Dixie Group CEO Comments
Chattanooga, TN, March 02, 2006--The Dixie Group reported a significant drop in income from continuing operations for the fourth quarter, and below are the comments of Daniel K. Frierson, chairman and chief executive officer of Dixie Group. He explains why the company reported income from continuing operations for the fourth quarter was $3.3 million, or $0.25 per diluted share, compared with $5.0 million, or $0.40 per diluted share, for the prior-year period.
Frierson said, "We began 2005 with tremendous momentum, with carpet sales up 32% in the fourth quarter of 2004 and 26% for 2004 as a whole. During the first half of 2005, carpet sales grew at 18% and East Coast order entry was strong, rising 50% for the month of April. This continued surge in demand created operational issues in our manufacturing and distribution facilities that serviced the Masland Residential, Masland Contract and Dixie Home products. Costs escalated as our operations became less efficient and raw material prices increased again in April. As we progressed through the second quarter, longer delivery schedules and missed shipping dates began to affect our order entry and rate of sales growth. Simply stated, we had overrun our operational capabilities in 2005, resulting in delayed production and product introductions, significantly higher costs, and poorer service and quality. Obviously, we had to take corrective actions.
"We addressed these issues in the short term by adding people, lengthening operating schedules and outsourcing production when appropriate. All of these actions improved customer service, but had a negative impact on our costs. We accelerated some key capital expenditures to help resolve the situation. To simplify our operations and support growth longer term, we moved a significant portion of inventory to, and staffed a new distribution facility in North Georgia and developed a plan to add tufting manufacturing to this facility. To better utilize our West Coast operations, we consolidated three facilities into two and began producing products there for our East Coast operations. Initially, these initiatives caused us to incur costs to start up and consolidate operations; however, over the longer term, these actions should reduce costs and complexities, improve quality and service, and position us to accommodate future growth.
"By the end of the fourth quarter, we saw significant improvements as a result of these actions. Manufacturing and distribution operations were running at close to typical operating schedules. Our on-time shipping rates were back to normal and our product quality was improving. Carpet sales grew 15% compared with the third quarter of this year and over 6% compared with the fourth quarter of 2004. The new distribution facilities in North Georgia and on the West Coast were fully operational. Three of the six tufting machines scheduled for North Georgia are now fully operational and the remaining three machines are on schedule to be operating by early in the second quarter of this year.
"Operating income improved $2.3 million in the fourth quarter, compared with the third quarter of 2005, but was $3.2 million lower than in the fourth quarter a year ago. Higher raw material costs and the start-up expenses for our tufting and carpet tile operations had a negative impact on our fourth quarter 2005 results and more than offset the effect of the operating improvements we made. Raw material costs rose in early October and again in December, the magnitude of which can be measured somewhat by the $2.4 million increase in our LIFO inventory reserve during the fourth quarter of this year ($4.5 million for the year). We responded to the higher raw material costs by increasing selling prices. However, the majority of this higher cost will not be recouped until 2006, due to the normal lag in the time required to pass along raw material price increases to our customers.
"We are optimistic as we begin the 2006 year. Many of the barriers that reduced our profitability in 2005 have been addressed. Raw material costs appear to have stabilized, and the trends we are seeing now in our order entry and sales lead us to believe that our revenues will grow in the 7% to 12% range this year," Frierson concluded.
Related Topics:Masland Carpets & Rugs, RD Weis, The Dixie Group
