The Dixie Group(DXYN) - 2020 Q4 - Annual Report

Part I Business The Dixie Group specializes in high-end residential and commercial floorcovering, expanding into hard surfaces like LVF, with residential sales at 79% in 2020 and declining customer concentration - The company's core business is marketing, manufacturing, and selling high-end residential and commercial floorcovering products under brands including Fabrica, Masland, Dixie Home, and AtlasMasland[18] - In response to a market shift, the company has expanded into hard surface flooring, launching Luxury Vinyl Flooring (LVF) products like TRUCOR™ and Calibré, and an engineered wood program[19] Sales by End-User Market | Market Segment | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Residential floorcovering products | 79% | 72% | 72% | | Commercial floorcovering products | 21% | 28% | 28% | - A single mass merchant customer accounted for 7% of net sales in 2020, a decrease from 11% in 2019 and 13% in 2018, indicating a declining concentration with this customer[36] - The company relies heavily on nylon yarn as its primary raw material and purchases a significant portion from a single supplier, posing a potential supply chain risk[40] Risk Factors The company faces significant risks from the COVID-19 pandemic, economic downturns, high indebtedness, intense competition, and reliance on a single raw material supplier - The COVID-19 pandemic has had and is expected to continue to have an adverse impact on the company's financial condition and results of operations due to potential shutdowns, decreased demand, and supply chain disruptions[48][49] - The business is highly sensitive to general economic conditions, with declines in residential or commercial construction, remodeling, and consumer spending posing a material risk[50][51][52] - A significant amount of indebtedness relative to equity could negatively impact the company's ability to fund operations and satisfy debt obligations[56] - The company faces intense competition from larger manufacturers and the accelerated growth of hard surface flooring alternatives, which could decrease demand and profitability[61] - A significant portion of nylon yarn, a principal raw material, is purchased from one supplier, and an unanticipated termination or interruption of this supply could have a material adverse effect on operations[67][68] Properties The Dixie Group operates approximately 2.8 million square feet of administrative, manufacturing, and distribution facilities, with most owned properties mortgaged to secure credit Facility Space Overview | Type of Operation | Approximate Square Feet | | :--- | :--- | | Administrative | 94,400 | | Manufacturing and Distribution | 2,679,300 | | TOTAL | 2,773,700 | - The company's primary facilities are located in Atmore, AL; Roanoke, AL; Saraland, AL; Santa Ana, CA; and various cities in Georgia including Calhoun and Dalton[86] - Substantially all owned properties are subject to mortgages which secure outstanding borrowings under the company's senior credit facilities[87] Legal Proceedings The company is a defendant in four lawsuits regarding alleged PFC discharge from carpet manufacturing, seeking monetary damages and injunctive relief, with potential loss currently unestimable - The company is a defendant in four lawsuits related to the alleged discharge of chemical products, including PFCs like PFOA and PFOS, into water systems[88] - The lawsuits were filed by The Water Works and Sewer Boards of Gadsden and Centre, Alabama; the City of Rome, Georgia; and a class action on behalf of residents of Floyd County, Georgia[90][91][92] - Plaintiffs seek monetary damages for water filtration systems and other costs, as well as injunctive relief; the company intends to defend the matters vigorously and cannot estimate potential exposure at this time[90][91][92] Executive Officers of the Registrant This section lists the executive officers of The Dixie Group as of February 25, 2021, including Daniel K. Frierson (Chairman & CEO) and Allen L. Danzey (CFO) Key Executive Officers (as of Feb 25, 2021) | Name | Age | Position | | :--- | :--- | :--- | | Daniel K. Frierson | 79 | Chairman of the Board, and Chief Executive Officer | | D. Kennedy Frierson, Jr. | 53 | Vice President and Chief Operating Officer | | Allen L. Danzey | 51 | Chief Financial Officer | | Thomas M. Nuckols | 53 | Vice President and President, Dixie Residential | | W. Derek Davis | 70 | Vice President, Human Resources | Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's Common Stock trades on NASDAQ (DXYN); no dividends were paid in 2020 or 2019, and 375,938 shares were repurchased in Q4 2020 for $1.88 per share - The company's Common Stock is traded on the NASDAQ Global Market under the symbol DXYN[100] - No dividends were paid in 2020 or 2019, and payment is restricted under the company's revolving credit