THE DIXIE GROUP, INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this report. OVERVIEW Our business consists principally of marketing, manufacturing and selling floorcovering products to high-end customers through our various sales forces and brands. We focus primarily on the upper end of the floorcovering market where we believe we have strong brands and competitive advantages with our style and design capabilities and customer relationships. Our Fabrica, Masland, and Dixie Home brands have a significant presence in the high-end residential floorcovering markets.Dixie International sells all of our brands outside of the North American market. Historically, we participated in the upper end specified commercial flooring marketplace through our Atlas | Masland Contract brand. OnSeptember 13, 2021 , we sold our Commercial business. As a result of the transaction, we have effectively exited the Commercial Business and now focus exclusively on our residential floorcovering markets. The results of our Commercial business activity are included in discontinued operations in the included financial statements. Table of Contents 14 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Fiscal Year EndedDecember 31, 2022 Compared with Fiscal Year EndedDecember 25, 2021 Fiscal Year Ended (amounts in thousands) December 31, % of Net December 25, % of Net Increase 2022 Sales 2021 Sales (Decrease) % Change Net sales$ 303,570 100.0 %$ 341,247 100.0 %$ (37,677) (11.0) % Cost of sales 249,946 82.3 % 263,992 77.4 % (14,046) (5.3) % Gross profit 53,624 17.7 % 77,255 22.6 % (23,631) (30.6) % Selling and administrative expenses 76,957 25.4 % 67,926 19.9 % 9,031 13.3 % Other operating (income) expense, net 239 0.1 % (927) (0.3) % 1,166 (125.8) % Facility consolidation and severance expenses, net 4,584 1.5 % 255 0.1 % 4,329 1,697.6 % Operating income (loss) (28,156) (9.3) % 10,001 2.9 % (38,157) (381.5) % Interest expense 5,340 1.8 % 4,742 1.4 % 598 12.6 % Other expense, net 6 - % 1 - % 5 500.0 % Income (loss) from continuing operations before taxes (33,502) (11.1) % 5,258 1.5 % (38,760) (737.2) % Income tax provision (benefit) (87) - % 105 - % (192) (182.9) %
Income (loss) from continuing operations (33,415) (11.1) %
5,153 1.5 % (38,568) (748.5) %
Loss from discontinued operations, net of
tax (1,664) (0.5) % (3,537) (1.0) % 1,873 (53.0) %
Net income (loss) $ (35,079) (11.6) % $ 1,616 0.5 % $ (36,695) (2,270.7) %
Net Sales . Net sales for the year ended December 31, 2022 were $303.6 million
compared with $341.2 in the year-earlier period, a decrease of 11.0% for the
year-over-year comparison. The decrease in net sales in 2022 was primarily the
result of the loss of sales through our largest mass merchant customer after the
first quarter and lower demand in the second half of the year.
Gross Profit. Gross profit, as a percentage of net sales, decreased 4.9
percentage points in 2022 compared with 2021. In the fourth quarter of 2021, the
Company's primary supplier of raw materials for its nylon broadloom products
announced an abrupt exit from the business and imposed exorbitantly high price
increases on the Company at levels that we were unable to pass on to our
customers. The Company completed its conversion to new lower cost raw materials
from multiple suppliers in the first part of the third quarter of 2022, but
gross profit margins were negatively impacted throughout 2022 as we processed
through the higher cost inventory produced in prior periods.
In addition, our gross profit margins in 2022 were negatively impacted by
extreme increases in the cost of ocean freight for our imported inventory. Costs
for import containers reached levels multiple times the average cost in 2021.
The rapid pace and high level of the increases prevented us from being able to
pass along all of the costs through our pricing to customers. These rates had
returned to lower, more expected levels by the end of 2022.
Inflationary pressure also negatively impacted our gross profit margins in 2022.
The costs of our raw materials increased through the first half of 2022 before
we started to see some relief in the later part of the year.
