10-K 1 a2013dxyn10k.htm 10-K 2013 DXYN 10K



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
R ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 28, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to ________.

Commission File Number 0-2585

The Dixie Group, Inc.
(Exact name of registrant as specified in its charter)
Tennessee
 
62-0183370
(State or other jurisdiction of incorporation of organization)
 
(I.R.S. Employer Identification No.)
 
 
 
104 Nowlin Lane, Suite 101, Chattanooga, TN 37421
 
(423) 510-7000
(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
 
Name of each exchange on which registered
Common Stock, $3.00 par value
 
NASDAQ Stock Market, LLC
 
 
 
Securities registered pursuant to Section 12(g) of the Act:
 
 
Title of class
 
 
None
 
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes R No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. o Yes R 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.  R Yes o 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). R Yes o  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.  o

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 o    Accelerated filer R    Non-accelerated filer o    Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes R No

The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 28, 2013 (the last business day of the registrant's most recently completed fiscal second quarter) was $88,645,594.  The aggregate market value was computed by reference to the closing price of the Common Stock on such date.  In making this calculation, the registrant has assumed, without admitting for any purpose, that all executive officers, directors, and holders of more than 10% of a class of outstanding Common Stock, and no other persons, are affiliates.  No market exists for the shares of Class B Common Stock, which is neither registered under Section 12 of the Act nor subject to Section 15(d) of the Act.

Indicate the number of shares outstanding of each of the registrant's classes of Common Stock as of the latest practicable date.
Class
 
Outstanding as of February 28, 2014
Common Stock, $3.00 Par Value
 
12,453,166

shares
Class B Common Stock, $3.00 Par Value
 
866,875

shares
Class C Common Stock, $3.00 Par Value
 
0

shares

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the following document are incorporated by reference:
Proxy Statement of the registrant for annual meeting of shareholders to be held April 29, 2014 (Part III).






THE DIXIE GROUP, INC.

Index to Annual Report
on Form 10-K for
Year Ended December 28, 2013

PART I
Page
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
Item 15.
 
 
 
 
 
 
 
 
 
 
 
 








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, 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.



Table of Contents    3    




Part I.

Item 1.
BUSINESS
 
General
 
Our business consists principally of marketing, manufacturing and selling carpet and rugs to high-end residential and commercial customers through our various sales forces and brands. A small portion of our manufacturing capacity is used to provide carpet and yarn related services to other manufacturers.
 
From 1920 until 1993 we were exclusively in the textile business. We sold our textile assets and began acquiring floorcovering businesses in 1993. We focus exclusively on the upper-end of the soft floorcovering market where we believe we have strong brands and competitive advantages with our style and design capabilities and customer relationships.
 
Our business is concentrated in areas of the soft floorcovering markets where innovative styling, design, color, quality and service, as well as limited distribution, are welcomed and rewarded.  Our Fabrica, Masland, and Dixie Home brands have a significant presence in the high-end residential soft floorcovering markets.  Our Masland Contract brand and Avant, a brand launched in 2013, participate in the upper end specified commercial marketplace. Dixie International sells all of our brands outside of the North American market. Our brands are well known, highly regarded and complementary; by being differentiated, we offer meaningful alternatives to the discriminating customer.
 
We have one line of business, carpet and rug manufacturing.

Our Brands
 
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.  The Carousel line of products was acquired in 2013 and added to our Fabrica line of products. The Carousel line of products consists of made-to-order, hand-crafted, extremely high quality carpets and area rugs in natural fibers, primarily wool, with a wide variety of patterns and textures manufactured by machine, hand weaving and hand-hooked techniques. 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.  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 tufted broadloom residential and commercial carpet to selected retailers and home centers under the Dixie Home and private label brands.  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 broadloom residential carpet market.  Its products are marketed at selling prices which we believe average two times the soft floorcovering industry's average selling price.
  
Masland Contract markets and manufactures broadloom and modular carpet tile for 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. Masland Contract has strong brand recognition within the upper-end contract market, and competes through innovative styling, color, patterns, quality and service.  

Avant Contract, a new commercial business launched in 2013, is designed to focus on the corporate office market through multi-line sales agents. These agents carry a broad array of products for the corporate interiors market and will exclusively offer Avant as their soft floorcovering offering. Its modular carpet tile and broadloom product offerings are designed for the interior designer in the upper-end of the contract market who appreciates sophisticated texture, color and patterns with excellent service.










Industry
 
The carpet and rug industry 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.  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 soft floorcovering markets are styling, color, product design, quality and service.  In the high-end residential and high-end commercial markets, carpet competes with various other types of floorcoverings.  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® TruSoft™ 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 in our industry and 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", “Masland Contract” and "Avant" are of greatest importance to our business.  We believe that we have taken adequate steps to protect our interest in all significant trademarks.
 
Customer and Product Concentration
 
As a percentage of our net sales, one customer, Lowe's, a mass merchant, accounted for approximately 13% in 2013, 9% in 2012 and 12% in 2011. No other customer was more than 10 percent of our sales during the periods presented.  During 2013, sales to our top ten customers accounted for 20% percent of our sales and our top 20 customers accounted for 23% percent of our sales.  We do not make a material amount of sales in foreign countries.  

We do not have any single class of products that accounts for more than 10 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:
 
2013

 
2012

 
2011

Residential floorcovering products
74
%
 
75
%
 
71
%
Commercial floorcovering products
26
%
 
25
%
 
29
%

Seasonality
 
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 between the second, third and fourth quarters.  Working capital requirements have normally reached their highest levels in the second and third quarters of the year.


Table of Contents    5    




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 and are not expected to have a material adverse impact in the future.  See "Risk Factors” in Item 1A of this report.

Raw Materials
 
Our primary raw material is yarn.  Nylon is the primary yarn we utilize and, to a lesser extent, polyester and wool 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 domestic and international sources.  Our other raw materials are purchased primarily from domestic suppliers. 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 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 28, 2013, we employed 1,423 associates in our operations.
 
Available Information
 
Our internet address is www.thedixiegroup.com.  We make the following reports filed by us with the Securities and Exchange Commission available, free of charge, on our website under the heading "Investor Relations":
 
1.
annual reports on Form 10-K;
2.
quarterly reports on Form 10-Q;
3.
current reports on Form 8-K; and
4.
amendments to the foregoing reports.
 
The contents of our website are not a part of this report.
Item 1A.    RISK FACTORS

In addition to the other information provided in this Report, the following risk factors should be considered when evaluating the results of our operations, future prospects and an investment in shares of our Common Stock.  Any of these factors could cause our actual financial results to differ materially from our historical results, and could give rise to events that might have a material adverse effect on our business, financial condition and results of operations.
 
The floor covering 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 floor covering industry, in which the Company participates, 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. The Company derives a majority of its sales from the replacement segment of the market. Therefore, economic

Table of Contents    6    




changes that result in a significant or prolonged decline in spending for remodeling and replacement activities could have a material adverse effect on the Company’s business and results of operations.

The floor covering industry is highly dependent on construction activity, including new construction, which is cyclical in nature and recently experienced a downturn. The downturn in the U.S. and global economies, along with the residential and commercial markets in such economies, negatively impacted the floor covering industry and the Company’s business. Although the impact of a decline in new construction activity is typically accompanied by an increase in remodeling and replacement activity, these activities lagged during the downturn. Although the difficult economic conditions have improved, 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 the Company’s 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 certain retail and mass merchant channels of distribution. Because we depend on such certain channels of distribution, a significant reduction of sales through these channels could adversely affect our business.

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 materially adversely affect 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 overall 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, and the cost and terms of it, remains uncertain. These and other economic factors could have a material adverse effect on demand for our products and on its financial condition and operating results.

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 floor covering industry is highly competitive. We face competition from a number of domestic manufacturers and independent distributors of floor covering products and, in certain product areas, foreign manufacturers. Significant consolidation within the floor covering 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 may also result in decreased demand for our products and in the loss of market share. In addition, we face, and will continue to face, pressure on sales prices of our products from competitors. 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 of our 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 increase and the inability to pass any such increases to our customers could materially adversely affect our business, results of operations and financial condition.

The prices of raw materials and fuel-related costs vary significantly with market conditions. In particular, our business requires the purchase of large volumes of nylon and polyester yarn, as well as wool yarns, synthetic backing, latex, and dyes. Increases in the cost of these raw materials could materially adversely affect our business, results of operations and financial condition if





we are unable to pass these increases through to our customers. Although we generally attempt to pass on increases in raw material, energy and fuel-related costs to our customers, our ability to do so is dependent upon the rate and magnitude of any increase, competitive pressures and market conditions for our products. There have been in the past, and may be in the future, periods of time during which increases in these costs cannot be recovered. During such periods of time, our business may be materially adversely 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 floor covering products. A significant portion of such yarn is purchased from one supplier. Our yarn supplier is on the 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 competiveness of our products. While we believe there are other sources of nylon yarns, an unanticipated termination or interruption of our current supply of 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 fiber products. An extended interruption in the supply of these or other raw materials or sourced products used in the Company’s business or in the supply of suitable substitute materials or products would disrupt the Company’s operations, which could have a material adverse effect on the Company’s business.

