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DXYN > SEC Filings for DXYN > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for DIXIE GROUP INC

Form 10-Q for DIXIE GROUP INC


7-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is presented to update the discussion of results of operations and financial condition included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies were outlined in Management's Discussion and Analysis of Results of Operations and Financial Condition in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no significant changes to those critical accounting policies subsequent to the date of that report.

OVERVIEW

We believe that since 2011, increased resales and remodeling of existing homes and commercial facilities, have positively affected our sales growth to a greater extent than the industry in general because of the higher-end markets where our products are concentrated. While our business was more deeply affected by the economic downturn in 2008 through 2010, 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 has been significantly above that of the industry as the economy rebounded subsequent to the downturn.

We believe our business was severely negatively impacted by the extreme weather conditions that affected much of the country during January and February. Although our sales growth continued to outpace the carpet industry in our first quarter 2014 year-over-year period, our comparative growth in January and February of 2014 was significantly below the growth we were experiencing in the more recent historical periods and the growth we anticipated during this period. We did see our sales growth rate increase in March compared with the same period in 2013 and, during the first four weeks of April, have seen higher rates of sales growth versus 2013, returning to levels we anticipated.

During 2013 and 2012, we embarked upon several strategic and tactical initiatives that we believe will permit us to strengthen future results. 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. 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 and acquired a wool manufacturing facility in Calhoun, Georgia that has permitted us to enhance our wool processing capabilities and related product offerings. In addition, we acquired certain dyeing technology we did not previously have that will further enhance our ability to provide a broader array of differentiated products.

As we have modified and enhanced our continuous dye line in Calhoun, Georgia, our capacity and capabilities have expanded. We continue to assess all of our dyeing and ancillary assets to determine whether, and to what extent, further rationalization of assets may be prudent.

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 was designed to strengthen our position in our wool product line where we have seen continued growth. 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. The implementation of these initiatives has had a negative effect on our results during the latter part of 2013 and the first quarter of 2014. We are nearing the new product launch for a number of wool products and the equipment realignment.

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 leasing a 292,000 square foot facility that will serve as a finished goods warehouse and a cut-order and distribution center in Adairsville, Georgia; such lease commencing on May 1, 2014.

We expect the plan to be substantially completed by mid-part of fiscal 2015. We currently expect the implementation of this plan to result in total restructuring expenses of approximately $2.4 million, with approximately $1.4 million of such expenses during the fiscal 2014 and approximately $1.0 million of such expenses during the fiscal 2015. These expenses primarily consist of moving and relocation expenses, information technology expenses and expenses relating to conversion and realignment of equipment.

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Effective March 19, 2014, we acquired Atlas Carpet Mills, Inc. ("Atlas"). Total consideration for the acquisition was approximately $18.9 million. Atlas is a California based manufacturer and marketer of high-end commercial broadloom and tile carpeting serving soft floorcovering markets. Atlas has a strong reputation for exceptional design, quality and service. This brand will be sold through the existing Atlas sales force and will serve to broaden our product offerings for commercial applications along with our Masland Contract brand. The existing management of Atlas will continue with the Company. Prior to the acquisition, we were a long-time supplier of yarn to Atlas through our Candlewick Yarn operation and provided certain tile manufacturing services for their tile product line.

We recognized a gain of $8.7 million on the purchase of Atlas. We believe that several factors were significant in the recognition of a gain from the acquisition of Atlas. Atlas had higher cost of dyeing due to the lack of capacity utilization and therefore needed to lower costs by combining dye facilities with another operation. In addition, Atlas had a higher cost of modular carpet tile manufacturing due to outsourcing the tile manufacturing operations. Therefore, Atlas would have had to make significant investments in product and manufacturing equipment to be competitive in the modular carpet manufacturing business. Finally, the Seller had the desire to see Atlas operated as an independent brand and organization in the future. All of these objectives were achieved by combining Atlas with us in a mutually advantageous relationship.

As a part of the Atlas acquisition, we will discontinue operations at the Atlas dyeing facility in Los Angeles and move the carpet dyeing of their products to our Susan Street dyeing operation located in Santa Ana, California. We adopted a formal plan to accommodate the dyeing move and address the modification of computer systems. The costs of these initiatives are expected to be approximately $1.5 million and should be completed in fiscal 2015. During the quarter ended March 29, 2014, we incurred costs of $73 thousand associated with this plan.

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. We believe the actions discussed above have been, and are, necessary to position us to more fully take advantage of the markets we serve and have helped to facilitate the growth we have experienced and that we anticipate in the future.

