UNITED STATES
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 January 26, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
Common shares outstanding at January 26, 2003: 11,486,709
Par Value: $.05
INDEX TO FORM 10-Q
For the period ended January 26,2003
Part I - Financial Statements. Page
- ------------------------------------------ ------
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Income (Loss) Three and Nine Months Ended I-1
January 26, 2003 and January 27, 2002
Consolidated Balance Sheets January 26, 2003, January 27, 2002 and I-2
April 28,2002
Consolidated Statements of Cash Flows Nine Months Ended January 26, I-3
2003 and January 27, 2002
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial I-16
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About I-27
Market Risk
Item 4. Controls and Procedures I-28
Part II - Other Information
- -------------------------------------
Item 6. Exhibits and Reports on Form 8-K II-1
Signature II-2
Certifications II-2
Item 1: Financial Statements
CULP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND NINE MONTHS ENDED JANUARY 26, 2003 AND JANUARY 27, 2002
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- ----------------------------
January 26, January 27, % Over
2003 2002 (Under) 2003 2002
-------------- ------------- ------------- ---------------- ----------
Net sales $ 79,292 90,618 (12.5)% 100.0 % 100.0 %
Cost of sales 65,504 77,110 (15.1)% 82.6 % 85.1 %
-------------- ------------- ------------- ---------------- ----------
Gross profit 13,788 13,508 2.1 % 17.4 % 14.9 %
Selling, general and
administrative expenses 9,798 11,038 (11.2)% 12.4 % 12.2 %
Restructuring expense and asset impairment charges (354) 0 (100.0)% (0.4)% 0.0 %
-------------- ------------- ------------- ---------------- ----------
Income from operations 4,344 2,470 75.9 % 5.5 % 2.7 %
Interest expense 1,665 1,820 (8.5)% 2.1 % 2.0 %
Interest income (143) (42) 240.5 % (0.2)% (0.0)%
Other expense (income), net 192 435 (55.9)% 0.2 % 0.5 %
-------------- ------------- ------------- ---------------- ----------
Income before income taxes 2,630 257 923.3 % 3.3 % 0.3 %
Income taxes * 963 87 1,006.9 % 36.6 % 34.0 %
-------------- ------------- ------------- ---------------- ----------
Net Income $ 1,667 170 880.6 % 2.1 % 0.2 %
============== ============= ============= ================ ==========
Net Income per share-basic $0.15 $0.02 650.0 %
Net Income per share-diluted $0.14 $0.02 600.0 %
Average shares outstanding-basic 11,485 11,221 2.4 %
Average shares outstanding-diluted 11,714 11,304 3.6 %
NINE MONTHS ENDED (UNAUDITED)
-----------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- ----------------------------
January 26, January 27, % Over
2003 2002 (Under) 2003 2002
-------------- ------------- ------------- ---------------- ----------
Net sales $ 248,753 273,481 (9.0)% 100.0 % 100.0 %
Cost of sales 207,368 233,642 (11.2)% 83.4 % 85.4 %
-------------- ------------- ------------- ---------------- ----------
Gross profit 41,385 39,839 3.9 % 16.6 % 14.6 %
Selling, general and
administrative expenses 29,716 33,823 (12.1)% 11.9 % 12.4 %
Restructuring expense and asset impairment charges 13,006 1,303 898.2 % 5.2 % 0.5 %
-------------- ------------- ------------- ---------------- ----------
Income (loss) from operations (1,337) 4,713 (128.4)% (0.5)% 1.7 %
Interest expense 5,244 5,851 (10.4)% 2.1 % 2.1 %
Interest income (414) (99) 318.2 % (0.2)% (0.0)%
Other expense (income), net 645 1,772 (63.6)% 0.3 % 0.6 %
-------------- ------------- ------------- ---------------- ----------
Loss before income taxes (6,812) (2,811) (142.3)% (2.7)% (1.0)%
Income taxes * (2,804) (956) 193.3 % 41.2 % 34.0 %
-------------- ------------- ------------- ---------------- ----------
Loss before cumulative effect of accounting change (4,008) (1,855) (116.1)% (1.6)% (0.7)%
================ ==========
Cumulative effect of accounting change, net of income
taxes (24,151) 0
-------------- -------------
Net loss $ (28,159) (1,855)
============== =============
Basic loss per share:
Loss before cumulative effect of accounting
change $ (0.35) (0.17) (111.7)%
Cumulative effect of accounting change (2.11) 0.00 (100.0)%
-------------- ------------- ----------
Net loss (2.46) (0.17) (1,387.6)%
============== ============= ==========
Diluted loss per share:
Loss before cumulative effect of accounting
change $ (0.35) (0.17) (111.7)%
Cumulative effect of accounting change (2.11) 0.00 (100.0)%
-------------- ------------- ----------
Net loss (2.46) (0.17) (1,387.6)%
============== ============= ==========
Average shares outstanding-basic 11,450 11,221 2.0 %
Average shares outstanding-diluted 11,450 11,221 2.0 %
* Percent of sales column for income taxes is calculated as a % of income (loss)
before income taxes.
CULP, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 26, 2003, JANUARY 27, 2002, AND APRIL 28, 2002
Unaudited
(Amounts in Thousands)
Amounts Increase
------------------------------ (Decrease)
January 26, January 27, ------------------------- * April 28,
2003 2002 Dollars Percent 2002
--------------- ------------- ---------- ------------- ------------
Current assets
Cash and cash investments $ 38,480 10,359 28,121 271.5 % 31,993
Accounts receivable 32,427 46,171 (13,744) (29.8)% 43,366
Inventories 53,560 59,398 (5,838) (9.8)% 57,899
Other current assets 15,339 9,323 6,016 64.5 % 13,413
--------------- ------------- ---------- ------------- ------------
Total current assets 139,806 125,251 14,555 11.6 % 146,671
Property, plant & equipment, net 85,396 102,457 (17,061) (16.7)% 89,772
Goodwill 9,240 47,432 (38,192) (80.5)% 47,083
Other assets 2,311 1,641 670 40.8 % 4,187
--------------- ------------- ---------- ------------- ------------
Total assets $ 236,753 276,781 (40,028) (14.5)% 287,713
=============== ============= ========== ============= ============
Current liabilities
Current maturities of long-term debt $ 13,133 3,127 10,006 320.0 % 1,483
Accounts payable 21,924 21,336 588 2.8 % 24,327
Accrued expenses 14,646 13,652 994 7.3 % 16,460
Accrued restructuring 8,465 1,363 7,102 521.1 % 2,445
--------------- ------------- ---------- ------------- ------------
Total current liabilities 58,168 39,478 18,690 47.3 % 44,715
Long-term debt 83,008 106,960 (23,952) (22.4)% 107,001
Deferred income taxes 3,502 10,330 (6,828) (66.1)% 16,932
--------------- ------------- ---------- ------------- ------------
Total liabilities 144,678 156,768 (12,090) (7.7)% 168,648
Shareholders' equity 92,075 120,013 (27,938) (23.3)% 119,065
--------------- ------------- ---------- ------------- ------------
Total liabilities and
shareholders' equity $ 236,753 276,781 (40,028) (14.5)% 287,713
=============== ============= ========== ============= ============
Shares outstanding 11,487 11,221 266 2.4 % 11,320
=============== ============= ========== ============= ============
* Derived from audited financial statements.
