Annual Statements Open main menu

DIXIE GROUP INC - Quarter Report: 2006 April (Form 10-Q)

The Dixie Group, Inc. 10-Q First Quarter 2006




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.   20549


 

Form 10-Q

 

(Mark One)

  


S

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: April 1, 2006

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________________ to _______________________


  

Commission File Number: 0-2585

 

[f10q040106001.gif]
THE DIXIE GROUP, INC.

(Exact name of Registrant as specified in its charter)


Tennessee

     

62-0183370

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

345-B Nowlin Lane,  Chattanooga, TN

37421

(423) 510-7010

(Address of principal executive offices)

(zip code)

(Registrant's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)


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.




S




Yes




o




No


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.  (Check one):


Large accelerated filer

o

 

Accelerated filer

S

 

Non-accelerated filer

o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.


o


Yes


S


No


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 April 26, 2006

Common Stock, $3 Par Value

 

11,988,135 shares

Class B Common Stock, $3 Par Value

 

720,560 shares

Class C Common Stock, $3 Par Value

 

0 shares




The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 1




THE DIXIE GROUP, INC.

INDEX TO QUARTERLY FINANCIAL REPORT

Table of Contents

PART 1.  FINANCIAL INFORMATION

  
     
 

Item 1 --

Financial Statements

 

Page

  

Consolidated Condensed Balance Sheets -

3

   

April 1, 2006 and December 31, 2005

  
  

Consolidated Condensed Statements of Income -

4

   

Three Months Ended April 1, 2006 and March 26, 2005

  
  

Consolidated Condensed Statements of Cash Flows -

5

   

Three Months Ended April 1, 2006 and March 26, 2005

  
  

Consolidated Condensed Statement of Stockholders' Equity -

6

   

Three Months Ended April 1, 2006

  
  

Notes to Consolidated Condensed Financial Statements

7 - 14

 

Item 2 --

Management's Discussion and Analysis of Results of Operations and Financial Condition

15 - 17

 

Item 3 --

Quantitative and Qualitative Disclosures about Market Risk

18

 

Item 4 --

Controls and Procedures

 

18

      

PART 11.  OTHER INFORMATION

 

19

     
 

Item 1 --

Legal Proceedings

  
 

Item 2 --

Unregistered Sales of Equity Securities and Use of Proceeds

  
 

Item 3 --

Defaults Upon Senior Securities

  
 

Item 4 --

Submission of Matters to a Vote of Security Holders

  
 

Item 5 --

Other information

  
 

Item 6 --

Exhibits

  
     
  

Signatures

 

22





The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 2



PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

THE DIXIE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(dollars in thousands)

 

 

 

 

 

April 1, 2006

  

December 31, 2005

ASSETS

 

 

(Unaudited)

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

           1,393 

 

$

              --- 

 

Accounts receivable (less allowance for doubtful accounts of $657 for 2006
   and $595 for 2005)

 

 

          37,802 

  

          31,633 

 

Inventories

 

 

          76,569 

  

           72,871 

 

Other current assets

 

 

         11,105 

  

         10,577 

 

 

TOTAL CURRENT ASSETS

 

 

        126,869 

  

       115,081 

 

 

 

 

     

PROPERTY, PLANT AND EQUIPMENT

 

     

 

Land and improvements

 

 

             6,100 

  

              6,047 

 

Buildings and improvements

 

 

          44,521 

  

           44,348 

 

Machinery and equipment

 

 

      114,179 

  

        107,993 

 

 

 

 

 

          164,800 

  

           158,388 

 

Less accumulated depreciation and amortization

 

 

       (68,221)

  

         (65,440)

 

 

NET PROPERTY, PLANT AND EQUIPMENT

 

 

            96,579 

  

            92,948 

 

 

 

 

     

OTHER ASSETS

 

     

 

Goodwill

 

 

            57,177 

  

           57,177 

 

Other long-term assets

 

 

        12,847 

  

         11,797 

 

 

TOTAL OTHER ASSETS

 

 

          70,024 

  

            68,974 

TOTAL ASSETS

 

$

      293,472 

 

$

        277,003 

         

LIABILITIES AND STOCKHOLDERS' EQUITY

 

     

CURRENT LIABILITIES

 

     

 

Accounts payable

 

$

            19,669 

 

$

           14,929 

 

Accrued expenses

 

 

         19,986 

  

          18,295 

 

Current portion of long-term debt

 

 

            6,964 

  

             6,341 

 

 

TOTAL CURRENT LIABILITIES

 

 

          46,619 

  

          39,565 

 

 

 

 

     

LONG-TERM DEBT

 

     

 

Senior indebtedness

 

 

        68,992 

  

         60,987 

 

Capital lease obligations

 

 

             4,436 

  

          4,727 

 

Convertible subordinated debentures

 

 

            22,162 

  

         22,162 

 

 

TOTAL LONG-TERM DEBT

 

 

           95,590 

  

         87,876 

 

 

 

 

     

DEFERRED INCOME TAXES

 

 

           10,954 

  

         10,768 

 

 

 

 

     

OTHER LONG-TERM LIABILITIES

 

 

        15,073 

  

        15,310 

 

 

 

 

     

COMMITMENTS AND CONTINGENCIES

 

 

                 --- 

  

              --- 

 

 

 

 

     

STOCKHOLDERS' EQUITY

 

     

 

Common Stock ($3 par value per share):  Authorized 80,000,000 shares, issued -
   15,386,980 shares for 2006 and 15,347,589 shares for 2005

 

 

         46,161 

  

        46,043 

 

Class B Common Stock ($3 par value per share): Authorized 16,000,000 shares, issued -
   720,560 for 2006 and 714,560 shares for 2005

 

 

        2,162 

  

         2,144 

 

Additional paid-in capital

 

 

      133,977 

  

        134,353 

 

Unearned stock compensation

 

 

             --- 

  

             (719)

 

Accumulated deficit

 

 

     (571)

  

       (1,406)

 

Accumulated other comprehensive loss

 

 

                   (2,404)

  

                   (2,887)

 

 

 

 

 

       179,325 

  

       177,528 

 

Less Common Stock in treasury at cost - 3,398,845 shares for 2006 and 3,395,390 shares
   for 2005

 

 

(54,089)

  

             (54,044)

 

 

TOTAL STOCKHOLDERS' EQUITY

 

 

     125,236 

  

      123,484 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 

$

   293,472 

 

$

      277,003 

See accompanying notes to the consolidated condensed financial statements.



