<PAGE>
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 July 1, 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 July 28, 2000
Common Stock, $3 Par Value 10,747,877 shares
Class B Common Stock, $3 Par Value 795,970 shares
Class C Common Stock, $3 Par Value 0 shares
<PAGE>
THE DIXIE GROUP, INC.
INDEX
Part I. Financial Information: Page No.
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets --
July 1, 2000 and December 25, 1999 3
Consolidated Statements of Operations --
Three and Six Months Ended July 1, 2000
and June 26, 1999 5
Consolidated Condensed Statements of Cash Flows --
Six Months Ended July 1, 2000
and June 26, 1999 6
Consolidated Statement of Stockholders' Equity --
Three and Six Months Ended July 1, 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 20
Item 2 - Changes in Securities and Use of Proceeds 20
Item 3 - Defaults Upon Senior Securities 20
Item 4 - Submission of Matters to a Vote of Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 21
<PAGE> 2
PART I - ITEM 1
FINANCIAL INFORMATION
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
July 1, December 25,
2000 1999
_____________ ____________
(dollar amounts in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,728 $ 12,541
Accounts receivable (less allowance for
doubtful accounts of $2,549 for 2000
and $1,831 for 1999) 25,573 19,454
Inventories 125,365 104,042
Net assets held for sale 457 457
Other 17,421 14,471
_____________ ____________
TOTAL CURRENT ASSETS 172,544 150,965
PROPERTY, PLANT AND EQUIPMENT 334,823 307,766
Less accumulated amortization and
depreciation (141,624) (134,180)
_____________ ____________
NET PROPERTY, PLANT AND EQUIPMENT 193,199 173,586
INTANGIBLE ASSETS (less accumulated
amortization of $6,956 for 2000
and $6,190 for 1999) 51,497 52,460
INVESTMENT IN AFFILIATE 11,183 --
OTHER ASSETS 15,233 14,890
_____________ ____________
TOTAL ASSETS $ 443,656 $ 391,901
_____________ ____________
_____________ ____________
See Notes to Consolidated Condensed Financial Statements.
<PAGE> 3
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
July 1, December 25,
2000 1999
_____________ ____________
(dollar amounts in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 51,095 $ 53,590
Accrued expenses 22,772 26,241
Accrued losses of discontinued operations 2,600 3,461
Current portion of long-term debt 13,994 13,460
Other 18,000 --
_____________ ____________
TOTAL CURRENT LIABILITIES 108,461 96,752
LONG-TERM DEBT
Senior indebtedness 103,811 60,961
Subordinated notes 42,857 45,238
Convertible subordinated debentures 34,737 37,237
_____________ ____________
TOTAL LONG-TERM DEBT 181,405 143,436
OTHER LIABILITIES 10,574 10,295
DEFERRED INCOME TAXES 24,399 23,508
MINORITY INTEREST IN SUBSIDIARY 795 --
STOCKHOLDERS' EQUITY
Common Stock ($3 par value per share)
authorized 80,000,000 shares - issued
and outstanding, 14,265,296 shares
for 2000 and 14,264,277 shares for 1999 42,796 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 - 886,788 shares
for 2000 and 620,516 shares for 1999 2,660 1,861
Additional paid-in capital 136,056 136,144
Stock subscriptions receivable (6,167) (5,456)
Unearned stock compensation (412) (489)
Retained earnings (deficit) (2,589) (2,659)
Accumulated other comprehensive income (412) (412)
_____________ ____________
174,320 174,170
Less Common Stock in treasury at cost -
3,518,438 shares for 2000 and
3,511,829 shares for 1999 (56,298) (56,260)
_____________ ____________
TOTAL STOCKHOLDERS' EQUITY 118,022 117,910
_____________ ____________
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 443,656 $ 391,901
_____________ ____________
_____________ ____________
See Notes to Consolidated Condensed Financial Statements.
