10-Q 1 g65495e10-q.txt THE DIXIE GROUP, INC. 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 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 (I.R.S. Employer incorporation or organization) Identification No.) 345-B Nowlin Lane Chattanooga, Tennessee 37421 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (423) 510-7010 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. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding as of November 8, 2000 Common Stock, $3 Par Value 10,706,877 shares Class B Common Stock, $3 Par Value 795,970 shares Class C Common Stock, $3 Par Value 0 shares
2 THE DIXIE GROUP, INC. INDEX
Part I. Financial Information: Page No. Item 1 - Financial Statements Consolidated Condensed Balance Sheets -- September 30, 2000 and December 25, 1999 3 Consolidated Condensed Statements of Operations -- Three and Nine Months Ended September 30, 2000 and September 25, 1999 5 Consolidated Condensed Statements of Cash Flows -- Nine Months Ended September 30, 2000 and September 25, 1999 6 Consolidated Condensed Statements of Stockholders' Equity -- Nine Months Ended September 30, 2000 8 Notes to Consolidated Condensed Financial Statements 9 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 16 Item 3 - Quantitative and Qualitative Disclosures About Market Risks 19 Part II. Other Information: Item 1 - Legal Proceedings 19 Item 2 - Changes in Securities and Use of Proceeds 19 Item 3 - Defaults Upon Senior Securities 19 Item 4 - Submission of Matters to a Vote of Security Holders 19 Item 5 - Other Information 19 Item 6 - Exhibits and Reports on Form 8-K 19
2 3 PART I - ITEM 1 FINANCIAL INFORMATION THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
September 30, December 25, 2000 1999 ------------- ------------ (dollar amounts in thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,614 $ 12,541 Accounts receivable (less allowance for doubtful accounts of $2,044 for 2000 and $1,831 for 1999) 25,161 19,454 Inventories 122,427 104,042 Net assets held for sale 68 457 Other 18,263 14,471 --------- --------- TOTAL CURRENT ASSETS 169,533 150,965 PROPERTY, PLANT AND EQUIPMENT 330,741 307,766 Less accumulated amortization and depreciation (144,038) (134,180) --------- --------- NET PROPERTY, PLANT AND EQUIPMENT 186,703 173,586 INTANGIBLE ASSETS (less accumulated amortization of $7,317 for 2000 and $6,190 for 1999) 51,139 52,460 INVESTMENT IN AFFILIATE 11,589 -- OTHER ASSETS 17,210 14,890 --------- --------- TOTAL ASSETS $ 436,174 $ 391,901 ========= =========
See Notes to Consolidated Condensed Financial Statements. 3 4 THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
September 30, December 25, 2000 1999 ------------- ------------- (dollar amounts in thousands) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 52,921 $ 53,590 Accrued expenses 20,766 26,241 Accrued losses of discontinued operations 2,661 3,461 Current portion of long-term debt 14,019 13,460 --------- --------- TOTAL CURRENT LIABILITIES 90,367 96,752 LONG-TERM DEBT Senior indebtedness 120,798 60,961 Subordinated notes 40,476 45,238 Convertible subordinated debentures 34,737 37,237 --------- --------- TOTAL LONG-TERM DEBT 196,011 143,436 OTHER LIABILITIES 10,238 10,295 DEFERRED INCOME TAXES 25,426 23,508 STOCKHOLDERS' EQUITY Common Stock ($3 par value per share) authorized 80,000,000 shares - issued and outstanding, 14,226,315 shares for 2000 and 14,264,277 shares for 1999 42,679 42,793 Class B Common Stock ($3 par value per share) authorized 16,000,000 shares - issued and outstanding, 795,970 shares for 2000 and 1999 2,388 2,388 Common Stock Subscribed - 805,801 shares for 2000 and 620,516 shares for 1999 2,417 1,861 Additional paid-in capital 135,189 136,144 Stock subscriptions receivable (5,456) (5,456) Unearned stock compensation (106) (489) Retained earnings (deficit) (6,265) (2,659) Accumulated other comprehensive income (412) (412) --------- --------- 170,434 174,170 Less Common Stock in treasury at cost - 3,519,438 shares for 2000 and 3,511,829 shares for 1999 (56,302) (56,260) --------- --------- TOTAL STOCKHOLDERS' EQUITY 114,132 117,910 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 436,174 $ 391,901 ========= =========
See Notes to Consolidated Condensed Financial Statements. 4 5 THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended -------------------------------- --------------------------------- September 30, September 25, September 30, September 25, 2000 1999 2000 1999 ------------- ------------- -------------- ------------- (dollar amounts in thousands, except per share data) Net Sales $ 142,554 $142,589 $ 414,786 $435,926 Cost of Sales 116,142 111,713 333,647 342,821 --------- -------- --------- -------- GROSS PROFIT 26,412 30,876 81,139 93,105 Selling and administrative expenses 28,751 22,267 75,319 64,626 Other (income) expense - net (824) 317 (961) 2,457 --------- -------- --------- -------- INCOME (LOSS) BEFORE (1,515) 8,292 6,781 26,022 INTEREST AND TAXES Interest expense 4,503 3,173 12,618 9,972 --------- -------- --------- -------- INCOME (LOSS) BEFORE (6,018) 5,119 (5,837) 16,050 INCOME TAXES Income tax provision (benefit) (2,342) 2,050 (2,231) 6,341 --------- -------- --------- -------- Income (loss) from Continuing Operations (3,676) 3,069 (3,606) 9,709 Income from Disposal of Discontinued Operations -- -- -- 4,419 --------- -------- --------- -------- Net income (loss) $ (3,676) $ 3,069 $ (3,606) $ 14,128 ========= ======== ========= ======== Earnings per Share: Basic Earnings (loss) per share: Income (loss) from continuing operations $ (0.32) $ 0.27 $ (0.31) $ 0.86 Income from disposal of discontinued operations -- -- -- 0.39 --------- -------- --------- -------- Net income (loss) $ (0.32) $ 0.27 $ (0.31) $ 1.25 ========= ======== ========= ======== Shares outstanding 11,470 11,390 11,471 11,318 Diluted Earnings (loss) per share: Income (loss) from continuing operations $ (0.32) $ 0.26 $ (0.31) $ 0.83 Income from disposal of discontinued operations -- -- -- 0.37 --------- -------- --------- -------- Net income (loss) $ (0.32) $ 0.26 $ (0.31) $ 1.20 ========= ======== ========= ======== Shares outstanding 11,470 11,857 11,471 11,733
