bargaining 401(k) plan was $123 in 2018, $125 in 2017 and $71 in 2016.
54
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Non-Qualified Retirement Savings Plan
The Company sponsors a non-qualified retirement savings plan that allows eligible associates to defer a specified percentage of
their compensation. The obligations owed to participants under this plan were $13,943 at December 29, 2018 and $17,010 at
December 30, 2017 and are included in other long-term liabilities in the Company's Consolidated Balance Sheets. The obligations
are unsecured general obligations of the Company and the participants have no right, interest or claim in the assets of the Company,
except as unsecured general creditors. The Company utilizes a Rabbi Trust to hold, invest and reinvest deferrals and contributions
under the plan. Amounts are invested in Company-owned life insurance in the Rabbi Trust and the cash surrender value of the
policies was $13,822 at December 29, 2018 and $18,232 at December 30, 2017 and is included in other assets in the Company's
Consolidated Balance Sheets.
Multi-Employer Pension Plan
The Company contributes to a multi-employer pension plan under the terms of a collective-bargaining agreement that covers its
union-represented employees. These union-represented employees represented approximately 15% of the Company's total
employees. The risks of participating in multi-employer plans are different from single-employer plans. If a participating employer
stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. If the
Company chooses to stop participating in the multi-employer plan, the Company may be required to pay the plan an amount based
on the underfunded status of the plan, referred to as a withdrawal liability.
The Company's participation in the multi-employer pension plan for 2018 is provided in the table below. The "EIN/Pension Plan
Number" column provides the Employee Identification Number (EIN) and the three digit plan number. The most recent Pension
Protection Act (PPA) zone status available in 2018 and 2017 is for the plan's year-end at 2017 and 2016, respectively. The zone
status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors,
plans in the red zone are generally less than 65% funded, plans in the yellow zone are less than 80% funded and plans in the green
zone are at least 80% funded. The "FIP/RP Status Pending/Implemented" column indicates a plan for which a financial improvement
plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration date of the
collective-bargaining agreement to which the plan is subject.
Pension Fund
EIN/Pension Plan
Number
Pension
Protection Act
Zone Status
2018
2017
FIP/RP Status
Pending/
Implemented
(1)
Contributions (2)
2018
2017
2016
Surcharge
Imposed
(1)
Expiration
Date of
Collective-
Bargaining
Agreement
The Pension Plan of the
National Retirement Fund
13-6130178 - 001 Red
Red
Implemented $ 320 $ 313 $ 274
Yes
6/1/2019
(1) The collective-bargaining agreement requires the Company to contribute to the plan at the rate of $0.47 per compensated hour for each covered
employee. The Company will make additional contributions, as mandated by law, in accordance with the fund's 2010 Rehabilitation Plan which
required a surcharge equal to $0.03 per hour (from $0.47 to $0.50) effective June 1, 2014 to May 31, 2015, a surcharge equal to $0.03 per hour
(from $0.50 to $0.53) effective June 1, 2015 to May 31, 2016, a surcharge equal to $0.02 per hour (from $0.53 to $0.55) effective June 1, 2016
to May 31, 2017, a surcharge equal to $0.03 per hour (from $0.55 to $0.58) effective June 1, 2017 to May 31, 2018, and a surcharge equal to
$0.02 per hour (from $0.58 to $0.60) effective June 1, 2018 to May 31, 2019. Based upon current employment and benefit levels, the Company's
contributions to the multi-employer pension plan are expected to be approximately $323 for 2019.
(2) The Company's contributions to the plan do not represent more than 5% of the total contributions to the plan for the most recent plan year
available.
Postretirement Plans
The Company sponsors a postretirement benefit plan that provides life insurance to a limited number of associates upon retirement
as part of a collective bargaining agreement.
55
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Information about the benefit obligation and funded status of the Company's postretirement benefit plan is summarized as follows:
Change in benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contributions
Benefits paid
Fair value of plan assets at end of year
2018
2017
$
325
$
8
17
(18)
(1)
331
—
1
(1)
—
314
7
16
(11)
(1)
325
—
1
(1)
—
Unfunded amount
$
(331) $
(325)
The balance sheet classification of the Company's liability for the postretirement benefit plan is summarized as follows:
Accrued expenses
Other long-term liabilities
Total liability
2018
2017
$
$
15
316
331
$
$
14
311
325
Benefits expected to be paid on behalf of associates for the postretirement benefit plan during the period 2019 through 2028 are
summarized as follows:
Years
2019
2020
2021
2022
2023
2024 - 2028
Postretirement
Plan
$
15
14
14
14
14
73
Assumptions used to determine the benefit obligation of the Company's postretirement benefit plan are summarized as follows:
Weighted-average assumptions as of year-end:
Discount rate (benefit obligation)
2018
2017
4.00%
4.00%
56
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Components of net periodic benefit cost (credit) for the postretirement plan are summarized as follows:
Service cost
Interest cost
Amortization of prior service credits
Recognized net actuarial gains
Net periodic benefit cost (credit)
2018
2017
2016
$
$
$
8
17
(4)
(28)
$
7
16
(4)
(30)
(7) $
(11) $
7
15
(4)
(33)
(15)
Pre-tax amounts included in AOCIL for the Company's postretirement benefit plan at 2018 are summarized as follows:
Prior service credits
Unrecognized actuarial gains
Totals
NOTE 14 - INCOME TAXES
Postretirement Benefit Plan
Balance at 2018
2019 Expected
Amortization
$
$
(3) $
(372)
(375) $
(4)
(27)
(31)
The provision (benefit) for income taxes on income (loss) from continuing operations consists of the following:
Current
Federal
State
Total current
Deferred
Federal
State
Total deferred
Income tax provision (benefit)
2018
2017
2016
(178) $
(116)
(294)
(434)
(103)
(537)
(831) $
278
$
(950)
(672)
7,535
646
8,181
7,509
$
(396)
34
(362)
(3,003)
(257)
(3,260)
(3,622)
$
$
57
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Differences between the provision (benefit) for income taxes and the amount computed by applying the statutory federal income
tax rate to income (loss) from continuing operations before taxes are summarized as follows:
Federal statutory rate
Statutory rate applied to income (loss) from continuing
operations before taxes
Plus state income taxes, net of federal tax effect
Total statutory provision (benefit)
Effect of differences:
Nondeductible meals and entertainment
Executive compensation limitation
Federal tax credits
Reserve for uncertain tax positions
Goodwill
Change in valuation allowance
Tax reform
Stock-based compensation
Other items
Income tax provision (benefit)
2018
2017
2016
21%
35%
35%
$
(4,685)
$
(173)
(4,858)
90
258
(286)
27
—
3,990
—
82
$
(134)
(831)
$
$
(635)
(198)
(833)
161
—
(200)
8
—
6,470
1,749
146
8
7,509
$
(3,090)
(145)
(3,235)
148
—
(395)
31
(13)
106
—
—
(264)
(3,622)
On December 22, 2017, the President signed the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, lowered
the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. The Company substantially completed its provisional
analysis of the income tax effects of the Tax Act and recorded a reasonable estimate of such effects during the fourth quarter of
2017. Pursuant to Staff Accounting Bulletin No. 118, the Company has completed its analysis and all adjustments have been included
in income from continuing operations as an adjustment to income tax expense.
The income tax benefit for the twelve months ended December 29, 2018 was $831. During the fourth quarter of 2017, the Company
recorded a full valuation allowance against the deferred tax assets resulting in only refundable credits and a small amount of state
taxes being recognized in the tax benefit for 2018. The Company is in a net deferred tax liability position of $568 and $1,105 at
December 29, 2018 and December 30, 2017 respectively. These amounts are included in other long-term liabilities in the Company's
Consolidated Balance Sheets.
The income tax expense for 2017 was $7,509, which included a charge of $1,749 related to the re-measurement of certain net
deferred tax assets using the lower U.S. corporate income tax rate and a charge of $6,420 to increase our valuation allowance
related to our net deferred tax asset. The majority of the increase in the valuation allowance is related to the revised treatment of
net operating losses under the Tax Act. Absent the impact of the Tax Act, our effective income tax benefit rate for 2017 would have
been 36.4%.
In 2016, the Company increased valuation allowances by $106 related to state income tax loss carryforwards and state income tax
credit carryforwards to reflect the estimated amount of deferred tax assets that may not be realized during the carryforward periods.
Income tax payments, net of (income tax refunds) received for continuing and discontinued operations were $20 in 2018, $44 in
2017 and $(190) in 2016.
58
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Significant components of the Company's deferred tax assets and liabilities are as follows:
2018
2017
Deferred tax assets:
Inventories
Retirement benefits
State net operating losses
Federal net operating losses
State tax credit carryforwards
Federal tax credit carryforwards
Allowances for bad debts, claims and discounts
Other
Total deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Total deferred tax liabilities
$
4,128
$
1,718
4,142
4,560
1,688
3,721
2,199
5,646
27,802
(16,993)
10,809
11,377
11,377
3,146
2,200
4,196
3,204
1,963
3,365
2,373
3,649
24,096
(12,994)
11,102
12,207
12,207
Net deferred tax liability
$
(568) $
(1,105)
At December 29, 2018, $4,560 of deferred tax assets related to approximately $21,712 of federal net operating loss carryforwards
and $4,142 of deferred tax assets related to approximately $76,797 of state net operating loss carryforwards. In addition, $3,721
of federal tax credit carryforwards and $1,688 of state tax credit carryforwards were available to the Company. The federal net
operating loss carryforwards and the federal tax credit carryforwards originating prior to 2018 will expire between 2029 and 2039.
The state net operating loss carryforwards and the state tax credit carryforwards will expire between 2018 and 2039. A valuation
allowance of $16,993 is recorded to reflect the estimated amount of deferred tax assets that may not be realized during the
carryforward periods. At December 29, 2018, the Company is in a net deferred tax liability position of $568 which is included in
other liabilities in the Company's Consolidated Balance Sheets.
Tax Uncertainties
Unrecognized tax benefits were $441 at December 29, 2018, $414 at December 30, 2017 and $406 at December 31, 2016. Such
benefits, if recognized, would affect the Company's effective tax rate. There were no significant interest or penalties accrued as of
December 29, 2018, December 30, 2017, or December 31, 2016.
The following is a summary of the change in the Company's unrecognized tax benefits:
Balance at beginning of year
Additions based on tax positions taken during a current period
Reductions related to settlement of tax matters
Balance at end of year
$
$
2018
2017
2016
414
$
406
$
27
—
8
—
441
$
414
$
375
31
—
406
The Company and its subsidiaries are subject to United States federal income taxes, as well as income taxes in a number of state
jurisdictions. The tax years subsequent to 2014 remain open to examination for federal income taxes. The majority of state
jurisdictions remain open for tax years subsequent to 2014. A few state jurisdictions remain open to examination for tax years
subsequent to 2013.
59
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 15 - COMMON STOCK AND EARNINGS (LOSS) PER SHARE
Common & Preferred Stock
The Company's charter authorizes 80,000,000 shares of Common Stock with a $3 par value per share and 16,000,000 shares of
Class B Common Stock with a $3 par value per share. Holders of Class B Common Stock have the right to twenty votes per share
on matters that are submitted to Shareholders for approval and to dividends in an amount not greater than dividends declared and
paid on Common Stock. Class B Common Stock is restricted as to transferability and may be converted into Common Stock on a
one share for one share basis. The Company's charter also authorizes 200,000,000 shares of Class C Common Stock, $3 par
value per share, and 16,000,000 shares of Preferred Stock. No shares of Class C Common Stock or Preferred Stock have been
issued.
Earnings (Loss) Per Share
The Company's unvested stock awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or
unpaid, are considered participating securities and are included in the computation of earnings per share. The accounting guidance
requires additional disclosure of EPS for common stock and unvested share-based payment awards, separately disclosing
distributed and undistributed earnings. Undistributed earnings represent earnings that were available for distribution but were not
distributed. Common stock and unvested share-based payment awards earn dividends equally. All earnings were undistributed in
all periods presented.
The following table sets forth the computation of basic and diluted earnings (loss) per share from continuing operations:
Basic earnings (loss) per share:
Income (loss) from continuing operations
Less: Allocation of earnings to participating securities
Income (loss) from continuing operations available to common
shareholders - basic
Basic weighted-average shares outstanding (1)
Basic earnings (loss) per share - continuing operations
Diluted earnings (loss) per share:
Income (loss) from continuing operations available to common
shareholders - basic
Add: Undistributed earnings reallocated to unvested shareholders
Income (loss) from continuing operations available to common
shareholders - basic
Basic weighted-average shares outstanding (1)
Effect of dilutive securities:
Stock options (2)
Directors' stock performance units (2)
$
$
$
$
$
2018
2017
2016
(21,479) $
(9,322) $
(5,207)
—
—
—
(21,479) $
(9,322) $
15,764
15,699
(1.36) $
(0.59) $
(5,207)
15,638
(0.33)
(21,479) $
(9,322) $
(5,207)
—
—
—
(21,479) $
(9,322) $
15,764
15,699
—
—
—
—
(5,207)
15,638
—
—
15,638
(0.33)
Diluted weighted-average shares outstanding (1)(2)
15,764
15,699
Diluted earnings (loss) per share - continuing operations
$
(1.36) $
(0.59) $
Includes Common and Class B Common shares, excluding 570 unvested participating securities, in thousands.
(1)
(2) Shares issuable under stock option plans where the exercise price is greater than the average market price of the Company's Common Stock
during the relevant period and directors' stock performance units have been excluded to the extent they are anti-dilutive. Aggregate shares
excluded were 422 in 2018, 448 in 2017 and 220 in 2016.
NOTE 16 - STOCK PLANS AND STOCK COMPENSATION EXPENSE
The Company recognizes compensation expense relating to share-based payments based on the fair value of the equity instrument
issued and records such expense in selling and administrative expenses in the Company's Consolidated Statements of
Operations. The number of shares to be issued is determined by dividing the specified dollar value of the award by the market value
per share on the grant date. The Company's stock compensation expense (credit) was $(29) in 2018, $940 in 2017 and $1,324 in
2016. The credit in 2018 is related to the reversal of stock compensation that did not vest.
60
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
2016 Incentive Compensation Plan
On May 3, 2016, the Company's shareholders' approved and adopted the Company's 2016 Incentive Compensation Plan (the
"2016 Incentive Compensation Plan") which provides for the issuance of a maximum of 800,000 shares of Common Stock and/or
Class B Common Stock for the grant of options, and/or other stock-based or stock-denominated awards to employees, officers,
directors, and agents of the Company and its participating subsidiaries. The 2016 Incentive Compensation Plan and the allocation
of shares thereunder superseded and replaced The Dixie Group, Inc. Stock Awards Plan, as amended (the "2006 Plan") and the
allocation of shares thereunder. The 2006 Plan was terminated with respect to new awards. Awards previously granted under the
2006 Plan continue to be governed by the terms of that plan and are not affected by its termination.
2006 Stock Awards Plan
The Company had a Stock Awards Plan, ("2006 Plan"), as amended, which provided for the issuance of up to 1,800,000 shares of
Common Stock and/or Class B Common Stock as stock-based or stock-denominated awards to directors of the Company and to
salaried employees of the Company and its participating subsidiaries.
Restricted Stock Awards
Each executive officer has the opportunity to earn a Primary Long-Term Incentive Award of restricted stock and separately receive
an award of restricted stock denominated as “Career Shares.” The number of shares issued, if any, is based on the market price
of the Company’s Common Stock at the time of grant of the award, subject to a $5.00 per share minimum value. Primary Long-
Term Incentive Awards vest over three years. For participants over age 60, Career Share Awards fully vest when the participant
becomes (i) qualified to retire from the Company and (ii) has retained such shares two years following the grant date. For the
participants under age 60, Career Shares vest ratably over five years beginning on the participant's 61st birthday.
On March 12, 2018, the Company granted 297,292 shares of restricted stock to certain key employees. The grant-date fair value
of the awards was $832, or $2.80 per share, and will be recognized as stock compensation expense over a weighted-average
period of 6.1 years from the date the awards were granted. Each award is subject to a continued service condition. The fair value
of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant
date.
On July 30, 2018, the Company granted 10,000 shares of restricted stock to an employee. The grant-date fair value of the award
was $20, or $2.00 per share and will be recognized as stock compensation over a three-year vesting period from the date the award
was granted. The award is subject to a continued service condition. The fair value of each share of restricted stock awarded was
equal to the market value of a share of the Company's Common Stock on the grant date.
On March 10, 2017, the Company granted 40,000 shares of restricted stock to certain key employees. The grant-date fair value
of the awards was $140, or $3.50 per share, and will be recognized as stock compensation expense over a three-year vesting
period from the date the awards were granted. Each award is subject to a continued service condition. The fair value of each share
of restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On September 1, 2017, the Company granted 10,000 shares of restricted stock to a key employee. The grant-date fair value of
the award was $42, or $4.15 per share, and will be recognized as stock compensation expense over a three-year vesting period
from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of
restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On September 18, 2017, the Company granted 10,000 shares of restricted stock to a key employee. The grant-date fair value of
the award was $41, or $4.05 per share, and will be recognized as stock compensation expense over a three-year vesting period
from the date the award was granted. The award is subject to a continued service condition. The fair value of each share of
restricted stock awarded was equal to the market value of a share of the Company's Common Stock on the grant date.
