DIXIE GROUP INC

Previous wording

We continue to be impacted by soft consumer demand driven by inflationary pressures and high interest rates. Persistent inflation continues to hinder consumer discretionary spending, which has caused consumers to postpone large purchases of durable goods such as flooring. Macroeconomic factors continue to impact new home construction and residential renovation and remodeling activity. Residential remodeling is a primary sales driver of flooring products, and most flooring is replaced before a home is listed for sale or just after a home purchase is completed. The current housing market conditions have suppressed remodeling activity as home sales remain soft. Housing turnover rates remain suppressed due to high home mortgage rates and consumers continue to face a higher cost of living. We have, to some extent, offset the impact of a soft housing market and decreased renovation activity through cost containment, improved productivity and lower input costs. Due to low housing availability, aging stock and greater household formation, we believe demand in our markets will accelerate when interest rates decline. However, the ongoing impact of soft consumer demand, inflationary pressures and high interest rates to our business, financial condition, and results of operations cannot be determined at this time.

Current wording

We continue to be impacted by soft consumer demand driven by persistent inflationary pressures and elevated interest rates. Persistent inflation continues to hinder consumer discretionary spending, which has caused consumers to postpone large purchases of durable goods such as flooring. Macroeconomic factors continue to impact new home construction and residential renovation and remodeling activity. Residential remodeling is a primary sales driver of flooring products, and most flooring is replaced before a home is listed for sale or just after a home purchase is completed. The current housing market conditions have suppressed remodeling activity as home sales remain soft. Housing turnover rates remain suppressed due to high home mortgage rates and consumers continue to face a higher cost of living. We have, to some extent, offset the impact of a soft housing market and decreased renovation activity through cost containment, improved productivity and lower input costs. Due to low housing availability, aging stock and greater household formation, we believe demand in our markets will accelerate when interest rates decline. However, the ongoing impact of soft consumer demand, inflationary pressures and high interest rates to our business, financial condition, and results of operations cannot be determined at this time.

Previous wording

We continue to monitor recent trade policy and tariff announcements, including various executive orders issued by the current U.S. presidential administration. Increased restrictions on global trade, including an increase in U.S. tariffs and any retaliatory responses thereto, could result in, among other things, increased input costs, supply chain disruptions, and decreased consumer demand, any of which may adversely affect our business financial condition and results of operations. We are working to determine our overall tariff cost exposure, the potential impact of retaliatory responses thereto, if any, and mitigation plans. Given the timing, uncertainty and fluidity of the evolving global trade environment, the impact to our business, financial condition and results of operations cannot be predicted.

Current wording

We continue to monitor trade policy and tariff announcements, including various executive orders issued by the current U.S. presidential administration. Increased restrictions on global trade, including an increase in U.S. tariffs and any retaliatory responses thereto, could result in, among other things, increased input costs, supply chain disruptions, and decreased consumer demand, any of which may adversely affect our business financial condition and results of operations.

Previous wording

For the third quarter of 2025, our net sales from continuing operations decreased 3.9% compared with the third quarter of 2024. The lower net sales were attributed to continued lower demand driven by continued high interest rates and inflation.

Current wording

For the first quarter of 2026, our net sales from continuing operations decreased 5.7% compared with the first quarter of 2025. The lower net sales were attributed to continued lower demand driven by continued high interest rates and inflation.

Previous wording

Gross profit as a percentage of net sales was 24.8% in the third quarter of 2025 compared with 24.6% in the third quarter of 2024. The higher gross profit percentage in 2025 was primarily driven by cost reductions in our operations.

Current wording

Gross profit as a percentage of net sales was 32.5% in the first quarter of 2026 compared with 26.8% in the first quarter of 2025. The higher gross profit percentage in 2026 includes the impact of $3.3 million in IEEPA tariff refunds recorded during the first quarter of 2026.

Previous wording

Selling and administrative expenses were $50.0 million, or 25.8% of net sales, in the first nine months of 2025 compared with $51.3 million, or 25.6% of net sales in the year earlier period. Selling and administrative expenses as a percentage of net sales increased in the first nine months of 2025 as compared to the first nine months of 2024 primarily due to lower sales volume and higher legal expenses offset in part by lower sample and marketing expenses.

Current wording

Selling and administrative expenses were $16.0 million, or 26.9% of net sales, in the first quarter of 2026 compared with $16.9 million, or 26.8% of net sales in the year earlier period. Selling and administrative expenses as a percentage of net sales increased in the first quarter of 2026 as compared to the first quarter of 2025 due to lower sales volumes offset by lower selling expenses.

Previous wording

Net other (income) expense was income of $16 thousand in the third quarter of 2025 compared with income of $2 thousand in the third quarter of 2024.

Current wording

Net other operating income was $84 thousand in the first quarter of 2026 compared with income of $98 thousand in the first quarter of 2025.