See Notes to Consolidated Condensed Financial Statements. 5 6 THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended --------------------------------- September 30, September 25, 2000 1999 ------------- ------------- (dollar amounts in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (3,606) $ 14,128 Adjustments to reconcile net income (loss) to net cash provided by operating activities of continuing operations: (Income) on disposal of discontinued operations -- (4,419) Depreciation and amortization 17,923 16,945 Provision (benefit) for deferred income taxes 3,492 (1,358) (Gain) on property, plant and equipment disposals (1,933) (53) -------- -------- 15,876 25,243 Changes in operating assets and liabilities, including discontinued operations, net of effects of business combination (32,113) (23,053) -------- -------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (16,237) 2,190 CASH FLOWS FROM INVESTING ACTIVITIES Net proceeds from sale of property, plant, and equipment 17,962 91 Net proceeds from assets held for sale -- 57,380 Purchase of property, plant, and equipment (41,142) (23,845) Net cash paid in business combinations (9,117) (32,194) Investment in affiliate (11,589) -- -------- -------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (43,886) 1,432
See Notes to Consolidated Condensed Financial Statements. 6 7 THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED)
Nine Months Ended --------------------------------------- September 30, September 25, 2000 1999 ------------- ------------- (dollar amounts in thousands) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in credit line borrowings 64,915 16,921 Payments on subordinated debentures (7,262) (2,500) Payments on term loan (6,179) (14,000) Other (278) 734 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 51,196 1,155 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,927) 4,777 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,541 2,815 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,614 $ 7,592 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid $ 13,299 $ 11,289 ======== ======== Income taxes paid (refunds received) $ (201) $ 10,837 ======== ========
See Notes to Consolidated Condensed Financial Statements. 7 8 THE DIXIE GROUP, INC. CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (dollars in thousands) (UNAUDITED)
Common Accumulated Stock and Common Additional Retained Other Common Total Class B Stock Paid-In Earnings Comprehensive Stock In Stockholders' Stock Subscribed Capital Other (Deficit) Income Treasury Equity BALANCE AT DECEMBER 25, 1999 $ 45,181 $ 1,861 $ 136,144 $(5,945) $(2,659) $ (412) $(56,260) $ 117,910 Common Stock acquired for treasury - 7,609 shares (42) (42) Common Stock subscribed - 355,389 shares 1,066 474 (1,540) -- Stock subscriptions settled - 170,104 shares (510) (1,030) 1,540 -- Amortization of restricted stock grants 178 178 Restricted stock grants cancelled - 40,000 shares (120) (400) 205 (315) Common Stock sold under stock option plan - 2,038 shares 6 2 8 Other (1) (1) Net (loss) for the period (3,606) (3,606) BALANCE AT SEPTEMBER 30, 2000 $ 45,067 $ 2,417 $ 135,189 $(5,562) $(6,265) $ (412) $(56,302) $ 114,132
See Notes to Consolidated Condensed Financial Statements. 8 9 THE DIXIE GROUP, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (dollar amounts in thousands, except where noted or per share data) NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements which do not include all of the information and footnotes required in annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the entire year. Cash and Cash Equivalents: Cash and highly liquid investments with original maturities of three months or less when purchased are reported as cash equivalents. Credit and Market Risk: The Company sells floorcovering products and, prior to July 1999, sold textile/apparel products to a wide variety of manufacturers and retailers located primarily throughout the United States. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. An allowance for doubtful accounts is maintained at a level which management believes is sufficient to cover potential credit losses, including potential losses on receivables sold. The Company invests its excess cash in short-term investments and has not experienced any losses on those investments. NOTE B - SALE OF ACCOUNTS RECEIVABLE In June, 2000, the Company replaced its existing $45.0 million accounts receivable securitization program with a new one-year program which provides for up to $60.0 million of funding. Under the agreement, a significant portion of the Company's accounts receivable is sold, on a revolving basis, to a special purpose wholly-owned subsidiary which assigns such receivables to an independent issuer of receivables-backed commercial paper as security for amounts borrowed by the special purpose subsidiary. The transaction is accounted for as a sale of accounts