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 February 1, 2004
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
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of the latest practical date:
Common shares outstanding at February 1, 2004: 11,528,834
Par Value: $.05
INDEX TO FORM 10-Q
For the period ended February 1, 2004
Part I - Financial Statements. Page
- ------------------------------------------ -------
Item 1. Unaudited Interim Consolidated Financial Statements:
Consolidated Statements of Income (Loss)--Three and Nine Months Ended
February 1, 2004 and January 26, 2003 I-1
Consolidated Balance Sheets February 1, 2004, January 26, 2003 and
April 27, 2003 I-2
Consolidated Statements of Cash Flows--Nine Months Ended
February 1, 2004 and January 26, 2003 I-3
Consolidated Statements of Shareholders' Equity I-4
Notes to Consolidated Financial Statements I-5
Item 2. Management's Discussion and Analysis of Financial I-17
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About I-25
Market Risk
Item 4. Controls and Procedures I-25
Part II - Other Information
- ------------------------------------
Item 6. Exhibits and Reports on Form 8-K II-1
Signature II-2
CULP, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE THREE MONTHS AND NINE MONTHS ENDED FEBRUARY 1, 2004 AND JANUARY 26, 2003
Unaudited
(Amounts in Thousands, Except for Per Share Data)
THREE MONTHS ENDED
-------------------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- ------------------------------
February 1, January 26, % Over February 1, January 26,
2004 2003 (Under) 2004 2003
------------- ------------- ------------- ------------- -------------
Net sales $ 76,561 79,492 (3.7) % 100.0 % 100.0 %
Cost of sales 62,093 65,704 (5.5) % 81.1 % 82.7 %
------------- ------------- ------------- ------------- -------------
Gross profit 14,468 13,788 4.9 % 18.9 % 17.3 %
Selling, general and
administrative expenses 10,282 9,798 4.9 % 13.4 % 12.3 %
Restructuring expense 0 (354) (100.0) % 0.0 % (0.4)%
------------- ------------- ------------- ------------- -------------
Income from operations 4,186 4,344 3.6 % 5.5 % 5.5 %
Interest expense 1,534 1,665 (7.9) % 2.0 % 2.1 %
Interest income (113) (143) (21.0) % (0.1)% (0.2)%
Early extinguishment of debt 1,672 0 100.0 % 2.2 % 0.0 %
Other expense (income), net 229 192 19.3 % 0.3 % 0.2 %
------------- ------------- ------------- ------------- -------------
Income before income taxes 864 2,630 (67.1) % 1.1 % 3.3 %
Income taxes* 112 963 (88.4) % 13.0 % 36.6 %
------------- ------------- ------------- ------------- -------------
Net income $ 752 1,667 (54.9) % 1.0 % 2.1 %
============= ============= ============= ============= =============
Net income per share-basic $0.07 $0.15 (53.3) %
Net income per share-diluted $0.06 $0.14 (57.1) %
Average shares outstanding-basic 11,529 11,485 0.4 %
Average shares outstanding-diluted 11,859 11,714 1.2 %
NINE MONTHS ENDED
------------------------------------------------------------------------------
Amounts Percent of Sales
----------------------------- ------------------------------
February 1, January 26, % Over February 1, January 26,
2004 2003 (Under) 2004 2003
------------- ------------- ------------- ------------- -------------
Net sales $ 232,968 249,240 (6.5) % 100.0 % 100.0 %
Cost of sales 190,283 207,855 (8.5) % 81.7 % 83.4 %
------------- ------------- ------------- ------------- -------------
Gross profit 42,685 41,385 3.1 % 18.3 % 16.6 %
Selling, general and
administrative expenses 31,089 29,716 4.6 % 13.3 % 11.9 %
Restructuring expense 0 13,006 (100.0) % 0.0 % 5.2 %
------------- ------------- ------------- ------------- -------------
Income (loss) from operations 11,596 (1,337) 967.3 % 5.0 % (0.5)%
Interest expense 4,540 5,244 (13.4) % 1.9 % 2.1 %
Interest income (356) (414) (14.0) % (0.2)% (0.2)%
Early extinguishment of debt 1,672 0 100.0 % 0.7 % 0.0 %
Other expense (income), net 536 645 (16.9) % 0.2 % 0.3 %
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes 5,204 (6,812) 176.4 % 2.2 % (2.7)%
Income taxes* 1,717 (2,804) 161.2 % 33.0 % 41.2 %
------------- ------------- ------------- ------------- -------------
Income (loss) before cumulative effect of
accounting change 3,487 (4,008) 187.0 % 1.5 % (1.6)%
============= =============
Cumulative effect of accounting change,
net of income taxes 0 (24,151)
------------- -------------
Net income (loss) $ 3,487 (28,159)
============= =============
Basic income (loss) per share:
Income (loss) before cumulative
effect of accounting change $ 0.30 (0.35) 186.5 %
Cumulative effect of accounting change 0.00 (2.11) 100.0 %
------------- ------------- -----------
Net income (loss) $ 0.30 (2.46) 112.3 %
============= ============= ===========
Diluted income (loss) per share:
Income (loss) before cumulative
effect of accounting change $ 0.30 (0.35) 184.7 %
Cumulative effect of accounting change 0.00 (2.11) 100.0 %
------------- ------------- -----------
Net income (loss) $ 0.30 (2.46) 112.1 %
============= ============= ===========
Average shares outstanding-basic 11,522 11,450 0.6 %
Average shares outstanding-diluted 11,764 11,450 2.7 %
*Percent of sales column for income taxes is calculated as a % of income (loss)
before income taxes.
