DIXIE GROUP INC Management’s Discussion and Analysis of the Financial Position and Operating Results (Form 10-Q)
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report.
FORWARD-LOOKING INFORMATION
This Report contains statements that may be considered forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements include the use of terms or phrases such as "expects,"
"estimates," "projects," "believes," "anticipates," "intends," and similar terms
and phrases. Such forward-looking statements relate to, among other matters, our
future financial performance, business prospects, growth strategies or
liquidity. The following important factors may affect our future results and
could cause those results to differ materially from our historical results;
these factors include, in addition to those "Risk Factors" detailed in item 1A
of this report, and described elsewhere in this document: the potential negative
impact to our business of the ongoing coronavirus ("COVID-19") pandemic, the
duration, impact and severity of which is highly uncertain, the cost and
availability of, raw materials, capital and transportation costs related to
petroleum price levels, the cost and availability of energy supplies, the loss
of a significant customer or group of customers and/or major supplier(s), the
ability to attract, develop and retain qualified personnel, materially adverse
changes in economic conditions generally in carpet, rug and floorcovering
markets we serve, and other risks detailed from time to time in our filings with
the Securities and Exchange Commission .
OVERVIEW
Our business consists principally of marketing, manufacturing and selling
floorcovering products to high-end customers through our various sales forces
and brands. We focus primarily on the upper end of the floorcovering market
where we believe we have strong brands and competitive advantages with our style
and design capabilities and customer relationships. Our Fabrica, Masland, and
Dixie Home brands have a significant presence in the high-end residential
floorcovering markets. Dixie International sells all of our brands outside of
the North American market.
Historically, we participated in the upper end specified commercial flooring
marketplace through our Atlas | Masland Contract brand. On September 13, 2021 ,
we sold our Commercial business. The results of our Commercial business activity
are included in discontinued operations in the included financial statements.
Our business is primarily concentrated in areas of the soft floorcovering
markets which include broadloom carpet, carpet tiles and rugs. However, in
response to a significant shift in the flooring marketplace toward hard surface
products, we have launched multiple hard surface initiatives over the last few
years. Dixie Home and Masland Residential, offer Stainmaster® TRUCOR™ Luxury
Vinyl Flooring and our premium residential brand, Fabrica, offers a high-end
engineered wood line.
Our net sales from continuing operations were $89 million for the third quarter
of 2021 and $252 million for the nine months ended September 25, 2021 .
Comparisons to the same periods in prior year are skewed by the negative impact
of the COVID-19 pandemic in the second quarter of 2020 as well as high demand
for residential products in 2021. Strong activity in the housing markets related
to remodeling and new home construction have driven a strong demand for
residential floor covering products in 2021.
Our net income for the three months and nine months ended September 25, 2021 was
$6.4 million and $7.7 million respectively. The income was driven by strong
operating margins, resulting from high production volume in our manufacturing
plants and a favorable impact from higher current period pricing, and selling
and administrative expenses at levels that are favorably in line with sales
volume when compared with prior periods.
Our interest expense for the three month period ended September 25, 2021 was
$1,179 which compares favorably to the interest expense of $1,561 from the same
period in the prior year. The interest expense for the nine month period ended
September 25, 2021 was $3,750 which also compares favorably to the $4,204 in
interest expense in the same period of the prior year. The reduced interest
expense is a factor of our reduction and restructuring of debt over the last
three years which included the sale and leaseback transaction for our facility
in Santa Anna , California in the fourth quarter of 2018 and the divestiture of
our Commercial division in the third quarter of 2021. We have reduced debt by
$81 million from our most recent high level of debt at $141 million at September
29, 2018 to $60 million at September 25, 2021 .
During the second quarter of 2021, the trademark for certain branded fibers our
company has historically used in certain products was sold to a mass market
retailer. Under the terms of the agreement, the availability of the trademark
for use by our company, and others in the industry, is being gradually phased
out. Our company had previously begun developing alternative offerings in
response to prior disruptions in fiber supply. We accelerated the development
process and we believe the movement away from dependence on the particular
trademark and related fibers will provide the company with opportunities to
develop enhanced competitive products with alternate fibers. We have also
assisted our specialty retail customers with the transition to
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our new offerings through a non-disruptive, turnkey solution offering a retail
friendly selling solution including new signage and merchandising materials.
RANSOMWARE INCIDENT
On April 17, 2021 , we detected a ransomware attack on portions of our
information technology systems. Response protocols were initiated immediately,
we contacted our cybersecurity insurance provider, notified legal authorities
and engaged cybersecurity experts. All systems impacted by this attack have been
substantially restored and additional security measures have been put in place.