receivable. Accordingly, the undivided interest in receivables sold under the agreement is excluded from the Company's balance sheet. Amounts sold under this arrangement and the previous program were $44.3 million at September 30, 2000 and $45.0 million at December 25, 1999. The Company's retained interest in the accounts receivable is included in the balance sheet as accounts receivable. Proceeds from the sale of accounts receivable are less than the face amount of the accounts receivable sold by an amount which approximates the variable financing cost of receivables-backed commercial paper plus administrative fees typical in such transactions. The Company continues to service the receivables and maintains an allowance for doubtful accounts based upon the expected collectibility of all of the accounts receivable generated by the Company. NOTE C - INVENTORIES Inventories are stated at the lower of cost or market. At September 30, 2000, the last-in, first-out (LIFO) cost method was used for substantially all inventories. At December 25, 1999, LIFO cost method was used for approximately 80% of total inventories and the first-in, first-out (FIFO) cost method was used for approximately 20% of total inventories. Inventories are summarized as follows: 9 10
September 30, December 25, 2000 1999 ------------- ------------ At FIFO cost: Raw materials $ 40,065 $ 31,664 Work-in-process 20,666 18,389 Finished goods 57,392 49,121 Supplies, repair parts, and other 2,247 1,835 ---------- ---------- 120,370 101,009 LIFO value over FIFO value 2,057 3,033 ---------- ---------- Total inventories $ 122,427 $ 104,042 ========== ==========
NOTE D - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended Nine Months Ended ------------------------- ------------------------- Sept 30, Sept 25, Sept 30, Sept 25, 2000 1999 2000 1999 --------- --------- --------- --------- Income (loss) from continuing operations (1) $ (3,676) $ 3,069 $ (3,606) $ 9,709 Income from disposal of discontinued operations (1) -- -- -- 4,419 Net income (loss) $ (3,676) $ 3,069 $ (3,606) $ 14,128 ========= ========= ========= ========= Denominator for calculation of basic earnings per share - weighted average shares (2) 11,470 11,390 11,471 11,318 Effect of dilutive securities: Stock options -- 184 -- 166 Stock subscriptions -- 283 -- 249 Denominator for calculation of diluted earnings per share - weighted average shares adjusted for potential dilution (3) 11,470 11,857 11,471 11,733
10 11
Three Months Ended Nine Months Ended ----------------------------- ---------------------------- Sept 30, Sept 25, Sept 30, Sept 25, 2000 1999 2000 1999 -------- -------- -------- -------- Basic Earnings per share: Income (loss) from continuing operations $ (0.32) $ 0.27 $ (0.31) $ 0.86 Income from disposal of discontinued operations -- -- -- 0.39 Net income (loss) $ (0.32) $ 0.27 $ (0.31) $ 1.25 ======= ======= ======= ======= Diluted Earnings per share: Income (loss) from continuing operations $ (0.32) $ 0.26 $ (0.31) $ 0.83 Income from disposal of discontinued operations -- -- -- 0.37 Net Income (loss) $ (0.32) $ 0.26 $ (0.31) $ 1.20 ======= ======= ======= =======
(1) No adjustments needed for diluted calculation. (2) Includes Common and Class B Common shares in thousands. (3) Because their effects are anti-dilutive, excludes shares issuable pursuant to certain grants under stock option, stock subscription, and restricted stock plans and the assumed conversion of subordinated debentures into shares of Common stock as follows: 3,281 shares in 2000 and 1,655 shares in 1999. NOTE E - LONG TERM DEBT AND CREDIT ARRANGEMENTS Long-term debt consists of the following:
September 30, December 25, 2000 1999 ------------ ------------ Senior indebtedness: Credit line borrowings $ 95,989 $ 30,073 Term loan 30,167 36,346 Other 1,399 740 ----------- ----------- Total senior indebtedness 127,555 67,159 Subordinated notes 45,238 50,000 Convertible subordinated debentures 37,237 39,737 ----------- ----------- Total long-term debt 210,030 156,896 Less current portion (14,019) (13,460) ----------- ----------- Total long-term debt (less current portion) $ 196,011 $ 143,436 =========== ===========
The Company's senior credit arrangement was amended on November 2, 2000 to secure, with a significant portion of the Company and its subsidiaries' assets, borrowings under the arrangement and adjust covenants to reflect expected future results and the Company's current financial structure. The credit agreement provides revolving credit of up to $100.0 million through March 2003 and $5.0 million of short-term credit. The $30.2 million term loan outstanding under the agreement is payable in quarterly installments of approximately $1.6 million through December 31, 2002 with a final installment of $15.4 million in March, 2003. Interest rates under the credit agreement effectively allow for borrowing at 11 12 rates equal to LIBOR plus 1.75% to 2.75%. Commitment fees, ranging from .25% to .50% per annum on the revolving credit line are payable on the average daily unused balance of the revolving credit facility. The Company's subordinated notes are unsecured, bear interest at 9.96% to 10.61% payable semiannually, and are due in semiannual installments of $2,381 which commenced February 1, 2000. The Company's convertible subordinated debentures bear interest at 7% payable semiannually, are due in 2012, and are convertible by the holder into shares of Common Stock of the Company at an effective conversion price of $32.20 per share, subject to adjustment under certain