| | | | | | | | | | | | | | | | | | | | | | | | | CONSOLIDATED STATEMENTS OF NET INCOME | | FOR THE THREE AND NINE MONTHS ENDED JANUARYJULY 29, 2012 AND JANUARY 30,JULY 31, 2011 | | UNAUDITED | | (Amounts in Thousands, Except for Per Share Data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | THREE MONTHS ENDED | | | | | | | | | | | | | | | | | | | | | July 29, | | | July 31, | | | | | 2012 | | | 2011 | | | | | | | | | | Net sales | | $ | 69,184 | | | | 60,270 | | Cost of sales | | | 56,064 | | | | 51,392 | | | Gross profit | | | 13,120 | | | | 8,878 | | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 7,641 | | | | 5,757 | | | Income from operations | | | 5,479 | | | | 3,121 | | | | | | | | | | | | Interest expense | | | 190 | | | | 220 | | Interest income | | | (127 | ) | | | (129 | ) | Other expense | | | 44 | | | | 65 | | | Income before income taxes | | | 5,372 | | | | 2,965 | | | | | | | | | | | | Income taxes | | | 1,848 | | | | 1,145 | | | Net income | | $ | 3,524 | | | | 1,820 | | | | | | | | | | | | Net income per share, basic | | $ | 0.28 | | | | 0.14 | | Net income per share, diluted | | | 0.28 | | | | 0.14 | | Average shares outstanding, basic | | | 12,551 | | | | 13,061 | | Average shares outstanding, diluted | | | 12,711 | | | | 13,205 | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | |
| | | THREE MONTHS ENDED | | | | | | | | | | | | | | | | | | | | January 29, | | January 30, | | | | 2012 | | 2011 | | | | | | | | | Net sales | | | $ | 60,450 | | | | 51,652 | | Cost of sales | | | 51,939 | | | | 43,413 | | | Gross profit | | | 8,511 | | | | 8,239 | | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 5,518 | | | | 5,129 | | Restructuring expense | | | - | | | | 7 | | | Income from operations | | | 2,993 | | | | 3,103 | | | | | | | | | | | | Interest expense | | | 181 | | | | 224 | | Interest income | | | (148 | ) | | | (57 | ) | Other expense | | | 83 | | | | 28 | | | Income before income taxes | | | 2,877 | | | | 2,908 | | | | | | | | | | | | Income taxes | | | 1,075 | | | | 483 | | | Net income | | $ | 1,802 | | | | 2,425 | | | | | | | | | | | | Net income per share, basic | | $ | 0.14 | | | | 0.19 | | Net income per share, diluted | | | 0.14 | | | | 0.18 | | Average shares outstanding, basic | | | 12,536 | | | | 13,005 | | Average shares outstanding, diluted | | | 12,677 | | | | 13,228 | | | | | | | | | | | | | | | | | | | | | | | | | NINE MONTHS ENDED | | | | | | | | | | | | | | | | | | | | | | | | January 29, | | January 30, | | | | 2012 | | 2011 | | | | | | | | | | | Net sales | | | $ | 178,733 | | | | 156,443 | | Cost of sales | | | 152,698 | | | | 130,886 | | | Gross profit | | | 26,035 | | | | 25,557 | | | | | | | | | | | | Selling, general and | | | | | | | | | administrative expenses | | | 16,995 | | | | 14,544 | | | Income from operations | | | 9,040 | | | | 11,013 | | | | | | | | | | | | Interest expense | | | 590 | | | | 659 | | Interest income | | | (387 | ) | | | (144 | ) | Other expense | | | 132 | | | | 111 | | | Income before income taxes | | | 8,705 | | | | 10,387 | | | | | | | | | | | | Income taxes | | | (1,168 | ) | | | 213 | | | Net income | | $ | 9,873 | | | | 10,174 | | | | | | | | | | | | Net income per share, basic | | $ | 0.77 | | | | 0.79 | | Net income per share, diluted | | | 0.76 | | | | 0.77 | | Average shares outstanding, basic | | | 12,777 | | | | 12,936 | | Average shares outstanding, diluted | | | 12,918 | | | | 13,218 | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | |
| CONSOLIDATED BALANCE SHEETS | JANUARY 29, 2012, JANUARY 30, 2011 AND MAY 1, 2011 | UNAUDITED | (Amounts in Thousands) |
| | | | | | | | | | | | January 29, | | January 30, | | * May 1, | | | 2012 | | 2011 | | 2011 | | | | | | | | | | | Current assets: | | | | | | | | | | Cash and cash equivalents | | $ | 15,096 | | | | 17,259 | | | | 23,181 | | Short-term investments | | | 8,511 | | | | 5,518 | | | | 7,699 | | Accounts receivable, net | | | 22,012 | | | | 16,909 | | | | 20,209 | | Inventories | | | 32,910 | | | | 26,407 | | | | 28,723 | | Deferred income taxes | | | 2,767 | | | | 296 | | | | 293 | | Assets held for sale | | | 45 | | | | 112 | | | | 75 | | Income taxes receivable | | | - | | | | 407 | | | | 79 | | Other current assets | | | 2,522 | | | | 1,521 | | | | 2,376 | | Total current assets | | | 83,863 | | | | 68,429 | | | | 82,635 | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 30,285 | | | | 30,571 | | | | 30,296 | | Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | | Deferred income taxes | | | 3,903 | | | | 1,322 | | | | 3,606 | | Other assets | | | 1,944 | | | | 2,093 | | | | 2,052 | | | | | | | | | | | | | | | Total assets | | $ | 131,457 | | | | 113,877 | | | | 130,051 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Current maturities of long-term debt | | $ | 2,400 | | | | 2,400 | | | | 2,412 | | Line of credit | | | 875 | | | | - | | | | - | | Accounts payable-trade | | | 23,489 | | | | 17,121 | | | | 24,871 | | Accounts payable - capital expenditures | | | 15 | | | | 203 | | | | 140 | | Accrued expenses | | | 7,594 | | | | 5,971 | | | | 7,617 | | Accrued restructuring costs | | | 40 | | | | 71 | | | | 44 | | Deferred income taxes | | | - | | | | - | | | | 82 | | Income taxes payable - current | | | 208 | | | | 289 | | | | 646 | | Total current liabilities | | | 34,621 | | | | 26,055 | | | | 35,812 | | | | | | | | | | | | | | | Income taxes payable - long-term | | | 4,040 | | | | 3,934 | | | | 4,167 | | Deferred income taxes | | | 659 | | | | 622 | | | | 596 | | Long-term debt, less current maturities | | | 6,766 | | | | 9,166 | | | | 9,135 | | | | | | | | | | | | | | | Total liabilities | | | 46,086 | | | | 39,777 | | | | 49,710 | | | | | | | | | | | | | | | Commitments and Contingencies (Note 17) | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity | | | 85,371 | | | | 74,100 | | | | 80,341 | | | | | | | | | | | | | | | Total liabilities and | | | | | | | | | | | | | shareholders' equity | | $ | 131,457 | | | | 113,877 | | | | 130,051 | | | | | | | | | | | | | | | Shares outstanding | | | 12,693 | | | | 13,214 | | | | 13,264 | | | | | | | | | | | | | | | | | | | | | | | | | | | | * Derived from audited financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. |
| | | | | | | | | | | | | | | | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | FOR THE THREE MONTHS ENDED JULY 29, 2012 AND JULY 31, 2011 | | UNAUDITED | | | | | | | | | | | | | | | | | | | | | | | | | THREE MONTHS ENDED | | | | | | | | | | | | | | | | | | July 29, | | | July 31, | | | | 2012 | | | 2011 | | | | | | | | | Net income | | $ | 3,524 | | | | 1,820 | | | | | | | | | | | Other comprehensive income | | | | | | | | | | | | | | | | | | Unrealized gains on short-term investments | | | 33 | | | | 15 | | | | | | | | | | | Total other comprehensive income | | | 33 | | | | 15 | | | | | | | | | | | Comprehensive income | | | 3,557 | | | | 1,835 | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | |
| | CONSOLIDATED BALANCE SHEETS | | JULY 29, 2012, JULY 31, 2011 AND APRIL 29, 2012 | | UNAUDITED | | (Amounts in Thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | July 29, | | | July 31, | | | * April 29, | | | | 2012 | | | 2011 | | | 2012 | | | | | | | | | | | | Current assets: | | | | | | | | | | Cash and cash equivalents | | $ | 21,889 | | | | 14,570 | | | | 25,023 | | Short-term investments | | | 5,200 | | | | 10,443 | | | | 5,941 | | Accounts receivable, net | | | 20,021 | | | | 18,905 | | | | 25,055 | | Inventories | | | 44,052 | | | | 34,858 | | | | 36,373 | | Deferred income taxes | | | 2,337 | | | | 1,237 | | | | 2,467 | | Assets held for sale | | | 15 | | | | 75 | | | | 15 | | Income taxes receivable | | | - | | | | 79 | | | | - | | Other current assets | | | 2,563 | | | | 2,862 | | | | 1,989 | | Total current assets | | | 96,077 | | | | 83,029 | | | | 96,863 | | | | | | | | | | | | | | | Property, plant and equipment, net | | | 31,016 | | | | 30,615 | | | | 31,279 | | Goodwill | | | 11,462 | | | | 11,462 | | | | 11,462 | | Deferred income taxes | | | 2,715 | | | | 2,191 | | | | 3,205 | | Other assets | | | 1,890 | | | | 2,010 | | | | 1,907 | | | | | | | | | | | | | | | Total assets | | $ | 143,160 | | | | 129,307 | | | | 144,716 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | Current maturities of long-term debt | | $ | 2,400 | | | | 2,409 | | | | 2,404 | | Line of credit | | | 834 | | | | - | | | | 889 | | Accounts payable-trade | | | 27,284 | | | | 25,022 | | | | 30,663 | | Accounts payable - capital expenditures | | | 152 | | | | 342 | | | | 169 | | Accrued expenses | | | 8,366 | | | | 5,862 | | | | 9,321 | | Accrued restructuring costs | | | 40 | | | | 41 | | | | 40 | | Deferred income taxes | | | - | | | | 82 | | | | - | | Income taxes payable - current | | | 751 | | | | 345 | | | | 642 | | Total current liabilities | | | 39,827 | | | | 34,103 | | | | 44,128 | | | | | | | | | | | | | | | Income taxes payable - long-term | | | 4,131 | | | | 4,178 | | | | 4,164 | | Deferred income taxes | | | 705 | | | | 596 | | | | 705 | | Long-term debt, less current maturities | | | 6,666 | | | | 9,079 | | | | 6,719 | | | | | | | | | | | | | | | Total liabilities | | | 51,329 | | | | 47,956 | | | | 55,716 | | | | | | | | | | | | | | | Commitments and Contingencies (Note 15) | | | | | | | | | | | | | | | | | | | | | | | | | | Shareholders' equity | | | 91,831 | | | | 81,351 | | | | 89,000 | | | | | | | | | | | | | | | Total liabilities and | | | | | | | | | | | | | shareholders' equity | | $ | 143,160 | | | | 129,307 | | | | 144,716 | | | | | | | | | | | | | | | Shares outstanding | | | 12,656 | | | | 13,181 | | | | 12,703 | | | | | | | | | | | | | | | | | | | | | | | | | | | | * Derived from audited financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | | |
| CONSOLIDATED STATEMENTS OF CASH FLOWS | FOR THE NINETHREE MONTHS ENDED JANUARYJULY 29, 2012 AND JANUARY 30,JULY 31, 2011 | UNAUDITED | (Amounts in Thousands) |
| | NINE MONTHS ENDED | | | | | | | | | | | | | | | | | January 29, | | January 30, | | | 2012 | | 2011 | | | | | | | | Cash flows from operating activities: | | | | | | | Net income | | $ | 9,873 | | | | 10,174 | | Adjustments to reconcile net income to net cash | | | | | | | | | provided by operating activities: | | | | | | | | | Depreciation | | | 3,600 | | | | 3,205 | | Amortization of other assets | | | 183 | | | | 385 | | Stock-based compensation | | | 258 | | | | 280 | | Excess tax benefit related to stock-based compensation | | | (39 | ) | | | (285 | ) | Deferred income taxes | | | (2,751 | ) | | | (1,219 | ) | (Gain) loss on sale of equipment | | | (157 | ) | | | 15 | | Foreign currency exchange (gains) losses | | | (196 | ) | | | 33 | | Changes in assets and liabilities: | | | | | | | | | Accounts receivable | | | (1,769 | ) | | | 3,053 | | Inventories | | | (4,045 | ) | | | (291 | ) | Other current assets | | | (159 | ) | | | 204 | | Other assets | | | (49 | ) | | | 13 | | Accounts payable - trade | | | (1,709 | ) | | | (5,459 | ) | Accrued expenses | | | (1 | ) | | | (3,822 | ) | Accrued restructuring | | | (4 | ) | | | (253 | ) | Income taxes | | | (305 | ) | | | 379 | | Net cash provided by operating activities | | | 2,730 | | | | 6,412 | | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Capital expenditures | | | (3,715 | ) | | | (5,580 | ) | Proceeds from the sale of equipment | | | 188 | | | | 27 | | Purchase of short-term investments | | | (4,821 | ) | | | (4,532 | ) | Proceeds from the sale of short-term investments | | | 4,096 | | | | 2,037 | | Net cash used in investing activities | | | (4,252 | ) | | | (8,048 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Proceeds from lines of credit | | | 6,323 | | | | - | | Payments on lines of credit | | | (5,500 | ) | | | - | | Payments on long-term debt | | | (2,354 | ) | | | (129 | ) | Payments on vendor-financed capital expenditures | | | - | | | | (188 | ) | Proceeds from common stock issued | | | 237 | | | | 591 | | Common stock repurchased | | | (5,384 | ) | | | - | | Debt issuance costs | | | (26 | ) | | | (27 | ) | Excess tax benefit related to stock-based compensation | | | 39 | | | | 285 | | Net cash (used in) provided by financing activities | | | (6,665 | ) | | | 532 | | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | | 102 | | | | 68 | | | | | | | | | | | Decrease in cash and cash equivalents | | | (8,085 | ) | | | (1,036 | ) | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 23,181 | | | | 18,295 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 15,096 | | | | 17,259 | | | | | | | | | | | See accompanying notes to consolidated financial statements. |
| | THREE MONTHS ENDED | | | | | | | | | | | | | | | | | | July 29, | | | July 31, | | | | 2012 | | | 2011 | | | | | | | | | Cash flows from operating activities: | | | | | | | Net income | | $ | 3,524 | | | | 1,820 | | Adjustments to reconcile net income to net cash | | | | | | | | | used in operating activities: | | | | | | | | | Depreciation | | | 1,254 | | | | 1,187 | | Amortization of other assets | | | 60 | | | | 56 | | Stock-based compensation | | | 70 | | | | 77 | | Excess tax benefit related to stock-based compensation | | | (55 | ) | | | (31 | ) | Deferred income taxes | | | 675 | | | | 502 | | Foreign currency exchange gains | | | (80 | ) | | | (39 | ) | Changes in assets and liabilities: | | | | | | | | | Accounts receivable | | | 4,985 | | | | 1,322 | | Inventories | | | (7,710 | ) | | | (6,080 | ) | Other current assets | | | (572 | ) | | | (486 | ) | Other assets | | | (43 | ) | | | (14 | ) | Accounts payable - trade | | | (3,288 | ) | | | 54 | | Accrued expenses | | | (930 | ) | | | (1,750 | ) | Accrued restructuring | | | - | | | | (3 | ) | Income taxes | | | 148 | | | | (257 | ) | Net cash used in operating activities | | | (1,962 | ) | | | (3,642 | ) | | | | | | | | | | Cash flows from investing activities: | | | | | | | | | Capital expenditures | | | (1,008 | ) | | | (1,304 | ) | Purchase of short-term investments | | | (25 | ) | | | (4,761 | ) | Proceeds from the sale of short-term investments | | | 795 | | | | 2,032 | | Net cash used in investing activities | | | (238 | ) | | | (4,033 | ) | | | | | | | | | | Cash flows from financing activities: | | | | | | | | | Payments on long-term debt | | | (50 | ) | | | (53 | ) | Proceeds from common stock issued | | | - | | | | 169 | | Common stock repurchased | | | (470 | ) | | | (1,102 | ) | Dividends paid | | | (381 | ) | | | - | | Excess tax benefit related to stock-based compensation | | | 55 | | | | 31 | | Net cash used in financing activities | | | (846 | ) | | | (955 | ) | | | | | | | | | | Effect of exchange rate changes on cash and cash equivalents | | | (88 | ) | | | 19 | | | | | | | | | | | Decrease in cash and cash equivalents | | | (3,134 | ) | | | (8,611 | ) | | | | | | | | | | Cash and cash equivalents at beginning of period | | | 25,023 | | | | 23,181 | | | | | | | | | | | Cash and cash equivalents at end of period | | $ | 21,889 | | | | 14,570 | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | UNAUDITED | (Dollars in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital | | | | | Accumulated | | | | | | | | | | | | Contributed | | | | | Other | | Total | | | Common Stock | | in Excess | | Accumulated | | Comprehensive | | Shareholders’ | | | Shares | | Amount | | of Par Value | | Earnings | | Income | | Equity | Balance, May 2, 2010 | | | 13,051,785 | | | $ | 652 | | | | 49,459 | | | | 12,833 | | | | 103 | | | $ | 63,047 | | Net income | | | - | | | | - | | | | - | | | | 16,164 | | | | - | | | | 16,164 | | Stock-based compensation | | | - | | | | - | | | | 360 | | | | - | | | | - | | | | 360 | | Loss on cash flow hedge, net of taxes | | | - | | | | - | | | | - | | | | - | | | | (103 | ) | | | (103 | ) | Common stock issuable in connection | | | | | | | | | | | | | | | | | | | | | | with performance based units | | | 40,000 | | | | 2 | | | | (2 | ) | | | - | | | | - | | | | - | | Common stock withheld for withholding taxes | | | | | | | | | | | | | | | | | | | | | | payable and cost of option exercises | | | (60,415 | ) | | | (3 | ) | | | (560 | ) | | | - | | | | - | | | | (563 | ) | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 339 | | | | - | | | | - | | | | 339 | | Fully vested common stock award | | | 3,114 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issuable in connection | | | | | | | | | | | | | | | | . | | | | | | with stock option plans | | | 229,974 | | | | 12 | | | | 1,085 | | | | - | | | | - | | | | 1,097 | | Balance, May 1, 2011 | | | 13,264,458 | | | | 663 | | | | 50,681 | | | | 28,997 | | | | - | | | | 80,341 | | Net income | | | - | | | | - | | | | - | | | | 9,873 | | | | - | | | | 9,873 | | Stock-based compensation | | | - | | | | - | | | | 258 | | | | - | | | | - | | | | 258 | | Unrealized gain on short-term investments | | | - | | | | - | | | | - | | | | - | | | | 7 | | | | 7 | | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 39 | | | | - | | | | - | | | | 39 | | Common stock repurchased | | | (624,459 | ) | | | (31 | ) | | | (5,353 | ) | | | - | | | | - | | | | (5,384 | ) | Fully vested common stock award | | | 3,075 | | | | - | | | | - | | | | | | | | | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | | | | | | | with stock option plans | | | 49,500 | | | | 2 | | | | 235 | | | | - | | | | - | | | | 237 | | Balance, January 29, 2012 | | | 12,692,574 | | | $ | 634 | | | | 45,860 | | | | 38,870 | | | | 7 | | | $ | 85,371 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. |
| CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | UNAUDITED | (Dollars in thousands, except share data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Capital | | | | | | Accumulated | | | | | | | | | | | | | Contributed | | | | | | Other | | | Total | | | | Common Stock | | | in Excess | | | Accumulated | | | Comprehensive | | | Shareholders’ | | | | Shares | | | Amount | | | of Par Value | | | Earnings | | | Income | | | Equity | | Balance, May 1, 2011 | | | 13,264,458 | | | $ | 663 | | | | 50,681 | | | | 28,997 | | | | - | | | $ | 80,341 | | Net income | | | - | | | | - | | | | - | | | | 13,296 | | | | - | | | | 13,296 | | Stock-based compensation | | | - | | | | - | | | | 349 | | | | - | | | | - | | | | 349 | | Unrealized gain on short-term investments | | | - | | | | - | | | | - | | | | - | | | | 16 | | | | 16 | | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 64 | | | | - | | | | - | | | | 64 | | Common stock repurchased | | | (624,127 | ) | | | (31 | ) | | | (5,353 | ) | | | | | | | | | | | (5,384 | ) | Fully vested common stock award | | | 3,075 | | | | - | | | | - | | | | - | | | | - | | | | - | | Common stock issued in connection | | | | | | | | | | | | | | | | . | | | | | | with stock option plans | | | 59,400 | | | | 3 | | | | 315 | | | | - | | | | - | | | | 318 | | Balance, April 29, 2012 * | | | 12,702,806 | | | | 635 | | | | 46,056 | | | | 42,293 | | | | 16 | | | | 89,000 | | Net income | | | - | | | | - | | | | - | | | | 3,524 | | | | - | | | | 3,524 | | Stock-based compensation | | | - | | | | - | | | | 70 | | | | - | | | | - | | | | 70 | | Unrealized gains on short-term investments | | | - | | | | - | | | | - | | | | - | | | | 33 | | | | 33 | | Excess tax benefit related to stock | | | | | | | | | | | | | | | | | | | | | | | | | based compensation | | | - | | | | - | | | | 55 | | | | - | | | | - | | | | 55 | | Common stock repurchased | | | (47,296 | ) | | | (2 | ) | | | (468 | ) | | | - | | | | - | | | | (470 | ) | Dividends paid | | | - | | | | - | | | | - | | | | (381 | ) | | | - | | | | (381 | ) | Balance, July 29, 2012 | | | 12,655,510 | | | $ | 633 | | | | 45,713 | | | | 45,436 | | | | 49 | | | $ | 91,831 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | * Derived from audited financial statements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | See accompanying notes to consolidated financial statements. | | | | | | | | | | | | | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc. and subsidiaries (the “company”) include all adjustments, which are, in the opinion of management, necessary for fair presentation of the results of operations and financial position in accordance with accounting principles generally accepted in the U.S.position. All of these adjustments are of a normal recurring nature. Results of operations for interim periods may not be indicative of future results. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements, which are included in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 201112, 2012 for the fiscal year ended May 1, 2011.April 29, 2012.