We may experience certain risks associated with acquisitions, joint ventures and strategic investments.

We have recently embarked on several strategic and tactical initiatives, including acquisitions and investment in new products, to strengthen our future and to enable us to return to sustained growth and profitability. Growth through acquisitions involves risks, many of which may continue to affect us after the acquisition. An acquired company 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. Reported earnings may not meet expectations because of goodwill and intangible asset impairment, other asset impairments, increased interest costs and issuance of additional securities or debt as a result of these acquisitions. We may also face challenges in consolidating functions and integrating our organizations, procedures, operations and product lines in a timely and efficient manner.

The diversion of management attention and any difficulties encountered in the transition and integration process could have a material adverse effect on our revenues, level of expenses and operating results. Failure to successfully manage and integrate an acquisition with our existing operations could lead to the potential loss of customers of the acquired business, the potential loss of employees who may be vital to the new 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 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 regulatory governance 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 its operations. Additionally, future laws, ordinances or regulations 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.

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 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. 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.

Item 2.
PROPERTIES

The following table lists our facilities according to location, type of operation and approximate total floor space as of February 28, 2014:
Location
 
Type of Operation
 
Approximate Square Feet
Administrative:
 
 
 
 
Dalton, GA*
 
Administrative
 
16,000

Saraland, AL
 
Administrative
 
29,000

Santa Ana, CA
 
Administrative
 
4,000

Chattanooga, TN*
 
Administrative
 
3,500

Calhoun, GA
 
Administrative
 
10,600

 
 
Total Administrative
 
63,100

 
 
 
 
 
Manufacturing and Distribution:
 
 
Atmore, AL
 
Carpet Manufacturing, Distribution
 
610,000

Saraland, AL
 
Carpet Tile Manufacturing, Distribution
 
384,000

Saraland, AL*
 
Samples and Rug Manufacturing, Distribution
 
132,000

Roanoke, AL
 
Carpet Yarn Processing
 
204,000

Santa Ana, CA
 
Carpet and Rug Manufacturing, Distribution
 
200,000

Calhoun, GA *
 
Carpet Wool Manufacturing
 
99,000

Calhoun, GA
 
Carpet Dyeing & Processing
 
193,300

Chatsworth, GA *
 
Samples and Distribution
 
79,600

Eton, GA
 
Carpet Manufacturing, Distribution
 
408,000

 
 
Total Manufacturing and Distribution
 
2,309,900

 
 
 
 
 
* Leased properties
 
TOTAL
 
2,373,000


In addition to the facilities listed above, we lease a small amount of office space in various locations. In addition, during 2013, we entered into a lease for a 292,000 square feet distribution facility which will commence on May 1, 2014.






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

At December 28, 2013, the Company was a plaintiff in a lawsuit against a former raw material supplier. In its lawsuit, the Company alleges that the former supplier sold defective materials to the Company over a period of time, which, when applied to certain of the Company’s products, caused those products to become defective and unmerchantable in the ordinary course of the Company’s business. On January 31, 2014, the Company and the supplier settled the Company's claim for $400 thousand.
Item 4.
MINE SAFETY DISCLOSURES

Not applicable.





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 28, 2014, 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, 72
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 and Retirement Plans Committee.  He serves as Director of Astec Industries, Inc. headquartered in Chattanooga, Tennessee; and Louisiana-Pacific Corporation headquartered in Nashville, Tennessee.
 
 
 
D. Kennedy Frierson, Jr., 47
Vice President and Chief Operating Officer
 
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, 53
Vice President and Chief Financial Officer
 
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.
 
 
 
Paul B. Comiskey, 62
Vice President and President, Dixie Residential
 
Vice President and President of Dixie Residential since August 2009.  Vice President and President, Dixie Home from February 2007 to July 2009.  President, Dixie Home from December 2006 to January 2007.  Senior Vice President of Residential Sales, Mohawk Industries, Inc. from 1998 to 2006.  Executive Vice President of Sales and Marketing for World Carpets from 1996 to 1998.
 
 
 
V. Lee Martin, 62
Vice President and President, Masland Contract
 
President, Masland Contract since August 2012 and Vice President since February 2013. President, Step 2 Surfaces, LLC from 2011 to August 2012. Corporate Vice President, Sales and Marketing, for J & J Industries from 1994 to 2011.
 
 
 
W. Derek Davis, 63
Vice President, Human Resources
 
Vice President of Human Resources since January 1991. Corporate Employee Relations Director, 1988 to 1991.
 
 
 
D. Eugene Lasater, 63
Controller
 
Controller since 1988.
 
 
 
Starr T. Klein, 71
Secretary
 
Secretary since November 1992. Assistant Secretary, 1987 to 1992.

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.







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 28, 2014, the total number of holders of our Common Stock was approximately 2,350 including an estimated 1,900 shareholders who hold our Common Stock in nominee names, but excluding approximately 580 participants in our 401(k) plan who may direct the voting of the shares allocated to their accounts.  The total number of holders of our Class B Common Stock was 12.

Recent Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

The following table provides information regarding our repurchases of shares of our Common Stock during the three months ended December 28, 2013:

Fiscal Month Ending
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
 
Maximum Number (or approximate dollar value) of Shares That May Yet Be Purchased Under Plans or Programs
November 2, 2013
 

 
$

 

 
 
November 30, 2013
 

 

 

 
 
December 28, 2013
 

 

 

 
 
Three Fiscal Months Ended December 28, 2013
 

 
$

 

 
$
4,268,461


(1)
On August 8, 2007, we announced a program to repurchase up to $10 million of our Common Stock.
































Quarterly Financial Data, Dividends and Price Range of Common Stock

Following are quarterly financial data, dividends and price range of Common Stock for the four quarterly periods in the years ended December 28, 2013 and December 29, 2012.  Due to rounding, the totals of the quarterly information for each of the years reflected below may not necessarily equal the annual totals.  The discussion of restrictions on payment of dividends is included in Note 9 to the Consolidated Financial Statements included herein.

THE DIXIE GROUP, INC.
QUARTERLY FINANCIAL DATA, DIVIDENDS AND PRICE RANGE OF COMMON STOCK
(unaudited) (dollars in thousands, except per share data)
2013
 
1ST
 
2ND
 
3RD
 
4TH
Net sales
 
$
75,440

 
$
83,617

 
$
90,210

 
$
95,799

Gross profit
 
18,412

 
22,302

 
22,100

 
22,825

Operating income
 
1,677

 
3,271

 
1,830

 
1,813

Income from continuing operations
 
651

 
1,677

 
1,432

 
1,598

Loss from discontinued operations
 
(15
)
 
(32
)
 
(20
)
 
(1
)
Net income
 
$
636

 
$
1,645

 
$
1,412

 
$
1,597

Basic earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.05

 
$
0.13

 
$
0.11

 
$
0.12

Discontinued operations
 

 

 

 

Net income
 
$
0.05

 
$
0.13

 
$
0.11

 
$
0.12

Diluted earnings per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
0.05

 
$
0.13

 
$
0.11

 
$
0.12

Discontinued operations
 

 

 

 

Net income
 
$
0.05

 
$
0.13

 
$
0.11

 
$
0.12

 
 
 
 
 
 
 
 
 
Common Stock Prices:
 
 
 
 
 
 
 
 
High
 
$
5.93

 
$
9.38

 
$
12.05

 
$
13.85

Low
 
3.24

 
5.30

 
7.43

 
9.15

 
 
 
 
 
 
 
 
 
2012
 
1ST
 
2ND
 
3RD
 
4TH
Net sales
 
$
62,851

 
$
66,566

 
$
65,822

 
$
71,134

Gross profit
 
15,703

 
15,719

 
16,557

 
17,395

Operating income (loss)
 
620

 
(40
)
 
820

 
415

Income (loss) from continuing operations
 
(104
)
 
(404
)
 
269

 
(413
)
Loss from discontinued operations
 
(77
)
 
(29
)
 
(167
)
 
(2
)
Net income (loss)
 
$
(181
)
 
$
(433
)
 
$
102

 
$
(415
)
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.01
)
 
$
(0.03
)
 
$
0.02

 
$
(0.03
)
Discontinued operations
 

 

 
(0.01
)
 

Net income (loss)
 
$
(0.01
)
 
$
(0.03
)
 
$
0.01

 
$
(0.03
)
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.01
)
 
$
(0.03
)
 
$
0.02

 
$
(0.03
)
Discontinued operations
 

 

 
(0.01
)
 

Net income (loss)
 
$
(0.01
)
 
$
(0.03
)
 
$
0.01

 
$
(0.03
)
 
 
 
 
 
 
 
 
 
Common Stock Prices:
 
 
 
 
 
 
 
 
High
 
$
4.79

 
$
4.25

 
$
3.90

 
$
4.38

Low
 
2.83

 
3.20

 
3.02

 
2.95













Shareholder Return Performance Presentation

We compare our performance to two different industry indexes published by Dow Jones, Inc. The first of these is the Dow Jones Furnishings Index, which is composed of publicly traded companies classified by Dow Jones in the furnishings industry. The second is the Dow Jones 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 600 Stock Index, plus both the Dow Jones Furnishings Index and the Dow Jones Building Materials & Fixtures Index, in each case for the five year period ended December 28, 2013. The comparison assumes that $100.00 was invested on December 27, 2008, in our Common Stock, the S&P 600 Index, and each of the two Peer Groups, and assumes the reinvestment of dividends.
The foregoing shareholder performance presentation shall not be deemed "soliciting material" or to be "filed" with the Commission subject to Regulation 14A, or subject to the liabilities of Section 18 of the Exchange Act.





