Dixie Group 3Q Sales Up, Earnings Off

Chattanooga, TN, October 26, 2005--The Dixie Group in the third quarter and reported income from continuing operations was $1.3 million, or $0.10 per diluted share, compared with $3.6 million, or $0.28 per diluted share, for the third quarter of 2004. Sales for the third quarter of 2005 were $76.7 million up 3% from sales of $74.1 million in the year-earlier quarter. For the first nine months of fiscal 2005, income from continuing operations was $6.7 million, or $0.52 per diluted share, compared with $9 million, or $0.72 per diluted share, for the first nine months of 2004. Sales for the first nine months of 2005 were $230.8 million, up 10% from the prior-year period. Commenting on the results, Daniel K. Frierson, chairman and chief executive officer, said, "Operations in the third quarter 2005 were affected by a number of issues. The growth we experienced during the past several years, combined with extremely high levels of order entry in April 2005, overtaxed our manufacturing and distribution capabilities. This rapid growth significantly increased the complexity of our operations and had a negative impact on customer service, product quality and manufacturing efficiency. To improve service to our customers, we added associates, lengthened operating schedules and increased production outsourcing. Also during the quarter, we completed the staffing and movement of inventory into a new distribution facility in North Georgia, relocated our West Coast distribution operation from a leased facility to an owned facility and began the installation of modular/carpet tile equipment to expand our commercial product offerings. While these actions are intended to improve results in the future, much of the cost for these improvements was incurred during the third quarter. In addition, natural gas costs increased significantly during the quarter. Furthermore, our distribution and carpet manufacturing facilities located in Saraland and Atmore, Alabama, were evacuated three times during the quarter as a result of tropical storm Cindy and hurricanes Dennis and Katrina. Although the storms caused only minor damage to these facilities, their operations were interrupted for a total of approximately five days during the quarter. "As a result of these issues, our rate of sales growth moderated in the third quarter, while manufacturing and distribution costs increased significantly. We estimate that the negative impact on gross margins of the weather-related events was approximately $1.0 million to $1.5 million during the third quarter. "We are optimistic that sales revenue and results will improve in the fourth quarter of this year and beyond. October order entry and sales levels have improved significantly compared with the third quarter levels. We now expect fourth quarter 2005 sales to improve 15% to 19% compared with the third quarter of this year and 6% to 10% compared with the strong fourth quarter a year ago. The moves to the new distribution facilities on both the East and West Coasts are now completed, which should improve customer service and reduce distribution costs. In the fourth quarter, we have begun installing tufting manufacturing equipment in our North Georgia facility. The installation of this equipment, which is expected to be completed during the second quarter of 2006, should simplify our manufacturing operations, reduce costs and diversify the geographic locations of our carpet manufacturing facilities. "Raw material prices increased in early October of this year and additional raw material price increases have been announced for November. We raised selling prices in October and have announced additional selling price increases that will go into effect with orders taken in November and December of this year. When these selling price increases are fully implemented, we believe we will recoup the higher raw material and energy costs."