circumstances. Mandatory sinking fund payments, which commenced May 15, 1998, will retire $2,500 principal amount of the debentures annually and approximately 70% of the debentures prior to maturity. The convertible debentures are subordinated in right of payment to all other indebtedness of the Company. At September 30, 2000, the Company is party to an interest rate swap agreement, with a notional amount of $70.0 million, to reduce the impact of changes in interest rates on its floating rate long-term debt. Under the agreement, the Company pays a fixed rate of 6.75% and receives a variable rate, which was 6.80% at September 30, 2000. Any interest rate differential realized is recognized as an adjustment to interest expense over the life of the swap agreement. The Company's long-term debt and credit agreements contain financial covenants relating to minimum net worth, the ratio of debt to capitalization and debt to earnings before interest, taxes depreciation and amortization (EBITDA), payment of dividends and certain other financial ratios. Payment of dividends is limited to 50% of aggregate consolidated net income subsequent to December 25, 1999 and financial covenants currently do not permit the payment of dividends. As of November 2, 2000, the Company's borrowing capacity under its credit arrangements was $13.1 million (including amounts available under short-term credit lines). NOTE F - BUSINESS COMBINATION AND INVESTMENTS IN AFFILIATES On July 1, 2000, the Company acquired 90% of the capital stock of Fabrica International ("Fabrica"), a privately held California corporation and a one-third interest in Chroma Systems Partners ("Chroma"). On September 8, 2000, the Company acquired the remaining 10% of the capital stock of Fabrica. Subsequent to the end of the third quarter, the Company's interest in Chroma increased to 50%. Fabrica produces and sells higher-end carpet and rugs to carpet retailers, interior designers, luxury yacht manufacturers, furniture stores and other markets. Chroma performs dyeing and finishing processes on a contract basis for Fabrica and other carpet businesses. The acquisition of Fabrica was accounted for under the purchase method and the Chroma interest was accounted for under the equity method. The Company acquired the stock of Fabrica for $9.0 million in cash. In connection with the acquisition, the Company recorded assets with a fair value of approximately $17.1 million and liabilities of $9.1 million. The agreement provides for additional payment of $50.0 million in 2003 if Fabrica's cumulative gross sales for the period of April 1, 2000 through June 30, 2003 exceed certain levels. The agreement also provides for an additional contingent amount of up to $2.5 million to be paid in April 2005 based upon Fabrica's cumulative earnings before interest and taxes for the five-year period beginning January 1, 2000. Any contingent amounts that may become payable under the agreement will be treated as an additional cost of the acquisition. Goodwill that may be generated from these transactions will be amortized over future periods on a straight-line basis. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisition of Fabrica had occurred at the beginning of the periods presented after giving effect to certain adjustments, including interest expense on debt to finance the acquisition, depreciation expense on adjusted fixed asset values and related income taxes. The pro forma results are presented for comparative purposes only and do not purport to be indicative of future results or the results that would have occurred had the acquisition taken place at the beginning of the periods presented. The pro forma information below does not include information pertaining to the equity investment in Chroma. Their results of operations have been included in the Company's statement of operations subsequent to July 1, 2000. 12 13
Nine Months Ended Quarter Ended ------------------------------- Sept 25, Sept 30, Sept 25, 1999 2000 1999 ------------- ------------ ------------ Net sales $ 153,860 $ 439,951 $ 467,034 Income (loss) from continuing Operations 4,386 (1,805) 12,502 Net income (loss) 4,386 (1,805) 16,921 Basic earnings (loss) per share: Income (loss) from continuing Operations 0.39 (0.16) 1.10 Net income (loss) 0.39 (0.16) 1.50 Diluted earnings (loss) per share: Income (loss) from continuing Operations 0.37 (0.16) 1.07 Net income (loss) 0.37 (0.16) 1.44
The initial investment in Chroma was $11.0 million paid in cash on July 3, 2000. The agreement provides for an adjustment to the amount paid generally equal to the Company's share of Chroma's income or loss for the three years ending June 30, 2003 less $1.8 million. The excess of cost over the Company's share of Chroma's net assets was approximately $9.0 million. Such amount is amortized as a reduction against the Company's share of Chroma's earnings over the appropriate periods. The Company's share of Chroma's earnings for the third quarter ending September 30, 2000 were approximately $556. NOTE G - COMMITMENTS On August 15, 2000, the Company sold machinery and equipment used in its operations for approximately $15.0 million. The assets were leased back from the purchaser under an operating lease for a period of four years at an annual lease cost of approximately $2.9 million. The lease requires the Company to pay customary operating and repair expenses and to observe certain operating restrictions and financial covenants. NOTE H - SEGMENT DATA The Company's floorcovering operations are segmented based on