Item 6.
SELECTED FINANCIAL DATA
The Dixie Group, Inc.
Historical Summary
(dollars in thousands, except share and per share data)
 
 
 
 
 
 
 
 
 
 
 
FISCAL YEARS
 
2013
 
2012
 
2011 (1)
 
2010 (2)
 
2009 (3)
OPERATIONS
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
345,066

 
$
266,372

 
$
270,110

 
$
231,322

 
$
203,480

Gross profit
 
85,639

 
65,372

 
65,506

 
56,651

 
52,106

Operating income (loss)
 
8,591

 
1,815

 
5,668

 
(2,570
)
 
(45,389
)
Income (loss) from continuing operations before taxes
 
4,715

 
(1,054
)
 
1,956

 
(6,977
)
 
(50,729
)
Income tax provision (benefit)
 
(643
)
 
(401
)
 
684

 
(2,604
)
 
(8,870
)
Income (loss) from continuing operations
 
5,358

 
(653
)
 
1,272

 
(4,373
)
 
(41,859
)
Depreciation and amortization
 
10,262

 
9,396

 
9,649

 
11,575

 
13,504

Dividends
 

 

 

 

 

Capital expenditures
 
11,438

 
3,386

 
6,740

 
1,771

 
2,436

Assets purchased under capital leases
 
1,865

 
666

 
14

 
127

 

FINANCIAL POSITION
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
248,866

 
$
201,770

 
$
182,943

 
$
180,929

 
$
181,944

Working capital
 
95,679

 
76,958

 
66,417

 
56,496

 
52,616

Long-term debt
 
101,759

 
80,166

 
65,357

 
58,070

 
59,349

Stockholders' equity
 
70,771

 
64,046

 
64,385

 
62,430

 
66,349

PER SHARE
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.40

 
$
(0.05
)
 
$
0.10

 
$
(0.35
)
 
$
(3.39
)
Diluted
 
0.40

 
(0.05
)
 
0.10

 
(0.35
)
 
(3.39
)
Dividends:
 
 
 
 
 
 
 
 
 
 
Common Stock
 

 

 

 

 

Class B Common Stock
 

 

 

 

 

Book value
 
5.32

 
4.88

 
4.99

 
4.86

 
5.20

GENERAL
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
12,736,835

 
12,637,657

 
12,585,396

 
12,524,358

 
12,330,648

Diluted
 
12,851,917

 
12,637,657

 
12,623,054

 
12,524,358

 
12,330,648

Number of shareholders (4)
 
2,350

 
1,800

 
1,750

 
1,750

 
1,860

Number of associates
 
1,423

 
1,200

 
1,171

 
1,150

 
1,050


(1)
Includes income of $563, or $356 net of tax, for facility consolidation and severance in 2011.
(2)
Includes expenses of $1,556, or $1,008 net of tax, for facility consolidation and severance costs in 2010.
(3)
Includes expenses of $36,956, or $32,055 net of tax, for the impairment of goodwill and long-lived assets and facility consolidation and severance costs in 2009.
(4)
The approximate number of record holders of our Common Stock for 2009 through 2013 includes Management's estimate of shareholders who held our Common Stock in nominee names as follows:  2009 - 1,300 shareholders; 2010 - 1,250 shareholders; 2011 - 1,250 shareholders; 2012 - 1,255 shareholders; 2013 - 1,900 shareholders.







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

Publicly reported information has reflected improved factors in the economy in the United States that have positively affected the carpet industry beginning in the latter half of 2012 throughout 2013 with continuing improvement anticipated in 2014. These factors include an increase in new and existing home sales, residential remodeling and an increase in residential and commercial investment as a percentage of the United States Gross Domestic Product. We believe our business, driven more by resale and remodeling of existing homes and commercial facilities, has been positively affected by this overall market improvement during these periods. While our business was more deeply affected by the economic crisis as it reached the higher end markets where our business is concentrated, we believe our position in the upper end of the markets has permitted us to benefit from improved conditions and will allow us to take advantage of further anticipated growth in the upper end markets. Our residential and commercial sales growth rate for 2013 compared with 2012 was significantly above that of the industry.
 
During 2013 and 2012, we embarked upon several strategic and tactical initiatives that we believe will permit us to strengthen our future and allow us to return to sustained growth and profitability, although certain of these actions negatively impacted our results in 2013 and 2012. These items, further discussed below, include the investment in the development of certain new products, the acquisition of a continuous dyeing facility in North Georgia, the acquisition of certain rug manufacturing equipment and related business, realignment of certain of our broadloom tufting technologies from Atmore, Alabama into our North Georgia Eton facility, an opportunistic purchase of certain products from an industry competitor to incorporate into our product line and changes in both manufacturing and commercial business management during 2012. During 2013, we expanded our yarn processing capabilities at our Roanoke, Alabama yarn processing facility to support our growth with internal supply and lessen our dependence on externally supplied yarn requirements and acquired a wool manufacturing facility in Calhoun, Georgia that will permit us to enhance our wool processing capabilities and related product offerings. In addition, during 2013 we acquired certain dyeing technology we did not previously have that will further enhance our ability to provide a broader array of differentiated products.

We have taken advantage of several opportunities to invest in products we believe will further differentiate us from the competition. We have access to two new yarn systems that have been limited in distribution and, we believe, will provide exceptional softness and colorfastness qualities. In addition, we have developed a new “permaset process” for wool which we believe will allow our designer customers the broadest possible choice of colorations. As a result, during 2012 we invested at an increased rate in sampling initiatives related to these product offerings as compared to the same periods in the prior year. During 2013, we have seen positive market acceptance for the products associated with these investments.

During 2012, we relocated certain of our tufting technologies from our manufacturing facility in Atmore, Alabama to our facility in Eton, Georgia to achieve a more favorable cost structure for the products and markets served from those technologies. The tufting realignment was completed during 2012. This realignment resulted in incremental operating costs of approximately $926 thousand during 2012. This realignment positively affected our costs, manufacturing capabilities and costs structure during 2013.

On November 2, 2012, we acquired a continuous carpet dyeing facility in Calhoun, Georgia. The acquisition of this dyeing operation has allowed us to transition certain of our products from our beck dyeing operation in Atmore, Alabama and from other third party commission continuous dyeing operations located in North Georgia. This has allowed us to achieve significant cost reductions in the dyeing process and and the capacity to support future growth. The purchase price of this acquisition consisted of a $5.5 million, seller financed note, a cash payment of $239 thousand and $823 thousand representing the fair value of a five year, below market agreement to process certain of the seller's products on a commission basis during this period as we ramp up the dyeing of our products. In conjunction with the acquisition of these assets, we are in the process of assessing all of our dyeing and ancillary assets to determine whether and to what extent further rationalization of assets would be advisable.

On November 28, 2012, we acquired certain specialized wool rug tufting equipment and the associated business for total consideration valued at $2.6 million, consisting of $958 thousand of cash paid, $471 thousand representing the fair value of cash to be paid in equal installments over a three-year period and $1.1 million representing the fair value of contingent consideration over a three-year period. We were the major consumer of products produced by the seller on the equipment. The acquisition has allowed us to reduce our cost by permitting us to produce the goods in-house. Additionally, this has allowed us to support what we believe to be good growth potential in markets we currently serve and provide access to other markets.

Additionally, during 2012, we made a change in our manufacturing management in connection with the realignment and relocation of our tufting equipment. We also brought in new leadership for our commercial business in an effort to strengthen our performance in our commercial sector. These actions resulted in incremental costs of approximately $600 thousand in 2012.





We believe the management changes have positively affected our commercial business in terms of sales growth, manufacturing cost improvements and return on investment.

On June 30, 2013, we completed the acquisition of Robertex Associates, Inc., a high-end manufacturer of specialty wool floorcovering products marketed under the names of “Robertex” and “Carousel”. This acquisition will allow us to strengthen our position in our wool product line where we have seen strong growth, although these products appeal to a more select and discriminating customer base. The purchase price of the acquisition was approximately $6.0 million, plus additional consideration contingent upon growth in gross margins of selected products for five years subsequent to the acquisition. In order to appropriately support the increased wool business, we are realigning certain manufacturing equipment in this facility and infrastructure across our Company related to wool products. As our wool production capabilities are being expanded and enhanced, we are developing new products and investing in increased product sampling for these products. Until such time that all of these actions have been completed and products are in the field, there will be a negative effect on our results.

