SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 29, 2001
Commission File No. 0-12781
CULP, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1001967
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or other organization)
101 S. Main St., High Point, North Carolina 27261-2686
(Address of principal executive offices) (zip code)
(336) 889-5161
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
Common shares outstanding at July 29, 2001: 11,221,158
Par Value: $.05
INDEX TO FORM 10-Q
For the period ended July 29, 2001
Part I - Financial Statements. Page
- ------------------------------------------ -------
Item 1. Unaudited Interim Consolidated Financial Statements:
- ---------------------------------------------------------------
Consolidated Statements of Loss-Three Months Ended July 29, 2001 I-1
and July 30, 2000
Consolidated Balance Sheets-July 29, 2001, July 30, 2000 and
April 29, 2001 I-2
Consolidated Statements of Cash Flows---Three Months Ended
July 29, 2001 and July 30, 2000 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Sales by Segment/Division I-11
International Sales by Geographic Area I-12
Item 2. Management's Discussion and Analysis of Financial I-13
- -----------------------------------------------------------
Condition and Results of Operations
-----------------------------------
Item 3. Quantitative and Qualitative Disclosures About I-18
- --------------------------------------------------------
Market Risk
-----------
Part II - Other Information
- -------------------------------------
Item 6. Exhibits and Reports on Form 8-K II-1
Signature II-2
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF LOSS
FOR THE THREE MONTHS ENDED JULY 29, 2001 AND JULY 30, 2000
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------
Amounts Percent of Sales
------------------------- -------------------------
July 29, July 30, % Over
2001 2000 (Under) 2002 2001
----------- ------------ ----------- ----------- ------------
Net sales $ 86,463 101,878 (15.1)% 100.0 % 100.0 %
Cost of sales 75,674 87,704 (13.7)% 87.5 % 86.1 %
----------- ------------ ----------- ----------- ------------
Gross profit 10,789 14,174 (23.9)% 12.5 % 13.9 %
Selling, general and
administrative expenses 11,235 13,778 (18.5)% 13.0 % 13.5 %
Restructuring expense 1,303 0 100.0 % 1.5 % 0.0 %
----------- ------------ ----------- ----------- ------------
Income (loss) from operations (1,749) 396 (541.7)% (2.0)% 0.4 %
Interest expense 2,068 2,323 (11.0)% 2.4 % 2.3 %
Interest income (23) (7) 228.6 % (0.0)% (0.0)%
Other expense (income), net 572 741 (22.8)% 0.7 % 0.7 %
----------- ------------ ----------- ----------- ------------
Loss before income taxes (4,366) (2,661) (64.1)% (5.0)% (2.6)%
Income taxes * (1,484) (905) (64.0)% 34.0 % 34.0 %
----------- ------------ ----------- ----------- ------------
Net loss $ (2,882) (1,756) (64.1)% (3.3)% (1.7)%
=========== ============ =========== =========== ============
Net loss per share ($0.26) ($0.16) (62.5)%
Net loss per share, assuming dilution ($0.26) ($0.16) (62.5)%
Dividends per share $0.00 $0.035 (100.0)%
Average shares outstanding 11,221 11,209 0.1 %
Average shares outstanding, assuming dilution 11,221 11,209 0.1 %
* Percent of sales column is calculated as a % of loss before income taxes.
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JULY 29, 2001, JULY 30, 2000, AND APRIL 29, 2001
Unaudited
(Amounts in Thousands)
Amounts Increase
--------------------------------- (Decrease) (1)
July 29, July 30, ---------------------------- April 29,
2001 2000 Dollars Percent 2001
---------------- ------------- ------------- ----------- ---------
Current assets
Cash and cash investments $ 549 1,654 (1,105) (66.8) % 1,207
Accounts receivable 52,353 58,851 (6,498) (11.0) % 57,849
Inventories 59,006 74,600 (15,594) (20.9) % 59,997
Other current assets 9,893 11,565 (1,672) (14.5) % 7,856
---------------- ------------- ------------- ----------- ---------
Total current assets 121,801 146,670 (24,869) (17.0) % 126,909
Property, plant & equipment, net 109,417 123,636 (14,219) (11.5) % 112,322
Goodwill 48,129 49,525 (1,396) (2.8) % 48,478
Other assets 1,711 6,652 (4,941) (74.3) % 1,871
---------------- ------------- ------------- ----------- ---------
Total assets $ 281,058 326,483 (45,425) (13.9) % 289,580
================ ============= ============= =========== =========
Current liabilities
Current maturities of long-term debt $ 2,130 1,678 452 26.9 % 2,488
Accounts payable 24,773 24,942 (169) (0.7) % 27,371
Accrued expenses 16,494 19,762 (3,268) (16.5) % 17,153
Income taxes payable 0 0 0 0.0 % 1,268
---------------- ------------- ------------- ----------- ---------
Total current liabilities 43,397 46,382 (2,985) (6.4) % 48,280
Long-term debt 108,522 135,150 (26,628) (19.7) % 109,168
Deferred income taxes 10,330 17,459 (7,129) (40.8) % 10,330
---------------- ------------- ------------- ----------- ---------
Total liabilities 162,249 198,991 (36,742) (18.5) % 167,778
Shareholders' equity 118,809 127,492 (8,683) (6.8) % 121,802
---------------- ------------- ------------- ----------- ---------
Total liabilities and
shareholders' equity $ 281,058 326,483 (45,425) (13.9) % 289,580
================ ============= ============= =========== =========
Shares outstanding 11,221 11,209 12 0.1 % 11,221
================ ============= ============= =========== =========
(1) Derived from audited financial statements.