We continue to assess the financial impact of the interruption to our business
caused by this event.
COVID-19 PANDEMIC
Beginning with the second week of March 2020 , we began experiencing reduced
volume as the result of the COVID-19 pandemic and related government
restrictions. The sales decline continued into the second quarter through the
third week of April 2020 after which we started to see a gradual and consistent
improvement in sales through the end of the third quarter. Once the extent of
the pandemic became apparent, we implemented our continuity plan to maintain the
health and safety of our associates, preserve cash, and minimize the impact on
our customers. We implemented cost reductions including cutting non-essential
expenditures, reducing capital expenditures, rotating layoffs and furloughs,
select job eliminations and temporary salary reductions. We also deferred new
product introductions and reduced our sample and marketing expenses for 2020.
Although the pandemic has continued in 2021, the impact on operations has been
limited but we cannot be certain as to any additional future impact of the
COVID-19 crisis.
DIVESTITURE OF COMMERCIAL BUSINESS
On September 13, 2021 , the Company sold its Atlas|Masland commercial business
(the "Commercial Business") to Mannington Mills, Inc. (the "Purchaser").
In accordance with the Asset Purchase Agreement dated September 13, 2021 , the
Company sold assets that include certain inventory and certain items of
machinery and equipment used exclusively in the Commercial Business, and related
intellectual property for a purchase price of $20.5 million . The Purchaser also
assumed the liability to fulfill the orders represented by advance customer
deposit liabilities of $3.1 million .
The Company has retained the Business Company’s cash deposits, all accounts receivable and certain inventory and equipment. In addition, the Company has agreed not to compete with the specified business activities and Atlas | Masland markets for a period of 5 years after
As a result of the transaction the Company has effectively exited the Commercial Business and will now focus exclusively on its residential floorcovering segment. The sale of Atlas|Masland represents a strategic shift that will have a major effect on the Company's operations. The Company has accounted for the transaction as discontinued operations on the date the entity was disposed. Accordingly, the Company is reporting the results of Atlas|Masland operations and cash flows, and balance sheet classifications for the current and comparative periods as discontinued operations. Prior to the consummation of the sale, the Company was neither actively marketing the business for sale nor had intentions to abandon the Commercial Business and as a result did not present the results as assets held for sale or discontinued operations in prior filings. See Note 21 for the Company's discontinued operations reporting. At closing, the Company received approximately$18.4 million in net proceeds, after depositing$2.1 million within an escrow account. The escrow account is for certain potential seller indemnifications and will be released to the Company in two installments with 50% of the escrow paid in 90 days from closing and the remaining amount paid 18 months from the closing date. In order to release liens on certain fixed assets included in the Asset Purchase Agreement, the Company placed$2.1 million in cash collateral in an account with the lender (Greater Nevada Credit Union ). The remaining proceeds were applied to the Company's debt with its senior credit facility (Fifth Third Bank ).
The gain on the sale of assets is summarized as follows: Net proceeds, including escrow funds
20,500,000
Inventory (11,500,031)
LIFO Gain 2,304,806
Fixed Assets (2,277,876)
Contract Liabilities 3,127,215
Net tangible assets sold (8,345,886)
Capital gain on disposal of sold assets, before ancillary costs 12,154,114
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Other transaction costs
Adjustments to Accruals, Reserves and Allowances
(8 462 393) 1
Transaction Costs (1,031,645) 2 Total other transaction related costs
(9,494,038)
Gain on sale of discontinued operations
2,660,076
1) For the remaining retained commercial inventory and fixed assets, the Company recognized adjustment to recognize the effects of the transaction. For inventory, the Company recognized lower of cost or market adjustments of approximately$6.6 million . The Company's remaining fixed assets will be disposed of by sale and the Company recognized an adjustment of approximately$1.8 million to reflect the lower of its carrying value or estimated fair value less cost to sell. For these assets, the Company has suspended the associated depreciation and will recognize changes in the fair value less cost to sell as gains or losses in future periods until the date of sale. 2) Transaction costs were legal expenses and involuntary employee termination costs related to one-time benefit arrangements. In addition, the Company and the Purchaser simultaneously entered into a transition services agreement pursuant to which the Company will assist Mannington in transitioning the AtlasMasland business to Mannington, by, among other things, assisting in filling open orders and completing the manufacture of work in progress that will result in a temporary continued involvement in the Commercial Business until approximatelyDecember 31,2021 . The Company has shown the results of these operations as a component of discontinued operations. RESULTS OF OPERATIONS Table of Contents 26
-------------------------------------------------------------------------------- The following tables provide information derived from our Unaudited Condensed Consolidated Financial Statements for the periods indicated. Percentages used are expressed as a percent of net sales. The discussion that follows each table should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements as well as our annual report on Form 10-K for the year endedDecember 26, 2020 . Three Months EndedSeptember 25, 2021 Compared with the Three Months EndedSeptember 26, 2020 Net Sales ($ in thousands) 2021 2020 Inc./(Dec.) Inc./(Dec.)