<PAGE> 4
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
_______________________ ____________________
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
________ _______ ________ ________
(dollar amounts in thousands,
except per share data)
<S> <C> <C> <C> <C>
Net sales $140,658 $152,113 $272,232 $293,337
Cost of sales 111,306 119,094 217,505 231,108
_______ _______ _______ _______
GROSS PROFIT 29,352 33,019 54,727 62,229
Selling and administrative expenses 23,409 21,889 46,569 42,359
Other (income) expense - net (270) 1,020 (138) 2,140
_______ _______ _______ _______
INCOME BEFORE INTEREST AND TAXES 6,213 10,110 8,296 17,730
Interest expense 4,113 3,453 8,115 6,799
_______ _______ _______ _______
INCOME BEFORE INCOME TAXES 2,100 6,657 181 10,931
Income tax provision 846 2,597 111 4,291
_______ _______ _______ _______
Income from Continuing Operations $ 1,254 $ 4,060 $ 70 $ 6,640
Income from Disposal of
Discontinued Operations -- 4,419 -- 4,419
_______ _______ _______ _______
Net Income $ 1,254 $ 8,479 $ 70 $ 11,059
_______ _______ _______ _______
_______ _______ _______ _______
Earnings per Share:
Basic Earnings per share:
Income from continuing operations $ 0.11 $ 0.36 $ 0.01 $ 0.59
Income from disposal of
discontinued operations -- 0.39 -- 0.39
Net Income $ 0.11 $ 0.75 $ 0.01 $ 0.98
Shares outstanding 11,470 11,281 11,472 11,282
Diluted Earnings per share:
Income from continuing operations $ 0.11 $ 0.35 $ 0.01 $ 0.57
Income from disposal of
discontinued operations -- 0.37 -- 0.37
Net Income $ 0.11 $ 0.72 $ 0.01 $ 0.94
Shares outstanding 11,471 11,716 11,490 11,672
</TABLE>
See Notes to Consolidated Condensed Financial Statements.
<PAGE> 5
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
______________________________
July 1, June 26,
2000 1999
_____________ _____________
(dollar amounts in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 70 $ 11,059
Adjustments to reconcile net income
to net cash provided by
operating activities of continuing
operations:
(Income) on disposal of
discontinued operations -- (4,419)
Depreciation and amortization 12,774 12,071
Provision (benefit) for deferred
income taxes 2,494 (1,263)
(Gain) on property, plant and
equipment disposals (322) --
__________ __________
15,016 17,448
Changes in operating assets and
liabilities including discontinued
operations, net of effects of
business combination (35,608) (11,558)
__________ __________
NET CASH (USED) PROVIDED BY
OPERATING ACTIVITIES (20,592) 5,890
CASH FLOWS FROM INVESTING ACTIVITIES
Net proceeds from sale of
property, plant, and equipment 2,372 --
Net proceeds from assets held for sale -- 47,396
Purchase of property, plant, and equipment (28,158) (17,296)
Net cash paid in business combinations -- (32,194)
__________ __________
NET CASH USED IN INVESTING ACTIVITIES (25,786) (2,094)
See Notes to Consolidated Condensed Financial Statements.