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 29, 2001 AND JULY 30, 2000
Unaudited
(Amounts in Thousands)
THREE MONTHS ENDED
-------------------------
Amounts
-------------------------
July 29, July 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $ (2,882) (1,756)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 4,473 5,060
Amortization of intangible assets 393 399
Amortization of deferred compensation (13) 63
Restructuring expense 1,303 0
Changes in assets and liabilities:
Accounts receivable 5,496 16,372
Inventories 991 (129)
Other current assets (1,987) (1,216)
Other assets (3) 147
Accounts payable (123) (6,886)
Accrued expenses (1,957) (2,409)
Income taxes payable (1,268) 0
------------ ------------
Net cash provided by operating activities 4,423 9,645
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,602) (2,289)
Purchase of investments to fund deferred compensation liability 0 (200)
------------ ------------
Net cash used in investing activities (1,602) (2,489)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 16 0
Principal payments on long-term debt (1,020) (658)
Change in accounts payable-capital expenditures (2,475) (5,459)
Dividends paid 0 (392)
------------ ------------
Net cash used in financing activities (3,479) (6,509)
------------ ------------
Increase (decrease) in cash and cash investments (658) 647
Cash and cash investments at beginning of period 1,207 1,007
------------ ------------
Cash and cash investments at end of period $ 549 1,654
============ ============
CULP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
(Dollars in thousands, except share and per share data)
Capital Accumulated
Common Stock Contributed Other Total
------------------------- in Excess Retained Comprehensive Shareholders'
Shares Amount of Par Value Earnings Loss Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 2000 11,208,720 $ 560 $ 35,266 $ 93,814 $ $ 129,640
Cash dividends ($0.105 per share) (1,177) (1,177)
Net loss (8,311) (8,311)
Common stock issued in connection
with stock option plans 12,438 1 1,649 1,650
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 29, 2001 11,221,158 561 36,915 84,326 121,802
Net loss (2,882) (2,882)
Other comprehensive loss:
Loss on cash flow hedges, net of taxes (98) (98)
Common stock issued (forfeited) in connection
with stock option plans (13) (13)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, July 29, 2001 11,221,158 $ 561 $ 36,902 $ 81,444 $ (98) $ 118,809
====================================================================================================================================
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc.
and subsidiary include all adjustments, which are, in the opinion of management,
necessary for fair presentation of the results of operations and financial
position. All of these adjustments are of a normal recurring nature except as
disclosed in note 8 to the consolidated financial statements. 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 27, 2001 for the fiscal year ended April 29, 2001.
================================================================================
2. Accounts Receivable
A summary of accounts receivable follows (dollars in thousands):
- --------------------------------------------------------------------------------
July 29, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Customers $ 54,663 $ 60,218
Allowance for doubtful accounts (1,263) (1,282)
Reserve for returns and allowances (1,047) (1,087)
- --------------------------------------------------------------------------------
$ 52,353 $ 57,849
================================================================================
3. Inventories
Inventories are carried at the lower of cost or market. Cost is determined
for substantially all inventories using the LIFO (last-in, first-out) method.