See accompanying notes to consolidated financial statements
CULP, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 1, 2004, JANUARY 26, 2003 AND APRIL 27, 2003
Unaudited
(Amounts in Thousands)
Amounts Increase
--------------------------------- (Decrease)
February 1, January 26, --------------------------------- * April 27,
2004 2003 Dollars Percent 2003
-------------- ------------- -------------- --------------- ------------
Current assets
Cash and cash equivalents $ 8,932 38,480 (29,548) (76.8)% 14,355
Short-term investments 0 0 0 0.0 % 10,043
Accounts receivable 28,282 32,427 (4,145) (12.8)% 32,259
Inventories 52,000 53,560 (1,560) (2.9)% 49,552
Deferred income taxes 12,303 9,447 2,856 30.2 % 12,303
Other current assets 2,610 5,892 (3,282) (55.7)% 3,204
-------------- ------------- -------------- --------------- ------------
Total current assets 104,127 139,806 (35,679) (25.5)% 121,716
Property, plant & equipment, net 78,909 85,396 (6,487) (7.6)% 84,962
Goodwill 9,240 9,240 0 0.0 % 9,240
Other assets 1,577 2,311 (734) (31.8)% 2,235
-------------- ------------- -------------- --------------- ------------
Total assets $ 193,853 236,753 (42,900) (18.1)% 218,153
============== ============= ============== =============== ============
Current liabilities
Current maturities of long-term debt $ 544 13,133 (12,589) (95.9)% 500
Accounts payable 17,790 21,924 (4,134) (18.9)% 19,874
Accrued expenses 12,901 14,646 (1,745) (11.9)% 14,071
Accrued restructuring 6,353 8,465 (2,112) (24.9)% 7,743
Income taxes payable 2,428 0 2,428 100.0 % 349
-------------- ------------- -------------- ------------ ------------
Total current liabilities 40,016 58,168 (18,152) (31.2)% 42,537
Long-term debt 50,519 83,008 (32,489) (39.1)% 76,000
Deferred income taxes 3,851 3,502 349 10.0 % 3,851
-------------- ------------- -------------- --------------- ------------
Total liabilities 94,386 144,678 (50,292) (34.8)% 122,388
Shareholders' equity 99,467 92,075 7,392 8.0 % 95,765
-------------- ------------- -------------- --------------- ------------
Total liabilities and
shareholders' equity $ 193,853 236,753 (42,900) (18.1)% 218,153
============== ============= ============== =============== ============
Shares outstanding 11,529 11,487 42 0.4 % 11,515
============== ============= ============== =============== ============
* Derived from audited financial statements
See accompanying notes to consolidated financial statements
CULP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FEBRUARY 1, 2004 AND JANUARY 26, 2003
Unaudited
(Amounts in Thousands)
NINE MONTHS ENDED
------------------------------
Amounts
------------------------------
February 1, January 26,
2004 2003
-------------- -------------
Cash flows from operating activities:
Net income (loss) $ 3,487 (28,159)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change, net of income taxes 0 24,151
Depreciation 10,294 10,554
Amortization of other assets 136 286
Stock-based compensation 157 158
Restructuring expense 0 13,006
Changes in assets and liabilities:
Accounts receivable 3,977 10,939
Inventories (2,448) 4,339
Other current assets 594 (1,885)
Other assets 522 295
Accounts payable 544 (5,477)
Accrued expenses (1,170) (1,551)
Accrued restructuring expenses (1,390) (2,792)
Income taxes payable 2,079 0
-------------- -------------
Net cash provided by operating activities 16,782 23,864
-------------- -------------
Cash flows used in investing activities:
Capital expenditures (4,097) (5,224)
Proceeds from the sale of short-term investments 10,043 0
-------------- -------------
Net cash provided by (used in) investing activities 5,946 (5,224)
-------------- -------------
Cash flows used in financing activities:
Payments on vendor-financed capital expenditures (2,772) (778)
Principal payments of long-term debt (25,437) (12,343)
Proceeds from common stock issued 58 968
-------------- -------------
Net cash used in financing activities (28,151) (12,153)
-------------- -------------
Increase (decreases) in cash and cash equivalents (5,423) 6,487
Cash and cash equivalents at beginning of period 14,355 31,993
-------------- -------------
Cash and cash equivalents at end of period $ 8,932 38,480
============== =============
See accompanying notes to consolidated financial statements
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 Unearned Retained Comprehensive Shareholders'
Shares Amount of Par Value Compensation Earnings Income Equity
- ----------------------------------- --------------- ----------- ------------ ------------ ----------- -------------- -------------
Balance, April 28, 2002 11,319,584 $ 566 38,375 (769) 80,886 7 $ 119,065
Net loss (24,887) (24,887)
Net loss on cash flow hedges (7) (7)
Stock-based compensation 210 210
Common stock issued in connection
with stock option plans 195,875 10 1,374 1,384
- ----------------------------------- ---------------- ---------- ------------ ------------ ----------- -------------- -------------
Balance, April 27, 2003 11,515,459 $ 576 39,749 (559) 55,999 0 $ 95,765
- ----------------------------------- ---------------- ---------- ------------ ------------ ----------- -------------- -------------
Net income 3,487 3,487
Stock-based compensation 157 157
Common stock issued in connection
with stock option plans 13,375 1 57 58
- ----------------------------------- ---------------- ---------- ------------ ------------ ----------- -------------- -------------
Balance, February 1, 2004 11,528,834 $ 577 39,806 (402) 59,486 0 $ 99,467
=================================== ================ ========== ============ ============ =========== ============== =============
See accompanying notes to consolidated financial statements
Culp, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Culp, Inc.
and subsidiaries (the "company") include all adjustments, which are, in the
opinion of management, necessary for fair presentation of the results of
operations and financial position. All of these adjustments are of a normal
recurring nature except as disclosed in notes 9 and 13 to the consolidated
financial statements, which relate to fiscal 2003. 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
28, 2003 for the fiscal year ended April 27, 2003.
The company's nine months ended February 1, 2004 and January 26, 2003 represent
40 and 39 week periods, respectively.