product similarities. Accordingly, its two reportable segments are Carpet Manufacturing and Floorcovering Base Materials. The Company's Carpet Manufacturing segment is a leading carpet and rug manufacturer and supplier to higher-end residential and commercial customers serviced by Masland Carpets and Fabrica International, to consumers through major retailers under the Bretlin, Globaltex and Alliance Mills brands and to the factory-built housing and recreational vehicle markets through Carriage Carpets. The Company's Floorcovering Base Materials segment supplies extruded plied and heat-set filament and spun yarn, through Candlewick Yarns, to the Company's Carpet Manufacturing segment and, to a lesser extent, to specialty carpet yarn markets. The profit performance measure for the Company's segments is defined as Internal EBIT (earnings before interest and taxes). The aggregate of Internal EBIT for the reportable segments differs from the Company's consolidated earnings before interest and taxes by costs associated with the sale of accounts receivable under the Company's accounts receivable sales agreement and other amounts that are not included in the segments' operations. Assets measured in each reportable segment include long-lived assets, goodwill, inventories at current cost, and accounts receivable 13 14 Allocations of corporate general and administrative expenses are used in the determination of segment profit performance; however, assets of the corporate departments are not used in the segment asset performance measurement. All amortization of goodwill is included in segment profit performance measurement; however, only selected intangible assets are included in the asset performance measurement. The following table reflects selected operating data relating to the two reportable segments of the Company:
Three Months Ended Nine Months Ended --------------------------- --------------------------- Sept 30, Sept 25, Sept 30, Sept 25, 2000 1999 2000 1999 ---------- ---------- ---------- ---------- NET SALES - EXTERNAL CUSTOMERS Carpet Manufacturing $ 125,011 $ 113,136 $ 356,485 $ 339,989 Floorcovering Base Materials 17,543 29,453 58,301 95,937 ---------- ---------- ---------- ---------- Total Net Sales $ 142,554 $ 142,589 $ 414,786 $ 435,926 INTERSEGMENTAL SALES Carpet Manufacturing $ 7,878 $ 5,791 $ 19,973 $ 14,418 Floorcovering Base Materials 38,269 27,489 105,028 74,530 ---------- ---------- ---------- ---------- Total intersegmental sales $ 46,147 $ 33,280 $ 125,001 $ 88,948 PROFIT (LOSS) PERFORMANCE Carpet Manufacturing $ (3,201) $ 7,764 $ 5,805 $ 23,694 Floorcovering Base Materials (163) 619 (1,043) 3,626 ---------- ---------- ---------- ---------- Segment Total (3,364) 8,383 4,762 27,320 Cost of A/R sales program 1,005 661 2,514 2,148 Other non-segment (income) (2,854) (570) (4,533) (850) ---------- ---------- ---------- ---------- Earnings (loss) Before Interest and Taxes (1,515) 8,292 6,781 26,022 Interest expense 4,503 3,173 12,618 9,972 ---------- ---------- ---------- ---------- Consolidated income (loss) before income taxes from continuing operations $ (6,018) $ 5,119 $ (5,837) $ 16,050
As of ---------------------------- September 30, December 25, 2000 1999 ------------- ------------ IDENTIFIABLE ASSETS Carpet Manufacturing $ 343,712 $ 292,889 Floorcovering Base Materials 76,174 76,051 Other 16,220 22,504 Assets of discontinued operations 68 457 ---------- ---------- Total consolidated assets $ 436,174 $ 391,901
14 15 NOTE I - OTHER INCOME On September 30, 2000, the Company sold certain recreational real estate. The gain of approximately $2.0 million on the sale was included in the other (income) expense - net of the Company's income statement. 15 16 PART I - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following is presented to update the discussion of results of operations and financial condition included in the Company's 1999 Annual Report (dollar amounts in thousands, except where noted or per share data). On July 1, 2000, the Company acquired 90% of the stock of Fabrica International ("Fabrica"), a privately held corporation which manufactures and sells high-end luxury carpet and rugs to carpet retailers, interior designers, luxury yacht manufacturers, furniture stores and other markets. On September 8, 2000, the Company acquired the remaining 10% of the capital stock of Fabrica. The total purchase price was $9.0 million plus up to $52.5 million of contingent consideration based on future sales and earnings. Additionally, the Company acquired a one-third equity interest in Chroma Systems Partners ("Chroma"), a business which performs dyeing and finishing processes for Fabrica and other carpet businesses. The equity investment in Chroma was $11.0 million, and provides for an adjustment to the amount paid generally equal to the Company's share of Chroma's income or loss for the three years ending June 30, 2003 less $1.8 million. Subsequent to the end of the third quarter the Company's interest in Chroma increased to 50%. In the third quarter 2000, the Company began implementing a strategy to improve asset utilization and operating efficiencies to improve the Company's cost structure by integrating manufacturing operations and information support systems of it's North Georgia tufted carpet businesses. The Company also began reducing inventories, which had been increased to excessive levels to insure service to customers during the re-alignment of the Company's yarn operations and construction of a new distribution center and to support aggressive