A summary of inventories follows (dollars in thousands):
- --------------------------------------------------------------------------------
July 29, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Raw materials $ 33,050 $ 31,489
Work-in-process 3,731 4,748
Finished goods 22,613 24,148
- --------------------------------------------------------------------------------
Total inventories valued at FIFO cost 59,394 60,385
Adjustments of certain inventories to the
LIFO cost method (388) (388)
- --------------------------------------------------------------------------------
$ 59,006 $ 59,997
================================================================================
4. Accounts Payable
A summary of accounts payable follows (dollars in thousands):
- --------------------------------------------------------------------------------
July 29, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Accounts payable-trade $ 21,826 $ 21,949
Accounts payable-capital expenditures 2,947 5,422
- --------------------------------------------------------------------------------
$ 24,773 $ 27,371
================================================================================
5. Accrued Expenses
A summary of accrued expenses follows (dollars in thousands):
- --------------------------------------------------------------------------------
July 29, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Compensation and benefits $ 4,780 $ 6,503
Restructuring 2,540 2,383
Other 9,174 8,267
- --------------------------------------------------------------------------------
$ 16,494 $ 17,153
================================================================================
6. Long-Term Debt
A summary of long-term debt follows (dollars in thousands):
- --------------------------------------------------------------------------------
July 29, 2001 April 29, 2001
- --------------------------------------------------------------------------------
Senior unsecured notes $ 75,000 $ 75,000
Industrial revenue bonds and other obligations 32,975 32,959
Revolving credit facility 999 999
Obligations to sellers 1,678 2,698
- --------------------------------------------------------------------------------
110,652 111,656
Less current maturities (2,130) (2,488)
- --------------------------------------------------------------------------------
$ 108,522 $ 109,168
================================================================================
The senior unsecured notes have a fixed coupon rate of 6.76% and an average
remaining term of 7 years. The principal payments become due from March 2006 to
March 2010 with interest payable semi-annually.
The company's revolving credit agreement (the "Credit Agreement") provides
a multi-currency revolving credit facility, which expires in April 2002, with a
syndicate of banks in the United States. In August 2001, the company reduced the
revolving loan commitment from $25,000,000 to $20,000,000, and the Credit
Agreement was amended to amend the company's debt to EBITDA ratio, as defined by
the agreement. The agreement requires payment of a quarterly facility fee. On
borrowings outstanding at July 29, 2001, the interest rate was 7.75% (LIBOR plus
4.00%).
The company's $2,000,000 revolving line of credit expires on April 2002. At
July 29, 2001, no borrowings were outstanding under the revolving line of
credit.
The industrial revenue bonds (IRBs) are generally due in balloon maturities
which occur at various dates from 2009 to 2013. The IRBs are collateralized by
letters of credit for the outstanding balance of the IRBs and certain interest
payments due thereunder.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At July 29, 2001, the company
was in compliance with these financial covenants.
At July 29, 2001, the company had two interest rate swap agreements with a
bank. The following table summarizes certain data regarding the interest rate
swaps:
notional amount interest rate expiration date
--------------------------------------------------------------
$ 5,000,000 6.9% June 2002
$ 5,000,000 6.6% July 2002
During the first quarter of fiscal 2002, the company recorded a
mark-to-market loss of $58,000 because the interest rate swaps no longer serve
as a hedge due to the repayment of debt in fiscal 2001. Management believes the
risk of incurring losses resulting from the inability of the bank to fulfill its
obligation under the interest rate swap agreements to be remote and that any
losses incurred would be immaterial.
================================================================================
7. Cash Flow Information
Payments for interest and income taxes during the period were (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Interest $ 785 $ 1,053
Income taxes 612 0
================================================================================
8. Restructuring
To reduce costs and improve efficiency, the company initiated a
restructuring plan in January 2001 to streamline the corporate structure,
consolidate manufacturing operations and close certain facilities. The company
recorded restructuring charges of $6.5 million in fiscal 2001 and an additional
amount of $1.3 million, primarily related to health care costs for terminated
personnel, in the first quarter of fiscal 2002. A portion of this total
restructuring charge, related to the write-down of inventories ($0.9 million),
was classified as a component of cost of sales in fiscal 2001. In addition, the
company recognized restructuring related charges, primarily costs related to
moving equipment, of $1.0 million in the first quarter of fiscal 2002 and $0.9
million in fiscal 2001. The company expects to recognize additional
restructuring related charges, primarily costs related to moving equipment, of
approximately $0.2 million in the second quarter of fiscal 2002.
The following summarizes the fiscal 2001 and 2002 restructuring activity
(dollars in thousands):
2001 April 29, 2002 July 29,
Non-Cash 2001 Non-Cash 2001
Write- Paid in Reserve 2002 Write- Paid in Reserve
Charges Downs 2001 Balance Adjustment Downs 2002 Balance
- ---------------------------------------------------------------------------------------------------
Non-cash write-downs
of fixed assets to
Net realizable value $ 2,540 2,540 - - 160 160 - -
Non-cash write-downs
Of inventories 874 874 - - - - - -
Employee termination
Benefits 969 - 491 478 925 - 410 993
Lease termination and
Other exit costs 2,116 - 211 1,905 218 - 576 1,547
- ---------------------------------------------------------------------------------------------------
$ 6,499 $ 3,414 $ 702 $ 2,383 $ 1,303 $ 160 $ 986 $ 2,540
- ---------------------------------------------------------------------------------------------------
===================================================================================================
9. Comprehensive Loss
Comprehensive loss is the total of net loss and other changes in equity,
except those resulting from investments by shareholders and distributions to
shareholders not reflected in net loss.