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 26, 2003 AND JANUARY 27, 2002
Unaudited
(Amounts in Thousands)
NINE MONTHS ENDED
----------------------------
Amounts
----------------------------
January 26, January 27,
2003 2002
------------- -------------
Cash flows from operating activities:
Net loss $ (28,159) (1,855)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of accounting change, net of income taxes 24,151 0
Depreciation 10,554 13,214
Amortization of intangible and other assets 286 1,177
Amortization of stock based compensation 158 92
Restructuring expense 13,006 1,303
Changes in assets and liabilities:
Accounts receivable 10,939 11,678
Inventories 4,339 599
Other current assets (1,885) (1,453)
Other assets 295 (19)
Accounts payable (5,477) (1,768)
Accrued expenses (1,551) (1,156)
Accrued restructuring (2,792) (2,163)
Income taxes payable 0 (1,268)
------------- -------------
Net cash provided by operating activities 23,864 18,381
------------- -------------
Cash flows from investing activities:
Capital expenditures (9,076) (3,393)
------------- -------------
Net cash used in investing activities (9,076) (3,393)
------------- -------------
Cash flows from financing activities:
Principal payments of long-term debt (12,343) (1,569)
Change in accounts payable-capital expenditures 3,074 (4,267)
Proceeds from common stock issued 968 0
------------- -------------
Net cash used in financing activities (8,301) (5,836)
------------- -------------
Increase in cash and cash investments 6,487 9,152
Cash and cash investments at beginning of period 31,993 1,207
------------- -------------
Cash and cash investments at end of period $ 38,480 10,359
============= =============
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 Income Equity
- ------------------------------------------------------------------------------------------------------------------------------
Balance, April 29, 2001 11,221,158 $ 561 36,915 84,326 $ 121,802
Net loss (3,440) (3,440)
Net gain on cash flow hedges 7 7
Common stock issued in connection
with stock option plans 98,426 5 691 696
- ------------------------------------------------------------------------------------------------------------------------------
Balance, April 28, 2002 11,319,584 $ 566 37,606 80,886 7 $ 119,065
Net loss (28,159) (28,159)
Net gain on cash flow hedges 43 43
Common stock issued in connection
with stock option plans 167,125 8 1,118 1,126
- ------------------------------------------------------------------------------------------------------------------------------
Balance, Janaury 26, 2003 11,486,709 $ 574 38,724 52,727 50 $ 92,075
==============================================================================================================================
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 notes 2, 8 and 12 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 26, 2002 for the fiscal year ended April 28, 2002.
================================================================================
2. Accounts Receivable
A summary of accounts receivable follows (dollars in thousands):
- -------------------------------------------------------------------------------
January 26, 2003 April 28, 2002
- -------------------------------------------------------------------------------
Customers $ 34,933 $ 46,886
Allowance for doubtful accounts (1,625) (2,465)
Reserve for returns and allowances (881) (1,055)
- -------------------------------------------------------------------------------
$ 32,427 $ 43,366
During fiscal 2003, the company placed significant focus on reducing outstanding
accounts receivable, including a concerted effort to collect past due accounts,
shorten payment terms by offering a cash discount and resolve old items within
receivable accounts. In the third quarter, due to the decrease in past due
receivable balances, there was a net reduction of $435,000 in the allowance for
doubtful accounts. This compares with bad debt expense of $703,000 in the year
earlier period. Additionally, as a result of this effort, the company has
resolved $370,000 in old, open credits with customers which were credited to net
sales during the quarter.
================================================================================
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):
- -------------------------------------------------------------------------------
January 26, 2003 April 28, 2002
- -------------------------------------------------------------------------------
Raw materials $ 24,824 $ 27,081
Work-in-process 4,029 3,830
Finished goods 24,952 27,233
- -------------------------------------------------------------------------------
Total inventories valued at FIFO 53,805 58,144
Adjustments of certain inventories to LIFO (245) (245)
- -------------------------------------------------------------------------------
$ 53,560 $ 57,899
===============================================================================
4. Accounts Payable
A summary of accounts payable follows (dollars in thousands):
- -------------------------------------------------------------------------------
January 26, 2003 April 28, 2002
- -------------------------------------------------------------------------------
Accounts payable-trade $ 17,470 $ 22,947
Accounts payable-capital expenditures 4,454 1,380
- -------------------------------------------------------------------------------
$ 21,924 $ 24,327
===============================================================================
5. Accrued Expenses
A summary of accrued expenses follows (dollars in thousands):
- --------------------------------------------------------------------------------
January 26, 2003 April 28, 2002
- --------------------------------------------------------------------------------
Compensation, commissions and related benefits $ 8,326 $ 10,122
Interest 2,465 1,111
Other 3,855 5,227
- --------------------------------------------------------------------------------
$ 14,646 $ 16,460
================================================================================
6. Long-Term Debt
A summary of long-term debt follows (dollars in thousands):
- -------------------------------------------------------------------------------
January 26, 2003 April 28, 2002
- -------------------------------------------------------------------------------
Unsecured term notes $ 75,000 $ 75,000
Industrial revenue bonds 19,712 30,612
Canadian government loan 1,429 1,852
Obligations to sellers 0 1,020
- -------------------------------------------------------------------------------
96,141 108,484
Less current maturities (13,133) (1,483)
- -------------------------------------------------------------------------------
$ 83,008 $ 107,001
- -------------------------------------------------------------------------------
In August 2002, the company entered into an agreement with its principal
bank lender that provides for a revolving loan commitment of $15.0 million,
including letters of credit up to $2.5 million. The agreement provides an
additional $21.0 million in letters of credit supporting the industrial revenue
bonds described below. Borrowings under the facility generally carry interest at
the London Interbank Offered Rate plus an adjustable margin based upon the
company's debt/EBITDA ratio, as defined by the agreement. As of January 26,
2003, there were $855,000 in outstanding letters of credit in support of
inventory purchases and no borrowings outstanding under the agreement. Letter of
credit and commitment fees are also determined by the company's debt/EBITDA
ratio, as defined by the agreement. The credit facility expires in August 2004.
The unsecured term notes have an average remaining term of 6 years. The
principal payments become due from March 2006 to March 2010. Interest is payable
semi-annually at a fixed coupon rate of 7.76%.
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 accrued thereunder. As of January 26, 2003, the interest rate on
outstanding IRBs was 3.75%, including the letter of credit fee percentage.
On March 3, 2003, the company elected to prepay $12.7 million of IRB debt.
