focus
on style
1998
Annual
Report
(CULP LOGO APPEARS HERE)
THE CULP TEAM OF MORE THAN 4,300 ASSOCIATES MARKETS OVER 3,000 PATTERNS OF
UPHOLSTERY FABRICS FOR FURNITURE AND OVER 1,000 STYLES OF MATTRESS TICKING TO AN
INTERNATIONAL ARRAY OF CUSTOMERS. WE ARE A FULLY INTEGRATED MARKETER WITH
MANUFACTURING PLANTS IN NORTH AND SOUTH CAROLINA, ALABAMA, TENNESSEE,
PENNSYLVANIA AND CANADA.
(Photo appears here)
DESIGN MEANS BUSINESS AT CULP
Culp
FABRICS
Culp indeed is focused on design. The new Howard L. Dunn, Jr. design center is
the latest tangible expression of how important the creation of new patterns,
textures and styles is to our business. This report provides a timely
opportunity to take you on a tour of this revolutionary new complex. The
opportunity to unite virtually all of our design resources excited us, and that
vision is now reality. Come with us as we share our report on another record
year for Culp and the actions we are taking to enhance our position as the
world's largest marketer of upholstery fabrics for furniture and a leading
supplier of mattress ticking.
2
highlights
Culp invested $95 million for acquisitions and capital expenditures to support
the company's ongoing long-term growth initiative.
Net sales for 1998 reached a new high of $476.7 million. Net income also set a
new annual record for the ninth consecutive year of $15.5 million, or $1.19 per
share diluted.
International sales for 1998 rose 35% and accounted for $137.2 million, or 29%,
of net sales.
Opening of the new Howard L. Dunn, Jr. design center provided a
single location for most of the company's design resources.
Completion of a private placement of $75 million senior unsecured notes in April
1998 increased flexibility for funding future capital needs.
(Photo of fabrics)
3
five-year
(Amounts in thousands, percent growth
except per share data) 1998 1997 change rate
- -----------------------------------------------------------------------------------
STATEMENTS OF INCOME
Net sales $476,715 398,879 19.5% 18.9%
Gross profit 83,561 72,485 15.3 21.0
Income from operations 30,574 27,427 11.5 30.8
Net income 15,513 13,770 12.7 28.1
Average shares outstanding (diluted) 13,042 11,929 9.3 3.3
PER SHARE
Net income (diluted) $ 1.19 1.15 3.5% 23.8%
Cash dividends 0.14 0.13 7.7 16.9
Book value 10.11 8.79 15.0 15.1
BALANCE SHEET
Working capital $102,730 69,777 47.2% 24.1%
Total assets 354,815 243,952 45.4 27.2
Funded debt 151,616 65,623 131.0 41.7
Shareholders' equity 131,519 110,789 18.7 19.3
RATIOS
Gross profit margin 17.5% 18.2%
Operating income margin 6.4 6.9
Net income margin 3.3 3.5
Return on average equity 13.0 15.2
Funded debt to capital 53.5 37.2
(Throughout this annual report, 1998, 1997, 1996, 1995 and 1994 are used to
refer, respectively, to the company's fiscal years that ended in those same
calendar periods.)
NET SALES
($ MILLIONS)
(A bar graph appears here with the following plot points.)
94 95 96 97 98
$245.0 $308.0 $351.7 $398.9 $476.7
NET INCOME
($ MILLIONS)
(A bar graph appears here with the following plot points.)
94 95 96 97 98
$7.7 $9.8 $11.0 $13.8 $15.5
NET INCOME
PER SHARE
(DILUTED)
(A bar graph appears here with the following plot points.)
94 95 96 97 98
0.68 0.86 0.94 1.15 1.19
CASH DIVIDENDS
PER SHARE
(A bar graph appears here with the following plot points.)
94 95 96 97 98
0.08 0.10 0.11 0.13 0.14
4
TO
OUR
FELLOW
SHAREHOLDERS
l
e
t
t
e
r
"Build it, and they will come," is the memorable line from the movie Field of
Dreams. We aren't expecting "Shoeless" Joe Jackson to appear out of the mists at
Culp, but we are excited about our longer term opportunities as a result of the
considerable capital investments we made during 1998. Our plans for building an
integrated marketing organization began taking shape years ago; and several
developments during 1998 marked notable steps toward that goal that will provide
significant benefits to our customers, associates and, most importantly, our
shareholders. 1999: GROWTH CHALLENGE Our message in this letter is not intended
to repeat the discussion starting on page 13 about the significant operational
and financial trends during 1998. As the highlights on the previous page
portray, net sales, net income and net income per share each set new records for
the year. Nine consecutive years of higher earnings represent an achievement of
which we are proud, and we encourage you to read the comments that relate more
of the specific factors that contributed to our ability to stretch that record
one more year.
As the caveats read in investment literature, past performance is no
guarantee of future returns. In fact, as we start 1999, we see significant
challenges to a positive showing again this year. Costs associated with some of
our expansion projects are still putting pressure on margins. More importantly,
we are experiencing a pronounced decline in demand for wet-printed flock fabrics
that have been an important focus of our capital expenditures. We are
implementing significant operational changes to deal with these circumstances
and expect improvement as the year progresses. The bottom-line
(Photo of fabrics)
5
year in review
- -------------------
picture at this time, however, is for difficult year-to-year comparisons through
at least the first and second quarters. Although this will likely present a
near-term interruption in Culp's growth, we believe this will prove temporary
and remain optimistic about reaching our fundamental goal of long-term growth in
net income per share. ACQUISITIONS ENHANCE OVERALL GROWTH Purchases of existing
operations and other physical assets have been an integral component of Culp's
growth for more than a decade. We anticipate other acquisition opportunities, in
large part because of the consolidation that remains prevalent in the home
furnishings industry. The share of the market controlled by the top 10
manufacturers is up more than 50% over the past ten years. The 25 largest
retailers now claim approximately one of every four dollars spent by consumers
on home furnishings. Industry players are getting larger, in part to afford the
investment in information systems and other capital projects needed to keep pace
with the demands of consumers. During 1998 we invested a total of $59 million to
acquire three operations. In August 1997, we purchased Phillips Mills. This
well-established upholstery fabric business expanded our capability in woven
jacquards, prints and velvets and helped broaden Culp's customer base. The other
two transactions during the year were chosen not to gain immediate incremental
market share but to move us forward in our ongoing drive to become more
vertically integrated. The operations of Artee Industries and Wetumpka yarn
strategically gave us control over filling yarn, one of the most important raw
materials in our business. These are the yarns that determine the texture of our
fabrics; that bring life to the patterns we have designed and that help
customers differentiate their products before the discerning eyes of consumers.
Although we had been extruding some polypropylene yarns internally, we had
reached a point where manufacturing our own specialty yarns had become
essential. We have already begun to see a return from this move, and we are
confident the future holds an even greater promise. HEAVY LIFTING CHARACTERIZES
CAPITAL SPENDING Those who have been Culp shareholders for several years are
well aware of the meaningful dollar investment we have made to support our goal
of offering customers value. This continued in 1998 with record capital spending
of $36 million. Interestingly, the total amount was almost evenly split among
expansion, vertical integration and modernization. This capped a five-year
period in which we have invested $112 million. We believe spending of that
magnitude easily qualifies as heavy lifting. In weight lifting the challenge is
not just to lift the bar, but to accomplish the task with balance and
efficiency. Our record for 1998 shows progress in completing these projects, but
our task now is to increase the productivity from these various initiatives. A
few specifics will illustrate the broad scope of the projects, apart from the
design center, we undertook. A major expansion of our capacity for wet-printed
fabrics at a new facility in Lumberton, North Carolina is now operational with
two production lines. All of the jacquard and dobby looms at our Pageland, South
Carolina facility were moved to allow for an improved product flow.
State-of-the-art equipment at a North Carolina plant is producing unfinished
flock fabric. A modern weaving facility in Tennessee houses our
Rossville/Chromatex line, and three of five planned additional yarn extrusion
lines are operational.
(GRAPHIC OF A STRAND OF YARN APPEARS HERE)
6
Heavy lifting indeed! Although we recognize the importance of an ongoing capital
investment program, our planned spending for 1999 is less than half of the prior
year. Our focus clearly must be the maturation of the projects recently
completed. We are fortunate that Culp's profitability has enabled us to support
these investments while maintaining a solid financial position. Our funded
debt/capital ratio totaled 54% at the close of 1998 with borrowings of $30
million against our $100 million line of credit. During the fourth quarter, we
enhanced our financial flexibility further by closing a private placement of $75
million in senior unsecured notes with a fixed rate of 6.76% for 10 years.
DESIGN FOCUS AIDS MARKETING Design is an essential factor in the complex
equation our customers use to gauge the value provided by Culp's fabrics. In
essence, a customer's furniture is a presentation of our fabrics. That
all-important first impression in a retail showroom or when a delivery is made
to a home or office is directly influenced by our fabrics. Our practice
increasingly is to bring customers into the design process. This helps build a
working partnership, enabling us to share our analysis of trends and styling
changes and benefit, in turn, from the customer's own market research and often
close communication with retailers.
The completion of the Howard L. Dunn, Jr. design center epitomizes the key
role of design in our business. Although the structure itself conveys a clear
sense of innovation, the heart of this resource center is the personnel within.
We were fortunate during 1998 to add a number of talented designers with solid
reputations for a willingness to test new concepts. We are encouraging them to
push our entire organization, convinced that stretching ourselves will yield the
progressive designs that spell success for customers--and for Culp!
(Photo of fabric samples)
7
One should understand that while the physical center serves as the starting
point for our designs, this effort involves the entire capabilities of Culp. We
are working hard to ensure that each business unit develops the internal
collaboration with design, manufacturing and sales for a successful marketing
program. CAD technology is assisting us greatly in this area by allowing
designers much broader flexibility to experiment with new patterns and textures.
The architectural planning for the new center was specifically designed to
accommodate computerized systems in a setting that invites customers to
participate actively in the conception of new designs.
MANAGEMENT RESTRUCTURING With net sales nearing a half-billion dollars in 1999,
we have the proven resources to realize continued long-term growth. To
capitalize fully on our opportunities, we have recently implemented changes in
Culp's management structure that reflect the substantial expansion that has
occurred in our operational breadth. By uniting related operations, we have
formed four business units that replace six separate groups. Our goal is to
raise overall efficiency, improve internal communications and develop more
comprehensive marketing programs that correlate our diverse fabric offerings
into unified collections for customers. We are confident the new structure will
enhance Culp's competitiveness and help build stronger working partnerships with
customers.