The company’s nine-monthsthree months ended JanuaryJuly 29, 2012 and January 30,July 31, 2011, represent 3913 week periods, respectively.
2. Significant Accounting Policies
As of JanuaryJuly 29, 2012, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year then ended May 1, 2011.April 29, 2012.
Recently Adopted Accounting Pronouncements
ASC Topic 605
In October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605, “Revenue Recognition”, to revise accounting guidance related to revenue arrangements with multiple deliverables. The guidance relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting and modifies the manner in which the transaction consideration is allocated across the individual deliverables. Also, this guidance expands the disclosure requirements for revenue arrangements with multiple deliverables. This guidance was effective as of May 2, 2011 (the beginning of our fiscal 2012) and did not have an impact on our consolidated results of operations and financial condition.
Recently Issued Accounting Pronouncements
ASC Topic 220
In June of 2011, the FASB issued ASU No. 2011-05 which amends ASC Topic 220, “Comprehensive Income”, to revise accounting guidance related to the presentationIncome – Presentation of comprehensive income in an entity’s financial statements. The guidance allows an entity the option to present the totalComprehensive Income.” ASU No. 2011-05 requires comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with a total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount offor comprehensive income. ASU 2011-05This update eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity or notes to the financial statements. This revised guidance doesequity. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance is effective for fiscal years,The amendments in this update should be applied retrospectively and interim periods within those years, beginning after December 15, 2011. As a result, this guidance is effective for our first quarter of fiscal 2013. The FASB amended this guidance in December 2011 to postpone a requirement to present items that are reclassified from other comprehensive income to net income on the face of the financial statement where the components of net income and other comprehensive income are presented and reinstate previous guidance related to such reclassifications. This guidance will change how we present comprehensive income in our consolidated financial statements as we currently present the components of other comprehensive income and total comprehensive income as part of our notes to the consolidated financial statements (see Note 13). Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In September 2011, the FASB issued amended guidance that permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying the current two-step goodwill impairment test. If an entity concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not be required to perform the two-step impairment test for that reporting unit. This guidance is effective for interim and annual reporting periods beginning April 30, 2012, with earlyafter December 15, 2011. We adopted this guidance in the first quarter of fiscal 2013. The adoption permitted,of ASU 2011-05 is for presentation purposes only and will not have ahad no material impact on our results of operations, cash flows orconsolidated financial position.statements.
3. Stock-Based Compensation
Common Stock Award
On October 1, 2011, we granted a total of 3,075 shares of common stock to our board of directors. These shares of common stock vested immediately and were measured at $8.45 per share, which represents the closing price of the company’s common stock at the date of grant.
On October 1, 2010, we granted a total of 3,114 shares of common stock to our board of directors. These shares of common stock vested immediately and were measured at $10.02 per share, which represents the closing price of the company’s common stock at the date of grant.
We recorded $26,000 and $31,000 of compensation expense within selling, general, and administrative expense for these common stock awards for the nine-month period ending January 29, 2012 and January 30, 2011, respectively.
Incentive Stock Option Awards
We did not grant any incentive stock option awards during the first nine monthsquarter of fiscal 2012.2013.
At JanuaryJuly 29, 2012, options to purchase 219,375209,475 shares of common stock were outstanding, had a weighted average exercise price of $7.26$7.22 per share, and a weighted average contractual term of 5.34.9 years. At JanuaryJuly 29, 2012, the aggregate intrinsic value for options outstanding was $403,000.$614,000.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) At JanuaryJuly 29, 2012, outstanding options to purchase 168,175188,475 shares of common stock were exercisable, had a weighted average exercise price of $7.56$7.68 per share, and a weighted average contractual term of 5.14.7 years. At JanuaryJuly 29, 2012, the aggregate intrinsic value for options exercisable was $259,000.$466,000.
The aggregate intrinsic value for options exercised during nine-month periods ended January 29,the first quarter of fiscal 2012 and January 30, 2011,was $157,000. No options were $196,000 and $820,000, respectively.exercised during the first quarter of fiscal 2013.
The remaining unrecognized compensation cost related to incentive stock option awards at JanuaryJuly 29, 2012, was $96,000$37,000 which is expected to be recognized over a weighted average period of 1.1 years.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We recorded $101,000$25,000 and $111,000$34,000 of compensation expense on incentive stock option grants within selling, general, and administrative expense for the nine-monththree-month periods ended JanuaryJuly 29, 2012, and January 30,July 31, 2011, respectively. Time Vested Restricted Stock Awards
We did not grant any time vested restricted stock awards during the first nine monthsquarter of fiscal 2012.2013. We recorded $131,000$28,000 and $126,000$43,000 of compensation expense within selling, general, and administrative expense for time vested restricted stock awards for the nine-monththree-month periods ending JanuaryJuly 29, 2012 and January 30,July 31, 2011 respectively. At JanuaryJuly 29, 2012, there were 185,000123,335 shares of time vested restricted stock outstanding and unvested. Of the 185,000123,335 shares outstanding and unvested, 105,00070,000 shares (granted on January 7, 2009) vest in equal one-third installments on May 1, 2012, 2013 and 2014, respectively. The remaining 80,00053,335 shares (granted on July 1, 2009) vest in equal one-third installments on July 1, 2012, 2013, and 2014, respectively. At JanuaryJuly 29, 2012, the weighted average fair value of these outstanding and unvested shares was $3.65$3.71 per share. During the nine-month period ending January 29, 2012, 10,000first quarter of fiscal 2013, 61,665 shares of time vested restricted stock vested and had a weighted average fair value of $18,800$232,000 or $1.88$3.76 per share. At JanuaryJuly 29, 2012, the remaining unrecognized compensation cost related to the unvested restricted stock awards was $203,000,$130,000, which is expected to be recognized over a weighted average vesting period of 1.71.5 years. Performance Based Restricted Stock Units
We did not grant anyOn July 11, 2012, certain key members of management were granted performance based restricted common stock units during the first nine months of fiscal 2012.
On January 7, 2009 (fiscal 2009), certain key management employees and a non-employee were grantedwhich could earn up to 120,000 shares of performance based restrictedcommon stock units. This award contingently vested in one-third increments, if in any discrete period of two consecutive quarters from February 2, 2009 through April 30, 2012, certain performance goalstargets are met. As of August 1, 2010 (fiscal 2011), the performance goalsmet as defined in the agreement were met and as a result, all of the performance basedrelated restricted stock units have vested.unit agreement. These awards were valued based on the fair market value on the date of grant. The fair value of these awards were $10.21, which represents the closing price of our common stock on the date of grant. The vesting of these awards are over the requisite service period of three years.
NoThe company recorded compensation cost was recorded for performance based restricted stock units for the nine-month period ended January 29, 2012, as all performance based restricted stock units that have been granted by the company were fully vested at the endexpense of fiscal 2011. We recorded $12,000$17,000 within selling, general, and administrative expense for performance based restricted stock units for the nine-monththree-month period ended January 30, 2011.ending July 29, 2012. No compensation expense was recorded for performance based restricted stock units for the three-month period ending July 31, 2011, as the performance based restricted stock units granted in fiscal 2009 were fully vested in fiscal 2011 and no performance based restricted stock units were granted in fiscal years 2010 through 2012. Compensation cost is recorded based on an assessment each reporting period of the probability if certain performance goals will be met during the vesting period. If performance goals are not probable of occurrence, no compensation cost will be recognized and any recognized compensation cost would be reversed.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of July 29, 2012, the remaining unrecognized compensation cost related to the performance based restricted stock units was $596,000, which is expected to be recognized over a weighted average vesting period of 3.0 years.
Common Stock Awards We did not grant any common stock awards during the first quarter of fiscal 2013.
Other Share-Based Arrangements
Effective May 2, 2011, we entered into an agreement in which we granted a non-employee a stock appreciation right that is indexed on 70,000 shares of our common stock. This agreement requires us to settle in cash an amount equal to $35,000, plus the excess, if any, over a stock appreciation right value of $700,000 at May 2, 2011. This stock appreciation right value of $700,000 represents the 70,000 indexed shares of common stock noted above measured at the closing price per share of $10 at May 2, 2011. The cash settlement in connection with the stock appreciation right value would represent the difference between a stock appreciation right value that is indexed on the 70,000 shares of common stock noted above and based on the highest closing price per share of our common stock for the period May 2, 2011 through June 30, 2012 (limited to $12 per share) and the $700,000 stock appreciation right value at May 2, 2011. This award will vest over the period May 2, 2011 through June 30, 2012 as this represents the non-employee’s required service period. During the first quarter of fiscal 2013, this award fully vested and was paid out at a fair value totaling $174,000. Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Compensation expense associated with this agreement was $44,000$40,000 and $8,000 for the nine-monthsthree-months ended JanuaryJuly 29, 2012.2012 and July 31, 2011, respectively.
4. Accounts Receivable
A summary of accounts receivable follows: | | | | | | | (dollars in thousands) | | July 29, 2012 | | | April 29, 2012 | | Customers | | $ | 21,226 | | | $ | 26,100 | | Allowance for doubtful accounts | | | (639 | ) | | | (567 | ) | Reserve for returns and allowances and discounts | | | (566 | ) | | | (478 | ) | | | $ | 20,021 | | | $ | 25,055 | |
| | | | | | | (dollars in thousands) | | January 29, 2012 | | May 1, 2011 | Customers | | $ | 23,113 | | | $ | 21,562 | | Allowance for doubtful accounts | | | (561 | ) | | | (776 | ) | Reserve for returns and allowances and discounts | | | (540 | ) | | | (577 | ) | | | $ | 22,012 | | | $ | 20,209 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A summary of the activity in the allowance for doubtful accounts follows: | | | | | | | | | | Nine months ended | | Three months ended | | (dollars in thousands) | | January 29, 2012 | | January 30, 2011 | | July 29, 2012 | | | July 31, 2011 | | Beginning balance | | $ | (776 | ) | | $ | (1,322 | ) | | $ | (567 | ) | | $ | (776 | ) | Provision for bad debts | | | 18 | | | | 295 | | | | (41 | ) | | | 14 | | Net write-offs, net of recoveries | | | 197 | | | | (19 | ) | | | (31 | ) | | | 40 | | Ending balance | | $ | (561 | ) | | $ | (1,046 | ) | | $ | (639 | ) | | $ | (722 | ) |
A summary of the activity in the allowance for returns and allowances and discounts accounts follows: | | Nine months ended | (dollars in thousands) | | January 29, 2012 | | January 30, 2011 | Beginning balance | | $ | (577 | ) | | $ | (534 | ) | Provision for returns, allowances and discounts | | | (1,929 | ) | | | (1,606 | ) | Credits issued | | | 1,966 | | | | 1,550 | | Ending balance | | $ | (540 | ) | | $ | (590 | ) |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) | | Three months ended | | (dollars in thousands) | | July 29, 2012 | | | July 31, 2011 | | Beginning balance | | $ | (478 | ) | | $ | (577 | ) | Provision for returns, allowances | | | | | | | | | and discounts | | | (847 | ) | | | (628 | ) | Credits issued | | | 759 | | | | 655 | | Ending balance | | $ | (566 | ) | | $ | (550 | ) |
5. Inventories
Inventories are carried at the lower of cost or market. Cost is determined using the FIFO (first-in, first-out) method.
A summary of inventories follows: (dollars in thousands) | | January 29, 2012 | | May 1, 2011 | | July 29, 2012 | | | April 29, 2012 | | Raw materials | | $ | 5,032 | | | $ | 6,130 | | | $ | 5,917 | | | $ | 5,534 | | Work-in-process | | | 2,475 | | | | 2,421 | | | | 2,511 | | | | 3,631 | | Finished goods | | | 25,403 | | | | 20,172 | | | | 35,624 | | | | 27,208 | | | | $ | 32,910 | | | $ | 28,723 | | | $ | 44,052 | | | $ | 36,373 | |
6. Other Assets
A summary of other assets follows: (dollars in thousands) | | January 29, 2012 | | May 1, 2011 | Cash surrender value – life insurance | | $ | 1,327 | | | $ | 1,323 | | Non-compete agreements, net | | | 369 | | | | 480 | | Other | | | 248 | | | | 249 | | | | $ | 1,944 | | | $ | 2,052 | |
(dollars in thousands) | | July 29, 2012 | | | April 29, 2012 | | Cash surrender value – life insurance | | $ | 1,327 | | | $ | 1,327 | | Non-compete agreement, net | | | 295 | | | | 333 | | Other | | | 268 | | | | 247 | | | | $ | 1,890 | | | $ | 1,907 | |
We recorded a non-compete agreementsagreement in connection with our asset purchase agreementsagreement with International Textile Group, Inc. (ITG) and Bodet & Horst (acquired in 2008) at theirits fair valuesvalue based on valuation techniques. The non-compete agreement associated with ITG was amortized on a straight line basis over the four year life of the agreement and expired at the end of the third quarter of fiscal 2011. The non-compete agreement associated with Bodet & Horst is amortized on a straight line basis over the six year life of the agreement and requires quarterly payments of $12,500 over the life of the agreement. As of JanuaryJuly 29, 2012, the total remaining non-compete payments were $125,000.$100,000.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The gross carrying amount of thesethis non-compete agreementsagreement was $1.0$1.1 million at JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, respectively. At JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, accumulated amortization for thesethe non-compete agreementsagreement was $692,000$790,000 and $544,000,$741,000, respectively. Amortization expense for thesethe non-compete agreementsagreement was $148,000 and $363,000$49,000 for the ninethree month periods ended JanuaryJuly 29, 2012 and January 30,July 31, 2011, respectively. The remaining amortization expense (which includes the total remaining Bodet & Horst non-compete payments of $125,000)$100,000) for the next fourthree fiscal years follows: FY 2012 - $49,000; FY 2013 - $198,000;$148,000; FY 2014 - $198,000; and FY 2015 - $49,000. The weighted average amortization period for thesethe non-compete agreementsagreement is 2.52.0 years as of JanuaryJuly 29, 2012.
At JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, we had four life insurance contracts with death benefits to the respective insured totaling $12.9 million. Our cash surrender value – life insurance balances of $1.3 million at JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, respectively, are collectible upon death of the respective insured. Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Accrued Expenses
A summary of accrued expenses follows: (dollars in thousands) | | January 29, 2012 | | May 1, 2011 | | July 29, 2012 | | | April 29, 2012 | | Compensation, commissions and related benefits | | $ | 4,480 | | | $ | 6,032 | | | $ | 5,751 | | | $ | 7,293 | | Interest | | | 324 | | | | 184 | | | | 323 | | | | 147 | | Other accrued expenses | | | 2,790 | | | | 1,401 | | | | 2,292 | | | | 1,881 | | | | $ | 7,594 | | | $ | 7,617 | | | $ | 8,366 | | | $ | 9,321 | |
8. Long-Term Debt and Lines of Credit
A summary of long-term debt and lines of credit follows: (dollars in thousands) | | January 29, 2012 | | May 1, 2011 | | July 29, 2012 | | | April 29, 2012 | | Unsecured senior term notes | | $ | 8,800 | | | $ | 11,000 | | | $ | 8,800 | | | $ | 8,800 | | Canadian government loan | | | 366 | | | | 547 | | | | 266 | | | | 323 | | | | | 9,166 | | | | 11,547 | | | | 9,066 | | | | 9,123 | | Current maturities of long-term debt | | | (2,400 | ) | | | (2,412 | ) | | | (2,400 | ) | | | (2,404 | ) | Long-term debt, less current maturities of long-term debt | | $ | 6,766 | | | $ | 9,135 | | | $ | 6,666 | | | $ | 6,719 | |
Unsecured Term Notes
In connection with the Bodet & Horst acquisition, in 2008, we entered into a note agreement dated August 11, 2008. This agreement provided for the issuance of $11.0 million of unsecured term notes with a fixed interest rate of 8.01% and a term of seven years. Principal payments of $2.2 million per year are due on the notes beginning August 11, 2011. The principal payments are payable over an average term of 3.53 years through August 11, 2015. Any principal prepayments will be assessed a penalty as defined in the agreement. This agreement contains customary financial and other covenants as defined in the agreement.