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 3




THE DIXIE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(dollars in thousands, except per share data)

 

 

 

Three Months Ended

 

 

 

April 1, 2006

  

March 26, 2005

Net sales

 

    79,173 

 

   72,034 

Cost of sales

 

 

    56,974 

  

 49,991 

 

 

     

Gross profit

 

 

    22,199 

  

   22,043 

Selling and administrative expenses

 

 

    19,216 

  

   17,799 

Other operating income

 

 

 (342)

  

        (85)

Other operating expense

 

 

     157 

  

         36 

 

 

     

Operating income

 

 

      3,168 

  

  4,293 

 

 

     

Interest expense

 

 

       1,767 

  

    1,402 

Other income

 

 

        (12)

  

         (92)

Other expense

 

 

           3 

  

    20 

 

 

     

Income from continuing operations before taxes

 

 

  1,410 

  

   2,963 

Income tax provision

 

 

      484 

  

   1,091 

 

 

     

Income from continuing operations

 

 

     926 

  

      1,872 

Loss from discontinued operations, net of tax

 

 

        (91)

  

    (412)

Income on disposal of discontinued operations, net of tax

 

 

      --- 

  

       834 

 

 

     

Net income

 

      835 

 

   2,294 

 

 

     

BASIC EARNINGS (LOSS) PER SHARE:

 

     

 

Continuing operations

 

       0.07 

 

       0.15 

 

Discontinued operations

 

 

    --- 

  

     (0.03)

 

Disposal of discontinued operations

 

 

          --- 

  

      0.07 

 

Net income

 

       0.07 

 

     0.19 

 

 

 

     

SHARES OUTSTANDING

 

 

   12,632 

  

 12,270 

 

 

     

DILUTED EARNINGS (LOSS) PER SHARE:

 

     

 

Continuing operations

 

    0.07 

 

    0.15 

 

Discontinued operations

 

 

   (0.01)

  

  (0.03)

 

Disposal of discontinued operations

 

 

      --- 

  

   0.06 

 

Net income

 

        0.06 

 

    0.18 

 

 

 

     

SHARES OUTSTANDING

 

 

    12,935 

  

     12,853 

 

 

 

     

DIVIDENDS PER SHARE:

 

     

 

Common Stock

 

 

           --- 

  

         --- 

 

Class B Common Stock

 

 

          --- 

  

       --- 

 

 

 

     

See accompanying notes to the consolidated condensed financial statements.

 

 

 


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 4




THE DIXIE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(dollars in thousands)

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

April 1, 2006

  

March 26, 2005

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Income from continuing operations

 

       926 

 

      1,872 

 

Loss from discontinued operations

 

 

        (91)

  

        (412)

 

Income on disposal of discontinued operations

 

 

            --- 

  

            834 

 

Net income

 

 

         835 

  

      2,294 

 

 

 

 

 

 

     

 

Adjustments to reconcile net income to net cash

 

     

 

 

(used in) provided by operating activities:

 

     

 

 

 

Depreciation and amortization

 

 

      2,853 

  

        2,616 

 

 

 

Change in deferred income taxes

 

 

         678 

  

         (777)

 

 

 

Net (gain) loss on property, plant and equipment disposals

 

 

          (20)

  

        20 

 

 

 

Stock-based compensation expense

 

 

    118 

  

         146 

 

 

 

Changes in operating assets and liabilities:

 

     

 

 

 

 

Accounts receivable

 

 

      (6,169)

  

       346 

 

 

 

 

Inventories

 

 

     (3,698)

  

     (1,614)

 

 

 

 

Accounts payable and accrued expenses

 

 

     6,431 

  

             659 

 

 

 

 

Other operating assets and liabilities

 

 

     (1,897)

  

        2,525 

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

 

 

        (869)

  

          6,215 

 

 

 

 

 

 

     

CASH FLOWS FROM INVESTING ACTIVITIES

 

     

 

Net proceeds from sales of property, plant and equipment

 

 

           20 

  

           210 

 

Purchase of property, plant and equipment

 

 

    (6,412)

  

      (4,804)

NET CASH USED IN INVESTING ACTIVITIES

 

 

      (6,392)

  

       (4,594)

 

 

 

 

 

 

     

CASH FLOWS FROM FINANCING ACTIVITIES

 

     

 

Net borrowings (payments) on credit line

 

 

       5,596 

  

            (389)

 

Payments on term loan

 

 

        (570)

  

          (715)

 

Borrowings from equipment financing

 

 

       3,876 

  

              --- 

 

Payments on equipment financing

 

 

        (239)

  

           (156)

 

Payments on capitalized leases

 

 

        (275)

  

            (686)

 

Payments on mortgage note payable

 

 

        (51)

  

          (48)

 

Common stock issued under stock option plans

 

 

      304 

  

        246 

 

Common stock acquired for treasury

 

 

       (45)

  

              --- 

 

Tax benefits from exercise of stock options

 

 

          58 

  

          127 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

     8,654 

  

      (1,621)

 

 

 

 

 

 

     

INCREASE IN CASH AND CASH EQUIVALENTS

 

 

      1,393 

  

        --- 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

 

          --- 

  

        --- 

 

 

 

 

 

 

     

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

      1,393 

 

         --- 

 

Supplemental Cash Flow Information:

 

Interest paid

 

$

1,374 

 

$

829 

 

Income taxes paid, net of tax refunds

 

 

279 

  

123 

 

See accompanying notes to the consolidated condensed financial statements.



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 5




THE DIXIE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock and Class B Common Stock

 

 

Additional Paid-in Capital

 

 

Unearned Stock Compensation

 

 

Retained Earnings (Deficit)

 

 

Accumulated Other Comprehensive Loss

 

 

Common Stock in Treasury

 

 

Total Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2005

 

$

48,187 

 

$

  134,353 

 

$

            (719)

 

$

     (1,406)

 

$

           (2,887)

 

$

(54,044)

 

$

        123,484 

 

 

                    

Common Stock acquired for treasury - 3,455 shares

 

 

        --- 

  

           --- 

  

              --- 

  

             ---

  

            --- 

  

         (45)

  

            (45)

 

 

                    

Common Stock and Class B sold under stock option plan - 45,391 shares

 

 

         136 

  

          167 

  

               --- 

  

            --- 

  

             --- 

  

          --- 

  

              303 

 

 

                    

Tax benefit from exercise of stock options

 

 

              --- 

  

                58 

  

             --- 

  

          --- 

  

            --- 

  

         --- 

  

                    58 

 

 

                    

Stock-based compensation expense

 

 

                   --- 

  

              118 

  

               --- 

  

        --- 

  

              --- 

  

           --- 

  

                  118 

 

 

                    

Reclassification upon adoption of SFAS No.123(R)

 

 

                   --- 

  

            (719)

  

                719 

  

         --- 

  

            --- 

  

          --- 

  

           --- 

 

 

                    

Other comprehensive income

 

 

                   --- 

  

                   --- 

  

              --- 

  

          --- 

  

                  483 

  

          --- 

  

                  483 

 

 

                    

Net income

 

 

                   --- 

  

                   --- 

  

              --- 

  

        835 

  

              --- 

  

          --- 

  

                  835 

 

 

                    

Balance at April 1, 2006

 

$

48,323 

 

$

 133,977 

 

$

            --- 

 

$

     (571)

 

$

          (2,404)

 

$

 (54,089)

 

$

    125,236 

 

 

                    

See accompanying notes to the consolidated condensed financial statements.