Accordingly, this amount has been reclassified as current maturities of
long-term debt. The remaining $7.0 million in IRB debt is due to be repaid in
2009.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At January 26, 2003, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
fiscal years are: 2003 - $0; 2004 - $476,000; 2005 - $476,000; 2006 -
$11,477,000; and 2007 - $11,000,000.
================================================================================
7. Cash Flow Information
Payments (refunds) for interest and income taxes for the nine months ended
January 26, 2003 and January 27, 2002 follow (dollars in thousands):
- -------------------------------------------------------------------------------
2003 2002
- -------------------------------------------------------------------------------
Interest $ 3,954 $ 4,977
Income taxes (refunds) (1,746) 1,553
===============================================================================
8. Restructuring and Asset Impairment Charges
A summary of accrued restructuring reserve activity follows:
Chattanooga Restructuring
In August 2002, management approved a restructuring plan within the Culp
Decorative Fabrics division aimed at lowering manufacturing costs, simplifying
the dobby fabric upholstery line, increasing asset utilization and enhancing the
division's manufacturing competitiveness. The restructuring plan principally
involves (1) consolidation of the division's weaving, finishing, yarn-making and
distribution operations by closing the facility in Chattanooga, Tennessee and
integrating these functions into other plants, (2) a significant reduction in
the number of stock keeping units (SKUs) offered in the dobby product line and
(3) a net reduction in workforce of approximately 300 positions. During the
second quarter of fiscal 2003, the total restructuring and related charges
incurred were $13.2 million, of which approximately $2.9 million represented
non-cash items relating to fixed asset write-downs included in restructuring
expense and $1.2 million represented machinery and equipment relocation costs
included in cost of sales. During the third quarter of fiscal 2003, related
charges of $751,000 representing machinery and equipment relocation costs and
inventory mark-downs were included in cost of sales. Additional related charges
of approximately $750,000 are estimated to be recorded over the next three
months.
As of January 26, 2003, there were no assets classified as held for sale in
relation to the Chattanooga restructuring.
The following summarizes the activity in the restructuring accrual (dollars
in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2003 $ 1,972 $ 7,194 $ 9,166
Paid in fiscal 2003 (1,103) (536) (1,639)
- --------------------------------------------------------------------------------
Balance, January 26, 2003 $ 869 $ 6,658 $ 7,527
- --------------------------------------------------------------------------------
Wet Printed Flock Restructuring
In April 2002, management approved a plan to exit the wet printed flock
upholstery fabric business. The exit plan involved closing a printing facility
and flocking operation within the Culp Velvets/Prints (CVP) division, reduction
in related selling and administrative expenses and termination of 25 employees.
The total charge for the exit plan was $9.7 million, of which approximately $8.2
million represented non-cash items relating to fixed asset and inventory
write-downs.
During the second quarter of fiscal 2003, an additional restructuring
expense of $1.3 million was recorded for the non-cash write-down of assets to
reflect the deterioration in market value experienced since April 2002.
During the third quarter of fiscal 2003, as a result of management's
continual evaluation of the restructuring accrual, the reserve was reduced
$313,000 for employee termination benefits to reflect current estimates of
future health care claims. Additionally, the reserve was reduced $42,000 for
lease termination and other exit costs to reflect current estimates of future
security expenses and other costs.
As of January 26, 2003, assets classified as held for sale, including a
building, machinery and equipment, of $485,000 are included in other assets.
Management is actively marketing these assets and anticipates the successful
disposal of these assets. There were no assets classified as held for sale at
January 27, 2002.
The following summarizes the activity in the CVP restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2002 $ 842 $ 610 $ 1,452
Paid in fiscal 2002 (5) (5) (10)
- --------------------------------------------------------------------------------
Balance, April 28, 2002 837 605 1,442
Adjustments in fiscal 2003 (313) (42) (355)
Paid in fiscal 2003 (424) (111) (535)
- --------------------------------------------------------------------------------
Balance, January 26, 2003 $ 100 $ 452 $ 552
- --------------------------------------------------------------------------------
CDF Restructuring
During fiscal 2001 and continuing into fiscal 2002, the company undertook a
restructuring plan in its upholstery fabric segment which involved (1) the
consolidation of certain fabric manufacturing capacity within the Culp
Decorative Fabrics (CDF) division, (2) closing one of the company's four yarn
manufacturing plants within the Culp Yarn division, (3) an extensive reduction
in selling, general and administrative expenses including the termination of 110
employees and (4) a comprehensive SKU reduction initiative related to finished
goods and raw materials in CDF. For fiscal 2001, the total restructuring and
related charges incurred were $7.4 million, of which approximately $3.4 million
represented non-cash items relating to fixed asset and inventory write-downs,
and $931,000 represented machinery and equipment relocation costs included in
cost of sales. During the first quarter of fiscal 2002, the total restructuring
and related charges incurred were $2.3 million, of which $160,000 represented
non-cash items relating to fixed asset write-downs included in restructuring
expense and $1.0 million represented machinery and equipment relocation costs
included in cost of sales. During the second quarter of fiscal 2002,
restructuring related charges of $158,000 were incurred and represented
machinery and equipment relocation costs included in cost of sales.
During the third quarter of fiscal 2003, as result of management's
continual evaluation of the restructuring accrual, the reserve was reduced
$275,000 for employee termination benefits to reflect current estimates of
future health care claims. Additionally, the reserve was increased $276,000 for
lease termination and other exit costs to reflect current estimates of remaining
lease expenses, property taxes, insurance and other exit costs.
As of January 26, 2003 and January 27, 2002, there were no assets
classified as held for sale in relation to the CDF restructuring.
The following summarizes the activity in the CDF restructuring accrual
(dollars in thousands):
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2001 $ 969 $ 2,116 $ 3,085
Paid in fiscal 2001 (491) (211) (702)
- --------------------------------------------------------------------------------
Balance, April 29, 2001 478 1,905 2,383
Additions in fiscal 2002 925 218 1,143
Paid in fiscal 2002 (891) (1,632) (2,523)
- --------------------------------------------------------------------------------
Balance, April 28, 2002 512 491 1,003
Adjustments in fiscal 2003 (275) 276 1
Paid in fiscal 2003 (137) (481) (618)
- --------------------------------------------------------------------------------
Balance, January 26, 2003 $ 100 $ 286 $ 386
- --------------------------------------------------------------------------------
================================================================================
9. Comprehensive Income (Loss)
Comprehensive income (loss) is the total of net income (loss) and other
changes in equity, except those resulting from investments by shareholders and
distributions to shareholders not reflected in net income (loss).