Subsequent to our 2013 year end, on January 20, 2014, our Board of Directors approved a 2014 Warehousing/Distribution/Manufacturing Restructuring Plan intended to align our warehousing, distribution and manufacturing to support our growth and manufacturing strategy. The plan is intended to create a better cost structure and improve distribution capabilities and customer service. The key element and first major step of this plan is the leasing and occupancy of a 292,000 square foot finished goods warehouse, cut-order and distribution facility in Adairsville, Georgia; such lease and occupancy to commence as of May 1, 2014.

We expect the plan to be substantially completed in the second quarter of the fiscal year ending December 26, 2015. We currently expect the implementation of this plan will result in total restructuring expenses of approximately $2.4 million, with approximately $1.3 million of such expenses during the fiscal year ending December 27, 2014 and approximately $1.1 million of such expenses during the fiscal year ending December 26, 2015, primarily consisting of moving and relocation expenses, information technology expenses and expenses relating to conversion and realignment of equipment.

We remain optimistic about conditions that affect the higher-end residential markets we serve and continue to address initiatives in our commercial offerings related to our products, manufacturing processes and distribution alternatives.

RESULTS OF OPERATIONS

Our discussion and analysis of financial condition and results of operations is based on our Consolidated Financial Statements that were prepared in accordance with U. S. generally accepted accounting principles.

Each of our 2013 and 2012 quarterly fiscal periods contained 13 operating weeks. Our first quarter of 2011 contained 14 operating weeks while our second through fourth quarters of 2011 contained 13 operating weeks; therefore, 2013 and 2012 contained 52 operating weeks compared with 53 operating weeks in 2011. Discussions below related to percentage changes in net sales in 2012 compared with 2011 have been adjusted to reflect the comparable number of weeks and are qualified with the term “net sales as adjusted”. We believe "net sales as adjusted" will assist our financial statement users in understanding the rate of growth in our business in the comparative periods. (See reconciliation of net sales to net sales as adjusted in the table below.)

Reconciliation of Net Sales to Net Sales as Adjusted
 
Fiscal Year Ended
 
Percent Increase (Decrease)
 
December 28, 2013
 
December 29, 2012
 
December 31, 2011
 
2013 vs. 2012
 
2012 vs. 2011
Net sales as reported
$
345,066

 
$
266,372

 
$
270,110

 
29.5
%
 
(1.4
)%
Adjustment to net sales:
 
 
 
 
 
 
 
 
 
Impact of shipping weeks

 

 
(4,711
)
 
 
 
 
Net sales as adjusted
$
345,066

 
$
266,372

 
$
265,399

 
29.5
%
 
0.4
 %
 





The following table sets forth certain elements of our continuing operations as a percentage of net sales for the periods indicated:
 
Fiscal Year Ended
 
December 28, 2013
 
December 29, 2012
 
December 31, 2011
Net sales
100.0
%
 
100.0
%
 
100.0
 %
Cost of sales
75.2
%
 
75.5
%
 
75.7
 %
Gross profit
24.8
%
 
24.5
%
 
24.3
 %
Selling and administrative expenses
22.2
%
 
23.8
%
 
22.5
 %
Other operating (income) expense, net
0.1
%
 
%
 
(0.1
)%
Facility consolidation and severance expense, net
%
 
%
 
(0.2
)%
Operating income
2.5
%
 
0.7
%
 
2.1
 %

Fiscal Year Ended December 28, 2013 Compared with Fiscal Year Ended December 29, 2012

Net Sales. Net sales for the year ended December 28, 2013 were $345.1 million compared with $266.4 million in the year-earlier period, an increase of 29.5% for the year-over-year comparison. The carpet industry reported a percentage increase in the mid- single digits in net sales in 2013 compared with 2012. Our 2013 year-over-year carpet sales comparison reflected an increase of 28.9% in net sales. Sales of residential carpet are up 28.5% and sales of commercial carpet increased 30.1%. Revenue from carpet yarn processing and carpet dyeing and finishing services increased $4.1 million in 2013 compared with 2012. We believe our residential and commercial sales were positively affected primarily as a result of the introduction of new products and the expansion of our wool products.

Cost of Sales. Cost of sales, as a percentage of net sales, was basically unchanged in 2013 compared with 2012. Cost of sales in 2013 included approximately $5.1 million of costs associated with acquisitions in late 2012 and 2013 as well as certain process realignment and expansion initiatives undertaken during 2013. Cost of sales in 2012 included incremental costs of approximately $1.4 million related to tufting equipment relocations and costs related to the transition of products from our beck dyeing operations to our continuous dyeing operations acquired in the fourth quarter of 2012.

Gross Profit. Gross profit increased $20.3 million in 2013 compared with 2012. The increase in gross profit was primarily attributable to higher sales. Gross profit in 2013 and 2012 was negatively affected by the incremental costs discussed above related to costs of sales.

Selling and Administrative Expenses. Selling and administrative expenses were $76.6 million in 2013 compared with $63.5 million in 2012, a decline of 1.6 percentage points as a percentage of sales in 2013 compared with 2012. Selling and administrative costs in 2013 included approximately $1.8 million of sampling costs incurred to incorporate the new wool products associated with the Robertex acquisition and our launch of a new tile product line. 2012 included $1.7 million related to investment in the development and sampling of new product initiatives, $409 thousand for incremental costs related to the two acquisitions and $600 thousand of costs related to management changes.

Other Operating (Income) Expense, Net. Net other operating (income) expense was $494 thousand in 2013 compared with $68 thousand in 2012. The change in 2013 was due to the disposal of certain manufacturing assets taken out of service, losses on currency valuations and settlement of a claim against a supplier.
 
Operating Income. Operating income was $8.6 million in 2013 compared with operating income of $1.8 million in 2012. The increase in 2013 was primarily a result of the increased level of sales in 2013, less the variable selling expenses associated with the sales increase.

Interest Expense. Interest expense increased $610 thousand in 2013 principally due to higher levels of debt to support our growth, including an increase in debt related to business acquisitions in late 2012 and during mid-2013.

Other (Income) Expense, Net. Other (income) expense, net was an expense of $26 thousand in 2013 compared to income of $277 thousand in 2012. The change was primarily the result of a $187 thousand gain recognized on the sale of a non-operating asset in 2012.

Income Tax Provision (Benefit). Our income tax provision was a benefit of $643 thousand in 2013 on positive earnings primarily as a result of the reversal of $1.2 million of previously established reserves for state income tax loss and tax credit carryforwards. The reversal of the reserves was based on a number of factors including current and future earnings assumptions by taxing jurisdiction. Additionally, 2013 included certain tax credits of approximately $520 thousand related to the years 2009 - 2011 determined to be available for utilization and $304 thousand of 2012 research and development tax credits that could not be recognized until the extension of the credit was approved by Congress in 2013. Our effective income tax benefit rate was 38.0% in 2012. The effective tax rate varied from statutory rates in 2012 primarily as a result of adjustments to





estimates used in the 2011 estimated tax calculations versus amounts used in the subsequent tax return filing for the 2011 period, net of the effects of permanent differences on the lower level of pre-tax earnings in the 2012 tax calculations.

Net Income (Loss). Continuing operations reflected income of $5.4 million, or $0.40 per diluted share in 2013, compared with a loss from continuing operations of $653 thousand, or $0.05 per diluted share in 2012. Our discontinued operations reflected a loss of $68 thousand, or $0.01 per diluted share in 2013, compared with a loss of $274 thousand, or $0.02 per diluted share in 2012. Including discontinued operations, our net income was $5.3 million, or $0.39 per diluted share, in 2013 compared with a net loss of $927 thousand, or $0.07 per diluted share, in 2012.

Fiscal Year Ended December 29, 2012 Compared with Fiscal Year Ended December 31, 2011

Net Sales. Net sales for the year ended December 29, 2012 were $266.4 million compared with $270.1 million in the year-earlier period, a decrease of 1.4% for the year-over-year comparison. Net sales in 2012 reflected an increase of 0.4% compared with 2011 on a "net sales as adjusted" basis. The carpet industry reported a percentage increase in the low single digits in net sales in 2012. Our 2012 year-over-year carpet sales comparison reflected a decrease of 1.8% in net sales, or 0.1% on a "net sales as adjusted" basis. Sales of residential carpet are up 2.5%, or 4.3% on a "net sales as adjusted" basis and sales of commercial carpet declined 12.7%, or 11.1% on a "net sales as adjusted" basis. Revenue from carpet yarn processing and carpet dyeing and finishing services increased $1.1 million in 2012 compared with 2011.

Cost of Sales. Cost of sales, as a percentage of net sales, was basically unchanged; a decrease of 0.2 percentage points in 2012 compared with 2011. Cost of sales included costs of approximately $926 thousand in 2012 related to tufting equipment relocations. Other manufacturing efficiencies and cost improvements more than offset these relocation costs.

Gross Profit. Gross profit was basically unchanged in both total dollars and as a percentage of net sales in 2012 compared with 2011. Gross profit on lower sales in 2012 was affected by costs of approximately $926 thousand incurred in 2012 related to tufting equipment relocations. However, we experienced more favorable product mix in our residential products in 2012 compared with 2011.

Selling and Administrative Expenses. Selling and administrative expenses reflected an increase of $2.8 million, or 1.3 percentage points as a percentage of sales in 2012 compared with 2011. The increase is primarily a result of an increase of $1.7 million related to investment in the development and sampling of new product initiatives, $409 thousand for costs related to the two acquisitions and $600 thousand of costs related to management changes.