internal sales forecasts. As a result of implementation of the integration and inventory reduction plan, the Company recorded approximately $6.5 million of cost, which are not anticipated to reoccur in 2001, in the third quarter 2000. The Company anticipates an additional $2.5 million to $3.0 million of similar costs in the fourth quarter of 2000 to substantially complete the planed manufacturing consolidation and inventory reduction. The Company anticipates annual savings of $12.0 million to $15.0 million from the manufacturing consolidations and other identified costs reduction programs. Expected cost improvements should result from increased utilization of tufting, dyeing, finishing and distribution assets, improved operating efficiencies, and product quality, as well as elimination of fixed cost associated with the multi-site operations. Realization of the savings will be dependent upon many factors, including continued and increasing levels of demand and careful avoidance of additional, offsetting cost. RESULTS OF OPERATIONS The Company recorded a net loss of $3,676, or $.32 per diluted share, in the quarter ended September 30, 2000 and $3,606, or $.31 per diluted share, for the first nine months of 2000. Results for the third quarter and year-to-date 2000 reflected cost of $6.5 million to consolidate manufacturing operations and information systems, curtail operations to reduce inventories and to recognize losses associated with off quality inventories identified during the third quarter. Results for the 2000 reporting periods also included a gain of $2.0 million from the sale of real estate. The effect of these costs, net of the real estate gain, was $4.5 million ($2.8 million after-tax), or $.24 per diluted share, for the third quarter and nine months ended September 30, 2000. The 2000 results compared with net income of $3,069, or $.26 per diluted share, in the third quarter 1999 and income from continuing operations of $9,709, or $.83 per diluted share, for the first nine months of 1999. Net income for the first nine months of 1999 included a gain of $4,419, or $.37 per diluted share, related to discontinued operations. Net sales were $142,554 in the third quarter of 2000 and $414,786 for the first nine months of 2000, compared with net sales of $142,589 in the third quarter of 1999 and $435,926 in the first nine months of 1999. The Company's operations are segmented based on product similarities. Accordingly, its two reportable segments are Carpet Manufacturing and Floorcovering Base Materials. The Company's Carpet Manufacturing segment is a leading carpet and rug manufacturer and supplier to higher-end residential and commercial customers serviced by Masland Carpets and Fabrica International, to consumers through major retailers under the Bretlin, Globaltex and Alliance Mills brands and to the factory-built housing and recreational vehicle markets through Carriage Carpets. The Company's 16 17 Floorcovering Base Materials segment supplies extruded plied and heat-set filament and spun yarn, through Candlewick Yarns, to the Company's Carpet Manufacturing segment and, to a lesser extent, to external customers in specialty carpet yarn markets. Sales to external customers in the Company's Carpet Manufacturing segment were $125,011 in the quarter ended September 30, 2000 and $356,485 for the first nine months of 2000. Sales increased 10.5% in the third quarter of 2000 and 4.9% for the first nine months of 2000, over the comparable 1999 periods. The improvement reflects a significant increase in dollar volume of sales to high-end commercial and residential markets, including $12.0 million related to the acquisition of Fabrica, and to home center/mass merchant markets which more than offset a decline in sales to the factory-built housing market. Results of operations in the Carpet Manufacturing segment was a $3,201 loss in the third quarter of 2000 and a $5,805 profit for the first nine months of 2000. Excluding unusual cost associated with inventories and manufacturing and system consolidations, the Carpet Manufacturing segment's operating profit was $2,388 in the third quarter of 2000 and $11,394 for the first nine months of 2000. These results compare with an operating profit of $7,764 in the third quarter of 1999 and $23,694 for the 1999 year-to-date period. The decrease in profitability for the 2000 periods was principally the result of high manufacturing and distribution cost in the Company's rapidly growing tufted home center and distributor businesses, lower sales volume to the factory-built housing market and higher raw material costs. Sales to external customers in the Company's Floorcovering Base Materials segment were $17,543 in the quarter ended September 30, 2000 and $58,301 for the first nine months of 2000, a decrease of approximately 40% compared with the corresponding 1999 periods. The sales decline was primarily the result of reduced external sales volume subsequent to the sale of the Company's Ulmer, SC yarn plant in July 1999, greater utilization of yarn capacity by the Company's carpet operations and the shift of a number of the Company's external yarn programs from a full package basis to a conversion basis, in which the customer supplies fiber for yarn processing. Operating losses in the Floorcovering Base Materials segment were $163 in the third quarter of 2000 and $1,043 for the first nine months of 2000. In the third quarter of 2000, certain of the Company's base materials facilities were operated at reduced levels to reduce