On March 11, 2016, the Company issued 149,215 shares of restricted stock to officers and other key employees. The grant-date
fair value of the awards was $651, or $4.360 per share, and is expected to be recognized as stock compensation expense over a
weighted-average period of 8.7 years from the date the awards were granted. Each award is subject to a continued service condition.
The fair value of each share of restricted stock awarded was equal to the market value of a share of the Company's Common Stock
on the grant date.
61
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Restricted stock activity for the three years ended December 29, 2018 is summarized as follows:
Outstanding at December 26, 2015
Granted
Vested
Forfeited
Outstanding at December 31, 2016
Granted
Vested
Forfeited
Outstanding at December 30, 2017
Granted
Vested
Forfeited
Outstanding at December 29, 2018
Number of Shares
416,795
$
149,215
(107,318)
(1,314)
457,378
60,000
(78,908)
(4,629)
433,841
307,292
(64,939)
(106,196)
569,998
$
Weighted-
Average Grant-
Date Fair Value
8.90
4.36
8.88
15.68
7.41
3.70
8.79
5.96
6.66
2.77
6.58
9.51
4.04
As of December 29, 2018, unrecognized compensation cost related to unvested restricted stock was $1,458. That cost is expected
to be recognized over a weighted-average period of 7.7 years. The total fair value of shares vested was approximately $173, $276
and $456 during 2018, 2017 and 2016, respectively.
Stock Performance Units
The Company's non-employee directors receive an annual retainer of $18 in cash and $18 in value of Stock Performance Units
(subject to a $5.00 minimum per unit). If market value at the date of the grants is above $5.00 per share; there is no reduction in
the number of units issued. However, if the market value at the date of the grants is below $5.00, units will be reduced to reflect
the $5.00 per share minimum. Upon retirement, the Company issues the number of shares of Common Stock equivalent to the
number of Stock Performance Units held by non-employee directors at that time. As of December 29, 2018, 123,321 Stock
Performance Units were outstanding under this plan. As of December 29, 2018, unrecognized compensation cost related to Stock
Performance Units was $24. That cost is expected to be recognized over a weighted-average period of 0.3 years.
Stock Options
Options granted under the Company's 2006 Plan and the 2016 Plan were exercisable for periods determined at the time the awards
are granted. Effective 2009, the Company established a $5.00 minimum exercise price on all options granted.
On May 30, 2017, the Company granted 203,000 options with a market condition to certain key employees of the Company at a
weighted-average exercise price of $4.30. The grant-date fair value of these options was $306. These options vest over a two-
year period and require the Company's stock to trade at or above $7.00 for five consecutive trading days after the two-year period
and within five years of issuance to meet the market condition.
The fair value of each option was estimated on the date of grant using a lattice model. Expected volatility was based on historical
volatility of the Company's stock, using the most recent period equal to the expected life of the options. The risk-free interest rate
was based on the U.S. Treasury yield for a term equal to the expected life of the option at the time of grant. The Company uses
historical exercise behavior data of similar employee groups to determine the expected life of options.
62
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The following weighted-average assumptions were used to estimate the fair value of stock options granted during the year ended
December 29, 2018:
Expected Volatility
Risk-free interest rate
Dividend yield
Expected life of options (yrs)
2018 (1)
2017
2016 (1)
—%
—%
—%
0
47.80%
1.79%
—%
5
—%
—%
—%
0
(1) No options were granted during the years ended December 29, 2018 and December 31, 2016.
Option activity for the three years ended December 29, 2018 is summarized as follows:
Weighted-
Average Exercise
Price
Weighted-Average
Remaining
Contractual Life
(in years)
Weighted-
Average Fair
Value of Options
Granted During
the Year
Number of Shares
Outstanding at December 26, 2015
103,500
$
Granted
Exercised
Forfeited
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
—
—
—
103,500
203,000
—
—
Outstanding at December 30, 2017
306,500
Granted
Exercised
Forfeited
Outstanding at December 29, 2018
Options exercisable at:
December 31, 2016
December 30, 2017
December 29, 2018
—
—
(8,000)
298,500
103,500
$
103,500
103,500
5.00
—
—
—
5.00
4.30
—
—
4.54
—
—
4.17
4.55
5.00
5.00
5.00
$
2.5
$
0.8
—
—
—
—
—
1.51
—
—
—
—
—
—
—
—
—
—
At December 29, 2018, there was no intrinsic value of outstanding stock options and no intrinsic value of exercisable stock options.
The intrinsic value of stock options exercised during 2018, 2017 and 2016 was $0, $0 and $0, respectively. At December 29, 2018,
unrecognized compensation expense related to unvested stock options was $72 and is expected to be recognized over a weighted-
average period of 0.4 years.
63
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 17 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Components of accumulated other comprehensive income (loss), net of tax, are as follows:
Interest
Rate Swaps
Post-
Retirement
Liabilities
Balance at December 26, 2015
Unrealized loss on interest rate swaps, net of tax of $100
Reclassification of loss into earnings from interest rate swaps, net of tax of $491
Unrecognized net actuarial loss on postretirement benefit plans, net of tax of $1
Reclassification of net actuarial gain into earnings from postretirement benefit
plans, net of tax of $13
Reclassification of prior service credits into earnings from postretirement benefit
plans, net of tax of $2
Balance at December 31, 2016
Unrealized gain on interest rate swaps, net of tax of $68
Reclassification of loss into earnings from interest rate swaps, net of tax of $475
Unrecognized net actuarial gain on postretirement benefit plans, net of tax of $4
Reclassification of net actuarial gain into earnings from postretirement benefit
plans, net of tax of $11
Reclassification of prior service credits into earnings from postretirement benefit
plans, net of tax of $1
Reclassification of stranded tax effects
Balance at December 30, 2017
Unrealized gain on interest rate swaps, net of tax of $0
Reclassification of loss into earnings from interest rate swaps, net of tax of $0
Unrecognized net actuarial gain on postretirement benefit plans, net of tax of $0
Reclassification of net actuarial gain into earnings from postretirement benefit
plans, net of tax of $0
Reclassification of prior service credits into earnings from postretirement benefit
plans, net of tax of $0
(2,853)
(163)
800
—
—
—
(2,216)
112
775
—
—
—
(258)
(1,587)
531
673
—
—
—
280
—
—
(2)
(20)
(2)
256
—
—
7
(19)
(3)
47
288
—
—
18
(27)
(4)
Balance at December 29, 2018
$
(383) $
275
$
Total
(2,573)
(163)
800
(2)
(20)
(2)
(1,960)
112
775
7
(19)
(3)
(211)
(1,299)
531
673
18
(27)
(4)
(108)
NOTE 18 - COMMITMENTS AND CONTINGENCIES
Commitments
The Company had purchase commitments of $2,730 at December 29, 2018, primarily related to machinery and equipment. The
Company enters into fixed-price contracts with suppliers to purchase natural gas to support certain manufacturing processes. The
Company had contract purchases of $428 in 2018, $640 in 2017 and $855 in 2016. At December 29, 2018, the Company has
commitments to purchase natural gas of $252 for 2019 and $72 for 2020.
64
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
The Company leases certain equipment under capital leases and certain buildings, machinery and equipment under operating
leases. Commitments for minimum rentals under non-cancelable leases, including any applicable rent escalation clauses, are as
follows:
2019
2020
2021
2022
2023
Thereafter
Total commitments
Less amounts representing interest
Total
Capital
Leases
Operating
Leases
$
4,590
$
4,205
3,333
989
244
—
13,361
(1,265)
$
12,096
$
3,002
2,533
2,121
1,667
882
3,155
13,360
—
13,360
Rental expense was approximately $4,453, $3,687 and $3,575 during 2018, 2017 and 2016, respectively.
Property, plant and equipment includes machinery and equipment under capital leases which have asset cost and accumulated
depreciation of $22,400 and $7,866, respectively, at December 29, 2018, and $25,250 and $8,300, respectively, at December 30,
2017.
Contingencies
The Company assesses its exposure related to legal matters, including those pertaining to product liability, safety and health matters
and other items that arise in the regular course of its business. If the Company determines that it is probable a loss has been
incurred, the amount of the loss, or an amount within the range of loss, that can be reasonably estimated will be recorded.
Environmental Remediation
The Company accrues for losses associated with environmental remediation obligations when such losses are probable and
estimable. Remediation obligations are accrued based on the latest available information and are recorded at undiscounted amounts.
The Company regularly monitors the progress of environmental remediation. If studies indicate that the cost of remediation has
changed from the previous estimate, an adjustment to the liability would be recorded in the period in which such determination is
made. (See Note 21).
Legal Proceedings
The Company has been sued, together with the 3M Company and approximately 30 other carpet manufacturers, by the Gadsden
(Alabama) Water Works in the circuit court of Etowah County Alabama [The Water Works and Sewer Board of the City of Gadsden
v. 3M Company, et al, civil action No. 31-CV-2016-900676.00] and by the Town of Centre (Alabama) Water Works in the circuit
court of Cherokee County Alabama [The Water Works and Sewer Board of the Town of Centre v. 3M Company, et al, civil action
No. 13-CV-2017-900049.00]. Both cases seek monetary damages and injunctive relief related to the use of certain chemical
compounds in the manufacture and finishing of carpet products “in and around Dalton Georgia.” On motion of the defendants, the
cases were removed to the U.S. District Court for the Northern District of Alabama (Middle Division) Case No. 4:16-CV-01755-SGC
and Case No. 4:17-CV-01026-KOB. Subsequently, the Gadsden Water Works filed a motion to have the case remanded back to
the state court and such motion has been granted. Currently, the Company joined several other co-defendants in filing a Petition
for Writ of Mandamus with the Alabama Supreme Court asking for an Order directing the trial court to grant the Company’s and
other codefendants’ motions to dismiss the Alabama-filed actions for lack of personal jurisdiction. The Petitions have been
consolidated by the Alabama Supreme Court with the Town of Centre (Alabama) matter (described above). The Petitions are still
pending and there is no statutory deadline for the court to issue a decision. The lawsuits allege that perflourinated compounds
(“PFC”), perflourinated acid (“PFOA”) and perfluorooctane sulfonate (“PFOS”) manufactured by 3M were used in certain finishing
and treatment processes by the defendants and, as a consequence of such use, were subsequently either discharged into or
leached into the water systems around Dalton, Georgia. The Complaints seek damages that exceed $10, but are otherwise
unspecified in amount in addition to injunctive relief and punitive damages. The Company intends to defend the matters vigorously
and is unable to estimate the potential exposure to loss, if any, at this time.
On November 16, 2018 the Superior Court of the State of California granted preliminary approval of a class action settlement in
the matter of Carlos Garcia v. Fabrica International, Inc. et al Orange County Superior Court Case No. 30-2017-00949461-CU-OE-
CXC. The court further approved the procedures for Settlement Class Members to opt-out of or object to the Settlement. The terms
65
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
of the settlement provide that Fabrica, a wholly owned subsidiary of the Company, has agreed to pay $1,514 (the “Gross Settlement
Amount”) to fully resolve all claims in the Lawsuit, including payments to Settlement Class Members, Class Counsel’s attorneys’
fees and expenses, settlement administration costs, and the Class Representative’s Service Award. The amount of the proposed
settlement was recorded during the quarter ended June 30, 2018. The deadline for class members to opt-out was February 1,
2019. The deadline for the plaintiff to file a motion for final approval of the class action settlement is March 29, 2019. The final
fairness hearing is scheduled for April 12, 2019.
The Company is one of multiple parties to three current lawsuits filed in Madison County Illinois, styled Brenda Bridgeman, Individually
and as Special Administrator of the Estate of Robert Bridgeman, Deceased, vs. American Honda Motor Co., Inc., f/k/a Metropolitan
Life Insurance Co., et al No. 15-L-374, styled Charles Anderson, Pltf., vs. 3M Company, et al, No. 17-L-525 and styled Danny Atkins
and Pamela Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2. All three lawsuits entail a claim for damages to be determined
in excess of $50 filed on behalf of either a former employee or the estate of an individual which alleges that the deceased contracted
mesothelioma as a result of exposure to asbestos while employed by the Company. Discovery in each matter is ongoing, and a
tentative trial date has been set for one of the cases. The Company has denied liability, is defending the matters vigorously and is
unable to estimate its potential exposure to loss, if any, at this time. In August of 2017, the lawsuit styled Sandra D. Watts, Individually
and as Special Administrator of the Estate of Dianne Averett, Deceased vs. 4520 Corp., Inc. f/k/a Benjamin F. Shaw Company, et
al No. 12-L-2032 was placed in the category of "special closed with settlements and bankruptcy claims pending" to all remaining
defendants. In March 2018, the lawsuit styled Charles Anderson, Individually and as Special Administrator of the Estate of Charles
Anderson, Deceased vs. 3M Company, et al, No. 17-L-525 was dismissed without prejudice. In October 2018, the lawsuit styled
Danny Atkins and Pamela Atkins, Pltfs., vs. Aurora Pump Company, et al. No. 18-L-2 was dismissed without prejudice.
NOTE 19 - OTHER EXPENSE, NET
Other operating expense, net is summarized as follows:
Other operating expense, net:
(Gain) loss on property, plant and equipment disposals
$
(1,047) $
170
$
2018
2017
2016
(Gain) loss on currency exchanges
Amortization of intangibles
Retirement expenses
BP settlement gain (1)
Miscellaneous (income) expense
Other operating expense, net
126
305
64
—
1,010
458
$
$
(72)
306
155
—
(118)
441
$
725
167
305
154
(841)
(109)
401
(1) On November 21, 2016, the Company entered into a full and final release agreement with BP Exploration and Production, Inc. and various
related entities pursuant to which the Company released any and all claims related to the Deepwater Horizon oil spill which occurred on April
20, 2010. In exchange for this release, the Company received a net amount of $841 from the settlement.
Other expense, net is summarized as follows:
Other expense, net:
Post-retirement income
Miscellaneous (income) expense
Other expense, net
2018
2017
2016
(15)
18
3
$
(18)
39
21
$
(21)
22
1
$
NOTE 20 - FACILITY CONSOLIDATION AND SEVERANCE EXPENSES, NET
2014 Warehousing, Distribution & Manufacturing Consolidation Plan
The Company developed a plan to align its warehousing, distribution and manufacturing to support its growth and manufacturing
strategy resulting in improved distribution capabilities and customer service. The key element and first major step of this plan was
the acquisition of a facility to serve as a finished goods warehouse and a cut-order and distribution center in Adairsville, Georgia.
Costs related to the consolidation included moving and relocation expenses, information technology expenses and expenses relating
to conversion and realignment of equipment. In addition, this plan included the elimination of both carpet dyeing and yarn dyeing
in the Company's Atmore, Alabama facility designed to more fully accommodate the distribution and manufacturing realignment.
66
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
As a result, the dyeing operations in Atmore were moved to the Company's continuous dyeing facility, skein dyeing operation and
other outside dyeing processors.
To complete the Warehousing, Distribution & Manufacturing Consolidation Plan, the Company moved its Saraland rug operation
from an expiring leased building to an owned facility in March 2016. The Company completed this consolidation plan during 2016.
As a result of eliminating its dyeing operations in Atmore, Alabama, the Company disposed of its waste water treatment plant in
2014. Subsequently, after extensive testing, it was determined that the Company still had some contaminants above background
levels and installed a soil cap to finalize the cleanup of the site of the Company's former waste water treatment plant.
2015 Corporate Office Consolidation Plan
In April 2015, the Company's Board of Directors approved the Corporate Office Consolidation Plan, to cover the costs of consolidating
three of the Company's existing leased divisional and corporate offices to a single leased facility located in Dalton, Georgia. The
Company paid a fee to terminate one of the leased facilities, did not renew a second facility and vacated the third facility. Related
to the vacated facility, the Company recorded the estimated costs related to the fulfillment of its contractual lease obligation and
on-going facility maintenance, net of an estimate of sub-lease expectations. Accordingly, if the estimates differ, the Company would
record an additional charge or benefit, as appropriate. Costs related to the consolidation included the lease termination fee,
contractual lease obligations and moving costs.
2017 Profit Improvement Plan
During the fourth quarter of 2017, the Company announced a Profit Improvement Plan to improve profitability through lower cost
and streamlined decision making and aligning processes to maximize efficiency. The plan includes consolidating the management
of the Company's two commercial brands, Atlas Carpet Mills and Masland Contract, under one management team, sharing operations
in sales, marketing, product development and manufacturing. Specific to this plan includes focusing nearly all commercial solution
dyed make-to-order production in our Atmore, Alabama operations where the Company has developed such make-to-order
capabilities over the last 5 years. Further, the Company is aligning its west coast production facilities, better utilizing its west coast
real estate by moving production to its Porterville, California and Atmore, Alabama operations and preparing for more efficient
distribution of its west coast products. Furthermore, the Company is re-configuring its east coast distribution facilities to provide
more efficient distribution of its products. In addition, the Company had reductions in related support functions such as accounting
and information services.