A summary of total comprehensive loss for the period follows (dollars in
thousands):
- --------------------------------------------------------------------------------
2002 2001
- --------------------------------------------------------------------------------
Net loss $ (2,882) $ (1,756)
Other comprehensive loss:
Loss on cash flow hedges, net
of taxes of $50 (98) 0
- --------------------------------------------------------------------------------
$ (2,980) $ (1,756)
================================================================================
Losses on cash flow hedges reflected in other comprehensive loss above are
expected to be recognized in results of operations over the next twelve months.
10. Derivatives
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, as amended by SFAS No. 137 and SFAS No. 138, requires the company to
recognize all derivative instruments on the balance sheet at fair value. These
statements also establish new accounting rules for hedging instruments, which
depend on the nature of the hedge relationship. A fair value hedge requires that
the effective portion of the change in the fair value of a derivative instrument
be offset against the change in the fair value of the underlying asset,
liability, or firm commitment being hedged through earnings. A cash flow hedge
requires that the effective portion of the change in the fair value of a
derivative instrument be recognized in Other Comprehensive Income ("OCI"), a
component of Stockholders' Equity, and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. The
ineffective portion of a derivative instrument's change in fair value is
immediately recognized in earnings.
Fair Value Hedging Strategy
The company uses forward exchange contracts and options to hedge against
its exposure to currency fluctuations on firm commitments to purchase certain
machinery and equipment and raw materials. The company had approximately
$484,000 and $1,547,000 of outstanding foreign exchange forward contracts
(denominated in Euros) as of July 29, 2001 and April 29, 2001, respectively. As
of July 29, 2001 the duration of these contracts is three months. Due to the
short maturity of these financial instruments, the fair values of these
contracts approximate the contract amount.
Cash Flow Hedging Strategy
During 2001, the company adopted a policy to manage the exposure related to
forecasted purchases of inventories denominated in the EURO through use of
forward exchange contracts and options. At July 29, 2001, the duration of these
contracts is fifteen months.
The company adopted SFAS No. 133 as amended, effective April 30, 2001. The
effect of this adoption is not material for the three months ended July 29,
2001.
================================================================================
11. Segment Information
The company's operations are classified into two business segments:
upholstery fabrics and mattress ticking. The upholstery fabrics segment
principally manufactures and sells woven jacquards and dobbies, wet and
heat-transfer prints, and woven and tufted velvets primarily to residential and
commercial (contract) furniture manufacturers. The mattress ticking segment
principally manufactures and sells woven jacquards, heat-transfer prints and
pigment prints to bedding manufacturers.
The company internally manages and reports selling, general and
administrative expenses, interest expense, interest income, other expense and
income taxes on a total company basis. Thus, profit by business segment
represents gross profit. In addition, the company internally manages and reports
cash and cash investments, accounts receivable, other current assets, restricted
investments, property, plant and equipment, goodwill and other assets on a total
company basis. Thus, identifiable assets by business segment represent
inventories.
Sales, gross profit and inventories for the company's operating segments
are as follows:
- --------------------------------------------------------------------------------
(dollars in thousands):
2002 2001
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 61,647 $ 74,926
Mattress Ticking 24,816 26,952
- --------------------------------------------------------------------------------
$ 86,463 $ 101,878
================================================================================
Gross Profit
Upholstery Fabrics $ 4,540 $ 7,913
Mattress Ticking 6,249 6,261
- --------------------------------------------------------------------------------
$ 10,789 $ 14,174
================================================================================
Inventories
Upholstery Fabrics $ 47,256 $ 61,213
Mattress Ticking 11,750 13,387
- --------------------------------------------------------------------------------
$ 59,006 $ 74,600
================================================================================
12. Recent Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142, "Goodwill and Other Intangible Assets". This statement supersedes
Accounting Principles Board ("APB") Opinion No. 17 "Intangible Assets". SFAS No.
142 establishes new standards for measuring the carrying value of goodwill
related to acquired companies. Management is currently analyzing the impact of
adopting SFAS No. 142, which will become effective for the company on April 29,
2002.
CULP, INC.