A summary of total comprehensive income for the three months ended January
26, 2003 and January 27, 2002 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net income $ 1,667 $ 170
Gain (loss) on foreign currency contracts, net of taxes:
Net changes in fair value 99 (60)
Net gains (losses) reclassified into earnings (85) 13
- --------------------------------------------------------------------------------
$ 1,681 $ 123
- --------------------------------------------------------------------------------
A summary of total comprehensive loss for the nine months ended January 26, 2003
and January 27, 2002 follows (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net loss $ (28,159) $(1,855)
Gain (loss) on foreign currency contracts, net of taxes:
Net changes in fair value 49 (56)
Net gains (losses) reclassified into earnings (6) 30
- --------------------------------------------------------------------------------
$ (28,116) $(1,881)
- --------------------------------------------------------------------------------
Gains on cash flow hedges reflected in other comprehensive loss above are
expected to be recognized in results of operations over the next three months.
================================================================================
10. Income (Loss) per Share
Basic income (loss) per share is computed using the weighted-average number
of shares outstanding during the period. Diluted income per share uses the
weighted-average number of shares outstanding during the period plus the
dilutive effect of stock options calculated using the treasury stock method.
Weighted average shares used in the computation of basic and diluted income
(loss) per share follows:
(in thousands) Three Months Ended
- -------------------------------------------------------------------------------
January 26, 2003 January 27, 2002
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, basic 11,485 11,221
Effect of dilutive stock options 229 83
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, diluted 11,714 11,304
- --------------------------------------------------------------------------------
Options to purchase 1,718,125 shares and 987,926 shares of common stock
were not included in the computation of diluted income per share for the three
months ended January 26, 2003 and January 27, 2002, respectively, because the
exercise price of the options was greater than the average market price of the
common shares.
Weighted average shares used in the computation of basic and diluted loss
per share for the nine months ended January 26, 2003 and January 27, 2002 do not
include stock options because the effect would be antidilutive.
================================================================================
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, 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, other current assets, property, plant and equipment,
and other assets on a total company basis. Thus, identifiable assets by business
segment represent accounts receivable, inventories and goodwill.
Sales and gross profit for the company's operating segments for the three
months ended January 26, 2003 and January 27, 2002 follow (dollars in
thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 55,909 $ 65,844
Mattress Ticking 23,383 24,774
- --------------------------------------------------------------------------------
$ 79,292 $ 90,618
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 8,088 $ 6,828
Mattress Ticking 5,700 6,680
- --------------------------------------------------------------------------------
$ 13,788 $ 13,508
- --------------------------------------------------------------------------------
Sales and gross profit for the company's operating segments for the nine
months ended January 26, 2003 and January 27, 2002 follow (dollars in
thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Net sales
Upholstery Fabrics $ 174,269 $ 197,869
Mattress Ticking 74,484 75,612
- --------------------------------------------------------------------------------
$ 248,753 $ 273,481
- --------------------------------------------------------------------------------
Gross Profit
Upholstery Fabrics $ 23,739 $ 19,561
Mattress Ticking 17,646 20,278
- --------------------------------------------------------------------------------
$ 41,385 $ 39,839
- --------------------------------------------------------------------------------
Identifiable assets, consisting of accounts receivable, inventories and
goodwill for the company's operating segments as of January 26, 2003 and January
27, 2002 follow (dollars in thousands):
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Upholstery Fabrics $ 66,839 $ 123,374
Mattress Ticking 28,388 28,737
- --------------------------------------------------------------------------------
$ 95,227 $ 153,001
- --------------------------------------------------------------------------------
================================================================================
12. Recently Adopted Accounting Standard
The company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective April 29, 2002. SFAS No. 142 represents a substantial change in how
goodwill is accounted for. SFAS No. 142 requires that goodwill no longer be
amortized and that goodwill be tested for impairment by comparing each reporting
unit's carrying value to its fair value. SFAS No. 142 requires that any goodwill
impairment loss recognized as a result of initial application be reported as a
change in accounting principle, and that the income per share effects of the
accounting change be separately disclosed.
As required by the standard, the company ceased recording goodwill
amortization for fiscal 2003. The following table reconciles fiscal 2002 net
income (loss) to its amount adjusted to exclude goodwill:
(in thousands, except per share data) Three Months Ended Nine Months Ended
- --------------------------------------------------------------------------------
January 27, 2002 January 27, 2002
- --------------------------------------------------------------------------------
Reported net income (loss) $ 170 $ (1,855)
Goodwill amortization, net of tax 230 690
- --------------------------------------------------------------------------------
Adjusted net income (loss) 400 (1,165)
- --------------------------------------------------------------------------------
Basic
Reported net income (loss) per share 0.02 (0.17)
Adjusted net income (loss) per share 0.04 (0.11)
Diluted
Reported net income (loss) per share 0.02 (0.17)
Adjusted net income (loss) per share 0.04 (0.11)
- --------------------------------------------------------------------------------
For the initial application of SFAS No. 142, an independent business
valuation specialist was engaged to assist the company in the determination of
the fair market value of the Culp Decorative Fabrics (CDF) division because of
the significance of the goodwill associated with the division and due to its
operating performance for fiscal 2002 and 2001. The fair value of the CDF
division as determined using several different valuation methods, including
comparable companies, comparable transactions and discounted cash flow analysis,
was determined to be less than its carrying value. Accordingly, the company
recorded a goodwill impairment charge of $37.6 million ($24.2 million net of
taxes of $13.4 million), or $2.11 per share diluted, related to the goodwill
associated with the CDF division. After the goodwill impairment charge, the
company's goodwill by division is: Culp Decorative Fabrics - $4.4 million, Culp
Yarn - $700,000 and Culp Home Fashions - $4.1 million.
================================================================================
13. Recent Accounting Pronouncements
In December 2002, the Financial Accounting Standards Board issued SFAS
No.148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." This statement provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No.148
requires prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure provisions of the
statement are effective for financial statements for fiscal years ending after
December 15, 2002 and interim periods beginning after December 15, 2002. The
adoption of SFAS 148 will require enhanced disclosures for the Company's
stock-based employee compensation plans.
In November 2002, FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of FASB Interpretation No. 34." This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after December
15, 2002 and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for financial
statements of interim and annual periods ending after December 15, 2002.
================================================================================
Item 2.
Management's Discussion and Analysis of Financial
Condition and Results of Operations
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 mattress fabrics (ticking) for bedding. The company's
fabrics are used primarily in the production of residential and contract
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.
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 contract 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 primarily used by Culp. In mattress
ticking, Culp Home Fashions markets a broad array of fabrics used by bedding
manufacturers.
The following tables set forth the company's sales and gross profit by
segment/division, excluding restructuring related charges, and international
sales by geographic area for the three and nine months ended January 26, 2003
and January 27, 2002.