Costs related to the facility consolidation plans are summarized as follows:
Accrued
Balance at
December 30,
2017
2018
Expenses
(1)
2018 Cash
Payments
Accrued
Balance at
December 29,
2018
Total Costs
Incurred to
Date
Total
Expected
Costs
As of December 29,
2018
Warehousing, Distribution and
Manufacturing Consolidation Plan
Corporate Office Consolidation Plan
Profit Improvement Plan
Total All Plans
Asset Impairments
$
$
$
— $
— $
— $
— $
7,440
$
7,440
171
334
505
$
9
3,158
3,167
— $
3,320
$
$
82
2,646
2,728
$
98
846
944
816
3,794
$
12,050
— $
— $
3,320
816
6,055
14,311
3,320
$
$
Accrued
Balance at
December 31,
2016
2017
Expenses
(1)
2017 Cash
Payments
Accrued
Balance at
December 30,
2017
Warehousing, Distribution and
Manufacturing Consolidation Plan
Corporate Office Consolidation Plan
Profit Improvement Plan
Total All Plans
$
$
$
266
248
— $
514
$
$
(4) $
262
$
4
636
636
$
$
81
302
645
$
$
—
171
334
505
(1) Costs incurred under these plans are classified as "facility consolidation and severance expenses, net" in the Company's Consolidated Statements
of Operations.
67
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
NOTE 21 - DISCONTINUED OPERATIONS
The Company has either sold or discontinued certain operations that are accounted for as "Discontinued Operations" under applicable
accounting guidance. Discontinued operations are summarized as follows:
Income (loss) from discontinued operations:
Workers' compensation costs from former textile operations
Environmental remediation costs from former textile operations
Income (loss) from discontinued operations, before taxes
Income tax benefit
Income (loss) from discontinued operations, net of tax
Income on disposal of Carousel discontinued operations before income taxes
Income tax provision
Income on disposal of discontinued operations, net of tax
2018
2017
2016
$
$
$
$
$
212
(117)
95
—
95
$
$
$
— $
—
— $
(155) $
(225)
(380) $
(147)
(233) $
— $
—
— $
(2)
(216)
(218)
(87)
(131)
100
40
60
Undiscounted reserves are maintained for the self-insured workers' compensation obligations related to the Company's former
textile operations. These reserves are administered by a third-party workers' compensation service provider under the supervision
of Company personnel. Such reserves are reassessed on a quarterly basis. Pre-tax cost incurred for workers' compensation as a
component of discontinued operations primarily represents a change in estimate for each period from unanticipated medical costs
associated with the Company's obligations.
Reserves for environmental remediation obligations are established on an undiscounted basis. The Company has an accrual for
environmental remediation obligations related to discontinued operations of $1,728 as of December 29, 2018 and $1,746 as of
December 30, 2017. The liability established represents the Company's best estimate of possible loss and is the reasonable amount
to which there is any meaningful degree of certainty given the periods of estimated remediation and the dollars applicable to such
remediation for those periods. The actual timeline to remediate, and thus, the ultimate cost to complete such remediation through
these remediation efforts, may differ significantly from our estimates. Pre-tax cost for environmental remediation obligations classified
as discontinued operations were primarily a result of specific events requiring action and additional expense in each period.
NOTE 22 - RELATED PARTY TRANSACTIONS
The Company is a party to a 5-year lease with the seller of Atlas Carpet Mills, Inc. to lease three manufacturing facilities as part of
the acquisition in 2014. The lessor is controlled by an associate of the Company. Rent paid to the lessor during 2018, 2017, and
2016 was $1,003, $978, and $793, respectively. The lease was based on current market values for similar facilities.
The Company purchases a portion of its product needs in the form of fiber, yarn and carpet from Engineered Floors, an entity
substantially controlled by Robert E. Shaw, a shareholder of the Company. An affiliate of Mr. Shaw holds approximately 7.2% of the
Company's Common Stock, which represents approximately 3.5% of the total vote of all classes of the Company's Common Stock.
Engineered Floors is one of several suppliers of such materials to the Company. Total purchases from Engineered Floors for 2018,
2017 and 2016 were approximately $8,200, $7,200 and $7,300, respectively; or approximately 2.6%, 2.3%, and 2.4% of the
Company's cost of goods sold in 2018, 2017, and 2016, respectively. Purchases from Engineered Floors are based on market
value, negotiated prices. The Company has no contractual commitments with Mr. Shaw associated with its business relationship
with Engineered Floors. Transactions with Engineered Floors are reviewed annually by the Company's board of directors.
The Company is a party to a 10-year lease with the Rothman Family Partnership to lease a manufacturing facility as part of the
Robertex acquisition in 2013. The lessor is controlled by an associate of the Company. Rent paid to the lessor during 2018, 2017,
and 2016 was $278, $273, and $267, respectively. The lease was based on current market values for similar facilities. In addition,
the Company has a note payable to Robert P. Rothman related to the acquisition of Robertex Inc. (See Note 10).
NOTE 23 - SUBSEQUENT EVENT
On January 14, 2019, the Company, entered into a purchase and sale agreement (the “Purchase and Sale Agreement”) with Saraland
Industrial, LLC, an Alabama limited liability company (the “Purchaser”). Pursuant to the terms of the Purchase and Sale Agreement,
the Company sold its Saraland facility, and approximately 17.12 acres of surrounding property located in Saraland, Alabama (the
“Property”) to the Purchaser for a purchase price of $11,500. Concurrent with the sale of the Property, the Company and the
68
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except per share data)
(Continued)
Purchaser entered into a twenty-year lease agreement (the “Lease Agreement”), whereby the Company will lease back the Property
at an annual rental rate of $977, subject to annual rent increases of 1.25%. Under the Lease Agreement, Dixie Group has two (2)
consecutive options to extend the term of the Lease by ten years for each such option. The company concurrently executed a lease
guaranty, pursuant to which it guaranteed the prompt payment when due of all rent payments to be made by its wholly owned
subsidiary, TDG Operations, LLC under the Lease Agreement.
Concurrently with the sale, the Company paid off the approximately $5,000 mortgage on the property to First Tennessee Bank
National Association and terminated the related fixed interest rate swap agreement. In connection with the Purchase and Sale
Agreement, the Company’s lender consented to the sale of the Saraland Facility. No other material terms of the credit agreement
were amended.
69
Item 15(a)(2)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
THE DIXIE GROUP, INC.
(dollars in thousands)
Balance at
Beginning
of Year
Additions -
Charged to
Costs and
Expenses
Additions -
Charged to
Other
Account -
Describe
Deductions -
Describe
Balance at
End of
Year
Description
Year ended December 29, 2018:
Reserves deducted from asset accounts:
Allowance for doubtful accounts
$
133
$
162
$
—
$
121 (1) $
174
Reserves classified as liabilities:
Provision for claims, allowances and
warranties
Year ended December 30, 2017:
Reserves deducted from asset accounts:
6,360
2,098
—
2,741 (2)
5,717
Allowance for doubtful accounts
$
107
$
70
$
—
$
44 (1) $
133
Reserves classified as liabilities:
Provision for claims, allowances and
warranties (As Adjusted)*
Year ended December 31, 2016:
Reserves deducted from asset accounts:
7,039
8,341
—
9,020 (2)*
6,360
Allowance for doubtful accounts
$
470
$
38
$
—
$
401 (1) $
107
Reserves classified as liabilities:
Provision for claims, allowances and
warranties (As Adjusted)*
* - See Note 2.
6,658
10,407
—
10,026 (2)
7,039
(1) Uncollectible accounts written off, net of recoveries.
(2) Reserve reductions for claims, allowances and warranties settled.
70
ANNUAL REPORT ON FORM 10-K
ITEM 15(b)
EXHIBITS
YEAR ENDED DECEMBER 29, 2018
THE DIXIE GROUP, INC.
DALTON, GEORGIA
Exhibit Index
EXHIBIT NO. DESCRIPTION
(1.1)*
(2.1)*
(3.1)*
(3.2)*
(5.1)*
(10.1)*
(10.2)*
(10.3)*
(10.4)*
(10.5)*
(10.6)*
(10.7)*
(10.8)*
(10.9)*
(10.10)*
(10.11)*
(10.12)*
(10.13)*
Underwriting Agreement for 2,500,000 Shares of The Dixie Group, Inc. (Incorporated by reference to Exhibit
(1.1) to Dixie's Current Report on Form 8-K dated May 20, 2014.)
Securities Purchase Agreement between Masland Carpets, LLC and Robert P. Rothman dated as of June 30,
2013. (Incorporated by reference to Exhibit (2.1) to Dixie's Current Report on Form 8-K dated June 30, 2013.)
Text of Restated Charter of The Dixie Group, Inc. as Amended - Blackline Version. (Incorporated by reference
to Exhibit (3.4) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2003.)
Amended By-Laws of The Dixie Group, Inc. as of February 22, 2007. (Incorporated by reference to Exhibit 3.1
to Dixie's Current Report on Form 8-K dated February 26, 2007.)
Shelf Registration Statement on Form S-3. (Incorporated by reference to Exhibit (5.1) to Dixie's Current Report
on Form 8-K dated May 20, 2014.)
The Dixie Group, Inc. New Non-qualified Retirement Savings Plan effective August 1, 1999. (Incorporated by
reference to Exhibit (10.1) to Dixie's Quarterly Report on Form 10-Q for the quarter ended June 26, 1999.)**
The Dixie Group, Inc. 2006 Stock Awards Plan. (Incorporated by reference to Annex A to the Company's Proxy
Statement for its 2006 Annual Meeting of Shareholders, filed March 20, 2006.)**
Summary Description of the 2006 Incentive Compensation Plan, approved February 23, 2006. (Incorporated by
reference to Current Report on Form 8-K dated March 1, 2006.)**
Summary Description of The Dixie Group, Inc., 2006 Incentive Compensation Plan/Range of Incentives.
(Incorporated by reference to Exhibit (10.62) to Dixie's Annual Report on Form 10-K for the year ended
December 28, 2013.)**
Material terms of the performance goals for the period 2007-2011, pursuant to which incentive compensation
awards may be made to certain key executives of the Company based on the results achieved by the
Company during such years, approved March 14, 2006. (Incorporated by reference to Current Report on Form
8-K dated March 20, 2006.)**
Form of Award of Career Shares under the 2006 Incentive Compensation Plan for Participants holding only
shares of the Company's Common Stock. (Incorporated by reference to Exhibit (10.1) to Dixie's Current Report
on Form 8-K dated June 6, 2006.)**
Form of Award of Career Shares under the 2006 Incentive Compensation Plan for Participants holding shares
of the Company's Class B Common Stock. (Incorporated by reference to Exhibit (10.2) to Dixie's Current
Report on Form 8-K dated June 6, 2006.)**
Form of Award of Long Term Incentive Plan Shares under the 2006 Incentive Compensation Plan for
Participants holding only shares of the Company's Common Stock. (Incorporated by reference to Exhibit (10.3)
to Dixie's Current Report on Form 8-K dated June 6, 2006.)**
Form of Award of Long Term Incentive Plan Shares under the 2006 Incentive Compensation Plan for
Participants holding shares of the Company's Class B Common Stock. (Incorporated by reference to Exhibit
(10.4) to Dixie's Current Report on Form 8-K dated June 6, 2006.)**
Master Lease Agreement, Corporate Guaranty and Schedule to the Master Lease Agreement by and between
General Electric Capital Corporation and Masland Carpets, LLC dated August 21, 2009. (Incorporated by
reference to Exhibit (10.1, 10.2, 10.3) to Dixie's Current Report on Form 8-K dated August 25, 2009.)
Amended and Modified Financing Agreement, by and between The Dixie Group, Inc. and certain of its
subsidiaries named therein, and General Electric Credit Corporation, as lender, dated June 26, 2012.
(Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated June 26, 2012.)
Agreement to Reduce Security Deposit Amount and Amendment to Security Deposit Pledge Agreement, by
and between The Dixie Group, Inc. and certain of its subsidiaries named therein, and General Electric Credit
Corporation, as lender, dated June 26, 2012. (Incorporated by reference to Exhibit (10.2) to Dixie's Current
Report on Form 8-K dated June 26, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Purchase
and Sale Agreement dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual
Report on Form 10-K for the year ended December 29, 2012.)
71
(10.14)*
(10.15)*
(10.16)*
(10.17)*
(10.18)*
(10.19)*
(10.20)*
(10.21)*
(10.22)*
(10.23)*
(10.24)*
(10.25)*
(10.26)*
(10.27)*
(10.28)*
(10.29)*
(10.30)*
(10.31)*
(10.32)*
(10.33)*
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Bill of Sale,
dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual Report on Form 10-K
for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Lease
Agreement, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual Report on
Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Short Form
Lease Agreement, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual
Report on Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Option
Agreement, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual Report on
Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Pilot
Agreement, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual Report on
Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Loan
Agreement, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual Report on
Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Loan and
Security Agreement, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual
Report on Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Deed to
Secure Debt and Security Agreement, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12)
to Dixie's Annual Report on Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Notice and
Consent to Assignment, dated December 28, 2012. (Incorporated by reference to Exhibit (4.12) to Dixie's
Annual Report on Form 10-K for the year ended December 29, 2012.)
Obligation to the Development Authority of Gordon County; by and among Masland Carpets, LLC, Absolute
Assignment of Deed to Secure Debt and Security Agreement and Other Loan Documents, dated December 28,
2012. (Incorporated by reference to Exhibit (4.12) to Dixie's Annual Report on Form 10-K for the year ended
December 29, 2012.)
Obligation to the Development Authority of Murray County; by and among TDG Operations, LLC, Series 2014
Bond, dated October 17, 2014. (Incorporated by reference to Exhibit (10.48) to Dixie's Annual Report on Form
10-K for the year ended December 27, 2014.)
Obligation to the Development Authority of Murray County; by and among TDG Operations, LLC, PILOT
Agreement, dated October 1, 2014. (Incorporated by reference to Exhibit (10.49) to Dixie's Annual Report on
Form 10-K for the year ended December 27, 2014.)
Obligation to the Development Authority of Murray County; by and among TDG Operations, LLC, Bond
Purchase Loan Agreement, dated October 1, 2014. (Incorporated by reference to Exhibit (10.50) to Dixie's
Annual Report on Form 10-K for the year ended December 27, 2014.)
Obligation to the Development Authority of Murray County; by and among TDG Operations, LLC, Option
Agreement, dated October 1, 2014.(Incorporated by reference to Exhibit (10.51) to Dixie's Annual Report on
Form 10-K for the year ended December 27, 2014.)
Obligation to the Development Authority of Murray County; by and among TDG Operations, LLC, Bill of Sale,
dated October 1, 2014. (Incorporated by reference to Exhibit (10.52) to Dixie's Annual Report on Form 10-K for
the year ended December 27, 2014.)
Obligation to the Development Authority of Murray County; by and among TDG Operations, LLC, Assignment
of Rents and Leases and Security Agreement dated October 1, 2014. (Incorporated by reference to Exhibit
(10.53) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2014.)
Project Development Agreement, by and between TDG Operations, LLC, a Georgia Limited Liability Company
doing business as Masland Carpets and the City of Atmore, Alabama, dated December 11, 2014. (Incorporated
by reference to Exhibit (10.54) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2014.)
Credit Agreement, by and among The Dixie Group, Inc. and certain of its subsidiaries, as Borrowers, cert of its
subsidiaries, as Guarantor, the Lendors from time to time party thereto, Wells Fargo Bank Capital Finance LLC,
as Administrative Agent, and co-lender and Bank of America and the Other parties thereto, dated September
13, 2011. (Incorporated by reference to Exhibit (10.10) to Dixie's Current Report on Form 8-K dated September
14, 2011.)
Security Agreement, by and among The Dixie Group, Inc. and certain of its subsidiaries, as Borrowers, certain
of its subsidiaries, as Guarantor, the Lenders from time to time party thereto, Wells Fargo Bank Capital Finance
LLC, as Administrative Agent, and co-lender and Bank of America and the Other parties thereto, dated
September 13, 2011. (Incorporated by reference to Exhibit (10.11) to Dixie's Current Report on Form 8-K dated
September 14, 2011.)
Form of Mortgages, by and among The Dixie Group, Inc. and certain of its subsidiaries, as Borrowers, certain
of its subsidiaries, as Guarantor, the Lenders from time to time party thereto, Wells Fargo Bank Capital Finance
LLC, as Administrative Agent, and co-lender and Bank of America and the Other parties thereto, dated
September 13, 2011. (Incorporated by reference to Exhibit (10.12) to Dixie's Current Report on Form 8-K dated
September 14, 2011.)