================================================================================
2. Stock-Based Compensation
Compensation costs related to employee stock option plans are recognized
utilizing the intrinsic value-based method prescribed by APB No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. The company has
adopted the disclosure requirements of SFAS No. 123, Accounting for Stock- Based
Compensation, as amended by SFAS No. 148. Accordingly, compensation cost is
recorded over the vesting period of the options based upon the difference in
option price and fair market price at the date of grant, if any.
The following table illustrates the effect on net income and income per
share if the company had applied the fair value recognition provisions of SFAS
No. 123, as amended by SFAS No. 148, for the three months ended February 1, 2004
and January 26, 2003.
(dollars in thousands, except per share data)
February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Net income, as reported $ 752 $ 1,667
Add: Total stock-based employee
compensation expense included in
net income, net of tax 39 17
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of tax (116) (56)
- --------------------------------------------------------------------------------
Pro forma net income $ 675 $ 1,627
- --------------------------------------------------------------------------------
Income per share:
Basic - as reported $ 0.07 $ 0.15
Basic - pro forma 0.06 0.14
Diluted - as reported 0.06 0.14
Diluted - pro forma 0.06 0.14
- --------------------------------------------------------------------------------
The following table illustrates the effect on net income (loss) and income
(loss) per share if the company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, for the nine months
ended February 1, 2004 and January 26, 2003.
(dollars in thousands, except per share data)
February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Net income (loss), as reported $ 3,487 $ (28,159)
Add: Total stock-based employee
compensation expense included in
net income (loss), net of tax 105 50
Deduct: Total stock-based employee
compensation expense determined under
fair value-based method for all awards,
net of tax (356) (169)
- --------------------------------------------------------------------------------
Pro forma net income (loss) $ 3,236 $ (28,278)
- --------------------------------------------------------------------------------
Income (loss) per share:
Basic - as reported $ 0.30 $ (2.46)
Basic - pro forma 0.28 (2.47)
Diluted - as reported 0.30 (2.46)
Diluted - pro forma 0.28 (2.47)
- --------------------------------------------------------------------------------
================================================================================
3. Accounts Receivable
A summary of accounts receivable follows:
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 April 27, 2003
- --------------------------------------------------------------------------------
Customers $ 30,864 $ 34,580
Allowance for doubtful accounts (1,673) (1,558)
Reserve for returns and allowances (909) (763)
- --------------------------------------------------------------------------------
$ 28,282 $ 32,259
A summary of the activity in the allowance for doubtful accounts follows:
Nine months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Beginning balance $ (1,558) $ (2,465)
- --------------------------------------------------------------------------------
(Provision for) reversal of bad debt
expense (162) 512
Net write-offs 47 328
- --------------------------------------------------------------------------------
Ending balance $ (1,673) $ (1,625)
================================================================================
4. 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) February 1, 2004 April 27, 2003
- --------------------------------------------------------------------------------
Raw materials $ 22,174 $ 23,269
Work-in-process 4,345 2,917
Finished goods 25,481 23,366
- --------------------------------------------------------------------------------
Total inventories valued at FIFO 52,000 49,552
Adjustments of certain inventories to LIFO 0 0
- --------------------------------------------------------------------------------
$ 52,000 $ 49,552
================================================================================
5. Accounts Payable
- --------------------------------------------------------------------------------
A summary of accounts payable follows:
(dollars in thousands) February 1, 2004 April 27, 2003
- --------------------------------------------------------------------------------
Accounts payable-trade $ 14,933 $ 14,389
Accounts payable-capital expenditures 2,857 5,485
- --------------------------------------------------------------------------------
$ 17,790 $ 19,874
================================================================================
6. Accrued Expenses
A summary of accrued expenses follows:
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 April 27, 2003
- --------------------------------------------------------------------------------
Compensation, commissions and related
benefits $ 7,430 $ 9,683
Interest 1,506 763
Other 3,965 3,625
- --------------------------------------------------------------------------------
$ 12,901 $ 14,071
================================================================================
7. Long-Term Debt
A summary of long-term debt follows:
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 April 27, 2003
- --------------------------------------------------------------------------------
Unsecured term notes $ 49,975 $ 75,000
Canadian government loan 1,088 1,500
- --------------------------------------------------------------------------------
51,063 76,500
Less current maturities (544) (500)
- --------------------------------------------------------------------------------
$ 50,519 $ 76,000
- --------------------------------------------------------------------------------
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. 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 February 1, 2004, there were $168,000 in outstanding letters of credit in
support of inventory purchases and no borrowings outstanding under the
agreement. The credit facility expires in August 2004.
During the third quarter of fiscal 2004, the company elected to make a
$25.0 million prepayment on the unsecured term notes. As a result of this
prepayment, the company incurred a consent fee and prepayment premium of $1.3
million, additional debt issue cost amortization of $144,000 and approximately
$202,000 in other professional fees. The remaining principal balance is payable
over an average remaining term of five years beginning March 2006 through March
2010. Interest is payable semi-annually at a fixed coupon rate of 7.76%.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At February 1, 2004, the
company was in compliance with these financial covenants.
The principal payment requirements of long-term debt during the next five
fiscal years are: 2004 - $0; 2005 - $544,000; 2006 - $8,079,000; 2007 -
$7,535,000; and 2008 - $19,835,000.
8. Cash Flow Information
Payments for interest and income taxes follow:
Nine months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Interest $ 3,835 $ 3,954
Income tax refunds (362) (1,746)
- --------------------------------------------------------------------------------
The non-cash portion of capital expenditures representing vendor financing
totaled $331,000 and $3.7 million for the nine months ended February 1, 2004 and
January 26, 2003, respectively.