We made our firsthave paid the required principal payment total of $2.2$4.4 million associated with this note agreement, of which $2.2 million was paid on August 11, 2011.2012 and August 11, 2011, respectively. As a result, we currently have an outstanding balance on our unsecured senior term notes of $6.6 million.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Government of Quebec Loan
We have an agreement with the Government of Quebec for a term loan that is non-interest bearing and is payable in 48 equal monthly installments (denominated in Canadian dollars) commencing December 1, 2009. The proceeds were used to partially finance capital expenditures at our Rayonese facility located in Quebec, Canada.
Revolving Credit Agreement – United States
At May 1, 2011, we hadWe have an unsecured Amended and Restated Credit Agreement that providedprovides for a revolving loan commitment of $6.5$7.6 million including letters of credit up to $3.0 million. This agreement wasand is set to expire August 15, 2012. Onon August 25, 2011, we entered into a seventeenth amendment to the Amended and Restated Credit Agreement, amending the agreement effective May 1, 2011 (the end of our fiscal 2011).2013. This amendment extends the expiration date of the line of credit through August 25, 2013, increases the revolving loan commitment from $6.5 million to $10.0 million, and decreases the capital expenditure limit for fiscal years 2012 and 2013 from $10.0 million to $6.0 million. On January 17, 2012, and in connection with the Culp Europe Credit Agreement discussed below, we entered into an eighteenth amendment to decrease our revolving loan commitment from $10.0 million to $7.6 million.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The amended agreement provides for a pricing matrix to determine the interest rate payable on loans made under the agreement (applicable interest rate of 1.88%2.24% at JanuaryJuly 29, 2012). As of January 29, 2012, there were $50,000 in outstanding letters of credit (all of which related to workers compensation). At JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, there were no borrowings outstanding under the agreement.
Revolving Credit Agreement – China
At January 29, 2012, we hadWe have an unsecured credit agreement associated with our operations in China that provides for a line of credit of up to 40 million RMB (approximately $6.3 million USD at JanuaryJuly 29, 2012). This agreement expires, expiring on September 2, 2012 and2012. This agreement has an interest rate determined by the Chinese government. There were no borrowings outstanding under the agreement as of JanuaryJuly 29, 2012 and May 1, 2011.April 29, 2012.
On September 2, 2012, we renewed our unsecured credit agreement associated with our operations in China. The renewal extended the agreement to September 2, 2013, and provides for a line of credit up to approximately 40 million RMB (approximately $6.3 million USD).
Revolving Credit Agreement -– Europe
On January 17, 2012, we entered into an unsecured credit agreement associated with our operations in Poland that provides for a line of credit of up to 6.8 million Polish Zloty (approximately $2.1$2.0 million USD at JanuaryJuly 29, 2012). This agreement expires on January 15, 2013 and bears interest at WIBOR (Warsaw Interbank Offered Rate) plus 2% (applicable interest rate of 6.89%6.95% at JanuaryJuly 29, 2012). At January 29, 2012, $875,000There were $834,000 and $889,000 (2.8 million Polish Zloty) wasin borrowings outstanding under this agreement.agreement at July 29, 2012 and April 29, 2012, respectively.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At JanuaryJuly 29, 2012, the company was in compliance with these financial covenants.
At JanuaryJuly 29, 2012, the principal payment requirements of long-term debt during the next four years are: Year 1 – $2.4 million; Year 2 - $2.4$2.3 million; Year 3 - $2.2 million; and Year 4 - $2.2 million.
The fair value of the company’s long-term debt is estimated by discounting the future cash flows at rates currently offered to the company for similar debt instruments of comparable maturities. At JanuaryJuly 29, 2012, the carrying value of the company’s long-term debt was $9.2$9.1 million and the fair value was $8.2$8.0 million. At May 1, 2011,April 29, 2012, the carrying value of the company’s long-term debt was $11.5$9.1 million and the fair value was $10.2$8.1 million.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 9. Fair Value of Financial Instruments
ASC Topic 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the company’s assumptions (unobservable inputs). Determining where an asset or liability falls within that hierarchy depends on the lowest level input that is significant to the fair value measurement as a whole. An adjustment to the pricing method used within either level 1 or level 2 inputs could generate a fair value measurement that effectively falls in a lower level in the hierarchy. The hierarchy consists of three broad levels as follows: Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Level 1 – Quoted market prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than level 1 inputs that are either directly or indirectly observable, and
Level 3 – Unobservable inputs developed using the company’s estimates and assumptions, which reflect those that market participants would use.
The following table presents information about assets and liabilities measured at fair value on a recurring basis:
| | Fair value measurements at July 29, 2012 using: | | | | | | | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | | | | | | | | | | | | | | (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | Low Duration Bond Fund | | $ | 2,051 | | | | N/A | | | | N/A | | | $ | 2,051 | | Limited Term Bond Fund | | | 2,063 | | | | N/A | | | | N/A | | | | 2,063 | | Intermediate Term Bond Fund | | | 1,086 | | | | N/A | | | | N/A | | | | 1,086 | |
| | Fair value measurements at April 29, 2012 using: | | | | | | | | Quoted prices in active markets for identical assets | | | Significant other observable inputs | | | Significant unobservable inputs | | | | | | | | | | | | | | | | | | (amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | Low Duration Bond Fund | | $ | 2,049 | | | | N/A | | | | N/A | | | $ | 2,049 | | Limited Term Bond Fund | | | 2,037 | | | | N/A | | | | N/A | | | | 2,037 | | Intermediate Term Bond Fund | | | 1,058 | | | | N/A | | | | N/A | | | | 1,058 | |
| | Fair value measurements at January 29, 2012 using: | | | | | | | Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | | | | | | | | | | | | | | | (amounts in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | Low Duration Bond Fund | | $ | 2,021 | | | N/A | | | N/A | | | $ | 2,021 | | Limited Term Bond Fund | | | 2,042 | | | N/A | | | N/A | | | | 2,042 | | Intermediate Term Bond Fund | | | 1,045 | | | N/A | | | N/A | | | | 1,045 | | | | | | | | | | | | | | | | | | | | | Fair value measurements at May 1, 2011 using: | | | | | | | | | | | | | | | | | | | | Quoted prices in active markets for identical assets | | Significant other observable inputs | | Significant unobservable inputs | | | | | | | | | | | | | | | | | | | | | | (amounts in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | | | | | | | | | | | | | | | | | Assets: | | | | | | | | | | | | | | | | | Low Duration Bond Fund | | $ | 1,003 | | | N/A | | | N/A | | | $ | 1,003 | | | | | | | | | | | | | | | | | | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The determination of where an asset or liability falls in the hierarchy requires significant judgment. We evaluate our hierarchy disclosures each quarter based on various factors and it is possible that an asset or liability may be classified differently from quarter to quarter. However, we expect that changes in classifications between different levels will be rare.
Short-term investments include short-term bond funds and deposit accounts that have maturities of less than one year. Our short-term bond funds are classified as available-for-sale and their unrealized gains or losses are included in other comprehensive income. Our short-term bond funds were recorded at their fair value of $5.2 million and $5.1 million and $1.0 million at JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, respectively. At JanuaryOur short-term bond funds had unrealized gains totaling $49,000 and $16,000 at July 29, 2012 and May 1, 2011,April 29, 2012. At July 29, 2012 and April 29, 2012, the fair value of our short-term bond funds approximatesapproximated its cost basis. The carrying amount of cash and cash equivalents, short-term investments that pertain to interest bearing deposit accounts, accounts receivable, other current assets, accounts payable and accrued expenses approximates fair value because of the short maturity of these financial instruments. Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Derivatives In accordance with the provisions ASC Topic 815, Derivatives and Hedging, our Canadian dollar foreign exchange contract was designated as a cash flow hedge, with the fair value of this financial instrument recorded in other assets and changes in fair value recorded in accumulated other comprehensive income. ASC Topic 815 requires disclosure of gains and losses on derivative instruments in the following tabular format.
| (Amounts in Thousands) | | Fair Values of Derivative Instruments As of, | | January 29,2012 | | May 1, 2011 | | | | | | Derivatives designated as hedging instruments under ASC Topic 815 | Balance
Sheet
Location
| | Fair
Value
| | Balance
Sheet
Location
| | Fair
Value
| | | | | | | | | | | Canadian dollar foreign exchange contract | Other assets | | $ | - | | Other assets | | $ | - | | | | | | | | | | | | | |
Derivatives in ASC Topic 815 Net Investment Hedging Relationships | | Amt of Gain (Loss) (net of tax) Recognized in OCI on Derivative (Effective Portion) and recorded in Other assets and Accrued Expenses at Fair Value | | | Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | Amount of Gain (net of tax) or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | | 2012 | | 2011 | | | | 2012 | | 2011 | | | | 2012 | | 2011 | | | | | | | | | | | | | | | | | | | | | | | | Canadian Dollar Foreign Exchange Contract | | $ | - | | | $ | (103 | ) | | Other Expense | | $ | - | | | $ | 5 | | | Other Expense | | $ | - | | | $ | 79 | |
On January 21, 2009, we entered into a Canadian dollar foreign exchange rate contract to mitigate the risk of foreign exchange rate fluctuations associated with our loan from the Government of Quebec. This agreement effectively converted the Canadian dollar principal payments at a fixed Canadian dollar foreign exchange rate compared with the United States dollar of 1.218 and was due to expire on November 1, 2013. During the first quarter of fiscal 2011, we elected to terminate this contract due to the favorable Canadian dollar foreign changes rates in comparison to the fixed contractual rate noted above.
During the fourth quarter of fiscal 2012, we entered into an agreement to enter foreign exchange contracts that mitigate the risk of foreign exchange rate fluctuations for inventory purchases associated with our operations located in Poland. These contracts effectively convert USD inventory payments at a fixed USD foreign exchange rate compared with the Polish Zloty.
11. Cash Flow Information
Payments for interest and income taxes follows: | | Nine months ended | | Three months ended | | (dollars in thousands) | | January 29, 2012 | | January 30, 2011 | | July 29, 2012 | | | July 31, 2011 | | Interest | | $ | 449 | | | $ | 454 | | | $ | 14 | | | $ | - | | Net income tax payments | | | 1,886 | | | | 1,054 | | | | 1,026 | | | | 891 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
No interest costs were capitalized for the nine months ending January 29, 2012. Interest costs of $17,000 for the construction of qualifying property, plant, and equipment were capitalized for the nine months ending January 30, 2011.
During the nine-month period ending January 29, 2012, no shares of common stock were withheld to satisfy withholding tax liabilities and other costs incurred in connection with vesting of performance based restricted stock units or the exercise of options to purchase common stock. During the nine-month period ending January 30, 2011, 33,835 shares of common stock were withheld to satisfy withholding tax liabilities and other costs incurred in connection with 40,000 shares of common stock issued and related to the vesting of performance based restricted stock units and the exercise of 72,000 options to purchase of common stock. The total withholding tax liabilities and other costs incurred totaled $329,000.
12.11. Net Income Per Share
Basic net income per share is computed using the weighted-average number of shares outstanding during the period. Diluted net income per share uses the weighted-average number of shares outstanding during the period plus the dilutive effect of stock-based compensation calculated using the treasury stock method. Weighted average shares used in the computation of basic and diluted net income per share follows: | | | | | | | | | | Three months ended | | Three months ended | | (amounts in thousands) | | January 29, 2012 | | January 30, 2011 | | July 29, 2012 | | | July 31, 2011 | | Weighted average common shares outstanding, basic | | | 12,536 | | | | 13,005 | | | | 12,551 | | | | 13,061 | | Dilutive effect of stock-based compensation | | | 141 | | | | 223 | | | | 160 | | | | 144 | | Weighted average common shares outstanding, diluted | | | 12,677 | | | | 13,228 | | | | 12,711 | | | | 13,205 | |
All options to purchase shares of common stock were included in the computation of diluted net income for the three months ended July 29, 2012, as the exercise price of the options was less than the average market price of the common shares. Options to purchase 142,75024,750 shares of common stock were not included in the computation of diluted net income per share for the three months ended January 29, 2012,July 31, 2011, as the exercise price of the options was greater than the average market price of the common shares. All options of common stock were included in the computation of diluted net income per share as the exercise price of the options was less than average market price of the common shares for the three months ended January 30, 2011.
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The computations of basic net income per share did not include 185,000123,335 and 195,000185,000 shares of time vested restricted common stock as these shares were unvested for the three months ending JanuaryJuly 29, 2012 and January 30, 2011, respectively. | | Nine months ended | (amounts in thousands) | | January 29, 2012 | | January 30, 2011 | Weighted average common shares outstanding, basic | | | 12,777 | | | | 12,936 | | Dilutive effect of stock-based compensation | | | 141 | | | | 282 | | Weighted average common shares outstanding, diluted | | | 12,918 | | | | 13,218 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Options to purchase 142,750 shares of common stock were not included in the computation of diluted net income per share for the nine months ended January 29, 2012, as the exercise price of the options was greater than the average market price of the common shares. All options of common stock were included in the computation of diluted net income for the nine months ended January 30, 2011, as the exercise price of the options was less than the average market price of the common shares.
The computations of basic net income per share did not include 185,000 and 195,000 shares of time vested restricted common stock as these shares were unvested for the nine months ending January 29, 2012 and January 30,July 31, 2011, respectively.
13. Comprehensive Income
Comprehensive income is the total income and other changes in shareholders’ equity, except those resulting from investments by shareholders and distributions to shareholders not reflected in net income.
A summary of comprehensive income follows:
| | Nine months ended | (dollars in thousands) | | January 29, 2012 | | January 30, 2011 | | | $ | 9,873 | | | $ | 10,174 | | Unrealized gains on short-term investments | | | 7 | | | | - | | Loss on cash flow hedge, net of income taxes | | | - | | | | (103 | ) | | | | 9,880 | | | $ | 10,071 | |
14.12. Segment Information
Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures and sells fabrics to bedding manufacturers. The upholstery fabrics segment manufactures and sells fabrics primarily to residential and commercial (contract) furniture manufacturers.
We evaluate the operating performance of our segments based upon income (loss) from operations before restructuring and related charges or (credits), certain unallocated corporate expenses, and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses primarily represent compensation and benefits for certain executive officers and all costs related to being a public company. Segment assets include assets used in the operations of each segment and primarily consist of accounts receivable, inventories, and property, plant and equipment. The mattress fabrics segment also includes in segment assets, assets held for sale, goodwill and a non-compete agreements associated with certain acquisitions. The upholstery fabrics segment also includes assets held for sale in segment assets.an acquisition.