SALES BY SEGMENT/DIVISION
FOR THE THREE MONTHS ENDED JULY 29, 2001 AND JULY 30, 2000
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------
Amounts Percent of Total Sales
--------------------- -----------------------
July 29, July 30, % Over
Segment/Division 2001 2000 (Under) 2002 2001
- ------------------------------ ---------- ---------- ------------ ---------- -----------
Upholstery Fabrics
Culp Decorative Fabrics $ 35,160 41,533 (15.3) % 40.7 % 40.8 %
Culp Velvets/Prints 25,520 30,074 (15.1) % 29.5 % 29.5 %
Culp Yarn 967 3,319 (70.9) % 1.1 % 3.3 %
---------- ---------- ------------ ---------- -----------
61,647 74,926 (17.7) % 71.3 % 73.5 %
Mattress Ticking
Culp Home Fashions 24,816 26,952 (7.9) % 28.7 % 26.5 %
---------- ---------- ------------ ---------- -----------
* $ 86,463 101,878 (15.1) % 100.0 % 100.0 %
========== ========== ============ ========== ===========
* U.S. sales were $71,800 and $82,290 for the first quarter of fiscal 2002 and
fiscal 2001, respectively. The percentage decrease in U.S. sales was 12.7% for
the first quarter.
CULP, INC.
INTERNATIONAL SALES BY GEOGRAPHIC AREA
FOR THE THREE MONTHS ENDED JULY 29, 2001 AND JULY 30, 2000
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
-------------------------------------------------------------------
Amounts Percent of Total Sales
-------------------------- -------------------------
July 29, July 30, % Over
Geographic Area 2001 2000 (Under) 2002 2001
- ---------------------------- ------------ ------------ ----------- ----------- ----------
North America (Excluding USA) $ 8,052 8,395 (4.1) % 54.9 % 42.9 %
Europe 705 1,452 (51.4) % 4.8 % 7.4 %
Middle East 2,903 5,043 (42.4) % 19.8 % 25.7 %
Far East & Asia 2,570 3,236 (20.6) % 17.5 % 16.5 %
South America 159 306 (48.0) % 1.1 % 1.6 %
All other areas 274 1,156 (76.3) % 1.9 % 5.9 %
------------ ------------ ----------- ----------- ----------
$ 14,663 19,588 (25.1) % 100.0 % 100.0 %
============ ============ =========== =========== ==========
International sales, and the percentage of total sales, for each of the last
five fiscal years follows: fiscal 1997-$101,571 (25%); fiscal 1998-$137,223
(29%); fiscal 1999-$113,354 (23%); fiscal 2000-$111,104 (23%); and fiscal
2001-$77,824 (19%). International sales for the first quarter represented 17.0%
and 19.2% for 2002 and 2001, respectively.
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following analysis of the 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.
Overview
Culp is one of the largest integrated marketers in the world for upholstery
fabrics for furniture and is one of the leading global producers of mattress
fabrics (or ticking). The company's fabrics are used primarily in the production
of residential and commercial upholstered furniture and bedding products,
including sofas, recliners, chairs, love seats, sectionals, sofa-beds, office
seating and mattress sets. Although Culp markets fabrics at most price levels,
the company emphasizes fabrics that have broad appeal in the promotional and
popular-priced categories of furniture and bedding.
Culp's worldwide leadership as a marketer of upholstery fabrics and mattress
ticking has been achieved through internal expansion and the integration of
strategic acquisitions.
The company's operating segments are upholstery fabrics and mattress ticking,
with related divisions organized within those segments. In upholstery fabrics,
Culp Decorative Fabrics markets jacquard and dobby woven fabrics for residential
and commercial furniture. Culp Velvets/Prints markets a broad range of printed
and velvet fabrics used primarily for residential and juvenile furniture. Culp
Yarn manufactures specialty filling yarn that is used by Culp and also marketed
to outside customers. In mattress ticking, Culp Home Fashions markets a broad
array of fabrics used by bedding manufacturers.
Restructuring Actions
During fiscal 2001, the company initiated a restructuring plan intended to lower
operating expenses, increase manufacturing utilization, raise productivity and
position the company to operate profitably within the current environment of
reduced demand. The plan involved the consolidation of certain fabric
manufacturing capacity within the Culp Decorative Fabrics division, closing one
of the company's four yarn manufacturing plants within Culp Yarn, and an
extensive reduction in selling, general and administrative expenses. The company
also recognized certain inventory write-downs related to the closed facilities
as part of this initiative. The charge from the restructuring, cost reduction
and inventory write-down initiatives is expected to total $10.0 million, about
$3.6 million of which represents non-cash items. This includes an additional
amount of $1.3 million resulting from re-evaluating restructuring costs in the
first quarter of fiscal 2002, principally related to health care costs for
terminated personnel. The company recognized $7.4 million of restructuring and
related charges during fiscal 2001 and $2.3 million in the first quarter of
fiscal 2002. Management expects to record the remaining charges, estimated at
$150,000, during the second quarter of fiscal 2002. The company plans to realize
annualized cost reductions of at least $14 million when the full benefit of this
program is realized. For the first quarter of fiscal 2002, the restructuring and
related charges were recorded with $1.3 million in the line item called
"Restructuring expense" and $1.0 million in "Cost of sales." The costs reflected
in "Cost of sales" are principally related to the relocation of manufacturing
equipment.
