FIRE AT AUSTRALIAN MANUFACTURING FACILITY

On July 20, 2012, a fire occurred at the Company’s manufacturing facility in Picton, Australia. The facility’s carpet production line, primarily comprised of tufting and backing machinery, sustained extensive damage and was rendered inoperable. Other areas of the Company’s Picton site relating to yarn preparation and warehousing were largely undamaged by the fire. The finished goods inventory and some raw materials for the business are kept at a separate offsite location and were not affected by this incident.

The Picton facility served the Company’s customers throughout Australia and New Zealand. It represented approximately 7% of the Company’s total annual production, 10% of its net sales, and 13% of its operating income. Since the fire, the Company has utilized adequate production capacity at its manufacturing facilities in Thailand, China and elsewhere to meet customer demand typically serviced from Picton. The Company has business interruption and property damage insurance. The Company is in the process of building a new manufacturing facility in Minto, Australia and expects it to become operational in late 2013.

In 2012, the Company recorded a charge of approximately $22.3 million for impairment of fixed assets related to the fire, and incurred approximately $21.3 million of excess production costs related to the fire as it has utilized other facilities to service customers in the Australia and New Zealand markets. As of the end of 2012, the Company has determined that the receipt of reimbursement of these expenses from its insurer is probable in accordance with its insurance policies and has therefore recorded a receivable for these items. As of year-end 2012, the Company had received $20.7 million of reimbursement from the insurance company related to the fire at the Picton facility. The table below details the nature of expenses as well as insurance receivables and amounts already received related to the fire:


	2012
	(in millions)
Impairment of fixed assets at the Picton Facility	$	22.3
Incremental payroll costs		2.9
Incremental shipping costs		15.5
Other incremental costs		2.9

Total incurred costs through December 30, 2012	$	43.6

Insurance recovery receivable	$	22.9
Insurance recoveries already received	$	20.7

In addition to these additional production costs, the Company has incurred approximately $1.7 million of costs related to the fire that are non-production related and at this time are not considered probable of recovery from the insurance company. As a result, these amounts are included in the determination of operating income as shown on the line item “Expenses Related to Australia Fire” on the consolidated condensed statement of operations.

The Company is gathering information related to an insurance claim for lost profits as a result of the fire. As of the end of 2012, the Company has not recorded any receivables or amounts for lost profits, but expects to do so at a later date as information and analysis become more complete and recovery becomes probable.