72
(10.34)*
(10.35)*
(10.36)*
(10.37)*
(10.38)*
(10.39)*
(10.40)*
(10.41)*
(10.42)*
(10.43)*
(10.44)*
(10.45)*
(10.46)*
(10.47)*
(10.48)*
(10.49)*
(10.50)*
(10.51)*
(10.52)*
Credit Agreement, by and between The Dixie Group, Inc. and certain of its subsidiaries named therein, and
Wells Fargo Bank, N.A. as lender, dated September 13, 2011. (Incorporated by reference to Exhibit (10.20) to
Dixie's Current Report on Form 8-K dated September 14, 2011.)
Security Agreement, by and between The Dixie Group, Inc. and certain of its subsidiaries named therein, and
Wells Fargo Bank, N.A. as lender, dated September 13, 2011. (Incorporated by reference to Exhibit (10.21) to
Dixie's Current Report on Form 8-K dated September 14, 2011.)
First Mortgage, by and between The Dixie Group, Inc. and certain of its subsidiaries named therein, and Wells
Fargo Bank, N.A. as lender, dated September 13, 2011. (Incorporated by reference to Exhibit (10.22) to Dixie's
Current Report on Form 8-K dated September 14, 2011.)
First Amendment to Credit Agreement dated as of November 2, 2012, by and among The Dixie Group, Inc.,
certain of its subsidiaries, and Wells Fargo Bank, N.A. as Agent and the persons identified as Lenders therein.
(Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated November 5, 2012.)
First Amendment to Credit Agreement dated as of November 2, 2012, by and among The Dixie Group, Inc.,
certain of it subsidiaries, and Wells Fargo Capital Finance, LLC as Agent and the persons identified as Lenders
therein. (Incorporated by reference to Exhibit (10.2) to Dixie's Current Report on Form 8-K dated November 5,
2012.)
Intercreditor Agreement dated as of November 2, 2012, by and among Wells Fargo Capital Finance, LLC and
Wells Fargo Bank, N.A. as Agents and The Dixie Group, Inc. and certain of its subsidiaries. (Incorporated by
reference to Exhibit (10.3) to Dixie's Current Report on Form 8-K dated November 5, 2012.)
Second Amendment to Credit Agreement dated as of April 1, 2013, by and among The Dixie Group, Inc. certain
of its subsidiaries and Wells Fargo Capital Finance, LLC, as Agent and the persons identified as Lenders
therein. (Incorporated by reference to Exhibit (10.01) to Dixie's Current Report on Form 8-K dated April 3,
2013.)
Third Amendment to Credit Agreement dated as of May 22, 2013, by and among The Dixie Group, Inc. certain
of its subsidiaries and Wells Fargo Capital Finance, LLC, as Agent and the persons identified as Lenders
therein. (Incorporated by reference to Exhibit (10.57) to Dixie's Annual Report on Form 10-K for the year ended
December 28, 2013.)
Fourth Amendment to Credit Agreement dated as of July 1, 2013, by and among The Dixie Group, Inc. certain
of its subsidiaries and Wells Fargo Capital Finance, LLC, as Agent and the persons identified as Lenders
therein. (Incorporated by reference to Exhibit (10.58) to Dixie's Annual Report on Form 10-K for the year ended
December 28, 2013.)
Fifth Amendment to Credit Agreement dated as of July 30, 2013, by and among The Dixie Group, Inc. certain of
its subsidiaries and Wells Fargo Capital Finance, LLC, as Agent and the persons identified as Lenders therein.
(Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 10-Q dated August 7, 2013.)
Sixth Amendment to Credit Agreement dated as of August 30, 2013, by and among The Dixie Group, Inc.
certain of its subsidiaries and Wells Fargo Capital Finance, LLC, as Agent and the persons identified as
Lenders therein. (Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 10-Q dated
November 6, 2013.)
Seventh Amendment to Credit Agreement dated as of January 20, 2014, by and among The Dixie Group, Inc.
certain of its subsidiaries and Wells Fargo Capital Finance, LLC, as Agent and the persons identified as
Lenders therein. (Incorporated by reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated
January 21, 2014.)
Eighth Amendment to Credit Agreement dated as of March 14, 2014, by and among The Dixie Group, Inc.
certain of its subsidiaries and Wells Fargo Capital Finance, LLC, as Agent and the persons identified as
Lenders therein. (Incorporated by reference to Exhibit (10.2) to Dixie's Current Report on Form 8-K dated
March 20, 2014.)
Term Note 1 dated November 7, 2014, by TDG Operations, LLC, a Georgia limited liability company and First
Tennessee Bank National Association. (Incorporated by reference to Exhibit (10.71) to Dixie's Annual Report on
Form 10-K for the year ended December 27, 2014.)
Deed to Secure Debt, Assignment of Rents and Leases, Security Agreement and Fixture Filing by TDG
Operations, LLC, a Georgia limited liability company and First Tennessee Bank National Association, dated
November 7, 2014. (Incorporated by reference to Exhibit (10.72) to Dixie's Annual Report on Form 10-K for the
year ended December 27, 2014.)
Term Note 2 dated November 7, 2014, by TDG Operations, LLC, a Georgia limited liability company and First
Tennessee Bank National Association. (Incorporated by reference to Exhibit (10.73) to Dixie's Annual Report on
Form 10-K for the year ended December 27, 2014.)
Amendment to Term Loan Agreement, Note 2, dated November 7, 2014, by TDG Operations, LLC, a Georgia
limited liability company and First Tennessee Bank National Association. (Incorporated by reference to Exhibit
(10.74) to Dixie's Annual Report on Form 10-K for the year ended December 27, 2014.)
Term Note 3 dated January 23, 2015, by TDG Operations, LLC, a Georgia limited liability company and First
Tennessee Bank National Association. (Incorporated by reference to Exhibit (10.75) to Dixie's Annual Report on
Form 10-K for the year ended December 27, 2014.)
Mortgage, Assignment of Rents and Leases, Security Agreement and Fixture Filing by TDG Operations, LLC, a
Georgia limited liability company and First Tennessee Bank National Association, dated January 23, 2015.
(Incorporated by reference to Exhibit (10.76) to Dixie's Annual Report on Form 10-K for the year ended
December 27, 2014.)
73
(10.53)*
(10.54)*
(10.55)*
(10.56)*
(10.57)*
(10.58)*
(10.59)*
(10.60)*
(10.61)*
(10.62)*
(10.63)*
(10.64)*
(10.65)*
(10.66)*
(10.67)*
(10.68)*
(10.69)*
(10.70)*
(10.71)*
(10.72)*
(10.73)*
(10.74)*
Mortgagee's Subordination and Consent, dated January 23, 2015, by and between Wells Fargo Capital
Finance, LLC, as Agent, and The Dixie Group, Inc. and it subsidiaries, as Borrower, and First Tennessee Bank
National Association, as Mortgagee. (Incorporated by reference to Exhibit (10.77) to Dixie's Annual Report on
Form 10-K for the year ended December 27, 2014.)
Amended and Restated Mortgagee's Subordination and Consent, dated January 23, 2015, by and between
Wells Fargo Capital Finance, LLC, as Agent, and The Dixie Group, Inc. and it subsidiaries, as Borrower, and
First Tennessee Bank National Association, as Mortgagee. (Incorporated by reference to Exhibit (10.78) to
Dixie's Annual Report on Form 10-K for the year ended December 27, 2014.)
Amendment to Deed to Secure Debt, Assignment of Rents and Leases, Security Agreement and Fixture Filing,
dated January 23, 2015, between TDG Operations, LLC, a Georgia limited liability company, and First
Tennessee Bank National Association. (Incorporated by reference to Exhibit (10.79) to Dixie's Annual Report on
Form 10-K for the year ended December 27, 2014.)
Stock Purchase Agreement between TDG Operations, LLC, a wholly owned subsidiary of The Dixie Group, Inc.
and James Horwich, Trustee under the Horwich Trust of 1973, to purchase all outstanding capital stock of Atlas
Carpet Mills, Inc. (Incorporated by reference to Exhibit (10.2) to Dixie's Current Report on Form 8-K dated
March 20, 2014.)
Summary of Annual Incentive Compensation Plan Applicable to 2015. (Incorporated by reference to Exhibit
(10.1) to Dixie's Current Report on Form 8-K dated March 13, 2015.)**
Form of LTIP award (B shareholder). (Incorporated by reference to Exhibit (10.2) to Dixie's Current Report on
Form 8-K dated March 13, 2015.)**
Form of LTIP award (common only). (Incorporated by reference to Exhibit (10.3) to Dixie's Current Report on
Form 8-K dated March 13, 2015.)**
Form of Career Share award (B shareholder). (Incorporated by reference to Exhibit (10.4) to Dixie's Current
Report on Form 8-K dated March 13, 2015.)**
Form of Career Share award (common only). (Incorporated by reference to Exhibit (10.5) to Dixie's Current
Report on Form 8-K dated March 13, 2015.)**
Form of Retention Grant (Service Condition only). (Incorporated by reference to Exhibit (10.6) to Dixie's Current
Report on Form 8-K dated March 13, 2015.)**
Form of Retention Grant (Performance Condition and Service Condition). (Incorporated by reference to Exhibit
(10.7) to Dixie's Current Report on Form 8-K dated March 13, 2015.)**
Form of Award of 100,000 share of Restricted Stock under the 2006 Stock Awards Plan to Daniel K. Frierson.
(Incorporated by Reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated April 30, 2015.)**
Thornton Edge LLC Lease for Reed Road Facility. (Incorporated by reference to Exhibit (10.1) to Dixie's
Current Report on Form 10-Q dated November 4, 2015.)
Thornton Edge LLC First Lease Amendment for Reed Road Facility. (Incorporated by reference to Exhibit
(10.2) to Dixie's Current Report on Form 10-Q dated November 4, 2015.)
Thornton Edge LLC Second Lease Amendment for Reed Road Facility. (Incorporated by reference to Exhibit
(10.3) to Dixie's Current Report on Form 10-Q dated November 4, 2015.)
2016 Incentive Compensation Plan. (Incorporate by reference to Appendix A to Dixie's Proxy Statement for the
Registrant's Annual Meeting of Shareholders held May 3, 2016.)**
Summary of Incentive Plan for 2016. (Incorporated by Reference to Exhibit (10.1) to Dixie's Current Report on
Form 8-K dated March 11, 2016.)**
Long Term Incentive Plan Award B Shareholder. (Incorporated by Reference to Exhibit (10.2) to Dixie's Current
Report on Form 8-K dated March 11, 2016.)**
Long Term Incentive Plan Award Common. (Incorporated by Reference to Exhibit (10.3) to Dixie's Current
Report on Form 8-K dated March 11, 2016.)**
Career Shares B Shareholder. (Incorporated by Reference to Exhibit (10.4) to Dixie's Current Report on Form
8-K dated March 11, 2016.)**
Career Shares Common. (Incorporated by Reference to Exhibit (10.5) to Dixie's Current Report on Form 8-K
dated March 11, 2016.)**
Tenth Amendment to Credit Agreement, First Amendment to Security Agreement, and First Amendment to
Guaranty. (Incorporated by Reference to Exhibit (10.1) to Dixie's Current Report on Form 8-K dated September
26, 2016.)
(10.75)*
Summary of Incentive Plan for 2017. (Incorporated by Reference to Exhibit (10.1) to Dixie's Current Report on
Form 8-K dated March 10, 2017.)**
(10.76)*
(10.77)*
(10.78)
Form of Stock Option Agreement - Common Stock - 2016 Stock Plan. (Incorporated by Reference to Exhibit
(10.1) to Dixie's Current Report on Form 8-K dated May 31, 2017.)**
Form of Stock Option Agreement - Class B Holder - 2016 Stock Plan. (Incorporated by Reference to Exhibit
(10.2) to Dixie's Current Report on Form 8-K dated May 31, 2017.)**
Royalty Carpet Mills Lease for Porterville, California Facility. (Incorporated by Reference to Exhibit (10.78) to
Dixie's Current Report on Form 10-K dated March 13, 2018.)
74
(10.79)
Summary of Incentive Plan for 2018. (Incorporated by Reference to Exhibit (10.1) to Dixie's Current Report on
Form 8-K dated March 9, 2018.)**
(10.80)
(10.81)
(10.82)
(10.83)
(10.84)
(10.85)
(14)*
(16)*
(21)
(23)
(31.1)
(31.2)
(32.1)
(32.2)
Long Term Incentive Plan Award B Shareholder. (Incorporated by Reference to Exhibit (10.2) to Dixie's Current
Report on Form 8-K dated March 9, 2018.)**
Long Term Incentive Plan Award Common. (Incorporated by Reference to Exhibit (10.3) to Dixie's Current
Report on Form 8-K dated March 9, 2018.)**
Career Shares B Shareholder. (Incorporated by Reference to Exhibit (10.4) to Dixie's Current Report on Form
8-K dated March 9, 2018.)**
Career Shares Common. (Incorporated by Reference to Exhibit (10.5) to Dixie's Current Report on Form 8-K
dated March 9, 2018.)**
Eleventh Consent and Amendment to Credit Agreement. (Incorporated by Reference to Exhibit (10.1) to Dixie's
Current Report on Form 8-K dated January 17, 2019.)
Agreement For the Purchase and Sale of Real Property between Saraland Industrial, LLC and TDG
Operations, LLC. (Incorporated by Reference to Exhibit (10.2) to Dixie's Current Report on Form 8-K dated
January 17, 2019.)
Code of Ethics, as amended and restated, February 15, 2010. (Incorporated by reference to Exhibit 14 to
Dixie's Annual Report on Form 10-K for year ended December 26, 2009.)
Letter from Ernst & Young LLP regarding change in certifying accountant. (Incorporated by reference to Exhibit
16 to Dixie's Form 8-K dated November 15, 2013.)
Subsidiaries of the Registrant. (Filed herewith.)
Consent of Dixon Hughes Goodman LLP Independent Registered Public Accounting Firm.(Filed herewith.)
CEO Certification pursuant to Securities Exchange Act Rule 13a-14(a). (Filed herewith.)
CFO Certification pursuant to Securities Exchange Act Rule 13a-14(a). (Filed herewith.)
CEO Certification pursuant to Securities Exchange Act Rule 13a-14(b). (Filed herewith.)
CFO Certification pursuant to Securities Exchange Act Rule 13a-14(b). (Filed herewith.)
(101.INS)
XBRL Instance Document. (Filed herewith.)
(101.SCH)
XBRL Taxonomy Extension Schema Document. (Filed herewith.)
(101.CAL)
XBRL Taxaonomy Extension Calculation Linkbase Document. (Filed herewith.)
(101.DEF)
XBRL Taxonomy Extension Definition Linkbase Document. (Filed herewith.)
(101.LAB)
XBRL Taxonomy Extension Label Linkbase Document. (Filed herewith.)
(101.PRE)
XBRL Taxonomy Extension Presentation Linkbase Document. (Filed herewith.)
* Commission File No. 0-2585.
** Indicates a management contract or compensatory plan or arrangement.
75
P R O X Y S T A T E M E N T
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
SCHEDULE 14A INFORMATION
(Rule 14a-101)
Proxy Statement Pursuant to Section 14(a) of the
Securities and Exchange Act of 1934
(Amendment No. )
Filed by the Registrant
Filed by a Party other than the Registrant
Check the appropriate box:
Preliminary Proxy Statement
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Pursuant to Section 240.14a-12
The Dixie Group, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
No fee required.
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1)
2)
3)
4)
5)
Title of each class of securities to which transaction applies:
Aggregate number of securities to which transaction applies:
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set
forth the amount on which the filing fee is calculated and state how it was determined):
Proposed maximum aggregate value of transaction:
Total fee paid:
Fee paid previously with preliminary materials.
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for
which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the
Form or Schedule and the date of its filing.
1)
2)
3)
4)
Amount Previously Paid:
Form, Schedule or Registrant Statement No.:
Filing Party:
Date Filed:
THE DIXIE GROUP, INC.
475 Reed Road
Dalton, Georgia 30720
(706) 876-5800
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To the Shareholders of The Dixie Group, Inc.:
The Annual Meeting of Shareholders of The Dixie Group, Inc. will be held at the Corporate Office, 475 Reed Road, Dalton,
Georgia, on May 1, 2019 at 8:00 a.m., Eastern Time, for the following purposes:
1.
2.
3.
4.
5.
To elect seven individuals to the Board of Directors for a term of one year each;
To cast an advisory vote on the Company’s Executive Compensation for its named executive officers (“Say-on-
Pay”);
To cast an advisory vote on the frequency of future say-on-pay votes;
To ratify appointment of Dixon Hughes Goodman LLP to serve as independent registered public accountants
of the Company for 2019; and
Such other business as may properly come before the Annual Meeting of Shareholders or any adjournment
thereof.
Only shareholders of record of the Common Stock and Class B Common Stock at the close of business on February 22,
2019, are entitled to notice of, and to vote at, the Annual Meeting or any adjournment thereof.
Your attention is directed to the Proxy Statement accompanying this Notice for more complete information regarding the
matters to be acted upon at the Annual Meeting.
The Dixie Group, Inc.