Financial information for the company’s operating segments follows: | | Three months ended | | (dollars in thousands) | | July 29, 2012 | | | July 31, 2011 | | Net sales: | | | | | | | Mattress Fabrics | | $ | 37,964 | | | $ | 32,170 | | Upholstery Fabrics | | | 31,220 | | | | 28,100 | | | | $ | 69,184 | | | $ | 60,270 | | | | | | | | | | | Gross profit: | | | | | | | | | Mattress Fabrics | | $ | 7,622 | | | $ | 5,137 | | Upholstery Fabrics | | | 5,498 | | | | 3,741 | | | | $ | 13,120 | | | $ | 8,878 | | | | | | | | | | | Selling, general, and administrative expenses: | | | | | | | | | Mattress Fabrics | | $ | 2,391 | | | $ | 1,992 | | Upholstery Fabrics | | | 3,340 | | | | 2,766 | | Total segment selling, general, and | | | | | | | | | administrative expenses | | | 5,731 | | | | 4,758 | | Unallocated corporate expenses | | | 1,910 | | | | 999 | | | | $ | 7,641 | | | $ | 5,757 | | | | | | | | | | | Income from operations: | | | | | | | | | Mattress Fabrics | | $ | 5,230 | | | $ | 3,146 | | Upholstery Fabrics | | | 2,159 | | | | 974 | | Total segment income from operations | | | 7,389 | | | | 4,120 | | Unallocated corporate expenses | | | (1,910 | ) | | | (999 | ) | Total income from operations | | | 5,479 | | | | 3,121 | | Interest expense | | | (190 | ) | | | (220 | ) | Interest income | | | 127 | | | | 129 | | Other expense | | | (44 | ) | | | (65 | ) | Income before income taxes | | $ | 5,372 | | | $ | 2,965 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | | Three months ended | (dollars in thousands) | | January 29, 2012 | | January 30, 2011 | Net sales: | | | | | | | | Mattress Fabrics | | $ | 34,719 | | | $ | 27,991 | | | Upholstery Fabrics | | | 25,731 | | | | 23,661 | | | | | $ | 60,450 | | | $ | 51,652 | | | Gross profit: | | | | | | | | | | Mattress Fabrics | | $ | 5,104 | | | $ | 4,596 | | | Upholstery Fabrics | | | 3,407 | | | | 3,643 | | | | | $ | 8,511 | | | $ | 8,239 | | | Selling, general, and administrative expenses: | | | | | | | | | | Mattress Fabrics | | $ | 1,970 | | | $ | 1,780 | | | Upholstery Fabrics | | | 2,653 | | | | 2,517 | | | Total segment selling, general, and administrative expenses | | | 4,623 | | | | 4,297 | | | Unallocated corporate expenses | | | 895 | | | | 832 | | | | | $ | 5,518 | | | $ | 5,129 | | | Income from operations: | | | | | | | | | | Mattress Fabrics | | $ | 3,134 | | | $ | 2,816 | | | Upholstery Fabrics | | | 754 | | | | 1,126 | | | Total segment income from operations | | | 3,888 | | | | 3,942 | | | Unallocated corporate expenses | | | (895 | ) | | | (832 | ) | | Restructuring expense | | | - | | | | (7 | ) | (1) | Total income from operations | | | 2,993 | | | | 3,103 | | | Interest expense | | | (181 | ) | | | (224 | ) | | Interest income | | | 148 | | | | 57 | | | Other expense | | | (83 | ) | | | (28 | ) | | Income before income taxes | | $ | 2,877 | | | $ | 2,908 | | |
(1) | The $7 restructuring charge represents $17 for lease termination and other exit costs offset by a credit of $10 for sales proceeds received on equipment with no carrying value. This restructuring charge relates to the Upholstery Fabrics segment. | Balance sheet information for the company’s operating segments follow: | | Nine months ended | (dollars in thousands) | | January 29, 2012 | | January 30, 2011 | Net sales: | | | | | | | | | Mattress Fabrics | | $ | 102,130 | | | | $ | 87,244 | | | Upholstery Fabrics | | | 76,603 | | | | | 69,199 | | | | | $ | 178,733 | | | | $ | 156,443 | | | Gross profit: | | | | | | | | | | | Mattress Fabrics | | $ | 16,180 | | | | $ | 15,616 | | | Upholstery Fabrics | | | 9,932 | | | | | 9,941 | | | Total segment gross profit | | $ | 26,112 | | | | $ | 25,557 | | | Other non-recurring charges | | | (77 | ) | (2) | | | - | | | | | $ | 26,035 | | | | $ | 25,557 | | | Selling, general, and administrative expenses: | | | | | | | | | | | Mattress Fabrics | | $ | 6,094 | | | | $ | 5,480 | | | Upholstery Fabrics | | | 8,186 | | | | | 6,394 | | | Total segment selling, general, and administrative expenses | | | 14,280 | | | | | 11,874 | | | Unallocated corporate expenses | | | 2,715 | | | | | 2,670 | | | | | $ | 16,995 | | | | $ | 14,544 | | | Income from operations: | | | | | | | | | | | Mattress Fabrics | | $ | 10,087 | | | | $ | 10,136 | | | Upholstery Fabrics | | | 1,745 | | | | | 3,547 | | | Total segment income from operations | | | 11,832 | | | | | 13,683 | | | Unallocated corporate expenses | | | (2,715 | ) | | | | (2,670 | ) | | Other non-recurring charges | | | (77 | ) | (2) | | | - | | | Total income from operations | | | 9,040 | | | | | 11,013 | | | Interest expense | | | (590 | ) | | | | (659 | ) | | Interest income | | | 387 | | | | | 144 | | | Other expense | | | (132 | ) | | | | (111 | ) | | Income before income taxes | | $ | 8,705 | | | | $ | 10,387 | | |
(dollars in thousands) | | July 29, 2012 | | | April 29, 2012 | | Segment assets: | | | | | | | Mattress Fabrics | | | | | | | Current assets (1) | | $ | 36,735 | | | $ | 29,909 | | Assets held for sale | | | 15 | | | | 15 | | Non-compete agreements, net | | | 295 | | | | 333 | | Goodwill | | | 11,462 | | | | 11,462 | | Property, plant and equipment (2) | | | 29,114 | | | | 29,237 | | Total mattress fabrics assets | | | 77,621 | | | | 70,956 | | Upholstery Fabrics | | | | | | | | | Current assets (1) | | | 27,338 | | | | 31,519 | | Property, plant and equipment (3) | | | 1,062 | | | | 1,124 | | Total upholstery fabrics assets | | | 28,400 | | | | 32,643 | | Total segment assets | | | 106,021 | | | | 103,599 | | Non-segment assets: | | | | | | | | | Cash and cash equivalents | | | 21,889 | | | | 25,023 | | Short-term investments | | | 5,200 | | | | 5,941 | | Deferred income taxes | | | 5,052 | | | | 5,672 | | Other current assets | | | 2,563 | | | | 1,989 | | Property, plant and equipment (4) | | | 840 | | | | 918 | | Other assets | | | 1,595 | | | | 1,574 | | Total assets | | $ | 143,160 | | | $ | 144,716 | |
(2) | The $77 other non-recurring charge represents employee termination benefits associated with our Anderson, SC plant facility. This non-recurring charge relates to the Upholstery Fabrics segment. |
| | Three months ended | | (dollars in thousands) | | July 29, 2012 | | | July 31, 2011 | | Capital expenditures (5): | | | | | | | Mattress Fabrics | | $ | 969 | | | $ | 1,205 | | Upholstery Fabrics | | | 8 | | | | 292 | | Unallocated Corporate | | | 14 | | | | 9 | | Total capital expenditures | | $ | 991 | | | $ | 1,506 | | Depreciation expense: | | | | | | | | | Mattress Fabrics | | $ | 1,092 | | | $ | 1,029 | | Upholstery Fabrics | | | 162 | | | | 158 | | Total depreciation expense | | $ | 1,254 | | | $ | 1,187 | |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Balance sheet information for the company’s operating segments follow:
(dollars in thousands) | | January 29, 2012 | | May 1, 2011 | Segment assets: | | | | | | | Mattress Fabrics | | | | | | | Current assets (3) | | $ | 28,638 | | | $ | 25,456 | | Assets held for sale | | | 14 | | | | 14 | | Non-compete agreements, net | | | 369 | | | | 480 | | Goodwill | | | 11,462 | | | | 11,462 | | Property, plant and equipment (4) | | | 28,210 | | | | 28,581 | | Total mattress fabrics assets | | | 68,693 | | | | 65,993 | | Upholstery Fabrics | | | | | | | | | Current assets (3) | | | 26,284 | | | | 23,476 | | Assets held for sale | | | 31 | | | | 61 | | Property, plant and equipment (5) | | | 1,246 | | | | 967 | | Total upholstery fabrics assets | | | 27,561 | | | | 24,504 | | Total segment assets | | | 96,254 | | | | 90,497 | | Non-segment assets: | | | | | | | | | Cash and cash equivalents | | | 15,096 | | | | 23,181 | | Short-term investments | | | 8,511 | | | | 7,699 | | Income taxes receivable | | | - | | | | 79 | | Deferred income taxes | | | 6,670 | | | | 3,899 | | Other current assets | | | 2,522 | | | | 2,376 | | Property, plant and equipment (6) | | | 829 | | | | 748 | | Other assets | | | 1,575 | | | | 1,572 | | Total assets | | $ | 131,457 | | | $ | 130,051 | |
| | Nine months ended | (dollars in thousands) | | January 29, 2012 | | January 30, 2011 | Capital expenditures (7): | | | | | | | Mattress Fabrics | | $ | 2,761 | | | $ | 5,040 | | Upholstery Fabrics | | | 481 | | | | 170 | | Unallocated Corporate | | | 351 | | | | 193 | | Total capital expenditures | | $ | 3,593 | | | $ | 5,403 | | Depreciation expense: | | | | | | | | | Mattress Fabrics | | $ | 3,163 | | | $ | 2,795 | | Upholstery Fabrics | | | 437 | | | | 410 | | Total depreciation expense | | $ | 3,600 | | | $ | 3,205 | |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) (1) | Current assets represent accounts receivable and inventory for the respective segment. |
(4) (2) | The $28.2$29.1 million at JanuaryJuly 29, 2012, represents property, plant, and equipment of $19.8$21.3 million and $8.4$7.8 million located in the U.S. and Canada, respectively. The $28.6$29.2 million at May 1, 2011,April 29, 2012, represents property, plant, and equipment of $20.0$21.2 million and $8.6$8.0 million located in the U.S. and Canada, respectively. |
(5) (3) | The $1.2$1.1 million at JanuaryJuly 29, 2012, represents property, plant, and equipment located in the U.S. of $957,$788, located in China of $179,$175, and located in Poland of $110.$99. The $967$1.1 million at May 1, 2011,April 29, 2012, represents property, plant, and equipment located in the U.S. of $727,$837, located in China of $184,$183, and located in Poland of $56.$104. |
(6) (4) | The $829$840 and $748$918 at JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, respectively, represent property, plant, and equipment associated with unallocated corporate departments and corporate departments shared by both the mattress and upholstery fabric segments. Property, plant, and equipment associated with corporate are located in the U.S. |
(7) (5) | Capital expenditure amounts are stated on the accrual basis. See Consolidated Statement of Cash Flows for capital expenditure amounts on a cash basis. |
15.13. Income Taxes
Effective Income Tax Rate
We recorded an income tax benefitexpense of $1.2$1.8 million, or (13.4)%34.4% of income before income tax expense, for the ninethree month period ended JanuaryJuly 29, 2012, compared to income tax expense of $213,000,$1.1 million, or 2.1%38.6% of income before income tax expense, for the ninethree month period ended January 30,July 31, 2011. Our effective income tax rates for the ninethree month periods ended JanuaryJuly 29, 2012 and January 30,July 31, 2011 were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currencies in relation to the U.S. dollar. Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The effective income tax rate of (13.4)%expense for the ninethree month period ended JanuaryJuly 29, 2012 is different from the amount obtained by applying our statutory rate of 34% to income before income taxes for the following reasons:
● | · | The effectiveincome tax rate increased 5% for an increase in unrecognized tax benefits. |
| · | The income tax rate was reduced by 50% for a reduction in our valuation allowance associated with our U.S. net deferred income tax assets. This 50% reduction in our effective income tax rate is due to a change in judgment about the realization of our U.S. net deferred income tax assets in future years. Since the realization of our U.S. net deferred income tax assets is a result of a change in judgment about future years, we recorded an income tax benefit of $4.4 million that represents a discrete event in which the full tax effects were recorded for the nine month period ending January 29, 2012. |
● | The effective income tax rate was reduced by 7%5% for taxable income subject to lower statutory income tax rates in foreign jurisdictions (Canada and China) compared with the statutory income tax rate of 34% for the United States. |
● | The effective income tax rate was increased 7% for an increase in unrecognized tax benefits. |
● · | The effective income tax rate was increased by 2.6%0.4% for stock-based compensation and other miscellaneous items. |
Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The effective income tax rate of 2.1%expense for the ninethree month period ended January 30,July 31, 2011 is different from the amount obtained by applying our statutory rate of 34% to income before income taxes for the following reasons:
● | · | The effective income tax rate was reduced by 31%increased 11% for a reductionan increase in our valuation allowance recorded against our net deferred incomeunrecognized tax assets. Of this 31% reduction in our effective income tax rate, 19% and 12% pertain to our operations located in the U.S. and China, respectively. The 19% reduction in our effective income tax rate from our U.S. operations is due to the realization of our U.S. net deferred income tax assets from ordinary taxable income projected for fiscal 2011. Since the realization of our U.S. net deferred income tax assets were from ordinary taxable income in the current fiscal year, its tax effects are included in the computation of the annual effective tax rate for fiscal 2011. The 12% reduction in our effective income tax rate from our China operations is due to a change in judgment about the realization of our China net deferred income tax assets in future years. Since the realization of our China net deferred income tax assets is a result of a change in judgment about future years, we recorded an income tax benefit of $1.3 million that represents a discrete event in which the full tax effects were recorded for the nine month period ended January 30, 2011.benefits. |
● | · | The income tax rate was reduced by 7% for taxable income subject to lower statutory income tax rates in foreign jurisdictions (Canada and China) compared with the statutory income tax rate of 34% for the United States. |
● | The income tax rate was reduced by 3% for adjustments made to our Canadian deferred income tax liabilities and associated with our election to file our Canadian income tax returns in U.S. dollars commencing with our fiscal 2011 tax year. Our Canadian income tax returns were filed in Canadian dollars for fiscal years prior to fiscal 2011. This adjustment totaled $315,000 and represented a discrete event in which the full tax effects were recorded during the nine-month period ended January 30, 2011. |
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
●
| The income tax rate increased 9% for an increase in unrecognized tax benefits. This 9% increase in the income tax rate also includes an income tax benefit of $107,000 or a reduction in the income tax rate of 1% for the subsequent recognition of unrecognized tax benefits. This adjustment of $107,000 represents a discrete event in which the full tax effects were recorded during the nine month period ended January 30, 2011. |
● · | The income tax rate was increased by 0.1%0.6% for stock-based compensation and other miscellaneous items. |
Deferred Income Taxes Summary In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessments at July 29, 2012 and April 29, 2012, we recorded a partial valuation allowance of $12.1 million and $16.4$12.8 million against our net deferred income tax assets associated with our U.S. operations at January 29, 2012, and May 1, 2011, respectively.operations. No valuation allowance has been recorded against our net deferred income tax assets associated with our operations located in China, Canada, and Europe.Poland. United States Our net deferred income tax asset regarding our U.S. operations primarily pertains to incurring significant U.S. pre-tax losses over prior fiscal years, with U.S. loss carryforwards totaling $60.0$59.9 million at May 1, 2011.April 29, 2012. Due to the favorable results of our multi-year restructuring process and profit improvements made in our upholstery fabric operations and key acquisitions and capital investments made for our mattress fabric segment, on a cumulative three-year basis ending May 1, 2011April 29, 2012 (the end of our fiscal 2011)2012), our U.S. operations earned a pre-tax income of $4.2$11.9 million. In addition, our U.S. operations reported a pre-tax income over fiscal years 2011 and 2010 totaling $8.2 million. We believe that fiscal years 2011 and 2010 are a more indicative measure of future pre-tax income as these fiscal years reflect operating performance afterThis trend continued into the cost savings of recent profit-improvement and restructuring plans were realized, as well as the full operational effects of the acquisitions associated with the company’s mattress fabric operations located in the U.S. This improvement continued through the secondfirst quarter of fiscal 2012,2013, as our U.S. operations earned a cumulative pretax income through the second quarter of fiscal 2012 and fiscal years 2011 and 2010 totaling $10.0$1.2 million. This continued earnings improvement from our U.S. operations was driven by our mattress fabric operations (which primarily resides in the U.S.). During the second quarter of fiscal 2012, our mattress fabric operations had net sales totaling $35.2 million compared with $28.3 million in the second quarter of fiscal 2011. In addition, our mattress fabric operations had operating income totaling $3.8 million in the second quarter of fiscal 2012 compared with $3.3 million in the second quarter of fiscal 2011. These improved results in the second quarter of fiscal 2012, which were better than expected, can be attributed to increased sales from our sales and marketing initiatives and new programs with customers who are leading suppliers in the bedding industry. Collectively, these developments increased our confidence in forecasting U.S. taxable income through fiscal 2014 in the second quarter of fiscal 2012. Based on the continuation of these trends in the third quarter of fiscal 2012, we maintain our position that we can forecast U.S. taxable income through 2014. During the third quarter of fiscal 2012, our mattress fabric operations had net sales totaling $34.7 million compared with $28.0 million in the third quarter of fiscal 2011. In addition, our mattress fabric operations had operating income totaling $3.1 million in the third quarter of fiscal 2012 compared with $2.8 million in the third quarter of fiscal 2011.
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Although our U.S. operations have reported pre-tax income on a cumulative three-year basis and financial results continue to improve, the significant uncertainty in the overall economic climate has made it very difficultalso continued. As a result, to forecast medium and long-term financial results associated with our U.S. operations.has remained difficult. Since it will take a significant period of time for our U.S. operations to realize its U.S. net deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believe it is too uncertain to project U.S. pre-tax income levels associated with our U.S. operations after fiscal 2014 that support a “more likely than not” assertion at the end of our thirdfirst quarter of fiscal 2012.2013. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Based on thethis significant positive and negative evidence, noted above, we maintained our position as of April 29, 2012, and recorded a partial valuation allowance of $12.1$12.8 million at JanuaryJuly 29, 2012, against the net deferred income tax assets associated with our U.S. operations that are expected to reverse beyond fiscal 2014 and we recognized an income tax benefit of $4.4 million in the second quarter of fiscal 2012 for the reduction in this valuation allowance for projected U.S. taxable income in fiscal years 2013 and 2014 to reduce our U.S. loss carryforwards.2014. Overall The recorded valuation allowance of $12.1$12.8 million has no effect on our operations, loan covenant compliance, or the possible realization of the U.S. income tax loss carryforwards in the future. If it is determined that it is “more likely than not”more-likely-than-not that we will realize any of these U.S. income tax loss carryforwards, an income tax benefit would be recognized at that time. At JanuaryJuly 29, 2012, the current deferred income tax asset of $2.8$2.3 million represents $2.5$1.9 million and $256,000$387,000 from our operations located in the U.S. and China, respectively. At May 1, 2011,April 29, 2012, the current deferred income tax asset of $293,000 pertains to our operations located in China. At May 1, 2011, the current deferred income tax liability of $82,000 pertains to our operations located in Canada. At January 29, 2012, the non-current deferred income tax asset of $3.9$2.5 million represents $2.8$2.1 million and $1.1 million$405,000 from our operations located in the U.S. and China, respectively. At May 1, 2011,July 29, 2012, the non-current deferred income tax asset of $3.6$2.7 million represents $2.3$1.6 million, $929,000, and $1.3 million$169,000 from our operations located in the U.S., China, and China,Poland, respectively. At JanuaryApril 29, 2012, the non-current deferred tax asset of $3.2 million represents $2.1 million, $1.0 million, and $115,000 from our operations located in the U.S., China, and Poland, respectively. At July 29, 2012 and May 1, 2011,April 29, 2012, the non-current deferred income tax liability of $659,000 and $596,000$705,000 pertains to our operations located in Canada.
Uncertainty In Income Taxes
At JanuaryJuly 29, 2012, we had $12.3$12.6 million of total gross unrecognized tax benefits, of which $4.0$4.1 million represents the amount of gross unrecognized tax benefits that, if recognized would favorably affect the income tax rate in future periods. Of the $12.3$12.6 million in gross unrecognized tax benefits as of JanuaryJuly 29, 2012, $8.3$8.5 million were classified as net non-current deferred income taxes and $4.0$4.1 million were classified as income taxes payable –long-term in the accompanying consolidated balance sheets. Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
At May 1, 2011, we had $11.7 million of total gross unrecognized tax benefits, of which $4.2 million would favorably affect the income tax rate in future periods. Of the $11.7 million in total gross unrecognized tax benefits as of May 1, 2011, $7.5 million were classified as net non-current deferred income taxes and $4.2 million were classified as income taxes payable – long-term in the accompanying consolidated balance sheets.
We estimate that the amount of gross unrecognized tax benefits will increase by approximately $1.0 million$819,000 for fiscal 2012.2013. This increase primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions.
16.
14. Statutory Reserves Our subsidiaries located in China are required to transfer 10% of their net income, as determined in accordance with the People’s Republic of China (PRC) accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of the company’s registered capital. The transfer to this reserve must be made before distributions of any dividend to shareholders. As of JanuaryJuly 29, 2012, the company’s statutory surplus reserve was $2.9$3.5 million, representing 10% of accumulated earnings and profits determined in accordance with PRC accounting rules and regulations. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them provided that the remaining reserve balance after such issue is not less than 25% of the registered capital. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Our subsidiaries located in China can transfer funds to the parent company with the exception of the statutory surplus reserve of $2.9$3.5 million to assist with debt repayment, capital expenditures, and other expenses of the company’s business.