Other Operating (Income) Expense, Net. Net other operating expense was $68 thousand in 2012 compared with net other operating income of $266 thousand in 2011. The change was due to a settlement gain of $492 thousand recognized in 2011 related to a company-owned insurance policy, net of a decrease in certain retirement related expenses of $170 thousand in 2012 compared with 2011.

Facility Consolidation and Severance (Benefit) Expense, Net. Facility consolidation and severance expenses reflected a cost reduction of $563 thousand in 2011. The gain in 2011 was a result of the favorable settlement of a lease obligation in 2011 compared with the amount previously reserved under our restructuring plan.

Operating Income (Loss). Operating income was $1.8 million in 2012 compared with operating income of $5.7 million in 2011. The decrease in 2012 was primarily a result of the higher selling and administrative expenses and gains in 2011 related to the facilities consolidation and company-owned life insurance of $563 thousand and $492 thousand, respectively.

Interest Expense. Interest expense decreased $324 thousand in 2012 principally due to lower interest rates in 2012 compared with 2011.

Other (Income) Expense, Net. Other income was $277 thousand in 2012 compared with income of $75 thousand in 2011, an improvement of $202 thousand. The change was primarily the result of a gain recognized on the sale of a non-operating asset in 2012.

Refinancing Expenses. Expenses of $317 thousand were recorded in the third quarter of 2011 related to refinancing our senior credit and term loan facility and included the costs associated with the extinguishment or modification of existing debt and the addition of new debt arrangements.

Income Tax Provision (Benefit). Our effective income tax benefit rate was 38.0% in 2012, compared with an effective income tax provision rate of 35.0% in 2011. The effective tax rate varied from statutory rates in 2012 primarily as a result of adjustments to estimates used in the 2011 estimated tax calculations versus amounts used in the subsequent tax return filing for the 2011 period, net of the effects of permanent differences on the lower level of pre-tax earnings in the 2012 tax calculations.

Net Income (Loss). Continuing operations reflected a loss of $653 thousand, or $0.05 per diluted share in 2012, compared with income from continuing operations of $1.3 million, or $0.10 per diluted share in 2011. Our discontinued operations reflected a loss of $274 thousand, or $0.02 per diluted share in 2012, compared with a loss of $286 thousand, or $0.02 per diluted share in





2011. Including discontinued operations, our net loss was $927 thousand, or $0.07 per diluted share, in 2012 compared with net income of $986 thousand, or $0.08 per diluted share, in 2011.

LIQUIDITY AND CAPITAL RESOURCES

We believe our operating cash flows, credit availability under our senior loan and security agreement and other sources of financing are adequate to finance our normal foreseeable liquidity requirements. However, deterioration in our markets or significant additional cash expenditures above our normal liquidity requirements could 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.

Cash Sources and Uses. During the year ended December 28, 2013, cash provided from financing activities was $19.2 million. $5.9 million was used to fund our operating activities, $11.4 million to invest in property, plant and equipment and $2.2 million cash paid in business combination. Working capital increased $18.7 million in 2013, including an increase in inventories of $21.4 million to support higher levels of business activity and an increase of $11.6 million in accounts receivable primarily related to the higher level of sales. Additionally, other current assets increased approximately $2.0 million as a result of deposits related to equipment financing arrangements and the current portion of deferred tax assets. Accounts payable increased $6.8 million in 2013 compared with 2012 primarily as a result raw material purchases associated with the increased levels of business and accrued expenses increased $7.1 million primarily as a result of significant growth in our business during 2013. Additionally, the current portion of debt reflected an increase of $2.2 million as of the 2013 balance sheet date compared with the 2012 comparative period related to increases in funded debt levels outside of our revolving facility.
 
Capital expenditures, excluding assets acquired under business acquisitions, were $13.3 million in 2013; $11.4 million through funded debt and $1.9 million of equipment acquired under capital leases, $4.1 million in 2012 and $6.8 million in 2011. Depreciation and amortization were $10.3 million in 2013, $9.4 million in 2012 and $9.6 million in 2011. A significant portion of capital expenditures in 2013 were directed toward expanding manufacturing capabilities while capital expenditures in 2012 and 2011 were directed to a greater degree toward new and more efficient manufacturing capabilities and, to a lesser extent in each year, computer software enhancements. We expect capital expenditures to be approximately $16 million in 2014, while depreciation and amortization are expected to be approximately $12 million. Planned capital expenditures in 2014 are primarily directed toward both new manufacturing equipment and an expansion and realignment of our warehousing, cut order, distribution and certain manufacturing processes.

Senior Credit Facility. On September 14, 2011, we entered into a five-year, secured revolving credit facility (the "senior credit facility"). The senior credit facility provided for a maximum of $90.0 million of revolving credit, subject to borrowing base availability, including limited amounts of credit in the form of letters of credit and swingline loans. The borrowing base was equal to specified percentages of our eligible accounts receivable, inventories and fixed assets less reserves established, from time to time, by the administrative agent under the senior credit facility. We can use the proceeds of the senior credit facility for general corporate purposes, including financing acquisitions and refinancing other indebtedness.

At our election, revolving loans under the senior credit facility bore interest at annual rates equal to either (a) LIBOR for 1, 2 or 3 month periods, as selected by us, plus an applicable margin of either 2.00% or 2.25%, or (b) the higher of the prime rate, the Federal Funds rate plus 0.5%, or a daily LIBOR rate, plus an applicable margin of either 1.00% or 1.50%. The applicable margin was determined based on availability under the senior credit facility with margins increasing as availability decreases. We also paid an unused line fee on the average amount by which the aggregate commitments exceed utilization of the senior credit facility equal to 0.375% per annum.

The senior credit facility included certain affirmative and negative covenants that imposed restrictions on our financial and business operations, including limitations on debt, liens, investments, fundamental changes in our business, asset dispositions, dividends and other similar restricted payments, transactions with affiliates, payments and modifications of certain existing debt, future negative pledges, and changes in the nature of our business. We were also required to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability was less than $10.0 million.

Amended Senior Credit Facility. As amended, our senior credit facility ("amended senior credit facility") provides for a maximum of $130.0 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. In addition, the term of the facility was extended to August 1, 2018.

At our election, revolving loans under the amended senior 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 of either 1.50%, 1.75% or 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 of either 0.50%, 0.75% or 1.00%. The applicable margin is determined based on availability under the amended senior credit facility with margins increasing as availability decreases. We continue to pay an unused line fee on the average amount by which the aggregate commitments exceed utilization of the senior credit facility equal to 0.375% per annum.






The amended senior credit facility continues to include certain affirmative and negative covenants that impose restrictions on our financial and business operations. The amended senior credit facility requires that we maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability is less than $14.4 million. At December 28, 2013, we were in compliance with the amended senior credit facility's covenants.

Average Interest Rates and Availability. The weighted-average interest rate on borrowings outstanding under the amended senior credit facility was 2.66% at December 28, 2013 and 3.59% at December 29, 2012. As of December 28, 2013, the unused borrowing availability under the amended senior credit facility was $32.6 million.

Mortgage Note Payable. On April 1, 2013, we terminated our five-year $11.1 million mortgage loan which had a balance of $9.8 million. The mortgage loan was secured by our Susan Street real estate and liens secondary to the senior credit facility. The mortgage loan was scheduled to mature on September 13, 2016. Prior to the termination, the mortgage loan bore interest at a variable rate equal to one month LIBOR plus 3.00% and was payable in equal monthly installments of principal of $61 thousand, plus interest calculated on the declining balance of the mortgage loan, with a final payment of $7.4 million due on maturity.

Obligation to Development Authority of Gordon County. On November 2, 2012, we signed a 6% 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 are now payment obligations to the Authority. These transactions were consummated in order to provide us with a tax abatement to the related real estate and equipment at this facility. The tax abatement plan provides 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 bears interest at 6% and is payable in equal monthly installments of principal and interest of $106 thousand over 57 months.

Deferred Financing Costs and Refinancing Expenses. In connection with the amendments in 2013 and 2012, we incurred additional financing costs of $351 thousand and $28 thousand, respectively, that are being amortized over the remaining term of the facility. In addition, we incurred $37 thousand of financing costs related to an equipment note payable. Additionally in 2013, we recognized $94 thousand of refinancing expenses related to the write-off of previously deferred financing costs related to our mortgage note payable. During 2012, we incurred $187 thousand in financing costs related to the obligations to the Authority that is being amortized over the term of the obligation. As a result of the refinancing in 2011, we paid $1.4 million in financing cost that is being amortized over the term of the senior credit facility and the mortgage loan. Additionally in 2011, we recognized $317 thousand of refinancing expenses of which $92 thousand related to the write-off of previously deferred financing costs and $225 thousand related to fees paid to third parties in connection with the new senior credit facility and mortgage loan.

Equipment Notes Payable. Our equipment financing notes have terms ranging from four to seven years, are secured by the specific equipment financed, bear interest ranging from 1.00% to 7.72% and are due in monthly installments of principal and interest ranging from $2 thousand to $49 thousand through June 2020. The notes do not contain financial covenants.