Net sales, continuing operations 89,294 70,035 19,259
27.5%
Net sales, discontinued operations 15,065 15,885 (820)
(5.2)% Net sales, combined 104,359 85,920 18,439 21.5% During the third quarter of 2021, our net sales from continuing operations increased 27.5% compared with the third quarter of 2020. Net sales from discontinued operations decreased 5.2% versus the prior year. The significant increase in net sales from continuing operations in the third quarter of 2021 as compared to the same period in 2020 was driven by our residential floor covering products and was the result of strong growth in new and existing home sales and home remodeling in 2021. Decreased sales of in our discontinued operations in the third quarter of 2021 as compared to the same period in 2020 was primarily the result of the sale of the operations and discontinuance of business onSeptember 13, 2021 . Continuing Operations Three Months Ended September 25, September 26, 2021 2020 Net Sales 100.0 % 100.0 % Cost of Sales 72.1 % 75.5 % Gross Profit 27.9 % 24.5 % Selling and Administrative Expenses 20.3 % 21.8 % Other Operating (Income) Expenses, Net (0.1) % (0.2) % Facility Consolidation and Severance Expenses, Net 0.1 % 0.7 % Operating Income (Loss) 7.7 % 2.2 % Gross Profit For continuing operations, gross profit as a percentage of net sales was 27.9% in the third quarter of 2021 compared with 24.5% in the third quarter of 2020. The gross profit percentage in 2020 was impacted by under absorbed costs as a result of the lower volume caused by the COVID-19 pandemic. Higher residential production volumes and higher current period pricing matched against lower prior period costs within the quarter in the third quarter of 2021 offset inefficiencies in our commercial production facilities and increases in raw material costs.
Selling and administration costs
Table of Contents 27 -------------------------------------------------------------------------------- Selling and administrative expenses from continuing operations were$18.0 million , or 20.3% of net sales, in the third quarter of 2021 compared with$15.2 million , or 21.8% of net sales, in the year earlier period. In the second quarter of 2020, the Company initiated cost reductions including layoffs, pay reductions and spending freezes in response to the reduced demand caused by the COVID-19 pandemic. These cost reductions continued into the third quarter of 2020. Spending on selling and administrative expenses in 2021 increased in line with growing demand.
Other operating expenses (income), net
Net other operating income, was$131 thousand in the third quarter of 2021 compared with net other operating income of$172 thousand in the third quarter of 2020. Differences between the two quarters compared related to changes in fair market value adjustments related to our non-qualified retirement plan.
Facility consolidation and termination costs, net
Facility consolidation and severance expenses totaled$88 thousand in the third quarter of 2021 compared with expense of$515 thousand in the third quarter of 2020. Facility consolidation expenses recorded in the third quarter of 2021 were residual expenses related to our Profit Improvement Plan. The expenses in the second quarter of 2020 were comprised of costs related to our COVID-19 Continuity Plan.
Operating profit (loss)
We reported an operating income of$6.8 million in the third quarter of 2021 compared with an operating income of$1.5 million in the third quarter of 2020. In the third quarter of 2021, operating margins driven by productions volumes and favorable pricing helped drive the high operating income. In the third quarter of 2020, the lower sales volume contributed to under absorbed manufacturing costs and lower gross profit margins.The lower margins were slightly offset by expense reductions from our COVID-19 Continuity Plan.
Interest expense decreased$382 thousand in the third quarter of 2021 compared with the third quarter of 2020. The decrease is the result of restructuring and reduction of debt. Debt decreased$13.6 million from$74.0 million at the end of the third quarter of 2020 to$60.4 million at the end of the third quarter of 2021. Income Tax Benefit We recorded an income tax expense for continuing operations of$62 thousand in the third quarter of 2021. In the third quarter of 2020 we recorded an income tax benefit of$293 thousand .
Net profit (loss) from continuing operations
Continuing operations reflected an income of$5.6 million , or$0.35 per diluted share, in the third quarter of 2021 compared with a loss of$175 thousand , or$0.01 per diluted share, in the same period in 2020.