Selling and Administrative Expenses. Selling and administrative expenses were
$77.0 million in 2022 compared with $67.9 million in 2021. Selling and
administrative expenses as a percent of the net sales for 2022 and 2021 were
25.4% and 19.9% respectively. Higher investment in samples to support the
introduction of our new decorative line of business drove much of the cost
increase. The new decorative products were not available to customers until the
fourth quarter of 2022 which limited the return on the investment in 2022.
Other Operating (Income) Expense, Net. Net other operating expense was $239
thousand in 2022 compared with an income of $927 thousand in 2021. In 2022, the
expense was primarily the result of loss on impairment of assets and retirement
expenses net of additional insurance proceeds related to a claim at our Roanoke,
Alabama facility. In 2021, the income was primarily the result of $1.7 million
in insurance proceeds related to a claim at our Roanoke, Alabama facility
partially offset by $1.1 million in legal expenses.
Facility Consolidation and Severance Expenses, Net. Facility consolidation
expenses were $4.6 million in 2022 compared with $0.3 million in 2021. The
facility consolidation expenses incurred during 2022 were primarily related to
our plan for the consolidation of our east coast manufacturing. Subsequent to
the divestiture of our commercial business in the third quarter of 2021, we
began consolidating our manufacturing facilities on the east coast to better
align our production capacity with our sales volume. The expenses in 2021 were
primarily related to residual expense activity from the Profit Improvement Plan.
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Operating Income (Loss). The operating loss in 2022 was $28.2 million compared
to income of $10.0 million in 2021. The 2022 loss was the result of lower sales
volume due to lower demand and the loss of our largest mass merchant customer,
higher costs related to our former primary fiber supplier exiting the business,
higher freight cost on imported goods, higher material costs as a result of
inflation, increased sample costs and high restructuring expenses from our plan
to consolidate the east coast manufacturing.
Interest Expense. Interest expense was $5.3 million in 2022 compared with $4.7
million in 2021. The increase is the result of higher interest rates and higher
debt incurred in 2022 in order to fund operations.
Income Tax Provision (Benefit). Our effective income tax rate was a benefit of
0.26% in 2022. The benefit relates to federal and state cash taxes paid offset
by certain federal and state credits and also includes a benefit for the
termination of certain derivative contracts for which there existed stranded tax
effects within other comprehensive income. In 2022, we increased our valuation
allowance by $8.5 million related to our net deferred tax asset and specific
federal and state net operating losses and federal and state tax credit
carryforwards.
Our effective income tax rate was a provision of 2.00% in 2021. The provision
relates to federal and state cash taxes paid offset by certain federal and state
credits and also includes a benefit for the termination of certain derivative
contracts for which there existed stranded tax effects within other
comprehensive income.
Net Income (Loss). Continuing operations reflected a loss of $33.4 million , or
$2.21 per diluted share in 2022, compared with income from continuing operations
of $5.2 million , or $0.32 per diluted share in 2021. Our discontinued operations
reflected a loss of $1.7 million , or $0.11 per diluted share in 2022 compared
with a loss of $3.5 million , or $0.23 per diluted share in 2021. Including
discontinued operations, we had a net loss of $35.1 million , or $2.32 per
diluted share, in 2022 compared with net income of $1.6 million , or $0.09 per
diluted share, in 2021.
LIQUIDITY AND CAPITAL RESOURCES
During the year endedDecember 31, 2022 , cash used in continuing operations was$17.5 million driven by reduction of receivables of$15.2 million , an increase of inventories by$1.0 million and decrease in accounts payable and other accrued expenses of$9.6 million .