<PAGE> 6
THE DIXIE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
- CONTINUED
(UNAUDITED)
Six Months Ended
______________________________
July 1, June 26,
2000 1999
_____________ _____________
(dollar amounts in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in credit
line borrowings 47,306 1,280
Payments on subordinated debentures (4,881) (2,500)
Payments on term loan (4,543) (3,000)
Other (317) 315
___________ ___________
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES OF CONTINUING OPERATIONS 37,565 (3,905)
(DECREASE) IN CASH AND CASH
EQUIVALENTS (8,813) (109)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 12,541 2,815
___________ ___________
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 3,728 $ 2,706
___________ ___________
___________ ___________
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 8,436 $ 7,380
__________ ___________
__________ ___________
Income taxes paid
(refunds received) $ (212) $ 4,723
__________ ___________
__________ ___________
See Notes to Consolidated Condensed Financial Statements
<PAGE> 7
<TABLE>
<CAPTION>
THE DIXIE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Common
Stock Accumulated
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
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -
4,969 shares (31) (31)
Common Stock subscribed -
45,714 shares 138 203 (341) -
Stock subscriptions settled -
20,000 shares (60) (87) 147 -
Amortization of restricted
stock grants 36 36
Common Stock sold under stock
option plan - 1,019 shares 3 1 4
Net (loss) for the period (1,184) (1,184)
BALANCE AT APRIL 1, 2000 $45,184 $1,939 $136,260 $(6,102) $ (3,843) $ (412) $(56,291) $116,735
Common Stock acquired for treasury -
1,640 shares (7) (7)
Common Stock subscribed -
309,675 shares 929 271 (1,200) -
Stock subscriptions settled -
69,117 shares (208) (474) 682 -
Amortization of restricted
stock grants 41 41
Other (1) (1)
Net income for the period 1,254 1,254
BALANCE AT JULY 1, 2000 $45,184 $2,660 $136,056 $(6,579) $ (2,589) $ (412) $(56,298) $118,022
</TABLE>
See notes to consolidated financial statements.
<PAGE> 8
THE DIXIE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(dollar amounts in thousands, except 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 six months ended July 1, 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 $43.3 million at July 1, 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
<PAGE> 9
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 July 1, 2000 and
December 25, 1999, the last-in, first-out (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:
July 1, December 25,
2000 1999
_____________ ____________
At FIFO cost:
Raw materials $ 38,692 $ 31,664
Work-in-process 17,411 18,389
Finished goods 64,919 49,121
Supplies, repair parts, and other 2,109 1,835
_____________ ____________
123,131 101,009
LIFO value over FIFO value 2,234 3,033
_____________ ____________
Total inventories $ 125,365 $ 104,042
_____________ ____________
_____________ ____________
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
Three Months Ended Six Months Ended
__________________ ________________
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
Income from continuing operations(1) $ 1,254 $ 4,060 $ 70 $ 6,640
Income from disposal of
discontinued operations(1) _ -- 4,419 _ -- 4,419
Net Income $ 1,254 $ 8,479 $ 70 $11,059
______ ______ ______ ______
______ ______ ______ ______
Denominator for calculation of
basic earnings per share -
weighted average shares(2) 11,470 11,281 11,472 11,282
Effect of dilutive securities:
Stock options 1 266 18 233
Stock subscriptions -- 169 -- 157
Denominator for calculation of
diluted earnings per share -
weighted average shares adjusted
for potential dilution(3) 11,471 11,716 11,490 11,672
<PAGE> 10
Three Months Ended Six Months Ended
__________________ ________________
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
Basic Earnings per share:
Income from continuing operations $ 0.11 $ 0.36 $ 0.01 $ 0.59
Income from disposal of
discontinued operations -- 0.39 -- 0.39
Net Income $ 0.11 $ 0.75 $ 0.01 $ 0.98
______ ______ ______ ______
______ ______ ______ ______
Diluted Earnings per share:
Income from continuing operations $ 0.11 $ 0.35 $ 0.01 $ 0.57
Income from disposal of
discontinued operations -- 0.37 -- 0.37
Net Income $__0.11 $ 0.72 $ 0.01 $ 0.94
______ _______ ______ ______
(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: 3,500 shares in 2000
and 1,956 shares in 1999.
