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DXYN > SEC Filings for DXYN > Form 10-Q on 6-Aug-2014All Recent SEC Filings

Show all filings for DIXIE GROUP INC

Form 10-Q for DIXIE GROUP INC


6-Aug-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 resale 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. 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 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 the first six months of 2014 year-over-year period, our comparative growth in January and February of 2014 was significantly below the growth we had experienced in recent periods and the growth we anticipated during the first quarter of 2014. Beginning in March, we saw our sales growth rate increase compared with the same period in 2013 and, during the second quarter of 2014, have seen higher rates of sales growth versus 2013, returning to levels we anticipated. Additionally, our growth in the second quarter and first six months of 2014 compared with the prior-year periods included the results of Atlas Carpet Mills, Inc. ("Atlas") after the acquisition in late March of 2014.

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.

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. As our wool production capabilities are being expanded and enhanced, we are developing new products and investing in increased sampling for these products. The implementation of these initiatives had a negative effect on our results during the latter part of 2013 and the first quarter of 2014. We are nearing the launch for a number of wool products and the completion of 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 was 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; the lease commenced on May 1, 2014. In June of 2014, the Board of Directors approved a modification of this plan to include the elimination of both carpet dyeing and yarn dyeing in our Atmore, Alabama facility designed to more fully accommodate our distribution and manufacturing realignment. As a result, the dyeing operations in Atmore will be moved to our Colormaster continuous dyeing facility, our Calhoun Wool skein dyeing operation and other outside dyeing processors.

Prior to the June 2014 plan modification, estimated expenses were approximately $2.4 million, with approximately $1.4 million of such expenses anticipated during fiscal 2014 and approximately $1.0 million of such expenses during fiscal 2015. These expenses primarily consist of moving and relocation expenses, information technology expenses and expenses relating to conversion and realignment of equipment. The modified plan is estimated to include additional expenses of approximately $1.4 million; $600 thousand in 2014 primarily for facility restoration and equipment relocation and $800 thousand in 2015 for additional distribution relocation and facility restoration expenses. During the three and six months ended June 28, 2014, we incurred costs of $384 thousand related to this plan. In addition, we had a non-cash asset impairment charge of $655 thousand related to manufacturing equipment that is being taken out of service in our Atmore facility.

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Effective March 19, 2014, we acquired Atlas. Total consideration for the acquisition was approximately $18.7 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 and Avant brands. 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 in the first quarter of 2014 based on certain provisional valuations. We retrospectively applied adjustments of $1.9 million to the initial provisional amount in the first quarter of 2014. The increase was primarily attributable to the Atlas dye house that was idled as a result of the acquisition and reflected as an asset held for sale and to a lesser extent, inventories. Subsequent to its closure, we entered into a tentative agreement with a potential buyer for the dye house facility at a value higher than the provisional amounts originally used.

As a part of the Atlas acquisition, we discontinued operations at the Atlas dyeing facility in Los Angeles and moved 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 $1.6 million and should be completed in fiscal 2015. During the period subsequent to the acquisition through our period ended June 28, 2014, we incurred costs of $565 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:
                                      Three Months Ended         Six Months Ended
                                     June 28,     June 29,     June 28,    June 29,
                                       2014         2013         2014        2013
Net sales                             100.0 %       100.0 %    100.0  %      100.0 %
Cost of sales                          75.4 %        73.3 %     76.9  %       74.4 %
Gross profit                           24.6 %        26.7 %     23.1  %       25.6 %
Selling and administrative expenses    22.5 %        22.6 %     23.1  %       22.5 %
Other operating expense, net            0.2 %         0.2 %      0.2  %          - %
Facility consolidation expenses         0.9 %           - %      0.5  %          - %
Impairment of assets                    0.6 %           - %      0.3  %          - %
Operating income (loss)                 0.4 %         3.9 %     (1.0 )%        3.1 %

Net Sales. Net sales for the quarter ended June 28, 2014 were $108.2 million compared with net sales of $83.6 million for the year-earlier quarter, an increase of 29.4%. Net sales in the first six months of 2014 were $193.5 million compared with net sales of $159.1 million in the first six months of 2013, an increase of 21.6%. Excluding sales related to Atlas, net sales reflected increases of 14.8% and 12.9% for the three and six month periods ended June 28, 2014, respectively. In the second quarter of 2014, residential carpet sales reflected an increase of 13.7% and net sales of commercial carpet increased 83.5% (24.4% excluding Atlas) compared with the second quarter of 2013. Residential carpet sales increased 11.7% and commercial net sales increased 50.9% (17.0% excluding Atlas) in the first six months of 2014 compared with the first six months of 2013. Our residential sales in the second quarter and first six months of 2014, compared with the prior-year period, included increased sales in our higher-end channels across all of our residential brands. Our commercial business is more heavily concentrated in specified project-oriented business which, we believe, was positively affected by general economic improvements in the quarterly and year-to-date periods in 2014 compared with the prior year periods in 2013. Additionally, we believe we have been positively affected by new products and marketing initiatives implemented in our commercial business.