Management believes the company now has a sound footprint of efficient,
world-class facilities utilizing state-of-the-art equipment that positions the
company well to meet the demands by manufacturers for even shorter lead times,
consistently reliable delivery schedules and appealing designs.
Three Months ended July 29, 2001 compared with Three Months ended July 30, 2000
Net Sales. Compared with fiscal 2001, upholstery fabric sales for the first
quarter of fiscal 2002 decreased 17.7% to $61.6 million, and mattress ticking
sales decreased 7.9% to $24.8 million (See Sales by Segment/Division schedule on
page I-11). The upholstery fabric sales decrease reflected: (1) a sharp
reduction (24.9%, or $3.8 million) in international sales, principally due to
the high value of the U.S. dollar relative to international currencies; (2) a
decrease in external yarn sales (70.9% or $2.4 million) due to the company's
internal consumption of more of the yarn division's output and exit from certain
yarn businesses as part of the restructuring plan; (3) a decrease in sales to
contract furniture customers ($1.2 million), and (4) a more moderate decrease
(11.6% or $5.9 million) in sales to U.S. residential furniture manufacturers.
The company believes that it is improving its market share in the U.S.
residential market because of well-received fabric placements from the Culp
Decorative Fabrics and Culp Velvets/Prints divisions. The decline in sales in
this category is attributed to general market conditions, and the sales decrease
in mattress ticking also reflects an overall slowdown in industry-wide demand
for bedding in the U.S.
The company had previously announced that it did not expect to report a profit
for the first quarter, excluding restructuring and related charges. Key factors
influencing the year-to-year comparison were the sharp, persistent weakness in
consumer spending on home furnishings, especially in the promotional price
category, and the strength in the U.S. dollar that had an adverse impact on
exports. Although industry conditions remain challenging, incoming orders early
in the second quarter for mattress ticking and from U.S. residential furniture
customers are showing some improvement. Based on this trend, Culp expects to
operate its manufacturing capacity at a higher level of output than in the first
quarter. Any increase in demand from U.S. manufacturers of residential furniture
is expected to be offset in part by a continued decline in international and
contract orders.
Gross Profit and Cost of Sales. Gross profit included restructuring related
charges of $1.0 million. Excluding these charges, gross profit declined 17.0%
for the first quarter of fiscal 2002 compared with the year-earlier period and
decreased as a percentage of net sales from 13.9% to 13.6%. The decline of $2.4
million in gross profit, excluding restructuring related charges, was
attributable to the Culp Decorative Fabrics ("CDF") division. The principal
factors contributing to the decrease were: (1) the decline in sales volume, and
(2) lower manufacturing productivity due to the consolidation activities within
the division during the quarter. The company has taken significant steps to
improve productivity and increase output in the CDF division over the last six
months. Although the company expects to see improving results from these
restructuring steps in the second quarter for CDF, it does not expect to realize
the full benefit of these actions until the second half of fiscal 2002. The
company experienced gross margin improvement in each of its other divisions,
even while reporting lower sales in those divisions.
Selling, General and Administrative Expenses. SG&A expenses for the first
quarter declined 18.5% from the prior year. Reflecting the impact of the
company's actions to reduce expenses, SG&A expenses declined from 13.5% to 13.0%
as a percentage of sales. SG&A expenses in the first quarter include bad debt
expense of $800,000 compared with $45,000 in the year-earlier period. The
increase in bad debt expense from a year ago primarily reflects write-offs
related to two residential furniture customers. Without the additional bad debt
expense, SG&A expenses were reduced by $3.3 million, or 23.9%, and were 12.1% of
net sales.
Interest Expense. Interest expense for the first quarter declined from $2.3
million to $2.1 million due to significantly lower borrowings outstanding,
offset somewhat by a substantial increase in interest rates.
Other Expense (Income). Other expense (income) for the first quarter of fiscal
2002 totaled $572,000 compared with $741,000 in the prior year. The decrease was
principally due to the company's deferred compensation plan, which was
terminated in January 2001 as a part of the company's cost reduction initiative.