NOTE E - LONG TERM DEBT AND CREDIT ARRANGEMENTS
Long-term debt consists of the following:
July 1, December 25,
2000 1999
Senior indebtedness:
Credit line borrowings $ 78,282 $ 30,073
Term loan 31,803 36,346
Other 458 740
Total senior indebtedness 110,543 67,159
Subordinated notes 47,619 50,000
Convertible subordinated debentures 37,237 39,737
Total long-term debt 195,399 156,896
Less current portion (13,994) (13,460)
Total long-term debt (less current
portion) $181,405 $143,436
________ ________
________ ________
The Company's unsecured revolving credit and term-loan facility provides
for revolving credit of up to $100.0 million through a five-year commitment
period which began March 31, 1998, and a $60.0 million, seven-year term-
loan. Interest rates available under the facility may be selected by the
<PAGE> 11
Company from a number of options which effectively allow for borrowing at
rates equal to or lower than the greater of the lender's prime rate, or the
federal funds rate plus .5% per annum. Commitment fees, ranging from .25%
to .375% 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 July 1, 2000, the Company is party to an interest rate swap agreement,
with a notional amount of $30.0 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 5.97% and receives a variable rate, which
was 6.69% at July 1, 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, payment of dividends and certain other financial ratios.
The 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 July 1, 2000, the Company's borrowing capacity under its credit
arrangements was $23.7 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"). 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. Their results will be included in
the Company's income statement subsequent to July 1, 2000.
The stock of Fabrica was acquired for $7.0 million payable in cash on July
3, 2000. At July 1, 2000, such amount is included in other current
liabilities in the Company's consolidated condensed balance sheet. In
connection with the acquisition, the Company recorded assets with a fair
value of approximately $17.1 million, liabilities of $9.1 million and
<PAGE> 12
minority interest of $795 thousand. The Company will be obligated to pay
$45.0 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 $2.25 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. The Company expects to
purchase the remaining 10% of the Fabrica capital stock in the third
quarter of 2000 for $2.0 million in cash and contingent amounts
proportionally similar to those in the initial purchase. 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.
Quarter Ended Six Months Ended
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
Net sales $ 153,640 $ 162,850 $297,397 $313,174
Income from continuing
Operations 2,280 4,939 1,862 8,164
Net Income 2,280 9,358 1,862 12,583
Basic earnings per share:
Income from continuing
Operations 0.20 0.44 0.16 0.72
Net income 0.20 0.83 0.16 1.12
Diluted earnings per share:
Income from continuing
Operations 0.20 0.42 0.16 0.70
Net income 0.20 0.80 0.16 1.08
The initial investment in Chroma was $11.0 million payable in cash on July
3, 2000. At July 1, 2000, such amount is included in other current
liabilities in the Company's consolidated condensed balance sheet. 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. Pending
valuation of Chroma's net assets, such amount will be amortized as a
reduction against the Company's share of Chroma's earnings over the
appropriate periods.
<PAGE> 13
NOTE G - 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 deemed to be non-operating in
nature. Assets measured in each reportable segment include long-lived
assets and goodwill, inventories at current cost, and accounts receivables
(without reductions for receivables assigned under the Company's accounts
receivable sales agreement).
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 expenses incurred for the amortization of goodwill are
recognized 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 Six Months Ended
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
NET SALES - EXTERNAL CUSTOMERS
Carpet Manufacturing $119,113 $117,435 $231,475 $226,853
Floorcovering Base Materials 21,545 34,678 40,757 66,484
Total Net Sales $140,658 $152,113 $272,232 $293,337
INTERSEGMENTAL SALES
Carpet Manufacturing $ 6,861 $ 4,269 $ 12,094 $ 8,627
Floorcovering Base Materials 33,819 26,900 66,760 47,041
Total intersegmental sales $ 40,680 $ 31,469 $ 78,854 $ 55,668
<PAGE> 14
Three Months Ended Six Months Ended
July 1, June 26, July 1, June 26,
2000 1999 2000 1999
PROFIT PERFORMANCE
Carpet Manufacturing $ 5,950 $ 8,621 $ 9,006 $ 15,635
Floorcovering Base Materials 268 1,675 (879) 3,003
Segment Total 6,218 10,296 8,127 18,638
Cost of A/R sales program 770 748 1,511 1,509
Other non-segment (income) (765) (562) (1,680) (601)
Earnings Before Interest and Taxes 6,213 10,110 8,296 17,730
Interest expense 4,113 3,453 8,115 6,799
Consolidated income before income
taxes from continuing operations $ 2,100 $ 6,657 $ 181 $ 10,931
As of
July 1, December 25,
2000 1999
IDENTIFIABLE ASSETS
Carpet Manufacturing $336,038 $292,889
Floorcovering Base Materials 85,082 76,051
Other 22,079 22,504
Assets of discontinued operations 457 457
Total consolidated assets $443,656 $391,901
NOTE H - SUBSEQUENT EVENT
On August 15, 2000, the Company signed an agreement which is expected to
close on August 17, 2000, to sell machinery and equipment used in its
operations for approximately $15.0 million. The agreement provides that
the assets will be 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.