RESULTS OF OPERATIONS

The following table sets forth certain elements of our continuing operations as
a percentage of net sales for the periods indicated:
                                      March 29,    March 30,
                                         2014         2013
Net sales                               100.0  %     100.0  %
Cost of sales                            78.9  %      75.6  %
Gross profit                             21.1  %      24.4  %
Selling and administrative expenses      23.7  %      22.4  %
Other operating (income) expense, net     0.2  %      (0.2 )%
Facility consolidation expenses           0.1  %         -  %

Operating income (loss) (2.9 )% 2.2 %

Net Sales. Net sales for the quarter ended March 29, 2014 was $85.3 million, an increase of 13.1% compared with net sales of $75.4 million for the year-earlier quarter. In the first quarter of 2014, residential carpet sales increased 9.4% and net sales of commercial carpet increased 18.0% compared with the first quarter of 2013, or an increase in commercial sales of 9.6% excluding the sales attributable to Atlas for the period of March 20, 2014 through March 29, 2014. We believe our sales were negatively affected by the extreme weather conditions during the first quarter of 2014.

Cost of Sales. Cost of sales as a percentage of net sales was 78.9% in the first quarter of 2014 compared with 75.6% in the first quarter of 2013. The 2014 period included $1.5 million of costs directly attributable to the adverse weather conditions and manufacturing inefficiencies related to replacement of the dryer at our Colormaster continuous dyeing facility. Additionally, the adverse weather conditions during the first quarter impacted our production resulting in under absorption of fixed costs. The 2013 period was negatively affected by integration and expansion costs of $1.3 million related to the acquisition of the Colormaster continuous dyeing facility in late 2012, the integration of the Crown Rug assets and startup expenses related to the continued expansion of our tufting operation in Eton, Georgia.

Gross Profit. Gross profit was $18.0 million in the first quarter of 2014 compared with $18.4 million in the year-earlier period. Our gross profit was impacted from the weather in the first quarter of 2014 due to both lower sales and higher per unit costs of production.

Selling and Administrative Expenses. Selling and administrative expenses increased 1.3 percentage points as a percentage of sales in the first quarter of 2014 compared with the first quarter of 2013. The first quarter of 2014 included $455 thousand of

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costs related to the Atlas acquisition and the formation of the joint venture and $620 thousand related to the rebranding of certain wool products and other marketing initiatives.

Other Operating (Income) Expense, Net. Other operating (income) expense, net was an expense of $152 thousand in the first quarter of 2014 and income of $160 thousand in the first quarter of 2013. The first quarter of 2014 included currency valuation losses of $83 thousand in excess of such losses in the prior-year period. The 2013 period included a gain of $202 thousand related to settlement of a company-owned insurance policy.

Facility Consolidation Expenses. These expenses are related to the Atlas dye house consolidation subsequent to the Atlas acquisition on March 19, 2014 (see discussion in overview commentary above).

Operating Income (Loss). We reported an operating loss of $2.5 million in the first quarter of 2014 compared with operating income of $1.7 million in the first quarter of 2013. Operating results in the 2014 reporting period were negatively affected by the weather-related costs discussed, manufacturing inefficiencies related to the replacement of the dryer at Colormaster, the Atlas acquisition-related expenses and market-related expenses.

Interest Expense. Interest expense increased $17 thousand in the first quarter of 2014 compared with the first quarter of 2013. Although debt was higher in the first quarter of 2014 compared with the first quarter of 2013, our effective interest rates were lower.

Other Expense, Net. Other expense, net was not significant in the first quarter of 2014 or 2013.

Income Tax Provision. Our effective income tax rate is based upon estimated annual income tax rates. The effective income tax rate in the first quarter of 2014 was 37.0%, which approximates the Company's statutory tax rate. The difference between the effective tax rate and the statutory tax rate for the three months ended March 29, 2014 was affected by certain non-deductible expenses and a tax benefit for tax deductible goodwill. In addition, the Company realized a tax benefit for the use of certain state net operating losses that had a valuation allowance. The effective tax rate in the first quarter of 2013 differed from statutory rates primarily due to the effect of the domestic manufacturing deduction inherent in development of the 2013 estimated tax rate, benefits of certain 2012 federal tax credits required to be recognized in the first quarter of 2013 as the law had not been passed until January 2013 and as a result of a non-taxable settlement gain related to company-owned insurance.

Income from Continuing Operations. We had income from continuing operations of $3.3 million, or $0.24 per diluted share in the first quarter of 2014 compared with income from continuing operations of $651 thousand, or $0.05 per diluted share in the first quarter of 2013. The pretax gain of $8.7 million on the purchase of Atlas had a positive effect on income from continuing operations of approximately $5.5 million after-tax, or $0.42 per diluted share.