Income Taxes. The effective tax rate for the first quarter of fiscal 2002 was
34.0%, unchanged from the prior year.
Net Loss Per Share. Net loss per share for the first quarter of fiscal 2002,
excluding restructuring and related charges, totaled ($0.12) per share diluted
(based on 11,221,000 average shares outstanding during the period) compared with
a net loss of ($0.16) per share diluted (based on 11,209,000 average shares
outstanding during the period) a year ago.
Liquidity and Capital Resources
Liquidity. Operating working capital (comprised of accounts receivable,
inventory and accounts payable) was $86.6 million at July 29, 2001, down from
$108.5 million a year ago.
The company has reduced funded debt by $26.2 million or 19.1% from the first
quarter of last year, and by $1.0 million from last fiscal year end. Funded debt
equals long-term debt plus current maturities. Funded debt was $110.7 million at
July 29, 2001, compared with $136.8 million a year ago and $111.7 million at
fiscal year end. Compared with 51.8% a year ago, the company's funded
debt-to-capital ratio was 48.2% at July 29, 2001, its lowest level since July
1997. Through the first three months of fiscal 2002, the company had an
operating cash flow of $4.4 million compared with $9.6 million in the
year-earlier period.
EBITDA for the first quarter of fiscal 2002 was $4.8 million compared with $5.2
million in the prior year. EBITDA excludes interest, income taxes, depreciation,
amortization, and all restructuring and related charges, non-cash or cash.
Financing Arrangements. Culp has $75 million of senior unsecured notes with a
fixed coupon rate of 6.76% and an average remaining term of seven years.
In addition, the company has a $20 million syndicated, multi-currency revolving
credit facility. The facility, which expires in April 2002, requires quarterly
payments of interest on all outstanding borrowings and a quarterly facility fee.
In January and August 2001, the company amended the credit facility to amend
certain covenants. Additionally, the January amendment increased the interest
rate from LIBOR plus 1.10% to 1.60% to LIBOR plus 2.50% to 4.25%. The interest
rate matrix is based on the company's debt to EBITDA ratio, as defined by the
facility, such that a lower ratio allows for a lower interest rate. The amended
facility also limits capital expenditures and restricts dividends and common
stock repurchases. As of July 29, 2001, the company had outstanding balances of
approximately $1 million under the credit facility.
The company also has a total of $33.0 million in currently outstanding
industrial revenue bonds ("IRBs") which have been used to finance capital
expenditures. The IRBs bear interest at variable rates with a weighted average
of 8.26%, including the letter of credit fee percentage. The IRBs are
collateralized by letters of credit for the outstanding balance of the IRBs and
certain interest payments due thereunder. The January 2001 amendment to the
credit facility also increased the letter of credit fees to a range from 2.50%
to 4.25%, based on the company's debt to EBITDA ratio.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. As of July 29, 2001, the
company was in compliance with these financial covenants.
As of July 29, 2001, the company had two interest rate swap agreements with a
$10 million notional amount. During the first quarter of fiscal 2002, the
company recorded a mark-to-market loss of $58,000 because the interest rate
swaps no longer serve as a hedge due to the repayment of debt. The company also
enters into foreign exchange forward and option contracts to hedge against
currency fluctuations with respect to firm commitments and anticipated
transactions to purchase certain machinery, equipment and raw materials.
Capital Expenditures. The company maintains an ongoing program of capital
expenditures designed to increase capacity as needed, enhance manufacturing
efficiencies through modernization and increase the company's vertical
integration. The company's budget for capital spending for fiscal 2002 is $4.0
million, compared with $8.1 million in fiscal 2001. Depreciation for the first
quarter of fiscal 2002 totaled $4.5 million.
The company believes that cash flows from operations and funds available under
existing credit facilities will be sufficient to fund capital expenditures and
working capital requirements for the foreseeable future.
Inflation
The cost of the company's raw materials is remaining generally stable although,
the company is experiencing some price increases in petroleum related raw
materials. Factors that reasonably can be expected to influence margins in the
future include changes in raw material prices, trends in other operating costs
and overall competitive conditions.
Seasonality
The company's business is slightly seasonal, with relatively stronger sales
during the second and fourth fiscal quarters. This seasonality results from
one-week closings of the company's manufacturing facilities, and the facilities
of most of its customers in the United States, during the first and third
quarters for the holiday weeks including July 4th and Christmas.
