Dixie Group Has Drop In Sales, But Reports Profit

  • Monday, August 5, 2019

The Dixie Group, Inc. (NASDAQ: DXYN) reported financial results for the quarter ended June 29, including a drop in net sales.

For the second quarter of 2019, the company had net sales of $100,394,000 as compared to $106,438,000in 2018. The company’s second quarter net sales were down 5.7% as compared to the same period in 2018 while the industry, we estimate, was down similarly.

For the second quarter of 2019, the company had a loss from continuing operations of $1,216,000 or $0.07 per diluted share; however, adjusting for costs associated with facility restructuring and related inventory impairments, the company had a non-GAAP adjusted profit of $697,000 or $0.04 per share for the second quarter. For the second quarter of 2018, the Company reported a loss of $1,815,000 or $0.12 per diluted share; which on a comparable non-GAAP adjusted basis was a loss of $1,626,000 or $0.10 per share.

Unusual expenses during the period included $1.9 million in restructuring related expenses including a reserve for post termination worker’s compensation expenses related to the closure of our west coast facilities, facility consolidation expenses, and inventory write downs for commercial white dyeable products. We have incurred, through the second quarter of 2019, approximately $17.4 million in costs to implement the Profit Improvement Plan including write downs of related inventory, goodwill and other assets. We estimate the total costs of the Plan and related costs, once complete by the end of 2019, to be $18.2 million. The total cost reductions of these restructuring efforts, once fully implemented, is approximately $18.7 million annually, as compared to our cost structure in 2017 when we began this process.

Commenting on the results, Daniel K. Frierson, chairman and chief executive officer, said, “We began our Profit Improvement Plan in late 2017. This Plan included a review of all of our business processes though the primary focus was on the restructuring of our commercial business. Subsequent to our starting this plan, Invista made the decision to exit the production of most piece dyeable yarns for the commercial market. This decision, therefore, caused us to expand the commercial restructuring to be a complete integration of all aspects of the business.

As a result of this action, we have completed the combination of our Atlas and Masland business into one commercial business, now known as Atlas | Masland Contract. In order to accomplish the cost reductions and combine our commercial business, we have expensed over $17 million of restructuring related charges to date which have been reflected in our statements of operations since 2017.

As mentioned above, without these costs in the second quarter, the Company was profitable. Costs related to the plan are nearly complete and will be at a much lower level in the future. We look forward to completing the Profit Improvement Plan in the second half of 2019.

Our residential sales were down 2.6% for second quarter of 2019. Residential soft surface products were down 4.1% while we estimate our segment of the soft surface market was down high single digits. Residential hard surface sales were up 48% while we estimate the industry was up low double digits.

Our strongest residential sales growth was in hard surfaces where we continued gaining traction in the luxury vinyl flooring and engineered wood flooring segments. Our new TRUCOR™ SPC program has begun to gain traction in the market. We will be expanding our Fabrica wood program during the second half of 2019. Our EnVision 6,6™ nylon program continues growing nicely. In the third quarter of 2019, we will continue to expand our placement of this program in the specialty retail channel. Our EnVision 6,6™ nylon products are well styled, and feature type 6,6 nylon for durability, stain, and soil resistance which stands up to the most demanding applications.

In April 2019, we launched Masland California Classics. This collection of 16 styles is finished and distributed out of our Santa Ana, California facility. In our Dixie Home line, we are expanding the Pacific Living Quick ship program, growing our footprint from 10 to 19 styles with new retail displays and updated colors. Our Masland and Dixie Home customers in the western United States will benefit from these program expansions.

Our commercial business in the second quarter was down 13.7% while the industry we believe was up the in the low single digits. Our commercial team has a number of new offerings for 2019 with particular emphasis on new modular carpet tile offerings. Our new Sustaina™ modular carpet tile backing system, a PVC and polyurethane free backing system, was created for the specifier who desires both the most sustainable construction and performance in high relative humidity environments, thus allowing quicker installation on new concrete surfaces. The Crafted Collection will launch in the third quarter of 2019 using this new backing system. Further, Crafted will have over 80% recycled content with 100% recycled content in the face fiber,” Frierson concluded.

Our gross profit for the second quarter of 2019 was 23.4% of net sales as compared to a gross profit of 23.6% in the second quarter of 2018. Included in our cost of sales for the period was $202 thousand in inventory write downs related to our restructuring. We are still running high backlogs in our commercial business as we overcome the effects of moving our commercial tufting operations from the west coast to our Atmore, Alabama facility. We anticipate those to be back to normal later this summer.

Selling and administrative expenses for the second quarter of 2019 were 21.0% of net sales, a decrease of 1.4 percentage points from our level of 22.4% in the second quarter of 2018. The decrease in our selling and administrative costs is primarily due to the Profit Improvement Plan we initiated in the fourth quarter of 2017 as we consolidated our two commercial management businesses and streamlined other costs throughout the Company. We had $1.7 million in expenses related to our Profit Improvement Plan during the period. The bulk of the expense was related to post termination worker’s compensation claims. We are objecting to these post termination worker’s compensation cases vigorously as we believe they are without merit. Other unusually high expenses during the period were medical costs associated with our traditional preferred provider network medical plans. One of these medical plans is being replaced in August of this year, and the other plan will be replaced later in 2019 with a more cost efficient plan.

Our receivables increased $3.9 million during the second quarter of 2019 due to our normal seasonal patterns. Our inventories increased $343 thousand due to normal seasonal fluctuations. Our annual capital expenditures for 2019 are planned at a level of approximately $4 million. For the first half of 2019 our capital expenditures, including those financed through capital leases, were $2.2 million as compared to depreciation and amortization of $5.9 million. Interest expense was up due to higher interest rates from a year ago. Availability under our lines of credit was $10.1 million at the end of the period. Our debt decreased $5.5 million during the quarter and is down $11.0 million from a year ago at this time.

Our residential business continues to outperform our commercial business, though we are confident that our commercial reorganization is proving successful.

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