We have not constructed a ballpark out of a cornfield, but we have built an
organization of which we are very proud. The concentrated energies of our
associates are behind Culp's global leadership, and our purpose is to ensure
that they continue to have the resources and support to develop their
capabilities to the fullest.
Sincerely,
/s/ Robert G. Culp
Robert G. (Rob) Culp, III
Chairman and Chief Executive Officer
/s/ Howard L. Dunn, Jr.
Howard L. Dunn, Jr.
President and Chief Operating Officer
(Photo of color samples)
8
(Photo of fabric samples)
FOCUS ON DESIGN INTEGRATION
9
THE NEW HOWARD L. DUNN, JR. DESIGN CENTER
(Photo appears here with the following caption.)
Howard L. Dunn, Jr. Design Center's Design Court
We welcome you to the Howard L. Dunn, Jr. design center. At the entrance
gallery, you will find an array of fabrics spanning jacquards, dobbies, wet
print flocks, heat-transfer prints, woven and tufted velvets and pigment prints.
Here in one location, a furniture or bedding manufacturer will find
comprehensive solutions to meeting the challenge of serving today's
discriminating consumer. By consolidating most of our design resources in a
single location, we offer an unmatched selection of fabrics, backed by a highly
efficient, vertically integrated manufacturing organization.
CONSOLIDATES DESIGN RESOURCES
The genesis for a new design or texture can come from a myriad of sources. Our
goal in Culp's new design center is to stimulate that process, and we
figuratively have set creativity as the cornerstone for this exciting new
facility. The latest in computer-based systems allow Culp's designers to
translate a broad range of original artwork into new patterns and styles.
Conventional practice requires considerable time to take these designs and
produce actual samples. Culp's advanced systems utilizing sophisticated color
printers give our designers and customers realistic visual renditions virtually
on-demand. The advantages are obvious. Specialized ideas can easily be explored.
Customers can be encouraged to participate actively in the entire design
process, not just presented a limited selection of prepared samples. Design
becomes a true working partner to enhance one's marketing programs. COORDINATION
One especially exciting aspect of our design center is the coordination it is
fostering among our various business units. Culp's broad range of manufacturing
processes and finishing techniques offer the potential to develop an integrated
line of fabrics that match the increased market emphasis on complete room
furnishings. The boucle dobby fabric for the casual, relaxed feel of a sectional
sofa can be combined with a jacquard or printed fabric for accompanying separate
chairs. We are increasingly using this process to provide one-stop shopping for
customers. Make it easy to do business with Culp, and we will get more of that
business.
(Three photos appears on this page--two of fabric samples and one of a computer
with a fabric design on the background)
TO STRENGTHEN OUR DESIGN LEADERSHIP
10
(Photos of beds, chairs, couches and fabric samples appear on the back of
a pull-out page.)
11
CORPORATE DIRECTORY
m
a
n
a
g
e
m
e
n
t
Robert G. Culp, III
Chairman of the Board and Chief Executive Officer;
Director (E,N)
Howard L. Dunn, Jr.
President and Chief Operating Officer; Director (E)
Franklin N. Saxon
Senior Vice President and President of the Culp Velvets/Prints division;
Director (E)
Dan E. Jacobs
Senior Vice President and President of the Culp Decorative Fabrics division
Kenneth M. Ludwig
Senior Vice President-Human Resources; Assistant Secretary
Philip W. Wilson
Vice President and Chief Financial Officer
Kathy J. Hardy
Corporate Secretary
Harry R. Culp
Director; Private Investments, High Point, NC
Robert T. Davis
Director, former chairman of Artee Industries, Incorporated
Earl M. Honeycutt
Director (A,C); Retired President, Amoco Fabrics and Fibers Company,
Atlanta, GA
Patrick H. Norton
Director (N); Chairman of the Board;
La-Z-Boy, Inc., Monroe, MI
Earl N. Phillips, Jr.
Director; Chairman of the Board and Chief Executive Officer,
GE Capital First Factors, High Point, NC
Bland W. Worley
Director (A,C,N); Retired Chairman of the Board and Chief Executive
Officer, BarclaysAmericanCorporation, Charlotte, NC
Baxter P. Freeze, Sr.
Director Emeritus; Retired President, Chairman of the Board,
Commonwealth Hosiery Mills, Inc., Randleman, NC
BOARD COMMITTEES:
A-AUDIT
C-COMPENSATION
E-EXECUTIVE
N-NOMINATING
12
SHAREHOLDERS'
EQUITY
($ MILLIONS)
(A bar graph appears here with the following plot points.)
94 95 96 97 98
$62.6 $71.4 $81.4 $110.8 $131.5
RETURN ON
AVERAGE EQUITY
(A bar graph appears here with the following plot points.)
94 95 96 97 98
13.1% 14.6% 14.4% 15.2% 13.0%
INTERNATIONAL
SALES
($ MILLIONS)
(A bar graph appears here with the following plot points.)
94 95 96 97 98
$44.0 $58.0 $77.4 $101.6 $137.2
CAPITAL
EXPENDITURES
($ MILLIONS)
(A bar graph appears here with the following plot points.)
94 95 96 97 98
$16.8 $18.1 $14.4 $27.0 $35.9
financial index
Management's Discussion 13
Balance Sheets 16
Statements of Income 17
Shareholders' Equity 18
Cash Flows 19
Notes 20
Selected Quarterly Data 26
Selected Annual Data 27
Auditors' Report 28
13
Management's discussion and analysis of financial condition and results of
operations
The following analysis of the financial condition and results of operations
should be read in conjunction with the Financial Statements and Notes and other
exhibits included elsewhere in this report.
OVERVIEW
Culp believes that it is the largest manufacturer and marketer in the world
for upholstery fabrics for furniture and is one of the leading global producers
of mattress fabrics (or ticking). The company's fabrics are used primarily in
the production of residential and commercial upholstered furniture and bedding
products, including sofas, recliners, chairs, love seats, sectionals, sofa-beds,
office seating and mattress sets. Although Culp markets fabrics at most price
levels, the company emphasizes fabrics that have broad appeal in the promotional
and popular-priced categories of furniture and bedding.
Culp's worldwide leadership as a manufacturer and marketer of upholstery
fabrics and mattress ticking has been achieved through internal expansion and
the integration of strategic acquisitions. Acquisitions and internal expansion
over the past five years have included the following transactions:
[] In February 1998, Culp acquired the business and substantially all the assets
relating to the yarn manufacturing business operating as Artee Industries,
Incorporated. The transaction was valued at closing at $17.9 million with
additional compensation of up to $7.6 million contingent upon the profitability
of Artee Industries during Culp's fiscal year ending May 2, 1999. The Artee
transaction substantially expanded the company's capacity for manufacturing
specialty filling yarn. Culp initially acquired the capability to manufacture
filling yarn in December 1997 through the acquisition of the business and
certain assets relating to the Wetumpka spun yarn operation of Dan River, Inc.
[] In August 1997, Culp acquired the business and certain assets relating to the
upholstery fabric businesses operating as Phillips Weaving Mills, Phillips
Velvet Mills, Phillips Printing and Phillips Mills in a transaction valued at
approximately $39.5 million.
[] In January 1997, the company acquired a 107,000 square-foot facility in
Lumberton, North Carolina and installed manufacturing equipment necessary to
produce wet-printed flock upholstery fabrics. This new facility, which began
operating in July 1997, involved capital expenditures of $9 million.
[] In March 1995, the company acquired Rayonese Textile Inc. ("Rayonese") in a
transaction valued at $10.5 million. The acquisition of Rayonese substantially
increased the company's capacity to manufacture jacquard greige, or unfinished,
goods used by the company in the production of printed fabrics.
[] In November 1993, the company purchased the assets that now comprise
Rossville/Chromatex in a transaction valued at $39.3 million. This acquisition
significantly added to the company's capacity to produce jacquard and dobby
upholstery fabrics marketed principally for residential furniture.
The company is organized into business units. Culp Textures and
Rossville/Chromatex manufacture jacquard and dobby woven fabrics for residential
and commercial furniture. Phillips Mills manufactures jacquard woven fabrics
primarily for residential furniture. Velvets/Prints manufactures a broad range
of printed and velvet fabrics used primarily for residential and juvenile
furniture. Culp Home Fashions principally manufactures mattress ticking. Artee
Industries manufactures specialty filling yarn that is used by Culp and also
marketed to outside customers.
RESULTS OF OPERATIONS
The following table sets forth certain items in the company's consolidated
statements of income as a percentage of net sales.
1998 1997 1996
- --------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 82.5 81.8 82.2
- --------------------------------------------------------------------------
Gross profit 17.5 18.2 17.8
Selling, general and administrative
expenses 11.1 11.3 11.1
- --------------------------------------------------------------------------
Income from operations 6.4 6.9 6.7
Interest expense 1.5 1.2 1.5
Interest income (0.1) (0.1) 0.0
Other expense 0.4 0.4 0.3
- --------------------------------------------------------------------------
Income before income taxes 4.6 5.4 4.9
Income taxes (*) 29.0 36.0 36.5
Net Income 3.3% 3.5% 3.1%
- --------------------------------------------------------------------------
* Calculated as a percent of income before income taxes.
The following table sets forth the company's sales by business unit and major
product category for each of the company's three most recent years. The table
also sets forth the change in net sales for the business units and major product
categories as a percentage for comparative periods included in the table.