================================================================================
9. Restructuring and Asset Impairment Charges
- --------------------------------------------------------------------------------
A summary of accrued restructuring follows:
(dollars in thousands) February 1, 2004 April 27, 2003
- --------------------------------------------------------------------------------
Fiscal 2003 CDF $ 5,833 $ 6,989
Wet Printed Flock 486 543
Fiscal 2001 CDF 34 211
- --------------------------------------------------------------------------------
$ 6,353 $ 7,743
- --------------------------------------------------------------------------------
Fiscal 2003 CDF 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
involved (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 fiscal
2003, the total restructuring and related charges incurred were $15.0 million,
of which approximately $4.1 million represented non-cash items, including $2.8
million in impairment of property, plant and equipment and $1.3 million in
inventory write-downs. Of the total charge, $12.0 million was recorded in
restructuring expense in the 2003 Consolidated Statement of Income (Loss); and
$1.3 million, related to inventory write-downs, and $1.7 million, related to
equipment moving and relocation expense, were recorded in cost of sales in the
2003 Consolidated Statement of Income (Loss).
As of February 1, 2004, assets classified as held for sale consisted of
machinery and equipment with a value of $166,000 and are included in other
assets. Management is actively marketing these assets and anticipates their
successful disposal.
The following summarizes the activity in the restructuring accrual:
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(dollars in thousands) Benefits Other Exit Costs Total
- --------------------------------------------------------------------------------
Accrual established in fiscal 2003 $ 1,972 $ 7,194 $ 9,166
Paid in fiscal 2003 (1,228) (949) (2,177)
- --------------------------------------------------------------------------------
Balance, April 27, 2003 744 6,245 6,989
Paid in fiscal 2004 (354) (802) (1,156)
- --------------------------------------------------------------------------------
Balance, February 1, 2004 $ 390 $ 5,443 $ 5,833
- --------------------------------------------------------------------------------
Wet Printed Flock Restructuring
In April 2002, management approved a plan to exit the wet printed flock
upholstery fabric business and has been actively seeking to sell the assets
related to this product line. The exit plan involved closing a printing facility
and flocking operation within the Culp Velvets/Prints division (CVP), reduction
in related selling and administrative expenses and termination of 86 employees.
The total charge for the exit plan was $9.7 million, of which approximately $8.2
million represented non-cash items, including $7.6 million in impairment of
property, plant and equipment and $619,000 in inventory write-downs. Of the
total charge, $9.1 million was recorded in restructuring expense in the 2002
Consolidated Statement of Income (Loss), and $619,000, related to inventory
write-downs, was recorded in cost of sales in the 2002 Consolidated Statement of
Income (Loss). During the fiscal year ended April 28, 2002, sales of the wet
printed flock product contributed $17.1 million, or 4.5%, of the company's total
sales and resulted in an operating loss of approximately $2.1 million.
During 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. Due to management's continual
evaluation of the restructuring accrual, the reserve was reduced $313,000 to
reflect current estimates of future health care claims. Additionally, the
reserve was reduced $42,000 to reflect current estimates of future security
expenses and other costs.
As of February 1, 2004, assets classified as held for sale, including a
building, machinery and equipment of $170,000 are included in other assets.
Management is actively marketing these assets and anticipates their successful
disposal.
The following summarizes the activity in the CVP restructuring accrual:
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(dollars in thousands) 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 (428) (116) (544)
- --------------------------------------------------------------------------------
Balance, April 27, 2003 96 447 543
Paid in fiscal 2004 1 (58) (57)
- --------------------------------------------------------------------------------
Balance, February 1, 2004 $ 97 $ 389 $ 486
- --------------------------------------------------------------------------------
Fiscal 2001 CDF Restructuring
During fiscal 2001 and continuing into fiscal 2002, the company undertook a
restructuring plan in its upholstery fabrics 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. The 2001 charge from the restructuring and
related costs was $7.4 million, approximately $3.4 million of which represented
non-cash items, including $2.5 million in impairment of property, plant and
equipment and $874,000 in inventory write-downs. Of the total charge, $5.6
million was recorded in restructuring expense in the 2001 Consolidated Statement
of Income (Loss); and $874,000, related to inventory write-downs, and $931,000,
related to equipment relocation costs, were recorded in cost of sales in the
2001 Consolidated Statement of Income (Loss). The 2002 charge from restructuring
and related expenses was $2.5 million, approximately $160,000 of which
represented the non-cash impairment of property, plant and equipment. Of the
total charge, $1.3 million was included in restructuring expense in the 2002
Consolidated Statement of Income (Loss), and $1.2 million, related to equipment
relocation costs, was recorded in cost of sales in the 2002 Consolidated
Statement of Income (Loss).
During fiscal 2003, as a result of management's continual evaluation of the
restructuring accrual, the reserve was reduced $275,000 to reflect current
estimates of future health care claims and increased $276,000 to reflect current
estimates of remaining lease expenses, property taxes, insurance and other exit
costs.
As of February 1, 2004, 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:
- --------------------------------------------------------------------------------
Employee Lease
Termination Termination and
(dollars in thousands) 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 (202) (591) (793)
- --------------------------------------------------------------------------------
Balance, April 27, 2003 35 176 211
Paid in fiscal 2004 (33) (144) (177)
- --------------------------------------------------------------------------------
Balance, February 1, 2004 $ 2 $ 32 $ 34
- --------------------------------------------------------------------------------
================================================================================
10. 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 (loss) follows:
Three months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Net income $ 752 $ 1,667
Unrealized gain (loss) on foreign
currency contracts, net of taxes:
Unrealized holding gains arising
during the period 0 99
Less: reclassification adjustment
for gains included in net income 0 (85)
Unrealized gain (loss) on short-term investments:
Add: reclassification adjustment for losses
included in net income 57 0
- --------------------------------------------------------------------------------
Net comprehensive income $ 809 $ 1,681
- --------------------------------------------------------------------------------
Nine months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Net income (loss) $ 3,487 $ (28,159)
Unrealized gain (loss) on foreign
currency contracts, net of taxes:
Unrealized holding gains arising
during the period 0 49
Less: reclassification adjustment
for gains included in net income 0 (6)
- --------------------------------------------------------------------------------
Net comprehensive income (loss) $ 3,487 $ (28,116)
- --------------------------------------------------------------------------------
================================================================================
11. 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:
Three months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, basic 11,529 11,485
Effect of dilutive stock options 330 229
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, diluted 11,859 11,714
- --------------------------------------------------------------------------------
Options to purchase 247,625 shares and 456,875 shares of common stock were
not included in the computation of diluted income per share for the three months
ended February 1, 2004 and January 26, 2003, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
Nine months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, basic 11,522 11,450
Effect of dilutive stock options 242 0
- --------------------------------------------------------------------------------
Weighted average common
shares outstanding, diluted 11,764 11,450
- --------------------------------------------------------------------------------
Options to purchase 392,606 shares and 357,625 shares of common stock were
not included in the computation of diluted income per share for the nine months
ended February 1, 2004 and January 26, 2003, respectively, because the exercise
price of the options was greater than the average market price of the common
shares.