17.15. Commitments and Contingencies
Chromatex Environmental Claim A lawsuit was filed against us and other defendants (Chromatex, Inc., Rossville Industries, Inc., Rossville Companies, Inc. and Rossville Investments, Inc.) on February 5, 2008 in United States District Court for the Middle District of Pennsylvania. The plaintiffs are Alan Shulman, Stanley Siegel, Ruth Cherenson as Personal Representative of Estate of Alan Cherenson, and Adrienne Rolla and M.F. Rolla as Executors of the Estate of Joseph Byrnes. The plaintiffs were partners in a general partnership that formerly owned a manufacturing plant in West Hazleton, Pennsylvania (the “Site”). Approximately two years after this general partnership sold the Site to defendants Chromatex, Inc. and Rossville Industries, Inc., we leased and operated the Site as part of our Rossville/Chromatex division. The lawsuit involves court judgments that have been entered against the plaintiffs and against defendant Chromatex, Inc. requiring them to pay costs incurred by the United States Environmental Protection Agency (“USEPA”) responding to environmental contamination at the Site, in amounts approximating $8.6 million, plus unspecified future environmental costs. We understand that the USEPA’s costs now exceed $13 million, but are not expected to increase significantly in the future. Neither USEPA nor any other governmental authority has asserted any claim against us on account of these matters. The plaintiffs seek contribution from us and other defendants and a declaration that the company and the other defendants are responsible for environmental response costs under environmental laws and certain agreements. The plaintiffs also assert that we tortiously interfered with contracts between them and other defendants in the case and diverted assets to prevent the plaintiffs from being paid monies owed to them. We do not believe we have any liability for the matters described in this litigation and intend to defend ourselves vigorously. In addition, we have an indemnification agreement with certain other defendants in the litigation pursuant to which the other defendants agreed to indemnify us for any damages we incur as a result of the environmental matters that are the subject of this litigation, although it is unclear whether the indemnitors have significant assets at this time. Since the loss is not probable and cannot be estimated, no reserve has been recorded. Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Other Litigation The company is involved in legal proceedings and claims which have arisen in the ordinary course of business. These actions, when ultimately concluded and settled, will not, in the opinion of management, have a material adverse effect upon the financial position, results of operations or cash flows of the company. Purchase Commitments At JanuaryJuly 29, 2012, and May 1, 2011,April 29, 2012, we had open purchase commitments to acquire equipment for our mattress fabrics segment totaling $1.4$766,000 and $1.2 million, respectively. Culp, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Joint Product, Sales and $980,000, respectively.Marketing Agreement In order to expand our product offerings and keep pace with the changing customer demand trends within the bedding industry, we entered into a joint product development, sales and marketing agreement with A. Lava & Son Co. (Lava) on May 21, 2012. This agreement forms a new business named Culp-Lava Applied Sewn Solutions (Culp-Lava) and will provide us the opportunity to enter the business of designing, producing, and marketing sewn mattress covers. As we enter the business of sewn mattress covers, we will be able to leverage our design capabilities and expand our product offerings from mattress fabrics to finished covers. In connection with this agreement, Lava will provide us with technical assistance and know-how for the start-up of the business and will work with us on the design, sales and marketing of sewn mattress covers. As part of the agreement, the new business will be fully funded and 100% owned by us. We have established a manufacturing facility located in Stokesdale, North Carolina that is adjacent to our mattress fabric headquarters, providing favorable operating synergies with management and production in the same location. As a result, we will have two mirrored manufacturing facilities to serve our customer base and meet current and expected demand trends in the bedding industry. We will have responsibility for all operating control of the new business, including capital expenditures and production and operating costs. We are projecting our capital investment to be approximately $1.0 million over the next four years. Lava is not required to invest capital into Culp-Lava. We are on schedule to commence production late in the second quarter of fiscal 2013 and plan to add up to 129 employees at full capacity.
18.16. Common Stock Repurchase Program
On June 16, 2011,13, 2012, we announced that our board of directors authorized the expenditure ofapproved authorization for us to acquire up to $5.0 million of our common stock. This action replaced prior authorizations to acquire up to $7.0 million of our common stock in fiscal 2012, of which $5.4 million had been used during the fiscal year.
During the three-months ended July 29, 2012, we purchased 47,296 shares of our common stock at a cost of $470,000. In August 2012, we reached the authorized amount of $5.0 million, as we purchased an additional 455,299 shares of our common stock at a cost of approximately $4.5 million. Since our common stock repurchase program was implemented in fiscal 2012, we have repurchased 1.1 million shares of common stock at a cost of $10.4 million.
On August 29, 2012, we announced that our board of directors approved a new authorization for the repurchase of sharesus to acquire up to $2.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, and through plans established under the Securities Exchange Act Rule 10b5-1.10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities.
17. Quarterly Dividend Program
On August 29, 2011,June 13, 2012, we announced that our board of directors authorizedapproved the expenditurepayment of an additional $2.0 million, for a total authorizationcash dividend of $7.0 million, for$0.03 per share in the repurchasefirst quarter of sharesfiscal 2013, to shareholders of our common stock.record as of the close of business on July 2, 2012. This cash dividend payment totaled $381,000.
We purchased 624,459 sharesexpect to pay a cash dividend each quarter of our common stockfiscal 2013, with expected remaining payment dates in October, January, and April. Future dividend payments are subject to Board approval and may be adjusted at a cost of $5.4 million for the nine-month period ending January 29, 2012.Board’s discretion as business needs or market conditions change.
This report and the exhibits attached hereto contain “forward-looking statements” within the meaning of the federal securities laws, including the Private Securities Litigation Reform Act of 1995 (Section 27A of the Securities Act of 1933 and Section 27A of the Securities and Exchange Act of 1934). Such statements are inherently subject to risks and uncertainties. Further, forward looking statements are intended to speak only as of the date on which they are made, and we disclaim any duty to update such statements. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often but not always characterized by qualifying words such as “expect,” “believe,” “estimate,” “plan” and “project” and their derivatives, and include but are not limited to statements about expectations for our future operations, production levels, sales, gross profit margins, operating income, SG&A or other expenses, earnings, and other performance or liquidity measures, as well as any statements regarding future economic or industry trends or future developments. Factors that could influence the matters discussed in such statements include the level of housing starts and sales of existing homes, consumer confidence, trends in disposable income, and general economic conditions. Decreases in these economic indicators could have a negative effect on our business and prospects. Likewise, increases in interest rates, particularly home mortgage rates, and increases in consumer debt or the general rate of inflation, could affect us adversely. Changes in consumer tastes or preferences toward products not produced by us could erode demand for our products. Changes in the value of the U.S. dollar versus other currencies couldcan affect our financial results because a significant portion of our operations are located outside the United States. Strengthening of the U.S. dollar against other currencies could make our products less competitive on the basis of price in markets outside the United States, and strengthening of currencies in Canada China, and EuropeChina can have a negative impact on our sales of products produced in those places. Also, economic and political instability in international areas could affect our operations or sources of goods in those areas, as well as demand for our products in international markets. Further information about these factors, as well as other factors that could affect our future operations or financial results and the matters discussed in forward-looking statements are included in Item 1A “Risk Factors” section in our Form 10-K filed with the Securities and Exchange Commission on July 15, 201112, 2012 for the fiscal year ended May 1, 2011.April 29, 2012.
ITEM 2. | | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations
The following analysis of financial condition and results of operations should be read in conjunction with the Financial Statements and Notes and other exhibits included elsewhere in this report.
GeneralOverview
Our fiscal year is the 52 or 53 week period ending on the Sunday closest to April 30. The ninethree months ended JanuaryJuly 29, 2012, and January 30,July 31, 2011, represent 3913 week periods, respectively. Our operations are classified into two business segments: mattress fabrics and upholstery fabrics. The mattress fabrics segment manufactures, sources and sells fabrics to bedding manufacturers. The upholstery fabrics segment sources, manufactures and sells fabrics primarily to residential and commercial (contract) furniture manufacturers.
We evaluate the operating performance of our segments based upon income (loss) from operations before restructuring and related charges or credits, certain unallocated corporate expenses and other non-recurring items. Cost of sales in both segments include costs to manufacture or source our products, including costs such as raw material and finished goods purchases, direct and indirect labor, overhead and incoming freight charges. Unallocated corporate expenses represent primarily compensation and benefits for certain executive officers and all costs related to being a public company.
Executive Summary
NetWe reported net sales were $60.5of $69.2 million for the thirdfirst quarter of fiscal 2012,2013, an increase of 17%15%, compared with $51.7$60.3 million for the thirdfirst quarter of fiscal 2011. Net2012. This level of sales were $178.7 millionrepresents our highest total net sales for a first quarter period in eight years. These results reflect better than expected sales momentum through the ninesummer months ended January 29, 2012, an increase of 14% compared with $156.4 million for the nine months ended January 30, 2011. Both ofin both our business segments had sales gains, in spite of an uncertain global economic environment. In addition, our third quarter is typically a slower quarterly period duesegments. We continued to the scheduled holiday plant shutdowns. We believe these trends reflect the success of our various sales and marketing initiatives along with the benefits ofhave favorable customer response to our design capabilities and our diverse product line. Our global manufacturing platform.platform has enhanced our ability to develop new products and meet the changing style demands of our customers.
IncomeWe reported income before income taxes was $2.9of $5.4 million in the thirdfirst quarter of fiscal 2012 and2013, an increase of 81%, compared with $3.0 million for the thirdfirst quarter of fiscal 2011. Income before income taxes was $8.7 million for the nine months ended January 29, 2012, a decrease of 16% compared with $10.4 million for the nine months ended January 30, 2011. Despite2012. This increase is due to the increase in net sales income before income taxes declined primarily becausenoted above and the stabilization of significant increases in our raw material costs in both of our business segments andas compared to previous quarters. This increase was partially offset by higher selling, general, and administrative expenses (SG&A) primarily in the upholstery fabrics segment. To help offsetfirst quarter of fiscal 2013 compared to the first quarter of fiscal 2012. SG&A primarily increased raw material costs,due to higher incentive compensation accruals reflecting stronger financial results in relation to pre-established performance targets.
As we move into the second quarter, we have implemented customer price increasesexperienced a seasonal slowdown, leading us to believe that the growth rate experienced in both business segments. These price increases, however, arethe first quarter of this year will not expected to fully restore our reduced operating profit margins. Whilecontinue into the increased raw material costs affected our operating margins for year to date fiscal 2012, we are encouraged that raw material prices have recently stabilized for both of our business segments.second quarter.
We reported net income of $3.5 million, or $0.28 per diluted share, in the first quarter of fiscal 2013, compared with net income of $1.8 million, or $0.14 per diluted share, in the thirdfirst quarter of fiscal 2012 compared with net income of $2.4 million, or $0.18 per diluted share in the third quarter of fiscal 2011.2012. Net income for the thirdfirst quarter of fiscal 2012 includes2013 included income tax expense of $1.8 million, or 34.4% of income before income taxes, compared with income tax expense of $1.1 million, and netor 38.6% of income before income taxes, for the thirdfirst quarter of fiscal 2011 includes income tax expense of $483,000. Net income was $9.9 million, or $0.76 per diluted share, for the nine months ended January 29, 2012, compared with $10.2 million, or $0.77 per diluted share, for the nine months ended January 30, 2011. Net income for the nine months ended January 29, 2012 includes an income tax benefit of $1.2 million and net income for the nine months ended January 30, 2011 includes income tax expense of $213,000. The income tax benefit of $1.2 million for the nine months ended January 29, 2012, includes a $4.4 million non-cash reversal during the second quarter of fiscal 2012 for a portion of the valuation allowance associated with our U.S. operations. The income tax expense of $213,000 for the nine months ended January 30, 2011 includes a $1.3 million non-cash reversal during the second quarter of fiscal 2011 for the entire valuation allowance associated with our China operations.2012.
At JanuaryJuly 29, 2012, our cash and cash equivalents and short-term investments totaled $23.6$27.1 million exceedingand exceeded our total debt (current maturities of long-term debt, long-term debt, and line of credit) of $10.1$9.9 million. We madeOn August 11, 2012, we paid our first $2.2 million scheduled principal payment on our long-term debt during the second quarter of fiscal 2012. Our next scheduledrequired annual principal payment of $2.2 million is due in August 2012.associated with our unsecured senior term notes, thus further lowering our total debt by that amount.
On January 17,June 13, 2012, we entered into an unsecured credit agreement associated withannounced that our operations in Poland that provides for a line of credit up to 6.8 million Polish Zloty (approximately $2.1 million USD at January 29, 2012). This agreement expires on January 15, 2013 and bears interest at the Warsaw Interbank Offered Rate (“WIBOR”) plus 2% (applicable interest rate of 6.89% at January 29, 2012). At January 29, 2012, $875,000 (2.8 million Polish Zloty) was outstanding under this agreement. In connection with the unsecured credit agreement associated with our operations in Poland, we entered into an eighteenth amendment of our U.S. unsecured credit agreement to decrease our revolving loan commitment from $10.0 million to $7.6 million.
Our board of directors has authorized the expenditureapproved authorization for us to acquire up to $5.0 million of our common stock. This action replaced prior authorizations to acquire up to $7.0 million of our common stock in fiscal 2012 of which $5.4 million had been used during the fiscal year. During the three-months ended July 29, 2012, we purchased 47,296 shares of our common stock at a cost of $470,000. In August 2012, we reached the authorized amount of $5.0 million, as we purchased an additional 455,299 shares of our common stock at a cost of approximately $4.5 million. Since our common stock repurchase program was implemented in fiscal 2012, we have repurchased 1.1 million shares of common stock at a cost of $10.4 million.
On August 29, 2012, we announced that our board of directors approved a new authorization for the repurchase of sharesus to acquire up to $2.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, and through plans established under the Securities Exchange Act Rule 10b5-1.10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities. Since On June 13, 2012 we announced that our board of directors approved the initial authorizationpayment of this program on June 16, 2011, we have repurchased 624,459 sharesa cash dividend of our common stock at a cost of $5.4 million, through$0.03 per share in the thirdfirst quarter of fiscal 2013, to shareholders of record as of the close of business on July 2, 2012. This cash dividend payment totaled $381,000. We expect to pay a cash dividend every quarter of fiscal 2013, with expected remaining payment dates in October, January, and April. Future dividend payments are subject to Board approval and may be adjusted at the Board’s discretion as business needs or market conditions change.
Segment Analysis
The following tables set forth the company’s statement of operations by segment for the three and nine months ended JanuaryJuly 29, 2012, and January 30,July 31, 2011.
CULP, INC. | STATEMENTS OF OPERATIONS BY SEGMENT | FOR THE THREE MONTHS ENDED JANUARY 29, 2012 AND JANUARY 30, 2011 | (Unaudited) | | | (Amounts in thousands) |
CULP, INC. | STATEMENTS OF OPERATIONS BY SEGMENT | FOR THE THREE MONTHS ENDED JULY 29, 2012 AND JULY 31, 2011 | (Unaudited) | | | | | | | | | | | | | | | | | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | THREE MONTHS ENDED | | | | | | | | | | | | | | | | | | | Amounts | | | | | Percent of Total Sales | | | July 29, | | | July 31, | | | % Over | | July 29, | | July 31, | Net Sales by Segment | | 2012 | | | 2011 | | | (Under) | | 2012 | | 2011 | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 37,964 | | | | 32,170 | | | | 18.0 | % | | | 54.9 | % | | | 53.4 | % | Upholstery Fabrics | | | 31,220 | | | | 28,100 | | | | 11.1 | % | | | 45.1 | % | | | 46.6 | % | | | | | | | | | | | | | | | | | | | | | | Net Sales | | $ | 69,184 | | | | 60,270 | | | | 14.8 | % | | | 100.0 | % | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit by Segment | | | | | | | | | | | | | | Gross Profit Margin | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 7,622 | | | | 5,137 | | | | 48.4 | % | | | 20.1 | % | | | 16.0 | % | Upholstery Fabrics | | | 5,498 | | | | 3,741 | | | | 47.0 | % | | | 17.6 | % | | | 13.3 | % | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | | 13,120 | | | | 8,878 | | | | 47.8 | % | | | 19.0 | % | | | 14.7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, General and Administrative expenses by Segment | | | | | | | | | | | | | | Percent of Sales | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 2,391 | | | | 1,992 | | | | 20.0 | % | | | 6.3 | % | | | 6.2 | % | Upholstery Fabrics | | | 3,340 | | | | 2,766 | | | | 20.8 | % | | | 10.7 | % | | | 9.8 | % | Unallocated Corporate expenses | | | 1,910 | | | | 999 | | | | 91.2 | % | | | 2.8 | % | | | 1.7 | % | Selling, general, and administrative expenses | | | 7,641 | | | | 5,757 | | | | 32.7 | % | | | 11.0 | % | | | 9.6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Income (loss) by Segment | | | | | | | | | | | | | | Operating Income (Loss) Margin | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 5,230 | | | | 3,146 | | | | 66.2 | % | | | 13.8 | % | | | 9.8 | % | Upholstery Fabrics | | | 2,159 | | | | 974 | | | | 121.7 | % | | | 6.9 | % | | | 3.5 | % | Unallocated corporate expenses | | | (1,910 | ) | | | (999 | ) | | | 91.2 | % | | | (2.8 | ) % | | | (1.7 | ) % | | | | | | | | | | | | | | | | | | | | | | Operating income | | | 5,479 | | | | 3,121 | | | | 75.6 | % | | | 7.9 | % | | | 5.2 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation by Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 1,092 | | | | 1,029 | | | | 6.1 | % | | | | | | | | | Upholstery Fabrics | | | 162 | | | | 158 | | | | 2.5 | % | | | | | | | | | Subtotal | | | 1,254 | | | | 1,187 | | | | 5.6 | % | | | | | | | | |
| | THREE MONTHS ENDED | | | | | | | | | | | | | | | | | | | | | | | Amounts | | | | | | | | Percent of Total Sales | | | January 29, | | | | January 30, | | | | | % Over | | January 29, | | January 30, | Net Sales by Segment | | 2012 | | | | 2011 | | | | | (Under) | | 2012 | | 2011 | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 34,719 | | | | | 27,991 | | | | | | 24.0 | % | | | 57.4 | | % | | | 54.2 | % | Upholstery Fabrics | | | 25,731 | | | | | 23,661 | | | | | | 8.7 | % | | | 42.6 | | % | | | 45.8 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Net Sales | | $ | 60,450 | | | | | 51,652 | | | | | | 17.0 | % | | | 100.0 | | % | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit by Segment | | | | | | | | | | | | | | | | | Gross Profit Margin | | | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 5,104 | | | | | 4,596 | | | | | | 11.1 | % | | | 14.7 | | % | | | 16.4 | % | Upholstery Fabrics | | | 3,407 | | | | | 3,643 | | | | | | (6.5 | ) % | | | 13.2 | | % | | | 15.4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | | 8,511 | | | | | 8,239 | | | | | | 3.3 | % | | | 14.1 | | % | | | 16.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, General and Administrative expenses by Segment | | | | | | | | | | | | | | | | | Percent of Sales | | | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 1,970 | | | | | 1,780 | | | | | | 10.7 | % | | | 5.7 | | % | | | 6.4 | % | Upholstery Fabrics | | | 2,653 | | | | | 2,517 | | | | | | 5.4 | % | | | 10.3 | | % | | | 10.6 | % | Unallocated Corporate expenses | | | 895 | | | | | 832 | | | | | | 7.6 | % | | | 1.5 | | % | | | 1.6 | % | Selling, General and Administrative expenses | | | 5,518 | | | | | 5,129 | | | | | | 7.6 | % | | | 9.1 | | % | | | 9.9 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Income (loss) by Segment | | | | | | | | | | | | | | | | | Operating Income (Loss) Margin | | | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 3,134 | | | | | 2,816 | | | | | | 11.3 | % | | | 9.0 | | % | | | 10.1 | % | Upholstery Fabrics | | | 754 | | | | | 1,126 | | | | | | (33.0 | ) % | | | 2.9 | | % | | | 4.8 | % | Unallocated corporate expenses | | | (895 | ) | | | | (832 | ) | | | | | 7.6 | % | | | (1.5 | ) | % | | | (1.6 | ) % | | | | | | | | | | | | | | | | | | | | | | | | | | Subtotal | | | 2,993 | | | | | 3,110 | | | | | | (3.8 | ) % | | | 5.0 | | % | | | 6.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Restructuring and related charges | | | - | | | | | (7 | ) | | (1) | | | (100.0 | ) % | | | 0.0 | | % | | | (0.0 | ) % | | | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | | 2,993 | | | | | 3,103 | | | | | | (3.5 | ) % | | | 5.0 | | % | | | 6.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation by Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 1,081 | | | | | 974 | | | | | | 11.0 | % | | | | | | | | | | Upholstery Fabrics | | | 133 | | | | | 134 | | | | | | (0.7 | ) % | | | | | | | | | | Subtotal | | $ | 1,214 | | | | | 1,108 | | | | | | 9.6 | % | | | | | | | | | |
Notes:
(1) The $7 restructuring charge represents $17 for lease termination and other exit costs offset by a credit of $10 for sales proceeds received on equipment with no carrying value.