Capital Lease Obligations. Our capital lease obligations have terms ranging from four to seven years, are secured by the specific equipment leased, bear interest ranging from 2.90% to 7.72% and are due in monthly installments of principal and interest ranging from $2 thousand to $32 thousand through November 2018.

Interest Payments. Interest payments for continuing operations were $3.1 million in 2013, $2.8 million in 2012 and $3.3 million in 2011.

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 28, 2013, the total unrecognized compensation expense related to unvested restricted stock awards was $1.3 million with a weighted-average vesting period of 4.2 years and unrecognized compensation expense related to unvested stock options was $18 thousand with a weighted-average vesting period of 0.9 years.

Off-Balance Sheet Arrangements. We have no off-balance sheet arrangements at December 28, 2013 or December 29, 2012.

Income Tax Considerations. During 2013, our tax benefit of $643 thousand included $1.2 million related to the reversal of previously established reserves for state income tax loss and tax credit carryforwards. The reversal of the reserves was based on a number of factors including current and future earnings assumptions by taxing jurisdiction. Additionally, 2013 included certain tax credits of approximately $520 thousand related to the years of 2009 - 2011 determined to be available for utilization and $304 thousand of 2012 research and development tax credits that could not be recognized until the extension of the credit was approved by Congress in 2013.

During 2014, we anticipate cash outlays for income taxes to be relatively equivalent to our provision for income taxes unless it is determined that additional state valuation allowances should be reversed in which case our provision would be expected to be lower than cash outlays to the extent of the reversal of such valuation allowances. For 2015 and 2016, we expect our cash outlay for taxes to exceed our tax provision based on the anticipated differences between the book basis and tax basis of long-





lived, depreciable assets. Such differences could be in the range of $2.0 million in each of the periods, although there are many factors that could alter the actual experience. At December 28, 2013, we were in a net deferred tax asset position of $2.6 million. We performed an analysis, including an evaluation of certain tax planning strategies available to us, related to the net deferred tax asset and believe that the net deferred tax asset is recoverable in future periods. Approximately $6.8 million of future taxable income would be required to realize the deferred tax asset.

During the first quarter of 2012, we paid approximately $1.3 million representing a settlement reached with the Internal Revenue Service for an audit for the tax years of 2004 through 2009. The settlement is related to temporary differences between the carrying amounts of assets for financial reporting purposes and the tax basis of those assets; accordingly the settlement resulted in an increase in deferred taxes and had no significant impact on tax expense.

Discontinued Operations - Environmental Contingencies. We have reserves for environmental obligations established at five previously owned sites that were associated with our discontinued textile businesses. Each site has a Corrective Action Plan (“CAP”) with the applicable authoritative state regulatory body responsible for oversight for environmental compliance. The CAP for four of these sites involves natural attenuation (degradation of the contaminants through naturally occurring events) over periods estimated at 10 to 20 years and the CAP on the remaining site involves a pump and treat remediation process, estimated to occur over a period of 25 years. Additionally, we have a reserve for an environmental liability on the property of a facility and related business that was sold in 2004. The CAP has a specified remaining remediation term estimated to be 4 years subsequent to 2013. The total costs for remediation for all of these sites during 2013 were $83 thousand, all of which related to normal ongoing remediation costs. We expect normal remediation costs to range from approximately $80 thousand to $100 thousand annually. We have a reserve of $1.8 million for environmental liabilities at these sites as of December 28, 2013. 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 costs 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 28, 2013, we had $2.8 million of 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. During 2013, we purchased a portion of our requirements for polyester fiber from Engineered Floors, an entity controlled by Robert E. Shaw. Mr. Shaw reported holding approximately 10% of our Common Stock, which as of year-end represented approximately 4% of the total vote of all classes of our Common Stock. Engineered Floors is our principal supplier of polyester fiber and polyester broadloom carpet. Total purchases from Engineered Floors for 2013 and 2012 were approximately $12 million and $8 million, respectively; or approximately 8% of our external yarn and carpet purchases in 2013 and 2012. Purchases from Engineered Floors are based on market value, negotiated prices. We have no contractual arrangements or commitments with Mr. Shaw associated with our business relationship with Engineered Floors. Transactions with Engineered Floors were reviewed and approved by our board of directors.

During 2013, we entered into a 10-year lease with the Rothman Family Partnership to lease a manufacturing facility as part of the Robertex acquisition. The Rothman Family Partnership includes Robert P. Rothman who is an associate of the Company. Rent paid to the Rothman Family Partnership during 2013 was $127 thousand. The lease was based on current market values for similar facilities.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU 2013-02 requires us to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, we are required to present significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. ASU 2013-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. Since the new standard did not change the current requirements for reporting net income or other comprehensive income in the financial statements, the adoption of this ASU did not have a material effect on our Consolidated Financial Statements.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. In January 2013, the FASB issued ASU No. 2013-01, "Balance Sheet (Topic 210)—Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities". The ASU clarifies that ordinary trade receivables and payables are not in the scope of ASU No. 2011-11. ASU No. 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netting arrangement or similar agreement. The effective date





is the same as the effective date of ASU 2011-11. We do not expect that the adoption of these ASUs will have a material effect on our Consolidated Financial Statements.

In July 2012, the FASB issued ASU No. 2012-02, "Intangibles--Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment." This ASU states that an entity has the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Codification Subtopic 350-30, "Intangibles--Goodwill and Other, General Intangibles Other than Goodwill." Under the guidance in this ASU, an entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this ASU did not have a a material effect on our Consolidated Financial Statements.

In February 2013, the FASB issued ASU No. 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date". This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. For public entities, the ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The ASU shall be applied retrospectively to all prior periods presented for those obligations within the scope of this Subtopic that exist at the beginning of an entity's fiscal year of adoption. Early adoption is permitted. We do not expect that the adoption of this ASU will have a material effect on our Consolidated Financial Statements.

In July 2013, the FASB issued ASU No. 2013-10, "Derivatives and Hedging (Topic 815) - Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes". This ASU allows the use of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a benchmark interest rate for hedge accounting purposes in addition to interest rates on direct Treasury obligations of the United States government and LIBOR. In addition, the ASU removes the restriction on using different benchmark rates for similar hedges. The ASU became effective on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this ASU did not have a material effect on our Consolidated Financial Statements.

In July 2013, the FASB issued ASU No. 2013-11, "Income Taxes (Topic 740) - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists". This ASU requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. This ASU is effective for annual and interim periods beginning after December 15, 2013, with early adoption permitted. We do not expect that the adoption of this ASU will have a material effect on our Consolidated Financial Statements.

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. Revenues, including shipping and handling amounts, are recognized when the following criteria are met:  there is persuasive evidence that a sales agreement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collection is reasonably assured. Delivery is considered to have occurred when the customer takes title to products, which is generally on the date of shipment. At the time revenue is recognized, we record a provision for the estimated amount of future returns based primarily on historical experience and any known trends or conditions.
 





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.
 
Customer claims and product warranties. We provide product warranties related to manufacturing defects and specific performance standards for our products. We record reserves for the estimated costs of defective products and failure to meet applicable performance standards. The levels of reserves are established based primarily upon historical experience and our evaluation of pending claims. Because our evaluations are based on historical experience and conditions at the time our financial statements are prepared, actual results could differ from the reserves 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 net 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. 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 and the weighted average cost of capital (“WACC”). 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. Should a significant or prolonged deterioration in economic conditions occur key judgments and assumptions could be impacted.

Contingent Consideration. Contingent consideration liabilities represent future amounts we may be required to pay in conjunction with various business combinations. The ultimate amount of future payments is based on sales levels for one contingent liability and incremental gross margin growth related to another contingent liability. We estimate the fair value of the contingent consideration liability related to sales levels by forecasting estimated cash payments based on projected sales and discounting the cash payment to its present value using a risk-adjusted rate of return. We estimate the fair value of the contingent consideration liability associated with incremental gross margin growth by employing Monte Carlo simulations to estimate the volatility and systematic relative risk of gross margin levels and discounting the associated cash payment amounts to their present values using a credit-risk-adjusted interest rate. We evaluate our estimates of the fair value of contingent consideration liabilities on a periodic basis. Any changes in the fair value of contingent consideration liabilities are recorded through earnings. The total estimated fair value of contingent consideration liabilities was $2.8 million and $1.9 million at December 28, 2013 and December 29, 2012, respectively, and was included in accrued expenses and other liabilities in our consolidated balance sheets.
 
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. The Company’s effective tax rate is based on its income, statutory tax rates and tax planning opportunities available in the jurisdictions in which it operates. 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. The Company evaluates 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 the Company is not able to realize all or a portion of its deferred tax assets in the future, a valuation allowance is provided. The Company would recognize 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 had valuation allowances of $3.7 million at December 28, 2013 and $4.9 million at December 29, 2012. For further information regarding the Company’s valuation allowances, see Note 13 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.
 
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 11 to the Consolidated Financial Statements).