(Amounts in thousands) THREE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------------- -----------------------
January 26, January 27, % Over
Segment/Division Sales 2003 2002 (Under) 2003 2002
- -------------------------------- --------------- -------------- ---------- ----------- ----------
Upholstery Fabrics
Culp Decorative Fabrics $ 31,734 35,878 (11.6)% 40.0 % 39.6 %
Culp Velvets/Prints 22,819 28,648 (20.3)% 28.8 % 31.6 %
Culp Yarn 1,356 1,318 2.9 % 1.7 % 1.5 %
--------------- -------------- ---------- ----------- ----------
55,909 65,844 (15.1)% 70.5 % 72.7 %
Mattress Ticking
Culp Home Fashions 23,383 24,774 (5.6)% 29.5 % 27.3 %
--------------- -------------- ---------- ----------- ----------
* $ 79,292 90,618 (12.5)% 100.0 % 100.0 %
=============== ============== ========== =========== ==========
Segment Gross Profit Gross Profit Margin
- -------------------------------- -----------------------
Upholstery Fabrics (1) $ 8,839 6,829 29.4 % 15.8 % 10.4 %
Mattress Ticking 5,700 6,679 (14.7)% 24.4 % 27.0 %
--------------- -------------- ---------- ----------- ----------
$ 14,539 13,508 7.6 % 18.3 % 14.9 %
=============== ============== ========== =========== ==========
NINE MONTHS ENDED (UNAUDITED)
--------------------------------------------------------------------
Amounts Percent of Total Sales
------------------------------- -----------------------
January 26, January 27, % Over
Segment/Division Sales 2003 2002 (Under) 2003 2002
- -------------------------------- --------------- -------------- ---------- ----------- ----------
Upholstery Fabrics
Culp Decorative Fabrics $ 100,324 109,531 (8.4)% 40.3 % 40.1 %
Culp Velvets/Prints 69,243 84,522 (18.1)% 27.8 % 30.9 %
Culp Yarn 4,702 3,816 23.2 % 1.9 % 1.4 %
--------------- -------------- ---------- ----------- ----------
174,269 197,869 (11.9)% 70.1 % 72.4 %
Mattress Ticking
Culp Home Fashions 74,484 75,612 (1.5)% 29.9 % 27.6 %
--------------- -------------- ---------- ----------- ----------
* $ 248,753 273,481 (9.0)% 100.0 % 100.0 %
=============== ============== ========== =========== ==========
Segment Gross Profit Gross Profit Margin
- -------------------------------- -----------------------
Upholstery Fabrics (1) $ 25,649 20,696 23.9 % 14.7 % 10.5 %
Mattress Ticking 17,647 20,278 (13.0)% 23.7 % 26.8 %
--------------- -------------- ---------- ----------- ----------
$ 43,296 40,974 5.7 % 17.4 % 15.0 %
=============== ============== ========== =========== ==========
* U.S. sales were $71,130 and $79,539 for the third quarter of fiscal 2003 and
fiscal 2002, respectively; and $218,957 and $233,617 for the nine months of
fiscal 2003 and 2002, respectively. The percentage decrease in U.S. sales was
10.6% for the third quarter and a decrease of 6.3% for the nine months.
(1) Excludes restructuring related charges of $751,000 for the third quarter of
fiscal 2003; and excludes $1.9 million and $1.2 million for the first nine
months of fiscal 2003 and 2002, respectively.
(Amounts in thousands) THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------
Amounts
---------------------------------
January 26, January 27, % Over
Geographic Area 2003 2002 (Under)
---------------------------------------- ---------------- --------------- -----------
North America (Excluding USA) $ 6,648 6,613 0.5 %
Europe 274 472 (41.9)%
Middle East 260 598 (56.5)%
Far East & Asia 765 2,924 (73.8)%
South America 94 155 (39.4)%
All other areas 121 318 (61.9)%
---------------- --------------- -----------
$ 8,162 11,079 (26.3)%
================ =============== ===========
Percent of total sales 10.3% 12.2%
NINE MONTHS ENDED (UNAUDITED)
------------------------------------------------
Amounts
---------------------------------
January 26, January 27, % Over
Geographic Area 2003 2002 (Under)
---------------------------------------- ---------------- --------------- -----------
North America (Excluding USA) $ 22,622 23,023 (1.7)%
Europe 535 2,115 (74.7)%
Middle East 1,907 4,804 (60.3)%
Far East & Asia 3,748 8,414 (55.5)%
South America 508 490 3.7 %
All other areas 476 1,018 (53.2)%
---------------- --------------- -----------
$ 29,796 39,864 (25.3) %
================ =============== ===========
Percent of total sales 12.0% 14.6%
International sales, and the percentage of total sales, for each of the last
three fiscal years follows: fiscal 2000-$111,104 (23%); fiscal 2001 - $77,824
(19%) and fiscal 2002 - $53,501 (14%).
Three and Nine Months ended January 26, 2003 compared with Three and Nine Months
ended January 27, 2002
For the third quarter, net sales decreased 12.5% to $79.3 million; and the
company reported net income of $1.7 million, or $0.14 per share diluted versus
net income of $170,000, or $0.02 per share diluted in the third quarter of
fiscal 2002. Excluding restructuring and related charges and credits, earnings
for the third quarter of fiscal 2003 were $1.9 million, or $0.16 per share
diluted versus net income of $400,000, or $0.04 per share diluted in the third
quarter of fiscal 2002, excluding goodwill amortization. For the first nine
months of fiscal 2003, net sales decreased 9.0% to $248.8 million, and the
company reported a net loss before cumulative effect of accounting change of
$4.0 million, or $0.35 per share diluted versus a net loss of $1.9 million, or
$0.17 per share diluted a year ago. Excluding restructuring and related charges
and credits, net income for the first nine months of fiscal 2003 was $5.1
million, or $0.43 per share diluted versus $447,000, or $0.04 per share diluted
for 2002, excluding goodwill amortization. The company reported further
improvement in its balance sheet by reducing funded debt by $12.3 million during
the first nine months of fiscal 2003 and ending the quarter with $38.5 million
in cash and cash investments.
During fiscal 2003, the company has placed significant focus on reducing
outstanding accounts receivable, including a concerted effort to collect past
due accounts, shorten payment terms by offering a cash discount and resolve old
items within receivable accounts. As of January 26, 2003, accounts receivable
decreased 29.8% from the year earlier levels. In the third quarter, due to the
decrease in past due receivable balances, there was a net reduction of $435,000
in the allowance for doubtful accounts. This compares with bad debt expense of
$703,000 in the year earlier period. Additionally, as a result of this effort,
the company has resolved $370,000 in old, open credits with customers, which
were credited to net sales during the quarter.
Restructuring Actions
The financial results for the third quarter include a total of $751,000 in
restructuring related charges, which were classified in cost of sales, and a
$354,000 credit classified under the restructuring expense line item. The
restructuring related charges of $751,000 represent inventory markdowns and
equipment relocation costs associated with the closing of the Chattanooga,
Tennessee facility within the Culp Decorative Fabrics division in October 2002.
The restructuring credit represents the reversal of previously accrued personnel
costs, principally extended health care benefit expense, relating to the exit of
the wet printed flock business during April 2002.