Daniel K. Frierson
Chairman of the Board
Dalton, Georgia
Dated: March 22, 2019
PLEASE READ THE ATTACHED MATERIAL CAREFULLY AND COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND
RETURN IT PROMPTLY TO THE COMPANY IN THE ENCLOSED POSTAGE-PAID ENVELOPE SO THAT YOUR SHARES OF
COMMON STOCK AND CLASS B COMMON STOCK WILL BE REPRESENTED AT THE MEETING. IF YOU ATTEND THE
MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE YOUR SHARES IN PERSON, SHOULD YOU SO DESIRE.
Important Notice
Regarding Internet
Availability of Proxy Materials
for the
Annual Meeting of Shareholders
to be held on
May 1, 2019
The proxy statement and annual report to shareholders are available under "Annual Report and Proxy Materials" at
www.dixiegroup.com/Investor.
THE DIXIE GROUP, INC.
475 Reed Road
Dalton, Georgia 30720
Phone (706) 876-5800
ANNUAL MEETING OF SHAREHOLDERS
May 1, 2019
PROXY STATEMENT
INTRODUCTION
The enclosed Proxy is solicited on behalf of the Board of Directors of the Company for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders. This Proxy Statement and the enclosed Proxy will be mailed on or about
March 22, 2019, to shareholders of record of the Company’s Common Stock and Class B Common Stock as of the close of business
on February 22, 2019.
At the Annual Meeting, holders of the Company’s Common Stock, $3.00 par value per share (“Common Stock”), and Class
B Common Stock, $3.00 par value per share (“Class B Common Stock”), will be asked to: (i) elect seven (7) individuals to the Board
of Directors for a term of one year each, (ii) cast an advisory vote on the Company’s executive compensation for its named executive
officers; (iii) cast an advisory vote on the frequency of the shareholder advisory vote on executive compensation; (iv) ratify the
appointment of Dixon Hughes Goodman LLP to serve as independent registered public accountants of the Company for 2019, and
(v) transact any other business that may properly come before the meeting.
The Board of Directors recommends that the Company’s shareholders vote (i) FOR electing the seven (7) nominees for
director; (ii) FOR approving the Company’s executive compensation of its named executive officers; (iii) FOR setting the frequency
of the shareholder advisory vote on executive compensation at an annual vote; (iv) FOR ratifying the appointment of Dixon Hughes
Goodman LLP to serve as independent registered public accountants of the Company for 2019.
RECORD DATE, VOTE REQUIRED AND RELATED MATTERS
The Board has fixed the close of business on February 22, 2019, as the Record Date for the determination of shareholders
entitled to notice of, and to vote at, the Annual Meeting. In accordance with the Company’s Charter, each outstanding share of
Common Stock is entitled to one vote, and each outstanding share of Class B Common Stock is entitled to 20 votes, exercisable
in person or by properly executed Proxy, on each matter brought before the Annual Meeting. Cumulative voting is not permitted.
As of February 22, 2019, 15,522,588 shares of Common Stock, representing 15,522,588 votes, were held of record by approximately
2,800 shareholders (including an estimated 2,400 shareholders whose shares are held in nominee names) and 839,304 shares of
Class B Common Stock, representing 16,786,080 votes, were held by 10 individual shareholders, together representing an aggregate
of 32,308,668 votes.
Shares represented at the Annual Meeting by properly executed Proxy will be voted in accordance with the instructions
indicated therein unless such Proxy has previously been revoked. If no instructions are indicated, such shares will be voted (i) FOR
electing the seven (7) nominees for director; (ii) FOR approving the Company’s executive compensation of its named executive
officers; (iii) FOR setting the frequency of the shareholder advisory vote on executive compensation at an annual vote; (iv) FOR
ratifying the appointment of Dixon Hughes Goodman LLP to serve as independent registered public accountants of the Company
for 2019.
Any Proxy given pursuant to this solicitation may be revoked at any time by the shareholder giving it by (i) delivering to
the Corporate Secretary of the Company a written notice of revocation bearing a later date than the Proxy, (ii) submitting a later-
dated, properly executed Proxy, or (iii) revoking the Proxy and voting in person at the Annual Meeting. Attendance at the Annual
Meeting will not, in and of itself, constitute a revocation of a Proxy. Any written notice revoking a Proxy should be sent to The Dixie
Group, Inc., P.O. Box 2007, Dalton, Georgia 30722-2007, Attention: Derek Davis.
The persons designated as proxies were selected by the Board of Directors and are Daniel K. Frierson, Lowry F. Kline
and Michael L. Owens. The cost of solicitation of Proxies will be borne by the Company.
The presence, in person or by Proxy, of the holders of a majority of the aggregate outstanding vote of Common Stock and
Class B Common Stock entitled to vote is necessary to constitute a quorum at the Annual Meeting. In accordance with Tennessee
law, Directors are elected by the affirmative vote of a plurality of the votes cast in person or by Proxy at the Annual Meeting.
1
Approval of the Company’s executive compensation for its named executive officers will be deemed to have been obtained
if the number of votes properly cast in favor of such compensation exceeds the number of votes cast against such compensation.
With respect to the advisory vote on the frequency of say-on-pay advisory votes, the option that receives the highest
number of votes will be deemed to have been selected by shareholders.
Ratification of the appointment of Dixon Hughes Goodman LLP to serve as independent registered public accountants of
the Company for 2019 will be approved if the votes properly cast favoring ratification exceed the votes cast opposing ratification.
Shares covered by abstentions and broker non-votes, while counted for purposes of determining the presence of a quorum
at the Annual Meeting, are not considered to be affirmative or negative votes. Abstentions and broker non-votes will have no effect
upon the election of a nominee for director, so long as such nominee receives any affirmative votes.
A copy of the Company’s Annual Report for the year-ended December 29, 2018, is enclosed herewith.
The Board is not aware of any other matter to be brought before the Annual Meeting for a vote of shareholders. If, however,
other matters are properly presented, Proxies representing shares of Common Stock and Class B Common Stock will be voted in
accordance with the best judgment of the proxy holders.
2
PRINCIPAL SHAREHOLDERS
Shareholders of record at the close of business on February 22, 2019, the Record Date, will be entitled to notice of and
to vote at the Annual Meeting.
The following is information regarding beneficial owners of more than 5% of the Company's Common Stock or Class B
Common Stock. Beneficial ownership information is also presented for (i) the executive officers named in the Summary Compensation
Table; (ii) all directors and nominees; and (iii) all directors and executive officers, as a group, as of February 22, 2019 (except as
otherwise noted).
Name and Address of Beneficial Owner
Title of Class
Daniel K. Frierson
111 East and West Road
Common Stock
Lookout Mountain, TN 37350
Class B Common Stock
Number of
Shares
Beneficially
Owned(1)(2)
% of Class
975,695
839,304
(3)
(4)
5.9 %
100.0 %
Dimensional Fund Advisors, L.P.
Palisades West, Building One,
6300 Bee Cave Road
Austin, TX 78746
Hodges Capital Holdings, Inc.
2905 Maple Avenue
Dallas, TX 75201
Royce & Associates, LLC
745 Fifth Avenue
New York, NY 10151
Robert E. Shaw
115 West King Street
Dalton, GA 30722-1005
Terry Ledbetter, Jr.
400 West Louisiana Street
McKinney, TX 75009
Wells Fargo & Company
420 Montgomery Street
San Francisco, CA 94163
Common Stock
1,004,199
(5)
6.5 %
Common Stock
1,606,954
(6)
10.4 %
Common Stock
1,229,101
(7)
7.9 %
Common Stock
1,125,000
(8)
7.2 %
Common Stock
1,047,155
(9)
6.7 %
Common Stock
1,331,764
(10)
8.6 %
3
Additional Directors and Executive Officers
Title of Class
Number of
Shares
Beneficially
Owned (1)
% of Class
William F. Blue, Jr.
Common Stock
26,371
(11)
Charles E. Brock
Common Stock
18,141
(12)
W. Derek Davis
Jon A. Faulkner
D. Kennedy Frierson, Jr.
Common Stock
102,155
(13)
Common Stock
183,536
(14)
1.1 %
Common Stock
Class B Common Stock
274,894
233,019
(15)
(4)
1.7 %
27.8 %
*
*
*
E. David Hobbs
Common Stock
30,034
(16)
Walter W. Hubbard***
Common Stock
29,001
(17)
Lowry F. Kline
Hilda S. Murray
Common Stock
61,499
(18)
Common Stock
18,141
(19)
T.M. Nuckols, Jr.
Common Stock
52,493
(20)
Michael L. Owens
Common Stock
13,975
(21)
*
*
*
*
*
*
All Directors, Named Executive Officers and
Executive Officers as Group (12 Persons) **
Common Stock
Class B Common Stock
1,535,342
839,304
(22)
(23)
9.3 %
100.0 %
* Percentage of shares beneficially owned does not exceed 1% of the Class.
** The total vote of Common Stock and Class B Common Stock represented by the shares held by all directors and executive
officers as a group is 17,482,118 votes or 54.1% of the total vote.
*** Mr. Hubbard's term as Director will not extend past the Annual Meeting.
(1)
(2)
Under the rules of the Securities and Exchange Commission and for the purposes of these disclosures, a person is deemed
to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to
direct the voting of such security, or “investment power,” which includes the power to dispose or to direct the disposition of
such security. Under these rules, more than one person may be deemed to be a beneficial owner of the same securities.
The Class B Common Stock is convertible on a share-for-share basis into shares of Common Stock, and accordingly,
outstanding shares of such stock are treated as having been converted to shares of Common Stock for purposes of determining
both the number and percentage of class of Common Stock for persons set forth in the table who hold such shares.
Does not include 227,219 shares of Common Stock owned by The Dixie Group, Inc. 401(k) Retirement Savings Plan (the
“401(k) Plan”) for which Daniel K. Frierson is a fiduciary and for which Bank of America, N.A. serves as Trustee. Participants
in the 401(k) Plan may direct the voting of all shares of Common Stock held in their accounts, and the Trustee must vote all
shares of Common Stock held in the 401(k) Plan in the ratio reflected by such direction. Participants may also direct the
disposition of such shares. Accordingly, for purposes of these disclosures, shares held for participants in the 401(k) Plan are
reported as beneficially owned by the participants.
4
(3) Mr. Daniel K. Frierson's beneficial ownership of Common Stock and Class B Common Stock may be summarized as follows:
Shares held outright
Shares held in his Individual Retirement Account
Shares held in 401(k) Plan
Shares held by his wife
Shares held by his children, their spouses and grandchildren
Unvested restricted stock
Shares held by family Unitrust
Exercisable Stock Option
Deemed conversion of his Class B Common Stock
Total
Total does not include 40,000 shares of Non Exercisable Stock Options.
(a) Sole voting and investment power
(b) Shared voting and investment power
(c) Sole voting and shared investment power
Number of
Shares
Common Stock
13,263
3,567
796
—
32,477
36,288
—
50,000
839,304
975,695
(a)
(a)
(b)
(a)
(a)
Number of
Shares Class B
Common Stock
394,350
17,061
—
94,879
291,241
36,287
5,486
—
—
839,304
(a)
(a)
(c)
(c)
(a)
(a)
(4)
(5)
(6)
(7)
(8)
(9)
The 839,304 includes 391,606 shares of Class B Common Stock held subject to a Shareholder's Agreement among Daniel
K. Frierson, his wife, two of their five children (including D. Kennedy Frierson, Jr., his son) and certain family trusts which
hold Class B Common Stock, pursuant to which Daniel K. Frierson has been granted a proxy to vote such shares. The
Shareholder's Agreement relates only to shares of Class B Common Stock held by each of the parties to the agreement.
Pursuant to the agreement Daniel K. Frierson is granted a proxy to vote such shares of Class B Common Stock so long as
they remain subject to the agreement. The Class B Common Stock is convertible on a share for share basis in to shares of
Common Stock; however, upon conversion such shares are no longer subject to the agreement. Nevertheless, the parties
to the agreement may be deemed to be members of a "group" for purposes of Section 13(d) of the act and for purposes of
reporting beneficial ownership of the Common Stock of The Dixie Group, Inc., and accordingly Daniel K. Frierson, and the
other parties to the agreement have jointly filed a report on Schedule 13(d) reporting beneficial ownership of the Common
Stock which they own.
Dimensional Fund Advisors, L.P. has reported beneficial ownership of an aggregate of 1,004,199 shares of Common Stock,
as follows: 981,068 shares of Common Stock, for which it has sole voting power, and 1,004,199 shares of Common Stock
for which it has sole dispositive power. The reported information is based upon the Schedule 13G filed by Dimensional Fund
Advisors, L.P. with the Securities and Exchange Commission on February 8, 2019.
Hodges Capital Holdings, Inc. Craig Hodges, First Dallas Securities, Inc., Hodges Capital Management, Inc., Hodges Fund,
and Hodges Pure Contrarian Fund has reported beneficial ownership of an aggregate of 1,606,954 shares of Common Stock.
Hodges Capital Holdings, Inc. reports having shared voting power of 1,382,929 and 1,606,954 shared dispositive power.
The reported information is based upon the Schedule 13G filed by Hodges Capital Holdings, Inc. with the Securities and
Exchange Commission on February 11, 2019.
Royce & Associates LLC has reported beneficial ownership of 1,229,101 shares of Common Stock for which it has sole
dispositive power and sole voting power. The reported information is based upon the Schedule 13G filed by Royce & Associates
LP with the Securities and Exchange Commission on January 14, 2019.
Robert E. Shaw has reported the beneficial ownership of an aggregate of 1,125,000 shares of Common Stock for which he
has 1,125,000 shared voting power and 1,125,000 shared dispositive power. The reported information is based upon the
Schedule 13G filed by Mr. Shaw with the Securities and Exchange Commission on January 30, 2019.
Terry Ledbetter, Jr. has reported the beneficial ownership of an aggregate of 1,047,155 shares of Common Stock for which
he has 664,266 shared voting power and 1,047,155 shared dispositive power. The reported information is based upon the
Schedule 13G filed by Kopion Asset Management, LLC and Mr. Ledbetter, founder and manager of Kopion Asset Management,
LLC, with the Securities and Exchange Commission on February 12, 2019.
(10) Wells Fargo & Company has reported the beneficial ownership of an aggregate of 1,331,764 shares of Common Stock, on
behalf the following subsidiaries: Wells Capital Management Incorporated, Wells Fargo Funds Management, LLC, Wells
Fargo Bank, National Association and Wells Fargo Clearing Services, LLC. It has reported 1,090,760 shares of Common
Stock for which it has shared voting power. The reported information is based on a Form 13G filed on January 22, 2019.
5
(11) Mr. William F. Blue's beneficial ownership may be summarized as follows:
Shares held outright
Performance Units, convertible into shares of Common Stock on retirement as a director
Total
(12) Mr. Charles E. Brock's beneficial ownership may be summarized as follows:
Shares held outright
Performance Units, convertible into shares of Common Stock on retirement as a director
Total
(13) Mr. W. Derek Davis's beneficial ownership may be summarized as follows:
Shares held outright
Shares held by his wife
Unvested Restricted Stock
Held in 401(k) Plan
Exercisable Stock Options
Total
Total does not include 15,000 shares of Non Exercisable Stock Options.
(14) Mr. Jon A. Faulkner's beneficial ownership may be summarized as follows:
Shares held outright
Unvested Restricted Stock
Exercisable Stock Options
Total
Total does not include 15,000 shares of Non Exercisable Stock Options.
Number of Shares
Common Stock
12,609
13,762
26,371
Number of Shares
Common Stock
—
18,141
18,141
Number of Shares
Common Stock
66,512
4,500
24,386
4,257
2,500
102,155
Number of Shares
Common Stock
65,693
106,843
11,000
183,536
6
(15) Mr. D. Kennedy Frierson Jr.'s beneficial ownership may be summarized as follows:
Shares held outright
Shares held by his wife
Shares held in trust(s) for children
Shares held in 401(k)
Unvested Restricted Stock
Exercisable Stock Options
Deemed conversion of Class B Stock
Total
Number of
Shares
Common Stock
Number of
Shares Class B
Common Stock
10,000
100
2,585
2,301
4,889
22,000
233,019
274,894
89,038 (a)
—
15,540 (a)
—
128,441 (a)
—
— (a)
233,019
Total does not include 25,000 shares of Non Exercisable Stock Options.
(a) Subject to Shareholder's Agreement described in Note (4), above. Mr. Kennedy Frierson has sole investment power,
and no voting power with respect to such shares.
(16) Mr. E. David Hobbs' beneficial ownership may be summarized as follows:
Shares held outright
Unvested Restricted Stock
Total
Total does not include 15,000 shares of Non Exercisable Stock Options.