At December 28, 2013, $60,274, or approximately 56% of our total debt, was subject to floating interest rates.  A 10% fluctuation in the variable interest rates applicable to this floating rate debt would have an annual after-tax impact of approximately $81.

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

On November 11, 2013, the Audit Committee of the Board of Directors confirmed its engagement of Ernst & Young LLP (“E&Y”) to audit the Company’s consolidated financial statements as of and for the year ending December 28, 2013, and the effectiveness of the Company’s internal control over financial reporting as of December 28, 2013. Upon completion of all procedures related to filing the Company’s Annual Report on Form 10-K for the year ended December 28, 2013, the engagement of E&Y will end.

At that time, the Committee approved the engagement of Dixon Hughes Goodman LLP to serve as independent registered public accountants for the Company for fiscal 2014.

During the fiscal years ended December 28, 2013 and December 29, 2012, Ernst & Young's reports on the Registrant's financial statements did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended December 28, 2013 and December 29, 2012 and the subsequent periods through the date of this report, (i) there were no disagreements between the Registrant and Ernst & Young on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young to make reference to the subject matter of the disagreements in connection with its reports on the Registrant's financial statements, and (ii) there were no reportable events as that term is described in Item 304(a)(1)(v) of Regulation S-K.

During the two most recent fiscal years and through the date of this report, neither the Registrant nor anyone on its behalf consulted with Dixon Hughes Goodman regarding any of the following:

(i)
The application of accounting principles to a specific transaction, either completed or proposed;

(ii)
The type of audit opinion that might be rendered on the Registrant's financial statements, and none of the following was provided to the Registrant:

(a)
a written report; or (b) oral advice that Dixon Hughes Goodman concluded was an important factor considered by the Registrant in reaching a decision as to an accounting, auditing or financial reporting issue; or

(iii)
Any matter that was subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) of Regulation S-K, or a reportable event, as described in Item 304(a)(1)(v) of Regulation S-K.













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 Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have evaluated the effectiveness 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 28, 2013, 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.  During the last fiscal quarter, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Our management report on internal control over financial reporting and the report of our independent registered public accounting firm on our internal control over financial reporting are contained in Item 15(a)(1) of this report.

Item 9B.
OTHER INFORMATION

None.






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 April 29, 2014 is 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 John W. Murrey, III 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. Murrey's 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 28, 2013, members of our audit committee are John W. Murrey, III, Chairman, Charles E. Brock, J. Don Brock, Walter W. Hubbard, Lowry F. Kline, Hilda W. Murray and Michael L. Owens.

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 April 29, 2014 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 the beneficial ownership table (and accompanying notes), in the Proxy Statement of the registrant for the annual meeting of shareholders to be held April 29, 2014 is incorporated herein by reference.

Equity Compensation Plan Information as of December 28, 2013

The following table sets forth information as to our equity compensation plans as of the end of the 2013 fiscal year:
 
(a)
 
(b)
 
(c)
Plan Category
Number of securities to be issued upon exercise of the outstanding options, warrants and rights
 
Weighted-average exercise price of outstanding options, warrants and rights
 
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
759,995

(1)
$
10.64

(2)
622,819


(1)
Does not include 525,799 shares issued but unvested Common Stock pursuant to restricted stock grants under our 2006 Stock Awards Plan, with a weighted-average grant date value of $6.64 per share.
(2)
Includes the aggregate weighted-average of (i) the exercise price per share for outstanding options to purchase 555,105 shares of Common Stock under our 2000 Stock Incentive Plan and 105,250 shares of Common Stock under our 2006 Stock Awards Plan and (ii) the price per share of the Common Stock on the grant date for each of 99,640 Performance Units issued under the Directors' Stock 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 April 29, 2014 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 April 29, 2014 is incorporated herein by reference.





PART IV.

Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)
(1) The response to this portion of Item 15 is submitted as a separate section of this report.
(2) No financial statements required.
(3) 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.







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 12, 2014
 
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 12, 2014
Daniel K. Frierson
 
 
 
 
 
 
 
 
 
/s/ JON A. FAULKNER
 
Vice President, Chief Financial Officer
 
March 12, 2014
Jon A. Faulkner
 
 
 
 
 
 
 
 
 
/s/ D. KENNEDY FRIERSON, JR.
 
Vice President, Chief Operating Officer and Director
 
March 12, 2014
D. Kennedy Frierson, Jr.
 
 
 
 
 
 
 
 
 
/s/ D. EUGENE LASATER
 
Controller
 
March 12, 2014
D. Eugene Lasater
 
 
 
 
 
 
 
 
 
/s/ CHARLES E. BROCK
 
Director
 
March 12, 2014
Charles E. Brock
 
 
 
 
 
 
 
 
 
/s/ J. DON BROCK
 
Director
 
March 12, 2014
J. Don Brock
 
 
 
 
 
 
 
 
 
/s/ WALTER W. HUBBARD
 
Director
 
March 12, 2014
Walter W. Hubbard
 
 
 
 
 
 
 
 
 
/s/ LOWRY F. KLINE
 
Director
 
March 12, 2014
Lowry F. Kline
 
 
 
 
 
 
 
 
 
/s/ HILDA S. MURRAY
 
Director
 
March 12, 2014
Hilda S. Murray
 
 
 
 
 
 
 
 
 
/s/ JOHN W. MURREY, III
 
Director
 
March 12, 2014
John W. Murrey, III
 
 
 
 
 
 
 
 
 
/s/ MICHAEL L. OWENS
 
Director
 
March 12, 2014
Michael L. Owens
 
 
 
 







ANNUAL REPORT ON FORM 10-K

ITEM 8 AND ITEM 15(a)(1)

LIST OF FINANCIAL STATEMENTS

FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 28, 2013

THE DIXIE GROUP, INC.

CHATTANOOGA, TENNESSEE



Table of Contents    30    




FORM 10-K - ITEM 8 and ITEM 15(a)(1)

THE DIXIE GROUP, INC. AND SUBSIDIARIES

LIST OF FINANCIAL STATEMENTS


The following consolidated financial statements of The Dixie Group, Inc. and subsidiaries are included in Item 8 and Item 15(a)(1):








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. Our internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report on internal control over financial reporting as of December 28, 2013.
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 (1992 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 28, 2013, based on those criteria.

Daniel K. Frierson
Chairman of the Board and
Chief Executive Officer

Jon A. Faulkner
Chief Financial Officer








Report of Independent Registered Public Accounting Firm
 
 
The Board of Directors and Shareholders of The Dixie Group, Inc.
 
We have audited The Dixie Group, Inc.'s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). The Dixie Group, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, 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.
 
In our opinion, The Dixie Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 28, 2013, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Dixie Group, Inc. as of December 28, 2013 and December 29, 2012, and 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 28, 2013 of The Dixie Group, Inc. and our report dated March 12, 2014 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
Atlanta, Georgia
March 12, 2014








Report of Independent Registered Public Accounting Firm
 
The Board of Directors and Shareholders of The Dixie Group, Inc.
 
We have audited the accompanying consolidated balance sheets of The Dixie Group, Inc. as of December 28, 2013 and December 29, 2012, and the related consolidated statements of statements of operations, comprehensive income (loss), stockholders' equity and cash flows for each of the three years in the period ended December 28, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Dixie Group, Inc. at December 28, 2013 and December 29, 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 28, 2013, in conformity with U.S. generally accepted accounting principles.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Dixie Group, Inc.'s internal control over financial reporting as of December 28, 2013, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 12, 2014 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP

Atlanta, Georgia
March 12, 2014





THE DIXIE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
 
December 28,
2013
 
December 29,
2012
ASSETS
 
 
 

CURRENT ASSETS
 
 
 
Cash and cash equivalents
$
255

 
$
491

Receivables, net
44,063

 
32,469

Inventories
93,667

 
72,245

Deferred income taxes
6,622

 
5,615

Other current assets
5,182

 
4,235

TOTAL CURRENT ASSETS
149,789

 
115,055

 
 
 
 
PROPERTY, PLANT AND EQUIPMENT, NET
74,485

 
69,483

OTHER ASSETS
24,592

 
17,232

TOTAL ASSETS
$
248,866

 
$
201,770

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
CURRENT LIABILITIES
 
 
 
Accounts payable
$
21,679

 
$
14,891

Accrued expenses
26,202

 
19,147

Current portion of long-term debt
6,229

 
4,059

TOTAL CURRENT LIABILITIES
54,110

 
38,097

 
 
 
 
LONG-TERM DEBT
101,759

 
80,166

DEFERRED INCOME TAXES
4,072

 
3,824

OTHER LONG-TERM LIABILITIES
18,154

 
15,637

TOTAL LIABILITIES
178,095

 
137,724

 
 
 
 
COMMITMENTS AND CONTINGENCIES (See Note 17)


 


 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
Common Stock ($3 par value per share):  Authorized 80,000,000 shares, issued and outstanding - 12,441,356 shares for 2013 and 12,173,961 shares for 2012
37,324

 
36,522

Class B Common Stock ($3 par value per share): Authorized 16,000,000 shares, issued and outstanding - 870,287 shares for 2013 and 952,784 shares for 2012
2,611

 
2,858

Additional paid-in capital
137,170

 
136,744

Accumulated deficit
(106,550
)
 
(111,840
)
Accumulated other comprehensive income (loss)
216

 
(238
)
TOTAL STOCKHOLDERS' EQUITY
70,771

 
64,046

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
248,866

 
$
201,770


See accompanying notes to the consolidated financial statements.





THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
 
Year Ended
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
NET SALES
$
345,066

 
$
266,372

 
$
270,110

Cost of sales
259,427

 
201,000

 
204,604

GROSS PROFIT
85,639

 
65,372

 
65,506

 
 
 
 
 
 
Selling and administrative expenses
76,554

 
63,489

 
60,667

Other operating (income) expense, net
494

 
68

 
(266
)
Facility consolidation and severance expenses, net

 

 
(563
)
OPERATING INCOME
8,591

 
1,815

 
5,668

 
 
 
 
 
 
Interest expense
3,756

 
3,146

 
3,470

Other (income) expense, net
26

 
(277
)
 
(75
)
Refinancing expenses
94

 

 
317

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE TAXES
4,715

 
(1,054
)
 
1,956

Income tax provision (benefit)
(643
)
 
(401
)
 
684

INCOME (LOSS) FROM CONTINUING OPERATIONS
5,358

 
(653
)
 
1,272

Loss from discontinued operations, net of tax
(68
)
 
(274
)
 
(286
)
NET INCOME (LOSS)
$
5,290

 
$
(927
)
 
$
986

 
 
 
 
 
 
BASIC EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
Continuing operations
$
0.40

 
$
(0.05
)
 
$
0.10

Discontinued operations
(0.01
)
 
(0.02
)
 
(0.02
)
Net income (loss)
$
0.39

 
$
(0.07
)
 
$
0.08

 
 
 
 
 
 
BASIC SHARES OUTSTANDING
12,737

 
12,638

 
12,585

 
 
 
 
 
 
DILUTED EARNINGS (LOSS) PER SHARE:
 
 
 
 
 
Continuing operations
$
0.40

 
$
(0.05
)
 
$
0.10

Discontinued operations
(0.01
)
 
(0.02
)
 
(0.02
)
Net income (loss)
$
0.39

 
$
(0.07
)
 
$
0.08

 
 
 
 
 
 
DILUTED SHARES OUTSTANDING
12,852

 
12,638

 
12,623

 
 
 
 
 
 
DIVIDENDS PER SHARE:
 
 
 
 
 
Common Stock
$

 
$

 
$

Class B Common Stock

 

 


See accompanying notes to the consolidated financial statements. 

Table of Contents    36    




THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)

 
Year Ended
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
NET INCOME (LOSS)
$
5,290

 
$
(927
)
 
$
986

 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
Unrealized gain (loss) on interest rate swaps
236

 
(476
)
 
(412
)
Reclassification of loss into earnings from interest rate swaps
176

 
98

 
268

Amortization of unrealized loss on dedesignated interest rate swaps
98

 
289

 
93

Unrecognized net actuarial gain on postretirement benefit plans
20

 
20

 
67

Reclassification of net actuarial gain into earnings from postretirement benefit plans
(22
)
 
(27
)
 
(18
)
Reclassification of prior service credits into earnings from postretirement benefit plans
(54
)
 
(54
)
 
(55
)
 

 

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
454

 
(150
)
 
(57
)
 
 
 
 
 
 
COMPREHENSIVE INCOME (LOSS)
$
5,744

 
$
(1,077
)
 
$
929


See accompanying notes to the consolidated financial statements.

Table of Contents    37    




THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
 
Year Ended
 
December 28,
2013
 
December 29,
2012
 
December 31,
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 

 
 

 
 

Income (loss) from continuing operations
$
5,358

 
$
(653
)
 
$
1,272

Loss from discontinued operations
(68
)
 
(274
)
 
(286
)
Net income (loss)
5,290

 
(927
)
 
986

 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities, net of acquisitions:
 
 
 
 
 
Depreciation and amortization
10,262

 
9,396

 
9,649

Provision (benefit) for deferred income taxes
(1,037
)
 
(643
)
 
(254
)
Net (gain) loss on property, plant and equipment disposals
195

 
(186
)
 
37

Stock-based compensation expense
847

 
937

 
663

Excess tax benefits from stock-based compensation
(151
)
 

 

Write-off of deferred financing costs
94

 

 
92

Changes in operating assets and liabilities:
 
 
 
 
 
Receivables
(11,479
)
 
(3,296
)
 
2,204

Inventories
(19,283
)
 
(8,115
)
 
(5,650
)
Other current assets
(878
)
 
(2,506
)
 
(313
)
Accounts payable and accrued expenses
11,642

 
1,455

 
(1,724
)
Other operating assets and liabilities
(1,423
)
 
(827
)
 
(636
)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(5,921
)
 
(4,712
)
 
5,054

 
 
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
 
 
Net proceeds from sales of property, plant and equipment
48

 
187

 
5

Purchase of property, plant and equipment
(11,438
)
 
(3,386
)
 
(6,740
)
Net cash paid in business acquisitions
(2,170
)
 
(1,197
)
 

NET CASH USED IN INVESTING ACTIVITIES
(13,560
)
 
(4,396
)
 
(6,735
)
 
 
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
 
 
Net payments on previous credit line

 

 
(30,503
)
Payments on previous term loan

 

 
(11,324
)
Net borrowings on current credit line
25,152

 
7,316

 
52,806

Borrowings on current mortgage note payable

 

 
11,063

Payments on current mortgage note payable
(10,141
)
 
(737
)
 
(185
)
Payments on previous mortgage note payable

 

 
(5,736
)
Payments on note payable related to acquisition
(852
)
 
(161
)
 

Borrowings on equipment financing
4,312

 
5,003

 
1,794

Payments on equipment financing
(1,212
)
 
(1,293
)
 
(2,660
)
Payments on capitalized leases
(688
)
 
(204
)
 
(360
)
Borrowings on notes payable
2,429

 
795

 
733

Payments on notes payable
(851
)
 
(746
)
 
(609
)
Payments on subordinated indebtedness

 

 
(12,162
)
Change in outstanding checks in excess of cash
1,350

 
(205
)
 
366

Proceeds from stock option exercises
190

 

 

Repurchases of Common Stock
(207
)
 
(199
)
 
(131
)
Excess tax benefits from stock-based compensation
151

 

 

Payments for debt issuance costs
(388
)
 
(268
)
 
(1,357
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
19,245

 
9,301

 
1,735

 
 
 
 
 
 
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(236
)
 
193

 
54

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
491

 
298

 
244

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
255

 
$
491

 
$
298

 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents    38    




SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
 
Equipment purchased under capital leases
$
1,865

 
$
666

 
$
14

Fair value of assets acquired in acquisitions
8,062

 
9,184

 

Liabilities assumed in acquisitions
(836
)
 
(42
)
 

Note payable related to acquisition
(3,749
)
 
(5,500
)
 

Accrued consideration related to acquisition
(1,307
)
 
(2,445
)
 


See accompanying notes to the consolidated financial statements.

Table of Contents    39    




THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)

 
Common Stock
 
Class B Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders' Equity
Balance at December 25, 2010
$
35,926

 
$
2,603

 
$
135,831

 
$
(111,899
)
 
$
(31
)
 
$
62,430

Repurchases of Common Stock - 29,069 shares
(87
)
 

 
(44
)
 

 

 
(131
)
Restricted stock grants issued - 91,340 shares
211

 
63

 
(274
)
 

 

 

Class B converted into Common Stock - 6,197 shares
18

 
(18
)
 

 

 

 

Stock-based compensation expense

 

 
663

 

 

 
663

Reclassification of deferred compensation on Directors' stock

 

 
494

 

 

 
494

Net income

 

 

 
986

 

 
986

Other comprehensive loss

 

 

 

 
(57
)
 
(57
)
Balance at December 31, 2011
36,068

 
2,648

 
136,670

 
(110,913
)
 
(88
)
 
64,385

Repurchases of Common Stock - 50,444 shares
(151
)
 

 
(48
)
 

 

 
(199
)
Restricted stock grants issued - 289,233 shares
609

 
258

 
(867
)
 

 

 

Restricted stock grants forfeited - 17,229 shares
(52
)
 

 
52

 

 

 

Class B converted into Common Stock - 15,925 shares
48

 
(48
)
 

 

 

 

Stock-based compensation expense

 

 
937

 

 

 
937

Net loss

 

 

 
(927
)
 

 
(927
)
Other comprehensive loss

 

 

 

 
(150
)
 
(150
)
Balance at December 29, 2012
36,522

 
2,858

 
136,744

 
(111,840
)
 
(238
)
 
64,046

Common Stock issued - 50,464 shares
151

 

 
39

 

 

 
190

Repurchases of Common Stock - 38,815 shares
(116
)
 

 
(91
)
 

 

 
(207
)
Restricted stock grants issued - 173,249 shares
346

 
174

 
(520
)
 

 

 

Class B converted into Common Stock - 140,477 shares
421

 
(421
)
 

 

 

 

Stock-based compensation expense

 

 
847

 

 

 
847