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Rating Action:

MOODY'S DOWNGRADES DIXIE YARNS CONVERTIBLE SUB DEBT FROM B1 TO B3. ASSIGNS RATING OF BI TO UNSECURED BANK LOAN

08 May 1996
MOODY'S DOWNGRADES DIXIE YARNS CONVERTIBLE SUB DEBT FROM B1 TO B3. ASSIGNS RATING OF BI TO UNSECURED BANK LOAN New York, 05-08-96 -- Moody's Investors Service downgraded to B3 from B1 the rating of Dixie Yarns Inc.'s US$ 44.8 million issue of 7% convertible subordinated debentures. At the same time, Moody's assigned a rating of B1 to the company's $125 million senior unsecured bank term and revolving credit facility.
The ratings reflect Dixie Yarns' continuing weak operating earnings, which--in combination with asset write-downs--have led to net losses since 1994; the potential of further asset write-downs; its high unit fixed costs and resulting limited competitive price flexibility in the U.S. carpet, apparel, and upholstery markets which are at a cyclical low; and the company's efforts to expand at a time of excess supply in the carpet industry.
However, the ratings are supported by some recent operating efficiencies and the potential for debt reduction if Dixie completes a planned sale of assets of its unprofitable textile threads division.
In addition, the B1 bank credit facility rating recognizes the prior claim of the US$ 45 million accounts receivables facility on the company's best assets as well as the benefits of the two subordinated debt issues.
Dixie Yarns recorded a pre-tax losses of US$ 12 million in fiscal 1994 and US$ 65 million in 1995 (after a non-cash write-down of US$ 63 million of assets). For the first quarter of 1996 it has a net loss of US$ 991,000, versus an after-tax profit of US$ 883,000 in the first quarter of 1995.
In its textile business, whose yarns, industrial sewing threads, and knit fabrics account for about one half of its total sales, Dixie Yarns has responded by contracting out cut and sew operations, introducing air-jet technology, and closing and consolidating plants. Gross profit margins improved to 14.6% in 1995 from 13.5% in 1994; and operating profit margins jumped to 2.4% from .7%, more than offsetting higher raw materials costs. Thus, gross profit increased US$ 10.9 million while SG & A remained unchanged. Still, in the first quarter of this year, Dixie Yarns reported operating losses in this business.
By contrast, the profitable floorcovering group, which makes commercial, residential, and designer carpeting and rugs, increased its sales 2% in 1995. But operating margins, squeezed by low volume, excess capacity and price pressure during a time of higher raw material costs, fell a dramatic 21%. And expansion activities at the Carriage and Masland facilities increased sales expense and added disruption costs from the introduction of a new distribution center. As a result, the group's operating profit declined to US$ 20.1 million last year from US$ 25.4 million in 1994. And the first quarter 1996 showed lower sales and operating margins than the same period last year--primarily due to continued weakness in the carpet yarns segment.
If the proposed sale of textile's thread operation is realized, floorcovering will become the company's major operation. Dixie has the advantage here of a 60% share of the carpet market for the still thriving U.S. manufactured housing market. But since the group also makes substantial direct sales of carpets and rugs to high-end retailers (including residential designers and commercial specifiers), the greater reliance on this group will also mean a greater focus on end products, which will require the company to compete effectively on a quick response basis in terms of design flexibility and delivery. Should the threads sale not materialize, further operating losses could be forthcoming.
The company is also attempting to lower overall sales and administrative expenses which have risen for the past three years from 10.5% of sales in 1993 to 12.3% in 1995 but the $ 1 million savings reported for first quarter 1996 probably represents a very small reduction in quarterly expense.
For the past two years, the company has taken sizable non-cash write-offs (US$ 63.6 million in 1995 and US$ 19.6 million in 1994), primarily on fixed and intangible textile assets, which have been either sold or impaired. The company was able to offset these losses both years by small gains on life insurance and business interruption insurance (US$ 16.8 million and US$ 5.2 million respectively in 1995 and US$ 12.8 million in 1994). Capital expenditure has matched depreciation and amortization expense historically but may be lower this year.
Nominal leverage is moderate at 53% debt to book capitalization. This ratio would be higher if adjusted for the US$ 45 million accounts receivables facility and a write-down of intangibles which are not justified based on earnings. EBITDA to interest expense has remained fairly stable for the past two years at around 3 times coverage.
The bank group has waived and amended financial provision tests in the past, presumably in anticipation of a US$ 50 million reduction in debt from the proceeds of the threads division. To date, no agreement has been signed.
Dixie Yarns, Inc., headquartered in Chattanooga, Tennessee, manufactures both textiles-- including yarns, industrial sewing threads, and knit fabrics--and floorcovering products such carpets for manufactured housing and recreational vehicle industries, high-end residential carpets, and rugs for commercial, residential and designer markets.

No Related Data.
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