<PAGE> 15
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 per share data)
On July 1, 2000, the Company acquired 90% of the stock of Fabrica
International, 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. The
purchase price was $7.0 million plus contingent payments based on future
sales and earnings. Additionally, the Company acquired a one-third equity
interest in Chroma Systems Partners, a business which performs dyeing and
finishing processes for Fabrica and other carpet businesses. The equity
investment in Chroma was $11.0 million, subject to adjustments based on
Chroma earnings for the three-year period ending June 30, 2003.
The Company anticipates acquiring the remaining 10% of the Fabrica stock in
the third quarter of 2000.
These transactions are expected to be accretive to earnings immediately
and, together with Masland, provide two growth businesses in the high-end
residential market.
RESULTS OF OPERATIONS
Net income and income from continuing operations was $1,254 or $.11 per
diluted share for the quarter ended July 1, 2000 and $70, or $.01 per
diluted share for the first six months of 2000 compared with income from
continuing operations of $4,060, or $.36 per diluted share in the second
quarter 1999 and $6,640, or $.59 per diluted share for the first half of
1999. Net income was $8,479, or $.72 per diluted share in the second
quarter of 1999 and $11,059, or $.94 per diluted share for the first six
months of 1999 and included a net gain of $4,419, or $.37 per diluted
share, from the disposal of discontinued operations.
Net sales were $140,658 in the second quarter of 2000 and $272,232 for the
first six months of 2000, compared with net sales of $152,113 in the second
quarter of 1999 and $293,337 in the first half of 1999.
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.
<PAGE> 16
Sales to external customers in the Company's Carpet Manufacturing segment
were $119,113 in the quarter ended July 1, 2000 and $231,475 for the first
six months of 2000. Sales increased 1.4% in the second quarter of 2000 and
2.0% for the first half 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 and to home center/mass
merchant markets which more than offset a 17% decline in sales to the
factory-built housing market.
Operating profits in the Carpet Manufacturing segment were $5,950 in the
second quarter of 2000 and $9,006 for the first six months of 2000,
compared with $8,621 in the second quarter of 1999 and $15,635 in the first
half of 1999. The decrease in profitability was principally the result of
lower shipment volume to the factory-built housing market, higher raw
material costs and inefficiencies due to the rapid expansion of the
Company's home center business.
Sales to external customers in the Company's Floorcovering Base Materials
segment were $21,545 in the quarter ended July 1, 2000 and $40,757 for the
first six months of 2000. The approximately 38% decrease in sales for the
second quarter and first six months of 2000 compared with the comparable
1999 periods was the result of the sale of the Ulmer, SC yarn plant in July
1999, greater utilization of yarn capacity by our 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 profits in the Floorcovering Base Materials segment were $268 in
the second quarter of 2000 and resulted in a loss of $879 for the first
half of 2000, compared with operating profits of $1,675 and $3,003
respectively, for the second quarter and first half of 1999. The
profitability decrease 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, which negatively
affected operations, particularly in the first quarter of 2000. 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 second quarter and first six months
of 2000.
A number of the Company's suppliers, whose products are petroleum based,
increased prices of raw materials purchased by each of the Company's two
reportable segments in 2000. The Company's ability to recover raw material
cost increases varied according to the market served.