Previous wording

Facility consolidation and severance expenses in the third quarter of 2025 were $117 thousand compared with $283 thousand in the third quarter of 2024. The expenses in 2025 and 2024 were related to our restructuring plan for the consolidation of our east coast manufacturing.

Current wording

Facility consolidation and severance expenses in the first quarter of 2026 were $112 thousand compared with $115 thousand in the first quarter of 2025. The expenses in 2026 and 2025 were related to our restructuring plan for the consolidation of our east coast manufacturing.

Previous wording

We reported operating income of $1.2 million in the first nine months of 2025 compared with an operating loss of $669 thousand in the first nine months of 2024. The increase in operating income was primarily the result of cost reductions in our operations.

Current wording

We reported operating income of $3.3 million in the first quarter of 2026 compared with operating income of $11 thousand in the first quarter of 2025. The increase in operating income was due to $3.3 million in IEEPA tariff refunds recorded during the first quarter of 2026.

Previous wording

Interest expense increased $384 thousand in the third quarter of 2025 compared with the third quarter of 2024. The increase is primarily the result of higher interest rates in 2025 on our variable rate debt.

Current wording

Interest expense increased $412 thousand in the first quarter of 2026 compared with the first quarter of 2025. The increase is primarily the result of higher interest rates in 2026 on our higher levels of debt.

Previous wording

Net other (income) expense was an expense of $67 thousand in the first nine months of 2025 compared with an expense of $8 thousand in the first nine months of 2024. Net other (income) expense included a loss of $66 thousand related to an extinguishment of a debt arrangement in the first nine months of 2025.

Current wording

Net other (income) expense was income of $32 thousand in the first quarter of 2026 compared with an expense of $88 thousand in the first quarter of 2025. Net other (income) expense included a loss of $66 thousand related to an extinguishment of a debt arrangement in the first quarter of 2025.

Previous wording

We recorded an income tax expense from continuing operations of $56 thousand in the first nine months of 2025 compared to a income tax expense of $16 thousand in the first nine months of 2024.

Current wording

We recorded an income tax expense from continuing operations of $37 thousand in the first quarter of 2026 compared to an income tax expense of $12 thousand in the first quarter of 2025.

Previous wording

The benefit tax rate for the three months ending September 27, 2025 was 0.57% compared with a benefit tax rate of 0.11% for the three months ending September 28, 2024. Because we maintain a full valuation allowance against our deferred tax balances, we are only able to recognize refundable credits and a small amount of state taxes in the tax expense for the third quarter of 2025 and 2024. We are in a net deferred tax liability position of $91 thousand at September 27, 2025 and December 28, 2024, which is included in other long-term liabilities in our consolidated condensed balance sheets.

Current wording

The effective tax rate for the three months ended March 28, 2026 was 2.66% compared with an effective tax rate of 0.76% for the three months ended March 29, 2025. Because we maintain a full valuation allowance against our deferred tax balances, we are only able to recognize refundable credits and a small amount of state taxes in the tax expense for the first quarter of 2026 and 2025. We are in a net deferred tax liability position of $91 thousand at March 28, 2026 and December 27, 2025, which is included in other long-term liabilities in our consolidated condensed balance sheets.

Previous wording

We account for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were $570 thousand and $560 thousand at September 27, 2025 and December 28, 2024, respectively. Such benefits, if recognized, would affect our effective tax rate. There were no significant interest or penalties accrued as of September 27, 2025 and December 28, 2024.

Current wording

We account for uncertainty in income tax positions according to FASB guidance relating to uncertain tax positions. Unrecognized tax benefits were $589 thousand and $576 thousand at March 28, 2026 and December 27, 2025, respectively. Such benefits, if recognized, would affect our effective tax rate. There were no significant interest or penalties accrued as of March 28, 2026 and December 27, 2025.

Previous wording

Continuing operations reflected a loss of $4.0 million, or $0.28 per diluted share, in the third quarter of 2025 compared with a loss of $3.7 million, or $0.26 per diluted share, in the same period in 2024. The loss from discontinued operations was $79 thousand in the third quarter of 2025 compared to a loss of $182 thousand in the third quarter of 2024. See Note 20 to the consolidated condensed financial statements for additional details related to discontinued operations.

Current wording

Continuing operations reflected income of $1.4 million, or $0.09 per diluted share, in the first quarter of 2026 compared with a loss of $1.6 million, or $0.11 per diluted share, in the same period in 2025. The loss from discontinued operations was $203 thousand in the first quarter of 2026 compared to a loss of $115 thousand in the first quarter of 2025. See Note 20 to the consolidated condensed financial statements for additional details related to discontinued operations.