(DOLLARS IN THOUSANDS) AMOUNTS PERCENT CHANGE
- ------------------------------------------------------------------------------------
1997- 1996-
BUSINESS UNIT/PRODUCT CATEGORY 1998 1997 1996 1998 1997
- ------------------------------------------------------------------------------------
UPHOLSTERY FABRICS:
Culp Textures $ 92,727 $ 88,218 $ 84,384 5.1% 4.5%
Rossville/Chromatex 84,740 79,512 74,203 6.6% 7.2%
- ------------------------------------------------------------------------------------
177,467 167,730 158,587 5.8% 5.8%
Phillips 32,698 -- -- 100.0% --
Velvets/Prints 171,389 156,467 125,701 9.5% 24.5%
- ------------------------------------------------------------------------------------
381,554 324,197 284,288 17.7% 14.0%
MATTRESS TICKING:
Culp Home Fashions 87,285 74,682 67,379 16.9% 10.8%
YARN:
Artee Industries 7,876 -- -- 100.0% --
- ------------------------------------------------------------------------------------
$476,715 $398,879 $ 351,667 19.5% 13.4%
====================================================================================
1998 Compared with 1997
Net Sales. Net sales for 1998 increased by $77.8 million, or 19.5%, compared
with 1997. The company's sales of upholstery fabrics increased $57.4 million, or
17.7%, in 1998 compared with 1997. The principal factor contributing to the
increased sales was the contribution of $32.7 million from Phillips Mills, which
was acquired on August 5, 1997. Sales from Velvets/Prints, which manufactures
and markets fabrics that have been especially popular in markets outside the
United States, were up from the prior year. Although the strength in the U.S.
dollar relative to other currencies affected demand for Culp's fabrics,
Velvets/Prints continued to achieve increased international sales during 1998.
Sales from Culp Textures and Rossville/Chromatex rose at a lesser rate for
fiscal 1998. Sales from Culp Home Fashions, which principally consist of
mattress ticking and bedding products, rose 16.9% from a year ago. Excluding the
contribution from
14
acquired operations, Culp's sales of upholstery fabrics for furniture to
U.S.-based accounts were down slightly from 1997. Overall sales to U.S.-based
accounts, including the contribution from acquired operations, were up 14.2% for
1998. International sales, consisting primarily of upholstery fabrics, increased
to $137.2 million, up 35.1% from 1997. International shipments accounted for
28.8% of the company's sales for 1998, up from 25.5% in 1997. Since the close of
fiscal 1998, demand for fabrics marketed by Velvets/Prints began to slow in
certain international regions that had been primary export areas for the
company. This slowdown, which the company believes is industry-wide and linked
to economic difficulties in these areas, has accelerated and is expected to
affect the company's results significantly through at least the first half of
fiscal 1999.
GROSS PROFIT AND COST OF SALES. Gross profit for 1998 increased by $11.1
million and amounted to 17.5% of net sales compared with 18.2% in 1997. The
company benefited from an increased absorption of fixed costs as a result of the
growth in sales, the investment in equipment designed to lower manufacturing
costs and raise productivity and contributions from acquisitions. These benefits
were more than offset in 1998 by the impact of competitive pressures on the
margins of sales to certain U.S. and international customers and expansion
projects that did not reach targeted levels of productivity. The cost of raw
materials remained relatively stable in 1998. The significant slowdown in
international sales of certain fabrics that has developed since the close of
1998 is expected to have an adverse impact on the company's gross profit for
1999. The company expects that this development, combined with other competitive
issues, will likely lead to significantly lower gross profit compared with the
prior year through at least the first half of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses declined slightly as a percentage of net sales for 1998
to 11.1% compared with 11.3% a year ago. The company is continuing to incur
higher expenses related to expanded resources for designing fabrics with new
patterns and textures and increased selling commissions associated with
international sales. These factors were offset by lower accruals as a percentage
of net sales for incentive-based compensation plans and by the increase in
overall operating efficiency as a result of the growth in net sales.
INTEREST EXPENSE. Net interest expense for 1998 of $6.8 million was up from
$4.4 million in 1997 due principally to borrowings related to the acquisition of
Phillips Mills on August 5, 1997. The company also incurred higher borrowings in
1998 to finance capital expenditures and additional working capital
requirements.
OTHER EXPENSE. Other expense increased to $1.9 million for 1998 compared with
$1.5 million for 1997, principally due to the amortization of goodwill
associated with the acquisition of Phillips Mills.
INCOME TAXES. The effective tax rate for 1998 was 29.0% compared with 36.0% in
1997. The lower rate was due principally to increased tax benefits related to
the company's international sales and to a higher proportion of earnings from
the company's Canadian subsidiary that is taxed at a lower effective rate. The
company expects the effective tax rate for 1999 to be approximately 34%.
NET INCOME PER SHARE. Diluted net income per share for 1998 totaled $1.19
compared with $1.15 a year ago. The weighted average number of outstanding
shares diluted increased 9.3% from 1997, principally due to the company's
secondary offering completed in February 1997.
1997 COMPARED WITH 1996
Net Sales. Net sales for 1997 increased by $47.2 million, or 13.4%, compared
with 1996. The company's sales of upholstery fabrics increased $39.9 million, or
14.0% in 1997 compared with 1996. Sales from Velvets/Prints were up
significantly from the prior year, reflecting the positive impact of increased
international sales of wet-printed flock fabrics. Sales from Rossville/Chromatex
and Culp Textures also rose for the year. Sales from Culp Home Fashions,
principally represented by mattress ticking and bedding products, rose 10.8% for
the year. Business within the United States, especially sales to residential
furniture manufacturers, decreased by 2.1% during the fourth quarter of 1997 in
comparison to the same period of 1996. However, the company still achieved an 8%
gain in sales to U.S.-based accounts for the year. International sales,
consisting primarily of upholstery fabrics, increased to $101.6 million, up
31.2% from 1996. International shipments accounted for 25.5% of the company's
sales for 1997, up from 22.0% in 1996. Sales were made to customers in over 50
countries during 1997.
GROSS PROFIT AND COST OF SALES. Gross profit for 1997 increased by $9.9
million and amounted to 18.2% of net sales compared with 17.8% in 1996. A
significant portion of the increase in gross profit dollars was generated by
Velvets/Prints and, to a lesser degree, by Culp Home Fashions. Gross profit for
Culp Textures and Rossville/Chromatex increased slightly. Factors contributing
to the higher profitability included the increased absorption of fixed costs as
a result of the growth in sales as well as the benefit from the company's
ongoing capital investment in equipment designed to lower manufacturing costs
and raise productivity. The company also began to experience a stabilization in
the cost of raw materials during 1997 and, in some instances, realized lower
costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased as a percentage of net sales for 1997.
Although the company continued to emphasize cost-containment programs, planned
increases in expenses related to resources for designing new fabrics, higher
selling commissions related to international sales and higher data processing
costs contributed to the higher ratio of expenses to net sales.
INTEREST EXPENSE. Interest expense, net of interest income, of $4.4 million
for 1997 was down from $5.2 million in 1996 due to lower average borrowings
outstanding.
OTHER EXPENSE. Other expense increased $565,000 in comparison to 1996,
primarily due to the non-recurring write-off of certain fixed assets totaling
$175,000 and the recognition in 1996 of a gain of $100,000 related to an
indemnification for an environmental matter.
INCOME TAXES. The effective tax rate for 1997 decreased slightly to 36.0%
compared with 36.5% in 1996. This decrease was primarily due to the lower tax
rate related to Canadian income and tax benefits related to international sales.
NET INCOME PER SHARE. Diluted net income per share for 1997 totaled $1.15
compared with $0.94 in 1996.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Cash and cash investments were $2.3 million as of May 3, 1998
compared with $830,000 at the end of 1997. Funded debt (long-term debt,
including current maturities, less restricted investments) increased to $151.6
million at the close of 1998 from $65.6 million at the end of 1997. The increase
of $86.0 million in funded debt during 1998 was primarily a result of
acquisitions and capital investments made during the year. As a percentage of
total capital (funded debt plus total shareholders' equity), the company's
borrowings amounted to 53.5% as of May 3, 1998 compared with 37.2% at the end of
1997. The company's working capital as of May 3, 1998 was $102.7 million
compared with $69.8 million at the close of 1997.
The company's cash flow from operations was $8.9 million for 1998, consisting
of $33.1 million from earnings (net income plus depreciation, amortization and
deferred income taxes) offset by a reduction of $24.2 million from changes in
working capital. In April 1998, Culp completed the
15
sale of $75 million of senior unsecured notes ("Notes") in a private placement
to institutional investors. The Notes have a fixed coupon rate of 6.76% and an
average term of 10 years. The net proceeds from the private placement were used
to repay existing indebtedness under the company's bank credit facility.
FINANCING ARRANGEMENTS. In April 1997, the company completed a $125 million
syndicated five-year, unsecured, multi-currency revolving credit facility. The
facility requires quarterly payments of interest on all outstanding borrowings
and provides for a reduction of $5 million annually in the maximum amount of the
facility. Subsequent to the private placement of Notes in April 1998, the
maximum amount of the revolving credit facility was reduced to $100 million. As
of May 3, 1998, the company had outstanding balances of $30 million under the
credit facility.
The company also has a total of $34.8 million in currently outstanding
industrial revenue bonds ("IRBs") which have been used to finance capital
expenditures. The IRBs are collateralized by restricted investments of $4.0
million as of May 3, 1998 and letters of credit for the outstanding balance of
the IRBs and certain interest payments due thereunder.
The company's loan agreements require, among other things, that the company
maintain certain financial ratios. As of May 3, 1998, the company was in
compliance with these financial covenants.
As of May 3, 1998, the company had three interest rate swap agreements to
reduce its exposure to floating interest rates on a $25 million notional amount.
The effect of these contracts is to "fix" the interest rate payable on $25
million of the company's variable rate borrowings at a weighted average rate of
7.1%. The company also enters into foreign exchange forward and option contracts
to hedge against currency fluctuations with respect to firm commitments to
purchase certain machinery and equipment and raw materials and certain
anticipated Canadian dollar expenses of the company's Canadian subsidiary.
CAPITAL EXPENDITURES. The company maintains an ongoing program of capital
expenditures designed to increase capacity as needed, enhance manufacturing
efficiencies through modernization and increase the company's vertical
integration. Capital expenditures totaled $35.9 million for 1998. The company
anticipates capital spending of $10-$15 million in 1999.
The company believes that cash flows from operations and funds available under
existing credit facilities and committed IRB financings will be sufficient to
fund capital expenditures and working capital requirements for the foreseeable
future.
INFLATION
The company's costs for operating expenses, such as labor, utilities and
manufacturing supplies, rose during 1998 and 1997. Competitive conditions did
not allow the company to fully offset the impact of these increases through
higher prices, thereby putting pressure on profit margins. Although the cost of
the company's raw materials has generally stabilized and, in some cases,
declined during 1998, margins will continue to be influenced by raw material
prices, other operating costs and overall competitive conditions.
SEASONALITY
The company's business is slightly 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.