Net Income. Discontinued operations reflected a loss of $40 thousand, or $0.00 per diluted share, in the first quarter of 2014 compared with a loss of $15 thousand, or $0.00 per diluted share, in the same period in 2013. Including discontinued operations, we had net income of $3.3 million, or $0.24 per diluted share, in the first quarter of 2014 compared with net income of $636 thousand, or $0.05 per diluted share, in the first quarter of 2013. The pretax gain of $8.7 million on the purchase of Atlas had a positive effect on net income of approximately $5.5 million after-tax, or $0.42 per diluted share.

LIQUIDITY AND CAPITAL RESOURCES

During the three months ended March 29, 2014, debt increased $23.1 million under our senior credit line and equipment financing agreements and an additional $1.5 million related to assets acquired under capital leases for a total increase in debt of $24.6 million. These funds were used to finance our operations; including $3.6 million in operating activities, $14.1 million related to the Atlas acquisition, $2.8 million in property, plant and equipment purchases, $2.2 million to fund outstanding checks and $158 thousand for miscellaneous cash outlays.

Excluding assets acquired and liabilities assumed in the Atlas acquisition and the change in the current portion of debt, working capital increased $1.3 million in the first three months of 2014. The increase was principally attributable to an increase in inventories commensurate with the higher level of business.

Capital asset acquisitions for the three months ended March 29, 2014 were $4.3 million; $2.8 million through funded debt and $1.5 million of equipment acquired under capital leases, while depreciation and amortization was $3.0 million. We expect capital expenditures and capital leases combined to be approximately $18.0 million in 2014 for normal capital expenditures while depreciation and amortization is expected to be approximately $12.5 million. Planned capital expenditures in 2014 are primarily for new equipment.

Debt Facilities

On March 14, 2014, we amended the senior credit facility ("amended senior credit facility"), effective as of March 19, 2014 to permit the acquisition of Atlas by means of an over advance ("Tranche B Advance") of $5.4 million maturing on June 30, 2014. The Tranche B Advance bears interest at a rate of 3.50% plus LIBOR, subject also to various availability percentages, limitat

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ions, covenants and conditions. In addition, the revolving portion of the facility ("Tranche A Advance") provides for a maximum of $150 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 March 14, 2019.

At our election, Tranche A Advances of the amended senior credit facility bear interest at annual rates equal to either (a) LIBOR for 1, 2 or 3 month periods, as we may select, 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 us to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability is less than $14.44 million through May 31, 2014 and increases to $16.5 million from and after June 1, 2014. The amendment also provided for a waiver of the measurement and application of the fixed charge coverage ratio that would otherwise be required by a reduction in excess availability from March 14, 2014 through, and including, April 13, 2014. As of March 29, 2014, the unused borrowing availability under the amended senior credit facility was $20.6 million.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2011, the Financial Accounting Standards Board ("FASB") issued ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." The amendments in this ASU required 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 was 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 had to 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 clarified that ordinary trade receivables and payables were not in the scope of ASU No. 2011-11. ASU No. 2011-11 applied only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that were either offset in accordance with specific criteria contained in the Codification or subject to a master netting arrangement or similar agreement. The effective date was the same as the effective date of ASU 2011-11. The adoption of these ASUs did not have a material effect on our Consolidated Condensed 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 provided 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 was fixed at the reporting date, except for obligations addressed within existing guidance in GAAP. For public entities, the ASU was 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 existed at the beginning of an entity's fiscal year of adoption. Early adoption was permitted. The adoption of this ASU did not have a material effect on our Consolidated Condensed 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 required 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 was not available at the reporting date, the unrecognized tax benefit will be presented in the financial statements as a liability and not combined with deferred tax assets. This ASU was effective for annual and interim periods beginning after December 15, 2013, with early adoption permitted. The adoption of this ASU did not have a material effect on our Consolidated Condensed Financial Statements.

In April 2014, the FASB issued ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity". The ASU was issued to change the requirements for reporting discontinued operations and to enhance the disclosures in this area. The ASU requires a disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift and will have a major effect on an entity's operations and financial results. The ASU will be effective prospectively for interim and annual reporting periods beginning after December 15, 2014. The adoption of this ASU will only impact our reporting and disclosures of future disposals, if any.

CERTAIN FACTORS AFFECTING THE COMPANY'S PERFORMANCE

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In addition to the other information provided in this Report, the risk factors included in Item 1A 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.

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. These statements include the use of terms or phrases that include such terms 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 floor covering markets we serve and other risks detailed from time to time in our filings with the Securities and Exchange Commission.

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