The Culp Decorative Fabrics (CDF) restructuring actions are expected to
significantly improve gross margins within the division, while allowing the
ability to meet foreseeable levels of demand on a substantially lower cost base.
The initiative is projected to result in annual cost savings of approximately
$12 to $15 million, beginning in the third quarter of fiscal 2003. Approximately
$8.0 million of these savings relate to fixed manufacturing costs, and the
remaining $4.0 to $7.0 million relate to variable manufacturing costs. Savings
from lower fixed manufacturing costs, which were achieved due to the closing of
the Chattanooga, Tennessee operation at the end of the second quarter, began
being realized and contributed to the third quarter results. However, while
there has been some progress on savings with variable manufacturing costs, the
company expects these benefits to begin being realized over the next two
quarters as operations within CDF achieve higher levels of efficiency.
The remaining elements from the CDF Chattanooga restructuring initiative to be
completed are as follows: (1) achieve targeted levels of operating efficiency
for the looms transferred into the Pageland operation, which is projected to
take until the end of the first quarter of fiscal 2004; (2) transfer certain
finishing and warping equipment to other CDF plants by the end of this fiscal
year; and (3) complete the capital expenditure projects related to the
restructuring.
Another important element of the CDF restructuring initiative was a major
reduction in the complexity of the dobby upholstery product line, which has led
to the elimination of approximately 1,500 low volume stock keeping units (SKUs)
representing about 70% of the finished goods SKUs (but only 10% of sales) in
that product category. This initiative is now substantially complete and has
been accomplished without significant disruptions of customer relationships.
The CDF restructuring is expected to result in total restructuring and related
charges of approximately $15 million, with approximately $14 million having been
incurred in the second and third quarters of this fiscal year. The company
currently estimates that this restructuring will result in additional charges of
approximately $750,000 during the fourth quarter of the fiscal year, most of
which relate to equipment relocation costs.
UPHOLSTERY FABRIC SEGMENT
NET SALES -- Upholstery fabric sales for the third quarter of fiscal 2003
decreased 15.1% to $55.9 million. Domestic upholstery fabric sales decreased
11.9% to $50.9 million, due primarily to overall weakness in consumer demand for
upholstered furniture, and other factors discussed below. International sales
decreased 37.9% to $5.0 million, due primarily to the exiting of the wet printed
flock fabric business in April 2002. For the first nine months of fiscal 2003,
upholstery fabric sales decreased 11.9% to $174.3 million due to lower consumer
demand and issues addressed below.
In addition to overall softness in demand during the quarter, the sales decrease
in upholstery fabrics is attributable to the company's strategy to focus on
improving the profitability of its sales mix by reducing or eliminating products
generating little or no profit. In the Culp Velvets/Prints division, the company
discontinued its unprofitable wet printed flock business at the end of last
fiscal year. This product line produced annual sales last year of approximately
$17 million with approximately $2 million in operating losses. In the CDF
division, the company discontinued about half of its finished goods SKUs (or
approximately 10,000) over the last year, most of which were small volume items
and were costly to produce. These discontinued SKUs include the dobby product
line SKUs that were recently eliminated as part of the Chattanooga
restructuring. The company expects this process of identifying and dropping its
low profit items to continue through the balance of this fiscal year.
The company believes additional factors that are likely impacting upholstery
fabric sales are (1) the increasing market share of leather furniture being sold
in the U.S.; and (2) the increase in imported fabrics, both in "piece goods" and
"cut and sewn kits."
GROSS PROFIT -- In spite of weak furniture demand, the upholstery fabric segment
improved its gross profit dollars and margins significantly. Excluding
restructuring related charges of $751,000 for the third quarter of fiscal 2003,
gross profit dollars and margin increased to $8.8 million and 15.8% from $6.8
million and 10.4% in the third quarter of last year. For the first nine months
of fiscal 2003, excluding restructuring related charges, gross profit dollars
and margin improved to $25.6 million and 14.7% compared to $20.7 million and
10.5% the previous year. The key factors behind this gain was a sharp
improvement in CDF due to: (1) a more profitable sales mix; (2) the increasing
productivity benefits from the CDF 2001 restructuring; and (3) the fixed cost
reduction benefits from the Chattanooga closure.
The company is optimistic that gross profit dollars and margins in the
upholstery fabric segment will continue to improve over the next few quarters,
driven principally by the progress within the CDF division. More specifically,
within CDF the company is focused on (1) creating and selling products with
better margins; (2) continuing to reduce low profit SKUs; and (3) improving
manufacturing performance in terms of productivity and inventory obsolescence
MATTRESS TICKING SEGMENT
NET SALES -- Mattress fabric (ticking) sales for the third quarter of fiscal
2003 decreased 5.6% to $23.4 million. Sales to U.S. bedding manufacturers fell
7.2% to $20.3 million, while sales to international customers increased by 5.9%
to $3.1 million. For the first nine months of fiscal 2003, mattress fabric sales
were slightly lower than last year, down 1.5% to 74.5 million. The sales
decrease is due to overall weakness in consumer demand for mattresses.
GROSS PROFIT -- The mattress fabric segment (Culp Home Fashions or CHF) reported
for the third quarter of fiscal 2003 gross profit dollars and margins of $5.7
million and 24.4%, respectively, both down from $6.7 million and 27.0% during
the corresponding quarter of the prior year. For the first nine months of fiscal
2003, gross profit dollars and margin decreased to $17.6 million and 23.7% from
$20.3 and 26.8% the previous year. The key factors impacting gross profit were
lower sales and the residual impact from a high cost European sourcing agreement
that ended October 31, 2002. During the quarter the division worked down its
inventory position of these products by reducing production. CHF entered into
this agreement with the supplier in October 2001 as part of the termination of a
long-term supply relationship. The agreement provided, among other things, that
the company maintain a certain level of weekly purchases through October 31,
2002. Therefore, for the first half of this fiscal year, the company was
required to source products from this supplier that were significantly more
expensive than products manufactured at the company's U.S. and Canadian plants
in order to meet the agreement's minimum purchase levels. The company had
planned during the last fiscal year for the termination of this supply agreement
by initiating a plan to increase capacity in the U.S. and Canadian plants
beginning in the first quarter and ending by January 2003. This capacity
expansion project accounts for approximately $4.5 million of the company's
fiscal 2003 capital spending. This supply agreement was concluded on October 31,
2002.
The company is currently evaluating the potential impact on profits based on a
decision by a major mattress ticking customer to begin production of one-sided
mattresses. This decision could potentially lower demand for the company's
mattress ticking products. However, management believes that any significant
impact on demand would not occur until early fiscal 2004. Additionally, the
company is currently examining alternatives to increase customer diversification
to offset this potential decrease in demand.