SUBSEQUENT EVENTS
Culp is structured in business units. Through 1998, this organization consisted
of six groups: (i) Culp Textures, (ii) Rossville/Chromatex, (iii)
Velvets/Prints, (iv) Culp Home Fashions, (v) Phillips Mills and (vi) Artee
Industries. After the close of the fiscal year, this structure was reorganized
into a management structure with four business units: (i) Culp Decorative
Fabrics, (ii) Culp Velvets/Prints, (iii) Culp Home Fashions and (iv) Culp Yarn.
Management's goal in this restructuring is to raise overall efficiency, improve
internal communications and develop more comprehensive marketing programs that
correlate Culp's diverse fabric offerings into unified collections for
customers.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," which is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. SFAS No. 128 specifies the computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock. Early adoption of SFAS No. 128 was prohibited and, as a result,
the company adopted SFAS No. 128 in the third fiscal quarter of 1998.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," effective
for periods beginning after December 15, 1997. The purpose of this standard is
to disclose disaggregated information which provides information about the
operating segments an enterprise engages in, consistent with the way management
reviews financial information to make decisions about the enterprise's operating
matters. The company will comply with the requirements of this standard for
fiscal year 1999.
YEAR 2000 CONSIDERATIONS
Management has developed a plan to modify the company's information technology
to recognize the year 2000 and has begun converting critical data processing
systems. The company's Year 2000 initiative is being managed by a team of
internal staff and management. Management currently expects the project to be
substantially complete by the end of fiscal 1999. The cost of this initiative,
principally represented by internal resources, is not expected to be material to
the company's results of operations or financial position. This project is not
expected to have a significant effect on the company's operations, though no
assurance can be given in this regard.
FORWARD-LOOKING INFORMATION
This annual report to shareholders and the company's annual report on Form 10-K
contain statements that could be deemed "forward-looking statements," within the
meaning of the federal securities laws. Such statements are inherently subject
to risks and uncertainties. Forward-looking statements are statements that
include projections, expectations or beliefs about future events or results or
otherwise are not statements of historical fact. Such statements are often
characterized by qualifying words such as "expect," "believe," "estimate,"
"plan" and "project" and their derivatives. Factors that could influence the
matters discussed in such statements include the level of housing starts and
sales of existing homes, consumer confidence, trends in disposable income and
general economic conditions. Decreases in these economic indicators could have a
negative effect on the company's business and prospects. Likewise, increases in
interest rates, particularly home mortgage rates, and increases in consumer debt
or the general rate of inflation, could affect the company adversely. Because of
the increasing percentage of the company's sales derived by 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 the
international area could affect the demand for the company's products.
16
Consolidated Balance Sheets
MAY 3, 1998 AND APRIL 27, 1997 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
current assets:
cash and cash investments $ 2,312 830
accounts receivable 73,773 56,691
inventories 78,594 53,463
other current assets 7,808 5,450
- ----------------------------------------------------------------------------------------------------------------------------------
total current assets 162,487 116,434
restricted investments 4,021 11,018
property, plant and equipment, net 128,805 91,231
goodwill 55,162 22,262
other assets 4,340 3,007
==================================================================================================================================
total assets $354,815 243,952
==================================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
current liabilities:
current maturities of long-term debt $ 3,325 100
accounts payable 37,214 29,903
accrued expenses 17,936 15,074
income taxes payable 1,282 1,580
- ----------------------------------------------------------------------------------------------------------------------------------
total current liabilities 59,757 46,657
long-term debt 152,312 76,541
deferred income taxes 11,227 9,965
- ----------------------------------------------------------------------------------------------------------------------------------
total liabilities 223,296 133,163
==================================================================================================================================
commitments and contingencies (notes 10 and 11)
shareholders' equity:
preferred stock, $.05 par value, authorized 10,000,000
shares 0 0
common stock, $.05 par value, authorized 40,000,000
shares, issued and outstanding 13,007,021 at
May 3, 1998 and 12,608,759 at April 27, 1997 650 630
capital contributed in excess of par value 40,882 33,899
retained earnings 89,987 76,260
- ----------------------------------------------------------------------------------------------------------------------------------
total shareholders' equity 131,519 110,789
- ----------------------------------------------------------------------------------------------------------------------------------
total liabilities and shareholders' equity $354,815 243,952
==================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
17
Consolidated Statements of Income
FOR THE YEARS ENDED MAY 3, 1998, APRIL 27, 1997,
AND APRIL 28, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------------
net sales $ 476,715 398,879 351,667
cost of sales 393,154 326,394 289,129
- -------------------------------------------------------------------------------------------------------------------------------
gross profit 83,561 72,485 62,538
selling, general and administrative expenses 52,987 45,058 39,068
- -------------------------------------------------------------------------------------------------------------------------------
income from operations 30,574 27,427 23,470
interest expense 7,117 4,671 5,316
interest income (304) (280) (92)
other expense 1,912 1,521 956
- -------------------------------------------------------------------------------------------------------------------------------
income before income taxes 21,849 21,515 17,290
income taxes 6,336 7,745 6,310
- -------------------------------------------------------------------------------------------------------------------------------
net income $ 15,513 13,770 10,980
==================================================================================================================================
net income per share $ 1.22 1.18 0.98
- -------------------------------------------------------------------------------------------------------------------------------
net income per share, assuming dilution $ 1.19 1.15 0.94
===============================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
18
Consolidated Statements of Shareholders' Equity
CAPITAL
FOR THE YEARS ENDED MAY 3, 1998, COMMON COMMON CONTRIBUTED TOTAL
APRIL 27, 1997 AND APRIL 28, 1996 STOCK STOCK IN EXCESS OF RETAINED SHAREHOLDERS'
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) SHARES AMOUNT PAR VALUE EARNINGS EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
balance, April 30, 1995 11,204,766 $ 560 16,577 54,259 71,396
cash dividends ($0.11 per share) (1,236) (1,236)
net income 10,980 10,980
common stock issued in connection
with stock option plan 85,534 5 301 306
- ---------------------------------------------------------------------------------------------------------------------------------
balance, April 28, 1996 11,290,300 565 16,878 64,003 81,446
proceeds from public offering of
1,200,000 shares 1,200,000 60 16,235 16,295
cash dividends ($0.13 per share) (1,513) (1,513)
net income 13,770 13,770
common stock issued in connection
with stock option plan 118,459 5 786 791
- ---------------------------------------------------------------------------------------------------------------------------------
balance, April 27, 1997 12,608,759 630 33,899 76,260 110,789
cash dividends ($0.14 per share) (1,786) (1,786)
net income 15,513 15,513
common stock issued in connection
with stock option plans 114,051 6 997 1,003
common stock issued in connection
with acquisition of Artee
Industries, Incorporated's assets 284,211 14 5,386 5,400
stock options issued in connection
with acquisition of Phillips' assets 600 600
- ---------------------------------------------------------------------------------------------------------------------------------
balance, May 3, 1998 13,007,021 $ 650 40,882 89,987 131,519
=================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
19
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED MAY 3, 1998, APRIL 27, 1997, AND APRIL 28, 1996
(DOLLARS IN THOUSANDS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
cash flows from operating activities:
net income $ 15,513 13,770 10,980
adjustments to reconcile net income to net cash provided by
operating activities:
depreciation 14,808 12,688 12,348
amortization of intangible assets 1,371 810 748
provision for deferred income taxes 1,416 966 2,210
changes in assets and liabilities, net of effects of
businesses acquired:
accounts receivable (13,207) (4,653) (7,786)
inventories (17,684) (6,068) (1,624)
other current assets (660) (348) (537)
other assets (380) (205) (103)
accounts payable 6,477 2,586 (1,077)
accrued expenses 1,506 2,510 1,032
income taxes payable (298) 1,383 (464)
- -----------------------------------------------------------------------------------------------------------------------------------
net cash provided by operating activities 8,862 23,439 15,727
- -----------------------------------------------------------------------------------------------------------------------------------
cash flows from investing activities:
capital expenditures (35,879) (26,958) (14,385)
purchase of restricted investments (8,770) (9,770) (6,019)
purchase of investments to fund deferred compensation liability (581) (563) (1,286)
sale of restricted investments 15,767 4,002 1,564
payments for businesses acquired (42,966) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
net cash used in investing activities (72,429) (33,289) (20,126)
- -----------------------------------------------------------------------------------------------------------------------------------
cash flows from financing activities:
proceeds from issuance of long-term debt 86,246 54,500 19,854
principal payments on long-term debt (17,100) (59,900) (11,555)
cash dividends paid (1,786) (1,513) (1,236)
proceeds from common stock issued 562 17,086 306
change in accounts payable - capital expenditures (2,873) 9 (3,865)
- -----------------------------------------------------------------------------------------------------------------------------------
net cash provided by financing activities 65,049 10,182 3,504
- -----------------------------------------------------------------------------------------------------------------------------------
increase (decrease) in cash and cash investments 1,482 332 (895)
cash and cash investments, beginning of year 830 498 1,393
- -----------------------------------------------------------------------------------------------------------------------------------
cash and cash investments, end of year $ 2,312 830 498
===================================================================================================================================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
20
Notes to Consolidated Financial Statements
1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the
accounts of the company and its subsidiary, which is wholly-owned. All
significant intercompany balances and transactions are eliminated in
consolidation.
DESCRIPTION OF BUSINESS The company primarily manufactures and markets
furniture upholstery fabrics and mattress ticking for the furniture, bedding,
and related industries, with the majority of its business conducted in the
United States.
FISCAL YEAR The company's fiscal year is the 52 or 53 week period ending on
the Sunday closest to April 30. Fiscal year 1998 included 53 weeks and fiscal
years 1997 and 1996 included 52 weeks.
STATEMENTS OF CASH FLOWS For purposes of reporting cash flows, the company
considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash investments.
ACCOUNTS RECEIVABLE Substantially all of the company's accounts receivable are
due from manufacturers and distributors in the markets noted above. The company
grants credit to customers, a substantial number of which are located in the
United States. Management performs credit evaluations of the company's customers
and generally does not require collateral.
INVENTORIES Principally all inventories are valued at the lower of last-in,
first-out (LIFO) cost or market.
RESTRICTED INVESTMENTS Restricted investments were purchased with proceeds
from industrial revenue bond issues and are invested pending application of such
proceeds to project costs or repayment of the bonds. The investments are stated
at cost which approximates market value.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is recorded at
cost. Depreciation is generally computed using the straight-line method over the
estimated useful lives of the respective assets. Major renewals and betterments
are capitalized. Maintenance, repairs and minor renewals are expensed as
incurred. When properties are retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts. Amounts received on
disposal less the book value of assets sold are charged or credited to income.