 

 

 

 

 

 

 

 

 


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 6




THE DIXIE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except per share data)


NOTE A - BASIS OF PRESENTATION


The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements which do not include all the information and footnotes required by such accounting principles for annual financial statements.  In the opinion of management, all adjustments (generally consisting of normal recurring accruals) considered necessary for a fair presentation have been included in the accompanying financial statements.  The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission, which includes consolidated financial statements for the fiscal year ended December 31, 2005.  Operating results for the three month period ended April 1, 2006 are not necessarily indicative of the results that may be expected for the entire 2006 year.


The financial statements separately report discontinued operations and the results of continuing operations (See Note F).  Disclosures included herein pertain to the Company's continuing operations unless noted otherwise.


NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS


In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections", a replacement of APB Opinion No. 20 and FASB Statement No. 3.  The statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle.  SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.  Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005.  The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement.  The Company does not expect the adoption of SFAS No. 154 to have a material effect on its financial statements.


In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS No. 155") which is effective for fiscal years beginning after September 15, 2006.  The statement was issued to clarify the application of FASB Statement No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments.  The Company does not expect the adoption of SFAS No. 155 to have a material effect on its financial statements.


In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS No. 156") which is effective for fiscal years beginning after September 15, 2006.  This statement was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes.  The Company does not expect the adoption of SFAS No. 156 to have a material effect on its financial statements.


NOTE C - SHARE-BASED PAYMENTS


Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment ("SFAS No. 123(R)").  SFAS No. 123(R) requires that compensation expense relating to share-based payments be recognized in financial statements based on the fair value of the equity or liability instrument issued.  The Statement also requires that forfeitures be estimated over the vesting period of the instrument.  Actual forfeitures prior to the adoption of SFAS 123(R) were considered by the Company.  Accordingly, there was no cumulative effect upon the adoption of SFAS 123(R).


The Company adopted SFAS No. 123(R) using the modified prospective method to account for stock options, restricted shares and stock performance units granted by the Company.  Under the modified prospective method, compensation expense for share-based payments is recognized for periods after the date of adoption for (a) all unvested awards granted prior to January 1, 2006, based on the estimated grant-date fair value in accordance with the original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), and (b) all awards granted subsequent to January 1, 2006, based on the estimated grant-date fair value in accordance with the provisions of SFAS No. 123(R).


Return to Table of Contents




The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 7



Prior to January 1, 2006, as permitted by SFAS No. 123, the Company accounted for share-based payments to employees using Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and accordingly, did not record compensation expense for stock options granted.  Results for prior periods have not been retrospectively restated.  Following is a pro forma summary of the Company's net income and earnings per share for the three months ended March 25, 2005, as if the Company had determined compensation expense for share-based payments based on the recognition provisions of SFAS No. 123(R).

        

Three Months Ended

         

March 26, 2005

Net income, as reported

      

         2,294 

Stock compensation expense, net of taxes

       

           (600)

Adjusted net income

       

         1,694 

           

Basic earnings per share, as reported

      

          0.19 

Stock compensation expense, net of taxes

       

          (0.05)

Adjusted basic earnings per share

      

          0.14 

           

Diluted earnings per share, as reported

      

           0.18 

Stock compensation expense, net of taxes

       

           (0.05)

Adjusted diluted earnings per share

      

           0.13 

           


The pro forma effect of applying SFAS No. 123(R) on net income and earnings per share shown above is not necessarily indicative of future results.


No stock awards were granted during the three months ended April 1, 2006 and March 26, 2005.  SFAS No. 123(R) requires that the excess tax benefits relating to compensation expense be reported as a financing cash flow, rather than as an operating cash flow as required under prior guidance.  Excess tax benefits of $58 were included in cash used by financing activities for the three months ended April 1, 2006.


Restricted Stock Awards


In February 2005, the Company granted 67,180 shares of restricted stock with a grant-date fair value of $1,200, or $17.86 per share, to officers and other key employees.  The restricted stock vests ratably in three equal annual installments beginning one year from the grant date.  The fair value of restricted stock granted was equal to the market value of the Company's Common Stock on the grant date.


         

 

Number of Shares

Outstanding at December 31, 2005

       

      57,990 

 

Granted

       

               --- 

 

Vested

       

      (19,330)

 

Forfeited

       

          --- 

Outstanding at April 1, 2006

      

 

        38,660 


As of April 1, 2006, unrecognized compensation expense related to unvested restricted stock was $633.  The unrecognized amounts are expected to be recorded as follows: $259 in 2006, $345 in 2007 and $29 in 2008.  The vesting date market value of restricted stock that vested during the three months ended April 1, 2006 was approximately $251.


Stock Options


The Company's 2000 Stock Incentive Plan reserved 1,936,500 shares of Common Stock for sale or award to key associates or outside directors of the Company under stock options, stock appreciation rights, restricted stock grants, or other awards.  Outstanding options are generally exercisable at a cumulative rate of 25% per year after the second year from the date the options are granted and generally expire five to ten years after the date of grant.  Options outstanding were granted at prices at or above market price on the date of grant.

Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 8




The fair value of each option is estimated on the date of grant using the Black-Scholes model.  No options were granted during the three months ended April 1, 2006 and March 26, 2005.  The assumptions used to determine fair value of stock options granted prior to adoption of SFAS No. 123(R) are described more fully in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2005.