inventory, which resulted in fixed costs absorption losses. Excluding such losses, operations resulted in a profit of $651 for the quarter and a loss of $229 for the nine months. These results compare with operating profits of $619 and $3,626 respectively, for the third quarter and first nine months of 1999. The profitability decrease for the year-to-date 2000 period was principally a result of cost associated with realignment and expansion of the Company's yarn manufacturing facilities and expansion of the Company's extrusion capacity. The majority of the yarn manufacturing and extrusion projects were completed by the end of the second quarter of 2000. Higher raw material prices also negatively impacted results during the first nine months of 2000 compared with 1999. A number of the Company's suppliers of petroleum based raw materials increased prices in 2000. The Company's ability to recover such cost increases has varied according to the market served. The extent to which further cost increases can be recovered is uncertain. However, selected raw material price decreases have occurred since the end of the third quarter. Selling and administrative expenses were $28,751, or 20.2% of sales, in the third quarter of 2000 and $75,319, or 18.2% of sales, in the first nine months of 2000. This compared with $22,267, or 15.6% of sales, in the third quarter of 1999 and $64,626, or 14.8% of sales, for the first nine months in 1999. The increase resulted from growth in the Company's high-end residential, commercial and home center businesses and start-up expenses associated with expanded distribution channels. Selling and administrative expenses increased as a percent of sales principally due to the decline in the sales to yarn and factory built housing markets. Sales to the yarn and factory built housing markets have relatively low selling and administrative expenses compared with sales to the Company's other markets, which grew during the periods. Interest expense increased in 2000 over the comparable 1999 periods due to increased debt and higher interest rates. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of 2000, the Company's long-term debt increased $51,196 excluding debt assumed in the Fabrica acquisition. Funds of $41,142 were utilized for property, plant and equipment expenditures, $20,706 for the acquisition of Fabrica and the investment in Chroma and, $16,237 through operating activities. Funds of $17,962 were generated from the sale of property, plant and 17 18 equipment. Additionally, funds of $8,927, as reflected as a reduction of cash on the Company's balance sheet, were utilized to reduce debt. The majority of the capital expenditures were focused on the Company's yarn realignment and expansion, extrusion expansion and a new distribution center. Inventories were increased to maintain customer service levels while the yarn realignment and distribution center were being completed and to support forecasted growth in the Company's Home Center Business. During the third quarter of 2000, inventories were reduced by $3.0 million and the Company anticipates an additional $8.0 million reduction by year-end. At September 30, 2000, the Company's debt consisted of $37.2 million of convertible subordinated debentures, $45.2 million of subordinated notes, $30.2 million of senior term loans and $97.4 million of credit line indebtedness, principally under the Company's senior credit agreement. The Company's senior credit arrangement was amended on November 2, 2000 to secure borrowing under the arrangement and adjust covenants to reflect expected future results and the Company's current financial structure. The credit agreement provides revolving credit of up to $100.0 million through March 2003 and $5.0 million of short-term credit. The $30.2 million term loan outstanding under the agreement is payable in quarterly installments of approximately $1.6 million through December 31, 2002 with a final installment of $15.4 million in March, 2003. Interest rates under the credit agreement effectively allow for borrowing at rates equal to LIBOR plus 1.75% to 2.75%. Commitment fees, ranging from .25% to .50% per annum on the revolving credit line are payable on the average daily unused balance of the revolving credit facility. The Company's long-term debt and credit agreements contain financial covenants relating to minimum net worth, the ratio of debt to capitalization and debt to earnings before interest, taxes depreciation and amortization (EBITDA), payment of dividends and certain other financial ratios. Payment of dividends is limited to 50% of aggregate consolidated net income subsequent to December 25, 1999 and financial covenants currently do not permit the payment of dividends. In June, 2000, the Company replaced its existing $45.0 million accounts receivable securitization program with a new one-year program which provides for up to $60.0 million of funding. At September 30, 2000, amounts funded under the agreement were $44.3 million. On August 15, 2000, the Company sold machinery and equipment used in its operations for approximately $15.0 million. The assets were leased back from the purchaser under an operating lease for a period of four years at an annual lease cost of approximately $2.9 million. Availability under the Company's existing debt arrangements, together with the Company's operating cash flows, are expected to be adequate to finance the Company's anticipated liquidity requirements. However, significant additional cash expenditures beyond normal requirements