Interest costs of $678,000 incurred during the year ended May 3, 1998 for the
purchase and construction of qualifying fixed assets were capitalized and are
being amortized over the related assets' estimated useful lives.
FOREIGN CURRENCY TRANSLATION The United States dollar is the functional
currency for the company's Canadian subsidiary. Translation gains or losses for
this subsidiary are reflected in net income.
GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill, which represents the
unamortized excess of the purchase price over the fair values of the net assets
acquired, is being amortized using the straight-line method over 40 years. The
company assesses the recoverability of goodwill by determining whether the
amortization of the balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired businesses. The
assessment of the recoverability of goodwill will be impacted if estimated cash
flows are not achieved.
Other intangible assets are included in other assets and consist principally
of debt issue costs. Amortization is computed using the straight-line method
over the respective terms of the debt agreements.
INCOME TAXES Deferred taxes are recognized for the temporary differences
between the financial statement carrying amounts and the tax bases of the
company's assets and liabilities and operating loss and tax credit carryforwards
at income tax rates expected to be in effect when such amounts are realized or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that includes the enactment date.
No provision is made for income taxes which may be payable if undistributed
income of the company's Canadian subsidiary were to be paid as dividends to the
company, since the company intends that such earnings will continue to be
invested. At May 3, 1998, the amount of such undistributed income was $10.7
million. Foreign tax credits may be available as a reduction of United States
income taxes in the event of such distributions.
REVENUE RECOGNITION Revenue is recognized when products are shipped to
customers. Provision is made currently for estimated product returns, claims and
allowances.
STOCK OPTION PLANS Prior to April 29, 1996, the company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense was recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On April 29, 1996, the company adopted SFAS No. 123, Accounting
for Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
net income per share disclosures for employee stock option grants made in fiscal
1996 and future years as if the fair-value-based method defined in SFAS No. 123
had been applied. The company has elected to continue to apply the provisions of
APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No.
123.
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amount of cash and cash
investments, accounts receivable, other current assets, accounts payable and
accrued expenses approximates fair value because of the short maturity of these
financial instruments.
The fair value of the company's long-term debt is estimated by discounting the
future cash flows at rates currently offered to the company for similar debt
instruments of comparable maturities. The fair value of the company's long-term
debt approximates the carrying value of the debt at May 3, 1998.
INTEREST RATE SWAP AGREEMENTS Interest rate swap agreements generally involve
the exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. These agreements are used to
effectively fix the interest rates on certain variable rate borrowings. Net
amounts paid or received are reflected as adjustments to interest expense.
FORWARD CONTRACTS Gains and losses related to qualifying hedges of firm
commitments and certain anticipated transactions of the company's Canadian
subsidiary are deferred and included in the measurement of the related foreign
currency transaction when the hedged transaction occurs.
21
PER SHARE DATA During the third quarter of fiscal 1998, the company adopted
Statement of Financial Accounting Standards No. 128 that requires the reporting
of both net income per share and net income per share, assuming dilution. Net
income per share is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Net income per share, assuming dilution reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Prior periods have been restated to
reflect the new standard. The following table reconciles the numerators and
denominators of net income per share and net income per share, assuming
dilution:
(Amounts in thousands, Income Shares Per Share
except per share data) (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------
1998
Net income per share $ 15,513 12,744 $ 1.22
Effect of dilutive securities:
Options 0 298
- --------------------------------------------------------------------------------
Net income per share,
assuming dilution $ 15,513 13,042 $ 1.19
================================================================================
1997
Net income per share $ 13,770 11,624 $ 1.18
Effect of dilutive securities:
Options 0 305
- --------------------------------------------------------------------------------
Net income per share,
assuming dilution $ 13,770 11,929 $ 1.15
================================================================================
1996
Net income per share $ 10,980 11,234 $ 0.98
Effect of dilutive securities:
Options 0 288
Convertible note payable 175 364
- --------------------------------------------------------------------------------
Net income per share,
assuming dilution $ 11,155 11,886 $ 0.94
================================================================================
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION Certain items in the 1997 consolidated financial statements
have been reclassified to conform with the presentation adopted in the current
year. The reclassifications did not impact net income as previously reported.
2. ACQUISITIONS
On August 5, 1997, the company purchased the operations and certain assets
relating to an upholstery fabric business operating as Phillips Weaving Mills,
Phillips Velvet Mills, Phillips Printing and Phillips Mills (Phillips). The
transaction was valued at approximately $39.5 million and involved the purchase
of assets for cash, the assumption of certain notes, liabilities and contracts,
the payments under the terms of certain obligations to Phillips and the issuance
of an option for 100,000 shares of common stock. The consideration for the
acquisition also included contingent payments to Phillips within three years
following closing that could range from $0 to $5.5 million, depending upon the
future sales performance of the Phillips jacquard fabric product line. Goodwill
on the transaction was approximately $30.8 million, which is being amortized on
the straight-line method over 40 years.
On December 30, 1997, the company purchased the operations and certain assets
relating to the Wetumpka spun yarn operation of Dan River Inc. The transaction
was valued at approximately $1.4 million and involved the purchase of assets for
cash.
On February 2, 1998, the company purchased the operations and certain assets
relating to a yarn manufacturing business operating as Artee Industries,
Incorporated (Artee). The transaction was valued at approximately $17.9 million
and involved the purchase of assets for cash, the assumption of certain
liabilities and the issuance of a note payable and common stock of the company.
The consideration for the acquisition also included contingent payments to Artee
that could range from $0 to $7.6 million, depending upon the future
profitability of Artee during the company's fiscal year ending May 2, 1999.
Goodwill on the transaction was approximately $3.3 million, which is being
amortized on the straight-line method over 40 years.
The three acquisitions mentioned above were accounted for as purchases, and
accordingly, the total purchase price has been allocated to the assets and
retained liabilities acquired based on their estimated fair values at the dates
of the acquisitions. The preliminary estimated fair values of assets and
retained liabilities acquired are summarized below:
(dollars in thousands)
- --------------------------------------------------------------------------------
accounts receivable, net $ 3,875
inventories 7,447
other current assets 907
property, plant and equipment 16,503
goodwill 34,133
other assets 1,455
accounts payable and accrued expenses (5,504)
- --------------------------------------------------------------------------------
total 58,816
issuance of 284,211 shares of Culp, Inc. common stock 5,400
issuance of an option for 100,000 shares of
Culp, Inc. common stock 600
issuance of obligations to sellers 9,850
- --------------------------------------------------------------------------------
cash paid $ 42,966
================================================================================
The operating results of the three acquisitions mentioned above are included in
the company's consolidated results of operations from the dates of the
acquisitions. The following unaudited pro forma data presents the consolidated
results of operations as if the acquisitions had occurred at the beginning of
fiscal 1997, after giving effect to certain adjustments, including amortization
of goodwill, interest expense on the debt of the acquisitions and related income
tax effects. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had the
acquisitions been made as of those dates or of results which may occur in the
future.
22
(dollars in thousands, except per share data) (unaudited) 1998 1997
- --------------------------------------------------------------------------------
net sales $ 505,950 471,751
net income 16,283 15,652
net income per share 1.26 1.31
net income per share, assuming dilution 1.23 1.28
3. ACCOUNTS RECEIVABLE
A summary of accounts receivable follows:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
customers $ 75,695 58,568
allowance for doubtful accounts (1,244) (1,500)
reserve for returns and allowances (678) (377)
- --------------------------------------------------------------------------------
$ 73,773 56,691
================================================================================
4. INVENTORIES
A summary of inventories follows:
(dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
inventories on the FIFO cost method
raw materials $ 45,319 32,025
work-in-process 6,608 4,627
finished goods 31,017 20,212
- --------------------------------------------------------------------------------
total inventories on the
FIFO cost method 82,944 56,864
adjustments of certain inventories to the
LIFO cost method (2,364) (3,401)
adjustments of certain inventories to market (1,986) -
- --------------------------------------------------------------------------------
$ 78,594 53,463
================================================================================
5. PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment follows:
depreciable lives
(dollars in thousands) (in years) 1998 1997
- -------------------------------------------------------------------------
land and improvements 10 $ 2,205 1,795
buildings and improvements 7-40 21,548 13,719
leasehold improvements 7-10 1,544 1,379
machinery and equipment 3-12 162,070 124,531
office furniture and equipment 3-10 13,508 13,122
capital projects in progress 23,659 19,019
- -------------------------------------------------------------------------
224,534 173,565
accumulated depreciation (95,729) (82,334)
- -------------------------------------------------------------------------
$ 128,80 $ 91,231
=========================================================================
6. GOODWILL
A summary of goodwill follows:
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
goodwill $ 58,351 24,218
accumulated amortization (3,189) (1,956)
- --------------------------------------------------------------------------------
$ 55,162 22,262
================================================================================
7. ACCOUNTS PAYABLE
A summary of accounts payable follows:
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
accounts payable - trade $34,340 24,156
accounts payable - capital expenditures 2,874 5,747
- --------------------------------------------------------------------------------
$37,214 29,903
================================================================================
8. ACCRUED EXPENSES
A summary of accrued expenses follows:
(DOLLARS IN THOUSANDS) 1998 1997
- --------------------------------------------------------------------------------
compensation and benefits $12,212 10,217
other 5,724 4,857
- --------------------------------------------------------------------------------
$17,936 15,074
================================================================================
9. INCOME TAXES
A summary of income taxes follows:
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
current
federal $2,698 5,109 3,345
state 493 881 700
Canadian 1,729 789 0
- --------------------------------------------------------------------------------
4,920 6,779 4,045
- --------------------------------------------------------------------------------
deferred
federal 563 (26) 1,422
state 102 (12) 145
Canadian 751 1,004 698
- --------------------------------------------------------------------------------
1,416 966 2,265
- --------------------------------------------------------------------------------
$6,336 7,745 6,310
================================================================================
Income before income taxes related to the company's Canadian operation for the
years ended May 3, 1998, April 27, 1997, and April 28, 1996 were $8,000,000,
$5,500,000 and $2,100,000, respectively.