Net cash used in investing activities was
During the year endedDecember 31, 2022 , cash provided by financing activities was$19.9 million . We had net borrowings of$18.6 million on the revolving credit facility. Borrowings on notes payable, net of payments was$4.8 million and finance leases were reduced by payments of$1.1 million . The balance in amount of checks outstanding in excess of cash at year end 2022 decreased from prior year resulting in a cash outflow of$1.4 million . Repurchases of Common Stock were$0.7 million during 2022. We believe, after having reviewed various financial scenarios, our operating cash flows, credit availability under our revolving credit facility and other sources of financing are adequate to finance our anticipated liquidity requirements under current operating conditions. We have specifically considered the impact of continued operating losses on our liquidity position and our ability to comply with financial covenants by our primary lenders. As part of our evaluation, we considered cost reductions that began in 2022 related to our change to lower cost raw materials, decreased freight expense on imported goods and cost reductions implemented under our East Coast Consolidation Plan, as well as plans for the sale and leaseback of existing assets. Availability under the new Senior Secured Revolving Credit Facility onDecember 31, 2022 was$15.3 million . Significant additional cash expenditures above our normal liquidity requirements, significant deterioration in economic conditions or continued operating losses could affect our business and require supplemental financing or other funding sources. There can be no assurance that the sale leaseback transaction, other such supplemental financing or other sources of funding can be obtained or will be obtained on terms favorable to us. We cannot predict, and are unable to know, the long-term impact of the COVID-19 pandemic and the related economic consequences or how these events may affect our future liquidity.
Debt Facilities
Revolving Credit Facility. OnOctober 30, 2020 , we entered into a$75.0 million Senior Secured Revolving Credit Facility withFifth Third Bank National Association as lender. The loan is secured by a first priority security interest on all accounts receivable, cash, and inventory, and provides for borrowing limited by certain percentages of values of the accounts receivable and inventory. The revolving credit facility matures onOctober 30, 2025 . We have transitioned our benchmark rate LIBOR to SOFR during fourth quarter of 2022. At our election, advances of the revolving credit facility bear interest at annual rates equal to either (a) SOFR (plus a 0.10% SOFR adjustment) for 1 or 3 month periods, as defined with a floor of 0.75% or published SOFR and previously LIBOR, plus an applicable margin ranging between 1.50% and 2.00%, or (b) the higher of the prime rate plus an applicable margin ranging between 0.50% and 1.00%. The Table of Contents 16 -------------------------------------------------------------------------------- applicable margin is determined based on availability under the revolving credit facility with margins increasing as availability decreases. The applicable margin can be increased by 0.50% if the fixed charge coverage ratio is below a 1.10 to 1.00 ratio. As ofDecember 31, 2022 , the applicable margin on our revolving credit facility was 2.50% for SOFR and 1.50% for Prime due to the fixed charge coverage ratio being below 1.10 to 1.00. We pay an unused line fee on the average amount by which the aggregate commitments exceed utilization of the revolving credit facility equal to 0.25% per annum. The weighted-average interest rate on borrowings outstanding under the revolving credit facility was 6.81% atDecember 31, 2022 and 3.00% forDecember 25, 2021 . The agreement is subject to customary terms and conditions and annual administrative fees with pricing varying on excess availability and a fixed charge coverage ratio. The agreement is also subject to certain compliance, affirmative, and financial covenants. As of the reporting date, we are in compliance with all such applicable financial covenants or have obtained an appropriate waiver for such applicable financial covenants. We are only subject to the financial covenants if borrowing availability is less than$8.9 million , which is equal to 12.5% of the lesser of the total loan availability of$75.0 million or total collateral available, and remains until the availability is greater than 12.5% for thirty consecutive days. As ofDecember 31, 2022 , the unused borrowing availability under the revolving credit facility was$15.3 million . Term Loans. EffectiveOctober 28, 2020 , we entered into a$10.0 million principal amount USDA Guaranteed term loan withAmeriState Bank as lender. The term of the loan is 25 years and bears interest at a minimum 5.00% rate or 4.00% above 5-year treasury, to be reset every 5 years at 3.5% above 5-year treasury. The loan is secured by a first mortgage on ourAtmore, Alabama andRoanoke, Alabama facilities. The loan requires certain compliance, affirmative, and financial covenants and, as of the reporting date, we are in compliance with or have received waivers for all such financial covenants. EffectiveOctober 29, 2020 , we entered into