(17) Mr. Walter W. Hubbard's beneficial ownership may be summarized as follows:
Shares held outright
Performance Units, convertible into shares of Common Stock on retirement as a director
Total
(18) Mr. Lowry F. Kline's beneficial ownership may be summarized as follows:
Shares held outright
Performance Units, convertible into shares of Common Stock on retirement as a director
Total
(19) Ms. Hilda S. Murray's beneficial ownership may be summarized as follows:
Shares held outright
Performance Units, convertible into shares of Common Stock on retirement as a director
Total
7
Number of Shares
Common Stock
5,472
24,562
30,034
Number of Shares
Common Stock
—
29,001
29,001
Number of Shares
Common Stock
31,198
30,301
61,499
Number of Shares
Common Stock
—
18,141
18,141
(20) Mr. T.M. Nuckols, Jr.'s beneficial ownership may be summarized as follows:
Shares held outright
Unvested Restricted Stock
Total
Total does not include 15,000 shares of Non Exercisable Stock Options.
(21) Mr. Michael L. Owens' beneficial ownership may be summarized as follows:
Shares held outright
Performance Units, convertible into shares of Common Stock on retirement as a director
Number of Shares
Common Stock
—
52,493
52,493
Number of Shares
Common Stock
—
13,975
13,975
Total
(22)
Includes: (i) 204,747 shares of Common Stock owned directly by individuals in this group; (ii) 7,354 shares of Common Stock
allocated to accounts in the 401(k) Plan of members of this group; (iii) options, which are either immediately exercisable, or
exercisable within 60 days of the Record Date to purchase 85,500 shares of Common Stock; (iv) 123,321 shares of Common
Stock held pursuant to performance units issued as payment of one-half of the annual retainer for the Company's non-
employee directors; (v) 22,088 shares of Common Stock owned by immediate family members of certain members of this
group; (vi) 3,567 shares held in individual retirement accounts; (vii) 249,461 unvested restricted shares of Common Stock
held by individuals in this group, which shares may be voted by such individuals; and (viii) 839,304 shares of Class B Common
Stock held by individuals in this group, that could be converted on a share for share basis into shares of Common Stock.
(This total excludes options which are not yet vested of 125,000 shares of Common Stock.)
(23)
Includes: (i) 839,304 shares of Class B Common Stock held subject to the Shareholder Agreement described in Note (4)
above.
8
PROPOSAL ONE
ELECTION OF DIRECTORS
Information About Nominees for Director
Pursuant to the Company’s Bylaws, all Directors are elected to serve a one year term, or until their successors are elected
and qualified. The Board of Directors is permitted to appoint directors to fill the unexpired terms of directors who resign.
The names of the nominees for election to the Board, their ages, their principal occupation or employment (which has
continued for at least the past five years unless otherwise noted), directorships held by them in other publicly-held corporations or
investment companies, the dates they first became directors of the Company, and certain other relevant information with respect
to such nominees are as follows:
William F. Blue, Jr., age 60, is Chairman of the Board of The Hopeway Foundation in Charlotte, North Carolina. From
2008 until his retirement in 2014, he served as Vice Chairman of Investment Banking and Capital Markets, part of Wells Fargo
Securities, LLC, in Charlotte. Throughout his 29-year investment banking career, he represented foreign and domestic corporations
in financing and advisory assignments, including acquisitions, divestitures, recapitalizations, fairness opinions, and public and
private equity and debt offerings. From 1998 until 2008, Mr. Blue served as group head of the Wachovia Consumer and Retail
Investment Banking group. Before joining Wachovia, he was a managing director in the Mergers and Acquisitions group of
NationsBanc Montgomery Securities, the predecessor firm to Banc of America Securities. Mr. Blue is a member of the Company's
Audit Committee, Executive Committee and Compensation Committee. He has been a director of the Company since October
2014.
Charles E. Brock, age 54, is the owner of Brock Partnerships, an entrepreneurial advisory and investment firm. From
2013-2018, Mr. Brock served as President and Chief Executive Officer of Launch Tennessee, a public-private partnership, focused
on the development of high-growth companies in Tennessee. Previously, he served as the Executive Entrepreneur of The Company
Lab, a Chattanooga organization that serves as “the Front Door for Entrepreneurs” in Southeast Tennessee and one of Launch
Tennessee's regional accelerators. Mr. Brock was a founding partner of the Chattanooga Renaissance Fund, a locally based angel
investment group. Mr. Brock also serves as a director of Four Bridges Capital Advisors, a Chattanooga based boutique investment
bank as well as director of Pinnacle Financial Partners. Mr. Brock is a member of the Company’s Audit Committee and a member
of the Company's Governance Committee. He has been a director of the Company since 2012.
Daniel K. Frierson, age 77, is Chairman of the Board of the Company, a position he has held since 1987. He also has
been Chief Executive Officer of the Company since 1980 and a director of the Company since 1973. Mr. Frierson serves as a
director of Astec Industries, Inc., a manufacturer of specialized equipment for building and restoring the world’s infrastructure
headquartered in Chattanooga, Tennessee, and Printpack, Inc., a world leading Flexible Packaging Company, headquartered in
Atlanta, Georgia. Mr. Frierson is Chairman of the Company's Executive Committee.
D. Kennedy Frierson, Jr., age 52, is Chief Operating Officer of the Company, a position he has held since 2009. He has
been President of Masland Residential, General Manager of Dixie Home, President of Bretlin as well as various other positions in
operations, sales and senior management of the Company since 1998. He has been a director of the Company since 2012.
Lowry F. Kline, age 78, served as a director of Coca-Cola Enterprises, Inc. from April 2000 until April 2008, serving as
Chairman from April 2002 until April 2008, and as Vice Chairman from April 2000 to April 2003. Mr. Kline served as Chief Executive
Officer of Coca-Cola Enterprises, Inc. from April 2001 until January 2004 and from December 2005 to April 2006. Prior to becoming
Chief Executive Officer for Coca-Cola Enterprises, Inc., he held a number of positions with said company, including Chief
Administrative Officer, Executive Vice President and General Counsel. Mr. Kline is a former director of Jackson Furniture Industries,
Inc., headquartered in Cleveland, Tennessee and McKee Foods Corporation, headquartered in Collegedale, Tennessee. Mr. Kline
is Chairman of the Company’s Compensation Committee, a member of the Company’s Audit Committee and a member of the
Company’s Executive Committee. He has been a director of the Company since 2004.
Hilda S. Murray, age 64, is the Corporate Secretary and Executive Vice President of TPC Printing & Packaging, a specialty
packaging and printing company in Chattanooga, TN. She is also founder and President of Greener Planet, LLC, an environmental
compliance consultant to the packaging and printing industry. Ms. Murray has been a Director of the Company since 2012 and is
a member of the Company’s Audit Committee and is Chairman of the Company’s Nominating and Corporate Governance Committee.
Michael L. Owens, age 62, is Assistant Dean of Graduate Programs and Lecturer in the College of Business at the
University of Tennessee at Chattanooga, Chattanooga, Tennessee. Prior to joining the University of Tennessee at Chattanooga,
Mr. Owens was President of Coverdell & Company, Atlanta, Georgia. Prior to joining Coverdell, he was Senior Vice President and
Chief Operating Officer of Monumental Life Insurance Company. He has been a director of the Company since 2014 and is a
member of the Company's Audit Committee.
9
D. Kennedy Frierson, Jr., the Company’s Vice President and Chief Operating Officer, is the son of Daniel K. Frierson. No
other director, nominee, or executive officer of the Company has any family relationship, not more remote than first cousin, to any
other director, nominee, or executive officer.
Considerations with Respect to Nominees
In selecting the slate of nominees for 2019, the independent directors of the Board considered the familiarity of the
Company’s incumbent Directors with the business and prospects of the Company, developed as a result of their service on the
Company’s Board. The Board believes that such familiarity will be helpful in their service on the Company’s Board. With respect to
all nominees, the independent directors of the Board noted the particular qualifications, experience, attributes and skills possessed
by each nominee. These qualifications are reflected in the business experience listed under each nominee’s name, above. In order
of the list of nominees, such information may be summarized as follows: Mr. Blue is an experienced investment banker having been
Vice Chairman of Wells Fargo Securities and involved with capital formation, mergers, acquisitions and financing of various types
of ventures. Mr. Brock is experienced in establishing new businesses having been involved in the establishment of both Foxmark
Media and CapitalMark Bank and Trust. Mr. Daniel K. Frierson has served with the Company in several management and executive
capacities his entire adult life, and has been Chief Executive Officer since 1980 and a Board member since 1973. In such capacity,
he has been instrumental in planning and implementing the transition of the Company to its current position as a manufacturer of
residential and commercial floorcovering products. Additionally, Mr. Frierson has experience as a board member of other public
companies as well as significant trade group experience relevant to the Company’s business. He is well known and respected
throughout the industry. Mr. D. Kennedy Frierson, Jr. has served with the Company in various capacities since 1992. He is currently
Chief Operating Officer and has most recently led the Company’s Masland Residential business. Ms. Murray has a long history of
executive management experience at TPC Printing and Packaging, a provider to the specialty packaging business as well as
experience with environmental controls and footprint through Greener Planet. Mr. Kline has a long history of management and
board level experience with the world’s largest bottler and distributor of Coca Cola Products. Additionally, he has an extensive
background in business, corporate and securities law. Mr. Kline has served as a Director of the Company for several years, as
reflected above, and chairs the Company’s Compensation Committee. Mr. Owens has extensive business and management
experience, having served as President of Coverdell & Company prior to joining the University of Tennessee at Chattanooga. In
addition, he has auditing experience having been employed as a certified public accountant and is Chairman of the Company's
Audit Committee.
John W. Murrey did not stand for reelection in 2018 to the board upon reaching age 75, in accordance with the Company’s
age-eligibility requirements. Likewise, Mr. Hubbard, age 75, will not stand for reelection in 2019. The requirement has been waived
for Lowry Kline, who chairs the independent directors’ executive sessions, and for Daniel K. Frierson, the Company’s Chief Executive
Officer.
The Board of Directors recommends that the Company’s shareholders vote FOR electing the seven (7)
nominees for director.
10
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
Meetings of the Board of Directors
The Board of Directors of the Company met five (5) times in 2018.
Committees, Attendance, and Directors' Fees
The Company has a standing Executive Committee, Audit Committee, Compensation Committee, and Nominations and
Corporate Governance Committee. Copies of the Charters of the Company’s Audit Committee, Compensation Committee and
Nominations and Corporate Governance Committees may be found on the Company’s website at www.dixiegroup.com/Investor.
Members of the Executive Committee are Daniel K. Frierson, Chairman, William F. Blue, Jr. and Lowry F. Kline. Except
as otherwise limited by law or by resolution of the Board of Directors, the Executive Committee has and may exercise all of the
powers and authority of the Board of Directors for the management of the business and affairs of the Company, which power the
Executive Committee exercises between the meetings of the full Board of Directors. The Executive Committee met one (1) time in
2018.
Members of the Audit Committee are Michael L. Owens, Chairman, William F. Blue, Jr., Charles E. Brock, Walter W.
Hubbard, Lowry F. Kline, and Hilda S. Murray. All of the members of the Audit Committee are “independent directors” as that term
is defined by applicable regulations and rules of the National Association of Securities Dealers, Inc. (“NASD”). The Audit Committee
evaluates audit performance, handles relations with the Company’s independent auditors, and evaluates policies and procedures
relating to internal accounting functions and controls. The Audit Committee has the authority to engage the independent accountants
for the Company. The Audit Committee operates pursuant to an Audit Committee Charter adopted by the Board of Directors. The
Audit Committee has implemented pre-approval policies and procedures related to the provision of audit and non-audit services
performed by the independent auditors. Under these procedures, the Audit Committee approves the type of services to be provided
and the estimated fees related to those services.
The Audit Committee met four (4) times in 2018.
Members of the Compensation Committee are Lowry F. Kline, Chairman, William F. Blue, Jr., and Walter W. Hubbard. The
Compensation Committee administers the Company’s compensation plans, reviews and may establish the compensation of the
Company’s officers, and makes recommendations to the Board of Directors concerning such compensation and related matters.
The Compensation Committee acts pursuant to a written Charter adopted by the Board of Directors.
The Compensation Committee may request recommendations from the Company’s management concerning the types
and levels of compensation to be paid to the Company’s executive officers. Additionally, the Compensation Committee is authorized
to engage compensation consultants and may review and consider information and recommendations of compensation consultants
otherwise engaged by the Company or the Board of Directors in connection with the assessment, review and structuring of
compensation plans and compensation levels. For a description of the Compensation Committee actions with respect to
Compensation of Executive Officers in 2018, see Compensation Discussion and Analysis - Compensation for 2018.
Annually, the Compensation Committee reviews the performance of the Chief Executive Officer against goals and objectives
established by the Committee as part of the process of determining his compensation. The Compensation Committee reports to
the Board on its performance review.
The Compensation Committee met one (1) time in 2018.
The members of the Nominations and Corporate Governance Committee in 2018 were Hilda S. Murray, Chairman, Charles
E. Brock, and Michael L. Owens. The Nominations and Corporate Governance Committee develops and recommends for board
approval corporate governance guidelines.
The Nominations and Corporate Governance Committee’s Charter includes the duties of a nominating committee.
Nominees approved by a majority of the Committee are recommended to the full Board. In selecting and approving director nominees,
the Committee considers, among other factors, the existing composition of the Board and the mix of Board members appropriate
for the perceived needs of the Company. The Committee believes continuity in leadership and board tenure increase the Board’s
ability to exercise meaningful board oversight. Because qualified incumbent directors provide stockholders the benefit of continuity
of leadership and seasoned judgment gained through experience as a director of the Company, the Committee will generally give
priority as potential candidates to those incumbent directors interested in standing for re-election who have satisfied director
performance expectations, including regular attendance at, preparation for and meaningful participation in Board and committee
meetings.
11
The Nominations and Corporate Governance Committee also considers the following in selecting the proposed nominee
slate:
•
•
•
at all times at least a majority of directors must be “independent” in the opinion of the Board as determined in accordance
with relevant regulatory and NASD standards;
at all times at least three members of the Board must satisfy heightened standards of independence for Audit Committee
members; and
at all times the Board should have at least one member who satisfies the criteria to be designated by the Board as
an “audit committee financial expert”.
In selecting the current slate of director nominees, the Committee considered overall qualifications and the requirements
of the makeup of the Board of Directors rather than addressing separate topics such as diversity in its selection. The Board considered
the value of the incumbents’ familiarity with the Company and its business as well as the considerations outlined above under the
heading Considerations with Respect to Nominees.
The Nominations and Corporate Governance Committee met one (1) time in 2018.
Board Leadership Structure
Mr. Daniel K. Frierson currently serves as the Chairman of the Board and the Chief Executive Officer of the Company.
The positions of Chief Executive Officer and Chairman of the Board are combined. Executive sessions of the Board are chaired by
the chairman of the Compensation Committee, Lowry F. Kline, who, as noted above, has extensive management and Board
experience independent of his experience with the Company. Mr. Kline and the independent directors set their own agenda for
meetings in executive session and may consider any topic relevant to the Company and its business. The Company believes that
regular, periodic, meetings held in executive session, in the absence of management members or management directors, provide
the Board an adequate opportunity to review and address issues affecting management or the Company that require an independent
perspective. Additionally, the Company’s Audit Committee holds separate executive sessions with the Company’s independent
registered public accounts, internal auditor and management. The Audit Committee also sets its own agenda and may consider
any relevant topic in its executive sessions.
Director Attendance
During 2018, no director attended fewer than 75% of the total number of meetings of the Board of Directors and any
Committee of the Board of Directors on which he served. All directors are invited and encouraged to attend the annual meeting of
shareholders. In general, all directors attend the annual meeting of shareholders unless they are unable to do so due to unavoidable
commitments or intervening events.
Director Compensation
Directors who are employees of the Company do not receive any additional compensation for their services as members
of the Board of Directors. Non-employee directors receive an annual retainer of $36,000, payable one-half in cash and one-half in
value of Performance Units (subject to a $5.00 per share minimum value for determination of the number of performance units to
be issued). Performance Units are redeemable upon a director’s retirement for an equivalent number of shares of the Company’s
Common Stock. In addition to the annual retainer, directors who are not employees of the Company receive $1,500 for each Board
meeting attended and $1,000 for each committee meeting attended. Chairmen of the Audit and Compensation committees receive
an additional annual payment of $8,000 and the Chairmen of the Nominations and Corporate Governance Committee receives an
additional annual payment of $4,000. For an additional discussion of Director Compensation, see the tabular information below
under the heading, “Director Compensation.”
Independent Directors
The Board has determined that William F. Blue, Jr., Charles E. Brock, Walter W. Hubbard, Lowry F. Kline, Hilda S. Murray,
and Michael L. Owens are independent within the meaning of the standards for independence set forth in the Company’s corporate
governance guidelines, which are consistent with the applicable Securities and Exchange Commission (“SEC”) rules and NASDAQ
standards.
Executive Sessions of the Independent Directors
The Company’s independent directors meet in executive session at each regularly scheduled quarterly meeting of the
Board, with the chair of the Compensation Committee serving as chair of such executive sessions.