Cost of Sales. Cost of sales as a percentage of net sales was 75.4% in the second quarter of 2014 compared with 73.3% in the second quarter of 2013. Cost of sales was 76.9% in the first six months of 2014 compared with 74.4% in the first six months of 2013. The second quarter and first six months of 2014 were negatively affected by operational inefficiencies as we implemented our warehousing, distribution and manufacturing consolidation plan and its effect on our manufacturing processes. Additionally, the first six months of 2014 included $1.5 million of costs directly attributable to the adverse weather conditions in January and February of 2014 and manufacturing inefficiencies related to the replacement of the dryer at our Colormaster continuous dyeing

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facility. During the second quarter of 2014, we incurred higher workers' compensation cost as a result of an accident that occurred while installing equipment to accommodate the Atlas dye house integration.

Gross Profit. Gross profit dollars increased $4.3 million in the second quarter of 2014 compared with the second quarter 2013 and increased $3.9 million in the first six months of 2014 compared with the same period in 2013 primarily reflecting the effects of the increased sales volume.

Selling and Administrative Expenses. Selling and administrative expenses decreased 0.1% as a percentage of sales in the second quarter of 2014 compared with the same period in 2013 and increased 0.6% as a percentage of sales in the first six months of 2014 compared with the first six months of 2013. We did not achieve leverage of selling expense commensurate with the increase in sales volume primarily as a result of a significant number of new sales associates whose sales did not support their level of compensation.

Other Operating Expense, Net. Other operating expense was $219 thousand in the second quarter of 2014 compared with expense of $190 thousand in the prior-year period. Other operating expense was $371 thousand in the first six months of 2014 and $30 thousand in the first six months of 2013. The six months of 2013 included a gain of $202 thousand related to settlement of a company-owned insurance policy.

Facility Consolidation Expenses. We incurred expenses of $384 thousand associated with the warehousing, distribution and manufacturing consolidation plan in the three and six month periods ending June 28, 2014. Under the Atlas restructuring plan, we incurred $565 thousand and $638 thousand for the three and six month periods ending June 28, 2014, respectively.

Impairment of Assets. As a result of the discontinuance of beck and skein dyeing at our Atmore, Alabama facility related to our restructuring, certain of our dyeing related assets have been identified for disposal. The resulting charge was a $655 thousand, or 0.6% and 0.3% of sales for the three and six months ended June 28, 2014, respectively.

Operating Income (Loss). We reported operating income of $440 thousand in the second quarter of 2014 compared with operating income of $3.3 million in the second quarter of 2013. We reported an operating loss of $2.0 million in the first six months of 2014 compared with operating income of $4.9 million in the first six months of 2013. Operating results in the 2014 reporting periods were negatively affected by the weather related conditions in January and February and as a result of costs associated with the warehousing, distribution and manufacturing consolidation plans and the workers' compensation expense.

Interest Expense. Interest expense increased $289 thousand in the second quarter of 2014 and $305 thousand for the first six months of 2014, respectively compared with the same periods in 2013. The increases are principally a result of higher levels of debt in the 2014 periods primarily as a result of debt related to increased working capital to support the higher levels of business activity and the Tranche B loan associated with the Atlas acquisition.

Other (Income) Expense, Net. Other (income) expense in the second quarter and first six months of 2014 or 2013 was not significant.

Income Tax Provision (Benefit). Our effective income tax rates are based upon estimated annual tax rates. Our income tax provision in the second quarter and first six months of 2014 included the recognition of approximately $117 thousand of tax expense related to certain market-based stock awards that were not earned. Additionally, the second quarter of 2014 included the recognition of additional expenses related to the true-up of our year-to-date provision pertaining to a revision of the annual estimated tax provision. Excluding the tax adjustment for the stock award, our tax provision rate was 38.3% for the first six months of 2014. Our effective income tax provision rate was 27.0% in the second quarter of 2013 and 21.6% for the first six months of 2013. The effective tax rates in the second quarter and first six months of 2013 differed from statutory rates primarily due to the effect of the estimate of federal credits, the domestic manufacturing deduction and the reversal of certain state valuation allowances. Additionally, the effective tax rate for the first six months of 2013 included the recognition of certain 2012 federal tax credits required to be recognized in the first quarter of 2013 and the effects of a non-taxable settlement gain related to company-owned insurance in the first quarter of 2013.