Previous wording

During the nine months ended September 27, 2025, cash provided by operating activities in continuing operations was $9.7 million. An increase in accounts receivable used $3.1 million during the first nine months of 2025. Prepaid and other current assets used $1.0 million primarily as a result of prepaid sample and marketing expenses. An increase in inventory used $1.6 million and an increase in accounts payable and accrued expenses generated $14.7 million of cash during the first nine months.

Current wording

During the three months ended March 28, 2026, cash used in operating activities in continuing operations was $2.6 million. An increase in accounts receivable and receivables for tariffs used $7.0 million during the first three months of 2026. Prepaid and other current assets used $782 thousand primarily as a result of prepaid sample and marketing expenses. An increase in inventory used $1.7 million and an increase in accounts payable and accrued expenses generated $4.3 million of cash during the first three months.

Previous wording

Purchases of capital assets for the nine months ended September 27, 2025 resulted in a $446 thousand cash out flow to the business. Depreciation and amortization for the nine months ended September 27, 2025 were $4.2 million. We expect capital expenditures to be approximately $0.8 million in 2025 while depreciation and amortization is expected to be approximately $5.8 million.

Current wording

Purchases of capital assets for the three months ended March 28, 2026 resulted in a $59 thousand cash out flow to the business. Depreciation and amortization for the three months ended March 28, 2025 were $1.4 million. We expect capital expenditures to be approximately $2.9 million in 2026 while depreciation and amortization is expected to be approximately $5.5 million.

Previous wording

During the nine months ended September 27, 2025, cash used in financing activities was $1.8 million. We had net payments on our previous revolving credit facility of $50.0 million and net borrowings on our current revolving credit facility of $53.1 million. We had net payments on notes payable and financing leases of $3.1 million and paid $1.3 million in debt issuance costs for our current revolving facility.

Current wording

During the three months ended March 28, 2026, cash provided by financing activities was $1.9 million. We had net borrowings on our current revolving credit facility of $3.0 million. We had net payments on notes payable and financing leases of $1.1 million.

Previous wording

As described in Note 9, our revolving credit facility requires a lockbox arrangement, which provides for all cash receipts to be swept daily to reduce the balance outstanding. This arrangement, combined with the existence of a “subjective acceleration clause” (as defined by U.S. GAAP) in the revolving credit facility, requires the balance on the revolving credit facility to be classified as a current liability. The “subjective acceleration clause” allows the lender to declare an event of default if there is a material adverse change in our business or financial condition. Upon the occurrence of an event of default, the lender may, among other things, declare all obligations payable in full. We have $53.1 million of outstanding indebtedness under our senior credit facility that is classified as current as of September 27, 2025. As of the date of these financial statements, our existing cash and cash equivalents would not be sufficient to satisfy this debt in whole and meet our operating needs for at least one year after the issuance of these financial statements.

Current wording

As described in Note 9 to the consolidated condensed financial statements, we had $55.7 million of outstanding indebtedness under our senior credit facility that is classified as current as of March 28, 2026. As of the date of these financial statements, the Company’s existing cash and cash equivalents would not be sufficient to satisfy this debt in whole and meet the Company’s operating needs for at least one year after the issuance of these financial statements.

Previous wording

We have evaluated our liquidity position over the next twelve months. In our evaluation, we considered the impact of past operating losses on our liquidity position, the continuing impact of cost reductions implemented under our East Coast Consolidation Plan, lower planned sample investments, additional cost savings expected to be generated from the operations of our extrusion equipment and other cost reductions. We believe, after having reviewed various financial scenarios, that 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. However, our current forecasts project that we may not be able to maintain compliance with certain of our financial covenants under our loan agreements. We have been able to obtain waivers in the past for such violations but it cannot be assured that such waivers will be obtained in the future. Refer to Note 1 in our consolidated condensed financial statements for detail regarding our assessment as a going concern.

Current wording

We have evaluated our liquidity position over the next twelve months. In our evaluation we considered recent operating losses, reduced availability under our credit facility, covenant violations and macroeconomic pressures. Management has developed plans that are intended to improve liquidity and address these conditions, including profit improvement initiatives and seeking additional debt financing. Our evaluation of these plans, and our assumptions regarding their execution and timing, requires significant judgment and is subject to inherent uncertainty. We believe, after having reviewed various financial scenarios, 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. Refer to Note 1 in our consolidated condensed financial statements for detail regarding our assessment as a going concern.

Previous wording

Availability under our MidCap Financial Senior Secured Revolving Credit Facility on September 27, 2025 was $10.9 million which is subject to a $6.0 million minimum excess availability requirement. Significant additional cash expenditures above our normal liquidity requirements, significant deterioration in economic conditions or continued operating losses could negatively affect our business and require supplemental financing or other funding sources.

Current wording

Availability under our MidCap Financial Senior Secured Revolving Credit Facility on March 28, 2026 was $10.3 million which is subject to a $6.0 million minimum excess availability requirement. 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.