12
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, and regulations of the SEC thereunder, require the Company’s
executive officers and directors and persons who beneficially own more than 10% of the Company’s Common Stock, as well as
certain affiliates of such persons, to file initial reports of such ownership and monthly transaction reports covering any changes in
such ownership with the SEC and the National Association of Securities Dealers. Executive officers, directors and persons owning
more than 10% of the Company’s Common Stock are required by SEC regulations to furnish the Company with all such reports
they file. Based on its review of the copies of such reports received by it, the Company believes that, during fiscal year 2018, all
filing requirements applicable to its executive officers, directors, and owners of more than 10% of the Company's Common Stock
have been met.
Management Succession
Periodically, the Board reviews a succession plan, developed by management, addressing the policies and principles for
selecting successors to the Company’s executive officers, including the Company’s CEO. The succession plan includes an
assessment of the experience, performance and skills believed to be desirable for possible successors to the Company’s executive
officers.
Certain Transactions between the Company and Directors and Officers
The Company’s Nominations and Corporate Governance Committee has adopted written policies and procedures
concerning the review, approval or ratification of all transactions required to be disclosed under the SEC’s Regulation S-K, Rule
404. These policies and procedures cover all related party transactions required to be disclosed under the SEC’s rules as well as
all material conflict of interest transactions as defined by relevant state law and the rules and regulations of NASDAQ that are
applicable to the Company, and require that all such transactions be identified by management and disclosed to the committee for
review. If required and appropriate under the circumstances, the committee will consider such transactions for approval or ratification.
Full disclosure of the material terms of any such transaction must be made to the committee, including:
•
•
•
the parties to the transaction and their relationship to the Company, its directors and officers;
the terms of the transaction, including all proposed periodic payments; and
the direct or indirect interest of any related parties or any director, officer or associate in the transaction.
To be approved or ratified, the committee must find any such transaction to be fair to the Company. Prior approval of such
transactions must be obtained generally, if they are material to the Company. If such transactions are immaterial, such transactions
may be ratified and prior approval is not required. Ordinary employment transactions may be ratified.
Certain Related Party Transactions
During its fiscal year ended December 29, 2018, the Company purchased a portion of its product needs in the form of
fiber, yarn, and carpet from Engineered Floors, an entity substantially controlled by Robert E. Shaw, a shareholder of the Company.
Mr. Shaw has reported holding approximately 7.2% of the Company’s Common Stock, which, as of year-end, represented
approximately 3.5% of the total vote of all classes of the Company’s Common Stock. Engineered Floors is one of several suppliers
of such products to the Company. Total purchases from Engineered Floors for 2018 were approximately $8.2 million; or approximately
2.6% of the Company’s cost of goods sold in 2018. In accordance with the terms of its charter, the Compensation Committee
reviewed the Company’s supply relationship with Engineered Floors. The dollar value of Mr. Shaw’s interest in the transactions with
Engineered Floors is not known to the Company.
13
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors is composed of seven members, each of whom is an independent, non-
employee director. The Audit Committee operates under a written Audit Committee Charter adopted and approved by the Board of
Directors. The Charter is reviewed at least annually by the Committee. While the Committee has the responsibilities and powers
set forth in its written charter, it is not the duty of the Committee to plan or conduct audits. This function is conducted by the Company’s
management and its independent registered public accountants.
The Committee has reviewed and discussed with management the audited financial statements of the Company for the
year ended December 29, 2018 (the “Audited Financial Statements”). In addition, the Committee has discussed with Dixon Hughes
Goodman LLP all matters required by applicable auditing standards.
The Committee also has received the written report, disclosure and the letter from Dixon Hughes Goodman required by
PCAOB Rule 3526, “Communication with Audit Committees Concerning Independence”, and the Committee has reviewed,
evaluated, and discussed with that firm the written report and its independence from the Company. The Committee also has
discussed with management of the Company and Dixon Hughes Goodman LLP such other matters and received such assurances
from them as the Committee deemed appropriate.
Based on the foregoing review and discussions and relying thereon, the Committee has recommended to the Company’s
Board of Directors the inclusion of the Company’s Audited Financial Statements in the Company’s Annual Report on Form 10-K for
the year ended December 29, 2018, to be filed with the Securities and Exchange Commission.
THE AUDIT COMMITTEE
Michael L. Owens, Chairman
William F. Blue, Jr.
Charles E. Brock
Walter W. Hubbard
Lowry F. Kline
Hilda S. Murray
AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that Michael L. Owens, Chairman of the Audit Committee, is an audit committee financial expert
as defined by Item 407(d)(5) of Regulation S-K of the Securities Exchange Act of 1934, as amended, and is independent within the
meaning of Rule 10A-3(b)(l) of the Securities Exchange Act of 1934 of the Securities Exchange Act of 1934. For a brief list of Mr.
Owens’ relevant experience, please refer to Mr. Owens’ biographical information as set forth in the Election of Directors section of
this proxy statement. Additionally, the Board believes the remaining members of the Audit Committee would qualify as audit
committee financial experts, within the meaning of applicable rules, based on each individual's qualification and expertise.
14
COMPENSATION DISCUSSION AND ANALYSIS
The Compensation Committee sets compensation for the Company’s executive officers, and its decisions are reported to
and reviewed by the Board of Directors. The Compensation Committee currently consists of three independent directors chosen
annually by the Board.
Compensation of the Company’s executive officers is intended to be competitive with compensation offered by other
companies generally similar to the Company in size and lines of business. In determining what types and levels of compensation
to offer, the Committee may review relevant, publicly available data and, from time to time, it may receive advice and information
from professional compensation consultants.
The Elements of Executive Officer Compensation
Compensation for each of the Company’s executive officers consists generally of base salary, retirement plan benefits
and other customary employment benefits, as well as potential cash incentive awards and stock plan awards pursuant to an annual
incentive plan reviewed and adopted by the Committee at the beginning of each year. The annual incentive plan is customarily
structured so that a significant portion of each executive’s potential annual compensation may consist of equity awards, the award
value of which is tied to accomplishing both financial and non-financial goals and objectives.
Compensation for 2018.
Effective February 19, 2018, the Compensation Committee selected performance goals and a range of possible incentives
for the Company’s 2018 Incentive Compensation Plan (the “2018 Plan”). Pursuant to the 2018 Plan, each executive officer had the
opportunity to earn a Cash Incentive Award, a Primary Long-Term Incentive Award of restricted stock, and an award of restricted
stock denominated as “Career Shares.” The potential range of cash incentives and conditions to vesting of the restricted stock
awards are described below.
No incentive awards were awarded to the Company's executive officers for 2018. Incentive awards earned with respect
to results for 2017 were, however, paid in the first quarter of 2018, in accordance with past practice.
For 2018, each executive officer also received customary retirement plan benefits and other customary employment
benefits, as in prior years.
Salary for 2018. The base salaries for the executive officers were not adjusted during 2018. See the 2018 Summary
Compensation Table for a tabular presentation of the amount of salary and other compensation elements paid in proportion to total
compensation for each named executive officer.
Potential Incentive Awards for 2018. The CEO and all executive officers whose responsibilities primarily relate to
corporate level administration had the opportunity to earn a cash payment ranging from 15% to no more than 105% of such
executive’s base salary (from 45% to 105% for the Chief Executive Officer and Chief Operating Officer, and from 30% to 90% for
the Chief Financial Officer and from 15% to 75% for all other officers). Fifty percent of the amount of the potential award was based
on achievement of specified levels of operating income from continuing operations for the Company, as adjusted for unusual items,
30% of the amount was based on achievement of specified levels of operating income of the Company’s residential business
operations, as adjusted for unusual items, and 20% of the amount was based on achievement of specified levels of the Company’s
commercial business operating income, as adjusted for unusual items.
Executive officers whose responsibilities primarily relate to one of the Company’s business units, had the opportunity to
earn a cash payment ranging from 15% to no more than 75% of such participant’s base salary. Fifty five percent of the amount was
based on achievement of specified levels of their annual business unit operating income, as adjusted for unusual items, 30% was
based on the achievement of specified levels of the Company’s consolidated operating income, as adjusted for unusual items, and
15% was based on achievement of specified levels of the annual operating income of the Company’s other business units, as
adjusted for unusual items.
Primary Long-Term Incentive Share Awards and Career Shares Awards for 2018. The incentive plan provided for two
possible awards of restricted stock: Primary Long-Term Incentive Share Awards and Career Share Awards. Receipt of the Primary
Long-Term Incentive Share Awards was contingent on the Company’s achievement of minimum levels of adjusted operating income
and, in the case of Career Share Awards was contingent on the Company's having a profitable operating income, as adjusted.
The Primary Long-Term Incentive Share Award was designed as a possible award of restricted shares, in value equal to
no more than 35% of the executive’s base salary as of the beginning of 2018 plus any cash incentive award paid for such year.
Any Primary Long-Term Incentive Share Awards, if earned, vest ratably over three years.
Career Shares were designed as a possible award of restricted stock valued at 20% of each executive officer’s base salary
as of the beginning of the year, excluding the Company’s Chief Operating Officer and Chief Financial Officer. The level of career
share awards was set at 35% and 30%, respectively, of the Chief Operating Officer’s and Chief Financial Officer’s base salary for
2018.
15
In accordance with past practice, any such award, if earned, would be granted in 2019. For participants age 61 or older,
the Career Share Awards vest ratably over two years from the date of the grant. For the participants age 60 or younger, shares
vest ratably over five years from the date of grant after the participant reaches age 61.
Additionally, all Share Awards are subject to vesting or forfeiture under certain conditions as follows: death, disability or
a change in control will result in immediate vesting of all Share Awards; termination without cause will also result in immediate
vesting of all Career Share Awards and in immediate vesting of that portion of Long-Term Incentive Share Awards that have been
expensed; voluntary termination of employment prior to retirement, or termination for cause will result in forfeiture of all unvested
awards; to the extent that the Company has recognized compensation expense related to the shares subject to the awards, such
amounts vest at retirement age and are paid out by March 15th of the subsequent year.
All awards of restricted stock are subject to a $5.00 minimum price per share when determining the number of shares
awarded. The Compensation Committee retained the discretion to reduce any award by up to 30% of the amount otherwise earned
based on the participant’s failure to achieve individual performance goals set by the committee.
No 2018 Incentive Awards. No awards were granted under the 2018 Incentive Compensation Plan.
Incentive Compensation Applicable to 2019. Following year-end, the Committee adopted an incentive plan for 2019
providing for possible cash incentive awards and restricted stock awards in the form of Long-Term Incentive Share Awards and
Career Share awards, as in prior years, and similar in structure to the annual plan adopted for 2018. Any such awards, if earned,
will be paid, in the case of the cash award, or granted, in the case of the restricted stock awards, in March 2020.
Retirement Plans and Other Benefits. The Company’s compensation for its executive officers also includes the
opportunity to participate in two retirement plans, one qualified and one non-qualified for federal tax purposes, and certain health
insurance, life insurance, relocation allowances, and other benefits. Such benefits are designed to be similar to the benefits available
to other exempt, salaried associates of the Company, and to be comparable to and competitive with benefits offered by businesses
with which the Company competes for executive talent.
Executive officers may elect to contribute a limited amount of their compensation to the qualified plan and make deferrals
into the non-qualified plan (up to 90% of total compensation). Although the plans permit the Company to make discretionary
contributions in an aggregate amount equal to up to 3% of the executive officer’s cash compensation, for 2018 the Company made
a contribution of 1% to the qualified plan, while no Company contributions were made to the non-qualified plan.
In 2015, the Company's Chief Executive Officer, Daniel K. Frierson, was awarded a 100,000 share retention grant with
both a continued service condition and a performance condition. The performance condition was not met at the year end of 2018,
and in accordance with the terms of the award, it was forfeited.
Compensation Considerations for 2018 and 2019. The tax effect of possible forms of compensation on the Company
and on the executive officers is a factor considered in determining types of compensation to be awarded. Similarly, the accounting
treatment accorded various types of compensation may be an important factor used to determine the form of compensation. The
deductibility, for tax purposes, of compensation paid to named executive officers is subject to limits imposed by Section 162 of the
Internal Revenue Code. Annual compensation exceeding $1 million is non-deductible. Accordingly, all compensation in excess of
$1 million paid to any of the Company's named executive officers (and the Chief Financial Officer) in any given year will be non-
deductible.
The Company held a “Say on Pay” vote at its annual meeting in 2018. At that meeting, in excess of 98% of the votes were
cast “For” approval of our executive compensation as described in the Proxy Statement for that meeting. The Committee intends
to consider these results as part of its ongoing review of executive compensation.
Termination Benefits. Upon a Participant's reaching retirement age (as defined in the plan), all Long-Term Incentive Plan
and Career Share restricted stock awards vest to the extent such awards have been expensed in the Company’s financial statements.
As of year-end, Daniel K. Frierson, and Mr. E. David Hobbs were the only Named Executive Officers eligible for retirement in
accordance with the terms of the restricted stock awards. If Mr. Frierson had retired at year end, the number of shares subject to
such awards that would have vested and the value of such shares would have been 22,359 shares and $15,652. If Mr. Hobbs had
retired at year end, the number of shares subject to such awards that would have vested and the value of such shares would have
been 7,664 shares and $5,365. For purposes of valuing the foregoing awards, the Company used the year-end market value of
the Company’s Common Stock, which was $0.70/share.
16
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis, set forth above,
with management.
Based on our review and the discussions we held with management, we have recommended to the Board of Directors
that the Compensation Discussion and Analysis be included in the Company’s Proxy Materials.
Respectfully submitted,
Lowry F. Kline, Chairman
William F. Blue, Jr.
Walter W. Hubbard
17
EXECUTIVE COMPENSATION INFORMATION
The following table sets forth information as to all compensation earned during the fiscal years ended December 31, 2016,
December 30, 2017 and December 29, 2018 for (i) the Company's Chief Executive Officer; and (ii) the Company's Chief Financial
Officer, (iii) the three other most highly compensated executive officers who served as such during the fiscal year ended December
29, 2018 (the “Named Executive Officers”). For a more complete discussion of the elements of executive compensation, this
information should be read in conjunction with the other tabular information presented in the balance of this section.
Summary Compensation Table
Name and Principal
Position (a)
Year
(b)
Salary ($)
(c)(1)
Bonus ($)
(d)(2)
Stock
Awards ($)
(e)(3)
Option
Awards ($)
(f)
Nonqualified
Compensation
Earnings ($)
(h)(4)
All Other
Compensation ($)
(i)(5)
Total ($)
(j)
Daniel K Frierson
Chief Executive Officer
2018
2017
2016
625,000
257,656
203,210
625,000
625,000
—
—
109,000
—
55,748
D. Kennedy Frierson, Jr.
Chief Operating Officer
Jon A. Faulkner, Chief
Financial Officer
T.M. Nuckols, Vice
President, President,
Dixie Residential
E. David Hobbs, Vice
President, President,
Dixie Commercial
2018
320,000
125,975
130,026
2017
320,000
2016
320,000
—
—
97,664
—
34,842
—
23,366
2018
270,000
84,351
98,840
2017
270,000
2016
270,000
—
—
2018
275,000
123,750
2017
248,958
2016
—
—
—
70,632
90,980
70,000
—
2018
250,000
55,000
68,774
2017
247,500
2016
203,437
—
—
—
23,366
16,786
—
—
—
—
—
—
—
23,366
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,529
5,087
5,479
5,307
4,874
5,479
5,163
4,602
5,389
4,647
2,172
—
2,960
3,879
3,705
1,091,395
685,835
739,479
581,308
359,716
423,143
458,354
297,968
346,021
494,377
344,496
—
376,734
274,745
223,928
(1) Includes all amounts deferred at the election of the Named Executive Officer.
(2) Cash bonuses are shown in the year granted, not earned, because employment through year-end is a condition of earning
the award. Therefore, the bonus shown in the column for 2018 relates to performance achieved in 2017.
(3) Amounts reflect the aggregate grant date fair value computed in accordance with FASB ASC Topic 718 for the year
presented of stock awards to the Named Executive Officers. Continued employment is a condition of the Plan so the grant
date is in the year after the year for which the performance was earned.
(4) The Dixie Group does not provide above-market or preferential earnings on deferred compensation. The Named Executive
Officers did not participate in any defined benefit or actuarial pension plans for the periods presented.
(5) The following table is a summary and quantification of all amounts included in column (i).
18
All Other Compensation
Name (a)
Year (b)
Registrant
Contributions to
Defined
Contributions Plans
($)(c)
Insurance
Premiums ($)(d)
Other ($)(f) (1&2)
Total Perquisites
and Other
Benefits($)(g)
Daniel K. Frierson
D. Kennedy Frierson, Jr.
Jon A. Faulkner
T.M. Nuckols
E. David Hobbs
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2,650
2,208
2,600
2,650
2,208
2,600
2,650
2,208
2,600
2,475
1,115
2,034
1,925
2,879
2,879
2,879
2,657
2,666
2,879
2,513
2,394
2,789
2,172
2,172
1,845
1,845
1,780
5,529
5,087
5,479
5,307
4,874
5,479
5,163
4,602
5,389
4,647
2,172
—
2,960
3,879
3,705
(1) No named Executive Officer received any tax reimbursement, discounted securities purchases, or payment or accrual on
termination plans for the period presented.