CULP, INC. | STATEMENTS OF OPERATIONS BY SEGMENT | FOR THE NINE MONTHS ENDED JANUARY 29, 2012 AND JANUARY 30, 2011 | (Unaudited) | | | (Amounts in thousands) |
| | NINE MONTHS ENDED | | | | | | | | | | | | | | | | | | | | | | Amounts | | | | | | Percent of Total Sales | | | January 29, | | | | | January 30, | | | % Over | | January 29, | | January 30, | Net Sales by Segment | | 2012 | | | | | 2011 | | | (Under) | | 2012 | | 2011 | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 102,130 | | | | | | 87,244 | | | | 17.1 | % | | | 57.1 | % | | | 55.8 | % | Upholstery Fabrics | | | 76,603 | | | | | | 69,199 | | | | 10.7 | % | | | 42.9 | % | | | 44.2 | % | | | | | | | | | | | | | | | | | | | | | | | | Net Sales | | $ | 178,733 | | | | | | 156,443 | | | | 14.2 | % | | | 100.0 | % | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit by Segment | | | | | | | | | | | | | | | | Gross Profit Margin | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 16,180 | | | | | | 15,616 | | | | 3.6 | % | | | 15.8 | % | | | 17.9 | % | Upholstery Fabrics | | | 9,932 | | | | | | 9,941 | | | | (0.1 | ) % | | | 13.0 | % | | | 14.4 | % | Subtotal | | | 26,112 | | | | | | 25,557 | | | | 2.2 | % | | | 14.6 | % | | | 16.3 | % | | | | | | | | | | | | | | | | | | | | | | | | Other non-recurring charges | | | (77 | ) | | (1) | | | - | | | | 100.0 | % | | | (0.0 | ) % | | | 0.0 | % | | | | | | | | | | | | | | | | | | | | | | | | Gross Profit | | | 26,035 | | | | | | 25,557 | | | | 1.9 | % | | | 14.6 | % | | | 16.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Selling, General and Administrative expenses by Segment | | | | | | | | | | | | | | | | Percent of Sales | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 6,094 | | | | | | 5,480 | | | | 11.2 | % | | | 6.0 | % | | | 6.3 | % | Upholstery Fabrics | | | 8,186 | | | | | | 6,394 | | | | 28.0 | % | | | 10.7 | % | | | 9.2 | % | Unallocated Corporate expenses | | | 2,715 | | | | | | 2,670 | | | | 1.7 | % | | | 1.5 | % | | | 1.7 | % | Selling, General, and Administrative expenses | | | 16,995 | | | | | | 14,544 | | | | 16.9 | % | | | 9.5 | % | | | 9.3 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Operating Income (loss) by Segment | | | | | | | | | | | | | | | | Operating Income (Loss) Margin | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 10,087 | | | | | | 10,136 | | | | (0.5 | ) % | | | 9.9 | % | | | 11.6 | % | Upholstery Fabrics | | | 1,745 | | | | | | 3,547 | | | | (50.8 | ) % | | | 2.3 | % | | | 5.1 | % | Unallocated corporate expenses | | | (2,715 | ) | | | | | (2,670 | ) | | | 1.7 | % | | | (1.5 | ) % | | | (1.7 | ) % | Subtotal | | | 9,117 | | | | | | 11,013 | | | | (17.2 | ) % | | | 5.1 | % | | | 7.0 | % | | | | | | | | | | | | | | | | | | | | | | | | Other non-recurring charges | | | (77 | ) | | (1) | | | - | | | | 100.0 | % | | | (0.0 | ) % | | | 0.0 | % | | | | | | | | | | | | | | | | | | | | | | | | Operating income | | | 9,040 | | | | | | 11,013 | | | | (17.9 | ) % | | | 5.1 | % | | | 7.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation by Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Mattress Fabrics | | $ | 3,163 | | | | | | 2,795 | | | | 13.2 | % | | | | | | | | | Upholstery Fabrics | | | 437 | | | | | | 410 | | | | 6.6 | % | | | | | | | | | Subtotal | | | 3,600 | | | | | | 3,205 | | | | 12.3 | % | | | | | | | | |
Notes:
(1) Our other non-recurring charges represent employee termination benefits associated with our Anderson, SC plant facility.
Three and Nine months ended JanuaryJuly 29, 2012 compared with the Three and Nine Months ended January 30,July 31, 2011
Mattress Fabrics Segment
Net Sales
NetMattress fabrics sales for the first quarter of fiscal 2013 were $34.7$38.0 million, an increase of 18% compared with $32.2 million for the thirdfirst quarter of fiscal 2012, an increase of 24% compared with $28.0 million for the third quarter of fiscal 2011. Net sales were $102.1 million for the nine months ended January 29, 2012, an increase of 17% compared with $87.2 million for the nine months ended January 30, 2011.This2012. We believe this increase in net sales was primarily due to improved industry demand and our sales and marketing initiatives. We have been able to respond to this increased demand as we are benefitting from our recent investments in production facilities that have expanded our internal capacity. The bedding industry is evolving into a more decorative business with increased product diversity andreflects growing consumer demand for better bedding and a higher quality mattress fabric. Our expandedfabrics. As the mattress industry continues to evolve into a more decorative business, our many years of planned capital investments have positioned us to meet this demand with an extensive manufacturing platform has allowedand flexible capacity to produce an innovative and diverse line of products.
Sales and Marketing Initiatives In order to expand our product offerings and keep pace with the changing customer demand trends within the bedding industry, we entered into a joint product development, sales and marketing agreement with A. Lava & Son Co. (Lava) on May 21, 2012. This agreement forms a new business named Culp-Lava Applied Sewn Solutions (Culp-Lava) and will provide us the opportunity to better serve our customers by providing them with a diverse product line in all major product categories. This product diversity, along withenter the business of designing, producing, and marketing sewn mattress covers. As we enter the business of sewn mattress covers, we will be able to leverage our design capabilities and expand our product innovation, has created additionalofferings from mattress fabrics to finished covers. In connection with this agreement, Lava will provide us with technical assistance and know-how for the start-up of the business and will work with us on the design, sales opportunitiesand marketing of sewn mattress covers. As part of the agreement, the new business will be fully funded and 100% owned by us. We have established a manufacturing facility located in Stokesdale, North Carolina that is adjacent to our mattress fabric headquarters, providing favorable operating synergies with customers who are leading suppliersmanagement and production in the same location. As a result, we will have two mirrored manufacturing facilities to serve our customer base and meet current and expected demand trends in the bedding industry. The increase in net sales also reflects price increases we implemented startingWe will have responsibility for all operating control of the new business, including capital expenditures and production and operating costs. We are projecting our capital investment to be approximately $1.0 million over the next four years. Lava is not required to invest capital into Culp-Lava. We are on schedule to commence production late in the fourthsecond quarter of fiscal 20112013 and plan to partially offset the increased raw material costs noted below.add up to 129 employees at full capacity.
Gross Profit and Operating Income
For the thirdfirst quarter of fiscal 2012,2013, the mattress fabrics segment reported a gross profit of $7.6 million, or 20% of net sales, compared with $5.1 million, compared with $4.6 million for the third quarter of fiscal 2011. Gross profit margins were 14.7% and 16.4%or 16% of net sales, for the thirdfirst quarter of fiscal 2012 and 2011, respectively. Selling, general, and administrative expenses (SG&A)2012. SG&A for the thirdfirst quarter of fiscal 2012 were $2.02013 was $2.4 million or 6%6.3% of net sales, compared with $1.8$2.0 million, or 6%6.2% of net sales for the thirdfirst quarter of fiscal 2011.2012. Operating income was $5.2 million for the thirdfirst quarter of fiscal 2012 was $3.1 million2013 compared with $2.8$3.1 million for the thirdfirst quarter of fiscal 2011.2012. Operating margins were 9%14% and 10% of net sales in the thirdfirst quarter of fiscal 2013 and 2012, and 2011, respectively.
For the nine months ended January 29, 2012, gross profit was $16.2 million, compared with $15.6 million for the nine months ended January 30, 2011. Gross profit margins were 16% and 18% of net sales for the nine months ended January 29, 2012, and January 30, 2011, respectively. SG&A for the nine months ended January 29, 2012 were $6.1 million, or 6% of net sales, compared with $5.5 million, or 6% of net sales, for the nine months ended January 30, 2011. Operating income was $10.1 million for the nine months ended January 29, 2012 and January 30, 2011, respectively. Operating margins were 10% and 12% of net sales for the nine months ended January 29, 2012 and January 30, 2011, respectively.
Although we are pleased with theOur increase in netprofitability represents higher sales noted above,volume and favorable product mix, operating efficiencies from our gross profitmanufacturing platform, and operating margins were affected by higherthe recent stabilization of raw material costs, and customer pricing pressure, and scheduled holiday plant shutdowns.costs. We are encouraged that raw material costs have decreased from their peak levels and seemalso continued to have stabilized. However, we are still experiencing higher raw material costs as compared to prior year periods. As a result, we implemented customer price increases starting in the fourth quarter of fiscal 2011. These customer price increases, however, are not expected to fully restore our reduced operating profit margins. In addition, we have worked diligently to manage our production costs and identifymerchandise new products with alternative sources of yarns and raw materials without comprisingcompromising quality or production efficiency.and value for our customers. Our profitability also reflects increased SG&A due to higher incentive compensation accruals reflecting stronger financial results in relation to pre-established performance targets.
Segment assets
Segment assets consist of accounts receivable, inventory, assets held for sale, a non-compete agreementsagreement associated with the certain acquisitions,an acquisition, goodwill, and property, plant, and equipment.
As of JanuaryJuly 29, 2012, accounts receivable and inventory totaled $28.6$36.7 million compared with $25.5$29.9 million at May 1, 2011.April 29, 2012. This increase is primarily due to increasedreflects the 18% increase in net sales from increased customer demand. As noted above, net sales for our mattress fabrics segment increased 17% forin the nine months ended January 29, 2012first quarter of fiscal 2013 compared with the nine months ended January 30, 2011.first quarter of fiscal 2012.
As of JanuaryJuly 29, 2012, property, plant and equipment totaled $28.2$29.1 million compared with $28.6$29.2 million at May 1, 2011.April 29, 2012. The $28.2$29.1 million at JanuaryJuly 29, 2012, represents property, plant, and equipment of $19.8$21.3 million and $8.4$7.8 million located in the U.S. and Canada, respectively. The $28.6$29.2 million at May 1, 2011,April 29, 2012 represents property, plant, and equipment of $20.0$21.2 million and $8.6$8.0 million located in the U.S. and Canada, respectively. The decrease ofchange in this segment’s property, plant, and equipment reflectsbalance at July 29, 2012 compared with April 29, 2012, is due to depreciation expense of $1.1 million offset by capital spending of $2.8 million offset by depreciation expense of $3.2$1.0 million.
As of JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, the carrying value of the segment’s goodwill was $11.5 million. As of JanuaryJuly 29, 2012, and May 1, 2011,April 29, 2012, the carrying value of the non-compete agreements were $369,000$295,000 and $480,000,$333,000, respectively. The decrease in the carrying value of the non-compete agreements is primarily due to amortization expense for the nine months ended January 29, 2012. At JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012 assets held for sale totaled $14,000.$15,000.
Upholstery Fabrics Segment
Net Sales
Upholstery fabric net sales (which include both fabric and cut and sewn kits) for the thirdfirst quarter of fiscal 20122013 were $25.7$31.2 million, a 9%an 11% increase compared with $23.7$28.1 million in the thirdfirst quarter of fiscal 2011.2012. Net sales of upholstery fabrics produced outside our U.S. manufacturing operations were $22.6$27.6 million in the thirdfirst quarter of fiscal 2012, a 9%2013, an 11% increase compared with $20.7$24.8 million in the thirdfirst quarter of fiscal 2011.2012. Net sales of upholstery fabrics produced by our U.S. manufacturing operations were $3.1$3.6 million in the thirdfirst quarter of fiscal 2012, a 6% increase2013 compared with $2.9$3.3 million in the thirdfirst quarter of fiscal 2011.2012. These results reflect a favorable response to our innovative designs and new product introductions from key customers.
Upholstery fabric net sales for the nine months ended January 29, 2012, were $76.6 million, an 11% increase compared with $69.2 million for the nine months ended January 30, 2011. Net sales for upholstery fabrics produced outside our U.S. manufacturing operations were $67.3 million for the nine months ended January 29, 2012, a 12% increase compared with $60.0 million for the nine months ended January 30, 2011. Net sales of upholstery fabrics produced by our U.S. manufacturing operations were $9.3 million for the nine months ended January 29, 2012, a 1% increase compared with $9.2 million for the nine months ended January 30, 2011.
We are encouraged by the favorable sales trends in our upholstery fabrics business in spite of the continued weakness in the U.S. housing market and the uncertain global economic environment. Our increase in net sales was primarily driven by the growth of our China produced fabrics. China produced fabrics account for 86% of our total upholstery fabric sales. Our China platform, now in its tenth year of operation, plays a major role in our global sales efforts and we are pleased with increased sales to keythe increasing level of fabric placements with customers located in the U.S., the local China, market, and other international customers. This increase in net sales also reflects price increases we implemented starting in the fourth quarter of fiscal 2011 to partially offset increased raw material costs. In addition, the increase reflects the third full quarter of sales from our European operation located in Poland. This operation was established in the fourth quarter of fiscal 2011 and is still in the early stages of development. We are encouraged by the initial sales trends and the interest level from several of the largest furniture manufacturers and retailers in Europe.countries.
Gross Profit and Operating Income
For the third quarter of fiscal 2012, theThe upholstery fabrics segment reported a gross profit of $3.4$5.5 million, compared with $3.6 million foror 18% of net sales, in the thirdfirst quarter of fiscal 2011. Gross profit margins were2013 compared with $3.7 million, or 13% and 15% forof net sales, in the third quartersfirst quarter of fiscal 2012 and 2011, respectively.2012. SG&A for the thirdfirst quarter of fiscal 2012 were $2.72013 was $3.3 million, or 11% of net sales compared with $2.5$2.8 million, foror 10% of net sales in the thirdfirst quarter of fiscal 2011.2012. Operating income forwas $2.2 million in the thirdfirst quarter of fiscal 2012 was $754,0002013 compared with operating income of $1.1 million$974,000 in the third quarter of fiscal 2011. Operating margins were 3% and 5% for the third quarters of fiscal 2012 and 2011, respectively.
For the nine months ended January 29, 2012 and January 30, 2011, the upholstery fabrics segment reported a gross profit of $9.9 million. Gross profit margins were 13.0% and 14.4% for the nine months ended January 29, 2012 and January 30, 2011, respectively. SG&A for the nine months ended January 29, 2012 were $8.2 million, a 28% increase compared with $6.4 million for the nine months ended January 30, 2011. Operating income for the nine months ended January 29, 2012 was $1.7 million, a decrease of 51% compared with $3.5 million for the nine months ended January 30, 2011. Operating margins were 2% and 5% for the nine months ended January 29, 2012 and January 30, 2011, respectively.
Although we are pleased with the increase in net sales noted above, our upholstery fabric results were affected by higher raw material costs and unfavorable foreign currency fluctuations in relation to the U.S. dollar associated with our operations located in China. As a result, we implemented customer price increases starting in the fourth quarter of fiscal 2011 and in addition are expected to implement a price increase late in the fourthfirst quarter of fiscal 2012. These customer price increases, however, are not expected to fully restore our reduced operating profit margins. While we are encouraged that raw material costs have stabilized, our production costs are still higher in comparison to the same time a year ago. In order to reduce our production costs, we have utilized our design capabilities and manufacturing platform to introduce new products that offer excellent quality and value at better margins.
The adverse trends in gross profit and operating incomeOperating margins were also affected by lower profitability in our U.S. velvet products line6.9% and 3.5% of net sales in the first half of fiscal 2012. The lower profitability in our U.S. velvet products line was due to both higher raw material costs and lower demand in this product category. Because of these trends, we implemented customer price increases and took steps to align our velvet capacity with expected demand. As a result of these initiatives, our U.S. upholstery operation returned to profitability during the third quarter of fiscal 2012. Going forward, we are encouraged about2013 and 2012, respectively. Our increase in profitability represents higher sales volume, operating efficiencies from both our China and domestic manufacturing operations, and the opportunity to increase our net salesrecent stabilization of woven textured products, which we started manufacturing at this U.S. facility just over two years ago.raw material costs. Our costs to produce this product category in the U.S. are now comparable to our production costs in China.