Stock option activity for the three months ended April 1, 2006 is summarized as follows:

    

Number of Shares

  

Weighted Average Exercise Price

  

Weighted-Average Remaining Contractual Life

Outstanding at December 31, 2005

 

   1,189,312 

 

        10.78 

  

6.80 

 

Granted

 

                --- 

  

            --- 

   
 

Exercised

 

      (45,391)

  

          6.69 

   
 

Forfeited

 

      (15,000)

  

        15.67 

   

Outstanding at April 1, 2006

 

   1,128,921 

 

        10.88 

  

                   6.40 

           

Exercisable at April 1, 2006

 

   1,046,121 

  

        11.25 

  

                   6.30 


At April 1, 2006, the aggregate intrinsic value of the outstanding options was $4,604 and exercisable options were $3,884.  The total intrinsic value of options exercised during the three months ended April 1, 2006 and March 26, 2005 was $359 and $803, respectively.  Unrecognized compensation expense for unvested options at April 1, 2006, was $206.  The remaining amounts expected to be recognized are $87 in 2006, $76 in 2007, $35 in 2008 and $8 in 2009.


Stock Performance Units


The Company's non-employee directors receive $12 of their annual retainer in Stock Performance Units under the Company's Directors Stock Plan.  The number of Stock Performance Units granted is determined by using the closing price the day prior to the grant date.  Upon retirement, the Company issues Common Stock equivalent to the number of Stock Performance Units granted.  As of April 1, 2006, 31,240 Stock Performance Units were outstanding under this plan.


NOTE D - RECEIVABLES


Receivables are summarized as follows:

      

 

April 1, 2006

  

December 31, 2005

Customers, trade

   

       35,347 

 

          30,174 

Other

     

         3,112 

  

           2,054 

Gross receivables

    

       38,459 

  

          32,228 

Less allowance for doubtful accounts

    

           657 

  

              595 

Net receivables

   

       37,802 

 

          31,633 


The Company had notes receivables in the amount of $509 and $522 at April 1, 2006 and December 31, 2005, respectively. The notes receivable are included in accounts receivable and other long-term assets in the Company's consolidated condensed financial statements.


NOTE E - INVENTORIES


Inventories are stated at the lower of cost or market.  Cost is determined using the last-in, first-out (LIFO) method, which generally matches current costs of inventory sold with current revenues, for substantially all inventories.


Inventories are summarized as follows:

      

 

April 1, 2006

  

December 31, 2005

Raw materials

   

     26,407 

 

          22,037 

Work-in-process

    

     16,293 

  

          17,498 

Finished goods

    

     41,015 

  

          40,959 

Supplies, repair parts and other

    

          453 

  

              480 

LIFO reserve

    

      (7,599)

  

          (8,103)

Total inventories

   

     76,569 

 

          72,871 

Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 9




NOTE F - DISCONTINUED OPERATIONS


Following is a summary of the Company's discontinued operations:

       

Three Months Ended

      

 

April 1, 2006

  

March 26, 2005

Net sales

   

$

             --- 

 

           --- 

           

Loss from discontinued operations:

        
 

Before income taxes

    

          (138)

  

           (652)

 

Income tax benefit

    

          (47)

  

           (240)

Loss from discontinued operations, net of tax

   

$

            (91)

 

           (412)

           

Income on disposal of discontinued operations:

        
 

Before income taxes

    

           --- 

  

         1,320 

 

Income tax provision

    

           --- 

  

          486 

Income on disposal of discontinued operations, net of tax

   

$

           --- 

 

         834 


The losses from discontinued operations in 2006 and 2005 principally consists of additional workers' compensation costs associated with the Company's sale of assets of its factory-built housing carpet, needlebond and carpet recycling businesses in 2003 and 2004.  The $834 income on disposal of discontinued operations in 2005 is the result of a recovery of a previously written-off note receivable associated with the cotton yarn and dyeing textile operations sold in 1999.  Operating results associated with businesses sold are classified as discontinued operations for all periods presented.


NOTE G - ACCRUED EXPENSES


Accrued expenses are summarized as follows:

      

 

April 1, 2006

  

December 31, 2005

Compensation and benefits

   

$

        6,115 

 

$

        6,076 

Accrued income taxes

    

        1,753 

  

        1,856 

Provision for customer rebates, claims and allowances

  

        3,953 

  

        4,160 

Outstanding checks in excess of cash

    

        2,851 

  

        1,918 

Other

     

        5,314 

  

        4,285 

Total accrued expenses

   

$

      19,986 

 

$

      18,295 


NOTE H - PRODUCT WARRANTY RESERVES


The Company provides varying warranties related to its products against manufacturing defects and specific performance standards.  The Company records reserves for the estimated costs of defective products and failure of its products to meet applicable performance standards at the time sales are recorded.  The levels of reserves are established based primarily upon historical experience and evaluation of known claims.


Following is a summary of the Company's warranty activity:

      

 

April 1, 2006

  

March 26, 2005

Warranty reserve beginning of period

   

         1,109 

 

           922 

Warranty liabilities accrued

    

         1,302 

  

          1,032 

Warranty liabilities settled

    

        (1,448)

  

        (1,110)

Changes for pre-existing warranty liabilities

    

           128 

  

            23 

Warranty reserve end of period

   

         1,091 

 

           867 


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 10



NOTE I - LONG-TERM DEBT AND CREDIT ARRANGEMENTS


Long-term debt consists of the following:

       

April 1, 2006

  

December 31, 2005

Senior indebtedness 

        
 

Credit line borrowings 

   

$

  38,545 

 

$

     32,949 

 

Term loans 

    

      18,860 

  

          19,430 

 

Equipment financing 

    

        7,978 

  

            4,341 

 

Capital lease obligations 

    

        5,573 

  

            5,848 

 

Mortgage note payable 

    

        6,936 

  

            6,987 

Total senior indebtedness 

    

      77,892 

  

          69,555 

Convertible subordinated debentures 

    

      24,662 

  

          24,662 

Total long-term debt 

    

     102,554 

  

          94,217 

Less current portion of long-term debt 

    

       (5,826)

  

           (5,221)

Less current portion of capital lease obligations 

   

       (1,138)

  

           (1,120)

Total long-term debt, less current portions 

   

$

      95,590 

 

$

          87,876 


During the quarter ended April 1, 2006, the Company borrowed $3,876 under equipment financing notes.  The equipment financing notes are secured by the specific equipment financed, bear interest ranging from 6.19% to 6.83% and are due in monthly installments over five to seven year terms.  The Company's senior loan and security agreement matures on May 11, 2010 and provides the Company with $70,000 of credit, consisting of $50,000 of revolving credit and a $20,000 term loan facility.  The Company's long-term debt and capital lease facilities do not contain financial covenants; however, these facilities contain covenants that generally limit dividends and repurchases of the Company's Common Stock to $3,000 annually and could limit future acquisitions.  The unused borrowing capacity under the senior loan and security agreement on April 1, 2006 was approximately $8,898 (see Note P).