19
Grants of Plan-Based Awards
Estimated Future Payouts Under Equity Incentive Plan Awards (1)
Name (a)
Daniel K. Frierson
D. Kennedy Frierson, Jr.
Jon A. Faulkner
T.M. Nuckols
E. David Hobbs
Securities
Underlying
Options (#)
(j)
Base Price
of Option
($/#) (k)
Shares of
Stock or
Units (#)
(i)
Grant
Date Fair
Value of
Stock and
Option
Awards
($)
25,000
$70,000
47,575
$133,210
22,400
24,038
$62,720
$67,306
16,200
19,100
$45,360
$53,480
11,000
21,493
$30,800
$60,180
9,200
$25,760
15,362
$43,014
Grant
Date (b)
3/12/2018
3/12/2018
3/12/2018
3/12/2018
3/12/2018
3/12/2018
3/12/2018
3/12/2018
3/12/2018
3/12/2018
(1) The amount set forth in the table reflects the grant date fair value of the award determined in accordance with FASB ASC
Topic 718.
No awards of restricted stock made to the Named Executive Officers under the 2018 Incentive Compensation Plan were granted
in 2019, in accordance with the terms of the plan.
20
Name (a)
Daniel K. Frierson
D. Kennedy Frierson, Jr.
Jon A. Faulkner
T.M. Nuckols
E. David Hobbs
Option Exercises and Stock Vested
Option Awards
Stock Awards
Number of Shares
Acquired on
Exercise (#)(b)
Value Realized on
Exercise ($)(c) (1)
Number of Shares
Acquired on
Vesting (#)(d)
Value Realized on
Vesting ($)(e)(2)
—
—
—
—
—
—
—
—
—
—
12,500
35,500
—
—
—
—
—
—
1,925
5,467
(1) The value realized is calculated as average of the high and low price on the relevant exercise date minus the option price
times the number of acquired shares.
(2) The value realized is calculated as the average of the high and low price on the relevant vesting date times the number of
vested shares.
The following table sets forth information concerning the Company’s Non-Qualified Defined Contribution Plan for each of the Named
Executive Officers for the fiscal year ended December 29, 2018. The Company does not maintain any other non-tax qualified
deferred compensation plans. There were two withdrawals or distributions by the Named Executive Officers in the fiscal year ended
2018.
Name (a)
Daniel K. Frierson
D. Kennedy Frierson, Jr.
Jon A. Faulkner
T.M. Nuckols
E. David Hobbs
Nonqualified Deferred Compensation
Executive
Contribution
in Last FY ($)
(b)(1)(2)
Registrant
Contribution
in Last FY ($)
(c)(1)(2)
Aggregate
Earnings in
Last FY ($)
(d)(1)(2)(3)
Aggregate
Withdrawals/
Distributions
($)(e)
Aggregate
Balance at
Last FYE ($)
(f)
82,781
50,694
67,481
—
41,600
—
—
—
—
—
(215,307)
(1,619,451)
966,666
(43,732)
—
631,973
(151,447)
(98,810)
1,306,327
—
(10,534)
—
—
—
125,548
(1) For each of the named executive officers, the entire amount reported in this column (b) is included within the amount report
in column (c) of the 2018 Summary Compensation Table.
(2) None of the amounts reported in this column (d) are reported in column (h) of the 2018 Summary Compensation Table
because the Company does not pay guaranteed, above-market or preferential earnings on deferred compensation.
(3) Amounts reported in this column (f) for each named executive officer include amounts previously reported in the Company's
Summary Compensation Table last year when earned if that officer's compensation was required to be disclosed in the
previous year. This total reflects the cumulative value of each named executive officer's deferrals and investment experience.
21
The following table sets forth information concerning outstanding equity awards for each of the Named Executive Officers at fiscal
year-end.
Outstanding Equity Awards at Fiscal Year-End
Option Awards
Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Option (#)(d)
Option
Exercise
Price ($)
(e)
Option
Expiration
Date (f)
Stock Awards
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)(i)
Equity
Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($)(j)
—
—
—
5.00
4.59
5.00
4.59
5.00
4.17
11/4/2019
72,575
50,803
5/30/2022
11/4/2019
133,330
93,331
5/30/2022
11/4/2019
106,843
74,790
5/30/2022
Name (a)
Exercisable(
#)(b)
Unexercisable
(#)(c)
Daniel K. Frierson
50,000
D. Kennedy
Frierson, Jr.
22,000
Jon A. Faulkner
11,000
—
40,000
—
25,000
—
15,000
T.M. Nuckols
—
15,000
—
4.17
5/30/2022
52,493
36,745
E. David Hobbs
—
15,000
—
4.17
5/30/2022
24,562
17,193
(1)
The market value of the restricted stock set forth in the table has been calculated by multiplying the closing price of the
Company’s Common Stock at year-end ($0.70/share) by the number of shares of unvested restricted stock subject to the
award.
22
DIRECTOR COMPENSATION
Name (a)
Fees earned or
paid in cash ($)
(b)(1)
Stock Awards ($)
(c)(2)
Option Awards ($)
(d)(3)
All Other
Compensation ($)
(e)(4)
William F. Blue, Jr.
29,000
11,520
Charles E. Brock
30,500
11,520
Walter W. Hubbard
30,500
11,520
Lowry F. Kline
39,500
11,520
Hilda S. Murray
32,000
11,520
Michael L. Owens
37,500
11,520
—
—
—
—
—
—
—
—
—
—
—
—
Total ($)
40,520
42,020
42,020
51,020
43,520
49,020
(1) Directors who are employees of the Company do not receive any additional compensation for their services as members
of the Board of Directors. Non-employee directors receive an annual retainer of $36,000, payable $18,000 in cash and
the remainder in Performance Units (subject, for payments made in 2016, 2017 and 2018, to a $5.00 minimum value per
unit). For 2018 the value awarded was $11,520 in Performance Units determined as of the date of grant. In addition to the
annual retainer, directors who are not employees of the Company received $1,500 for each Board meeting attended and
$1,000 for each committee meeting attended. Chairmen of the Audit and Compensation committees receive an additional
annual payment of $8,000 and the Chairmen of the Nominations and Corporate Governance Committee receives an
additional annual payment of $4,000. Also, directors receive reimbursement of the expenses they incur in attending all
board and committee meetings.
(2) The value presented is the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. The value
of the Performance Units awarded to each non-employee director under the Company's 2018 Incentive Compensation
Plan was $11,520.
At fiscal year-end, each non-employee director was issued the following outstanding equity awards, with respect to service for 2018:
Name (a)
William F. Blue, Jr.
Charles E. Brock
Walter W. Hubbard
Lowry F. Kline
Hilda S. Murray
Michael L. Owens
Performance Units
(#)(b)(1)
3,600
3,600
3,600
3,600
3,600
3,600
(1) The performance units represent an equal number of shares of the Company's Common Stock. At year-end, the aggregate
value of such stock was $15,120, determined by multiplying the number of performance units issued by the year-end per
share market value of the Company's Common Stock ($0.70/share).
23
PROPOSAL TWO
ADVISORY VOTE ON EXECUTIVE COMPENSATION
As required under recent amendments to the Securities Exchange Act of 1934, our stockholders may cast an advisory
vote on the compensation of our Named Executive Officers, as described in this proxy statement.
Our executive compensation programs are designed to attract, motivate, and retain our Named Executive Officers, who
are critical to our success. Please read the Compensation Discussion and Analysis for additional details about our executive
compensation programs, including information about the fiscal 2018 compensation of our Named Executive Officers.
We are asking our Shareholders to indicate their approval of our Named Executive Officer compensation as described in
this proxy statement. This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders the opportunity to express
their views on our Named Executive Officers’ compensation. This vote is not intended to address any specific item of compensation,
but rather the overall compensation of our Named Executive Officers and the philosophy, policies and practices described in this
proxy statement.
We recommend that stockholders vote, on an advisory basis, “FOR” the following resolution:
“RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the Company’s
named executive officers, as discussed and disclosed in the Compensation Discussion and Analysis, the executive
compensation tables and related narrative executive compensation disclosure in this proxy statement.”
The above resolution will be deemed to be approved if it receives the affirmative vote of a majority of the total votes cast
on Proposal Two at the annual meeting. Abstentions and broker non-votes are not considered to be votes cast and, accordingly,
will have no effect on the outcome of the vote. As this vote is an advisory vote, the outcome is not binding on us with respect to
future executive compensation decisions, including those relating to our named executive officers. Our Board of Directors and our
Compensation Committee, however, value the opinions of our stockholders, and to the extent there is any significant vote against
the Named Executive Officer compensation as disclosed in this proxy statement, the Compensation Committee will consider our
stockholders’ concerns and will evaluate whether any actions are necessary to address those concerns.
The Board of Directors recommends that the Company’s shareholders vote FOR the approval of Proposal Two.
ADVISORY VOTE ON THE FREQUENCY OF FUTURE ADVISORY SAY-ON-PAY VOTES
PROPOSAL THREE
Our stockholders also have the opportunity to indicate how frequently we should seek an advisory vote on the compensation
of our named executive officers. By voting on Proposal Three, stockholders may indicate whether they would prefer an advisory
vote on named executive officer compensation once every one, two, or three years. You will have the opportunity to vote on this
issue at least once every six years.
Our Board of Directors has determined that an advisory vote on executive compensation that occurs every year is the
most appropriate alternative for our company. Accordingly, our Board of Directors recommends that you vote for a one-year interval
for the advisory vote on executive compensation.
You may cast your vote on your preferred voting frequency by choosing the option of one year, two years, or three years.
You may also abstain from voting. The option that receives the highest number of advisory votes by shareholders will be the
frequency for the advisory vote on executive compensation deemed to have been selected by stockholders. Abstentions and broker
non-votes will have no effect on the outcome of the vote.
As the vote is advisory and not binding, the Board of Directors may decide that it is in the best interests of the Company
and its shareholders to hold an advisory vote on executive compensation more or less frequently than the option selected by our
shareholders (but not less often than once every three years). However, we value the opinions of our shareholders and will consider
the outcome of the advisory vote in deciding how often to hold the advisory vote on executive compensation in future years.
The Board of Directors recommends a vote FOR the frequency of the say-on-pay advisory vote to be "one year".
24
PROPOSAL FOUR
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS FOR 2019
The firm of Dixon Hughes Goodman LLP served as independent registered public accountants for the Company for fiscal
year 2018. Subject to ratification of its decision by the Company’s shareholders, the Company has selected the firm of Dixon Hughes
Goodman LLP to serve as its independent registered public accountants for its 2019 fiscal year. A representative of Dixon Hughes
Goodman LLP is expected to be present at the Annual Meeting and will have the opportunity to make a statement if he so desires
and to respond to appropriate questions from shareholders.
The Board of Directors recommends that that the Company’s shareholders vote FOR Proposal Four.
In the event that the Company’s shareholders do not ratify the selection of Dixon Hughes Goodman LLP as independent
registered public accountants for fiscal 2019, the Board of Directors will consider other alternatives, including appointment of another
firm to serve as independent registered public accountants for fiscal 2019.
25
The following table sets forth the fees paid to Dixon Hughes Goodman LLP for services provided during fiscal year 2017
and 2018:
AUDIT FEES DISCUSSION
Audit fees paid to Dixon Hughes Goodman LLP (1)
Audit related fees (2)
Tax fees (3)
All other fees (4)
Total Audit Fees
2018
2017
610,026 $
3,354 $
45,495 $
5,716 $
664,591 $
652,536
23,612
174,975
—
851,123
$
$
$
$
$
(1) Represents fees for professional services paid to Dixon Hughes Goodman LLP provided in connection with the audit of
the Company’s annual financial statements, review of the Company’s quarterly financial statements, review of other
SEC filings and technical accounting issues during 2017 and 2018.
(2) Represents fees for discussions of recent accounting pronouncements and review of SEC comment letter.
(3) Represents fees for tax compliance and tax planning services.
(4) Represents fees related to a sale leaseback transaction.
It is the policy of the Audit Committee to pre-approve all services provided by its independent registered public accountants.
In addition, the Audit Committee has granted the Chairman of the Audit Committee the power to pre-approve any services that the
Committee, as a whole, could approve. None of the fees were approved by the Audit Committee pursuant to the de minimis exception
of Reg. S-X T Rule 2-01(c)(7)(i)(C).
SHAREHOLDER PROPOSALS
FOR INCLUSION IN NEXT YEAR'S PROXY STATEMENT
In the event any shareholder wishes to present a proposal at the 2020 Annual Meeting of Shareholders, such proposal
must be received by the Company on or before November 15, 2019, to be considered for inclusion in the Company's proxy materials.
All shareholder proposals should be addressed to the Company at its principal executive offices, P.O. Box 2007, Dalton, Georgia
30722-2007, Attention: Corporate Secretary, and must comply with the rules and regulations of the Securities and Exchange
Commission.
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Shareholders who wish to communicate with members of the Board, including the independent directors individually or
as a group, may send correspondence to them in care of the Corporate Secretary at the Company’s corporate headquarters, P.O.
Box 2007, Dalton, Georgia 30722-2007.
ADDITIONAL INFORMATION
The entire cost of soliciting proxies will be borne by the Company. In addition to solicitation of proxies by mail, proxies may
be solicited by the Company’s directors, officers, and other employees by personal interview, telephone, and telegram. The persons
making such solicitations will receive no additional compensation for such services. The Company also requests that brokerage
houses and other custodians, nominees, and fiduciaries forward solicitation materials to the beneficial owners of the shares of
Common Stock held of record by such persons and will pay such brokers and other fiduciaries all of their reasonable out-of-pocket
expenses incurred in connection therewith.
OTHER MATTERS
As of the date of this Proxy Material, the Board does not intend to present, and has not been informed that any other
person intends to present, any matter for action at the Annual Meeting other than those specifically referred to herein. If other
matters should properly come before the Annual Meeting, it is intended that the holders of the proxies will vote in accordance with
their best judgment.
Dated: March 22, 2019
The Dixie Group, Inc.
Daniel K. Frierson
Chairman of the Board
26
DIR ECTOR S
OFFICERS
Daniel K. Frierson
Chairman of the Board and
Chief Executive Officer
D. Kennedy Frierson, Jr.
Vice President and
Chief Operating Officer
Jon A. Faulkner
Vice President and
Chief Financial Officer
W. Derek Davis
Corporate Secretary
and Vice President,
Human Resources
T.M. Nuckols
Vice President and President,
Dixie Residential
E. David Hobbs
Vice President and President,
TDG Commercial
Daniel K. Frierson (1)
Chairman of the Board and
Chief Executive Officer,
The Dixie Group, Inc.
William F. Blue, Jr. (1) (2) (4)
Chairman of the Board,
The Hopeway Foundation
Charles E. Brock (3) (4)
President and
Chief Executive Officer,
Launch Tennessee
D. Kennedy Frierson, Jr.
Chief Operating Officer,
The Dixie Group, Inc.
Walter W. Hubbard (2) (4)
Retired President and
Chief Executive Officer,
Honeywell Nylon, Inc.
Lowry F. Kline (1) (2) (4)
Retired Chairman,
Coca-Cola Enterprises, Inc.
Hilda S. Murray (3) (4)
Corporate Secretary and
Executive Vice President,
TPC Printing & Packaging
Michael L. Owens (3) (4)
Assistant Dean of Graduate
Programs & Lecturer,
College of Business,
University of Tennessee
at Chattanooga
(1) Member of Executive Committee
(2) Member of Compensation Committee
(3) Member of Nomination and Corporate
Governance Committee
(4) Member of Audit Committee
CORPORATE
INFORMATION
Corporate Office
The Dixie Group, Inc.
475 Reed Road
Dalton, Georgia 30720
(706) 876-5800
Independent Registered
Public Accountants
Dixon Hughes Goodman LLP
191 Peachtree Street, NE
Suite 2700
Atlanta, Georgia 30303
Legal Counsel
Miller & Martin PLLC
1200 Volunteer Building
832 Georgia Avenue
Chattanooga, Tennessee 37402
Investor Contact
Jon A. Faulkner
Vice President and
Chief Financial Officer
The Dixie Group, Inc.
475 Reed Road
Dalton, Georgia 30720
(706) 876-5814
Form 10-K and Other
Information
A copy of the Company’s
Annual Report on Form 10-K
for the fiscal year ended
December 29, 2018, is
included with this report.
Annual Meeting
The Annual Meeting of
Shareholders of The Dixie
Group, Inc. will be held at
8:00 A.M. EDT on May 1, 2019,
at the Corporate Office in
Dalton, Georgia.
Stock Listing
The Dixie Group’s Common
Stock is listed on the NASDAQ
Global Market under the
symbol DXYN.
Stock Transfer Agent
Computershare Investor
Services, LLC
Post Office Box 30170
College Station, Texas 77845
The Dixie Group maintains
a website,
www.thedixiegroup.com,
where additional information
about the Company may
be obtained.
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