Income (Loss) from Continuing Operations. We had a loss from continuing operations of $605 thousand, or $0.04 per diluted share, in the second quarter of 2014 compared with income from continuing operations of $1.7 million, or $0.13 per diluted share, in the second quarter of 2013. Continuing operations reflected income of $3.8 million, or $0.27 per diluted share, for the first six months of 2014 compared with income from continuing operations of $2.3 million, or $0.17 per diluted share, in the first six months of 2013. The first six months of 2014 included an after-tax gain of approximately $6.5 million on the Atlas purchase.

Net Income (Loss). Discontinued operations reflected a loss of $39 thousand, or $0.00 per diluted share, in the second quarter of 2014 compared with a loss of $32 thousand, or $0.00 per diluted share, in the same period in 2013. Discontinued operations reflected a loss of $79 thousand, or $0.01 per diluted share, in first the first six months of 2014 compared with a loss of $47 thousand, or $0.00 per diluted share, in the first six months of 2013. Including discontinued operations, we had a net loss of $644 thousand, or $0.04 per diluted share, in the second quarter of 2014 compared with net income of $1.6 million, or $0.13 per diluted share, in the second quarter of 2013.The first six months of 2014 reflected net income of $3.8 million, or $0.26 per diluted share, compared with net income of $2.3 million, or $0.17 per diluted share, in the comparable six month period in 2013.

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LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 28, 2014, we generated funds of $24.6 million from the May 2014 equity offering, net of issuance costs including the underwriter discount. Additionally, debt increased $6.7 million under our senior credit line, equipment financing agreements and capital leases related to assets acquired. The increase in debt included $404 thousand of debt assumed in the acquisition of Atlas, $3.4 million related to capitalized leases and $2.3 million of machinery deposits funded by a lender. These funds were used to finance our operations; including $3.8 million in operating activities, $14.1 million related to the Atlas acquisition, $5.1 million in property, plant and equipment purchases (excluding $3.4 million of assets under capitalized leases), $507 thousand for deposits on machinery, $1.5 million to fund outstanding checks and $475 thousand for repurchases of our stock.

Excluding assets acquired and liabilities assumed in the Atlas acquisition and the change in the current portion of debt, working capital increased $7.3 million in the first six months of 2014. The increase was a result of an increase in inventories and accounts receivable, net of accounts payable and accrued expenses, commensurate with the increased level of business activity.

Capital asset acquisitions for the six months ended June 28, 2014 were $8.5 million; $5.1 million through funded debt and $3.4 million of equipment acquired under capital leases, while depreciation and amortization was $6.3 million. We expect capital expenditures and capital leases combined to be approximately $19.0 million in 2014 while depreciation and amortization is expected to be approximately $12.7 million. Planned capital expenditures in 2014 are primarily for new equipment.

Debt Facilities

On March 14, 2014, we amended our senior credit facility ("amended senior credit facility"), effective as of March 19, 2014 to permit the acquisition of Atlas Carpet Mills, Inc. by means of an over advance ("Tranche B Advance") of $5.4 million which increased to 5.8 million and matured on June 30, 2014. The Tranche B Advance bore interest at a rate of 3.50% plus LIBOR, subject also to various availability percentages, limitations, covenants and conditions. In addition, the revolving portion of the facility ("Tranche A Advance") provides for a maximum of $150.0 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 amended senior credit facility was extended from August 1, 2018 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 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 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 includes certain affirmative and negative covenants that impose restrictions on our financial and business operations. The amended senior credit facility required us to maintain a fixed charge coverage ratio of 1.1 to 1.0 during any period that borrowing availability was less than $14.4 million through May 31, 2014 and increased to $16.5 million after May 31, 2014. The amendment also provided for a waiver of the measurement and application of the fixed charge coverage ratio that would otherwise have been required by a reduction in excess availability from March 14, 2014 through and including April 13, 2014. As of June 28, 2014, the unused borrowing availability under the amended senior credit facility was $46.5 million. Subsequent to June 28, 2014, availability decreased by the amount of the Tranche B repayment.

Equity Offering

On May 20, 2014, we completed a public offering of 2.5 million shares of our common stock. Net proceeds from the offering were $24.6 million and were used to reduce the balance under our revolving credit facility and to pay off the $5.8 million Tranche B Advance associated with the recent acquisition of Atlas Carpet Mills which matured on June 30, 2014.

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

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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.

In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We have not yet selected a transition method. We will be evaluating the effect that the ASU will have on our Consolidated Condensed Financial Statements and related disclosures.

CERTAIN FACTORS AFFECTING THE COMPANY'S PERFORMANCE

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