OTHER CORPORATE EXPENSES
Selling, General and Administrative Expenses. SG&A expenses for the third
quarter declined $1.2 million, or 11.2%, from the prior year, and as a percent
of net sales, SG&A expenses increased to 12.4% from 12.2%. SG&A expenses in the
third quarter included a net reduction of $435,000 in the allowance for doubtful
accounts, due to a decrease in past due receivable balances. This compares with
bad debt expense of $703,000 in the year-earlier period. Year to date SG&A
expenses were lower than the previous year by $4.1 million due primarily to
lower bad debt expense.
Interest Expense (Income). Interest expense for the third quarter declined to
$1.7 million from $1.8 million due to significantly lower borrowings
outstanding, offset somewhat by an increase in the interest rate on the
company's $75.0 million term loan. Interest income increased to $143,000 from
$42,000 due to significantly higher invested cash as compared with the prior
year. For the first nine months of fiscal 2003, interest expense declined to
$5.2 million from $5.9 the previous year, while interest income increased to
$414,000 from $99,000 versus the prior year.
Other Expense. Other expense for the third quarter of fiscal 2003 totaled
$192,000 compared with $435,000 in the prior year. For the first nine months of
fiscal 2003, other expense totaled $645,000 compared to $1.8 million last year.
The decrease was principally due to the adoption of SFAS No. 142, which
discontinued the amortization of goodwill. Goodwill amortization during the
third quarter and first nine months of fiscal 2002 was $350,000 and $1,050,000,
respectively.
Income Taxes. Excluding the cumulative effect of accounting change and
restructuring and related charges, the effective tax rate for the first nine
months of fiscal 2003 was 37.0% compared to 34.0% the prior year.
Liquidity and Capital Resources
Liquidity. Cash and cash investments as of January 26, 2003 increased to $38.5
million from $32.0 million at the end of fiscal 2002, reflecting cash flow from
operations of $23.9 million for the first nine months of fiscal 2003, capital
expenditures of $9.1 million, debt repayment of $12.3 million, stock issuance
from the sale of exercised stock options of $1.0 million and an increase in
accounts payable for capital expenditures of $3.1 million.
Accounts receivable as of January 26, 2003 decreased 29.8% from the year-earlier
level, due principally to the decline in international sales with their related
longer credit terms, repayment of past due balances and an increase in the
number of customers taking the cash discount for shorter payment terms. Days
sales outstanding totaled 34 days at January 26, 2003 compared with 43 a year
ago and 36 at last fiscal year end. Inventories at the close of the third
quarter decreased 9.8% from a year ago. Inventory turns for the third quarter
were 4.8 versus 5.1 for the year-earlier period. Operating working capital
(comprised of accounts receivable, inventory and accounts payable) was $64.1
million at January 26, 2003, down from $84.2 million a year ago.
EBITDA for the third quarter of fiscal 2003 was $8.1 million compared with $6.9
million in the prior year. EBITDA includes earnings before interest, income
taxes, depreciation, amortization, all restructuring and related charges,
certain non-cash charges and cumulative effect of accounting change, as defined
by the company's credit agreement.
Financing Arrangements. As of the end of the third quarter, the company had
reduced funded debt by $12.3 million from last fiscal year end. Funded debt
equals long-term debt plus current maturities. Funded debt was $96.1 million at
January 26, 2003, compared with $108.5 million at fiscal 2002 year end. The
company's funded debt-to-capital ratio was 51.1% at January 26, 2003. Since the
end of fiscal 2000 (two and three fourths years), the company has substantially
reduced its funded debt by a total of $41.3 million or 30.1%.
The company also reports its leverage statistics in terms of funded debt, net of
cash and cash investments, under the assumption it could use the cash to repay
debt at any time. Funded debt, net of cash and cash investments, was $57.7
million at January 26, 2003 compared with $76.5 million at fiscal 2002 year end.
In addition, funded debt, net of cash and cash investments, to capital employed
ratio was 38.5% and funded debt, net of cash and cash investments, to EBITDA was
1.54, which is substantially lower than the highest point level of 4.28 at
January 2001.
The company entered into a new loan agreement during August 2002 with its
principal bank lender that provides, among other things, for: (1) a two year
$34.7 million credit facility, which includes a $15.0 million revolving credit
line and $19.7 million for letters of credit for the company's industrial
revenue bonds (IRBs) excluding interest, (2) lower interest rates based upon a
pricing matrix, and (3) improved financial covenants. The IRBs are
collateralized by letters of credit for the outstanding balance of the IRBs and
certain interest payments accrued thereunder. Interest on the outstanding IRBs
as of January 26, 2003 was 3.75%, including the letter of credit fee percentage.
Also, the loan agreement specifically allows for the fiscal 2003 Culp Decorative
Fabrics restructuring and related charges (see discussion above).
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. The company's principal
financial covenants are (1) funded debt to EBITDA; (2) EBILTDA to interest
expense plus leases; (3) funded debt to total capital; (4) funded debt to
tangible capital; and (5) minimum tangible shareholders' equity. EBILTDA
includes earnings before interest, income taxes, lease expense, depreciation,
amortization, all restructuring and related charges, certain non-cash charges
and cumulative effect of accounting change, as defined by the company's credit
agreement. As of January 26, 2003, the company was in compliance with these
financial covenants.
The company initiated the early repayment of $12.7 million of its IRBs on March
3, 2003. Effective with this repayment of IRBs, under the terms of the company's
bank loan agreement, the liens on the company's assets pledged as collateral for
the company's outstanding loans are required to be removed. In addition, with
these debt retirements, the company will have reduced its funded debt by $25.0
million during fiscal 2003.
The remaining funded debt after repayment of these IRBs will be comprised of a
$75.0 million term loan, with a fixed interest rate of 7.76%, $7.0 million in
remaining IRBs and a $1.4 million, non-interest bearing term loan with the
Canadian government. The first scheduled principal payment on the $75.0 million
term loan is due March 2006, three years away, and it amounts to $11.0 million.
The Canadian government loan is repaid in annual installments of approximately
$450,000 per year.
The company plans to maintain a cash reserve of at least $25.0 million for the
foreseeable future. Cash accumulated above this level will likely be used to
repay the remaining $7.0 million in IRBs over the next several quarters. The
company has chosen to repay the outstanding IRBs first due to high prepayment
fees and costs associated with the $75 million term loan.
Capital Expenditures. Capital spending for the first nine months of fiscal 2003
was $9.1 million. The company's original budget for capital spending for all of
fiscal 2003 was $8.5 million, compared with $4.7 million in fiscal 2002. As part
of the fiscal 2003 restructuring plan in the Culp Decorative Fabrics division,
the company increased the budget by $4.5 million to $13.0 million. Depreciation
for the third quarter of fiscal 2003 totaled $3.4 million, and is projected at
$14.0 million for the full fiscal year.
Free Cash Flow. Free cash flow was $17.9 million for the first nine months of
fiscal 2003 compared with $10.7 million for the same period of the prior year.
The company defines free cash flow as cash from operations, less capital
expenditures, plus or minus the change in accounts payable for capital
expenditures. The key reasons for this improvement were continued improvement in
accounts receivable collections, lower inventory levels, higher profits and the
benefit from deferred payment terms for capital expenditures.