a$15.0 million principal amount USDA Guaranteed term loan with theGreater Nevada Credit Union as lender. The term of the loan is 10 years and bears interest at a minimum 5.00% rate or 4.00% above 5-year treasury, to be reset after 5 years at 3.5% above 5-year treasury. Payments on the loan are interest only over the first three years and principal and interest over the remaining seven years. The loan is secured by a first lien on a substantial portion of our machinery and equipment, a certificate of deposit and a second lien on ourAtmore andRoanoke facilities. The loan requires certain compliance, affirmative, and financial covenants and, as of the reporting date, we are in compliance with or have received waivers for all such financial covenants. Notes Payable - Buildings. OnMarch 16, 2022 , we entered into a twenty-year$11.0 million note payable to refinance our existing note payable on our distribution center inAdairsville, Georgia (the "Property"). The note payable bears interest at a fixed annual rate of 3.81%. The note is secured by the Property and a guarantee of the Company. Concurrent with the closing of this note, we paid off existing loans secured by the Property in the amount of$5,456 and terminated an existing interest rate swap agreement. Notes Payable - Equipment and Other. Our equipment and other financing notes have terms up to 1 year, bear interest ranging from 3.99% to 4.75% and are due in monthly installments through their maturity dates. Our equipment and other notes do not contain any financial covenants. Finance Lease - Buildings. OnJanuary 14, 2019 , we entered into a purchase and sale agreement (the "Purchase and Sale Agreement") withSaraland Industrial, LLC , anAlabama limited liability company (the "Purchaser"). Pursuant to the terms of the Purchase and Sale Agreement, we sold ourSaraland facility, and approximately 17.12 acres of surrounding property located inSaraland, Alabama (the "Property") to the Purchaser for a purchase price of$11.5 million . Concurrent with the sale of the Property, we and the Purchaser entered into a twenty-year lease agreement (the "Lease Agreement"), whereby we leased back the Property at an annual rental rate of$977 thousand , subject to annual rent increases of 1.25%. Under the Lease Agreement, we have two (2) consecutive options to extend the term of the Lease by ten years for each such option. This transaction was recorded as a failed sale and leaseback as the present value of lease payments exceeded 90% of its fair value. We recorded a liability for the amounts received, continued to depreciate the asset, and imputed an interest rate so that the net carrying amount of the financial liability and remaining assets will be zero at the end of the lease term.
Finance Lease Obligations. Our finance lease obligations are due in monthly installments through their maturity dates. Our finance lease obligations are secured by the specific equipment leased. (See Note 10 to our Consolidated Financial Statements).
Stock-Based Awards
We recognize compensation expense related to share-based stock awards based on the fair value of the equity instrument over the period of vesting for the individual stock awards that were granted. AtDecember 31, 2022 , the total unrecognized compensation expense related to unvested restricted stock awards was$1.8 million with a weighted-average vesting period of 6.0 years.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements at
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Income Tax Considerations
For the year ended
During 2023 and 2024, we do not anticipate any cash outlays for income taxes to exceed$100 thousand . This is due to our tax loss carryforwards and tax credit carryforwards that will be used to partially offset taxable income. AtDecember 31, 2022 , we were in a net deferred tax liability position of$91 thousand , which was included in other long-term liabilities in our Consolidated Balance Sheets.
Discontinued Operations - Environmental Contingencies
We have reserves for environmental obligations established at four previously owned sites that were associated with our discontinued textile businesses. We have a reserve of$2.2 million for environmental liabilities at these sites as ofDecember 31, 2022 . 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
Certain Related Party Transactions
We purchase a portion of our product needs in the form of fiber, yarn and carpet from Engineered Floors, an entity substantially controlled byRobert E. Shaw , a shareholder of our Company. An affiliate ofMr. Shaw holds approximately 7.8% of our Common Stock, which represents approximately 3.0% 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 2022 and 2021 were approximately$917 thousand and$3.9 million , respectively; or approximately 0.4% and 1.4% of our cost of sales in 2022 and 2021, respectively. Purchases from Engineered Floors are based on market value, negotiated prices. We have no contractual commitments withMr. Shaw associated with our business relationship with Engineered Floors. Transactions with Engineered Floors are reviewed annually by our board of directors.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements of this Form 10-K for a discussion of new accounting pronouncements which is incorporated herein by reference.