facility[103] - In Q4 2020, the company repurchased 375,938 shares of its common stock at an average price of $1.88 per share as part of a newly approved $2.9 million repurchase plan[102] Selected Financial Data This section provides a five-year financial summary (2016-2020), showing declining net sales from $397.5 million to $315.9 million and losses in most years, except 2019 due to a facility sale gain Five-Year Selected Financial Data (dollars in thousands) | Fiscal Year | Net sales | Gross profit | Operating income (loss) | Income (loss) from continuing operations | Total assets | Long-term debt | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | 2020 | $315,939 | $76,456 | $(2,919) | $(9,088) | $232,868 | $72,041 | | 2019 | $374,582 | $86,205 | $21,349 | $15,619 | $247,659 | $81,667 | | 2018 | $405,033 | $86,991 | $(15,816) | $(21,479) | $252,778 | $120,251 | | 2017 | $412,462 | $101,213 | $3,947 | $(9,322) | $283,907 | $123,446 | | 2016 | $397,453 | $95,425 | $(3,436) | $(5,207) | $268,987 | $98,256 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 15.7% decrease in 2020 net sales due to COVID-19, improved gross margin from cost cuts, the $25.1 million gain on a 2019 facility sale, and strengthened liquidity via new credit facilities COVID-19 Pandemic Impact The COVID-19 pandemic significantly reduced sales in Q2 2020, prompting cost cuts and CARES Act utilization, with residential sales recovering while commercial markets remained weak - The company experienced reduced sales volume beginning in March 2020 due to the pandemic, with a gradual and consistent improvement from late April through year-end[117] - Cost reduction measures included cutting nonessential spending, reducing capital expenditures, rotating layoffs, and temporary salary reductions[117] - The company deferred $1.8 million in payroll taxes and recognized a $2.1 million employee retention credit under the CARES Act[118] Results of Operations In 2020, net sales decreased 15.7% to $315.9 million, resulting in a $2.9 million operating loss, contrasting with 2019's $21.3 million operating income boosted by a $25.1 million facility sale gain Comparison of Operations: 2020 vs. 2019 (dollars in thousands) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $315,939 | $374,582 | (15.7)% | | Gross profit | $76,456 | $86,205 | (11.3)% | | Gross Margin | 24.2% | 23.0% | +1.2 p.p. | | Operating income (loss) | $(2,919) | $21,349 | (113.7)% | | Net income (loss) | $(9,208) | $15,271 | (160.3)% | - The 2020 operating loss was driven by lower sales volume and restructuring expenses, partially offset by higher gross profit margins from cost reduction plans[127] - The 2019 operating income of $21.3 million was heavily impacted by a $25.1 million gain on the sale of the company's Santa Ana, California facility[125][136][140] Liquidity and Capital Resources In 2020, cash from operations was $13.5 million, driven by inventory reduction; liquidity was enhanced in Q4 with a new $75 million revolving facility and $25 million in term loans, resulting in $43.3 million availability - Cash provided by operations was $13.5 million in 2020, driven by a $10.1 million reduction in inventories[145] - In Q4 2020, the company replaced its senior credit facility with a new $75 million Senior Secured Revolving Credit Facility with Fifth Third Bank, maturing in 2025[148][151] - The company also entered into two USDA Guaranteed term loans for a combined principal of $25 million[148][155][156] - As of December 26, 2020, unused borrowing availability under the new revolving credit facility was $43.3 million[148][153] Critical Accounting Policies Critical accounting policies involve significant judgment in revenue recognition, LIFO inventory valuation, goodwill impairment, self-insured accruals, and deferred tax asset recoverability, leading to a valuation allowance - Key policies requiring significant judgment include revenue recognition, inventory valuation (LIFO), goodwill impairment, self-insured accruals, income taxes, and loss contingencies[178][179][183][184][185][186] - The company maintains a valuation allowance of $15.4 million against its deferred tax assets at year-end 2020 due to uncertainty about their future recoverability[185] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate volatility, with 68% of total debt at floating rates, where a 100 basis point change impacts annual pre-tax income by $395,000 - The company's main market risk is interest rate volatility on its floating-rate debt[187] - At year-end 2020, $53.3 million, or approximately 68% of total debt, was subject to floating interest rates[188] - A 100 basis point (1%) fluctuation in variable interest rates would result in an annual pre-tax impact of approximately $395,000[188] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2020, including the auditor's report, balance sheets, income statements, cash