Forward-Looking Information
The company's quarterly report on Form 10-Q contains statements that may be
deemed "forward-looking statements" within the meaning of the federal securities
laws, including the Private Securities Litigation Reform Act of 1995. Such
statements are inherently subject to risks and uncertainties. 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 characterized by qualifying words such as
"expect," "believe," "estimate," "plan," and "project" and their derivatives.
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 the company's 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 the company adversely. Because of the significant percentage of the
company's sales derived from international shipments, strengthening of the U.S.
dollar against other currencies could make the company's products less
competitive on the basis of price in markets outside the United States.
Additionally, economic and political instability in international areas could
affect the demand for the company's products.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets." This statement supersedes
Accounting Principles Board ("APB") Opinion No. 17 "Intangible Assets." SFAS No.
142 establishes new standards for measuring the carrying value of goodwill
related to acquired companies. Management is currently analyzing the impact of
adopting SFAS No. 142, which will become effective for the Company on April 29,
2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to market risk from changes in interest rates on debt and
foreign currency exchange rates. The company's market risk sensitive instruments
are not entered into for trading purposes. The company has not experienced any
significant changes in market risk since July 29, 2001.
The company's exposure to interest rate risk consists of floating rate debt
based on the London Interbank Offered Rate plus an adjustable margin under the
company's revolving credit agreement and variable rate debt in connection with
industrial revenue bonds. To lower or limit overall borrowing costs, the company
entered into interest rate swap agreements to modify the interest
characteristics of portions of its outstanding debt. The agreements entitle the
company to receive or pay to the counterparty (a major bank), on a quarterly
basis, the amounts, if any, by which the company's interest payments covered by
swap agreements differ from those of the counterparty. As of July 29, 2001 the
fair value of the swap agreements and changes in fair value resulting from
changes in market interest rates are recognized in the consolidated financial
statements because the interest rate swaps no longer serve as a hedge due to the
repayment of debt in fiscal 2001. The annual impact on the company's results of
operations of a 100 basis point interest rate change on the July 29, 2001
outstanding balance of the variable rate debt would be approximately $320,000
irrespective of any swaps.
The company's exposure to fluctuations in foreign currency exchange rates is due
primarily to a foreign subsidiary domiciled in Canada and firmly committed and
anticipated purchases purchases of certain machinery, equipment and raw
materials in foreign currencies. The company's Canadian subsidiary uses the
United States dollar as its functional currency. The company generally does not
use financial derivative instruments to hedge foreign currency exchange rate
risks associated with the Canadian subsidiary. However, the company generally
enters into foreign exchange forward and option contracts as a hedge against its
exposure to currency fluctuations on firmly committed and anticipated purchases
of certain machinery, equipment and raw materials. The Canadian subsidiary is
not material to the company's consolidated results of operations; therefore, the
impact of a 10% change in the exchange rate at July 29, 2001 would not have a
significant impact on the company's results of operations or financial position.
Additionally, as the company utilizes foreign currency instruments for hedging
anticipated and firmly committed transactions, a loss in fair value for those
instruments is generally offset by increases in the value of the underlying
exposure.
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are filed 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 January
29, 1995, filed March 15, 1995, and are
incorporated herein by reference.
3(ii) Restated and Amended Bylaws of the Company, as
amended June 12, 2001.
3(iii) Articles of Amendment of Culp, Inc. dated
October 5, 1999 for the purpose of amending its
Restated Charter to fix the designation,
preferences, limitations and relative rights of a
series of its Preferred Stock. The Articles of
Amendment of Culp, Inc. were filed as Exhibit
3(iii) to the Company's Form 10-Q for the quarter
ended October 31, 1999, filed December 15, 1999,
and are incorporated herein by reference.
10(a) Sixth Amendment to Credit Agreement dated March
28, 2001, among Wachovia Bank, N.A., as agent,
First Union National Bank, as documentation agent,
and Wachovia Bank, N.A., First Union National Bank,
and Suntrust Bank as lenders.
10(b) Seventh Amendment to Credit Agreement,
dated August 29, 2001, among Wachovia Bank, N.A.,
as agent, First Union National Bank, as
documentation agent, and Wachovia Bank, N.A.,
First Union National Bank, and Suntrust Bank as
lenders.
(b) Reports on Form 8-K:
The following reports on Form 8-K were filed during the period covered
by this report:
(1)Form 8-K dated August 22, 2001, included under Item 5,
Other Events, the Company's press release for quarterly earnings
and the Financial Information Release relating to certain
financial information for the quarter and year ended July 29,
2001.
SIGNATURE
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: September 12, 2001 By: s/s Franklin N. Saxon
Franklin N. Saxon
Executive Vice President and
Chief Financial Officer
(Authorized to sign on behalf
of the registrant and also sign-
ing as principal financial officer)