Interrupted operations
Discontinued operations reflected an income of$836 thousand , or$0.05 per diluted share, in the third quarter of 2021 compared with an income of$685 thousand , or$0.04 per diluted share, in the same period in 2020. The largest contributor to the income in both periods was the divestiture of the commercial business. See note 21 on Discontinued Operations for additional detail. Including discontinued operations, the Company had a net income of$6.4 million , or$0.40 per diluted share, in the third quarter of 2021 compared with a net income of$860 thousand , or$0.05 per diluted share, in the third quarter of 2020. Table of Contents 28 -------------------------------------------------------------------------------- Nine Months EndedSeptember 25, 2021 Compared with the Nine Months EndedSeptember 26, 2020 Net Sales ($ in thousands) 2021 2020 Inc./(Dec.) Inc./(Dec.)
Net sales, continuing operations 252 022 175 354 76 668
43.7%
Net sales, discontinued operations 43,470 51,967 (8,497)
(16.4)% Net sales, combined 295,492 227,321 68,171 30.0% During the first nine months of 2021, net sales from continuing operations, representing our ongoing residential business, increased 43.7% compared with the first nine months of 2020. The significant increase in the net sales of our residential floor covering products in the first nine months of 2021 as compared to the same period in 2020 was the result of strong growth in new and existing home sales and home remodeling in 2021. Decreased net sales in our discontinued operations, representing our discontinued commercial business, in the third quarter of 2021 as compared to the same period in 2020 was the result of the continued impact of the COVID-19 pandemic on the commercial markets we serve, particularly in the hospitality and retail market segments and the sale of the commercial business and discontinuance of operations onSeptember 13, 2021 .. Continuing Operations Nine Months Ended September 25, September 26, 2021 2020 Net Sales 100.0 % 100.0 % Cost of Sales 74.5 % 78.5 % Gross Profit 25.5 % 21.5 % Selling and Administrative Expenses 20.2 % 24.1 % Other Operating (Income) Expenses, Net - % (0.1) % Facility Consolidation and Severance Expenses, Net 0.1 % 1.0 % Operating Income (Loss) 5.2 % (3.5) % Gross Profit Gross profit as a percentage of net sales was 25.5% in the first nine months of 2021 compared with 21.5% in the first nine months of 2020. The lower gross profit percentage in 2020 was driven by under absorbed costs as a result of the lower volume caused by the COVID-19 pandemic. Higher residential production volumes and favorable pricing in the third quarter offset inefficiencies in our commercial production facilities and increases in raw material costs.
Selling and administration costs
Selling and administrative expenses were$50.8 million , or 20.2% of net sales, in the first nine months of 2021 compared with$42.3 million , or 24.1% of net sales, in the year earlier period. Beginning in the second quarter of 2020, the Company initiated cost reductions including layoffs, pay reductions and spending freezes in response to the reduced demand caused by the COVID-19 pandemic. Spending on selling and administrative expenses in 2021 increased in line with growing demand. Table of Contents 29
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Other operating expenses (income), net
Net other operating income, was$96 thousand in the first nine months of 2021 compared with net other operating income of 163 thousand in the same period of 2020. Differences between the two quarters compared related to changes in fair market value adjustments related to our non-qualified retirement plan.
Facility consolidation and termination costs, net
Facility consolidation and severance expenses totaled$183 thousand in the nine month period endedSeptember 25, 2021 compared with expense of$1,785 thousand in the nine month period endedSeptember 26, 2020 . Facility consolidation expenses recorded in the first nine months of 2021 were residual expenses related to our Profit Improvement Plan and the COVID-19 Continuity Plan. The expenses in the third quarter of 2020 were comprised of costs related to our COVID-19 Continuity Plan including severance expenses and financing expenses.
Operating profit (loss)
We reported an operating income of$13.5 million in the first nine months of 2021 compared with an operating loss of$6.1 million in the first nine months of 2020. In the first nine months of 2021, gross margins improved from higher sales demand and the benefit of favorable pricing which helped to offset the under absorbed costs in our commercial manufacturing facilities and higher raw material costs. In the first nine months of 2020, the lower sales volume as a result of the COVID-19 pandemic contributed to under absorbed manufacturing costs and lower gross profit margins.The lower margins were slightly offset by expense reductions from our COVID-19 Continuity Plan.