The following schedule summarizes the principal differences between income
taxes at the federal income tax rate and the effective income tax rate reflected
in the consolidated financial statements:
1998 1997 1996
- ------------------------------------------------------------------------------
federal income tax rate 35.0% 35.0% 34.2%
state income taxes, net of federal
income tax benefit 1.8 2.6 3.4
exempt income of foreign sales corporation (6.4) (1.7) (1.7)
other (1.4) 0.1 0.6
- ------------------------------------------------------------------------------
29.0% 36.0% 36.5%
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities consist of the following:
23
(DOLLARS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------
deferred tax liabilities:
property, plant and equipment, net $(10,526) (8,903)
goodwill (1,651) (1,019)
other (326) (105)
- -------------------------------------------------------------------------------
total deferred tax liabilities (12,503) (10,027)
deferred tax assets:
accounts receivable 590 638
inventories 1,356 380
compensation 1,515 1,231
liabilities and reserves 1,673 691
- -------------------------------------------------------------------------------
gross deferred tax assets 5,134 2,940
valuation allowance 0 0
- -------------------------------------------------------------------------------
total deferred tax assets 5,134 2,940
- -------------------------------------------------------------------------------
$ (7,369) (7,087)
================================================================================
Deferred taxes are classified in the accompanying consolidated balance sheet
captions as follows:
(DOLLARS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------
other current assets $ 3,858 2,878
deferred income taxes (11,227) (9,965)
- -------------------------------------------------------------------------------
$ (7,369) (7,087)
================================================================================
The company believes that it is more likely than not that the results of future
operations will generate sufficient taxable income to realize the remaining
deferred tax assets.
Income taxes paid, net of income tax refunds, were $5,218,000 in 1998;
$5,396,000 in 1997; and $4,623,000 in 1996.
10. LONG-TERM DEBT
A summary of long-term debt follows:
(DOLLARS IN THOUSANDS) 1998 1997
- -------------------------------------------------------------------------------
senior unsecured notes $ 75,000 --
industrial revenue bonds and other obligations 34,787 31,641
revolving credit facility 30,000 41,000
revolving line of credit 6,000 4,000
obligations to sellers 9,850 --
- -------------------------------------------------------------------------------
155,637 76,641
- --------------------------------------------------------------------------------
current maturities (3,325) (100)
- --------------------------------------------------------------------------------
$ 152,312 76,541
================================================================================
On April 2, 1998, the company completed the sale of $75,000,000 of senior
unsecured notes (the "Notes") in a private placement to insurance companies. The
Notes have a fixed coupon rate of 6.76% and an average term of 10 years. The
principal payments become due from March 2006 to March 2010 with interest
payable semi-annually.
The company's revolving credit agreement (the "Credit Agreement") provides an
unsecured multi-currency revolving credit facility, which expires in April 2002,
with a syndicate of banks in the United States and Europe. The Credit Agreement
provides for a revolving loan commitment of $100,000,000. The agreement requires
payment of a quarterly facility fee in advance. Additionally, the agreement
requires payment of interest on any outstanding borrowings based on, at the
company's option, (1) the reference rate of the agent acting on behalf of the
syndicate of banks, or (2) a specified pricing grid which increases from LIBOR
or IBOR based on the company's debt to EBITDA ratio, as defined by the
agreement. At May 3, 1998, all of the outstanding borrowings under the
multi-currency agreement were based on LIBOR and the interest rate was
approximately 6.02%.
The company's $6,000,000 revolving line of credit expires on May 31, 1999.
However, the line of credit will automatically be extended for an additional
three-month period on each August 31, November 30, February 28 and May 31 unless
the bank notifies the company that the line of credit will not be extended.
Additionally, the revolving line of credit requires payment of interest monthly
on any outstanding borrowings at an interest rate based on LIBOR plus a margin
based on the company's debt to EBITDA ratio, as defined in the credit facility.
At May 3, 1998, the interest rate on outstanding borrowings was approximately
6.02%.
The industrial revenue bonds (IRB) are generally due in balloon maturities
which occur at various dates from 2006 to 2013. All of the bonds bear interest
at variable rates of approximately 60% of the prime rate (prime at May 3, 1998
was 8.5%). The IRBs are collateralized by restricted investments of $4,021,000
and letters of credit for $35,036,000 at May 3, 1998.
The company's loan agreements require, among other things, that the company
maintain compliance with certain financial ratios. At May 3, 1998, the company
was in compliance with these required financial covenants.
At May 3, 1998, the company had three interest rate swap agreements with a
bank in order to reduce its exposure to floating interest rates on a portion of
its variable rate borrowings.
The following table summarizes certain data regarding the interest rate swaps:
NOTIONAL AMOUNT INTEREST RATE EXPIRATION DATE
- --------------------------------------------------------------------------------
$ 15,000,000 7.3% April 2000
$ 5,000,000 6.9% June 2002
$ 5,000,000 6.6% July 2002
The estimated amount at which the company could terminate these agreements as of
May 3, 1998 is approximately $476,000. Net amounts paid under these agreements
increased interest expense by approximately $232,000 in 1998; $301,000 in 1997;
and $290,000 in 1996. Management believes the risk of incurring losses resulting
from the inability of the bank to fulfill its obligation under the interest rate
swap agreements to be remote and that any losses incurred would be immaterial.
The principal payment requirements of long-term debt during the next five
years are: 1999 - $3,325,000; 2000 - $7,910,000; 2001 - $1,910,000; 2002 -
$31,910,000; and 2003 - $1,910,000.
Interest paid during 1998, 1997 and 1996 totaled $7,067,000, $4,834,000, and
$5,365,000, respectively.
11. COMMITMENTS AND CONTINGENCIES
The company leases certain office, manufacturing and warehouse facilities and
equipment, primarily computer, and vehicles, under noncancellable operating
leases. Lease terms related to real estate range from five to ten
24
years with renewal options for additional periods ranging from five to fifteen
years. The leases generally require the company to pay real estate taxes,
maintenance, insurance and other expenses. Rental expense for operating leases,
net of sublease income, was $6,065,000 in 1998, $4,590,000 in 1997; and
$3,502,000 in 1996. Future minimum rental commitments for noncancellable
operating leases are $5,813,000 in 1999; $5,129,000 in 2000; $3,199,000 in 2001;
$2,205,000 in 2002; $1,990,000 in 2003; and $9,017,000 in later years.
The company is involved in several legal proceedings and claims which have
arisen in the ordinary course of its business. These actions, when ultimately
concluded and settled, will not, in the opinion of management, have a material
adverse effect upon the financial position, results of operations or liquidity
of the company.
The company has outstanding capital expenditure commitments of approximately
$3,614,000 as of May 3, 1998.
12. STOCK OPTION PLANS
The company has a fixed stock option plan under which options to purchase
common stock may be granted to officers, directors and key employees. At May 3,
1998, 800,677 shares of common stock were authorized for issuance under the
plan. Options are generally exercisable one year after the date of grant and
generally expire beginning ten years after the date of grant.
No compensation cost has been recognized for this stock option plan as options
are granted under the plan at an option price not less than fair market value at
the date of grant.
A summary of the status of the plan as of May 3, 1998, April 27, 1997 and
April 28, 1996 and changes during the years ended on those dates is presented
below:
During fiscal 1995, the company adopted a stock option plan which provided for
the one-time grant to officers and certain senior managers of options to
purchase 121,000 shares of the company's common stock at $.05 (par value) per
share. Coincident with the adoption of this plan, the company's 1993 stock
option plan was amended to reduce the number of shares issuable under that plan
by 121,000 shares. The accelerated vesting provisions of this plan were achieved
and all options vested 45 days after the end of fiscal 1997 and, as a result,
the compensation expense recorded under APB opinion No. 25 was approximately
$1,026,000 for the three-year period ended April 27, 1997. Since these options
were granted in fiscal 1995, the provisions of SFAS No. 123 are not applicable.
As of May 3, 1998, the 65,000 options outstanding under the plan have exercise
prices of $0.05 and a weighted-average remaining contractual life of 5.7 years.
Options exercised during fiscal 1998 were 49,000.
During September 1997, the company's shareholders approved the 1997
performance-based option plan which provides for the one-time grant to certain
officers and certain senior managers of options to purchase 106,000 shares of
the company's common stock at $1.00 per share. Options under the plan are
exercisable the earlier of January 1, 2006 or approximately 30 days after the
end of fiscal 1999 if the company achieves net income per share of $1.50 for
fiscal 1999, which would represent a 15% compound annual growth rate from fiscal
1996 net income per share of $0.98. During 1998, the compensation expense
recorded under APB Opinion No. 25 was approximately $250,000.
As of May 3, 1998, the 106,000 options outstanding under the plan have
exercise prices of $1.00 and a weighted-average remaining contractual life of
8.7 years. The weighted-average fair value of the 106,000 options granted during
1998 was $19.10. Had compensation cost for this stock-based compensation plan
and the fixed stock option plan with
1998 1997 1996
WEIGHTED-AVG. WEIGHTED-AVG. WEIGHTED-AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 407,228 $ 8.69 443,437 $ 7.46 455,721 $ 6.65
Granted 187,250 18.89 82,250 12.61 83,250 8.27
Exercised (65,051) 8.63 (118,459) 6.81 (85,534) 3.51
Canceled/expired -- -- -- -- (10,000) 11.25
- ------------------------------------------------------------------------------------------------------------------------------------
outstanding at end of year 529,427 12.30 407,228 8.69 443,437 7.46
====================================================================================================================================
Options exercisable at year-end 453,427 10.97 336,228 7.91 371,437 7.37
Weighted-average fair value of options
granted during the year $ 6.72 $ 4.55 $ 2.98
====================================================================================================================================
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------
NUMBER WEIGHTED-AVG. NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG. EXERCISABLE WEIGHTED-AVG.
