The Dixie Group Reports Loss In Second Quarter 2018

Thursday, August 2, 2018

The Dixie Group, Inc. Thursday reported financial results for the quarter ended June 30.  For the second quarter of 2018, the company had net sales of $106,438,000 as compared to $107,187,000 in 2017. The company’s second quarter net sales were down 0.7% as compared to the same period in 2017 while the industry, Dixie Group estimates, was flat.

For the second quarter of 2018, the company had a loss from continuing operations of $1,972,000 or $0.13 per diluted share as compared to a profit of $1,226,000 or $0.08 per diluted share in the second quarter of 2017.

The company had unusual expenses during the period of $2 million, including a $1.51 million charge related to settlement of a class action litigation as well as a $450,000 charge related to an accident at one of its yarn facilities. On a non-GAAP basis, the company had earnings for continuing operations of $182,000 or $0.01 per diluted share. 

Commenting on the results, Daniel K. Frierson, chairman and chief executive officer, said, “Our residential sales were up 4.0 percent for the quarter with the industry, we estimate, being up slightly as compared to the prior year. Our residential sales were strongest through our independent retail channels. In 2018 we have reintroduced the Masland Energy collection. Masland Energy is a modern take on the traditional main street commercial business. Our Energy products are highly stylized and feature type 6, 6 nylon delivering the performance required by the most demanding segments of the commercial market. The Fabrica wood line was launched with initial selective distribution in the southeast United States. The Fabrica collection features both flooring and companion wood wall coverings. The line will include French oak, maple and birch with a style and quality consistent with the high-end quality of Fabrica’s brand. 

"Our commercial business in the second quarter was down 10.1 percent while the industry we believe was down slightly. We did benefit from the reorganization of our commercial business this past fall with lower selling and administrative expenses. Our commercial team, led by David Hobbs, has a number of new offerings for 2018 with particular emphasis on new modular carpet tile offerings. Getting in sync with the current urban bicycle movement, Masland Contract’s Shift Your Attitude collection celebrates the freedom found in life on two wheels.  Introduced at the NeoCon show in Chicago, each new style reflects the energy of the urban lifestyle and is manufactured for high-level performance in commercial environments.

"Our gross profit for second quarter of 2018 was 23.6 percent of net sales as compared to a gross profit of 26.5 percent in 2017. During the second quarter of 2018, we agreed to a Memorandum of Understanding regarding settlement of a class action litigation resulting in a $1.51 million charge. Our gross profit was also impacted by an accident in one of our yarn operations, resulting in a $450,000 charge during the period. In addition to this $2 million in unusual charges, our sales and costs were negatively impacted by lower sales in our commercial business, contributing to under absorbed costs in our manufacturing operations.

"Our gross margin was further impacted by higher than normal waste, purchase price variances and distribution expenses. We have made changes in our manufacturing operations to lower costs by better aligning staffing to demand, implemented several waste reduction initiatives, and are streamlining our distribution operations. To maintain our workforce, we have increased wages and improved benefits.  This has helped us reduce turnover as we deal with a continued tight labor market. We announced a residential price increase for this August primarily to offset higher labor, material and other operational costs.

"Selling and administrative expenses for the quarter were 22.4 percent of net sales, a decrease of 1.2 percentage points from our level of 23.6 percent in the second quarter of 2017. The decrease in our selling and administrative costs is primarily due to the Profit Improvement Program we initiated in the fourth quarter of last year as we consolidated our two commercial management teams under the leadership of David Hobbs. We had $190,000 in restructuring expenses primarily related to our Profit Improvement Plan during the period. 

"During the second quarter, our receivables increased $1.5 million due to our normal seasonal pattern. Inventories increased $5.4 million due to normal seasonal factors. Our capital expenditures for the year of 2018 are planned at a maintenance level of approximately $6 million. For the first half of 2018, our capital expenditures, including those financed through capital leases, were $1.4 million as compared to depreciation and amortization of $6.3 million. 

"Interest expense was up due to higher levels of debt and higher interest rates from a year ago. During the period, the results of discontinued operations included income of $250,000 from an insurance settlement. Our debt increased $3.5 million during the quarter.

"Our floorcovering sales for the first four weeks of the third quarter are down approximately 2.2 percent versus the same period in 2017. Our residential business continues to outperform our commercial business. 

"We are well positioned to continue to be the style leader in the flooring industry," concluded Mr. Frierson.

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