Interest charges
Interest expense has decreased
Tax benefit
In the first nine months of 2021, we recorded a tax charge of
The effective income tax rate for the nine months endingSeptember 25, 2021 was 6.15% compared with a benefit rate of 7.20% for the nine months endingSeptember 26, 2020 . Because the Company maintains a full valuation allowance against its deferred income tax balances, the Company is only able to recognize refundable credits, the accrual of federal and state cash taxes, and a benefit for the recognition of stranded tax effects within other comprehensive income (loss) related to the termination of certain derivative contracts in the tax benefit for the first nine months of 2021. The Company is expecting to be in a Federal cash tax paying position for the year based on the projected full utilization of its NOL carryforwards and the limitation on its ability to utilize credit carryforwards to offset its tax liability. The Company is expecting to be in a Federal cash tax paying position for the year based on the projected full utilization of its NOL carryforwards and the limitation on its ability to utilize credit carryforwards to offset its tax liability. The Company is in a net deferred tax liability position of$91 atSeptember 25, 2021 andDecember 26, 2020 , respectively, which is included in other long-term liabilities in the Company's Consolidated Condensed Balance Sheets. The Company accounts for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were$214 atSeptember 25,2021 andDecember 26, 2020 , respectively. Such benefits, if recognized, would affect the Company's effective tax rate. There were no significant interest or penalties accrued as ofSeptember 25, 2021 andDecember 26, 2020 . The Company and its subsidiaries are subject toUnited States federal income taxes, as well as income taxes in a number of state jurisdictions. The tax years subsequent to 2016 remain open to examination forU.S. federal income taxes. The majority of state jurisdictions remain open for tax years subsequent to 2016. A few state jurisdictions remain open to examination for tax years subsequent to 2015. Table of Contents 30
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Net income (loss)
Continuing operations reflected an income of$9.7 million , or$0.58 per diluted share, in the first nine months of 2021 compared with a loss of$10.4 million , or$0.63 per diluted share, in the same period in 2020. Discontinued operations reflected a loss of$1.3 million , or$0.09 per diluted share, in the first nine months of 2021 compared with an income of$778 thousand , or$0.05 per diluted share, in the same period in 2020. The largest contributor to the income in both periods was the divestiture of the commercial business. See note 21 on Discontinued Operations for additional detail. Including discontinued operations, the Company had a net income of$7.8 million , or$0.49 per diluted share, in the nine month period endedSeptember 25, 2021 compared with a net loss of$8.9 million , or$0.58 per diluted share, in the same period of 2020.
LIQUIDITY AND CAPITAL RESOURCES
During the nine months endedSeptember 25, 2021 , cash provided by continuing operations was$4.6 million . The income from continuing operations for the period was$9.1 million . Accounts receivable held for continuing operations increased$9.5 million from the seasonally low 2020 fiscal year end accounts receivable balance. The increase in accounts receivable atSeptember 2021 quarter end reflects the increased sales volume for the period driven by the higher demand for residential products. Inventories held for continuing operations increased$15.3 million as we are building up inventories to meet increased demand. Accounts payable and accrued expenses for continuing operations increased$12.5 million primarily driven by accruals for raw material purchases in order to replenish inventory to meet the growing demand. Purchases and sales of capital assets for the nine months endedSeptember 25, 2021 netted to a$15.1 million cash flow to the business. Depreciation and amortization for the nine months endedSeptember 25, 2021 were$6.9 million . We expect capital expenditures to be approximately$5.0 million in 2021 while depreciation and amortization is expected to be approximately$10.0 million . Planned capital expenditures in 2021 are primarily for new equipment. During the nine months endedSeptember 25, 2021 , cash used in financing activities for continuing operations was$18.2 million . We had net payments on our revolving credit facility of$11.6 million and payments on notes payable and financing leases of$6.2 million . After the end of the third quarter of 2020, the Company replaced its senior credit facility with Wells Fargo Capital Finance with a$75 million , senior secured Revolving Credit Facility withFifth Third Bank National Association . Additionally, the Company entered into two fixed asset loans in the combined principal amount of$25 million . We believe our operating cash flows, credit availability under our revolving credit facility and other sources of financing are adequate to finance our anticipated liquidity requirements under current operating conditions. We cannot predict, and are unable to know, the long-term impact of the COVID-19 pandemic and the related economic consequences or how these events may affect our future liquidity. Availability under our Senior Secured Revolving Credit Facility onSeptember 25, 2021 was$54.1 million . See Note 9, Long-Term Debt and Credit Arrangements, for additional details regarding our Senior Credit Facility. Significant additional cash expenditures above our normal liquidity requirements, significant deterioration in economic conditions or continued operating losses could affect our business and require supplemental financing or other funding sources. There can be no assurance that such supplemental financing or other sources of funding can be obtained or will be obtained on terms favorable to us. Changes to Critical Accounting Policies Our critical accounting policies were outlined in Management's Discussion and Analysis of Results of Financial Condition and Results of Operations in our 2020 Annual Report on Form 10-K filed with theSecurities and Exchange Commission .
Recent accounting positions
The recent accounting positions are presented in note 2 of the condensed consolidated financial statements.
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