EXERCISE PRICES AT 5/3/98 CONTRACTUAL LIFE EXERCISE PRICE AT 5/3/98 EXERCISE PRICE
- ---------------------------------------------------------------------------------------------------
$ 2.82 -- $ 7.75 142,427 4.5 years $ 5.04 142,427 $ 5.04
$ 8.00 -- $12.75 168,375 6.4 10.83 168,375 10.83
$13.34 -- $20.25 207,375 6.8 18.02 131,375 16.73
$20.94 -- $20.94 11,250 9.4 20.94 11,250 20.94
- ---------------------------------------------------------------------------------------------------
529,427 6.1 12.30 453,427 10.97
===================================================================================================
25
529,427 options outstanding at May 3, 1998 been determined consistent with SFAS
No. 123, the company's net income, net income per share and net income per
share, assuming dilution would have been reduced to the pro forma amounts
indicated below:
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1996
- --------------------------------------------------------------------------------
Net income As reported $15,513 13,770 10,980
Pro forma 15,377 13,637 10,927
- --------------------------------------------------------------------------------
Net income per share As reported $ 1.22 1.18 0.98
Pro forma 1.21 1.17 0.97
- --------------------------------------------------------------------------------
Net income per share, As reported $ 1.19 1.15 0.94
assuming dilution Pro forma 1.18 1.14 0.93
- --------------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant
using the Black Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend yield
of 1%, 1% and 1%; risk-free interest rates of 5.5%, 5% And 5%; expected
volatility of 42%, 44% and 44%; and expected lives of 5.3 years, 3 years and 3
years.
13. BENEFIT PLANS
The company has a defined contribution plan which covers substantially all
employees and provides for participant contributions on a pre-tax basis and
discretionary matching contributions by the company, which are determined
annually. Company contributions to the plan were $1,103,000 in 1998; $ 875,000
in 1997; and $791,000 in 1996.
In addition to the defined contribution plan, the company has a nonqualified
deferred compensation plan covering officers and certain other associates. At
May 3, 1998 and April 27, 1997, the company's nonqualified plan liability of
$3,059,000 and $2,128,000 at May 3, 1998 and April 27, 1997, respectively, is
included in accrued expenses in the accompanying consolidated balance sheets.
The company also had assets related to the nonqualified plan of $2,355,000 and
$1,774,000 at May 3, 1998 and April 27, 1997, respectively, which are included
in other assets in the accompanying consolidated balance sheets.
14. INTERNATIONAL SALES
International sales, of which 94%, 91%, and 90% were denominated in U.S. dollars
in 1998, 1997, and 1996, accounted for 29% of net sales in 1998, 25% in 1997,
and 22% in 1996, and are summarized by geographic area as follows:
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------------------------------------------------------------
North America (excluding USA) $31,160 27,479 23,528
Europe 30,775 25,245 18,927
Middle East 34,412 23,505 15,609
Asia and Pacific Rim 32,344 19,646 12,124
South America 5,158 2,604 2,753
All other areas 3,374 3,092 4,456
- --------------------------------------------------------------------------------
$137,223 101,571 77,397
================================================================================
15. RELATED PARTY TRANSACTIONS
A director of the company is also an officer and director of a major customer of
the company. The amount of sales to this customer was approximately $30,545,000
in 1998; $27,549,000 in 1997; and $27,739,000 in 1996. The amount due from this
customer at May 3, 1998 was approximately $2,413,000 and at April 27, 1997 was
approximately $2,718,000.
A director of the company is also an officer and director of the lessor of the
company's office facilities in High Point. Rent expense for the company's office
facilities was approximately $482,000 in 1998; $436,000 in 1997; and $421,000 in
1996.
Rents paid to entities owned by certain shareholders and officers of the
company and their immediate families were $724,000 in 1998 and $680,000 in 1997
and 1996.
16. FOREIGN EXCHANGE FORWARD CONTRACTS
The company generally enters into foreign exchange forward and option contracts
as a hedge against its exposure to currency fluctuations on firm commitments to
purchase certain machinery and equipment and raw materials and certain
anticipated Canadian dollar expenses of the company's Canadian subsidiary. The
company had approximately $519,000 and $2,432,000 of outstanding foreign
exchange forward and option contracts as of May 3, 1998 and April 27, 1997,
respectively (primarily denominated in Belgian francs and German marks). The
contracts outstanding at May 3, 1998 mature at various dates in fiscal 1999. Due
to the short maturity of these financial instruments, the fair values of these
contracts approximate the contract amounts at May 3, 1998 and April 27, 1997,
respectively.
17. STOCK OFFERING
In February of 1997, the company completed the sale of 1,200,000 shares of
common stock at a per share price of $15 less commissions and expenses of
approximately $1,700,000 which resulted in net proceeds realized of
approximately $16,300,000. The net proceeds received from the offering were used
to reduce outstanding borrowings under the company's revolving credit line.
The stock offering also included 640,000 shares of common stock sold by two
non-management shareholders at a per share price of $15 less commissions of
approximately $576,000 which resulted in net proceeds realized of approximately
$9,024,000 by the selling shareholders.
26
Selected Quarterly Data
FISCAL FISCAL FISCAL FISCAL FISCAL FISCAL
1998 1998 1998 1998 1997 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS) 4TH QUARTER 3RD QUARTER 2ND QUARTER 1ST QUARTER 4TH QUARTER 3RD QUARTER
- -------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA (10)
net sales $ 135,834 118,457 122,926 99,498 105,678 97,468
cost of sales 112,644 97,554 100,191 82,765 85,386 80,317
- -------------------------------------------------------------------------------------------------------------------------------
gross profit 23,190 20,903 22,735 16,733 20,292 17,151
SG & A expenses 15,277 13,162 13,632 10,916 11,730 10,760
- -------------------------------------------------------------------------------------------------------------------------------
income from operations 7,913 7,741 9,103 5,817 8,562 6,391
interest expense 1,837 2,180 1,820 1,280 1,019 1,228
interest income (69) (73) (72) (90) (90) (73)
other expense 753 492 425 242 404 421
- -------------------------------------------------------------------------------------------------------------------------------
income before income taxes 5,392 5,142 6,930 4,385 7,229 4,815
income taxes 1,236 1,140 2,425 1,535 2,389 1,805
- -------------------------------------------------------------------------------------------------------------------------------
net income 4,156 4,002 4,505 2,850 4,840 3,010
===============================================================================================================================
EBITDA (6) $ 11,796 11,390 12,643 9,012 11,582 9,279
depreciation 4,148 3,791 3,613 3,256 3,248 3,119
cash dividends 453 444 446 443 410 368
===============================================================================================================================
weighted average shares outstanding 12,993 12,692 12,668 12,631 12,546 11,342
weighted average shares outstanding,
assuming dilution 13,284 12,986 12,980 12,929 12,856 11,653
===============================================================================================================================
PER SHARE DATA (10)
net income (9) $ 0.32 0.32 0.36 0.23 0.39 0.27
net income, assuming dilution (9) 0.31 0.31 0.35 0.22 0.38 0.26
cash dividends 0.035 0.035 0.035 0.035 0.0325 0.0325
book value 10.11 9.58 9.30 8.98 8.79 7.89
===============================================================================================================================
BALANCE SHEET DATA (10)
working capital $ 102,730 104,026 98,833 88,969 69,777 60,689
property, plant and equipment, net 128,805 113,658 107,377 97,128 91,231 86,146
total assets 354,815 327,322 320,979 253,319 243,952 228,262
capital expenditures 7,696 8,967 10,063 9,153 8,333 8,949
long-term debt 152,312 144,079 139,991 96,016 76,541 86,266
funded debt (1) 151,616 141,223 131,833 87,930 65,623 80,588
shareholders' equity 131,519 121,613 118,005 113,537 110,789 89,578
capital employed (7) 283,135 262,836 249,838 201,467 176,412 170,166
===============================================================================================================================
RATIOS & OTHER DATA (10)
gross profit margin 17.1% 17.6% 18.5% 16.8% 19.2% 17.6%
operating income margin 5.8 6.5 7.4 5.8 8.1 6.6
net income margin 3.1 3.4 3.7 2.9 4.6 3.1
EBITDA margin 8.7 9.6 10.3 9.1 11.0 9.5
effective income tax rate 22.9 22.2 35.0 35.0 33.0 37.5
funded debt-to-total capital ratio (1) 53.5 53.7 52.8 43.6 37.2 47.4
working capital turnover 4.7 4.7 4.8 5.1 5.3 5.3
days sales in receivables 49 52 55 50 49 47
inventory turnover 5.9 5.4 6.1 5.8 6.6 6.2
===============================================================================================================================
STOCK DATA
stock price
high $ 21.75 21.00 22.19 18.63 19.63 17.00
low 18.63 18.38 17.38 16.50 14.50 13.50
close 18.88 20.00 19.00 17.63 16.63 14.88
P/E ratio (2)
high 17.8 16.2 17.8 15.3 16.6 14.7
low 15.3 14.1 13.9 13.5 12.3 11.6
daily average trading volume (shares) (8) 16.9 17.5 13.9 15.8 33.3 15.0
===============================================================================================================================
FISCAL FISCAL
1997 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS) 2ND QUARTER 1ST QUARTER
- ----------------------------------------------------------------------
INCOME STATEMENT DATA (10)
net sales 105,204 90,529
cost of sales 86,082 74,609
- ----------------------------------------------------------------------
gross profit 19,122 15,920
SG & A expenses 11,704 10,864
- ----------------------------------------------------------------------
income from operations 7,913 5,056
interest expense 1,242 1,182
interest income (60) (57)
other expense 301 395
- ----------------------------------------------------------------------
income before income taxes 5,935 3,536
income taxes 2,225 1,326
- ----------------------------------------------------------------------
net income 3,710 2,210
======================================================================
EBITDA (6) 10,540 8,003
depreciation 3,177 3,144
cash dividends 367 368
======================================================================
weighted average shares outstanding 11,312 11,297
weighted average shares outstanding,
assuming dilution 11,608 11,592
======================================================================
PER SHARE DATA (10)
net income (9) 0.33 0.20
net income, assuming dilution (9) 0.32 0.19
cash dividends 0.0325 0.0325
book value 7.66 7.37
======================================================================
BALANCE SHEET DATA (10)
working capital 57,230 53,635
property, plant and equipment, net 80,316 78,292
total assets 219,527 208,283
capital expenditures 5,201 4,475
long-term debt 72,891 70,916
funded debt (1) 74,612 72,772
shareholders' equity 86,835 83,356
capital employed (7) 161,447 156,128
======================================================================
RATIOS & OTHER DATA (10)
gross profit margin 18.2% 17.6%
operating income margin 7.1 5.6
net income margin 3.5 2.4
EBITDA margin 10.0 8.8
effective income tax rate 37.5 37.5
funded debt-to-total capital ratio (1) 46.2 46.6
working capital turnover 5.4 5.4
days sales in receivables 45 43
inventory turnover 6.6 6.0
======================================================================
STOCK DATA
stock price
high 14.38 14.25
low 11.75 11.50
close 13.75 12.25
P/E ratio (2)
high 13.0 13.6
low 10.6 11.0
daily average trading volume (shares) (8) 8.8 21.3
======================================================================
(1) FUNDED DEBT INCLUDES LONG- AND SHORT-TERM DEBT, LESS RESTRICTED
INVESTMENTS.