could require supplementation or replacement of the Company's credit facilities. There can be no assurance that any such additional credit will be available on terms as favorable as the Company's current credit facilities. YEAR 2000 SYSTEMS ISSUES The Company has not experienced any significant system related year 2000 conversion issues. NEW ACCOUNTING STANDARDS In June, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133 (SFAS No.133), which establishes accounting and reporting standards for derivative instruments and hedging activities. In June 1999, FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133", which amends the effective date of SFAS No. 133 to all fiscal quarters of fiscal years beginning after June 15, 2000. Adoption of the statement is not expected to have a significant impact on the Company's results of operations or financial position. In July, 2000 the Emerging Issue Task Force ( EITF) reached a consensus that all shipping and handling billings to a customer in a sale transaction represent fees earned for goods provided and, accordingly, amounts billed related to shipping and handling should be classified as revenue. In September, 2000 the EITF reached a consensus that a company 18 19 cannot net the shipping and handling costs against the shipping and handling revenues in the financial statements and that a company may adopt a policy of including shipping and handling costs in cost of goods sold. If shipping and handling costs are significant and are not included in cost of goods sold, a company should disclose both the amount of such costs and which line item on the income statement includes that amount. Implementation date is the fourth quarter of a registrant's fiscal year beginning after December 15, 1999 and requires restatement for all periods presented. The Company is assessing it's classification alternatives for adoption in the fourth quarter, 2000. Adoption of EITF 00-10 is not expected to have a significant impact on the Company's results of operations and financial condition. FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q may contain certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as such are amended. These forward-looking statements are identified by their use of terms or phrases such as "expects," "estimates," "projects," "believes," "anticipates," "intends," and similar terms and phrases. Such terms or phrases relate to, among other matters, the Company's future financial performance, business prospects, growth, strategies, or liquidity. Forward-looking statements involve a number of risks and uncertainties. The following important factors may affect the future results of The Dixie Group, Inc. and could cause those results to differ materially from its historical results or those expressed in the forward-looking statements. These factors include, among others, market risks relating to interest rates, raw material prices, the loss of a significant customer or group of customers, materially adverse changes in economic conditions generally in carpet, rug and floorcovering markets served by the Company and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. PART I - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company is party to an interest rate swap agreement as a hedge to market risk exposure for potential fluctuations in its variable rate long-term debt instruments. Any interest rate differential is reflected as an adjustment to interest expense over the life of the swap agreement. The Company does not use derivative financial instruments for trading purposes. Based on the Company's $70.0 million interest rate swap agreement, the Company pays a fixed rate and receives a variable rate. A 10% fluctuation in the variable rate would result in an annual economic impact to the Company of approximately $300. PART II. OTHER INFORMATION Item 1 - Legal Proceedings None. Item 2 - Changes in Securities and Use of Proceeds None. Item 3 - Defaults Upon Senior Securities None. Item 4 - Submission of Matters to a Vote of Security Holders None. Item 5 - Other Information None. Item 6 - Exhibits and Reports on Form 8-K 19 20 Item 6 (a) Exhibits (i) Exhibits Incorporated by Reference None. (ii) Exhibits Filed with this Report (4.1) Second Amendment, dated October 5, 2000 to Credit Agreement dated March 31, 1998. (4.2) Third Amendment, dated November 2, 2000 to Credit Agreement dated March 31, 1998. (4.3) Pledge Agreement dated November 2, 2000 between the Company and SunTrust Bank, as collateral agent. (4.4) Security Agreement dated November 2, 2000 between the Company and SunTrust Bank, as collateral Agent. (27) Financial Data Schedule (for SEC Use only) (b) Reports on Form 8-K (1) A Current Report on Form 8-K dated July 1, 2000 was filed to report the acquisition of 90% of Fabrica International and a one-third equity interest in Chroma Systems Partners. (2) An Amended Current Report on Form 8-K dated July 1, 2000 was filed to include the financial statements of Fabrica International and pro forma financial information as required by article 3 of Regulation S-X and Article 11 of Regulation S-X, respectively. 20 21 SIGNATURES Pursuant to the requirements 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. THE DIXIE GROUP, INC. ----------------------------------- (Registrant) November 14, 2000 ----------------- (Date) /s/ GARY A. HARMON ----------------------------------- Gary A. Harmon Vice President and Chief Financial Officer /s/ D. EUGENE LASATER ----------------------------------- D. Eugene Lasater Controller 21