The decline in operating income wasprofitability also reflects increased SG&A due to a significantan increase in SG&A in fiscal 2012. This increase was primarily due to start-up expenses associated with our Culp Europe operations that did not occur in the nine month period ending January 30, 2011. In addition, SG&A were lower for the nine month period ending January 30, 2011 due to (i) a decrease in incentive compensation accruals reflecting weakerstronger financial results in relation to pre-established performance targets and (ii) a decrease in bad debt expense reflecting a decrease in our consolidated accounts receivable balance, as well as management's assessment of estimated credit exposures within our accounts receivable portfolio. These decreases in SG&A in the nine months ending January 30, 2011 did not occur for the nine months ending January 29, 2012.
Segment Assetstargets.
We experienced sales and profit improvement during the first quarter of fiscal 2013 from our U.S. operations with increased demand for both velvet and woven texture fabrics. As a result of our efforts to improve productivity, we have a much more efficient operation with higher capacity utilization than a year ago. In addition, raw material costs have stabilized compared to previous quarters. We have continued to work to manage our production costs and introduce new value added products. All of these factors had a favorable impact on the performance of our U.S. upholstery fabric operation.
During the first quarter of fiscal 2013, we continued our efforts to develop our Culp Europe operation located in Poland. However, the ongoing uncertainties related to the European economy have affected our business. While this is creating challenges for the near term, we remain optimistic about the future opportunities for Culp Europe to enhance our global sales as business conditions improve.
Segment Assets Segment assets consist of accounts receivable, inventory, assets held for sale, and property, plant, and equipment. As of JanuaryJuly 29, 2012, accounts receivable and inventory totaled $26.3$27.3 million compared to $23.5$31.5 million at May 1, 2011.April 29, 2012. This increase is primarily duedecrease in accounts receivable and inventory reflect a projected decrease in this segment’s business in the second quarter of fiscal 2013 compared to increased net sales from increased customer demand. As noted above, net sales forthe first quarter of fiscal 2013 as a result of the cyclical nature of our upholstery fabrics segment increased 11% for the nine months ended January 29, 2012 compared with the nine months ended January 30, 2011.
Assets held for sale totaled $31,000 and $61,000 at January 29, 2012 and May 1, 2011, respectively.fabrics’ business.
As of JanuaryJuly 29, 2012 and April 29, 2012, property, plant, and equipment totaled $1.2 million compared with $967,000 at May 1, 2011.$1.1 million. The $1.2$1.1 million at JanuaryJuly 29, 2012, represents property, plant, and equipment located in the U.S. of $957,000,$788,000, located in China of $179,000,$175,000, and located in Poland of $110,000.$99,000. The $967,000$1.1 million at May 1, 2011,April 29, 2012, represents property, plant, and equipment located in the U.S. of $727,000,$837,000, located in China of $184,000,$183,000, and located in Poland of $56,000.$104,000.
Other Income Statement Categories
Selling, General and Administrative Expenses (SG&A)
For the third quarter of fiscal 2012, SG&ASelling, general, and administrative expenses (SG&A) for the company as a whole was $5.5 million compared with $5.1were $7.6 million for the thirdfirst quarter of fiscal 2011. For the nine months ended January 29, 2012, SG&A for the company as a whole was $17.0 million, an increase of 17%2013 compared with $14.5$5.8 million for the nine months ended January 30, 2011. These increases infirst quarter of fiscal 2012. As a percent of net sales, SG&A expenses were primarily due to start-up expenses associated with our Culp Europe operations that did not occur11.0% in the nine months ended January 30, 2011. In addition, SG&A were lowerfirst quarter of fiscal 2013 compared with 9.6% in the nine months ended January 30, 2011, due to (i) a decreasefirst quarter of fiscal 2012. This increase primarily represents an increase in stock based compensation which reflects a decrease in stock-based awards and the company's stock price, (ii) a decrease inour incentive compensation accruals reflecting weakerstronger financial results in relation to pre-established performance targets, and (iii) a decrease in bad debt expense reflecting a decrease in our consolidated accounts receivable balance, as well as management's assessment of estimated credit exposures within our accounts receivable portfolio. These decreases in SG&A in the nine months ended January 30, 2011, did not occur in the nine months ended January 29, 2012.targets.
Interest Expense (Income)
Interest expense for the thirdfirst quarter of fiscal 20122013 was $181,000$190,000 compared with $224,000to $220,000 for the thirdfirst quarter of fiscal 2011. Interest expense for the nine months ended January 29, 2012 was $590,000 compared with $659,000 for the nine months ended January 30, 2011.2012. This trend reflects lower outstanding balances on ourof long-term debt.
Interest income was $148,000$127,000 for the thirdfirst quarter of fiscal 20122013 compared with $57,000to $129,000 for the thirdfirst quarter of fiscal 2011. Interest income for the nine months ended January 29, 2012 was $387,000 compared with $144,000 for the nine months ended January 30, 2011. Our increase in interest income is primarily due to a higher rate of return on increased short-term investment balances in fiscal 2012 compared with the fiscal 2011.2012.
Other Expense
Other expense for the thirdfirst quarter of fiscal 20122013 was $83,000$44,000 compared with $28,000other expense of $65,000 for the thirdfirst quarter of fiscal 2011. Other expense was $132,000 for the nine months ended January 29, 2012 compared with $111,000 for the nine months ended January 30, 2011.This change primarily reflects fluctuations in the foreign currency exchange rates for our subsidiaries domiciled in Canada, China, and Poland and our ability to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in Canadian dollars, the Polish Zloty, and EUROs during fiscal 2012.
Income Taxes
Effective Income Tax Rate
We recorded an income tax benefitexpense of $1.2$1.8 million, or (13.4)%34.4% of income before income tax expense, for the ninethree month period ended JanuaryJuly 29, 2012, compared to income tax expense of $213,000,$1.1 million, or 2.1%38.6% of income before income tax expense, for the ninethree month period ended January 30,July 31, 2011. Our effective income tax rates for the ninethree month periods ended JanuaryJuly 29, 2012 and January 30,July 31, 2011 were based upon the estimated effective income tax rate applicable for the full year after giving effect to any significant items related specifically to interim periods. The effective income tax rate can be affected over the fiscal year by the mix and timing of actual earnings from our U.S. operations and foreign sources versus annual projections and changes in foreign currencies in relation to the U.S. dollar.
The effective income tax rate of (13.4)%expense for the ninethree month period ended JanuaryJuly 29, 2012 is different from the amount obtained by applying our statutory rate of 34% to income before income taxes for the following reasons:
| · | The effectiveincome tax rate increased 5% for an increase in unrecognized tax benefits. |
| · | The income tax rate was reduced by 50% for a reduction in our valuation allowance associated with our U.S. net deferred income tax assets. This 50% reduction in our effective income tax rate is due to a change in judgment about the realization of our U.S. net deferred income tax assets in future years. Since the realization of our U.S. net deferred income tax assets is a result of a change in judgment about future years, we recorded an income tax benefit of $4.4 million that represents a discrete event in which the full tax effects were recorded for the nine month period ending January 29, 2012. |
· | The effective income tax rate was reduced by 7%5% for taxable income subject to lower statutory income tax rates in foreign jurisdictions (Canada and China) compared with the statutory income tax rate of 34% for the United States. |
· | The effective income tax rate was increased 7% for an increase in unrecognized tax benefits. |
· | The effective income tax rate was increased by 2.6%0.4% for stock-based compensation and other miscellaneous items. |
The effective income tax rate of 2.1%expense for the ninethree month period ended January 30,July 31, 2011 iswas different from the amount obtained by applying our statutory rate of 34% to income before income taxes for the following reasons:
· | · | The effective income tax rate was reduced by 31%increased 11% for a reductionan increase in our valuation allowance recorded against our net deferred incomeunrecognized tax assets. Of this 31% reduction in our effective income tax rate, 19% and 12% pertain to our operations located in the U.S. and China, respectively. The 19% reduction in our effective income tax rate from our U.S. operations is due to the realization of our U.S. net deferred income tax assets from ordinary taxable income projected for fiscal 2011. Since the realization of our U.S. net deferred income tax assets were from ordinary taxable income in the current fiscal year, its tax effects are included in the computation of the annual effective tax rate for fiscal 2011. The 12% reduction in our effective income tax rate from our China operations is due to a change in judgment about the realization of our China net deferred income tax assets in future years. Since the realization of our China net deferred income tax assets is a result of a change in judgment about future years, we recorded an income tax benefit of $1.3 million that represents a discrete event in which the full tax effects were recorded for the nine month period ended January 30, 2011.benefits. |
| · | The income tax rate was reduced by 7% for taxable income subject to lower statutory income tax rates in foreign jurisdictions (Canada and China) compared with the statutory income tax rate of 34% for the United States. |
· | The income tax rate was reduced by 3% for adjustments made to our Canadian deferred income tax liabilities and associated with our election to file our Canadian income tax returns in U.S. dollars commencing with our fiscal 2011 tax year. Our Canadian income tax returns were filed in Canadian dollars for fiscal years prior to fiscal 2011. This adjustment totaled $315,000 and represented a discrete event in which the full tax effects were recorded during the nine-month period ended January 30, 2011. |
· | The income tax rate increased 9% for an increase in unrecognized tax benefits. This 9% increase in the income tax rate also includes an income tax benefit of $107,000 or a reduction in the income tax rate of 1% for the subsequent recognition of unrecognized tax benefits. This adjustment of $107,000 represents a discrete event in which the full tax effects were recorded during the nine month period ended January 30, 2011. |
· | The income tax rate was increased by 0.1%0.6% for stock-based compensation and other miscellaneous items. |
Deferred Income Taxes Summary In accordance with ASC Topic 740, we evaluate our deferred income taxes to determine if a valuation allowance is required. ASC Topic 740 requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard, with significant weight being given to evidence that can be objectively verified. Since the company operates in multiple jurisdictions, we assess the need for a valuation allowance on a jurisdiction-by-jurisdiction basis, taking into account the effects of local tax law. Based on our assessments at July 29, 2012 and April 29, 2012, we recorded a partial valuation allowance of $12.1 million and $16.4$12.8 million against our net deferred income tax assets associated with our U.S. operations at January 29, 2012, and May 1, 2011, respectively.operations. No valuation allowance has been recorded against our net deferred income tax assets associated with our operations located in China, Canada, and Europe.Poland. United States Our net deferred income tax asset regarding our U.S. operations primarily pertains to incurring significant U.S. pre-tax losses over prior fiscal years, with U.S. loss carryforwards totaling $60.0$59.9 million at May 1, 2011.April 29, 2012. Due to the favorable results of our multi-year restructuring process and profit improvements made in our upholstery fabric operations and key acquisitions and capital investments made for our mattress fabric segment, on a cumulative three-year basis ending May 1, 2011April 29, 2012 (the end of our fiscal 2011)2012), our U.S. operations earned a pre-tax income of $4.2$11.9 million. In addition, our U.S. operations reported a pre-tax income over fiscal years 2011 and 2010 totaling $8.2 million. We believe that fiscal years 2011 and 2010 are a more indicative measure of future pre-tax income as these fiscal years reflect operating performance afterThis trend continued into the cost savings of recent profit-improvement and restructuring plans were realized, as well as the full operational effects of the acquisitions associated with the company’s mattress fabric operations located in the U.S. This improvement continued through the secondfirst quarter of fiscal 2012,2013, as our U.S. operations earned a cumulative pretax income through the second quarter of fiscal 2012 and fiscal years 2011 and 2010 totaling $10.0$1.2 million. This continued earnings improvement from our U.S. operations was driven by our mattress fabric operations (which primarily resides in the U.S.). During the second quarter of fiscal 2012, our mattress fabric operations had net sales totaling $35.2 million compared with $28.3 million in the second quarter of fiscal 2011. In addition, our mattress fabric operations had operating income totaling $3.8 million in the second quarter of fiscal 2012 compared with $3.3 million in the second quarter of fiscal 2011. These improved results in the second quarter of fiscal 2012, which were better than expected, can be attributed to increased sales from our sales and marketing initiatives and new programs with customers who are leading suppliers in the bedding industry. Collectively, these developments increased our confidence in forecasting U.S. taxable income through fiscal 2014 in the second quarter of fiscal 2012. Based on the continuation of these trends in the third quarter of fiscal 2012, we maintain our position that we can forecast U.S. taxable income through 2014. During the third quarter of fiscal 2012, our mattress fabric operations had net sales totaling $34.7 million compared with $28.0 million in the third quarter of fiscal 2011. In addition, our mattress fabric operations had operating income totaling $3.1 million in the third quarter of fiscal 2012 compared with $2.8 million in the third quarter of fiscal 2011.
Although our U.S. operations have reported pre-tax income on a cumulative three-year basis and financial results continue to improve, the significant uncertainty in the overall economic climate has made it very difficultalso continued. As a result, to forecast medium and long-term financial results associated with our U.S. operations.has remained difficult. Since it will take a significant period of time for our U.S. operations to realize its U.S. net deferred income tax assets based on earned and forecasted U.S. pre-tax income levels, we believe it is too uncertain to project U.S. pre-tax income levels associated with our U.S. operations after fiscal 2014 that support a “more likely than not” assertion at the end of our thirdfirst quarter of fiscal 2012.2013. Based on thethis significant positive and negative evidence, noted above, we maintained our position as of April 29, 2012, and recorded a partial valuation allowance of $12.1$12.8 million at JanuaryJuly 29, 2012, against the net deferred income tax assets associated with our U.S. operations that are expected to reverse beyond fiscal 2014 and we recognized an income tax benefit of $4.4 million in the second quarter of fiscal 2012 for the reduction in this valuation allowance for projected U.S. taxable income in fiscal years 2013 and 2014 to reduce our U.S. loss carryforwards.2014. Overall The recorded valuation allowance of $12.1$12.8 million has no effect on our operations, loan covenant compliance, or the possible realization of the U.S. income tax loss carryforwards in the future. If it is determined that it is “more likely than not”more-likely-than-not that we will realize any of these U.S. income tax loss carryforwards, an income tax benefit would be recognized at that time. At JanuaryJuly 29, 2012, the current deferred income tax asset of $2.8$2.3 million represents $2.5$1.9 million and $256,000$387,000 from our operations located in the U.S. and China, respectively. At May 1, 2011,April 29, 2012, the current deferred income tax asset of $293,000 pertains to our operations located in China. At May 1, 2011, the current deferred income tax liability of $82,000 pertains to our operations located in Canada. At January 29, 2012, the non-current deferred income tax asset of $3.9$2.5 million represents $2.8$2.1 million and $1.1 million$405,000 from our operations located in the U.S. and China, respectively. At May 1, 2011,July 29, 2012, the non-current deferred income tax asset of $3.6$2.7 million represents $2.3$1.6 million, $929,000, and $1.3 million$169,000 from our operations located in the U.S., China, and China,Poland, respectively. At JanuaryApril 29, 2012, the non-current deferred tax asset of $3.2 million represents $2.1 million, $1.0 million, and $115,000 from our operations located in the U.S., China, and Poland, respectively. At July 29, 2012 and May 1, 2011,April 29, 2012, the non-current deferred income tax liability of $659,000 and $596,000$705,000 pertains to our operations located in Canada.
Uncertainty In Income Taxes
At JanuaryJuly 29, 2012, we had $12.3$12.6 million of total gross unrecognized tax benefits, of which $4.0$4.1 million represents the amount of gross unrecognized tax benefits that, if recognized would favorably affect the income tax rate in future periods. Of the $12.3$12.6 million in gross unrecognized tax benefits as of JanuaryJuly 29, 2012, $8.3$8.5 million were classified as net non-current deferred income taxes and $4.0$4.1 million were classified as income taxes payable –long-term in the accompanying consolidated balance sheets.
At May 1, 2011, we had $11.7 million of total gross unrecognized tax benefits, of which $4.2 million would favorably affect the income tax rate in future periods. Of the $11.7 million in total gross unrecognized tax benefits as of May 1, 2011, $7.5 million were classified as net non-current deferred income taxes and $4.2 million were classified as income taxes payable – long-term in the accompanying consolidated balance sheets.
We estimate that the amount of gross unrecognized tax benefits will increase by approximately $1.0 million$819,000 for fiscal 2012.2013. This increase primarily relates to double taxation under applicable tax treaties with foreign tax jurisdictions. Although we reported an income tax benefit of $1.2 million and income tax expense of $213,000 for the nine months ending January 29, 2012 and January 30, 2011, respectively, we pay income taxes associated with our subsidiaries located in Canada, China, and Poland. We had income tax payments of $1.9 million and $1.1 million for the nine months ending January 29, 2012 and January 30, 2011, respectively.
Liquidity and Capital Resources
Liquidity
Our sources of liquidity include cash and cash equivalents, short-term investments, cash flow from operations, and amounts available under our unsecured revolving credit lines. These sources have been adequate for day-to-day operations and capital expenditures. We believe our present cash and cash equivalents and short-term investment balance of $23.6$27.1 million at JanuaryJuly 29, 2012, cash flow from operations, and current availability under our unsecured revolving credit lines will be sufficient to fund our business needs and fiscal 20122013 contractual obligations.
At July 29, 2012, our cash and cash equivalents and short-term investments totaled $27.1 million, exceeded our total debt (current maturities of long-term debt, long-term debt, and line of credit) of $9.9 million. On August 11, 2012, we paid our required annual principal payment of $2.2 million associated with our unsecured senior term notes. thus lowering our total debt by that amount.
Our cash and cash equivalents and short-term investments of $27.1 million at July 29, 2012, decreased from $31.0 million at April 29, 2012. This decrease primarily represents net cash used from operating activities of $2.0 million, capital expenditures of $1.0 million, and common stock repurchases and dividend payments totaling $851,000. The net cash used from operating activities of $2.0 million was used to fund working capital requirements to meet the net sales growth that occurred in the first quarter of fiscal 2013.
On June 13, 2012, we announced that our board of directors has authorized the expenditureapproved authorization for us to acquire up to $5.0 million of our common stock. This action replaced prior authorizations to acquire up to $7.0 million of our common stock in fiscal 2012, of which $5.4 million had been used during the fiscal year. During the three-months ended July 29, 2012, we purchased 47,296 shares of our common stock at a cost of $470,000. In August 2012, we reached the above authorized amount of $5.0 million, as we purchased an additional 455,299 shares of common stock at a cost of approximately $4.5 million. Since our common stock repurchase program was implemented in fiscal 2012, we have repurchased 1.1 million shares of common stock at a cost of $10.4 million.