NOTE J - DERIVATIVE FINANCIAL INSTRUMENTS


The Company is a party to an interest rate swap agreement with a notional amount of $30,000 through May 11, 2010.  Under the interest rate swap agreement, the Company pays a fixed rate of interest of 4.79% and receives in return a specified variable rate of interest.  The interest rate swap is linked to the Company's variable rate debt and is considered a highly effective hedge.  The fair value of the interest rate swap agreement is reflected on the Company's balance sheet and related gains and losses are deferred in Accumulated Other Comprehensive Loss ("AOCL").  Net unrealized gains included in AOCL were $255 at April 1, 2006.


The Company is also a party to an interest rate swap agreement through March 2013, which is linked to a mortgage note payable and considered a highly effective hedge.  Under the interest rate swap agreement, the Company pays a fixed rate of interest times a notional principal amount equal to the outstanding balance of the mortgage note, and receives in return an amount equal to a specified variable rate of interest times the same notional principal.  The fair value of the interest rate swap agreement is reflected on the Company's balance sheet and related gains and losses are deferred in other comprehensive income.  As of April 1, 2006, the notional amount of the interest swap agreement was $6,936.  Under the terms of the swap agreement, the Company pays a fixed interest rate of 4.54% through March 2013, which effectively fixes interest on the mortgage note payable at 6.54%.  Net unrealized gains included in AOCL were $147 at April 1, 2006.


The Company was party to an interest rate swap agreement which expired March 11, 2005.  Under the interest rate swap agreement, the Company paid a fixed rate of interest of 3.24% times a notional amount of $70,000, and received in return an amount equal to a specified variable rate of interest times the same notional amount.  The swap agreement was deemed highly effective as a cash flow hedge by the Company until a significant portion of the related debt was retired in 2003.  At such time the interest rate swap became ineffective and the Company wrote off the portion of interest expense in AOCL related to the debt retired.  Changes in the fair value of the swap were marked to market through interest expense.  Amounts that remained in AOCL at the time of the de-designation were amortized into earnings through interest expense over the remaining life of the swap.


NOTE K - EMPLOYEE BENEFIT PLANS


The Company sponsors a 401(k) defined contribution plan covering substantially all associates.  The Company matches associates' contributions up to a maximum of 5% on a sliding scale based on the level of the associate's contribution.  The Company may make additional contributions to the plan if the Company attains certain performance targets.

Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 11



The Company sponsors a non-qualified retirement savings plan that allows eligible associates to defer a specified percentage of their compensation.  The obligations owed to participants were $10,306 at April 1, 2006 and $10,217 at December 31, 2005 and are included in other liabilities in the Company's balance sheet.


The Company sponsors two defined benefit retirement plans, one that covers a limited number of the Company's active associates and another that has been frozen since 1993 as to new benefits earned under the plan.  The Company is in the process of terminating the frozen defined benefit plan.  A significant number of associates covered by this plan were employed in operations that have been sold or discontinued.  The Company received a favorable ruling permitting termination of this plan from the Internal Revenue Service and expects to terminate this plan and distribute assets to its participants in the second quarter of fiscal 2006.  The estimated settlement expenses to be recognized upon the plan termination in the second quarter of fiscal 2006 are approximately $3,000, or $1,900 net of tax.  Approximately $1,700, net of tax, is expected to be recorded as a loss from discontinued operations.  The funds required to terminate the plan are expected to be approximately $2,300.  


Costs charged to continuing operations for all pension plans are summarized as follows:

       

Three Months Ended

      

 

April 1, 2006

  

March 26, 2005

Components of net periodic benefit costs:

        
 

Defined benefit plans

        
  

Service cost

   

             29 

 

             40 

  

Interest cost

    

             24 

  

             37 

  

Expected return on plan assets

    

            (26)

  

            (30)

  

Amortization of prior service cost

    

               1 

  

               1 

  

Recognized net actuarial loss

    

             13 

  

            19 

 

Net periodic benefit cost

   

             41 

 

             67 


Settlement expenses related to the plan termination in the amount of approximately $350 are expected to be recorded in the Company's continuing operations during the second quarter of 2006.


The Company sponsors a postretirement benefit plan that provides life insurance to a limited number of associates as a result of a prior acquisition.  The Company also sponsors a postretirement benefit plan that provides medical and life insurance for a limited number of associates who retired prior to January 1, 2003.


Costs charged to continuing operations for all postretirement plans are summarized as follows:

       

Three Months Ended

      

 

April 1, 2006

  

March 26, 2005

Components of net periodic benefit costs:

        
 

Defined benefit plans

        
  

Service cost

   

               2 

 

            10 

  

Interest cost

    

               5 

  

            20 

  

Amortization of prior service costs

    

           (5)

  

          (10)

  

Recognized net actuarial losses

    

          (2)

  

           --- 

 

Net periodic benefit cost

   

           --- 

 

          20 


Except for $550 of additional funding expected to be required for the defined benefit plan being terminated in 2006, amounts contributed or expected to be contributed by the Company during the current fiscal year to its pension and postretirement plans are not anticipated to be significantly different from amounts disclosed in the Company's 2005 Annual Report filed on Form 10-K.


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 12



NOTE L - COMMON STOCK AND EARNINGS PER SHARE


The following table sets forth the computation of basic and diluted earnings per share from continuing operations:

       

Three Months Ended

      

 

April 1, 2006

  

March 26,2005

Income from continuing operations (1)

   

        926 

 

      1,872 

           

Denominator for calculation of basic earnings per share - weighted-average shares (2)

    

      12,632 

  

   12,270 

           

Effect of dilutive securities:

        
 

Stock options (3)

    

       278 

  

          548 

 

Restricted stock grants (3)

    

          --- 

  

           23 

 

Directors' stock performance units (3)

    

          25 

  

            12 

Denominator for calculation of diluted earnings per share - weighted-average shares adjusted for potential dilution (2)(3)

    

      12,935 

  

          12,853 

           

Earnings per share:

        
 

Basic

   

      0.07 

 

         0.15 

 

Diluted

    

      0.07 

  

        0.15 

           

(1)

No adjustments needed in the numerator for diluted calculations.

(2)

Includes Common and Class B Common shares in thousands.

(3)

Because their effects are anti-dilutive, excludes shares issuable under stock option plans whose grant price is greater than the average market price of Common Shares outstanding at the end of the relevant period and shares issuable on conversion of subordinated debentures into shares of Common Stock.  Aggregate shares excluded were 966 in 2006 and 846 in 2005.