For the nine months ended January 26, 2003 options to purchase 640,875
shares were not included in the computation of diluted net loss per share
because the company incurred a net loss for the period.
================================================================================
12. 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 equivalents, short-term investments, deferred income taxes, other
current assets and other assets on a total company basis. Thus, identifiable
assets by business segment represent accounts receivable, inventories, property,
plant and equipment and goodwill.
Net sales and gross profit for the company's operating segments follow:
Three months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Net sales:
Upholstery Fabrics $ 51,447 $ 55,995
Mattress Ticking 25,114 23,497
- --------------------------------------------------------------------------------
$ 76,561 $ 79,492
- --------------------------------------------------------------------------------
Gross profit:
Upholstery Fabrics $ 9,375 $ 8,088
Mattress Ticking 5,093 5,700
- --------------------------------------------------------------------------------
$ 14,468 $ 13,788
- --------------------------------------------------------------------------------
Net sales and gross profit for the company's operating segments follow:
Nine months ended
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Net sales:
Upholstery Fabrics $ 153,846 $ 174,452
Mattress Ticking 79,122 74,788
- --------------------------------------------------------------------------------
$ 232,968 $ 249,240
- --------------------------------------------------------------------------------
Gross profit:
Upholstery Fabrics $ 25,191 $ 23,738
Mattress Ticking 17,494 17,647
- --------------------------------------------------------------------------------
$ 42,685 $ 41,385
- --------------------------------------------------------------------------------
Identifiable assets, consisting of accounts receivable, inventories,
property, plant and equipment and goodwill, for the company's operating segments
follow:
- --------------------------------------------------------------------------------
(dollars in thousands) February 1, 2004 pril 27, 2003
- --------------------------------------------------------------------------------
Upholstery Fabrics $ 114,497 $ 124,889
Mattress Ticking 53,934 51,124
- --------------------------------------------------------------------------------
168,431 176,013
Non-identifiable assets:
Cash and cash equivalents 8,932 14,355
Short-term investments 0 10,043
Deferred income taxes 12,303 12,303
Other current assets 2,610 3,204
Other assets 1,577 2,235
- --------------------------------------------------------------------------------
Total assets $ 193,853 $ 218,153
- --------------------------------------------------------------------------------
================================================================================
13. Cumulative Effect of Accounting Change
The company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective April 29, 2002. 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. 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 during the
first quarter of fiscal 2003. 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.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following analysis of financial condition and results of operations
should be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
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 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.
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 primarily used by Culp. In
mattress ticking, Culp Home Fashions markets a broad array of fabrics used by
bedding manufacturers.
The following table sets forth the company's sales and gross profit by
segment/division for the three and nine months ended February 1, 2004 and
January 26, 2003.
CULP, INC.
SALES / GROSS PROFIT BY SEGMENT/DIVISION
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 1, 2004 AND JANUARY 26, 2003
(Amounts in thousands)
THREE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------
Amounts Percent of Total Sales
---------------------- -------------------------------
February 1, January 26, % Over February 1, January 26,
Segment/Division Sales (1) 2004 2003 (Under) 2004 2003
- --------------------------------------------------- ---------- ---------- --------- --------------- ---------------
Upholstery Fabrics
Culp Decorative Fabrics $ 29,173 31,798 (8.3)% 38.1 % 40.0 %
Culp Velvets/Prints 21,769 22,841 (4.7)% 28.4 % 28.7 %
Culp Yarn 505 1,356 (62.8)% 0.7 % 1.7 %
---------- ---------- --------- --------------- ---------------
51,447 55,995 (8.1)% 67.2 % 70.4 %
Mattress Ticking
Culp Home Fashions 25,114 23,497 6.9 % 32.8 % 29.6 %
---------- ---------- --------- --------------- ---------------
$ 76,561 79,492 (3.7)% 100.0 % 100.0 %
========== ========== ========= =============== ===============
Segment Gross Profit Gross Profit Margin
- --------------------------------------------------- -------------------------------
Upholstery Fabrics (2) $ 9,375 8,088 15.9 % 18.2 % 14.4 %
Mattress Ticking 5,093 5,700 (10.6)% 20.3 % 24.3 %
---------- ---------- --------- --------------- ---------------
Gross profit $ 14,468 13,788 4.9 % 18.9 % 17.3 %
========== ========== ========= =============== ===============
NINE MONTHS ENDED (UNAUDITED)
------------------------------------------------------------------
Amounts Percent of Total Sales
---------------------- -------------------------------
February 1, January 26, % Over February 1, January 26,
Segment/Division Sales (1) 2004 2003 (Under) 2004 2003
- --------------------------------------------------- ---------- ---------- --------- --------------- ---------------
Upholstery Fabrics
Culp Decorative Fabrics $ 88,002 100,473 (12.4)% 37.8 % 40.3 %
Culp Velvets/Prints 62,093 69,277 (10.4)% 26.7 % 27.8 %
Culp Yarn 3,751 4,702 (20.2)% 1.6 % 1.9 %
---------- ---------- --------- --------------- ---------------
153,846 174,452 (11.8)% 66.0 % 70.0 %
Mattress Ticking
Culp Home Fashions 79,122 74,788 5.8 % 34.0 % 30.0 %
---------- ---------- --------- --------------- ---------------
$ 232,968 249,240 (6.5)% 100.0 % 100.0 %
========== ========== ========= =============== ===============
Segment Gross Profit Gross Profit Margin
- --------------------------------------------------- -------------------------------
Upholstery Fabrics (2) $ 25,191 23,738 6.1 % 16.4 % 13.6 %
Mattress Ticking 17,494 17,647 (0.9)% 22.1 % 23.6 %
---------- ---------- --------- --------------- ---------------
Gross profit $ 42,685 41,385 3.1 % 18.3 % 16.6 %
========== ========== ========= =============== ===============
(1) International Sales and portion of total sales is: Q3 - $8.5 million FY04 (11.1%) & $8.2 million
FY03 (10.3%); YTD - $26.1 million FY04 (11.2%) & $29.8 million FY03 (12.0%)
(2) Gross profit includes $751,000 and $1.9 million of restructuring related charges from the shut down of the
Chattanooga operation for the three and nine month period of fiscal 2003, respectively.