Critical Accounting Policies
Certain estimates and assumptions are made when preparing our financial statements. Estimates involve judgments with respect to, among other things, future economic factors that are difficult to predict. As a result, actual amounts could differ from estimates made when our financial statements are prepared.
The Securities and Exchange Commission requires management to identify its most critical accounting policies, defined as those that are both most important to the portrayal of our financial condition and operating results and the application of which requires our most difficult, subjective, and complex judgments. Although our estimates have not differed materially from our experience, such estimates pertain to inherently uncertain matters that could result in material differences in subsequent periods. We believe application of the following accounting policies require significant judgments and estimates and represent our critical accounting policies. Other significant accounting policies are discussed in Note 1 to our Consolidated Financial Statements. Table of Contents 18 -------------------------------------------------------------------------------- •Revenue recognition. We derive our revenues primarily from the sale of floorcovering products and processing services. Revenues are recognized when control of these products or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those products and services. Sales, value add, and other taxes we collect concurrent with revenue-producing activities are excluded from revenue. Shipping and handling fees charged to customers are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. We do not have any significant financing components as payment is received at or shortly after the point of sale. We determine revenue recognition through the following steps: ?Identification of the contract with a customer ?Identification of the performance obligations in the contract ?Determination of the transaction price ?Allocation of the transaction price to the performance obligations in the contract ?Recognition of revenue when, or as, the performance obligation is satisfied •Variable Consideration. The nature of our business gives rise to variable consideration, including rebates, allowances, and returns that generally decrease the transaction price, which reduces revenue. These variable amounts are generally credited to the customer, based on achieving certain levels of sales activity, product returns, or price concessions. Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimates of variable consideration are estimated based upon historical experience and known trends. •Customer claims and product warranties. We generally provide product warranties related to manufacturing defects and specific performance standards for our products for a period of up to two years. We accrue for estimated future assurance warranty costs in the period in which the sale is recorded. The costs are included in Cost of Sales in the Consolidated Statements of Operations and the product warranty reserve is included in accrued expenses in the Consolidated Balance Sheets. We calculate our accrual using the portfolio approach based upon historical experience and known trends. We do not provide an additional service-type warranty. •Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out method (LIFO), which generally matches current costs of inventory sold with current revenues, for substantially all inventories. Reserves are also established to adjust inventories that are off-quality, aged or obsolete to their estimated net realizable value. Additionally, rates of recoverability per unit of off-quality, aged or obsolete inventory are estimated based on historical rates of recoverability and other known conditions or circumstances that may affect future recoverability. Actual results could differ from assumptions used to value our inventory. •Self-insured accruals. We estimate costs required to settle claims related to our self-insured medical, dental and workers' compensation plans. These estimates include costs to settle known claims, as well as incurred and unreported claims. The estimated costs of known and unreported claims are based on historical experience. Actual results could differ from assumptions used to estimate these accruals. •Income taxes. Our effective tax rate is based on income, statutory tax rates and tax planning opportunities available in the jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in a future period. We evaluate the recoverability of these future tax benefits by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income inherently rely on estimates, including business forecasts and other projections of financial results over an extended period of time. In the event that we are not able to realize all or a portion of our deferred tax assets in the future, a valuation allowance is provided. We recognize such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. We had valuation allowances of$21.3 million atDecember 31, 2022 and$12.9 million atDecember 25, 2021 . AtDecember 31, 2022 , we were in a net deferred tax liability position of$91 thousand . For further information regarding our valuation allowances, see Note 14 to the Consolidated Financial Statements. •Loss contingencies. We routinely assess our exposure related to legal matters, environmental matters, product liabilities or any other claims against our assets that may arise in the normal course of business. If we determine that it is probable a loss has been incurred, the amount of the loss, or an amount within the range of loss, that can be reasonably estimated will be recorded. 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