On August 29, 2012, we announced that our board of directors approved a new authorization for the repurchase of sharesus to acquire up to $2.0 million of our common stock. Under the common stock repurchase program, shares may be purchased from time to time in open market transactions, block trades, and through plans established under the Securities Exchange Act Rule 10b5-1.10b5-1, or otherwise. The amount of shares purchased and the timing of such purchases will be based on working capital requirements, market and general business conditions, and other factors including alternative investment opportunities. Since the initial authorization of this program on June 16, 2011, we have repurchased 624,459 shares of our common stock at a cost of $5.4 million, through the third quarter of fiscal 2012.
At January 29, 2012, our cash and cash equivalents and short-term investments totaled $23.6 million, exceeding our total debt (current maturities of long-term debt, long-term debt, and line of credit) of $10.1 million. Our cash and cash equivalents and short-term investments of $23.6 million at January 29, 2012, decreased from $30.9 million at May 1, 2011. This decrease reflects higher than normal working capital levels to facilitate our sales growth, capital expenditures of $3.7 million, long-term debt principal payments of $2.4 million and common stock repurchases of $5.4 million, offset by net income during the nine months ended January 29, 2012.
Looking ahead to the rest of fiscal 2012, we continue to be encouraged by the opportunities for generating free cash flow, principally from net income plus depreciation and other non-cash expenses. With respect to uses of our cash for the remainder for fiscal 2012, we expect cash capital expenditures to be approximately $5.3 million, of which $3.7 million has been spent through the third quarter of fiscal 2012. Additionally, we expect a modest working capital investment to support higher sales. We have already made our first scheduled principal payment of $2.2 million during the second quarter of fiscal 2012 and our next scheduled $2.2 million principal payment is not due until August 2012. Lastly, we have spent $5.4 million of the approved $7.0 million for our common stock repurchase program.
On June 13, 2012, we announced that our board of directors approved a payment of a cash dividend of $0.03 per share in the first quarter of fiscal 2013, to shareholders of record as of the close of business on July 2, 2012. This cash dividend payment totaled $381,000. We expect to pay a cash dividend every quarter of fiscal 2013, with expected remaining payment dates in October, January, and April. Future dividend payments are subject to board approval and may be adjusted at the board’s discretion as business needs or market conditions change.
Our cash and cash equivalents and short-term investment balance may be adversely affected by factors beyond our control, such as weakening industry demand and delays in receipt of payment on accounts receivable.
Working Capital
Accounts receivable at JanuaryJuly 29, 2012, were $22.0$20.0 million, an increase of 30%$1.1 million or 6% compared with $16.9$18.9 million at January 30,July 31, 2011. This increase in accounts receivable is due to our net sales increase of 15% in the first quarter of fiscal 2013 compared with the first quarter of 2012, offset by improved cash collections as our days’ sales outstanding improved from 26 days during the first quarter of fiscal 2012 to 24 days during the first quarter of fiscal 2013. Our improved cash collections are due to major customers in both our upholstery and mattress fabrics segments taking advantage of cash discounts for early payments.
Inventories as of July 29, 2012 were $44.1 million, an increase of $9.2 million, or 26%, compared with $34.9 million at July 31, 2011. This increase primarily reflects increased business volume in both our business segments forin the first quarter of fiscal 20122013 compared with fiscal 2011. Days’ sales outstanding totaled 31 and 28 days during the third quartersfirst quarter of fiscal 2012 and 2011, respectively.
Inventories as2012. Inventory turns for the first quarter of January 29, 2012fiscal 2013 were $32.9 million, an increase of 25%,5.2 compared with $28.7 million at January 30, 2011. This increase also reflects increased business volume in both our business segments for fiscal 2012 compared with fiscal 2011. Inventory turns were 6.26.0 for the third quartersfirst quarter of fiscal 2012 and 2011, respectively.2012.
Accounts payable-trade as of JanuaryJuly 29, 2012, was $23.5were $27.3 million, an increase of 37%$2.3 million, or 9% compared with $17.1$25.0 million at January 30,July 31, 2011. This increase primarily reflects increased business volume and inventory purchases in both our business segments in the first quarter of fiscal 20122013 compared with the first quarter of fiscal 2011.2012.
Operating working capital (comprised of accounts receivable and inventories, less accounts payable-trade and capital expenditures) was $31.4$36.6 million at JanuaryJuly 29, 2012 compared with $26.0$28.4 million at January 30,July 31, 2011. Working capital turnover was 8.78.5 and 8.58.6 during the quarters ended JanuaryJuly 29, 2012, and January 30,July 31, 2011, respectively.
Financing Arrangements
Unsecured Term Notes
In connection with the Bodet & Horst acquisition in 2008, we entered into a note agreement dated August 11, 2008. This agreement provided for the issuance of $11.0 million of unsecured term notes with a fixed interest rate of 8.01% and a term of seven years. Principal payments of $2.2 million per year are due on the notes beginning August 11, 2011. The principal payments are payable over an average term of 3.53 years through August 11, 2015. Any principal prepayments will be assessed a penalty as defined in the agreement. This agreement contains customary financial and other covenants as defined in the agreement.
We made our firsthave paid the required principal payment total of $2.2$4.4 million associated with this note agreement, of which $2.2 million was paid on August 11, 2011.2012 and August 11, 2011, respectively. As a result, we currently have an outstanding balance on our unsecured senior term notes of $6.6 million.
Government of Quebec Loan
We have an agreement with the Government of Quebec for a term loan that is non-interest bearing and is payable in 48 equal monthly installments (denominated in Canadian dollars) commencing December 1, 2009. The proceeds were used to partially finance capital expenditures at our Rayonese facility located in Quebec, Canada.
Revolving Credit Agreement – United States
At May 1, 2011, we hadWe have an unsecured Amended and Restated Credit Agreement that providedprovides for a revolving loan commitment of $6.5$7.6 million including letters of credit up to $3.0 million. This agreement wasand is set to expire August 15, 2012. Onon August 25, 2011, we entered into a seventeenth amendment to the Amended and Restated Credit Agreement, amending the agreement effective May 1, 2011 (the end of our fiscal 2011).2013. This amendment extends the expiration date of the line of credit through August 25, 2013, increases the revolving loan commitment from $6.5 million to $10.0 million, and decreases the capital expenditure limit for fiscal years 2012 and 2013 from $10.0 million to $6.0 million. On January 17, 2012, and in connection with the Culp Europe Credit Agreement discussed below, we entered into an eighteenth amendment to decrease our revolving loan commitment from $10.0 million to $7.6 million.
The amended agreement provides for a pricing matrix to determine the interest rate payable on loans made under the agreement (applicable interest rate of 1.88%2.24% at JanuaryJuly 29, 2012). As of January 29, 2012, there were $50,000 in outstanding letters of credit (all of which related to workers compensation). At JanuaryJuly 29, 2012 and May 1, 2011,April 29, 2012, there were no borrowings outstanding under the agreement.
Revolving Credit Agreement – China
At January 29, 2012, we hadWe have an unsecured credit agreement associated with our operations in China that provides for a line of credit of up to 40 million RMB (approximately $6.3 million USD at JanuaryJuly 29, 2012). This agreement expires, expiring on September 2, 2012 and2012. This agreement has an interest rate determined by the Chinese government. There were no borrowings outstanding under the agreement as of JanuaryJuly 29, 2012 and May 1, 2011.April 29, 2012.
On September 2, 2012, we renewed our unsecured credit agreement associated with our operations in China. The renewal extended the agreement to September 2, 2013, and provides for a line of credit up to approximately 40 million RMB (approximately $6.3 million USD).
Revolving Credit Agreement -– Europe
On January 17, 2012, we entered into an unsecured credit agreement associated with our operations in Poland that provides for a line of credit of up to 6.8 million Polish Zloty (approximately $2.1$2.0 million USD at JanuaryJuly 29, 2012). This agreement expires on January 15, 2013 and bears interest at WIBOR (Warsaw Interbank Offered Rate) plus 2% (applicable interest rate of 6.89%6.95% at JanuaryJuly 29, 2012). At January 29, 2012, $875,000There were $834,000 and $889,000 (2.8 million Polish Zloty) wasin borrowings outstanding under this agreement.agreement at July 29, 2012 and April 29, 2012, respectively.
Overall
Our loan agreements require, among other things, that we maintain compliance with certain financial covenants. At JanuaryJuly 29, 2012, the company was in compliance with these financial covenants.
At JanuaryJuly 29, 2012, the principal payment requirements of long-term debt during the next four years are: Year 1 – $2.4 million; Year 2 - $2.4$2.3 million; Year 3 - $2.2 million; and Year 4 - $2.2 million.
Capital Expenditures and Depreciation
Capital expenditures on a cash basis for the ninethree months ended JanuaryJuly 29, 2012 and January 30,July 31, 2011 were $3.7$1.0 million and $5.6$1.3 million, respectively. Capital expenditures for the ninethree months ended JanuaryJuly 29, 2012 and January 30,July 31, 2011 primarily relatemostly related to the mattress fabrics segment. Depreciation expense for the ninethree months ended JanuaryJuly 29, 2012 and January 30,July 31, 2011 was $3.6$1.3 million $3.2$1.2 million, respectively. Depreciation expense for the ninethree months ended JanuaryJuly 29, 2012 and January 30,July 31, 2011, primarily relaterelated to the mattress fabrics segment.
For the full fiscal 2012,2013, we currently expect cash capital expenditures to be approximately $5.3$5.0 million compared with capital expenditures of$5.9 million in fiscal 2012 and $6.4 million in fiscal 2011 and $7.4 million in fiscal 2010.2011. Planned capital expenditures for fiscal 20122013 primarily relate to the mattress fabrics segment. For fiscal 2012,2013, depreciation expense is projected to be $5$5.2 million, which primarily relates to the mattress fabrics segment. For fiscal 2013, we are estimating cash capital expenditures and depreciation expense for the company as a whole to be approximately $5.0 million. The estimated capital spending and depreciation expense for fiscal 2013 primarily relates to our mattress fabrics segment. These are management’smanagment’s current expectations only, and changes in our business needs could cause changes in plans for capital expenditures and expectations for related depreciation expense.
At JanuaryJuly 29, 2012, we had amounts due regarding capital expenditures totaling $15,000,$152,000, which pertain to outstanding vendor invoices, none of which are financed. The total outstanding amount of $15,000$152,000 is expectedrequired to be paid in full in fiscal 2012.2013.
Critical Accounting Policies and Recent Accounting Developments
As of JanuaryJuly 29, 2012, there were no changes in the nature of our significant accounting policies or the application of those policies from those reported in our annual report on Form 10-K for the year ended May 1, 2011.April 29, 2012.
Refer to Note 12 located in the notes to the consolidated financial statements for recently adopted and issued accounting pronouncements since the filing of our Form 10-K for the year ended May 1, 2011.April 29, 2012.
Contractual Obligations As of JanuaryJuly 29, 2012, there were no significant or new contractual obligations from those reported in our annual report on Form 10-K for the year ended May 1, 2011,April 29, 2012, with the exception of open purchase commitments to acquire equipment with regardsregard to ourthe mattress fabrics segment totaling $1.4 million$766,000 at JanuaryJuly 29, 2012, compared with $980,000$1.2 million at May 1, 2011.April 29, 2012.
Inflation
Any significant increase in our raw material costs, utility/energy costs and general economic inflation could have a material adverse impact on the company, because competitive conditions have limited our ability to pass significant operating cost increases on to customers. As discussed elsewhere in this reportour Form 10-K for the year ended April 29, 2012 (see “Segment Analysis”Analysis”), significant increases in raw material costs led to lower profit margins for both of our business segments for the nine months ended January 29, 2012.during fiscal 2012 and 2011.
We are exposed to market risk from changes in interest rates on our revolving credit lines. At JanuaryJuly 29, 2012, our U.S. revolving credit agreement provides for a pricing matrix to determine the interest rate payable on loans made under this agreement. Our revolving credit line associated with our China subsidiaries bears interest at a rate determined by the Chinese government. At JanuaryJuly 29, 2012, there were no borrowings outstanding under our U.S. andor China revolving credit lines. On January 17, 2012, we entered into an unsecured credit agreement associated with our operations located in Poland that bears interest at WIBOR plus 2%. At JanuaryJuly 29, 2012, $875,000$834,000 was outstanding under this agreement and this amount is required to be paid in full by January 15, 2013, when this agreement expires. We are not exposed to market risk from changes in interest rates on our long-term debt. Our unsecured term notes have a fixed interest rate of 8.01%, and the loan associated with the Government of Quebec is non-interest bearing. We are exposed to market risk from changes in the value of foreign currencies for our subsidiaries domiciled in China, Canada, and Europe.Poland. We try to maintain a natural hedge by keeping a balance of our assets and liabilities denominated in the local currenciescurrency of our subsidiaries domiciled in Canada and Europe,Poland, although there is no assurance that we will be able to continually maintain this natural hedge. Our foreign subsidiaries use the U.S.United States dollar as their functional currency. A substantial portion of the company’s imports purchased outside the United States are denominated in U.S. dollars. A 10% change in the above exchange rates at JanuaryJuly 29, 2012, would not have had a significant impact on our results of operations or financial position.
During the fourth quarter of fiscal 2012, we entered into an agreement to enter foreign exchange contracts that mitigate the risk of foreign exchange rate fluctuations for inventory purchases associated with our operations located in Poland. These contracts effectively convert USD inventory payments at a fixed USD foreign exchange rate compared with the Polish Zloty.
We have conducted an evaluation of the effectiveness of our disclosure controls and procedures as of JanuaryJuly 29, 2012, the end of the period covered by this report. This evaluation was conducted under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, we have concluded that these disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports filed by us and submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported as and when required. Further, we concluded that our disclosure controls and procedures have been designed to ensure that information required to be disclosed in reports filed by us under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, in a manner to allow timely decisions regarding the required disclosures.
There has been no change in our internal control over financial reporting that occurred during the quarter ended JanuaryJuly 29, 2012, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
There have not been any material changes to our legal proceedings during the ninethree months ended JanuaryJuly 29, 2012. Our legal proceedings are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 201112, 2012 for the fiscal year ended May 1, 2011.April 29, 2012.
There have not been any material changes to our risk factors during the ninethree months ended JanuaryJuly 29, 2012. Our risk factors are disclosed in the company’s annual report on Form 10-K filed with the Securities and Exchange Commission on July 15, 201112, 2012 for the fiscal year ended May 1, 2011.April 29, 2012.
ISSUER PURCHASES OF EQUITY SECURITIES
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | October 31, 2011 to December 4, 2011 | 38,584 | $8.32 | 38,584 | $1,903,980 | December 5, 2011 to January 1, 2012 | 21,449 | $8.00 | 21,449 | $1,732,470 | January 2, 2012 to January 29, 2012 | 14,181 | $8.07 | 14,181 | $1,617,983 | Total | 74,214 | $8.18 | 74,214 | $1,617,983 |
Period | | (a) Total Number of Shares Purchased | | | (b) Average Price Paid per Share | | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | | April 30, 2012 to June 3, 2012 | | | - | | | | - | | | | - | | | | $1,617,983 | | June 4, 2012 to July 1, 2012 | | | 20,910 | | | | $9.92 | | | | 20,910 | | | | $4,792,413 | | July 2, 2012 to July 29, 2012 | | | 26,386 | | | | $9.99 | | | | 26,386 | | | | $4,528,740 | | Total | | | 47,296 | | | | $9.96 | | | | 47,296 | | | | $4,528,740 | |
| (1) | On June 16, 2011,During fiscal 2012, our board of directors authorized the expenditure of $5.0up to $7.0 million for the repurchase of our common stock. The amount determined in column (d) for the period April 30, 2012 through June 3, 2012 is based on the $7.0 million authorized amount in fiscal 2012. On August 29, 2011,June 13, 2012, we announced that our board of directors authorized the expenditure of an additional $2.0approved a new authorization for us to acquire up to $5.0 million (a cumulative total of $7.0 million) for the repurchase of our common stock. This action replaced the authorization to acquire up to $7.0 million of our common stock in fiscal 2012, of which $5.4 million was used during the fiscal year. The amounts determined in column (d) abovefor the periods June 4, 2012 through July 1, 2012 and July 2, 2012 through July 29, 2012 are based on the cumulative$5.0 million that was authorized amount of $7.0 million as of August 29, 2011.on June 13, 2012. |
The following exhibits are submitted as part of this report.The following exhibits are submitted as part of this report. | | | 3(i) | Articles of Incorporation of the company, as amended, were filed as Exhibit 3(i) to the company’s Form 10-Q for the quarter ended July 28, 2002, filed September 11, 2002 (Commission File No. 001-12597), and are incorporated herein by reference. | | | 3 (ii) | Restated and Amended Bylaws of the company, as amended November 12, 2007, were filed as Exhibit 3.1 to the company’s Form 8-K dated November 12, 2007, and incorporated herein by reference. | | | 10.1 | Seventeenth Amendment to Amended and Restated Credit Agreement dated asForm of August 25, 2011 among Culp, Inc. and Wells Fargo Bank, N.A. was filed as Exhibit 10.1restricted stock unit agreement for restricted stock units granted pursuant to the company’s Form 10-Q for the quarter ended July 31, 2011 dated September 9, 2011, and is incorporated herein by reference.2007 Equity Incentive Plan. | | | 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | | | 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | | | 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. | | | 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. | | | 101.INS ** | XBRL Instance Document | | | 101.SCH ** | XBRL Taxonomy Extension Schema Document | | | 101.CAL ** | XBRL Taxonomy Extension Calculation Linkbase Document | | | 101.LAB ** | XBRL Taxonomy Extension Label Linkbase Document | | | 101.PRE ** | XBRL Taxonomy Extension Presentation Linkbase Document | | | 101.DEF ** | XBRL Taxonomy Extension Definition Linkbase Document | | | ** In accordance with Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of the registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
** In accordance with Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of the registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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.
| | CULP, INC. | | | (Registrant) | | | | | | | Date: March 9,September 7, 2012 | By: | /s/ Kenneth R. Bowling | | | Kenneth R. Bowling | | | Vice President and Chief Financial Officer | | | (Authorized to sign on behalf of the registrant | | | and also signing as principal financial officer) | | | | | | | | By: | /s/ Thomas B. Gallagher, Jr. | | | Thomas B. Gallagher, Jr. | | | Corporate Controller | | | (Authorized to sign on behalf of the registrant | | | and also signing as principal accounting officer) |
EXHIBIT INDEX
Exhibit Number Exhibit
EXHIBIT INDEX | 10.1 | Form of restricted stock unit agreement for restricted stock units granted pursuant to the 2007 Equity Incentive Plan. |
| | | Exhibit Number | | Exhibit | | | | | | | 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
| | | 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
| | | 32.1 | | Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
| | | 32.2 | | Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
| | | 101.INS | | XBRL Instance Document |
| | | 101.SCH | | XBRL Taxonomy Extension Schema Document |
| | | 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| | | 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| | | 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | | 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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