NOTE M - COMPREHENSIVE INCOME


Comprehensive income is as follows:

       

Three Months Ended

      

 

April 1,2006

  

March 26,2005

Net income

   

       835 

 

         2,294 

Other comprehensive income:

        
 

Unrealized gains on interest rate swap agreements, net of tax of $296 in 2006 and $76 in 2005

    

           483 

  

              103 

Comprehensive income

   

        1,318 

 

            2,397 


Components of accumulated other comprehensive income (loss), net of tax, are as follows:

    

Minimum

  

Interest

   
    

Pension

  

Rate

   
   

 

Liability

  

Swaps

  

Total

Balance at December 31, 2005

  (2,806)

 

        (81)

 

       (2,887)

 

Unrealized gains on interest rate swap agreements, net of tax of $296

 

          --- 

  

   483 

  

      483 

Balance at April 1, 2006

 (2,806)

 

      402 

 

    (2,404)


NOTE N - SEGMENT INFORMATION


The Company is in one line of business, Carpet Manufacturing.


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 13



NOTE O - OTHER (INCOME) EXPENSE


Other (income) expense is summarized as follows:

       

April 1, 2006

  

March 26, 2005

Other operating income: 

        
 

Insurance settlements and refunds 

   

       (232)

 

 $ 

                   - 

 

Miscellaneous income 

    

          (110)

  

               (85)

Other operating income 

   

          (342)

 

               (85)

           

Other operating expense: 

        
 

Retirement expenses 

   

        145 

 

              33 

 

Miscellaneous expense 

    

             12 

  

                  3 

Other operating expense 

   

           157 

 

                36 

           

Other income: 

        
 

Interest income 

    

            (12)

  

               (84)

 

Miscellaneous income 

    

            --- 

  

                 (8)

Other income 

   

            (12)

 

               (92)

           

Other expense: 

        
 

Miscellaneous expense 

   

               3 

 

                20 

Other expense 

   

               3 

 

                20 


NOTE P - SUBSEQUENT EVENT


In May 2006, the Company amended its senior loan and security agreement to increase the amount of the facility from $70,000 to $80,000, increase the agreements revolving credit facility by $10,000 from $50,000 to $60,000 and change certain definitions in the agreement to facilitate the increase in the revolving credit facility.  Other terms of the credit facility were not modified.


The unused borrowing capacity under the senior credit facility on May 3, 2006 was approximately $18,157.

Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 14




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 our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission.


CRITICAL ACCOUNTING POLICIES


Our critical accounting policies were outlined in Management's Discussion and Analysis of Results of Operations and Financial Condition in our 2005 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no changes to those critical accounting policies subsequent to the date of that report.


RESULTS OF OPERATIONS


The following table sets forth certain elements of our continuing operating results as a percentage of net sales for the periods indicated:

 

 

Three Months Ended

 

 

April 1,2006

 

March 26,2005

Net sales

 

100.0 % 

 

100.0 %

Cost of sales

 

72.0 % 

 

69.4 %

 

 

 

 

 

Gross profit

 

28.0 % 

 

30.6 %

Selling and administrative expenses

 

24.3 % 

 

24.7 %

 

 

 

 

 

Other operating income

 

(0.5)% 

 

(0.1)%

Other operating expense

 

0.2 % 

 

0.0 %

 

 

 

 

 

Operating income

 

4.0 % 

 

6.0 %


Net Sales.  Net sales for the quarter ended April 1, 2006 were $79.2 million, an increase of 9.9%, compared with $72.0 million for the quarter ended March 26, 2005.


The improved revenue in 2006 reflects a 10.8% increase in sales of carpet products compared with the same period in 2005. The higher revenue was driven by year-over-year increases of 15.5% in the sale of commercial carpet products and 8.5% in the sale of residential carpet products.  Although a substantial majority of the total growth in carpet revenue was equally split between our commercial carpet products and our Dixie Home brand of residential products, all of our carpet product lines grew during the first quarter of 2006.  


Net sales of carpet yarn declined $260 thousand, or 7%, in the first quarter of 2006 compared with the same period in the prior year due to the use of more of our carpet yarn capacity to support the growth of our carpet businesses.


Cost of Sales.  Cost of sales as a percentage of net sales increased 2.6 percentage points in the first quarter of 2006, compared with the previous year. This increase is principally attributable to the higher cost and quality issues related to outsourcing of tufting production and start-up costs associated with our new tufting and modular/carpet tile operation.  


Gross Profit.  Despite the higher cost of sales, as a percentage of net sales, gross profit increased $156 thousand the first quarter of 2006 compared with the same period in 2005 as a result of higher sales volume.


Selling and Administrative Expenses.  Selling and administrative expenses increased $1.4 million in the first quarter of 2006 compared with the first quarter of 2005 due to marketing, product development and administrative expenses to support revenue growth. As a percentage of sales, these expenses declined due to higher sales volume.


Other Operating Income/Other Operating Expense.  Net other operating income and other operating expense reflected a slight improvement in 2006 compared with 2005 primarily as a result of life insurance benefits received in 2006.


Operating Income.  Operating income was $3.2 million, or 4.0% of net sales, in the quarter ended April 1, 2006 compared with $4.3 million, or 6.0% of net sales, in the quarter ended March 26, 2005.


Interest Expense.  Interest expense increased $365 thousand for the three months ended April 1, 2006 compared with the 2005 reporting period principally due higher levels of debt in 2006.

Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 15




Other Income/Other Expense.  Other income and other expense were not significant in the 2006 or 2005 reporting periods.


Income Tax Provision.  Our effective income tax rate was 34.3% for three months ended April 1, 2006 compared with 36.8% for the three months ended March 26, 2005. The decrease in the effective income tax rate in 2006 was principally due to non-taxable income from life insurance benefits in 2006.


Income from Continuing Operations.  Income from continuing operations was $1.4 million, or $0.07 per diluted share, for the three months ended April 1, 2006 compared with $3.0 million, or $0.15 per diluted share, for the three months ended March 26, 2005.


Net Income.  Discontinued operations reflected a loss of $91 thousand, $0.01 per diluted share, for the three months ended April 1, 2006 compared with income from discontinued operations of $422 thousand, or $0.03 per diluted share, in the same period of 2005. Including discontinued operations, net income was $835 thousand, or $0.06 per diluted share, for the first three months of 2006, compared with $2.3 million, or $0.18 per diluted share, for the same period of 2005.