(2) P/E RATIOS BASED ON TRAILING 12-MONTH NET INCOME PER SHARE.
(3) SHARE AND PER SHARE DATA ADJUSTED FOR STOCK SPLITS, EXCEPT FOR TRADING
VOLUME.
(4) ROSSVILLE/CHROMATEX INCLUDED IN CONSOLIDATED RESULTS FROM ITS NOVEMBER 1,
1993 ACQUISITION BY CULP.
(5) RAYONESE INCLUDED IN CONSOLIDATED RESULTS FROM ITS MARCH 6, 1995
ACQUISITION BY CULP.
(6) EBITDA REPRESENTS EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND
AMORTIZATION.
(7) CAPITAL EMPLOYED INCLUDES FUNDED DEBT AND SHAREHOLDERS' EQUITY.
(8) CULP'S COMMON SHARES WERE LISTED ON THE NEW YORK STOCK EXCHANGE ON DECEMBER
31, 1996.
(9) NET INCOME PER SHARE DATA PRESENTED IN ACCORDANCE WITH SFAS NO. 128 WHICH
WAS ADOPTED IN 1998.
(10) PHILLIPS, WETUMPKA AND ARTEE INCLUDED IN CONSOLIDATED RESULTS FROM THEIR
AUGUST 5, 1997, DECEMBER 30, 1997 AND FEBRUARY 2, 1998 ACQUISITIONS BY
CULP, RESPECTIVELY.
27
Selected Annual Data
PERCENT FIVE-YEAR
(AMOUNTS IN THOUSANDS, EXCEPT PER FISCAL FISCAL FISCAL FISCAL FISCAL CHANGE GROWTH
SHARE AMOUNTS) 1998 1997 1996 1995 1994 1998/1997 RATE
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA (4) (5) (10)
net sales $ 476,715 398,879 351,667 308,026 245,049 19.5% 18.9%
cost of sales 393,154 326,394 289,129 253,345 202,426 20.5 18.5
- -----------------------------------------------------------------------------------------------------------------------------------
gross profit 83,561 72,485 62,538 54,681 42,623 15.3 21.0
S G & A expenses 52,987 45,058 39,068 33,432 27,858 17.6 17.0
- -----------------------------------------------------------------------------------------------------------------------------------
income from operations 30,574 27,427 23,470 21,249 14,765 11.5 30.8
interest expense 7,117 4,671 5,316 4,715 2,515 52.4 38.3
interest income (304) (280) (92) (64) (79) 8.6 60.0
other expense 1,912 1,521 956 1,082 350 25.73 53.2
- -----------------------------------------------------------------------------------------------------------------------------------
income before income taxes 21,849 21,515 17,290 15,516 11,979 1.6 27.1
income taxes 6,336 7,745 6,310 5,741 4,314 (18.2) 24.7
- -----------------------------------------------------------------------------------------------------------------------------------
net income 15,513 13,770 10,980 9,775 7,665 12.7 28.1
===================================================================================================================================
EBITDA (6) $ 44,841 39,404 35,610 32,052 23,256 13.8 24.6
depreciation 14,808 12,688 12,348 11,257 8,497 16.7 17.1
cash dividends 1,786 1,513 1,236 1,120 887 18.0 20.7
===================================================================================================================================
weighted average shares outstanding 12,744 11,624 11,234 11,203 11,076 9.6 3.2
weighted average shares outstanding,
assuming dilution 13,042 11,929 11,886 11,461 11,344 9.3 3.3
===================================================================================================================================
PER SHARE DATA (3) (4) (5) (10)
net income (9) $ 1.22 1.18 0.98 0.87 0.69 3.4% 24.4%
net income, assuming dilution (9) 1.19 1.15 0.94 0.86 0.68 3.5 23.8
cash dividends 0.14 0.13 0.11 0.10 0.08 7.7 16.9
book value 10.11 8.79 7.21 6.37 5.60 15.0 15.1
===================================================================================================================================
BALANCE SHEET DATA (4) (5) (10)
working capital $ 102,730 69,777 56,953 38,612 37,949 47.2% 24.1%
property, plant and equipment, net 128,805 91,231 76,961 75,8056 4,004 41.2 23.7
total assets 354,815 243,952 211,644 194,999 164,948 45.4 27.2
capital expenditures 35,879 26,958 14,385 18,058 16,764 33.1 24.6
businesses acquired 58,816 0 0 10,455 38,205 100.0 100.0
long-term debt 152,312 76,541 74,941 62,187 58,512 99.0 45.8
funded debt (1) 151,616 65,623 76,791 72,947 58,639 131.0 41.7
shareholders' equity 131,519 110,789 81,446 71,396 62,649 18.7 19.3
capital employed (7) 283,135 176,412 158,237 144,343 121,288 60.5 28.4
===================================================================================================================================
RATIOS & OTHER DATA (4) (5) (10)
gross profit margin 17.5% 18.2% 17.8% 17.8% 17.4%
operating income margin 6.4 6.9 6.7 6.9 6.0
net income margin 3.3 3.5 3.1 3.2 3.1
EBITDA margin 9.4 9.9 10.1 10.4 9.5
effective income tax rate 29.0 36.0 36.5 37.0 36.0
funded debt-to-total capital ratio (1) 53.5 37.2 48.5 50.5 48.3
return on average total capital 8.4 10.1 9.5 9.6 9.2
return on average equity 13.0 15.2 14.4 14.6 13.1
working capital turnover 4.7 5.3 5.3 5.6 5.7
days sales in receivables 49 49 46 47 43
inventory turnover 5.8 6.4 6.0 6.0 6.3
===================================================================================================================================
STOCK DATA (3)
stock price
high $ 22.19 19.63 13.25 12.50 17.33
low 16.50 11.50 7.75 7.25 5.67
close 18.88 16.63 13.00 9.75 11.63
P/E ratio (2)
high 18.2 16.6 13.5 14.3 25.1
low 13.5 9.7 7.9 8.3 8.2
daily average trading volume (shares) (8) 16.0 19.7 19.3 39.7 43.7
===================================================================================================================================
(1) - (10) SEE SELECTED QUARTERLY DATA TABLE FOOTNOTE
28
Report of Independent Auditors
To the Board of Directors and Shareholders of Culp, Inc.:
We have audited the accompanying consolidated balance sheets of Culp, Inc. and
subsidiary as of May 3, 1998 and April 27, 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the years
in the three-year period ended May 3, 1998. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Culp, Inc.
and subsidiary as of May 3, 1998 and April 27, 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended May 3, 1998, in conformity with generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
Greensboro, North Carolina
June 3, 1998
Management's Responsibility
The management of Culp, Inc. is responsible for the accuracy and consistency
of all the information contained in this Annual Report, including the financial
statements. These statements have been prepared to conform with generally
accepted accounting principles. The preparation of financial statements and
related data involves estimates and the use of judgment.
Culp, Inc. maintains internal accounting controls designed to provide
reasonable assurance that the financial records are accurate, that the assets of
the company are safeguarded, and that the financial statements present fairly
the financial position and results of operations of the company.
KPMG Peat Marwick LLP, the company's independent auditors, conducts an audit
in accordance with generally accepted auditing standards and provides an opinion
on the financial statements prepared by management. Their report for 1998 is
presented above.
The Audit Committee of the Board of Directors reviews the scope of the audit
and the findings of the independent auditors. The internal auditor and the
independent auditors meet with the Audit Committee to discuss audit and
financial reporting issues. The Committee also reviews the company's principal
accounting policies, significant internal accounting controls, the Annual Report
and annual SEC filings (Form 10-K and Proxy Statement).
/s/ Robert G. Culp, III
Robert G. Culp, III
Chairman and Chief Executive Officer
/s/ Phillip W. Wilson
Phillip W. Wilson
Vice President and Chief Financial Officer
June 3, 1998
shareholder information
Corporate Address
101 South Main Street
Post Office Box 2686
High Point, NC 27261
Telephone: (336) 889-5161
Fax: (336) 887-7089
Internet: www.culpinc.com
Registrar and Transfer Agent
Wachovia Bank of North Carolina, N.A.
Winston-Salem, NC 27102
(800) 633-4236
Written shareholder correspondence
should be sent to:
Wachovia Shareholder Services
P.O. Box 8218
Boston, MA 02266-8218
Transfers should be sent to:
Wachovia Shareholder Services
P.O. Box 8217
Boston, MA 02266-8217
Auditors
KPMG Peat Marwick LLP
Greensboro, NC 27401
Legal Counsel
Robinson, Bradshaw & Hinson, PA
Charlotte, NC 28246
Form 10-K and Quarterly Reports/Investor Contact
The Form 10-K Annual Report of Culp, Inc., as filed with the Securities and
Exchange Commission, is available without charge to shareholders upon written
request. Shareholders may also obtain copies of the corporate news releases
issued in conjunction with the company's quarterly results. These requests and
other investor contacts should be directed to Kathy Hardy at the corporate
address.
NYSE Symbol
The Company's common stock is traded on the New York Stock Exchange under the
symbol CFI.
Analyst Coverage
These analysts cover Culp, Inc.:
C.L. King & Associates - Tom Lewis
Interstate/Johnson Lane - Kay Norwood, CFA
Raymond, James & Associates - Budd Bugatch, CFA
Robinson-Humphrey Co., Inc. - Lorraine Miller, CFA
Wheat First Securities, Inc. - John Baugh, CFA
Value Line, Inc. - Noah Goldner
Stock Listing
Culp, Inc. common stock is traded on the New York Stock Exchange under the
symbol CFI. As of May 3, 1998, Culp, Inc. had approximately 2,900 shareholders
based on the number of holders of record and an estimate of the number of
individual participants represented by security position listings.
Annual Meeting
Shareholders are cordially invited to attend the annual meeting to be held
Tuesday, September 15, 1998 at the Radisson Hotel; 135 South Main Street; High
Point, North Carolina.
(logo)
Culp, Inc.
101 South Main Street
Post Office Box 2686
High Point, NC 27261
(336) 889-5161
Internet: www.culpinc.com