Three and Nine Months ended February 1, 2004 compared with Three and Nine Months
ended January 26, 2003
For the third quarter of fiscal 2004, net sales decreased 3.7% to $76.6
million; and the company reported net income of $752,000, or $0.06 per share
diluted, compared with net income of $1.7 million, or $0.14 per share diluted,
in the third quarter of fiscal 2003. The current quarter results include a $1.7
million charge, or $0.10 per share diluted, associated with a $25.0 million
prepayment of the company's $75 million of outstanding senior notes. The
financial results for the third quarter of fiscal 2003 included $397,000, or
$.02 per share diluted, in restructuring and related charges.
For the first nine months of fiscal 2004, net sales decreased 6.5% to $233
million; and the company reported net income of $3.5 million, or $0.30 per share
diluted, compared with a loss before the cumulative effect of accounting change
of $4.0 million, or $0.35 per share diluted, for the same period last year. The
financial results for the first nine months of fiscal 2004 include the $1.7
million prepayment charge ($0.10 per share diluted) described above. Including
the cumulative effect of accounting change, the company reported a net loss for
the first nine months of fiscal 2003 of $28.2 million, or $2.46 share. In the
first quarter of 2003, the company recorded a non-cash goodwill impairment
charge, net of income taxes, of $24.2 million, or $2.11 per share. Additionally,
the financial results for the first nine months of fiscal 2003 included $14.9
million in restructuring and related charges. As reflected in the financial
statements for fiscal 2003, restructuring and related charges were recorded as
$13.0 million in the line item "restructuring expense" and $1.9 million in "cost
of sales," reducing net income by $9.1 million, net of taxes (or $0.80 per
share). Year-to-date results for fiscal 2004 include 40 weeks versus 39 weeks
for the same period of fiscal 2003.
Upholstery Fabrics Segment
Net Sales -- Upholstery fabric sales for the third quarter of fiscal 2004
decreased 8.1% to $51.4 million compared with the third quarter of fiscal 2003,
primarily reflecting a decline in orders in the Culp Decorative Fabrics (CDF)
division, which management believes is related to an increasing consumer
preference for leather and competition from imported fabrics, including cut and
sewn kits. Although the 8.1% decline is higher than the 4.3% decline experienced
during the previous quarter, this quarterly sales decline is a substantial
improvement over the 22.5% decrease in the first quarter of fiscal 2004 and the
17.2% decrease in the fourth quarter of fiscal 2003.
Upholstery fabric yards sold during the third quarter were 11.8 million versus
13.2 million in the third quarter of fiscal 2003, a decline of 10.6%. Average
selling price was $4.28 for the third quarter compared with $4.11 in the same
quarter of last year, an increase of 4.1%, due primarily to higher average
selling prices in the CDF division.
With the company's offshore sourcing efforts, including the China platform, the
company is increasing significantly sales of upholstery fabric products produced
outside of the company's U.S. manufacturing plants. These sales, which include
microdenier suedes, accounted for approximately 8.5% of upholstery fabric sales
for the third quarter of fiscal 2004, almost double the percentage from the year
earlier quarter.
Year-to-date upholstery fabric sales decreased 11.8% to $153.8, reflecting weak
consumer demand for furniture earlier in the fiscal year, an increase in
consumer demand for leather furniture and an increase in imported upholstery
fabrics, both in piece goods and cut and sewn kits. Year-to-date yards sold for
the upholstery fabrics segment were 35.7 million versus 41.7 million in the same
period last year. The year-to-date average selling price was $4.18 compared with
$4.06 in the same period last year.
Gross Profit -- Gross profit for the third quarter of fiscal 2004 was $9.4
million, or 18.2%, versus $8.1 million, or 14.4%, for the same quarter of last
year. For the first nine months of fiscal 2004, upholstery fabrics gross profit
was $25.2 million, or 16.4% compared with $23.7 million, or 13.6% in the same
period last year. Restructuring related charges of $751,000 and $1.9 million
were included in gross profit for the third quarter and first nine months of
fiscal 2003, respectively. The increase in gross profit and margins for both the
quarter and year-to-date results primarily reflects significant gains in
manufacturing operating efficiencies within the CDF division.
China Operations -- The start up of the company's China operation is
generally proceeding in accordance with previously announced plans. During the
third quarter, the company completed the installation of manufacturing equipment
and began running some production trials. During the fourth quarter, the company
expects to begin incoming fabric inspection and testing, and to start shipping
fabric to customers. Limited finishing operations are also anticipated to begin
in the fourth quarter of this fiscal year. As expected, the company is
experiencing modest operating losses in its China operation during the start up
phase, which is expected to be completed by the end of this fiscal year,
although some level of operating losses from the China operation is expected to
continue until some time in fiscal 2005.