LIQUIDITY AND CAPITAL RESOURCES


During the three months ended April 1, 2006, our debt increased $8.3 million and was used primarily to invest $6.4 million in capital assets and to fund our operations.  $3.9 million of the capital expenditures were financed through equipment financing notes which are due in monthly principal installments over five to seven years.  The equipment financing notes bear interest at fixed rates ranging from 6.19% to 6.83%.


Capital expenditures for the three-months ended April 1, 2006 were $6.4 million while depreciation and amortization was $2.9 million.  We expect capital expenditures to be approximately $15.0 million for fiscal 2006 while depreciation and amortization is expected to be approximately $11.2 million.  The estimated 2006 capital expenditures are primarily related to completing the new tufting operation in North Georgia, newer manufacturing technology and information systems.


Approximately $2.3 million of funds will be required to fully fund our defined benefit retirement plan that is expected to be terminated in the second quarter of this year.


In May 2006, the Company amended its senior loan and security agreement to increase the amount of the facility from $70.0 million to $80.0 million and increased the agreements revolving credit facility by $10.0 million from $50.0 million to $60.0 million.


We believe that cash generated from our operations and our existing facilities are adequate to fund our planned liquidity needs.  Unused borrowing capacity under our revolving credit facility was $18.2 million at May 3, 2006.


RECENT ACCOUNTING PRONOUNCEMENTS


Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R) ("SFAS No. 123(R)"). SFAS No. 123(R) requires compensation expense relating to share-based awards to be recognized in financial statements and that such expense be measured based on the fair value of the equity instrument issued.  Prior to the adoption of this statement, we accounted for share-based payments to employees using Accounting Principles Board Opinion No. 25 and accordingly, did not record compensation expense for stock options granted.  We utilized the Black-Scholes option-pricing model to determine the fair value for stock-based awards under SFAS 123(R) and the determination of the pro-forma effects of stock-based awards for disclosure purposes prior to adoption of 123(R). In applying the provisions of SFAS No. 123(R), we used the modified prospective method and accordingly, previously published financial statements were not retrospectively restated.  Actual forfeitures prior to the adoption of SFAS 123(R) were considered by us.  Accordingly, there was no cumulative effect upon the adoption of SFAS 123(R).  Outstanding stock-based awards were not modified prior to the adoption of SFAS 123(R).  As of January 1, 2006, $719 thousand of unrecognized compensation expense for non-vested restricted stock awards will be recognized ratably from January 1, 2006 through February 1, 2008.  As of January 1, 2006 $231 thousand of unrecognized compensation cost related to non-vested stock option awards will be recognized as follows: $87 in 2006, $76 in 2007, $35 in 2008 and $8 in 2009.


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 16




In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections", a replacement of APB Opinion No. 20 and FASB Statement No. 3.  The statement applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle.  SFAS No. 154 requires retrospective application to prior periods' financial statements of a voluntary change in accounting principle unless it is impracticable.  SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.  Earlier application is permitted for accounting changes and corrections of errors made occurring in fiscal years beginning after June 1, 2005.  The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement.  We do not expect the adoption of SFAS No. 154 to have a material effect on our financial statements.


In February 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS No. 155") which is effective for fiscal years beginning after September 15, 2006.  The statement was issued to clarify the application of FASB Statement No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments.  We do not expect the adoption of SFAS No. 155 to have a material effect on our financial statements.


In March 2006, the FASB issued Statement of Financial Accounting Standards No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140" ("SFAS No. 156") which is effective for fiscal years beginning after September 15, 2006.  This statement was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes.  We do not expect the adoption of SFAS No. 156 to have a material effect on our financial statements.


CERTAIN FACTORS AFFECTING THE COMPANY'S PERFORMANCE


In addition to the other information provided in this Report, the risk factors included in Item 1A should be considered when evaluating results of our operations, future prospects and an investment in shares of our Common Stock.  Any of these factors could cause our actual financial results to differ materially from our historical results, and could give rise to events that might have a material adverse effect on our business, financial condition and results of operations.


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. These statements include the use of terms or phrases that include such terms as "expects," "estimated," "projects," "believes," "anticipates," "intends," and similar terms and phrases. Such terms or phrases 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 detailed above under the heading "Certain Factors Affecting the Company's Performance", the cost and availability of capital and raw materials, transportation costs related to petroleum price levels, the cost and availability of energy supplies, the loss of a significant customer or group of customers, 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.


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 17




Item 3 - Quantitative and Qualitative Disclosures about Market Risk (dollars in thousands)


The Company's earnings, cash flows and financial position are exposed to market risks relating to interest rates.  It is the Company's policy to minimize its exposure to adverse changes in interest rates and manage interest rate risks inherent in funding the Company with debt.  The Company addresses this financial exposure through a risk management program that includes maintaining a mix of fixed and floating rate debt and the use of derivative financial instruments.


At April 1, 2006, the Company had an interest rate swap agreement on its mortgage note payable with a notional amount equal to the outstanding balance of the mortgage note ($6,936 at April 1, 2006) which expires in March of 2013.  Under the interest rate swap agreement, the Company pays a fixed rate of 4.54% of interest times the notional amount and receives in return an amount equal to a specified variable rate of interest times the same notional amount.  The swap agreement effectively fixes the interest rate on the mortgage note payable at 6.54%.


The Company is also a party to an interest rate swap agreement with a notional amount of $30,000 through May 11, 2010.  Under the interest rate swap agreement, the Company pays a fixed rate of interest of 4.79% and receives in return a specified variable rate of interest.  The interest rate swap agreement is linked to the Company's variable rate debt and is considered a highly effective hedge.


At April 1, 2006, $27,405, or approximately 27%, of the Company's total debt was subject to floating interest rates.  A 10% fluctuation in the variable interest rates applicable to this floating rate debt would have an annual after-tax impact on the Company's net income of approximately $122.


Item 4 - Controls and Procedures


As of April 1, 2006, our management, under the supervision and with the participation of our Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures.  Based on that evaluation, our management concluded that disclosure controls and procedures were effective.


During the first quarter of 2006, we implemented an enterprise-wide general ledger and financial reporting system across all business units.  Internal control over financial reporting was not affected as a result of implementation of the new financial reporting system.


No significant changes in our internal control over financial reporting occurred during the quarter covered by this report that materially adversely affected, or is reasonably likely to adversely affect, our internal control over financial reporting.


Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. These inherent limitations are known features of the financial reporting process; therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.  


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 18




PART II. OTHER INFORMATION

        

Item 1 - Legal Proceedings

 

None.