Selling and administrative expenses were $23,409, or 16.6% of sales, in the
second quarter of 2000 and $46,569, or 17.1% of sales, in the first six
months of 2000, compared with $21,889, or 14.4% of sales, in the second
quarter of 1999 and $42,359, or 14.5% of sales, for the first six 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 the expansion of 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, which
have relatively low selling and administrative expenses compared with sales
to the Company's other markets, which grew during the period.
<PAGE> 17
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 six months of 2000, the Company's long-term debt increased
$38,503 from the 1999 year-end level. The increase was principally
attributable to expenditures of $28,158 for property, plant and equipment
and $20,592 of funds used by operating activities. The majority of these
capital expenditures were focused on the Company's yarn realignment and
expansion, extrusion expansion and a new distribution center. Working
capital increased in 2000 as a result of higher inventory levels and
reduced levels of accounts payable and accrued expenses. Inventories were
increased to maintain customer service levels while the yarn realignment
and distribution center projects are being completed and to support
anticipated growth in the Company's Home Center Business.
At July 1, 2000, the Company's debt consisted of $37.2 million of
convertible subordinated debentures, $47.6 million of subordinated notes,
$31.8 million of senior term loans and $78.3 million of credit line
indebtedness, principally under the Company's senior credit agreement.
Fixed annual payments under the Company's debt arrangements are
approximately $13.6 million in 2000. The Company's unsecured credit
agreement provides revolving credit of up to $100.0 million through March
2003.
Interest rates available under the credit agreement may be selected by the
Company from a number of options which effectively allow for borrowing at
rates equal to or lower than the greater of the lender's prime rate or
federal funds rate plus 0.5%. As of July 1, 2000, the Company's unused
borrowing capacity under its credit arrangements was $23.7 million
(including amounts available under short-term credit lines).
The Company's long-term debt and credit agreements contain financial
covenants relating to minimum net worth, the ratio of debt to
capitalization, 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 can
provide for up to $60.0 million of funding.
On August 15, 2000, the Company signed a sale and lease-back agreement,
expected to close on August 17, 2000. Pursuant to the agreement, the
Company will sell machinery and equipment used in its operations for
approximately $15.0 million. The assets will be 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 and 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
<PAGE> 18
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 STANDARD
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.
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, as 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.
<PAGE> 19
Based on the Company's $30.0 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 economic impact to the Company of
approximately $100 thousand.
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
(a) The annual meeting of shareholders was held on May 4, 2000.
(b) The meeting was held to consider and vote upon the following
proposals:
(1) To elect Directors for the following year; and
(2) To approve a Stock Incentive Plan.
All Directors were elected and all proposals were approved with
the results of the vote summarized as follows:
FOR AGAINST ABSTAIN TOTAL
__________ _______ _______ __________
J. Don Brock 24,814,962 17,516 429,838 25,262,316
Paul K. Brock 24,815,862 16,616 429,838 25,262,316
Lovic A. Brooks, Jr. 24,803,912 28,566 429,838 25,262,316
Daniel K. Frierson 24,816,307 16,171 429,838 25,262,316
Paul K. Frierson 24,816,307 16,171 429,838 25,262,316
William N. Fry, IV 24,816,612 15,866 429,838 25,262,316
John W. Murrey, III 24,815,012 17,466 429,838 25,262,316
Peter L. Smith 24,816,612 15,866 429,838 25,262,316
Robert J. Sudderth, Jr. 24,816,507 15,971 429,838 25,262,316
Approval of Stock
Incentive Plan 23,359,629 1,884,226 18,461 25,262,316
Item 5 - Other Information
None.
<PAGE> 20
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
(i) Exhibits Incorporated by Reference
None.
(ii) Exhibits Filed with this Report
(27.) Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the registrant during the
three month period ended July 1, 2000.
<PAGE> 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)
August 15, 2000
____________________
(Date)
/s/GARY A. HARMON
__________________________
Gary A. Harmon
Vice President and
Chief Financial Officer
/s/D. EUGENE LASATER
__________________________
D. Eugene Lasater
Controller
<PAGE> 22