flows, and comprehensive notes Report of Independent Registered Public Accounting Firm The independent auditor issued an unqualified opinion on the financial statements, identifying the LIFO inventory reserve as a critical audit matter due to calculation complexity - The auditor expressed an unqualified opinion on the financial statements[230] - The LIFO (last-in, first-out) inventory reserve was identified as a critical audit matter due to its complexity and the judgment required for market adjustments[235][236] Consolidated Financial Statements The consolidated financial statements show total assets of $232.9 million and stockholders' equity of $63.8 million as of December 26, 2020, with $315.9 million in net sales and a $9.2 million net loss for the year Key Financial Statement Data (Fiscal Year 2020) | Metric | Amount (in thousands) | | :--- | :--- | | Balance Sheet (as of Dec 26, 2020): | | | Total Assets | $232,868 | | Total Liabilities | $169,077 | | Total Stockholders' Equity | $63,791 | | Statement of Operations (Year ended Dec 26, 2020): | | | Net Sales | $315,939 | | Gross Profit | $76,456 | | Operating Loss | $(2,919) | | Net Loss | $(9,208) | | Statement of Cash Flows (Year ended Dec 26, 2020): | | | Net Cash Provided by Operating Activities | $13,549 | Notes to Consolidated Financial Statements The notes detail accounting policies, including LIFO inventory valuation, long-term debt, new credit facilities, lease obligations, income taxes with a significant valuation allowance, and environmental liabilities - Inventories are valued using the LIFO method; the LIFO reserve was $18.5 million as of December 26, 2020[268][310] - In Q4 2020, the company entered into a new $75 million revolving credit facility and two term loans totaling $25 million[322][326][327] - The company maintains a full valuation allowance of $15.4 million against its deferred tax assets at year-end 2020 due to uncertainty of realization[375][378] - The company has an accrual of $1.9 million for environmental remediation obligations related to discontinued textile operations[433] Controls and Procedures As of December 26, 2020, the CEO and CFO concluded disclosure controls were effective, with no material changes to internal control over financial reporting in Q4 2020 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 26, 2020[192] - No changes in internal control over financial reporting occurred during the fourth quarter that materially affected, or are reasonably likely to materially affect, internal controls[193] Part III Directors, Executive Officers and Corporate Governance Director and Section 16(a) compliance information is incorporated from the 2021 Proxy Statement, with executive officer details in Part I, and Michael L. Owens identified as an audit committee financial expert - Information about director nominees and Section 16(a) compliance is incorporated by reference from the Proxy Statement for the annual meeting to be held May 5, 2021[201] - The Board has determined that Michael L. Owens qualifies as an audit committee financial expert[203] Executive Compensation All executive and director compensation information, including the Compensation Discussion and Analysis, is incorporated by reference from the 2021 Proxy Statement - The sections "Compensation Discussion and Analysis", "Executive Compensation Information" and "Director Compensation" are incorporated by reference from the 2021 Proxy Statement[205] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated from the 2021 Proxy Statement, with 609,453 securities available for future issuance under equity compensation plans as of December 26, 2020 - Information on security ownership is incorporated by reference from the 2021 Proxy Statement[206] Equity Compensation Plan Information (as of Dec 26, 2020) | Plan Category | Securities to be issued upon exercise | Weighted-average exercise price | Securities available for future issuance | | :--- | :--- | :--- | :--- | | Equity Compensation Plans approved by security holders | 281,320 | $4.35 | 609,453 | Certain Relationships and Related Transactions, and Director Independence Information on certain related party transactions and director independence is incorporated by reference from the 2021 Proxy Statement - The sections "Certain Transactions Between the Company and Directors and Officers" and "Independent Directors" are incorporated by reference from the 2021 Proxy Statement[208] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the "Audit Fees Discussion" section of the 2021 Proxy Statement - The "Audit Fees Discussion" section is incorporated by reference from the 2021 Proxy Statement[209] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of this Annual Report on Form 10-K, with a detailed exhibit index attached - This item lists the financial statements, schedules, and exhibits filed with the Form 10-K[212]