Mattress Ticking Segment
Net Sales -- Mattress ticking sales for the third quarter of fiscal 2004
increased 6.9% to $25.1 million, due to better industry demand and continued
gains with key customers. The 5.8% fiscal year to date sales gain in this
segment is especially noteworthy because it has occurred during the bedding
industry's ongoing transition to selling predominantly one-sided mattresses,
which utilize about one-third less mattress ticking. This transition at retail
began in late calendar year 2002 and is expected to continue through early
calendar year 2005.
Mattress ticking yards sold during the third quarter of fiscal 2004 were 10.0
million compared with 9.0 million yards in the third quarter of last year, an
increase of 11.1%. The average selling price was $2.50 for the third quarter,
compared with $2.59 in the same quarter last year. Year-to-date yards sold were
31.5 million versus 29.8 million for the same period last year, a 5.7% increase.
The $2.50 average selling price for the first nine months of fiscal 2004 was
unchanged from the same period last year.
The company previously announced that it has entered into an agreement with
another company to distribute flame-resistant fabrics to its customers in the
bedding industry. This product is designed to help bedding customers comply with
new safety standards, especially the State of California's new open flame
mattress flammability standard, currently scheduled to go into effect January 1,
2005.
Gross Profit -- For the third quarter of fiscal 2004, the mattress ticking
segment reported gross profit dollars and margins of $5.1 million and 20.3%,
respectively, compared with $5.7 million and 24.3% for the same period of last
year. Year-to-date gross profit for mattress ticking was $17.5 million, or 22.1%
compared with 17.6 million, or 23.6% for the same period last year. This
reduction in gross profit for both the third quarter and year-to-date was due
principally to a modest change in product mix toward lower margin fabrics.
Other Corporate Expenses
Selling, General and Administrative Expenses -- SG&A expenses of $10.3
million for the third quarter increased approximately $500,000, or 4.9%, from
the prior year amount. As a percent of net sales, SG&A expenses increased to
13.4% from 12.3% the previous year. This increase over the prior year was due
primarily to a $435,000 credit to bad debt expense in the third quarter of
fiscal 2003 resulting from a net reduction in the allowance for doubtful
accounts, due to a decrease in past due receivable balances. The company did not
have any bad debt expense or credit to bad debt expense in the third quarter of
fiscal 2004.
SG&A expenses for the first nine months of fiscal 2004 increased 4.6% to $31.1
million, due primarily to higher professional fees and higher bad debt expense.
Interest Expense(Income) - Interest expense totaled $1.5 million and $4.5
million for the third quarter and first nine months of fiscal 2004,
respectively, compared with $1.7 million and $5.2 million for the prior year
comparable periods. The decrease in interest expense during the periods resulted
from lower borrowings outstanding. Interest income decreased to $113,000 from
$143,000 the previous year due to lower interest rates earned in fiscal 2004
compared with the previous year.
Early Extinguishment of Debt - See "Financing Arrangements" discussion
below.
Income Taxes -- The effective tax rate (taxes as a percentage of pretax
income (loss)) for the first nine months of fiscal 2004 was 33.0% compared with
41.2% for the first nine months of fiscal 2003. The higher rate for the prior
period reflects the increased tax benefits related to the company's loss in the
U.S. resulting from the restructuring charges recorded in the fiscal 2003 second
quarter. The lower rate for fiscal 2004 also reflects the benefit from the
company's decrease in estimated tax accruals during the third quarter, which
reduced the annual effective rate from 37.0% to 33.0%, and increased earnings
for the quarter and year-to-date by $208,000, or $0.02 per diluted share.
Liquidity and Capital Resources
Liquidity - The company's sources of liquidity include cash and cash
equivalents, cash flow from operations and amounts available under its revolving
credit line. These sources have been adequate for day-to-day operations and
capital expenditures. The company expects these sources of liquidity to continue
to be adequate for the foreseeable future. Cash and cash equivalents as of
February 1, 2004 decreased to $8.9 million from $24.4 million at the end of
fiscal 2003, reflecting free cash flow of $9.9 million for the first nine months
of fiscal 2004, a $.4 million repayment of the term loan with the Canadian
government and the $25.0 million prepayment of the company's $75.0 million
outstanding senior notes (see additional discussion of free cash flow and debt
below).
Accounts receivable as of February 1, 2004 decreased 12.8% from the year-earlier
level, principally due to lower sales and an increase in the number of customers
taking the cash discount for shorter payment terms. Days sales outstanding
totaled 31 days at February 1, 2004, compared with 34 days at the same time last
fiscal year. Inventories at the close of the third quarter decreased 2.9% from a
year ago. Inventory turns for the third quarter were 4.7 versus 4.8 for the
year-earlier period. Operating working capital (comprised of accounts
receivable, inventories and trade accounts payable) was $62.5 million at
February 1, 2004, down from $64.1 million a year ago.
Financing Arrangements -- During the third quarter of fiscal 2004, the
company made a $25.0 million prepayment on its $75.0 million of outstanding
senior notes. As part of the transaction, the company negotiated a five percent,
or $1.25 million, premium to be paid to the current note holders for the
prepayment of this principal amount. This premium amount, along with other
related transaction costs, resulted in a charge of $1.7 million, or $0.10 per
share, in the third quarter of fiscal 2004. As a result of this prepayment, the
company will realize annualized savings of approximately $1.7 million, or $0.09
per share, in net interest expense in each of the next two years, and a
declining amount over the reminder of the notes' term until 2010. In addition,
the company's long-term debt to capital ratio improved to 33.9% compared with
51.1% for the same period last year. During the past three and one half years
the company has generated sufficient cash flow from operations to reduce
long-term debt by $86.0 million, or 62.0%.
The company's remaining $51.1 million in long-term debt is unsecured and is
comprised of $50 million in outstanding senior notes, with a fixed interest rate
of 7.76%, and a $1.1 million, non-interest bearing term loan with the Canadian
government. Additionally, the company has a $15.0 million revolving credit line
with a bank, of which no balance was outstanding at February 1, 2004. The bank
agreement expires in August 2004. The first scheduled principal payment on the
$50 million senior notes is due March 2006 in the amount of $7.5 million. The
Canadian government loan is repaid in annual installments of approximately
$500,000 per year. The company was in compliance with all financial covenants in
its loan agreements as of February 1, 2004.