     
        

Item 1A - Risk Factors

    


In addition to the other information provided in this Report, the following risk factors should be considered when evaluating results of our operations, future prospects and an investment in shares of our Common Stock.  Any of these factors could cause our actual financial results to differ materially from our historical results, and could give rise to events that might have a material adverse effect on our business, financial condition and results of operations.


The floorcovering industry is cyclical and prolonged declines in residential or commercial construction activity, or corporate remodeling and refurbishment could have a material adverse effect on our business.


The U.S. floorcovering industry is cyclical and is influenced by a number of general economic factors.  The floorcovering industry in general is dependent on residential and commercial construction activity, including new construction as well as remodeling.  New construction activity is cyclical in nature. To a somewhat lesser degree, this also is true with residential and commercial remodeling.   A prolonged decline in any of these industries could have a material adverse effect on our business, financial condition and results of operations. The level of activity in these industries is significantly affected by numerous factors, all of which are beyond our control, including:

·

consumer confidence;
·

housing demand;
·

financing availability;
·

national and local economic conditions;
·

interest rates;
·

employment levels;
·

changes in disposable income;
·

commercial rental vacancy rates; and
·

federal and state income tax policies.


Our product concentration in the higher-end of the residential and commercial markets could be a significant factor in the impact of these factors on our business.


We face intense competition in our industry, which could decrease demand for our products and could have a material adverse effect on our profitability.


The floorcovering industry is highly competitive.  We face competition from a number of domestic manufacturers and independent distributors of floorcovering products and, in certain product areas, foreign manufacturers.  There has been significant consolidation within the floorcovering industry during recent years that has caused a number of our existing and potential competitors to be larger and have greater resources and access to capital than we do.  Maintaining our competitive position may require us to make substantial investments in our product development efforts, manufacturing facilities, distribution network and sales and marketing activities, which may be limited by restrictions set forth in our credit facilities.  Competitive pressures may also result in decreased demand for our products and in the loss of market share.  In addition, we face, and will continue to face, pressure on sales prices of our products from competitors.  As a result of any of these factors, there could be a material adverse effect on our sales and profitability.


Raw material prices may increase.


The cost of raw materials has a significant impact on our profitability.  In particular, our business requires the purchase of large volumes of nylon yarn, synthetic backing, latex and dyes.  Most of our raw materials are petroleum-based and their costs tend to fluctuate, over time, with the price of oil.  Increases in the cost of these raw materials could materially adversely affect our business, results of operations and financial condition if we are unable to pass these increases through to our customers. We believe we will be successful in increasing our selling prices to pass along raw material and other cost as they may occur; however, there can be no assurance that we will successfully recover such increases in cost.

Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 19



Unanticipated termination or interruption of our arrangements with third-party suppliers of nylon yarn could have a material adverse effect on us.


Nylon yarn is the principal raw material used in our floorcovering products.  A significant portion of our nylon yarn purchases is from one supplier.  We believe there are other sources of nylon yarns; however, an unanticipated termination or interruption of our supply arrangements could adversely affect our supply arrangements and could be material.


We may be responsible for environmental cleanup costs.


Various federal, state and local environmental laws govern the use of our facilities. These laws govern such matters as:

·

Discharges to air and water;

·

Handling and disposal of solid and hazardous substances and waste; and

·

Remediation of contamination from releases of hazardous substances in our facilities and off-site
       disposal locations.


Our operations also are governed by laws relating to workplace safety and worker health, which, among other things, establish noise standards and regulate the use of hazardous materials and chemicals in the workplace. We have taken, and will continue to take, steps to comply with these laws. If we fail to comply with present or future environmental or safety regulations, we could be subject to future liabilities. However, we cannot insure that complying with these environmental or health and safety laws and requirements will not adversely affect our business, results of operations and financial condition. Future laws, ordinances or regulations could give rise to additional compliance or remediation costs, which could have a material adverse effect on our business, results of operations and financial condition.


Acts of Terrorism.


Our business could be materially adversely affected as a result of international conflicts or acts of terrorism.  Terrorist acts or acts of war may cause damage or disruption to our facilities, employees, customers, suppliers, and distributors, which could have a material adverse affect on our business, results of operations or financial condition.  Such conflicts also may cause damage or disruption to transportation and communication systems and to our ability to manage logistics in such an environment, including receipt of supplies and distribution of products.


Unanticipated Business Interruptions.


Our business could be adversely affected if a significant portion of our plant, equipment or operations were damaged or interrupted by a casualty, condemnation, utility service, work stoppage or other event beyond our control.  Such an event could have a material adverse effect on our business, results of operations and financial condition.



        

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

 

On January 30, 2006, the Company issued a total of 10,000 shares of Common Stock to retiring director Joseph L. Jennings, Jr. pursuant to the Company's Incentive Stock Option Plan.  .

        

Item 3 - Defaults Upon Senior Securities

   
 

None.

     
        

Item 4 - Submission of Matters to a Vote of Security Holders

 

None.

     
       

Item 5 - Other Information

    
 

None.

     


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 20




Item 6 - Exhibits

  
 

(a)

Exhibits

  
  

(i)

Exhibits Incorporated by Reference

     
   

10.26

Second Amendment, dated January 18, 2006, to Employment Agreement dated November 20, 2002 between The Dixie Group, Inc. and David E. Polley.  (Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated January 18, 2006).

     
   

10.27

The Dixie Group, Inc. 2006 Stock Awards Plan (Incorporated by reference to Annex A to the Company's Proxy Statement for its 2006 Annual Meeting of Shareholders, filed March 20, 2006.

     
   

10.28  

On February 23, 2006, the Compensation Committee of the Board of Directors of The Dixie Group, Inc., approved the 2006 Incentive Compensation Plan.  (Incorporated by reference to Current Report on Form 8-K dated March 1, 2006).

     
   

10.29

On March 14, 2006, the Compensation Committee of the Board of Directors of The Dixie Group, Inc., approved the 2007-2011 Incentive Compensation Plan pursuant to which incentive compensation awards may be made to certain key executives of the Company based on the results achieved by the Company during such years.  (Incorporated by reference to Current Report on Form 8-K dated March 20, 2006).

     
     
  

(ii)

Exhibits Filed with this Report

     
   

31.1

CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     
   

31.2

CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

     
   

32.1

CEO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     
   

32.2

CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

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)

 

   

Date: May 9, 2006

      

By: /s/ GARY A. HARMON

  

Gary A. Harmon
Vice President and Chief Financial Officer

   

Date: May 9, 2006

 

By: /s/ D. EUGENE LASATER

  

D. Eugene Lasater
Controller


Return to Table of Contents



The Dixie Group, Inc. - 1st Quarter 10-Q 2006

Page 22