BUSINESS OUTLOOK
For the fourth quarter of fiscal 2003, the company believes consolidated sales
will decline in the same range as the third quarter decrease of 12.5% while
gross profit margins are expected to approximate last year's fourth quarter
gross margin of 21.8%, excluding restructuring and related charges, resulting in
lower gross profit dollars. More than offsetting this gross profit dollar
decrease, total SG&A, interest and other expenses are expected to decline
approximately $4.0 million in the fourth quarter, absent any large unusual
items, from a total of $17.3 million in last year's fourth quarter. The cost
reduction is due to several factors: (1) lower incentive compensation; (2) an
unusually high bad debt expense of $1.2 million in last year's fourth quarter;
(3) various reductions in other SG&A expenses; and (4) lower net interest
expense. The lower incentive compensation expense reflects the fact that the
entire fiscal 2002 amount was recorded in the fourth quarter since the company
was operating at a net loss through the third quarter and therefore did not meet
incentive targets. However, this year's expense was accrued more ratably over
the four quarterly periods as incentive targets were realized. Therefore, with
gross profit margin about the same on lower sales, and substantially lower
costs, the company is comfortable with the range of published analyst's earnings
estimates of $0.40 to $0.43 per share for the fourth quarter of fiscal 2003,
excluding any restructuring and related charges or large unusual items. Net
earnings for the fourth quarter of last year were $4.4 million, or $0.38 per
share, excluding restructuring and related charges and goodwill amortization.
The company's financial results over the last few quarters and its business
outlook clearly demonstrate the company's strategic focus on: (1) improving the
profitability of its sales mix; (2) increasing margins and return on capital
employed; and (3) generating free cash flow and strengthening its balance sheet.
Inflation
The cost of the company's raw materials has been generally stable during the
past several quarters. However, recently the company has experienced price
increases from certain raw material vendors and freight carriers due to rising
oil prices. Any prolonged and substantial increase in oil prices has the
potential to negatively impact profits in future quarters. The company is
currently evaluating these price increases and may decide to raise its prices to
customers in order to lesson the impact of increased costs on profitability.
Other factors that reasonably can be expected to influence margins in the future
include trends in other operating costs and overall competitive conditions.
Seasonality
The company's business is moderately seasonal, with increased 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.
Critical Accounting Policies and Recent Accounting Developments
The company considered the disclosure requirements of Financial Reporting
Release No. 60 regarding critical accounting policies and Financial Reporting
Release No. 61 regarding liquidity and capital resources, certain trading
activities and related party/certain other disclosures, and concluded that there
were no material changes during the first nine months of fiscal 2003 that would
warrant further disclosure beyond those matters previously disclosed in the
company's Annual Report on Form 10-K for the year ended April 28, 2002, except
for the areas noted below:
Long-lived Assets
The company adopted the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, effective April 29, 2002. SFAS No.
144 establishes a single accounting model for long-lived assets to be disposed
of by sale, and also resolves implementation issues related to SFAS 121.
Adoption of SFAS No. 144 did not have a significant impact on the company's
financial position, results of operations or cash flows.
Goodwill
As of April 29, 2002, Culp adopted SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 represents a substantial change in how goodwill is
accounted for. SFAS No. 142 requires that goodwill no longer be amortized and
that goodwill be tested for impairment by comparing the reporting unit's
carrying value to its fair value as of April 29, 2002. SFAS No. 142 requires
that any goodwill impairment loss recognized as a result of initial application
is reported as of the first quarter of fiscal 2003 as a change in accounting
principle, and that the income per share effects of the accounting change be
separately disclosed.
For initial application of SFAS No. 142, an independent business valuation
specialist was engaged to assist the company in the determination of the fair
market value of Culp Decorative Fabrics because of the significance of the
goodwill associated with the division and due to its operating performance for
fiscal 2001 and 2002. As a result of the adoption of SFAS No. 142, during the
first quarter of fiscal 2003 the company recorded a non-operating, non-cash
goodwill impairment charge of $37.6 million ($24.2 million net of taxes of $13.4
million), or $2.11 per share diluted, related to the goodwill associated with
the Culp Decorative Fabrics division. After the goodwill impairment charge, the
company's remaining goodwill relates to the following divisions: Culp Decorative
Fabrics - $4.4 million, Culp Yarn - $0.7 million and Culp Home Fashions - $4.1
million.
Forward-Looking Information
This Report 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 (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. Forward-looking statements are statements that include projections,
expectations or beliefs about future events of 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 the company's future sales, gross profit
margins, SG&A or other expenses, and earnings, as well as any statements
regarding the company's view of estimates of the company's future results by
analysts. 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. Finally,
unanticipated delays or costs in executing restructuring actions could cause the
cumulative effect of restructuring actions to fail to meet the objectives set
forth by management.
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 January 26, 2003.
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. The annual impact on the company's results of
operations of a 100 basis point interest rate change on the January 26, 2003
outstanding balance of the variable rate debt would be approximately $197,000.
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 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 amount of Canadian-denominated sales
and manufacturing costs are not material to the company's consolidated results
of operations; therefore, a 10% change in the exchange rate at January 26, 2003
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.
Item 4. Controls and Procedures
Within 90 days of the filing of this report, the company conducted a review and
evaluation of its disclosure controls and procedures, under the supervision and
with the participation of the company's Chief Executive Officer and Chief
Financial Officer. Based upon this review, the Chief Executive Officer and Chief
Financial Officer concluded that the company's disclosure controls and
procedures were adequate and effective to ensure that information required to be
disclosed is recorded, processed, summarized, and reported in a timely manner.
There were no significant changes in the company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation described above, nor were there any significant deficiencies or
material weaknesses in the controls which required corrective action.
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
included July 28, 2002, filed September 11, 2002, and are
incorporated herein by reference.
3(ii) Restated and Amended Bylaws of the Company, as amended June 12,
2001, were filed as Exhibit 3(ii) to the Company's Form
10-Q for the quarter ended July 29, 2001 filed September
12, 2001, and are incorporated herein by reference.
10(a) 2002 Stock Option Plan
99(a) Certification of Chief Executive Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
99(b) Certification of Chief Financial Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
(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 November 25, 2002, 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 six months ended October 27, 2002.
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: March 12, 2003 By: /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)
CERTIFICATIONS
I, Robert G. Culp, III, Chairman of the Board and Chief Executive Officer of
Culp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effective of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 12, 2003
/s/ Robert G. Culp, III
-------------------
Robert G. Culp, III
Chairman of the Board and
Chief Executive Officer
I, Franklin N. Saxon, Executive Vice President and Chief Financial Officer of
Culp, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Culp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effective of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 12, 2003
/s/ Franklin N. Saxon
-----------------
Franklin N. Saxon
Executive Vice President and
Chief Financial Officer