Capital Expenditures -- Capital spending for the first nine months of
fiscal 2004 was $4.2 million. Depreciation is estimated at $14.0 million for the
full fiscal year, which is unchanged from the previous year. For fiscal 2004,
the company expects capital expenditures to be approximately $7.0 million, of
which approximately $3.5 million is related to the company's China operations.
The China investment includes manufacturing equipment and leasehold
improvements. For fiscal 2005, the company anticipates capital expenditures to
be approximately $8.0 million, of which approximately $4.4 million will be used
for the purchase and up fit of an office building to be used for the company's
corporate offices and showrooms (see discussion below).
The company's board of directors recently approved the purchase and up fit of an
approximately 55,000 square foot building in High Point, North Carolina that
will serve as the company's new corporate offices and as new space for the
company's showrooms. This purchase will involve about one-half of the company's
capital expenditure budget for fiscal 2005 and will result in the company's
headquarters and showroom space being in the same facility for the first time.
The move to the new space is expected to occur during the late summer and early
fall of 2004, at which time the company will vacate leased space that it
currently occupies in downtown High Point. In connection with vacating these
leased premises, the company expects to take a charge related primarily to the
remaining lease obligations of approximately $600,000, or $0.03 per share,
during the second quarter of fiscal 2005. On an ongoing basis, however, the
company will avoid lease expenses of approximately $750,000 per year that are
currently being paid for rent and related expenses on its present office and
showroom space. The company expects the annual operating costs of the new
building to be significantly lower than the lease and related costs associated
with the leased facilities.
Free Cash Flow -- Free cash flow is a non-GAAP performance measure that
management believes provides useful information to investors because it measures
the company's available cash flow for potential debt repayment, stock
repurchases and additions to cash and cash equivalents. Free cash flow was $9.9
million for the first nine months of fiscal 2004, compared with $17.9 million
for the same period last year. This decrease is primarily due to less cash flow
generated from working capital. For fiscal 2004, the company believes free cash
flow will be substantially less than fiscal 2003 primarily because the company
does not expect the continued significant reduction in working capital reflected
in each of the previous three years. In addition, the company will have higher
payments on vendor-financed capital expenditures ($3.7 million in fiscal 2004
compared with $1.3 million in fiscal 2003).
A reconciliation of net cash provided by operating activities to free cash flow
is set forth below:
- --------------------------------------------------------------------------------
(dollars in thousands) Nine months ended
- --------------------------------------------------------------------------------
February 1, 2004 January 26, 2003
- --------------------------------------------------------------------------------
Net cash provided by operating activities $16,782 $23,864
Minus: Capital expenditures (4,097) (5,224)
Minus: Payments on vendor-financed
capital expenditures (2,772) (778)
- --------------------------------------------------------------------------------
Free Cash flow $9,913 $17,862
- --------------------------------------------------------------------------------
Business Outlook
While the home furnishings retail environment appears to be improving, the
company expects that fourth quarter consolidated sales will decrease slightly
from the same quarter of last year. Mattress ticking segment sales are expected
to continue to increase in the fourth quarter at a significantly higher rate
than the 6.9% growth in the third quarter. Upholstery fabric segment sales are
expected to decline from the same quarter of last year at about the same rate of
8.1% experienced in the third quarter, due primarily to softness in incoming
orders for CDF. With these sales expectations and the current industry outlook,
the company expects to report net income in the range of $0.31 to $0.35 per
diluted share, with actual results primarily depending upon the level of demand
throughout the quarter.
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 2004 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 27, 2003.
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 or results or otherwise are not
statements of historical fact. Such statements are often but not always
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives, and include but are not limited to
statements about expectations for 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. In addition,
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. Also, economic and political instability in international areas
could affect the company's operations or sources of goods in those areas, as
well as demand for the company's products in international markets. 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. Other factors that could affect the matters discussed in
forward looking statements are included in the company's periodic reports filed
with the Securities and Exchange Commission.
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'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. As of February 1, 2004 there were no borrowings outstanding under the
company's revolving credit agreement. Additionally, approximately 98% of the
company's long-term debt is at a fixed rate. Thus, any reasonably foreseeable
change in interest rates would have no material effect on the company's interest
expense.
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 total sales and total
manufacturing costs. Therefore, a 10% change in the exchange rate at February 1,
2004 would not have a material 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 an increase in the value
of the underlying exposure.
ITEM 4. CONTROLS AND PROCEDURES
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 as of February 1,
2004, and the Chief Executive Officer and Chief Financial Officer have concluded
that the company's disclosure controls and procedures are adequate and
effective. In addition, no change in the company's internal control over
financial reporting has occurred during, or subsequent to, the period covered by
this report that has materially affected, or is reasonably likely to materially
affect, the company's internal control over financial reporting.
Part II - Other Information
- -----------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) 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 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.
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The following reports on Form 8-K were furnished during the period covered by
this report:
Form 8-K dated November 12, 2003, included under Item 7, Financial
Statements and Exhibits, the notice to Culp, Inc. Directors and Executive
Officers, dated November 12, 2003, and under Item 11, a description of the
company's notice of blackout period for its Culp, Inc. Employees'
Retirement Builder Plan because the Plan will be changing investment
options and recordkeeper providers.
Form 8-K dated November 24, 2003, included under Item 12, Results of
Operations and Financial Condition, the Company's press release for
quarterly earnings and the Financial Information Release relating to
certain financial information for the quarter ended November 2, 2003.
Form 8-K dated January 29, 2004, included under Item 9, Regulation FD,
the company's press release to disclose a $25.0 million prepayment on the
company's $75.0 million of outstanding senior notes.
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 17, 2004 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)